Understanding fiduciary duty.

• Author: Mariani, John F.

When does a person owe another a fiduciary duty? Unless their relationship is one of the classic relationships that impose fiduciary duties, such as the attorney/client, executor/heir, guardian/ward, agent/principal, trustee/beneficiary, or corporate officer/shareholder, (1) the answer is often unclear. Courts in recent years have imposed a fiduciary duty on persons in numerous other types of relationships. Depending on the particular facts, lenders, (2) clerics, (3) and even wives (4) have all been saddled with fiduciary duties. Commentators have attempted to isolate a defining principle that specifies the circumstances or relationships that warrant the imposition of fiduciary duties. (5) None of their theories, however, fully captures the myriad applications of fiduciary duty, (6) leading one commentator to refer to the fiduciary relationship as "one of the most elusive concepts in Anglo-American law," (7) another to describe it as "a concept in search of a principle," (8) and yet another to state that it may be more accurate to speak of relationships having a fiduciary component to them rather than to speak of fiduciary relationships as such. (9) The purpose of this article, then, is to facilitate an understanding of the fiduciary relationship and to offer practical guidance regarding when a fiduciary duty might arise in a given relationship, the scope and limitations of the duty, and the remedies available.

The Fiduciary

At the heart of courts' interpretations of the fiduciary relationship is a concern that persons who assume trustee-like positions with discretionary power over the interests of others might abuse their position. (10) Black's defines a "fiduciary" as:

[a] person holding the character of a trustee, or a character analogous to that of a trustee, in respect to the trust and confidence involved in it and the scrupulous good faith and candor which it requires ... [a] person having [a] duty, created by his undertaking, to act primarily for another's benefit in matters connected with such undertaking ... a person having duties involving good faith, trust, special confidence, and candor towards another. (11)

No one principle fully captures all the circumstances in which a fiduciary duty is imposed because the concept of owing a fiduciary duty was not originally conceived as a strict legal rule. Instead, it is fundamentally a flexible equitable concept that arose to provide relief when no legal remedy was available. (12) It is applied through analogy to circumstances in which fiduciary duties conventionally apply and is, therefore, necessarily situation-specific. (13) Understanding its origin and historical development, described in a somewhat lengthy endnote, is important to understand its proper application. (14) The language used by courts to describe the fiduciary relationship reflects its historical origin in equity. For instance, in Doe v. Evans, 814 So. 2d 370, 374 (Fla. 2002), quoting Quinn v. Phipps, 113 So. 419, 421 (Fla. 1927), the Florida Supreme Court, using centuries old language, characterized the fiduciary relationship as follows:

[T]he relation and duties involved need not be legal; they may be moral, social, domestic, or personal. If a relation of trust and confidence exists between the parties (that is to say, where confidence is reposed by one party and a trust accepted by the other, or where confidence has been acquired and abused), that is sufficient as a predicate for relief. (15)

The court in Doe also stated that "[a] fiduciary relation exists between two persons when one of them is under a duty to act for or to give advice for the benefit of another upon matters within the scope of that relation," (16) relying on Comment a to [section] 874 of the Restatement (Second) of Torts. Comment a has been fairly criticized as being both under- and over-inclusive, arguably excluding established categories of actors who are subject to fiduciary duties, while perhaps including many relationships that normally do not result in the imposition of fiduciary duties. (17)

Duty of a Fiduciary

The most basic duty of a fiduciary is the duty of loyalty, which obligates the fiduciary to put the interests of the beneficiary first, ahead of the fiduciary's self interest, and to refrain from exploiting the relationship for the fiduciary's personal benefit. (18) This gives rise to more specific duties, such as the prohibition against self-dealing, conflicts of interest, and the duty to disclose material facts. (19) Perhaps the most famous description of the duty of loyalty is by Chief Judge Benjamin Cardozo in Meinhard v. Salmon, 164 N.E. 545, 546 (N.Y. 1928):

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. (20)

In addition to a duty of loyalty, a fiduciary also owes a duty of care to carry out its responsibilities in an informed and considered manner and to act as an ordinary prudent person would act in the management of his or her own affairs. (21) If the fiduciary has special skills, or becomes a fiduciary on the basis of representations of special skills or expertise, the fiduciary is under a duty to use those skills. (22)

How Fiduciary Duty Arises

A fiduciary duty may arise either expressly or impliedly. (23)

A fiduciary duty arises expressly by contract when the parties specifically agree to a relationship, such as the attorney/client or agent/principal relationship, that is considered to be a fiduciary relationship. (24) The Florida statutes also expressly impose a fiduciary duty in a variety of relationships, including broker/client, (25) trustee/beneficiary, (26) guardian/ward, (27) partners to partners, (28) corporate directors to shareholders, (29) general partners to limited partners, (30) and managing members of limited liability companies to members. (31)

A fiduciary duties may also be implied in law, regardless of whether contractual relations or formal writings exist or a statute imposes such a duty, when one party relies on another to act on the party's behalf and to look out for its best interests. (32) This requires proper factual allegation of dependency by the party and an undertaking by the other side to advise, counsel, protect, or benefit the dependent party. (33)

For example, in Masztal v. The City of Miami, 971 So. 2d 803, 808 (Fla. 3d DCA 2008), putative class action plaintiffs and their attorneys were held to owe an implied fiduciary duty to potential members of a class of property owners prior to certification of a class. (34) The named plaintiffs brought a class action against the City of Miami, challenging a special assessment to fund fire rescue services and seeking a refund to all who had paid the assessment. (35) Prior to the court considering class certification, the named plaintiffs and the city settled for $7 million. (36) Another group of property owners sought to intervene and vacate the settlement agreement on the grounds of breach of fiduciary duty and collusion between the attorneys and the named plaintiffs. (37) The city also moved to vacate the settlement because it believed that the settlement was for an entire class of property owners. (38) The trial court granted both motions. (39)

On appeal, the named plaintiffs and their attorneys argued that the trial court erred in determining that they had breached a fiduciary duty to a class because no class had been certified at the time of the settlement and, thus, the named plaintiffs could settle their individual claims without a fairness hearing or judicial approval. (40) The Third District Court of Appeal rejected that argument, stating that from the outset of the case, the named plaintiffs and their attorneys had proceeded on behalf of a class, and that class certification was "nothing more than a ministerial act," the absense of which could not be used to circumvent or undermine a fiduciary relationship. (41) According to the court, there was an implied fiduciary relationship between the named plaintiffs, their attorneys, and a class, because the original plaintiffs voluntarily accepted the position of class representatives, and they and their attorneys proposed to represent an entire class. (42)

Scope of a Fiduciary Relationship

When a fiduciary relationship exists, the fiduciary is under a duty to act for the benefit of the beneficiary only as to matters within the scope of the fiduciary relationship. (43) No duty attaches to matters beyond the scope of the fiduciary relationship. (44) As an example, consider the decision in Hill v. Bache Halsey Stuart Shields Inc., 790 F.2d 817 (10th Cir. 1986) (applying Colorado law). In Hill, a customer brought an action against a commodity futures brokerage after he lost $50,000, asserting, among other claims, one for breach of fiduciary duty.45 Following a jury verdict, the trial court awarded the plaintiffs $47,000 in compensatory damages and $2 million in punitive damages. The trial court had instructed the jury as follows:

"In order for the plaintiff to recover from the defendant on his state law breach of fiduciary duty claim, you must find that all of the following elements have been proved by a preponderance of the evidence: 1) That the plaintiff reposed his trust and confidence in [the broker], or plaintiff's trust and confidence was induced from him by [the broker], and thus a fiduciary relationship existed; 2) [t]hat [the broker] breached his fiduciary duty by failing to deal with the plaintiff in utmost good faith and solely for the plaintiff's benefit in the handling of his commodity futures account; 3) [t]hat the plaintiff incurred losses; and 4) [t]hat the plaintiff's losses were caused by [the broker's] breach of duty." (46)

The court of appeals reversed and remanded because...