Monthly Archives: August 2014

August 20, 2014

Are You a Fiduciary?

by J. Robert Smith

After reviewing the posts on this blog, I realized that we have not discussed what the term “fiduciary” means and who falls within that definition.  Perhaps it is because the word “fiduciary” encompasses so many different types of people and roles that actually identifying those who are fiduciaries can, at times, be difficult.  On the other hand, perhaps we have simply assumed that a fiduciary is self-explanatory. And it many instances it is. Most of us are familiar with the more obvious relationships that impose fiduciary duties: attorney/client, accountants/client, trustee/beneficiary, executor/heir, guardian/ward, real estate agent/client and corporate officer/shareholder. Yet there are many more relationships that give rise to fiduciary duties.  And often those relationships are unclear.  But given that this blog is brought to you by the Holland & Hart Fiduciary Solutions group, it only makes sense that we solve what it really means to be a fiduciary. 

Courts and commentators have repeatedly attempted to set forth a principle that would encompass all the relationships and situations imposing fiduciary duties. But so far, none of them seem to work.  One of the difficulties is that courts are continually finding ways to impose fiduciary duties on non-traditional relationships.  In fact, courts have found fiduciary relationships to exist between investment bankers/clients (see In Re: Daisy Systems Corp.,  97 F.3d 1171 (9th Cir. 1996)), priests/parishioners (see Doe v. Evans, 814 So. 2d 370 (Fla. 2002)), teachers/students (see Doe v. Terwilliger, 2010 Conn. Super. LEXIS 1597 (2010)) and spouses (see Williams v. Waldman, 108 Nev. 466, 772 (1992)).  As a result, the definition of fiduciaries is constantly evolving. As one commentator has pointed out, the fiduciary relationship is “one of the most elusive concepts in Anglo-American law.” Deborah A. DeMott, Beyond Metaphor: An Analysis of Fiduciary Obligation, 1988 Duke L. J. 879, 879 (1988). Likewise, it has been stated that:

“[f]iduciary” is a vague term, and it has been pressed into service for a number of ends. . . . [T]he term “fiduciary” is so vague that plaintiffs have been able to claim that fiduciary obligations have been breached when in fact the particular defendant was not a fiduciary stricto sensu [i.e., in the strict sense] . . . .

United States v. Milovanovic, 678 F.3d 713 (9th Cir. 2012) (quoting Black’s Law Dictionary, 702 (9th ed. 2009).

Perhaps the reason why fiduciary relationships are so difficult to nail down is because the concept arose as a flexible equitable remedy. See DeMott, Beyond Metaphor at 880-82.  Consequently, whether one is a fiduciary, and therefore involved in a fiduciary relationship, is by its very nature case specific. 

So, what is a fiduciary?  Broadly speaking, “[a] fiduciary relation exists between two persons when one of them is under a duty to act for or to give advice for the benefit of another upon matters within the scope of the relation.”  Restatement (Second) Torts, §874, comment a.  Similarly, Black’s Law Dictionary defines a “fiduciary” as:

[A] person holding the character of a trustee, or a character analogous to that of a trustee, in respect to the trust and confidence involved in it and the scrupulous good faith and candor which it requires … [a] person having [a] duty, created by his undertaking, to act primarily for another’s benefit in matters connected with such undertaking…a person having duties involving good faith, trust, special confidence, and candor towards another.

Given such broad definitions, it is no wonder that determining whether someone is in fact a fiduciary has become so problematic.

To make matters worse, a fiduciary duty need not be express, but can be implied.  Express fiduciary relationships arise by contract or statute. Those are relatively easy to determine. Implied fiduciary relationships, however, arise when, regardless of any contract or statute, one party relies upon another to act on their behalf and look out for his/her best interests and/or property.  Again, this is a fact intensive inquiry.  Moreover, even if there is a contract defining the parties’ relationship as something other than a fiduciary relationship, subsequent actions by the parties may create an implied fiduciary relationship. 

Of course, there must be at least two to tango. A fiduciary relationship cannot be unilaterally formed. Instead, the purported fiduciary must agree, whether expressly or impliedly, to act in the other party’s best interest. 

Ultimately, despite the difficulty of defining fiduciary relationships, the basic concept focuses on whether a person assumes a trustee like position with discretionary power over the interest of others. Such relationship may be express or implied, and arises under a variety of circumstances.  Thus, if you find yourself taking care or possession of another person’s money, property or decision making, you are likely a fiduciary.  But unfortunately, that is not the end of the story.  It is only the beginning.  As stated by Justice Frankfurter, in S.E.C. v. Chenery Corp., 318 U.S. 80, 85-86 (1943) , “to say that a man is a fiduciary only begins analysis; it gives direction to further inquiry. To whom is he a fiduciary? What obligations does he owe as a fiduciary? In what respect has he failed to discharge these obligations? And what are the consequences of his deviation from duty?”  I leave those questions for subsequent posts.   

August 4, 2014

The Donald Sterling Scandal and High Stakes Probate Litigation

by Morgan Wiener

Perhaps lost in the scandal and drama surrounding Donald Sterling’s offensive comments earlier this year and the now impending sale of the Los Angeles Clippers is the fact many of the issues in this saga turn on questions of trust law and the terms of a family trust.

The Clippers are owned by the Sterling Family Trust, of which Donald and his estranged wife, Shelly Sterling, served as co-trustees.  However, following Donald’s offensive comments and rambling interviews given in the wake of the scandal, he was diagnosed with Alzheimer’s disease and declared mentally incapacitated.  The determination of incapacity allowed Shelly to remove him as co-trustee and assume control over the trust.  As the sole trustee, Shelly then negotiated the sale of the Clippers to former Microsoft CEO Steve Ballmer for $2 billion.  Prior to the trial in this matter and Shelly’s assuming control as sole trustee, and perhaps in an attempt to avoid the current result, Donald had dissolved the trust.  Also at stake are certain debts owed by the trust – if the sale to the Clippers does not go through, the trust could be in default on up to $500 million in loans.

At issue in the weeks-long probate trial about the proposed sale of the Clippers was whether Shelly was able to, and properly did, remove Donald as co-trustee of the trust.  Los Angeles County Superior Court Judge Michael Levanas ruled that Shelly did have authority to enter into the sale, that the trust was unambiguous, and that the proposed sale of the team could go through.  A written ruling has not yet been issued.

While the specifics of this case are unusual and headline grabbing, the underlying issues are quite common.  Questions involving capacity, removal of trustees, division of duties among co-trustees, and termination of trusts are pervasive both in the drafting of trusts and in litigation involving trusts and trustees.  While most practitioners will probably not encounter a trust that owns an NBA franchise and billions of dollars in assets, this case highlights the importance of considering these issues, making sure that clients understand the ramifications and impacts of including certain provisions in their trust documents, and the options available to trustees in a situation where a dispute has arisen or a trustee may be incapacitated.