How serious is a breach of fiduciary duty in a business situation, and why is this issue raised in so many business disputes and lawsuits?  What creates a fiduciary duty and what types of actions violate this important business duty?

Key Takeaways about How Serious is a Breach of Fiduciary Duty in a Business Situation?:

• In a business setting, a fiduciary relationship is created when one party reasonably relies on another to act with honesty, loyalty, competence, and complete transparency. The fiduciary is expected to exercise judgment not for personal gain, but for the benefit of the company or stakeholders to whom the duty is owed. This obligation applies regardless of whether the fiduciary’s actions were intentional or merely reckless.
• Fiduciary duties commonly arise in business relationships that involve control, access to sensitive information, or decision-making authority.
• Many business owners are surprised to learn that employees, particularly those in positions of trust or with access to confidential information, not only have a legal fiduciary duty to the company, but are liable if they breach their fiduciary duty to the organization, even before leaving a company. The duty does not disappear simply because an individual believes they are acting in their own career interests.
• Because fiduciary duty claims often involve substantial financial exposure and reputational risk, they require careful analysis and decisive action. Remedies may include monetary damages, disgorgement of profits, removal from management, or court-ordered accountings.

How Does A Breach of Fiduciary Duty in a Business Situation Usually Occur?

A breach of fiduciary duty in a business situation usually occurs when someone entrusted with authority, discretion, or control places their own interests ahead of the company or the individuals they are obligated to protect. These claims are among the most serious disputes in business litigation because fiduciary duty represents the highest standard of conduct recognized by law.

In a business setting, a fiduciary relationship is created when one party reasonably relies on another to act with honesty, loyalty, competence, and complete transparency. The fiduciary is expected to exercise judgment not for personal gain, but for the benefit of the company or stakeholders to whom the duty is owed. This obligation applies regardless of whether the fiduciary’s actions were intentional or merely reckless.

Fiduciary duties commonly arise in business relationships that involve control, access to sensitive information, or decision-making authority. Examples include:

• Officers and directors who owe duties to the company and its stakeholders
• The majority of stakeholders who owe duties to minority shareholders or members
• Members of an LLC who owe duties to one another
• Partners in a partnership or joint venture
• Employees who owe fiduciary duties to their employer

Many business owners are surprised to learn that employees, particularly those in positions of trust or with access to confidential information, not only have a legal fiduciary duty to the company, but are liable if they breach their fiduciary duty to the organization, even before leaving a company. The duty does not disappear simply because an individual believes they are acting in their own career interests.

A breach of fiduciary duty in a business situation occurs when a fiduciary acts in a manner that is inconsistent with these obligations. This includes actions that harm the company, expose it to unnecessary risk, or unfairly advantage the fiduciary at others’ expense. Courts evaluate not only outcomes, but also process, disclosure, and intent.

The responsibilities of a fiduciary in a company are demanding by design. Fiduciaries are required to exercise their highest level of business judgment, diligence, and professional care in every decision they make. A fiduciary in a business setting must act in good faith, prioritize the company’s or stakeholders’ best interests, and avoid even the appearance of divided loyalty.

Key fiduciary responsibilities include:

• Acting with loyalty and avoiding conflicts of interest
• Providing complete and accurate disclosure of material information
• Refraining from self-dealing or secret profits
• Avoiding the use of company assets or opportunities for personal gain
• Disclosing competing interests and obtaining informed consent
• Never acting as a dual agent without authorization

If a fiduciary actually intended to take an action that could be perceived to conflict with the company’s interests, advance a competing venture, or personally benefit the fiduciary, they are almost always required to seek legal guidance, disclose the issue in advance, obtain approval from those to whom the duty is owed. Silence or partial disclosure is often treated as a violation.

A fiduciary duty is actually established under California law. It does not have to be contained within the body of any agreement. There are many ways a breach of fiduciary duty in a business situation can arise. Common examples include providing false or misleading financial information, engaging in business fraud, misappropriating company funds, or commingling personal and business assets. Other frequent claims involve misuse of trade secrets, competing against the company while still employed or in control, and steering business opportunities away from the company for personal benefit.

Additional examples include:

• Gross negligence in managing company affairs
• Favoring one investor or partner over others without disclosure
• Unauthorized compensation or expense reimbursement
• Working with a competitor of the company that employs them, or purposefully undermining the company’s strategy
• Withholding material information from partners or shareholders

Because fiduciary duty claims often involve substantial financial exposure and reputational risk, they require careful analysis and decisive action. Remedies may include monetary damages, disgorgement of profits, removal from management, or court-ordered accountings.

The Watkins Firm has more than 40 years of experience representing clients in breach of fiduciary duty claims, both in enforcing fiduciary obligations and in defending against allegations. These disputes often arise among business partners, LLC members, shareholders, investors, and key employees and require a sophisticated understanding of both business operations and litigation strategy.

A breach of fiduciary duty in a business situation is not merely a disagreement over management style. It is an allegation that the foundational trust of a business relationship has been violated. Addressing these issues early, with experienced legal guidance, is often the most effective way to protect the company, preserve value, and limit long-term damage.

Pro-Tip: “Well, generally, a fiduciary duty is when one party has an advantage of power, knowledge, or resources over another party. And they’re doing business with each other. That’s basically where we get fiduciary duty. And then the laws have been built on that concept for hundreds of years. So you can imagine that today’s fiduciary duty lawsuits are much different than they were 50 years ago. We’ve come a long way. The laws have changed.

A fiduciary is supposed to act openly, honestly, and fairly. They’re supposed to put the beneficiary’s interest above their own, and they’re supposed to never self-deal, they’re supposed to act in good faith. Basically, not take money or take an action that is not in the interests of your fiduciary client that they don’t know you’re taking.

For example, you’re a shareholder and you find out your buddy down the street owns the same amount of shares as you, but he got twice the dividends as you did. Corporations and their board of directors and their officers have an obligation to treat like shareholders in a like, and similar manner.  Unfortunately, quite often that just doesn’t happen. Sometimes other things that happen with corporations, such as insider trading, it happens on the large market, big caps. They go to jail, things like that, but it also happens on the small market.

We see this every year, several times a year, a shareholder client comes in, (they call themselves partners), but it’s a corporation. And they say, ‘my company decided to go bankrupt. Then I found out that the principles opened up a new company over in England and they made $10 million, and we lost everything.’ Basically, these bad actors were hoping that you didn’t find out on those situations. Again, the sooner we find out the quicker we can get what we call temporary protective orders and asset seizures and levies with a judge to stop them from stealing or taking other actions in breach of a fiduciary duty.” – Dan Watkins, Founding Partner

How Can The Watkins Firm Help to Protect Your Interests in a Breach of Fiduciary Duty Case?

A case which involves a breach of fiduciary duty in a business dispute involves substantial legal and financial risk.  The primary civil remedy in these cases is substantial compensation in the form of damages.  Allegations of a breach of fiduciary duty are common in any business-related dispute.  If you are concerned about the actions of a fellow stakeholder or an employee, or if you have been accused of a breach of fiduciary duty we invite you to review our Podcast – Episode 17 – Violation or Breach of Fiduciary Duty, as well as the strong recommendations of our clients and contact the Watkins Firm or call 858-535-1511 for a complimentary consultation today.

Meet Daniel Watkins:

Daniel W. Watkins is a true people person who sincerely listens. He cares deeply about what others are going through.  Dan enjoys digging into the facts and finding creative solutions to problems.  He contributes his insights candidly and constructively.

Dan’s interest in people make him deeply invested in every relationship and his exuberant personality makes him a true litigator. Dan fights for his clients with a fierce and calculated commitment.

Dan has practiced in the areas of business, medical practices and healthcare business, high tech/science, real estate and employment defense law since 1987. He is a trusted litigation strategist and true trial attorney with over 50 jury and bench trials to his credit. Dan has successfully represented both large companies and individuals and achieved substantial victories in well-publicized trials throughout California and the U.S.

He is experienced in business and corporate formation and administration, as well as all forms of alternative dispute resolution, including binding arbitration and mediation.

THE ROAD TO BECOMING A BUSINESS LAWYER AND LITIGATOR

Dan has almost 40 years of experience working with, for and against some of the largest insurance companies in the country. He has successfully tried and litigated cases in the areas of Healthcare Compliance, Commercial Litigation, Unfair Business Practices, Fraud, Breach of Contract, Battery, Premises Liability, Product Defect, Medical Malpractice, Discrimination, Sexual Harassment, Construction Defect, as well as Unfair Competition, Defamation, and Trade Secrets.

In December 2003, Dan commenced litigation against Health South Surgery Centers-West, Inc and its’ subsidiaries, exposing the company’s extensive mismanagement and misconduct of its’ surgery centers. Dan has also been asked by some of California’s largest municipalities and corporations to conduct legally required investigations into matters involving alleged employment discrimination and harassment.