How Confidential Relationships and Legal Fiduciary Relationships Are Unlike

Suppose you’re a retired small business owner and believe a bank employee has breached some legal duties owed to you. You want to sue the employee but are unsure what kind of relationship existed between you and the potential defendant and which type of lawsuit you should file.

Fiduciary Relationships vs. Confidential Relationships

In Iowa, the courts have held that only two types of fiduciary relationships exist.

  • Legal Fiduciary: A fiduciary person or entity under contract with you or assigned by the courts to care for your personal or financial interest is a “fiduciary in itself.” Also known as a legal fiduciary, these positions often exist between a financial advisor/investor, trustee/beneficiary, attorney/client, or executor/heir.
  • Confidential relationship: A confidential relationship is a trusting alliance between two parties that may (or may not) turn into an fiduciary relationship itself. A legal confidential relationship occurs when one party exercises authority over another individual after gaining the reliant party’s trust.

Over one hundred years ago, the Supreme Court of Iowa in Schmidt v. Schmidt established that a party who earns another person’s confidence has a legal obligation to act in the best interests of the weaker party. The court noted that the dominant person in a confidential relationship should also bear fiduciary duties when advising on personal or financial issues during the relationship.

Recent court decisions have affirmed this precedent. In 1998, the Todd Court ruled that confidential relationships happen when you place confidence in another who can influence and exercise dominion and control over you and your intent.

Thus, all fiduciary relationships in Iowa are confidential, but not all confidential relationships qualify as fiduciary in nature. Fiduciary relationships typically exist through party affiliation established in an agreement. In contrast, confidential relationships entail fiduciary duties only when the more powerful party influences the weaker party’s healthcare, financial, or personal decisions.

Why Defining Trust Relationships Is Necessary

Understanding the relationship between you and a potential defendant is important because it determines which type of lawsuit you should file.

  • Fiduciary litigation involves disputes that arise when fiduciaries by themselves breach the ethical obligations owed to you. Fiduciary duty breaches often result in financial harm where one’s only recourse for recovery would be to bring fiduciary litigation. These lawsuits typically claim the defendant participated in self-dealing, conflicts of interest, or negligence, all tortious acts that can cause monetary damages to a person or an estate.
  • Confidential relationship claims attach to undue influence or fraud actions mainly brought during estate disputes. These lawsuits may allege that a dominant person in a trusting relationship with a vulnerable loved one used his/her apparent authority to pursue an improper favor from the weaker party. Accordingly, undue influence lawsuits attempt to recover the assets that the dominant person misappropriated from an estate.

More on Confidential Relationships and Undue Influence Claims

The Iowa courts have exhibited consistent caution in providing an exact definition for confidential relationships since these relationships can manifest in various forms. Nonetheless, the Iowa Supreme Court has asserted its probate courts “must examine the evidence of each claim” to find whether the defendant exercised apparent authority over the weaker individual when determining the presence of a confidential relationship.

For instance, in TODD, just because the deceased’s brother accompanied the decedent on vacation and assisted him with banking matters on a single occasion was not enough to establish a confidential relationship between the two parties. Furthermore, the court has held that demonstrating a familial connection without additional evidence of undue influence is insufficient to determine that a legal confidential relationship was present among parties.

Relationships that are not fiduciary in themselves require “proof of the elements of dominion and control,” according to TODD, which establishes the existence of a confidential relationship.

Moreover, the responsibility of proving an undue influence claim during probate litigation lies with the party bringing the lawsuit. However, if the challenger successfully establishes that a confidential relationship between the defendant and the deceased existed, the burden of proof shifts to the defendant to prove the absence of undue influence.

Showing that one’s inheritance was not unduly influenced is often a heavy burden to overcome in court. In line with the precedent set by the Todd Court, individuals who had a confidential relationship with the deceased and subsequently received assets from the estate must prove with “clear and convincing” evidence that their inheritance is legitimate.

And Now, Back to Our Case

In our fictitious example above… You are a retired businesswoman with most of her cash assets held at ABC National Bank. One morning, while waiting for the bank manager, you overhear bank employee, Mark, discussing future options with a janitor. Specifically, Mark tells the janitor that he believes XYZ stock will “double in price by next month.”

When asking Mark whether the rumor is true, he responds casually, “I’m going to go for it and will recommend it to my family to buy as well.” Three days later, you advise your investment banker to purchase $25,000 in XYZ stock based on Mark’s advice.

Unfortunately, after you left the bank, Mark discovered that the CEO of XYZ was embezzling from the company, prompting him not to purchase the options. In a week, your XYZ stocks plummeted to zero, and you discover that Mark never invested in XYZ, and he failed to advise you not to invest after your last encounter with him.

You believe that Mark, as an ABC Bank employee, held a fiduciary or legal duty to you to tell you not to invest in XYZ after receiving information about the embezzlement. Mark is an employee you have occasionally seen at the bank but didn’t know by name before your conversation with him a week ago.

What Kind of Relationship Do You Have With Mark and Can You Sue?

You may feel that your relationship with Mark would likely fall under the confidential relationship category. But remember that according to the TODD Court, despite fiduciary relationships arising whenever one party rests confidence in another who exercises influence, the relationship between customers and bank employees is not inherently fiduciary, absent extraordinary facts and circumstances.

If you were to sue Mark individually or ABC Bank as an entity, you most likely would not be able to prove the first element in fiduciary litigation – that Mark or the Bank owed you a fiduciary duty.

You would also be unable to establish that a confidential relationship between you and Mark existed since the employee never established a personal and trusting relationship with you.

Under a reasonable person standard, you should have known that Mark was a person representing only his interests and not yours. Mark also did not hold an exclusive contractual, fiduciary relationship with you that required him to give you investment advice.

Moreover, Mark never dominated, influenced, or controlled you, and you should have known that the conversation between you and him was only friendly banter instead of influential advice.

Therefore, no fiduciary status arose from Mark’s comments during his shift at the Bank because being friendly to you and casually conversing with you is not enough to create a confidential or fiduciary relationship under TODD.

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