Spring 2009 Newsletter
The Statute of Limitations for an Action for Breach of Trust Action: A Comparison between the Uniform Trust Code and the Common Law
By: Charles M. Sims, Esq. and Michele K. Burke, Esq.
By enacting the Virginia Uniform Trust Code (“Virginia UTC”), the General Assembly provided greater certainty to the accrual of the statute of limitations, which may increase a trustee’s ability to successfully assert the statute of limitations as an affirmative defense to a claim for breach of fiduciary duty. The Virginia UTC also places greater burdens on beneficiaries to remain vigilant, even if they are merely contingent beneficiaries, or risk having their claims extinguished by the running of the statue of limitations.
The statute of limitations under the Virginia UTC departs from the common law, because it allows the trustee to invoke the affirmative defense while continuing to act in his or her fiduciary capacity. Counterbalancing trustees’need for certainty in their exposure for acts carried out as a trustee and the beneficiaries’need to be informed of potential claims, the Virginia UTC provides that the statute of limitations begins to run if the trustee has adequately informed the beneficiary of the potential claim for breach of trust. This departs from the common law, where the statute of limitations did not begin to run on claims against a trustee of an express trust until the trustee had denied or repudiated the trust, thus effectively terminating the fiduciary relationship. The Virginia UTC, thus, departs from how the statute of limitation is applied to other fiduciaries, such as accountants, attorneys, and agents, where under the continuous relationship rule the statute of limitations does not begin to run until the termination of the undertaking (which is analogous to the rule regarding repudiation1).2
The application of the statute of limitations to contingent beneficiaries under the Virginia UTC also departs from the common law because under the common law, neither the statute of limitations nor laches began to run to bar a contingent beneficiary’s claim against a trustee until those interests had vested. Contingent beneficiaries must now remain vigilant and act to protect their rights, even though those rights may never vest, or risk having claims barred when the rights have vested.
II. THE UNIFORM TRUST CODE
The Virginia UTC is found at Title 55 Chapter 31 of the Virginia Code (the “Virginia UTC”), and it became effective July 1, 2006.3 The increase in the use of trusts, and the accompanying rise in the number of questions concerning trust administration, led to the development of the UTC.4 According to legal scholars, the common law as developed through case law failed to address the myrid number of issues that arise in the day to day activities of trust administration and none of the uniform acts relating to trusts dealt with the subject comprehensively.5 Thus, “[t]he UTC arose out of the need to fill in the gaps left by both common law and statutory law developments.”6 It appears that the drafters of the UTC intended to provide greater certainty to trustees as to when claims could be brought against trustees for acts taken in management of the trust. While providing that certainty, however, the drafters may have provided a circumstance where claims of contingent beneficiaries would be extinguished before their rights in the trust ever vested.
A. The Limitations Period Set Forth in the Virginia UTC
The Virginia UTC at Va. Code § 55-550.05, provides for a limitation of action for claims a beneficiary has against a trustee for breach of trust.7 A violation by a trustee of a duty the trustee owes to a beneficiary is a breach of trust.8 Under the Virginia UTC, a “beneficiary” is “a person that (i) has a present or future beneficial interest in a trust, vested or contingent; or (ii) in a capacity other than that of trustee, holds a power of appointment over trust property.”9 Therefore, on its face, the limitation period applies to most any claim that vested or contingent beneficiaries would have against a trustee.10
There are three limitations periods set forth in Virginia Code § 55-550.05. First, a beneficiary is barred from commencing an action for breach of trust against a trustee “more than one year after the date the beneficiary or a representative of the beneficiary was sent a report that adequately disclosed the existence of a potential claim for breach of trust and informed the beneficiary of the time allowed for commencing a proceeding.”11“ A report adequately discloses the existence of a potential claim for breach of trust if it provides sufficient information so that the beneficiary or representative knows of the potential claim or should have inquired into its existence.”12 A person has “knowledge” of a fact if the person has (1) actual knowledge of it; (2) has received a notice or notification of it; or (3) from all the facts and circumstances known to the person at the time in question, has reason to know it.13
Second, in other instances, except in a case of fraud, the Virginia UTC bars any claim against a trustee five years after the termination of the fiduciary relationship. The fiduciary relationship is terminated by: (1) the removal, resignation, or death of the trustee; (2) the termination of the beneficiary’s interest in the trust; or (3) the termination of the trust.14 Therefore, with the exception of an action involving fraud, the limitations period does not apply to a cause of action for breach of trust against a trustee until a beneficiary receives a report that adequately discloses the existence of a potential claim for breach of trust and the one year limitations period. If there is not an adequate report of a breach, then the limitations period does not apply until the fiduciary relationship between the beneficiary and trustee is terminated, in which case the statute of limitations is five years.
The third and final statute of limitation provision set out in the Virginia UTC pertains to a trustee who has committed fraud in connection with any proceeding or in any statement filed under the Virginia UTC,or if the trustee commits fraud in avoiding or circumventing the provisions or purposes of the Virginia UTC.15 Fraud claims are barred two years after the fraud is discovered. Significantly, the discovery rule does not apply to a proceeding brought against one not a perpetrator of the fraud and the limitation period is five years after the time the fraud is committed.16
B. Applicability of the Limitation Period
The Virginia UTC applies retroactively to all trusts17 created before, on or after July 1, 2006, including express inter vivos trusts, charitable or non-charitable trusts, trusts created pursuant to a statute, judgment or decree that requires the trust to be administered in the manner of an express trust, and testamentary trusts.18 Additionally, the Virginia UTC applies to all judicial proceedings concerning trusts commenced on or after July 1, 2006, with exceptions.19 Therefore, the limitations period does not apply to acts completed before July 1, 2006; however, it does not apply to extend a repealed or superseded limitation period if the statute of limitations has commenced to run on a cause of action before July 1,2006.20
III. DEPARTURE FROM THE COMMON LAW
A. Two Year Catch all Limitations Period
Before the enactment of the Virginia UTC, there was “no express statute of limitations for actions by a fiduciary, against a trustee for breach of trust.”21 Courts applied the Virginia catch-all statute of limitations to suits for breach of fiduciary duty and accompanying negligence claims against trustees, such claims being encompassed in a claim for breach of trust.22 The catch-all statute of limitations is currently two years.23
B. Denial or Repudiation of the Trust by the Trustee Required
A significant difference between the common law and the Virginia UTC is that the statute of limitations now applies to an action brought by a beneficiary against a trustee of an express trust before the termination of the fiduciary relationship if the trustee adequately informs the beneficiary or a representative of the beneficiary of a potential claim for breach of trust.24 Under the common law (now superseded by the Virginia UTC), it was well settled that the statute of limitation did not begin to run on a claim of express trust until the trustee denied or repudiated the trust and the trust beneficiary had actual or constructive notice of this denial or repudiation or the trust terminated.25 As stated by the Supreme Court of Virginia in Russel’s Ex’re v. Passmore, “It is well settled that a subsisting, recognized and acknowledged trust, as between a trustee and cestui que trust is not within the operation of the statute of limitations.”26 In cases where the trustee raised the affirmative defense of the statute of limitations, the determinative issue was whether the trustee had repudiated the trust and whether the repudiation had been communicated to the beneficiary.27 A trustee’s communication of a repudiation of the trust extends beyond simply informing the beneficiary that he breached of one of his duties and the beneficiary may have a claim against the trustee. The Supreme Court of Virginia explained:
So long as the trust subsists, the right of the cestui que trust will not be barred by the possession of the trustee, however long continued, as the possession of the trustee is treated as the possession of the cestui que trust, and although he does not execute the trust, his mere possession and inactivity as to the trust,of themselves, afford no indicia of an adverse claim by him. But if the trustee denies the trust, and assumes absolute ownership of the trust property, in such a manner that the cestui que trust has actual or constructive notice of the repudiation of the trust by the trustee, the statute attaches and begins to run from that time against the cestui que trust, unless the latter is at the time under some one of the statutory disabilities, or is under undue influence proceeding from the trustee. Such denial of the trust, and assertion of an adversary claim in himself, is an abandonment of the fiduciary character in which he has stood to the property, and from that time the claim of the cestui que trust is subject to the operation of the statute. But in order to put the statute in motion, it must appear that the cestui que trust had, or ought to have had, knowledge of the trustee’s denial, repudiation, or adverse claim, and that the trustee has been guilty of no fraud in that regard.28
In Kappa Sigma Fraternity, Inc. v. Kappa Sigma Memorial Foundation, the Supreme Court of Virginia addressed the statute of limitations as applied to a claim of express trust, and held that the “statute of limitation begins to run on a claim of express trust when the trustee denies or repudiates the trust and the trust beneficiary has actual or constructive notice of this denial or repudiation.”29 Under the facts before it, the Court found that amendments to the corporation’s status and purpose constituted “a repudiation of any express trust maintained by the [corporation] for the benefit of the [Kappa Sigma Fraternity].”30 Because such action by the trustee is an abandonment of the existing fiduciary character of the trustee’s relationship to the trust property, the statute begins to run based on the trustee’s action and notice, unless the trustee has committed a fraud with regard to the giving of notice.”31 Accordingly, the Court held that because the fundamental change in the corporation’s status occurred in 1974 and the plaintiff had actual notice of the change in that same year, the plaintiff’s express trust claim was time-barred when the suit was filed in 2001, “regardless of whether the express trust claim brought by the Fraternity is construed as being based on breach of contract, an injury to property, or on breach of fiduciary duty.”32
By comparison, in Broaddus v. Gresham, the Supreme Court of Virginia held that no part of the beneficiary’s claims was barred by the statute of limitations, because there was no claim or suggestion that the trustee had repudiated the trust or denied liability for the payments. To the contrary, the trustee had continually acknowledged his duty to make the payments as required of him by the terms of the will that created the trust. In Broaddus, a mother died in 1922, leaving in her will a provision that called for her husband to receive the income from her property, except for $50 monthly that he was to pay their daughter.33 When his daughter came of age in 1922, she received payment in full for the installments of the legacy due to her to date.34 Over the following years, the father became considerably in arrears in the payments and the daughter “frequently called upon” her father for settlement, but it was not made.35 Nineteen years later, in 1941, the daughter brought an action against her father alleging that, as a trustee, he held rents collected for her benefit and that he was accountable to her for the rents collected.36 She prayed for an accounting and a judgment for the balance due.37 The father challenged the existence of the trust, claiming he was a debtor and not a trustee.38
After making the threshold determination that an express trust existed and that the father was the trustee, the Virginia Supreme Court stated, “It is well settled that so long as there has been no denial or repudiation of an express and continuing trust, such as we have here, neither the statute of limitations nor laches will constitute a bar to an account or other proper relief to which the cestui que trustis entitled.”39 The fact that the beneficiary was aware of the breach and frequently called upon the trustee for settlement did not factor into the Court’s holding that no part of the beneficiary’s claim was barred by the statute of limitations or by the beneficiary’s delay in instituting the suit. Instead, the Court found that “there is no claim or suggestion” that the trustee has repudiated the trust or that he denied liability for the payments to the beneficiary.40 Further, the Court held that the trustee never repudiated or denied liability, therefore “no part of the [beneficiary’s] claim was barred by the statute of limitations or by her delay in instituting the suit.”41 Therefore, a trustee’s breach of duty does not constitute a repudiation of the trust unless the act constitutes an abandonment of the existing fiduciary character of the trustee’s relationship to the trust property.
Therefore, Virginia Code § 55-550.05(A), which provides that the one year statute of limitations begins to run against a beneficiary after the trustee adequately notifies the beneficiary of a potential claim for breach of trust (rather than a repudiation) is a significant change from the common law. However, because the common law rule requiring notice of repudiation applied only to express continuing trusts, Virginia Code § 55-550.05(C), which provides that the limitation period of five years accrues upon the termination of the fiduciary relationship, is consistent with the common law.
The practical effect of the change in the law is that a trustee of an express trust may successfully invoke the statute of limitations if the trustee adequately informs the beneficiary of a potential claim. A trustee should carefully comply with the reporting requirements of the limitations provision and must remember to include notice of the one year limitations period in the trustee’s report. On the other hand, a beneficiary should be vigilant and carefully examine a trustee’s report to determine if a potential claim exists to ensure that a potential claim is not barred by the one year statute of limitations.
C. Not Applicable to Contingent Beneficiaries
The most significant difference between the common law and the Virginia UTC is application of the statute of limitations to contingent beneficiaries. Under the common law, the statute of limitations does not apply to a breach of trust claim brought by a contingent beneficiary against a trustee, because his or her interest has not vested and thus, contingent beneficiary is under no obligation to invoke the aid of the court.42 The Virginia UTC, however, defines a “beneficiary” as a person that has merely a contingent interest in the trust, and thus, contingent beneficiaries must remain vigilant or risk losing rights that may not vest until much later.
For example, in a case where the life tenant is still living, under the common law, the contingent beneficiaries have no obligation to bring an action against a trustee for breach of his or her duty before their interests vest. In Effinger, the testator died in 1835, leaving a life estate to his wife and directing that upon her death the property be sold and distributed among the named beneficiaries. The wife died in 1879. In 1881, certain of the named beneficiaries brought an action to construe the will. Certain other beneficiaries argued that this claim was time-barred, as more than 45 years had elapsed since the will had been recorded. The court rejected this argument and held that the suit was timely because “until the death of the life tenant he had no claim which he was called upon to assert.”43 The Supreme Court of Virginia applied this same rule to an action brought by a contingent remainder man against a trustee. In Sedgewick’s Curator v. Taylor, the contingent beneficiary brought an action against the trustee while the life-tenant was still living. Citing Effinger, the Court held that the claim was not stale because while the life-tenant was still living, the interests in remainder, being contingent, had not yet accrued.44
To the same effect was Stewart v. Conrad, administrator, 100 Va. 128, 135, 40 S.E. 624, 627 (1902), where the court addressed a situation where the remainder men brought an action against the trustee:
The remainder men, under the terms of the law creating the trust fund, are not entitled to the possession of any part of it until the death of the life tenant, who was a party to this suit, and who, so far as this record shows, is still alive. Until her death appellants would have no standing in court except to ask a court of equity to prevent or remedy a violation of the trust and to preserve the trust fund. They had the right to invoke the aid of a court of equity for those purposes, but they were under no legal obligation to do so, and the objection of laches or acquiescence will not lie for their failure to assert rights which have not yet accrued.45
Thus, under the common law, while contingent beneficiaries had the right to invoke the aid of the equity court to enforce the trustee’s obligations, to have the trust funds accounted for and collected, and to protect their contingent interests in the trust principal, they were under no legal obligation to do so, as their rights to the trust property had not yet accrued. Accordingly, the statute of limitations did not apply to their claims.
Now, under the Virginia UTC, contingent beneficiaries must remain vigilant to protect their interests.For example, if a trustee makes a wrongful distribution to a life beneficiary, then resigns, the five year statute of limitations begins to run against the contingent beneficiary’s claim. If the life beneficiary does not die within the five years, the contingent beneficiary’s right to bring an action will be extinguished before his interest vests. Because the contingent beneficiary is burdened with the obligation to bring a claim before his or her interest in the estate vests, the contingent beneficiary must weigh the benefit of bringing a claim to protect an interest in property that he or she may never acquire. That burden is especially great, because a contingent beneficiary is entitled to bring only equitable claims to protect his or her interest, not legal claims.46
The Virginia UTC limitations provision provides greater certainty on how long claims against a trustee may remain viable. To ensure maximum protection from the Virginia UTC, the trustee should adequately report any potential claims that any beneficiary may have against a trustee while weighing the potential negative effect of the disclosure on the fiduciary relationship. Beneficiaries on the other hand should remain vigilant by examining any report that a trustee may provide regarding a potential claim and seek legal counsel to ensure that his or her rights are not extinguished.
Charles M. Simsis a partner with and leads LeClair Ryan’s Commercial Litigation and Business Litigation Practices. He regularly litigates in federal and state court all manner and types of complex commercial disputes, including claims for officers’and directors’ liability and professional malpractice; breach of contract, fraud, violations of state trade secret laws, tortious interference with contract, and ERISA claims. Mr. Sims also frequently represents clients in intellectual property litigation in federal and state court, and has a special interest in technology related issues.
Michele K. Burkeis an associate in LeClairRyan’s Commercial Litigation Group. She focuses her practice on trust and estate litigation, fiduciary litigation and business litigation matters involving directors and officers, professional liability, errors and omissions liability, breach of contract and tortious interference with contract.
1See Kappa Sigma Fraternity, Inc. v. Kappa Sigma Memorial Foundation, 266 Va. 455, 469, 587 S.E.2d 701, 709 (2003) (“Because such action by the trustee is an abandonment of the existing fiduciary character of the trustee’s relationship to the trust property, the statute begins to run based on the trustee’s action and notice, unless the trustee has committed a fraud with regard to the giving of notice.”); Wilson v. Rowlett, 235 Va. 644, 647-648, 369 S.E.2d 194, 196 (the statute of limitations began to run when the employee’s participation in the insurance policy trust terminated; the continuous relationship rule did not apply because the employee was charged with the knowledge that his fiduciary relationship with the insurance policy trustee was terminated).
2McCormick v. Romans, Jr.,214 Va. 144, 148, 198 S.E.2d 651,654 (1973) (statute of limitations does not run until attorney's services terminated); Stevenson v. Jones, 142 Va. 391, 128 S.E.568 (1925) (statute of limitations does not run until denial of bailsment and conversion occurs, relying on the principle that the statute of limitations does not begin to run against a trustee unless there has been an open demand and repudiation of the trust by the trustee); W. Hamilton Bryson, Bryson on Virginia Civil Procedure, p. 256 (3rd ed. 1997).
3Va. Code § 55-541 et. seq.
4John E. Donaldson and Robert T. Danforth, Annual Survey of Virginia Law: Article: The Virginia Uniform Trust Code, 40 U.Rich. L. Rev. 325, 325 (2005).
7Va. Code § 55-550.05.
8Va. Code § 55-550.01.
9Va. Code § 55-541.03.
10In the case of a revocable trust, “[w]hile a trust is revocable, rights of the beneficiaries are subject to the control of, and the durites of the trustee are owed exclusisvely to the settlor.” Va.Code § 55-546.03.
11Va. Code § 55-550.05 (A).
12Va. Code § 55-550.05 (B).
13Va. Code § 55-541.04.
14Va. Code § 55-550.05 (C).
15Va. Code § 55-550.05(D). A discussion of the provision relating to the perpetration of fraud is beyond the scope of this article.
16Va. Code § 55-550.05(D).
17Va. Code § 55.541.02 (with limited exceptions).
19Va. Code § 55-551.06.
21Kline v. Nations Bank of Va., N.A., 886 F. Supp. 1285, 1297 (E.D. Va. 1995).
22Id.(citing Va. Code § 8.01-248; Resolution Trust Corp. v. Walde, 856 F. Supp. 281, 285 (E.D. Va. 1994) (citing, among other authority, FDIC v. Cocke, 7 F.3d 396, 401-02 (4th Cir. 1993); Lavay Corp. v. Dominion Fed. Sav. & Loan Ass’n, 830 F.2d 522, 527 (4th Cir. 1987), cert. denied, 484 U.S. 1065, 98 L. Ed. 2d 991, 108 S. Ct. 1027 (1988)); International Surplus Lines Ins. Co. v. Marsh & McLennan, Inc., 838 F.2d 124, 128 (4th Cir. 1988); In re Southern Int’l Co., 165 Bankr. 815, 824 (Bankr. E.D. Va. 1994) (applying the catch-all statute to a claim against a bankruptcy trustee for breach of fiduciary duty)).
23Va. Code § 8.01-248.
24Va. Code § 55-550.05 (A).
25Kappa Sigma Fraternity, Inc. v. Kappa Sigma Memorial Foundation, 266 Va. 455, 469, 587 S.E.2d 701, 709 (2003) (citing Russel’s Ex’re v. Passmore, 127 Va. 475, 511, 103 S.E. 652, 664(1920); Wiglesworth v. Taylor, 239 Va. 603, 608, 391 S.E.2d 299,303 (1990); Broaddus v. Gresham, 181 Va. 725, 734, 26 S.E.2d33, 36 (1943)); Kline, 886 F. Supp. at 1297-1298.
26Russel’s Ex’re,127 Va. at 510, 103 S.E. at 663 (quoting Woodon Limitation of Actions, section 200, p. 418).
27See Kappa Sigma, 266 Va. 455, 587 S.E.2d 701; Broaddus, 181 Va. 725, 26 S.E.2d 33 (trustees breach of duty to distribute a specified amount of income was not a repudiation); Kline, 886 F.Supp. at 1297-1298 (repudiation did not occur until the life tenant died and the defendant repudiated by failing to deliver the income to the beneficiary).
28Russel’s Ex’re,127 Va. at 511, 103 S.E. at 664 (quoting Woodon Limitation of Actions § 212; citing 2 Perry on Trusts (6th ed.), section 863; Hammond v. Ridley’s Ex’rs, 116 Va. 393, at p. 399, 82 S.E. 102; Bargamin v. Clarke, 61 Va. (20 Gratt.) 544; Hogg’s Eq. Principles, section 567)).
29Kappa Sigma 266 Va. at 469, 587 S.E.2d at 709.
30Id. at 468-469, 587 S.E.2d at 709.
31Id. at 469, 587 S.E.2d at 710.
33Broaddus, 181 Va. at 728, 26 S.E.2d at 34.
34Id. at 728, 26 S.E.2d at 34.
35Id. at729, 26 S.E.2d at 34-35.
38Id. at 730, 26 S.E.2d at 35.
39Id. at 734, 26 S.E.2d at 36.
40Id. at 734, 26 S.E.2d at 37.
42Effinger v. Hall, 81 Va. 94 (1885); Sedgwick’s Curator v. Taylor, 84 Va. 820, 6 S.E. 226 (1888); Stewart v. Conrad, 100 Va. 128, 135, 40 S.E. 624, 627 (1902); Makel v. Tredegar Trust Co., 69 Va.Cir. 204, 206-207, 2005 Va. Cir. Lexis 153 at 4-5 (2005).
43Effinger ,81 Va. at 100.
44Sedgwick’s Curator, 84 Va. at 827, 6 S.E. at 230
45See also Sedgwick’s Curator, 84 Va. at 827, 6 S.E. at 230 (holding that the claim of the contingent remainder man under a trust was not time-barred because it had not yet vested); Stewart, 100 Va. at 135, 40 S.E. at 627.
46See Id.; see also Makel, 69 Va. Cir. at 206-207; 2005 Va. Cir. Lexis at 4-5.