Oregon Fiduciary Duties: A Primer

“But don't ever take sides with anyone against the Family again.  Ever.”

Michael Corleone, The Godfather

The Family, your partnership, your controlling interest in a small corporation or limited liability company, or simply volunteering to handle a relative’s finances:  all these circumstances involve fiduciary duties.  These relationships, and other relationships of trust like them, require the utmost care in handling the matter you undertake on behalf of that person.  For instance, your ailing mother-in-law asks that you manage her finances and you agree to do so without any compensation.  A court will likely hold you are a fiduciary to your mother-in-law.  If you invest unwisely or imprudently, then you will likely be found to in breach of your fiduciary duties to your mother-in-law and will likely be liable for her losses. 

Another example, you are the managing partner of a limited liability company and its majority shareholder. You decide to reorganize the company resulting in the dismissal of one of your business partners who is also a minority shareholder. A court may find that you, as a majority shareholder, owe a fiduciary duty to your minority shareholder partner and that you are liable for any damages he or she sustains for breaching your fiduciary duties to him or her.

There are many different circumstances in which fiduciary duties may be found.  But, to determine in what circumstances fiduciary duties arise, you must develop a basic knowledge of what a fiduciary is and learn the associated duties.

What is a fiduciary duty?

Commonly understood, a fiduciary is one who holds something in trust for another.[1]  Legally, a fiduciary is similar to a trustee and carries a duty to act primarily for another’s benefit in the matter entrusted to the fiduciary.[2]  The duties a fiduciary owes to another include the duties of care, undivided loyalty; good faith and fair dealing; and, full, fair, and frank disclosure.[3]  The fiduciary best fulfills its duties if it approaches them with the attitude of serving the beneficiary’s interests rather than its own personal interests.[4]  In other words, a fiduciary is held to stricter standard than is found in the marketplace.[5]

When does a person owe fiduciary duties?

Fiduciary duties are largely defined by the relationship.A fiduciary relationship, for instance, exists between the executor of an estate and the family beneficiaries of that estate. In other words, the fiduciary is the agent, and the person entrusting the matter is the principal. In many cases, a person encounters a fiduciary relationship when engaging a professional.

Some professions automatically owe fiduciary duties as an integral part of working in that profession. Doctors, lawyers, CPAs, and real estate agents/brokers owe fiduciary duties to their respective clients. Of course, traditional fiduciaries such as trustees and guardians owe fiduciary duties.In a corporate context, a majority shareholder of a closely held corporation owes fiduciary duties to minority shareholders.Directors and senior executive officers of all corporations owe fiduciary duties to their corporations.[6]  Other professionals may also owe fiduciary duties to their clients.The focus is on the nature of the parties’ relationship: does one party exercise control in the other party’s best interest?[7]  Consequently, an architect or engineer may have fiduciary duties to their clients.

Legislatures may require by statute that persons in certain positions owe fiduciary duties to others.This is the case in partnerships and member-managed limited liability companies.By statute, partners and LLC members owe fiduciary duties to the other partners and LLC members.[8]  Doctors also owe fiduciary duties to their patients under statute.

In sum, a person must look to their relationship and responsibilities in the undertaking with another to ascertain whether or not they owe the other person in the relationship fiduciary duties.A good rule of thumb may be that if there is money or a high level of trust involved on behalf of another, then fiduciary duties exist and are owed. 

What are the Fiduciary Duties? 

Duty of Care

At the most basic level, a duty of care is incumbent upon everyone to act as a reasonably prudent person under similar circumstances.With respect to the fiduciary duty of care, that duty is defined by the relationship.For instance, a doctor’s duty of care to his patient is defined by statute: a physician licensed to practice medicine has the duty to use that degree of care, skill and diligence which is used by ordinarily careful physicians in the community.[9]  Similarly, lawyers must provide competent representation through knowledge, skill, thoroughness and preparation, as well as diligence and other express duties.[10]

At the corporate level, directors and officers of limited liability companies, limited liability partnerships and professional corporations owe the duty of care of an ordinary reasonable prudent person in a like position acting under similar circumstances, and in manner the director or officer reasonably believes to be in the best interest of the corporation.[11]  At a minimum, a director or officer owes a duty to refrain from engaging in grossly negligent or reckless conduct, intentional misconduct, or knowingly violating the law.[12]

The essence of the duty of care is attention.[13]  Exercising the duty of care requires that a person be attentive to the needs of the matter entrusted to him or her.The matter entrusted may be the holding of personal property such as storing a car or an airplane, or may be managing a multi-million dollar investment fund.The degree of care required for storing a car may be slight compared to the degree of care required for managing an investment fund.The bottom line is that a person must be attentiveof his or her duty to the matter with which he or she is entrusted.

Duty of Undivided Loyalty

The duty of loyalty is best exemplified in the popular movie “The Godfather.”In a memorable scene, Michael Corleone counsels his brother:“Fredo, you're my older brother, and I love you. But don't ever take sides with anyone against the Family again. Ever.”[14]  This scene exemplifies the breach of the duty of loyalty.Fredo tried to cut a deal for himself instead of serving the Family’s interests, and in so doing, breached the duty of loyalty.The lesson:as a fiduciary, don’t ever take sides against the person or entity with whom you have a fiduciary relationship.

More commonly, the duty of loyalty is described in the negative as “self-dealing” or “conflict of interest.”Self-dealing or conflict of interest is a breach of the duty of loyalty.It occurs, for example, when an agent fails to disclose and fully explain facts, when a partner squeezes-out another partner, when a director or officer takes an opportunity from a corporation, or in any number of similar circumstances.When a person is acting on behalf of another person or entity, a duty of loyalty exists.By siding with Moe Green, Fredo breached his duty of loyalty to the Family.

Duty of Good Faith and Fair Dealing

A fiduciary’s duty of good faith and fair dealing means having an honest intention and freedom from knowledge of circumstances which would put his principal on notice or cause the principal to question the circumstances.For example, if an architect or engineer knew of site conditions which were unfavorable to an owner and did not disclose that knowledge, then they may be found in breach of the duty of good faith and fair dealing.A fiduciary cannot deal fairly if he or she is playing both sides, so by example, a fiduciary cannot withhold information from a principal, or take advantage of insider information in a transaction.

In Oregon, the fiduciary duty of good faith and fair dealing are implied only in special relationships.[15]  A special relationship is one in which one party has an obligation to pursue the interests of another party.[16]  In other words, a special relationship is a principal-agent relationship and is found in most fiduciary relationships.This type of relationship is found in professional relationships where the professional (e.g. doctor, lawyer, CPA, real estate agent/broker, architect, and engineer) is obligated to protect the interests of the client.In addition, a special relationship may be found through the terms of a contract.[17]

Duty of Full, Fair, and Frank Disclosure

The duty of full, fair and frank disclosure overlaps each of the above discussed duties, but is nevertheless its own fiduciary duty.This fiduciary duty requires the person in the fiduciary capacity to disclose to his or her principal all known information.A broker, for instance, must disclose all relevant information that a buyer would desire.Failure to disclose buyer-desired information may result in the breach of the fiduciary duty of full, fair, and frank disclosure.Moreover, it may also violate the fiduciary duties of care and undivided loyalty.[18]

Conclusion

The duties a fiduciary owes to a principal are not esoteric legal definitions of obscure Latin terms, but rather common sense ideas.A fiduciary is held to something stricter than the morals of the marketplace.To paraphrase a late, great judge: It is not honesty alone, but honor in its highest and most sincere form.[19]  The duties of care; undivided loyalty; utmost good faith and fair dealing; and, full, fair, and frank disclosure combine to form this high honor. It is this heightened standard that marks the baseline for fiduciary behavior.