The court of equity is there for the trustee as well as for the beneficiaries | Charles E. Rounds, Jr. – Suffolk University School of Law
From time immemorial, the court of chancery has been the refuge which equity has offered to the fiduciary who has a reasonable doubt as to his fiduciary rights, duties and obligations, or who finds himself an innocent bystander in a dispute between beneficiaries who compromises his ability to properly discharge his fiduciary duties. The functions assumed by a trustee are innumerable and onerous. Among these is the positive obligation to perform the terms of the trust. But what if a critical term is manifestly or latently ambiguous? A fiduciary who mistakenly distributes income and/or principal from fiduciary accounting, for example, breaches this obligation and may be held personally, if not absolutely, liable for the consequences of the breach. So what is the innocent trustee who has a reasonable doubt as to who has the right to do what? Obtain legal advice, distribute and hope for the best? Not a good idea. Remember that even a trustee who relied in good faith on faulty legal advice led to misdelivery of trust assets is not necessarily immune from personal liability for adverse economic consequences. of that trust, a topic that is generally addressed in §8.32 of Loring and Rondes: Administrator’s Handbook (2022). As between the innocent beneficiary and the innocent fiduciary, the latter should bear the burden of any consequential economic loss.
Equity confers on the trustee a constellation of fiduciary rights to somewhat alleviate his fiduciary burdens, one of which is the right, at the expense of the trust, to seek directions or declaratory judgment from the court of equity where there is a reasonable doubt. It is well established that a trustee cannot be held liable for compliance with a court order, however erroneous. (Whether there may be an obligation to appeal the order is another matter entirely. See Manual §6.2.6). This special “well-established” immunity from fiduciary responsibility is, in a nutshell, the “safe harbour” that equity provides to fiduciaries. See Bangert v. Northern Trust Co., 839 NE2d 640, 645-646 (ill. 2005). The fiduciary duty is to perform the actual terms of the trust; fiduciary law consists in seeking, at the expense of the trust, the assistance of the court when there is a reasonable doubt as to the real nature of these conditions. Where there is a reasonable doubt, a trustee who fails to exercise this right, again a right which can be exercised at the expense of the trust, has only himself to blame for the consequences.
The constellation of fiduciary rights that equity confers on fiduciaries is generally reflected in
§3.5.2 of Loring and Rounds: A Trustee’s Handbook (2022), the section and its subsections of which are reproduced in full in the appendix below. The 2022 edition of the handbook is available for purchase at: https://law-store.wolterskluwer.com/s/product/loring-rounds-a-trustees-handbook-2022e-misb/01t4R00000OVWE4QAP.