Professor James Toomey analyzes fiduciary principles by comparing two standards, “best interests” and “substituted judgment.” As defined by Toomey, a fiduciary makes a decision in the principal’s best interest when the fiduciary objectively assesses the circumstances. On the other hand, substituted judgment considers the principal’s subjective intent, and thus asks the fiduciary to make the decision the principal would have wanted under the circumstances. Toomey evaluates both models by considering various applications of fiduciary law and assessing whether either standard adequately articulates the legal obligations imposed on fiduciaries.
To demonstrate the difference between the fiduciary standards, Professor Toomey describes how fiduciary decisions based on substituted judgment focus on probable intent and personal identity of the principal. Alternatively, fiduciary decisions based on best interests do not focus on personal identity, but instead reflect the ideal, efficient choices based on the circumstances. Further, he discusses situations where fiduciaries have blended these two standards.
Professor Toomey begins with a historical overview of fiduciary law, which governs the rights and duties of those reposed with legal authority to make decisions on behalf of another person. The foundational principles of fiduciary law emerged from trust law, which separates the burdens and benefits of property ownership by appointing a trustee to manage assets for the beneficial enjoyment of the beneficiary. He explains how a fiduciary relationship works, including restrictions on trustee discretion, a prohibition on self-dealing, and other rules that regulate conflicts of interest. Because these core duties are mandatory fiduciary obligations, they are fundamental to the fiduciary relationship. In contrast, he explains that other fiduciary duties, such as the duties to inform and account to the beneficiary, are waivable, and thus subject to modification by a settlor.
Next, Toomey compares the fiduciary obligations under trust law to fiduciaries in other contexts, such as corporate directors, partnerships, executors, and attorneys. He explains the significance of the different types of fiduciary relationships and how distinctions between them reflect the functions of the fiduciary. For example, he explains one example of the duty of loyalty for a trustee means avoiding a conflict of interest with a beneficiary. This means a trustee cannot create a situation that will cause him to be on both sides of a transaction when managing trust property. For example, a trustee is responsible for managing trust property. Even so, the trustee is prohibited from selling assets from his separate business to the trust even if the price is fair, unless he obtains a court order or beneficiary approval before the transaction. That’s a bright line rule. In other circumstances, the duty of loyalty is not specifically defined, which may leave the fiduciary in precarious circumstances. For example, he explains how a person operating as an agent through a power of attorney has all the legal rights as the principal and is not specifically prohibited from buying and selling property from himself on the principal’s behalf. While the agent may owe a duty of care, loyalty, in this scenario, does not have a bright line definition.
In the next part, Professor Toomey evaluates the differences between best interests and substituted judgment as applied to healthcare surrogate fiduciaries for incapacitated patients. Fiduciary decisions based on the best interests standard use factors such as quality of life, likely impact of the treatment or surgery, and alternatives to invasive procedures, to name a few. Under this standard, the patient’s perspective is given little weight because objective reasonableness is the focus. On the other hand, substituted judgment places the patient’s desire at the forefront. The surrogate must base the decision on what the patient would have chosen, even if the surrogate disagrees or it goes against the reasonableness standard. In making the decision, the fiduciary may consider the patient’s life stories and prior treatment preferences as factors in determining what they would have wanted.
Professor Toomey also compares the fiduciary standards between a trustee and an agent. A trustee’s paramount duty is to act in the beneficiary’s best interests. When applying an objective standard, however, a trustee might focus on maximizing the value and longevity of the trust based on terms and goals set by the settlor without regard to the beneficiary’s particular wishes. Toomey then distinguishes an agent’s duty of obedience to the principal under the substituted judgment regime. Finally, he addresses fiduciaries such as attorneys and doctors who have a blended obligation to be objective and to consider the object’s wishes. While they have an objective duty of care, they must also balance it with the client’s or patient’s wishes.
Professor Toomey then evaluates when and under what circumstances the alternative standards may be applicable to a fiduciary. His analysis focuses on the circumstances surrounding the need for a fiduciary and how each standard impacts the situation. Finally, he describes circumstances in which the best interests model is the better option and others in which substituted judgment works better; however, he seems to conclude that a balancing test based on individual circumstances would be the best option.
Professor Toomey explains a legal framework that he views as ideal for regulating fiduciary relationships. First, he establishes that agency and trust fiduciaries are fundamental fiduciary relationships. Based on their respective roles, they can complement each other within a given set of relationships. In other words, we need both. Next, he argues that a fiduciary relationship based on the legal status of the fiduciary may be personalized, based on substituted judgment or depersonalized, based on best interest, or a blend, depending on the purpose and nature of the parties involved. He argues that pure agency relationships are based on substituted judgment by default, which restrains the fiduciary. Because many fiduciary relationships are consensual, the substituted judgment standard aligns with expectations. Some, therefore, argue this may imply a contractual standard in fiduciary law. Toomey, however, indicates that a contractual fiduciary has a different purpose and function.
Contractual fiduciaries apply the substituted judgment standard because the parties to a contract agree upon the terms of engagement and are therefore bound by the terms. This was an excellent comparison because it demonstrates that contractual fiduciaries focus on the terms of engagement, not the individual desires of the parties, even as the situation evolves over time. On the other hand, agent and trustee fiduciaries may be bound by certain terms, but as situations evolve, they have more flexibility to adjust, which shifts to a best interest standard, or, in other words, a blend. Therefore, he argues, contractual fiduciaries may not be fully contractual in the normal sense. He argues that while some scholars believe a contract is an ongoing relationship, he argues contract fiduciaries must comply with the content of the agreement, full stop. In the end, he argues that fiduciary roles span many categories and should be customized based on the different types of fiduciaries to provide better standards to follow.
This article provides a practical approach to identifying and applying standards to the fiduciary decision-making process. It evaluates the application of those standards to different types of fiduciaries and offers a valuable perspective on how to tailor the standards to the circumstances and the type of fiduciary involved. Professor Toomy’s evaluation of the best interests and substituted judgment standards provides great insight for a variety of fiduciaries and a practical framework for the decision-making process, and identifies the need for more clarity.
