Obedience as the foundation of fiduciary duty.

• Author: Atkinson, Rob

1. INTRODUCTION II. IDENTIFYING THE DUTY OF OBEDIENCE A. Locating the Duty of Obedience in the Tripartite Scheme of Fiduciary Duties 1. Depth 2. Breadth 3. Length 4. Summary B. Locating the Duty of Obedience in Four Fiduciary Contexts 1. For-Profit Corporate Law a. The Trilogy of Bilateral Corporate Relationships i. Relationship of the State as Principal to the Corporation's Equity Investors as Agents ii. Relationship of Owners as Principals to Managers as Agents iii. Relations Among Owners: Minority Shareholders Constraining the Majority b. Why Corporate Law Theorists Overlook the Duty of Obedience 2. Private Trust Law a. The Trilateral Structure of Trusts b. The Dual Function of Trusts i. The Earning Function ii. The Spending Function c. The Strong Form of the Duty of Obedience d. Enforcement 3. Charitable Trust Law a. Purpose b. Duration c. Enforcement-The Weakness of the Strong Form 4. Charitable Corporation Law a. The Corporate Model b. The Trust Model c. The Common Flaw of Both Models III. NORMATIVE ANALYSIS: EVALUATING THE DUTY OF OBEDIENCE A. Narrowing the Scope of the Inquiry 1. Normative Analysis of the Weak Form of the Duty of Obedience a. The Absence of Any Strong Duty of Obedience in the Business Corporation b. The Strong Duty of Obedience in the Law of Private Trusts B. Dead Hand Control in the Law of Charity 1. The Traditional Case for Dead Hand Control a. Deontological Arguments b. Consequentialist Arguments 2. The Positive Alternative to Dead Hand Control: Charitable Independence 3. The Wrong Solution to a Real Problem: Dead Hand Control Against Fiduciary Bias Toward Current Expenditure IV. RECOMMENDATIONS FOR REPLACING DEAD HAND CONTROL OF CHARITABLE ASSETS A. Individual Monitors 1. Default Takers Policing Restricted Gifts 2. The Traditional Charitable Visitor B. Institutional Monitors 1. Creating For-Profit Firms 2. Expanding Governmental Supervision 3. Monitoring Charity with Charity V. CONCLUSION I. INTRODUCTION

   Commentators, both doctrinal and theoretical, (1) have come to agree that the fiduciary relationship rests on twin pillars, the duty of care and the duty of loyalty. This paper argues that a third duty, obedience, is more basic, the foundation on which the duties of care and loyalty ultimately rest. In place of the prevailing dualistic theory of fiduciary duty, it offers a trinitarian alternative. As in traditional trinitarianism, the claim here is that, properly understood, three identifiably different elements are, essentially, one.

   In that sense, fiduciary trinitarianism is, to shift metaphors from theology to physics, a unified field theorem of fiduciary duty. As in physics, the theory offered here takes up a double challenge: to explain more data--in this case, more legal doctrine and social policy--more simply. The ideal, here as there, will be to reduce all the relevant phenomena to a single, unifying principle. Physicists have yet to name their fundamental force; in the fiduciary relationship, it is the agent's duty to obey the will of the principal. (2)

   Obedience to that will is the source not only of the duties of care and loyalty, but also of a peculiar but widely ignored obligation. This is the duty of private and charitable trustees to follow the directions of principals who are dead, a duty that gives principals what is known in Anglo-American law as dead hand control. As we shall see, this peculiar obligation occurs outside the principal scope of the prevailing dualist theory. That theory, largely economic in its method, has tended to focus on for-profit organizations, particularly business corporations, and to assimilate other fiduciary relationships, especially private trusts and charitable organizations, to the corporate model. This paper reverses that process of analysis. It shows how a close examination of the law of trusts, charitable as well as private, throws useful light on the law of corporations, both for-profit and nonprofit. Trinitarian theory accounts for both the presence of dead hand control in private and charitable trusts and its absence in business organizations.

   Part II identifies the duty of obedience in three basic steps. First, and most importantly, it shows how the duty of obedience underlies the duties of care and loyalty. Next, it distinguishes two forms of the duty of obedience, the strong and the weak. The strong form of the duty of obedience is dead hand control, the legally enforceable duty of living fiduciaries to follow the dictates of principals who are no longer alive. The weak form of the duty of obedience, on the other hand, is, essentially, nothing more than the ordinary law of contracts and agency. Under that law, private parties may impose obligations enforceable after their deaths both by and on behalf of surviving private parties, but neither by nor on behalf of the decedents themselves. With the weak form of the duty of obedience, in other words, the dead can pass control of property on to others, but the dead cannot take that control with them.

   Finally, Part II locates these two forms of the duty of obedience, the strong and the weak, in four kinds of fiduciary relationships: for-profit corporations, private trusts, charitable trusts, and charitable corporations. (3) Each organizational form, we shall see, sheds important light on the others. In its weak form, the duty of obedience is universal in--indeed, essential to--all fiduciary relationships. In its strong form, by contrast, the duty of obedience is far from ubiquitous. It is found in the Anglo-American law of private trusts and charitable trusts, but not in the Anglo-American law of for-profit corporations. As a supposed corollary of charitable trust law, charitable corporation law sometimes includes a "strong" duty of obedience; American authorities are seriously divided on this point. To resolve this dispute, we have to turn from descriptive to normative analysis, from identifying to evaluating the strong form of the duty of obedience.

   Part III takes up that normative analysis. It concedes, arguendo, that dead hand control serves a useful social purpose in the context of private trusts. But it shows that the same rationale cannot justify dead hand control of charitable assets, and it finds that the other rationales usually offered are no more compelling. Rather, the arguments against dead hand control of charitable assets substantially outweigh those in its favor. Accordingly, Part III concludes that the law of charities, both trust and corporate, should eliminate the strong form of the duty of obedience, thus removing legally enforceable dead hand control of charitable assets. (4)

   As the absence of dead hand control in the business corporation reminds us, this would hardly be unprecedented. This is not to say, however, that precisely the same policy considerations apply in both contexts. Charities are, at their very root, different from for-profit entities. Charities, as a subset of the more inclusive class of nonprofit organizations, have no residual private "owners"; their distinguishing feature is control by fiduciaries for the public benefit. For-profit corporations, as a subset of for-profit entities, are residually owned and ultimately controlled by private parties, in their private capacities, for their private benefit.

   These differences mean that eliminating the strong form of the duty of obedience in charities will necessarily produce a different end state, in either of two directions. On the one hand, control of the charity could come to rest in the charitable fiduciaries themselves. Those fiduciaries would be free to use the charitable assets in their control for any charitable purpose, subject, of course, to the duties of care and loyalty. This is the situation I have called for elsewhere, (5) but it is a situation rife with problems. (6) On the other hand, control could come to rest outside the charity, either elsewhere in the nonprofit sector or somewhere in the public or private sectors. The final part of the paper briefly examines these policy options and concludes that, on balance, charities' changes of purpose are best monitored by other charities.

2. IDENTIFYING THE DUTY OF OBEDIENCE

   1. Locating the Duty of Obedience in the Tripartite Scheme of Fiduciary Duties

      Our first task is to locate the duty of obedience in relation to the two more generally recognized fiduciary duties in Anglo-American law: the duty of care and the duty of loyalty. As a preliminary step, it will be helpful to think of fiduciary duties as having three dimensions: depth, breadth, and length. The following subsections explore these three dimensions in detail. In each dimension, we shall see, the duty of obedience is more extensive than the duties of care and loyalty; the duty of obedience is, in other words, deeper, broader, and longer.

      1. Depth

         The duty of obedience is often overlooked (7) or included in one of the other two fundamental fiduciary duties, (8) precisely because it is so basic as to be almost invisible. To see why this is so, we need to examine the very foundation of fiduciary duty. The irreducible root of the fiduciary relationship is one person's acting for (9) another. (10) The duty of obedience derives directly from--indeed, is virtually synonymous with--that basic principle. The root of the fiduciary relationship is this directive from the principal to the fiduciary: Serve the one the principal designates, as the principal designates. (11) The fiduciary must, at the most basic level, obey that directive; that directive is the duty of obedience. (12)

         Seen from this perspective, the duties of loyalty and care are derivative from, and grounded upon, the more fundamental duty of obedience. The duty of care requires, as the very term suggests, that fiduciaries must, upon pain of legal penalties, manage the assets committed to them at the direction of another with at least a legally mandated degree of effort and skill--in a word, care. (13) Even...