Fiduciary Duties & Claims: A Litigation Guide

Fiduciary duties arise in many contexts in the worlds of business and law. These can include, but are not limited to, dealings among partners; the foreclosure of mortgages; the administration of trusts; and actions taken pursuant to powers of attorney are among them. A fiduciary relationship arises whenever influence has been acquired and abused, or confidence has been reposed and betrayed.

Once a person becomes a fiduciary, the law asks him or her to become an extremely moral person and pressures him to behave in a selfless fashion. Contract law, however, does not go beyond the morals of the marketplace where self-interest is the norm. As you might expect, fiduciary duties are often the subject of litigation, and fiduciary claims need to be well-understood. Here are a few examples.

Fiduciary Duties and Partnerships

Partners owe each other a fiduciary duty to act with “utmost good faith or honesty, and loyalty or obedience, as well as candor, due care, and fair dealing.” A partner’s duty extends to acting in the best financial interest of the other partners, and to not act in malice or arbitrarily to advance their own interests. In limited partnerships, general partners owe fiduciary duties to limited partners. A partner who breaches fiduciary duties can be sued by the partners owed the duties.

A general partner in one case violated fiduciary duties he owed to limited partners by allowing the partnership to default on a loan. That led to foreclosure against the partnership property, even though he claimed that was in his personal interest to do so. Furthermore, those dealing with partnerships must be careful to not induce one partner to breach fiduciary duties owed to other partners, or they will risk exposure.

In one case, the court allowed one partner to sue a company that has sold property to a second partner, alleging that the seller had “aided and abetted” the second partner in violating its fiduciary duties to the first partner by never conveying the property to the first partner and by defaulting on the payments to the seller, which then foreclosed on the property. The jury, however, vindicated the seller.

Fiduciary Duties and Foreclosure

Creditors foreclosing on mortgages owe the debtor certain fiduciary duties. Such a creditor must exert “every reasonable effort to obtain a fair and reasonable price under the circumstances,” even if it means adjourning the sale or establishing an “upset price” below which the creditor will not accept any offer. Fair treatment defintions can vary, but inadequacy of price alone is not sufficient to demonstrate bad faith unless the price is so low as to “shock the judicial conscience.”

Here is one example. A debtor, facing financial distress, borrowed money from his friend to pay his debts and conveyed him title to his house to secure repayment. The borrowed amount was substantially less than the fair market value of the house. When the friend claimed he no longer could wait for repayment, he sold his interest in the land to a golfing buddy for far less than fair market value, but enough to cover the outstanding balance of the loan. He did so without marketing the property, without obtaining a current appraisal, and without taking any other steps to reasonably ensure a fair price, even though he knew that the creditor had found someone willing and able to buy the property. The court found that the creditor had violated his fiduciary duties to his friend.

Fiduciary Duties and Probate

Powers of attorney make the attorney-in-fact the fiduciary of the person granting the power. These duties are enforceable in the Probate Division of the Circuit court.

Sometimes, friendship can be at stake. That was the case in one instance we are familiar with, where the parties were long-time friends who attended the same church and considered each other to be family. Suffering from ill-health, the grantor decided to move away, and appointed her friend as attorney-in-fact to sell her house and wind up her household in New Hampshire. After the house was under contract but before it closed, the grantor told her friend that she no longer wanted to sell the house, but did nothing to revoke the power of attorney or to stop the closing. After consulting with counsel, the friend closed on the sale, and the grantor sued her.

The Probate Court found that the friend offered satisfactory explanations for everything she had done, that she had attempted to follow the grantor’s confusing and contradictory instructions that she had relied on advice of counsel, that she had attempted to act in the grantor’s best interest, and that she had adequately accounted for all of the grantor’s funds.

Conclusion

Fiduciaries and those who deal with them need to be aware of the important responsibilities imposed on them by law, and to discharge them in the utmost good faith, or face the possibility of lawsuits and exposure to damages. If you need help navigating the world of fiduciary duties, contact us today.

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