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Today’s class

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  1. Today’s class • We begin our discussion of the fiduciary duties of trustees with consideration of the duty of loyalty • Trustees must serve the interests of the trust, not of themselves

  2. Trustee powers • As the reading indicates, trustees can do their jobs only with broad grants of power. Thus, for example, Indiana grants many powers to trustees. • But if trustees are given broad powers, how do we ensure that they employ them on behalf of the beneficiaries? • If the trust does well, the beneficiaries gain most of the benefit, and if the trust does poorly, the beneficiaries suffer most of the lost. Trust law needs to align the trustee’s incentives with the interests of the beneficiaries. • Trust law also needs to protect against the potential for intentional misconduct • Trust law has created a fiduciary obligation with a number of duties, particularly loyalty and prudence

  3. The fiduciary obligation Settlor Trustee • Rise of Management Trust • Maximum Empowerment • Fiduciary Obligation • Loyalty • Prudence • Subsidiary Rules Beneficiaries

  4. Trustee powers • Question 1, page 674 • Even though UTC § 815 grants sweeping powers in general terms, it still is useful to have the specific enumerations of power in UTC § 816—in a particular case whether the trustee has the power to undertake an action is subject to the vicissitudes of judicial interpretation. • § 816 thus provides certainty for the actions taken. As a corollary, § 816 gives comfort to third parties who deal with the trustee • Question 2, page 674 • Statutes change, trusts sometimes move, or the trustee might find it necessary to conduct business out of state. Third parties are comforted by—and sometimes demand to see—explicit authorization in the trust instrument.

  5. Duty of loyalty • Enforced strictly • When engaged in self-dealing or other transactions that involve the trustee’s personal interests, the trustee is subject to a no-further-inquiry principle • Good faith and fairness to the beneficiaries are not a defense • The beneficiaries can force the trustee to undo the transaction or compensate them in damages • Absent advance judicial approval, the only defenses are settlor authorization or beneficiary consent (plus acting in good faith and in the best interests of the trust) • Some limited exceptions (e.g., corporate trustees can invest in their own mutual funds; conflicts that arise from the structure of the trust), plus acting in good faith and in the best interests of the trust

  6. Hartman v. Hartle, 122 A. 615 (N.J. Ct. Chancery 1923), p.675 Hartman v. Hartle Dorothea What were the facts? Executor Lewis Plaintiff Josephine Dieker Mr. Dieker (Executor) Will directs executors to sell real estate and divide proceeds among children. Josephine sells Farm for $5,500. March 1923 Feb. 1922 1921 April 1922 Executors sell Farm at auction for $3,900 to Lewis, purchased on behalf of Josephine, spouse of an executor. Plaintiff sues executors for self-dealing, seeks one-fifth of profit realized in sale of Farm by Josephine.

  7. Hartman • Was the sale of the Farm to a spouse of one of the trustees acceptable? • Not without advance approval of the court • Did it matter that there was no evidence of fraud? • No. Good faith and fairness are not a defense to self-dealing • What’s the remedy? • Too late to undo the sale and put the farm up for resale, since the current owner is a bona fide purchaser (recall Marsden). Instead, the one child has to give the plaintiff one-fifth of the profits on the resale.

  8. In re Gleeson’s Will124 N.E.2d 624 (Ill. App. 1955), p. 676 In re Gleeson’s Will What were the facts? With expiration of lease imminent, Colbrook renews lease to himself for another year with an increase in rent (from $6/acre to $10/acre) plus a share of the crops. Mary Gleeson leases 160 acres of farmland to Con Colbrook for one year. Feb. 1951 Mar. 1952 Mar. 1950 Mar. 1951 Gleeson dies. Will devises farmland to Colbrook, in trust, for benefit of her three children. Colbrook leases farmland to another tenant. Did Colbrook breach the duty of loyalty by self-dealing when he renewed his lease?

  9. Gleeson • Could Colbrook defend his lease on the grounds that • He increased his rent payments by 2/3 and added a share of the crops • There wasn’t time to find another tenant before the term of the lease would begin • That he had already sown part of the next year’s crop • That he was open and honest and that his lease was in the best interests of the trust • None of that mattered. The duty of loyalty required him to pay all of his profits to the trust

  10. Settlor authorization • Trustees can engage in conflicted transactions with settlor authorization • Must the authorization be specific to the transaction, or can settlor’s also authorize conflicted transactions implicitly by appointing a trustee who comes to the role with an existing conflict of interest? • In other words, can the settlor provide authorization by accepting a structural conflict of interest? • Let’s look at Rothko to find out

  11. In re Rothko372 N.E.2d 291 (N.Y. 1977), p. 679 In re Rothko What were the facts? Mark Rothko dies, leaving 798 paintings of “tremendous value.” Names Reis, Stamos, and Levine as executors. Rothko’s children (plus state AG) sue to remove executors and rescind contracts. Executors appeal. Appellate court affirms factual and legal findings but with adjustment to damages. May 1970 1972 Feb. 1970 1971 Nov. 1977 Executors dispose of paintings, within three weeks, through contracts with MAG and MNY, two related corps. Surrogate Court makes the following findings: • Reis, as an officer of MNY, was conflicted. • Stamos, as struggling artist, was conflicted by need to curry favor with MAG and MNY. • Levine, though not conflicted, acted imprudently, given Reis’ and Stamos’ conflicts of interest.

  12. Structural conflicts • The court muddied the waters with its discussion on page 682, when it drew a distinction between self-dealing and other conflicts of interest • The Restatement does not draw such a distinction • But there are the exceptions for structural conflicts of interest (e.g., corporate trustee that invests trust assets in the corporation’s own mutual funds) • Did Rothko expect his trustees to continue dealing with MNY? • Even if he did, the trustees still had to meet standards of good faith and best interests, and the court found that they did not do so (hasty sales without independent appraisal; high commission for the gallery)

  13. Trustee Powers • Except as provided in the terms of the trust and subject to [prudent investor provisions in Ind. Code § 30-4-3.5], a trustee has the power to perform without court authorization [subject to provisions about conflicts of interest or multiple trustees], every act necessary or appropriate for the purposes of the trust including, by way of illustration and not of limitation, the following powers: • Ind. Code § 30-4-3-3