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Estate planning requires a trusted person, a fiduciary, who can carry out your wishes after you are gone. What happens when there is a breach of fiduciary duty and that person acts in their own best interest? In this article we will explain in detail what fiduciary duty is and what happens in case of breach.

At Ortiz & Ortiz we have excellent estate planning attorneys who can advise and guide you through the entire process. We have been serving the community for over 30 years and have offices in Queens and Manhattan. We also have virtual consultations for all five boroughs of New York. Contact us! 

New York Breach of Fiduciary Duty in 2021

What is fiduciary duty? 

Fiduciary duty is the obligation of a person to act with the best intentions with respect to the will of another person or entity. This duty may be by law, contract, agreement, or by a relationship of trust between the parties. 

Characteristics of fiduciary duty: 

  • For fiduciary duty to exist there must be a relationship between the parties involving special trust or, simply, reliance on the fiduciary. 
  • The parties involved in the fiduciary duty are, on the one hand, the fiduciary and, on the other hand, the person who places the trust in the fiduciary who is called cestui que.
  • Fiduciary duty can arise in various aspects of life. From a business relationship between partners, a director with a client, a bank with its client, among others. 
  • Fiduciary duty also exists when it comes to estate planning. There is a trust relationship with the executor, estate administrator and trustee. All of these figures must comply with a fiduciary duty. 
  • In the event that there is a breach of fiduciary duty, a claim can be made to the court proving that there was a fiduciary relationship, that there was misconduct on the part of the fiduciary, and the damages caused. 

Who are considered fiduciaries? 

For there to be a fiduciary relationship there must be two parties and a relationship of trust. However, there is no limit to the circumstances in which such a relationship can exist. 

However, there are certain persons who are generally considered to be fiduciaries: 

  • Attorneys
  • Bankers
  • Business partners or associates
  • Corporate officers
  • Officers of a company
  • Shareholders
  • Personal representatives such as executors and administrators of estates
  • Trustees
  • Investment advisors

Note: You may also be interested in our articles on the different types of fiduciaries and their differences. Read about the executor of an estate and everything related to New York letters of administration. Also, find out what is the difference between the executor and the administrator of the estate and what is the difference between the executor and the trustee. 

What types of fiduciary duties are there?

types of fiduciary duties

When it comes to fiduciary duty, there are three categories: duty of care, duty of candor, and duty of loyalty. Below, we will discuss what each of these entails in detail. Breach of fiduciary duty in any of these categories can end in a lawsuit. Read on to find out what happens and what the consequences of breach of fiduciary duty are!

Duty of care

This refers to the person of trust or fiduciary must act as a reasonable and prudent person in a similar circumstance. 

Duty of candor

The duty of candor implies that the fiduciary must be completely honest and truthful. In that sense, they must disclose all information that could harm the company or the individual to whom the duty is owed. 

Duty of loyalty

The duty of loyalty requires the fiduciary to act in good faith. That is, that all of their decisions be in line with the interests of the firm, corporation or individual who assigned the fiduciary duty. 

When it comes to estate planning, for example, the duty of loyalty implies that all management, protection and distribution of assets be in line with the interests of the person who entrusted them with the fiduciary duty but also of the beneficiary. In no case may the fiduciary act based on their own interests or convenience. That would be considered a breach of fiduciary duty. 

When does a fiduciary duty arise?

A fiduciary duty may arise by statute, contract, agreement, or other circumstance involving a relationship of trust. Here are some of the circumstances in which fiduciary duty arises. 

  • Company law: applies the fiduciary duty of care and loyalty. The duty of care is limited to grossly negligent or reckless conduct. The person as a partner must not engage in intentional misconduct or a conscious violation of the law. Meanwhile, a partner’s duty of loyalty applies to accountability to the partnership for any property and profits derived by the partner. 
  • Corporate law: Both officers and directors owe fiduciary duties to shareholders and the corporation itself. However, shareholders do not owe fiduciary duties to each other, except in the case of closely held corporations. 
  • Closely held corporations: Officers, directors and shareholders of a closely held corporation owe fiduciary duties. For example, in the State of New York, shareholders have fiduciary duties similar to those owed by partners to each other. For their part, directors and shareholders have a duty of candor, good faith and, above all, loyalty. 
  • Limited Liability Companies (LLC): when they are limited liability companies, the fiduciary duty is generally subject according to the operation of the company. There are some cases in which the members may have duties similar to those of a corporation or a partnership as described above. But there are also other cases in which the participants of the partnership may waive their fiduciary duties altogether. Basically, in a Limited Liability Company (LLC) having or not having fiduciary duties will depend on the agreement that the members have made.
  • Personal representatives: the executor, the administrator of the estate, the trustee and the agent who performs actions mandated by a power of attorney are all personal representatives. All these figures are part of the estate planning tools that a person can appoint during their lifetime with the proper advice of an attorney. The fiduciary who is to take charge of carrying out the last will of the decedent will have a fiduciary duty to the decedent but above all to the beneficiaries. It is imperative that they act in good faith, with complete sincerity and loyalty. 

Note: Are you thinking about starting to plan what will happen to your estate after you are gone? You may be interested in our related articles: Testate and Intestate Succession, Revocable Living Trust in New York, Irrevocable Trust in New York State, and Difference Between Trust and Will.

Can fiduciary duties be waived and how?

The answer to this question is yes. There are some entities that are allowed to waive fiduciary duties. In some states, corporations are permitted to insure and indemnify their directors and officers against breach of fiduciary duty. 

Corporations in New York State may limit or eliminate the personal liability of their directors for breach of fiduciary duty. However, the duties of loyalty and good faith are immovable. In the case of LLCs, the personal liability of managers or members of the operating agreement may be limited or eliminated. 

Signs of Breach of Fiduciary Duty

There are three categories of fiduciary duty: duty of care, loyalty and sincerity. When there is a breach of fiduciary duty it means that one of these three is not being fulfilled and that one of the parties is not acting in the best interest of the other party. How can you tell? What signs can be identified as the most common when there is a breach of fiduciary duty? 

Common examples of breach of fiduciary duty:

Self-dealing or conflict of interest.

Occurs when the fiduciary is on both sides of a deal. The fiduciary is faced with a personal conflict of interest on one side and their fiduciary duty on the other. Actions identified under this heading are when over-payments are accepted, assets are sold, given away or appropriated for their own welfare, company funds are borrowed as a personal loan, among others. One of the most common in this category is insider trading. 

Misappropriation of corporate opportunities

New York law states that fiduciaries of a corporation, LLC or partnership have a fiduciary duty to safeguard current business assets. But, in addition, they must safeguard business opportunities as they arise. In that sense, a fiduciary cannot usurp a business opportunity for itself, as that could be considered an asset of the corporation. Nor can they promote any personal interest that is incompatible with the interests of the corporation. 

To determine what constitutes a business opportunity, the “tangible expectancy test” or “line of business test” is used in New York. 

  • Tangible expectancy test: analyzes whether the corporation has a tangible interest or expectation in the opportunity in question.
  • Line of business test: evaluates whether the opportunity is essential to the corporation’s line of business. 

Deception

Deception occurs primarily when the fiduciary duty of candor is breached. It is when all important or sufficient information is not provided so that there are no misunderstandings leading to conflicts of interest. 

How to file a breach of fiduciary duty claim?

breach of fiduciary duty claims

In order to file a breach of fiduciary duty claim there are three basic elements that must be proven. At this stage it is essential to have a lawyer who can accompany you in this process and guide you through the claim process. 

In order to make a claim for breach it must be proven that:  

  • There was a fiduciary relationship and a duty associated with it. It must be shown that there was a relationship between the parties and, therefore, a relationship of trust.
  • That there was a breach of that fiduciary duty. The misconduct of the fiduciary will vary according to the fiduciary relationship.
  • Damages associated with or as a direct consequence of the breach of fiduciary duty. It must be established or at least be clear whether they are monetary damages, reputational damages, future damages or other matters. 

Other elements to consider: 

  • Heightened pleading: In general, claims when litigation allegations are made and conveyed through a brief and simple statement of facts. However, when there are claims of breach of fiduciary duty it may be in more detail than usual. For this reason, it is called an enhanced pleading. This is something that courts may request because they may need more detail in the statements such as dates, names, and other information related to the statements. 
  • Statute of Limitations: The time limit a party has to file a breach of fiduciary duty claim will vary depending on the jurisdiction in which the claims are to be made. Some jurisdictions do not explicitly include a statute of limitations for breach of fiduciary duty claims. In general, it is the courts themselves that analyze the allegations involved and with that in hand decide whether there is a statute of limitations. For example, if the breach of fiduciary duty sounds like fraud, the court could use the same statute of limitations as in fraud cases.  
  • Related causes of action: In some cases the courts are called upon to claim breach of fiduciary duty but along the way other related causes of action may be found where the fiduciary could be liable. For example, if a contract is the basis for a breach of fiduciary duty claim, breach of contract may also be alleged in a lawsuit. 
  • One who aids and abets a fiduciary breach may also be liable for damages: In New York State, one who aided and abetted the act may also be held liable for damages for breach of fiduciary duty. Claims are also generally brought against advisors or others involved who participated with knowledge of the breach being committed. The requirements for bringing an aiding and abetting action of a breach of duty by one fiduciary to another are that the defendant induced or participated with knowledge of the breach, and that the plaintiff suffered damages as a result of the breach.
  • The business judgment rule: Where a fiduciary is a director or officer of a corporation, the plaintiff must overcome the business judgment rule. The latter establishes a presumption that the defendant acted in good faith and in a prudent manner. 

Consequences of Breach of Fiduciary Duty

The consequences of breaching fiduciary duty are simple: the fiduciary is removed from their duties. When they are an executor, administrator or trustee and it is found that there is a breach, i.e., that they do not conduct their affairs properly, the court is asked to revoke their appointment. This means that they are removed from office. 

Section 711 of the New York Surrogate’s Court Procedure Act (“SCPA”) provides that such relief may be sought from the Court. Some of the grounds for fiduciary removal include waste of assets, dishonesty, improper handling of property, and refusal or neglect on the part of the fiduciary to obey an order of the Court.

Note: You may also be interested in Intestate succession laws in New York and Steps to contest a will.

experienced breach of fiduciary duty lawyers in New York

Are you witnessing a breach of fiduciary duty? As we told you before, there are three types of fiduciary duty: duty of care, duty of loyalty and duty of candor. It is important to a breach claim that you can prove that there was a fiduciary duty, that there was misconduct by the fiduciary, and that the misconduct had consequences. 

Contact our experienced asset protection attorneys in New York today to help you with your case. They will be able to advise and guide you in: 

  • Analyzing whether there is indeed a breach of fiduciary duty in your situation.
  • Proving that there was a fiduciary relationship, that there were damages and what those damages are.
  • Pursuing the claim in court. Help you put together the complete scheme so that the courts can understand exactly where the breach is. 
  • Guide and accompany you through the entire process. 

Let us know your case today! Remember that we can assist you in Spanish and English