Cary A. Lind, P.C. - Arlington Heights Probate Attorney

FIDUCIARY DUTIES AND BREACH - WHEN TRUSTEES AND REPRESENTATIVES GO BAD - PART 3

Cary A. Lind, P.C. - Arlington Heights Probate Attorney

FIDUCIARY DUTIES AND BREACH - WHEN TRUSTEES AND REPRESENTATIVES GO BAD - PART 3

Remedies for Breach of Fiduciary Duty

There are several remedies a court can impose for breach of fiduciary duty, depending on the nature of the conduct, the financial impact on a beneficiary, and other factors. These will be discussed only generally, because the facts of each case will play a large part in the outcome. The remedies are not exclusive, and more than one may be imposed in any given situation.

Surcharge

Surcharge is a word no fiduciary ever wants to hear. A surcharge requires a fiduciary to pay money to the trust or estate. A surcharge often results from matters disclosed in an accounting and can be based upon fees, expenses, or expenditures disallowed or improperly made, upon financial losses, or upon any other action making it necessary to put the assets back to the condition they should have been had the fiduciary performed properly. In most cases, a fiduciary has no direct interest in the fiduciary assets. Imposing a surcharge means that the fiduciary must pay from his own money. That result can wipe out any or all benefits the fiduciary received and may even cost the fiduciary more than he is paid.

In the case described in Part 1, the ultimate losses to the client's trust totalled almost $300,000.00 out of the total trust assets of almost $800,000.00, approximately 37% of its value. We are now seeking a surcharge to recover those losses plus interest and dividends that would have been earned on the lost assets and appreciation that would have accrued on those assets.

Denial of Fees

A fiduciary is normally entitled charge for his services and to pay his attorneys for representing him. When a fiduciary's actions are improper or do not benefit the trust or estate, a court can deny the fiduciary the right to receive fees or to pay his attorney fees from the fiduciary assets. That result is a variation on a surcharge in that the fiduciary may have to make the trust or estate whole by repaying any amounts improperly paid from the assets for those fees. The fiduciary may still be liable to his attorneys for fees. Ultimately, the fiduciary and his attorneys may have to decide who will not be fully paid.

A fiduciary may not improperly seek to retain his trusteeship because of fees to be earned or for other reasons that constitute a breach of the fiduciary duty of loyalty. In NC Illinois Trust Company vs. Madigan, 351 Ill.App.3d 311, 812 N.E.2d 1038, 286 Ill.Dec. 23 (Ill.App. 2 Dist. 2004), the beneficiaries of a trust sought leave to terminate the trust. The trustee was the only party who resisted the termination and appealed. The essence of the Court's ruling was that trustee bank had allowed its own interests to take priority over the best interests of the beneficiaries, a clear breach of fiduciary duty.

National City was therefore the only party interested in perpetuating the trust, and it could be said that its appeal involved considerations of interest primarily to itself.

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Here, if National City had not sought a stay, the trust would have been dissolved immediately and National City could certainly not have received compensation for administering it thereafter. The stay had the effect of postponing this occurrence but should not be allowed to impair the ultimate effect of the judgment. To accept National City's argument and allow it compensation would remove yet more money from the trust that the judgment was meant to dissolve. We conclude that the mere fact that the judgment was stayed does not require that National City receive the compensation it seeks.

Removal

Removal of a fiduciary is the most drastic remedy. Removal usually results from an intentional violation of fiduciary duty or from other wrongful conduct, especially where the wrongful conduct is likely to continue without removal of the fiduciary. However, even removal does not avoid a fiduciary's duty to account, to pay a surcharge, or to otherwise carry out his duties for the period of his tenure as trustee.

Attorney Fees and Punitive Damages

Illinois generally adheres to the American rule, in which each party is responsible for his or her own attorney fees. However, Illinois law provides that upon a finding of breach of fiduciary duty, the court can award the beneficiary attorneys' fees from the fiduciary even in the absence of an award of punitive damages. A beneficiary will usually be entitled to pre-judgment interest or similar remedy for lost earnings based upon any breach. A beneficiary may be awarded punitive damages upon proper proof. The purpose of punitive damages is clearly stated to punish the fiduciary for prohibited conduct.

Individual vs. Institutional Fiduciaries

In light of all of the above, is it better to choose an individual or institutional fiduciary?

  • Cost. An institutional fiduciary will almost certainly cost more than an individual fiduciary, because the institutional fiduciary will usually charge based upon a percentage of the value of the assets administered.

  • Expertise. An institutional fiduciary will probably have greater expertise. However, a fiduciary does not have to have expertise himself, and he can hire an attorney, accountant, investment advisor, and any others necessary to provide any missing expertise.

  • Mistakes. Even institutional fiduciaries make errors, and some of them can be very costly. To an institutional trustee, a trust or estate is only one of many. To an individual trustee, the trust or estate may be his only one and will usually receive top attention and priority. On the other hand an institutional trustee will likely have insurance to cover losses. The same may not be true of an individual trustee.

  • Relationship with beneficiaries. An individual may actually do a better job as fiduciary because of his personal relationship with the beneficiaries, even in a family situation. However, an individual may not have the objectivity necessary to avoid personal bias or other issues that may get in the way of proper performance.

  • Disputes. An institutional fiduciary will vigorously defend itself in disputes. It will most likely hire a big law firm at a premium rate to protect itself against any liability of any kind. That may impede a beneficiary's ability to carry out a meaningful challenge to improper actions by the fiduciary, especially where the beneficiary will not automatically recover his or her legal fees.

There are other factors, and each situation must be separately analyzed. Ultimately, a testator or grantor should balance the expected performance of each kind of fiduciary against the cost. I almost always recommend naming an individual trustee rather than an institutional trustee based upon the factors noted above. With larger estates and trusts, however, the answer may be the opposite, especially where there is a need for greater expertise.

©2007 by Cary A. Lind, all rights reserved.

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Cary A. Lind, P.C., is in Arlington Heights, Illinois, and serves clients in places including Arlington Heights, Prospect Heights, Schaumburg, Park Ridge, Rolling Meadows, Barrington, Buffalo Grove, Mount Prospect, Palatine, Wheeling, Elk Grove Village, Cook County, Lake County and DuPage County.

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