Fiduciary Duty

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When someone has a “fiduciary duty,” this means that he is responsible for acting in a way that benefits another person. An example of a fiduciary duty is a legal guardian taking care of a minor. The legal guardian’s fiduciary duty is to make the best decisions on the minor’s behalf, such as medical care and the school the minor attends. To explore this concept, consider the following fiduciary duty definition.

Definition of Fiduciary Duty

Noun

  1. A relationship between two individuals that requires one individual to act in the best interests of the other, often financially.

Origin

1585–1595           Latin    (fīdūciārius)

What is a Fiduciary?

A fiduciary is a person who, by law, is responsible for acting in the best interests of another person. A fiduciary can be a bank or a brokerage firm. The most common example of a fiduciary duty is that which a trustee performs under a trust. Under a trust, the trustor gives the trustee the right to hold onto property or assets for a beneficiary. A trust is set up to protect one’s assets, and to ensure that the trustee distributes those assets when the time is right and as the trustor intended.

A trust is beneficial in numerous situations, both while the trustor is still alive, and after his death. For instance, a trustor can set up a trust to:

  • Set aside funds for his underage beneficiary, until the beneficiary is of age and can handle his own assets
  • Set aside funds to take care of a mentally handicapped beneficiary
  • Protect his assets from taxes and probate upon his death
  • Protect his assets from creditors
  • Establish who will inherit which assets upon his death

Breach of Fiduciary Duty

A breach of fiduciary duty occurs when someone entrusted to take care of another person fails to do so. In other words, the person acted in a way that was contrary to the other person’s best interests, rather than in support of them.

A breach of fiduciary duty can occur in several ways, including an action taken to benefit one’s own self-interest. A breach can also occur when a person fails to disclose important information. Such a failure can cause harm to the other person, such as whether a conflict of interest exists regarding legal representation.

Elements to a Breach of Fiduciary Duty Claim

For someone to be successful on a breach of fiduciary duty claim, he must prove the following three elements:

  1. That the plaintiff expected the defendant to uphold a certain responsibility
  2. That the defendant breached that responsibility in some way
  3. That the plaintiff suffered as the direct result of the defendant’s misconduct

A plaintiff who did not suffer damages does not have an actionable claim. There are several ways in which a person can commit a breach of fiduciary duty, including:

  • Failing to disclose important information, or misrepresenting facts
  • Misappropriating funds (e.g. spending money meant for child support on a trip to the spa)
  • Misusing one’s position of influence (e.g. a C.E.O. using his position for ill-gotten gains)

A person who believes he has been the victim of a breach of fiduciary duty may have the right to sue. However, it is incredibly difficult to prove a breach. It is also difficult to calculate exactly the amount of damages that the plaintiff suffered as the result of the plaintiff’s alleged breach. For this reason, the plaintiff will normally list breach of fiduciary duty in addition to other claims, like malice or fraud. The court then considers the claims collectively when deciding how much damages to award.

Penalties for a Breach of Fiduciary Duty

If a person suspects another of a breach of fiduciary duty, he may be able to sue that person for damages. A common example of a breach of fiduciary duty happens often in the corporate world. When a shareholder claims that a company’s director acted in his own best interests, rather than those of his shareholder, the shareholder can sue.

In this case, the shareholder could file for compensatory damages against the director. If the court found the director did, in fact, commit a breach of fiduciary duty, the court could order the director to pay compensatory damages.

Other penalties for a breach of fiduciary duty include:

  • A legal malpractice lawsuit, if the offender is an attorney
  • The loss of a professional license or accreditation
  • Punitive damages to prevent the offender from acting similarly in the future

Fiduciary Duty Example Involving the Former Enron C.E.O.

An example of a fiduciary duty breach occurred in the criminal case that lead up to Skilling v. United States (2010). In Skilling v. United States, the Supreme Court reviewed the facts of the criminal case involving Jeffrey Skilling, the former C.E.O. of Enron. Here, the jury trial in the Texas District Court lead to Skilling’s conviction on charges that included insider trading and making false representations to auditors. Skilling received a sentence of 14 years in prison.

On appeal, one of Skilling’s arguments was that Skilling’s pre-trial publicity biased the jury, and this bias influenced them to find him guilty. He also argued that the government prosecuted him illegally.

One of the accusations against Skilling was that he withheld information that would have convinced another employer in a similar position to change its course of action. This is a breach of fiduciary duty. The U.S. Court of Appeals for the Fifth Circuit affirmed the conviction, but vacated Skilling’s sentence and remanded the case back to the lower court. The purpose for doing so was to order the lower court to re-determine Skilling’s sentence.

The case made its way all the way up to the U.S. Supreme Court. The Court agreed to hear the case, and had to decide on two issues:

  1. Was the government required to show that Skilling acted in such a way as to achieve ill-gotten gains?
  2. Is the government required, in cases of high publicity, to prove beyond a reasonable doubt that publicity did not bias any jury member?

Supreme Court Decision

In the end, the Court both affirmed and reversed Skilling’s conviction. The Court held that Skilling received a fair trial despite his pre-trial publicity. Further, the Court held that Skilling’s conduct did not, in fact, result in the receipt of bribes or kickbacks, as defined in the “Honest Services” fraud statute. Therefore, while the Court upheld Skilling’s conviction but remanded the case for a re-trial, Skilling ultimately received a 10-year reduction in his prison sentence.

In Their Own Words

Said the Court, in its Decision:

“Interpreted to encompass only bribery and kickback schemes, §1346 is not unconstitutionally vague. A prohibition on fraudulently depriving another of one’s honest services by accepting bribes or kickbacks presents neither a fair-notice nor an arbitrary-prosecution problem. (Citation omitted.) As to fair notice, it has always been clear that bribes and kickbacks constitute honest-services fraud, (citation omitted), and the statute’s mens rea requirement further blunts any notice concern, (citation omitted). As to arbitrary prosecutions, the Court perceives no significant risk that the honest-services statute, as here interpreted, will be stretched out of shape. Its prohibition on bribes and kickbacks draws content not only from the pre-McNally case law, but also from federal statutes proscribing and defining similar crimes. (Citation omitted.)

Skilling did not violate § 1346, as the Court interprets the statute. The Government charged Skilling with conspiring to defraud Enron’s shareholders by misrepresenting the company’s fiscal health to his own profit, but the Government never alleged that he solicited or accepted side payments from a third party in exchange for making these misrepresentations. Because the indictment alleged three objects of the conspiracy — honest-services wire fraud, money-or-property wire fraud, and securities fraud — Skilling’s conviction is flawed. (Citation omitted). This determination, however, does not necessarily require reversal of the conspiracy conviction, for errors of the Yates variety are subject to harmless-error analysis. The Court leaves the parties’ dispute about whether the error here was harmless for resolution on remand, along with the question whether reversal on the conspiracy count would touch any of Skilling’s other convictions.”

Related Legal Terms and Issues

  • Compensatory Damages – An award of money in compensation for actual economic loss, property damage, or injury, not including punitive damages.
  • Damages – A monetary award in compensation for a financial loss, loss of or damage to personal or real property, or an injury.
  • Defendant – A party against whom a lawsuit has been filed in civil court, or who has been accused of, or charged with, a crime or offense.
  • Plaintiff – A person who brings a legal action against another person or entity, such as in a civil lawsuit, or criminal proceedings.
  • Probate – The court process by which a Will is proved valid or invalid.
  • Punitive Damages – Money awarded to the injured party above and beyond their actual damages. This is to punish the wrongdoer for outrageous misconduct in a civil matter.
  • Shareholder – Someone who owns shares in a company. A shareholder, also referred to as a “stockholder,” profits when the company makes money. He also loses money when the company is unsuccessful.
  • Vacate – To cancel, or to otherwise deem void.