It happens occasionally that business associations arise from existing relationships. Perhaps relatives create a family business. Friends open a store together. Neighbors come together to bring a new product or service to their community.
But what happens when the existing relationship is a fiduciary relationship? A business opportunity can arise for an attorney and client, agent and principal, or trustee and beneficiary. These relationships bring with them responsibilities that might alter or add to the duties normally owed to each co-owner of a business.
Here is a quick guide to the issues that can arise when fiduciaries go into business together.
Fiduciary Relationships
Fiduciary duties arise in certain kinds of trusted relationships. They occur, for example, when a principal authorizes a fiduciary to act in their interests and on their behalf.
Many relationships are fiduciary in nature. Attorneys have a fiduciary relationship with their clients. Trustees and beneficiaries have a fiduciary relationship. Agents act as fiduciaries for their principals.
A fiduciary relationship imposes several duties on the fiduciary.
Duty of Loyalty
The duty of loyalty means that the fiduciary must place the principal’s interests ahead of their own interests. The duty of loyalty ensures that the fiduciary avoids self-dealing or making side deals to the detriment of the principal.
The duty of loyalty also imposes on the fiduciary the duty to fully disclose their actions taken on behalf of the principal. This guarantees that the principal remains informed about all actions taken by the fiduciary in their relationship.
Duty of Care
The duty of care requires the fiduciary to handle the principal’s matters in a reasonably prudent manner. The fiduciary must take actions in good faith and only after becoming reasonably informed about the nature and consequences of the actions.
It also requires the fiduciary to take reasonable steps to bring matters to the principal’s attention. Even if the principal is not engaged in the matters handled by the fiduciary, the fiduciary must still live up to the reasonable expectations for someone in that type of relationship.
Thus, a trustee must provide financial information and accountings to a beneficiary, even if the beneficiary has no experience or knowledge in finance.
Going into Business with a Fiduciary
When an accountant, attorney, agent, or other fiduciary comes across a business opportunity, they might consider bringing it to the attention of a client. In turn, the client may invite the fiduciary to become a co-owner in the new business for a variety of reasons, including to:
- Reward the fiduciary for delivering the opportunity
- Bring the fiduciary’s expertise into the business
- Repay the fiduciary for past work
But going into business with a fiduciary brings challenges.
Presumptively Invalid
The duty of loyalty owed by the fiduciary brings scrutiny from courts in any disputes between co-owners who have a separate fiduciary relationship.
Courts presume that transactions between a fiduciary and principal are invalid, requiring the fiduciary to prove that the transaction was fair to enforce its terms.
Take, for example, a recent case in Houston. In Adam v. Marcos, a lawyer entered into a joint venture agreement with a client. The pair had a falling out and the lawyer sued the client/joint venturer for breach of contract.
The court applied the presumption of invalidity to the relationship and noted that the attorney failed to sustain his burden to show that the transaction was fair. As a fiduciary, the lawyer was required to show that he advised the client on the deal, just as he would have advised the client about any other deal. Specifically, the lawyer had to:
- Inform the client of all material facts about the agreement
- Advise the client about whether the consideration for the contract was adequate
- Counsel the client to seek independent advice
In this case, the lawyer had not fulfilled his fiduciary duties to the client. As a result, the lawyer failed to overcome the presumption of invalidity.
Jeopardize the Underlying Relationship
In addition to forming an invalid business relationship, fiduciaries who go into business with their principals may put the underlying relationship at risk. An accountant that goes into business with a client might lose the business and the client if things go wrong.
Also, bear in mind that the principal, in theory at least, has the upper hand in these businesses. Since courts set a high bar for a valid transaction, the principal could potentially take advantage of a fiduciary, knowing that the courts may very well decline to protect them in litigation.
Business Relationships Involving a Fiduciary
These relationships face tight scrutiny from courts. Even with a sophisticated principal, a fiduciary’s duties of loyalty and care set a high bar to establishing a valid relationship.
When you enter into these relationships as a fiduciary, tread carefully, document thoroughly, and disclose completely. And beware that even with these precautions, a court could still invalidate the relationship.
The post When a Texas Fiduciary Goes Into Business Owing a Duty appeared first on Freeman Law.
from Texas Bar Today https://ift.tt/3i3wU1w
via Abogado Aly Website
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