Breach of Fiduciary Duty: They Can’t Do That!

In this article, our litigation lawyers discuss breach of fiduciary duty in Colorado and your rights.

Someone you trust and you’ve gone into business with is letting you down. They don’t seem to be managing the business the way you had discussed before you opened your doors as partners. Are they just bad at business? Or is something more going on?

You have invested in a business with a board of directors who own most of the shares. It seems like the managers and the board are not doing the right things to let you and the other smaller shareholders know what’s going on. Is that legal? Does the board of directors have to inform you about big business decisions?

Your dad is in poor health and lives far away. His local banker has been in charge of his finances by default for a number of years, and he trusts her implicitly. Now the bank is merging with another bank, and when you last spoke with the banker you weren’t sure your dad’s interests were her priority. Does the banker have a legal obligation to look out for your dad?

Some relationships are so close and trusting that the law imposes special obligations on the people being trusted. Attorney to client, corporate director to shareholders, partners with each other – these are all examples of this kind of relationship. Even some commonplace business relationships may have special factors that give rise to what is called a fiduciary duty.

The people entrusted are called fiduciaries – people with a legal or ethical obligation to protect another person’s interests.

A breach of fiduciary duty involves the trusted person breaking that bond of trust.

What is Fiduciary Duty (& what isn’t)?

The concept of fiduciary duty was developed to give businesses stability. For a stable business to survive and thrive, partners, shareholders and directors must be able to trust and rely on each other to promote the best interests and success of the business. If you are unsure of the exact duty owed by each person involved, the partnership agreement or other organizational documents often outline these duties.

Fiduciary duty is made up of two equal parts: a duty of care and a duty of loyalty. The duty of loyalty means that the fiduciary must look out for the client’s interests above all others, including their own. So, a fiduciary cannot have more than one fiduciary relationship if their duties would conflict. The duty of care means that the fiduciary must use the watchfulness, attention, caution and prudence that a reasonable person in the circumstances would use.

For a breach to occur and a legal action to be possible, you must prove that:

1. Fiduciary Relationship: The two parties share a relationship and a fiduciary relationship existed
2. Trust Established: The client has trust and confidence in the fiduciary
3. Assumption of Duty: The fiduciary undertakes that trust and assumes a duty to advise and protect the client
4. Breach of Duty: The fiduciary breaks this trust and neglects its duties to the client, &
5. Suffering of Damages: The client suffers damages because of the fiduciary’s breach

If any of these pieces is missing, there has been no legal breach. Depending on the type of relationship you have, there are various types of fiduciary duty that can arise. As mentioned above, directors of corporations, partners in a partnership, and certain client-agent relationships give rise to this strong legal bond. Below we discuss some examples of these relationships and how to recognize a breach.

You should speak with an attorney to help you determine whether you have a fiduciary relationship within your business, and how to move forward with any legal case.

Corporate Breach of Fiduciary Duty

Corporate directors and officers have a fiduciary duty to act in good faith and in the best interests of the corporation and its shareholders.

Fiduciary duties owed to a corporation include:

1. The duty NOT to act against a corporation’s interests;
2. The obligation to deal fairly when buying stock from minority shareholders; and
3. The obligation NOT to use corporate funds for personal gain.

While directors owe these fiduciary duties to their corporations, they do have broad discretion in making business decisions, as long as they act in good faith. The officers and directors may not be required to let all the shareholders about big decisions, but if they waste corporate assets they may be subject to liability.

Controlling or majority shareholders also have a fiduciary duty to act with “extreme candor, unselfishness and good faith” toward the smaller shareholders. They may be sued by any shareholder to recover damages for a breach of that duty.

To sue a corporation for breach of fiduciary duty, the person or group bringing the lawsuit must be a shareholder when the action commences and remain a shareholder until the action concludes. In Colorado, shareholders have three years to bring a lawsuit once the alleged breach has taken place.

Fiduciary Duty between Partners

As with directors, officers and majority shareholders, specific activities can result in a breach between partners. Some common issues include self-dealing and breach of contract. A partner may not benefit himself at the expense of the company or other shareholders, or do business with people whose interests are opposed to the business. Along these lines, a partner cannot allow a third party to breach a contract between the third party and the business.

For example, a contract your partner set up with a cleaning service is not working out. The cleaners are not doing the job properly, but your partner isn’t finding another vendor, just sticking with this company she’s known for a long time. A lot of money is going out the door for this service and you’re concerned. Is this a breach of their fiduciary duty? Should you sue your partner over this, even if it is a breach?

There is a distinction between making a bad business decision and breaching fiduciary responsibility. Any owner is protected by what is known as the business judgment rule, and partnership disputes can be a death knell for a business. Think carefully about whether you can resolve the dispute without suing, and consult an experienced attorney if you believe the break is irreparable.

Fiduciary Duty to a Business Client

Attorneys and their clients share a fiduciary relationship, as do some bankers and their customers. For example, a fiduciary duty may arise between a bank and its customer where the bank assumes control and responsibility over the customer’s assets and operations, or where the customer places special trust and confidence in the bank and becomes dependent on it. The duties of care and loyalty require that the banker act without regard to personal gain, and that they not take on other fiduciary relationships that could conflict with their duty to any existing customer. The existence of this kind of bond is tricky and could be difficult to prove, so if you believe there has been a breach of this kind, you should consult an experienced attorney to review your case.

The attorney-client relationship is special and is therefore covered by specific laws. Again, an experienced attorney from Robinson & Henry can help determine whether this specific kind of relationship has come up for you or a member of your family.

Damages

If a breach has taken place, you need to establish a case in order to recover any money owed to you. To establish a case for breach of fiduciary duty, there must be sufficient evidence of damages that were caused by the defendant’s breach. One of the unique things about suing for a fiduciary breach is that you may seek punitive damages. Unlike compensatory damages, which seek to compensate, punitive damages are meant to punish the defendant and ensure that the action does not happen again. Because of the deep trust and legal bond that has been broken, the court may award this type of damages. There are relatively few kinds of lawsuits in the world of business that will permit damages for pain and mental suffering.

By and large, the type and amount of damages will depend upon the nature of the relationship and the effect that the breach had on the company and the person bringing the lawsuit. The attorneys at Robinson & Henry can help you sort through the pros and cons of this type of suit and determine what course of action works best for your case.

What Defenses Do I Have If I am Accused of Breaching a Fiduciary Duty?

A typical breach of fiduciary duty defense consists of proving that the agent acted within the boundaries and agreements of his or her position. The following defenses can be used for breach of fiduciary duty:

• Lack of fiduciary duty (all of the 5 pieces not in place)
• The statute of limitation (3 years) has passed to bring the lawsuit
• The actions are within the bounds of the fiduciary relationship
• The other party was also contributing to the wrong and also committed a breach

Ownership, partnership, and shareholder disputes can cost you an enormous amount of stress, money and time. The attorneys at Robinson & Henry have the skills and experience to help you mitigate all three.

Call Robinson & Henry for an assessment to see where you stand and what actions are required. Our attorneys can help sort through the various relationships, keeping in mind the original purpose of these laws: a strong, stable business. Call us at 303-688-0944 to set up an assessment appointment.