INTRODUCTION 2 II. DISCUSSION 2 A. VIRTUAL REPRESENTATION MEETS FUTURE INTERESTS 6 B. Two PRINCIPAL VARIETIES OF VIRTUAL REPRESENTATION STATUTES 12 C. VIRTUAL REPRESENTATION EVOLUTION 13 1. The Old South Dakota Virtual Representation Statutes 15 2. The Uniform Trust Code 18 3. The New South Dakota Virtual Representation Statutes 20 D. A PROPOSED FLOWCHART 29 E. SIX ILLUSTRATIONS 33 1. Conrad Cop's ILIT 33 2. Malika Mall's Testamentary Trust 34 3. Vidor Votive's IDGT 35 4. Winnifred West's DAPT 37 5. Yolanda Young's RLT 39 6. Zander Zinc's SLAT 41 III. CONCLUSION 42 I. INTRODUCTION
South Dakota has revolutionized the field of virtual representation in the context of trust proceedings. The standard rule stretching far back into history is that a representative of a trust beneficiary who has a conflict of interest cannot adequately represent the beneficiary, nullifying the notice that was undertaken. (1) This defect undermined the ability to achieve finality in any proceeding conducted under the virtual representation framework. South Dakota's recent legislation reverses that rule and cures that defect. It provides that representatives with a conflict of interest may nevertheless bind the persons that they represent. (2) Often a person carrying out notice in a trust proceeding (a "notifier") will be unaware of a representative's conflict of interest. The new legislation ensures that the proceeding will be effective in spite of an unknown conflict. To ensure due process requirements are satisfied, additional safeguards offset this extension of virtual representation. (3) By granting res judicata effect to trust proceedings--both judicial and non-judicial--which utilize virtual representation frameworks even where a representative is infected with a disqualifying conflict of interest, the aims of finality and assurance in trust proceedings have been achieved. This article reveals an unpacking of South Dakota's virtual representation revolution by outlining the doctrines of representation and reviewing the evolution of virtual representation in its historical context.
We should begin with the general rules: First, in trust litigation involving third parties, the trustee can represent and bind the trust and all of its beneficiaries. (4) By third party trust litigation, I mean, for example, circumstances such as where the trust has entered into an agreement with a third party and the other party has breached the agreement. (5) In these circumstances, the trustee may maintain a suit against the buyer. (6) These kinds of circumstances might be termed "fiduciary representation" where the trustee makes a decision (as a fiduciary) which affects all of the beneficiaries, but the beneficiaries themselves are not necessary parties to the decree or settlement. (7) Where the trust is resolving matters with third parties, the trustee speaks for the trust. (8) As the Restatement (Third) of Trusts confirms, "A trustee may maintain a proceeding against a third party on behalf of the trust and its beneficiaries." (9) As the legal owner of trust property--including choses in action--the trustee is the proper party to bring any action against third parties on behalf of the trust and its beneficiaries. (10) "A trustee," as South Dakota law frames it, "is a general agent for the trust property." (11) As such, when a trustee acts, those acts "bind the trust properly to the same extent as the acts of an agent bind his principal." (12)
Second, in internal trust matters, both the trustee and the trust beneficiaries are necessary parties. (13) Internal trust matters might include a proposal to modify a trust, to remedy a breach by the trustee, or to approve a trustee's past (e.g., an accounting) or proposed actions. Here, the trustee cannot bind the beneficiaries; indeed, the interests of the trustee and the interests of beneficiaries may be opposed. (14) Thus, in internal trust matters--those between beneficiaries, or, more commonly, between the trustee and the beneficiaries--the beneficiaries become necessary or indispensable parties. (15) The well-known Bogert treatise on trusts emphasizes: "Beneficiaries (including remainder beneficiaries, those whose interests are contingent or created by settlement agreement, and those who are designated to take in default of an exercise of a power of appointment), often are necessary or indispensable parties[.]" (16) The failure to join or notice a beneficiary either results in a decree which is ineffective against the omitted beneficiary or--worse--a finding that the court simply lacked jurisdiction to decide the issue, rendering the decree ineffective against everyone. (17) The requirement of joining all of the beneficiaries is especially problematic with minor beneficiaries or beneficiaries whose identities cannot yet be ascertained with certainty. One option is appointing a guardian ad litem to represent those beneficiaries. (18) Alternatively, of course, if a conservator is acting, the conservator might bind the minor or impaired beneficiary by representing that person's interests. (19) Other representatives might also be considered. (20) A second option is "virtual representation" where notice on one party with a similar interest to another party has the effect of binding the similarly situated unnoticed party. (21) In South Dakota, both representation and virtual representation are often grouped under the umbrella term "virtual representation" since the statutes encompassing both concepts were titled the "Virtual Representation Statutes" in the code. (22) Today, the new chapter is similarly titled "Virtual Representation", although it includes representation and virtual representation concepts as well. (23)
Virtual representation refers to trust beneficiary notice, consent, input, and opposition by proxy on account of the substantial similarity of interests between the noticed beneficiary and the non-noticed beneficiary. (24) Similarity of interests is key to the adequacy of representation. (25) As one court described it, "Thus, where it appears that a particular party, though not before the court in person, is so far represented by others that his interests receive actual and efficient protection, the decree may be held to be binding upon him." (26) The effectiveness of virtual representation--the binding nature of the decree on a beneficiary who had not been made a party--depended upon two concerns: the adequacy of the representation (or similarity or interests) and the absence of hostility or conflicts between the non-noticed beneficiary and the noticed beneficiary virtually representing her. (27)
In the sections which follow, I will map the evolution of representation and virtual representation back to 18th century England. (28) Two primary varieties of virtual representation will be sketched: vertical and horizontal. (29) The common law rules of virtual representation were restated by the American Law Institute in the 1930s, then re-codified and expanded by New York in 1967. (30) Next, I will summarize the 1998 South Dakota statutes modeled on the New York statutes. (31) I will briefly summarize the Uniform Trust Code provisions addressing representation. (32) And I will summarize the 2017 revamping of representation by South Dakota. (33) Finally, I will articulate a proposed flowchart for working through a representation problem and provide several illustrations. (34)
VIRTUAL REPRESENTATION MEETS FUTURE INTERESTS
Virtual representation was a common law doctrine arising out of notice issues when future interests were at issue. (35) It was first recognized in England in the 1700s as courts began to relax the necessary parties rule where it was impossible, as a practical matter, to notice everyone. (36) American courts recognized the sensibility of virtual representation beginning about the time of the American Civil War. (37) For example, practical difficulties arose in creditor claims in probate proceedings where numerous creditors asserted claims against the estate. (38) Courts developed a rule that the final decree directing creditor payments could discharge the executor and bind absent creditors who appeared thereafter, given the similarity of the creditors' interests. (39)
Future interests often involve notice challenges. Consider, for example, if O has conveyed Blackacre "to A for life then to A's living children" where A currently has two children, B and C, ages seven and eleven. If a quiet title, foreclosure, or eminent domain proceeding is commenced regarding Blackacre, A (who holds a life estate) must be served with notice. (40) But what about the contingent remaindermen? (41) Three problems are present. First, B and C are minors. Who can speak for them? Second, the identity of the persons who will take the remainder interest at A's death are currently unascertained. It may be B and C; it may be only B if C predeceases A. Third, the remaindermen may include additional children of A as yet unborn. For example, A may have an additional child, D who will become a contingent remainderman at birth. How can D--or additional unborns E, F, and G--participate in the proceedings? Moreover, must they participate in order to give preclusive effect to the judgment that is ultimately entered?
It's worth noting that the relative importance of the interests of the contingent remaindermen can be affected by the type of legal issue presented and the ages and circumstances of the parties. These kinds of circumstances can have both practical and legal import. For example, to continue with our example introduced in the foregoing paragraph, if A is 99-years-old, it's very unlikely that A will have additional children, although it is still legally possible. This legal truism is referred to as "the fertile octogenarian" future interests discourse; the law presumes that any living person may have children. (42) Today this legal truism has greater practical truth since the...
CONFLICT-OF-INTEREST-INFECTED VIRTUAL REPRESENTATIVES AND A CURE.
|Author:||Simmons, Thomas E.|
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