Discretionary Powers in Trusts: Classes and Limitations, Study notes of Law

Download Discretionary Powers in Trusts: Classes and Limitations and more Study notes Law in PDF only on Docsity! ST. LOUIS LAW REVIEW THE SCHOOL OF LAW The Samuel Breckenridge Prize Awards for notes appearing in Volume XIX of the Law Review have been announced by the prize committee consisting of George W. Simpkins, Earl Susman and Fred A. Eppenberger. The prizes for the best note appear- ing in each of the four issues were awarded to: Herman Goralnik for his note in the December, 1933 issue, Securities as Subjects of Interstate Commerce; Harry Willmer Jones for his note in the February, 1934 issue, The Interest Required of a Petitioner for Receivership in Missouri; Sidney J. Murphy for his note in the April, 1934 issue, The Extent of the Right of a Public Utility to Refuse Service; Louis Clayton Larrabee for her note in the June 1934 issue, Publication as a Relinquishment of the Common Law Right in Literary Property. Mr. Murphy won the additional prize for the best note of the entire group. Notes SOME ASPECTS OF DISCRETIONARY TRUSTS Under this title it is proposed to confine the discussion to situa- tions in which the trustee has been given a discretion as to the quantum of income or principal he may pay over to the benefici- ary. Such discretions vary in degree; in general three classes may be distinguished. (1) The most common category comprises discretionary powers expressly qualified and subordinated to some purpose of the settlor; such would include a discretion to pay such sums as the trustee deems fit "for the comfortable support" of the cestui;1 for "support and maintenance" ;2 for suitable edu- cation;3 for necessary medical expenses ;4 or to convey the prin- cipal "when he deems cestui able to manage it." At times the IIn re Walters (1924) 278 Pa. 421, 123 Atl. 408; Cecil's Trustee v. Robertson & Bro. (Ky. 1907) 105 S. W. 926; Ratliff's Ex'ers v. Common- wealth (1907) 139 Ky. 533, 101 S. W. 978. 'Morris v. Daiker (1929) 35 Ohio App. 394, 172 N. E. 540; Coker v. Coker (1922) 208 Ala. 354, 94 So. 566; Taylor v. Harwell (1880) 65 Ala. 1; Gardner v. O'Loughlin (1912) 76 N. H. 481, 84 Atl. 935; Bronson v. Strause (1889) 57 Conn. 147, 17 Atl. 699; Smith v. Wildman (1870) 37 Conn. 384; Louisville Tobacco Warehouse Co. v. Thompson (1916) 172 Ky. 350, 189 S. W. 245; Manning v. Sheehan (1911) 133 N. Y. Supp. 1006; Brooks v. Reynolds (C. C. A. 6, 1893) 59 F. 923; Osborne v. Gordon (1893) 86 Wis. 92, 56 N. W. 334. 'Morris v. Daiker, supra note 2; In re Reith's Estate (1904) 144 Cal. 314, 77 Pac. 942; Mackenzie v. Los Angeles Trust Co. (1918) 39 Cal. App. 247, 178 Pac. 557. 'French v. Calkins (1911) 252 Ill. 243, 96 N. ]. 877. 'Meek v. Briggs (1893) 87 Iowa 610, 54 N. W. 456; Morris v. Daiker supra note 2; Bacon v. Bacon (1882) 55 Vt. 243. NOTES trustee is not only given a discretion as to the quantum to be paid over, but may also choose among several persons or purposes designated by the trust instrument.6 The expressed guide often becomes tenuously vague; as in the case of a discretion to pay over principal if the trustee should "deem it to the interest" of the cestui ;7 or to pay so much as considered "needful" ;8 or to use a fund "entirely as they deem best for her."9 (2) Such border- line situations adumbrate and are not easily distinguishable from the second group in which no express boundaries are set up for the trustee's guidance. This class stands midway between the qualified and the so-called absolute discretions. In a leading case the trustee was directed to pay income to the cestui "in such pro- portions and in such manner as she (the trustee) herself may decide."'1, The distinction between this and the preceding group is rendered perilously slight by the fact that in most cases the guiding purpose of the settler can be gleaned from the "four corners" if not from the letter of the instrument. (3) The third classification embraces the discretions variously known as pure, unqualified, absolute or uncontrollable. In such cases the terms of the trust instrument appear to free the trustee from any inter- ference with the exercise of his discretion :-to use for the well- being of the cestui "without any restrictions whatever";" "dis- cretion shall not in any manner be interfered with by any court" ;12 "sole and uncontrolled discretion without being liable for the exercise of such discretion" ;13 "such payments to be at all times at the sole and absolute discretion of the said trustee" ;14 are typical phrases. 5 It should be noted that these dispensing 'Hall v. Williams (1876) 120 Mass. 344 (to use income "in such way and ways as shall be most likely to make the same enure and be beneficial to such recipient's husband, wife or ---- children, or otherwise beneficial to such recipient in the way of his or her education, or advancement, or sup- port, exercising in all such cases ---- the judgment that would be expected from a good father."); Hamilton v. Drago (1926) 241 N. Y. 401, 150 N. E. 496; Andrews v. Tuttle (1914) 45 Utah 98, 143 Pac. 124. 'Huntington v. Jones (1899) 72 Conn. 45, 43 Atl. 564; In re Clark (1915) 174 Iowa 449, 154 N. W. 759; Roosevelt v. Roosevelt (1875) 6 Hun 31; In re Naglee's Estate (1866) 52 Pa. 154; and see Watling v. Watling (C. C. A. 6, 1928) 27 F. 2nd. 193. •Rackeman v. Wood (1909) 203 Mass. 501, 89 N. E. 1037. 'Rinker's Adm'r. v. Simpson (1932) 159 Va. 612, 166 S. E. 546; see also Jones v. Jones (1894) 30 N. Y. Supp. 177. Carter v. Young (1927) 193 N. C. 678, 137 S. E. 875. "Kiffner v. Kiffner (1919) 185 Iowa 1064, 171 N. W. 590. 'Raymond v. Tiffany (1908) 112 N. Y. Supp. 252. "Hamilton v. Drago (1926) 241 N. Y. 401, 150 N. E. 496. "Keyser v. Mitchell (1871) 67 Pa. 473. "For others see In re Neil (1890) 62 L. T. (N. S.) 649; Angell v. Angell (1908) 28 R. I. 592, 68 Atl. 583; Cromwell v. Converse (Conn. 1928) 143 Atl. 416; Keating v. Keating (1917) 182 Iowa 1056, 165 N. W. 74; Mitchell v. Choctaw Bank (1914) 107 Miss. 314, 65 So. 278 (to control "as if it were his own, absolutely, in fee simple, without any order of any ST. LOUIS LAW REVIEW reasonable or arbitrary" abuse of discretion includes a hetero- geneous assortment of cases which defies any reduction to rules. It is under the aegis of this phrase that the courts assert their most frequent control over the trustee. "Reasonable" is to be understood "in view of the nature and amount of the income, the time when it becomes available to the trustee for the purposes of distribution, and the circumstances of the beneficiaries." 20 Such definitions, however, add little; each case merits an in- dividual consideration. 27 By a reasonable implication the needs of the beneficiary have been held to include those of his family.271 (3) The intervention of equity will also be justified by a total failure to exercise the given discretion. 28 The trustee need not, however, make a separate exercise of his discretion every time he pays over; the fact that a trustee in all subsequent payments through a period of years had never varied the amount decided upon for the first payment has been held not to constitute evi- dence of a failure to exercise his discretion.20 (4) It has been stated as a separate rule that a discretion will not be permitted to be exercised in such a manner as to controvert the purpose of 'Angell v. Angell (1908) 28 R. I. 592, at p. 598, 68 Ati. 583, at p. 586; and consult note 21. ' Eaton v. Loveren (1924) 81 N. H. 275, 125 AtI. 433, 35 A. L. R. 1034 (The trustee must consider "the amount of money at his disposal, their (cestuis') present as well as their probable future needs, their health and capacity to help themselves, and then do what the ordinary Man would do under similiar circumstances."); Gardner v. O'Loughlin (1912) 76 N. H. 481, 84 Atl. 935; Colton v. Colton (1888) 127 U. S. 300 at p. 321; Leverett v. Barnwell (1913) 214 Mass. 105, 101 N. E. 75; Manning v. Sheehan (1911) 133 N. Y. Supp. 1006; In re Hilton (1916) 160 N. Y. Supp. 55; In re Van Zandt's Will (1931) 247 N. Y. Supp. 441; In re Reith's Estate (1904) 144 Cal. 314, 77 Pac. 942; Russell v. Hartley (1910) 83 Conn. 654, 78 Atl. 320; Keating v. Keating (1917) 182 Iowa 1056, 165 N. W. 74; Cecil's Trustee v. Robertson & Bro. (Ky. 1907) 105 S. W. 926; Marshall's Trustee v. Rash (1888) 87 Ky. 116, 7 S. W. 879; Read v. Patterson (1888) 44 N. J. Eq. 211, 14 Atl. 490. There is a conflict as to whether the trustee can favor one beneficiary over another; holding this an arbitrary violation of the testator's implied intent that members of a class should be favored equally, Jones v. Jones (1894) 30 N. Y. Supp. 177; contra, sustaining such distinction if reas- onably supported by a substantial difference in the circumstances of the cestuis, Stephenson v. Norris (1906) 128 Wis. 242, 107 N. W. 343; and see Trout v. Pratt (1907) 106 Va. 431, 56 S. E. 165. " There is conflict as to whether the divorced wife of the cestui can com- pel payment of her alimony out of the trust fund. If she is regarded as no longer belonging to the family she is held a mere creditor and denied remedy. Eaton v. Loveren, supra note 27; Kiffner v. Kiffner (1919) 185 Iowa 1064, 171 N. W. 590. Contra, treated as still a member of the family, England v. England (1922) 223 Ill. App. 549; and see dictum in Wetmore v. Wetmore (1896) 149 N. Y. 520, 44 N. E. 169. But the cestui's child, although in the custody of its divorced mother, remains "in the family." Eaton v. Eaton (1926) 82 N. H. 216, 132 At]. 10. Consult local statutes. " Coker v. Coker (1922) 208 Ala. 354, 94 So. 566; Andrews v. Tuttle (1914) 45 Utah 98, 143 Pac. 124; Wilson v. Turner (1883) 22 Ch. D. 521. Cromwell v. Converse (Conn. 1928) 143 Atl. 416. NOTES the settlor.10 It is submitted that this is merely a statement of a basic principle which underlies the tests outlined above; for "the trustees are always under compulsion to carry out the testator's main purpose as disclosed by the will, and their discretion always must be subservient thereto ;-31 the rules of reasonableness, good faith and diligent exercise of discretion are always guided by the settlor's purpose. Some authority has been advanced for the proposition that in the cases either of an "unguided" or of an "absolute" discretion equity cannot correct an unreasonable exercise and can only in- tervene in case of "bad faith." The reason presented is that the settlor has expressly unfettered the trustee's actions, or has laid down no standard of rasonableness. 3 2 Although this rule appears to have obtained in England, the majority of the American au- thorities do not sustain it.3 The American decisions appear bet- ter founded; for, as has been seen, in almost all cases the purpose of the settlor can be ascertained from the "four corners" of the trust instrument, and the intent that there be a reasonable com- pliance with his desires can be interpreted to be impliedly pres- ent.3 4 Furthermore, the power to compel a reasonable execution of the trustee's discretion is always inherent in a court of equity and cannot be nullified by a private fiat.3 5 It is possible that in actual practice the courts may be less ready to find abuse of an "absolute" discretion than in cases where an expressed standard is squarely before their eyes. The difference, however, is of de- gree only, and not of kind. It thus appears that the three varie- ties of discretionary trusts receive essentially similar treatment. This conclusion finds support not only in the dicta but also in the actual results attained in the reported cases. Separate classifica- tion is descriptively interesting, but not necessary. Some confusion exists as to the proper decrees by which equity can enforce its corrective supervision over abuse of discretion. Three types of control may be utilized. (1) The court in less "Murphy v. Delano (1901) 95 Me. 229, 49 AtI. 1053. Plummer v. Brown (Roberts) (1916) 315 Mo. 627, at 659, 287 S. W. 316, at 327. "Tabor v. Brooks (1878) 10 Ch, D. 273; Gisborne v. Gisborne (1877) 2 App. Cas. 300; and see dictum in Town of Sharon v. Simons (1857) 30 Vt. 458; and see dictum in Watling v. Watling (C. C. A. 6, 1928) 27 F (2d) 193, at 195 "Court ought not to overrule the trustee's discretion, except upon the clearest of proof, that is, proof that it has not exercised a good faith discretion." But as a matter of fact the court seems to imply that "reasonable" would be a necessary ingredient of "good faith" -- "honest and well intentioned discretion." " Keating v. Keating (1917) 182 Iowa 1056, 165 N. W. 74; Rinker's Adm'r. v. Simpson (1933) 159 Va. 612, 166 S. E. 546; Angell v. Angell (1908) 28 R. I. 592, 68 Atl. 583; In re Naglee's Estate (1866) 52 Pa. 154 (Disregard incorrect head note!) "In this connection consult notes 18 and 31. Consult note 19. ST. LOUIS LAW REVIEW flagrant cases may content itself with ordering the trustee to exercise his discretion in a proper manner, with the caveat that in the event of his failure to do so the court will exercise the power itself;36 for it is preferred not to usurp the trustee's dis- cretion any farther than absolutely necessary. In their solici- tude over the inviolability of discretion, however, the courts have sometimes gone far toward creating a doctrine of "untouchabil- ity"; and it has been said that the court may discharge a trustee for unreasonable refusal to act, but cannot itself order him to pay a definitely ascertained sum, or act in his place2 (2) The majority view does not wait upon this technicality, but permits the court, when its attention is called to an abuse, to determine the precise sum which is reasonable, to order the trustee to pay over this amount, and, if necessary, to execute the power itself. 8 A court of chancery will not permit the plain ends and purposes of a discretionary trust to be defeated by the arbi- trary exercise of their discretion by trustees, even though to prevent it the court must substitute its discretion for that of the trustee's.8 (3) Where the abuse is of suitable gravity the trustee is removed. This measure usually, though not necessarily, is reserved to cases involving "bad faith," refusal to act, or total perversion of the trust.3 0 'Manning v. Sheehan (1911) 133 N. Y. Supp. 1006 (here "no culpable failure to exercise discretion in a reasonable manner." The trustee merely doubted his powers.) Such a mild remedy, of course, may be extended to more serious abuses if the court desires. See Carter v. Young (1927) 193 N. C. 678, 137 S. E. 875. "Eaton v. Eaton (1926) 82 N. Hl. 216, 132 At]. 10. IEdward v. Edward (1925) 117 Kan. 458, 232 Pac. 240 (ordered trustee to pay $150 per month) ; Watling v. Watling (C. C. A. 6, 1928) 27 F. (2d) 193; Callister v. Fassitt (1900) 163 N. Y. 281, 57 N. E. 490 (Court set precise sum for trustee to pay); Gardner v. O'Loughlin (1912) 76 N. H. 481, 84 Atl. 935 (same); McDonald v. McDonald (1891) 92 Ala. 537, 9 So. 195 (same); In re Harrar's Estate (1914) 244 Pa. 542, 91 At]. 503; Coker v. Coker (1922) 208 Ala. 354, 94 So. 566 (case of "perversion and abandon- ment of trust"; court administered trust itself); Andrews v. Tuttle (1914) 45 Utah 98, 143 Pac. 124 (Court itself divided among the cestuis); Jones v. Jones (1894) 30 N. Y. Supp. 177 (Court can remove trustee or compel him to pay definitely ascertained sums). ',Rinker's Adm'r. v. Simpson (1932) 159 Va. 612 at 622, 166 S. E. 546, at 550. M artin v. McCune (1925) 318 Ill. 585, 149 N. E. 489; Keating v. Keat- ing (1917) 182 Iowa 1056, 165 N. W. 74 (The trustee had continually main- tained and acted on the assumption that his discretion was "absolute." The trust instrument, indeed, had expressly exempted him from "any order of court." The court not only declared him subject to its jurisdiction but removed him because (for one reason) his claim of absolute discretion was a "denial of the trust"--a far journey from the theory of "uncontrollable discretion"!). NOTES suit of the cestui,4 7 there should be no objection on principle to the creditor's being able to tap the resources of the trust with- out needless circuity of action. This view obtains some adher- ents; it is deserving of more.48 Another line of decisions, arising in jurisdictions in which re- straints on alienation of trust funds are disfavored, seeks to pierce the barrier of the discretionary trust through a scrutiny of the time at which the cestui obtains a property interest in the payments. In the leading English case of In re Nei 49 the income was to be paid as the trustee "in uncontrolled discretion think fit"; the cestui mortgaged his future income; the debt became due, and the creditor notified the trustee, who, however, con- tinued to pay to the cestui. It was held that, although the pay- ments were discretionary, there came an infinitesimal moment immediately before actual payment when in the "irrevocable determination" of the trustee the money belonged to the bene- ficiary and the creditor's rights attached. At this moment the trustee had notice of the assignment to the plaintiff, and, since in spite of this he paid over to the cestui, he was held personally liable to the plaintiff for this misapplication of the funds. The more recent case of Hamilton v. Drago50 commits the New York courts to a similar view. Under a statute permitting a creditor to secure an execution against ten percent of any trust income "due and owing" the cestui, the plaintiff sought to attach future income to be paid over by a trustee possessed of "sole and uncontrollable discretion." Recognizing the power of the trustee to vary or withhold his awards the court, in holding for the plaintiff, said: if it (the discretion) is exercised in favor of the (cestui), then there is due him the whole or such part of the income as the trustee may allot to him. After such allotment he " Rinker's Adm'r. v. Simpson (1932) 159 Va. 612, 166 S. E. 546; Manning v. Sheehan (1911) 133 N. Y. Supp. 1006; Gardner v. O'Loughlin (1912) 76 N. H. 481, 84 Atl. 935. " Cecil's Trustee v. Robertson & Bro. (Ky. 1907) 105 S. W. 926 (The Kentucky courts do not enforce restraints on alienation of trust incomes. The creditor here, therefore, had only to deal with the discretionary aspects of the trust, without the added problem of spendthrift implications.). See also Marshall's Trustee v. Rash (1888) 87 Ky. 116, 7 S. W. 879; In re Walters (1924) 278 Pa. 421, 123 AtI. 408 (Here the State, which was sup- porting a lunatic cestui, recovered expenses from the trustee who had un- reasonably refused to exercise his discretion to support the cestui.) ; Morris v. Daiker (1929) 35 Ohio App. 394, 172 N. E. 540 (dictum). (1890) 62 L. T. (N. S.) 649; see also In re Coleman (1888) 39 Ch. 443; Lord v. Bunn (1843) 2 Y. & C. C. C. 98, 63 Eng. Rep. 43. (1926) 241 N. Y. 401, 150 N. E. 496. The case does not cite any authorities; its genesis apparently is similar to that of Pallas Athene. See also the dissenting openion in Kiffner v. Kiffner (1919) 185 Iowa 1064, at 1067, 171 N. W. 590, at 591. ST. LOUIS LAW REVIEW may compel its payment. At least for some appreciable time, however brief, the award must precede the delivery of the income he is to receive, and during that time the exe- cution attaches. The solution attempted by these courts has at least the virtue of enabling the creditor to attach the fund before it reaches the hands of the cestui; where proper notice is served the trustee cannot pay it over to the beneficiary without rendering himself liable to the creditor for such a misapplication. Considered as a complete remedy, however, the rule is not without defects. Un- der the New York statute permitting only ten percent of the al- lotment to be attached the presence of an execution is not likely to deter the trustee from making payments; but in a jurisdiction which completely abolishes spendthrift restraints on alienation, the trustee will be likely to be deterred from making payments which automatically may belong in their entirety to the credi- tor;"' nor will the cestui care to force the discretion of the trustee in such a case. The creditor thus is left without any active or satisfactory remedy and must wait upon the action of the trustee or the beneficiary. An additional flaw has been found in the reasoning that there may be a time before the handing over of the funds when the title has vested in the cestui; it has been pointed out that this would involve permitting the cestui to recover from the trustee money alloted to him but not paid over, whereas the established law permits the trustee to change his mind at any time before actual payment.52 This difficulty, however, may be solved by the consideration that the only con- clusive proof that the trustee has made an "irrevocable deter- mination" consists in the fact that he actually did pay over; hence the "split second" doctrine probably will of necessity be confined to situations like the present. The chief difficulty is, as mentioned above, one of practicality. It thus would appear that from one aspect the rule of Pole v. Pietsch presents the more fundamental solution to the problem; for, under it, the creditor need not wait for the cestui to act, but is given an active remedy against a trustee who has unreason- ably refused to advance funds to the cestui. This rule, of course, does not cover the situation where the trustee has always made reasonable payments, and whose discretion, therefore, cannot be forced by either cestui or creditor. This is not a defect in jurisdictions which enforce the settlor's intent to keep the trust fund free from prodigality; for so long as the cestui himself has received proper disbursements the purpose of the trust instru- ment is fulfilled, and no further solicitude need be paid to the 1 Comment, 26 Col. L. Rev. 776. = Supra note 51. NOTES creditor, who can wait and attach the funds in the hands of the cestui. But in a forum which favors the rights of the creditor above the desire of the settlor to restrict alienation, and which accordingly wishes to give the creditor a lien on the funds before they reach the cestui, it would be well to supplement the remedy provided by Pole v. Pietsch with that of Hamilton v. Drago. Where these remedies thus are used in conjunction the creditor will be protected in both contingencies :-under the "split sec- ond" rule he can attach the sum about to be paid over, and, under the doctrine of Pole v. Pietsch, in the event that the trustee should fail properly to exercise his discretion, he can go to court to force reasonable payments to satisfy his claim. These are not perfect solvents of the problem. Taking into account the complex and often diametrically conflicting factors of the settlor's intent, the public policy of the jurisdiction, the discretion of the trustee, the claim of the cestui to present sup- port and the claim of the creditor for a debt perhaps incurred long before the creation of the trust, these two remedies, even though used in conjunction, appear woefully incomplete. More subtle and adequate methods may in time be devised. Meanwhile these tools, however blunt, have been fashioned by the courts and lie at hand; much can be done with these to extricate the creditor from his present unsatisfactory position. CHRISTIAN B. PEPER '35. THE ENFORCEMENT OF MINIMUM WAGE PROVISIONS UNDER THE NIRA With the enactment of the NIRA there arose a great deal of speculation as to how effective its provisions would be and the extent to which the courts would enforce them. The purpose of the Act as stated in the Declaration of Policy is to eliminate un- fair competitive practices, reduce and relieve unemployment, im- prove the standards of labor, and otherwise rehabilitate indus- try.1 According to Senator Wagner the National Industrial Re- covery Act has as its single objective the wide-spread and perma- nent reemployment of workers at wages sufficient to secure com- fort and decent living. Business may not compete by reducing wages, by sweating labor, or by resorting to unfair practices.2 The purpose of this discussion is to show the extent to which the courts have enforced minimum wage provisions under the NIRA. The NIRA itself provides for several methods of enforcing the '48 Stat. L. 196, 15 U. S. C. Sec. 701. 'Hearings before Senate Committee on Finance, May 22 to June 1, 1933, p. 1 .