Opinion ID: 1847774
Heading Depth: 1
Heading Rank: 25

Heading: Burdens of Production and Persuasion Regarding Trustee's Constructive Fraud

Text: The appellants rely on our cases dealing with an attorney in fact's self-dealing to argue that the burden was on Charles to prove that these transactions were equitable to Dolores. The rules in those cases were largely based upon fiduciary duties. An agency creates a fiduciary relationship, subjecting the agent to a duty to refrain from doing any harmful act to the principal. An agent must act solely for the principal's benefit in all matters connected with the agency, even at the expense of the agent's own interest. [35] An agent is prohibited from profiting from the agency relationship to the detriment of the principal. Also, an agent is prohibited from having a personal stake that conflicts with the principal's interest in a transaction in which the agent represents the principal. [36] In the attorney-in-fact cases, we were also concerned about the potential for fraud when a fiduciary has broad powers to control another person's property. We have stated that the policy concern underlying the law is primarily focused on the potential for fraud that exists when an agent acting under a durable power of attorney has the power to make gifts, especially after the principal becomes incapacitated. [37] Because of these concerns, we have held that a party establishes a prima facie case of fraud by showing that an attorney in fact used the principal's power of attorney to make a gift of the principal's assets to himself or herself or to make a gift to a third party with a close relationship to the attorney in fact. [38] Whether the fiduciary acted in good faith or had actual intent to defraud is immaterial; when these circumstances are shown, the law presumes constructive fraud. [39] What is significant is that the burden of going forward with evidence then shifts to the fiduciary to establish by clear and convincing evidence that (1) the transaction was made under the power expressly granted in the instrument and the clear intent of the donor and (2) the fairness of the transaction. [40] It is correct that we have not applied these constructive fraud rules to the fiduciary relationship between a trustee and beneficiary. But like a power of attorney, a trust creates a fiduciary relationship regarding property. A person in a fiduciary relation to another is under a duty to act for the benefit of the other as to matters within the scope of the relation. [41] And [a] trustee shall administer the trust solely in the interests of the beneficiaries. [42] This provision of the Nebraska Uniform Trust Code (Nebraska UTC) is patterned after the corresponding provision of the Uniform Trust Code, [43] which, in turn, is taken from the Restatement (Second) of Trusts. [44] The Restatement comments set forth the same underlying fiduciary principles regarding trusts that we have applied in attorney-in-fact cases. A trustee is under a duty not to profit at the expense of the beneficiary and not to enter into competition with him without his consent, unless authorized to do so by the terms of the trust or by a proper court. [45] The trustee violates his duty to the beneficiary... where he uses the trust property for his own purposes. [46] The Restatement (Third) of Trusts rule is even more explicit: It adds that [e]xcept in discrete circumstances, the trustee is strictly prohibited from engaging in transactions that involve self-dealing or that otherwise involve or create a conflict between the trustee's fiduciary duties and personal interests. [47] And because trustees have great control over the beneficiaries' property interests and beneficiaries cannot readily terminate their fiduciaries or dispose of their interests, [t]he duty of loyalty is, for trustees, particularly strict even by comparison to the standards of other fiduciary relationships. [48] Beyond abstaining from self-dealing, a trustee must refrain from placing himself in a position where his personal interest or that of a third person does or may conflict with the interest of the beneficiaries, even if the trustee has not profited by a transaction. [49] The above principles are codified in § 30-3867. That statute allows a beneficiary to void any conflict-of-interest transaction unless a listed exception applies. [50] As in agency relationships, trusts also raise policy concerns regarding the potential for self-dealing. Like incapacitated principals in an agency relationship, trust beneficiaries often have inferior knowledge about a transaction. Trust beneficiaries also have a limited ability to protect their interests absent the trustee's full disclosure or court approval. [51] The same fiduciary principles and policy concerns about the potential for fraud are present in a trust relationship. Accordingly, we will apply to trustees the same common-law rules that we have applied to attorneys in fact. So unless an exception under § 30-3867 applies, a beneficiary establishes a prima facie case of fraud by showing that a trustee's transaction benefited the trustee at the beneficiary's expense. The burden of going forward with evidence then shifts to the trustee to establish the following by clear and convincing evidence: The transaction was made under a power expressly granted in the trust and the clear intent of the settlor; and the transaction was in the beneficiary's best interests. We emphasize, however, that because these rules are prompted by the concern for self-dealing, they apply only when a beneficiary shows the trustee benefited from a transaction at the beneficiary's expense. We recognize that under § 30-3867, a beneficiary could also show a breach of duty by proving that the trustee's conflict of interest affected a transaction, even if the transaction did not involve self-dealing. [52] But not every circumstance involving a conflict of interest would impose the same burden on the trustee to produce clear and convincing evidence that the transaction was authorized by the trust. [53] And showing a fiduciary relationship alone does not establish constructive fraud. Constructive fraud is the breach of a duty arising out of a fiduciary or confidential relationship. [54]