FIDUCIARY LITIGATION: DAMAGES

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1 FIDUCIARY LITIGATION: DAMAGES Robert H. Burger, Esq. Williams Mullen 222 Central Park Avenue, Suite 1700 Virginia Beach, Virginia facsimile

2 FIDUCIARY LITIGATION: DAMAGES I. Compensatory Damages A. Equity will not hold fiduciaries liable for losses incurred in managing a trust where they acted in good faith, in the exercise of reasonable discretion, and as they would probably have done in their own matters. See 19 M.J. Trusts and Trustees Good faith is a defense only where a trustee, acting within the limits of his powers, with proper prudence and diligence, commits mere mistakes or errors of judgment. Therefore, good faith is no defense where a trustee has arbitrarily overstepped the bounds of his authority, or has handled his trust affairs in such a manner as to be unable to render a proper accounting. Id. 2. The inquiry in every case in which it is sought to fix a liability upon a fiduciary is: a) Did he act within the scope of his powers and duties? b) Did he act in good faith? c) Did he act with ordinary prudence? If he did so act, he is not responsible for the consequences of the act, thought it result in the loss of the trust fund, or some part of it. See Powers v. Powers, 174 Va. 164 (1939). 3. A trustee who acts in reasonable reliance on the terms of the trust as expressed in the trust instrument is not liable to a beneficiary for a breach 2

3 of trust to the extent the breach resulted from the reliance. (Virginia Code Ann ) B. Damages for Breach of Trust * (Virginia Code Ann ) 1. A trustee who commits a breach of trust is liable to the beneficiaries affected for the greater of: a) The amount required to restore the value of the trust property and trust distributions to what they would have been had the breach not occurred; or b) The profit the trustee made by reason of the breach. 2. Contribution from Other Trustee(s) a) If more than one trustee is liable to the beneficiaries for a breach of trust, a trustee is entitled to contribution from the other trustee or trustees. b) A trustee is not entitled to contribution if the trustee was substantially more at fault than another trustee or if the trustee committed the breach of trust in bad faith or with reckless indifference to the purposes of the trust or the interests of the beneficiaries. c) A trustee who received a benefit from the breach of trust is not entitled to contribution from another trustee to the extent of the benefit received. C. Damages in Absence of Breach (Virginia Code Ann ) * A violation by a trustee of a duty the trustee owes to a beneficiary is a breach of trust. (Virginia Code Ann (A)) 3

4 1. A trustee is accountable to an affected beneficiary for any profit made by the trustee arising from the administration of the trust, even absent a breach of trust. 2. Absent a breach of trust, a trustee is not liable to a beneficiary for a loss or depreciation in the value of trust property or not having made a profit. II. Punitive Damages A. Punitive damages are allowable only where there is misconduct or actual malice, or such reckless or negligence as to evidence a conscious disregard of the rights of others. Punitive damages are not favored in Virginia because they are meant to punish, rather than compensate, and should be awarded only in cases of the most egregious conduct. See Xspedius Management Co. of Va. v. Stephan, 269 Va. 421 (2005). 1. In Virginia, punitive damages are capped at $350, (Virginia Code Ann ) B. Under the law of trusts, trustees generally are not liable for punitive damages for breach of fiduciary duty. See Donnkenny, Inc. v. Virginia Financial and Ins. Services, Inc., 739 F.Supp. 290 (W.D. Va. 1990). 1. Virginia law has been found to allow an award of punitive damages in a breach of trust claim only when the breach was particularly egregious or involved some kind of separate tortious conduct. See 19 M.J. Trusts and 4

5 Trustees 111; Kline v. NationsBank of Virginia, 886 F.Supp (E.D. Va. 1995). III. Limitation on Personal Liability of a Trustee (Virginia Code Ann ) A. Except as otherwise provided in the contract, a trustee is not personally liable on a contract properly entered into in the trustee s fiduciary capacity in the course of administering the trust if the trustee in the contract disclosed the fiduciary capacity. B. A trustee is personally liable for torts committed in the course of administering a trust, or for obligations arising from ownership or control of trust property, including liability of violation of environmental law, only if the trustee is personally at fault. C. A claim based on a contract entered into by a trustee in the trustee s fiduciary capacity, on an obligation arising from ownership or control of trust property, or on a tort committed in the course of administering a trust, may be asserted in a judicial proceeding against the trustee in the trustee s fiduciary capacity, whether or not the trustee is personally liable for the claim. IV. Attorneys Fees and Costs A. In a judicial proceeding involving the administration of a trust, the court, as justice and equity may require, may award costs and expenses, including 5

6 reasonable attorneys fees, to any party, to be paid by another party or from the trust that is the subject of the controversy. (Virginia Code Ann ) B. Procedure (Rule 3:25 of the Rules of the Supreme Court of Virginia) 1. A party seeking to recover attorneys fees shall include a demand therefore in the complaint, counterclaim, cross-claim, third-party pleading, or in a responsive pleading. a) The demand must identify the basis on which the party relies in requesting attorneys fees. 2. The failure of a party to file a demand as required constitutes a waiver by the party of the claim for attorneys fees, unless leave to file an amended pleading seeking attorneys fees is granted _1.DOC 6

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