In the July 28, 2021 opinion of In Re Estate of Calvin, the South Dakota Supreme Court determined that Trust beneficiaries lacked standing to bring a creditor claim against their father’s estate because the Trust was the real party in interest.
The Facts of In Re Estate Of Calvin
John Calvin was the lifetime beneficiary of the Ben W. Calvin Trust (“Trust”). Calvin’s children (“Children”) were the remainder beneficiaries of the Trust.
Section I of the Trust granted general powers to the trustee:
The Trustees shall have the power to manage the trust estate as in their judgment and discretion may seem most advantageous to said trust estate and the beneficiaries thereof; . . . to allocate between income and principal all receipts and disbursements in such manner as to the Trustees shall seem just and equitable, and in accordance with generally accepted trust accounting principles; to make payments of income or principal payable to or applicable for the use and benefit of any beneficiary hereunder by making such payments either directly to such beneficiary or applying the same for the use and benefit of such beneficiary . . . .
Section II of the Trust ordered the trustee:
(A) To pay the entire net income from the trust estate to JOHN C. CALVIN, son of the Settlor, at convenient intervals, but at least annually, so long as he shall live. (B) (1) On the death of the said JOHN C. CALVIN to divide the principal of the trust into as many equal separate shares as he shall leave children then surviving and children then deceased leaving issue then surviving, taking by right of representation.
After Calvin died, the Children filed a creditor claim against Calvin’s estate pursuant to SDCL 29A-3-804.
In their creditor claim, the Children alleged that Calvin had received over $700,000 in disbursements of principal from the Trust in violation of the Trust terms. Specifically, the Children alleged that Calvin was not entitled to receive disbursements of principal from the Trust and that he fraudulently induced the Trustee to send him payments from the Trust principal between 2009 and 2019. Appellants sought $870,044 in damages against the Estate arising from the depletion of Trust principal and lost earnings on the principal.
The personal representative of Calvin’s estate disallowed the claim, and filed a motion to dismiss, alleging Appellants lacked standing, that the terms of the Trust allowed the disbursements made, and that a portion of the claim was time barred.
The circuit court granted the motion, holding the Trust disbursements to Calvin were proper under the terms of the Trust. The court did not address the parties’ arguments on standing and statute of limitations. The Children appealed the dismissal of their creditor claim to the South Dakota Supreme Court.
Standing To Bring a Creditor Claim Against a South Dakota Estate
Rather than address the propriety of the disbursements from the Trust, the South Dakota Supreme Court zeroed in on the Childrens’ standing to bring the creditor claim against the Estate:
Standing is established through being a ‘real party in interest.’ The real party in interest requirement for standing is satisfied if the litigant can show that he personally has suffered some actual or threatened injury as a result of the putatively illegal conduct of the defendant. Standing is a threshold question that must be resolved in order to determine if the court has power to act. (citations omitted).
The Children argued that they were “undoubtedly harmed by [Calvin’s] fraudulent inducement of the Trustee” and, as such, “have standing to bring a claim against the Estate to remedy such harm.”
The Personal representative responded by urging that the Children were not the real parties in interest because they alleged that Calvin defrauded the Trustee, not them. Therefore, the Trustee is the real party in interest.
Trustee = Real Party In Interest
The Children generally alleged in the creditor claim that Calvin falsely represented his financial status to the Trustee in order to induce the Trustee to make disbursements of principal to him. This claim did not directly allege that the Trustee engaged in wrongdoing, and the Children did not sue the Trustee in South Dakota. However, they argued that the principal payments made by the Trustee to Calvin were a breach of the Trust.
The South Dakota Supreme Court focused on the beneficiaries’ right to sue on behalf of the Trust, stating:
“At common law, where cause of action is prosecuted on behalf of an express trust, the trustee is the real party in interest because the trustee has legal title to the cause.” Saks v. Damon Raike & Co., 8 Cal. Rptr. 2d 869, 874 (Cal. Ct. App. 1992). “[T]he beneficiary of a trust generally is not the real party in interest and may not sue in the name of the trust. A trust beneficiary has no legal title or ownership interest in the trust assets; his or her right to sue is ordinarily limited to enforcement of the trust, according to its terms.”
Trust Beneficiary May Maintain an Action If Trustee Is Unable, Unavailable, Unsuitable, Or Improperly Fails To Protect the Beneficiary’s Interest
In certain instances, a beneficiary of a trust is permitted to maintain a proceeding relating to the Trust against a third party:
However, “[a] beneficiary may maintain a proceeding related to the trust or its property against a third party only if . . . the trustee is unable, unavailable, unsuitable, or improperly failing to protect the beneficiary’s interest.” Restatement (Third) of Trusts § 107 (2012). The beneficiary has the burden to “show that the trustee is improperly refusing or neglecting to bring an action, or if the trustee is unavailable or unable to act, the protection of the trust estate may depend on the initiative of a beneficiary to act. . . .” Restatement (Third) of Trusts § 107 cmt. c(2) (2012). See also Browning v. Brunt, 195 A.3d 1123, 1130 (Conn. 2018) (citing Restatement (Third) of Trusts § 107 cmt. c(2)) (“[I]n order to demonstrate that they fall under this exception, beneficiaries must demonstrate that the trustee either is improperly refusing or improperly neglecting to bring an action on behalf of the trust.”).
No Allegations Of Trustee’s Failure To Act = No Standing To Pursue Claim On Behalf Of Trust
Here, the Children did not allege that they asked the Trustee to pursue a creditor claim against the South Dakota Estate, that the Trustee declined to pursue such a claim, or that the Trustee was otherwise unable to assert a claim against the Estate. Additionally, the South Dakota Supreme Court noted that the Children made no allegation that Calvin made any fraudulent representations to them, but rather that Calvin fraudulently misrepresented his financial needs to the Trustee in order to obtain disbursements of principal. For fraud to be actionable, a party must further rely on it and be induced thereby to act to his injury or damage. The Children made no such allegation. Therefore, the Trustee was the real party in interest to pursue a claim that the Trust was defrauded by Calvin.
The Children argued that they had standing under an exception recognized in California, that is: “when a third party has assisted a trustee in a breach of trust, the beneficiaries may bring suit against both the trustee and the third party, but it is not necessary to join the trustee in the suit because primarily it is the beneficiaries who are wronged and who are entitled to sue the third party.”
The South Dakota Supreme Court declined to apply an exception that would permit a trust beneficiary to file an action against a third party for alleged misconduct, absent a showing that the trustee was unable, unavailable, unsuitable, or improperly failed to protect the beneficiary’s interest, stating:
Applying a broad exception for beneficiary standing against a third party, as advocated by Appellants, would eviscerate the general rule that all actions concerning a trust belong to the trustee in the first instance. Further, it is hardly an onerous burden to require the beneficiary to show that the trustee has wrongfully failed, refused, or is unable to pursue a claim against a third party concerning a trust before the beneficiary can claim to be the real party in interest for a claim on behalf of a trust.
Here, the dismissal based on standing likely could have been avoided if the trust beneficiaries had properly alleged that the Trustee had failed to pursue claims on behalf of the Trust. Although the dismissal of the creditor claim may have been affirmed on other grounds (such as the propriety of the distributions under the Trust language as relied on by the circuit court), the failure to properly allege standing was a clean basis for the South Dakota Supreme Court to affirm the dismissal of the creditor claim. Read more South Dakota Supreme Court opinions regarding trust disputes here and here.