What Constitutes Trustee Breach of the Duty of Loyalty?

A trustee’s responsibilities in managing a trust include the duty of loyalty imposed by Minnesota law. Breach of the duty subjects a trustee to litigation, including potential removal as trustee. To shed light on how a court may consider allegations of breach of the duty of loyalty by a trustee, this article discusses a Minnesota Court of Appeals decision that addressed the issue. The case concerned a beneficiary’s request for removal of a trustee based on a claim that the trustee’s failure to follow the beneficiary’s investment instructions constituted breach of the trustee’s duty of loyalty.

A Trustee’s Duty of Loyalty Under Minnesota Law

Minnesota statutes specifically address a trustee’s duty of loyalty in Minn. Stat. § 501C.0802. The Minnesota appellate courts interpret these provisions in case decisions when a beneficiary claims a breach of the duty.

The statutory section is detailed and complex, but subsection (a) states rather simply that: “A trustee owes a duty of loyalty to the beneficiaries. A trustee shall not place the trustee's own interests above those of the beneficiaries.” The section goes on to provide that a violation of this rule entitles a beneficiary to void certain transactions unless they meet specific criteria. Certain transactions are presumed to constitute breach of the duty of loyalty under the statute. The law also permits specific types of transactions, as long as they are fair to beneficiaries.

If a trustee violates the duty of loyalty, a beneficiary may petition the court to remove the trustee under Minn. Stat. § 501C.0706. That section gives district courts authority to remove a trustee and order other appropriate relief under circumstances specified in the statute.

Minnesota Court of Appeals Case Addressing the Duty of Loyalty

Background of the Case

In the case of In re: Trust of Phyllis Gene Jones, Settlor, A18-0021, 2018 WL 3826331, (Minn. App. Aug. 13, 2018), a beneficiary sought removal of a corporate trustee on the basis that the trustee breached the duty of loyalty by failing to follow an investment strategy requested by the beneficiary. The district court declined to remove the trustee, finding that the trustee did not breach the duty of loyalty or otherwise act in an unfitting manner. The beneficiary appealed to the Minnesota Court of Appeals, which reviewed the lower court’s decision for an abuse of discretion.

The beneficiary’s requested strategy involved investing in physical assets (such as coins) to protect the trust from an economic calamity. In the litigation, the beneficiary claimed that the trustee violated the duty of loyalty by declining to follow that strategy.

Court of Appeals Consideration of the Trustee’s Duty of Loyalty

In discussing the issues presented by the case, the Court of Appeals referred to the applicable statutory sections. Regarding the investment of assets, the court relied on Minn. Stat. § 501C.0901, which requires a trustee to invest and manage the assets as a prudent investor, exercising reasonable care, skill, and caution.

The decision rejected the beneficiary’s claim that the trustee’s failure to follow the requested investment strategy constituted a breach of the duty of loyalty. The Court relied on the statute and prior court decisions stating that the duty of loyalty requires the trustee to avoid conflicts between its own interests and its interests as trustee and to avoid acting for personal gain. In that context, the Court determined that the beneficiary did not demonstrate how the trustee’s failure to follow the requested strategy amounted to the trustee placing its own interests above those of the trustee.

The Court also relied on provisions of the trust itself, which gave the trustee authority to exercise investment authority as the trustee “determines in its sole and absolute discretion to be in the best interests of the beneficiaries.” The opinion also states that the trust contained a provision giving the trustee specific investment authority, including the ability to choose among a variety of investment types. The trust did not include provisions requiring the trustee to make investments based on the beneficiary’s preference or request.

Finally, the Court rejected the beneficiary’s claim that the trustee’s investment strategy was not in the beneficiary’s best interest, based on the record evidence. As such, the Court held that it could not conclude that the district court abused its discretion in finding that the trustee did not breach the duty of loyalty or was otherwise unfit to be trustee by declining to make investments requested by the beneficiary. The Court of Appeals upheld the district court’s decision.

Court Review of a Claim of Breach of the Duty of Loyalty by a Trustee

While the Jones decision is an unpublished opinion, it serves as an excellent illustration of how a Minnesota court approaches litigation that asserts breach of the duty of loyalty by a trustee. It also includes citations to previous court decisions on the duty of loyalty.

A district court looks to three different sources in evaluating conduct of the trustee:

• The applicable sections of the Minnesota Trust Code
• Past court decisions interpreting the relevant provisions of the Trust Code
• The provisions in the trust instrument

If a beneficiary or co-trustee suspects a breach of duty by a trustee, the concerned person should consult an experienced Minnesota trust litigation lawyer to determine whether a basis for challenging the conduct of the trustee exists. The lawyer will first determine the facts in the situation and then follow the same analysis that a court would use to determine whether the basis for court litigation involving trustee breach of duty and trustee removal exists under Minnesota law.

Additional Information

Additional information on the issues discussed above is available in these previous blog articles: Understanding the Trustee Prohibition Against Self-Dealing and Minnesota Trust Law: When and How to Remove a Trustee.

Schedule a Consultation With a Minnesota Trust Litigation Attorney

At the Dave Burns Law Office, a focus of my practice is trust disputes and probate litigation, including claims by a settlor or beneficiary against a trustee for breach of the duty of loyalty and other issues in trust management. I work with trustees, family members, and trust beneficiaries.

If you have a trust concern that may require litigation, I welcome you to contact me at (612) 677-8351 or by emailing dave@daveburnslaw.com. I work with clients throughout the Twin Cities metro area and am available to meet with clients in both Minneapolis and St. Paul and welcome inquiries from clients and referring attorneys throughout the State of Minnesota.