Breach of Fiduciary Duty: Duty of Care Violations
When you trust someone to manage your business interests or financial affairs for you, you expect them to act with your best interests at heart. This relationship, known as a fiduciary duty, is a cornerstone of business and personal law. When that trust is broken, it can cause significant financial and operational damage.
For business owners, understanding your rights is the first step toward a resolution in a breach of fiduciary duty case. Seeking legal advice is critical because a breach of fiduciary duty can threaten the stability of your business and personal assets.
The Parzivand Law Firm, PLLC provides clear guidance and an approachable and client-focused method for resolving business disputes. The Texas-based firm helps clients in Sugar Land, Stafford, and the greater Fort Bend County area find practical solutions to their legal challenges.
What is a Fiduciary Duty?
A fiduciary relationship exists when one person is required to act for the benefit of another. This duty applies in many contexts, including between business partners, corporate officers and shareholders, trustees and beneficiaries, and agents and principals. The person entrusted with this responsibility is called the fiduciary, and the person they serve is the beneficiary or principal.
This relationship is built on a foundation of trust, loyalty, and confidence. The law holds fiduciaries to a very high standard of conduct. They must place the interests of the beneficiary above their own. A failure to uphold this standard is known as a breach of fiduciary duty, which can lead to legal action.
These duties are generally broken down into two main categories: the duty of loyalty and the duty of care. While both are important, this discussion will focus on the duty of care.
Defining the Duty of Care
The duty of care requires a fiduciary to act with the competence and diligence that a reasonably prudent person would exercise in similar circumstances. It is not about guaranteeing a positive outcome. Fiduciaries are not held liable for honest mistakes in judgment, as long as they made their decisions in a reasonably informed manner.
A breach of the duty of care occurs when a fiduciary acts negligently, recklessly, or fails to perform their duties with the required level of attention. This means they must be informed and take reasonable steps to investigate and understand the matters for which they are responsible.
For example, a member of a company’s board of directors must review financial reports, attend meetings, and stay informed about the company's operations before making major decisions. Simply showing up without preparation or "rubber-stamping" decisions made by others could be a violation of their duty of care.
Examples of Duty of Care Violations
Violations of the duty of care can take many forms. Understanding these examples can help you recognize when a fiduciary may have breached their responsibilities.
Gross negligence: This goes beyond simple carelessness. It involves a severe lack of attention or a reckless disregard for the fiduciary’s responsibilities. An example would be a trustee who fails to invest trust funds for an extended period, allowing the assets to lose value due to inflation, without any reasonable justification.
Mismanagement of assets: A fiduciary responsible for managing funds or property must do so responsibly. This includes making sound investment decisions, maintaining property, and keeping accurate records. Commingling personal funds with business funds or making high-risk, speculative investments without authorization could constitute a breach.
Failure to be informed: Making significant decisions without gathering and reviewing relevant information is a common violation. A corporate director who votes to approve a merger without reading the terms of the agreement or seeking advice from financial analysts has likely breached the duty of care.
Failure to monitor: Fiduciaries, especially corporate directors, have a continuing obligation to oversee the operations of the entity they serve. This includes monitoring employees, staying aware of the company's financial health, and being alert to potential wrongdoing within the organization. Turning a blind eye to red flags can be a serious breach.
Texas Law on Fiduciary Duties
In Texas, the law takes fiduciary duties very seriously. Courts have described the relationship as one of "utmost good faith, and absolute and perfect candor, openness and honesty, and the absence of any concealment or deception." Texas law formally recognizes fiduciary duties in relationships established by contract or by the nature of the relationship itself, such as attorney-client, trustee-beneficiary, and business partnerships.
To prove a breach of fiduciary duty claim in a Texas court, a plaintiff must generally establish three key elements:
Existence of a fiduciary duty: The plaintiff must first prove that a fiduciary relationship existed between them and the defendant.
Breach of the duty: The plaintiff must then show that the fiduciary failed to honor that duty. In the context of the duty of care, this means showing the fiduciary acted with negligence or failed to act as a reasonably prudent person would.
Damages: The plaintiff must demonstrate that the breach caused them financial injury or damages. The harm must be a direct result of the fiduciary's actions or inactions.
One important legal concept in Texas corporate law is the Business Judgment Rule. This rule protects corporate directors and officers from liability for decisions that turn out poorly, as long as the decision was made in good faith, with ordinary care, and in a manner they reasonably believed to be in the best interest of the corporation.
However, this protection does not apply if the director was uninformed, had a conflict of interest, or was grossly negligent. A plaintiff can overcome the Business Judgment Rule by presenting evidence that the fiduciary did not meet these basic standards.
Business Law Attorney Serving Stafford, Texas
With office locations in Stafford and Houston, Texas, The Parzivand Law Firm, PLLC, focuses on more than just legal representation. Attorney Hessam Parzivand strives to build connections with his Texas clients and guide them through their legal challenges. His prior career in human resources provides him with a unique perspective, making him an accessible and easy-to-talk-to advisor.
He provides cost-effective solutions that are specifically designed for your individual circumstances, supporting you at every stage. If you need assistance with a breach of contract case or other business law matter in Stafford, Sugar Land, Richmond, Rosenberg, or elsewhere in Fort Bend County, call the firm today.