Tennessee § 35-15-802 - Duty of loyalty.

§ 35-15-802. Duty of loyalty.

A trustee shall administer the trust solely in the interests of the beneficiaries. Subject to the rights of persons dealing with or assisting the trustee as provided in § 35-15-1012 or as may otherwise be allowed under Tennessee law, a sale, encumbrance, or other transaction involving the investment or management of trust property entered into by the trustee for the trustee's own personal account or which is otherwise affected by a conflict between the trustee's fiduciary and personal interests is voidable by a beneficiary affected by the transaction unless: The transaction was authorized by the terms of the trust; The transaction was approved by the court; The beneficiary did not commence a judicial proceeding within the time allowed by § 35-15-1005; The beneficiary consented to the trustee's conduct, ratified the transaction, or released the trustee in compliance with § 35-15-1009; or The transaction involves a contract entered into or claim acquired by the trustee before the person became or contemplated becoming trustee. A sale, encumbrance, or other transaction involving the investment or management of trust property is presumed to be affected by a conflict between personal and fiduciary interests of the trustee if it is entered into by the trustee with: The trustee's spouse; The trustee's descendants, siblings, parents, or their spouses; An agent or attorney of the trustee; or A corporation or other person or enterprise in which the trustee, or a person that owns a significant interest in the trustee, has an interest that might affect the trustee's best judgment. A transaction between a trustee and a beneficiary that does not concern trust property but that occurs during the existence of the trust or while the trustee retains significant influence over the beneficiary and from which the trustee obtains an advantage is voidable by the beneficiary unless the trustee establishes that the transaction was fair to the beneficiary. A transaction not concerning trust property in which the trustee engages in the trustee's individual capacity involves a conflict between personal and fiduciary interests of the trustee if the transaction concerns an opportunity properly belonging to the trust. In addition to all other permissible investments and delegatable duties listed in this title, so long as they are fairly priced and in accordance with the interest of the beneficiaries and the interests of the fiduciary's appointment and otherwise comply with chapter 14 of this title, a fiduciary may purchase, sell, hold or otherwise deal with an affiliate or an interest in an affiliated investment, as well as delegate to an affiliate or other agent associated with the fiduciary and, upon satisfaction of the conditions stated in subsection (h), such fiduciary may receive fiduciary compensation from such account at the same rate as the fiduciary would otherwise be entitled to be compensated. Such activities shall occur without any presumption of a conflict between personal and fiduciary interests of the trustee or other fiduciary. As used in this section: “Affiliate” means any corporation or other entity that directly or indirectly through one or more intermediaries controls, is controlled by or is under common control with the fiduciary; “Affiliated investment” means an investment for which the fiduciary or an affiliate of the fiduciary acts as adviser, administrator, distributor, placement agent, underwriter, broker or in any other capacity for which it receives or has received a fee or commission from such investment or an investment acquired or disposed of in a transaction for which the fiduciary or an affiliate of the fiduciary receives or has received a fee or commission. “Affiliated investment” also means an investment in an insurance contract purchased from an insurance agency owned by, or affiliated with, the fiduciary, or any of its affiliates; “Delegate to an affiliate or associated agent” means a proper delegation of any duty of the fiduciary to any person or entity that is affiliated with, or associated with, the fiduciary. The action of doing any of the above shall be known as a “delegation to an affiliate or associated agent”; “Fee or commission” means compensation paid to a fiduciary or an affiliate thereof on account of its services to or on behalf of an investment; For purposes of this section, “fiduciary” means any fiduciary as defined in § 35-15-103, as well as any other fiduciary; and “Investment” means any security as defined in § 2(a)(1) of the Securities Act of 1933 (15 U.S.C. § 77b(a)(1)), any contract of sale of a commodity for future delivery within the meaning of § 2(i) of the Commodity Exchange Act (7 U.S.C. § 2(i)), or any other asset permitted for fiduciary accounts pursuant to the terms of chapter 14 of this title or by the terms of the governing instrument, including by way of illustration and not limitation: shares or interests in a public or private investment fund, which shall include, but not be limited to, a public or private investment fund organized as a limited partnership, limited liability company, statutory or common law business trust, real estate investment trust, joint venture or other general or limited partnership; or an open-end or closed-end management type investment company or investment trust registered under the Investment Company Act of 1940 (15 U.S.C. § 80a-1 et seq.). A fiduciary seeking compensation pursuant to subsection (f) shall, as is applicable relative to the fiduciary's particular appointment, disclose either: to those persons entitled to be kept informed about the administration of a trust under § 35-15-813(a)(1), subject to the provisions of § 35-15-813(d) and (e); to each principal in an agency relationship; or to all current recipients of statements of any other fiduciary account not described above; all fees or commissions paid or to be paid by the account, or received or to be received by an affiliate arising from such affiliated investment or delegation to an affiliate or associated agent. The disclosure required under this subsection (h) may be given either in a copy of the prospectus or any other disclosure document prepared for the affiliated investment under federal or state securities laws or in a written summary that includes all fees or commissions received or to be received by the fiduciary or any affiliate of the fiduciary and an explanation of the manner in which such fees or commissions are calculated, either as a percentage of the assets invested or by some other method. Such disclosure shall be made at least annually unless there has been no increase in the rate at which such fees or commissions are calculated since the most recent disclosure. Notwithstanding this subsection (h), no such disclosure is required if the governing instrument or a court order expressly authorizes the fiduciary to invest the fiduciary account in affiliated investments or to perform the delegation to an affiliate or associated agent. A fiduciary that has complied with subsection (h), whether by making the applicable disclosure or by relying on the terms of a governing instrument or court order, shall have full authority to administer an affiliated investment, including the authority to vote proxies thereon, without regard to the affiliation between the fiduciary and the investment or the fiduciary and delegatee, as the case may be. In voting shares of stock or in exercising powers of control over similar interests in other forms of enterprise, the trustee shall act in the best interests of the beneficiaries. If the trust is the sole owner of a corporation or other form of enterprise, the trustee shall elect or appoint directors or other managers who will manage the corporation or enterprise in the best interests of the beneficiaries. This section does not preclude the following transactions, if fair to the beneficiaries: An agreement between a trustee and a beneficiary relating to the appointment or compensation of the trustee; Payment of reasonable compensation to the trustee; A transaction between a trust and another trust, decedent's estate, or conservatorship of which the trustee is a fiduciary or in which a beneficiary has an interest; A deposit of trust money in a regulated financial-service institution operated by the trustee; or An advance by the trustee of money for the protection of the trust. The court may appoint a special fiduciary to make a decision with respect to any proposed transaction that might violate this section if entered into by the trustee. Acts 2004, ch. 537, § 61; 2010, ch. 725, § 8; 2013, ch. 390, § 30. Compiler's Notes. Acts 2013, ch. 390, § 55 provided that: (b) Except as otherwise provided in the act, on July 1, 2013: The act applies to all trusts created before, on, or after July 1, 2013; The act applies to all judicial proceedings concerning trusts commenced on or after July 1, 2013; The act applies to judicial proceedings concerning trusts commenced before July 1, 2013, unless the court finds that application of a particular provision of the act would substantially interfere with the effective conduct of the judicial proceedings or prejudice the rights of the parties, in which case the particular provision of the act does not apply and the superseded law applies; Any rule of construction or presumption provided in the act applies to trust instruments executed before July 1, 2013, unless there is a clear and express indication of a contrary intent in the terms of the trust; and An act done before July 1, 2013, is not affected by the act. 1. No Breach. Trustee's decision relating to a farm lease did not violate three statutory duties within the Uniform Trust Code because it exercised reasonable care, skill, and caution in its decision regarding the farm lease, and it kept a son reasonably informed about the administration of the trust and the farm lease. The son failed to demonstrate that the trustee administered the trust in a manner that was adverse to his beneficial interest as that interest was defined under the terms of the trust. Glass v. Suntrust Bank, 523 S.W.3d 61, 2016 Tenn. App. LEXIS 305 (Tenn. Ct. App. May 4, 2016), appeal denied, — S.W.3d —, 2016 Tenn. LEXIS 710 (Tenn. Sept. 26, 2016). Section Comment. Unless provided otherwise hereinafter, any reference to “section,” “subsection” or “subdivision” means all, or such portion of, T.C.A. § 35-15-802 . The provisions of this section in some ways diverge significantly from the Uniform Trust Code and the restatements. To the extent this section is in conflict with the Uniform Trust Code, any restatement or any other foreign law, such foreign law is not precedential or controlling and is rejected by the Tennessee Uniform Trust Code. This section addresses the duty of loyalty, perhaps the most fundamental duty of the trustee. Subsection (a) states the general principle, which is copied from Restatement (Second) of Trusts § 170(1) (1959). A trustee owes a duty of loyalty to the beneficiaries, a principle which is sometimes expressed as the obligation of the trustee not to place the trustee's own interests over those of the beneficiaries. Most but not all violations of the duty of loyalty concern transactions involving the trust property, but breaches of the duty can take other forms. For a discussion of the different types of violations, see George G. Bogert & George T. Bogert, The Law of Trusts and Trustees § 543 (Rev. 2d ed. 1993); and 2A Austin W. Scott & William F. Fratcher, The Law of Trusts §§ 170-170.24 (4th ed. 1987). The “interests of the beneficiaries” to which the trustee must be loyal are the beneficial interests as provided in the terms of the trust. See T.C.A. § 35-15-103 . The duty of loyalty applies to both charitable and noncharitable trusts, even though the beneficiaries of charitable trusts are indefinite. In the case of a charitable trust, the trustee must administer the trust solely in the interests of effectuating the trust's charitable purposes, as the purposes are defined under the terms of the trust. See Restatement (Second) of Trusts § 379 cmt. a (1959). Duty of loyalty issues often arise in connection with the settlor's designation of the trustee. For example, it is not uncommon that the trustee will also be a beneficiary. Or the settlor will name a friend or family member who is an officer of a company in which the settlor owns stock. In such cases, settlors should be advised to consider addressing in the terms of the trust how such conflicts are to be handled. T.C.A. § 35-15-105 authorizes a settlor to override an other-wise applicable duty of loyalty in the terms of the trust. Sometimes the override is implied. The grant to a trustee of authority to make a discretionary distribution to a class of beneficiaries that includes the trustee implicitly authorizes the trustee to make distributions for the trustee's own benefit. Subsection (b) states the general rule with respect to transactions involving trust property that are affected by a conflict of interest. A transaction affected by a conflict between the trustee's fiduciary and personal interests is voidable by a beneficiary who is affected by the transaction. Subsection (b) carries out the “no further inquiry” rule by making transactions involving trust property entered into by a trustee for the trustee's own personal account voidable without further proof. Such transactions are irrebuttably presumed to be affected by a conflict between personal and fiduciary interests. It is immaterial whether the trustee acts in good faith or pays a fair consideration. See Restatement (Second) of Trusts § 170 cmt. b (1959). Note that subsection (b) varies from section 802(b) of the Uniform Trust Code in that such subsection is subject not only to the rights of persons dealing with or assisting the trustee as provided in T.C.A. § 35-15-1012 , but is also subject to any other right allowed under Tennessee law. The rule is less severe with respect to transactions involving trust property entered into with persons who have close business or personal ties with the trustee. Under subsection (c), a transaction between a trustee and certain relatives and business associates is presumptively voidable, not void. Also presumptively voidable are transactions with corporations or other enterprises in which the trustee, or a person who owns a significant interest in the trustee, has an interest that might affect the trustee's best judgment. The presumption is rebutted if the trustee establishes that the transaction was not affected by a conflict between personal and fiduciary interests. Among the factors tending to rebut the presumption are whether the consideration was fair and whether the other terms of the transaction are similar to those that would be transacted with an independent party Even where the presumption under subsection (c) does not apply, a transaction may still be voided by a beneficiary if the beneficiary proves that a conflict between personal and fiduciary interests existed and that the transaction was affected by the conflict. The right of a beneficiary to void a transaction affected by a conflict of interest is optional. If the transaction proves profitable to the trust and unprofitable to the trustee, the beneficiary will likely allow the transaction to stand. For a comparable provision regulating fiduciary investments by national banks, see 12 C.F.R. § 9.12(a). As provided in subsection (b), no breach of the duty of loyalty occurs if the transaction was authorized by the terms of the trust or approved by the court, or if the beneficiary failed to commence a judicial proceeding against the appropriate fiduciary within the time allowed or chose to ratify the transaction, either prior to or subsequent to its occurrence. In determining whether a beneficiary has consented to a transaction, the principles of representation from title 35, chapter 3 may be applied. Subdivision (b)(5), which is derived from section 3-713(1) of the Uniform Probate Code, allows a trustee to implement a contract or pursue a claim that the trustee entered into or acquired before the person became or contemplated becoming trustee. While this subsection allows the transaction to proceed without automatically being voidable by a beneficiary, the transaction is not necessarily free from scrutiny. In implementing the contract or pursuing the claim, the trustee must still complete the transaction in a way that avoids a conflict between the trustee's fiduciary and personal interests. Because avoiding such a conflict will frequently be difficult, the trustee should consider petitioning the court to appoint a special fiduciary, as authorized by subsection (l) of this section, to work out the details and complete the transaction. Subsection (d) does not apply to a corporate trustee that makes a loan to or sells a financial product to a beneficiary in the ordinary course of business. Otherwise, subsection (d) creates a presumption that a transaction between a trustee and a beneficiary not involving trust property is an abuse by the trustee of a confidential relationship with the beneficiary. This subsection has limited scope. If the trust has terminated, there must be proof that the trustee's influence with the beneficiary remained. Furthermore, whether or not the trust has terminated, there must be proof that the trustee obtained an advantage from the relationship. The fact the trustee profited is insufficient to show an abuse if a third party would have similarly profited in an arm's length transaction. See 2A Austin W. Scott & William F. Fratcher § 170.25 (4th ed. 1987), which states the same principle in a slightly different form: “Where he deals directly with the beneficiaries, the transaction may stand, but only if the trustee makes full disclosure and takes no advantage of his position and the transaction is in all respects fair and reasonable.” Subsection (e), which allows a beneficiary to void a transaction entered into by the trustee that involved an opportunity belonging to the trust, is based on Restatement (Second) of Trusts § 170 cmt. k (1959). While normally associated with corporations and with their directors and officers, what is usually referred to as the corporate opportunity doctrine also applies to other types of fiduciary. The doctrine prohibits the trustee's pursuit of certain business activities, such as entering into a business in direct competition with a business owned by the trust, or the purchasing of an investment that the facts suggest the trustee was expected to purchase for the trust. For discussion of the corporate opportunity doctrine, see Kenneth B. Davis, Jr., Corporate Opportunity and Comparative Advantage, 84 Iowa L. Rev. 211 (1999); and Richard A. Epstein, Contract and Trust in Corporate Law: The Case of Corporate Opportunity, 21 Del. J. Corp. L. 5 (1996). See also Principles of Corporate Governance: Analysis and Recommendations § 5.05 (American Law Inst. 1994). Subsections (f) through (i) diverge significantly from the Uniform Trust Code and the restatements. Subsections (f) through (i) clearly grant the express authority to use affiliates and related parties or affiliated delegatees to manage assets and perform administrative functions. This increases flexibility and grants fiduciaries the ability to leverage expertise inside their broad organization. Versus the common law, the restatements, the Uniform Trust Code and Uniform Prudent Investor Act (as such uniform acts are proposed by ULC – NCCUSL), these provisions grant exceptions to the no further inquiry rule relative to conflicts of interests for investments and other transactions between affiliates so long as these transactions are fairly priced, are in accordance with the interests of the beneficiaries and the interests of the fiduciary appointment and otherwise comply with the Tennessee Uniform Prudent Investor Act. Under most circumstances, a fiduciary must disclose, at least annually (unless there has been no change) to the beneficiaries entitled to receive a copy of the trustee's annual report, the rate and method by which any additional compensation paid, earned or received from or by any affiliate was determined. In furtherance of its overriding emphasis on settlor’s intent and of freedom of disposition, under the Tennessee Uniform Trust Code, subsection (j) can be completely overridden by the terms of the trust. Moreover, under such code, the power to vote shares of stock or in exercising control over similar interests in other forms of enterprise may be removed from any trustee and placed in the hands of any other fiduciary as such is defined in T.C.A. § 35-15-103 . When such occurs any fiduciary from which such powers were so removed is an excluded fiduciary as such is defined in T.C.A. § 35-15-103 Absent the terms of a trust overriding subsection (j) as discussed in the immediately preceding paragraph, such sub-section addresses an overlap between trust and corporate law. It is based on Restatement of Trusts (Second) § 193 cmt. a (1959), which provides that “[i]t is the duty of the trustee in voting shares of stock to use proper care to promote the interest of the beneficiary,” and that the fiduciary responsibility of a trustee in voting a control block “is heavier than where he holds only a small fraction of the shares.” Similarly, the department of labor construes ERISA's duty of loyalty to make share voting a fiduciary function. See 29 C.F.R. § 2509.94-2. When the trust owns the entirety of the shares of a corporation, the corporate assets are in effect trust assets that the trustee determines to hold in corporate form. The trustee may not use the corporate form to escape the fiduciary duties of trust law. Thus, for example, a trustee whose duty of impartiality would require the trustee to make current distributions for the support of current beneficiaries may not evade that duty by holding assets in corporate form and pleading the discretion of corporate directors to determine dividend policy. Rather, the trustee must vote for corporate directors who will follow a dividend policy consistent with the trustee's trust-law duty of impartiality. Subsection (k) contains several exceptions to the general duty of loyalty, which apply if the transaction was fair to the beneficiaries. Subdivisions (k)(1) and (k)(2) clarify that a trustee is free to contract about the terms of appointment and rate of compensation. Consistent with Restatement (Second) of Trusts § 170 cmt. r (1959), subdivision (k)(3) authorizes a trustee to engage in a transaction involving another trust of which the trustee is also trustee, a transaction with a decedent's estate or a conservatorship estate of which the trustee is personal representative or conservator, or a transaction with another trust or other fiduciary relationship in which a beneficiary of the trust has an interest. The authority of a trustee to deposit funds in a financial institution operated by the trustee, as provided in subdivision (k)(4), is recognized in Restatement (Second) of Trusts § 170 cmt. m (1959). The power to deposit funds in its own institution does not negate the trustee's responsibility to invest prudently, including the obligation to earn a reasonable rate of interest on deposits. Subdivision (k)(5) authorizes a trustee to advance money for the protection of the trust. Such advances usually are of small amounts and are made in emergencies or as a matter of convenience. Pursuant to T.C.A. § 35-15-709 , the trustee has a lien against the trust property for any advances made. If a right is acquired, extinguished, or barred upon the expiration of a prescribed period that has commenced to run under any other statute before July 1, 2013, that statute continues to apply to the right even if it has been repealed or superseded.