Friends as fiduciaries.

Author:Leib, Ethan J.
 
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This Article argues that the law of fiduciary duties provides a good framework for friends to understand their duties to one another better, gives courts a useful set of rhetorical and analytical tools to employ when they are forced to entertain disputes that arise between close friends, and, finally, can help direct courts to furnish betrayed friends certain kinds of remedies that are most appropriate for achieving justice within that dispute context. This is not the first Article to make an effort to expand the reach of the fiduciary concept into new sorts of relationships that are not always considered within the ambit of fiduciary duty law. But the case for thinking of friends as fiduciaries is exceedingly persuasive and underappreciated, both in the law and in our lives.

TABLE OF CONTENTS I. THE FIDUCIARY A. The Fiduciary Relationship B. The Fiduciary Duties C. The Fiduciary Remedies D. The Fiduciary Concept II. THE FRIEND AND HER LIKENESS TO THE FIDUCIARY A. Trust and Friendship B. The Problems of Monitoring and Opportunism in Friendship C. The Friend as a Moral Fiduciary III. THE FRIEND AS A LEGAL FIDUCIARY? A. The Law's Ambivalence About Friends as Fiduciaries B. How To Treat Friends as Legal Fiduciaries 1. Close Friends Are Vulnerable to One Another 2. A "Friendship Judgment Rule" 3. Being Loyal to Friends 4. Giving Friends Their Due 5. Restituting Friends IV. THE MISFITS AND THE DANGERS OF TREATING FRIENDS AS FIDUCIARIES A. Misfits? B. The Dangers for Fiduciary Law and Friendship 1. Stretching Fiduciary Law Too Far? 2. Crowding Trust V. CONCLUSIONS John and David are both thirty-three years old and have been friends since college. They are not merely casual friends but stay in touch regularly and are important parts of each other's lives. They share intimacies, secrets, confidences, and trust each other with almost everything. If asked, they would surely say that they love each other and find each other to be very close to the center of their respective circles of affection.

For some years, both have been looking for a way out of academia and a way to pay for their children's private school tuitions. They have often imagined that they would pursue a business venture together and, given their competencies and interests, assumed that an environmentally friendly beverage company in China would suit them well. They also both believed that the venture would enrich them professionally and financially. Although they had been chatting casually about the plan for four years, neither had taken any affirmative steps to make the company a reality and neither had suggested to the other that their business idea was confidential.

Last year, David was approached by a wealthy acquaintance, Daniel, who was setting up shop in Beijing. Daniel casually knew David and John from college but knew nothing of their plan to go into business together. David, assuming that his "green" beverage company was unlikely to become a reality with John anytime soon (John was in the middle of researching his next book in South Korea and seemed, for the moment, fulfilled by the academic life), pitched Daniel on the idea. Daniel loved the plan and quickly set up Datong Drinks, a drink company that preached the unity of earth and man. Reasonable projections suggest that the company will be hugely profitable over the next five years. David was given a consulting contract by Datong (as a finder's fee reward, of sorts) worth one million dollars.

John had been traveling in South Korea doing research over the last year and stopped in Beijing recently on his way home. He went to his favorite coffee shop in the hutongs of Beijing and asked for a drink menu. He ordered a Datong "double green" iced tea. When he read the label, he was surprised to learn that someone else had beaten him to the punch on his business idea with David: the label was explicitly environmentalist. But then he noticed that the president of the company was Daniel--someone he knew from college.

He called Daniel in Beijing and they met up over some duck and beer. Daniel told John the story of Datong and told him of David's role in the development of the idea and his one million dollar contract.

John became furious and started thinking of ways he might sue David. John knew David had betrayed their friendship in selling out their idea to Daniel. But he was not sure if he could make out a legal claim against David. He knew they had no explicit contract and did not quite think any theft claim or intellectual property claim could be sustained.

But John had just completed reading a biography of Justice Benjamin Cardozo. He remembered the famous case of Meinhard v. Salmon--and its most notorious pronouncement:

Joint adventurers, like copartners, owe to one another, while the enterprise continues, the duty of the finest loyalty. Many forms of conduct permissible in a workaday world for those acting at arm's length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior. As to this there has developed a tradition that is unbending and inveterate. Uncompromising rigidity has been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty by the "disintegrating erosion" of particular exceptions. Only thus has the level of conduct for fiduciaries been kept at a level higher than that trodden by the crowd. It will not consciously be lowered by any judgment of this court. (1) John wondered: Did David violate any fiduciary duties to him as his friend? Is friendship a kind of "joint adventure" such that David's actions could be deemed usurpation of what should have been their joint opportunity? Were not the two of them in something "jointly, for better or for worse," as Cardozo described Meinhard and Salmon's venture? (2) Did David misappropriate information for his own purposes that could be deemed confidential? If so, what remedy should be available to John? Should David have to share his contract earnings from Datong? Should all profits David receives from Datong be disgorged and placed in a constructive trust for the benefit of both friends? For John exclusively? Should John be compensated from those earnings for his prorated contribution to the idea?

These queries stem neither from a real case nor from some law school exam. (3) But the central issue they raise--whether friends are fiduciaries for some purposes and in some contexts--is not wholly hypothetical either. Courts often need to assess whether the duties of friendship in moral life can be translated into legal duties. When and if courts do transmogrify friendship's duties into legally cognizable ones, they tend to enforce the duties through a set of remedies often considered equitable: disgorgement, the constructive trust, restitution. In short, the body of law courts consider when presented with fact scenarios like the fictional one just sketched is the law of fiduciary duties. And John was not far off in his channeling of Cardozo's Meinhard opinion. In what follows, I defend the use of fiduciary duty law to police the activities of close friends in certain contexts. Although the example of David's behavior is illustrative of the way a fiduciary duty of friendship might be breached, I hope to provide some guidance here on other ways the law of fiduciary duties can be employed to monitor the actions of our usually trustworthy close friends or those who pose as them.

To be sure, the fiduciary concept is still very much contested (4) and some famously think "there is no subject here." (5) More, many will recoil from the idea that friendship, an activity deeply rooted in the private sphere, should be subject to legal standards (6) (though these people will at least learn that, normative arguments aside, our courts do sometimes treat friends as fiduciaries). Still, I hope to make the case here that the law of fiduciary duties provides a good framework for friends to understand their duties to one another better, gives courts a useful set of rhetorical and analytical tools to employ when they are forced to entertain disputes that arise between close friends, and, finally, can help direct courts to furnish betrayed friends certain kinds of remedies that are most appropriate for achieving justice within that dispute context. This is not the first article to make an effort to expand the reach of the fiduciary concept into new sorts of relationships that are not always considered within the ambit of fiduciary duty law. (7) But the case for thinking of friends as fiduciaries is exceedingly persuasive and underappreciated, both in the law and in our lives.

The first three parts of this Article contain my affirmative argument. Part I begins with a simplified introduction to fiduciary relationships, their concomitant obligations, and the remedies breaches of fiduciary duties can be expected to trigger. Exploring these three components of fiduciary law should reveal the underlying concept of the fiduciary that helps to shape the contours of the relationships, the duties, and the common remedies courts use in policing fiduciary default. Part II aims to prove that the fiduciary concept can be usefully applied to the relationship of friendship; the proposal here to treat friends as fiduciaries is not merely metaphorical or analogical. (8) Part III shows that some courts do, in fact, see the relationship of friendship as triggering certain fiduciary duties. This grounding in case law helps buttress my normative argument that the law should (and can) police betrayed friendships.

Part IV countenances some objections to the proposal from within the fiduciary concept. In particular, I consider whether the presumed equality, reciprocity, and free exit attributed to close friendships render the fiduciary concept inappropriate. I also...

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