“There is a fiduciary duty here. It’s really inconceivable to us.”

(February 3, 2012): Many folks or businesses agree to manage another person’s interests, money or business.   When this happens there is a fiduciary duty that attaches to the person or entity managing the other person’s interests, money or business matters.

The acceptance of a fiduciary duty can occur, for example, by being a General Partner in a Limited Liability Partnership, a Finance Advisor to an individual, or by managing the funds, property or affairs of another.

When you handle the money or manage the assets of another person or entity, you assume a higher duty to that person or entity than is normal – this duty is called a “fiduciary duty”.  The basic definition of “fiduciary duty” is to put the interests of others you are representing or assisting above your own interests.  For example, you cannot steal or double-dip from the funds you are managing, grossly mismanage another’s assets or fail to keep adequate records.

However, many times the person or entity that takes on the management of another’s money, business or assets does not understand this fiduciary duty, becomes complacent or just doesn’t care about his duties.  Thus, as Henry Silverman, former CEO of Cendant Corporation, famously said when uncovering accounting improprieties of a business recently acquired by Cendant: “There is a fiduciary duty here. It’s really inconceivable to us.”

What he was saying is that it was inconceivable that proper care was not used to manage the funds or affairs of others, even in spite of the fiduciary duty owed.  The failure to exercise proper care in handling the money and affairs of others can not only place you or your business in great danger of incurring civil liability, but also opens a serious threat of possible criminal charges against you.

So, if you are about to manage, oversee, or care for the money or assets of another,  be sure to call your attorney, explain what you want to do, determine if there is a fiduciary duty and what type of risk management control you need to have to make sure you do not violate that fiduciary duty.   As always, an ounce of prevention is worth a pound of cure.

Leonard Schneider and other Liles Parker attorneys have extensive experience in business litigation, contract review and drafting. Call 1 (800) 475-1906 today for a free consultation.

Part I: The Fiduciary Duties of Officers and Directors of Insolvent Corporations

(April 23, 2010): This is the first installment of a three part article by David Parker examining the Fiduciary Duties of Officers and Directors of Insolvent Corporations and Corporations operating in the so called “Zone of Insolvency.”

Part I:  The Fiduciary Duties of Officers and Directors of Insolvent Corporations

Over the next few days, David P. Parker will be posting several articles examing the  fiduciary duties of Officers and Directors of insolvent corporations and corporations operating in the so called “Zone of Insolvency.”

In the United States, corporations are creatures of state law, and the fiduciary duties of a corporation’s directors are defined by its state of incorporation. Many U.S. corporations are incorporated in the state of Delaware, which has a strong tradition of well-developed corporate jurisprudence.   There may, however, be differences between Delaware law and the laws of other states within the United States.  In general, Directors of solvent corporations have two basic “fiduciary” duties, the duty of care and the duty of loyalty, owed to the corporation itself and the shareholders. Directors must act in good faith, with the care of a prudent person, and in the best interest of the corporation. Directors must also refrain from self-dealing, usurping corporate opportunities and receiving improper personal benefits.  Decisions made by a Director on an informed basis, in good faith and in the honest belief that the action was taken in the best interest of the corporation will be protected by the “business judgment rule.”  Generally, officers owe the same fiduciary duties as directors.

It has long been settled that under ordinary (i.e., solvent) circumstances, shareholders typically have only a derivative (and not direct) right to sue for breach of the fiduciary duties of directors. If they do bring suit against directors, they must do so on behalf of the corporation, and any proceeds of those suits are for the benefit of the corporation.

The Delaware Supreme Court in Catholic Educ. Programming Found., Inc. v. Gheewalla opined that upon insolvency, creditors (who have, after all, taken the place of shareholders as the de facto owners) may likewise bring only derivative – and not direct – suits on behalf of the corporation against directors

 David Parker has extensive experience representing the interests of Corporate Officers and Directors.  Should you have questions regarding the responsibilities of these individuals to insolvent corporations, give us a call.  Mr. Parker can be reached at: 1 (800) 475-1906.