Celtic Meltdown

                              

Chapter  7 - Fiduciary Duty 

There are some differences, depending on jurisdiction, as to the interpretation of the term Fiduciary Duty.

What you get here is a generally accepted interpretation of what the term refers to.

Fiduciary duty is the highest standard of care in law.
The word itself comes originally from the Latin fides, meaning faith, and fiducia, meaning trust.
Fiduciaries can include bankers, solicitors, business advisers, realestate agents, brokers, or anyone who undertakes to assist someone who places complete confidence and trust in that person or company. When a person acts for another in a fiduciary relationship, the law forbids the fiduciary from acting in any manner adverse or contrary to the interests of the client, or from acting for his own benefit in relation to the subject matter.

The duties of a fiduciary include ‘loyalty and reasonable care of the assets within its custody.’ A fiduciary is expected to be extremely loyal to the person to whom they owe the duty (the ‘principal’): they must not put their personal interests before the duty, and must not profit from their position as a fiduciary, unless the principal consents. The client is entitled to the best efforts of the fiduciary on his or her behalf and the fiduciary must exercise all of the skill, care and diligence at his or her disposal when acting on behalf of the client.

A person acting in a fiduciary capacity is required to make truthful and complete disclosures to those placing trust in him or her, and he or she is forbidden to obtain an unreasonable advantage at the latter’s expense. Best interest of the beneficiary must be primary A fiduciary is held to a standard of conduct and trust far greater than the comparable ‘duty of care’ in common law.

A fiduciary must avoid ‘self-dealing’ or ‘conflicts of interests’ in which the potential benefit to the fiduciary is in conflict with what is best for the person who trusts them.
For example, a banker must consider the best investment for the client, and not buy or sell investments on the basis of what brings the highest commission for the banker.

While a fiduciary and the beneficiary may join together in a purchase of property, the best interest of the beneficiary remains primary. All of the fiduciary’s actions must be performed for the advantage of the client.
The term also embraces legal relationships such as those between broker and client.

A fiduciary relationship extends to every possible case in which one side places confidence in the other and such confidence is accepted; this causes dependence by one individual and influence by the other. The courts will stringently examine any transaction by which a dominant individual obtains any advantage or profit at the expense of the party under their influence. Such transaction, in which ‘undue influence of the fiduciary’ can be established, is void.

When a bank provides expert advice on which a client relies on, a bank has a fiduciary obligation. As adviser, it should at all times act in the best interests of the client. Full disclosure of all actual or potential conflicts is vital. A fiduciary cannot have a conflict of interest.

A fiduciary will be held to account if proven to have acquired a profit, benefit or gain from the relationship by one of three means:

  • In circumstances of conflict of interest and duty;
  • In circumstances of conflict of duty and duty;
  • Taking advantage of the fiduciary position.

Conflict of interest and duty:
A fiduciary must not put themselves in a position where their interest and duty conflict. In other words, they must always serve the principal’s interests, subjugating their own preference for those of the ‘principal’. The fiduciary’s state of mind is irrelevant; that is, it does not matter whether the fiduciary had any ill-intent or dishonesty in mind.

Conflict of duty and duty:
A fiduciary’s duty must not conflict with another fiduciary duty. Conflicts between one fiduciary duty and another can arise, for example, when an agent, such as a real-estate agent, represents more than one client and the interests of those clients conflict. Therefore, the conflict of duty-and-duty rule applies.
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Taking advantage of the fiduciary position:
A fiduciary must not profit from the fiduciary position. This includes any benefits or profits which, although unrelated to the fiduciary position, came about because of an opportunity that the fiduciary position afforded. It is unnecessary that the principal would have been unable to make the profit; if the fiduciary makes a profit, by virtue of their role as fiduciary for the principal, then the fiduciary must report the profit to the principal. If the principal consents then the fiduciary may keep the benefit. If this requirement is not met then the property is deemed to be held by the fiduciary on constructive trust for the principal.

BREACHES OF FIDUCIARY DUTY:
Conduct by a fiduciary may be deemed constructive fraud when it is based on acts, omissions or concealments considered fraudulent and that gives one an advantage against the other because such conduct, though not actually fraudulent, dishonest or deceitful, demands redress for reasons of public policy.

Breach of fiduciary duty may also occur in insider trading, when an insider or a related party makes trades based on material, non-public information obtained during the performance of the insider’s duties at the company. Where a principal can establish both a fiduciary duty and a breach of that duty through violation of the above rules, the benefit gained by the fiduciary should be returned to the principal because it would be unconscionable to allow the fiduciary to retain the benefit by employing his or her strict common law legal rights. This will be the case, unless the fiduciary can show there was full disclosure of the conflict of interest or profit and that the principal fully accepted and freely consented to the fiduciary’s course of action.

Bank executives have a fiduciary duty (firstly) to their company.
They must act in the best interest of the company, act as trustee in regard of the assets of the company, be honest, divulge all conflicts of interest, and exercise skill. For example, a banker cannot lend money to somebody who is known to be unable to repay it, or would have been shown to be unable to pay it had the bank carried out even the most basic inquiries. If a bank did so they could be liable to having engaged in:

  • Fraud & deceit
  • Negligent misrepresentation
  • Civil conspiracy to commit fraud
  • Breach of fiduciary duty
  • Aiding and abetting breach of fiduciary duty
  • Gross negligence
  • Negligence
  • Civil conspiracy
  • Promissory estoppel (this prevents a party from acting in a certain way because the first party promised not to, and the second party relied on that promise and acted upon it).