Bray, Punitive Damages Against Trustees?

Punitive Damages Against Trustees?

Forthcoming in RESEARCH HANDBOOK ON FIDUCIARY LAW (D. Gordon Smith & Andrew S. Gold, eds.)

Samuel L. Bray1

Draft of August 2, 2016

Introduction

Whether punitive damages should be available against a trustee may seem like an easy question. Punitive damages are widely available in the legal systems of the United States,2 especially when a defendant has taken advantage of a plaintiff. When trustees breach their duties, that is what they are doing—taking advantage of beneficiaries. Moreover, the economic rationale for punitive damages is that they should be given for legal violations that are hard to detect.3 Breach of trust can be hard to detect: the settlor may be out of the picture, and the beneficiary may not be in a position to guard the guardian.4 The case for punitive damages is easy. And so it is unsurprising that in the last several decades a number of state courts have begun to allow the recovery of punitive damages against a trustee.5 This development occurred between the Restatement (Second) of Trusts (1959), which “contains no authorization or recognition of

1 Professor, UCLA School of Law. I am grateful to Nathan Chapman, Mark Gergen, Andrew Gold, Richard Hedlund, Adam Hirsch, Jill Horwitz, Daniel Kelly, Stephen Munzer, Richard Re, Robert Sitkoff, David Waddilove, and Stephen Yeazell for helpful comments and conversations. 2 For U.S. jurisdictions without punitive damages, see Exxon Shipping Co. v. Baker, 554 U.S. 471, 495 (2008). 3 See A. Mitchell Polinsky & Steven Shavell, Punitive Damages: An Economic Analysis, 111 HARV. L. REV. 869 (1998). 4 Robert Cooter & Bradley J. Freedman, The Fiduciary Relationship: Its Economic Character and Legal Consequences, 66 N.Y.U. L. REV. 1045, 1051 (1991). 5 John H. Langbein, Questioning the Trust Law Duty of Loyalty: Sole Interest or Best Interest?, 114 YALE L.J. 929, 990 n.242 (2005). punitive damages”;6 and the Restatement (Third) of Trusts (2003), which approves of their use “[i]n the egregious case.”7 This “recognition in modern law of punitive damages for . . . egregious fiduciary breaches” has been described as “a sign of movement toward deterrence.”8 It is true that not every American jurisdiction allows punitive damages against trustees.9 But the trend in that direction is unmistakable. One qualification is needed, but it is a small one. The emerging principle has a rule-exception structure. The rule is that punitive damages are not available against trustees, with an exception for “the egregious case.”10 But egregious cases are exactly where one would expect punitive damages anyway. In other areas of law, such as contract, this kind of rule- exception structure for the availability of punitive damages has not thwarted their use.11 Thus, despite this qualification, the emerging principle is that punitive damages are available against trustees. But in the long history of English law, inherited by the United States, punitive damages against trustees are an innovation. The law of trusts, including remedies, was developed in the courts of equity, especially the Court of Chancery. In Chancery there were no punitive damages.12

6 John H. Langbein, What ERISA Means by “Equitable”: The Supreme Court’s Trail of Error in Russell, Mertens, and Great-West, 103 COLUM. L. REV. 1317, 1347-48 (2003). 7 RESTATEMENT (THIRD) OF TRUSTS § 100 cmt d (2003); see also 1 DAN B. DOBBS, LAW OF REMEDIES: DAMAGES–EQUITY–RESTITUTION § 3.11(1), 460 (2d ed. 1993) (suggesting that the rule against punitive damages in equity has been “rejected by contemporary decisions that have addressed it as a serious issue”). 8 Robert H. Sitkoff, An Economic Theory of Fiduciary Law, in PHILOSOPHICAL FOUNDATIONS OF FIDUCIARY LAW 197, 207 (Andrew S. Gold & Paul B. Miller eds., 2014). For scholarship endorsing similar developments outside the United States, see Andrew Burrows, Remedial Coherence and Punitive Damages in Equity, in EQUITY IN COMMERCIAL LAW 381 (Simone Degeling & James Edelman eds., 2005); Mitchell McInnes, Taxonomic Lessons for the Supreme Court of Canada, in STRUCTURE AND JUSTIFICATION IN PRIVATE LAW: ESSAYS FOR PETER BIRKS 77, 88 (Charles Rickett & Ross Grantham eds., 2008) (“[I]t is difficult to understand why, by mere dint of pedigree, every equitable wrong resists punishment and deterrence.”). 9 See infra notes 17 and 19 and accompanying text; Langbein, supra note 6, at 1347-48 (noting that most federal decisions have rejected punitive damages for claims under the Employee Retirement Income Security Act). 10 See RESTATEMENT (THIRD) OF TRUSTS § 100 cmt d (2003). 11 Indeed, courts are actually more likely to award punitive damages in contract cases than in tort cases. See DOUGLAS LAYCOCK, MODERN AMERICAN REMEDIES: CASES AND MATERIALS 254-255 (4th ed. 2010). 12 See, e.g., United States v. Bernard, 202 F. 728, 732 (9th Cir. 1913). This was only an application of the more general principle that “equity has no punitive jurisdiction.” WALTER ASHBURNER, PRINCIPLES OF EQUITY 53 (1902); see also Livingston v. Woodworth, 56 U.S. (15 How.) 546, 559-560 (1853) (rejecting a punitive measure for an

2 Accordingly, the lack of punitive damages in trust law is now sometimes thought to have been a mere historical accident. Without the archaic law- equity division, the argument often goes, we can at last inter the notion that punitive damages are unavailable against trustees.13 Two points should give us pause. One is that the introduction of punitive damages as a trust-law remedy does not seem to have had much to do with the merger of law and equity. In the federal courts, legal and equitable procedures were combined by the Federal Rules of Civil Procedure in 1938. But the adoption of the Rules did not effect a broader merger of law and equity.14 In fact, that point was specifically recognized with respect to punitive damages in equity.15 Nor does the merger of legal and equitable courts seem to predict whether a jurisdiction will allow punitive damages against trustees. Among states with separate law and equity courts, some allow punitive damages in equity (e.g., Mississippi16) and some do not (e.g., Delaware17). Among states with merged law and equity courts, some allow punitive damages in equity (e.g., New Mexico18) and some do not (e.g., Maryland19). Furthermore, outside of procedure and courts, the separation of law and equity retains vitality. Fiduciary law

accounting because it conflicted with the settled equitable principle that plaintiffs in equity “will be allowed to claim that which, ex æquo et bono, is theirs, and nothing beyond this”). On traditional remedies for breach of trust, see F. W. MAITLAND, EQUITY: A COURSE OF LECTURES 216-226 (A. H. Chaytor, W. J. Whittaker & John Brunyate eds., 1949) (1936); J. D. HEYDON, M. J. LEEMING, & P. G. TURNER, MEAGHER, GUMMOW & LEHANE’S EQUITY: DOCTRINES AND REMEDIES §§ 23-020–23-085, at 801-081 (5th ed. 2015). 13 See, e.g., Tideway Oil Programs, Inc. v. Serio, 431 So. 2d 454, 460-64 (Miss. 1983); Note, Punitive Damages Held Recoverable in Action for Equitable Relief, 63 COLUM. L. REV. 175, 179 (1963); see also Schoenholtz v. Doniger, 657 F. Supp. 899, 913-914 (S.D.N.Y. 1987) (ERISA); Burrows, supra note 8; Maurice J. Holland, Some Contributions of Justice Peterson to Oregon's Civil Procedure, 73 OR. L. REV. 785, 814 n.79 (1994). 14 See Petrella v. Metro-Goldwyn-Mayer, Inc., 134 S. Ct. 1962, 1973–74 (2014); Grupo Mexicano de Desarrollo, S.A. v. Alliance Bond Fund, Inc., 527 U.S. 308, 318–19 (1999); Stainback v. Mo Hock Ke Lok Po, 336 U.S. 368, 382 n.26 (1949); Smith v. Gehring, 496 A.2d 317, 323–25 (Md. Ct. Spec. App. 1985). 15 Coca-Cola Co. v. Dixie-Cola Labs., 155 F.2d 59, 63 (4th Cir. 1946). 16 Tideway Oil Programs, Inc. v. Serio, 431 So. 2d 454 (Miss. 1983). 17 Touch of Italy Salumeria & Pasticceria, LLC v. Bascio, No. CIV.A. 8602-VCG, 2014 WL 108895, at *8 (Del. Ch. Jan. 13, 2014); Beals v. Washington Int’l, Inc., 386 A.2d 1156 (Del. Ch. 1978). 18 Madrid v. Marquez, 2001-NMCA-087, 131 N.M. 132, 134-35 (N.M. Ct. App. 2001). 19 Bontempo v. Lare, 444 Md. 344, 377, 119 A.3d 791, 811 (2015); Superior Const. Co. v. Elmo, 204 Md. 1, 26 (1954).

3 remains equitable.20 Equitable remedies continue to be distinguished from legal remedies.21 Therefore, whatever the justification may be for allowing punitive damages for breach of trust, it does not, like a conclusion from a premise, follow from the present state of the merger of law and equity. The second point that should give us pause comes from the perception of punitive damages for egregious fiduciary breaches as showing “movement toward deterrence.”22 Equity did not approve of bad conduct by trustees. Indeed, equity was famous for the rigor with which it required trustees to do justice. It could hardly be that the historic chancellors were ignorant of the need to discourage breaches of trust. It is a good principle of reform that before changing a rule, one should try to understand why it might have been there in the first place.23 This Essay considers whether punitive damages against trustees are justifiable. The conclusion reached is a skeptical one. If there is a good justification for using punitive damages instead of remedies such as the constructive trust, it is has yet to be given. Limitations on the scope of this analysis should be noted. The question is considered only for jurisdictions in the United States. The focus is on trustees, not fiduciaries more generally, though the argument certainly has implications for punitive damages against fiduciaries. Furthermore, all that is in view is trusts, a substantive area developed exclusively by equity, and not the full scope of equity’s aversion to punitive damages, which traditionally held even when a claim was brought in equity that could have been brought at law, such as a claim for the enforcement of a contract. In the older terminology, trust law is an

20 See Henry E. Smith, Why Fiduciary Law Is Equitable, in PHILOSOPHICAL FOUNDATIONS OF FIDUCIARY LAW, supra note 8, at 261; see also Deborah A. DeMott, Beyond Metaphor: An Analysis of Fiduciary Obligation, 1988 DUKE L.J. 879, 880-882. 21 See Samuel L. Bray, The System of Equitable Remedies, 63 UCLA L. REV. 530, 541-550 (2016); Samuel L. Bray, The Supreme Court and the New Equity, 68 VAND. L. REV. 997 (2015); but see Douglas Laycock, The Triumph of Equity, 56 L. & CONTEMP. PROBS. 53 (1993). 22 Sitkoff, supra note 8, at 207. 23 G. K. Chesterton describes a fence that lies across a road, and he contrasts two reformers. The first strides up to the fence and says “I don’t see the use of this; let us clear it away.” To which the more intelligent type of reformer will do well to answer: “If you don’t see the use of it, I certainly won’t let you clear it away. Go away and think. Then, when you can come back and tell me that you do see the use of it, I may allow you to destroy it.” G. K. Chesterton, The Thing: Why I Am a Catholic, in 3 G. K. CHESTERTON: COLLECTED WORKS 157 (1990).

4 example of equity’s “exclusive jurisdiction” and the arguments given here might have less force when thinking about equity’s “concurrent jurisdiction.”24 Instead, this Essay will consider whether there is present justification, in the legal systems of the United States, for awarding punitive damages against a trustee. Given the analytical fragmentation of scholars who study remedies, both in and out of trust law, a linear discussion might prove unsatisfactory. The approach taken will therefore be to consider the question three times, each time from a different perspective. The first perspective is that of a person who thinks the goal of remedies is to achieve the plaintiff’s rightful position. The second perspective is that of a person who thinks the law of remedies should aim for optimal deterrence. The third perspective is that of a person who gives credence to the distinction between law and equity as fundamentally different bodies of law and thought. You, dear reader, may hold one or more of these perspectives.25 Read accordingly.

The rightful-position perspective

One way to come at the question of whether punitive damages should be available against trustees is to consider the plaintiff’s rightful position. For most scholars in the field of remedies, the rightful position of the plaintiff is the proper aim when a court awards a remedy.26 The unitary aim of the rightful position, however, can obscure how the plaintiff reaches that position. Sometimes the plaintiff’s rightful position lies in the past. In such cases, the court is trying to put the plaintiff back to the rightful position. This is characteristic of tort law. In other cases, the plaintiff’s rightful position lies in the future (or an alternative future: what would have been the future without the defendant’s appropriation or breach). In these cases the court is trying to put the plaintiff forward to the rightful position. This is characteristic of contract law, and also of unjust enrichment. Although the main contract remedies—expectation

24 I have been critical of these categories. See Samuel L. Bray, A Little Bit of Laches Goes a Long Way: Notes on Petrella v. Metro-Goldwyn-Mayer, Inc., 67 VAND. L. REV. EN BANC 1, 12-13 (2014). But Emily Sherwin has recently shown the value of distinguishing between what was exclusive to equity and what was developed in tandem with law. See Emily L. Sherwin, Formal Elements of Contract and Fiduciary Law, in CONTRACT, STATUS, AND FIDUCIARY LAW (Paul B. Miller & Andrew S. Gold eds., 2016). 25 These perspectives—the first largely associated with the field of remedies; the second with law and economics; and the third with the tradition of equity—are not exhaustive. 26 See, e.g., LAYCOCK, supra note 11, at 14-15.

5 damages and specific performance—differ in many ways, they both are attempts to carry the plaintiff forward to the position he would have been in if the contract had been performed, not backward to the position he would have been in if the contract had never been made.27 Now which of these is the direction of travel when a beneficiary sues a trustee? One could plausibly say the beneficiary wants to move back to the rightful position, especially when seeking to recover for losses to the trust.28 If a breach of trust suit is meant to take the plaintiff back to the rightful position, and the rightful position is defined capaciously to include vindication, then it might include even punitive damages.29 (One could also think that punitive damages are not really be about the rightful position at all, but are instead meant to deter and punish the defendant.30) But there is another way of understanding the direction of travel to the plaintiff’s rightful position. What the trustee owes the beneficiary is not to go back to the position the beneficiary was in, as if there had never been the management of the trust that included the breach. Rather, the beneficiary is owed the trustee’s service, including all of the gains the trustee accumulates.31 As Professor Paul Miller puts it: “No one is entitled

27 The restitution measure of damages moves backward. The reliance measure can be seen as moving backward (i.e., to the pre-contract position) or forward (i.e., to the alternative future in which the contract was not made). 28 Cf. Deborah A. DeMott, Breach of Fiduciary Duty: On Justifiable Expectations of Loyalty and Their Consequences, 48 ARIZ. L.J. 925 (2006) (analyzing damages for breach of fiduciary duty as tort-like). 29 One might associate this view with civil recourse theory, since it recognizes that damages need not be narrowly compensatory and may instead be vindicatory. See John C. P. Goldberg, Two Conceptions of Tort Damages: Fair Versus Full Compensation, 55 DEPAUL L. REV. 435 (2006). Nevertheless, leading civil recourse theorists have suggested that in contrast to the law of torts, which is concerned with the “wrongful injuring of the plaintiff,” the law of equitable wrongs is concerned with “the fiduciary’s handling of the matters with which he has been entrusted, and the undoing of transactions undertaken in violation of his fiduciary obligations, irrespective of whether those transactions injured the plaintiff.” John C. P. Goldberg & Benjamin Zipursky, Civil Recourse Revisited, 39 FLA. ST. L. REV. 341, 351 (2011). That view of trust remedies has affinity with the forward- movement position described here. See infra note 32 and accompanying text. 30 See Mark P. Gergen, Causation in Disgorgement, 92 B. U. L. REV. 827, 830 (2012); cf. Andrew Kull, Restitution’s Outlaws, 78 CHI.-KENT L. REV. 17 (2003) (treating as punitive not the granting of restitutionary remedies but their denial). 31 It may be relevant for the forward movement of trust remedies that the parties have a relationship, as in contract. See John Langbein, The Contractarian Basis of the Law of Trusts, 105 YALE L.J. 625 (1995); but cf. Gregory Klass, What If Fiduciary Obligations Are Like Contractual Ones?, in CONTRACT, STATUS, AND FIDUCIARY LAW, supra note 24.

6 to gain from the execution of a fiduciary mandate save the beneficiary; to the extent there are such gains, they belong to the beneficiary.”32 This understanding shows how the remedies for breach of trust carry the plaintiff forward to the rightful position. The traditional remedy for breach of trust was an accounting, in which the trustee had to show how the funds were used and account for the profits made.33 That remedy was clearly intended to put the beneficiary forward into the rightful position. But a trustee’s accounting was a cumbersome remedy and it was replaced by a convenient approximation: “equitable compensation” (i.e., damages34). It remains blackletter law that this equitable compensation is not meant to take the beneficiary back to the position before the maladministration but rather to carry the beneficiary forward—either forward to the position the beneficiary would have been in if there had been prudent administration or forward to the position the beneficiary would have been in if all of the gains had accrued to the trust.35 The constructive trust, another equitable remedy for breach of trust, also does not restore the status quo ante. Consider an example: two trustees have taken the corpus of the trust and invested it, for their own profit, in a risky venture that brought huge returns. If the beneficiary sues the trustees, and the court awards a constructive trust,36 what the court would order the trustees to pay back is not the small return the trustees might have made for the trust with a prudent investment, but the huge return they made for themselves through the risky investment. That return belongs to the beneficiary.37

32 Paul B. Miller, Justifying Fiduciary Remedies, 63 U. TORONTO L.J. 570, 616 (2013); see Mosser v. Darrow, 341 U.S. 267, 273 (1951) (“But equity[’s] . . . prohibition is not merely against injuring the estate—it is against profiting out of the position of trust.”); John Gardner, Torts and Other Wrongs, 39 FLA. ST. L. REV. 43, 51 (2011) (“[T]he emphasis in equity is on the diversion of advantage—in the form of assets or profits—as opposed to the causation of loss, which is tort law’s first concern.”); Smith, supra note 20, at 273 (“[F]iduciary law declares that gains belong to the beneficiary because it was the beneficiary’s means that were used.”). 33 HEYDON, LEEMING, & TURNER, supra note 12, § 23-030, at 802-803. 34 The remedy for the loss to the trust can be called “damages” or “equitable compensation.” See, e.g., HEYDON, LEEMING, & TURNER, supra note 12, §§ 23-005, 23-010, 23-015, at 800-801; Langbein, supra note 6, at 1353 n.211. One advantage of the term “equitable compensation” is that it helps American courts understand that this traditional remedy for breach of trust is in fact equitable, not legal, which is particularly relevant in ERISA cases. 35 RESTATEMENT (THIRD) OF TRUSTS § 100 (2003); see also Gardner, supra note 32, at 51. 36 See generally RESTATEMENT (THIRD) OF RESTITUTION AND UNJUST ENRICHMENT § 55 (2011). 37 See Miller, supra note 32. The constructive trust is forward-looking in another sense: the defendant may be ordered to continue managing the trust for some time, and be

7 Still another remedy for breach of trust is removal. “A court may remove a trustee whose continuation in that role would be detrimental to the interests of the beneficiaries.”38 This remedy tries to protect the beneficiary in the future, not in the past. But there is one outlier. One remedy for breach of trust does not fit the model of moving forward to the plaintiff’s rightful position. Punitive damages look back to what the defendant has done, and deal out punishment.39 Moreover, the scope of liability should affect what remedies are used to achieve the plaintiff’s rightful position. Trust law has a broader scope of liability than contract or trust. It imposes affirmative duties. And it relies on strong presumptions that cut against the trustee, such as the no- further-inquiry rule about self-dealing.40 These presumptions create something like a regime of strict liability. That breadth of liability is related to the remedies on the back end.41 It makes no sense to presume that because a punitive remedy works well in another context, where the punitive remedy is imposed only after misconduct is actually found, that it will work equally well in a context where misconduct is merely presumed.42 Unless the scope of liability is taken into account, imposing punitive damages may work injustice in the short run, and in the long run

compensated for doing so. See RESTATEMENT (THIRD) OF RESTITUTION AND UNJUST ENRICHMENT § 55(2) & cmt. b (2011). 38 RESTATEMENT (THIRD) OF TRUSTS § 37 cmt d (2003). 39 Punitive damages are even unique when compared to the rather punitive “appreciation damages” of In re Rothko’s Estate, 43 N.Y.2d 305 (1977). In that case damages were measured not by the value of the art at the time it was sold by the executors but at its subsequent, higher valuation. The opinion is confused, leaving unclear what exactly the point of the remedy is—making the plaintiff whole without the possible subjectivity of calculating a hypothetical higher sale price plus interest, reaching profits that might not otherwise have been recaptured for the estate, or merely public policy. For critique, see Richard V. Wellman, Punitive Surcharges Against Disloyal Fiduciaries—Is Rothko Right?, 77 MICH. L. REV. 95 (1978). But whatever the point may have been, the court did not look backward to the value at sale but rather forward to the value in the present. 40 RESTATEMENT (THIRD) OF TRUSTS § 78 cmt b (2007) (“In transactions that violate the trustee’s duty of undivided loyalty, under the so-called ‘no further inquiry’ principle it is immaterial that the trustee may be able to show that the action in question was taken in good faith, that the terms of the transaction were fair, and that no profit resulted to the trustee.”). 41 See Cooter & Freedman, supra note 4, at 1070 (recognizing that the scope of liability for fiduciaries, especially burdens of proof and the inference of disloyalty from its appearance, affect the need for punitive damages). 42 Cf. Harris v. Digital Pulse Pty. Ltd. (2003) 56 NSWLR 298, 306, ¶ 20 (NSWCA) (opinion of Spigelman, C.J.) (making the point that the availability of a remedy in one body of law does not support an inference that it should be available in another).

8 there may be unintended changes to the duties of and standards of liability for trustees.43 In short, the characteristic aim of remedies for breach of trust is to put the plaintiff forward to the rightful position. Punitive damages do not fit this aim. Some may question whether punitive damages can be squared with the rightful position in any area of the law; the answer may depend on whether the rightful position is taken to include an element of vindication for the plaintiff.44 But whatever the answer may be to that question, punitive damages are especially dissonant in an area in which remedies are meant to carry the plaintiff forward and in which liability is often determined less by findings than by presumptions. From the rightful-position perspective, punitive damages against trustees are an aberration.

The optimal-deterrence perspective

For some readers, when remedies are awarded the aim should not be the plaintiff’s rightful position but rather optimal deterrence.45 From this perspective, does it make sense to allow punitive damages against trustees? The conventional answer is yes.46 If the only remedy given were equitable compensation (i.e., damages47), then a trustee who appropriated the corpus of the trust would only have to repay the loss. Because some breaches might go undetected, trustees would have an incentive to breach:

43 On the hydraulic relationship of justiciability, rights, and remedies, see Richard H. Fallon, Jr., The Linkage Between Justiciability and Remedies-and Their Connections to Substantive Rights, 92 VA. L. REV. 633 (2006). 44 See Goldberg, supra note 29. 45 The classic study, though focused on criminal sanctions rather than civil remedies, is Gary Becker, Crime and Punishment: An Economic Approach, 76 J. POL. ECON. 169 (1968). Standard applications to a civil remedy are Polinsky & Shavell, supra note 3, at 873 (offering “the basic principle that, to achieve appropriate deterrence, injurers should be made to pay for the harm their conduct generates, not less, not more”); ROBERT D. COOTER AND ARIEL PORAT, GETTING INCENTIVES RIGHT: IMPROVING TORTS, CONTRACTS, AND RESTITUTION 187 (2014) (treating the goal of remedies as the minimization of social costs). Some of the complexities of approximating optimal deterrence with damages can be found in Richard Craswell, Deterrence and Damages: The Multiplier Principle and Its Alternatives, 97 MICH. L. REV. 2185 (1999). An extension to trust-law remedies can be found in Dan Kelly’s essay in this volume, Daniel B. Kelly, Remedies for Breach of Fiduciary Duties: an Economic Analysis of Trusts, in RESEARCH HANDBOOK ON FIDUCIARY LAW __ (D. Gordon Smith & Andrew S. Gold eds., __). 46 See Kelly, supra note 45; see also Sitkoff, supra note 8, at 207. 47 On “equitable compensation,” see supra note 34.

9 heads I win, tails I break even. An obvious response is to allow some kind of supracompensatory remedy. The constructive trust can be one such remedy, because it is tied to the defendant’s gain rather than the plaintiff’s loss. Yet for optimal deterrence the constructive trust has an important flaw: it can recapture the trustee’s gain, but it offers no multiplier that would make up for imperfect detection.48 Thus, even in a regime with a compensatory remedy and the constructive trust, a trustee might be insufficiently deterred from breaching. That is the reason punitive damages are an attractive remedy to scholars who think of optimal deterrence as the goal. But there are two reasons to think punitive damages are not particularly effective instruments of deterrence against trustees. 1. Two Different Remedies? Punitive damages are attractive for optimal deterrence because they allow a dramatically higher remedy to be awarded to make up for low rates of detection. But that attractiveness exists in theory, and it is not supported by punitive damages in practice. In optimal-deterrence theory, the central criterion for when punitive damages should be awarded is not reprehensibility but low rates of detection.49 But in practice the central criterion for the award of punitive damages is whether the legal decisionmaker thinks the defendant’s actions were reprehensible.50 That moral outrage is the dominant criterion is fostered by the choice of decisionmaker: punitive damages are often awarded by a jury.51

48 For a suggestion that there should be such a multiplier, a kind of “punitive disgorgement,” see Kelly, supra note 45. 49 Polinsky and Shavell offer this general rule: “That a defendant’s conduct can be described as reprehensible is in itself irrelevant. Rather, the focus in determining punitive damages should be on the injurer's chance of escaping liability.” Polinsky & Shavell, supra note 3, at 906. 50 See, e.g., Stephen J. Choi & Theodore Eisenberg, Punitive Damages in Securities Arbitration: An Empirical Study, 39 J. LEG. STUDIES 497 (2010) (studying punitive damage awards in securities arbitration and finding a pattern “consistent with a substantial retributive component for punitive damages and less consistent with punitive damages as a vehicle to promote efficient deterrence”); see also Cooper Indus., Inc. v. Leatherman Tool Grp., Inc., 532 U.S. 424, 438-40 (2001). This is not to say that low rates of detection are never mentioned by courts. See Exxon Shipping Co. v. Baker, 554 U.S. 471, 494 (2008); Polinsky & Shavell, supra note 3, at 899 n.80. But detection rates are not nearly as important in the practice of punitive damages as they are in optimal-deterrence models, and in particular there is no evidence that they drive jury decisionmaking. 51 See Cass R. Sunstein et. al., Assessing Punitive Damages (with Notes on Cognition and Valuation in Law), 107 YALE L.J. 2071, 2111-12 (1998); see also Nathan Seth Chapman, Note, Punishment by the People: Rethinking the Jury's Political Role in Assigning Punitive Damages, 56 DUKE L.J. 1119 (2007).

10 Moreover, in optimal-deterrence theory, punitive damages may need to dramatically exceed compensatory damages. But in practice punitive damages are kept relatively low, and the Supreme Court has expressed skepticism about punitive damage awards that exceed a 4:1 ratio with compensatory damages.52 In other ways, too, the practice of punitive damages does not correspond to optimal-deterrence theory: defendant wealth is considered,53 the possibility of criminal sanctions for the defendant actually increases the magnitude of punitive damages instead of reducing it,54 and reputational losses do not count as an offset against an award of punitive damages.55 These differences between theory and practice have been recognized by scholars who construct optimal-deterrence models.56 But they are so pervasive that they call into question whether the punitive damages of theory and the punitive damages of practice are even the same remedy.57 Almost the only point they have in common is the fact that they both are supracompensatory. 2. Who Is Deterred? Punitive damages also carry a risk of overdeterrence. There is always a risk of overdeterrence from supracompensatory remedies, but ordinarily the risk is not great. For many of the activities proscribed by law, what is just on the legal side of the line is not conduct that contributes to the public good. Think of near fraud, near assault, and near obscenity.58 A little over-deterrence would not be so bad. But the social goods achieved through trusts can be fragile. Over-deterrence should be taken seriously. For trustees there are two particular over-deterrence concerns. First, there are the additional precautions a trustee may need to take (i.e., “steering-clear costs”). Trustees need to make decisions that are prudent

52 See State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408, 425 (2003). Even more restrictive, in federal maritime law the ratio of punitive damages to compensatory damages can rarely exceed 1:1. See Baker, 554 U.S. 471. 53 Contra Polinsky and Shavell, supra note 3, at 910-14. 54 Contra id. at 926-28. 55 Contra Cooter & Porat, supra note 45, ch. 11; but see Edward M. Iacobucci, On the Interaction Between Legal and Reputational Sanctions, 43 J. LEG. STUD. 189 (2014). 56 E.g., Polinsky and Shavell, supra note 3. 57 For other differences between the actual practice of remedies and the functions that remedies serve in economic models, see Samuel L. Bray, Remedies and Economics: Toward a Fruitful Dialogue (draft). 58 This principle seems to motivate judges who resist stating clear lines about what counts as fraud, Smith, supra note 20; or decline to give a declaratory judgment clarifying the scope of a criminal prohibition of obscenity, Adult Video Ass’n v. U.S. Dep’t of Justice, 71 F.3d 563 (6th Cir. 1995).

11 but not excessively cautious. If aggressive decisionmaking by trustees were to expose them to liability—especially because the principles of liability for trustees are standards not rules—then trustees may be deterred from wise choices by the possibility of punitive damages.59 Second, prudent, conscientious people need to be encouraged to be trustees. But if a trustee is subject to punitive damages, at the margin there is less reason to be a trustee in the first place.60 Punitive damages are a bad fit for both over-deterrence concerns. To see why, consider the types and risk profiles of trustees. For the sake of simplicity, imagine distinguishing trustees on two dimensions. On one dimension, some trustees are “externalizers,” Holmesian bad men who care about legal rules only to the extent they are enforced with sanctions.61 These trustees will feather their own nest with trust funds if they can get away with it. But other trustees are “internalizers” who try to obey the law without regard to the probability and severity of sanctions.62 These trustees act in good faith, not for their own gain. On the other dimension there are risk-averse trustees and risk-seeking trustees. (For the purposes of this example, assume that a trustee has a monotonic risk preference, not one that follows the curve suggested by prospect theory.) Thus there are risk-averse internalizers, risk-seeking internalizers, risk-averse externalizers, and risk-seeking externalizers. Internalizers know they will do the right thing. They might make a mistake (e.g., over-the-line risk-taking), in which case they will be liable for the loss to the trust. But they will not engage in conscious lawbreaking; they will not be taking anything from the till. If the remedies regime includes equitable compensation, the constructive trust, and removal—but not punitive damages—the internalizer has little to fear. Because the internalizing trustee will not be making any gains, the outer limit on liability will be the loss to the trust (i.e., equitable

59 Note that this concern is mitigated somewhat by the Uniform Prudent Investor Act, which allows individually risky investments as part of a diversified portfolio. 60 A third over-deterrence concern is that punitive damages may be used to punish a fiduciary for unpopular but constitutionally protected speech. See Joshua B. Bolten, Enforcing the CIA’s Secrecy Agreement Through Postpublication Civil Action: United States v. Snepp, 32 STAN. L. REV. 409, 427-28 (1980) (favoring the constructive trust over punitive damages for this and other reasons). 61 For analysis of “externalizers” and “internalizers” in contract law, see Rebecca Stone, Economic Analysis of Contract Law from the Internal Point of View, 116 COLUM. L. REV. (forthcoming 2016). 62 Id.

12 compensation63). Not so if punitive damages are available, especially given the broad scope of liability for trustees and the possibility of erroneous liability determinations. For an internalizing trustee, especially a risk- averse one, punitive damages raise both kinds of over-deterrence concerns: internalizing trustees will make investment decisions for the trust that are more cautious than they otherwise would be, and internalizing persons might be deterred from being trustees in the first place.64 And what of the externalizing trustee? Perhaps a risk-averse externalizer will be deterred from conscious wrongdoing by the threat of punitive damages. But what about an externalizer who is risk-seeking? Although punitive damages may be large, they are inevitably uncertain,65 and that very uncertainty will reduce their deterrent effect for this trustee.66 There is a further problem with using punitive damages to deter the externalizing trustee, one arising in situations with large and fairly certain gains from breach. Imagine a trustee, a risk-seeking externalizer. She learns that in a local race the horse Potato Chip is a sure bet to win.67 She decides to take trust funds and place a large bet on Potato Chip. If she makes the expected winnings, she can pay back the trust and keep the funds. But what if she is sued for breach of trust? If the supracompensatory remedy is the constructive trust, all of her gains could be recovered for the beneficiary, and her ultimate profit would be zero.

63 See supra note 47. 64 As Professor Wellman said in his critique of Rothko: those honest and able fiduciaries in a position of possible conflict may well be willing to administer the estate without extraordinary legal advice or court instructions if they know that the estate’s fair market value at the time of its disposition will provide a ceiling on their liability. Honest fiduciaries will be overly cautious only when threatened with surcharges they can neither estimate nor control. Wellman, supra note 39, at 116. Note that these trustees, even though aware of sanctions, are still internalizers: the sanctions are not the reason they obey the law. 65 See Cooter & Freedman, supra note 4, at 1069 (“[P]unitive damages remain unpredictable in the sense that their magnitude cannot be determined from knowledge of the law or the facts of the case.”); Gergen, supra note 30, at 830 (favorably contrasting disgorgement with punitive damages because the gain-based recovery “avoids the principal defect of punitive damages, which is the randomness in the amount of punitive awards”). 66 See Cooter & Freedman, supra note 4, at 1071 (“[A] risk-preferring wrongdoer will be deterred more by relatively certain, mild punishment than by relatively unlikely, severe punishment.”). 67 See P. G. WODEHOUSE, AUNTS AREN’T GENTLEMEN: A JEEVES AND BERTIE STORY (1974).

13 But if the supracompensatory remedy is punitive damages—especially if there are limits on punitive damages—then the trustee’s self-interest might suggest that she play the odds. She can put the trust funds on Potato Chip, make a killing, pay off the punitive damages, and still have enough money to retire to Cannes. Punitive damages thus raise different deterrence concerns for different trustees.68 For an internalizer, especially a risk-averse one, punitive damages raise over-deterrence concerns. These concerns are not raised by the constructive trust. For the externalizer, especially a risk-seeking one, punitive damages raise under-deterrence concerns. These concerns are not raised by the constructive trust. In other words, compared to the constructive trust, punitive damages deter exactly the wrong trustees. They increase deterrence on risk-averse internalizers, and they reduce deterrence on risk-seeking externalizers. One is tempted to say that shifting from the constructive trust to punitive damages would skew the market for trustees towards the lemons.

The law-and-equity perspective

A few years ago, the appeals court for New South Wales decided a major case on the availability of punitive damages in equity, Harris v. Digital Pulse.69 The majority adhered to the traditional rule: no punitive damages in equity. One point of dispute in that case is a good place to begin: does equity punish? The dissenting judge said yes,70 and on first glance that seems obviously correct. The historic chancellor would do bad things to bad people, and equity was famous for the lengths it would go to enforce its decrees. Contempt could bring escalating fines, imprisonment, and further in personam orders. Indeed, equity, perhaps evoking its borrowing

68 One could extend this point by considering other ways punitive damages might have different effects on certain kinds of trusts or trustees. One could argue for punitive damages for purpose trusts (because of the difficulty of monitoring, see Adam J. Hirsch, Bequests for Purposes: A Unified Theory, 56 WASH. & LEE L. REV. 33, 106 (1999)), or find less need for punitive damages against trustees with reinforcing loyalties (e.g., family ties to the beneficiary, reputational investments). 69 Harris v. Digital Pulse Pty. Ltd. (2003) 56 NSWLR 298 (NSWCA). Harris concluded that exemplary damages are not available for a breach of fiduciary duty by employees. For the leading opinion, see id. at 341-424, ¶¶ 229-478 (opinion of Heydon, JA). 70 Id. at 329-333, ¶¶ 156-178 (opinion of Mason, P.)

14 of rules, procedures, and chancellors from the Church, would be tenacious in reforming “the corrupt conscience” of the contemnor.71 But that very goal of reforming the conscience points away from punishment. It is true that the chancellor did not want the defendant to commit the same wrong again in the future—be it fraud, trespass, or the imposition of a penalty. But it is crucial to see the theory for how the chancellor wanted to arrive there. It was not by punishment that would deter the defendant from repeating the infraction. Rather, it was by correction that would change the defendant himself so he would not want to repeat the infraction.72 The chancellor sought to discipline, not to punish. That is why it can be said that “[p]unishment through monetary awards or otherwise is contrary to the basis and purpose of equity.”73 Understanding the chancellor’s aim of reformation is crucial to understanding the lengths to which equity would go, as well as the tendency of equity to stop short. Because the chancellor was not punishing the contemnor, he did not ask what contempt sanction was merited by the defendant’s contempt. It was not a balancing of the scales, an equivalence with the wrong (i.e., the wrong of flouting the equitable decree). Thus the chancellor would go much further than mere retribution, imprisoning a contemnor for what might seem like a minor violation.74 And equity would stop short: once the chancellor was satisfied

71 See The Earl of Oxford’s Case, 21 Eng. Rep. 485, 486 (1615) (“But the Chancellors have always corrected such corrupt Consciences, and caused them to render quid pro quo . . . .”). One of the treatise-writers puts it this way: “The object of the Court of Chancery was, in the first instance, the purification of the defendant’s conscience. It was a cathartic jurisdiction. If a person is allowed to remain in possession of property which it is against conscience for him to retain, his conscience will be oppressed; and the court, out of tenderness for his conscience, will deprive him, notwithstanding his resistance, of what is so heavy a burden upon it.” ASHBURNER, supra note 12, at 51. For a recent exposition, see Irit Samet, What Conscience Can Do for Equity, 3 JURISPRUDENCE 13 (2012). 72 See Richard Hedlund, The Theological Foundations of Equity's Conscience, 4 OXFORD J. L. & RELIGION 119, __ (2015) (“Equity seeks to make the wrongdoer a better person. . . . The wronged party, of course, receives redress, but the focus of equitable remedies is to relieve a wrongdoer’s troubled conscience.”). The refining of a trustee’s conscience might even extend to cases in which the trustee had committed no breach. See 2 JOSEPH STORY, COMMENTARIES ON EQUITY JURISPRUDENCE AS ADMINISTERED IN ENGLAND AND AMERICA 515 (2d ed. 1839). 73 HEYDON, LEEMING, & TURNER, supra note 12, § 23-595, at 865; see also ASHBURNER, supra note 12, at 53 (“A court of equity has no punitive jurisdiction. It never fined or imprisoned a wrongdoer except as part of its process.”). 74 For imprisonment for failure to appear after a subpoena (following additional proceedings), see Cases in Tempore Egerton (Ch. c. 1559 x c. 1604), reprinted in 1 CASES CONCERNING EQUITY AND THE COURTS OF EQUITY 1550-1660, at 328, no. 120-[60] (W.H. Bryson ed., 2001); for imprisonment for failure to answer a bill in equity, see Huet

15 that the contemnor had changed his mind and borne “fruits worthy of repentance,” no further sanction was needed.75 The lengths equity would reach in compelling obedience— “compliance” seems too weak a word—and its willingness to halt for grace and mercy, are not merely historical.76 They live on, in contemporary doctrines about equitable remedies, though in paler, thinner forms. For example, it is distinctively true about equitable remedies that courts will go further than the plaintiff’s right, protecting the plaintiff against other ways the defendant might try to repeat the violation.77 Or a court giving an equitable remedy might provide less protection than the plaintiff’s right, by phasing in (or phasing out) the injunction, or conditioning it on various measures to be taken by the plaintiff.78 A willingness to call off the disciplinary hounds can be seen in the U.S. Supreme Court’s current definition of coercive contempt: “the contemnor is able to purge the contempt and obtain his release by committing an affirmative act, and thus ‘carries the keys of his prison in his own pocket.’”79 The brief preceding discussion is not meant to be a defense of the distinction between law and equity.80 Rather, the point is that from the perspective of someone who accepts a fundamental distinction between law and equity—like the majority in Harris v. Digital Pulse—it is unsurprising that equity would lack punitive damages. This omission is not a historical oddity, but rather something consistent with the basic aims and methods of equity. It tries to correct injustice, but it does so by

v. Conquest (K.B. 1616), reprinted in 2 CASES CONCERNING EQUITY AND THE COURTS OF EQUITY 1550-1660, at 470-471, no. 245. 75 E.g., Glanville’s Case (K. B. 1615), reprinted in 2 CASES CONCERNING EQUITY AND THE COURTS OF EQUITY 1550-1660, at 440, 441, no. 230 (noting that although for the defendant’s fraud “the Court of Chancery might have inflicted some exemplary corporal punishment . . . yet the Court of Chancery spared all that course of punishment,” requiring instead that the defendant relinquish the judgment that he had had “gotten by such sleight and practice”). 76 There was of course change over time in how chancellors thought of their governance of the defendant’s conscience. Compare, for example, the discussion of medieval chancellors, of Lord Ellesmere, and of Lord Nottingham in DENNIS R. KLINCK, CONSCIENCE, EQUITY, AND THE COURT OF CHANCERY IN EARLY MODERN ENGLAND 23-24, 81-83, 242-245 (2010). For more emphasis on continuity, see Hedlund, supra note 72. 77 See Bray, supra note 21, at 568-571; see also Samuel L. Bray, The Myth of the Mild Declaratory Judgment, 63 DUKE L.J. 1091, 1130-32 (2014). 78 See Bray, supra note 21, at 568-571; Bray, supra note 77, at 1131-32. 79 Int’l Union, United Mine Workers of Am. v. Bagwell, 512 U.S. 821, 828, (1994) (quoting Gompers v. Buck's Stove & Range Co., 221 U.S. 418, 440 (1911)) (internal quotation marks omitted). 80 For that, see generally Bray, supra note 21; Smith, supra note 20.

16 making the defendant no longer want to commit the injustice. It prevents injustice not through an adjustment of the costs and benefits perceived by the defendant, but through an adjustment of the defendant. Such a thoroughly moralistic conception of equity is perhaps unacceptable now. It may be too expensive. It may be too slow. It may depend on a common culture and moral consensus (however thin) that no longer obtain in the United States.81 This kind of equity may bear down too heavily on the individual, and the coercive projects of this kind of equity will remind us of the Inquisition as it exists in the popular imagination. What is well meant can become an instrument of cruelty and oppression. (One has only to compare the American prison of today with the salutary goals of the reformers who invented the penitentiary.82) Moreover, equity must follow the law. In the United States, part of that law is the First Amendment, which constrains the government’s coercive efforts to reform the defendant’s speech and conscience, no matter how much a modern chancellor might think they are in need of reforming.83 The actual practice of equity has changed. Nevertheless, if equity is no longer bent on correction, it remains the case that equitable doctrines still hold back from punishment. In legal systems that distinguish between law and equity and that treat trusts as equitable, punitive damages in trust law are an idiosyncrasy to be explained. Their absence needs no explanation.

Punitive damages as an invasive species

One might accept the criticisms of punitive damages advanced so far, but counter that they only prove that punitive damages should be used selectively, used where appropriate. That is an old rebuttal by advocates of a legal reform, and in some ways it is impossible to answer. It was a favorite of Edwin Borchard, called the father of the declaratory judgment. Whenever someone pointed out a case in which a declaratory judgment

81 Professor Samet, while offering an able defense of equity’s correction of the conscience, still notes that there must be “a common moral ground that both the court and the defendant occupy.” Samet, supra note 71, at 35. 82 See Sharon Dolovich, Incarceration American-Style, 3 HARV. L. & POL’Y REV. 237 (2009). 83 See W. Va. State Bd. of Ed. v. Barnette, 319 U.S. 624, 642 (1943) (“If there is any fixed star in our constitutional constellation, it is that no official, high or petty, can prescribe what shall be orthodox in politics, nationalism, religion, or other matters of opinion or force citizens to confess by word or act their faith therein.”).

17 would be counterproductive or unhelpful, he would respond that, of course, in such a case the court should not give a declaratory judgment.84 Yet in a mixed regime—in which punitive damages and traditional equitable remedies like the constructive trust are both available against trustees—there are reasons to think that punitive damages will be systematically overused. First, the possibility of a higher ceiling for an award of punitive damages is attractive to plaintiffs’ attorneys. Even if the expected value for the plaintiff of an award of punitive damages and a constructive trust is the same, the higher ceiling for punitive damages will motivate settlement by risk-averse defendants.85 That greater likelihood of settlement means, all else being equal, that plaintiffs’ attorneys (though not necessarily plaintiffs) would prefer an award of punitive damages to a constructive trust with an identical expected value. Second, American attorneys are relatively unfamiliar with the intricate doctrines surrounding the constructive trust and other restitutionary remedies.86 That is, they are unfamiliar relative to their counterparts in other Anglo-American legal systems,87 and also unfamiliar relative to what American lawyers knew before restitution dropped out of the curriculum of American law schools in the second half of the twentieth century.88 Perhaps that trend will be reversed by the magisterial Restatement (Third) of Restitution and Unjust Enrichment. But the long-run effect of the Restatement is not certain. At present, American lawyers remain generally unfamiliar with restitution, and that unfamiliarity will only be further encouraged if they can avoid its

84 E.g., Edwin M. Borchard, The Uniform Act on Declaratory Judgments, 34 HARV. L. REV. 697, 707-708 (1921) (“[I]n any event, the relief being discretionary, and open to denial in the absence of the necessary parties interested or of sufficient argument, there is no more danger than now of snap judgments being rendered on questions of constitutionality.”). 85 On punitive damages and settlement, see A. Mitchell Polinsky, Are Punitive Damages Really Insignificant, Predictable, and Rational? A Comment on Eisenberg et al., 26 J. LEG. STUDIES 663, 667-71 (1997). 86 See Andrew Kull, Rationalizing Restitution, 83 CAL. L. REV. 1191, 1195 (1995) (“To put it bluntly, American lawyers today (judges and law professors included) do not know what restitution is.”); see also Mark P. Gergen, What Renders Enrichment Unjust?, 79 TEX. L. REV. 1927, 1980 (2001); Douglas Laycock, Restoring Restitution, 110 MICH. L. REV. 929, 930-31 (2012). 87 See John H. Langbein, The Later History of Restitution, in RESTITUTION PAST, PRESENT AND FUTURE: ESSAYS IN HONOUR OF GARETH JONES 55, 61-62 (W. R. Cornish et al. eds., 1998); Chaim Saiman, Restitution in America: Why the U.S. Refuses to Join the Global Restitution Party, 28 OXFORD J. LEGAL STUD. 99 (2008). 88 See Kull, supra note 86, at 1195 n.14.

18 complexity by falling back on a simpler and cruder appeal for punitive damages.89 The bottom line is that a system in which punitive damages and the constructive trust (to take one example of a traditional equitable remedy against trustees) are both available is likely to be a system that sees a gradual shift from the use of the constructive trust to the use of punitive damages, not because punitive damages are better at accomplishing the relevant goals, but because they are easier on and potentially more remunerative for attorneys. Agency costs tilt the field toward punitive damages. One further point should be raised about possible consequences in the long run from awarding punitive damages against trustees. Because trust law is equitable, it has traditionally been a jury-free zone. But when federal and state judges decide cases about jury trial rights, they often look to the pedigree of the remedy being sought.90 Where punitive damages are available, courts may reach the decision that they need to be awarded by a jury, even if the plaintiff’s claims would otherwise be considered equitable.91 Indeed, the U.S. Supreme Court has stated that claims for punitive remedies are legal and thus covered by the constitutional right to a jury trial.92 Little imagination would be needed to extend that statement to a suit for punitive damages against a trustee.93 Moreover, there would

89 Cf. John C. P. Goldberg & Robert H. Sitkoff, Torts and Estates: Remedying Wrongful Interference with Inheritance, 65 STAN. L. REV. 335, 390-392, 396 (2013) (warning of the imperialism of a Realist conception of tort law, and noting that its strength depends in part on “the forgetting by lawyers, judges, and academics of restitution and equitable remedies”). 90 E.g., Verenes v. Alvanos, 690 S.E.2d 771, 773 n.5 (S.C. 2010) (“[A] breach of a fiduciary duty may sound in law or equity depending on the nature of the relief sought.”). 91 Lebow v. Am. Trans Air, Inc., 86 F.3d 661, 669-673 (7th Cir. 1996) (reversing and remanding for jury trial on punitive damages, as a legal remedy, even though other relief sought was equitable). It is unsurprising, then, that in Snepp v. United States there was an exact fit between the choice of remedy and the choice of decisionmaker: the district court and the Supreme Court favored a constructive trust and no jury; the court of appeals favored punitive damages and found it necessary to remand for a jury trial. E.g., Snepp v. United States, 444 U.S. 507, 514-16 (1980); see Bolten, supra note 60, 411-412, 421; Doug Rendleman, Measurement of Restitution: Coordinating Restitution with Compensatory Damages and Punitive Damages, 68 WASH. & LEE L. REV. 973, 1002 (2011). 92 Tull v. United States, 481 U.S. 412, 422-25 (1987); see also Curtis v. Loether, 415 U.S. 189, 196-98 (1974) (holding that the Seventh Amendment jury trial right was implicated because “the relief sought here—actual and punitive damages—is the traditional form of relief offered in the courts of law”). 93 The Seventh Amendment civil jury right is applicable only in federal courts, but the vast majority of state constitutions have similar provisions. Eric J. Hamilton, Note, Federalism and the State Civil Jury Rights, 65 STAN. L. REV. 851 (2013).

19 be an added effect from how the decisions are sequenced: First a jury would decide punitive damages, then the judge would decide the equitable remedies. The temporal priority of the decision to give punitive damages would accelerate the crowding out of the constructive trust and other equitable remedies.

Conclusion

A satisfactory justification for punitive damages against trustees has not been given. Seen from the rightful-position perspective, punitive damages fail to support the plaintiff’s forward movement to the rightful position. They are also inconsistent with the scope of liability in trust law. From the perspective of optimal deterrence, punitive damages would increase deterrence for those who need it least (risk-averse internalizers), and decrease deterrence for those who need it most (risk-seeking externalizers). From the viewpoint of law and equity, punitive damages in trust law would be an idiosyncrasy requiring an explanation, whereas no explanation is needed for their absence. Even if punitive damages were used selectively, they would likely be overused relative to the constructive trust. Indeed, the uncanny coinciding of the rise of punitive damages against trustees with the decline in American lawyers’ familiarity with the constructive trust raises the possibility that it is not greater knowledge, but greater ignorance, that led to the development. Whatever the reason for this rise, the best verdict that can be rendered for punitive damages against trustees is “not proven.”