Take-Away: Some trust beneficiaries look at their trustee as their agent who is required to respond to the beneficiary’s directions. A federal appeals court in California recently disagreed that a trustee serves in an agency capacity with regard to the trust’s beneficiaries.

Case: Banks v. Northern Trust Corp, 929 F.3d 1046 (2019)

Issue: The facts in this litigation are technical as they deal more with a federal court’s jurisdiction over a lawsuit against the trustee. The question was whether to permit class action litigation to proceed against Northern Trust Company in federal court.

Facts: The plaintiffs in the litigation were beneficiaries of a trust who claimed to represent a class of plaintiffs injured by the corporate trustee. The plaintiffs filed the litigation in federal court against the corporate trustee, Northern Trust Company (Northern.) Federal court jurisdiction was asserted by the plaintiffs based on diversity among the litigants (i.e. different states of residence/business between the plaintiffs and Northern.) The complaint raised several claims against Northern, including: (i) trust funds were invested in Northern’s own proprietary products, which the plaintiffs claim led to ‘suboptimal returns’; (ii) Northern charged excessive fees for the preparation of the fiduciary income tax returns for the trust; (iii) Northern engaged in elder abuse (?); and (iv) Northern engaged in unfair competition under California’s securities laws.

Trial Court: Northern moved to dismiss the plaintiffs’ class action complaint. The federal District Court granted Northern’s motion to dismiss the complaint.  The court’s dismissal of the lawsuit was based on the highly technical Securities Litigation Uniform Standards Act (ULUSA), which expressly deprives a federal court of jurisdiction over state-law class actions that allege misrepresentation or omission of a material fact in connection with either: (i) the purchase or sale of securities, or (ii) the use of manipulative or deceptive devices in connection with the purchase or sale of securities. [15 U.S.C. Section 78bb (f) (1).] This Act, and its denial of federal court jurisdiction, is why the underlying facts of this litigation are confusing, and arguably not of much relevance to a trust’s administration.

Appeals Court: The federal Court of Appeals reversed the trial judge’s dismissal of the class action complaint against Northern, albeit on technical grounds.

  • Role of Trustee Buying and Selling Securities: The appellate court concluded that the plaintiffs did not purchase or securities; only Northern bought or sold securities in its capacity as trustee. Northern was alleged to have violated its duties by making those purchases and sales on behalf of the beneficiaries. Restating this technical focus on which party purchased the securities, the trial judge had relied on the conclusion that Northern at all times was acting as the agent for the trust beneficiaries in its purchase and sale of securities. This status of the trustee acting an agent was necessary in order for the trial judge to conclude that the SLUSA applied which, in turn, required the dismissal of the trust beneficiaries’ class action securities law complaint in federal court.
  • Trustee is Not an Agent: The appellate court went to great lengths to explain the difference between a trustee and an agent. Although both an agent and a trustee are fiduciaries, a trustee does not act for the beneficiaries in the way that an agent acts for its principal. The court pointed out that the beneficiary of an irrevocable trust cannot control the actions of a trustee in the same way that the principal can control his/her agent. The beneficiary-plaintiffs did not purchase or sell any securities; only Northern made the purchase and sales of the securities. When it did so, Northern was not acting as the trust beneficiaries’ agent in those transactions covered by the ULUSA. Therefore, the ULUSA did not apply to the plaintiffs’ class action complaint against Northern.
  • Other Claims: The appellate court also reversed the dismissal of the other claims asserted against Northern for improper fiduciary fees charged, elder abuse, and unfair competition. Unfortunately, there was no discussion of the facts upon which Northern was sued for ‘elder abuse;’ that, alone, would have provided some interesting reading.

Trustee is Not an Agent of the Beneficiary: Perhaps the trial judge’s misconception of Northern’s role derived from current Restatement (Third) of Trusts, the Uniform Trust Code (UTC), which heavily relies on the Restatement (Third) of Trusts, and legal commentaries that view a trust as a contractual relationship. In short, the trial judge may have relied upon the common depiction of a trust as manifesting a contractual relationship or agent-principal, that seem to arise from a provision in the UTC that requires that a trust must be administered by the trustee in good faith and for the benefit of the trust beneficiaries. [See MCL 700.7801, which adopts this UTC provision without any modification.]

Trust Not an Entity: A trust is not an entity at common law. However, as the Restatement (Third) of Trusts, Section 2, comment a, acknowledges:

Increasingly,..[however]..modern common law and statutory concepts and terminology tacitly recognize the trust as a legal ‘entity’ consisting of the trust estate and the associated fiduciary relations between the trustee and the beneficiaries.”

A recent example of this trust-is-a-separate-legal-entity is the Sixth Circuit’s decision reported yesterday- JPMorgan Chase Bank, N.A. v. Larry J. Winget Living Trust, No 18-2089 (decision dated November 7, 2019) where a revocable declaration of trust was treated as a legal entity, separate from its settlor.

Duty to Act: It is reasonable to expect that with the UTC’s inclination and recent legal journals willingness to view a trust as a separate legal entity, that a contract to form that legal entity would arise, and thus view the trustee acts as an agent for the trust’s beneficiaries. Yet there are fundamental differences between a trustee and an agent who acts on behalf of a principal. The core difference between the legal relationships of a trustee, and that of an agent, is that an agent, even an agent who is designated under a durable power of attorney (or the custodian of an IRA), generally has no duty to act. In contrast, while there is no duty to accept the appointment as a trustee, once appointment is accepted, the trustee then assumes an affirmative duty to act and to diligently administer the trust. Restatement (Third) of Trusts, Section 76(1), comment b; 1 Scott & Ascher, Trusts and Trustees, Section 2.3.4. Moreover, an agent normally does not take title to the property of its principal, in contrast to a trustee that must take title to the assets that are the subject of the trust relationship.

Conclusion:  The trial judge’s mistake was to treat the trustee as an agent acting on behalf of the trust beneficiaries. That was a reasonable mistake in light of the propensity of the UTC to treat a trust as a separate legal entity. However, as the appellate court stressed, at common law, a trust is a legal relationship; a trust is not a separate legal entity that is subject to contract principles that result in an agency relationship of acting on behalf of the trust beneficiaries. Because of this legal relationship, a trustee has an overarching duty to carry out the settlor’s intentions as expressed in the trust instrument; the wishes of the trust beneficiaries are subordinate to the settlor’s wishes. If anything, a trustee acts as the agent for the settlor, not for the trust beneficiaries. This was the distinction that the appellate court made, which led to Northern being sued in federal court in a class action for ‘suboptimal returns’ from the use of its proprietary products. Maybe the Banks judges should talk to the Winget judges and come up with a compromise interpretation of just exactly what is a trust- entity or relationship.