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The Fiduciary Duty—Et Tu, Brute?

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The Fiduciary Duty—Et Tu, Brute? Michigan Bar Journal September 2020 52 Best Practices The Fiduciary Duty—Et tu, Brute? By Gerard V. Mantese Historical Context in the tenant, for him to take away the prop- and loyalty toward another person and in erty of the lord.”4 the best interests of the other person....”6 Et tu, Brute? These famous words in- A good description from Michigan case- voke one of the most important and invet- law provides: “A fiduciary duty is a duty to Defining the fiduciary duty erate concepts in the law: the repose of act for someone else’s benefit, while subor- trust, from which arises the fiduciary duty. A fiduciary duty is a heightened sense of dinating one’s personal interests to that of So exalted is this concept that a betrayal of responsibility that one person has to an- the other person.” 7 (Emphasis in original.) another’s trust can leave the betrayer for- other in certain situations. Absent this posi- ever shunned. Just ask Brutus, or Judas, or tion of trust, the morals of the marketplace Benedict Arnold, whose names are eternally apply. It is hard to compete with Justice Car- The test for fiduciary status associated with disloyalty and deceit. dozo’s description of fiduciary duty, which in Michigan The fiduciary duty’s roots go back to the emphasizes scrupulous integrity: A fiduciary duty “arises from the repos- beginning of law itself, including in the ing of faith, confidence, and trust, and the Code of Hammurabi and its penalties for Many forms of conduct permissible in a reliance of one upon the judgment and ad- breach of trust.1 The duty is both ancient workaday world for those acting at arm’s vice of another.” 8 One’s placement of such and biblical: Ancient Rome’s Twelve Tables length, are forbidden to those bound by trust and confidence must be reasonable.9 declared “patronus si clienti fraudem fecerit, fiduciary ties. A trustee is held tosome - Michigan courts recognize four situations sacer esto” (“if a patron defrauds his client, thing stricter than the morals of the that commonly result in a fiduciary duty: let him be outlawed”), and the Book of market place. Not honesty alone, but the punctilio of an honor the most sen- Genesis posits mankind as having the orig- (1) when one person places trust in the 2 sitive, is then the standard of behav- inal fiduciary duty as stewards of the earth. faithful integrity of another, who as a re- ior. As to this there has developed a tra- The modern fiduciary duty began to take sult gains superiority or influence over dition that is unbending and inveterate.5 form in the Middle Ages, where creative the first, (2) when one person assumes (Emphasis added.) landowners used ancient fiduciary concepts control and responsibility over another, 3 to get around feudal restrictions on devises. Deriving from the Latin verb fidere (to (3) when one person has a duty to act for These early “uses” transitioned to equitable trust), the fiduciary duty also activates the or give advice to another on matters fall- trusts and the courts of chancery, which notions of action and energy in the service ing within the scope of the relationship, eventually recognized an explicit fiduciary of another. Black’s Law Dictionary defines or (4) when there is a specific relationship duty. One of the earliest references to the a fiduciary duty as: “A duty of utmost good that has traditionally been recognized duty came in the 1717 case of Bishop of faith, trust, confidence, and candor owed as involving fiduciary duties, as with a Winchester v Knight, in which Lord Chan- by a fiduciary...to the beneficiary[;] a duty lawyer and a client or a stockbroker and cellor Cowper declared that a “tenant is a to act with the highest degree of honesty a customer.10 sort of a fiduciary to the lord, and it is a breach of the trust which the law reposes The fiduciary duty’s roots go back to the “Best Practices” is a regular column of the Michigan Bar Journal, edited by Gerard V. beginning of law itself, including in the Mantese and Theresamarie Mantese for the Michigan Bar Journal Committee. To con- Code of Hammurabi and its penalties for tribute an article, contact Mr. Mantese at [email protected]. breach of trust. September 2020 Michigan Bar Journal Best Practices 53 nondisclosure violated the joint partners’ fiduciary duties to their fellow partner. Ad- Deriving from the Latin verb fidere (to trust), ditionally, Thomas v Satfield holds that it is not an excuse that a fiduciary did not have the fiduciary duty activates the notion of information at the time of the transaction in question. If the fiduciary obtained perti- action and energy in the service of another. nent information later, he must disclose it.25 The duty of due care A fiduciary duty may arise in many situ- company. The Marquette Circuit Court de- With respect to statutory fiduciary du- ations under the particular facts at issue. In clared the proxies void because of the moth- ties, Michigan statutes often refer to the duty the business world, some relationships leave er’s incompetence and held that the brother of due care in terms of an ordinarily pru- no doubt as to a fiduciary duty, such as an violated his fiduciary duties to the compa- dent person.26 Under the Michigan Supreme officer or director to the shareholders and nies and his sibling shareholders. Court’s “prudent person” rule, a fiduciary the corporation.11 Michigan courts also rec- must act as would a prudent person deal- ognize a fiduciary duty owed by controlling The duty of honesty and good faith ing with another’s property, and must use shareholders to noncontrolling shareholders any special skills or expertise when appro- A fiduciary also has a duty to act hon- in closely held corporations.12 When a non- priate.27 To be “prudent” means to act “with estly and in good faith. Thomas v Satfield traditional fiduciary relationship is alleged, care, diligence, integrity, fidelity and sound involved two companies associated with the facts establishing the repose of trust in business judgment.” the real estate and operations of a bowling another must be pled, and “the existence of In Castle v Shoham,28 the Michigan Court alley.19 The president and director of the a confidential relationship is a question of of Appeals applied this standard to a breach bowling alley was also a shareholder and fact”13 while the question of whether a fidu- of fiduciary duty claim. Before the Court director of the real estate company. The ciary duty exists on such facts is a question were claims of LLC member oppression un- bowling alley discovered that the negoti- of law for the court.14 der MCL 450.4515 and breach of fiduciary ated rental rate on the bowling alley was duty. The managing member, a corporation, premised on data that was incorrect or had engaged in acts of self-dealing. The What is demanded of a which the real estate company misrepre- Court held that the self-dealing was not only fiduciary—parsing the duty sented in negotiations, resulting in large oppressive, but also a breach of the duty of profits for the real estate company. Because In Michigan, “[a] fiduciary...owes his due care. Because of the LLC’s poor finan- of the common directors, the defendant principal a duty of good faith, loyalty, and cial condition, the managing member had owed plaintiff a fiduciary duty to act in fair dealing.”15 In other words, “a person in a not acted prudently when it caused the LLC good faith, which the Michigan Supreme fiduciary relation to another is under a duty to pay unreasonably high management fees Court held it breached when it was not hon- to act for the benefit of the other with regard to the managing member. est with the plaintiff bowling alley about to matters within the scope of the relation”16 the amount of profits the real estate com- while “subordinating one’s personal inter- pany would earn from the deal. ests to that of the other person.”17 Taken Examples of nontraditional together, the fiduciary duty has four basic fiduciary relationships The duty of full disclosure components: the duty of loyalty, the duty While some fiduciary relationships are of honesty and good faith, the duty of full Michigan’s rule requiring disclosure by more explicitly set forth in statute or years 20 disclosure, and the duty of due care. a fiduciary traces back to two 1936 cases. of caselaw (such as with directors and offi- Together, they require that a fiduciary must cers), others are dependent on the facts and fully disclose any “secret knowledge, in- circumstances of the situation. Examples of The duty of loyalty 21 tents and purposes” as well as “all the ma- these include the following: A violation of the duty of loyalty occurs terial facts and circumstances”22 that relate when the fiduciary acts for its own benefit to to the fiduciary relationship. Mere silence is 1. Bank/Depositor: the detriment of its principal. For example, enough to violate this duty.23 For example, Smith v Saginaw Sav & Loan Ass’n29 in Menhennick Family Trust,18 a brother who in Schmude Oil Co,24 joint partners in an oil Smith, who was ill, entrusted the defen- co-owned a closely held family business ob- drilling venture did not reveal to another dant bank with monitoring the progress tained proxies from his incompetent mother, partner that they had obtained additional of construction on a home 250 miles away, used his newfound majority voting power drilling acreage and thereby reduced his in- and with making payments to the builder to institute a single-person board, and is- terest in the venture from 25 percent to 9 per- for work completed.
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