Also known as: fiduciary statuses · fiduciary relationship
Written by attorneys · grounded in primary & secondary sources — see below
A legal relationship in which one party owes duties of loyalty, care, and good faith to another because of the trust and confidence reposed in the first party. The relationship requires the fiduciary to place the interests of the other party ahead of personal gain and to avoid undisclosed conflicts.
Lena and Marcus formed an LLC that purchased used medical vans at a low price and then sold them at a large markup to the nonprofit Healthy Streets they were organizing. They disclosed the profit only to a few major donors while leaving numerous small community contributors, who were part of the original financing plan, uninformed. Healthy Streets later sued to recover the secret profit.
Ms. Podmokly served as personal assistant to an elderly account holder and drew checks on his trust account payable to herself. The bank received the instruments with knowledge of her fiduciary role yet processed them without inquiry. The represented person later claimed the proceeds on the ground that the withdrawals breached fiduciary duty.
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Promoters stand in a fiduciary relationship to the corporation to be formed and to persons contemplated as original investors. This status arises during the promotion phase before incorporation and requires full disclosure of any self-dealing profits to all contemplated initial participants.
Disclosure and ratification must reach every person contemplated as part of the original financing scheme who becomes an initial shareholder. Partial disclosure to only some investors leaves the profit secret as to the rest and permits the corporation to recover it.
Mere knowledge that the drawer or payee acts as a fiduciary is not enough. The bank must also have notice that the instrument is being used for the fiduciary's personal benefit before it loses holder-in-due-course protection.