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George F. Bearup, J.D. Senior Legal Trust Advisor

21-May-20

Trusts – The Real-Party-in-Interest Doctrine

Take-Away: A trustee is charged with marshalling assets that are held, or supposed to be held, in a trust. If the trustee decides not to pursue assets to bring them into the trust, or to pursue claims the trust might have against third-parties, the real-party-in-interest doctrine normally says that only the trustee possesses the claim, not the trust beneficiary, and the beneficiary cannot act on behalf of the trust. However, the Michigan Trust Code provides an exception to this common law doctrine.

Background: The Michigan Trust Code requires a trustee to take reasonable steps to locate trust property and compel another person to deliver the property to the trustee. [MCL 700.7813(1).] The trustee is not required to always pursue claims or sue for the recovery of assets. Rather, the trustee is only required to take reasonable steps (not defined in the statute) to obtain the delivery of trust property. Consequently, this often ends up being a ‘facts and circumstances’ decision by the trustee, subject to second-guessing by trust beneficiaries. This can lead to disputes with the trust beneficiaries who demand that the trustee file a lawsuit to recover assets that  they believe should be held in the trust, with the trustee refusing to file the lawsuit relying on a cost-benefit analysis, or simply not being sure if an asset is actually a trust asset.

Example: Consider the common practice of the settlor assigning “all of my tangible personal property to my revocable trust” using a generic or ‘blanket’ bill of sale. It is not clear what items are actually covered with that bill of sale delivered to the trust. After the settlor’s death one beneficiary who is the settlor’s daughter claims that an item not in the settlor’s possession or in his home at the time of death, is now in the home of the settlor’s son,  an item that was purportedly covered by settlor’s the bill of sale. The daughter wants the trustee to sue her brother (who, coincidently, she never liked) for conversion of the disputed item. The trustee refuses to spend trust assets to pursue an action  for conversion against the settlor’s son who is in possession of the contested item. The daughter is adamant that her brother is in possession of the item wrongfully, yet the trustee is unwilling to file the lawsuit for conversion on behalf of the trust against the settlor’s son. Can the daughter file a lawsuit for the recovery of the item which she believes should be included in the trust estate when the trustee does not agree? At common law probably the daughter would not be permitted to file the lawsuit on behalf of the trust due to the real-party-in-interest doctrine. That changed with the Michigan Trust Code.

Michigan Trust Code: The Trust Code addresses this question: If a person or embezzles or wrongfully converts trust property, or refuses without colorable claim or right, to transfer possession of trust property to the current trustee on demand, the pearson is liable in an action brought by the current trustee, or the beneficiary of the trust for the benefit of the trust, for double the value of any property embezzled, converted, or wrongfully withheld from the current trustee. [MCL 700.7813(4).]

[Aside: This provision is slightly different from the statute that describes the responsibilities of a personal representative of the decedent’s estate to recover assets owed to the probate estate. In the case of a Will, the beneficiary of the decedent’s estate does not have any legal standing to pursue a claim against a third party on behalf of the probate estate. [MCL 700.1205(4).]

Real Party in Interest Doctrine: Whether a trust beneficiary possesses authority to pursue a claim on behalf of the beneficiary’s trust is called the real-party-in-interest doctrine at common law. In earlier court decisions the Michigan Court of Appeals has held that while a trust beneficiary possesses the power to invoke a probate court’s jurisdiction, the real-party-in-interest doctrine precludes the trust beneficiary from enforcing a claim that is possessed by the trustee. In re Rottenberg Living Trust, 300 Mich App 339 (2013) the Court held that real party in interest “requires that the claim be prosecuted by the party who by the substantive law in question owns the claim asserted,” citing Rite-Way Refuse Disposal, Inc v Vanderploeg, 161 Mich App 274 (1987). Thus, the trustee owns the claim on behalf of the trust, and normally the trustee has the duty to pursue the claim; in the past, the doctrine only permitted the trustee to pursue the litigation, not the trust beneficiary.

Recent Court Decisions: The trustee’s duty to pursue claims or to recover trust property seems to be modified by the statute that requires the trustee to only take reasonable steps to locate and compel the delivery of trust property to the trustee thus implying that a lawsuit to recover property is not required in every case while also giving the trust beneficiary the opportunity to pursue the litigation if the trustee declines.

  • One recent example of where the Court relied on the real-party-in-interest doctrine is where the settlor’s daughter sought to reopen a previously settled and dismissed probate proceeding so that she could compel a walk-through of her step-father’s home to identify personal property that she felt belonged to her mother’s trust, of which she was a residuary beneficiary. The Court found that the daughter’s petition was an attempt to marshal the trust property. The real-party-in-interest, according to the Court for that purpose, was the trustee and not the beneficiary. Accordingly, the Court dismissed the daughter’s petition, effectively denying her attempt to inspect her step-father’s home. In re Calleen Ann Brendt Living Trust, No. 341103 (Mich App, November 20, 2018.)
  • Last year the Court had another occasion to revisit the real-party-in-interest doctrine in a case where the beneficiaries had wanted to pursue a lawsuit for conversion against an individual who served on behalf of an entity that was named as the trustee at the time of the settlor’s death. The settlor had previously named the individual as trustee ‘so long as he is affiliated with his accounting firm.’ The accounting firm was later  formally named as the trustee, which explains why the trustee did not want to sue one of its employee-accountants for conversion. The probate court dismissed the lawsuit finding that the beneficiaries lacked standing, indirectly relying on the real-party-in-interest The Court of Appeals reversed that decision. The Court found that MCL 700.7813(4) was applicable to the situation, which gives the trust beneficiaries standing to bring the lawsuit. The Court also observed: “Both the doctrine of standing and the included real-party-in-interest rule are prudential limitations on a litigant’s ability to raise legal rights of another…..There is no dispute that plaintiffs were beneficiaries of the Trust, they were entitled to the residue of the Trust Estate in equal shares. Accordingly, plaintiffs were statutorily authorized to assert their claims of conversion on behalf of the Trust…..A beneficiary may sue in equity if a trustee refuses or neglects to sue.” Dice v Zimmerman, No.34260 (Mich App, July 30, 2019.)

It should be noted that this same Michigan Trust Code section also pertains to a trustee taking reasonable steps to compel a former trustee to deliver trust property to the current trustee, which may have been the situation in the Dice decision (the reported facts are not all that clear why the conversion claim arose.)

Reasonable Steps: This phrase also appears in the very short Michigan Trust Code provision with regard to the enforcement and defense of claims by a trustee. “A trustee shall take reasonable steps to enforce claims of the trust and to defend claims against the trust. [MCL 700.7812.] As noted earlier, the Code makes no attempt to define what constitutes reasonable steps, which means only that it is a reasonableness standard is applied to the trustee’s decision to pursue, or not, a claim on behalf of the trust. According to the  Reporter’s Comments with regard to both of these two statutes that define the trustee’s behavior: “The reasonableness standard permits a trustee to exercise discretion to either pursue a claim, or to refrain from pursuing a claim, where the nature of the claim warrants it.”

A recent example of where a trustee was not punished for pursuing a claim on behalf of the trust is Stockton v Stockton (In re Thomas Stockton Trust, No, 332278 (Mich App, September 19, 2017.)

In that case the trustee retained legal counsel to investigate whether to pursue a claim for conversion against a beneficiary for property that the trustee thought should be part of the trust estate. Legal counsel recommended that the lawsuit be filed. The lawsuit was filed, but trustee did not prevail on the merits. Then, no surprise, the vindicated trust beneficiary filed a motion to remove the trustee and to recover the attorney’s fees the trustee incurred pursuing the conversion lawsuit. The Court of Appeals denied the trustee’s removal and the repayment of trustee fees or legal fees incurred by the trustee because the Court found that there was conflicting evidence, and legitimate questions of fact and law surrounding the conversion claim. The Court noted: “There is nothing about the trustee’s decision to pursue the claim that was imprudent or an exercise of bad faith.”

Conclusion: The Michigan Trust Code thus appears to depart from the common law doctrine of real-party-in-interest by giving trust beneficiaries, but not probate

estate beneficiaries, standing to pursue the recovery of assets. In addition, the Code adds a reasonableness standard to the trustee’s duty to marshal assets of the trust estate, which suggests that any investigations conducted by the trustee should be well documented before it decides to not pursue claims on behalf of the trust estate.