The Elements of Breach of Fiduciary Duty Claims in Texas

If one party owes another a fiduciary duty, it means that he has an obligation to place the interest of the other party above his own interest. The duty owed is of the highest ethical seriousness, and is often described with ethically loaded terms like “honesty,” “loyalty,” and “integrity.”

Such obligations can arise through formal arrangement, such as in attorney-client or trustee relationships, but they can also arise more casually, from moral, social, domestic, or personal relationships, such as caregiver and dependent, or condo board member and unit owner.

Whether formal or informal, the duties created by a fiduciary-beneficiary relationship are legal obligations. When a breach of fiduciary duty occurs, the wronged party sometimes has grounds for legal action. It’s imperative, then, that both the fiduciary and the beneficiary understand the rights and duties their position gives them.

The Obligations of a Fiduciary

The positive responsibilities entailed by a fiduciary-beneficiary relationship will vary based on the specific kind of relationship, of which there are many. If the relationship is formally defined, the fiduciary’s obligations will be in large part determined by the formal agreement, for example, if the relationship is employer-employee, by the employment contract.

If the relationship takes place within the context of a licensed profession, as do, for example, attorney-client or doctor-patient relationships, the fiduciary must in addition adhere to all required standards of his profession.

But in all fiduciary relationships, even informal ones, certain negative responsibilities obtain. Most obviously, a fiduciary must not perpetrate fraud or misrepresentation. It is imperative that fiduciaries be honest and accurate in their bookkeeping, and not withhold relevant information from their beneficiaries.

Less obviously, and sometimes posing practical difficulties, a fiduciary must always place the interests and welfare of his beneficiary before his own interests. He cannot weigh the costs and benefits and determine that a great gain for himself outweighs a small loss for his beneficiary; rather, he must always act in his beneficiary’s interest, even at cost to himself.

Indeed, if he is contemplating any action that could be seen as contrary to the beneficiary’s interests, he must get the beneficiary’s permission before proceeding.

When a Beneficiary can Make a Breach-of-Fiduciary-Duty Claim

If a fiduciary-beneficiary relationship exists, and the fiduciary has somehow failed to uphold the duties that relationship imposes on him, and this breach has resulted either in injury to the beneficiary or benefit to the fiduciary, then the beneficiary has a claim against the fiduciary. In the state of Texas all three of the elements in the preceding sentence are necessary. To spell them out individually:

  • There must be a preexisting fiduciary-beneficiary relationship. Preexisting means established prior to the action which constituted the breach. If the relationship was not already established, then no trust had been given, and so no trust could be violated.
  • There must somehow have been a breach of fiduciary duty on the part of the fiduciary. It is not enough for an action taken by the fiduciary to result in his beneficiary experiencing a loss; unless the action also violated the fiduciary’s legal obligations, then no legal injury has been done.
  • The breach of fiduciary duty must have resulted either in injury to the beneficiary or benefit to the fiduciary. If neither such an injury nor such a benefit has taken place, then the breach had no consequences and is not actionable. It is obvious enough why Injury to the beneficiary would be grounds for a legal claim. Benefit to the fiduciary would be actionable on the principle that they are ill-gotten gains. They were, after all, obtained by putting the beneficiary at risk, even if they did not in the event lead to any losses on his part.

In the state of Texas, tort actions for breach-of-fiduciary-duty have a four year statute of limitations. This limitation, however, only applies when the plaintiff is trying to recover either the losses inflicted by the breach or the fiduciary’s ill-gotten gains. It does not prevent suits aimed at removing the fiduciary from his position, in situations where that removal would require more than simply terminating a contract.