Questioning the Trust-Law Duty of Loyalty: Sole Interest or Best Interest? 114 Yale L. J. 929 (2005)
The duty of loyalty requires a trustee "to administer the trust solely in the interest of the beneficiary." This "sole interest" rule is widely regarded as "the most fundamental, rule of trust law. In this Article I advance the view that the sole interest rule is unsound, and I indicate how it should be modified.
The sole interest rule prohibits the trustee from "plac[ing] himself in a position where his personal interest... conflicts or possibly may conflict with" the interests of the beneficiary. The rule applies not only to cases in which a trustee misappropriates trust property, but also to cases in which no such thing has happened-that is, to cases in which the trust "incurred no loss" or in which "actual benefit accrued to the trust" from a transaction with a conflicted trustee.
The conclusive presumption of invalidity under the sole interest rule has acquired a distinctive name: the "no further inquiry" rule. What that label emphasizes, as the official comment to the Uniform Trust Code of 2000 explains, is that "transactions involving trust property entered into by a trustee for the trustee's own personal account [are] voidable without further proof."' Courts invalidate a conflicted transaction without regard to its merits-"not because there is fraud, but because there may be fraud." "[E]quity deems it better to... strike down all disloyal acts, rather than to attempt to separate the harmless and the harmful by permitting the trustee to justify his representation of two interests." Courts have boasted of their "stubbornness and inflexibility," their "[u]ncompromising rigidity," in applying the sole interest rule. Remedies include rescission, disgorgement of gain, and consequential damages.
The underlying purpose of the duty of loyalty, which the sole interest rule is meant to serve, is to advance the best interest of the beneficiaries. This Article takes the view that a transaction prudently undertaken to advance the best interest of the beneficiaries best serves the purpose of the duty of loyalty, even if the trustee also does or might derive some benefit. A transaction in which there has been conflict or overlap of interest should be sustained if the trustee can prove that the transaction was prudently undertaken in the best interest of the beneficiaries. In such a case, inquiry into the merits is better than "no further inquiry."
Date of Authorship for this Version
Langbein, John H., "Questioning the Trust-Law Duty of Loyalty: Sole Interest or Best Interest?" (2005). Faculty Scholarship Series. 495.