Questioning the Trust Law Duty of Loyalty: Sole Interest or Best Interest?

• Published in: The Yale law journal Vol. 114; no. 5; pp. 929 - 990
• Main Author: Langbein, John H.
• Format: Journal Article
• Language: English
• Published: New Haven The Yale Law Journal Company 01.03.2005; Yale University, School of Law; Yale Law Journal Company, Inc
• Subjects: Beneficiaries; Conflict; Conflict of interests (Agency); Conflicts of interest; Corporate trustees; Courts; Economic law; Equity; Estate administration; Fiduciary duties; Fiduciary responsibility; Financial investments; Fraud; Investment trusts; Law; Laws, regulations and rules; Legal protection; Legislation; Loyalty; Militarism; Mutual funds; Powers and duties; Property trusts; Rule of law; Self-interest; State court decisions; Trust; Trust administration; Trust departments; Trust funds; Trusts; Trusts and trustees; U.S.A
• ISSN: 0044-0094; 1939-8611

The duty of loyalty requires a trustee to administer the trust solely in the interest of the beneficiaries. Any transaction in which the trustee has an actual or potential interest violates the sole interest rule, no matter how beneficial the transaction to the beneficiaries. This Article develops the view that a transaction should not give rise to liability merely because the trustee also benefits. Sometimes beneficiaries are better off when a transaction also benefits the trustee. Corporation law has wholly abandoned the sole interest rule, preferring a rule that permits a conflicted transaction that satisfies disclosure and fairness standards. Important changes have been undermining the trust law sole interest rule. The grievous procedural inadequacies of the equity courts that gave rise to the rule have now been overcome. The rise of professional trusteeship has required that the sole interest rule be abridged to permit trustee compensation. As trusteeship has increasingly become a branch of thefinancial services industry, major exceptions to the sole interest rule have been recognized to facilitate trustee-provided financial services. The rationale for these exceptions is that they benefit trust beneficiaries by promoting integration offunctions and economies of scale. the rule they modify. The duty of loyalty should be reformulated to prefer the best interest rather than the sole interest of the beneficiary. A conflicted transaction should continue to be presumed to violate the duty of loyalty, but rebuttably, not conclusively. The trustee should be allowed the defense that the transaction was in the best interest of the beneficiaries.