In 1991, Arthur Gilbert died leaving his widow Lenora as trustee of his
testamentary trust. Upon Lenora’s death, 15% of the trust was to be distributed
to Arthur’s granddaughter Tammy King, and 30% to Arthur’s stepdaughter (and
Lenora’s daughter) Barbara Johnston.
In 1997, Lenora transferred a piece of real property out of the trust,
without consideration, and used a second piece of real property as security for
a personal loan. Lenora failed to make payments on the personal loan, and the
lender foreclosed and took title to the real property. After Lenora was
diagnosed with dementia, Barbara began handling the receipt of the trust’s
rental income and withdrew such funds from the trust’s account.
After Lenora’s death in 2002, Barbara told the trust’s tenant to make checks
payable to her as trustee, even though the trust document specified that
Arthur’s son Lloyd would become successor trustee. In 2003, Lloyd recorded an
affidavit as successor trustee, but Barbara refused to provide Lloyd with any
financial information about the trust or the rental income received after
Tammy filed a complaint against Barbara, alleging conspiracy to breach trust,
breach of trust, and bad faith. Days before trial, Tammy moved to add Lloyd, as
trustee, as a plaintiff in the action, but when the trial court determined that
trial would have to be postponed as a result, Tammy’s attorney indicated they
wanted to move forward with trial, and the trial court denied the motion to add
Lloyd to the action.
The trial court determined that Barbara had exercised undue influence over
Lenora with regard to Lenora’s breach of her duties as trustee, but ultimately
held that Tammy did not have standing to bring the lawsuit without naming the
current trustee, Lloyd, as a defendant.
On appeal, the court recognized that normally the trustee is the real party
in interest regarding claims of the trust against third parties, and that the
trustee has the exclusive right to bring an action. However, the court found
that the exception to this rule applied: that a beneficiary may pursue claims
against a third party on his or her own, without participation by the trustee,
when that third party actively participated in, or knowingly benefited from, a
trustee’s breach of trust.
The court also resolved the open question of whether the appointment of a
successor trustee would extinguish a beneficiary’s right to sue a third party
for involvement in a prior trustee’s breach of trust, and held that the naming
of a successor trustee does not prevent a beneficiary from proceeding on such a
The court determined that Tammy had standing to bring her claims against
Barbara for her role as a third-party participant in Lenora’s breach of trust.
The court also held that while Tammy could possibly recover against Barbara for
her conduct as a trustee (a trustee de son tort) after Lenora’s death,
Barbara could not also be liable as a trustee before Lenora’s death. Barbara was
either a third-party participant or a trustee de son tort, but not both
The court remanded the case for the trial court to determine the amount of
damages that Barbara should reimburse the trust for her third-party
participation in Lenora’s breach of trust, whether Barbara was liable as a
trustee for breach of trust after Lenora’s death and the amount of damages under
this theory, and whether any other relief was appropriate.
This ruling clarifies that a beneficiary of a trust has standing to sue the
trustee, the trustee and a third-party participant in a breach of the trustee’s
fiduciary duties, or the third-party participant alone.
L. Hellmuth is the principal author of this release.