[New Version] What Are Fiduciaries and When Can They Be Sued for Breach of Duty?

A fiduciary is someone who is under a legal obligation to act in the best interest of another, be it a client, an employer or another person or entity. In the context of business organizations, fiduciaries include directors, officers and sometimes majority shareholders who have control over the company’s operations and financial decisions. These individuals are entrusted with significant responsibilities and must prioritize the company’s and its shareholders’ interests above their own personal gains. When they violate those duties, they are answerable for the damages they cause.

Fiduciaries must follow a prudent person standard of care, ensuring no conflicts of interest arise and seeking explicit consent for certain transactions. Examples of breach of fiduciary duty are the following:

1. Self-Dealing — This occurs when a fiduciary engages in transactions that benefit themselves at the expense of the company or its shareholders. For example, if a director approves a contract between the company and another business they own, this could be considered self-dealing.
2. Usurpation of Corporate Opportunities — Fiduciaries must not exploit business opportunities that belong to the company. A breach occurs if they divert a potential business opportunity to themselves instead of the company.
3. Misappropriation of Assets — Using company assets for personal use or benefit constitutes a breach of fiduciary duty. For instance, an officer using company funds for personal expenses without proper authorization.
4. Negligence — Failure to exercise due care in managing the company’s affairs can also be a breach. For example, if a board of directors neglects to adequately oversee the actions of company executives, leading to significant financial losses.

When a breach of fiduciary duty occurs in a corporation, the parties who can claim injury typically include the shareholders and, in some cases, the company itself. Shareholders may suffer financial losses due to the mismanagement or misconduct of the fiduciary, which can diminish the value of their shares or the overall profitability of the company. The company can also be directly harmed through financial losses, damage to its reputation, or missed business opportunities.

Legal remedies for breaches of fiduciary duties vary with the harm that results. One common remedy is monetary damages, which compensate the injured party for the financial losses incurred due to the breach. Courts may also impose equitable remedies such as injunctions to prevent further breaches or to compel fiduciaries to act in accordance with their duties. In cases of self-dealing or misappropriation, the court might order the fiduciary to disgorge any profits made from their misconduct. Additionally, courts can rescind contracts or transactions that were the result of a breach, effectively nullifying any agreements that were made in violation of fiduciary duties.

Breach of fiduciary duty litigation can be complex, since defendants in such cases may argue that their actions were in the best interest of the company or that they were protected by the business judgment rule, which offers a degree of protection for decisions made in good faith and with reasonable care.

The Law Offices of Donald W. Hudspeth P.C. in Phoenix, Arizona represents plaintiffs and defendants in breach of fiduciary duty cases and aggressively pursues the best possible outcome for our clients. To schedule a consultation, call our firm at 866-696-2033 or contact us online.