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What Constitutes a Breach of Fiduciary Duty in California? - Werner Law Firm

What Constitutes a Breach of Fiduciary Duty in California?

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Written by Troy Werner

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POSTED ON: September 20, 2018

Legal jargon can at times feel impenetrable to a layperson, thus removing any sense of relatability from the law, and making it obtuse and confusing. Yet the reality is that the law simply dictates proper conduct between individuals, either with other individuals or society. It sets guidelines and limits and enforces penalties on those that … Continue reading What Constitutes a Breach of Fiduciary Duty in California?

Legal jargon can at times feel impenetrable to a layperson, thus removing any sense of relatability from the law, and making it obtuse and confusing. Yet the reality is that the law simply dictates proper conduct between individuals, either with other individuals or society. It sets guidelines and limits and enforces penalties on those that infringe upon the rights and freedoms of others.

One such infringement is the betrayal of a person’s trust. Another is the breach of one’s fiduciary duty.

A fiduciary duty is an obligation to act in a person’s best interest, due to the nature of the relationship with said person. There are relationships wherein one party places their trust and confidence in another – thus meaning that the second party has a fiduciary duty to protect and uphold that trust.

There are, of course, many such relationships in theory – but only a few are legally enforceable, to the point that a breach of fiduciary duty can lead to a lawsuit. To understand what constitutes a breach of fiduciary duty in California, it’s important to grasp the difference between a handshake agreement and a binding fiduciary relationship.

Explaining Fiduciary Relationships

According to California Civil Jury Instructions published in 2017, 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.”

The document goes on to explain that a party’s fiduciary duty to their beneficiary exists once the beneficiary reposes their confidence in the integrity of the fiduciary. Upon that moment, the fiduciary cannot take advantage of the beneficiary or work against their interests without knowledge or consent.

Fiduciary duty in the eyes of the law begins once the fiduciary knowingly acts on behalf of the beneficiary, and in their benefit, or upon acknowledging the fiduciary duty by entering an official relationship that imposes said rules, such as the relationship between a corporation and its shareholders, or a lawyer and their client. Two parties that enter a fiduciary relationship on equal terms enter into a joint venture or partnership.

Fiduciary duty entails: treating the beneficiary with care and reasonable conduct; being open and honest with the beneficiary regarding relevant information, as it pertains to the relationship between the fiduciary and the beneficiary; acting in good faith, putting the relationship and the partnership/corporation above personal interests.

Another example of a fiduciary relationship is one where a client buys into a company’s stock expecting the company to work in the interest of improving its profitability and raising the value of its stock. Thus, any willful effort to undermine the company is a breach of fiduciary duty.

Broadly-speaking, fiduciary relationships exist between corporations and their shareholders, officers of a charity and the finances of said charity, and individuals entering into a confidential relationship (priest and parishioner, doctor and patient, guardian and ward) or financial partnership/joint venture.

What a Breach of Fiduciary Duty Looks Like

The golden rule is that we all treat each other as we would treat ourselves. To behave politely and in accordance to common decency. Yet some relationships are both personally and financially more valuable than others and require the protection of the law. However, this does not mean that slighting another person or respecting your own interests above theirs is punishable – you must simply do so without violating the rules of the fiduciary relationship.

For example – if the director of a company, a majority shareholder in said company, wishes to remove a minority shareholder, then conventionally, the only option is to convince the minority shareholder to sell their share. Alternatively, a more aggressive option is to freeze out a minority shareholder, utilizing a merger tactic. Fiduciary duty exists so majority shareholders cannot take advantage of minority shareholders and must cooperate with minority shareholders regarding their part in the company.

Insider trading, on the other hand, violates the fiduciary duty owed to the source of the information by the insider working there. As an act of fraud, insider trading is a criminal offense, as well as a breach of fiduciary duty.

Consequences of a Breach of Fiduciary Duty

A breach of fiduciary duty is not a criminal act but can be tied to one. As mentioned previously, insider trading is not only a breach of fiduciary duty but can be criminal, depending on the significance of the wrongdoing among other things. This means that on top of damages, the fiduciary would also have to deal with the consequences of a criminal act, and potentially jail time.

In California, the plaintiff can demand compensatory damages, and also punitive damages. Punitive damages are meant to put additional financial pressure on an individual after compensatory damages, sending a message to them and society and a breach of fiduciary duty is not to be tolerated.

However, the difficulty lies in a.) proving that a breach exists, and b.) quantifying damages.

Proving a Breach of Fiduciary Duty

The plaintiff making a claim against a party for a breach of their duties must prove that a fiduciary relationship existed to begin with, and that the defendant breached their fiduciary duty – and, finally, that said breach was damaging to the plaintiff.

This changes, however, if the defendant is an executive at a company. A director or officer in a company may breach their fiduciary duty if and only if they did so while considering the best interests of the company. As such, the defendant must prove that their breach was advantageous for the company, reasonable, and thus justified.

If you can prove that a breach of fiduciary duty was committed without the interests of the company in mind, then you can sue for damages.

Seek Professional Legal Help

If you suspect a breach of fiduciary duty, consider seeking a legal remedy soon. The longer you wait, the more difficult it may be to pursue and prove that a breach has taken place. If you seek to litigate, then time is of the essence.

By acting swiftly with the services of a litigation attorney by your side, you can pressure the other party into coming up with a settlement offer. If push comes to shove, having an experienced local litigation attorney will ensure that your interests are protected and properly represented in court.

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