The Arizona Trust Code at A.R.S. §14-11010(A) states that “Except as otherwise provided in the contract, a trustee is not personally liable on a contract properly entered into in the trustee’s fiduciary capacity in the course of administering the trust if the trustee in the contract disclosed the fiduciary capacity.” This provision indicates that so long as the trustee has disclosed his representative capacity that the trustee is not personally liable UNLESS the trustee expressly makes himself or herself personally liable to a contract (i.e. by giving a personal guaranty). This provision is meant to protect trustees, properly acting on behalf of a trust, when entering into contracts with third parties for the benefit of the trust.
In a recent case, the protection of the trust from liability to a third party were challenged where the trustee was thought not to have clearly enough indicated she was operating solely in her representative capacity. In the case of Focus Point/Kantor v. Johnson/Oak Acres, 235 Ariz. 170, 330 P.3d 360 (App. 2014), the Court concluded on the specific facts of the case that the trustee was not personally liable for a breach of contract by the trust, where specific provisions of the listing agreement and the manner in which the listing agreement was signed made it clear enough that the trustee was acting in her representative capacity.
In Focus Point, the Trustee hired a realtor to assist selling a piece of commercial property titled in the name of the Trust. After the initial listing agreement was signed, the realtor requested a second listing agreement for a longer period of time. The second listing agreement was prepared by the realtor, and was not reviewed by the Trustee. The Trustee proceeded to sign her name without further specifying in her own handwriting that she was signing in her representative capacity. The opposing party initially obtained a jury trial judgment against the trustee personally. However, on appeal, the court set aside the personal judgment against the trustee for several reasons.
First, the court of appeals found that it was clear that the trustee was not acting in her individual capacity. In the signature block where the trustee signed, the realtor had typed in “Oak Acres Trust – Cleo Johnson” above the words “Print Name of Owner.” The reviewing court also looked to the express language in the listing agreement which stated that the agreement was between the broker and the owner of the property (with the trust being identified as the owner), and went on to note that the broker never contended that the property was not owned by the trust. Finally, there was an addendum to the listing agreement which identified the owner as “Oak Acres Trust by Cleo Johnson” which the Court found to be a clear, unambiguous reference to both the actual owner of the property and that the trustee acted in her representative capacity. Together, there was enough indicia of who the property owner was (the trust) and the trustee’s representative capacity for the court to conclude that the trustee signed only in her representative capacity.
Second, the reviewing court also found that holding the trustee personally liable while at the same time finding the trust liable based on the same signature was inconsistent. The court reasoned that if the trust was liable because the trustee had legally bound the trust to the contract, that it was impossible for the trustee to also be using that same signature to create personal liability. Simply stated, the court said “It must be one or the other. It cannot be both.” Focus Point at P. 34.
A couple of key takeaways: a) make sure that any contract signed by the trustee for the benefit of the trust clearly notes the trustee’s representative capacity, and; b) always read the contract to make sure there are no provisions contained in the contract which create personal liability for the trustee.
This case upholds and affirms A.R.S. 14-11010(A) demonstrating the trustees entering into contracts with third parties on behalf of the trust are protected from individual liability. However, that is only one aspect of the trustee’s office. Trust administration can be daunting at times, and the trustee’s obligations to abide by the terms of the trust and act in the best interests of the trust beneficiaries is multifaceted and encompasses a number of duties that, if breached, can expose the trustee to liability. Legal assistance is highly recommended – especially when the trustee is not the person or persons who created the Trust.
The law office of Platt & Westby, P.C. are experienced and knowledgeable in trust administration. If you have a question about Arizona probate or estate planning and administration, call us at 602-277-4441 or use the form below to schedule a consultation with one of our experienced and knowledgeable attorneys