Breach of fiduciary duty and constructive fraud are probably the most conflated causes of action in fiduciary litigation. If you can’t readily discern between them, you’re in good company—many practitioners allege them in tandem as a single claim for relief, and a number of opinions from our appellate courts treat them likewise. Breach of fiduciary duty and constructive fraud are nonetheless distinguishable in two important ways.
To prevail on a claim for breach of fiduciary duty, the plaintiff must prove: (1) the existence of a fiduciary relationship, (2) a breach of the duty owed, and (3) damages proximately caused by the breach. See Green v. Freeman, 367 N.C. 136, 749 S.E.2d 262, 268 (2013). Although the elements for constructive fraud have appeared in various permutations, a widely accepted articulation is found in White v. Consolidated Planning, Inc., 166 N.C. App. 283, 603 S.E.2d 147 (2004): “To survive a motion to dismiss, a cause of action for constructive fraud must allege (1) a relationship of trust and confidence, (2) that the defendant took advantage of that position of trust in order to benefit himself, and (3) that plaintiff was, as a result, injured.” Id. at 294, S.E.2d at 156 (citing Sterner v. Penn, 159 N.C. App. 626, 631, 583 S.E.2d 670, 674 (2003)).
The first and third elements of both claims, while expressed slightly differently, are identical as a practical matter and that may explain the persistent confusion. In its most distilled essence, a fiduciary relationship is “a relationship of trust and confidence”. See generally Ward v. Fogel, 2014 N.C.App. LEXIS 1248, 20 (Dec. 2, 2014) (“Like constructive fraud, ‘[a] claim for breach of fiduciary duty requires the existence of a fiduciary relationship.’”) (quoting White at 293, 603 S.E.2d at 155). Similarly, a plaintiff’s allegation that the defendant’s misdeeds resulted in injury is tantamount to claiming the conduct proximately caused damages.
The difference, then, hinges on the second element of each cause of action. To breach a fiduciary duty, the defendant must fail to “act in good faith and with due regard to plaintiff’s interests.” Vail v. Vail, 233 N.C. 109, 114, 63 S.E.2d 202, 206 (1951). Constructive fraud, on the other hand, incorporates that sentiment while adding the requirement that the defendant sought to benefit himself in the transaction. See Toomer v. Branch Banking & Trust Co., 171 N.C. App. 58, 67, 614 S.E.2d 328, 335 (2005). In sum, we are left with the logical syllogism that conduct amounting to constructive fraud is also a breach of fiduciary duty, but not every breach of fiduciary duty constitutes constructive fraud.
The second critical difference between breach of fiduciary duty and constructive fraud is their respective statutes of limitations. For breach of fiduciary duty, the statute of limitations is three years. N.C. Gen. Stat. § 1-52(1) (2015). The statute begins to run when the claimant “’knew, or by due diligence, should have known’ of the facts constituting the basis for the claim.” Toomer at 68-69, 614 S.E.2d at 336. If, however, the alleged conduct rises to the level of constructive fraud, the statute of limitations is ten years. N.C. Gen. Stat. § 1-56 (2015). The tolling date also arguably differs between the two. For constructive fraud, the aggrieved party is under no duty to make inquiry “until something occurs to excite his suspicions”. See Shepherd v. Shepherd, 57 N.C. App. 680, 682-83, 292 S.E.2d 169, 171 (1989) (quotation omitted). While the plaintiff cannot be willfully ignorant, so long as he remains ignorant through no fault or negligence of his own, the statute will not begin to run. Id.
There is an understandable impulse to allege constructive fraud claims wherever they may lie to exploit its longer limitations period. Simply countenancing a claim as one for constructive fraud may not salvage an otherwise stale cause of action. For instance, to the extent a plaintiff’s lawsuit challenges a will, it cannot be the subject of a constructive fraud claim because that type of action may only be brought by caveat. James v. Schoonderwoerd, 2013 N.C. App. LEXIS 943, 17, 750 S.E.2d 920 (2013) (unpublished). Caveat proceedings, like breach of fiduciary duty claims, have a three-year statute of limitations. N.C. Gen. Stat. § 31-32 (2015). In the context of trusts, both causes of action are subject to the five-year statute of limitations provided in N.C. Gen. Stat. § 36C-10-1005(a) (2015).
Fiduciary litigation has risen significantly in recent years. Given the aging baby boomer population, that trend likely will continue. Understanding the subtle differences between a breach of fiduciary duty and constructive fraud could mean be the difference between winning and losing your case.