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Beneficiaries Of Trust Have Standing To Sue Trustee For Breach Of Fiduciary Duty That Occurred During Settlor’s Lifetime
January 8, 2013 | Bulletin No. 1018495.1
In Estate of Giraldin (--- P.3d ----, Cal., December 20, 2012), the California Supreme Court considered whether beneficiaries of a trust, following the settlor’s death, had standing to sue the trustee for breach of fiduciary duty to the settlor during the settlor’s lifetime. The court ruled that nothing in the law denies the beneficiaries of such standing and the probate code and other cases studied together imply broad rights to sue for breach of fiduciary duty. Therefore, the beneficiaries have standing to sue.
William and Mary Giraldin were married in 1959. When they married, William had four children and Mary had three. They subsequently had two more children, twins Timothy and Patrick, bringing the total number of children in the family to nine.
In 2002, William created and became settlor of the William A. Giraldin Trust and made son Timothy the trustee. The trust stipulated that William was the sole beneficiary of his trust during his lifetime, that Mary would become the sole beneficiary if she were still alive at the time of William’s death, and that the nine children would share equally in the remainder of the trust following the deaths of both parents.
In the meantime, William invested millions of dollars in a company founded by his son Patrick and co-owned by Timothy. The company’s stock performed badly and most of William’s investment was lost. William died in 2005 changing the status of the trust from revocable to irrevocable.
Four of William’s other children (“Plaintiffs”) sued Timothy in his capacity as trustee for breach of his fiduciary duties to William during William’s lifetime. Plaintiffs alleged that Timothy squandered William’s life savings for the enrichment of himself and Patrick, depriving the other seven children of their rightful benefits from the trust. Following a trial in 2008, the court ruled in Plaintiffs’ favor finding that Timothy had violated his fiduciary duty.
Timothy appealed and the court of appeal reversed finding that Plaintiffs lacked standing to sue because Timothy’s fiduciary duties as trustee were owed solely to William and not to the other beneficiaries. Plaintiffs appealed to the California Supreme Court, which accepted the case, specifically to address the question of whether remainder beneficiaries have standing to sue a trustee for harm caused by breaches of fiduciary duty to the settlor during the settlor’s lifetime.
Probate Code section 15800(b) states that during the time the trust is revocable, and the person holding the power to revoke is competent, “[T]he duties of the trustee are owed to the person holding the power to revoke.” That language makes clear that Plaintiffs had no standing to claim violations of fiduciary duties to themselves. However, the question here is whether they can sue after William’s death for breaches of Timothy’s duties to William during William’s lifetime. The Probate Code does not provide a clear yes/no answer to this question, nor does prior California case law.
Therefore, the court analyzed implications drawn from the Probate Code as a whole, various rulings from California and other states, and legal treatises on the subject. “As a general matter, the Probate Code affords beneficiaries broad remedies for a breach of trust,” the court said. Section 16420, for example, outlines circumstances under which a trustee may be held liable for a breach of trust. Section 16462 states that a trustee is not liable to a beneficiary for an act performed pursuant to written instructions from the person with the power to revoke. The court stated that language implies that if the trustee does not act pursuant to the settlor’s direction, the trustee may be liable. Further, Section 15800 limits its applicability to “during the time” the trust is revocable. Nothing in Section 15800 limits the ability of beneficiaries to petition after the trust becomes irrevocable. Analyzing those sections together, the court concluded, “[C]onsidered as a whole, the various Probate Code sections impose a duty on the trustee to protect the interests of the persons who are entitled to the proceeds of the trust.”
The court also referred to case law finding that beneficiaries cannot be accorded rights of a vested beneficiary prior to the death of a trustor. This implies that after the settlor dies, the beneficiary has such rights and may have standing to complain about a conservator’s action taken before the settlor’s death.
The court reviewed the findings of a legal treatise analyzing beneficiaries’ standing in cases from various states. It found, “[M]any courts have allowed beneficiaries to pursue breach of duty claims after the settlor’s death, related to the administration of the trust during the settlor’s lifetime, when, for example, there are allegations that the trustee breached its duty during the settlor’s lifetime.”
Nothing in the statutes or case law demonstrates that the beneficiaries lack standing to assert, after the settlor’s death, a breach of duty the trustee owed to settlor that harmed the beneficiaries. Therefore, the court ruled, without judging the merits of the case, “[W]e merely hold that, after the settlor’s death, the beneficiaries have standing to assert a breach of the fiduciary duty the trustee owed to the settlor to the extent that breach harmed the beneficiaries.”
The court of appeal’s judgment was reversed and the matter remanded for further proceedings.
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Linda M. Monje | 661.864.3800