Notes for Week of March 2
TRUST ADMINISTRATION: THE FIDUCIARY OBLIGATION
Hartman v. Hartle (NJ Court of Chancery, 1923) pg. 779
Facts: Testator Dorothea Geick directs in her will that her executors sell her farm and divide the
proceeds equally among her five children. The executors are two of her sons-in-law. They conduct
a sale, and the farm sells for $3,900 to one of T’s sons (who bought it on behalf of one of her
daughters, who was the wife of one of the executors). She then sold the property to a good faith
purchaser for value for $5,500.
Procedural Posture: Another daughter sues about the sales.
Issue: Whether the executor (and thus his wife) needed court approval before buying the property
without previous.
Holding: YES. Since the farm cannot be resold, the daughter and executors must pay one-fifth of
profits to complainant.
Notes:
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The prohibition on trustees and spouses buying is standard. Some states also prohibit any agent
of the trustee from buying. UTC §802(c) says these are presumptively voidable, but the
presumption is not conclusive. (782)
Had the purchaser been on notice of the breach, or not paid value, then the claimant could
reach the property and bring it back into the trust. This is called the “trust pursuit rule” (782).
In re Gleeson’s Will pg. 780
Facts: Gleeson leased farm land to Colbrook for one year terms. She died 15 days before a term
expired, and her will named Colbrook as trustee. He continued farming the land for another year,
increasing the rent he paid for it.
Issue: The general principle of equity is that “a trustee cannot deal in his individual capacity with the
trust property.” Should this be an exception? Does Colbrook’s good faith and honesty, and the fact
that the trust lost no money because of the hold-over justify him acting in his individual capacity as
farmer and as trustee?
Holding: NO. Requires Colbrook to pay all profit he received to the trust.
In re Rothko (NY CoA, 1977) pg. 783
Facts: Mark Rothko died testate, devising his residuary estate to the Mark Rothko Foundation. His
two children set aside half the disposition, as was their right under NY law. The estate’s largest
asset was hundreds of Rothko paintings. The three named executors had contracted to sell about
100 to Marlborough, a Liechtenstein corporation, and have the rest sold on consignment by
Marlborough. Reis, one of the executors was an officer of Marlborough (and so had a big conflict).
Stamos, another executor, was an unsuccessful artist (and so had a conflict because he might seek
to curry favor with the gallery, and because he knew of the first conflict and did nothing). Levine, the
third executor, had no personal conflict, but knew of the others and even raised the issue, and then
did nothing to correct it.
Procedural Posture: Kate Rothko (who had just reached majority) seeks to remove the executors,
enjoin Marlborough from disposing of the paintings, and return the paintings they still have, and
damages. The guardian of her minor brother joined her. The surrogate had:
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Removed the executors because of their breaches
Found Marlborough and its director Lloyd to be in contempt for selling paintings despite the
temporary restraining order.
Set aside the contracts
Set damages at the value of the sold paintings at the time of trial for which Marlborough,
Llyod, Stamos, and Reis were jointly and severably liable. This was over $9m. Of this, the
surrogate found Levine was only liable for the value at the time of sale, which was over
$6m.
The Appellate Division basically affirmed.
Issue: Appeal claimed that a conflict of interest, in the absence of self-dealing, should void the
contract only if the transaction is unfair. So the ‘no further inquiry’ rule should not apply.
Holding: NO. Or rather, so what. CoA says
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Lower courts found the deals were not fair, and had not relied solely on the no further
inquiry test.
Levine’s reliance on counsel was not a complete defense where he knew of the conflict.
Reis & Stamos DID have conflicts (it uses stonger terms)
And Marlborough was on notice to the executor’s breach of duty
Affirms appreciation damages where the executors failed in two ways: sold for too little
property which they should not have sold. Where the only breach is in selling too little, the
damages should be measured at the time of sale.
Notes:
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Kate Rothko was named administrator cum testament annexo (where T either failed to
name an executor, of they were disqualified, the court appoints a administrator c.t.a) (ftn. 8
on 789).
Estate of Collins (CA CoA, 1977) pg. 798
Facts:
At his death in 1963, Edward creates a testamentary trust for his wife, children, and parents,
which is worth about $80,000. After dispersements, it has about $50,000. The trustees, T’s business
partner and lawyer, then loan about $50,000 to developers. The trust language included very broad
terms “unless specifically limited, all discretions conferred upon the Trustees shall be absolute, and
their exercise conclusive on all persons interest[ed] in this trust… subject always to the discharge of
its fiduciary obligations…”
The trustees get a second lien on some undeveloped land, which had sold for $107,000 two
years previous, and had a current first lien of $90,000. The trustees did not get an appraisal, but
talked to a local real estate agent who estimated local properties to be selling for $18,000-$20,000
(making this one worth around $185,000).
The developers offered an additional security in 20% of their company, but they never recorded
this obligation in any way, nor gave over the stock, nor a personal guarentee. The developers
provided an un-audited estimate of the company’s value of $2,000,000. The trustees did not check
if the company had any pending lawsuits or foreclosure proceedings against it. In fact there were
many of both. The trustees did call the company’s bank, which said it had a satisfactory relationship
with the developers.
Apparently the area had been booming in 1965 when the loan was granted, but when boom
went bust, the developers’ company was forced into involuntary bankruptcy, and the developers
also personally filed. Though the trustees foreclosed on the land, their foreclosure was superseded
by that of the first lienholder. The entire investment was lost, and the trustees had spent $10,000 in
a futile effort to defeat the first lienholders.
Procedural Posture: Trustees petitioned the court to end the trust and discharge the trustees. After
a hearing, the trial court approved the account of the trust, terminated the trust, and discharged the
trustees. The trial court found that the trustees had met the ‘prudent man test’. Beneficiaries
appealed.
Issue: The beneficiaries claimed that the trustees failed to follow the standard of the ‘prudent
investor’. Defendant trustees disagree, and also say the trust language conferred on them absolute
discretion (even, by implication, to be imprudent).
Holding: For the Beneficiaries.
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Prudence: Though there are no statutorily prohibited investments, the Restatement §§2279 provide guidelines for prudence. The trustees failed in at least three ways:
o Investing 2/3 of the whole trust into one investment
o Investing in real property without a first lien
o Failing to investigate adequately the borrowers or the collateral
Absolute discretion: The broad discretion in this instrument was NOT absolute, and the
court does not decide if such investments would be acceptable if the language were
different. And even were the language absolute, “absolute discretion does not permit a
trustee to neglect its trust or abdicate its judgment.” Instead, the court focuses on the
remaining language affirming the fiduciary obligations.
Notes:
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The court does not reference the apparent self-dealing conflict-of-interest here – the
developers were clients of one of the trustees. This seems like a similar conflict of interest
as Stamos had in Rothko, supra.
Unlike the Restatement sections quoted, the modern Uniform Prudent Investor Act does not
restrict the type of investments (see below).
In re Estate of Janes (CoA nY, 1997) pg. 806
Facts:
Rodney Janes, testator, died in 1973 with an estate worth approximately $3.5m. The estate
consisted of $2.5m in stock, of which 71% (about $1.84m) was in Kodak stock. He was survived by
his wife Cynthia.
He created three trusts. One, worth half, was to pay its income to Cynthia (this was a marital
deduction trust), and it gave her testamentary power of appointment. A second trust provided
about a quarter of the total was a charitable trust directed to make annual contributions to listed
charities. A third trust gave its income to Cynthia for life, and the remainder to the charitable trust
on her death.
Lincoln Rochester Trust Company was named co-executor with Ms. Janes, and was the sole
trustee. The officers were Ellison Patterson and Richard Young. Ms. Janes had never worked, and
had a high school degree. Patterson recommended they sell enough Kodak stock to pay the taxes,
fees, and specific bequests (about 800 of the more than 13,000 shares). The memo also
recommended keeping the rest of the stock until the trusts were funded. Over the course of the
next 5 years, selling the stock was never discussed while its value plummeted from $139 to $40.
Procedural Posture:
In 1980, the firm filed its initial accounting. In 1981, it sought settlement of its accounts. In
1982, Cynthia filed objections for the imprudent retention of such a concentration of one stock. The
Attorney-General joined on behalf of the charitable organizations.
The trial found for Cynthia and the Attorney-General (the objectants), holding the firm (the
petitioner) acted imprudently by not selling the stock. The court imposed a surcharge and ordered
the firm to forfeit its commission and attorney’s fees. The court used the ‘lost profits’ or ‘market
index’ test to calculate the award – this would be the value at the time of trial of diversified
investments that could have been made from the proceeds of the sale of the stock, had the stock
been sold when it should have. The trial court used the bank’s own diversified investment portfolio
for this calculation. The Appellate Division affirmed, except changed the calculation of the award
based on the ‘value of the capital that was lost’ – just the difference between the stock price when it
should have been sold, and when it was sold.
Issue: “Whether, under all the facts and circumstances of the particular case, the fiduciary violated
the prudent person standard in maintaining a concentration of a particular stock in the estate’s
portfolio of investments” (809)
Holdings: AFFIRMED for the beneficiaries. The petitioner wanted a very restricted, rule-based
understanding of ‘prudent person’ which would acknowledge its actions as prudent as a matter of
law. But the court required a fact-specific inquiry, considering the actions as a whole (not just one
investment), over the entire time the assets were held, in the context of the purposes and size of
the trust.
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In this case, the concentration was unwise even though the stock was well regarded, and
the interest yield was too low for the purposes of supporting Cynthia and the charities.
“The petitioner failed to exercise due care and the kill it held itself out as possessing as a
corporate fiduciary” (811)
Divestiture date: There was evidence to support the trial court’s selection of the date at
which a reasonably prudent person would have divested, so that date is affirmed.
Damages: The trial court’s use of ‘lost profit’ standard from Rothko was incorrect, because
the fiduciaries did not act in bad in transferring property, and did not self-deal. Instead, the
Appellate Division’s ‘capital lost’ standard was correct. The correct way to determine the
damages is:
The value of the stock on the date it should have been sold
- Value when the stock when it was sold OR value of the stock at the time of accounting
+ Interest (whether, and at what rate is at the discretion of the trial court, in this case
the court used the legal interest rate, which is what is the interest rate on
money judgments)
- Dividends and other stock income should offset the interest
= ‘Capital lost’ damages
Notes: NY applied the diversification requirement in the 1995 law only prospectively. PA,
meanwhile, applied its diversification prospectively, but only to trusts made irrevocable after the
date of the law (and exempted all previously irrevocable trusts). (813)
Shriners Hospitals for Crippled Children v. Gardiner (pg. 819)
Facts: T created a trust to pay income to her daughter Mary Jane, and her two grandchildren Charles
and Robert; the remainder went to Shriver. She named Mary Jane trustee. Mary Jane had no
experience investing, so she delegated to Charles (the named alternate and beneficiary), who
embezzled $317,000.
Procedural Posture: Shriners brought a petition to surcharge Mary Jane because of her improper
delegation to Charles.
Issue: Did she delegate, and if so was that a breach? And was the breach causally related to the loss
suffered?
Holding: While a trustee without investment experience must seek out expert advice, “a prudent
investor would certainly participate, to some degree, in investment decision.” Also, a trustee may
not delegate, even to an alternate trustee. The court remanded on causation, seeming to say that
‘but for’ causality was insufficient to create liability. If the investment house failed in allowing the
embezzlement, the Mary Jane should not be liable.
Notes: Could Mary have just resigned as trustee, allowing Charles to take over as alternate?
Dennis v. Rhode Island Hospital Trust Co. (1st Cir. 1984) pg. 821
Facts: Alice Sullivan created a testamentary trust for her issue in 1920. It was to cease to exist in
1991 (to avoid the Rule Against Perpetuities). The trust distributes its income to Alice’s living issue,
and the principal will go to the issue still surviving in 1991. At the time of the case, the only living
issue are the two great-grandchildren suing, and so the survivor(s) among them will take the
principal in 1991.
The trust owned three buildings in downtown Providence, which were worth $300,000 in 1920.
Because these buildings were rented out, they threw off about $35,000 in interest annually. These
assets were held long after they had lost significant value (in 1945, 1970, and 1979, for a total of
$185,000), and before Providence’s recent upturn. During the time the buildings were owned by
the trust, they lost value because they were not adequately maintained or modernized, and also
because of general declines to real estate values starting in the mid-1950s because of the rise of the
suburbs, etc.
Procedural Posture:
The trial court held that the trustees had NOT acted impartially, benefitting the income
beneficiaries over the remainder beneficiaries by not selling the buildings by 1950. It ordered a
surcharge of $365,000, to restore the real value of the trust in 1950.
The trial court calculated the surcharge by subtracting the value of the buildings sold in 1970
and 1979 from what the values had been in 1950. This difference was $160,000. The court then
added 32 times the average increase in the consumer price index. This was to adjust for inflation for
the 32 years from the hypothetical sale until the lawsuit. Finally, the court added .4% for the 32
years as an ‘allowance for appreciation’.
Both sides appealed.
Issue: Was there partiality, and what should the damages be?
Holding: AFFIRMED, with a modification to damage award.
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Yes there was partiality. What the trustees should have done:
o
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Sold the property and invested in a non-deteriorating asset. This is what the trial
court said, and how it assessed damages. The Circuit says that is fine, and also
suggests other impartial actions.
o Kept the properties, but used some of the income to provide for the remaindermen
through amortizing the depreciation (and investing in the value of the building
through maintenance, etc.)
o Evidence of partiality:
 When they knew or should have known about the depreciation, they did not
do anything.
 They did not get the buildings appraised regularly
 The did not keep proper records
 They made no accountings in 55 years
 The income beneficiaries asked that the trust be managed to make the
largest possible income, and there seems to be evidence that the trustees
just did that.
Damages (=Surcharge):
o The choice of 1950 as a divestiture date is not because it was especially high, but
because this is when the trustees should have been on notice that the partiality
problem. Since there was adequate support for that decision, it was affirmed.
o The Circuit overturned the trial court as to the appreciation amount, since there was
no reason to believe the trustee would otherwise have outperformed inflation. (the
court didn’t mention the lack of bad faith)
Court upheld the removal of the trustees.
Notes:
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It seems that neither the trial court nor the circuit compounded the interest. This would be
critical, since it would increase the value of the CPI adjustment to about $336,000, rather
than $185,000. If the court compounded, then using average CPI, rather than annualized
CPI, is also nuts.
Also, it seems the courts implicitly understood, but never recognized, that high rents are
actually a sign that neighborhood real estate values are going to decline; the high rental
income should be seen as compensation for the future loss in value of the principal.
The court did not evaluate the trustee’s actions from the perspective of prudence.
In re Mulligan (pg. 826)
Facts: In 1965, T left a trust for his wife in her life, then to his nieces and nephews. The trustees
were the trust company and his widow. The trust company wanted to put it in stocks, but she
picked fixed income securities, which yielded a lot of interest, but grew so little that they did not
keep pace with inflation. The trust was much smaller in real terms at her deal in 1990 than when it
was started.
Procedural Posture: The remaindermen sued the trust company and the widow’s estate.
Holding: The court held this was a breach of impartiality (and also loyalty and prudence). The trust
company should have advocated for the remaindermen for forcefully, or sought direction from the
court if the widow still refused.
Fletcher v. Fletcher (SC VA, 1997) pg. 832
Facts:
Elinor Leh Fletcher put her assets in a revocable trust, for which she was grantor and trustee.
She amended it once. It contained provisions for her death, including the creation of three separate
trusts, each in the amount of $50,00 for one of her adult children, James, and his two children,
Andrew and Emily. It also named the successor co-trustees, F&M Bank-People’s Trust and another
of Elinor’s adult children Henry.
Henry and F&M only let James see parts of the original trust and the amendment (they gave him
the parts that they claimed referred to him), and refused to show him the Schedule A document
which listed the assets of the trust. Without these documents, James claimed he could not
determine if the trustees were doing their jobs.
The trustees say the grantor told them not to show the documents. Also, they have a number of
other arguments, including the grantor and other beneficiaries’ interests in confidentiality. They
relied heavily on the establishment of three separate trusts.
Procedural Posture: The trial court, after reviewing the trust under seal and having a hearing,
ordered the documents to be given over to James.
Issue: What information the beneficiaries of a trust have a right to.
Holding: AFFIRMED for the beneficiary.
The court held the creation of the three trusts was irrelevant, because the three trusts were
created from the “single cohesive trust instrument based on a unitary corpus” (836) Since the issue
was a matter of first impression, the court adopted the RST §173:
“The trustee is under a duty to the beneficiary to give him upon his request at reasonable times
complete and accurate information as to the nature and amount of the trust property, and to permit
him or a person duly authorized by him to inspect the subject matter of the trust and the accounts
and vouchers and other documents relating to the trust.” Irrespective of the terms of the trust, “the
beneficiary is always entitled to such information as is reasonably necessary to enable him to
enforce his rights.”
Notes: Would a child beneficiary be able to demand a complete accounting?
National Academy of Sciences v. Cambridge Trust Co. (SC MA, 1976) pg. 839
Facts: T died in 1932, leaving all of his real and personal property to be held in trust with the net
income going to his wife so long as she was alive and unmarried, and then it being given to the
National Research Council. In 1945, his widow remarried, but didn’t tell the bank, and they never
asked. They only found out she had remarried as a coincidence at her death in 1967. The 22 years
of payments after her marriage totaled $106,013.41.
Procedural Posture: National Academy of Sciences (of which the NRC is part) brought a petition in
Probate Court seeking revocation of the accounts (which it had not challenged at the time), and the
restoration of the distributions to the trust by the bank, with interest. The trial court agreed,
appeals court affirmed, as does the Supreme Court.
Issue: Whether the bank, through its accounting statements which listed the beneficiary as Florence
Troland (when she was now Florence Flynn) committed a constructive/technical fraud. And if so,
whether it should have to pay back the money.
Holding: For the petitioner.
Because the bank statements included a factual representation, about which the bank had no
actual knowledge (but held itself out to), and because the petitioner relied on that false information
to its detriment, the bank committed fraud. The court is careful to restrict its ruling to cases, such as
this one, where the fiduciary failed to make reasonable efforts to check the statements it
represented as true. The fact that the bank committed fraud allowed the court-approved
accountings to be set aside. Since there were no valid accountings, the trustee made payments to a
person who was not entitle to receive the money as a beneficiary without the authorization of the
court. Thus the bank has to pay it back.
Fiduciary Obligation Notes
BACKGROUND
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History –
o The trust arose in the Middle ages, when the primary source of wealth was land, and
when the transmission of land was highly regulated.
o These trustees did not manage the land (the beneficiaries usually did), they just
conveyed it to the remaindermen on the death of the testator.
o The trustees powers were strictly limited to those explicitly granted in the trust
document.
Modern trusts are made up of financial instruments which require active and skilled
management.
o Contemporary sources of trustee powers:
 The trust document
 Statute. Two types (777-8):
 Some states enumerate statutory powers to be incorporated by express
reference in the trust document
 Others, including the Uniform Trustees’ Powers Act, grant basic broad
powers which needn’t be incorporated into a trust instrument.
o UTPA §815 gives trustee:
 Any powers “an unmarried competent owner has over
individually owned property”
 + “any other powers appropriate…”
 = “braodest possible powers”
o UTC §816 enumerates powers (778)
o Other powers may be conferred in the trust.
o Because of the new responsibilities, the powers of trustees are drawn very broadly,
rather than very narrowly.
o Three functions of modern trustees (777):
 Administration
 Distribution
 Investment
o UTC §1012 eliminated the common law requirement that a third party must investigate
whether a trustee has the power to engage in a particular transaction, SO LONG AS the
third party is acting in good faith.
Who is bound?
o Trustees, Personal representatives, executors, and administrators are all held to the
same fiduciary standard (ftn. 4 on 783, see UPC§§ 3-703, 3-712)
o Comparisons to corporate fiduciary law (775)
 In all areas with fiduciary responsibilities, the law is trying to lessen or eliminate
the principal-agent problem. (Here the trustee-agent does not have the same
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exact interests as the beneficiary-principals, so the obligation to act as a
fiduciary, and the consequences if the trustee does not, should encourage the
alignment of the behavior of the trustee with the goals of the beneficiary.
Corporate principals (shareholders) have more recourses than do trust
beneficiaries. They may sell their stake, sell the company, or vote out the
board.
Since trust beneficiaries often cannot sell their interest or get a new trustee, the
laws of fiduciary duty are all the more important, and hence are more strongly
enforced.
Other Notes
o Standing
 Only beneficiary has standing to sue for breach of fiduciary duty (776)
 Except recently, a few exceptions (ftn. 3):
 Charitable trusts
 In actions to remove the trustee
o Multiple Trustees
 Where there are multiple trustees, the common law requires unanimity, but
many state statutes now allow majority (see 790).
 Each has a duty to prevent a serious breach of trust by any of the co-trustees.
 Divvying damages (see RST §258 on 791)
o ERISA (803-4)
 Includes a prudent investor standard which may not be waived.
 Also includes an ‘exclusive benefit rule’ which means that the trustees acts must
be solely for the benefit of the plan participants and their beneficiaries. This is
akin to a loyalty obligation.
 Though scholars are divided, the loyalty obligation may preclude socially
responsible investment.
TWO MAIN OBLIGATIONS – LOYALTY & PRUDENCE
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Loyalty – “forbids the trustee from self-dealing with trust assets and from engaging in conflictof-interest transactions adverse to the trust” (Langbein, 774)
o Hartman v. Hartle (NJ Court of Chancery, 1923) pg. 779
o In re Gleeson’s Will pg. 780
o The No-Further-Inquiry Rule:
 The rule in Gleeson is standard. Good faith and fairness are irrelevant to the
inquiry. In addition to requiring the return of profits, if the trustee has bought or
sold property with the trust, the court can undo the transaction.
 The SOLE defense the trustee has:
 The settlor authorized it or the beneficiaries consented after full
disclosure
 AND good faith/objectively fair and reasonable
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 To align incentives, Cooter suggests punitive damages are necessary (781).
o Though scholars are divided, the loyalty obligation may preclude socially responsible
investment.
o Exceptions:
 Most states have statutes allowing:
 A bank to serve as trustee and deposit holder.
 An institutional trustee to invest in mutual funds it owns.
 Trustee is entitled to reasonable compensation.
 See UTC §802(f) & (h)
Prudence –
o Definitions:
 “a reasonableness norm, comparable to the reasonable person rule of tort”
(Langbein, 774)
 “A trustee shall administer the trust as a prudent person would, by considering
the purposes, terms, distributional requirements, and other circumstance of the
trust. In satisfying this standard, the trustee shall exercise reasonable care, skill,
and caution.” UTC §804 (pg. 792)
 Uniform Prudent Investor Act (UPIA) §2(b) (pg. 797, 802) – outlines
considerations, and requires “an overall investment strategy having risk and
return objectives reasonably suited to the trust”
o Diversification:
 Modern Portfolio Theory and the Efficient Capital Market Hypothesis – suggest
risk is reflected in a stock’s rate of return. So no one can really pick better than
others, and it is no less ‘prudent’ (objectively) to pick high return risky choices,
or bonds with low returns which may not cover inflation, but will probably not
be defaulted upon. Since no one can perfectly predict risk, diversification lowers
risk, without lowering returns.
 UPIA §3 (pg. 805) diversify unless trustee reasonably determines, “because of
special circumstances, the purpose of the trust are better served without
diversifying.”
 Some examples of these special circumstances (814):
 Where the cost of re-distributing the portfolio (like taxes and fees)
outweigh the benefits.
 Where a single investment is a large part of the portfolio and shouldn’t
be traded – like a family home or business
 Where the trust is not diverse, but it is a small part of the beneficiary’s
diversified holdings.
 Where the trust is invested heavily or wholly in a single asset (like a
mutual fund) which is itself diversified, as long as the trustee uses due
care in picking that asset.
 When the corpus enters the trust heavily invested in one thing:
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o
o
o
UPIA §4 (pg. 814) a trustee doesn’t get out of these requirements just
because they assets came into the trust un-diverse. Within a
reasonable amount of time, the trustee must bring the trust in
compliance.
 Case law used to allow concentrations of stock where the trust
instrument authorized retention. Increasingly, instruments are read
narrowly, and it is considered a breach of the discretion to sell if the
trustee should have sold and did not. RTT §228 comment f supports the
narrow reading. (see 814-5).
 Where the trust requires a trustee to retain certain assets, they must do
so, and are liable if they sell the assets UNLESS:
o Keeping the assets is impossible/illegal
o OR the trustee get court approval because of changed
circumstances
 Where the grantor requires a particular investment strategy?(816)
Non-Delegation –
 Under the common law, a trustee was under a duty to the fiduciary to not
delegate the powers the trustee can be reasonably expected to perform,
including the selection of investments (RST §171 comment h, pg. 818-9).
 Cases: Shriners Hospitals for Crippled Children v. Gardiner (pg. 819)
 A subsequent trustee cannot be liable for the breaches of the preceding trustee
unless the successor trustee breached by unreasonably failing to notice/remedy
the first breach. (820)
 The non-delegation doctrine has been largely abrogated. See UPIA §9 (pg. 820),
UTC §807 (pg. 821). Now the trustee must fulfill their duty of care in selecting,
instructing, and monitoring an investor. In fact, an inexperienced trustee
probably has a duty to delegate )See RTT §227 comment j (pg. 821).
Damages (817):
 Total Return (used by the trial court in Janes, and the CoA in Rothko, also used
by RTT §§205, 208-11(1992), and in ERISA litigation)
 Capital Lost Plus Interest (used by the CoA in Janes)
 What if most prudent investments would have gone down?
 Market-Index Measure – compares the trustees chosen investments to a
standard index, such as the S&P 500 over that time.
 Most people don’t invest solely in stocks (usually a portion is left in
bonds and cash). Since stocks have more risk, they should have higher
returns. So if the S&P did better than the trustee, this doesn’t seem
fair, since the trustee maybe should have had a more conservative
investment strategy.
Application:
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o
Both professional and non-professional trustees are held to the fiduciary
standard. If a professional holds itself out as uniquely skilled, it can be held
liable for failing “to make reasonably diligent use of that skill” RTT §227
comment d (1992) pg. 813.
Cases:
 Estate of Collins (CA CoA, 1977) pg. 798 –
 In re Estate of Janes (CoA nY, 1997) pg. 806 –
IMPORTANT SUBRULES
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Impartiality – the duty to balance the interests of the various beneficiaries.
o Cases:
 Dennis v. Rhode Island Hospital Trust Co. (1st Cir. 1984) pg. 821 –
 In re Mulligan (pg. 826) –
o Notes:
 The flip-side of Dennis is also possible, where property has big a appreciation
potential, but no income (like undeveloped land). The trustees are also
obligated to sell that to be impartial. See Rutanen v. Ballard n. 5 on 827, which
used the yield on 6-month T bills to assess damages.
 Solutions to the conflict:
 Equitable Adjustment: The Uniform Principal and Income Act of 1997
§104 (pg. 828) allows a trustee to reallocated income or principal if
pursuing a portfolio for maximum total returns would otherwise create
unfair results for some beneficiaries. This is called ‘equitable
adjustment’, and is a default term (adopted already by many states)
which can be opted out of in the trust document.
o The UPIA allows prospective application of equitable
adjustment onto preexisting trusts.
 The Unitrust: Instead of giving one beneficiary the right to interest, the
grantor can instead give a right to a dispersement of a portion of the
principal. This way all beneficiaries gain from increase to the principal.
The trustee will seek to maximize returns, whatever the form. The
grantor can allow the amount going to the ‘income’ beneficiary to
prevailing interest rates or inflation. This may not perfectly align
incentives, because the ‘principal’ beneficiaries have a greater exposure
to risk (the book says upside, but really it’s in both directions; and only
to the extent the principal beneficiary’s share is much larger than the
income beneficiary’s).
o Some states have statutes allowing trusts to be converted into
unitrusts.
Duty to collect and protect trust property (830)
o Obtain the assets without unnecessary delay
o
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Examine the assets to make sure they are what the will provide (in the case of a
testamentary trust)
 So trustee may be liable to beneficiaries for the uncorrected failures of the
executor
Duty to earmark trust property (830-1)
o Earmarking assets prevents the trustee from later picking the successful ones as his
own, and the unsuccessful ones as belonging to the trust.
o Assets must be earmarked unless that is impossible (like bearer bonds)
o Under the older view, failing to earmark was a breach for which damages were awarded
even where the failure to earmark did not cause the loss. RST §179 comment d says
trustees are liable only where the failure to earmark caused the loss.
Duty not to mingle trust funds with trustee’s own (831)
o Commingling is a breach even if the trustee does not use the trust assets for his or her
own uses.
o Commingling would expose the trust assets to the creditors of the trustee.
o Corporate fiduciaries are usually allowed to invest trust assets in a common trust fund.
o Liability is the same as above, usually requiring a causal connection for damages.
Duty to inform and account to beneficiaries (832)
o Cases:
 Fletcher v. Fletcher (SC VA, 1997) pg. 832 –
 National Academy of Sciences v. Cambridge Trust Co. (SC MA, 1976) pg. 839 –
o UTC §813 (2004) – note that it is not a mandatory rule under UTC §105, so contradictory
language in a trust instrument would govern.
 Requires a trustee to give advanced notice to beneficiaries before non-routine
“transactions which significantly affect[] the trust estate and the interests of the
beneficiaries” (the comment to §813 endorses this language, which is from a MI
appellate opinion. See n3 on 838).
 §813 does not express an opinion on whether the communications between the
trustee and an agent (such as the trust’s lawyer) should be disclosed to the
beneficiaries, since they are the ‘real’ clients. Case law is mixed, but ERISA
litigation seems to require disclosure to beneficiaries. (see n4 on 838).
o Language waiving the judicial accounting requirements has been controversial (see 8423)
Subsidiary Rules (Langbein, 774), some in more detail, supra
o Duties to keep and render accounts
o To furnish information
o To invest or preserve trust assets and make them productive
o To enforce and defend claims
o To diversify investments
o To minimize costs