Tuesday, April 23, 2019
A fundamental duty of being a fiduciary is the duty of loyalty. In essence, this entails that the fiduciary must act solely in the interest of the beneficiaries. Breaching the duty of loyalty occurs when the fiduciary engages in self-dealing, or places their own interests above that of their charges.
In New York, the trusts and estates practice has had cases that relied on the "no further inquiry" rule, which will result in the transaction being set aside regardless of its fairness. The rule was established by long-standing precedent (1955) as the basis for declaring any such transaction voidable at the behest of the beneficiaries. This rule was recently examined in Albany County in Matter of Smith on May 17, 2018.
In that case, when the decedent died in May of 2003, he owned 90% interest in a closely held business and the respondent owned the remaining 10%. 70% was to be placed in trust with a few of the beneficiaries being minors, and 15% bequeathed to the respondent, who was also to act as trustee. Thus, the guardian ad litem for the minor beneficiaries claimed that when there were significant real estate sales from October 2003 to May 2004, with the respondent acting as the Secretary of the business and being paid a hefty compensation, that it was an act of self-dealing. The court agreed, and set aside the payments, and directed the respondent to restore the sum that he received from the estate.
The opinion provides a sharp lesson to be learned by fiduciaries who are tempted to benefit themselves at the expense of the estate or trust to which they owe undivided loyalty.
See Ilene Cooper, Fiduciary Self-Dealing, NYE State Litigation Blog, April 17, 2019.
Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.) for bringing this article to my attention.