Copy of Securities Law and Financial Fraud Violations Not Dischargeable in Bankruptcy


Fiduciary Duties in Arizona Investment Transactions 

This article analyzes a cause of action for breach of fiduciary duty in Arizona and the fiduciary duties that have been recognized in connection with investment transactions.

Please note that, while this article accurately describes applicable law on the subject covered at the time of its writing, the law continues to develop with the passage of time. Accordingly, before relying upon this article, care should be taken to verify that the law described herein has not changed.

I. Elements of Breach of Fiduciary Duty Claim in Arizona.

Arizona recognizes a claim for breach of fiduciary duty. See Revised Arizona Jury Instructions (“RAJI”) (Civil) 4th Commercial Torts 1A-3 and authorities cited therein. 

To establish a breach of fiduciary duty claim, the plaintiff must prove: (1) the defendant owed the plaintiff a fiduciary duty; (2) the defendant breached the fiduciary duty; (3) the defendant’s breach was a cause of the plaintiff’s damages; and (4) the plaintiff’s damages. See RAJI (Civil) 4th Commercial Torts 1A-1D and authorities cited therein. 

Notably, unlike a fraud claim, a breach of fiduciary duty claim does not require the plaintiff to prove any intent on the defendant’s part in connection with the wrongdoing.

This article will explore the first element, the existence of a fiduciary duty, and more specifically in investment transactions, in detail below. The type of fiduciary duty that the defendant owed to the plaintiff will in turn determine the second element, whether the defendant breach that duty, based on the defendant’s actions, failures or omissions.

With respect to the third element, causation, a “breach of fiduciary duty is a cause of damages if it helps produce the damages and if the damages would not have occurred without the breach.” See RAJI (Civil) 4th Commercial Torts 2 and authority cited therein.

The fourth element, damages, constitute “the full amount of money that will reasonably and fairly compensate” the plaintiff for any of the following elements of damage proven to have resulted from the defendant’s breach of fiduciary duty: (1) loss of money or other property; (2) profit or proceeds that the plaintiff would have received had the defendant performed its duties; (3) money or property that is unjust for the defendant to keep; (4) bodily harm; and (5) emotional distress. See RAJI (Civil) 4th Commercial Torts 3 and authorities cited therein. A court may also award punitive damages for a breach of fiduciary duty. See id. Comment 2 (citing Jerman v. O’Leary, 145 Ariz. 397, 402, 701 P.2d 1205, 1210 (Ct. App. 1985)).

Pursuant to A.R.S. § 12-542, there is a two year statute of limitations for a breach of fiduciary duty claim. CDT, Inc. v. Addison, Roberts & Ludwig, C.P.A., P.C., 198 Ariz. 173, 175, 7 P.3d 979, 981 (Ct. App. 2000). Accordingly, a plaintiff must commence and prosecute an action for breach of fiduciary duty within two years after the date of accrual. A.R.S. § 12-542. The discovery rule applies to the statute of limitations under A.R.S. § 12-542. CDT, Inc., 198 Ariz. at 176, 7 P.3d at 982. Thus, a claim for breach of fiduciary duty does not begin to accrue “until the plaintiff knows or with reasonable diligence should know the facts underlying the cause,” including the plaintiff’s appreciable, non-speculative damages. Id. at 176, 7 P.3d at 982 (citations omitted).

II. Fiduciary Duties in General in Arizona.

The first element, the existence of a fiduciary relationship, is generally a question of fact for the trier of fact, but only if there is sufficient evidence to submit the issue to the trier of fact. Gemstar Ltd. v. Ernst & Young, 185 Ariz. 493, 504-05, 917 P.2d 222, 233-34 (1996) (citations omitted). “When the evidence is insufficient to support a verdict, the trial court has a duty to decide the issue.” Id. at 404, 917 P.2d at 234 (quoting Rhoads v. Harvey Publ’ns, Inc., 145 Ariz. 142, 148, 700 P.2d 840, 846 (Ct. App. 1984)). 

There are two types of fiduciary relationships: (1) those specifically created by contract or formal legal proceedings; and (2) those implied in law due to the factual situation surrounding the transaction and the relationship of the parties. Burkons v. Ticor Title Ins. Co., 165 Ariz. 299, 304, 798 P.2d 1308, 1313 (Ct. App. 1989), reversed on other grounds, 168 Ariz. 345, 813 P.2d 710 (1991). This article focuses on the latter type of fiduciary relationships, which unlike the first category and breach of contract claims, do not involve contracts but are implied in law by courts based on the following standards.

Arizona case law distinguishes a fiduciary relationship from an arm’s length relationship. Standard Chartered PLC v. Price Waterhouse, 190 Ariz. 6, 24, 945 P.2d 317, 335 (Ct. App. 1996) (citations omitted). A fiduciary relationship “is a relation of parties in which one is bound to act for the benefit of the other and can take no advantage to himself from his acts relating to the interest of the other.” Rhoads, 145 Ariz. at 149, 700 P.2d at 847 (quoting In re McDonnell’s Estate, 65 Ariz. 248, 253, 179 P.2d 238 (1947)). 

To establish a fiduciary relationship “there must be something approximating business agency, professional relationship or family tie impelling or inducing the trusting party to relax the care and vigilance he would ordinarily exercise” or “great intimacy, disclosure of secrets, intrusting of power, and superiority of position.” Id. at 149, 700 P.2d at 847 (citing In re McDonnell’s Estate, 65 Ariz. at 253, 179 P.2d at 241; Condos v. Felder, 92 Ariz. 366, 371, 377 P.2d 305, 308) (1926)). “In a fiduciary relationship, the fiduciary holds ‘superiority of position’ over the beneficiary,” which “may be demonstrated in material aspects of the transaction at issue by a ‘substitution of the fiduciary’s will’” or an “imbalance of specialized knowledge and bargaining power” that puts the fiduciary in a superior position so that the beneficiary depends upon the fiduciary for information to the degree it ceases acting on its own behalf and cedes that function to the fiduciary. Standard Chartered, 190 Ariz. at 24-25, 945 P.2d at 335-36 (citations omitted). 

To put it another way, a fiduciary relationship arises:
by reason of kinship between the parties, or professional, business, or social relations that would reasonably lead an ordinarily prudent person in the management of his business affairs to repose that degree of confidence in another which largely results in the substation of that other’s will for his in material matters involved in the transaction; or where the party occupy relationship, whether legal, natural, or conventional in their origin, in which confidence is naturally inspired, or, in fact, reasonably exists.
Taeger v. Catholic Family & Cmty. Servs., 196 Ariz. 285, 995 P.2d 721 (Ct. App. 1999) (citing In re Guardianship of Chandos, 18 Ariz. App. 583, 585, 504 P.2d 524, 526 (1972)). Even if the beneficiary unilaterally placed trust or confidence, a fiduciary relationship exists if the fiduciary voluntarily and knowingly entered into the position of trust by accepting its corresponding responsibilities. Id. at 292, 995 P.2d at 728.

However, “mere confidence or implicit faith in another’s honesty and integrity” or “mere friendly relations” is not sufficient to constitute a fiduciary relationship. Rhoads, 145 Ariz. at 149, 700 P.2d at 847 (quoting In re McDonnell’s Estate, 65 Ariz. at 253, 179 P.2d at 241). See also Standard Chartered, 190 Ariz. at 24, 945 P.2d at 335 (“Mere trust in another’s competence or integrity does not suffice; ‘peculiar reliance in the trustworthiness of another’ is required.”) (citations omitted); id. at 25, 945 P.2d at 336 (“trust, confidence, and reliance, though necessary components, do not suffice to establish a fiduciary relationship;” there must be peculiar reliance in trustworthiness so as to substitute fiduciary’s will for beneficiary’s will). 

Moreover, reliance on or deference to another individual’s superior knowledge is not sufficient to “establish a fiduciary relationship unless the knowledge is of a kind beyond the fair and reasonable reach of the alleged beneficiary and inaccessible to the alleged beneficiary through the exercise of reasonable diligence.” Id. at 25, 945 P.2d at 336 (citations omitted). Compare id. at 25, 945 P.2d at 336 (finding insufficient deference to superior knowledge because beneficiary could have obtained access to such knowledge through others) to Taeger, 196 Ariz. at 291-93, 995 P.2d at 727-29 (finding sufficient deference to superior knowledge when beneficiary had no other source for information and had to rely upon fiduciary to provide all appropriate information).

“Where a relation of trust and confidence exists between two parties so that one of them places peculiar reliance in the trustworthiness of another, the latter is under a duty to make a full and truthful disclosure of all material facts and is liable for misrepresentation or concealment.” Rhoads, 145 Ariz. at 148-49, 700 P.2d at 846-47. In addition to this duty of care, there is also a duty of loyalty, which is an “obligation to act with the utmost loyalty and integrity.” Taeger, 196 Ariz. at 293, 995 P.2d at 729.

III. Specific Fiduciary Duties and Those in Investment Transactions in Arizona.

Applying the foregoing standards, Arizona courts have held that the following relationships are usually of a fiduciary nature: husband and wife, parent and child, other familial relationships, guardian and ward, attorney and client, corporate director and corporation, partners, general partner to limited partner, joint venturers, broker and client, agent and principal, real estate agent or broker and principal, escrow agent to parties in a transaction, trustee and parties to or beneficiaries of a trust, and executor or administrator and creditors. Id. at 149, 700 P.2d at 847 (citations omitted); RAJI (Civil) 4th Commercial Torts 1A-1D and authorities cited therein (providing jury instructions related to fiduciary duties existing for escrow agents, trustees, attorneys and partners). 

Accountants and auditors may also owe their clients fiduciary duties under the appropriate circumstances set forth hereinabove. See Gemstar, 185 Ariz. at 504-05, 917 P.2d at 233-34; Standard Chartered, 190 Ariz. at 23-25, 945 P.2d at 334-36. 

However, absent a special agreement, a fiduciary relationship does not typically apply to the relationship between a bank and ordinary depositor; it is simply a debtor-creditor relationship. See Rhoads, 145 Ariz. at 149, 700 P.2d at 847; McAlister v. Citibank, 171 Ariz. 207, 212, 829 P.2d 1253, 1258 (Ct. App. 1992) (citations omitted). Where, however, the relationship goes “far beyond that of a mere debtor and creditor,” and the bank, for example, acts as the customer’s financial advisor for many years and the customer relies upon that advice, then there may be a fiduciary relationship between the parties. Stewart v. Phoenix Nat’l Bank, 49 Ariz. 34, 44-45, 64 P.2d 101, 106 (1937).

So what about stockbrokers or other securities or financial professionals involved in investment transactions? Do they owe fiduciary duties to their clients and if so, what is the nature and scope of those fiduciary duties?

Again, financial advisors or investment advisors owe their clients fiduciary duties. See Stewart, 49 Ariz. at 44-45, 64 P.2d at 106; accord SEC v. Rauscher Pierce Refsnes, Inc., 17 F. Supp. 2d 985, 992-95 (D. Ariz. 1998).

Based upon the principal-agent relationship, a stockbroker owes it investor-client fiduciary duties during the length of any specific transaction, and may owe a continuing duty to the client if the stockbroker has discretionary authority over the client’s account or is acting as the clients’ financial or investment advisor. See Walston & Co, Inc. v. Miller, 100 Ariz. 48, 51-53, 410 P.2d 658, 660-62 (1966) (“broker and a customer have an agent-principal relationship with respect to each transaction to buy or sell”).

There is no quarrel with the proposition of law that when a broker serves as a customer’s agent, he is a fiduciary and owes his principal a duty to communicate certain information to him. . . . The agency relationship between customer and broker normally terminates with the execution of the order because the broker’s duties, unlike those of an investment advisor or those of a manager of a discretionary account are only to fulfill the mechanical, ministerial requirements of the purchase or sale of the security or future contracts on the market.

Id. at 51-52, 410 P.2d at 660-61. Unless the stockbroker has discretionary authority over the client’s account, is also acting as a financial or investment advisor to the client, or there is a contract dictating otherwise, the stockbroker has no continuing duty to report and furnish information to the client, such as price fluctuations, because it would be extremely burdensome and therefore unreasonable. Id. at 52, 410 P.2d at 661.

Anyone else who acts as an agent on behalf of any investors, such as an attorney, even if that individual is a co-investor, also owes fiduciary duties to those investor principals, including an “obligation of fully disclosing all material facts” concerning the investment or anything that is relevant to the parties’ principal-agent relationship. See In re Swartz, 129 Ariz. 288, 294, 630 P.2d 1020, 1026 (1981) (citations omitted).

The promoter of a corporation owes fiduciary duties to the corporation and its investors:
It is now settled law that a promoter sustains a fiduciary relation or a relation of trust and confidence to the corporation and to the stockholders thereof, and as a result of such relation of trust and confidence a promoter will not ordinarily be permitted to retain a secret profit made out of transactions with, or on behalf of, the corporation. Perfect candor and the utmost good faith and the strictest honesty are required of promoters, and their dealings with the corporation must be open and fair.
Frame v. Mahoney, 21 Ariz. 282, 287-88, 187 P. 584, 586 (1920) (citations omitted). See also Johnson v. Nychyk, 517 P.2d 1079, 1081 (Ariz. Ct. App. 1974) (“In Arizona the promoters of a corporation stand in a fiduciary relationship to the stockholder investors. Therefore, a finding that the defendants were promoters is a finding that they occupied a fiduciary relationship with the investors in the venture. Thus . . . a fiduciary duty is present so long as the promoter-investor relationship exists.”); accord Facciola v. Greenberg Traurig, LLP, 781 F. Supp. 2d 913, 924-25 (D. Ariz. 2011). But see Law v. Sidney, 47 Ariz. 1, 11 53 P.2d 64, 68 (1936) (“The evidence shows that plaintiff and defendant were strangers before they met and first discussed the question of investment [in defendant’s corporation], and there is no evidence that any fiduciary relation ever existed between them which would relieve plaintiff of the necessity of investigating the statements made by defendant to the same extent as any other reasonable person would be required to do. There is no claim that she was not a woman of mature years, fully competent to transact business independently.”).

“The burden is on the persons occupying such fiduciary relations to show that the transaction has been fair, open and conducted in the utmost good faith.” Hughes v. Caden De Cobre Mining Co., 13 Ariz. 52, 63, 108 P. 231, 236 (1910).

Officers, directors and managers of a corporation also owe fiduciary duties to the corporation and its stockholders, which require them to act with a high degree of care, honestly, fairly and in good faith and prohibit them from engaging in self-dealing. See Atkinson v. Marquart, 112 Ariz. 304, 306, 541 P.2d 556, 558 (1975) (citations omitted); Kadish v. Phoenix-Scottsdale Sports Co., 466 P.2d 794, 797 (1970) (citations omitted).

Conversely, a shareholder that has the ability to control and manage a corporation, such as majority stockholder, owes the same fiduciary duties to the corporation and other shareholders. See Mims v. Valley Nat’l Bank, 481 P.2d 876, 878 (1971).

With respect to limited liability companies (“LLCs”), the Arizona Limited Liability Company Act does not impose express fiduciary duties on managers or members of an LLC. See Van Weelden v. Hillcrest Bank, 2011 U.S. Dist. LEXIS 20180, at *15-16 & n.2 (Feb. 28, 2011). However, the Arizona Court of Appeals has determined, based upon Arizona legislative intent, statutory law, and common law, that LLCs should have the same liability as corporations, and thus, if an LLC’s operating agreement is silent, an LLC manager or member, like an officer or director of a corporation, could be liable for failing to fulfill their fiduciary obligations while acting on behalf of the LLC. See Sports Imaging of Ariz., LLC v. 1993 DKC Trust, 2008 Ariz. App. LEXIS 212, at *52-63 (Sept. 30, 2008); Robert A. Royal and Tracy S. Morehouse, Fiduciary Duties in Arizona Limited Liability Companies, Arizona Attorney (Mar. 2012) at 20-24. This is especially true if the manager or member assumes the duties of a fiduciary, such as acting or giving advice for the benefit of another, and therefore must exercise those fiduciary duties. Id.

IV. Conclusion.

In sum, a plaintiff may bring a claim against a defendant for breach of fiduciary duty in Arizona, but must plead and prove the existence of a fiduciary duty, breach of that duty, and damages proximately caused by that breach. A fiduciary duty may arise in connection with an investment transaction, but ultimately depends upon various facts, including the nature and scope of the parties’ relationship.
If you have questions regarding a possible securities law matter, or to arrange for a consultation concerning your legal matter, please contact Robert Mitchell at rdm@tblaw.com or at (602) 452-2730.
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