September 9, 2010

Breach of Fiduciary Duty

If you are the trustee of a trust in California, the California Probate Code spells out various duties which you must follow. Here are some examples in which the trustee failed to comply with their fiduciary duties.

1. The trust drafter instructed the trustee, Bank of America, to not allow the trust bank account to exceed the maximum Federal Deposit Insurance Corporation amount. For whatever reason, Bank of America permitted the account to exceed the threshold amount. In particular, the FDIC amount was $10,000 (think 1960s) but the account balance at one time was $49,000. Consequently, Bank of America was held to have breached its fiduciary duty to follow the terms of the trust. Prob C §16000; Estate of Gilmaker (1962) 57 C2d 627.

2. The beneficiaries of a large trust objected to the accounting done by the trustee, Wells Fargo bank. In response, the trustee threatened to deduct the cost of the audit from the objecting beneficiaries share of the trust in order to deter them. Consequently, the trustee was held to have breached the fiduciary duty of loyalty it owed to the beneficiaries because such action benefited the trustee at the beneficiaries' expense. Prob C § 16002; Estate of Gump (1991) 1 CA4th 582.     

3. The owner of a San Francisco restaurant left half of the family restaurant to be held in trust for his wife. The husband decided to appoint his attorney as trustee. Hence the attorney as trustee was responsible for the restaurant's operations. However, the attorney failed to perform his required trustee duties, as he did not keep a separate bank account, books or records for the trust, even though he had been the trustee for a number of years. Thus, the attorney breached his duty to keep the beneficiaries of the trust reasonably informed of the trust and its administration. Prob C § 16060; Di Grazia v. Anderlini (1994) 22 CA4th 1337.    

4. The trustee was engaged in a real estate dispute with one of the beneficiaries. Since the beneficiary had a combative litigation style, the costs were substantial. In order to cushion the blow of litigation, the trustee decided to sue the beneficiary for elder abuse (the trustee represented an elderly couple), which permitted the recovery of attorney fees. Ultimately, the trustee obtained a judgment against the beneficiary for roughly $700,000 in civil court. The problem was that the trustee incurred trustee fees totaling roughly $1.3 million in the process of obtaining that judgment. Furthermore, the beneficiary filed for bankruptcy subsequent to the judgment. Whoops. The court held that the trustee breached his duty to prudently enforce claims against the trust, since no prudent person would spend $1.3 million to try to collect $700,000. Prob C § 16010; Schwartz v. Labow (2008) 164 CA4th 417.     

5. The trustee decided to invest trust money in junior deeds of trusts, namely a second or junior mortgage. Instead of ascertaining the property's value through reasonable steps to make sure the property was worth the combined amount of both the first and second mortgage, the trustee solely relied on a real estate broker's guess as to the property's value. Naturally, the borrowers on the first loan defaulted, the property was foreclosed on and the trust lost $60,000 ($400,000 today) because the property was worth far less than what the real estate broker had guessed. Prob C §16047(d); Estate of Collins (1977) 72 CA3d 663.