Duties

Question 1

What is the meaning of a fiduciary relationship?

Answer 1

A person who holds a legal or ethical relationship of trust with one or more other parties

• At a minimum, it includes the duty to act prudently and to act in good faith

Question 2

What are the principal’s duties to the agent?

Answer 2

Compensation

Cooperation

Indemnity/reimbursement

Express contractual duties

Question 3

What liability does the principal face for breaching his duties?

Answer 3

Contractual remedies

Possessory lien

Question 4

What are an agent’s duties to the principal?

Answer 4

Fiduciary duty of loyalty

Obedience to lawful instructions

Reasonable care under the circumstances (including duty to disclose all relevant information)

Any other express contractual duties

Question 5

What liabilities does the agent face for breaching his duties?

Answer 5

Contractual remedies (if the agent was compensated)

Tort remedies

Constructive trust

Action for secret profits

• The actual profits or properties held by the agent whether or not the agent’s profit has caused the principal any loss.

Withhold compensation

Terminate agency relationship

Question 6

What are the fiduciary duties of partners?

Answer 6

(1) Duty of Loyalty

• Account for all profits or other benefits derived by the partner in connection with the partnership business
• Not deal with the partnership as one with an adverse interest
• Not compete with the partnership

(2) Duty of Care
* Refrain from engaging in negligent, reckless, or unlawful conduct or intentional misconduct
(3) Duty of Obedience
* Obey all reasonable directions of the partnership and not act outside the scope of his or her authority
(4) Duty to provide complete and accurate information concerning the partnership

Question 7

What are the duties of a general partner in an LP?

Answer 7

Fiduciary duties of care and loyalty

• A general partner does not automatically violate the duty of loyalty merely because the general partner’s conduct furthers his own interests

Question 8

What are the duties of a limited partner in an LP?

Answer 8

Generally owes no fiduciary duty to the partnership, and thus, is free to compete with the partnership and have interests adverse to those of the partnership, unless the partnership agreement provides otherwise

Question 9

In a member-managed LLC, what are the duties of the members?

Answer 9

Duty of care

• Act with the care that a person in a like position would exercise under similar circumstances
• Act in a manner reasonably believed to be in the LLC’s best interest

Duty of loyalty

• Account to the LLC for any benefit he derives in connection with LLC business
• Refrain from dealing adversely with the LLC (unless the transaction is fair to the LLC)
• Refrain from competing with the LLC’s business
• Members may authorize or ratify a specific act that would violate the duty of loyalty after disclosure of all material facts

Exercise rights in accordance with the contractual obligation of good faith and fair dealing

The operating agreement may eliminate the duty of loyalty and alter the duty of care if not unreasonable

• May not eliminate duty of good faith and fair dealing and may not authorize intentional misconduct or knowing violations of the law

Question 10

In a manager-managed LLC, what are the duties of the managers?

Answer 10

Only managers are subject to the duties of loyalty and care

• Same duties as under a member-managed LLC

Exercise rights in accordance with the contractual obligation of good faith and fair dealing

Only the members may authorize or ratify an act by a manager that would otherwise violate the duty of loyalty

The operating agreement may eliminate the duty of loyalty and alter the duty of care if not unreasonable

• May not eliminate duty of good faith and fair dealing and may not authorize intentional misconduct or knowing violations of the law

Question 11

What are the duties of promoters?

Answer 11

Promoters are joint venturers who have a fiduciary relationship with each other

The fiduciary duty to the corporation is one of fair disclosure and good faith

Question 12

What is the liability of a promoter for breach of fiduciary duty arising from sales to the corporation?

Answer 12

A promoter who profits by selling property to the corporation may be liable for his profit unless all material facts of the transaction were disclosed

• Upon disclosure to an independent board of directors, if the directors approve the transaction then the promoter has met his duty and will not be held liable
• If the board is not completely independent, the promoter still will not be liable for his profits if the subscribers knew of the transaction at the time they subscribed or unanimously ratified the transaction after full disclosure

Question 13

What are the duties of shareholders?

Answer 13

Generally, they have no fiduciary duties to the corporation or fellow shareholders and may act in their own personal interests

If the shareholders enter into an agreement, they have duties expressed in the agreement

If in a closed corporation, then shareholders have the duty of loyalty and good faith that partners have in a partnership

A controlling shareholder must refrain from using his control to cause the corporation to take action that unfairly prejudices minority shareholders

Question 14

What are the duties of directors?

Answer 14

(1) A duty to manage to the best of their ability
(2) A duty of care that includes the following (“Business Judgment Rule”):
* Must discharge their duties (1) in good faith, (2) with the care that an ordinary, prudent person in a like position would exercise under similar circumstances, and (3) in a manner reasonably believed to be in the best interest of the corporation
(3) A duty to disclose material corporate information to other board members
(4) A duty of loyalty
* (a) Do not engage in conflicting interest transactions, (b) abide by the corporate opportunity doctrine, (c) do not engage in competing businesses (unrelated businesses ok), (d) do not engage in insider trading

The articles may limit or eliminate directors’ personal liability for money damages to the corporation or shareholders for actions taken or for failure to take action

The articles cannot limit or eliminate liability for financial benefits received to which she is not entitled, intentionally inflicted harm on the corporation or shareholders, unlawful corporate distributions, or intentional violations of criminal law

Question 15

When is a director not liable under the Business Judgment Rule?

Answer 15

When he meets the requirements under his duty of care

• A director may rely on information, opinions, reports, or statements (including financial statements) if prepared or presented by (1) corporate officers or employees whom the director reasonably believes to be reliable and competent, (2) legal counsel, accountants, or other persons as to matters the director reasonably believes are within such person’s professional competence, or (3) a committee of the board of which the director is not a member, if the director reasonably believes the committee merits confidence

The person challenging the director’s action has the burden of proving that the standard was not met

Question 16

What is required under the duty of loyalty for directors of a corporation?

Answer 16

To abide by the duty of loyalty, a director must not enter into conflicting interest transactions, of if he does, he must make full disclosure of the conflict and receive approval from an independent board

A transactions is a conflicting interest it the director or a related person is (1) a party to the transactions, (2) has a beneficial interest in the transaction, or (3) a director, general partner, agent, or employee of another entity with whom the corporation is transacting business and the transaction is of such importance to the corporation that it would be brought before the board in the normal course of business

Question 17

What is the standard to uphold a conflicting interest transaction?

Answer 17

(1) The transaction was approved by a majority of directors (at least two) without a conflicting interest after disclosure of all material facts
(2) The transaction was approved by a majority of the votes entitled to be case by shareholders without a conflicting interest after disclosure of all material facts (notice of the meeting must describe the conflicting interest transaction), or
(3) The transaction, judged according to circumstances at the time of commitment, was fair to the corporation

A fact is considered material if an ordinary prudent person would consider it important in deciding whether to proceed with the transaction

Question 18

What is the Corporate Opportunities Doctrine?

Answer 18

The directors’ fiduciary duties prohibit them from diverting a business opportunity from the corporation without first giving the corporation an opportunity to act

Must be shown that the corporation would have an interest or expectancy in the transaction

Question 19

What are the duties of officers?

Answer 19

Officer duties are determined by the bylaws, or to the extent consistent with the bylaws, by the board or an officer so authorized by the board

Officers must carry out their duties in good faith, with the care an ordinary, prudent person in a like position would exercise under similar circumstances, and in a manner they reasonably believe to be in the best interest of the corporation

Question 20

What are the duties of a trustee?

Answer 20

(1) Duty to Administer Trust,
(2) Duty of Loyalty,
(3) Duty to Report,
(4) Duty to Separate Trust Property and Keep Records,
(5) Duty to Preserve Trust Property and Make It Productive
(6) Duty to Enforce Claims and Defend Trust from Attack

Question 21

What is the duty to administer the trust?

Answer 21

To administer the trust in good faith and in a prudent manner, in accordance with the terms and purpose of the trust instrument and the interests of beneficiaries

If a trustee has special skills or expertise, she will be held to a higher standard

If there is more than one beneficiary, the trustee must act impartially, taking into account any of their differing interests.

Generally, a trustee may not delegate discretionary functions

Question 22

What is the duty of loyalty for a trustee?

Answer 22

A trustee cannot enter into any transaction in which she is dealing with the trust in her individual capacity (i.e. a trustee cannot engage in self-dealing)

A trustee has a duty of undivided loyalty to the trust and its beneficiaries

Question 23

What are the sub-duties under the Duty of Loyalty?

Answer 23

(a) A trustee cannot buy or sell trust assets,
(b) a trustee may not sell property of one trust to another trust of which she is also a trustee,
(c) a trustee may not borrow trust funds nor loan her personal funds to the trust except to protect the trust) and any interest paid on such a loan must be returned to the trust,
(d) a trustee cannot use trust assets to secure a personal loan,
(e) a trustee cannot personally gain through her position as trustee,
(f) a corporate trustee cannot invest in its own stock as a trust investment, and
* but it can retain its own stock if such stock was a part of the original trust res when the trust was established, provided that retention of the stock meets the prudent investor standard
(g) self-employment can constitute a form of prohibited dealing
* however, if the trustee renders extraordinary services to the trust, she may be entitled to additional compensation

Question 24

What is indirect self-dealing?

Answer 24

When a trustee enters into a transaction with her spouse, close relative, attorney, or corporation in which she owns a significant interest; this violates her duty of loyalty

Question 25

What are the beneficiary’s rights in a prohibited transaction?

Answer 25

The transaction is voidable unless (1) a court or terms of the trust approved it; (2) the beneficiary failed to bring suit within the prescribed time period; (3) the beneficiary gave consent, ratification or release, or (4) it involves a contract or claim arising before the trustee became trustee

Question 26

What is the trustee’s duty to report?

Answer 26

Provide the qualified beneficiaries with her name, address, and phone number

Respond to beneficiary requests for information about the trust’s administration

Provide a copy of the trust instrument if requested

Furnish an annual accounting of the trust

Question 27

What is the duty to preserve trust property and make it productive?

Answer 27

The power to invest is normally implied from the duty to make trust property productive

The measure of damages for breach is the amount of income that would normally accrue from proper investment

Question 28

What is the duty to keep trust property separate?

Answer 28

Trust assets must be kept physically separate from trustee’s personal assets; no commingling

Trustee must earmark trust property

Question 29

What is the standard of care a trustee must exercise under the Uniform Prudent Investor Act?

Answer 29

One of reasonable care, skill, and caution when investing and managing trust assets

Investment decisions must be evaluated in the context of the entire trust portfolio (corpus) and as part of an overall investment strategy that has risk and return objectives reasonably suited to the particular trust

The UPIA permits any kind of property or investment decisions provided the trustee acts prudently

A trustee must diversify the investments of the trusts unless she reasonably determines that the purposes of the trust are better served without diversification

Question 30

What are the trustee’s liabilities if a trustee commits a breach of trust?

Answer 30

He is liable to the beneficiaries for the greater of: (a) the amount necessary to restore the trust property and distributions to what they would have been absent a breach, or (b) the trustee’s profit from the breach.

A trustee is liable to a beneficiary for any profit arising from administration of the trust, even if there was no breach

Question 31

What can the Court do if the trustee commits, or is about to commit, a breach of his trust duties?

Answer 31

(1) enforce specific performance of the trustee’s duties,
(2) enjoin the trustee from committing a breach of trust,
(3) compel the trustee tmoney or restore propertyo pay , or
(4) suspend or remove the trustee.