The New Jersey Uniform Trust Code – Part 10B: Duties, Defenses and Liabilities of Trustees, Including Limitations of Actions for Trustee Liability
B. Trustee Defenses to Claims of Breach of Trust
- Trustee Defenses: New Jersey UTC
- Limitation of actions
Perhaps the most important change in the law regarding trustee liability and defenses is the adoption by the NJ UTC of a limitation of action provision. N.J.S.A. § 3B: 31-74. That statute adopts specific time limits under New Jersey law as to when a beneficiary may bring claims against the trustee; such limits did not exist before and might only be imposed by the courts based upon equitable principles such as waiver, laches, and estoppel.
In particular, a report that adequately discloses “a potential claim for breach of trust” to the beneficiary and informs the beneficiary “of the time allowed for commending a proceeding” allows the trustee to invoke the protection of a six-month statute of limitation. N.J.S.A. § 3B: 31-74(a).
Whether a report “adequately discloses” a potential claim will be a controversial, fact-sensitive issue. The statute indicates that such a report must provide “sufficient information so that the beneficiary or representative knows of the potential claim or should have inquired into its existence.” N.J.S.A. 3B:31-74(b).
When N.J.S.A. § 3B: 31-74(a) does not apply, the statute of limitations is five years from the first to occur of: removal, resignation or death of the trustee; the termination of the beneficiary’s interest in the trust; or the termination of the trust. N.J.S.A. § 3B:31-74 (c). Moreover, that deadline does not apply until five years after the beneficiary: (a) attains the age of majority; (b) knows of the existence of the trust; or (c) has knowledge that he is or was a beneficiary. N.J.S.A. § 3B:31-74 (c). In other words, the statute of limitations is tolled by these circumstances.
The statute of limitations is inapplicable to “an action to recover for fraud or misrepresentation in the report.” N.J.S.A. § 3B:31-74(e).
- Adequacy of report
Again, whether a report “adequately discloses” a potential claim under N.J.S.A. 3B:31-74 will be controversial and unique to each case.
The application of similar statutes in other states may be instructive for how the New Jersey UTC will be interpreted. Some of those states have not actually have adopted the UTC but still have similar statutes dealing with these notice issues. For instance, numerous states have statutory provisions concerning limitations on actions against trustees which mirror the New Jersey UTC provision. E.g. O.C.G.A. § 53-12-307. While some of these statutes contain commentary or expansive provisions regarding what disclosures are presumptively adequate to trigger the limitations, Code of Ala. § 19-3B-1005; Rev. Code Wash. (ARCW) § 11.96A.070, most merely contain non-specific language similar to the New Jersey provision, e.g. Tenn. Code Ann. § 35-15-1005.
In turn, some of these statutes have produced cases which can serve as examples of what constitutes adequate disclosure, at least under the facts presented. See Ducharme v. Ducharme, 305 Mich. App. 1, 9 (Mich. Ct. App. 2014) (noting that an annual accounting contained “several items that form[ed] the basis of plaintiff’s complaint” and thus finding adequate disclosure); In re Thomas Lawrence Reeves Irrevocable Trust Under Agreement Dated February 26, 1997, 2015 Del. Ch. LEXIS 130, *21 (Del. Ch. Apr. 29, 2015) (noting that a specific accounting contained adequate disclosures).
Several other recent examples follow:
- Hasty v. Castleberry, 293 Ga. 727, 732, (Ga. 2013)
The Georgia Supreme Court first addressed what constitutes an adequate written report in Hasty v. Castleberry, where a trustee alleged that general correspondence from his accountant to the beneficiary was a report sufficient to trigger the shortened window. Hasty, 293 Ga. at 730. Unlike the New Jersey UTC, the Georgia statute contains a definition of “written report” outside of the section on limitations on actions against trustees. Id. at 732. Specifically, a report from a trustee to a beneficiary is one which includes “the assets, liabilities, receipts, and disbursements of the trust, the acts of the trustee, and the particulars relating to the administration of the trust, including the trust provisions that describe or affect such beneficiary’s interest.” The court applied this definition to “report” in the context of limitations on actions and ultimately concluded that, because the general correspondence letter did not contain the “type of detailed information” necessary to constitute a report, it did not trigger the shortened window for commencing proceedings. Id. at 732.
The inquiry in Hasty ended with the conclusion that the correspondence was not a report. Id. The court never addressed whether a document provided by a trustee could constitute a report but still be insufficient to adequately disclose a potential claim. Id.
- Smith v. SunTrust Bank, 325 Ga. App. 531 (Ga. Ct. App. 2014).
The court considered a trustee’s fraudulent conveyance in which only the non-fraudulent nature of the conveyance was disclosed in a quarterly accounting statement. The court found that the quarterly accounting statement did not meet the definition of a “report” due to its limited scope. Id. at 541. Again, the court did not address whether the statement would otherwise have provided adequate disclosure within the context of the Georgia statutes. Id. However, the court did consider whether the beneficiaries had exercised due diligence in discovering the fraudulent nature of the conveyance and found that the accounting statement was “not a complete disclosure of all material facts relating to the conveyance.” Id.
- Wells Fargo Bank, N.A. v. Cook, 332 Ga. App. 834 (Ga. Ct. App. 2015).
The Georgia Court of Appeals returned to the issue in Wells Fargo Bank, N.A. v. Cook. In that case, the trustee was found not liable for the exhaustion of CRAT assets from the payment of an annuity to the settlors, where regular statements triggered the statute of limitations, there was no evidence of breach of duty, the depletion came from the annuity payments and market conditions, and the trust terms eliminated any claim of a contract to guarantee the annuity payments would last for the lifetime of the settlors.
The court described the detailed information contained within the trust statements:
Among other things, the Trust statements identified the Trust, the trustee, the time period covered by each statement, a breakdown of the investment funds in which the Trust was invested, and a description of every transaction and disbursement made by the trustee during the time period designated in each statement. The statements included an account summary for the designated time period and information regarding the gains and losses on investments made by the Trust, income and dividend receipts, current yields of the investment funds, and beginning and ending balances. These statements consistently showed the value of the Trust declining over time.
The court found that the these disclosures “inform[ed] the plaintiffs of potential claims” and then concluded that, under the circumstances, the trust statements constituted reports. Id.
- Meyers v. First Tenn. Bank, N.A., 2016 Tenn. App. LEXIS 371, *24 (Tenn. Ct. App. May 27, 2016).
The Court of Appeals of Tennessee cited to an Advisory Commission comment on the Duty to Inform section of the Tennessee Trust Code – based on the national UTC — which states that the
Trust Code employs the term “report” instead of “accounting” in order to negate any inference that the report must be prepared in any particular format or with a high degree of formality. The reporting requirement might even be satisfied by providing the beneficiaries with copies of the trust’s income tax returns and monthly brokerage account statements if the information on those returns and statements is complete and sufficiently clear. The key factor is not the format chosen but whether the report provides the beneficiaries with the information necessary to protect their interests. . . .
Meyers, 2016 Tenn. App. LEXIS 371 at *24 (citing Tenn. Code Ann. § 35-15-813). Central to the claim in Meyers was whether the trustee had mismanaged trust real estate by failing to inspect it. Id. at *5–7. Thus, the court was willing to consider emails, “phone calls, faxes, letters, and meetings between the parties” to determine whether the trustee provided the beneficiaries with a report sufficient to trigger the shortened window for commencing proceedings. Id. at *26–45. Most of the trustee’s alleged “reports” failed due to technical deficiencies, such as who had sent/received them, but the court discounted two of the reports primarily because it was not clear that they “disclosed facts indicating the existence of a potential claim for breach of trust.” Id.
In one piece of correspondence, the trustee initially admitted that it had no record of inspecting the trust property, but later claimed that it had in fact made inspections and kept reports of those inspections. Id. at *36. In another letter, the trustee claimed to have met its obligations through annual inspections of the property, but had not found certain issues that became apparent after the tenants had vacated. Id. at *39–43. Both times, the court found that it was unclear if the disclosures indicated the existence of a potential claim. Id. at *37, *42–44. For the latter disclosure, the court emphasized that the trustee’s assurance that it had “met its obligations” made it less likely that a beneficiary would be put on notice of a potential claim. Id. at *42.
- Other defenses
Aside from this significant development as to time limits, the NJ UTC confirms other defenses available to the trustee. For example, under N.J.S.A. § 3B:31-75, a trustee who acts in reasonable reliance on the trust terms is not liable for a breach of trust to the extent the breach resulted from that reliance.
N.J.S.A. § 3B:31-76 further insulates a trustee from liability for a breach due to the happening of an event — such as marriage or death — where the trustee has exercised care to ascertain such happening, as in Section 1007 of the national UTC.
The NJ UTC also provides for the limited enforceability of an exculpatory clause, in a manner identical to Section 1008 of the UTC. N.J.S.A. § 3B:31-77. Such a clause does not relieve a trustee from liability for bad faith or reckless indifference to the purposes of the trust or the interests of the beneficiaries. N.J.S.A. § 3B:31-77(a). Moreover, the clause is invalid if it is drafted by or caused to be drafted by the trustee – a situation defined as “abuse” of the fiduciary relationship – unless the trustee proves the clause is fair and was adequately disclosed to the settlor. N.J.S.A. § 3B:31-77(b).
Consent, release and ratification are also valid defenses to trustee liability under the NJ UTC, exactly as set forth in Section 1009 of the model UTC. N.J.S.A. § 3B:31-78. Note, however, that consent, release and ratification require “capacity” and are not valid if “induced by improper conduct of the trustee” or if the beneficiary “did not know of the beneficiary’s rights or of the material facts relating to the breach.” N.J.S.A. § 3B:31-78(b). This standard seems more stringent than the “adequate disclosure” standard that triggers a six month limitation on actions. See N.J.S.A. § 3B:31-74 (b).
A trustee’s delegation of authority to a third party is a valid defense to liability for breach, but the NJ version is slightly different than provided under the standard UTC. Under N.J.S.A. § 3B:31-59, a trustee is insulated from liability for a breach by his agent where, as in the UTC, he prudently delegates his authority, but the New Jersey version adds the requirements that the trustee establish in writing the scope of the delegation of authority, and, moreover, that he provide “reasonable written notice” to qualified beneficiaries on each occasion upon which he delegates duties. N.J.S.A. § 3B:31-60 (b) (emphasis added).
- Trustee Defenses: Restatement and New Jersey Common Law
The Second Restatement and the most recent Tentative Draft of the Third Restatement allow a trustee to defend claims of breach of trust by invoking an exculpatory clause in the trust instrument. According to the Third Restatement, such a clause is enforceable to the extent its inclusion was not due to the trustee’s abuse of his relationship to the settlor. Restatement (Third) of Trusts § 96(1) (Tentative Draft No. 5 2009); see Restatement (Second) of Trusts § 222 (1959). An exculpatory clause is enforceable except to the extent that it purports to relieve the trustee “of liability for a breach of trust committed in bad faith or with indifference to the fiduciary duties of the trustee, the terms or purposes of the trust, or the interests of the beneficiaries, or … of accountability for profits derived from a breach of trust.” Restatement (Third) of Trusts §96(1) (Tentative Draft No. 5 2009); see Restatement (Second) of Trusts § 222 (1959).
Moreover, a beneficiary who consented to conduct by the trustee, ratified such conduct, or released the trustee from liability for an act or omission constituting a breach of trust cannot hold the trustee liable for that breach, so long as the beneficiary: had the capacity to do so; knew his rights and all the material facts relating to the breach; and was not induced by improper conduct of the trustee. Restatement (Third) of Trusts § 97 (Tentative Draft No. 5 2009); see Restatement (Second) of Trusts §§ 216-18 (1959).
As discussed earlier, a trustee is relieved of liability for his agent’s fiduciary breach so long as the trustee’s delegation of authority to that agent was prudent. Id. at § 80 cmt. g. Further, where a trustee is obligated to follow the instructions of a party who has power to direct the trust, it is a defense to a claim of breach of trust that the trustee was required to, and in fact, followed, the directions of that person. Restatement (Third) of Trusts § 75 cmt. b. (2009). However, a trustee in that situation is not insulated from liability to the extent the attempted exercise of power is contrary to the terms of trust or to the extent the trustee knows or has reason to know the directed actions would constitute a breach of fiduciary duty. Id. at § 75.
Finally, a trustee may defend a claim of breach of trust by asserting that a claim is barred by the doctrine of laches or a statute of limitations. Restatement (Third) of Trusts § 98 (Tentative Draft No. 5 2009); see Restatement (Second) of Trusts § 219 (1959).
New Jersey common law generally follows the Second Restatement in its approach to the law of trusts. Indeed, in New Jersey,
[t]he standard for fiduciaries that is gleaned from the common law and the Restatement (Second) of Trusts is that of reasonableness, i.e. such care and skill as a person of ordinary prudence would exercise in dealing with his own property. Whether the duty has been satisfied depends upon the circumstances as they reasonably appear at the time and not at some subsequent time when the conduct is called into question. See Restatement (Second) of Trusts § 174 comment b. (1959).
Mackenzie v. Reg’l Principals Ass’n, 377 N.J. Super. 252, 264 (Ch. Div. 2004); Branch v. White, 99 N.J. Super. 295, 295 (App. Div 1968) certif. denied, 51 N.J. 464 (1968)) (similarly providing that New Jersey follows the Restatement). Thus, the defenses to claims of breach of trust in New Jersey are generally the same as those discussed in the Restatement.
Most equitable defenses are also available. For example, laches was applied in favor of a trustee in Alper v. Simon, No. A-2016-11T4, N.J. Super Unpub. LEXIS 1536 (N.J. Super Ct. App. Div. June 25, 2014).