Fiduciary Obligations in the Horse Industry

By Michael F. Beethe, Esq.

Historically, dealing with horses meant that you were “on your own.” In other words, you had to watch your back, depending on no one. This reputation has continued, as being called a “horse trader” is often considered an insult. The court system reacted to the countless losses by unassuming amateurs, novice horse people or even experienced equestrians, due to acts of their agents.

Few industries contain as many agency relationships as the horse industry. Often agents buy and sell horses for their clients. Clients frequently make substantial decisions based solely upon their trainer’s advice. Countless similar relationships exist in the horse industry, many of which lack documentation. The relatively small size of the horse industry compounds the problems, as conflicts of interest arise on a regular basis.

Creating A Fiduciary Relationship

Fiduciary relationships can arise from various different situations. Unfortunately, no universal definition or standard exists for determining when a fiduciary relationship has been created. Most agree, however, that a fiduciary relationship arises when one party places his or her trust in another. One recent court decision defined a fiduciary relationship as one “founded on trust or confidence, reposed by one person in the integrity and fidelity of another.” Various situations in the horse industry can create such a relationship. While the fiduciary relationship can arise from a written document, the horse industry commonly witnesses the relationship arise by implication or oral agreement. Further, no compensation is required to create the fiduciary relationship.

The following represents only a partial listing of examples of fiduciary relationships in the horse industry:

The list could go on much longer. In order to determine if a fiduciary relationship exists, you must ask yourself this question: Has one person placed money, assets, trust or confidence in the hands of another? If you answer yes, than a fiduciary relationship exists.

The Fiduciary Duty

So you have determined that a fiduciary relationship exists. What does that mean? It means that the individual with whom the money, assets, trust or confidence has been placed (“agent”) owes a fiduciary duty to the party placing said money, assets, trust or confidence with them (“principal”). Again, however, no universal law exists which defines a fiduciary duty. As a general rule, most courts require the agent to exercise the highest degree of good faith and loyalty, and to act solely for the benefit of the principal in all matters connected with the relationship.

Typical Fiduciary Relationships and the Requirements

Agent – Buyer or Seller. An agent often serves as an intermediary in a horse sale. In many cases the agent will represent only one of the parties, either the buyer or seller (for situations where the agent represents both the buyer and seller, see below). Typically, the agent will receive a commission in exchange for his or her expertise and time spent in assisting the buyer or seller complete the sale. Note, however, that an agent need not receive a commission in order for the agent to owe a fiduciary duty to the buyer or seller.

When the agent represents the buyer or seller, the agent must disclose all that the agent knows of the transaction to the party they represent. Bill, a trainer is trying to help his customer find a new English Pleasure horse. Bill has a prospect picket out, and has made arrangements for his customer to try the horse. Bill has knowledge that the prospective horse has behavioral problems in the ring. Bill is required to disclose this problem to his customer, even if he believes he can eventually correct this problem, or that it may ultimately cause his customer to not buy the horse. This duty may prove difficult when the agent stands to gain a large commission upon the closing of the horse sale. Nevertheless, the agent owes the duty.

A common breach of the fiduciary duty in horse sales arises when the agent takes a secret commission or markup on a horse, without disclosing such commission or markup to their fiduciary. As an example, if a buyer enlists the assistance of an agent to purchase a horse, the agent must be truthful with the buyer. A recent federal court case examined a situation where a horse buyer’s agent, who was to receive a standard commission, sold several horses to the buyer for more than the sellers were asking. The agent pocketed the difference between what the seller was asking, and the seller paid for the horses, in addition to the standard commission. The federal court determined that such actions did indeed breach the fiduciary duty, and awarded monetary damages to the buyers.

Agent – Buyer and Seller. When a party acts as an agent in a horse sale, they owe a duty to act solely for the benefit of the agent’s fiduciary (the buyer or seller). Following this standard, an agent will find it impossible to represent both the buyer and seller, as it would be impossible to act for the sole benefit of both parties. In order for an agent to safely and legally represent both the buyer and seller in a horse sale transaction, the agent must obtain consent for the dual representation from both parties. Vickie has trained horses for Susan for several years. When Susan decides to sell her horse, she asks Vickie to help her in doing so. Vickie has another customer, Jeff, whom she has been helping to find a new horse. Vickie must proceed very carefully at this point if she decides to assist both Susan and Jeff in the sale of Susan’s horse to Jeff. Vickie should disclose to both Susan and Jeff that she is representing them both in this sale, and obtain their consent, or agreement, to that arrangement. Most states require the buyer and seller be aware of, and consent to, the dual representation. Without such consent from both buyer and seller will result in either party being able to rescind the sale, even if no bad faith was exercised by the agent.

Partners. Co-owners of property, including horses, are classified as partners. Partners owe a fiduciary duty to each other. One such duty that partners owe each other is the duty not to obtain secret profits from the sale of partnership property. The key to fulfilling fiduciary duties in partnership arrangements is clear and open disclosure, as well as proper treatment of partnership funds. In effect, each partner represents the partners in the partnership. In the leading case on the fiduciary duties of partners, one partner purchased the partnership’s horse on a public auction through a secret agent. Shortly after the partner’s purchase, the purchasing partner re-sold the horse for a significant profit. The court found in favor of the partnership (and against the purchasing partner), as every partner must give to the partnership any profits generated from partnership property, without the consent of the remaining partners. The purchasing partner should have sold the horse for the significant profit for the partnership, sharing the profit with all the partners.

Trainer – Owner. Some agents, such as trainers, serve as long-term agents of their fiduciaries. A trainer’s duty can cover a wide range of activities, including management of horses, accounting of expenses and income, advertising, and business decisions (i.e., determining whether to buy and sell horses), among various other duties. Such relationship imputes upon the trainer a duty to act in good faith and for the sole benefit of their client. Additionally, the trainer should also act within the authority given by the client. Hope has her former national champion gelding in training with Tom. Although Tom believes the horse is capable of winning more national championships, Hope wants to limit the shows the gelding is taken to, and does not want him shown at Nationals again. Even if Tom wants to continue campaigning this horse, he is under an obligation as Hope’s fiduciary to not do so. A trainer’s exceeding the authority granted to the trainer by the owner of the horse resulted in recent litigation. In this instance, the trainer took the horse to several shows (and incurred a good deal of expenses which were billed to the client) to which the owner did not consent. The court ruled that the owner was not responsible for unauthorized show expenses.

Damages for Breach of Fiduciary Duty

When an agent breaches the duty owed to his or her fiduciary, the courts grant the fiduciary various remedies, including:

Conclusion

The fiduciary relationship guards the horse industry, allowing fiduciaries to place their trust in agents. The fiduciary relationship arises in countless horse transactions, and should be taken seriously. If a fiduciary places money, assets, trust or confidence with the agent, the agent owes the fiduciary a duty of good faith and loyalty, and must act for the sole benefit of the fiduciary. Many of the examples of breach of fiduciary duties seem like breaches of common sense by the agent. In order to avoid a situation where you are accused of breaching the fiduciary duty, you should use your common sense. Recent cases illustrate that agents must take their duty seriously, using their common sense, or the court will make them pay.

DISCLAIMER

This article provides general coverage of its subject area. It is provided free, with the understanding that the author, publisher and/or publication does not intend this article to be viewed as rendering legal advice or service. If legal advice is sought or required, the services of a competent professional should be sought. The publisher shall not be responsible for any damages resulting from any error, inaccuracy or omission contained in this publication.

© March, 2010. All rights reserved. This article may not be reprinted nor reproduced in any manner without prior written permission by the author.