Breach of Fiduciary Duty in California

A breach of fiduciary duty in California occurs when an entity or person in a trustee position fails to act in the beneficiary’s best interest.


By Brad Nakase, Attorney

Email  |  Call (888) 600-8654

What does it mean to breach fiduciary duty?

A breach of fiduciary duty mean that a fiduciary breached the duty of care, loyalty, good faith, or confidentiality when serving the best interests of a beneficiary. To breach fiduciary duty means to violate or fail to fulfill the obligations and responsibilities associated with a fiduciary relationship. A fiduciary duty is a legal and ethical obligation to act in the best interests of another party, putting their interests ahead of one’s own. When someone breaches their fiduciary duty, they typically engage in actions or decisions that prioritize personal gain, interests, or benefits over the interests of the party to whom the duty is owed.

In the context of corporate officers and executives, breaching fiduciary duty could involve actions such as diverting opportunities or resources from the company for personal gain, neglecting due diligence in decision-making, providing inaccurate financial information knowingly, or making decisions that primarily benefit themselves rather than the company and its shareholders.

Breaching fiduciary duty is a serious matter and can lead to legal consequences, including lawsuits through the assistance of a commercial litigation attorney, financial penalties, and potential removal from the fiduciary position. The fiduciary duty is designed to ensure that individuals in positions of trust act with utmost integrity, loyalty, and responsibility toward the parties to whom they owe this duty.

What is fiduciary duty?

Fiduciary duty is a legal concept that represents the highest level of responsibility and trust one party holds toward another. In the context provided, particularly in California’s corporate environment, fiduciary duty pertains to the ethical and legal obligations that corporate officers and executives owe to the company and its shareholders. This duty requires these individuals to act in the best interests of both the company and its shareholders, setting aside personal interests and ensuring decisions are made for the collective benefit.

There are three primary aspects of fiduciary duty, as outlined below:

  1. Duty of Loyalty: Corporate officers and executives must display unwavering loyalty to the company and prioritize the company’s interests above their own. They are prohibited from pursuing personal gain at the company’s expense. For example, any actions that divert opportunities or resources from the company to the individual would be considered a breach of this duty.
  1. Duty of Care: In making decisions on behalf of the company, directors and executives are obligated to exercise due care, diligence, and competence. They should avoid negligence in performing their duties and responsibilities. Additionally, certain executives and directors are required to ensure that the financial information provided by the company is accurate and truthful to the best of their knowledge.
  1. Duty of Good Faith and Fair Dealing: Directors and executives are expected to perform their roles to the best of their abilities and to act in good faith while carrying out their duties. Their actions should be aligned with advancing the company’s interests and promoting its success.

While fiduciary duties are rigorous, they do come with potential defenses, particularly the “business judgement rule.” Under this rule, corporate officers and executives are shielded from liability for decisions made in the course of business, provided these decisions were made in good faith and with a reasonable belief that they were in the best interest of the organization. This rule acknowledges that not all decisions will yield favorable outcomes, and poor decisions alone may not constitute a breach of fiduciary duty.

Determining whether a breach of fiduciary duty has occurred and whether the business judgement rule applies can be intricate and complex. In such cases, seeking experienced legal representation is crucial to navigate the intricacies of corporate law and uphold the principles of fiduciary responsibility.

Breach of Fiduciary Duty California

California law explains breach of fiduciary duty as follows:

“A fiduciary relationship is ‘ “ ‘any relation existing between parties to a transaction wherein one of the parties is in duty bound to act with the utmost good faith for the benefit of the other party. Such a relation ordinarily arises where a confidence is reposed by one person in the integrity of another, and in such a relation the party in whom the confidence is reposed, if he voluntarily accepts or assumes to accept the confidence, can take no advantage from his acts relating to the interest of the other party without the latter’s knowledge or consent.”

There are four elements that make up a breach of fiduciary duty. These are described as follows:

1. Duty

When an individual has the responsibility to act in the place of someone else, this is described as a fiduciary duty. To prove that a fiduciary duty exists, or existed in the past, a business owner needs to display that there was a special relationship based on trust between themselves and another party.

Examples of this type of relationship include the following:

  • The relationship between employee and employer
  • The relationship between attorney and client
  • The relationship between trustee and beneficiary

2. Breach

An individual will need to prove that the other party in a defined relationship violated their fiduciary duty by doing something against one’s interests. They may have also failed to act in one’s interests when they did not perform an action as planned.

An individual in this position will also have to show that they suffered a loss. If the breach did not cause harm to the person in any way, then he or she cannot recover damages.

3. Causation

An individual will also have to prove that the breach of fiduciary duty was the direct cause of harm or damages endured. If an individual suffered damages, but they were not related to the breach or were not a reasonable and predictable result of the breach, then the person will not be able to recover damages.

4. Damages

Damages is money for breach of fiduciary duty. An individual must prove that the breach of fiduciary duty caused him to lose money or property rights.

What Are Examples of Breach of Fiduciary Duty?

There are many different kinds of fiduciary duty that can come up in business situations. Below, we will review the most common types of fiduciary breaches, which one might encounter in the business world.

Fiduciary Breach Between Agents and Employees

One of the most common forms of fiduciary relationships is that between an agent and a principal. An agent is any individual who accepts the responsibility to act on another person’s behalf. This individual has the fiduciary duty to further the interests of the principal and not act against that person’s interests.

Employees are considered to be agents of their employer, acting in their interest. The employer in this context is the principal. Non-employees may also qualify as agents if they agree to act on behalf of the employer or company.

For instance, if an employer hires independent contractors or a third-party firm to do work for his or her company, then these people might be considered agents.

Examples of an agent breaking their duty to a principal include the following situations:

  • Sharing or publicizing an employer’s trade secrets
  • Failing to follow an employer’s directions or orders
  • Incorrectly using or failing to account for an employer’s funds
  • Acting on behalf of a competitor
  • Failing to show care in carrying out duties and responsibilities
  • Profiting at the expense of the employer

If an employer hires an individual to firm to work for them, the employer should be able to rely on the party to act in his or her best interest. If the party does not do so, then an employer may be able to recover damages in a lawsuit.

For instance, let’s say an employee of a company lured clients away to work for a competitor’s company. In this case, the employer could sue the employee for damages. These damages would cover the loss of business or goodwill.

Fiduciary Breach Between Partners

A business’s partners – those who manage the company together – have a fiduciary duty to act in the best interest of one another as well as the company. It is possible for partners to breach this duty by doing any of the following actions:

  • Mismanaging or failing to account for company assets or funds
  • Leaving the partnership open to liability via negligence or wrongdoing
  • Damaging the reputation of the company via illegal or immoral behavior
  • Keeping important information concealed from other partners
  • Failing to disclose conflicts of interest
  • Taking a business opportunity away from the partnership for one’s own benefit

Partners have the right to expect that their co-partners will do everything they can to help the company succeed. A partner who is always careless or selfish, especially if they take money out of the company, is not acting in the best interest of the company. Nor is it something that other partners can afford to ignore. Because this can be an awkward and messy situation to deal with, it may be best to consult a partnership attorney. He or she can help partners understand their options as well as take action to protect the business.

Board of Directors

The shareholders of a corporation elect a board of directors to make decisions on behalf of the company. When it comes to closely-held, or small, corporations, the board is generally made up of majority shareholders. However, when a corporation is on the larger size, board members will usually be other professionals who were brought in to help manage the company with their expertise.

However a board of directors is designed, its members all have a fiduciary duty to act in the best interest of the company’s shareholders. The same principle applies to limited liability companies (LLCs). The managing members of an LLC have the fiduciary duty to act on behalf of all other members.

The same types of fiduciary breaches that occur in partnerships also apply to members of a board of directors. However, some additional examples include:

  • Stopping shareholders from exercising their voting rights
  • Preventing shareholders’ access to records
  • Refusing to pay dividends
  • Voting for unreasonable compensation for themselves
  • Performing wrongful actions to force out minority shareholders

If a board of directors or certain members of a board have broken a fiduciary duty to their shareholders, the shareholders may take legal action. Specifically, they can file a lawsuit to protect their interests.

Can an Attorney Help in the Event of a Breach of Fiduciary Duty?

If an individual or group feels that another party has broken their fiduciary duty in any of the above scenarios, the best course of action is to consult with our business litigation attorney for dealing in complex business litigation. An experienced attorney can help identify if there was, indeed, a breach of fiduciary duty and whether there is cause for a lawsuit.

See all blogs: Business | Corporate | Employment

HR Career Pathway

HR Career Pathway

Discover how to shape your HR career pathway effectively, utilizing insights on skills, gaps, and tools available for your professional growth. Learn strategies for navigating various HR career routes to enhance your development and impact.
Certifications For HR

Certifications For HR

Explore nine HR certifications to enhance your career prospects and demonstrate your knowledge of best HR practices. Discover how certifications can increase your earning potential and make you more competitive in the HR field.
HR Roles

HR Roles

Explore how HR roles have evolved from basic administrative functions to strategic tasks that enhance organizational performance and employee engagement. Learn about the crucial roles in HR that drive company success and adapt to technological and workplace changes.
Succession Planning

Succession Planning

Understand why effective succession planning is crucial for organizational continuity and competitiveness, and how a lack of planning can impact businesses. Discover how structured succession plans can benefit organizations by preparing future leaders and ensuring role continuity.
RACI Matrix

RACI Matrix

The RACI matrix is a crucial tool for HR professionals to delineate roles and enhance project management by clarifying responsibilities and communication. Implementing a RACI chart streamlines processes and boosts efficiency in complex projects.
Combined Assurance

Combined Assurance

Combined assurance enhances internal auditing by fostering collaboration across departments, improving efficiency, and reducing overlap. It boosts risk mitigation and confidence in governance, crucial for organizational success.
How To Start LLC

How To Start LLC

Navigate the process of creating an LLC in California, from naming your entity to fulfilling state tax obligations. Highlighting key steps including selecting a registered agent and drafting an operating agreement.
What is an S corporation

What is an S Corporation

Explore the benefits and considerations of electing S corporation status for your business, focusing on tax advantages and eligibility criteria. Determine if an S Corp is the right choice for you with insights on structure and taxation.
Sole proprietor vs S Corp

Sole Proprietor vs S Corp

Compare Sole Proprietorship and S Corp to find the best fit for your small business. Understand the advantages and challenges of each to make an informed decision.
What Is Recruiting- Definition, Process, and Types

What is recruiting? Definition, process, and types

Explore the intricate world of recruiting, from sourcing to hiring, and learn about its vital role in aligning candidates with a company's culture and needs. Understand the process, types, and the significance of recruiting in building a successful team.

How to Start a Corporation

How to form a corporation in 12 steps. This guide simplifies the process of starting a corporation in California, highlighting the benefits such as legal protection and tax savings for business owners. It covers key steps like selecting a business name, filing legal documents, and appointing directors.

How to transfer LLC ownership?

Two common ways to transfer LLC ownership are to conduct a partial sale to a third party or sell your entire LLC to a third party.

Why Do Companies Incorporate in Delaware?

The State of Delaware offers companies lenient tax benefits and liability protection. Also, companies that incorporate in Delaware do not have to do business in the state.

Inc vs. LLC

Incs. is short for incorporated, and LLC is short for Limited Liability Company. For Inc., where the owner elected to be an S corporation, the profit and loss are passed to its shareholders, whereas income and loss in an LLC flow through to the members.

What is an LLC and how does it work

An LLC is a business entity that protects the owners with limited liability protection. An LLC also offers pass-through taxation, which means the company’s profits and losses pass through to the owner’s personal tax level.

What Is a Disregarded Entity?

A “disregarded entity” refers to an entity with one owner and not organized as an entity such as a corporation, LLC, or partnership. For federal tax purposes, the disregarded entity and the owner, who is a natural person, are not treated separate.

5 Easy Steps: How to Dissolve a Corporation in California

When a business owner wishes to close, or dissolve, their business, he or she must file a certificate of dissolution with the Secretary of State. This certificate of dissolution lets the Secretary of State know that the business owner is terminating his or her California corporation, effectively closing it for good. Dissolution is a process that involves a number of steps.

15 Steps: Starting an Inc in California

For the business owner, there are many benefits to creating a corporation in California. Assuming it is properly run, a corporation has the ability to shield its shareholders from debts and liabilities on the business side of matters.

11 Steps on How to Start a Corporation

A corporation is a separate legal entity which can protect its owners from business liabilities and risks. There are many benefits to starting a corporation. A business owner can save money on taxes, protect his or her own assets, attract the interest of investors, or simply enhance one’s credibility among consumers and vendors.

5 Benefits: What Does it Mean to Incorporate a Business

For background, in order to incorporate a business, a founder must file paperwork with the state in which their business is located. There can either be a single shareholder or multiple involved in the incorporation process. Importantly, an incorporated business is legally a separate entity from its shareholders.

10 Must Know: Corporation vs. Incorporation

Inc. and Corp. are abbreviations that mean the same thing. Inc. means incorporated, while Corp. means corporation. When a corporation chooses its name, it can decide between adding either one of these suffixes to its name.

7 Differences Between Inc and Corp

Inc. is the abbreviation for incorporation, while Corp. is the abbreviation for corporation. Both of these abbreviations are used by entities that have been incorporated.

13 Steps Incorporation Process

Incorporation is the process a business owner must follow to turn his or her company into a corporation or a limited liability company (LLC). Incorporating a business turns it into its own legal entity with similar rights and duties as a person.

How to form a corporation in California.

Forming a corporation in California requires you to file an Article of Incorporation with the Secretary of State. However, there are other things you must do to comply with corporate law when forming a corporation in California.

Please tell us your story:

3 + 1 = ?

See all blog: Business | Corporate | Employment