Colorado Trust

Author: LegalEase Solutions

QUESTION PRESENTED

 Whether, under Colorado law, the trustee or beneficiaries of a trust are proper to be named in a suit against the trust?

SUMMARY

In Colorado, a trustee may be personally liable to third parties for obligations incurred during the administration of a trust.[1] A trustee acting in his fiduciary capacity may be proceeded against in claims against trust estate irrespective of his personal liability.[2] However, if he is not acting in fiduciary capacity, a trustee may be liable only if he is personally at fault.[3] A beneficiary may also be sued where he or she receives funds invalidly issued from the trust.[4]

RESEARCH FINDINGS

In Colorado, “[i]t is a generally accepted rule that a trustee may be personally liable to third parties for obligations incurred during the administration of a trust. These obligations may arise out of torts committed by the trustee … or as a result of owning property held in trust”  Colorado Springs Cablevision, Inc. v. Lively, 579 F. Supp. 252, 255 n6 (D. Colo. 1984) (citing Gibbons v. Pan American Petroleum Corp., 262 F.2d 852 (10th Cir.1958)).

In Colorado Springs, supra, the Defendant Lively sought “dismissal because he was sued in his individual capacity and not as a trustee.” Id., 579 F. Supp. at 255. The court observed that “Cablevision [Plaintiff] does not refer to the existence of a trust in its complaint. But it is apparent that the complaint, taken as a whole, is directed against Lively as the owner of Parkmoor.” Id. Therefore, the court held that specific allegations as to the capacity is “unnecessary” and the defendant is a proper party. Id.

The personal liability of trustee in Colorado is governed by C.R.S. § 15-16-306. C.R.S. § 15-16-306 (3) is set out as:

Claims based on contracts entered into by a trustee in his fiduciary capacity, on obligations arising from ownership or control of the trust estate, or on torts committed in the course of trust administration, may be asserted against the trust estate by proceeding against the trustee in his fiduciary capacity, whether or not the trustee is personally liable therefor.

Id.

However, C.R.S. § 15-16-306 (2) states that “A trustee is personally liable for obligations arising from ownership or control of property of the trust estate or for torts committed in the course of administration of the trust estate only if he is personally at fault.”

Action in equity

“The general equity rule is that all persons interested in the subject-matter of a suit must be made parties in order that the decree may affect their rights, and this rule requires that in litigation had in respect to trust property, both the trustee and the cestui que trust be made parties.” Webster v. Kautz, 123 P. 139, 142 (Colo. Ct. App. 1912). Further, “[a]ctions by a beneficiary or ward against a trustee or guardian in an existing trust or guardianship are generally, but not always, equitable in nature.” Kaitz v. Dist. Court, Second Judicial Dist., 650 P.2d 553, 555 (Colo. 1982) (citing Restatement (Second) of Trusts § 197 (1959)).

Suing a Beneficiary

            As beneficial owners who normally lack power to make decisions regarding trust funds, beneficiaries are rarely sued. Nonetheless, there is Colorado law indicating that where a beneficiary receives something from the trust pursuant to an invalid conveyance, the other beneficiaries may sue to void the conveyance. For example, in Fischbach v. Holzberlein, Plaintiff Beneficiaries sued other beneficiaries (“Defendant Beneficiaries”), claiming the beneficiary deeds issued to Defendant beneficiaries by the trust were invalid because, under Colorado law, a beneficiary can only receive a beneficiary deed from a natural person and not from a trust.

Privity of Contract

            Although privity of contract is necessary to make out a breach of contract claim in Colorado,  O’Brien v. Houston, 83 Colo. 109, 110, 262 P. 1020, 1021 (1927), “privity of contract, may not be used as a shield in [a] tort action.” Schnell v. Gustafson, 638 P.2d 850, 852 (Colo. App. 1981)(Finding that lack of privity of contract did not prevent plaintiffs from bringing a claim against Defendants for misrepresentations made in connection with the sale of real property.) In this case, the Defendants who did not sign the contract were nonetheless involved in fraudulently misrepresenting the condition of the object sold. Thus, although breach of contract claims may not stand as to the Defendants who weren’t parties to the contract, the tort claims in the complaint and other tort claims will not be affected by the lack of privity.

CONCLUSION

The law on suing a trustee in a claim against trust property in Colorado is as follows:

  • A trustee may be proceeded against for claims based on contracts entered into by him in his fiduciary capacity. In such instances, it is immaterial whether or not he is personally liable.
  • Other than instances of fiduciary capacity, a trustee is personally liable for obligations arising from ownership or control of property of the trust estate only if he is personally at fault.
  • A beneficiary may also be sued where he or she receives funds invalidly issued from the trust.
  • Non-parties to the contract cannot be sued for breach of contract, but they can be liable for torts made in connection with the breach.

[1] Colorado Springs Cablevision, Inc. v. Lively, 579 F. Supp. 252, 255 n6 (D. Colo. 1984)

[2] C.R.S. § 15-16-306 (3)

[3] C.R.S. § 15-16-306 (2)

[4] Fischbach v. Holzberlein, 215 P.3d 407, 409 (Colo. App. 2009)