In 1991, Arthur Gilbert died leaving his widow Lenora as trustee of his testamentary trust. Upon Lenora’s death, 15% of the trust was to be distributed to Arthur’s granddaughter Tammy King, and 30% to Arthur’s stepdaughter (and Lenora’s daughter) Barbara Johnston.
In 1997, Lenora transferred a piece of real property out of the trust, without consideration, and used a second piece of real property as security for a personal loan. Lenora failed to make payments on the personal loan, and the lender foreclosed and took title to the real property. After Lenora was diagnosed with dementia, Barbara began handling the receipt of the trust’s rental income and withdrew such funds from the trust’s account.
After Lenora’s death in 2002, Barbara told the trust’s tenant to make checks payable to her as trustee, even though the trust document specified that Arthur’s son Lloyd would become successor trustee. In 2003, Lloyd recorded an affidavit as successor trustee, but Barbara refused to provide Lloyd with any financial information about the trust or the rental income received after Lenora’s death.
Tammy filed a complaint against Barbara, alleging conspiracy to breach trust, breach of trust, and bad faith. Days before trial, Tammy moved to add Lloyd, as trustee, as a plaintiff in the action, but when the trial court determined that trial would have to be postponed as a result, Tammy’s attorney indicated they wanted to move forward with trial, and the trial court denied the motion to add Lloyd to the action.
The trial court determined that Barbara had exercised undue influence over Lenora with regard to Lenora’s breach of her duties as trustee, but ultimately held that Tammy did not have standing to bring the lawsuit without naming the current trustee, Lloyd, as a defendant.
On appeal, the court recognized that normally the trustee is the real party in interest regarding claims of the trust against third parties, and that the trustee has the exclusive right to bring an action. However, the court found that the exception to this rule applied: that a beneficiary may pursue claims against a third party on his or her own, without participation by the trustee, when that third party actively participated in, or knowingly benefited from, a trustee’s breach of trust.
The court also resolved the open question of whether the appointment of a successor trustee would extinguish a beneficiary’s right to sue a third party for involvement in a prior trustee’s breach of trust, and held that the naming of a successor trustee does not prevent a beneficiary from proceeding on such a claim.
The court determined that Tammy had standing to bring her claims against Barbara for her role as a third-party participant in Lenora’s breach of trust. The court also held that while Tammy could possibly recover against Barbara for her conduct as a trustee (a trustee de son tort) after Lenora’s death, Barbara could not also be liable as a trustee before Lenora’s death. Barbara was either a third-party participant or a trustee de son tort, but not both simultaneously.
The court remanded the case for the trial court to determine the amount of damages that Barbara should reimburse the trust for her third-party participation in Lenora’s breach of trust, whether Barbara was liable as a trustee for breach of trust after Lenora’s death and the amount of damages under this theory, and whether any other relief was appropriate.
This ruling clarifies that a beneficiary of a trust has standing to sue the trustee, the trustee and a third-party participant in a breach of the trustee’s fiduciary duties, or the third-party participant alone.
Kelly L. Hellmuth is the principal author of this release.