By Jeffrey C. Blumenthal. © All rights reserved.
The purpose of this article is to set forth who has standing to bring an action in Illinois against third parties for the preservation and protection of a private trust. As the article explains, in most instances and subject to certain rules, only trustees have standing to bring the action against third parties who are not themselves trustees of the trust. Except in the narrow circumstances articulated in this article, a beneficiary does not have standing to bring suit on behalf of the trust against third parties who are not trustees of the trust at issue.
Beneficiaries, including beneficiaries of discretionary trusts and certain contingent beneficiaries, have standing to maintain an action against a trustee for defalcation of duty. However, a contingent beneficiary’s interest must be vested and not subject to a condition precedent at the time suit is filed for that contingent beneficiary to have standing.
In order to file a lawsuit in Illinois, a party needs “standing.” Standing means that a party has (and alleges) some injury in fact to a legally cognizable interest. Lincoln Title Company v. Nomanbhoy Family Limited Partners, 2013 Ill. App. (3d) 120999*18, 2013 Ill. App. LEXIS 723*21-22, 999 N.E. 2d 748 (3rd Dist. 10/16/13). “[T]he claimed injury, whether ‘actual or threatened’ (citation omitted) must be (1) ‘distinct and palpable’ (citation omitted); (2) ‘fairly traceable to the defendant’s actions’ (citation omitted); and (3) ‘substantially likely to be prevented or redressed by the grant of the requested relief’” (citation omitted). Greer v. Illinois Housing Dev. Auth., 122, Ill. 2d 462, 492 (1988). “[T]he purpose behind the standing doctrine is to ensure that plaintiffs have a ‘personal stake in the outcome’ sufficient to ‘assure the concrete adverseness which sharpens the presentation of issues upon which the court so largely depends for illumination of difficult … questions.’” Scanlan v. Eisenberg, 669 F. 3d 838, 846 (7th Cir. 2012).
In the context of trust law it is usually only the trustee who has standing to sue third parties on behalf of the trust. Pursuant to 760 ILCS 5/4 and 5/4.11, a trustee has the power “[t]o compromise, contest, prosecute or abandon claims or other charges in favor of or against the trust estate”. In Godfrey v. Kamin, 2000 U.S. Dist. LEXIS 18213*12 (N.D. Ill. 2000), the District Court interpreted this power as meaning that “a trustee is the one who has the legal right to sue, not the beneficiary” Citing: United States ex. Rel. Mosay v. Buffalo Bros. Management, 20 F. 3d 739, 742 (7th Cir. 1994). See also: Pierce v. Johnson Electric Co., 117 Ill. App. 3d 867, 868 (1st Dist. 1983) (citing prior statute) (“[A] trustee generally has the power in Illinois to bring suit on behalf of the trust”.); Weisberger v. Weisberger, 954 N.E. 2d. 282, 289 fn. 2(1st Dist. 2011) (Trustee may bring suit for return of funds on behalf of a trust). Sullivan v. Kodsi, 359 Ill. App. 3d 1005, 1010 (1st Dist. 2005) (A trust “can sue or be sued through its trustee in a representative capacity on behalf of the trust”.) Restatement 2nd of Trusts, §280, is in accord with Illinois law and provides that the trustee can maintain an action against a third person such as the trustee could “if he held the trust property free of trust”.
Pursuant to 760 ILCS 5/10, where the trust provides for more than two trustees, a majority must agree on an action before it can be taken. Thus, in Madden v. University Club of Evanston, 97 Ill. App. 3d 330, 333 (1st Dist. 1981), where one of four trustees brought suit to foreclose a mortgage, the court dismissed the claim. The trial court ruled that the individual trustee lacked standing and the appellate court affirmed because, where there are more than two trustees, Section 10 of the Trust and Trustee’s Act (the “Trustee’s Act”) requires a majority of trustees to agree on an action before it is taken. In Madden, a majority of the trustees expressly disagreed with the dissenting trustee’s action of bringing a foreclosure action in connection with the trust property. The majority believed it was in the interests of the beneficiaries to hold onto to the property as long as possible. The Court noted that under 760 ILCS 5/10, the dissenting trustee was protected from liability because the statute provide that “a dissenting trustee has no liability for the acts of the majority.”
However, if a clause in the trust instrument gives extra weight to the determination of one or more trustees, that clause should give the “favored” trustee(s) standing to act despite the provisions of Section 10 of the Trustee’s Act. Section 3 of the Trustee’s Act (760 ILCS 5/3) allows the settlor “to specify in the [trust] instrument the rights, powers, duties, limitations and immunities applicable to the trustee, beneficiary and others and those provisions where not otherwise contrary to law shall control notwithstanding” any contrary provision of the Trustee’s Act. Therefore, a trust grantor should be able to vary the rule on when a specified trustee, who dissents from the majority, has standing to sue or otherwise act on behalf of the trust. As the appellate court held in Carter v. Carter, 965 N.E. 2d 1146, 1153 (1st Dist. 2012) appeal denied 2012 Ill. Lexis 837 (2012):
Through 760 ILSC 5/3 “the legislature intended that the settlor [i.e., the grantor] of a trust have the freedom to direct his bounty as he sees fit, even to the point of giving effect to a provision regarding the rights of beneficiaries that might depart from the standard provisions of the Act, unless ‘otherwise contrary to law’. In re Estate of Feinberg, 235 Ill. 2d 256, 267, 919 N.E. 2d 888, 335 Ill. Dec. 863 (2009). The exercise of discretion by the trustee is not subject to interference by the court absent proof of fraud, abuse of discretion or bad faith.”
While governed by a different statutory provision, Northern Trust Co. v. Continental Illinois Nat’l Bank & Trust Co., 43 Ill. App. 3d 169 (1st Dist. 1976) is a case in which the decision of a corporate trustee was given precedence over a contrary position of two individual trustees because of the terms of the will that created the charitable trust in question. Specifically, the Northern Trust Court approved a charitable trust distribution plan suggested by the corporate trustee over the plan proposed by two individual trustees, because a provision of the will that created the testamentary charitable trust gave extra weight to the corporate trustee’s decisions and required the corporate trustee’s concurrence before action proposed by the individual trustees could go forward. In making its ruling, the Northern Trust Court stated that this provision of the instrument that created the trust took the case out of the purview of an Illinois statute that required a majority of charitable trustees to agree on an action before it was taken–except where the language of the trust agreement or instrument provided otherwise.
Case law further indicates that where a trust instrument requires the appointment of a corporate trustee before a serving individual trustee can take action, an individual trustee does not have standing to independently file a lawsuit on the trust’s behalf. Godfrey v. Kamin, 62 Fed Appx. 693 (7th Cir. 2003). Instead, that individual trustee would have to await the appointment and agreement of the corporate trustee before an action could be filed. Where a deadlock exists between trustees as to a contemplated action, any of the trustees may file an action with the Court to obtain resolution of the deadlock. Madden v. University Club of Evanston, 97 Ill. App. 3d 133 (1st Dist. 1981); See also: Northern Trust Co. v. Continental Illinois Nat’l Bank & Trust Co., 43 Ill. App. 3d 169 (1st Dist. 1976)
The general rule that beneficiaries lack standing to bring an action against third parties other than the trustee to protect the beneficiaries’ rights in the trust is highlighted by the decision in Axelord v. Giambalvo, 129 Ill. App. 3d 512, 519 (1st Dist. 1984). In Axelrod, supra, the court held that trust beneficiaries had no standing to pursue derivative actions against former trustees where the successor trustees determined the costs of suit outweighed the potential recovery. The Court buttressed its ruling on Restatement 2nd of Trusts, §282 (1) (1959) and Comment (e) to that section. Section 282 provides that in those situations where a trustee can maintain an action against a third party if the trustee held the property free of the trust, the beneficiary cannot maintain an action except in two limited situations set forth in two limited, inapplicable situations set forth in §282 (2) and (3). Comment (e) to the section provides that if the trustee properly exercises his discretion to not pursue litigation against a third party, the beneficiary has no right to maintain the action.
Both §282 (2) and (3) of the Restatement (Second) Trusts, reflect the limited circumstances under which beneficiaries have a right to bring an action against third parties (other than the trustee) to protect their interests in a trust. Pursuant to §282 (2) of the Restatement 2nd of Trusts (1959), “if the trustee improperly refuses or neglects to bring an action” against a third party on the trust’s behalf, then then the beneficiary may maintain an action against a third party and the trustee to protect the beneficiary’s trust interests. Pursuant to §282 (3) the beneficiary may also bring an action against a third party to protect the beneficiary’s interest in the trust where there is no serving trustee or the trustee cannot be subjected to the court’s jurisdiction.
In the recent case of Tipsword v. I.D.F.A. Servs., 2011 U.S. Dist. LEXIS 71380 *18-21 (S.D. Ill. 2011), a District Court held that a beneficiary of a trust fund had standing, individually and as a class representative, to sue both the former trustee for breach of fiduciary duty, as well as third parties who were alleged to have knowingly aided and abetted the breach of fiduciary. In Tipsword standing existed based on the allegations that “the trustee of [the] trust is itself involved in culpable misconduct against the trust, necessitating the bringing of an action by a beneficiary of the trust. (2011 U.S. Dist. LEXIS 71380*18). The Tipsword Court quoted with approval to that portion of Section 869 in Bogert, Bogert & Hess, The Law of Trusts and Trustees (3d ed. 2000 & Supp. 2010) which provides:
If the trustee refuses to bring the action, after demand, or fails to
act, or the trusteeship is vacant, or the trustee has been absent for
many years, or the trustee has an adverse interest, or has conspired
to defeat the trust, or the trustee is held to be estopped to sue the
third party, the beneficiary may bring the action against the third
person. The necessities of the case entitle the beneficiary to proceed directly. (2011 U.S. Dist. LEXIS 71380 *18-19).
The court’s comments in Ready v. Ready, 33 Ill. App. 2d 145 (1st Dist. 1961) also confirm that a trust beneficiary has standing to pursue litigation against a third party to protect the beneficiaries interest in the trust where a trustee improperly refused to bring such an action after the beneficiary’s demand. In Ready, the decedent left farm property to his wife and descendants through a testamentary trust. One of the trust beneficiaries brought a class action seeking an accounting purportedly on behalf of all the beneficiaries against an agent of the trustee. The agent argued that the beneficiary lacked standing and the Court held that:
Only a person occupying the position of trustee can be required to
account as such. 35 ILP Trusts, se. 202. If the trustee refuses to
bring the action after demand, or refuses to act, the beneficiary
may bring an action and the trustee, parties’ defendant. Bogart,
Trusts and Trustees, vol. 4, part 1, sec. 870. The complaint in this
case did not allege any demand on the Trustee nor any refusal on
the part of the Trustees to act. Ready, supra at 152 (Emphasis added).
Although a trust beneficiary usually has standing to sue his trustee for breach of trust duties, where the beneficiary’s interest is contingent that interest must be “vested” for standing to exist. In other words, the contingent interest that is being relied upon to confer standing must be in existence at the time a law suit is filed and that interest is asserted as the basis for standing. If the contingent interest is dependent on the occurrence of a future event in order to come into existence–the future fulfillment of a condition precedent—there is no standing. While there are a number of Illinois cases that use expansive language in holding that even remote and contingent interests are sufficient to confer standing, in each of those cases, the contingent interest actually at issue was in existence at the time suit was filed and plaintiff’s standing was being challenged
For example, in Barnhart v. Barnhart, 415 Ill. 303, 323 (1953), the Supreme Court held that “heirs at law”, who were contingent remaindermen of a decedent’s testamentary trust, had standing to seek an accounting from the trustees to preserve and protect their remainder interests in the trust property. In so ruling, the Supreme Court stated, at 415 Ill. 303 at 323, that “a contingent remainderman should not be denied the right to bring an action against the trustees … merely because his interest is remote and contingent….” While the Court’s language in Barnhart was broad, the plaintiffs’ contingent remainder interest in that case was fixed and in existence at the time the lawsuit was filed.
In Burrows v. Palmer, 5 Ill. 2d 434 (1955), plaintiffs, contingent remaindermen, alleged that a trustee failed to transfer title of decedent’s apartment building to a trust as provided for in the residuary clause of the decedent’s will. The plaintiffs, sought a decree that the trustee held legal title to the real estate in his capacity as trustee, that the trustee be required to transfer title to a co-trustee, and that the Court retain jurisdiction of the trust to control the trust’s future administration. The Burrows Court stated at 5 Ill. 2d 434 at 440-441 that: “[A]lthough their interest is contingent and may not vest in possession…plaintiffs were entitled to maintain th[eir] action in equity in order to establish the trust in said property and to secure other relief necessary to protect and preserve said inheritance for the eventual owners.” While it is true that the contingent remaindermen in Burrows were not assured of ever possessing the trust property, the contingent remaindermens’ rights were fixed at the time the lawsuit was filed and not dependent on some future event in order to come into being.
Similarly, in Giagnorio v Torkelson Trust, 292 Ill. App. 3d 318, 324 (2nd Dist. 1997), the Appellate Court held that one contingent remainder beneficiary had standing to bring an action seeking to vitiate a trustee’s sales agreement with another contingent remainder beneficiary because the sale endangered the plaintiff’s interest in the trust. Like the above cases, in Giagnorio, the plaintiff’s contingent remainder interest in the trust was fixed and vested at the time suit was filed.
In contrast to the above cases, in Schlosser v. Schlosser, 247 Ill. App. 3d 1044 (1st Dist. 1993), the Court held that plaintiffs had no standing to set aside their grandmother’s 1981 inter vivos trust. The plaintiffs claimed that they had standing based on their grandmother’s 1976 will, which had been revoked by a 1981will. The Court found that the 1976 will did not provide standing because the grandchildren’s potential interests under that will were subject to condition precedents that had not been fulfilled at the time suit was filed.
Specifically, in order for the grandchildren to receive trust benefits under the 1976 will, the plaintiffs had to be living at the time their father died. Because their father was still alive at the time the suit was filed, it was uncertain whether the condition precedent for the plaintiffs’ interest would be fulfilled and therefore, there was no standing.
The testamentary trust created by the grandmother’s 1976 will also provided for the possibility of discretionary support payments to the grandchildren. However, the court ruled that because such payments were subject to the discretion of the trustee, the discretionary interest was insufficient to confer standing to sue. In so ruling, the court reasoned that whether the trustee’s would exercise his discretion to make such support payments constituted a condition precedent that “made it uncertain that the event necessary for vesting will occur.” (247 Ill. App. 3d at 1047) The court’s ruling on this point confuses the vesting of the right to possibly receive discretionary support payments, which occurred when the plaintiffs’ grandmother executed the instrument creating the trust, with the actual receipt of discretionary support payments, which was uncertain and dependent on the appropriate exercise of the trustee’s discretion in the future. In fact, in the recent case of Scanlon v. Eisenberg, 669 F. 3d 838, 843 (7th Cir 2012) the Seventh Circuit ruled that the beneficiary of a discretionary support trust had standing to bring an action for breach of trust.
The distinction between a vested, contingent interest that provides standing and an expectancy subject to a condition precedent that does not provide standing, was also addressed in Zagorski v. Kaleta (In re Estate of Michalak), 404 Ill. App. 3d 75 (1st Dist. 2010). In Zagorksi, supra, Michalak, an elderly and possibly mentally disabled person, designated her neighbors, the Kaletas, as remaindermen of her trust. Michalak’s niece, Zagorski, was subsequently appointed as Michalak’s guardian. After her appointment, Zagorski petitioned the court to amend the trust and eliminate the Kaletas as the trust remainderman and designate herself as the trust’s remainder beneficiary. The court approved Zagorski’s motion and the Kaletas appealed. In holding that the Kaletas had standing to challenge the trial court’s ruling, the appellate court noted at 404 Ill. App. 3d 75 at 84, “ the absence of any condition precedent to the Kaletas acquiring an interest in the real estate upon execution of the trust. Their enjoyment of the property would immediately materialize upon Michalak’s death, subject to no other conditions.” The court went on to note that “the Kaletas had an equitable remainder interest, which vested immediately upon the creation of the trust, and, therefore, they have standing to appeal the circuit court’s order”.
The Restatement 3rd of Trusts, §94 further provides that co-trustees, successor trustees and other persons who are acting on behalf of one or more beneficiaries have standing to sue a trustee for breach of duty. The Comment to 1(d) to §94 of Restatement 3rd of Trusts indicates that if a trust beneficiary is under an incapacity suit may be brought by his personal fiduciary, whether natural or legal guardian or conservator or agent acting under a durable power of attorney.
Comment to 1(d) to the above Restatement section further provides that a “settlor may reserve or confer upon others to enforce the trust. The holder of such a power has standing, on behalf of the beneficiaries to bring suit against the trustee, although the power does not prevent a beneficiary from acting on his or her own behalf”. The same comment recognizes that the “terms of a trust may reserve to the settlor or confer upon others a fiduciary power… to control or advise the trustee… or amend the trust. … Such a power enables the holder to sue on behalf of the beneficiaries, but only to enforce the trustee’s duties… with regard to that power.” For example, under 760 ILCS 5/§16.3, a trust protector, acting with respect to matters placed within the trust protector’s purview by the subject trust instrument, would have standing to sue the trustee.
Finally Comment to 1(d)(2) to §94 of Restatement 3rd of Trusts provides that the Settlor of the Trust, in his capacity as such, does not have standing to maintain a suit against the trustee for breach of trust, absent state legislation to that effect.