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What is a Fiduciary and What Are Fiduciary Duties? An Explanation for the Non-Lawyer.

By Burg Simpson

July 26, 2012   Colorado Blog, Colorado Business / Commercial Litigation

We hear a lot about being a “fiduciary” and “fiduciary duties,” but people often wonder exactly what that means. My practice consistently involves lawsuits over breach of fiduciary duty, and I see it every day in a number of ways. So let’s take a couple of minutes to discuss what it means to be a “fiduciary” or to owe a “fiduciary duty.”

A “fiduciary duty,” then, is the duty [i.e. the legal obligation—we will talk more about “duty” next time] the law recognizes and imposes on one who is acting as a fiduciary. When someone fails to fulfill their legal obligations we say they have “breached” their “duty” to someone else. Accordingly, when someone who is entrusted to act for the benefit of another fails to act properly, they are said to have “breached their fiduciary duty.”

Some examples:

  • “Mary” is an aging parent. Sometimes, when a parent ages, they are not able to properly care for their affairs, and so the Court may appoint someone [often a family member] to pay the parent’s bills and care for the parent’s assets. When that happens, the family member assumes “fiduciary” duties to the parent, and must act for the benefit of that parent. That happened to Mary. At 87, a family member “John” was appointed as Mary’s fiduciary to collect her pension and pay her bills. Unfortunately, John decided that it would be nice to take a vacation to Hawaii, and especially nice if he could use Mary’s money for that purpose. John breached his fiduciary duty to Mary when he decided to take some of the Mary’s money and use it to pay for his Hawaiian vacation. While John certainly enjoyed the “free” trip, Mary—the one to whom the fiduciary duty was owed—was harmed. John “breached” his fiduciary duty to Mary.
  • “Frank” bought 10% of a closely held business entity from “Sally.” He thought the investment in Sally’s business was a good way to make some income from his money. As a 10% owner Frank had rights, but he did not have “control” of the business. Sally, who holds 90% of the ownership [and thus “control” of the business] therefore is, by law, bound to make decisions as a “fiduciary” for all owners. When Sally, exercising her 90% ownership power, decided to take the funds from the company and pay for college for her child, that act was not “in the best interests” of the 10% owner Frank, and was a breach of the fiduciary duty Sally owed Frank.
  • “Bob” entered into a contract with “Mark” to manage his business. Mark contractually agreed to take actions “as a fiduciary” for the benefit of Bob and his business. At that point, Mark become a “fiduciary” to Bob. As a fiduciary, the law requires Mark to only take actions that are consistent with Bob’s best interests. In the course of managing Bob’s business Mark became aware of an opportunity for Bob’s business to make a sale. As a fiduciary, Mark was required to pursue that sales opportunity for Bob’s business [and Bob]. Instead, Mark decided to “do that deal on the side” and make the sale himself, rather than having Bob’s business make that sale [and earn that profit]. When Mark usurps that business opportunity that rightfully belongs to Bob and his business, Mark has breached his fiduciary duty to Bob.

As you can see, the types of situations in which “fiduciary duty” comes into play can be many and varied. These are, of course, very limited examples of the types of situations in which fiduciary duties exist, and the ways in which they can be breached.

In our modern world, with what appears to be crumbling ethical standards, I find an increasing number [and array] of situations in which people with responsibility to act as a fiduciary, are breaching those duties. My days are full of legal efforts helping those injured by the breach of fiduciary duty of another. I represent the Marys, Franks, and Bobs of this world, helping them find justice for their injuries and losses.

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