[Filed April 21, 1998 @ CJC and included in its records submitted to the WA Supreme Court]
BEFORE THE COMMISSION ON JUDICIAL CONDUCT
OF THE STATE OF WASHINGTON
|In re the Matter of
The Honorable Grant L. Anderson
Pierce County Superior Court
930 Tacoma Avenue South
Tacoma, Washington 98402
COMPLAINING ATTORNEY'S COMPILATION OF READINGS ON THE LAW GOVERNING FIDUCIARIES
1. Introduction. As the Complaining Attorney who initiated this proceeding in February of 1996, I submit to the members of the Commission's panel assigned to this case the following readings intended merely to educate those members (four of whom on the eight-member panel are public, non-lawyer members) on the general common law and Washington law applicable to fiduciaries. The Commission's Decision of April 3, 1998, made several findings of fact that establish Judge Anderson to have been the personal representative of the Hoffman Estate and an officer of three business corporations that it owned. Under applicable law, he was a "fiduciary" (and as personal representative, he was a "court appointed fiduciary") who owed a "duty of loyalty" to the beneficiaries (in Latin, a cestui que trust) of the estate and the trust that succeeded it.
Without an understanding of the well-established law governing fiduciaries, the Commission members cannot appreciate the egregiousness of the misconduct that they found, from their fact-finding hearing, that Judge Anderson had committed. It appears from the public files that Commission Counsel Paul R. Taylor failed to brief the Commission to any extent whatsoever concerning applicable fiduciary law. Since the adequacy of the sanctions recommended by the Commission for Judge Anderson's misconduct are being, and will continue to be, measured by many members of the legal profession (and many non-lawyers, as well) who do have an understanding of fiduciary law, the Commission's goal of enhancing public confidence in the judicial system requires that the Commission members consider that body of law in relation to sanctions that they recommend. The following Compilation simply presents what competent lawyers handling estates, trusts, and business matters, and clients who have been counseled in such matters by competent lawyers, ought to know. Anticipating objections, I have avoided interjecting my own legal arguments--I merely compiled extracts from Washington cases and a law student reference text. Following this section, all text I have authored is within brackets.
While I recognize it as unusual for a Complaining Attorney to submit a Compilation such a this, I previously have appeared by Motion (in the form of a letter dated December 23, 1997) in this proceeding, which the Commission panel members collectively considered and decided by an Order entered January 6, 1998. The Commission's Constitutional Charter (Washington Constitution Article IV, Section 31) does not prohibit such a submission. The Supreme Court permits "friend of the Court" submissions when they assist the Court's understanding of the issues in a case. This Compilation would have been unnecessary if Mr. Taylor had briefed the Commission on applicable fiduciary law; but since he did not, I have determined to prepare and submit this. Without the Commission's possessing, and demonstrating, an understanding of the well-established law that governed Judge Anderson's conduct while he was acting as a fiduciary (in fact, a court-appointed fiduciary), the Commission cannot (1) appreciate the egregiousness of the misconduct that it found he committed and (2) decide upon an appropriate sanction that will enhance public confidence in the judiciary.
As the following excerpts illustrate, judges routinely must measure the propriety of conduct by estate personal representatives, trustees, corporate officers and directors, business managers and agents, and myriad other fiduciaries against this well-established body of fiduciary law. Without an understanding of this law, the Commission cannot properly "measure-up" Judge Anderson's conduct so as to consider what degree of confidence future litigants, and their lawyers, will have in the integrity of the judicial system if their fiduciary misconduct cases are inextricably assigned to Judge Grant L. Anderson (which can happen if a litigant's single statutory "affidavit of prejudice" has been used on another judge).
2. Law Student Trust Law Hornbook. [Excerpts from Bogert, Trusts (6th ed., Hornbook Series, Student Edition, West 1987), § 95 entitled "Trustee's Duty of Loyalty":]
[Headnote, p.341:] The trustee owes a duty to the beneficiaries to administer the affairs of the trust solely in the interests of the beneficiaries, and to exclude from consideration his own advantages and the welfare of third persons. This is called the duty of loyalty.
If the trustee engages in a disloyal transaction, the beneficiary may secure the aid of equity in avoiding the act of the trustee or obtaining other appropriate relief, regardless of the good faith of the trustee or the effect of the trustee's conduct on the beneficiary or benefit to the trustee.
In enforcing the duty of loyalty the court is primarily interested in improving trust administration by deterring trustees from getting into positions of conflict of interests, and only secondarily in preventing loss to particular beneficiaries or unjust enrichment of the trustee.
[Body text, pgs 341-44:] One of the most important duties of a trustee is that of undivided loyalty to the beneficiaries. While he is administering the trust he 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. All his conduct which has any bearing on the affairs of the trust must be actuated by consideration of the welfare of the beneficiaries and them alone. He is in a position of such intimacy with those he is representing and has such great control over their property that a higher standard is established by the court of equity than would prevail in the case of an ordinary business relation.
It is a well-known quality of human nature that it is extremely difficult, or perhaps impossible, for an individual to act fairly in the interests of others whom he represents and at the same time to consider his own financial advantage. In most cases, consciously or unconsciously, he will tend to make a choice which is favorable to himself, regardless of its effect on those for whom he is supposed to be acting. Sometimes no harm will come to the beneficiaries because the trustee is unusually conscientious or the selfish action of the trustee does not work an injury to the beneficiary. But it is highly dangerous to fiduciary administration that the personal interests of the trustee come into play. Often actual harm will come to the beneficiaries. For the sake of protecting them against this risk equity forbids the disloyal transaction and does not consider its actual merits or effects which in many cases may be concealed.
The rule applies to conduct by the trustee which is in the interest of a third party, as well as to the case where his personal interest is involved. If the trustee was motivated by a desire to enrich a third person, the transaction is subject to attack on the grounds of disloyalty. Thus if a trustee has realty for sale, and sells it to X for the purpose of enabling X to make a profit on a resale, even though T is not to obtain any financial advantage and even though the sale was otherwise unexceptionable, the sale would be vulnerable under the duty of loyalty rule.
It is sometimes stated that equity "forbids" disloyal transactions, and this might lead to the implication that such acts are void. This, however, is not the case. The beneficiary has the choice of objecting to the transaction as against the trustee and others (assuming no bona fide purchaser has come into the picture.) Or he may elect to take the benefit of the disloyalty and assert his right to one of the remedies available. Thus if a trustee sells trust property to himself and thereby puts himself in a position where his personal interests to get the property at the lowest and best terms conflicts with his representative interest to sell for the highest figure, the beneficiary may affirm the transaction and treat the price paid as trust property and the property sold as belonging absolutely to the trustee; or he may set aside the sale, and get a decree that the property be restored to the trust on the return to the trustee of the price he paid; or he may take from the trustee any profit he may have made on a resale of the property.
Whether the trustee acted in good faith and with honest intentions is not relevant, nor is it important that the transaction attacked was fair and for an adequate consideration so that the beneficiary has suffered no loss as a result of the disloyal act. It is not material that the trustee himself made no profit from the disloyal act, although in most cases he has benefited. Thus if a trustee employs an agent and permits him to enter into transactions beneficial to the agent while he is engaged in the trust work, the trustee may be held liable for the amount of the agent's gain even though the trustee did not share in it.
In applying the loyalty rule the court of equity is not primarily concerned in preventing unjust enrichment and working out the equities of the parties in the individual case, although it does consider that problem in framing its decree. It is principally desirous of procuring a result which will keep all trustees out of temptation and thus conduce to the ethical and efficient administration of trusts.
The loyalty doctrine applies to all persons in a fiduciary or confidential relation, for example, to executors, administrators, guardians, agents, partners, promoters and directors and officers of corporations, public officers, and to those who, by reason of family relationship, age, health, education, or experience, have a superiority and dominance over others who trust them with business affairs and are, therefore, deemed to occupy a "confidential relation."
Equity will not permit the loyalty rule to be circumvented by any subterfuge. Indirect disloyalty is just as objectionable as direct. Hence the trustee cannot avoid the operation of the doctrine by dealing with a person who is in collusion with him (a straw man); or with one who has an identity of economic interests, for example, a wife; or with a corporation in which the trustee owns all or nearly all of the stock.
Corporate fiduciaries may violate the rule if they deal with affiliated or subsidiary corporations where there is a high degree of common interest and control.
Agents and employees of the trustee, and officers of a corporate fiduciary, are also affected by the loyalty rule.
[Body text, pgs 346-47 under the subheading "Illustrations of the Application of the Loyalty Rule":] So too, the loyalty principle may be applied where a trustee of a business engages in a competing enterprise, accepts a gift from one with whom he deals while conducting the trust business, or obtains an incidental benefit for himself while engaged in the conduct of the trust business.
3. Drinkwater Case. [Excerpt from In re Estate of Drinkwater, 22 Wn. App. 26, 29-31, 587 P.2d 606 (1978):]
"Trustees and guardians must conform to stringent standards of responsibility.In re Estate of Johnson, 187 Wash. 552, 554, 60 P.2d 271, 106 A.L.R. 217 (1936)."The law is that a trustee is under a duty to the beneficiary to administer the trust solely in the interest of such beneficiary, and, in doing this, an undivided loyalty to the trust is required. The trustee is not permitted to make a profit out of the trust. . . . An executor, executrix or administrator of an estate of a deceased person acts in a trust capacity, and must conform to the rules governing a trustee".Stewart v. Baldwin, 86 Wash. 63, 68, 149 P. 662 (1915)."An administrator stands in a fiduciary relation to those beneficially interested. He is subject to the universal rule that a trustee is bound to do that which will best serve the interests which for the time are intrusted to his care. His own good faith is not enough."In re Estate of Montgomery, 140 Wash. 51, 53, 248 P. 64 (1926), which involved a guardian's attempt to collect a real estate sales commission on property belonging to the estate."A guardian cannot be allowed to make a profit from the handling of his ward's estate."In re Carlson, 162 Wash. 20, 31, 297 P. 764 (1931), quoting from 26 R.C.L., § 189, at 1326-27."[T]he trustee has no right to derive any benefit or advantage from the trust fund; but all his skill and labor in the management of it must be directed to the advancement of the interest of his cestui que trust, . . ."
"Where a woman, on the day she died, gave her husband a deed to certain real estate, which he agreed to hold in trust for her son by a prior marriage, and the husband accepted the deed of trust, the Supreme Court prevented his later attempt to claim a homestead in that property.(Italics ours.) In re Estate of Eustace, 198 Wash. 142, 147, 87 P.2d 305 (1939)."A trustee, having accepted a trust and entered upon the discharge of his duties as trustee, is estopped from setting up a claim to the trust estate as against the beneficiary under the trust. A trustee cannot deal with trust property for his own profit, claim any advantage by reason of his relation to it, or set up a claim against the trust estate."
. . .
"'Under no circumstances can a trustee claim or set up a claim to the trust property adverse to the cestui que trust. . . . If a trustee desires to set up a title to the trust property in himself, he should refuse to accept the trust.' 1 Perry on Trusts and Trustees (7th ed.), 721, § 433."(Citations omitted.) In re Estate of Eustace, supra at 148, wherein the court, quoting In re Estate of Johnson, supra, further stated:"A claim of homestead is antagonistic to the rights of cestui que trust, and cannot be allowed. . .
. . .
The trustee owes to the cestui que trust the highest of good faith, diligence, and integrity.""Thus, the husband,"The law is that a trustee is under a duty to the beneficiary to administer the trust solely in the interest of such beneficiary, and, in doing this, an undivided loyalty to the trust is required. The trustee is not permitted to make a profit out of the trust."In re Estate of Eustace, supra at 148. That case is the logical obverse of the instant case. There, even though the husband would normally have had an absolute right to an award in lieu of homestead, he was estopped from claiming it because of the trust relationship.""having accepted the trust created by the deed which had been executed by his wife, could not thereafter secure any of the property specified in the deed by claiming it under the statute provided for exemption in lieu of homestead."
4. Kane Case. [Excerpt from Kane v. Klos, 50 Wn.2d 778, 784, 314 P. 2d 672 (1957):]
"By RCW 23.36.080, corporate officers and directors are fiduciaries. [New York Chief Justice] Cardozo's language in Meinhard v. Salmon, 249 N.Y. 458, 164 N.E. 545, defining fiduciary duties had become classic. He said:5. Hayes Oyster Case. [Excerpts from State ex rel. Hayes Oyster Co. v. Keypoint Oyster Co., 64 Wn.2d 375, 381, 391 P.2d 979 (1964):]"Many forms of conduct permissible in a workaday world for those acting at arm's length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior. As to this there has developed a tradition that is unbending and inveterate. Uncompromising rigidity has been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty by the 'disintegrating erosion' of particular exceptions. [Citation omitted.] Only thus has the level of conduct for fiduciaries been kept at a level higher than that trodden by the crowd. It will not consciously be lowered by any judgment of this court."
"Certain basic concepts have long been recognized by courts throughout the land on the status of corporate officers and directors. They occupy a fiduciary relation to a private corporation and the shareholders thereof akin to that of a trustee, and owe undivided loyalty, and a standard of behavior above that of the workaday world. 3 Fletcher, Cyclopedia of Corporations (1947 ed.) 838, p. 173; 2 Thompson on Corporations (3d ed.) 1320, p. 778; Leppaluoto v. Eggleston, 57 Wn. (2d) 393, 357 P. (2d) 725; Arneman v. Arneman, 43 Wn. (2d) 787, 264 P. (2d) 256, 45 A.L.R. (2d) 370; Kane v. Klos, 50 Wn. (2d) 778, 314 P.(2d) 672; Meinhard v. Salmon, 249 N. Y. 458, 164 N. E. 545, 62 A.L.R. 1.
"This concept is confirmed by the enactment of RCW 23.01.360, which provides:"Directors and other officers of a private corporation cannot directly or indirectly acquire a profit for themselves or acquire any other personal advantage in dealings with others on behalf of the corporation. 3 Fletcher, Cyclopedia of Corporations (1947 ed.) 884, p. 268; 13 Am. Jur. 998, p. 950; Western States Life Ins. Co. v. Lockwood, 166 Cal. 185, 135 Pac. 496; Fleishhacker v. Blum, 109 F. (2d) 543."Officers and directors shall be deemed to stand in a fiduciary relation to the corporation, and shall discharge the duties of their respective positions in good faith, and with that diligence, care and skill which ordinarily prudent men would exercise under similar circumstances in like positions."
"Respondent is correct in his contention that this court has abolished the mechanical rule whereby any transaction involving corporate property in which a director has an interest is voidable at the option of the corporation. Such a contract cannot be voided if the director or officer can show that the transaction was fair to the corporation. However, nondisclosure by an interested director or officer is, in itself, unfair.
"It is not necessary, however, that an officer or director of a corporation have an intent to defraud or that any injury result to the corporation for an officer or director to violate his fiduciary obligation in secretly acquiring an interest in corporate property.
"In quoting from 13 Am. Jur. 1002, p. 955, in the case of Lycette v. Green River Gorge, Inc., 21 Wn. (2d) 859, 153 P. (2d) 873, we said, p. 865:6. Williams Case. [Excerpt from Williams v. Queen Fisheries, 2 Wn. App. 691, 694, 469 P.2d 583 (1970):]"'Actual injury is not the principle upon which the law proceeds in condemning such contracts. Fidelity in the agent is what is aimed at, and as a means of securing it, the law will not permit the agent to place himself in a situation in which he may be tempted by his own private interest to disregard that of his principal. . .'"
"A corporate officer is an agent for his corporate principal. Corporate officers and directors occupy a fiduciary relationship to a private corporation and shareholders thereof akin to that of a trustee, and owe undivided loyalty and a standard of behavior above that of the workaday world. State ex rel. Hayes Oyster Co. v. Keypoint Oyster Co., 64 Wn.2d 375, 381, 391 P.2d 979 (1964), and cases cited therein.
"A principal may not rightfully terminate the agency relationship before the end of the period for which he has agreed to employ the agent, unless the agent has committed a material breach of contract or has failed to perform a condition. A serious violation of the duty of loyalty constitutes an entire breach of contract, justifying discharge of the agent. A willful violation of the duty of loyalty may constitute a material breach of the contract, even though the harm likely to arise from the breach is very small. Restatement (Second) of Agency § 409 (1958). The duty of loyalty is one of the elements of the fiduciary duty, and in discussing a trustee's duty of loyalty which is synonymous to that duty owed a principal by his agent, G. Bogert, Trusts & Trustees, § 543 (2d ed. 1960) states at 475:"The fiduciary obligation may be breached, although no corruption, dishonesty or bad faith is involved. The standard of duty required is for the agent to avoid placing himself in a situation where he may be tempted by his own private interests to disregard that of his principal and it is this corrupting tendency that the law condemns. [Citations omitted.]"Reasons behind the establishment of the loyalty rule by equity are that it is generally, if not always, humanly impossible for the same person to act fairly in two capacities and on behalf of two interests in the same transaction. Consciously or unconsciously he will favor one side as against the other, where there is or may be a conflict of interest. If one of the interests involved is that of the trustee personally, selfishness is apt to lead him to give himself an advantage. If permitted to represent antagonistic interests the trustee is placed under temptation and is apt in many cases to yield to the natural prompting to give himself the benefit of all doubts, or to make decisions which favor the third person who is competing with the beneficiary.
. . .
"In its desire to guard the highly valuable fiduciary relationships against improper administration, the court deems it better to forbid disloyalty and strike down all disloyal acts, rather than to attempt to separate the harmless and the harmful by permitting the trustee to justify his representation of two interests."
7. Crisman Case. [Excerpt from Crisman v. Crisman, 85 Wn. App. 15, 21-23, ___ P.2d ___ (1997), in which the court found that business manager's undisclosed acts of self-dealing constituted a fraud on their principal, the business owner:]
"In the present case, Crisman did not plead the nine elements of a traditional fraud action. Her evidence, however, was sufficient to prove that Uhlich and Robert owed her an affirmative duty of candor and breached that duty.
"Absent an affirmative duty to disclose material facts, a defendant's silence does not constitute fraudulent concealment or misrepresentation. Favors v. Matzke, 53 Wn. App. 789, 796, 770 P.2d 686, review denied, 113 Wn.2d 1033 (1989). When a duty to disclose does exist, however, the suppression of a material fact is tantamount to an affirmative misrepresentation. Washington Mut. Sav. Bank v. Hedreen, 125 Wn.2d 521, 526, 886 P.2d 1121 (1994); Oates, 31 Wn.2d at 902.
"A fiduciary relationship arises between an agent and a principal when the agent, without the knowledge and consent of the principal, exercises dominion and control over the principal's property sufficient to alienate the principal's right to the property. Moon v. Phipps, 67 Wn.2d 948, 955-56, 411 P.2d 157 (1966). Once a fiduciary relationship arises, the agent has a duty to act in the utmost good faith, to fully disclose all facts relating to his interest and his actions involving the affected property, and to deliver all benefits derived from or inuring to the property from the breach to the principal. Moon, 67 Wn.2d at 956.
"In this instance, Uhlich and Robert, acting as Crisman's agents, transferred corporate funds they received from the liquidation sale to their own benefit without Crisman's knowledge or consent. They were acting as Crisman's fiduciaries and, consequently, owed her an affirmative duty of disclosure. As Uhlich and Robert did not disclose their actions to Crisman, they breached this duty, and their silence constitutes an affirmative act of misrepresentation. Consequently, RCW 4.16.080(4), the statutory discovery rule for fraud, applies. The trial court erred as a matter of law when it held otherwise."
8. Eriks Case. [From Eriks v. Denver, 118 Wn.2d 451, 824 P.2d 1207 (1992), in which the court, upon a finding that an attorney had breached his fiduciary duty to two groups of clients with conflicting interests in a case, at page 462 quoted from Woods v. City Nat'l Bank & Trust Co., 312 U.S. 262, 85 L. Ed. 820, 61 S. Ct. 493 (1941), as follows:][On page 463, the court continued:]"Where [an attorney] . . . was serving more that one master or was subject to conflicting interests, he should be denied compensation. It is no answer to say that fraud or unfairness were not shown to have resulted. . . .
"A fiduciary who represents [multiple parties] . . . may not perfect his claim to compensation by insisting that, although he had conflicting interests, he served his several masters equally well . . .. Only strict adherence to these equitable principles can keep the standard of conduct for fiduciaries "at a level higher than the that trodden by the crowd." See Mr. Justice Cardozo in Meinhard v. Salmon, 249 N.Y. 458, 464, 164 N.E. 545 (1928)."
"The trial court found that Denver violated the CPR [Code of Professional Responsibility] and breached his fiduciary duty to his clients. Disgorgement of the fees is a reasonable way to "discipline specific breaches of professional responsibility, and to deter future misconduct of a similar type." [Citation omitted.] Such an order is within the inherent power of the trial court to fashion judgments. [Citation omitted.]"
9. RPC 1.6(c). [The Washington Supreme Court's adopted Rules of Professional Responsibility, Rule 1.6 captioned "Confidentiality," expressly permits attorneys--notwithstanding the general client confidentiality rule-- to report misconduct by "court-appointed fiduciaries":]
(a) A lawyer shall not reveal confidences or secrets relating to representation of a client unless the client consents after consultation, except for disclosures that are impliedly authorized in order to carry out the representation, and except as stated in sections (b) and (c).
(b) A lawyer may reveal such confidences or secrets to the extent the lawyer reasonably believes necessary:
(1) To prevent the client from committing a crime; or
(2) To establish a claim or defense on behalf of the lawyer in a controversy between the lawyer and the client, to establish a defense to a criminal charge or civil claim against the lawyer based upon conduct in which the client was involved, to respond to allegations in any proceeding concerning the lawyer's representation of the client, or pursuant to court order.
(c) A lawyer may reveal to the tribunal confidences or secrets which disclose any breach of fiduciary responsibility by a client who is a guardian, personal representative, receiver, or other court appointed fiduciary.
10. Personal Representative's Oath. [RCW 11.28.170 provides:]
"Before letters testamentary or of administration are issued, each personal representative or an officer of a bank or trust company qualified to act as a personal representative, must take and subscribe to an oath, before some person authorized to administer oaths, that the duties of the trust as personal representative will be performed according to law, which oath must be filed in the cause and recorded."
11. Superior Court Judge's Oath. [RCW 2.08.080 provides:]
"Every judge of a superior court shall, before entering upon the duties of his office, take and subscribe to an oath that he will support the Constitution of the United States and the Constitution of the state of Washington, and will faithfully and impartially discharge the duties of judge to the best of his ability, which oath shall be filed in the office of the secretary of state. Such oath or affirmation to be in form substantially the same as prescribed for justices of the supreme court."
|Dated April 21, 1998.||/s/
Douglas A. Schafer, Complaining Attorney