Can A Trustee Use Trust Funds For Their Benefit?
Recently, the Carolina Hurricanes owner was sued by his three sons for $105,000,000 because they allege he took $100,000,000 from the family trust as a loan for his NHL team but never returned the loan amount. While this case is being prosecuted in Michigan I believe it is an interesting case to do a bit of explaining what a trustee can and cannot do.
Let’s start with the basics of what a trustee is. A trust is not an entity and therefore cannot legally own any property. As a result, the trustee is the legal owner of all trust property on behalf of the trust. This is why when a trustee dies you have to record an affidavit of death of trustee to transfer title of any trust-owned real property to the new trustee.
And I know what you are probably thinking right now, “Wait, the trustee owns all of my money?” The answer is yes, but what you are really wondering, is can the trustee then take the money for their own benefit? The answer to that question is generally no.
Generally speaking in California the terms of the trust trumps the Probate Code, but if the trust is silent on a particular issue, then the Probate Code controls. So in this case, I am going to assume that California law applies and that the trust is silent on whether the Trustee can take the money for personal use.
Relevantly, under California law a trustee has a duty of loyalty (that is to administer the trust solely in the interest of the beneficiaries), duty to avoid a conflict of interest (meaning that the trustee cannot use the trust property for the trustee’s own profit), Duty to make trust property productive, duty to keep trust property separate and identified, and the duty to enforce claims.
By taking a large loan out of the trust and failing to repay it, the trustee may have violated all of these duties. He potentially violated his duty of loyalty by giving himself a loan, thereby putting his own self-interest above the beneficiaries. He also likely violated his duty to avoid a conflict of interest as he has a personal interest in not having to repay the loan, whereas the trust has an interest in receiving a repayment with a return on investment. He has also likely violated his duty to make the trust property productive, as the $100,000,000 is not being held in an interest bearing account and in fact no interest is seemingly being paid on the loan (and even if the loan was being paid, the interest rate is far below a reasonable rate of return). By putting the entire trust amount into the NHL team it is arguable that he has also mixed his assets with the trust’s assets (which is a big no-no). However, this amount was described as a loan so as long as the promissory note securing the loan remains in the name of the trust, he is probably has not violated this duty. Finally, he has violated his duty to enforce claims as he has defaulted on the loan he gave himself but has not pursued any remedy against himself.
The last sentence of the proceeding paragraph sounded kind of ridiculous, huh? “Of course the trustee didn’t bring a claim against himself, who would do that?!?” you might be asking yourself/me. Well, you are right, that is why the legislature has made it illegal for you to self-deal, because invariably it will put your own interest above the beneficiaries, which defeats the purpose of a trust.
Showing that the trustee had all of these breaches of duty is only half of the battle though. Because courts know that most trustees do not know what their legal obligations are, they generally let the trustees off the hook unless it is particularly egregious. However, if you can show concrete harm that you have suffered, you are more likely to succeed. So, in this case, the lawsuit is requesting $105,000,000 but the trustee only took $100,000,000. That extra $5,000,000 are the damages that the three boys are claiming. While this is a lot of money, it is not an absurd amount. According to their complaint, the Trustee signed a promissory note on June 30, 2013 at an interest rate of 2.15% but in June of 2013 the interest rate for mortgage’s were around 4.46%. If they insisted that the Trustee by failing his myriad of duties had a lower rate of return than he should have if the loan was given out at fair market value, then they could allege that the trustee owes the trust $13,380,000 (4.46% interest rate on $100,000,000 for the three years that have gone unpaid). Instead, they are only asking for damages at around $5,000,000 (which is still $1,450,000 less than what the 2.15% interest rate gives them the right to request).
As a result, the three boys are asking for less than they can, and maybe should have. However, it is also likely that they are asking for removal of the father as trustee, which with this large of an indiscretion, is likely to be granted and thereby preventing their father from using the trust’s money for his own personal gain again.