What Can You Do If Someone Breaches Their Fiduciary Duty?
Assume your parents created a trust and named you and your siblings as beneficiaries of the trust. After your parents passed away, you learn that the trustee of the trust invested a huge amount of the trust into his own business, which then failed. Almost all of your inheritance is gone! What can you do? The fiduciary duty is a relationship built on trust, and when that trust is broken, it can cost victims, both financially and emotionally. Fortunately, the legal system offers you a way to fight back. You can take your dishonest fiduciary to civil court for breach of fiduciary duty. This post addresses the concept of fiduciary duty and how to win a breach of fiduciary case.
What Is Fiduciary Duty?
Simply put, a fiduciary duty is the legal obligation of one party, the fiduciary, to act in the best interest of another party. The fiduciary must use their best effort, skill, knowledge, and diligence when acting on behalf of their client.
Certain relationships require a fiduciary duty. For example:
- Attorneys / Client
- Trustee / Beneficiary
- Corporate Board Members / Stockholders
- Guardian / Ward
In other cases, professionals can agree to take on a fiduciary obligation. Some (but not all) financial advisors act as a fiduciary. (Hint: If your financial advisor earns commissions, he or she is almost certainly NOT a fiduciary.)
A fiduciary duty is a high legal standard. It means that the fiduciary cannot seek to enrich themselves at your expense, lie to you, mismanage your account, or neglect any part of their obligation. Those who act as fiduciaries, such as corporate board members, attorneys, and trustees, often wield a lot of power. If they abuse that power, they can cause significant damage. That is why the fiduciary relationship is so important!
What Is Breach of Fiduciary Duty?
We just learned that a fiduciary has a legal obligation to:
- Act in the best interest of their client
- Use their best efforts when representing their client
If a fiduciary fails in either of these requirements, then they have breached their fiduciary duty. This is not just word play. Remember, a fiduciary duty is a legal obligation, which means that if a fiduciary doesn’t do their job, they could be vulnerable to a civil lawsuit!
Some of the most common forms of breach of fiduciary duty are:
- Self-dealing – A fiduciary using their position to enrich themselves, such as the trustee investing trust assets into their own company.
- Failure to Disclose Pertinent Information — This could mean failing to disclose a conflict of interest, such as an attorney representing one party in a divorce while having a business relationship with her spouse.
- Misappropriation of Funds – An example of this would be a trustee using asset funds to hire personal friends or family to help manage the trust rather than the best possible agents.
- Neglect of Responsibilities – This could be a board member missing board meetings, or a guardian failing to bring a ward to necessary medical appointments.
- Misrepresentation of Facts – The non-legalese word for this is “lying.”
It is definitely possible for a fiduciary to breach their fiduciary duty in multiple ways. In fact, it’s common. Typically, if a fiduciary is willing to bend the fiduciary rules in one regard, they’re willing to bend them in other ways as well.
How to Win a Breach of Fiduciary Duty Case
If you suspect a breach of fiduciary duty, what are your options? The first step is to stop doing business with that individual immediately! Your second action should be to meet with an attorney to discuss the possibility of bringing that individual to court. Breach of fiduciary duty is a civil tort, and you have the right to sue a fiduciary for not fulfilling their fiduciary duty.
In order to win your case, you’ll need to prove the following things:
- The Individual Owed You a Fiduciary Duty
As we reviewed earlier in this article, certain professions must operate under a fiduciary duty. Others professions do not have a built-in duty. (Note: California requires all professional trustees to be fiduciaries.) If your lawyer messed up your divorce case because he showed up to court hung over and without your case file, you can certainly sue him for breach of fiduciary duty, because all attorneys owe their clients a fiduciary duty. If you find out your broker recommended investment vehicles that gave her the highest commission instead of the ones that were truly the best for you, there may be little you can do if she never agreed to represent you was a fiduciary. Your best bet might be to find a financial advisor who is willing to give you a fiduciary commitment in the future.
- There Was a Breach of Duty
Remember that list of the most common forms of breach of duty? You need to prove that your fiduciary breached their duty. It is not enough that your trustee shifted your investments into stocks that then fell precipitously. You will need to prove that your trustee was not using good judgement and expertise when he made that bad bet. Just because your fiduciary loses a case, makes a bad decision, or loses money does not automatically mean it was a breach of duty.
- You Suffered Damages
Let’s say that your trustee made a very risky bet with the assets in your trust. Unless the trust specifically allowed for high-risk bets, this would likely represent a breach. However, if the bet unexpectedly pays off and the trust earns a huge return, then you cannot really say you suffered damages unless you want to try to make the case for emotional damages.
To complete your case, you must be able to show that you suffered damages as a result of the breach of fiduciary duty. If a CEO used company funds to pay for a lavish vacation that had no business value, you can point to the fact that wasteful spending means less operating costs, which could damage the company’s profitability, which represents damages for the company’s shareholders.
Getting Your Reward
If you can prove all three points above, then you can seek a remedy in court for breach of fiduciary duty. Most commonly, the reward will represent the actual damages that you suffered.
In some cases, however, it can be difficult to establish what the actual damages are. For example, let’s say that your attorney agrees to act as your parents’ trustee and then uses his brother to invest the assets in the trust. The brother, who’s spent a couple hours reading investment advice on the internet, does a predictably poor job. Only after your parents pass away 20 years later, do you then realize the damage that’s been done. Your parents put $100,000 in the trust, and now it only contains $25,000. Do you sue the attorney for the $75,000 that his brother lost? But what about how much money the $100,000 could have earned over 20 years if it had been invested by a real expert? It may be difficult to really know how much you lost.
In cases where a fiduciary acts with malice or perpetrates true fraud, you can seek real damages as well as additional damages (punitive damages), to punish the fiduciary.
As you can see, cases of breach of fiduciary duty can be complex and tricky. That’s why you want to work with a San Diego attorney who specializes in fiduciary cases. Contact me today to schedule a consultation to discuss your situation.
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