What is a Fiduciary?
A fiduciary is an individual who holds a special position of legal responsibility to their client, as a personal representative, guardian, trustee, conservator, attorney-in-fact, or custodian under the California Uniform Transfer to Minors Act, or any other applicable legal representative. (Prob. Code., § 39.) Fiduciary relationships commence when the fiduciary begins acting on behalf of their client for the client’s benefit.
What is a Fiduciary Relationship?
The existence of a fiduciary relationship can be established in various circumstances but is never guaranteed. This is because a contract may include specific terms to void the existence of a fiduciary relationship. A fiduciary relationship is “any relation existing between parties to a transaction wherein one of the parties is duty bound to act with the utmost good faith for the benefit of the other party.” (Cleveland v. Johnson (2012) 209 Cal.App.4th 1315, 1338.) Other fiduciary relationships recognized in California include:
- Attorney Client Relationships
- Business Partners and Joint Venturers (Corp. Code, § 16404.)
- Spouses (Fam. Code, § 721.)
- Agent and Principal Relationships (Cal. Jur. 3d Agency § 123.)
- Banks and Borrowers
- Insurers and Insured
- Some Co-Owner Relationships
- Joint Venturers
- Trustee & Trustee Beneficiary
- Corporations & Stockholders
This is a non-exhaustive list. Fiduciary duties can exist anywhere an individual is legally obligated to act in their client or partner’s best interest by upholding their duties.
What is a Fiduciary Duty?
Fiduciaries are responsible for performing a series of professional duties throughout the course of their client relationships. “Such a relation ordinarily arises where a confidence is reposed by one person in the integrity of another, an in such a relation the party in whom the confidence is reposed, if he voluntarily accepts or assumes to accept the confidence, can take no advantage from his acts relating to the interest of the other party without the latter’s knowledge or consent.” (Wolf v. Superior Court (2003) 107 Cal.App.4th 25, 29; Apollo Capital Fund, LLC v. Roth Capital Partners, LLC (2007) 158 Cal.App.4th 226, 246.) This entails:
1. Duty to Exercise Reasonable Care: The duty to exercise reasonable care requires fiduciaries to act on behalf of their client to the same degree as a reasonably prudent person would in identifying potential risks and courses of actions before taking the necessary action. “The fiduciary also is required to manage the subject matter of the relationship, with due care, must account toward the beneficiary, and must keep the beneficiary fully informed as to all matters pertinent to the beneficiary’s interest in the [matter.]” (Oakland Raiders v. National Football League (2005) 131 Cal.App.4th 621, 631, emphasis added.) This duty is also commonly known as the Duty of Prudence.
2. Duty of Confidentiality: The duty of confidentiality requires fiduciaries to “maintain inviolate the confidence, and at every peril to himself or herself to preserve the secrets, of his or her client.” (California Business and Professions Code, § 6068.) The carrying out of this duty can look different depending on the capacity a fiduciary is acting in, as each capacity may be subject to different exceptions permitting disclosure of information.
If the fiduciary is acting as a trustee, they must keep trust terms, assets, beneficiary identities, and all other trust information confidential. In this capacity, a fiduciary may only disclose information if the trust instrument explicitly authorizes disclosure, or if disclosure is required by law. (Cal. Prob. Code., § 16003).
3. Duty to Disclose: The duty to disclose requires the timely disclosure of material facts that could affect the client’s well-being. (In re Farrell (Bankr. C.D. Cal. 2019) 610 B.R. 317.)
4. Duty of Undivided Loyalty: The duty of undivided loyalty requires fiduciaries to put their client’s personal and/or business interests above their own. In carrying out this duty, fiduciaries must take steps to ensure no conflicts of interest or instances of self-dealing. (Huong Que, Inc. v. Luu (2007) 150 Cal.App.4th 400, 410-12.) A fiduciary engages in acts of self-dealing when they abuse their positions authority to grant themselves material benefits. (Id.)
5. Duty of Good Faith and Fair Dealing: The duty of good faith and fair dealing requires fiduciaries to act honestly and fairly throughout their fiduciary relationships. This duty exists to ensure fiduciaries are acting with a conscious regard for their fiduciary duties, and in accordance with the law, when acting on behalf of their clients. (see Hasso v. Hapke (2014) 227 Cal.App.4th 107, 140.)
A breach of fiduciary duty occurs when one or more of these duties are not upheld during a fiduciary relationship.
Breaches of Fiduciary Duties
In California, the statute of limitations for breach of fiduciary duty claims is four years from the date the breach occurred. (Civ. Code., § 343.) To allege a claim for breaches of fiduciary duties within this time, plaintiffs must prove damages by establishing four elements: (1) that a fiduciary duty existed; (2) that a breach of that existing duty occurred; (3) that plaintiff suffered damages; and (4) that plaintiff suffered damaged because of that breach. (Gutierrez v. Girardi (2011) 194 Cal. App.4th 925, 932.)
To successfully establish these elements plaintiffs must ensure they are not responsible for the breach by withholding information from their fiduciary and that the harm they suffered were not caused by factors the outside the fiduciary’s control. If the plaintiff is found to be partially responsible or is found to have been harmed by uncontrollable outside sources or is not harmed at all, they will not establish their claim.
Available Remedies
Because claims alleging breaches of fiduciary duties are civil claims, the most common remedies available are monetary damages awards. These awards generally include payment for damages suffered, court costs, and attorney fees. In some instances, the court may award punitive damages if the fiduciary is found to have acted with fraud, malice, or oppression. Punitive damages are awarded to punish the defendant in a lawsuit.
What is an example?
For example, “Shawn” is looking to buy property in California and hires “Julie” to be his real estate agent. After many months of looking, Julie finally shows Shawn what he thinks is the perfect house. Shawn tells Julie he’d like to put in an offer above asking price to make sure no one will buy the house out from under him. Julie knows the house has significant structural defects including foundation damage and significant roof leaks. Seeing Shawn’s enthusiasm, Julie decides not to tell Shawn about these defects and takes his above asking price offer to the sellers, knowing she is set to profit. The seller’s accept Shawn’s offer without hesitation. Shawn does not learn about the house’s structural defects until closing day.
Julie has committed a breach of fiduciary duty because she knew of the defects and chose not to disclose these material facts to Shawn to secure her profit. Assuming Shawn can establish he suffered damages because of Julie’s breach of fiduciary duty, Shawn can now sue Julie in court for a breach of fiduciary duty.
Conclusion
Upholding one’s duties is one of the most important parts of any fiduciary relationship. The Underwood Law Firm has a team of experienced lawyers who can help guide you through your partnerships end and help you pursue solutions to ensure you recover the entirety of what you are legally entitled to. We are here to help.