Fiduciary Duties In Pennsylvania And When They Are Enforced
The attorneys at Steve Harvey Law LLC have litigated claims for breach of fiduciary duties, both on behalf of plaintiffs and defendants, in many different legal contexts, including claims involving employees, employers, officers and directors, partners, and executors and administrators. The concept of fiduciary duties applies in all these contexts—employment law, corporate and partnership law, and wills and trusts law.
The concept of fiduciary duties is well developed in the Anglo-American legal systems, and dates as far back as Roman law. According to Webster’s Dictionary, “fiduciary” means “of, relating to, or involving a confidence or trust.”
American courts have offered many different but similar formulations of what it means to be a fiduciary:
- “a person having a duty, created by his own undertaking, to act primarily for another’s benefit in matters connected with such undertaking.”
- “one who enjoys a superior position in terms of knowledge and authority and in whom the other party places a high level of trust and confidence.”
- “any person who occupies a position of peculiar confidence towards another” and “contemplates fair dealing and good faith.”
- “a person who stands in a special relationship of trust, confidence, or responsibility in his obligation to others.”
- “a person who, on account of his relationship with another person (the beneficiary), is both authorized to act for the beneficiary and owes a duty of loyalty to the beneficiary.”
Although all fiduciaries are encompassed by these statements, the specific duties of a fiduciary will depend on the context in which the concept is applied. Importantly, in all these contexts persons subject to fiduciary duties who breach those duties can be liable for money damages.
The Fiduciary Duty Of Employees To Employers In Pennsylvania
The vast majority of employees in the United States are “at will” employees who can be fired for any reason or no reason at all, provided that the firing does not violate some other law, such as federal or state laws prohibiting employment decisions based on race, religion, age, or disability. Whether at will or not, all employees can be fired for “cause,” such as wrongful conduct on the job and sometimes off the job. So most employees are well aware that they can be terminated from their employment for a variety of reasons. But many would be surprised to learn that employees are also subject to fiduciary duties and can potentially be sued and held liable for money damages if they breach those duties.
Fortunately, the concept is relatively straightforward for employees. As one federal court recently stated, “an employee owes his employer a fiduciary duty of loyalty, which ‘consists of certain very basic and common sense obligations. An employee must not while employed act contrary to the employer’s interest.’” Obviously, am employee cannot steal from their employer. During a period of employment, an employee has a duty not to compete with his or her employer. This also means that they cannot divert opportunities from their employer to themselves personally. Perhaps most importantly, because it happen more often than one would think, an employee cannot take or use their employer’s confidential information, whether or not designated as a trade secret, for the employee’s purpose.
This applies with greatest force when the employee still works for the employer, but it can also apply after the employment relationship is over, if the employee took or acquired the information during the course of their employment. This same subject is often also addressed in confidentiality agreements or policies of the former employer.
Employees are at greatest risk of being sued for taking or using confidential information of their former employer if they go to work for a competitor in the same industry. Every employee who plans on going to work for a competitor should be aware that, while in the absence of an enforceable non-compete agreement it is perfectly legal to work for a competitor, the former employer often times will scrutinize email accounts and company hardware (laptops) to determine whether the employee engaged in wrongdoing, such as downloading or transferring company information.
Employers Fiduciary Duty To Employees
Fiduciary duties also apply to employers under the Employee Retirement Income Security Act of 1974 (“ERISA”), a federal law that sets minimum standards for most voluntarily established retirement and health plans in private industry to provide protection for individuals in these plans.
Fiduciaries under ERISA have important responsibilities and are subject to standards of conduct because they act on behalf of participants in a retirement plan and their beneficiaries. These responsibilities include:
- Acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them.
- Carrying out their duties prudently.
- Following the plan documents (unless inconsistent with ERISA).
- Diversifying plan investments.
- Paying only reasonable plan expenses.
According to DMJPS, “a plan must have at least one fiduciary (a person or entity) named in the written plan, or through a process described in the plan, as having control over the plan’s operation. The named fiduciary can be identified by office or by name. For some plans, it may be an administrative committee or a company’s board of directors.”
Further that, “An ERISA plan’s fiduciaries will ordinarily include the trustee, investment advisers, all individuals exercising discretion in the administration of the plan, all members of a plan’s administrative committee (if it has such a committee), and those who select committee officials. Attorneys, accountants, and actuaries generally are not fiduciaries when acting solely in their professional capacities. The key to determining whether an individual or an entity is a fiduciary is whether they are exercising discretion or control over the plan.”
Tra401k.com further clarifies that, “With fiduciary responsibilities, there is also potential liability. Fiduciaries who do not follow the basic standards of conduct may be personally liable to restore any losses to the plan, or to restore any profits made through improper use of the plan’s assets resulting from their actions.”
Because ERISA fiduciary duty violations can affect a large number of plan beneficiaries, they are often the subject of class action lawsuits. In ERISA litigation, plaintiffs often seek class certification by arguing that common evidence can be used to demonstrate that all class members were harmed by the defendant’s alleged harmful conduct and that a common methodology can be used to calculate damages for all class members.
Fiduciary Duty Of Corporate Directors, Board Members, Partners, Majority Shareholders And LLC Managers
Many states (including Pennsylvania and New Jersey) follow Delaware law on the fiduciary duties of corporate directors. These same concepts also can be applied, with important variations, to partners in partnerships and members of limited liability companies (“LLCs”).
Atkins, etal. Delineate that the basic fiduciary duties of a corporate officer or director are the “duties of care and loyalty”, which includes good faith. The duty of care requires “informed, deliberative decision-making based on all material information reasonably available. The duty of loyalty requires acting on a disinterested and independent basis, in good faith, with an honest belief that the action is in the best interests of the company and its stockholders.”
In reviewing decisions of corporate boards, Atkins further states that courts will, in the first instance, apply the business judgment rule. This is “a rebuttable presumption that in making decisions directors act in accord with their fiduciary duties. To rebut the presumption, a plaintiff has the burden of presenting evidence that directors were at least grossly negligent in not becoming adequately informed, or were motivated by interests other than those of the company’s [shareholders], or acted in bad faith by consciously disregarding a known duty.”
The statutory law of Delaware (and other states) permits corporations to include in their certificates of incorporation exculpation provisions for the benefit of directors, including provisions eliminating the personal liability of a director to the corporation or its stockholders for monetary damages for breaches of the duty of care (but not for breaches of the duty of loyalty).
When it comes to partnerships, general partners owe a fiduciary duty to each other, but the extent of duties and who is subject to them depends mostly on the wording of the partnership agreement.
In the context of LLCs, member-managed LLCs will be different from manager-managed LLC, because only those who manage the affairs of the company are subject to fiduciary duties. In manager-managed LLC, members appoint a manager (or managers) to be responsible for the day-to-day operations of the LLC. The LLC manager can be an outsider or a member. Managers have a duty to the members to act in good faith and promote the interests of the LLC. Fiduciary duties of managers include the duty of loyalty and the duty of care. Under the statutory laws of some states, however, fiduciary duties of managers of LLCs can be expressly limited.
Fiduciary Duty Of Executors, Estate Administrators And Trustees
If a person dies leaving a valid will, and the will names a person who is to execute the will and administer the estate, this person is called an executor. When the person in charge of administering the estate is not named in a will, that person is called an administrator. A trustee is a person who takes responsibility for managing money or assets that have been set aside in a trust for the benefit of someone else. All three positions carry with them fiduciary duties that, if breached can give rise to claims for money damages.
Executors and administrators have a duty to take custody of the estate and to administer it so as to preserve and protect the property for distribution to the proper persons within a reasonable time. In the discharge of this duty, an executor is regarded as a fiduciary and is held to the highest degree of good faith. He or she will be required to exercise the same degree of judgment, skill, care, and diligence that a reasonable or prudent person would ordinarily exercise in the management of his or her own affairs.
The fiduciary duties of an executor or administrator include a duty of loyalty, and this includes a prohibition on self-dealing. As stated by the Pennsylvania Supreme Court: “He that is entrusted with the interest of others, cannot be allowed to make the business an object of interest to himself; because from the frailty of nature, one who has the power[ ] will be too readily seized with the inclination to use the opportunity for serving his own interest at the expense of others for whom he is entrusted.” The prohibition on self-dealing is “is inflexible, without regard to the consideration paid, or the honesty of intent.”
Trustees are also subject to a duty of loyalty that requires them to act solely in the interests of the trust beneficiaries. A trustee who engages in self-dealing has breached the duty of loyalty by the very act. Other duties inherent in the fiduciary relationship of a trustee include a duty to administer the trust prudently, to incur only reasonable costs, and generally to use any specialized expertise possessed by the trustee which is relevant to the trust.
In addition to these generally recognized fiduciary duties of executors, administrators, and trustees, some jurisdictions (such as Pennsylvania) also recognize fiduciary duties when there is a confidential relationship. As recognized by the United States Court of Appeals for the Third Circuit: “[C]onfidential relationships can give rise to fiduciary duties under Pennsylvania law. “[T]he essence of [a confidential] relationship is trust and reliance on one side, and a corresponding opportunity to abuse that trust for personal gain on the other. Accordingly, [a confidential relationship] appears when the circumstances make it certain the parties do not deal on equal terms, but, on the one side there is an overmastering influence, or, on the other, weakness, dependence or trust, justifiably reposed[.]”
This discussion of fiduciary duties and when they apply is meant to provide an overview for those concerned that they may be sued or may have a claim for breach of fiduciary duty. Litigation of fiduciary duty claims can be very fact intensive and complicated, and it requires counsel with experience and knowledge not just in the law in this area but more generally in the area of complex and commercial litigation to understand how these concepts will come to bear in an actual lawsuit.
Fiduciary duty is a serious affair. If you are either looking to bring a claim of breach of fiduciary duty or defend yourself an allegation in Pennsylvania courts, you should seek counsel that can best represent you in a high stakes lawsuit. At Steve Harvey Law LLC we represent both plaintiffs and defendants in fiduciary duty litigation, in wide range of industries, from estates and trusts to the c-suite. Call us at 215-907-7313 to meet with an attorney and get a free consultation about your case.