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Fiduciary Duties Owed by Trustees

Fiduciary Duties of Trustee

By Bret R. Carter, Esq.

With tax season behind us it is a good time to review your personal affairs and get them in order. If you do not have your estate plan in place, or if it was completed more than five (5) years ago, take this opportunity to get everything completed or updated.

For many people, an estate plan that centers around a revocable living trust is the best option. The reason for that was explained in a prior article, Do I Need a Will, a Trust or Both? This article will discuss the duties of the person or entity that will be in charge of the assets that are placed in the trust. That person or entity is called a trustee.

A trustee is required to hold the property in trust for the beneficiaries named in the trust, follow the terms of the trust and pay or distribute the property as stated in the trust instrument. The trustee is required by law to adhere to numerous fiduciary duties while serving as trustee. Some of the fiduciary duties applicable to a trustee are:

  1. Duty of Loyalty

One of the numerous duties imposed upon a trustee by law is the Duty of Loyalty. That is, the trustee must not place the trustee’s interests above those of the beneficiaries of the trust. Further, a trustee may not seek any advantage at the expense of any beneficiary.

  1. Duty to Avoid Conflicts of Interest

Another duty owed to the beneficiaries by the trustee is the Duty to Avoid Conflicts of Interest. Conflicts of interest often arise when the trustee profits from the use of trust assets.  Another conflict of interest arises in situations where a trustee obtains an advantage over a beneficiary from a transaction the trustee carried out while administering the trust.

a. No Self-Dealing

Self-dealing includes instances where the trustee enters into a favorable transaction with himself or herself.  Even if the transaction is fair and in good faith the trustee may be liable for improper self-dealing and a breach of fiduciary duty.  For example, the trustee purchasing property from the trust for his or her personal ownership may constitute self-dealing because the trustee is both the seller (on behalf of the trust) and the buyer.

b. No Conflicting Personal or Business Interests

Conflicts of interest may also result in cases where the trustee is also a principal of a company in which the trust owns an interest. In those situations, the duties the trustee owes to the beneficiaries of the trust may conflict with those duties the trustee owes to the shareholders or other owners of the company.  Such conflicts of interest may result in a breach of fiduciary duty.

  1. Duty of Impartiality

The trustee is not permitted to favor one beneficiary or class of beneficiaries over others.  The trustee must act impartially at all times, especially when investing and managing trust property, all while considering the various interests of the different beneficiaries. Likewise, if the trustee complies with the demands of some beneficiaries while ignoring the objections of other beneficiaries, the trustee may have violated the Duty of Impartiality.  You cannot always make all beneficiaries happy but a trustee cannot favor one beneficiary over others.

There are numerous other fiduciary duties owed by trustees to beneficiaries, including the Duty of Disclosure and Duty Not to Delegate the trustee’s responsibilities. Those fiduciary duties will be discussed in a future edition of ClarkTalk Blog.


Thank you for joining us on ClarkTalk! We look forward to seeing you again on this forum.  Please note that the views expressed in the above blog do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interest relating to the subject matter covered by the blog.  If you have any questions about fiduciary duties owed by trustees to beneficiaries, please feel free to email Bret Carter at bcarter@clarktrev.com or to call him at 213.629.5700. For more information about Clark & Trevithick’s Trusts & Estates practice, please visit our website at www.ClarkTrev.com

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Foiled by Bankruptcy Filing? Maybe Not!

Bankruptcy

By Kimberly S. Winick, Esq.

Every creditor faces the risk that someone who owes them money will file for bankruptcy relief. Whether the debtor is planning to liquidate or reorganize, the initial filing invariably delays creditor recoveries.  Upon the filing, an automatic stay takes effect, generally preventing actions to enforce then-existing claims or rights against the debtor or any of the debtor’s property.  Creditors eventually may receive some or even all of what they are owed, with secured creditors (eg: lenders, parties holding security deposits) and priority creditors (eg: employees, consumers who have made deposits) having the best recovery prospects.  General unsecured creditors (eg: vendors, contract parties) run a greater risk of non-payment.  However, not all general unsecured creditors face identical risks of loss.

A fundamental philosophical underpinning of our bankruptcy laws is that a debtor should be given a fresh start.  Another is that all like creditors should receive equal treatment in the debtor’s case. An individual debtor generally will receive a discharge of all pre-bankruptcy unsecured debt, without the need to actually pay it off.  Unsecured creditors who timely file proofs of claim (or whose claims have been properly scheduled in a Chapter 11 case) are likely to share pro rata in a modest pool of assets and recover far less than they are owed.  An attentive creditor may be able to take advantage of exceptions to these rules.

Excepting the Claim from Discharge

Not every obligation of an individual debtor is subject to discharge.  Creditors who file and prevail on appropriate “non-dischargeability” complaints get to have their claims share in the general pool, and also are permitted to continue to assert and collect on those same claims against the debtor and his/her post-bankruptcy assets as if the bankruptcy filing had not occurred.  Generally claims arising from fraud, embezzlement or larceny are not dischargeable.  Similarly, while judgments for post-marital property division may be subject to discharge, claims for domestic support obligations are not.  The grounds for denial of discharge as to a particular creditor’s claim must be alleged in a timely-filed complaint and proven in the bankruptcy case.

A creditor who obtained a judgment before the bankruptcy filing may still have to prove that the claim evidenced by the judgment is not dischargeable.  Oftentimes, a judgment will not clearly be based on non-dischargeable grounds, such as a judgment for damages on a complaint alleging fraud in the inducement and breach of contract.  Similarly, a stipulation settling a lawsuit that included claims about false pretenses or false representations likely will not be enough to establish that the stipulated claim cannot be discharged.  By timely filing a complaint to prevent discharge, a creditor holding a pre-bankruptcy judgement or stipulated judgment will be given the opportunity to submit evidence and argue against discharge of the claim.  The window for filing such a case is short, 30 days after a notice of the deadline is mailed, often within the first three months of the case.  Clearly it is important for a creditor to evaluate its potential rights promptly upon receipt of information about a bankruptcy filing.

Excepting the Debtor From a Fresh Start

Some debtors don’t deserve a fresh start, and the Bankruptcy Code makes that clear.  Where a court finds that a bankruptcy case was not filed in good faith, the case may be dismissed, denying the debtor all bankruptcy relief.  Alternatively, the court may retain the case so that creditors share in the available assets, but deny the debtor its fresh start.  This means that the debtor is not permitted to discharge any debts – all claims are treated as non-dischargeable.  Under this scenario, creditors share in whatever assets have come under the control of the court, and retain the right to continue to pursue the debtor until they have been paid all they are owed.  Debtors who have lied to the court about their assets, hidden assets, hidden records, or cannot explain major losses of assets or information are most likely to suffer this sanction.  While it may feel like vindication, this is generally not the best result for any given creditor, as all claims, not just the particular creditor’s, will survive to be asserted against the debtor after the bankruptcy case.

Pursuing Co-obligors and Guarantors

As a general rule, only an identified debtor is protected by the stay in a bankruptcy case. In individual cases, a co-debtor may be protected for a brief time, if the court finds cause.  A creditor who has claims against third parties should take care to monitor the case and oppose the imposition of any “co-debtor stay.”  Apart from this limited exception, guarantors and co-obligors are fair targets during the pendency of a debtor’s bankruptcy case, unless they are debtors in their own bankruptcy cases.  A creditor who initially opted to enforce its judgment against the debtor, should avail itself of all reasonable recovery opportunities.  Moreover, these co-obligors may not be responsible for paying the claims of the debtor’s other creditors, and so may provide a recovery source that has fewer claims against it.

Conclusion

Each bankruptcy case has its own twists and turns, but an alert creditor may be able to turn the debtor’s case to the creditor’s benefit, and thus avoid being foiled by a bankruptcy filing.  An experienced creditors’ rights lawyer can help you develop and implement effective strategies when the people who owe you money file bankruptcy.


Thank you for joining us on ClarkTalk! We look forward to seeing you again on this forum.  Please note that the views expressed in the above blog do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interest relating to the subject matter covered by the blog.  If you have any questions about the treatment of creditors’ claims in bankruptcy, or about other creditors’ rights in bankruptcy, please feel free to email Kimberly S. Winick at kwinick@clarktrev.com or to call her at 213.629.5700. For more information about Clark & Trevithick’s Commercial Law and Insolvency practice, please visit our website at www.ClarkTrev.com

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SEC Adopts Amendments to the JOBS Act to help Entrepreneurs and Investors

Crowdfunding

By Peter V. Hogan, Esq.

On April 5, 2017, the Securities and Exchange Commission (the “SEC”) announced that it adopted amendments to increase the amount of money companies can raise through crowdfunding to adjust for inflation from $1,000,000 to $1,070,000. On April 5th, the SEC also approved amendments for inflation adjustments the annual gross revenue threshold used to determine eligibility for benefits offered to “emerging growth companies” (“EGCs”) under the Jumpstart Our Business Startups (“JOBS”) Act. The SEC is revising the EGC definition under Rule 12b-2 to mean an issuer that had total annul gross revenues of less than $1,070,000 (adjusted from $1,000,000).

The SEC is required to make inflation adjustments to certain JOBS Act rules at least once every five years after it was enacted on April 5, 2012. The SEC approved the new thresholds on March 31, 2017 and they will become effective when published in the Federal Register.

BACKGROUND

Section 101 of the JOBS Act added Section 2(a)(19) to the Securities Act of 1933 (the “Securities Act”) and Section 3(a)(80) to the Securities Exchange Act of 1934 (the “Exchange Act”) to define the term “emerging growth company.” Under those sections, the SEC is directed every five years to adjust the annual gross revenue amount used to determine EGC status for inflation by reflecting the change in the Consumer Price Index for All Urban Consumers (“CPI-U”) published by the Bureau of Labor Statistics (“BLS”) over said five year period. In order to do this, the SEC adopted amendments to the Securities Act Rule 405 and Exchange Act Rule 12b-2 to include a definition for EGC that reflects an inflation-adjusted annual gross revenue threshold. The JOBS Act also provided an exemption from the registration requirements of Section 5 under the Securities Act for certain crowdfunding transactions which helps reduce the cost of raising money for entrepreneurs. The SEC adopted amendments to Rule 100 and 201(t) of Regulation Crowdfunding and Securities Act Form C to reflect the required inflation adjustments.

Additionally, the SEC adopted Sections 102 and 103 of the JOBS Act to amend the Securities Act and the Exchange Act to provide several exemptions from certain disclosure, shareholder voting, and other regulatory requirements for any issuer that qualifies as a EGC. The exemptions reduce the financial disclosures an EGC is required to make in a public offering registration statement and relieve an EGC from conducting advisory votes on executive compensation, as well as provide relief from a number of accounting and disclosure requirements.

Below please find the tables demonstrating the inflation-adjustments made by the SEC which increase certain maximum amounts raised and invested under Regulation Crowdfunding.

Table 1:  Inflation-Adjusted Amounts in Rule 100 of Regulation Crowdfunding (Offering Maximum and Investment Limits)

Regulation Crowdfunding Rule Original Amount Rounded Inflation-Adjusted Amount
Maximum aggregate amount an issuer can sell under Regulation Crowdfunding in a 12-month period (Rule 100(a)(1)) $1,000,000 $1,070,000
Threshold for assessing investor’s annual income or net worth to determine investment limits (Rule 100(a)(2)(i) and (ii)) $100,000 $107,000
Lower threshold of Regulation Crowdfunding securities permitted to be sold to an investor if annual income or net worth is less than $107,000 (Rule 100(a)(2)(i)) $2,000 $2,200
Maximum amount that can be sold to an investor under Regulation Crowdfunding in a 12-month period (Rule 100(a)(2)(ii)) $100,000 $107,000

Table 2:  Inflation-Adjusted Amounts in Rule 201(t) of Regulation Crowdfunding (Financial Statement Requirements)

Regulation Crowdfunding Rule Original Offering Threshold Amount Rounded Inflation-Adjusted Amount
Rule 201(t)(1) $100,000 $107,000
Rule 201(t)(2) $500,000 $535,000
Rule 201(t)(3) $1,000,000 $1,070,000

While these adjustments may seem small, they may make a big difference to a company raising money to expand its business or an investor looking to qualify to invest in a crowdfunding transaction.


Thank you for joining us on ClarkTalk!  We look forward to seeing you again on this forum.  Please note that the views expressed in the above blog post do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interests relating to the subject matter covered by the blog. If you have any questions, please feel free to contact the author, Peter Hogan, by email at phogan@clarktrev.com or telephonically at (213) 629-5700.

Circular 230 Disclaimer: To comply with IRS requirements, please be advised that, any tax advice contained in this blog is not intended or written to be used, and cannot be used, by the recipient to avoid any federal tax penalty that may be imposed on the recipient, or to promote, market or recommend to another any referenced entity, investment plan or arrangement. For more information, please go to www.Clarktrev.com.