Self-dealing is simply not tolerated
in the relationship between a fiduciary and those whose interests he or she is
to protect. In attempting to address the
problem of self-dealing, a bright-line prohibition has evolved in trust law so
that where self-dealing is found, the Court will make "no further
inquiry." It is immaterial whether the
transaction was fair, or even if it garnered favorable results.
The origins of the "no further inquiry" rule in New York are discussed in
detail in Matter of Kilmer, 187 Misc. 121, 61 N.Y.S.2d 51 (Sur. Ct.
Broome County 1946) [enhanced version available to lexis.com subscribers]. In Kilmer,
the executors of an estate needed to sell some of the estate's real property
assets in order to pay estate taxes. After
duly marketing the property, the executors received a low offer. One of the co-executors believed that he
could broker a better deal, but the other co-executors were hesitant to turn
down any offer. The executors finally
agreed to allow their co-executor to continue to market the property if the
co-executor agreed to purchase the property for the amount of the low offer in
the event any deal fell through. No deal
came to fruition, so the co-executor bought the real property for the initial
low offer, as promised.
Several years later, some of the estate beneficiaries sought to void the
transaction, and the Surrogate's Court held in their favor. Upon review, the Surrogate acknowledged that
he had "no doubt" that the transaction had been free of "any ulterior motive on
the part of any of the executors." (Matter of Kilmer, 187 Misc. 121, 125,
61 N.Y.S.2d 51, 55 (Sur. Ct. Broome County 1946)) Yet, the court still refused to uphold the
sale because it did not want to set a bad precedent.
The clear policy of New York
courts is against permitting any insertion of a trustee's own private interest
into the management of the estate, regardless of the outcome.
Avoiding Allegations of Self-Dealing
of self-dealing by a fiduciary are quite serious and, if found liable, the
remedies are also quite severe. When a
trustee does engage in self-dealing, the beneficiaries are entitled to choose
among a variety of remedies including rescinding the transaction, damages
and/or lost profits or appreciation damages. See e.g., Matter of Witherall, 37 A.D.3d 879, 828 N.Y.S.2d 722 (3d
Dep't 2007) [enhanced version / unenhanced version available from lexisONE Free Case Law];
Matter of Rothko, 84 Misc. 2d 830,
379 N.Y.S.2d 923 (Sur. Ct. New York County 1975) [enhanced version].
In some instances, self-dealing
is authorized by the language of the governing instrument. However, even the broadest exoneration
provision will not provide unfettered exoneration for a self-dealing
fiduciary. See e.g., O'Hayer v. de St.
Aubin, 30 A.D.2d 419, 424, 293 N.Y.S.2d 147, 152 (2d Dep't 1968) [enhanced version] (noting that a trustee is still
liable if he acts in bad faith or intentionally or with reckless indifference
to the interests of the beneficiaries, or "if he has personally profited
through a breach of trust"). Moreover,
any exoneration clause will be strictly construed and may not protect a
A fiduciary can also avoid
liability if he or she receives prior judicial approval of an interested
transaction, upon a full and complete disclosure of all relevant information by
the fiduciary and where it is shown that it is for the benefit of the trust or
estate. Matter of Scarborough Properties, 25 N.Y.2d 553, 307 N.Y.S.2d 641,
255 N.E.2d 761 (1969) [enhanced version].
See also SCPA 2107(2).
Self-dealing can also be
authorized by beneficiary consent; however the level of full and complete
disclosure may come into dispute later.
The best practice is to fully apprise the beneficiaries, receive their
consent, and then seek court approval of the deal.
Jennifer F. Hillman is an attorney at Ruskin, Moscou
Faltischek, P.C., Uniondale,
New York where her practice
focuses in the area of trust and estate litigation. A longer discussion of this issue will appear
in an upcoming article in the New York Law Journal, co-authored with Hon. C.
. . . .
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