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

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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.

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