In Defense of the No Further Inquiry Rule: A Response to Professor Langbein

Abstract:     
In an article just published in the Yale Law Journal, Professor John Langbein argues for abolition of the "no-further-inquiry" rule. This rule has, for close to two hundred years, prohibited a trustee from engaging personally in transactions with the trust, unless the trustee obtains advance approval from a court or beneficiaries. Langbein contends that the rule deters trustee behavior that benefits trust beneficiaries, and urges substitution of a "best interest" defense that mirrors rules currently applied to corporate fiduciaries.

Langbein's analysis, however, fails to recognize that trustees of private express trusts face fewer incentives to act in the financial interest of trust beneficiaries than do other parties who face conflicts of interest. Trust beneficiaries are typically poor monitors of trustee behavior; beneficiaries have few opportunities to exit from the trust relationship; and market forces play a much more limited role in disciplining trustee behavior than they do in the case of the corporate fiduciary.

The no-further-inquiry rule, with its bright-line prohibition and its advance approval requirement, compensates for the unique vulnerability of trust beneficiaries. The rule responds to the significant prospect of underdeterrence. This problem is inadequately addressed by a "best interest" defense, and is far more significant than the overdeterrence problem on which Langbein focuses.

Judicial and legislative recognition of limited exceptions to the no-further-inquiry rule provides no evidence that the rule has outlived its usefulness. Instead, some of the exceptions are entirely consistent with the rule's rationale, while more recent exceptions reflect the lobbying power of the banking industry, not the inefficiency of the long-established rule.

Number of Pages in PDF File: 47

Keywords: fiduciary, no-further-inquiry rule, trustees, Langbein

Accepted Paper Series