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Report for Duty: Protecting Against Fiduciary Liability

Cite: Eddy R. Smith, Report for Duty: Protecting Against Fiduciary Liability, TENN. B. J., December 2016.
 
Serving as a fiduciary is not for the faint of heart. The recent Meyers case,[1] interpreting the statute of limitations for claims of breach of duty under the Tennessee trust code, shows how trustees can fulfill their obligations to beneficiaries and reduce the likelihood of a lawsuit.
 
In Meyers, the trust owned leased warehouses that fell into disrepair. Tenants might have caused the damage, but the trustee apparently never inspected the property and could not pinpoint when the damage occurred. The trustee’s regular statements of the financial accounts sent to the beneficiaries disclosed nothing about the condition of the real property. The trustee sent a letter of resignation in November 2005, but continued to administer the trust until its termination in November 2007. The beneficiaries sued in May 2010 for breach of fiduciary duty for failure to maintain and protect the real property.
 
Statute of limitations for actions against trustees. The trustee moved for summary judgment based on alternate statute of limitations defenses. An earlier version of Tenn. Code Ann. Section 35-15-1005, Limitation of action against trustee,[2] governed and provided:

  1. A beneficiary may not commence a proceeding against a trustee for breach of trust more than one year after the date the beneficiary or a representative of the beneficiary was sent a report that adequately disclosed facts indicating the existence of a potential claim for breach of trust.
  2. A report adequately discloses facts indicating the existence of a potential claim for breach of trust if it provides sufficient information so that the beneficiary or the beneficiary’s representative knows of the potential claim or has sufficient information to be presumed to know of it, or to be put on notice to inquire into its existence.
  3. If subsection (a) does not apply, a judicial proceeding by a beneficiary against a trustee for breach of trust must be commenced within three years after the first to occur of:
    1. The removal, resignation, or death of the trustee;
    2. The termination of the beneficiary’s interest in the trust; or
    3. The termination of the trust.

The trial court denied the trustee’s motion for summary judgment and the Tennessee Court of Appeals affirmed on two grounds. First, the court held that, under the plain language of 35-15-1005(a)-(b), a trustee must send a report to a beneficiary, detailing facts that evidence potential breach of trust, in order for the one-year statute of limitations under (a) to begin. Actual knowledge of facts indicating a potential claim (the “Tennessee general discovery rule”) is insufficient to trigger the shorter statute of limitations, in light of the statutory prescription. The trustee sent no information about the real property to two of three beneficiaries, and there was a question of fact whether what the trustee sent to the third beneficiary adequately disclosed facts indicating the existence of a potential claim for breach of trust.

Second, the Court held that, pursuant to Tenn. Code Ann. Sections 35-15-1005(c) and 35-15-707(a),[3] the trustee must leave office, not just send notice of resignation, for the three-year statute of limitations to be triggered under subsection (c). Therefore, the court held that the suit was timely because, although the trustee sent notice of resignation more than three years before the filing of the suit, it had been fewer than three years since the trust was terminated.

Trustee takeaways. Trustees should learn at least three things from Meyers.[4]

First, take care of trust property. Tenn. Code Ann. Section 35-15-809 requires a trustee to “take reasonable steps to take control of and protect the trust property.” Trustees should exercise caution when owning real property in trust, as most trustees do not possess expertise in managing real property. The trustee is responsible for inspecting and adequately maintaining all real property owned within the trust, and should contract for expertise where necessary. (Most trustees should consider hiring a property manager for trust real property.) When prudent, the trustee must pursue remedies against tenants and contractors for losses associated with the property. Sometimes the best decision is to sell real property and convert the proceeds to investments within the trustee’s wheelhouse.

Second, keep the qualified beneficiaries fully informed of what the trustee is doing. Tenn. Code Ann. Section 5-15-813(a)(1), Duty to inform and report, provides that a trustee shall keep certain beneficiaries of the trust “reasonably informed about the administration of the trust and of the material facts necessary for them to protect their interests” (emphasis added).

Sending adequate reports not only starts the statute of limitations for beneficiary legal challenges, but also can make lawsuits less likely. Keeping the beneficiaries informed can facilitate communication and a good working relationship, and allows any perceived or actual problems in trust administration to be addressed before they get worse. Note that 35-15-1005(a) does not require the trustee to disclose the existence of a potential claim for breach of trust, only facts indicating such existence, or to notify a beneficiary of the applicable statute of limitations. Note also that the trustee can eliminate a beneficiary’s ability to bring suit by obtaining the beneficiary’s consent to, release from liability for, or ratification of an action or decision pursuant to Tenn. Code Ann. Section 35-15-1009, provided the beneficiary knew of the beneficiary’s rights and the material facts relating to any potential breach.

Trustees might get additional help from the General Assembly. The Tennessee Bar Association plans to advocate for the 2017 Omnibus Bill of the Tennessee Probate Study Group. Section 17 of the bill would amend Tenn. Code Ann. Section 35-15-1005, effective July 1, 2017, to trigger the shorter one-year statute of limitations upon the date the party was sent “information” (perhaps broader than a report) that adequately discloses facts indicating the existence of a potential claim for breach of trust, or [this is new] the date the party “possessed actual knowledge” of facts indicating the existence of a potential claim for breach of trust.[5] Therefore, a trustee might be able to show that beneficiaries had knowledge, through means other than the trustee’s reporting, of facts sufficient to start the one-year statute of limitations. Nonetheless, this could become an expensive evidentiary endeavor; far better for the trustee to be able to show complete reporting that starts the statute.

Last, confront any issues head on. If there are problems in the trust administration, it often is better to admit them right away. The trustee in Meyers appears to have contributed to the delay in the statutes of limitations running through vague and noncommittal answers to a beneficiary’s questions about the real property, and ultimately sent a letter that attempted to assure the beneficiary that the trustee had met its obligations.

A word about individual trustees. Many of my clients believe the best person to oversee a trust is a family member or friend who has a close connection to the beneficiary, as corporate trustees sometimes struggle to understand the details and nuances of a beneficiary’s situation. However, much trustee litigation involves either well-meaning but incompetent individual trustees, or individual trustees whose carelessness or self-interest wreak havoc on a trust and its beneficiaries. Any individual considering serving as trustee should educate herself about what is involved. An excellent resource is “What It Means to be a Trustee,” published by the American College of Trust and Estate Counsel.[6]

Well-drafted trusts can blend personal connections to the beneficiaries with professional expertise. The trust can name a family member or friend as trustee and the trustee can hire legal and other professional help regarding fiduciary duties and compliance, investing, tax reporting, property management, etc. Alternatively, the trust can name a professional trustee and one or more individuals as trust advisors or trust protectors, who at least are a resource for the trustee and might be given certain powers over the trustee. Lastly, Tennessee law on “excluded fiduciaries” allows bifurcation of trustee powers, responsibilities and duties by naming a professional trustee for some trustee functions and an individual for others.[7]

Being a trustee or any other fiduciary is serious business. Tennessee trustees generally try to do their jobs well, and corporate trustees typically are equipped to do so. However, both individuals and professionals must take great care in accepting a trusteeship and carrying out their duties.

Notes

  1. Meyers v. First Tennessee Bank, No. E2014-01943-COA-R9-CV (Tenn. Ct. App. May 27, 2016). https://www.tncourts.gov/sites/ default/files/meyers_v._first_tn_bank.pdf.
  2. Tenn. Code Ann. § 35-15-1005, 2004 version. In 2013, the statute was amended to apply the same rules to suits against a trustee brought by another trustee or by a trust advisor or protector. 2013 Tenn. Pub. Ch. 390, § 40.
  3. “Unless a cotrustee remains in office or the court otherwise orders, and until the trust property is delivered to a successor trustee or other person entitled to it, a trustee who has resigned or been removed has the duties of a trustee and the powers necessary to protect the trust property.” Tenn. Code Ann. § 35-15-707(a).
  4. It is important to note that the trustee was not found liable in the Court of Appeals and that no allegations have been proved. The Court of Appeals simply ruled that the suit was timely..
  5. SECTION 17 [effective July 1, 2017] reads:
    Tenn. Code Ann., Section 35-15-1005, is amended by deleting the section in its entirety and substituting instead the following:
    §35-15-1005. Limitation of action against trustee by a beneficiary, trustee, trust advisor or trust protector.
    1. A beneficiary, trustee, trust advisor or trust protector may not commence a proceeding against a trustee, former trustee, trust advisor or trust protector for breach of trust more than one (1) year after the earlier of:
      1. the date the beneficiary, trustee, trust advisor or trust protector or a representative of the beneficiary, trustee, trust advisor or trust protector was sent information that adequately disclosed facts indicating the existence of a potential claim for breach of trust; or
      2. the date the beneficiary, trustee, trust advisor or trust protector or a representative of the beneficiary, trustee, trust advisor or trust protector possessed actual knowledge of facts indicating the existence of a potential claim for breach of trust.
    2. Facts indicate the existence of a potential claim forbreach of trust if they provide sufficient information so that the beneficiary, trustee, trust advisor or trust protector or the representative of the beneficiary, trustee, trust advisor or trust protector knows of the potential claim or has sufficient information to be presumed to know of it, or to be put on notice to inquire into its existence.
    3. If subsection (a) does not apply, a judicial proceeding against a trustee, former trustee, trust advisor or trust protector for breach of trust must be commenced within three (3) years after the first to occur of:
      1. The removal, resignation, or death of the trustee, former trustee, trust advisor or trust protector;
      2. The termination of the beneficiary’s interest in the trust;
      3. The termination of the trust.
    4. Notwithstanding subsections (a)-(c), no trustee, trust advisor or trust protector may commence a proceeding against a trustee or a former trustee if, under § 35-15-1005(a)-(c), none of the beneficiaries may commence a proceeding against a trustee or a former trustee for such breach of trust..
  6. http://www.actec.org/assets/1/6/ACTEC_What__It_Means_to_be_a_Trustee.pdf
  7. See Tenn. Code Ann. § 35-15-1205.

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