Penalty for Breach of Fiduciary Duty
The penalty for breach of fiduciary duty is typically payment for the actual damages incurred.3 min read
The penalty for breach of fiduciary duty is typically payment for the actual damages incurred, as well as any punitive damages if the breach of fiduciary duty involved fraud or malice.
What Is a Fiduciary Duty?
A fiduciary duty is when one party is obligated to act in the best interests of another party. An example is how a corporate board member must make the best decisions for a company's shareholders.
Some more examples of fiduciary duties include:
- A lawyer and a client.
- A trustee and a beneficiary.
- A principal and an agent.
For a fiduciary duty to be legally enforceable in a court of law, it must have been created through the factual circumstances of the relationship or under a contract, statue, or legal proceeding.
What Is a Breach of Fiduciary Duty?
If the party fails to fulfill his legal obligations, it is a breach of fiduciary duty and can result in a lawsuit in civil court. Some factors that a court will use to determine if the duty was actually breached can include:
- Whether or not the two parties were actually in a fiduciary relationship when the problem occurred.
- Whether or not the failure of the offending party was covered in the scope of the two parties' relationship.
A few examples of a breach of fiduciary duty include:
- One party failing to disclose important information, like a conflict of interest.
- Acting in a way that's contrary to the interests of a client.
- Performing an action in one's own self-interest rather than that of a client.
One specific instance to further explain a breach would be a CEO who strikes a deal to buy his friend's struggling company. While this is a great way to help his friend, it could be considered a breach of fiduciary duty if the CEO's company has a drop in share price. If this happened, the shareholders could file a lawsuit to help recoup some of their losses.
Consequences of Breaching Fiduciary Duty
Calculating the damages owed in a breach of fiduciary duty case can be tricky. There are three main things that a court will consider.
- Compensatory damages. If the party who suffered damages decides to file litigation, then compensatory damages are one of the most common outcomes. These are payments to help compensate for whatever loss the victim has suffered because of the breach. An example of compensatory damages could be if shareholders file litigation after the director of the company makes a bad business decision that causes a big loss. To win their case, the shareholders will need to prove how the director breached their fiduciary duty and how much they lost because of it.
- Punitive damages. Instead of the offending party just having to pay back what he lost the other party, punitive damages are a means of punishing the offending party. This discourages the party from acting this way again and also sends a message to other leaders that such behavior is inappropriate. Usually, punitive damages are only paid when malice or fraud is involved.
- Professional consequences. While the above outcomes will hurt a person financially, professional consequences will affect the person's career as well. For example, if an attorney commits a breach of fiduciary duty, he or she may face a legal malpractice lawsuit. If the claims are serious enough, the attorney could even be disbarred and banned from practicing law. A person could lose professional accreditation, preventing him from working in his chosen profession for the rest of his life.
An Example of These Consequences
To see these consequences in action, take the example of ICD Publications, Inc. v. Gittlitz. This case involved a corporate director who was liable for both compensatory and punitive damages. He also had to forfeit all the compensation he got while he was breaching his fiduciary duties. In all, the court demanded that the director pay back six years of his earnings, which amounted to more than $5 million.
This specific case happened in Illinois, but it's not the only state to impose forfeiture penalties on those who violate fiduciary duty. New York, Missouri, and Delaware all have similar regulations if a person breaches his fiduciary duties.
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