What Is a Breach of Fiduciary Duty?

A fiduciary duty is the highest duty the law imposes: the obligation to act for another's benefit with undivided loyalty and reasonable care. Partners owe it to each other, corporate officers and directors owe it to the company, majority shareholders can owe it to the minority, trustees owe it to beneficiaries, and agents, including real estate brokers, owe it to their principals. A breach occurs when the fiduciary self-deals, competes with the beneficiary, hides material information, or simply manages entrusted affairs with disloyalty or gross carelessness.

The claim has three elements: a fiduciary relationship, conduct that breached it, and resulting damage. Remedies go beyond ordinary contract damages and can include disgorgement of profits the fiduciary earned through the breach, constructive trusts over diverted assets, removal from office, and in egregious cases punitive damages.

In our practice these cases most often arise between business partners and LLC members, against officers who diverted opportunities or funds, and against trustees who treated trust assets as their own. The documents and money trail usually tell the story.

Who Actually Owes a Fiduciary Duty

Fiduciary duties do not arise from every business relationship. In California they attach to defined roles: corporate directors and officers to the corporation and its shareholders, general partners to the partnership and each other, managers and in many cases members of a manager-managed or member-managed LLC, trustees to beneficiaries, agents to principals, and majority shareholders in a close corporation to the minority.

Ordinary contracting parties, by contrast, generally owe each other good faith but not fiduciary loyalty. Whether a duty existed at all is frequently the threshold fight, because it determines the available remedies and the standard of conduct that applies.

The Three Duties

The duty of loyalty requires the fiduciary to put the entity's interests ahead of their own: no self-dealing, no diverting corporate or partnership opportunities, no competing in secret, no undisclosed side compensation. The duty of care requires acting with the diligence a reasonably prudent person would use in similar circumstances. The duty of disclosure requires volunteering material facts, not merely answering questions honestly when asked.

The disclosure duty is the one most often breached inadvertently. A fiduciary who technically answers every question but withholds the fact that would have changed the other side's decision has generally still breached.

Remedies and Timing

Available remedies go well beyond compensatory damages. Courts can order disgorgement of profits the fiduciary earned through the breach, impose a constructive trust on assets or opportunities that were diverted, compel an accounting, remove the fiduciary, and in cases involving malice, oppression, or fraud, award punitive damages.

Limitations periods vary with how the claim is characterized, and claims sounding in fraud or concealment are analyzed differently from those sounding in negligence. Because fiduciary breaches are often concealed by the person with control of the records, discovery-based accrual rules frequently matter. See our partnership dispute page for how these claims play out between owners.