Trustees and the Business Judgment Rule

Take-Away: A trustee’s decisions  with regard to the administration of a trust can be protected from second-guessing by trust beneficiaries if the trustee complies with the business judgment rule. However, if such a fiduciary decision falls under the business judgment rule, it is possible that a probate judge will decline the trustee’s petition for instructions, thus leaving the trustee ‘hanging out to dry.’

Background: At times a trustee will petition the probate court for advice and direction in the administration of a trust. Such a petition for direction or instructions from the probate judge can sometimes be motivated to provide the trustee with protection from liability since the trustee will then be following the directions of the probate judge pursuant to  a court order. While often legitimate questions arise that will also prompt the trustee to seek judicial advice and direction in the form of a court order of instructions, there are also occasions when the trustee’s petition to seek direction or instructions  from the probate court is motivated more by a desire to ‘pass the buck’ to the probate judge when trust beneficiaries are in disagreement, or by their nature the trust beneficiaries are litigious and the trustee intends to avoid becoming the target of their ire.

Question: Can a trustee petition the probate court for guidance and instructions when the trustee is specifically empowered to make the decision that the trustee wants the probate judge to make?

Michigan: In my prior life as a practicing attorney, it was my experience that Michigan probate judges were always receptive to  petitions for instruction from a trustee on just about any topic that was the subject of the petition. I never had a probate judge ‘push back’ and say the fiduciary was not entitled to receive direction from the judge. All the probate court petition for instructions requires is that it include allegations that justify the relief sought.[Michigan Court Rule 5.113(B)(1).] Thus, from my experience, Michigan probate judges seem to be more than willing to supply direction to a trustee that asks for guidance and instructions. I could not find any Michigan statute or court rule which expressly limits the matters or topics that a trustee can seek instructions on from a probate judge, including the trustee’s exercise of discretionary powers.

Common Law: That said, there are a couple of states that are not nearly as accommodating as Michigan probate courts seem to be when it comes to accepting a trustee’s petition that seeks instructions with regard to the administration of a trust. Nor, apparently, does the common law, as expressed in the Restatement (Third) of Trusts, encourage a trustee’s petition for instructions when the topic is within the trustee’s discretion or falls under what is called the business judgment rule.  

Restatement (Third) of Trusts: The Restatement (Third) of Trusts provides much more restrictive authority given to a trustee to seek instructions from a probate court, especially when the topic for which guidance is sought is within the scope of the trustee’s discretion or is authorized (and thus protected) under the so-called business judgment rule.

Limits to Judicial Instructions: Section 71 of the Restatement (Third) of Trusts, permits a trustee or a beneficiary to ask for ‘instructions regarding the administration or distribution of the trust if there is reasonable doubt about the powers or duties of the trusteeship or about the proper interpretation of the trust provisions.’ However, a comment to Section 71 then goes on to state that “if a matter rests within the sound discretion of the trustee, or is a matter of business judgment, the court ordinarily will not instruct the trustee how to exercise that discretion or judgment.” This comment then notes that it would not be proper for a probate court to instruct the trustee “on matters of judgment concerning the amounts of income or the portions of the trust estate the trustee should expend for the particular purposes in question.” [Section 71, comment d.]

Expenses Seeking Judicial Instructions: The Restatement also provides yet another comment on the expenses a trustee incurs in filing a petition for instructions from the probate court: “Expenses incurred by a trustee in applying to the court for instructions are payable from the trust estate unless the application for instructions was plainly unwarranted, there being no reasonable uncertainty about the powers or duties of the trustee or about the relevant law or proper interpretation of the trust. In such a case it is normally improper for a trustee to incur the expenses of making the application.” [Section 71, comment e.] When one considers the long list of statutory default powers conferred upon a trustee under the Michigan Trust Code [MCL 700.7817] that comprehensive list of fiduciary powers could create some anxiety for the trustee  if a petition for instructions is sought when the trustee already possesses the broad power that is the subject of the trustee’s petition for instructions. At least it is something to think about before filing such a petition for instructions.

‘Hands Off!’: A couple of states have very clear ‘hands off’ laws and policies that do not welcome a trustee’s petition for instruction. While trustees often seek advice and direction from a probate court, and estate planning commentators frequently  encourage trustees to file such petitions when in doubt (or when the trustee is nervous about upsetting one or more trust beneficiaries, desiring to ‘pass the buck’ decision to the probate judge) in some states the probate court will instruct the trustee to exercise its own business judgment and decline to provide guidance, at which point the trustee will then have to justify the court costs and  attorney’s fees that it incurred to file its petition for instructions.

New York: New York has adopted a statute that expressly directs that courts “need not entertain jurisdiction if to do so would be merely to substitute the court’s judgment for that of the fiduciary.” [SCPA Section 2107.] Comments from a few New York Surrogate Court decisions indicate this unwillingness of a Surrogate (or ‘probate’) Court to assist a trustee that seeks judicial direction or instructions reflect this reluctance to assist trustees in the administration of trusts:

-A Surrogate Court may entertain applications by a trustee to advise and direct only in “extraordinary circumstances such as complex valuation issues, or tax elections, or where there is a conflict among interested parties.”

-A trustee must demonstrate that “conditions of an estate are so unusual that it would not be safe or proper for the fiduciary to proceed in the ordinary business way.”

-The extraordinary circumstances exception when a petition for instructions will be received by a Surrogate Court are limited to the trustee being accused of self-dealing.

-A court will not “stamp its imprimatur on a course of action that is the trustee’s to choose.”

-“It is well settled that fiduciaries are not ‘mere ministerial agents’ and the courts have neither the duty nor the authority to exercise the business judgment that is imposed on fiduciaries.”

-“The court is loath to substitute its judgment for those of the petitioner.”

Example: The Personal Representatives of an estate were concerned that the sale of estate assets might leave an insufficient amount in the estate to fully satisfy all the bequests under the decedent’s Will. The Personal Representatives asked the Surrogate Court to approve the sale at the Personal Representatives’ proposed prices. The Court held that the question was one of business judgment and not law, concluding that  it would be improper for the court to provide direction and advice to the Personal Representatives. In re Estate of McGuire, 72 Misc. 3d 1221(A) Sur. Ct. Erie County, August 25, 2021.)

Example: The trustee’s questioned whether it,  a successor trustee, should commence an action against the predecessor trustees. The court found that the petition for instructions  called for an exercise of judgment that the successor trustee was empowered to make, and thus the petition did not present extraordinary circumstances that warranted advice and direction from the Surrogate Court judge. The court found that the successor trustee “must use its business judgment in determining the best course of action involving the estate property, including whether to commence an eviction proceeding against a trust beneficiary.” In re Kline Revocable Trust U/A dated September 9, 1971, 196 Misc. 2d 66 (Sur. Ct. Fulton County, 2003).

Example:  The court held, among other things, that a fiduciary’s uncertainty “about how to carry out its specified authority because of…ongoing disagreements with the beneficiaries and their mother is not a basis for the court to substitute its judgment for the fiduciary’s in routine, albeit difficult, matters of administration.” In re Duke, No.1962-1459/C 2013 WL 6684347 (Sur. Ct. N.Y. County, December 19, 2013.)

Business Judgment Rule: The business judgment rule is usually encountered in business litigation. This ‘rule’ affords a fiduciary some protection when, for example, the fiduciary participated in a properly investigated decision or transaction that, because of an honest mistake in business judgment, does not attain the desired result. However, if the fiduciary acts in bad faith or makes a decision that personally benefits itself, the business judgment rule is in applicable. Thus, absent evidence that the trustee did not act in the trust beneficiaries’ best interest, a court will not review an honest mistake of business judgment. Or, in the case of a trustee’s petition for instructions, a probate judge might reject the petition concluding that the trustee’s question or proposed course of action is covered by the business judgment rule and thus decline to provide the requested instructions.

Elements: Under the business judgment rule a court will uphold the decisions of a trustee as long as the decisions are made: (i) in good faith; (ii) with the care that a reasonably prudent person would use; and (iii) with the reasonable belief that the fiduciary is acting in the best interests of the trust’s beneficiaries. Therefore, if a trustee’s petition for instructions would arguably be protected by the business judgment rule, then a probate judge might reject that request for instructions so as to avoid substituting its judgment for that of the trustee.

Michigan: The business judgment rule has been codified in Michigan, but only with regard to creating the standard that is applicable in derivative action claims against corporate directors and officers. [MCL 450.1541a.] The statute provides that corporate directors and officers must act in good faith, with the care of an ordinarily prudent person, and in the corporation’s best interest. In the context of a trust’s administration, a court will presumably not interfere with a trustee’s decision absent a “clear showing of actual or impending wrong.” A court will become involved when those in control, i.e. the trustee, willfully abuse its powers, act in bad faith, neglects its duties, acts contrary to the trust’s purposes, or commits a breach of trust or fraud. Reed v Burton, 344 Mich 126 (1955).

Substitute Judgment: In sum, due to the business judgment rule, in the absence of bad faith or fraud, a court will not substitute its judgment for that of the trustee, and presumably the probate judge will decline to provide any instructions when the business judgment rule covers the trustee’s proposed actions. Matter of Estate of Butterfield v. Page, 418 Mich. 241 (1983).

Conclusion: Perhaps a trustee’s petition for instructions from a probate court  is never going to be a problem with Michigan probate courts in light of the apparent willingness of probate courts to entertain petitions for instructions on just about any question that a trustee might have. Yet there does seem to be some risk associated if such a petition is filed, unless the petition fits squarely within the advice-and-direction rule, or the trust is governed by the law of a state that is unwilling to instruct trustees. If a trustee’s petition for instructions is unlikely to be granted, rather than file the petition and incur unnecessary court and legal fees, perhaps the trustee would be better off exercising its good business judgment and contemporaneously document the support for the exercise of its discretion and judgment,  to protect itself from a subsequent challenge by trust beneficiaries. In conclusion, a trustee’s decision to file a petition for instructions from the probate court ought not be a knee-jerk reaction to every question or problem encountered in the administration of a trust.