No Further Inquiry: The Self-Dealing Fiduciary

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

Allegations 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 self-dealing fiduciary.

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. Raymond Radigan. 

. . . .

Explore the LEXIS.com Estates, Gifts & Trusts and Elder Law resources

Discover the features and benefits of LexisNexis® Tax Center

For more information about LexisNexis products and solutions connect with us through our corporate site.