Flagship Bank v. REINMAN, HARRELL, SILBERHORN, MOULE & GRAHAM, PA
12 Fla. L. Weekly 410, 503 So. 2d 913, 1987 Fla. App. LEXIS 11918 (1987)
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Rule of Law:
A trustee's duty to exercise reasonable care extends to protecting property that, while not formally described in the trust instrument, the trustee is actively seeking to recover as a trust asset in pending litigation.
Facts:
- In 1967 and 1970, promoters established two land trusts, the '660 on 530 Trust' and the '300 on 530 Trust,' for public investors but retained valuable portions of the land tracts for themselves.
- A successor trustee for the trusts filed a lawsuit in 1973 against the promoters, alleging fraud and seeking to have the retained land conveyed to the trusts.
- Between 1974 and 1976, property taxes on the retained land went unpaid, leading to the issuance of tax certificates.
- In early 1977, Flagship Bank of Orlando (Flagship) was appointed as the new successor trustee and took over the ongoing litigation against the promoters to recover the retained land.
- The holders of the tax certificates applied for tax deeds, and a tax sale for the retained property was scheduled for July 6, 1977.
- Promoters notified a Flagship trust officer of the impending tax sale approximately 30 days, and again 7 days, before the scheduled date.
- On the day of the sale, Flagship representatives attended but failed to redeem the tax certificates, instead qualifying as a bidder and failing to bid sufficiently, resulting in the property being sold to third parties.
Procedural Posture:
- In 1971, the Securities Exchange Commission filed a lawsuit regarding the trusts, and a receiver was appointed.
- In 1973, the trusts' trustee filed a separate action in federal court against the promoters to recover the retained land.
- In 1977, Flagship Bank was appointed successor trustee and was substituted as the plaintiff in the 1973 action.
- A federal judge authorized Flagship to redeem the tax certificates on the day of the tax sale.
- In 1982 and 1983, the successor trustees, Reinman, Harrell and Palmer (appellees), sued Flagship (appellant) in Florida state court for negligence.
- Following a non-jury trial, the trial court found in favor of the successor trustees and awarded damages.
- Flagship appealed the trial court's judgment to the District Court of Appeal of Florida, Fifth District.
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Issue:
Does a trustee have a legal duty to exercise due care to prevent the loss of real property at a tax sale when that property is not formally part of the trust corpus but is the subject of a pending lawsuit in which the trustee is seeking to have the property declared a trust asset?
Opinions:
Majority - Cowart, J.
Yes. A trustee has a legal duty to protect property it is actively claiming as a trust asset, even if that property is not formally described in the trust instrument. The court reasoned that a trustee's duties are not confined to the four corners of the trust document and include the general tort law duty to use due care to prevent damage to others. Because Flagship, as trustee, was actively contending in a lawsuit that the retained property was, in equity, a trust asset, it owed a duty to use due care to prevent that property from being lost at a tax sale. The court noted that Flagship's own last-minute efforts to redeem the property demonstrated that it recognized and undertook this duty. The court also held that the statute of limitations did not begin to run until successor trustees were appointed, and that the proper measure of damages was the property's fair market value at the time of trial to make the beneficiaries whole.
Analysis:
This decision clarifies that a trustee's fiduciary duty of care is not strictly limited to assets formally titled in the trust's name. It extends the duty to property that the trust has a colorable claim to and is actively pursuing through litigation. This holding prevents trustees from neglecting potential trust assets under the guise that ownership is not yet perfected. The ruling on damages, valuing the lost property at the time of trial rather than at the time of the breach, establishes a significant precedent for making beneficiaries whole by accounting for lost appreciation, particularly in cases involving real estate.
