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Remainder Beneficiary of Revocable Trust has Standing to Sue Trustee for Breach

UPDATE: On June 8, 2018, the Michigan Supreme Court vacated those portions of this decision that incorrectly construed the Michigan Trust Code provisions related to standing to initiate a trust proceeding.  The MSC also remanded the case to the Court of Appeals to be corrected and reissued.  Click here to read the MSC Order.  When a new COA opinion is issued, it will be added to this post.

 

Several issues are addressed in this published opinion regarding a family trust contest that occurs while Mom, settlor, is living. Mom’s trust is revocable and Dad is Trustee.  Mom may or may not be competent at the time of the litigation, hence the Trust may or may not have become irrevocable.

To read In Re Rhea Brody Living Trust click here.

The most interesting issue addressed in the opinion is whether Daughter, a residual beneficiary of a trust that remains revocable, has standing to contest the administrative actions of the Trustee. Mom’s Trust provides for both son and daughter to receive equal shares upon the death of survivor of herself and Dad.  Daughter says the sale, by Dad/Trustee, of certain business interests to Son and his children is a breach of his fiduciary duty to her and violates the requirement that he appoint an independent co-Trustee to engage in any action that alters the interests of beneficiaries.  The COA says Daughter, as reidual beneficiary, has standing as an “interested person” under EPIC pursuant to MCL 7.7201 to contest Trustee/Dad’s actions as Trustee which would ultimately affect her interest if the Trust if it is not subsequently amended to remove her.  It rejects the contention that standing is controlled by the “real party in interest” rule set forth in MCR 2.201(c). The COA holds that this would be true regardless of whether Mom is or isn’t competent (that is, regardless of whether trust has or has not become irrevocable).  This is an important clarification of the law, and would presumably mean that Daughter could have sued Mom/Settlor for doing the same thing if Mom were acting as her own Trustee.  (Of course, if that were the case, Mom could simply amend the Trust and make the issue moot.)

Further complicating the analysis is the fact that the Trust provides that if Dad survives Mom, Dad as Trustee may make unequal distributions to the two children. Accordingly Dad and Son argue that this means no harm was done to Daughter even if the sale reduced her expectancy interest in the Trust.  The COA however notes that Dad has not survived Mom and therefore those provisions are not in play.  The COA goes further (perhaps dicta), to conclude that notwithstanding the unequal distribution provisions, the overall intent of the Trust is equal division between children and therefore the actions of Trustee/Dad could be a breach.  The trial court in fact found his actions to be a breach and ruled in favor of daughter on summary disposition.

The COA also provides an interesting analysis of the remedies directed by the trial court regarding two sales that were the basis of the litigation. The trial court ordered reformation of the contract on one sale and rescinded the other.  The COA found that while rescission was an appropriate remedy, reformation was not.  In remanding the reformation portion of the trial court’s order, the COA offers an important explanation of the limitations of a court’s equitable powers.

Finally, and least importantly (although this is the first issue addressed in the opinion), this case looks at subject matter jurisdiction of business courts in relation to probate courts. Dad/Trustee argued that the litigation discussed above was improperly filed in probate court because all business litigation is required to be brought in the “business court.” The COA finds that there is a conflict between the statutes controlling business court and probate court subject matter jurisdiction, but concludes that the probate court does not lose subject matter jurisdiction over trust cases simply because the litigation involves issues related to business interests.  The COA notes that this confusion is temporary for the reason that the business court jurisdiction statute was recently amended to further limit the jurisdiction of business courts to cases in which a business entity is a party.  That change becomes effective October 11 2017.