Historically, a trust was seen as coterminous with the fiduciary duty owed by the trustee; it was defined by the duty of the trustee to the beneficiary:
“I should define a trust in some such way as the following – when a person has rights which he is bound to exercise on behalf of another or for the accomplishment of some purpose he is said to have those rights in trust for that other or for that other purpose and he is called a trustee.”[1]
Although trusts were employed earlier, the law governing trusts substantially grew in the fourteenth century: the “ancestor of the modern trust (the feoffment to uses), enjoyed a popularity at least from the reign of Edward III (1327-1377).”[2] Originally, enforcement of uses fell to the courts of the Church of England which used canon law to regulate the conduct of the trustee (the feoffee).[3] In the fifteenth century, Chancery took over the role of enforcing these antecedents to the modern trust.[4] The evolution from the ecclesiastic courts to Chancery carried forward the application of canon-law-based norms to the Equity Courts.[5] Presumably, these ecclesiastic origins count, at least in part, for the moralistic overlay that informs the fiduciary duty of trustees.[6] Today, trust enforcement is exclusively in Equity.[7]
Neither the UTC nor the MTA, which adopts the definitional sections of the uniform act, defines a trust.[8] Instead, its definition carries forward from the common law:
“A trust exists where the legal title to property is held by one or more persons under an equitable obligation to covey, apply, or deal with such property for the benefit of other persons.”[9]
The central aspect of this definition is the equitable obligation or the fiduciary duty owed by the trustee to the beneficiary: “A trustee owes to the beneficiaries of a trust duties of administration, prudence and loyalty. The trustee’s duty of loyalty – as the duty is known in this state – is well-established in the common law.[10]
At common law, trust fiduciary law 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.”[11] Of these two great principles, the duty of loyalty has been described as the “essence” of the fiduciary relationship.[12] 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.”[13]
An academic doctrine (an “insurgent theory”) seeks to establish a contractarian basis for fiduciary relationships with important implications for the continued vitality of that relationship. This doctrine is part of a larger exercise within the academy to view all relationships generally as a species of contract:
“Contract has become the dominant doctrinal current in modern American law. In fields ranging from corporations and partnership, to landlord and tenant, to servitudes, to the law of marriage, scholars have come to understand our legal rules as resting mainly on imputed bargains that are susceptible alteration by actual bargains.”[14]
If all relationships are contracts, then all relationships are governed by the terms of the “deal.” Under such a regime, fiduciary duty becomes simply another term of the implied bargain:
“Fiduciary duties are not special duties; they have no moral footing; they are the same sort of obligations, derived and enforced in the same way, as other contractual undertakings.”
* * *
“Scholars of non – or antieconomic bent have had trouble coming up with a unifying approach to fiduciary duties because they are looking for the wrong things. They are looking for something special about fiduciary relations. There are is nothing special to find… Contract law includes a principle of good faith in implementation – honesty in fact under the Uniform Commercial Code, plus an obligation to avoid (some) opportunistic advantage taking. Good faith in contract merges into fiduciary duties with a blur and not a line. Searching for the right definition of a fiduciary duty is not a special puzzle. In short there is no subject here, and efforts to unify it on a ground that presumes its distinctiveness are doomed.”[15]
To one urging a strict “contractarian” view of the fiduciary relationship, it would be the contract standard of good faith dealings, not a system of moral norms, that should regulate these relationships. These are radically different concepts:
“In general, the contracting party’s duty of good faith establishes nothing like the full panoply of fiduciary obligations. Judge Posner says as much in one of his judicial opinions:
The particular confusion to which the vaguely moralistic overtones of good faith give rise is the belief that every contract establishes a fiduciary relationship. A fiduciary is required to treat his principal as if the principal were he, and therefore he may not take advantage of the principal’s incapacity, ignorance, inexperience, or even naiveté … But it is unlikely that Wisconsin wishes, in the name of good faith, to make every contract signatory his brother’s keeper … In fact the law contemplates that people frequently will take advantage of the ignorance of those with whom they contract, without thereby incurring liability … [E]ven after you have signed a contract, you are not obliged to become an altruist toward the other party.”[16] (Internal quotation marks omitted).
Whether, or to what extent, fiduciary duty as a separate and stand-alone, non-contract principle should continue to play a pivotal role in trust and partnership law has been debated over the course of the past few decades.[17] Both the Uniform Trust Code and the revised Uniform Partnership Act were written at the time, and against the general backdrop, of the academic debate reinterpreting all relationships as essentially contractual in nature.[18]
The Uniform Trust Code provides that the traditional fiduciary obligations operate as default rules that can be modified somewhat by the trust agreement.[19] This very approach suggests a contractarian approach to the law of trusts.[20] Certain rules, however, are non-modifiable, including the ability of any trust agreement to alter the “duty of a trustee to act in good faith and in accordance with the terms and purposes of the trust and the interests of the beneficiaries.”[21] Although this is framed in what may sound like contractarian vocabulary (“good faith”), it is in fact close to the classic formulation of the fiduciary duty of loyalty.[22] The Uniform Trust Code may be “permeated with (contractarian) default rule rhetoric”[23] but it came out solidly in the anti-contractarian camp by rejecting a pure “good faith” standard in the contract, Uniform Commercial Code, sense.[24] The Comments to UTC § 105 state: “[A] settlor may not so negate the responsibilities of a trustee that the trustee would no longer be acting in a fiduciary capacity.”
The MTA varies the language of UTC § 105 somewhat. Instead of a requirement that the trustee must act in “good faith” in accordance with the interests of the beneficiaries, the MTA provides that the trustee must “act reasonably” in accordance with the interests of the beneficiaries.
Likewise, UTC § 801 (“Duty to Administer Trust”) states that the trustee “shall administer the trust in good faith in accordance with its terms and purposes and the interests of the beneficiaries” whereas MTA § 14.5-801 dictates that the trustee “shall administer the trust reasonably.”
The substitution of reasonableness for good faith to guide the trustee’s behavior emphasizes that it is an objective, not subjective, standard akin to the reasonable person standard in other areas of the law. It merely emphasizes the objective nature of the duty, it is not a material change from the UTC statute because by making good faith ??? to the purposes of the trust and for the benefit of the beneficiaries, the UC is not creating a subjective good faith standard.
[1] Frederic W. Maitland, “Equity: A Course of Lectures,” (A.H. Chaytor & W.J. Whittaker eds., 1st ed. 1909, reprinted Fred B. Rothman & Co. 1999), 44.[2] R. H. Helmholz, “The Early Enforcement of Uses,” 79 COLUM. L. REV. 1503 (1979). The origin of the antecedent to the modern trust, however, was even earlier. It began as a ploy to avoid the Statutes of Mortmain which were enacted by Edward I in 1279 and 1290. These Acts basically prohibited real property transferring to the church which, being perpetual, deprived the state from collecting inheritance taxes as each human holder would die: “The introduction of uses and trusts into England has been generally attributed to the ingenuity of the clergy in order to escape from the prohibitions of the Mortmain Acts.” Story’s Commentaries on Equity Jurisprudence, Chap XXIV, “Express Trusts,” at 270 (Bigelow’s 13th Ed. 1886). Accordingly, the use of trusts to avoid estate or generation skipping taxes has deep roots.
[3] Id. At 1504-5.
[4] Id. At 1512.
[5] “The evolution of the enforcement of uses from the ecclesiastical to Chancery jurisdiction serves as an example of the role that canon law has played in the growth and development of our common law. Modern students of legal history may regard it as part of the long continuing absorption into the secular law of remedies once available only in the courts of the Church. The rise of the Chancery jurisdiction over feoffees to uses is not, therefore, the story of the creation of a legal remedy where previously there had been none. Rather it is the story of continuing enforcement in a new setting.” Id., at 1513.
[6] “Beginning in the late fourteenth and early fifteenth centuries, beneficiaries increasingly turned for justice to the Chancellor who granted relief on the theory that he was ‘compelling the trustee to act upon the dictates of his conscience.’ In other words, the Chancellor’s role was to force the trustee to abide by his pre-existing moral or ethical obligation. … Thus, the duty of loyalty developed as an equitable doctrine to support and enforce pre-existing moral norms.” Leslie, “Trusting Trustees,” supra note 13, at 73.
[7] Story’s Commentaries on Equity Jurisprudence, (Bigelow’s 13th Ed.) Chap. XXIV at 267 (1886): “The positive law being silent on the subject, Courts of Equity, considering the conscience of the party intrusted as bound to perform the trust, have, to prevent a total failure of justice, interfered to compel the performance of it. And as they will complete the performance of the trust, so on the other hand they will assist the trustees and protect them in the due performance of the trusts whenever they seek aid and direction of the court as to the establishment, the management, or the execution of it.”
[8] UTC § 103; MTA § 14.5-103.
[9] From the Heart Church Ministries, Inc. v. African Methodist Episcopal Zion Church, 370 Md. 152, 181-2, 803 A.2d 548, 566 (2002).
[10]Hastings v. PNC Bank, NA, 429 Md. 5, 25, 54 A.3d 714, 725-6 (2012).
[11] John H. Langbein, “The Contractarian Basis of the Law of Trusts,” 105 Yale L.J. 625, 655-6 (1995)[hereinafter Langbein, “Contractarian”].
[12] Karen E. Boxx, “Of Punctilios and Paybacks: The Duty of Loyalty Under the Uniform Trust Code,” 67 Mo. L. Rev. 279, 280 (2002) (“The duty of loyalty has been called ‘the essence of the fiduciary relationship’ and even has been considered an expression synonymous with fiduciary.”).
[13] Langbein, “Contractarian,” supra note 6, at 655. Professor Langbein describes the other core duty, that of prudence, as follows: “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.'” Id.
[14] Langbein, “Contractarian,” supra note 6, at 630.
[15] Frank H. Easterbrook & Daniel R. Fischel, “Contract and Fiduciary Duty,” 36 J.L. & Econ. 425, 427 & 438 (1993).
[16]Fitzgibbon, supra note 1, at 324.
[17] This debate has generated more than a few articles. Some of the articles related to trusts include: Langbein, “Contractarian,” supra note 6; Fitzgibbon, supra note1; Boxx, supra note 7; Melanie B. Leslie, “Trusting Trustees: Fiduciary Duties and the Limits of Default Rules,” 94 Geo. L.J. 67 (2005)[hereinafter Leslie, “Trusting Trustees”]; Arthur B. Laby, “The Fiduciary Obligation as the Adoption Ends,” 56 Buff. L. Rev. 99 (2008). Some of the articles related to business organizations include: Deborah A. DeMott, “Beyond Metaphor: An Analysis of Fiduciary Obligation,” 1988 Duke L.J. 879 (1988); Henry N. Butler & Larry E. Ribstein, “Opting Out of Fiduciary Duties: A Response to the Anti-Contractarians,” 65 Wash. L. Rev. 1 (1990); J. Dennis Hynes, “Freedom of Contract, Fiduciary Duties, and Partnerships: The Bargain Principle and the Law of Agency,” 54 Wash. & Lee L. Rev. 439 (1997); Allan W. Vestal, “Fundamental Contractarian Error in the Revised Uniform Partnership Act of 1992,” 73 B. U. L. Rev. 523 (1993)[hereinafter Vestal, “Fundamental Contractarian Error”]; Lawrence E. Mitchell, “The Naked Emperor: A Corporate Lawyer Looks at RUPA’s Fiduciary Provisions,” 54 Wash. & Lee L. Rev. 465 (1997)[hereinafter Mitchell, “The Naked Emperor”]; Allan W. Vestal, “‘Assume a Rather Large Boat …’: The Mess We Have Made of Partnership Law,” 54 Wash. & Lee L. Rev. 487 (1997); Hillman, “Business Partners as Fiduciaries: Reflections on the Limits of Doctrine,” supra note 5.
[18] The Revised Uniform Partnership Act, adopted by Maryland in 1998, was also crafted against the backdrop of this movement. It, unlike the UTC, downgraded the traditional robust fiduciary duty owed among partners to merely the contract “good faith” standard. See Della Ratta v. Larkin, 382 Md. 553, 564-5, 856 A.2d 643, 650 (2004)(“RUPA narrowly defines the fiduciary duties of partners and downgrades the common-law fiduciary duty of good faith to the status of a non-fiduciary ‘obligation.'”); Also see Clancy v. King, 405 Md. 541, 954 A.2d 1092 (2008).
[19] Unif. Trust Code §§ 801-804; 105(b).
[20] “Of course, parties to a trust instrument may, to a considerable extent, tailor a trustee’s fiduciary duties to facilitate the settlor’s objectives. But it is a long leap from the proposition that fiduciary duties can be tailored to further individual objectives to the conclusion that fiduciary duties are merely gap-filling default rules, similar to those found in the Uniform Commercial Code’s (“U.C.C.”) Article Two.” Leslie, “Trusting Trustees” supra note 13, at 69. According to Professor Leslie, one consequence of embracing a contractarian view is that it may dislodge fiduciary duty from its moral/equitable moorings: “[L]abeling fiduciary duties ‘default rules’ threatens to strip fiduciary rules of their moral content. Fiduciary duties are most effective when they function both as legal rules and moral norms. A label that equates the duty of loyalty with, say, a U.C.C. provision allocating risk of loss undermines the duty’s normative force.” Id. at 70.
[21] Unif. Trust Code § 105(b)(2). The Reporter for the U.T.C. explains the purpose of providing default rules backstopped by non-modifiable provisions: “Most American trust law consists of rules subject to override by the terms of the trust. But, prior to the U.T.C., neither the Restatements, treatise writers, nor state legislatures had attempted to comprehensively list the principles of law not subject to override by the trust terms. The U.T.C. collects these principles in Section 105(b).” David M. English, “The New Mexico Uniform Trust Code,” 34 N.M. L. Rev. 1, 9-10 (2005).
[22] “Close to” but not exactly equal to the fiduciary duty of loyalty. “The duty of loyalty requires a trustee ‘to administer the trust solely in the interest of the beneficiary.’ This ‘sole interest’ rule is widely regarded as ‘the most fundamental’ rule of trust law.” John H. Langbein, “Questioning the Trust Law Duty of Loyalty: Sole or Best Interest?,” 114 Yale L.J. 929, 931 (2005)(a rule that Professor Langbein considers “unsound”)[hereinafter Langbein, “Questioning the Duty of Loyalty”]. See Unif. Trust Code § 802(a) for the classic definition of the duty of loyalty with the obligation to administer the trust “solely” in the interest of the beneficiary. The extent a trust instrument can modify or eliminate the “sole” benefit rule has broad-sweeping implications, including the impact on the no-further-inquiry approach to self dealing. See Melanie B. Leslie, “Common Law, Common Sense: Fiduciary Standards and Trustee Identity,” 27 Cardozo L. Rev. 2713 (2006).
[23] Leslie, “Trusting Trustees,” suprs note 13, at 71.
[24] Somewhat similarly, under Delaware corporate law, “good faith” is used as an element of the duty of loyalty: “[T]he term good faith has long been used as the key element in defining the state of mind that must motivate a loyal fiduciary. To wit, the duty of loyalty most fundamentally requires that a corporate fiduciary’s actions be undertaken in the good faith belief that they are in the best interests of the corporation and its stockholders … For these reasons, it has been traditional for the duty of loyalty to be articulated capaciously, in a manner that emphasizes not only the obligation of a loyal fiduciary to refrain from advantaging herself at the expense of the corporation but, just as importantly, to act affirmatively to further the corporation’s best interest. In this respect, our law has been clear that the duty of loyalty is implicated by all director actions because all such actions must be undertaken in good faith to advance the corporation’s best interests and because directors owe an affirmative obligation to put in a good faith effort to responsibly carry out their duties.” Strine, et al., “Loyalty’s Core Demand,” supra note 9, at 633-4 (2010)
