Trusting Trustees: Fiduciary Duties and the Limits of Default Rules

Abstract

In steadily increasing numbers, trust scholars are embracing the view that fiduciary duties are mere default rules, freely waivable by the parties to the trust document. This view parallels the default rule model developed in corporate law by Frank Easterbrook and Daniel Fischel, who have argued that fiduciary duties are "contract" terms that shareholders and management would have agreed to had they anticipated agency cost problems. Management, they argue, should be free to modify, or even eliminate, fiduciary duties in the corporate charter.

This movement by trust scholars to transplant corporate concepts into the law of trusts is has reached its apotheosis in the latest article by John Langbein, who seeks to replace the trust law duty of loyalty with the less stringent corporate standard. See John Langbein, Questioning The Trust Law Duty of Loyalty: Sole Interest or Best Interest? 114 Yale L. J. (2005) (his Yale article cites a draft version of this piece). The analogy to corporate law, however, is fundamentally misguided. Market forces, which (arguably) act to discipline corporate fiduciaries, impose no significant constraints on trustees. Information asymmetries between trust settlors and professional trustees make it unlikely that certain types of express waivers incorporated in trust documents reflect a settlor's judgment that the provision would be value maximizing. Perhaps most importantly, fiduciary duties are most effective when they function both as legal rules and moral norms. Labeling fiduciary duties "default rules" strips them of their normative content, which ultimately undermines fiduciary law's ability to support and reinforce efficient social norms.

This article develops a theoretical framework for determining whether and to what extent parties to a trust document should be permitted to modify fiduciary duties. This framework reveals that recent statutes and provisions of the newly promulgated Uniform Trust Code (UTC), which are premised on the default rule model, are detrimental to trust settlors and beneficiaries. Particular problems are provisions that exculpate trustees from liability for breach of the duty of care, and that allow institutional trustees to engage in a wide range of formerly prohibited self-dealing transactions.

Keywords: trusts, fiduciary duty, default rules, easterbrook-fischel