What Are Some Examples of a Breach of Fiduciary Duty?

Fiduciary Duty

There are many situations in business that involve a fiduciary duty. These types of relationships may arise between directors, officers, controlling shareholders, and with any party that has an obligation to act in the best interests of another. If this duty is breached, the injured party may incur considerable costs and suffer reputational harm. However, it’s important to understand that business matters can be complex — and not every mistake will constitute a breach of fiduciary duty.

Who Owes a Fiduciary Duty?

In a business context, fiduciary duties can arise in various fields and industries. Specifically, controlling shareholders owe a fiduciary duty to minority shareholders, business partners have this duty to each other, and directors have a duty to act in the best interests of the corporation. While corporate governance is one area in which fiduciary duties play a critical role, attorneys, financial advisors, real estate agents, stockbrokers, and the trustee of a trust also must act in accordance with this duty.

Common Examples of Breaches of Fiduciary Duty

A fiduciary duty is the highest legal standard of care — and failure to adhere to it can have significant financial ramifications for a company. Under Illinois law, there are two specific duties that fall under a fiduciary duty. These include a duty of care and a duty of loyalty. While the duty of care requires a corporation’s officers and directors to make decisions on behalf of the company in good faith, the duty of loyalty means they must act without economic conflict.

Simply put, a breach of fiduciary duty occurs when a party has an obligation to act in the interests of another party but fails to do so. A corporate officer or director can breach their fiduciary duty to the corporation in many different ways. The following are common examples of breach of fiduciary duty that may lead to litigation:

  • Sharing trade secrets
  • Failing to exercise reasonable care
  • Improperly using company funds
  • Acting on behalf of a competitor
  • Engaging in fraud, corruption, or embezzlement
  • Making decisions in bad faith
  • Failing to reasonably investigate before making a business decision
  • Acting on improper motives
  • Conflicts of interest
  • Insider trading
  • Purposely misrepresenting or concealing information

In addition, a fiduciary must be free from self-dealing and acting in their own best interests — rather than on behalf of the company. Fiduciaries are also prohibited from commingling or taking corporate assets and using them for their own personal advantage. If a plaintiff can show that (1) a fiduciary relationship existed; (2) the fiduciary duty was breached; and (3) the breach proximately caused the plaintiff’s damages, they may be able to secure a legal remedy. Specifically, the aggrieved party may be entitled to recover their monetary losses, equitable relief, an injunction, and punitive damages in some cases.

How Can Breaches of Fiduciary Duties Be Avoided?

Since there are many ways in which a fiduciary duty can be breached, it’s important to ensure you always act in the best interests of the party to whom you owe the duty. One way to help ensure breaches of fiduciary duty are avoided in a company is by creating policies that prohibit self-dealing, engaging in conflicts of interest, and other conduct that runs afoul of these obligations. It’s also a good idea for companies to keep minutes, document all meetings, and create board resolutions when major decisions are made.

While a business decision must be made in good faith, that doesn’t always mean it has to be the right one. Another way a claim for a breach of fiduciary duty can be avoided is by applying the business judgment rule. This doctrine presumes that corporate officers and directors made decisions in good faith and honestly believed they were in the corporation’s best interests — even if the outcome was not favorable to the company. It can be extremely challenging for a plaintiff to rebut this rule, absent a showing of fraud, corruption, or bad faith.

Contact an Experienced Illinois Business Attorney

A breach of fiduciary duty can be a serious matter for a company, resulting in a wide variety of damages. In such cases, it is crucial to have a knowledgeable business attorney to guide you through the legal process. Located in Rolling Meadows, Litico Law Group offers reliable representation and high-quality legal services in Illinois for a broad scope of business disputes, including breach of fiduciary duty claims. We welcome you to contact us at (847) 307-5942 to schedule a consultation to learn how we can assist you.

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Categories: Fiduciary Duty