Section 1005(a) of the Uniform Trust Code (UTC) provides that once a trustee sends a trust beneficiary a report that “adequately discloses” the existence of a potential claim for breach of trust, the beneficiary has one year to commence a proceeding against the trustee for said breach of trust. The report must inform the beneficiary “of the time allowed for commencing a proceeding.” A literal reading of the section suggests that this 1-year statute of limitations runs from the date the report is sent. The accompanying comment, on the other hand, indicates that the beneficiary needs to have been “furnished” the report. In any case, what if such a report is never sent to the beneficiary? To make the fact pattern even more extreme, what if the beneficiary has no idea that he is, or ever was, a beneficiary?
Ultimate Repose Provision
The UTC has a 5-year “ultimate repose” provision that could possibly take the trustee off the hook. It’s Section 1005(c), which provides that a trust beneficiary has five years to commence an action against the trustee for breach of trust. Any of the following events can set the clock running: (1) the removal, resignation or death of the trustee; (2) termination of the beneficiary’s interest; and (3) termination of the trust itself. At the expiration of the 5-year period, the trustee is home free, even if the beneficiary has never had even an inkling of the applicable law and facts. In other words, the statute “applies to cases in which the trustee has failed to report to the beneficiaries or the report did not meet … [the UTC’s] … disclosure requirements…” Is Section 1005(c) as trustee-friendly as a literal reading might suggest? Maybe—but maybe not.
It would be hard to conjure up a more radical departure from traditional principles of law and equity than Section 1005(c), at least as parsed in isolation. One of the crown jewels of the Anglo-American legal tradition is the equitable doctrine of laches as applied to breaches of trust. For centuries, it was settled law that a beneficiary had a reasonable time after obtaining a subjective understanding of the law and facts applicable to a breach of trust to put up or shut up.1 If a fully informed beneficiary sat on his rights for an unreasonable period of time, the trustee was off the hook.
The doctrine of laches in its classic manifestation strove to be fair to all parties. The trustee had legal title to the subject property and was privy to all the relevant facts. All fiduciary duties ran from the trustee to the beneficiary. Few duties of any kind ran from the beneficiary to the trustee. The beneficiary, as a practical matter, being at the mercy of the trustee, generally had no choice but to rely on the trustee’s good faith. But, once the beneficiary became aware of and subjectively understood the law and facts applicable to a particular breach, the playing field became more or less level. The trustee too was entitled to some deference. He shouldn’t have to endure a sword of Damocles, namely the threat of litigation, hanging over his head forever.
And, then, the legislatures began enacting statutes of limitation that were applicable to breaches of trust. These statutes merely tweaked the laches doctrine.2 The core of the doctrine remained in place, namely that a beneficiary must acquire, by whatever means, a subjective understanding of the applicable law and facts pertaining to the breach of trust before any balls ended up in his court. But, once such an understanding had been reached, the beneficiary then had three years, or whatever, to act. Not a bad solution. While doing minimal violence to the fiduciary principle, such statutes managed to afford trustees a clear path to closure—a win-win solution for all parties.
Now we have the UTC’s 5-year statute of ultimate repose, which, on its face, seems to have perverse incentives that can only do terrible harm to the fiduciary principle. Distributions of trust principal were made to the wrong person? No problem. Keep quiet until the 5-year period has run, and then the intended beneficiary will be locked out of the courthouse, allowing the trustee to go on his merry way. However, there are three exceptions to the statute’s applicability that suggest that the trustee may not necessarily be home free. As Justice John Dyson Heydon of the High Court of Australia is wont to say: “[t]he silent waters of equity run deep—often too deep for legislation to obstruct.”3 The three exceptions are: (1) fraud; (2) unjust enrichment; and (3) trust reformation.
The UTC takes no position as to whether fraudulent acts committed by the trustee incident to a breach of trust will cause a tolling of the 5-year ultimate repose provision:
This section doesn’t specifically provide that the statutes of limitations under this section [Section 1005] are tolled for fraud or other misdeeds, the drafters preferring to leave the resolution of this question to other law of the state.4
If there’s a fraud exception, then it’s tailor-made for the situation in which the trustee knows that he’s misdelivered the trust property, but keeps quiet about it. Every act he takes subsequent to acquiring this knowledge is an act of fraud perpetrated against the rightful beneficiary. Moreover, one can expect that it won’t be long before some court broadens the exception to encompass equitable constructive fraud.5 The trustee should have known that he’d misdelivered the trust property and should have so apprised the rightful beneficiary. At the point when the trustee knew or should have known of the misdelivery, the statute of repose is tolled.
The fraud exception can place stress on the trustee-trust counsel fiduciary relationship (see “The Dark Side,” p. 54).
Then, there’s the traditional substantive equitable remedy of restitution for the wrong of unjust enrichment.6 If someone has no basis in law or equity for having the legal title to an item of property, that person is unjustly enriched and can be made to transfer title to the person who lawfully should have it.7 If one takes title to property due to someone’s fraud, duress, undue influence or mistake, one is obliged to make restitution to the rightful owner. This applies even if one innocently acquires the title by mistake, such as by a trustee misdelivering the trust property. The UTC’s repose provision applies to actions against trustees for breaches of trust. It doesn’t apply to equitable restitution actions designed to remedy unjust enrichment; nor, should it apply to actions to recover the fees a trustee takes for perpetrating a material breach of trust.
Section 1005(c) is limited to breach of trust actions. It doesn’t regulate trust reformation actions. Presumably, trust reformation actions are subject to traditional laches principles. If that’s the case, then it may be possible to structure a trust reformation action as a quasi-breach-of-trust action that’s exempt from the section’s application.
The UTC has so expanded the equitable doctrine of reformation as to now be virtually open-ended:
The court may reform the terms of a trust, even if unambiguous, to conform the terms to the settlor’s intention if it is proved by clear and
convincing evidence what the settlor’s intention was and that the terms of the trust were affected by a mistake of fact or law, whether in expression or inducement.8
At minimum, a trustee who’s breached his duty can be compelled, via a creatively structured equitable reformation action, to render an equitable accounting, forego future compensation and leave office.
1. See generally Charles E. Rounds, Jr. and Charles E. Rounds, III, Loring and Rounds: A Trustee’s Handbook, Section 7.1.2 (2013) (laches and statutes of limitations that partially codify laches doctrine); Section 7.1.1.
2. Ibid., Section 7.1.2.
3. The Hon. Justice John Dyson Heydon, A.C., “Does Statutory Reform Stultify Trusts Law Analysis?” 6 Tr. Q. Rev., Issue 3, at p. 28 (2008).
4. Uniform Trust Code (UTC) Section 1005, cmt.
5. Supra note 1, Section 8.15.60 (constructive fraud).
6. Ibid., Section 184.108.40.206 (restitution).
7. Ibid., Section 8.15.78 (unjust enrichment).
8. UTC Section 415.