Dear jack1425,
The short answer to your first question, analyzed in Section I of this
response, is that the directors of a trust corporation are not
considered the trustee. The answer to your second question, as
outlined in Section II, depends upon the circumstances involved. In
essence, trustees who violate their fiduciary duties and harm the
beneficiaries of a trust are liable under Illinois law.
Explanation of Case Law Citations
In case you are not familiar with citations to case law, they
typically take the following form: <Volume Number> <Publication> <Page
Number>. Thus, 406 Ill. 102 refers to volume 406 of the Illinois
Reporter, at page 102. Similarly, 285 Ill. App. 3d 350 refers to
Volume 285 of the Illinois Appellate Digest 3rd, at page 350. If two
page numbers are referenced, e.g., 262 Ill. App. 3d 61, 68, it means
that the case begins at page 61, but that the portion of the case
relevant to the legal issue under discussion can be found on page 68.
I. Are the directors of a trust corporation considered the trustee,
severally and jointly?
The directors of a trust company are not the trustees, although there
are circumstances where they may be liable for wrongful actions
relating to a trust.
A. Directors are ordinarily not liable for the debts and obligations
of a corporation.
Under Illinois law, a corporation is a legal entity that exists
separately and distinctly from its shareholders, officers, and
directors, who are not generally liable for the corporation's debts.
(In re Estate of Wallen, 262 Ill. App. 3d 61, 68 (1994)). Accordingly,
shareholders, directors and officers are generally not liable for a
corporation's obligations. (Jacobson v. Buffalo Rock Shooters Supply
Inc., 278 Ill. App. 3d 1084 (1996)).
Thus, while the wrongful conduct of a trust corporation may create an
obligation on the part of the corporation to the beneficiaries of the
trust, it is not one which would of itself allow recovery against the
directors, individually or collectively.
B. Theories to Create Director Liability
1. "Piercing the Corporate Veil"
There is a legal doctrine referred to as "piercing the corporate
veil". This is not technically a separate action, but instead provides
a mechanism to try to reach a corporations owner or directors. Under
this doctrine, liability arises from fraud or injustice perpetrated
not on the corporation but on third persons dealing with the
corporation. (In re Rehabilitation of Centaur Insurance Co., 238 Ill.
App. 3d 292, 300).
In order to "pierce the corporate veil", a plaintiff must convince the
court that the corporation is merely the alter ego or business conduit
of another person or entity. (In re Centaur at 299). If this is
proved, this doctrine fastens liability on the individual or entity
that uses a corporation merely as an instrumentality to conduct that
person's or entity's business. (In re Centaur at 300).
Because a complaint seeking to pierce the corporate veil is not itself
a cause of action, the limitations period applicable to such a
complaint is governed by the nature of the underlying cause of action
alleged in the complaint. Please note also that "piercing the
corporate veil" is not as easy as it may sound, and courts typically
uphold the validity of corporations.
2. Individual Bad Acts
If a director commits individual bad acts which harm the plaintiff,
the director may bear personal liability for those bad acts, despite
his status as a director. For example, if a director engages in
self-dealing, such as by selling his own property to the trust at an
inflated price, the trust may be able to bring an action against the
director in his capacity as an individual to recover the
misappropriated funds.
Illinois law defines "conflicts of interest" as they relate to
directors at 805 ILCS 5/8.60 (The Illinois Business Corporation Act of
1983), which can be found on the website of the Illinois Legislature:
http://www.legis.state.il.us/ilcs/ch805/ch805act5articles/ch805act5Sub9.htm
II. What is the trustee's personal liability for violating laws and
frustrating the intentions of the settler?
A. The Law, Generally
Illinois has a statutory regime governing the duties and liabilities
of trustees. The scope of the actions permitted to a trustee are
defined in the Illinois Compiled Statutes, Trusts and Trustees Act,
760 ILCS 5/, available on the Illinois State Legislature website.
http://www.legis.state.il.us/ilcs/ch760/ch760act5.htm .
Pursuant to 760 ILCS 5/11, available through that link, the trustee
must furnish the trust beneficiaries with an annual account showing
the receipts, disbursements and inventory of the trust estate.
B. Liability Doesn't Always Follow From Bad Results
It is not always possible for a trustee to effect the intentions of
the settlor. Where a trust is composed largely of shares of stock, a
decline in the value of the stock or in dividends paid can leave the
trust short of income or significantly reduced in value. Even
perfectly appropriate investment and management decisions can have an
unintended negative effect on the value of a trust. Under the
"business judgment" rule, it is presumed that corporate officers make
business decisions in good faith. (Ferris Elevator Co. v. Neffco,
Inc., 285 Ill. App. 3d 350 (1996)). Courts will not ordinarily
second-guess ordinary business or management decisions made in good
faith, even where those decisions ultimately prove to be wrong. See,
e.g., Feldham v Sims, 326 Ill. App. 3d 302 (2001) (In which the
business judgment rule would have prevented the plaintiffs' action
directly against the board of directors.).
Thus, although events and bad management decisions may diminish a
trust and frustrate the intentions of the settlor, it does not
necessarily follow either that there was a breach of fiduciary duties
by the trustee, or that the beneficiaries will have any legal
recourse.
C. Liability for Violation of Fiduciary Duties
The various violations you state are all forms of the violation of a
trustee's fiduciary duties. "Fiduciary duties" are special duties
imposed on a fiduciary, to act with loyalty and care when managing the
assets of others. If a trustee misappropriated assets, failed to
properly file tax returns or pay taxes and incurred penalties against
a trust, engaged in self-dealing or insider trading to siphon funds
out of a trust, those acts would all breach the trustee's fiduciary
duties.
Under Illinois law, in order to establish a breach of fiduciary duty,
it must be demonstrated:
- That a fiduciary duty exists;
- That the fiduciary duty was breached;
- That the breach proximately caused an injury to the plaintiff.
(Martin v. Heinold Commodities, Inc., 163 Ill. 2d 33 (1994)).
A trustee must act with the utmost fidelity and good faith with
respect to the administration of the trust. Accordingly, the trustee
must not deal with the subject matter of the trust for his own
benefit. (White v. Macqueen, 360 Ill. 236 (1935)). When this duty is
breached, the presumption arises that the transaction at issue was
fraudulent. (Obermaier v. Obermaier, 128 Ill. App. 3d 602 (1984)). It
is then the trustee's burden to prove, by clear and convincing
evidence, that the transaction was fair and that the trustee did not
breach its duty of loyalty. (Curtis v. Fisher, 406 Ill. 102 (1950)).
In the case you describe, the trust company is the duly designated
trustee, satisfying the first prong of this test. Various fiduciary
duties were violated, satisfying the second prong. Presumably, as a
result of the violations, economic damage resulted or the purpose of
the trust was frustrated, satisfying the third prong. If the trustee
can be shown to have engaged in actions for its own benefit, a
presumption of fraudulent action will attach.
Research Strategy:
Searches on LexisOne, an online legal database of recent case law
(free registration required):
http://www.lexisone.com/
Searches on LexisOne's Illinois library:
director /4 liab!
director /4 self-dealing
"business judgment rule"
trustee /s (breach! /s fiduciary)
Google Search - "director liability" illinois
://www.google.com/search?q=%22director+liability%22+illinois
Google Search - Illinois statutes
://www.google.com/search?q=Illinois+statutes
Google Search - trustee illinois "fiduciary duties"
://www.google.com/search?q=trustee+illinois+%22fiduciary+duties%22
You certainly pose some very interesting and complicated questions. I
hope you find this information useful,
- expertlaw |
Clarification of Answer by
expertlaw-ga
on
01 Nov 2002 23:21 PST
Dear jack1425,
The language you quote is interesting, as it puts the directors into
rather active management role over the trust corporation. However,
there is nothing in that language which of itself would transform
them, individually or collectively, into trustees. Somebody within a
trust corporation must perform its fiduciary tasks on its behalf, and
the execution of those duties does not make that person a trustee.
I. The Duties Described Must Vest Somewhere In The Trust Corporation
The language you quote speaks of "the fiduciary powers of this
organization", reflecting the fact that the fiduciary duties at issue
belong not to the board of directors, but belong to the trust
corporation itself. The language does place the directors into an
active management role, but it is necessary that somebody within the
trust corporation exercise management and fiduciary duties on behalf
of the corporation. That is, those tasks must rest with some authority
within the trust corporation, whether it be the board itself, officers
of the corporation, management staff, or employees.
Please consider that, if the trust corporation did not vest the board
of directors with the power to exercise and delegate its fiduciary
duties, it would have to assign them to some other individual or group
of individuals within the corporation. After all, a corporation can
only function through the people who work for it.
B. Practically, This Has Little Impact On A Suit Against The Trust
Corporation
Realistically, a trust corporation is likely to have sufficient
assests and insurance to be collectible in the event of civil
litigation. The amount of damages should remain the same, whether
there is one institutional trustee or one hundred individuals jointly
and severally liable as trustees.
Should you wish to reach the directors, individually or collectively,
the best legal theories are those of piercing the corporate veil, or
of demonstrating individual bad acts, as described in Section I(B) of
the original answer.
Just so you know, in the context of preparing this clarification I
performed an additional, extensive review of Illinois law, in light of
the language you have quoted. I have not found any authority which
would support treating the directors as trustees.
I hope this clarification resolves your concerns,
- expertlaw
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