Transcript Introduction

Today’s class
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We begin our discussion of the fiduciary
duties of trustees with consideration of the
duty of loyalty
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Trustees must serve the interests of the trust,
not of themselves
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Trustee powers
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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?
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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
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The fiduciary obligation
Settlor
Trustee
Rise of Management Trust
 Maximum Empowerment
 Fiduciary Obligation
 Loyalty
 Prudence
 Subsidiary Rules
Beneficiaries
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Trustee powers
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Question 1, page 674
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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.
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§ 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
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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 4
Duty of loyalty
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Enforced strictly
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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
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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)
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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
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Hartman v. Hartle,
Hartman v. Hartle
122 A. 615 (N.J. Ct. Chancery 1923), p.675
What were the facts?
Executor
Dorothea
Lewis
Will directs executors to sell real estate
and divide proceeds among children.
Plaintiff
Josephine
Dieker
Josephine sells Farm for $5,500.
March 1923
Feb. 1922
1921
Executors sell Farm at auction for
$3,900 to Lewis, purchased on behalf
of Josephine, spouse of an executor.
Mr. Dieker
(Executor)
April 1922
Plaintiff sues executors for selfdealing, seeks one-fifth of profit
realized in sale of Farm by Josephine.
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Hartman
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Was the sale of the Farm to a spouse of one of the
trustees acceptable?
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Did it matter that there was no evidence of fraud?
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Not without advance approval of the court
No. Good faith and fairness are not a defense to selfdealing
What’s the remedy?
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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
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one-fifth of the profits on the resale.
In re Gleeson’s Will
In re
Gleeso
n’s Will
124 N.E.2d 624 (Ill. App. 1955), p. 676
What were the facts?
Mary Gleeson leases 160
acres of farmland to Con
Colbrook for one year.
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.
Feb. 1951
Mar. 1950
Mar. 1952
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?
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Gleeson
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Could Colbrook defend his lease on the grounds that
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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
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Settlor authorization
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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?
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Let’s look at Rothko to find out
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In re Rothko
In re
Rothko
372 N.E.2d 291 (N.Y. 1977), p. 679
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.
May 1970
Feb. 1970
Executors dispose
of paintings, within
three weeks,
through contracts
with MAG and MNY,
two related corps.
Executors appeal. Appellate
court affirms factual and
legal findings but with
adjustment to damages.
1972
1971
Nov. 1977
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.
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Structural conflicts
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The court muddied the waters with its discussion on
page 682, when it drew a distinction between selfdealing and other conflicts of interest
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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)
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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
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commission for the gallery)
Trustee Powers
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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:
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Ind. Code § 30-4-3-3
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