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What Are Fiduciary Duties and How do They Affect my Business?

August 31, 2018

 

In the realm of legal terms, you may have heard the term “Fiduciary Duty” but have been uncertain as to what it actually means. You are probably not alone because even our courts have trouble defining and applying it. Fiduciary duties refer to the manner in which fiduciaries must treat those who they owe the duties to in the course of business. A fiduciary duty demands trustee-like behavior that exceeds the standards of the market place. For a fiduciary duty to exist, however, there must first be a fiduciary relationship.

 

So, what is a fiduciary relationship? Courts have generally declined to define “fiduciary relationship” because attempting to define such a broad term may exclude “any relation that may exist between two or more persons with respect to the rights of persons or property of either.” Abbitt v. Gregory. Rather, courts have stated that a fiduciary relationship generally exists “wherever confidence on one side results in superiority and influence on the other side; where a special confidence is reposed in one who in equity and good conscience is bound to act in good faith and with due regard to the interests of the one reposing the confidence.” Vail v. Vail. “The relation and the duties involved in it need not be legal; it may be moral, social, domestic, or merely personal.” Abbit v. Gregory. Therefore, some relationships are considered inherently fiduciary. For example, relationships between spouses; attorney and client; someone holding a “power of attorney” over someone else, and perhaps most relevant for business purposes, members of a partnership are all considered inherently fiduciary to one-another.

           

Now that we have an idea of what a fiduciary relationship is, what does the existence of this relationship mean for your business dealings? In Meinhard v. Salmon, the landmark North Carolina case regarding fiduciary duties, the court stated that if a fiduciary relationship exists, then the fiduciary is held to a standard “stricter than the morals of the marketplace . . . [n]ot honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior.” This means that a fiduciary has a heightened sense of trust and loyalty and must act in the best interest of the other party. Practically applying this principle, North Carolina courts have found a breach of fiduciary duty where the fiduciary has done things such as competed with the partnership, usurped business opportunities, used partnership property for personal gain, and engaged in self-dealing at the partnership’s expense.

           

However, partnerships are not the only business structure in which fiduciary duties apply. In both corporations and LLC’s, directors and officers (mangers in an LLC) owe the business entity fiduciary duties. The North Carolina Business Corporation act states that “a director shall discharge his duties as a director . . . (1) In good faith; (2) With the care an ordinarily prudent person in a like position would exercise under similar circumstances; and (3) In a manner he reasonably believes to be in the best interests of the corporation.” N.C. Gen. Stat. § 55-8-30. Similarly, the North Carolina Limited Liability Company Act states that an LLC's managers and officials owe fiduciary duties to the LLC to discharge their duties in good faith, with the care of an ordinary prudent person, and in the best interests of the LLC. N.C. Gen. Stat. § 57D-3-21(b).

           

It can be a confusing process determining whether a fiduciary relationship exists and what duties are owed.  It might also be difficult to determine if a fiduciary duty has breached.  Claims for breach of fiduciary duty may entail recourse avenues that go above and beyond mere breach of contract recourses. As every business is different and this determination is very fact specific, it is prudent to seek guidance from qualified professionals. The attorneys Asheville Legal have experience counseling business owners and can help you make the right decision for your specific situation.

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The attorneys at Wimer & Snider, P.C. in Asheville have represented clients in much of the United States, including North Carolina, South Carolina, Georgia, Florida, California, Virginia, and Texas. We are licensed to practice law in North Carolina and Texas. Our offices are conveniently located in the arts district of West Asheville, NC.   Phone: 828-350-9799

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