Fiduciary Duties of Trustees

What are the duties of a trustee to a trust and its beneficiaries, particularly regarding investment and financial matters?

This article examines the scope and nature of the duties of a trustee to a trust and its beneficiaries under Arizona law, particularly regarding investment and financial matters charged to the trustee’s responsibility.

The Duties of a Trustee

A trustee has a fiduciary relationship with the beneficiaries of a trust.  Restatement (Second) of Trusts Section 171 cmt. a (a trustee “stands in a fiduciary relationship to the beneficiaries of the trust and therefore is under a duty personally to perform the responsibilities of the trusteeship except as it would be prudent, under the circumstances, to delegate to agents the making of decisions or the performance of acts of administration.”). The duties of a trustee arising out of this fiduciary relationship flow from “the special nature of the relation between trustee and beneficiary” and not from contract law.  In re Naarden Trust, 195 Ariz. 526, 530, 990 P.2d 1085, 1089 (Ct. App. 1999); see also Ariz. Tile, L.L.C. v. Berger, 224 P.3d 988, 996 (Ariz. Ct. App. 2010); Schoneberger v. Oelze, 208 Ariz. 591, 592, 96 P.3d 1078, 1079 (App. 2004) (holding a trust beneficiary not required to arbitrate as a trust is not a written contract requiring arbitration); Restatement (Second) of Trusts Section 169 cmt. c (“Although the trustee by accepting the office of trustee subjects himself to the duties of administration, his duties are not contractual in nature.”).

The Arizona Trust Code (the “Code”), modeled on the Uniform Trust Code (2005), governs the duties of a trustee.  See A.R.S. Section 14-10101, et seq. (2010).  The terms of a specific trust, however, prevail over the Code with certain exceptions.  A.R.S. Section 14-10105(B).  Most notably, the Code exclusively governs the duty of a trustee to act in good faith and the requirement that a trust must be for the benefit of the beneficiaries.  Id.

Duty of Care

In administering a trust, a trustee can exercise all powers given by the terms of the trust and any powers necessary to accomplish the purposes of the trust that are not prohibited by the trust’s terms.  See A.R.S. Section 14-10815(A); see also Restatement (Second) of Trusts Section 186 (trustee can “properly exercise such powers and only such powers as (a) are conferred upon him in specific words by the terms of the trust, or (b) are necessary or appropriate to carry out the purposes of the trust and are not forbidden by the terms of the trust.”); Restatement (Third) of Trusts Section 85 (2003).  A.R.S. Section 14-10816 gives a non-exclusive list of specific powers of a trustee, including the power to acquire property, borrow money, mortgage trust property, loan trust property, enter into contracts and prosecute and/or defend actions on behalf of the trust.  A trustee selected because of specialized skills has a duty to utilize such skills.  A.R.S. Section 14-10806 (a “trustee who has special skills or expertise, or who is named trustee in reliance on the trustee’s representation that the trustee has special skills or expertise, shall use those special skills or expertise.”); Restatement (Third) of Trusts Section 77(3) (if a “trustee possesses, or procured appointment by purporting to possess, special facilities or greater skill than that of a person of ordinary prudence, the trustee has a duty to use such facilities or skill.”).  Additionally, if a trustee wishes to delegate responsibilities to others who have specialized skills, the trustee must monitor the person delegated with such responsibilities.  A.R.S. Section 14-10807(A).

The duty of care requires a trustee administer a trust in good faith, exercising its powers as a prudent person would with “reasonable care, skill and caution.”  A.R.S. Section 14-10801 (“acceptance of a trusteeship, the trustee shall administer the trust in good faith, in accordance with its terms and purposes and the interests of the beneficiaries and in accordance with this chapter”); see also Lane Title & Trust Co. v. Brannon, 103 Ariz. 272, 278, 440 P.2d 105, 111 (1968) (holding trustee breached fiduciary duties and noting a trustee “must in good faith protect the interests of all beneficiaries, and exercise the care and diligence which an ordinary prudent person under the circumstances would exercise in the management of his own affairs.”); A.R.S. Section 14-10804 (a “trustee shall administer the trust as a prudent person would, by considering the purposes, terms, distributional requirements and other circumstances of the trust.  In satisfying this standard, the trustee shall exercise reasonable care, skill and caution.”);  see also Restatement (Second) of Trusts Section 174 (same); Restatement (Third) of Trusts Section 77 (same).  For example, a trustee breaches the “prudent man” standard when it delegates responsibilities that it should have performed.  Shriners Hosp. for Crippled Children v. Gardiner, 152 Ariz. 527, 528, 733 P.2d 1110, 1111 (1987) (trustee breached duty when she allowed a first alternate trustee to have all investment control).  Factors a trustee needs to take into account when prudently exercising its powers are:

the terms and purposes of the trust, the value and nature of the trust estate, the likely duration of the trust, and the amount and timing of its distribution requirements, along with potentially associated needs for liquidity, stability of income flow, and preservation of (or growth in) the purchasing power of capital.  Inevitably related to some of the foregoing, insofar as relevant to the trust purposes, are the needs, independent resources, and other personal and financial circumstances and concerns or goals of the various beneficiaries.

Restatement (Third) of Trusts Section 77 cmt. b (1).  When evaluating whether an act was prudent, a trustee is judged based on the circumstances at the time of the decision, and not with the benefit of hindsight.  Restatement (Second) of Trusts Section 174 cmt. b (“Whether the trustee is prudent in the doing of an act depends upon the circumstances as they reasonably appear to him at the time when he does the act and not at some subsequent time when his conduct is called in question.”); Restatement (Third) of Trusts Section 77 cmt. a (“The test of prudence is one of conduct not of performance.  The trustee’s conduct, and compliance with other fiduciary standards, is to be judged as of the time of the decision or action in question.”).

A trustee who manages and invests trust assets must do so under the “prudent investor” rule.  A.R.S. Section 14-10901(A); Restatement (Third) of Trusts SectionSection 90, 227 (discussing the general standard of a prudent investor).  In acting as a “prudent investor,” a trustee must make decisions by “considering the purposes, terms, distribution requirements and other circumstances of the trust.  In satisfying this standard the trustee shall exercise reasonable care, skill and caution.”  A.R.S. Section 14-10902(A).  A trustee’s investment decisions are not judged in isolation; investment decisions are judged with regard to a trust portfolio in its entirety.  A.R.S. Section 14-10902(B) (“A trustee’s investment and management decisions respecting individual assets shall not be evaluated in isolation but in the context of the trust portfolio as a whole and as part of an overall investment strategy having risk and return objectives reasonably suited to the trust.”).  There is a presumption that the trustee should diversify investments.  A.R.S. Section 14-10903 (“A trustee shall diversify the investments of the trust unless the trustee reasonably determines that, because of special circumstances, the purposes of the trust are better served without diversifying.”).  Related to the “prudent investor” rule is the requirement that a trustee must take reasonable steps to protect trust property and make it productive.  A.R.S. Section 14-10809 (“A trustee shall take reasonable steps to take control of and protect the trust property.”); see also Ross v. Bartz, 158 Ariz. 305, 307, 762 P.2d 592, 594 (Ct. App. 1988) (in affirming granting of a new trial, noting that a lawyer acting as trustee had “duty to take and keep control of the trust property and to use reasonable care and skill to preserve the trust property”); Restatement (Second) of Trusts SectionSection 175 (“The trustee is under a duty to the beneficiary to take reasonable steps to take and keep control of the trust property.”), 176 (“The trustee is under a duty to the beneficiary to use reasonable care and skill to preserve the trust property.”), 181 (“The trustee is under a duty to the beneficiaries to use reasonable care and skill to make the trust property productive in a manner that is consistent with the fiduciary duties of caution and impartiality.”).  Trustees also have the duty to ensure that trust assets are not squandered.  See In re Matthew W.T. Goodness Trust, 2009 R.I. Super. LEXIS 54, at *17-18 (May 14, 2009) (a “trustee must not waste trust property”); Weis-Buy Farms, Inc. v. Global Unlimited Mktg. Solutions, Inc., 2008 U.S. Dist. LEXIS 39538, at *6 (S.D. Fla. May 8, 2008) (held violation of a trustee’s duties to allow trust assets to dissipate).

Duty of Loyalty

A trustee also owes a duty of loyalty to a trust’s beneficiaries.  A.R.S. Section 14-10802(A) (“A trustee shall administer the trust solely in the interests of the beneficiaries.”).  This is considered the “most fundamental duty owed by the trustee to the beneficiaries of the trust. . . .”  Austin Wakeman Scott & William Franklin Fratcher, The Law of Trusts Section 170 (4th ed. 1987).  The duty of loyalty is defined as the duty of a trustee “to administer the trust solely in the interest of the beneficiaries. . . [and] to deal fairly and to communicate to the beneficiary all material facts the trustee knows or should know in connection with the transaction.”  Restatement (Second) of Trusts Section 170; see also Restatement (Third) of Trusts Section 78.  The duty of loyalty is stricter in the trustee-beneficiary relationship than in other fiduciary relationships.  Restatement (Third) of Trusts Section 78 cmt. a. “Except in discrete circumstances, the trustee is strictly prohibited from engaging in transactions that involve self-dealing or that otherwise involve or create a conflict between the trustee’s fiduciary duties and personal interests.” Restatement (Third) of Trusts Section 78 (2); see also Davis v. Zlatos, 211 Ariz. 519, 527, 123 P.3d 1156, 1164 (Ct. App. 2005) (trustee of an elderly woman violated fiduciary duty by taking money and property from her without encouraging her to get outside advice).

Notable Other Duties

A trustee must enforce a claim of the trust and defend the trust from claims brought against it.  A.R.S. Section 14-10816(14); Restatement (Second) of Trusts SectionSection 177 (“The trustee is under a duty to the beneficiary to take reasonable steps to realize on claims which he holds in trust.”), 178 (“The trustee is under a duty to the beneficiary to defend actions which may result in a loss to the trust estate, unless under all the circumstances it is reasonable not to make such defense.”).  A trustee also has a duty to account and render information to beneficiaries.  A.R.S. SectionSection 14-10810 (“A trustee shall keep adequate records of the administration of the trust.”), 14-10813 (“Unless the trust instrument provides otherwise, a trustee shall keep the qualified beneficiaries of the trust reasonably informed about the administration of the trust and of the material facts necessary for them to protect their interests.”); see also In re Estate of Schuster, 35 Ariz. 457, 469, 281 P. 38, 43 (1929) (“In rendering an account, the burden is on the trustee to make a proper and satisfactory accounting of the funds coming into his bands, and, if he does not, every intendment is against him.”); Restatement (Second) of Trusts SectionSection 172 (“The trustee is under a duty to the beneficiary to keep and render clear and accurate accounts with respect to the administration of the trust.”), 173; Restatement (Third) of Trusts Section83 (“A trustee has a duty to maintain clear, complete, and accurate books and records regarding the trust property and the administration of the trust, and, at reasonable intervals on request, to provide beneficiaries with reports or accountings.”).

Prudent Man Rule for Investments

A.R.S. Section 14-10901 provides “a trustee who invests and manages trust assets owes a duty to the beneficiaries of the trust to comply with the prudent investor rule…[t]he prudent investor rule is a default rule and may be expanded, restricted, eliminated or otherwise altered by the provisions of a trust.”  A.R.S. Section 14-10902 sets forth the “prudent investor rule”:

A. A trustee shall invest and manage trust assets as a prudent investor would by considering the purposes, terms, distribution requirements and other circumstances of the trust. In satisfying this standard the trustee shall exercise reasonable care, skill and caution.

B. A trustee’s investment and management decisions respecting individual assets shall not be evaluated in isolation but in the context of the trust portfolio as a whole and as a part of an overall investment strategy having risk and return objectives reasonably suited to the trust.

C. Among circumstances that a trustee shall consider in investing and managing trust assets are any of the following that are relevant to the trust or its beneficiaries:

1. General economic conditions.

2. The possible effect of inflation or deflation.

3. The expected tax consequences of investment decisions or strategies.

4. The role that each investment or course of action plays within the overall trust portfolio, which may include financial assets, interests in closely held enterprises, specialty assets, alternative investments, tangible and intangible personal property and real property.

5. The expected total return from income and the appreciation of capital.

6. Other resources of the beneficiaries.

7. Needs for liquidity, regularity of income and preservation or appreciation of capital.

8. An asset’s special relationship or special value, if any, to the purposes of the trust or to one or more of the beneficiaries.

D. A trustee shall make a reasonable effort to verify facts relevant to the investment and management of trust

assets.

E. A trustee may invest in any kind of property or type of investment consistent with the standards of this article.

See also Stevens v. Nat’l City Bank, 544 N.E.2d 612, 617 (Ohio 1989) (“a trustee may not use its discretionary investment powers fraudulently, or in bad faith . . . [f]urthermore, the trustee has a duty to invest idle trust funds so that they will be productive of income.”); In re Inter Vivos Trust of Mendenhall, 398 A.2d 951, 952 (Pa. 1979) (“Generally, a trustee who is authorized to retain investments need only exercise the skill and judgment which a prudent person, under similar circumstances, would exercise in connection with the management of his or her own estate.”).

The Restatement (Third) of Trusts Section 90 cmt. f recognizes five principles of the “prudent investor” rule: (1) prudent investors prefer low amounts of risk and cost for a certain rate of return; (2) no individual investment is per se a violation of the “prudent investor” rule; (3) “diversification is fundamental to the management of risk;” (4) a passive, prudent investor can increase its expected rate of return by increasing risk if a trust is able to handle such a risk for a period of time; and (5) varying from diversified investments may be warranted under “special circumstances or opportunities.”  See Stevens, 544 N.E.2d at 617-18 (“it is well established that a trustee . . . is under a duty to the beneficiaries to distribute the risk of loss within the trust by prudent diversification . . . [a] breach of such duty may render the trustee liable for any loss sustained by the failure to diversify.”); First Ala. Bank of Huntsville, N.A. v. Spragins, 515 So.2d 962, 964 (Ala. 1987) (affirming judgment of compensatory damages and interest when bank invested the majority of trust property in its own stock).

A trustee’s duties under the “prudent investor” rule not only apply to the initial investment decision, but also require a trustee to continually observe and evaluate investments to ensure they are consistent with the purpose and needs of a trust.  Restatement (Third) of Trusts Section 90 cmt. b; see also In re Estate of McCredy, 470 A.2d 585, 594 (Pa. 1983) (“Not only the trustee’s acquisition but also his retention of investments is subject to duties imposed for the benefit of the trust.”).  In determining whether an investment is appropriate for a trust, a trustee should look at the investment’s expected return, risks, marketability, cost, and any unique characteristics.   Restatement (Third) of Trusts Section 90 cmt. k. A trustee is expected to balance the goals of protecting a trust’s principal and giving a trust a reasonable rate of return.  Restatement (Third) of Trusts Section 90 cmt. e.

A trustee is judged under the “prudent investor” rule based on the information available to the trustee at the time of the investment decision, and not with hindsight; “[t]he trustee is not a guarantor of the trust’s investment performance.”  Id.  However, if “a trustee, such as a corporate or professional fiduciary, procured appointment as trustee by expressly or impliedly representing that it possessed greater skill . . . the trustee is liable for a loss that results from failure to make reasonably diligent use of that skill or of those special facilities.”  Restatement (Third) of Trusts Section 90 cmt. d; see also Mendenhall, 398 A.2d at 952 (“However, if the trustee possesses or procures its appointment by representing it has greater skill than that of a person of ordinary prudence, then it is required to exercise such greater skill.”); In re Estate of Beach, 125 Cal. Rptr. 570, 574 (Cal. 1975) (same).

Breach of Duties

“A breach of trust is a violation by the trustee of any duty which as trustee he owes to the beneficiary.”  Restatement (Second) of Trusts Section 201.  In addition to the liability of a natural person for a breach of trust, “[a]ny officer who causes the corporate trustee to commit a breach of trust causing loss to the trust administered by the corporation is personally liable for the loss to the beneficiaries of the trust.”  Seven G, 128 Ariz. at 593, 627 P.2d at 1091; see also Ariz. Tile, LLC, 224 P.3d at 994 (in finding a corporation breached its trust obligations, court concluded “a corporation’s breach of its trust obligation, as imposed by an Arizona statute, can result in the personal liability of a corporate officer or director. . . .”).

The following remedies are available in the case of a breach of trust: (1) compel trustee to perform its duties; (2) enjoin trustee from breaching the trust; (3) compel trustee to redress a breach; (4) order an accounting; (5) appoint a special fiduciary to administer the trust; (6) suspend the trustee; (7) remove the trustee under A.R.S. Section 14-10706; (8) reduce or deny trustee compensation; (9) void trustee’s acts, impose a lien or constructive trust on trust property and recover same; or (10) any other appropriate relief.  A.R.S. Section 14-11001; Restatement (Second) of Trusts Section 199.

Damages are the greater of the amount necessary to restore a trust to its condition prior to the breach or the amount of the profit made by the trustee as a result of the breach.  A.R.S. Section 14-11002(A); Restatement (Second) of Trusts Section 205.  A trustee can be liable to the trust for any profit, even if no breach of trust occurred.  A.R.S. Section 14-11003(A) (“a trustee is accountable to an affected beneficiary for any profit made by the trustee arising from the administration of the trust, even absence a breach of trust. . . .”); Restatement (Second) of Trusts Section 203 (“The trustee is accountable for any profit made by him through or arising out of the administration of the trust, although the profit does not result from a breach of trust.”).  A trustee is not liable, however, for loss of trust property not caused by a breach of trust.  A.R.S. Section 14-11003(B) (“Absent a breach of trust, a trustee is not liable to a beneficiary for a loss or depreciation in the value of trust property or for not having made a profit.”); Restatement (Second) of Trusts Section2 04 (“The trustee is not liable to the beneficiary for a loss or depreciation in value of the trust property, or for a failure to make a profit, not resulting from a breach of trust.”).

A trustee’s duties are to both the beneficiaries of a trust and the trust.

A trustee has duties to the beneficiaries of a trust.   A trustee has a duty of care, discussed in Section I(A) supra, to “in good faith protect the interests of all beneficiaries.”  Lane Title & Trust Co., 103 Ariz. at 278, 440 P.2d at 111; see also In re Trust Estate of Wills, 8 Ariz. App. 591, 595, 449 P.2d 435, 439 (1968) (in finding a trustee did not violate fiduciary duties by refusing to pay out claim by a guardian, stated “[a] trustee, in exercising discretion granted by the terms of the trust instrument, is under a duty to do so in good faith so as to protect the interests of all the beneficiaries of the trust.”).   A trustee also has a duty of loyalty, discussed in Section I(B) supra, “to administer the trust solely in the interest of the beneficiaries. . . [and] to deal fairly and to communicate to the beneficiary all material facts the trustee knows or should know in connection with the transaction.”  Restatement (Second) of Trusts Section 170; Restatement (Third) of Trusts Section 78; A.R.S. Section 14-10802(A); see also Hunt Inv. Co. v. Eliot, 154 Ariz. 357, 363, 742 P.2d 858, 864 (App. 1987) (a trustee “has a legally imposed fiduciary duty to manage the trust assets for the benefit of the primary beneficiaries.”).

A trustee also has duties to the assets of a trust.  A trustee has a duty to “preserve the trust property and make it productive. . . .” Forest Guardians v. Wells, 201 Ariz. 255, 260, 34 P.3d 364, 369 (2001) (remanded based on finding the Commissioner of the Arizona State Land Department has fiduciary duty to consider bids and determine whether they are best for the trust corpus and trust beneficiaries); A.R.S. Section 14-10809; Ross, 158 Ariz. at 307, 762 P.2d at 594; Restatement (Second) of Trusts SectionSection  175, 176, 181; see also Cornman Tweedy 560, LLC, v. City of Casa Grande, 213 Ariz. 1, 6, 137 P.3d 309, 314 (Ct. App. 2006) (state land officials have fiduciary duty to protect value of state lands and maximize rate of return of same).

A trustee has a duty to act in the best interests of the beneficiaries and a duty of  full disclosure.

A trustee’s duties include a duty to act in the best interests of the beneficiaries of the Trust.  See State v. U.S. Dep’t of the Interior, 45 F. Supp. 2d 1279, 1283 (D. Utah 1999) (“The legal attributes of such a relationship include a duty on the part of the trustee to act solely in the best interests of the trust beneficiary.”); Yates v. Yates, 354 S.E.2d 800, 801 (S.C. Ct. App. 1987) (“A trustee, as a fiduciary, is under a duty of loyalty to act solely in the best interest of the beneficiary.”); Jarrett v. U.S. Nat’l Bank, 725 P.2d 384, 387 (Or. Ct. App. 1986) (“In the absence of any specific directions, trustees must manage trust property in accordance with the statutory duty of prudent management and in the best interests of the beneficiaries.”); Restatement (Third) of Trusts Section 229 cmt. d (“Thus, the advantages of diversification [in investing] may be offset by other aspects of the fiduciary duty to preserve the trust estate and the general duty, so far as consistent with the purposes of the trust, to serve the best interests of the beneficiaries.”).  A trustee must avoid transactions where considerations other than a beneficiary’s best interests are implicated.  Restatement (Third) of Trusts Section78 cmt. b. (“a trustee must refrain, whether in fiduciary or personal dealings with third parties, from transactions in which it is reasonably foreseeable that the trustee’s future fiduciary conduct might be influenced by considerations other than the best interests of the beneficiaries.”) Courts use this “best interest” standard to evaluate trustee action.  See In re CVR 1997 Irrevocable Trust, 202 Ariz. 174, 178, 42 P.3d 605, 609 (Ct. App. 2002) (“Rather, the court should look at the actual administration of the trust, not just possible conflicts, to determine if the trustee and his agents have acted in the best interests of the trust beneficiaries.”); Porter v. Porter, 726 P.2d 459, 467 (Wash. 1986) (trustee removed when she failed to act in the best interests of the beneficiary); Restatement (Second) of Trusts Section 170 cmt. f (“The court will permit a trustee to purchase trust property only if in its opinion such purchase is for the best interest of the beneficiary.”).

A trustee’s duties also include a duty of full disclosure.  “[A] trustee shall keep the qualified beneficiaries of the trust reasonably informed about the administration of the trust and of the material facts necessary for them to protect their interests.”  A.R.S. Section 14-10813; see also In re Thurston, 199 Ariz. 215, 219, 16 P.3d 776, 780 (Ct. App. 2000) (“In a case involving a fiduciary relationship. . . the fiduciary has a duty to deal fairly, not fraudulently, and to disclose the true facts, not deceive.”); Regnery v. Meyers, 679 N.E.2d 74, 79 (Ill. App. Ct. 1997) (“. . . it is well settled that a trustee owes the highest duty to his beneficiary to fully and completely disclose all material facts relating to dealings with the trust.”); Huie v. Deshazo, 922 S.W.2d 920, 923 (Tex. 1996) (“The trustee’s duty of full disclosure extends to all material facts affecting the beneficiaries’ rights.”); Testa v. Roberts, 542 N.E.2d 654, 659 (Ohio Ct. App. 1988) (“His fiduciary status imposes upon an agent an affirmative duty to inform his principal of all of the facts relating to the subject matter of the agency that affect the principal’s interest.”);  Ball v. Posey, 222 Cal. Rptr. 746, 749 (Cal. Ct. App. 1986) (“[The] duty of a fiduciary embraces the obligation to render a full and fair disclosure to the beneficiary of all facts which materially affect his rights and interests.”); Restatement (Third) of Trusts Section 83 cmt. c (“trustee has affirmative duty to disclose relevant information”).  This duty to disclose exists even if the trustee is acting in a personal capacity.  Restatement (Third) of Trusts Section 78(3) (“Whether acting in a fiduciary or personal capacity, a trustee has a duty in dealing with a beneficiary to deal fairly and to communicate to the beneficiary all material facts the trustee knows or should know in connection with the matter.”).  The California Court of Appeals explains this duty as follows:

A fiduciary must disclose all material facts to his principal concerning the subject of the agency.  It almost goes without saying that the general fiduciary duty owed by the agent to his principal includes the duty to make a full and complete disclosure to him of all material facts which the agent knows and which might influence the principal with respect to the transaction and his willingness to enter into it.

Ziswasser v. Cole & Cowan, Inc., 210 Cal. Rptr. 428, 429-30 (Cal. Ct. App. 1985).  Material facts are defined as “facts which an agent should realize would be likely to affect the judgment of its principals.”  Travagliante v. J.W. Wood Realty Co., 425 S.W.2d 208, 212-13 (Mo. 1968) (corporate real estate broker, as trustee, had duty to disclose all material facts “fully and completely”).  This duty is considered affirmative.  Bright v. Addison, 171 S.W.3d 588, 597 (Tex. App. 2005) (“[A] fiduciary has much more than the traditional obligation not to make any material misrepresentations; he has an affirmative duty to make a full and accurate confession of all his fiduciary activities, transactions, profits, and mistakes.”)  This duty exists regardless of whether the trustee was acting within or outside of the “scope of the trust relationship.”  Restatement (Third) of Torts Section78 cmt. a.

A trustee and a trust beneficiary can also have a confidential relationship, outside of the relationship created by a trust.

A beneficiary can have a confidential relationship with a trustee, which gives rise to fiduciary duties somewhat separate from those created by a trust:

Even though not within the fiduciary relation inherent in trust administration, the trustee’s personal dealings with beneficiaries of the trust may involve a confidential relationship that is sufficiently natural to the parties’ roles in the trust relationship to be recognized by the trust law as an incident or extension of the intense duty of loyalty applicable to trustees.

Restatement (Third) of Trusts Section 78 cmt. g.

“The Supreme Court has held that parties have a duty of disclosure to one another when a fiduciary or agency relationship exists, or when circumstances exist such that one party has placed trust and confidence in the other.”  SEC v. Rauscher Pierce Refsnes, Inc., 17 F. Supp. 2d 985, 992 (D. Ariz. 1998) (holding plaintiff’s claim that financial adviser to the Department of Administration owed a fiduciary duty is a question of fact that cannot be resolved through a motion to dismiss).  Arizona courts similarly recognize that some relationships, while not considered traditional fiduciary relationships, warrant special consideration:

[T]here are other cases where there is just as great intimacy, disclosure of secrets, intrusting of power, and superiority of position in the case of the representative, but where the law has no special designation for the position of the parties.  It cannot be called trust or executorship, and yet it is so similar in its creation and operation that it should have like results.

Condos v. Felder, 92 Ariz. 366, 371, 377 P.2d 305, 308 (1962) (constructive trust imposed on property for illiterate business partner who had been told by his late business partner that the pair held land in joint tenancy with right of survivorship).  A confidential relationship is a relationship:

“arising by reason of kinship between the parties, or professional, business, or social relations that would reasonably lead an ordinarily prudent person in the management of his business affairs to repose that degree of confidence in another which largely results in the substitution of that other’s will for his in material matters involved in the transaction; or where the parties occupy relations, whether legal, natural, or conventional in their origin, in which confidence is naturally inspired, or, in fact, reasonably exists.”

Taeger v. Catholic Family & Cmty. Serv., 196 Ariz. 285, 290, 995 P.2d 721, 725 (Ct. App. 1999) (finding sufficient evidence of a confidential and fiduciary relationship between adoption agency and adoptive parents to survive directed verdict in favor of adoption agency); see also Stewart v. Phoenix Nat’l Bank, 49 Ariz. 34, 44, 64 P.2d 101, 106 (1937) (acknowledging there is no confidential relationship between an ordinary depositor and bank, but recognizing such a relationship where the customer relied on the financial advice of a bank for 23 years); but see Rhoads v. Harvey Publ’n, Inc., 145 Ariz. 142, 149-50, 700 P.2d 840, 847-48 (Ct. App. 1984) (no confidential relationship found between employee and independent contractor despite close and lengthy relationship, but finding “such a relationship could certainly be found if other facts were present.”).  Neither “mere confidence,” “implicit faith,” or “friendly relations,” however, is sufficient to create a confidential relationship.  Taeger, 196 Ariz. at 290, 995 P.2d at 726.    The existence of a confidential relationship is generally a question of fact.  Rhoads, 145 Ariz. at 148, 700 P.2d at 846.

The duties that come with a confidential relationship are similar to that of a fiduciary relationship � each party must act with the “utmost loyalty and integrity,” including making full disclosure of all material facts.  Taeger, 196 Ariz. at 293-94, 995 P.2d at 729-30.  Even if a party to a confidential relationship does not exercise all reasonable care in conducting business, it does not excuse the other party’s non-disclosure.  See Leigh v. Loyd, 74 Ariz. 84, 87, 244 P.2d 356, 358 (1952) (because of confidential relationship between real estate broker and client, client’s failure to read paperwork held not consent to broker’s fraud); Gonzales v. Gonzales, 181 Ariz. 32, 34, 887 P.2d 562, 564 (Ct. App. 1994) (reasonable care need only be exercised in the absence of a confidential relationship).

If a party to a confidential relationship breaches these duties, it can be held liable for constructive fraud.  The elements for constructive fraud in Arizona are as follows: (1) breach of a legal or equitable duty; (2) the law declares fraudulent without regard to guilt or intent of person liable; (3) because the breach “tends to deceive others, violates public or private confidences, or injures public interests.”  Taeger, 196 Ariz. at 294, 995 P.2d at 730.  Unlike with ordinary common law fraud, an injured party need not prove it relied on a misrepresentation, or that it had the right to rely.  Hassenpflug v. Jones, 84 Ariz. 33, 38, 323 P.2d 296, 299 (1958).  Once a confidential relationship is shown, a presumption of constructive fraud arises and a party can defend against an action for constructive fraud by showing with clear and convincing evidence that “they acted with entire fairness and that the other party acted independently, with full knowledge and of his own volition free from undue influence.”  In re Guardianship of Chandos, 18 Ariz. App. 583, 585, 504 P.2d 524, 526 (1972) (confidential relationship found when couple took care of elderly man with limited functioning as his de facto guardian).

Section 14-10105(B) provides:

The terms of a trust prevail over any provision of this chapter except: 1. The requirements for creating a trust.  2. The duty of a trustee to act in good faith and in accordance with the purposes of the trust.  3. The requirement that a trust and its terms be for the benefit of its beneficiaries and that the trust have a purpose that is lawful, not contrary to public policy and possible to achieve.  4. The power of the court to modify or terminate a trust under sections 14-10410, 14-10411, 14-10412, 14-10413, 14-10414, 14-10415 and 14-10416.  5.  The effect of a spendthrift provision and the rights of certain creditors and assignees to reach a trust as provided in article 5 of this chapter.  6.  The power of the court under section 14-10702 to require, dispense with, modify or terminate a bond.  7. The power of the court under section 14-10708, subsection B to adjust a trustee’s compensation specified in the terms of the trust that is unreasonably low or high.  8.  The duty to respond to the request of a qualified beneficiary of an irrevocable trust for trustee’s reports and other information reasonably related to the administration of a trust.  9.  The effect of an exculpatory term under section 14-11008.  10.  The rights under sections 14-11010, 14-11011, 14-11012 and 14-11013 of a person other than a trustee or beneficiary.  11. Periods of limitation for commencing a judicial proceeding.  12.  The power of the court to take action consistent with the settlor’s intent and exercise jurisdiction as may be necessary in the interests of justice.  13. The subject matter jurisdiction of the court and venue for commencing a proceeding as provided in sections 14-10203 and 14-10204.  14.  The notice provisions of section 14-10110, subsection B.

Section14-10815(A) reads:

A trustee, without authorization by the court, may exercise: 1. Powers conferred by the terms of the trust.  2.  Except as limited by the terms of the trust: (a) All powers over the trust property that an unmarried competent owner has over individually owned property. (b) Any other powers appropriate to achieve the proper investment, management and distribution of the trust property.  (c) Any other powers conferred by this chapter.

Section 8, in part, provides:

(1)   In administering a trust, the trustee has, except as limited by statute or the terms of the trust, (a) all of the powers over trust property that a legally competent, unmarried individual has with respect to individually owned property, as well as (b) powers granted by statute or the terms of the trust and (c) powers specifically applicable to trust administration that are recognized in other Sections of this Restatement.

Section 14-10816 enumerates 26 different powers of a trustee: (1) manage trust property; (2) buy or sell trust property; (3) exchange trust property; (4) open accounts with regulated financial service institutions; (5) “[b]orrow money, with or without security, and mortgage or pledge trust property for a period within or extending beyond the duration of the trust;” (6) continue the activities of a business trust; (7) exercise rights as the owner of stocks or other kinds of securities; (8) repair or improve real property; (9) enter into lease agreements; (10) grant options on trust property; (11) insure trust property; (12) abandon trust property; (13) take action with respect to trust property’s violation of environmental law; (14) settle claims; (15) pay taxes; (16) make tax decisions; (17) select method of trustee payment; (18) make loans of trust property; (19) pledge trust property; (20) appoint trustees in other jurisdictions; (21) pay out support to disabled beneficiaries; (22) distribute trust property; (23) engage in alternative dispute resolution relating to questions of trust interpretation or administration; (24) prosecute or defend an action on behalf of or against the trust; (25) execute contracts; (26) wind up the trust.

Section 14-10807(A) provides:

A trustee may delegate duties and powers that a prudent trustee of comparable skills could properly delegate under the circumstances.  The trustee shall exercise reasonable care, skill and caution in: 1. Selecting an agent.  2. Establishing the scope and terms of the delegation, consistent with the purposes and terms of the trust.  3.  Periodically reviewing the agent’s actions in order to monitor the agent’s performance and compliance with the terms of the delegation.

Section 174 states:

The trustee is under a duty to the beneficiary in administering the trust to exercise such care and skill as a man of ordinary prudence would exercise in dealing with his own property; and if the trustee has or procures his appointment as trustee by representing that he has greater skill than that of a man of ordinary prudence, he is under a duty to exercise such skill.

Section 77 defines a trustee’s duty of prudence as follows:

(1) The trustee has a duty to administer the trust as a prudent person would, in light of the purposes, terms, and other circumstances of the trust.  (2) The duty of prudence requires the exercise of reasonable care, skill, and caution.  (3) If the trustee possesses, or procured appointment by purporting to possess, special facilities or greater skill than that of a person of ordinary prudence, the trustee has a duty to use such facilities or skill.

Section14-10901 sets forth the prudent investor rule as follows:

A.  Except as provided in subsection B, a trustee who invests and manages trust assets owes a duty to the beneficiaries of the trust to comply with the prudent investor rule requirements of this article.  B. The prudent investor rule is a default rule and may be expanded, restricted, eliminated or otherwise altered by the provisions of a trust.  C. A trustee is not liable to a beneficiary to the extent that the trustee acted in reasonable reliance on the provisions of the trust.

Section  90 provides a general statement of prudent investment:

The trustee has a duty to the beneficiaries to invest and manage the funds of the trust as a prudent investor would, in light of the purposes, terms, distribution requirements, and other circumstances of the trust.  (a) This standard requires the exercise of reasonable care, skill, and caution, and is to be applied to investments not in isolation but in the context of the trust portfolio and as a part of an overall investment strategy, which should incorporate risk and return objectives reasonably suitable to the trust.  (b) In making and implementing investment decisions, the trustee has a duty to diversify the investments of the trust unless, under the circumstances, it is prudent not to do so.  (c) In addition, the trustee must: (1) conform to fundamental fiduciary duties of loyalty (Section 78) and impartiality (Section 79); (2) act with prudence in deciding whether and how to delegate authority and in the selection and supervision of agents (Section 80); and (3) incur only costs that are reasonable in amount and appropriate to the investment responsibilities of the trusteeship (Section 88).  (d) The trustee’s duties under this Section are subject to the rule of Section 91, dealing primarily with contrary investment provisions of a trust or statute.

Section 227 provides a somewhat different general standard of prudent investment:

The trustee is under a duty to the beneficiaries to invest and manage the funds of the trust as a prudent investor would, in light of the purposes, terms, distribution requirements, and other circumstances of the trust.  (a) This standard requires the exercise of reasonable care, skill, and caution, and is to be applied to investments not in isolation but in the context of the trust portfolio and as a part of an overall investment strategy, which should incorporate risk and return objectives reasonably suitable to the trust.  (b) In making and implementing investment decisions, the trustee has a duty to diversify the investments of the trust unless, under the circumstances, it is prudent not to do so.  (c) In addition, the trustee must: (1) conform to fundamental fiduciary duties of loyalty (Section 170) and impartiality (Section 183); (2) act with prudence in deciding whether and how to delegate authority and in the selection and supervision of agents (Section 171); and (3) incur only costs that are reasonable in amount and appropriate to the investment responsibilities of the trusteeship (Section 188).  (d) The trustee’s duties under this Section are subject to the rule of Section 228, dealing primarily with contrary investment provisions of a trust or statute.

Section 78 sets out the duty of loyalty as follows:

(1) Except as otherwise provided in the terms of the trust, a trustee has a duty to administer the trust solely in the interest of the beneficiaries, or solely in furtherance of its charitable purpose.  (2) Except in discrete circumstances, the trustee is strictly prohibited from engaging in transactions that involve self-dealing or that otherwise involve or create a conflict between the trustee’s fiduciary duties and personal interests.  (3) Whether acting in a fiduciary or personal capacity, a trustee has a duty in dealing with a beneficiary to deal fairly and to communicate to the beneficiary all material facts the trustee knows or should know in connection with the matter.

Section 78 cmt. a reads, in part,:

It follows from the nature of the trust relationship that the trustee stands in a fiduciary relationship with respect to the beneficiaries as to all matters within the scope of the trust relationship, that is, all matters involving the administration of the trust and its property.  The duty of loyalty is, for trustees, particularly strict even by comparison to the standards of other fiduciary relationships.

Section 173 provides:

The trustee is under a duty to the beneficiary to give him upon his request at reasonable time complete and accurate information as to the nature and amount of the trust property, and to permit him or a person duly authorized by him to inspect the subject matter of the trust and the accounts and vouchers and other documents relating to the trust.

These remedies are available with the exception that:

A court shall not change a fiduciary’s decision to exercise or not to exercise a discretionary power conferred by this article unless it determines that the decision was an abuse of the fiduciary’s discretion.  A court shall not determine that a fiduciary abused its discretion merely because the court would have exercised the discretion in a different manner or would not have exercised the discretion.

A.R.S. Section 14-7404.

Section 199 enumerates the following remedies:

(a) to compel the trustee to perform his duties as trustee; (b) to enjoin the trustee from committing a breach of trust; (c) to compel the trustee to redress a breach of trust; (d) to appoint a receiver to take possession of the trust property and administer the trust; (e) to remove the trustee.

Section 14-11002(A) provides:

[A] trustee who commits a breach of trust is liable to the beneficiaries affected for the greater of either: 1. The amount required to restore the value of the trust property and trust distributions to what they would have been had the breach not occurred.  2. The profit the trustee made by reason of the breach.

Section 78 cmt. a, in part, reads:

It follows from the nature of the trust relationship that the trustee stands in a fiduciary relationship with respect to the beneficiaries as to all matters within the scope of the trust relationship, that is, all matters involving the administration of the trust and its property.  The duty of loyalty is, for trustees, particularly strict even by comparison to the standards of other fiduciary relationships.

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