Also known as: breach of fiduciary duty · breaches of fiduciary duty · breaches of fiduciary duties · fiduciary breach
Written by attorneys · grounded in primary & secondary sources — see below
A violation by a person in a position of trust of the duties of loyalty and care owed to the beneficiary. The breach occurs when the fiduciary profits from self-dealing or misuse of entrusted property or opportunities without full disclosure and approval from those entitled to it. Remedies include disgorgement of secret profits, rescission of the transaction, or an accounting.
Brooke Bryant formed a corporation to acquire land she already owned. She disclosed the purchase price only to two initial subscribers but kept a substantial markup for herself. When the remaining contemplated investors learned of the undisclosed profit after subscribing, the corporation sued to recover it. The court required full disclosure to every person contemplated as part of the original financing scheme before any promoter could retain the gain.
Baxter Dynamics extended loans to Brighton Manufacturing and took control of its operations once the borrower faced insolvency. The lender directed liquidation of assets solely to repay its own loans, leaving other creditors unpaid. In the ensuing bankruptcy, the court equitably subordinated the lender's claim because its exercise of control constituted inequitable conduct that injured the debtor's other creditors.
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A general partner must account to the partnership for any profit or benefit obtained through use of partnership property, even if the partner also expends personal effort or routes the transaction through an affiliated entity. The duty of loyalty requires the partner to hold such benefits in trust for the partnership regardless of whether the work occurred outside normal hours.
No. When a person acts in the general partner capacity, the full duties of a general partner apply, including the duty of loyalty. The partnership agreement may authorize dual status and require disclosure, but it does not eliminate the obligation to avoid undisclosed self-dealing executed through the exercise of general partner authority.
A creditor's assertion of total control over a financially distressed debtor, followed by use of that control to liquidate assets solely for the creditor's benefit to the detriment of other creditors, constitutes inequitable conduct. Courts recognize breach of fiduciary duties as one of three classic categories that support equitable subordination of the claim.