What is a Fiduciary Duty Anyways?

The first time I remember hearing the word “fiduciary” was in the Rom-Com “Failure to Launch” as Sarah Jessica Parker discusses with her roommate her responsibility to get her employer’s son, Matthew McConaughey, to move out of his parents’ house. 

It wasn’t until law school that I learned the meaning of the term and its role in the business world.

Black’s Law Dictionary defines a “fiduciary” as “A person who is required to act for the benefit of another person [the “principal”] on all matters within the scope of their relationship.”  A fiduciary duty is the responsibility a fiduciary owes to another—whether it be to its employer, its partner, or to a business entity.  If a fiduciary breaches a duty owed to the principal, the principal may have cause to bring suit against the fiduciary and may recover damages.  While the fiduciary duties owed by a fiduciary may differ depending on the type of relationship, the most common types of fiduciary duties in the business world are (1) the duty of care, and (2) the duty of loyalty.

The Duty of Care

The fiduciary duty of care governs the conduct with which the fiduciary must act (or refrain from engaging in) when undertaking the principal’s business.  For instance, the duty of care may require the fiduciary to refrain from engaging in grossly negligent conduct.  Alternatively, it may require the fiduciary to act in a more specific way—for instance, doctors used to be required to act as would another reasonable doctor in the same field and same geographic area.  The standard of care varies among professions, types of relationship, and jurisdictions.

In the corporate world, directors and officers of a corporation owe a fiduciary duty of care to the corporation (rather than to the shareholders directly).  Directors and officers are protected by the Business Judgment Rule, which holds that as long as the directors and officers act in good faith and on a fully informed basis, ordinary business decisions won’t open them up to suit if they ultimately cause harm to the corporation.

For different types of entities (partnerships, LLCs, corporations, etc.), the duty of care may be modified by the governing documents of the entity (partnership agreement, operating agreement, bylaws, etc.).  Depending on the statute in the relevant jurisdiction, the duty of care may be limited by these documents or otherwise completely eliminated, as long as the other partners/members/ shareholders agree.

The Duty of Loyalty

This duty generally requires that the fiduciary put the principal’s interests above her own.  This includes the duty not to engage in self-dealing or otherwise to use one’s position to further personal interests rather than those of the principal.  This may include competing with the business (appropriating opportunities from the business) or transacting with the business for one’s own benefit.

Again, the duty of loyalty may be limited in the governing documents of the business entity if the relevant jurisdiction’s statute allows.  Typically, the duty of loyalty cannot be completely eliminated, but the governing documents can describe certain areas of permissible conduct.  For instance, if a member of an LLC that owns and operates a gym became a member due to his expertise in running fitness facilities, that member may be permitted by the operating agreement to continue competing with the LLC if the member owns other gyms in the community.  The operating agreement may state that such conduct does not violate the member’s duty of loyalty to the LLC.

Conclusion

Whether Sarah Jessica Parker breached her fiduciary duty in “Failure to Launch” was not explored in the film, although it’s clearly debatable that (1) her conduct may be considered reckless or grossly negligent, and (2) she may have acted in her own best interests rather than in the best interest of her employer.  But I’ll leave that up to your opinion and to the imaginations of law school examiners.

If you’re considering going into business with someone else, you should consider the fiduciary duties you will owe to each other and whether you need to limit those duties to protect your current and future interests.  For assistance with this critical process, contact a Sioux City, Sioux Falls, or Omaha business attorney.