|Avarice - Jacob Matham|
When a person acts in a fiduciary capacity, the interests of others are given priority. In terms of a trust, the trustee acts as a fiduciary for the beneficiary. Therefore, the trustee needs to elevate the interests of the beneficiary above theirs. The California probate code delineates the duties the trustee needs to perform in order to fulfill this fiduciary responsibility. Unfortunately, some trustees have issues when complying with all of their fiduciary duties.
One common way in which a fiduciary runs afoul of their duties is by engaging in self-dealing. This conduct violates both the fiduciary duty of loyalty and the fiduciary duty to avoid a conflict of interest. Prob C §§16002; 16004. In short, self-dealing involves the trustee behaving in a fashion that benefits themselves, without regard to the needs of the beneficiary. Intuitively, this is a breach of a trustee's fiduciary duty because they have elevated their concerns over the concerns of the beneficiary.
An example of self-dealing is as follows.
Thomas was the trustee of his neighbor Theo's trust. Theo had created the trust for the benefit of his nephew Bob. Theo's nephew was a profligate individual who failed to appreciate how to purchase prudently. Bob routinely purchased frivolous items such as lotto tickets, chia pets, body bands, tickets to Nickelback concerts, snuggies, movie tickets for John Carter, etc. Alarmed by Bob's antics, Theo decided to create a trust for Bob's benefit but to only make him a lifetime beneficiary. Furthermore, any distribution to Bob would be subject to an ascertainable standard, i.e. distributions could only be made for Bob's health, education, maintenance and support. Therefore, that 50th chia pet would not be purchased from Theo's trust.
The sole asset of Theo's trust was a rental property located in Los Gatos, CA, namely a fourplex. Theo was a real estate guru and shrewdly purchased, all-cash, a very lucrative rental property at just the right time. Rents from the fourplex provided a healthy cash-flow for the trust.
Unknown to Theo, Thomas was a compulsive gambler. Nearly every weekend would see Thomas scurry to a local casino to fritter away his money on craps, blackjack and Texas hold'em. Theo had just assumed that Thomas lived by the mantra "work hard play hard" and liked to get away for the weekend. Don't we all sometimes.
Thomas' gambling addiction eventually manifested into massive debt. Unable to pay this debt, Thomas deeded the property to himself. Then he obtained a home equity line of credit to satisfy his gambling debt.
This act constituted self-dealing because Thomas acted in his best interests rather than Bob's. In particular, Thomas, blinded by his gambling debt, had used trust property to benefit himself personally as opposed to benefiting Bob. Thus, Bob could pursue various legal remedies to rectify the error such as seeking a court order to void the transaction. Estate of Martin (1999) 72 CA4th 1438.
Self-dealing can be a very expensive proposition for the imprudent trustee. For instance, one trustee was adjudged to have engaged in self-dealing and the beneficiaries were awarded millions of dollars in damages. Uzyel v. Kadisha (2010) 188 CA4th 866.