An overhaul of Minnesota trust law is in the works, as the Minnesota House and Senate consider a bill to enact the “Minnesota Trust Code.” Minnesota would join 30 other states that have adopted a version of the Uniform Trust Code. The Minnesota Bankers Association and Minnesota State Bar Association support the bill.
The bill would revamp the statutory scheme and codify the common law of trusts, but is not intended to change Minnesota’s substantive trust law. Still, the bill would, among other things, create a statutory action for breach of trust, provide guidance on conflicts of interest, and amend the trust instruction petition (TIP) process.
Interplay Between Statute and Trust Agreement
The statute establishes default rules for trusts governed under Minnesota law. With certain exceptions, the terms of the trust prevail over any statutory provision and override the default rules.
As a practical matter, most indentures and securitization trust documents select New York law as the governing law. Except for TIP proceedings, which we discuss below, the Minnesota Trust Code would not apply to trust transactions governed by New York law or the law of any other state.
Breach of trust as statutory cause of action. For trusts governed by Minnesota law, the statute would create a cause of action for breach of trust, which is defined as “[a] violation by a trustee of a duty the trustee owes to a beneficiary.” If the beneficiary received a report that disclosed the claim’s existence, the limitations period is three years from receipt. Otherwise, the limitations period is six years from termination of the trust, the beneficiary’s interest or the trustee.
Remedies and damages. The court would enjoy broad power to rectify a breach of trust, including the power to compel, enjoin or remove the trustee. As damages, the beneficiary could recover the greater of the trust’s losses or the trustee’s profit.
Safe harbor. If a trustee reasonably relies on the terms of the trust agreement, it would not be liable for any breach of trust that results.
Limits on exculpation. Exculpatory clauses are common to indentures, PSAs and other trust instruments. The statute would codify restrictions on a trustee’s ability to insulate itself from liability. For example, a trust agreement may not relieve the trustee of liability for its bad faith or reckless indifference.
Knowledge. In practice, a trustee’s duties and potential liability often turn on what the trustee knows. Under the bill, a person has knowledge of a fact if he or she “has reason to know it” from everything known to him or her at the time. An organization, however, has knowledge of a fact once the responsible employee receives the information, or would have received the information if the organization exercised reasonable diligence. An organization exercises reasonable diligence if it maintains reasonable policies and procedures for communicating information and there is reasonable compliance with those policies and procedures. An employee need not communicate information unless the communication is part of his or her regular duties, or the employee knows the information would materially affect the trust.
Trustee Duties and Powers
For trusts governed by Minnesota law, the statute would codify the trustee's longstanding common law duties and powers, provide guidance on conflicts of interest, and clarify the court’s power to modify or terminate a trust.
Core duties. The trustee must administer the trust in good faith and with the reasonable care, skill and caution of a prudent person. The trustee owes the beneficiaries the duties of loyalty and impartiality.
Conflicts of interest. Under the proposed statute, a transaction for the trustee’s own personal account, or which is otherwise affected by a conflict of interest, is voidable by the affected beneficiary. The statute specifies certain exceptions, and also lists transactions that are presumed to be a conflict of interest — primarily various types of self-dealing.
Delegation. The statute would authorize a trustee to delegate duties and powers to an agent. As long as the trustee exercises reasonable care, skill and caution in selecting and supervising the agent, then the trustee is not liable for the agent’s actions.
The statute’s TIP process applies to all trusts, including indentures and securitizations governed by another state’s law. As long as the trustee has a trust office in Minnesota or administers the trust in the state, Minnesota courts may grant relief under a TIP petition. That is true today, and would not change under the statute. Even for trusts governed by another state’s law, the Minnesota statute would determine the procedures and the extent of the court’s authority — including venue, subject-matter jurisdiction and the court’s power to modify or terminate the trust.
At the petitioner’s option, the statute would provide for either in personam or in rem jurisdiction. The election may affect notice requirements, the persons on whom the final order is binding, and the court’s continuing jurisdiction over the trust. Also, as before, a person interested in the trust may file a TIP. The statute would codify a broad definition of “interested person,” which includes any “person having a property or other right in or claim against the assets of the trust.”
The subject matter of TIP proceedings would remain expansive, and Minnesota courts would retain their broad authority over trusts. The proposed statute even adds to the enumerated matters. For example, the bill specifies that the court may appoint an additional trustee or special fiduciary — even if there’s no vacancy — whenever the court considers the appointment necessary for the trust’s administration. Also, the court may modify the administrative or dispositive terms of a trust if, because of unanticipated circumstances, modification will further the trust’s purposes. Waste and impracticality would be grounds to modify administrative terms.
Status of Proposed Legislation
House: The Civil Law and Data Practices Committee has recommended approval, and the bill (H.F. 383) now awaits action by the full body.
Senate: The bill (S.F. 578) was introduced on February 5, 2015, and was referred to the Judiciary Committee. To date, no hearing has been scheduled.
Faegre Baker Daniels lawyers are monitoring this legislation as it progresses.