Breach Of Fiduciary Duty

Professionals in a variety of fields may have a fiduciary duty to their clients, assuming a responsibility to put their clients' interests ahead of their own. When one of these professionals betrays that trust, they commit a breach of fiduciary duty. Breach of fiduciary duty is a serious allegation. If you are convinced that a party who owed your business a fiduciary duty has failed in their charge and acted inappropriately, you may be able to seek legal remedy, including compensation for the damages your business has incurred as a result of the breach.

What is a Fiduciary Duty?

According to Cornell Law School's Legal Information Institute , a fiduciary duty is the responsibility one party has to act another's best interests in certain types of legal and business relationships. The party who holds this responsibility is known as "the fiduciary," while the party on whose behalf the duty is executed is known as "the principal" or sometimes the "beneficiary" – reflecting the fact that in a fiduciary relationship, the fiduciary's actions are directed toward the principal's benefit.

Fiduciary Relationships

A variety of legal and business relationships are characterized by a fiduciary duty. Accountants, auditors, financial advisors, stockbrokers, securities or financial professionals, promoters of corporations, officers, directors, managers, and majority shareholders all owe fiduciary duties to their clients, investors, corporations, or other parties involved in financial transactions. Failure in this duty can result in liability for the individual or entity if the principal decides to file a claim in court seeking damages for breach of fiduciary duty .

Contractual vs. Implied Fiduciary Duty

There are two types of fiduciary relationships, one created by contract and the other implied by law based on the relationship of the parties. Mere trust in another's honesty or competence is not enough to constitute a fiduciary relationship; generally speaking, the relationship must entail the principal's deference to the fiduciary's superior expertise. Because it can sometimes be difficult to prove that such an implied reliance, and therefore duty, was present, specifying the expectations for (and from) both parties in clear terms in a business contract may be beneficial to all involved.

What Is an Example of a Fiduciary Duty?

Fiduciary duties may be present in relationships across a number of contexts. Examples of relationships commonly structured by fiduciary duty include attorney-client, principal-agent, or guardian-ward. In estate planning, fiduciary duty may play a role in guardianships or trusteeships; depending on the circumstances, estate planning may involve the services of a financial planner who holds a fiduciary duty with respect to their client's personal financial planning, as well. Financial planning may also sometimes apply in business contexts, as many businesses entrust the management of assets to investment advisers, who unlike brokers have a responsibility not only to make recommendations that are appropriate to their clients' needs, but to place their clients' interests above their own.

In the corporate world, one of the most widely recognized examples of fiduciary duty is the responsibility the board of directors and other parties similarly involved in corporate governance hold with respect to the company and to the stakeholders whose fortunes are tied to those of the business. Directors of corporations have fiduciary duties including the duty of care, loyalty, confidentiality, prudence, disclosure, and good faith. Due to the severe consequences that may arise from breach of fiduciary duty allegations, directors of corporations are not only bound to act in the best interests of the corporation and its shareholders, but well-advised to avoid even the appearance of conflicts of interest.

What Is a Breach of Fiduciary Duty in Corporate Law?

A breach of fiduciary duty will always entail a failure of the fiduciary to act in the principal's best interests. The specific actions – or inactions – that constitute such a failure and leave the fiduciary open to a lawsuit to recover damages incurred as a result of the breach will depend on the type of fiduciary relationship involved and the circumstances of the case. In the context of corporate governance, Arizona law provides general outlines for the fiduciary duties assumed by company officers vs. directors. Both sets of (broadly similar) expectations are laid out in Title 10 of the Arizona Revised Statutes , which covers matters related to businesses organized as corporations or associations throughout the state.

Breach of fiduciary duty allegations are a serious matter, and meeting the burden of proof for breach of fiduciary duty by a corporation's board or officers can be difficult due to the presumption of good faith established under Ariz. Rev. Stat. § 10-831 and § 10-845 , respectively.

Standards of Conduct for Corporate Directors

Corporations in Arizona are required to operate with the oversight of a board of directors. The members of this board are responsible to the company's shareholders, to whom the directors owe a fiduciary duty.

The standards of conduct required of the members of corporation boards are defined by § 10-830 Ariz. Rev. Stat. (2023) , under which each member of any corporation's board of directors is obligated to carry out his or her duties with respect to the corporation:

●????? In "good faith" – that is, sincerely and without subterfuge

●????? With a degree of prudence appropriate to the circumstances of each decision or activity

●????? For the good, or what the director reasonably believes will be the good, of the company

In the fulfillment of their duties and particularly in making decisions with respect to the company's direction and transactions, each director is entitled to rely on information and advice provided by one or more of the corporation's officers whom the director believes to be competent in the area. A corporation's officers are generally appointed by its board of directors, and so one of the board's key responsibilities is the judicious selection of competent and reliable individuals to fill those organizational roles.

Standards of Conduct for Corporate Officers

Ariz. Rev. Stat. § 10-842 (2023) limits a corporate officer's responsibility to areas in which he or she holds "discretionary" decision-making authority. The law requires each officer to exercise that authority in good faith, with a degree of prudence appropriate to the circumstances, and only in accordance with what they believe to be the best interests of the company.

The wording of the statute provides some protections for corporate officers who make "honest mistakes," through the exercise of poor (but not rashly imprudent) judgment or because they themselves have been misled. Like members of the board of directors, each of a corporation's officers is expressly permitted to base the exercise of their discretion on information and advice provided by other parties who also hold authority within the company or who share a fiduciary duty toward it, but only insofar as the officer does not have independent reason for suspecting that such reliance may be unwarranted. In other words, the statute both acknowledges that corporate officers must frequently rely on knowledge and insights provided by others and codifies a responsibility to choose judiciously the parties on whose reports and recommendations they will act.

Do Business Partnerships Entail a Fiduciary Duty?

Businesses organized as partnerships are not governed by Title 10, but rather are covered under Title 29. In general, business partners will not owe one another the same duty that corporation officers and directors owe to shareholders, although the precise duties of each partner may be further specified by their contract and business formation documents.

Depending on the type of business the partners are engaged in, they may (individually or collectively) be subject to regulation under Title 32 , which governs professions and occupations. Some professions regularly entail the assumption of a fiduciary duty with respect to the firm's clients. In these cases, partners who are not excluded from liability under § 29-319 Ariz. Rev. Stat. (2023) may be held personally liable for damages in a breach of fiduciary duty suit, if a court finds that such a breach has occurred.

Seek Advice From an Experienced Business Law Attorney

If you have reason to believe that a trusted party has committed a breach of fiduciary duty that has harmed your company's reputation or its immediate or long-term chances for financial success, you may be able to seek legal remedy by filing an action in court seeking damages for breach of fiduciary duty. However, there are a number of ways that a fiduciary's personal liability may be limited, depending on the nature of the professional relationship, and overcoming the presumption of good faith that Arizona law applies to many situations can be difficult.