July 30, 2008
Brett McDonnell on Leib's Friends as Fiduciaries
Posted by Christine Hurt

In “Friends as Fiduciaries”, Ethan Leib argues that some close friends should be treated as fiduciaries for each other, at least up to a point.  He makes his argument in four main sections. The first section outlines some leading principles of fiduciary law:  what a fiduciary relationship is, why the law protects fiduciary relationships, the different duties that a fiduciary owes, and the remedies that follow upon finding a violation of fiduciary duty.  Leib plausibly stresses the importance of trust to fiduciary law.  Fiduciary law exists to protect those who in trusting others have made themselves vulnerable and who cannot easily monitor the actions of the fiduciary.  The second section outlines leading characteristics of friendship.  It argues both that friendship shares the core characteristics of fiduciary relationships and that applying fiduciary law to friendships would encourage trust within friendships, a valuable social trait.  The third section considers existing law on friendship and how that law should be extended given the analysis in the first two parts.  Courts are inconsistent, sometimes treating friends as fiduciaries and sometimes not.  Leib argues that fiduciary duties should only be relatively loosely applied to friends—the duty of care should not apply at all, while the duty of loyalty should give rise to liability only in egregious cases of advantage-taking. 

The final section of the article answers several objections.  The first type of objection concerns several ways in which friendships differ from prototypical fiduciary relations.  Two of these are that a fiduciary typically is superior or dominant in some way and that most fiduciary law regulates just one of the two parties in a relationship.  Leib has fine answers to these, but it might help him to more fully consider partnerships as a relationship that resembles friendship in these respects (he does mention partners, but only glancingly).  Partners owe fiduciary duties to their partnership—see Revised Uniform Partnership Act sect. 404.  Yet, the default rule for partnerships is that each partner shares equally in control.  Thus, a default partnership is egalitarian with mutual obligations—like friends.  The other type of objection concerns dangers that applying fiduciary law to friendships might create.  The most serious objection is that applying the law might discourage the formation of friendships or lead to developing formal mechanisms that substitute for and undermine the very trust Leib wants to support.  Leib argues that trust and the law are here likely to be complements, not substitutes, particularly given the extreme under-enforcement of the law that is likely to occur.

I like this paper—it’s thorough and well-argued.  But I’m not convinced yet.  My main doubt is that I find it hard to see how the law would have much prospective effect in all but a narrow range of circumstances.  Leib’s basic hope is that fiduciary law will encourage friends to not take advantage of each other, but how is the law going to affect behavior at all?  Compare friends with the directors of corporate boards.  For directors, there are a variety of ways in which judicial decisions get transmitted.  Most important is the role of corporate lawyers.  Others also help transmit legal rules, including consultants, investment bankers, and the business press.  Legal rules help shape the formal decisionmaking procedures of corporations.  None of that applies to friends.  I don’t consult a lawyer before entering into a friendship, nor as I make decisions whether to deepen or pull away from a friend.  No formal structures cabin decisions made within a friendship.  How, then, is the law going to deter advantage-taking?  Put it this way:  Leib describes a variety of cases that already regulate friends.  I had no idea those cases existed; it’s a safe bet that very few people do.  How, then, are those cases helping?

I also have two smaller points.  First, a difference between friendships and most fiduciary relations is that the existence of the relationship is much more vaguely defined with friendships.  This vagueness may make it even more unlikely, in some cases, that two people will see the law as applying to them.  Conversely, it may in other cases lead others to fear that the law will apply to them even when it probably would not.  They may then react by sub-optimally distancing themselves from each other.  This is a version of one of the objections Leib considers, but his answer does not consider the effect of vagueness (his answer uses marriage as an analogy, but marriage is much more precisely defined).  Here too, btw, the partnership analogy may help Leib—partnerships are also vaguely defined.  Leib deals with the definitional question in an earlier UCLA Law Review article—it would help if at relevant points he provided a bit more of an idea of his argument from that article.  My second smaller point is that Leib discusses “contribution-based restitution” as a frequently-attractive remedy for violations in the friendship context.  I’m concerned that too often it will be very difficult to value individual contributions within a friendship.  Here again partnership law is instructive—the default sharing rule is an equal split, in part because it is hard to value individual contributions.

Let me end by reiterating that this is quite a good paper.  It is one important part of a larger project on friendship and the law.  The paper raises interesting theoretical questions and addresses them smartly, and also has a reasonable shot at affecting some real life judicial opinions.  That’s not an easy combination.

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