Silen, Harold

English

UC Law SF Scholarship Repository

Hastings Law JournalVolume 7 | Issue 1 Article 121-1955Trusts: Distribution of Trust Income--Liability forPayments to an Unqualified BeneficiaryHarold SilenFollow this and additional works at: https://repository.uchastings.edu/hastings_law_journalPart of the Law CommonsThis Note is brought to you for free and open access by the Law Journals at UC Hastings Scholarship Repository. It has been accepted for inclusion inHastings Law Journal by an authorized editor of UC Hastings Scholarship Repository.Recommended CitationHarold Silen, Trusts: Distribution of Trust Income--Liability for Payments to an Unqualified Beneficiary, 7 Hastings L.J. 111 (1955).Available at: https://repository.uchastings.edu/hastings_law_journal/vol7/iss1/12maintained that the legislative attitude in enacting a tort claims act was accuratelyreflected by Judge Cardozo in Anderson v. John L. Hayes Construction Co.,2 1 whenhe said:"The exemption of the sovereign from suit involves hardship enough where consenthas been withheld. We are not to add to its rigor by refinement of construction whereconsent has been announced."2 2The general principle underlying tort liability is that when innocent partiesare injured through some activity of a wrongdoer, some relief is in order. It is alsogenerally conceded today that when innocent claimants suffer through the operationof some governmental activity, some recompense should be made. When the Stateof North Carolina enacted its Tort Claims Act, its intention, presumbaly, was toassume liability for torts committed against third parties through its own activities.In the principal case, the state authorized a prisoner to perform certain activitieswhich, in effect, made him an employee, and as a result of those activities an innocentparty suffered damage.The general classification of prisoner should not predominate over the fact thatthis individual was an employee while performing these activities. The intent ofstatutory waiver of sovereign immunity is against such a narrow construction.Louis I. Renga.TRUSTS: DISTmBUTION OF TRUST INCOME-L ABILITY FOR PAYMENTS TO ANUNQUALIFIED BENEFIcARtY.-Should the trustee who pays the wrong beneficiary beabsolutely liable for the incorrect distributions or is the test of his liability one ofthe use of ordinary care and reasonable skill and prudence? The Supreme Court ofSouth Carolina has held in the case of Rodgers v. Herron" that the trustee should notbe held to the standard of absolute liability but that the rule of reasonable care shouldgovern.The testator died in 1935 directing his executor, the defendant bank, to takecharge of the corpus of his estate and pay over the income to his widow during herwidowhood. On her death or remarriage the trustee was to pay the income to theseven children until the youngest child should reach 21 years of age; at which timethe corpus was to be distributed among the children in equal shares. The trusteepaid the income to the widow until 1949, even though a common law marriage2 wasconsummated in 1940 between the life income beneficiary and a Mr. Rodgers. In 1944the widow wrote to the trustee asking if they "can fix it with the Probate courts soI can get marred [married]. and get my income tell [until] the Baby is 21 years old." sA similar request was made in a conference with the trustee later in the same year.On each occasion the widow indicated that she had not remarried and would notremarry should the income cease on such an event.I 243 N.Y. 140, 153 N.E. 28 (1926).I2 d. at 147, 153 N.E. at 29. Quoted with approval in U. S. v. Aetna Casualty and Surety Co.,338 U.S. 366, 370 (1949).31 S.C. -, 85 S.E.2d 104 (1954).A common law marriage, in opposition to a ceremonial marriage (an event, the happeningof which can be fixed at some precise time), depends on the facts and circumstances evidencinga mutual agreement to live together as husband and wife, and not in concubinage. Such marriageshave been recognized in South Carolina. State v. Ward, 204 S.C. 210, 28 S.E.2d 785 (1944)." See note 1, supra at - , 85 S.E.2d at 107.Nov., 1955] NOTESIn 1946 the trustee received a letter from one of the testator's daughters advisinghim that her mother had remarried. A similar letter was received by the trustee in1948 from another child. Payments to the mother continued until suit was broughtin 1949.In the action for the monies mispaid since 1940, the children prayed for damagesfor $16,069.86. The Supreme Court modified the lower court's holding for thechildren, allowing only $6,040.64. This was the amount paid to the mother from 1946to the date of suit, establishing that the common law marriage disentitled the widowof her share under the trust instrument. The trustee must account, therefore, for theincome incorrectly distributed, from the time they could have discovered, throughthe exercise of ordinary care, prudence and diligence, that the widow had remarried.In reaching their result the court recognized the two well established doctrinesalluded to previously. First, that a trustee must use such diligence in the managementof the trust fund as a prudent man would use in his own affairs and if he fail to usethe care and skill of a man of ordinary prudence, he is liable for the resulting loss.4Secondly, that it is the duty of a trustee to pay the income or principal of a trustfund to the beneficiary who is entitled to it. If the trustee pays one who is neithera beneficiary nor the qualified beneficiary, he is liable, since he pays at his own risk.5They accepted the former rule as the basis for liability, saying that "the conflictbetween the rules . . . is more apparent than real." 6Notwithstanding its analysis, the court has failed to recognize that these two ruleshave dissimilar applications. One outstanding writer, in discussing these two doctrines,has said:7"The general rule as to care and diligence applied to trustees, namely, that theyare protected by the use of ordinary care and reasonable skill and prudence, does notapply to distributions of trust property to beneficiaries. Here the duty is unqualified.No excuses will be received for its non-performance. The trustee is like a debtor who mustpay his creditor and not merely use reasonable care and effort to do so." (Emphasisadded.)An examination of the two doctrines is necessary to properly evaluate theircorrect applications. The rule advocating that the trustee's duty is one of reasonablecare and diligence finds its most frequent illustrations in the investment of trustproperty and the management of trust estates.8 The conduct of these activities isprimarily determined by extenuating circumstances outside the specific sphere ofdistributing income or principal to a beneficiary. These circumstances, which arean integral part of the trustee's activities and guide his actions, include suchphenomena as the fluctuating economic markets and good business acumen. Forexample, this would involve activities of an investment nature9 where, because of'3 BOGERT, TRUSTS AND TRUSTEES § 541 (2d ed. 1946) ; RESTATEMENT, TRUSTS § 174 (1935);Waterman v. Alden, 144 Ill. 90, 32 N.E. 972 (1893).'4 BOGERT, TRUSTS AND TRUSTEES § 814 (2d ed. 1946) ; 3 SCOTT, TRUSTS § 226 (1st ed. 1939);RESTATEMENT, TRUSTS § 226 (1935) ; Prince de Beam v. Winans, 111 Md. 434, 74 A. 626 (1909).' See note 1, supra, at -, 85 S.E.2d at 111. The court justified this statement in the followingway: "Where the terms of the trust are free from doubt, the trustee who disregards them is guiltyof negligence .... When they are not clear, or where there is doubt as to who is entitled toreceive payment of either the principal or the income of the trust fund, it is the duty of thetrustee, in the exercise of the care and diligence to be expected of a reasonable man to apply tothe court for instructions. Essentially, therefore, the standard of conduct remains the samethroughout the performance of the duties of the trust. Ibid.BOGERT, TRUSTS § 109 (3d ed. 1952).'Welch v. Flory, 294 Mass. 138, 200 N.E. 900, 106 A.L.R. 813 (1936).In re Fulton Trust of New York, 257 N.Y. 132, 177 N.E. 397, 77 A.L.R. 499 (1931) (sugarstocks) ; Green v. Crapo, 181 Mass. 55, 62 N.E. 956 (1902) (railway bonds).THE HASTINGS LAW JOURNAL [Vol. 7these outside influences, the trustee must determine which is the best alternativeto follow in protecting the fund. Because of these numerous outside factors the lawdoes not impose an absolute standard of liability, but only holds the trustee to anobligation to exercise the care and skill of an ordinary man in the conduct of businessof a like character who is seeking the same objects in property management as thepurposes of the trust.10 Other phases of trust management where the trustee mustact according to his own discretion involve such varied business activities as managingreal property," which includes repairs'2 and rentals,i s voting under the corporatestock that the trust fund holds,'14 obtaining proper security for notes taken,' 5 andgenerally directing any affairs connected with the trust corpus.' 6 In carrying on thesefunctions, the trustee, to meet the standard created, must come up to the requirementsof normal ability and diligence and use his exceptional skill and knowledge, shouldhe be so endowed. 17In opposition to the aforementioned doctrine there is the rule holding a trusteeabsolutely liable if he pays an unqualified beneficiary. Under these circumstancesthis rule is more properly applied, because the trustee's duties are not influenced byoutside factors requiring his discretion. He has but one duty: to pay the income tothe entitled beneficiary. The application of the rule has disregarded good faith' sor reasonable care' 9 exercised by the trustee. In a leading case20 the trustee hadacted with the utmost good faith in paying one whom he reasonably supposed tobe the entitled beneficiary. However, the qualified cestui que trust had died six yearsearlier and someone had been fraudulently cashing the checks during this period.Nonetheless, the court held that his liability extended from the date of the initialpayment to the wrong person. Other cases dealing with forgery of the trustee's checksafter the beneficiary had died 2 ' or had become ineligible22 to receive the incomehave held that the trustee must determine the identity of the correctly entitled bene-ficiary at his own risk. Even a mistake of law does not excuse the trustee. Thus,liability has been absolutely imposed where the trustee took the advice of a competentlawyer who had incorrectly interpreted the trust instrument and made several incorrectpayments. 23 Liability was also imposed where the supposed beneficiary was laterfound to be an illegitimate child not entitled to share under the provisions of thetrust.24Although the rule of absolute liability has been clear in its application there havebeen several exceptions which are notable. The first is that even though the trustee10 BoGer, TaRsrs § 93 (3d ed. 1952)." In re McIntyre, 24 App.Div. 167, 28 N.Y.S. 785 (1897).2 Van der Veer v. Amers, 6 N.J. Super. 143, 70 A.2d 517 (1950).'s Pleasanton's Appeal, 99 Pa. 362 (1882).Weston v. Weston, 210 S.C. 1, 41 S.E.2d 372 (1947).10Waterman v. Alden, see note 3, supra.10 Exchange Trust Co. v. Doudera, 270 Mass. 227, 170 N.E. 73 (1930).17 BOGERT, TRUSTS § 93 (3d ed. 1952).15 Moyer v. Norristown-Penn. Trust Co., 296 Pa. 26, 145 A. 682 (1929); Ellis v. Kelsey,241 N.Y. 374, 150 N.E. 148 (1925)." Surratt v. State, 167 Md. 357, 173 A. 573, 100 A.L.R. 1116 (1934) ; Darling Stores v. FidelityBankers Trust, 167 Tenn. 165, 156 S.W.2d 419 (1941).'0 In re Sniffin's Estate, 265 App. Div. 1014, 36 N.Y.S. 527 (1942)."1 Daring Stores v. Fidelity Bankers Trust, see note 17, supra.22Heaney v. Riddle, 343 Pa. 453, 23 A.2d 456 (1942).3 Owings v. Rhodes, 65 Md. 408, 9 A. 903 (1886) ; Blish Trust, 350 Pa. 311, 38 A.2d 9 (1944);National Trustee Co. of Australasia Ltd. v. General Finance Co. of Australasia Ltd., (1905)A.C. 373."' Ellis v. Kelsey, see note 18, supra.Nov., 19551 NOTESTHE HASTINGS LAW JOURNALpays the beneficiary and not the beneficiary's assignee, he is not liable if he does nothave notice of the assignment.25 This argument was relied on by the court in theprincipal case. It is clear, however, that this is not an exception, since the trusteeis not neglecting the qualified beneficiary, but the only one who suffers here is theassignee. The second departure from the rule is an English statute,26 also mentionedin the Rodgers case. Under this act the trustee is excused when paying the wrong bene-ficiary if he acted honestly and reasonably. The probable creation of this statute wasto protect uncompensated trustees. 2 7 In the United States, trustees are fully compen-sated. 28 The third exception involves cases much like the principal one.29 Theysimply do not hold the trustee absolutely liable but imply that to do so would be tooharsh a burden to impose.Accepting for brief consideration the court's contention that a trustee is onlyliable for his negligence, it appears that the court should have extended liabilityfrom 1944. The court in the instant case, in opposition to the Circuit Court's findings,said that there was nothing in the evidence on which the trustee could be chargedwith knowledge of the marriage until 1946, since the widow's letter and conferencewere not of such a nature as to indicate a likelihood of her remarrying. The courtalso said that her statements were positive in suggesting she would remain unmarried.However, it appears that it is at least arguable that the widow indicated a desireto remarry. Her letter and the conference were concerned with discussing her rightsto the trust income should she alter her marital status. She made no reference to anyother problem. This seems to be enough evidence to charge the trustee with knowledgethat she intended to marry and should have put him on notice of a probable marriage.Then, acting in a reasonable and prudent manner, he should have stopped paymentsand made an investigation to determine her marital status. If it then appeared thata common law marriage had been consummated, he could have asked the court forinstructions as to the distribution of the income.In summation of the foregoing discussion it is submitted that the Rodgers caseshould have applied liability on an absolute standard, thereby holding the trusteeliable from 1940, the date of the remarriage. In making distributions to a beneficiary,2" The cases in point hold firmly to the rule of assignments, applying the rule of Dearle v.Hall, 3 Russ. 1, where applicable, and do not even attempt to rest liability on trust concepts.Seger v. Farmers Loan and Trust, 176 N.Y. 589, 68 N.E. 1124 (1903); In re Thaw's Estate,252 Pa. 99, 97 A. 108 (1916) ; Jenkinson v. New York Finance Co., 79 N.J. Eq. 247, 82 A. 36 (1911)." Trustees Act, 1925, 59 & 60 Vict., c. 19 § 61. The act says that if a trustee is personallyliable for a breach of trust "but has acted honestly and reasonably, and ought fairly to be excusedfor the breach of trust and for omitting to obtain the directions of the court in the matter in whichhe committed the breach, then the court may relieve him either wholly or partly from personalliability for the same." The original draft of this act was in 1896, and its effect was recognized andinterpreted by In re Alsop, 1 Ch. 1 (1914). The redraft of 1925 has no substantial changes in thissection." In early American cases and in English law the trustee served without compensation as itwas felt that if he were paid he would be too concerned with the financial aspect and think lessof the interest of the beneficiary. English trustees can be paid if the instrument so provides or ifthey would not act without compensation. 4 BOcERT, TRUSTS AND TRUSTEES § 974 (2d ed. 1946).2 PERRY, TRUSTS AND TRUSTEES § 904 p. 1529 (7th ed. 1929) : "Nothing is better established inEngland than that a trustee can have no allowance or compensation for his time and trouble inthe execution of a trust."2" In South Carolina the Code of South Carolina, 1942, § 9048, fixes a scale of fees wherebythe trustee is entitled to 21 % on sums received or paid out and not over 10% on sums receivedby way of interest.2 Application of Spitzmiller, 279 App. Div. 233, 109 N.Y.S.2d 1 (1951) ; In re United ConclaveBldg. and Loan Ass'n, 135 N.J. Eq. 63, 37 A.2d 197 (1944); Matter of Carpenter's Estate,154 Misc. 143, 276 N.Y.S. 754 (1935).[Vol. 7

Trusts: Distribution of Trust Income--Liability for Payments to an Unqualified Beneficiary

https://repository.uclawsf.edu/cgi/viewcontent.cgi?article=1469&context=hastings_law_journal

Trusts: Distribution of Trust Income--Liability for Payments to an Unqualified Beneficiary

Abstract

Similar works

Full text

Available Versions

UC Law SF Scholarship Repository