Advice To Fiduciaries For Avoiding Litigation

ADVICE TO FIDUCIARIES FOR
AVOIDING LITIGATION

Bruce S. Ross

February 24, 2006

TABLE OF CONTENTS

I. INTRODUCTION AND OVERVIEW.
II. THE TRUSTEE'S DUTIES HIGHLIGHTED.
       A. SCOPE NOTE.
       B. DUTY TO ADMINISTER TRUST..
            1. In General
            2. Trust Instrument Controls.
       C. DUTY OF LOYALTY
            1. In General
            2. Self-dealing Prohibited.
            3. Transactions Between Affiliated Business Entities.
            4. Other Examples.
                 a. Inadvertent Self-Dealing.
                 b. The Rothko Case (New York)
                 c. The Turney Case (Florida)
                 d. Controlled Corporation..
                 e. Loans to Trustee.
            5. Ratification of Conflict.
            6. Further Reading.
       D. DUTY OF IMPARTIALITY.
            1. In General
            2. Duty of Neutrality.
       E. DUTIES REGARDING CLAIMS AND ACTIONS.
       F. DUTY TO SEGREGATE TRUST PROPERTY.
       G. DUTY WITH RESPECT TO DELEGATION.
            1. The Restatement Second Formulation.
            2. Historical Background.
            3. Examples.
            4. Delegation Under the Restatement Third.
            5. Avoiding Liability for Agents' Delicts.
       H. DUTIES WITH RESPECT TO TRUST INVESTMENT AND ADMINISTRATION
                      (THE PRUDENT INVESTOR RULE)
            1. Historical Background.
            2. Other Attributes of the Prudent Investor Rule.
                 a. The Standard of Care May be Heightened.
                 b. Actions Not Judged by Hindsight.
                 c. Productive Investments.
            3. Recent Developments: Modern Portfolio Theory and the Prudent Investor Rule.
            4. Professor Halbach's Explication.
                 a. Duty With Respect to Portfolio Risk Level
                 b. Duty to Diversify.
                 c. Caution and the Duty of Impartiality.
                 d. Duty to be Cost-Conscious in Investing.
                 e. Professor Halbach concludes:
            5. Arizona Approach..
            6. California Approach.
            7. Florida Approach.
            8. Massachusetts Approach.
            9. Pennsylvania Approach.
            10. Washington Approach.
                 a. The Statute
                 b. Case Law.
            11. Uniform Trust Code Approach..
            12. Diversification
                 a. Introduction..
                 b. Arizona Approach.
                 c. Florida Approach
                 d. Massachusetts Approach
                 e. Washington Approach
                 f. Recent Developments
       I. THE TRUST LAW'S RESPONSE TO MODERN PORTFOLIO THEORY: TOTAL
                    RETURN LEGISLATION.
            1. The Equitable Adjustment Model
            2. The Unitrust Conversion Model
J. DUTIES WITH RESPECT TO CO-TRUSTEES.
            1. Unanimous Action Historically Required.
            2. Arizona Approach
            3. Florida Approach.
            4. Massachusetts Approach
            5. Washington Approach.
       K. DUTY OF SUCCESSOR TRUSTEE WITH RESPECT TO ACTS OF
                PREDECESSOR
       L. DUTY TO REPORT AND ACCOUNT TO BENEFICIARIES.
            1. In General
            2. Effect of Exculpation Clause.
            3. Arizona Law.
            4. California Law
            5. Delaware Law.
            6. Florida Law
            7. Massachusetts Law.
            8. Washington Law
            9. General Recommendations
III. REMEDIES FOR BREACH OF TRUST.
       A. HISTORICAL BACKGROUND.
       B. SCOPE OF REMEDIES
       C. REMEDY FOR SELF-DEALING
       D. APPRECIATION DAMAGES.
            1. Restatement Second Approach.
            2. Evolution of Damage Remedies Under the Prudent Investor Rule.
                 a. Early Developments.
                 b. California Law.
                 c. Uniform Trust Code Approach.
                 d. Case Law..
       E. PUNITIVE DAMAGES.
            1. In General
            2. Case Law..
       F. POSSIBLE CLAIMS FOR INTENTIONAL INFLICTION OF EMOTIONAL
                 DISTRESS.
IV. PROCEDURAL ISSUES IN SURCHARGE LITIGATION
       A. SCOPE NOTE
       B. DISCOVERY ISSUES..
            1. Communications with the Beneficiaries Generally.
            2. May the Beneficiaries Discover Communications Between the Trustee and
                       the Trustee's Counsel?.
                 a. Majority Rule.
                 b. California Authorities
                 c. Litigation Exception.
                 d. Practice Pointer
            3. The Attorney Work Product Doctrine
       C. IS THERE A RIGHT TO JURY TRIAL?
            1. In General
            2. State Rules.
            3. Further Reading.
       D. ATTORNEYS FEES' ISSUES..
            1. In General
            2. The Common Fund Doctrine
            3. Illustrative Case.
V. DEFENSES AND PREVENTIVE MEASURES.
       A. INTRODUCTION.
       B. STATUTE OF LIMITATIONS..
            1. In General
            2. California's and Arizona's Approach..
            3. Florida's Approach..
            4. Washington’s Approach..
       C. RES JUDICATA AND EXTRINSIC FRAUD..
            1. In General
            2. Extrinsic Fraud.
            3. Fiduciary's Failure to Fully Disclose.
                 a. California Case law..
                 b. California Statute.
                 c. Arizona Statute.
                 d. Additional Cases:
       D. LACHES AND ESTOPPEL..
       E. RATIFICATION OR CONSENT..
       F. EXCULPATORY CLAUSES..
            1. In General
            2. Case Law..
                 a. Special Considerations Applicable to Professional Trustees.
                 b. Other Cases.
            3. Invalidation of Exculpatory Clause for Undue Influence.
            4. Broadening the Trustee's Powers.
VI. CONCLUSION..
VII. APPENDIX OF RECENT DECISIONS.