Can an executed agreement purporting to settle nonjudicially a trustee’s accounts be final and binding absent compliance with the material-purpose doctrine, a.k.a Claflin doctrine?

Charles E. Rounds, Jr. - Suffolk University Law School

An irrevocable fully discretionary inter vivos trust was established to fund the college educations of five named individuals. They were and are fully competent in all respects. Title to the remainder-in-corpus ultimately passes to a charity. In violation of the trust’s material purposes, see §8.15.7 of Loring and Rounds: A Trustee’s Handbook (2023), the trustee purchased with entrusted funds five expensive sports cars and then distributed a vehicle outright and free of trust to each individual. The individual beneficiaries and the charity executed a nonjudicial settlement agreement (hereinafter “agreement”) approving the trustee’s report (hereinafter “accountings”). The distributions were fully disclosed in the accounting documentation, affixed to which was a copy of the governing instrument. No individual has considered even applying to college. Is this agreement final and binding on all persons? The settlor is seeking to have the agreement judicially voided, the accounts re-opened, and the breach of trust judicially remedied.

Things do not look promising for our settlor. A perusal of UTC §813, which regulates the trustee’s duty to inform and account, says nothing about accounting to nonbeneficiaries. Our settlor retained no beneficial interest and no powers. But wait. Am I barking up the wrong tree? This is a trust-modification issue, not a trust-accounting issue. The terms of the trust have been constructively modified via a nonjudicial settlement agreement approving the trustee’s accountings. The UTC, specifically §411(a), provides that a trust may be judicially modified upon consent of the settlor and all the beneficiaries, even if the modification is inconsistent with a material purpose of the trust. In our fact pattern, the court has not been asked to ratify the agreement, nor was the settlor a party to it. Ergo, the settlement is void ab initio, unless there has been compliance with UTC §111, which regulates nonjudicial settlement agreements generally.

The settlor, via UTC §111(a), would have standing to judicially contest the agreement’s enforceability in that he qualifies as an “interested person.” For purposes of §111, an interested person is a person whose consent would be required in order to achieve a binding settlement were the settlement approved by the court. Under UTC §411(a), the material-purpose doctrine may only be judicially neutered if the beneficiaries and the settlor all consent. Under UTC § 111(c), however, all nonjudicial settlement agreements must comply with the material-purpose doctrine. This even captures an agreement to which the settlor is a party.

Assuming the settlor manages to get the agreement’s voidance judicially confirmed, the court would have a follow-up duty, sua sponte, to remedy the trustee’s breaches of trust and to compel the unjustly enriched beneficiaries to make restitution to the trust estate. UTC §111(d) proffers a nonexclusive list of matters resolvable via nonjudicial settlement agreement. The top two are “the interpretation and construction of the terms of the trust” and “the approval of a trustee’s report or accounting.” The takeaway: The material-purpose doctrine may not be neutered nonjudicially via agreement to approve/settle a trustee’s accounts.

As to the UTC §1005(c) five-year statute of ultimate repose applicable to beneficiary-brought breach-of-trust actions. First, our settlor was not a beneficiary. Second, as trustee’s disposition of the automobiles constituted a fraud on the trustee’s special fiduciary powers, the statute of repose would have been unenforceable as against our settlor in any case, the trustee’s hands being unclean. Fraud on a special fiduciary power is a subject of §8.15.26 of Loring and Rounds: A Trustee’s Handbook (2023), which section is reproduced in appendix below. Handbook available for purchase at Loring and Rounds: A Trustee's Handbook, 2023 Edition | Wolters Kluwer Legal & Regulatory].

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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Charles E. Rounds, Jr. - Suffolk University Law School

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