At common law, the fiduciary duty governing trusts generally “resolves into two great principles, the duties of loyalty and prudence … Sub-rules of fiduciary administration abound … All of these rules are subsumed under the duties of loyalty and prudence, they are means of vindicating the beneficial interest.”[1] Of these two great principles, the duty of loyalty has been described as the “essence” of the fiduciary relationship.[2] Loyalty dictates that the trustees act for the sole benefit of the beneficiary: “The duty of loyalty requires the trustee ‘to administer the trust solely in the interest of the beneficiary.'” This obligation implements the beneficiaries’ entitlement to the trust assets. The trustee owns the assets, but only to facilitate the beneficiaries’ enjoyment.”[3] The duty of loyalty directs the duty owed by the trustee to the interests of the beneficiary. Although it would ordinarily exclude all selfish acts by a trustee, the exclusivity of the duty of loyalty is subject to an important exception: “The most commonly recognized exception to application of the rule is that where the settlor has expressly or impliedly approved of the self-dealing transaction of conflict of interest position.”[4]
The Maryland Court addressed this exception in Goldman v. Rubin.[5] In that case, the testator appointed as personal representative family members who were also board members of the closely held corporation. As such, they implemented an I.R.C. § 303 redemption – effectively dealing with themselves. Nevertheless, it did not constitute an act of self-dealing:
Here the personal representatives are not the ones who placed themselves in a position of conflict. They were placed in that position by Max, through the provisions of his will. He appointed as his personal representatives four of the five directors of MRI and then caused the personal representatives to deal with themselves, as directors, and with Bernard as president, as inexorably as if the will had expressly so directed.
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The question then is whether divided loyalty in this redemption transaction constitutes a breach of duty in and of itself. We think not. The selection of Max of directors and officers of MRI to be his personal representatives may be equated with the appointment of the surviving partner of the intestate as personal representative in Gianakos v. Magiros, supra, so that the personal representatives here were ‘authorized to take action which might, under other circumstances, constitute a conflict between (their) personal position(s) and (their) fiduciary capacity.’
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The effect of this holding is that, in such cases, the burden of proof on the issue of breach of trust is not initially on the fiduciary, because there is no presumption against the fiduciary based on his acting, despite divided loyalty, in the intended transaction. Consequently the burden of proof in this case is as stated in Lopez v. Lopez, 250 Md. 491, 501, 243 A.2d 588, 594 (1968):
(T)he person who challenges the conduct of a trustee, must first allege that the trustee has a duty and has be derelict in the performance of his duty, and offer evidence in support of this allegation. Then, and not until then, does the trustee have the burden of rebutting the allegation. In the absence of such proof, there is no duty on the trustee to prove a negative: i.e., that he has not been derelict in the performance of his duties.[6]
The second “great principle” of fiduciary duty is prudence. “The duty of prudence is a reasonableness norm, comparable to the reasonable person rule of tort. An objective standard of care places the trustee “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.”[7]
