Trust Litigation

Generally speaking, a trust is not subject to continuous judicial supervision absent a contrary court order.  However, an interested person, as defined by statute, may bring a judicial proceeding which may relate to any matter involving the administration of a trust, including a request for instructions and an action to declare rights.  The court has broad powers over a trust; these powers may not be modified by the terms of the trust.

A proceeding concerning the administration of a trust is started by filing a petition with the court.  Once an interested person makes an objection, which is a written response in probate court, to the petition, the proceeding becomes contested. A scheduling conference will be scheduled by the court to determine when the written response is due, and at this time the court will order the parties to submit a stipulated scheduling order, which will include the deadline for initial discovery; the deadline for the disclosure of witnesses, both expert and non-expert; the deadline for discovery requests including Interrogatories, Request for Admissions, and Request for Production, Inspection, and Copying of Documents and Tangible Things; the date by which discovery is to be concluded; and the date all pretrial motions must be filed, among many other issues.  At some point in the process, the court will likely order the parties to participate in mediation in the hopes they will come to a settlement, thus avoiding a trial.  The scheduling order is a road map of the litigation, and there are likely to be detours along the way.

Claims of Breach of Trust 

A breach of trust occurs when a trustee violates one or more of his or her trustee duties.  The Arizona Trust Code governs all actions of a trustee taken on or after January 1, 2009.  In addition, the Arizona Trust Code defines the remedies for breach of trust, which include compelling the trustee to perform the trustee’s duties; enjoining the trustee from committing a breach of trust; compelling the trustee to redress the breach of trust by paying money, restoring property or other means; ordering a trustee to account; appointing a special fiduciary to take possession of the trust property and administer the trust; suspend the trustee; remove the trustee; reduce or deny compensation to the trustee; void an act of the trustee; or order any other appropriate relief.

Any of the following may file a petition for breach of trust against the trustee, a co-trustee, or a former trustee:  a trust beneficiary, a co-trustee, or a successor trustee of the trust.

In addition to the remedies mentioned above, when a trustee breaches the trust the trustee is liable to the beneficiaries for the greater of the amount that would be required to restore both the value of the trust property and trust distributions to what they would have been had the breach not occurred, or the amount of profit the trustee made as a result of the breach.

Defenses to Breach of Trust Claims 

The Arizona Trust Code provides several defenses to a claim of breach of trust.  A review of the terms of the trust is the first step in analyzing whether the trustee breached the trust because the terms of the trust define the duties of the trustee.  Pursuant to statute, most of the trustee’s duties may be waived.  The terms of the trust may also include an exculpatory clause that may relieve the trustee from liability for a breach of trust.  However, it’s important to note that an exculpatory clause is ineffective against breaches of trust committed in bad faith or with reckless indifference to the purposes of the trust or the interests of the beneficiaries, or if the exculpatory clause was inserted by the trustee as a result of the trustee’s abuse of a fiduciary or confidential relationship with the settlor.

The terms of the trust may also provide the trustee’s power may be exercised in the trustee’s discretion, and this power is not subject to question unless the trustee abused the trustee’s discretion.  The court judges an exercise of discretion by determining if the trustee acted in good faith to protect the interests of all of the beneficiaries.  The question is an objective one for the court, and an abuse of discretion is not found where a court would have acted differently under the circumstances.

A trustee is not liable for breach of trust when the trustee’s actions were based on a reasonable reliance on the terms of the trust, but the trustee may not ignore a court order or nonjudicial settlement agreement interpreting the meaning of the trust instrument.

There are a number of specific situations for which the Arizona Trust Code provides defenses for the trustee, such as issues regarding the distribution of trust assets.  There are also defenses available to co-trustees, and even if there is a breach of trust, there are three defenses that may apply to protect the trustee.  These defenses are (1) statute of limitations, (2) common law doctrines of estoppel or laches, and (3) beneficiary consent.

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