What Acts Breach a Fiduciary Duty?

Fiduciary duties are legal obligations that one party owes to another in relationships involving trust, care, and loyalty. California law places significant emphasis on upholding these duties when fiduciaries, such as attorneys, fail to act in their client’s best interests, often for personal gain or through negligence. Breaches of fiduciary duties carry serious legal and financial consequences like lawsuits and other remedies including monetary damages. When a fiduciary breaches their duties, the injured party may seek legal recourse to remedy the harm caused. 

What is a Fiduciary Duty? 

Fiduciary duties are legal obligations requiring one party to act in the best interests of another, with the utmost good faith, loyalty, and care. Fiduciary duties arise in relationships entrusting one party with responsibilities that involve trust, reliance, and confidence. A “fiduciary” owes the “beneficiary” the fiduciary duties. 

Common types of fiduciary relationships in California include Corporate Officers and Directors, Trustees, Attorneys and Clients, Partners in a Partnership, and Executors and Personal Representatives. Each of these relationships require the fiduciary to uphold various duties like, the Duty of Care, the Duty of Loyalty, the Duty of Disclosure, and the Duty of Confidentiality. (Corp. Code, § 16404.)

What Acts Breach Fiduciary Duties? 

Breaches of fiduciary duties occur when fiduciaries fail to uphold their obligations, commonly by acting in self-interest, failing to disclose critical information, or neglecting their responsibilities. Beneficiaries are entitled to legal remedies when breaches occur such as monetary damages, disgorgement of profits, or in cases of severe misconduct, punitive damages. (Troensegaard v. Silvercrest Industries, Inc. (1985) 175 Cal.App.3d 218; Butte Fire Cases (2018) 24 Cal.App.5th 1150.) Because fiduciary duties are central to maintaining trust and fairness in professional and personal relationships in California, acts violating fiduciary duties are serious offenses for which the fiduciary is held liable. Each of the following are examples of acts that breach fiduciary duties. 

Conflicts of Interest

Conflicts of interest arise under California law when a fiduciary’s personal interests or relationships interfere with their obligation to act in the beneficiary’s best interests. California law considers conflicts of interest a breach of fiduciary duty because they compromise the fiduciary’s ability to act with loyalty, care, and in good faith. Generally, if conflicts of interest harm the beneficiary, the fiduciary is personally liable for losses caused by the breach. For example, Flatt v. Superior Court held that existence of fiduciary relationships with “access to confidential information, [specifically] by the attorney in the court of the first representation…” is a presumed conflict of interest requiring automatic disqualification of the attorney and their entire firm from representing the second client because a substantial relationship exists creating the conflict of interest. ((1994) 9 Cal.4th 275, 283.) 

Self-Dealing

A fiduciary engaging in acts of self-dealing violates their fiduciary duties. Acts of self-dealing occur in various ways. For example, fiduciaries are prohibited from buying property from themselves at their own sale. (Hartman v. Hartle (1923) 122 A. 615.) This obligation extends to the fiduciary’s partner or spouse, meaning if a partner or spouse purchases from the fiduciary at the fiduciary’s sale, the duty to avoid self-dealing is violated. (Id.) Likewise, a fiduciary who purchases real property for their personal benefit when they had a duty to purchase property for the beneficiary has engaged in self-dealing. In this instance, California law imposes a Constructive Trust, requiring the fiduciary to hold the property for the beneficiary’s benefit. (Kinert v. Wright (1947) 81 Cal.App.2d 919.) 

Similarly, a fiduciary cannot contract with themselves, even if the contract pre-existed the fiduciary relationship. In re Gleeson’s Will illustrates this principle, because the fiduciary of an estate renewed a real property lease by acting as both the fiduciary and tenant in the transaction. The court held that renewing the contract with himself was an act of self-dealing because the fiduciary acted as both parties in the renewal. To avoid this breach of fiduciary duties, the fiduciary “…should have decided to continue as a tenant or to act as [a fiduciary. Because] his election was to act as [a fiduciary] … he could not deal with himself.” (see In re Gleeson’s Will (1955) 124 N.E.2d 624, 667.) Therefore, fiduciaries must avoid entering transactions with themselves to avoid committing breaches for self-dealing. 

Failure to Account

Fiduciaries are required to provide beneficiaries with an accounting. (Prob. Code, §§ 16060, 16061; Corp. Code § 16404.) An accounting is a report drafted from the fiduciary’s detailed records of all significant transactions and financial activities throughout management of a trust or estate. 

Fiduciaries do not automatically breach the duty of accounting when engaging in conduct that furthers the partner’s own interest. (Corp. Code, § 16404(e).) Fiduciaries breach this fiduciary duty when they fail to provide an accounting, allowing beneficiaries to compel the fiduciary to provide an accounting in court. If an accounting is provided, but incomplete or inaccurate, beneficiaries can still challenge the accounting in court by disputing the accounting’s contents. (Prob. Code, §§ 16064, 17200.) 

Misappropriating Assets

Failing to properly manage or distribute assets or funds in a fiduciary relationship can constitute a breach of fiduciary duty. Fiduciaries misappropriate assets when they take or use assets or funds for their personal benefit, without notifying the beneficiary. Misappropriation of assets is a serious breach of fiduciary duty even if the fiduciary intends to pay the assets back or replace them. When misappropriation by a fiduciary occurs, the court creates a constructive trust to maintain the assets or funds for the beneficiary’s benefit. (In re Moeller (Bankr. S.D. Cal. 2012) 466 B.R. 525; Church v. Bailey (1949) 90 Cal.App.2d 501.) 

What is an Example?

“Shawn” is the trustee of his late father’s trust, which is set up to benefit his younger sister, “Julie.” The trust assets include a home and several financial investments. As trustee, Shawn has a fiduciary duty to maintain the trust in Julie’s best interests. When Shawn loses his job, he starts using trust funds to pay for his personal expenses without informing Julie of any of the withdrawals for Shawn’s personal use. Shawn never provides Julie with an accounting of how the trust assets are being used.  

Shawn is acting in his own interest by misappropriating trust funds and failing to inform Julie of the misuse of trust assets which deprives Julie of the ability to make informed decisions about the trust’s administration. Shawn is also neglecting to manage trust assets prudently by focusing on his own personal needs. These behaviors constitute violations of Shawn’s duties of loyalty, disclosure, and care. 

When Julie discovers Shawn’s misuse of funds, she immediately sues Shawn for breaches of fiduciary duties. Julie can seek damages and demand that Shawn return the misused funds because Shawn engaged in acts of self-dealing, failed to disclose material facts, and was overall negligent in managing the trust. 

Conclusion

Understanding what acts constitute a breach of fiduciary duty and the legal framework surrounding these violations is crucial for both parties in any fiduciary relationship. The Underwood Law Firm has a team of experienced lawyers who can help guide you through your asset management and help you pursue solutions to ensure you recover the entirety of what you are legally entitled to. We are here to help.