Voiding A Self-Dealing Transaction By An Executor Or Trustee

Our firm has seen an increase in the frequency of complaints about a fiduciary (an executor of an estate or a trustee of a trust) self-dealing in the estate or trust property. For example, this may occur when such fiduciary purchases property belonging to the estate or trust at less than fair market value. The fiduciary makes a personal profit from the sale while the beneficiaries suffer harm from such sale. In other words, the fiduciary abuses his power and takes advantage of the beneficiaries of the estate or trust.

The general rule and bedrock principle under Georgia law is that a fiduciary is under a heightened duty to administer a trust or estate solely in the best interest of the beneficiaries. An executor or trustee violates this duty not only where he purchases trust or estate property for himself from the trust estate, but also where he has a personal interest in the purchase of such a substantial nature that it might affect his judgment in making the sale. See Fulton Nat. Bank v. Tate, 363 F.2d 562 (1966).  Executors and trustees are “accountable to the beneficiaries for the trust property, and must exercise the highest degree of good faith as to all matters connected with the property committed to their care. It follows that, as a general rule, a trustee cannot purchase the property belonging to the trust estate, and certainly cannot make a personal profit in dealing with trust property.” Smith v. SunTrust Bank, 325 Ga. App. 531, 539 (2014); George Gleason Bogert et al., The Law of Trusts and Trustees §543(A) (3^rd ed.) (“The trustee owes a duty to the beneficiary not to buy trust property for himself, at his own sale, whether public or private. If he does assume the position of such a buyer, he becomes disloyal to the beneficiary in that he may be seeking private advantage at a time when his sole effort should be enhancement of the interests of the beneficiary.”) Our firm represented beneficiaries of the trust in the recent Smith v. SunTrust Bank case, a case now routinely cited in treatises and by plaintiffs in Georgia.

Under Georgia law, a self-dealing transaction by an executor or trustee is voidable at the option of the beneficiaries without any further inquiry into the fairness of the transaction.[1] Whenever an executor or trustee has placed himself in a position where his personal interest comes into conflict with his duties as a fiduciary, such as in a self-dealing transaction, “a court of equity never hesitates to remove him. In such circumstances a court does not stop to inquire whether the transactions complained of were fair or unfair, the inquiry stops when such relation is disclosed.” Fulton Nat. Bank v. Tate, 363 F.2d 562, 573 (1966). Further, in a self-dealing transaction “it is immaterial that the trustee [or executor] may be able to show that the action in question was taken in good faith, that the terms of the transaction were fair, and that no profit resulted to the trustee. A trustee, therefore, commits a breach of trust by purchasing trust property, even as the highest bidder at public auction.” See Restatement (Third) of Trusts, §78, comment b.

Although a self-dealing transaction undertaken by an executor or trustee is generally voidable at the option of the beneficiaries without a court inquiry into any proffered justifications by the executor or trustee and without requiring proof of bad faith, the transaction is not necessarily void as a matter of law. This means that a beneficiary’s right to set aside a self-dealing transaction is subject to certain defenses in Georgia law that may be raised by the fiduciary to justify the transaction and prevent it from being voided, for example, such fiduciary may claim that: (1) the beneficiary’s claims are barred by the doctrine of laches (waited too long to bring the claims); (2) the will or trust specifically authorizes the self-dealing transaction by a careful drafting of an exculpatory or exoneration clause (the will or trust has a specific provision granting the fiduciary the power to self-deal); or (3) the beneficiary ratified or consented to the self-dealing transaction (after the sale occurred the beneficiary learned about the sale and agreed to such sale).  Many times the fiduciary will try to defeat a claim by a beneficiary by asserting some of these or other defenses when they clearly do not apply to the facts of the case.

Profit by a fiduciary at the expense of a beneficiary is a serious matter. If you are a beneficiary of a will or trust and have a question regarding a potential self-dealing transaction undertaken by the executor(s) or trustee(s), you should consult with an attorney immediately to determine your options. An appropriate remedy may be voiding the transaction or both  asserting claims against such executor or trustee for damages for breach of fiduciary duty and attempting to void the transaction.

[1] See Brown v. Brown, 209 Ga. 620 (1953), Houston v. Bryan, 78 Ga. 181 (1887), Clark v. Clark, 167 Ga. 1 (1928), Fine v. Saul, 183 Ga. 309 (1936).