Also known as: fiduciary duty of loyalty · fiduciary duty of care · duty of loyalty · duty of care · fiduciary duty · loyalty and care
Written by attorneys · grounded in primary & secondary sources — see below
Obligations imposed on persons in positions of trust and confidence requiring them to act in the best interests of the beneficiary or entity without self-dealing and to refrain from grossly negligent or reckless conduct in managing affairs. The duty of loyalty prohibits a fiduciary from placing personal interests ahead of those owed to the company or beneficiaries. The duty of care requires refraining from grossly negligent or reckless conduct.
Farid Farahani, managing a member-managed LLC, failed to secure a construction site near a busy sidewalk. A pedestrian walking nearby was injured when debris fell. The court held Farid liable because his grossly negligent failure to address a known risk breached the fiduciary duty of care owed to the LLC.
Fatou Fall, a member of a member-managed LLC, used company resources to secure a contract for her separate business. She kept the resulting profit without disclosure. The company recovered the benefit because Fall owed loyalty duties to the entity and fellow members.
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Flora Ford and Frederick Ferguson formed a limited partnership. Their agreement attempted to waive all loyalty duties so Ford could compete directly with partnership opportunities. The court refused to enforce the waiver because the statute prohibits altering or eliminating the duty of loyalty.
Faith Fitzgerald and Fabian Flynn entered a general partnership. Their agreement tried to eliminate the duty of care entirely. The court struck the provision because the statute forbids altering or eliminating the duty of care except in narrow circumstances not present here.
Foxfire Biotech's manager left hazardous materials unsecured near employee workspaces. An employee suffered severe emotional distress that manifested in physical symptoms after discovering the risk. The manager remained liable because the grossly negligent lapse breached the fiduciary duty of care owed to the LLC.
Frontier Capital's promoter sold his own property to the soon-to-be-formed corporation at an inflated price. He disclosed the deal only to two initial subscribers but not to all contemplated investors. The corporation recovered the secret profit because full disclosure to every original investor was required.
The duty of loyalty is violated when a fiduciary engages in self-dealing, competes with the entity, or retains undisclosed profits from transactions involving the entity. Uniform acts require the fiduciary to account to the company for any such benefit and hold it as trustee.
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The duty of care is breached by grossly negligent or reckless conduct, willful or intentional misconduct, or knowing violation of law. Simple negligence does not suffice. The standard protects fiduciaries from ordinary mistakes while holding them accountable for serious departures from prudent management.
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Statutes permit some modification of the duties of loyalty and care but prohibit complete elimination except in limited cases involving informed ratification after full disclosure. Partnership and LLC agreements may prescribe standards for good faith but cannot authorize bad faith, willful misconduct, or knowing violations of law.
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All partners or members may authorize or ratify a transaction after full disclosure of material facts, thereby excusing what would otherwise violate the duty of loyalty. Ratification requires informed consent from those entitled to the duty and cannot validate knowing violations of law.
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…proposing the merger. The complaint was in two counts, the first based on diversity and claiming a breach of the directors' fiduciary duty to the stockholders. The second count alleged a violation of § 14(a)[^maj-1] of the Securities Exchange Act of 1934 with reference to the proxy solicitation material. The trial court held…