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What is the “F” word?  by Ryan T. Webster

“What is that “F” Word? …Fiduciary? …Is that what I am?” These are not an entirely uncommon question posed by clients to a lawyer. In fact, many people are in a fiduciary relationship and don’t even know it or don’t know their role. In fiduciary relationships, ignorance is not bliss; it can lead to serious civil and even criminal ramifications.

In a fiduciary relationship one person has a duty to act for the benefit of another person or certain group of people. Most fiduciary relationships are imposed by law regardless of whether the parties intended to create such a relationship.

The fiduciary owes the duty of loyalty, good faith, candor, to refrain from self-dealing, to act with integrity, and the duty of fully disclose. In other words, a fiduciary cannot use his position to benefit his own interest rather than the interest of his intended beneficiary. The fiduciary must be honest and disclose all relevant information to the beneficiary.

Who are fiduciaries? Who do they owe these duties to?

Formal fiduciary relationships include: business partners, who owe certain fiduciary duties to each other; holders of a power of attorney, who owe fiduciary duties to the person giving them the power; trustees and estate representatives owe duties to their beneficiaries; attorneys owe fiduciary duties to their clients; and employees owe their employer fiduciary duties. These formal fiduciary relationships created by forming one of the foregoing relationships. However, in some situations the duties owed may be altered by contract (e.g., a partnership agreement or employment agreement).

Fiduciary duties do not extend beyond the scope of the fiduciary relationship, and the type and scope of duties owed depend on the type of relationship.  Some relationships come with more duties than others. For example, trustees and estate personal representatives (executor or administrator) owe their beneficiaries duties in addition to the foregoing general fiduciary duties. They are often entrusted with the care and management of valuable assets for the benefit of a trust or an estate’s beneficiaries and have a duty to properly manage and safe guard assets that come into their possession and a duty to account to the beneficiaries for those assets.  Attorneys also have additional duties to their clients, such as keeping client confidences.

Employees owe their employers more limited fiduciary duties. While employed, employees must act in their employer’s best interest. An employee cannot, for example, divert a deal to himself or a competitor in exchange for more money or to harm his employer. However, the duty to act in the employer’s best interest does not prevent an employee from taking certain steps to compete with his employer.  While employed, an employee can seek other employment from a competitor or make plans to form a competing business, but the employee cannot try to take the employer’s customers or other employees before he resigns. The employee cannot take the employer’s trade secrets (e.g., customer lists or the secrete formula) when she leaves or later use the employer’s trade secrets.

If a fiduciary breaches any of his duties and the breach causes injury to a person owed that duty or the fiduciary derives a benefit from the breach, the fiduciary is liable. Unlike most other causes of action, the plaintiff does not have to be injured. If the fiduciary benefited from his breach without causing harm to the plaintiff, the fiduciary may still be liable. This does not mean that the fiduciary can never benefit from the fiduciary relationship. In fact, they usually do derive a benefit (e.g., charging for their services). To avoid liability, the fiduciary must be honest, fully disclose his actions and benefits received, and otherwise comply with his duties.

Lawsuits for breach of fiduciary duty appear to be on the rise. This is due in part to people assuming the role of a fiduciary without having a good understanding of their obligations or duties. There are also plenty of people who intentionally abuse the responsibility entrusted to them.

This article is not comprehensive on the subject of fiduciary duties and is not intended as legal advice. If you have questions or need legal advice with regard to a fiduciary relationship, consult with a qualified attorney.

Ryan Webster is an associate attorney at Alagood Cartwright Burke PC and can be reached at [email protected] or www.dentonlaw.com