Fiduciary Duties

What Are They, When Do They Exist and Why Use Them?

Walter J. Lack and Paul A. Traina

The courts have long protected certain persons who have entered into relationships where one party possesses superior knowledge and skill and where the other in good faith is relying upon that knowledge or skill. Those persons who possess a superior knowledge or skill, provide advice or control the affairs of another are called fiduciaries. Fiduciary relationships impose a heavy burden or duty upon the fiduciary to do all that is necessary and to act at all times in the best interest and for the benefit of the other party. Often, however, it is difficult to ascertain in exactly what context a fiduciary relationship or duty arises.

1. What Is a Fiduciary Duty?

A fiduciary duty or confidential relationship is created and exists in law when a person reposes trust and confidence in another, and the person in whom such confidence is reposed obtains control over another person's affairs. Lynch v. Cruttenden & Co., (1993) 18 Cal.App.4th 802, 809, 22 Cal.Rptr.2d 636, 641-642. Moreover, a fiduciary duty is often found to exist when one voluntarily accepts or assumes the confidence of another which demands that he may not act so as to take advantage of the other's interests without the other's consent. Tri-Growth Centre City, Ltd. v. Silldorf, Burdman, Duignan and Eisenberg (1989) 216 Cal.App.3d 1139, 1150, 265 Cal.Rptr. 330, 335.

The black letter definition of fiduciary duty does little to define the scope and context in which a fiduciary duty is created or to explain how it is applied in any particular case. Over the years it has become clear that the courts have identified specific relationships which have delineated when a fiduciary relationship actually exists. These so-called traditional fiduciary relationships involve situations in which one party, having knowledge superior to that of another, agrees to aid the other who has then put his complete trust and confidence in the one holding the superior knowledge. The breach of a fiduciary duty occurs when the one possessing superior knowledge uses the relationship to obtain an unfair advantage over the other for his or her own benefit or for the advantage of a third party or entity.

2. The Existence of Traditional Fiduciary Duties

In determining whether a fiduciary relationship exists, courts are required to look at the facts of each individual case and the particular relationship at issue. Kudokas v. Balkus (1972) 26 Cal.App.3d 744, 750, 103 Cal.Rptr. 318. The relationships and duties involved need not be of a legal nature; they may be moral, social, domestic or merely personal. Pryor v. Bristine (1963) 215 Cal.App.2d 437, 446, 30 Cal.Rptr. 376, 381. The existence of a fiduciary relationship embraces both technical fiduciary relations as recognized by law and informal relations which exist whenever one man reposes trust in another.

The most common fiduciary relationship is one that is permanently ingrained in each of us since the first day of law school, the Attorney/Client relationship. We have learned in our profession that because of our legal training clients approach us requesting advice and possible representation. Clients tell us about their personal relationships, confide in us regarding their financial means and disclose the most intimate details of their lives when they have retained us as their lawyers. They provide us with their medical records, financial documents and other information which may or may not bear on issues involved in their particular cases. They trust us unconditionally with this information because they believe and trust that we are in a position to help them and will maintain confidentiality. Our position as lawyers, the training we receive, the advice which we give and the trust which we gain from our clients all form the basis of a clear-cut fiduciary relationship.

In practice we learn as well about the variety of other relationships that exist which are considered by the courts to be fiduciary in nature. Like that of an Attorney/Client relationship, each of the relationships below recognizes the superior knowledge and skill which one party has above another's and the trust and confidence which is bestowed by the party relying upon the other's superiority. These are certain of the relationships which the courts have recognized as fiduciary in nature:

A. Bank/Depositor (Barrett v. Bank of America (1986) 183 Cal.App.3d 1362, 1369, 229 Cal.Rptr. 16, 20);

B. Controlling Shareholders/Corporation (Jones v. H.F. Ahmanson & Co. (1969) 1 Cal.3d 93, 108, 81 Cal.Rptr. 592, 599);

C. Corporate Directors/Controlling Shareholders (Efron v. Kalmanovitz (1964) 226

Cal.App.2d 546, 556, 38 Cal.Rptr. 148, 154);

D. Cotenants (Aaron v. Puccinelli (1953)121 Cal.App.2d 675, 264 P.2d 152);

E. Executor-Administrator/Beneficiary (Larrabee v. Tracy (1943) 21 Cal.2d 645,650, 134 P.2d 265, 268);

F. Guardian/Ward (Guardianship of Wood (1961) 193 Cal.App.2d 260, 266, 14 Cal.Rptr. 147, 151); and

G. Principal/Agent/Partner (Michelson v. Hamada (1994) 29 Cal.App.4th 1566, 36 Cal.Rptr.2d 343).

4. The 9th Circuit's Expansion of the Fiduciary Duty of an Investment Banker

As recently as 1996, the court in an unprecedented opinion expanded the definition of fiduciary duty to include that of an investment banker who is providing advice to a corporate client. The case of In Re: Daisy Systems Corp. (9th Circuit 1996) 97 F.3d 1171 represents an expansion of the traditional fiduciary duties which were previously well-recognized by law. The Daisy court found a fiduciary duty where sophisticated business persons were involved in a business transaction.

Daisy was a corporation specializing in the development of computer-aided engineering systems and which was seeking to acquire another public company. Daisy retained the investment banking firm of Bear Stearns to analyze the transaction and provide financial advice, including advice on the valuation and structure of the proposed buy-out. Daisy provided Bear Stearns with all its information, including but not limited to financial information about Daisy. The poor advice Daisy received from Bear Stearns left Daisy on the brink of bankruptcy, and a lawsuit was brought by Daisy against its former investment banker. In Re: Daisy Systems Corp., supra, at 1172-1175.

Daisy sued Bear Stearns, alleging among other causes of action a claim based on breach of fiduciary duty. Bear Stearns brought a motion for summary judgment, alleging that the relationship of an investment banker with a corporate client does not involve the traditional fiduciary relationship where one party is in a superior position to that of another. In finding on behalf of Bear Stearns, the trial court followed the leading case of Beery v. The State Bar (1987) 43 Cal.3d 802, 739 P.2d 1289, 1294, 239 Cal.Rptr. 121. In its opinion, the district court in Beery cited to the California Supreme Court decision in Barbara A. v. John G., (1983) 145 Cal.App.3d 369, 383, 193 Cal.Rptr. 422, wherein it was stated:

. . . the essence of a fiduciary or confidential relationship is that the parties do not deal on equal terms, because the person in whom trust and confidence is reposed and who accepts that trust and confidence is in a superior position to exert unique influence over the dependent party.

The district court went on to conclude that "[t]he requisite superiority could not be found to exist on the facts alleged in this particular case." In Re: Daisy Systems Corp., supra, at 1177. The district court found that merely because Bear Stearns was hired as an expert consultant to render financial services, this did not mean that it was in a position of superiority in the relationship between two sophisticated business entities. In Re: Daisy Systems Corp., supra, at 1177-1178.

In reversing the decision by the district court, the Court of Appeal found that the district court failed to carefully investigate the details of the Daisy/Bear Stearns relationship, including Daisy's claims that Bear Stearns was acting on Daisy's behalf. More importantly, the appellate court found that the district court never answered the question of whether Daisy reposed trust and confidence in Bear Stearns. The decision by the appellate court demonstrates that even in the world where two sophisticated business persons or entities deal with one another, a fiduciary relationship can exist depending upon the substance of the transaction and the reliance of one upon the other's ability.

6. The Case of Fightertown v. Robertson, Stephens & Co. Tests the Reliability and Scope of In Re: Daisy Corp.

More recently, a case was filed in Orange County, California involving Fightertown, U.S.A., a virtual reality company, against an investment bank, Robertson, Stephens & Co. (Orange County Superior Court Case Number 750511). In 1994 Fightertown had developed a cutting edge technology in the area of flight simulation. Fightertown offered the public customer the opportunity to sit as the pilot in the cockpits of different military-styled jet fighter simulators and engage in realistic "Top Gun" experiences, much the same as those provided in training our armed forces pilots.

Robertson, Stephens & Co. wooed Fightertown with the approach that $40 million could be raised for Fightertown if Fightertown was willing to undergo an initial public offering of its stock to the public. Fightertown and Robertson, Stephens & Co. solidified all the material terms of their agreement in a meeting and concluded the deal with a handshake between a Fightertown executive and a Robertson, Stephens & Co. executive in front of Fightertown's Board of Directors and key executives from Robertson, Stephens & Co. Later, when a general downturn in the stock market occurred, Robertson, Stephens & Co. decided not to perform the services to take Fightertown public. Fightertown sued Robertson, Stephens & Co., asserting several theories including one based on breach of fiduciary duty.

As in In Re: Daisy Systems Corp., Fightertown had turned over all its corporate information including its financials, business plans and product models to Robertson, Stephens & Co. and relied upon Robertson, Stephens & Co.'s advice and expertise in taking Fightertown public. The case proceeded to a verdict in favor of Fightertown in a very substantial sum. After the verdict, the trial court granted a judgment notwithstanding the verdict, finding that there could not have existed a fiduciary relationship between Fightertown and Robertson, Stephens & Co. because their executives were all sophisticated business persons. As in Daisy, Fightertown has appealed the issue of whether a fiduciary duty existed or could exist between Fightertown and Robertson, Stephens & Co. The case is currently on appeal.

7. Elements of a Breach of Fiduciary Duty and the Proof Required to Support the Claim

In order to recover in a claim based on breach of fiduciary duty, the plaintiff has the burden of proving certain elements by a preponderance of the evidence. The elements which a plaintiff is required to prove are:

A. That a fiduciary relationship existed between plaintiff and defendant;

B. That defendant breached this fiduciary duty;

C. That the breach by the defendant caused the damage plaintiff is claiming; and

D. The nature and extent of any and all of plaintiff's damages.

Tri-Growth Centre City, Ltd., supra at 1139-1150; Barbara A. v. John G., supra, at 422.

The jury instructions you submit for trial should include the attached form jury instruction, and a separate instruction containing the definition of when a fiduciary relationship arises would concurrently be submitted. The conditions under which a fiduciary relationship arises would be similar to those found in Lynch v. Cruttenden & Co., supra, at 809 (see section 1 above).

Proof of the existence of a fiduciary duty can be established by the testimony of the plaintiff, cross-examination of the defendant and/or introduction of documentation which tends to show the particular relationship. If the relationship falls outside the established fiduciary relationships discussed above, plaintiff's counsel must prove that the relationship which does exist nevertheless justifies the imposition of a fiduciary duty.

8. Why Bring a Fiduciary Duty Claim?

A plaintiff who brings a fiduciary duty claim is entitled to all tort damages. The most difficult part of a fiduciary duty claim is establishing the existence of the relationship (i.e., a traditional or a non-traditional fiduciary relationship) and the type of harm the client may have suffered. Once the existence of a fiduciary relationship is established (i.e., duty) and that duty is shown to have been breached, plaintiff is entitled to recover all those damages available in tort including punitive damages if the requisite oppression, malice and fraud are present. Thus, unlike a typical breach of contract claim, the damages which flow from a claim based on fiduciary duty can be much more far reaching.