Pursuing a Breaching Trustee's Co-conspirators: Theory and Practice of Third Party Fiduciary Liability - November 2007 - Trust and Estate Law
| Publication year | 2007 |
| Pages | 79 |
2007, November, Pg. 79. Pursuing a Breaching Trustee's Co-Conspirators: Theory and Practice of Third Party Fiduciary Liability - November 2007 - Trust and Estate Law
November 2007
Vol. 36, No. 11 [Page 79]
Trust and Estate Law
Pursuing a Breaching Trustee's Co-Conspirators Theory and Practice of Third Party Fiduciary Liability
by Susan R. Harris
Trust and Estate articles are sponsored by the CBA Trust and Estate Section. Topics include trust and estate planning and administration, probate litigation, guardianships and conservatorships, and tax planning.
Article Editors:
David W. Kirch, of David W. Kirch, P.C., Aurora - (303) 671-7726, dkirch@qwest.net; Constance D. Smith, of Rothgerber Johnson & Lyons LLP - (303) 623-9000, csmith@rothgerber.com
Susan R. Harris practices estate planning, probate, and trust law at Susan R. Harris & Associates, LLC in Greenwood Village - (303) 741-4776, suzy@srhassoc.com. The author thanks associate Barbara Tocker Ross and staff Brandie N. Rome and Jaimy Lewis for their assistance in preparing this article.
Sometimes fiduciaries breach their duties by transferring assets to third parties who are not entitled to such assets. This article discusses the circumstances under which such third parties may be personally liable as fiduciaries.
Dishonest fiduciaries who steal estate, trust, or conservatorship assets often expend considerable effort putting the ill-gotten gains beyond the easy reach of the injured beneficiaries. A typical means of such concealment is to transfer the assets to a willing third party, often a spouse or other family member. Such machinations create a thorny problem for those seeking to recover fiduciary assets and compensate beneficiaries for their losses. This is because the basic constructive trust remedy limits recovery to the res remaining in the third party's hands, and generally does not impose personal liability on the third party for the beneficiaries' actual losses.(fn1) With this remedy, the third party is not personally liable for the losses, absent proof that he or she took the assets with knowledge that they were trust assets, took them without giving adequate consideration, or both.
This article provides an overview of the third party trustee doctrine. It discusses federal and Colorado case law that supports recovery against the personal assets of a third party who knowingly participates in a breach of trust and who impedes recovery of illegally transferred trust assets.
Trustee Duties
An express trustee owes myriad fiduciary duties to the beneficiaries. These duties include:
In contrast, a constructive trustee owes only the duty to return property remaining in his or her possession; the constructive trust doctrine generally deals only with the trust res.(fn11) A person in possession of trust property may be an innocent, unknowing party, in which case his or her liability may be limited to the return of the property still in his or her possession. There is no liability to the trust for profits, damages, breach of fiduciary duty, or improper investment. Such person may be guilty of aiding and abetting a breach of fiduciary duty by knowingly receiving property from a breaching trustee, but may claim that no liability attaches other than the obligation to return only the original assets.
The Third Party Trustee Doctrine
Sometimes the only way to restore property to an injured trust or beneficiary is to impose full trustee liability on third parties who willingly secrete assets at the behest of a dishonest fiduciary. Recovery from that third party's individual assets, in addition to the return of the original trust property, if any, may be possible according to a long line of cases. These cases, which are discussed below, have not created a cohesive theory of third party trustee liability; instead, they have imposed trustee liability on third parties under numerous names and theories. For simplicity and convenience, the doctrine discussed in this article will be referred to as the "third party trustee" doctrine.
The facts compelling imposition of fiduciary liability on third parties may spring from different sources. These sources include:
In various cases, persons who receive property from breaching trustees have been referred to as:
Recent cases usually speak of this doctrine in the context of the "trust pursuit rule."(fn17)
Hypothetical
Considering the following scenario:
Settlor, who is in declining health and anticipates imminent disability, creates a revocable living trust, funds it with $2 million, and names his brother as fiduciary. Settlor is the sole beneficiary during his lifetime. The brother withdraws the trust assets and places them in his wife's personal brokerage account, with the wife's knowledge and consent.
The brother's wife then withdraws the trust funds from her brokerage account to purchase a residence in a jurisdiction with an unlimited homestead exemption. She also pays for personal and family expenses and buys cars, expensive vacations, and other luxuries, until the funds are squandered.
Settlor's representatives discover the theft and sue the brother and his wife. The brother admits the transfers, but is not employed and has no income or assets in his name. His modus operandi has been to place assets in his wife's name. Civil recovery from the brother is not possible even though a full array of remedies is available because he has committed a breach of fiduciary duty.
The brother's wife, who has considerable assets and a well-paying job, claims that the only liability that can be imposed against her is under the weak doctrine of constructive trust. She states that she is not required to return the property she no longer holds.
Development of the Doctrine
The third party trustee doctrine has existed for more than 400 years. It establishes that parties other than the original or intended trustee also are imbued with the same fiduciary duties in either of two circumstances:
1) when such party takes trust property from an original trustee with notice that the property belongs to a trust and not to the trustee; or
2) when such party participates in a breach of fiduciary duty with the original trustee and profits from it.(fn18)
In both of these circumstances, a court may consider the third party to be a trustee with all the same duties and liabilities as the original trustee. This may occur whether or not a constructive trust is imposed on the transferred property. The third party may be compelled to account, to disgorge profits, and to provide restitution so that the beneficiary is made whole.(fn19)
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