Duty Calls: Top 10 Fiduciary Situations

1. Fiduciary: Current Employee

Duty owed to: Employer

Scope of Duty: An employee’s duty to his employer is also known as a duty of loyalty and requires an employee to act in the best interests of his employer while employed. This duty does not apply to employees who have not been given the authority to act on behalf of their employer.

Significant Colorado case: Jet Courier Serv., Inc. v. Mulei, 771 P.2d 486 (Colo. 1989).

Fiduciary: Officer/Director/Manager/Majority Shareholders/Majority Owner of closely held entity

2. Duty owed to: Minority shareholders/owners

Scope of Duty: In a closely held entity, majority owners/managers owe the minority owners the highest degree of fidelity, loyalty, trust, faith and confidence, and are required to exercise their utmost good faith and cannot use their superior position and power in bad faith or for their individual advantage. When purchasing a minority shareholder/owner’s stock, the purchasing owner/officer must disclose all material facts affecting the value of the stock known to the purchaser by virtue of his position but not known to the selling shareholder.

Significant Colorado cases: Van Schaack Holdings, Ltd. v. Van Schaack, 867 P.2d 892 (Colo. 1994); River Management Corp. v. Lodge Properties Inc., 829 P.2d 398 (Colo. App. 1991).

3. Fiduciary: Trustee

Duty owed to: Trust Beneficiaries

Scope of Duty: A trustee appointed under a trust has a responsibility to the beneficiaries to act in their best interests consistent with the terms of the trust. When deciding how to invest the assets of a trust, a trustee must exercise the degree of skill and caution of a reasonably prudent investor.

Significant Colorado case: Buder v. Sartore, 774 P.2d 1383 (Colo. 1989).

4. Fiduciary: Homeowner’s Association

Duty owed to: Homeowners

Scope of Duty: A homeowner’s association owes a fiduciary duty to the homeowners to enforce restrictive covenants.

Significant Colorado case: Colorado Homes, Ltd. v. Loerch-Wilson, 43 P.3d 718 (Colo. App. 2001)

5. Fiduciary: Partner/Members

Duty owed to: Other Partners/Members

Scope of Duty: Partners in a business enterprise owe to one another the highest duty of loyalty, and are bound to act in the best interests of their partners and the partnership or enterprise. Unlike an employee whose fiduciary duty to his employer ends with the termination of the employee’s employment, a partner’s duties may continue during the winding up of the partnership and after the partner leaves the partnership.

Significant Colorado case: LaFond v. Sweeney, 345 P.3d 932, 2012 COA 27 (Colo.App.Div. 6 2012)

6. Fiduciary: Attorney

Duty owed to: Clients

Scope of Duty: Attorneys owe their clients many duties. Those duties include two primary obligations: (1) a duty to represent the client competently, and (2) a fiduciary obligation of loyalty and confidentiality. Most fiduciary duty claims involving the attorney/client relationship involve allegations of attorney malpractice.

Significant Colorado case: Aller v. Law Office of Carole C. Schriefer, P.C., 140 P.3d 23 (Colo.App. Div. 1 2005)

7. Fiduciary: Financial Advisor

Duty Owed to: Investor customers

Scope of Duty: A stockbroker/customer relationship is not, per se, fiduciary in nature. So a broker or financial advisor who merely receives and executes a customer’s orders does not exercise a degree of control where the law would recognize a fiduciary relationship. However, when a broker or advisor exercises practical control over a customer’s account, the broker/advisor owes the investor client a fiduciary duty to prudently manage the customer’s account.

Significant Colorado case: Paine, Webber, Jackson & Curtis, Inc. v. Adams, 718 P.2d 508 (Colo. 1986)

8. Fiduciary: Buyer or Tenant/Seller or Landlord’s Agent (Real Estate Broker)

Duty Owed to: Buyer/Tenant and Seller/Landlord

Scope of Duty: In Colorado, the real estate broker’s duties are established by statute (C.R.S. §§ 12-61-804 through 12-61-807). A real estate broker can represent the buyer/tenant or seller/landlord in a real estate transaction as the client’s agent. In such a situation, the real estate broker as an agent owes fiduciary duties only to the real estate broker’s principal or client. Those duties include the obligation of the real estate broker to comply with the terms of the written agreement, to exercise reasonable skill and care for the client, and to promote the client’s interest with “utmost good faith, loyalty, and fidelity.” A real estate broker also has an obligation not to disclose certain information without the consent of the broker’s client, such as the client’s willingness to pay more or accept less for a property, the client’s motivations in selling or buying, “material information” about the real estate broker’s client unless withholding such information would constitute fraud or dishonest dealing, or facts or suspicions that would “psychologically impact or stigmatize any real property.”

As an agent to one of the parties to the real estate transaction, the real estate broker owes no duty to the other party, except to disclose all “adverse material facts actually known by such broker.” Facts or suspicions regarding circumstances occurring on a parcel of property which could psychologically impact or stigmatize such property are not material facts subject to a disclosure requirement in a real estate transaction. C.R.S. § 38-35.5-101.

A buyer’s or tenant’s agent is not prohibited from showing other clients properties in which the buyer or tenant is interested. Likewise, a seller’s or landlord’s agent is able to represent multiple buyers or landlords that may own competing properties without breaching the broker’s duty to his or her client.

A real estate broker can also serve as a “transactional broker.” A transactional broker is not acting as an agent for any party to the real estate transaction and is not in a fiduciary relationship with either party to a real estate transaction.

9. Fiduciary: Officer/Director/Manager/Majority Shareholders/Majority Owner

Duty Owed to: Creditors

Scope of Duty: The officers or controlling owners of a corporation or entity “owe a fiduciary duty to creditors not to divest corporate property for personal benefit, to prefer themselves over other creditors, or to defeat a corporate creditor’s claim.”

Significant Colorado Case: Paratransit Risk Retention Grp. Ins. Co. v. Kamins, 160 P.3d 307, 320 (Colo. App. 2007).

10. Fiduciary: Family

Duty Owed to: Family

Explanation of Duty: A fiduciary duty can arise from the existence of a confidential relationship where one person occupies a superior position and has the opportunity to use that superiority to the other’s disadvantage. While there are many instances where such a confidential relationship may arise, perhaps the most common is familial relationships. Family members often place confidence in one another when they enter into business transactions. When dealing with family, people often drop their guard and assume that each side is acting fairly.

Scope of Duty: When dealing with family, there is an obligation to treat each other fairly and not take advantage of the trust and confidence that may exist as a result of the familial relationship.

Significant Colorado Case: An interesting case discussing the fiduciary relationship between family members and the Court’s enforcement of the obligation to act fairly is Lewis v. Lewis, 189 P.3d 1134 (Colo. 2008).

©Gregory M. O’Boyle. Greg O’Boyle is a Colorado Springs attorney who practices primarily in the area of commercial litigation.  Greg is a partner at Alpern Myers Stuart LLC.  He can be contacted at grego@coloradolawyers.net, or an appointment can be made by calling his assistant, Adrienne, at 719-226-7745.