Florida Probate, Trust & Guardianship Litigation

Standing in Trust Litigation

Standing is required to bring suit on behalf of another person or entity.  In trust litigation, sometimes the beneficiaries want the trustee to bring an action against another person, but the trustee refuses to do so.  But normally, only the trustee can enforce rights of a trust against third parties.  In most situations, the beneficiary would have to bring suit against the trustee, to force the trustee to bring the action or perhaps persuade the court to appoint the beneficiary as a special fiduciary to act on behalf of the trust in pursuing the action in question.  A beneficiary who does not institute the intermediate step of obtaining court permission before bringing suit proceeds at his or her peril.

In Roller v. Collins, 5D22-1114 (5th DCA 2023), the beneficiaries of a trust brought an action against a third party to enforce rights that were properly held by the trust.

James was the grantor and trustee of his revocable trust.  Judith was the wife of James.  James, individually and as trustee of his revocable trust, and Judith, individually, borrowed money from Northern Trust.  James, individually and as trustee of his revocable trust, executed a pledge agreement whereby he pledged securities in the revocable trust as collateral on the loan from Northern Trust.

James then died, making his revocable trust irrevocable.  Cypress Trust became the successor trustee of the trust.  Northern Trust declared the loan in default.  Cypress Trust, acting as successor trustee,  liquidated the pledged securities held in the trust and paid off the loan.  Importantly, the loan proceeds were used to improve the home where James and Judith lived.  At the death of James, Judith became the sole owner of the home, improved via the loan, which was paid off from assets of the trust.  The trust received no benefit from the loan or from satisfying the loan, only Judith did.

James’ three children were beneficiaries of the trust.  The children sued Judith for statutory reimbursement under Florida Statute 673.4191.

Can an Individual Who Benefits From a Loan Satisfied with Pledged Trust Assets be Liable for Reimbursement?

Yes, an individual can be liable to repay a trust when the trust satisfies a loan that benefits the individual.  As explained by the Court:

Section 673.4191 is entitled “Instruments signed for accommodation.” Pursuant to subsection 673.4191(1), an “accommodation party” is a party to an instrument who “signs the instrument for the purpose of incurring liability on the instrument without being a direct beneficiary of the value given for the instrument.” The party who receives the benefit is the “accommodated party.” § 673.4191(1), Fla. Stat. (2021). Thus, “accommodation parties remain directly accountable to the holder of the instrument and legally responsible, in contribution, to their co-accommodation makers.” Palma v. S. Fla. Pulmonary &Critical Care, LLC, 307 So.3d 860, 865 (Fla. 3d DCA 2020) (citing Dobrow v. Bryant, 427 So.2d 809, 810 (Fla. 5th DCA 1983)). Subsection 673.4191(5) provides that “an accommodation party who pays the instrument is entitled to reimbursement from the accommodated party and is entitled to enforce the instrument against the accommodated party.”

Neither chapter 673 nor section 673.4191 defines the term “person” or “a party” as a trust. However, section 671.201, Florida Statutes (2021), contains general definitions that apply to chapter 673. See § 671.101(2). Section 671.201(29) defines a “party” as “a person who has engaged in a transaction or made an agreement subject to this code.” § 671.201(29), Fla. Stat. (2021) (emphasis added). Under section 671.201(30), a “person” is defined as “an individual; corporation; business trust; estate; trust; partnership; limited liability company; association; joint venture; government; governmental subdivision, agency or instrumentality; public corporation; or any other legal or commercial entity.” § 671.201(30), Fla. Stat. (2021) (emphasis added). Thus, a “trust” is a person or party for the purposes of section 673.4191.

Grantor, as the then-trustee of the Trust, signed the Note and the Pledge Agreement. In doing so, Grantor, as trustee, pledged Trust assets as collateral for the Note and, acting as trustee, obligated the Trust to repay the debt. Put differently, Northern Trust could have independently sought contribution from either the Trust, Grantor, or Collins, and it would have been Northern Trust’s right to enforce the Note against any of the three parties, which supports Appellants’ claim that the Trust was an accommodation party. See § 673.4191(2), Fla. Stat. Further, the amended complaint alleged that the Trust did not receive a benefit. See § 673.4191(1), Fla. Stat.; see also Lyons v. Citizens Com. Bank of Tallahassee, 443 So.2d 229, 231 (Fla. 1st DCA 1983) (“In determining whether such a person is to be afforded the status of an accommodation party, several factors are to be considered, including . . . whether the party received any benefit from the transaction ….” (internal citations omitted)). As a result, it appears that the Trust could qualify as an accommodation party under section 673.4191(1). Once the Trust paid the debt owed by Collins, it had the right to recover the funds from Collins pursuant to section 673.4191(5).

Can a Beneficiary of a Trust Bring a Suit to Enforce an Obligation of the Trust?

The Court dismissed the case, holding that the beneficiaries of the trust did not have sufficient standing to bring suit on behalf of the trust.

Florida law has long recognized that it is generally the trustee, and not a beneficiary, who is the real party in interest with authority to bring an action on behalf of the trust. See Buerki v. Lochner, 570 So.2d 1061 (Fla. 2d DCA 1990) (holding that the trustee, the legal title holder to the trust property, would be the real party in interest to a suit brought to determine the trust’s assets); see also First Union Nat’l Bank v. Jones, 768 So.2d 1213, 1215 (Fla. 4th DCA 2000) (holding that a trustee “is merely the legal entity who is sued when an action is brought against” a trust). See generally Cady Huss &Elizabeth Hughes, The Real Party in Interest: Trustees, Actionline Vol. 20, no. 2 (Winter 20182019) (a publication of the Florida Bar Real Property, Probate, and Trust Law Section discussing the legal principle that the trustee, rather than the beneficiary, is the real party in interest when bringing an action on behalf of the trust). Accordingly, Florida Rule of Civil Procedure 1.210(a) provides that “every action may be prosecuted in the name of the real party in interest,” and recognizes that the trustee of an express trust may bring a suit on behalf of the trust.

Both rule 1.210(a) and Florida’s court decisions are in accordance with the longstanding principles governing the trustee’s authority to act on behalf of the trust. As a general rule, the trustee may exercise the power conferred upon it by the terms of the trust and all powers that an owner would have over the trust property. Jones v. First Nat’l Bank in Fort Lauderdale, 226 So.2d 834, 835 (Fla. 4th DCA 1969) (providing that the “duties, powers and liabilities of executors and trustees are ordinarily fixed by the terms of the . . . trust agreement” (internal citations omitted)). “From the trust, the trustee derives the rule of his conduct, the extent and limit of his authority, the measure of his obligation.” Id. (citing Valley Nat’l Bank of Phoenix v. Hartford Accident & Indem. Co., 136 P.2d 458 (Ariz. 1943)).

Finally, except to the extent modified by the Florida Trust Code or otherwise under Florida law, the common law of trusts still applies. See § 736.0106, Fla. Stat. (2021). Notably, the common law provides that the real party in interest in litigation involving a trust is the trustee. 90A C.J.S. Trusts § 575; 76 Am. Jur. 2d, Trusts § 601 (stating that the “trustee . . . is the real party in interest in litigation involving trust property”); see also 76 Am. Jur. 2d, Trusts § 602 (stating that “a trustee is a necessary party to assert or defend title to trust property, particularly in an adjudication of the rights of the beneficiaries in a trust”).

However, Appellants do not argue a common law exception on appeal. Rather they argue that they have standing because they are the “real party in interest,” by relying on our sister court’s holding in St. Martin’s Episcopal Church v. Prudential-Bache Securities, Inc., 613 So.2d 108 (Fla. 4th DCA 1993). But as we will explain, we think Appellants read that opinion too broadly.

In St. Martin’s, a beneficiary of a trust brought an independent claim against a securities dealer and the trustee, where a conflict of interest arose with the trustee. Id. at 108-09. In particular, the beneficiary alleged that the securities dealer and the trustee who was employed by the securities dealer, colluded to “churn” an investment account to make unnecessary stock trades and earn unwarranted commissions which dissipated trust assets. Id. at 109. The trial court dismissed the action, ruling that the beneficiary lacked standing. Id.

We disagree with Appellants’ position that St. Martin’s stands for the broad proposition that the beneficiary is actually the real party in interest to bring an action against a third party on behalf of the trust. Rather, we agree with the ruling in Buerki, that generally the trustee is the real party in interest to bring an action on behalf of the trust. Buerki, 570 So.2d at 1061. Absent any argument that a common law exception applies, Appellants have not demonstrated that they have standing to bring an action against Collins for statutory reimbursement.

 

 

In Cates v. Community Bank & Trust of Florida, the court determined that a potential inheritance gives you standing to sue for breach of trust.  You do not have to be a beneficiary of the trust that you are alleging has been maladministered to sue for breach of trust, but you at least have to have a will and/or trust contest pending that, if successful, would make you a beneficiary of the assets in the trust.

What is standing?

Standing is required to bring a lawsuit.  To have standing, a litigant must show a direct interest in the controversy, which will be affected by the outcome of the litigation.

In Cates, Cruz and Cates (appellants) sued Community Bank & Trust of Florida (Bank) for breach of trust.  The trial court dismissed their case for lack of standing. The trial court said their interest was “hypothetical” and based on uncertain future events.  Since appellants were not beneficiaries of the Trust, they did not have standing to sue.

On appeal, appellants argued that they had standing under the Florida Trust Code as interested persons.  The appellate court agreed and reversed for further proceedings.

Who is an interested person in Florida Trust proceedings?

In Florida trust proceedings, an interested person is defined as:

any person who may reasonably be expected to be affected by the outcome of the particular proceeding involved.  Section 731.201(23).

Facts of Cates v. Community Bank

In Cates, Appellants’ father, Elmer Cates, executed a  2016 pour over will, naming his 2016 Trust as beneficiary of his estate.  The Bank was the trustee of the Trust.  The Trust directed that most of the assets go to two different charities.

After decedent’s death, appellants brought a trust contest.  They alleged the 2016 will and trust were invalid because decedent lacked capacity at the time he executed the documents.

The Bank served appellants with a Trust accounting and account statements.  The Bank also served appellants with a statutory limitation notice.  A limitation notice is defined in section 736.1008 as:

a written statement of the trustee that an action by a beneficiary against the trustee for breach of trust based on any matter adequately disclosed in a trust disclosure document may be barred unless the action is commenced within 6 months after receipt of the trust disclosure document or receipt of a limitation notice that applies to that trust disclosure document, whichever is later.

Appellants then sued the Bank for mismanagement of the Trust.  The Bank moved to dismiss the breach case, arguing that appellants lacked standing because they were not named beneficiaries of the Trust.

The Bank argued that appellants first had to win their will and trust contest, before having standing to bring a breach of trust action.

The trial court agreed with the Bank that the breach of trust action was a hypothetical interest based on uncertain future events, and held that the appellants lacked standing to sue for breach of trust, because they were not beneficiaries of the trust.

The appellate court disagreed.

On appeal, the court framed the question as whether a potential inheritance is an interest that will be affected by the Bank’s management of the Trust.  If so, appellants would fall under the definition of interested persons (any person who may reasonably be expected to be affected by the outcome of the particular proceeding involved) and would have standing to sue under the Florida Trust Code.

Section 736.0815 And Standing Based On The Potential of Inheritance

Section 736.08165 governs the administration of a trust pending the outcome of an invalidation action and states:

Pending the outcome of a proceeding filed to determine the validity of all or part of a trust or the beneficiaries of all or part of a trust, the trustee shall proceed with the administration of the trust as if no proceeding had been commenced, except no action may be taken and no distribution may be made to a beneficiary in contravention of the rights of those persons who may be affected by the outcome of the proceeding.

Section 736.08165 requires a trustee to consider the rights of those potentially affected by an invalidation action when administering the trust.  The appellate court reasoned that Appellants could possibly receive the assets of the Trust depending on the outcome of the invalidation action.  The appellate court held that the appellants were certainly affected persons and stated:

Their rights as ‘persons who may be affected by the outcome of the proceeding’ under section 736.08165(1) can be understood as recognizing their rights to the assets of the challenged trust itself.  As such, we find that Appellants’ potential inheritance is an interest that will be affected by the Bank’s management of the Trust.

Therefore, appellants’ standing was based on the possibility that they would inherit the estate – the potential inheritance gave the appellants standing to sue for breach of trust. This case is important because standing is a threshold issue often disputed by parties.  If someone has a will or trust contest pending, they can also bring a breach action if the assets of the trust could belong to them upon a successful will and/or trust contest.  This creates less hurdles for a would be litigant, who will not have to wait for a successful outcome in a will or trust contest to proceed with a breach action.

Whether or not a beneficiary is a “qualified beneficiary” of a trust controls whether that person receives information and can otherwise participate in the administration of the trust.  The recent Florida case Rachins v. Minassian, 251 So.3d 919 (4th DCA 2018) explains how to determine who is a qualified beneficiary of a layered trust (a trust with subtrusts).

What is a Qualified Beneficiary of a Trust Under Florida Law?

Florida Statute 736.0103(4) defines the term “beneficiary” as follows:

“Beneficiary” means a person who has a present or future beneficial interest in a trust, vested or contingent, or who holds a power of appointment over trust property in a capacity other than that of trustee. An interest as a permissible appointee of a power of appointment, held by a person in a capacity other than that of trustee, is not a beneficial interest for purposes of this subsection. Upon an irrevocable exercise of a power of appointment, the interest of a person in whose favor the appointment is made shall be considered a present or future beneficial interest in a trust in the same manner as if the interest had been included in the trust instrument.

A “qualified beneficiary” is defined at Florida Statute 736.0103(16) as a much narrower group of persons, as follows:

“Qualified beneficiary” means a living beneficiary who, on the date the beneficiary’s qualification is determined:

(a) Is a distributee or permissible distributee of trust income or principal;
(b) Would be a distributee or permissible distributee of trust income or principal if the interests of the distributees described in paragraph (a) terminated on that date without causing the trust to terminate; or
(c) Would be a distributee or permissible distributee of trust income or principal if the trust terminated in accordance with its terms on that date.

In the words of the Rachins court:

In effect the class is limited to living persons who are current beneficiaries, intermediate beneficiaries, and first line remainder beneficiaries, whether vested or contingent.” Grimsley, supra, § 16:1. For example, contingent remainder beneficiaries of a trust are qualified beneficiaries under section 736.0103(16), Florida Statutes, because of their interest in the distribution of any principal remaining after the death of a lifetime beneficiary. Harrell v. Badger, 171 So. 3d 764, 769 (Fla. 5th DCA 2015).

A qualified beneficiary is entitled to annual accountings and other information about trust administration.  A qualified beneficiary will also have standing in any dispute regarding the trust.  A beneficiary who is not a qualified beneficiary is not automatically entitled to annual accountings, and may or may not have standing in a judicial proceeding, depending on how the person’s interest might be affected.

Is a Beneficiary of a Subtrust a Qualified Beneficiary of the Parent Trust?

Yes.  A court should disregard a parent – subtrust arrangement, instead looking at who receives the income and principal of the parent trust to determine who is a qualified beneficiary, whether or not it flows through a subtrust.

In the Rachins case, the surviving spouse was the lifetime beneficiary of the Family Trust.  At her death, any remaining corpus would be disbursed to a new trust to be created for the benefit of the deceased’s children.  The children brought suit against the surviving spouse for maladministration of the Family Trust. The trial court dismissed the lawsuit for lack of standing on the theory that the children are not beneficiaries or qualified beneficiaries of the Family Trust.

The appellate court reversed, holding that the children did have standing, as follows:

The fact that any remaining principal of the Family Trust would flow into a new trust created for the children, as opposed to being distributed to the children outright, does not preclude the children from being beneficiaries of the Family Trust under the statutory definition.

Likewise, the fact that the Family Trust terminates upon the wife’s death does not preclude the children from having a beneficial interest in the Family Trust. Indeed, by definition, a remainder interest in a trust refers to the right to receive trust property upon the termination of the trust.

The children are also qualified beneficiaries of the Family Trust. As noted above, the term “qualified beneficiary” includes a living beneficiary who “[w]ould be a distributee or permissible distributee of trust income or principal if the trust terminated in accordance with its terms on that date.” § 736.0103(16)(c), Fla. Stat. (2017). Here, the children are qualified beneficiaries under section 736.0103(16)(c), because they would be distributees of trust principal if the Family Trust terminated in accordance with its terms (i.e., the wife died).

 

 

Oral Argument at 5th District Court of Appeals

Florida Probate Attorney Jeffrey Skatoff Arguing in Court

Jeffrey Skatoff

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