Hosey v. Burgess
1995 Ark. LEXIS 2, 890 S.W.2d 262, 319 Ark. 183 (1995)
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Rule of Law:
A trustee's specific duty to collect and pay all net income from trust property to the life beneficiary overrides any general administrative powers granted in the trust instrument. Any personal profit a trustee derives from dealing with trust property, such as subleasing it for a higher rent, constitutes a breach of trust and that profit must inure to the beneficiary.
Facts:
- On April 10, 1980, Julian J. Watkins leased his 400-acre farm to his daughter, Leneva Judy Hosey, and her husband, N.R. Hosey, for 25 years at $35 per acre. The lease required the property be used for farming and prohibited subletting without Watkins's written consent.
- On March 25, 1982, Watkins executed a will creating a testamentary trust with the farm as its main asset, naming the Hoseys as trustees.
- The trust directed the trustees to pay all net income from the property to Watkins's wife, Florence R. Watkins, for the duration of her life. Upon Florence's death, the remaining trust principal would be distributed to Leneva Hosey.
- Julian Watkins died on May 12, 1983. The Hoseys, as lessees, paid the trust the stipulated $35 per acre rent, and as trustees, they paid the net proceeds to Florence Watkins.
- In 1989, the Hoseys ceased farming the property themselves and, without written consent, subleased the trust's farm along with their own land to a third party for a lump sum of $88,000 annually.
- The Hoseys continued to pay the trust only the original $35 per acre rent from 1989 to 1991, retaining the surplus profit generated from the sublease for themselves.
- Florence Watkins died on November 24, 1992.
Procedural Posture:
- Marysue Robinson Burgess, as executrix for the estate of Florence R. Watkins, filed suit against Leneva Judy Hosey in the Phillips County Chancery Court (trial court).
- The plaintiff sought to recover the difference between the rental income the Hoseys received from subleasing the trust property and the amount they paid to the life beneficiary for the years 1989-1991.
- The Chancellor found that the Hoseys had engaged in self-dealing and that any profit from the sublease should have gone to the trust beneficiary.
- The Chancery Court entered a decree awarding damages, prejudgment interest, and attorney’s fees to Burgess's side.
- Leneva Judy Hosey, the defendant, appealed the Chancellor's decree to the Supreme Court of Arkansas.
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Issue:
Does a trustee, who is also a lessee of trust property and the remainder beneficiary, commit a breach of trust by self-dealing when they sublease the trust property for a profit and fail to pay that profit to the life income beneficiary, even if the trust instrument grants broad powers and contemplates a conflict of interest?
Opinions:
Majority - Jack Holt, Jr., Chief Justice
Yes. A trustee commits a breach of trust by self-dealing when they sublease trust property for a personal profit that is not remitted to the income beneficiary. The court reasoned that while a trust instrument may contemplate a conflict of interest by naming a beneficiary as a trustee, this does not excuse the trustee from their fundamental fiduciary duties. The specific directive in Julian Watkins's will to 'collect the income thereon, and to pay to... my spouse the net income thereof' was an overriding and strictly limited instruction. This specific duty trumped the broad, general management powers granted elsewhere in the will. Citing Hardy v. Hardy, the court affirmed the principle that any profit obtained by a trustee from the administration of a trust inures to the trust estate. Furthermore, by ceasing to farm the land and subletting it, the Hoseys violated the terms of the original lease. Upon becoming trustees, they had a duty to enforce the lease's terms, even against themselves, and their failure to remit all proceeds from the unauthorized sublease to the life beneficiary constituted a breach of trust.
Analysis:
This case strongly reinforces the primacy of a trustee's duty of loyalty, even in situations where a conflict of interest is expressly created by the settlor. It establishes that specific, mandatory directives within a trust instrument, particularly concerning the distribution of income, will strictly limit a trustee's general discretionary powers. The decision serves as a significant precedent that a 'coincidental benefit' to a trustee must be truly incidental and cannot arise from a transaction that disadvantages a beneficiary or violates a core duty. This holding narrows the exception for settlor-sanctioned conflicts of interest, making it clear that such conflicts do not provide a license for self-dealing that harms the beneficiary.
