Reclaiming Fiduciary Law for the City

Abstract

Modern law sets “public” local government law apart from “private” business entities law. Although intuitive, this distinction ignores legal history and, even more troublingly, the contemporary practices of local governments. Due to distressed finances and a political atmosphere favoring privatization, present-day cities routinely engage in sophisticated market transactions typical of private business entities. Current law fails to adequately address this reality. Because cities are deemed public, courts do not analyze their transactions for compliance with the fiduciary duties private law imposes to ensure sound management. Major city transactions thus evade meaningful review.

This Article addresses this worrisome anomaly by demonstrating that the city’s supposed public nature need not interfere with the application of fiduciary duties to its market transactions. To the contrary, this Article shows that the fiduciary status of city officials is supported — indeed, necessitated — by U.S. law’s history, structure, and normative logic. This Article also devises the appropriate fiduciary duty of care — or sound management — that courts should apply to city officials. It advocates requiring local decision-makers to abide by certain processes of informed decision-making before selling major municipal assets. As primarily a procedural, nonsubstantive test, such a standard would not constrain the political discretion of local officials and could readily be applied by courts.

Keywords: fiduciary duties, local government, duty of care, public trust

JEL Classification: R51, R52, R53, R38, K22, K11