New Probate Section
|
|
Newsletters & Articles
BUSINESS LAW
Breach of Fiduciary Duty
A fiduciary duty is a special type of duty owed where there has been a special relationship created between individuals or between an individual and an entity. This special duty is not created by an agreement between the parties, but simply by the nature of the relationship. When that special duty has been
breached, a cause of action may ensue to recoup damages resulting from the breach. To prosecute a case of breach of fiduciary duty, one is not necessarily obligated to prove there existed an agreement between the parties that formed the fiduciary relationship, but show the existence of a special duty and the breach of it. The fiduciary relationship can be formed by agreement, but can also be formed by the existence of a special relationship between the parties. Texas case law has defined a fiduciary relationship to be “when a person is under a duty, created by law or contract, to act on or give advice for the benefit of another within the scope of the relationship,” that person has a fiduciary relationship with the other person. Whether a person has a fiduciary duty is a factual question. At Smith & Garg, our Houston Texas contract attorneys and our Harris County litigation lawyers will sit down, one on one, with you to get the facts, analyze the issue, and determine whether a fiduciary duty is owed; and if so, whether the person breached such fiduciary duty.
In describing the elementary nature of a fiduciary relationship, the Texas Supreme Court wrote in Texas Bank & Trust, v. A. E. Moore: “When persons enter into fiduciary relations each consents, as a matter of law, to have his conduct towards the other measured by the standards of the finer loyalties exacted by courts of equity. That is a sound rule and should not be whittled down by exceptions. If the existence of strained relations should be suffered to work an exception, then a designing fiduciary could easily bring about such relations to set the stage for a sharp bargain…mischief would result more often from engrafting exceptions upon the general rule than from a strict adherence thereto.” The Court also stated in an earlier case: “the term ‘fiduciary’ is derived from the civil law and contemplates fair dealing and good faith, rather than legal obligation, as the basis of the transaction. Further, the term [fiduciary] includes those informal relations which exist whenever one party trusts and relies upon another, as well as technical fiduciary relations.”
Formal as well as informal relationships give rise to a fiduciary relationship. Some examples of formal fiduciary relationships are: attorneys with their clients; partners with other partners, like in a limited partnership; agents with their principals; spouses, generally; agents in a power of attorney scenario with the principal; executors and trustees to devisees and beneficiaries; class representative in a class action suit to other class members; and employees to their employees during the employment period.
Informal fiduciary relationships can be created from “a moral, social, domestic or purely personal relationship of trust and confidence.” Examples of informal fiduciary relationships are: relationships that carry on over a long period of time wherein the parties create a high degree of trust, influence or confidence; and in certain business transactions wherein there was a fiduciary relationship that pre-existed the business transaction. An informal fiduciary relationship can be created where there exists a situation of dominance of one party and a weakness and dependence of the other party. Some examples of relationships that are not considered fiduciary are: banks to the depositors; and shareholders in a closely held corporation.
Within a fiduciary relationship, there exist two levels of duties, general and specific. General fiduciary duties apply to all fiduciaries and include: the duty of loyalty and utmost good faith; the duty of candor; the duty to refrain from self-dealing; the duty to act with the integrity of the strictest kind; the duty of fair and honest dealing; and the duty of full disclosure.
Specific fiduciary duties are those duties that are unique to a specific type of fiduciary. For instance, a trustee has specific duties that have been imposed by case law and the Texas Trust Code and include: the duty to use the level of skill and prudence that an ordinary, capable and careful person would use in handling his own affairs and the duty of loyalty to the beneficiaries of the trust. Other duties that trustees owe the beneficiaries are: the duty of good faith and fair dealing, loyalty and fidelity over the trust property and affairs; the duty to make the trust assets productive, yet preserve them; the duty to disclose all facts to the beneficiaries that might affect the beneficiaries’ rights; the duty to account to the beneficiaries for all trust transactions; the duty to properly manage, supervise and safeguard trust funds; the duty to refrain from self-dealing with trust assets; the duty to refrain from lending trust funds to himself, an affiliate or to the trustee’s employer or employee.
The fiduciary relationship of attorneys to their clients is based on the attorney’s actions – did the attorney act with fidelity and integrity? Other duties owed to client by their attorneys are: the duty to preserve the client’s confidences; the duty to represent the client with undivided loyalty; the duty to be honest about the fee agreement and to refrain from self-dealing; the duty to act with candor, openness, honesty and without concealment or deception; the duty to inform the client about matters that are material to the representation; duty to make full and fair disclosure to the client about settlement terms; duty to inform the client timely of conflicts of interest; the duty to turn over funds belonging to the client; and the duty to follow the client’s instructions.
Partnerships also give rise to the creation of fiduciary relationships. For instance, partners owe each other the duty of loyalty to the joint concern; the duty of the utmost good faith, fairness and honesty in dealing with each other in matters pertaining to the enterprise; the duty of full disclosure on all matters affecting the partnership; the duty to account for all partnership property; and the duty to refrain from competing with the partnership. Officers and directors of corporations have similar duties with a few additions: the duty of loyalty; the duty to make full disclosure of personal interest in the business dealing of the corporation; and the duty not to usurp the opportunities of the corporation for personal gain.
In order to prove breach of a fiduciary relationship, the plaintiff must show that the defendant breached the duty created by the relationship and that the defendant was the plaintiff’s fiduciary. The fiduciary duty in issue cannot extend to matters “beyond the underlying relationship of the parties.” The plaintiff must also show that the defendant’s breach of the duty resulted in an injury to the plaintiff or in a benefit to the defendant even if the plaintiff suffered no loss. There is an equitable presumption of unfairness when parties under a fiduciary relationship enter into a transaction and one of the parties does not benefit or profit from the relationship and the other does. When the presumption of unfairness is made, the burden to prove the transaction was fair and to produce evidence of the fairness shifts to the party seeking to enforce the agreement (the fiduciary).
When a court considers whether a transaction involving fiduciaries was fair, it will consider several factors. Those factors are: the existence, or lack thereof, of full disclosure about the transaction in issue; if the consideration was adequate; whether the beneficiary had the benefit of independent advice; and whether the fiduciary benefited at the expense of the beneficiary. An example of a court applying these standards to the facts is in the case of the Estate of Townes. (867 S.W.2d 414) In Townes, the ailing mother and her adult son had a fiduciary relationship wherein the son managed his mother’s financial affairs, including her investment portfolio. Son was authorized to sign checks on Mom’s checking account. Over a course of time, Son wrote over $400,000.00 of checks from the account to himself. All of the checks except the last one were written on an account which did not send Mom any statements. The last check was written on an account which issued statements, but was written while Mom was in a coma. The evidence showed that the accounts belonged to Mom and the income or appreciation from the accounts also belonged to Mom. There was no writing that spelled out the exact relationship between Son and Mom, however. There was testimony at trial that some or all of the money obtained by Son was a gift since Mom was very generous with her money. The court stated that “Even in the case of a gift between parties with a fiduciary relationship, ‘equity indulges the presumption of unfairness and invalidity, and requires proof at the hand of the party claiming validity … of the transaction that it is fair and reasonable.’” As to a transaction between fiduciaries, the court stated that “The transaction is unfair if the fiduciary significantly benefits from it as viewed in light of circumstances existing at the time of the transaction.”
In this case, Son and Mom enjoyed a close relationship and Son visited Mom regularly and often. Mom was found to be alert and engaged during Son’s management of her portfolio. However, the court found no evidence that Mom received independent advice about the transactions or even knew of them and that Son clearly benefitted from the transactions at Mom’s expense. The court found that Son failed to use proper accounting methods regarding Mom’s finances; and, during Son’s management of Mom’s portfolio, it lost $30,000.00. The appeals court found that Son converted the funds he withdrew from Mom’s accounts. The court also found that the presumption of unfairness of the transactions was not overcome by Son.
Misapplication of fiduciary property can be considered a crime under Texas Penal Code §32.45. In pertinent part, the statute reads: “A person commits an offense if he intentionally, knowingly, or recklessly misapplies property he holds as a fiduciary or property of a financial institution in a manner that involves substantial risk of loss to the owner of the property or to a person for whose benefit the property is held.” The severity of penalties for such actions is commensurate to the value of the misappropriated funds. Additionally, if the crime was committed against an elderly person, the penalty is increased to the next higher category.
In the criminal case of Showery v. State, 678 S.W.2d 103 (Tex.App. – El Paso 1984, pet. ref’d.), Showery, a doctor, provided services to the complainant and promised her help with getting a refund of her payment by filing the necessary insurance paperwork. Dr. Showery informed the complainant that her payments to him were payments in full. However, Dr. Showery made claims to the insurer that far exceeded the amounts paid by the complainant. The insurer denied most of the claim, but paid the doctor at least the sums collected from the complainant. Dr. Showery deposited the claim checks into his account, but did not refund any money to the complainant. Dr. Showery was found to be the complainant’s fiduciary and she was found to be the beneficiary. The court stated “[w]hen [Dr. Showery] received the funds from Prudential, he held them in trust for the benefit of the complainant. This trust arose from the original contract for services, the fees paid and the claim for insurance reimbursement. By depositing these proceeds in his business bank account and refusing to tender them to his patient, he breached a fiduciary obligation and imposed continuing loss upon the beneficiary.” Dr. Showery was convicted under the statute and given four years in prison. His grounds on appeal were overruled and the 4-year sentence was upheld.
In the civil realm, remedies for breach of fiduciary duty are recovery of actual damages, equitable relief (constructive trusts, fee forfeiture, ordered accounting, appointment of receivership, profit disgorgement), interest in the form of pre- and post-judgment and court costs. Attorney fees are generally not recoverable in a breach of fiduciary cause of action.
Actual damages include economic injuries that resulted from the breach. A plaintiff can recover economic out-of-pocket damages like the money paid in a transaction. Actual damages also include loss of profits.
A plaintiff may recover damages that result from mental anguish suffered as a result of the breach. For example, if the breach of fiduciary resulted in public embarrassment, the plaintiff may recover for those damages. However, the plaintiff must, in addition to proving breach of fiduciary duty, prove each element necessary for a recovery of mental anguish damages.
If the breach of fiduciary duty was intentional, the plaintiff may recover exemplary damages. An intentional breach of fiduciary duty happens when the defendant “intends to gain an additional, unwarranted benefit.”
Some forms of equitable relief include constructive trusts and fee forfeiture. Constructive trusts can be formed when there are “proceeds, funds or property … obtained as a result of the breach of fiduciary duty.” In cases where a constructive trust is formed, the “proceeds, funds, or property” are placed in the trust for the benefit of the harmed party (plaintiff). If a fiduciary collects fees as a result of a breach, the court may order the fees forfeited by the defendant.
If you believe that you have been a victim of a breach of fiduciary duty, contact the business law attorneys at Smith & Garg please via telephone at 281-210-0010. We have three offices to serve you (two offices in the Houston area and one office in Downtown Long Beach, CA).
|
|
