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Wednesday, October 31, 2012

Duty of Fiduciary Care -- Duty of Loyalty (business law)

While the Firm is quite adapt at handling immigration cases, and frankly, many of our clients are aliens, illegal or otherwise, we also have a vibrant business law practice. We recently filed in Superior Court (Washington, DC) for a client suing a former business with which he was associated. While the case is interesting on its own, just for the relationship between the plaintiff and defendant(s), the matter at focus in this blog is one cause of action brought forth in the complaint -- Duty of Fiduciary Care (and as a subset, duty of loyalty). What are these concepts..what do they mean?

When an executive or key employee is entrusted with operations at a company (corporation, partnership, or LLC), they have a duty to place the wellbeing of the company above their own gain. They cannot "sell-out" the company, and they cannot purposely fail to take action that would benefit the company or keep the company in the same position it currently holds -- just so that they prosper. The key is: "put the business before your own interests in areas where there could be a conflict of interest." By taking a leadership role in the company, a person agrees to this and by virtue of the position they hold, promises not to harm the company for personal gain.

Fiduciary duty is a fluid concept. However, there are certain key characteristics in business that always come up in the context of fiduciary duty. These are: duty of loyalty, duty of disclosure, duty of care (this one is not really fiduciary in nature, but is often lumped together with the rest).

On legal.practioner.com, an anynomous author explains the concept thus:
Fiduciary duties require that the fiduciary acts solely in the best interest of the employer/principal, free of any self-dealing, conflicts of interest, or other abuse of the principal for personal advantage. Thus, corporate directors, officers, and employees are barred from using corporate property or assets for their personal pursuits, or taking corporate opportunities for themselves. More traditional fraudulent conduct, such as thefts, acceptance of secret commissions, and conflicts of interest also violate the duty of loyalty, and may be prosecuted as such in addition to or instead of the underlying offence. (http://legal.practitioner.com/regulation/standards_9_3_6.htm)

Another excellent resource for fiduciary responsibilities of corporate officers is RR Donnelley publication entitled, "FIDUCIARY DUTIES AND OTHER RESPONSIBILITIES OF CORPORATE DIRECTORS AND OFFICERS" (written by Christopher M. Forrester and Celeste S. Ferber). While this is hardly light reading (the term slogging through molasses comes to mind), it is extremely thorough, especially on corproate boards and executive officers. See: http://www.mofo.com/files/Uploads/Images/RRDonnelley-2011-Fiduciary-Duties.pdf

Fiduciary duty cannot be a "surprise" to one of the parties. That is, you cannot accidently wake up one day and suddenly find yourself a "fiduciary" of some business or concern. In fact, each side must agree to the fiducairy relationship in order to one to exist. However, inherent in taking and executive position, or running your own business (where you are the owner), or becoming a director, etc., you agree to become a fiduciary to the extent the position entails it.

Do you have a business relationship or fiduciary issue that would benefit from a thorough review? Being threatened with a lawsuit, or wishing to challenge someone's handling of sensitive company operations can be tricky. Contact us! We'll take a look and let you know.

S

Sean R. Hanover, Esq
HanoverLawPC.com
Contact Us
703-402-2723

1 comment:

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