Corporate Veils and Trust Creditors

By Doug Chalgian on July 13, 2023

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In this case we dive into the murky area of creditor rights in Michigan Trust administration, and more specifically, the relationship between creditors of business entities v creditors of a trust which holds such entities.

For the sake of simplicity, assume that Entity B owed a debt to Entity A.  Entity B is owned by Entity C.  And Entity C is an asset of a trust being administered following the settlor’s death.

Entity A sues the Trustees claiming that they are mismanaging the Trust to the detriment of creditors, of which they are one.

The Trial Court says, in so many words:  A creditor of an entity in which the Trust holds an interest is not the same as a creditor of the trust – and you are (at best) a creditor of an entity owned by the Trust but not a creditor of the Trust.  Accordingly, Entity A’s case against the Trustees is dismissed.

The Court of appeals affirms.

This unpublished opinion is called: In Re Helen Tenney Miller Trust (click on the name to read the case). [Be forewarned: the facts are complicated and involve issues beyond the trust-creditor issue discussed in this post.]

In affirming the trial court, the Court of Appeals acknowledges that In Re Baldwin Trust [274 Mich App 387 (2007)] provides that a trustee may be accountable to creditors of a trust/estate under certain circumstances (Baldwin being the seminal case in Michigan on the issue of a fiduciary’s duty to creditors).

The COA explains that while a Trustee might have liability to a creditor in some situations, in this situation, this creditor’s reach falls short.  The decision explains that Entity A would have to first pierce the protections provided by the intervening entities, B and C, before they would have a direct claim against the Trustee.  And, the COA says, this creditor simply doesn’t have facts to get through the protections provided by these intervening entities.  Accordingly, the trial court was correct in dismissing Entity A’s challenge to the acts of the Trustees.

Thus, we see that the protective veil of a business entity must be pierced before a creditor of such an entity which is owned by a Trust would have standing to seek relief in a proceeding against a Trustee.


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mm By: Doug Chalgian
Doug Chalgian

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