Legal Memorandum: Doctrine of Frustration of a Trust

Issue: In an accounting proceeding under New York law, can a beneficiary be estopped, under the doctrine of frustration or otherwise, to make a claim to surcharge the trustee because of the beneficiary’s successful efforts to render the trustee’s job impossible?

Area of Law: Estate Planning & Probate
Keywords: Trustee's duties; Beneficiary's liability; Tortfeasor's degree of fault
Jurisdiction:  New York
Cited Cases: 285 N.Y. 284; 443 N.Y.S.2d 922; 432 N.Y.S.2d 921; 636 N.Y.S.2d 741; 176 N.Y.S.2d 292; 809 N.Y.S.2d 360; 589 N.Y.S.2d 582; 845 N.Y.S.2d 510; 288 N.Y.S. 655; 34 N.E.2d 322; 659 N.Y.S.2d 165; 486 N.Y.S.2d 956; 364 N.Y.S.2d 164; 274 A.D.2d 110; 435 N.Y.S.2d 632; 632 N.Y.S.2d 544; 853 N.Y.S.2d 92
Cited Statutes: Restatement (Second) of Trusts § 256(4)
Date: 07/01/2009

No New York case was located that applied or discussed the contract doctrine of “frustration” where a trust, not a contract was at issue.*FN1  However, there are at least three theories that a trustee may assert to defend against a beneficiary’s surcharge claim where the beneficiary has intentionally rendered the trustee’s duty impossible to perform.  These theories supply a complete defense to the surcharge claim, or, at worst, provide a means of minimizing the extent of trustee’s liability.

First, New York law does not impose upon trustees any duty to perform the impossible.  See In re Bank of New York, 35 N.Y.2d 512, 364 N.Y.S.2d 164, 169 (1974) (“Our courts do not demand investment infallibility, nor hold a trustee to prescience in investment decisions.”); In re Chase Manhattan Bank, 26 A.D.3d 824, 809 N.Y.S.2d 360, 365 (4th Dept. 2006) (same).  Rather, a trustee’s principal duties are to “act with utmost good faith in the administration of the trust,” In re Myers, 45 A.D.3d 955, 845 N.Y.S.2d 510, 513 (3d Dept. 2007), and to manage the trust property in accord with the “prudent person” rule.  See In re Newhoff’s Will, 107 A.D.2d 417, 486 N.Y.S.2d 956, 960 (2d Dept. 1985).

To warrant a surcharge against a trustee for violation of the prudent person standard, a beneficiary is required to show that a financial loss resulted from the trustee’s “negligence or failure to exercise that degree of care which […]

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