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A Dichotomy of Fiduciary Duties for the Trustee-Manager

ABA Section of Real Property, Trust & Estate Law

Timothy M. Ferges

Where a fiduciary serves as trustee and simultaneously manages a business entity owned by the trust, the fiduciary serves in dual fiduciary capacities. This “trustee-manager” owes fiduciary obligations to the trust beneficiaries both in his capacity as trustee and in his capacity as business manager. This dual fiduciary status raises a question—what law governs the trustee-manager’s conduct? Is the trustee-manager’s conduct governed by the law of trust and estate administration, the law of business management, or some combination of the two?

Among the trustee’s many fiduciary obligations are the proverbial triad of primary duties—the duties of good faith, loyalty, and due care. Directors, officers, and managers of business entities likewise owe fiduciary duties to the entities’ owners. Those directors, officers, and managers, however, might claim their actions should be subject to a lower level of scrutiny. They may cite concepts such as the “business judgment rule” as the standard governing their actions. The difference in these two fiduciary standards creates a quandary for courts, which must evaluate the conduct of an individual who serves in both capacities—as trustee and as director or officer of the entity owned by the trust she administers.

Where a fiduciary acts in the dual role as trustee and manager, the Uniform Trust Code may be interpreted to promote the imposition of the higher trust-level fiduciary duties to govern the conduct of trustee-managers. For example, § 802(g) provides that “[i]n voting shares of stock or in exercising powers of control over similar interests in other forms of enterprise, the trustee shall act in the best interests of the beneficiaries.” The Restatement (Second) of Trusts likewise can be viewed as promoting higher trustee-level duties. For example, it provides the duty of a trustee in voting shares of stock is “to use proper care to promote the interest of the beneficiary.” While the Uniform Trust Code and the Restatement might be interpreted to impose higher trust-level fiduciary obligations on a trustee who exercises his voting power over an entity owned by the trust, different courts in different states have taken varied approaches when evaluating the trustee-manager’s conduct.

Courts that have applied the heightened trust-level fiduciary standards. The New York Court of Appeals seems to have determined that the higher trustee-level fiduciary duty prevails. In re Hubbell’s Will, 302 N.Y. 246, 254–55 (1951), it held that “where a trustee holds a working control of the stock in an estate [owned] corporation he is accountable in the probate court for the administration of the corporate affairs.” The duty of trustees and personal representatives of estates to maintain a “punctilio of an honor the most sensitive . . . extends not only to the trust estate . . . but also to the operations of the corporation.”

Missouri has also determined that a trustee-manager owes the trust’s beneficiaries the highest level of fiduciary duty. In Betty G. Weldon Revocable Trust ex rel. Vivion v. Weldon ex rel. Weldon, 231 S.W.3d 158 (Mo. Ct. App. W.D. 2007), the court evaluated the actions of trustees who also served as members of the board of directors of a corporation owned by the trust. The court recognized that “[w]here a corporate director or officer’s decision falls within the business judgment rule, the court will not interfere with that decision.” Rather than apply the business judgment rule, however, the Weldon court applied the stricter standards under Missouri’s version of the Uniform Trust Code. Determining that the “trustee’s duty of loyalty to administer the trust solely in the interests of the beneficiaries” governed, rather than the business judgment rule, the court enjoined the trustee-directors from selling certain property owned by the corporation.

Courts that have applied the lower business-level fiduciary standards. While many courts have applied the heightened trust-level fiduciary standards to evaluate the actions of trustee-managers, others have applied the more deferential business-level standards.

In Perry v. Perry, 160 N.E.2d 97, 99–100 (Mass. 1959), a trust beneficiary challenged the actions of his uncles as trustees and directors of the company owned by the trust, claiming those trustee-managers engaged in various transactions that amounted to self-dealing. The Massachusetts court noted there was no evidence of actual fraud or bad faith and held there was “no basis on the findings for disregarding the corporate entity in determining the obligations of the officers of the corporation who were also trustees.” The court refused to set aside the transactions, even though they amounted to self-dealing.

The Rhode Island Superior Court in Wood Prince v. Lynch, 2005 WL 373805 at *5 (R.I. Super. Feb. 8, 2005), applied the more deferential business judgment rule to evaluate the conduct of a trustee-manager. The court recognized that trustees owe their beneficiaries the “highest” fiduciary duties. Nonetheless, the court concluded it was appropriate to apply the business judgment rule because it found commonality between the duties of trustees and directors; it noted both trustees and business managers owe the “triad” of duties to exercise good faith, loyalty, and due care.

The grantor’s ability to control the governing fiduciary standard. Where the grantor exhibits, either explicitly in the trust instrument or through his conduct, an intent that the lower business-level fiduciary duty govern the trustee-manager’s conduct, some courts will honor that intent, although in many instances this type of exculpatory language is disfavored or strictly construed.

Georgia has recognized that a grantor may explicitly provide in the trust instrument that the trustee-manager is to be governed by the lower business-level fiduciary duties. In Rollins v. Rollins, 294 Ga. 711 (2014), the Georgia Supreme Court reversed a decision of the Georgia Court of Appeals that extended the higher trustee-level fiduciary standard to the conduct of trustee-managers. The Georgia Supreme Court noted the Court of Appeals’ ruling “may be appropriate as a general rule.” Based on the facts, however, the Supreme Court found the settlor took great pains to clarify in the trust instrument his specific intention that the trustee-managers were to manage the companies owned in trust not solely for the benefit of the trusts’ beneficiaries, but also for the benefit of other shareholders. The court determined that a corporate-level fiduciary standard was more appropriate to evaluate the trustee’s conduct as director of the corporation.

New Hampshire has recognized that a grantor’s own conduct may evidence his intent that the trustee-manager’s conduct be governed by lower business-level fiduciary duties. In Bartlett v. Dumaine, 523 A.2d 1, 5–6 (N.H. 1986), the grantor created trusts during his lifetime that were funded with stock in corporations the grantor controlled. After his death, the grantor’s children pursued claims against the trustees who also managed the company. The New Hampshire Supreme Court recognized that trustees owe a high fiduciary duty to their beneficiaries. The court, however, determined that “[t]hese general principles of trust law apply to a trustee unless the settlor imposes different constraints on the trustee.” In this case, conflicts of interest of the trustee-managers were “inherent in the declared scheme of the settlor.” During his lifetime (when he served as trustee-manager himself), the grantor ran both the trust and the company as an integrated entity, maintaining the very conflicts of interest of which the beneficiaries later complained. The evidence demonstrated “that the settlor intended the trustees . . . within their discretion, to take business risks with trust funds in concert with the . . . Company.” In this particular case, the New Hampshire Supreme Court therefore did not apply trust-level fiduciary duties to the conduct of the trustee-managers.

ABA Section of Real Property, Trust & Estate Law

This article is an abridged and edited version of one that originally appeared on page 34 of Probate & Property, July/August 2018 (32:4).

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Timothy M. Ferges

Timothy M. Ferges is a partner in the trusts, estates, and private clients practice group at McCarter & English LLP in Newark, New Jersey, and New York City.