Breach of Fiduciary Duty Claims and the 1 Year Statute of Limitations

Take-Away: The one-year statute of limitations with regard to claims against a trustee will still apply, even if the trustee’s periodic reports and accountings fail to include the written alert that the trust beneficiaries have one year in which to bring their claims against the trustee.

Background: Claims filed against a trustee for breach of trust or breach of fiduciary duty are governed by the Michigan Trust Code. There is a relatively short one year statute of limitations to protect trustees, but only if certain conditions are met. Otherwise a 5-year statute of limitations applies.

Michigan Trust Code: MCL 700.7905 provides the limitations period for bringing claims against a trustee:

1. The following limitations on commencing proceedings apply in addition to other limitations provided by law:

1. A trust beneficiary shall not commence a proceeding against a trustee for breach of trust more than 1 year after the date the trust beneficiary or a representative of the trust beneficiary was sent a report that adequately disclosed the existence of a potential claim for breach of trust and informed the beneficiary of the time allowed for commencing a proceeding.

1. A trust beneficiary who has waived the right to receive reports pursuant to section 7814(5) shall not commence a proceeding for a breach of trust more than 1 year after the end of the calendar year in which the alleged breach occurs.

1. A report adequately discloses the existence of a potential claim for breach of trust if it provides sufficient information so that the trust beneficiary or representative knows of the potential claim or should have inquired  into the potential claim’s existence.

1. If subsection (1) does not apply, a judicial proceeding by a trust beneficiary against the trustee for breach of trust shall be commenced within 5 years after the first of the following to occur: (a) The removal, resignation, or death of the trustee; (b) The termination of the trust beneficiary’s interest in the trust; and (c) The termination of the trust.

For years, in order to intentionally start the short one-year statute of limitations running, a trustee will include in its periodic accountings or monthly reports to trust beneficiaries a statement that alerts the beneficiary to the one-year period in which to file his or her claim for breach of trust. A recent Michigan Court of Appeals decision held that the short one-year statute of limitations applied to preclude a complaint filed by trust beneficiaries, even when the trustee’s reports had failed to bring to the beneficiaries’ attention the one-year period that is allowed in which to commence a proceeding against the trustee for breach of trust.

Kilian et al. v TCF National Bank, Michigan Court of Appeals No.358761 (October 20, 2022)

Facts: The settlor died in 1996. She named her children as beneficiaries of her trust. 70% of the trust assets were set-aside to be held in trust for her son David, who was afflicted with mental health issues, although  David was named as co-trustee with Empire Bank. The remainder of the trust estate was split between two other children. David was entitled to installments of income from his trust share, along with a 5+5 power of withdrawal. For many years David exercised his withdrawal right, often over $50,000 a year. The trust owned majority share of Three Pines Resort, with the other two children owning smaller shares in the Resort. Over the years the corporate trustee changed three times. During the years the trust was in existence, monthly account statements and reports were given to the beneficiaries that reflected beginning market values, receipts, disbursements, gains and losses, and ending market value for the account, with lists in detail of each trustee transaction. With regard to the Resort real property a market value was shown on these reports, along with the real property’s tax cost basis and unrealized growth or loss. Prior to November 2013, these trustee reports failed to include language that alerted the beneficiaries to the time allowed for commencing a proceeding to challenge the trustee’s administration of the trust. For a number of years, however, the real estate owned by the trust  was reported with the same fair market value. Apparently the trustee’s dealing with David over the years was particularly challenging ultimately causing it to resign in 2017.

Claim: In November 2019, after the trustee had resigned in October 2017, the beneficiaries brought an action for breach of trust, waste, breach of fiduciary duty, and fraudulent misrepresentation. The beneficiaries claimed that the trustee had failed to keep adequate records of the trust’s expenses and operations, failed to keep the beneficiaries reasonably informed of the material facts necessary to protect their interests, and the mismanagement of the Resort, all of which had been concealed from them. The trustee responded that beginning in 2014 the monthly account statements informed the beneficiaries that if they believed that any fiduciary duties had been breached, they had one year in which  to commence proceedings for breach of trust. Since the beneficiaries did not file their complaint until late November, 2019, more than a year after the trustee’s final statement after it had resigned, the beneficiaries’ claims were precluded by the statute of limitations. The beneficiaries’ response was that because account statements prior to November 2013 did not include the one-year warning language prescribed by the statute, they were entitled to bring their claims related to the trustee’s conduct that occurred prior to November, 2013 for up to 5 years after the trustee resigned in October 2017.

Probate Court: The probate court dismissed any claims that were based on events that occurred prior to April 1, 2010, the effective date of the Michigan Trust Code. Apparently the trust instrument contained a provision that required a beneficiary to object within 90 days from the receipt of an accounting, so that 90-day ‘internal’ limitations period applied to bar those earlier claims against the trustee.  The probate court then dismissed the beneficiaries’ complaint based on the Trust Code’s one-year statute of limitations, finding that the beneficiaries had been sent  reports that adequately disclosed the existence of any  potential claims against the trustee.

Court of Appeals: With regard to the claims that were associated with the period between April 1, 2010 (the adoption of the Michigan Trust Code) and November, 2013 (when the trustee started to add to its periodic reports the key disclosure language used in MCL 700.7905, the Court held that the beneficiaries’ interpretation of MCL 700.7905 was not consistent with the statutory language, which provides that a beneficiary shall not commence a proceeding against a trustee more than one year after the beneficiary receives a report that adequately discloses claims and informs the beneficiary of the time allowed to commence a proceeding.

Statute’s Interpretation: “Considering the statutory language in its grammatical context and in light of the purposes of EPIC, we reject plaintiffs’ argument that they had until five years after Chemical Bank resigned as co-trustee on October 13, 2017, to commence an action for breaches of trust that occurred before they received the one-year statutory notice in November, 2013. Plaintiffs’ interpretation would make different limitations periods apply depending upon whether a trustee included a notice in one report but not another, even if potential claims had been adequately disclosed in previous reports. This interpretation would not result in simplicity or clarity. We conclude that, if at the time of the November 2013 statement, the statements adequately disclosed the existence of potential claims for breach of trust before that date, the plaintiffs had received ‘a report’ that was consistent with MCL 700.7905(1)(a).”

The Court addressed the use of the indefinite article ‘a report’ versus the definite article ‘the,’ to effectively read out of the statute the conjunctive ‘and’ as a separate condition to the short on-year limitations period. In short, the Court gave retroactive effect to the November 2013 report and notice as insulating any prior trustee reports that had failed to include the statutory notice. In the Court’s view, if the trustee’s previous reports had adequately disclosed the basis for potential claims against the trustee, such that the absence of the statutory notice to the one-year period in which to file a claim was not fatal to triggering the short statute of limitations for those earlier reports and accountings.

Obligation to Inquire: The Court of Appeals then went on for several pages of its decision to look at the periodic reports mailed by the corporate trustee between April 2010 and November 2013 to address if there was sufficient information provided that would have alerted the trust beneficiaries to possible claims against the trustee in its administration of the trust. Key to this analysis was the statutory language that the beneficiaries knew or should have inquired into the potential claim’s existence. As an example, with regard to the static value reported for the Resort over a period of years, the Court noted- “The static market values in the statement adequately informed plaintiffs of any potential claim that defendant was not updating the market values frequently…. the stated value of the Trust was not decreasing despite those withdrawals [by David.] ..We conclude that the beneficiaries had enough information to inquire about whether the Resort was being mismanaged….[t]he statements indicated that the market value of the Trust remained the same for years at a time, which should have led the contingent beneficiaries to question the value of the property.”

Conclusion: The Kilian decision is good news for trustees since it permits the use of the very short one-year statute of limitations to bar claims against the trustee for breach of trust, even when the ‘magic language’ of the statute is missing from the trustee’s periodic reports. Whether the Court’s reading out of the statute the conjunctive and as a separate condition to the short statute of limitations,  if an appeal is taken to the Michigan Supreme Court, is another matter. In sum, trustees should always include on all periodic reports and accountings the disclosure of the on-year statute of limitations. At the same time, beneficiaries must always remember that ignorance is not bliss and that trust beneficiaries have a corresponding duty to inquire into the existence of a possible claim against the trustee.