In a highly anticipated opinion, the Pennsylvania Supreme Court has prevented an end around the no fault removal provision of Uniform Trust Code (“UTC”) Section 706.  As we discussed in “An ‘End Around’ Trustee Removal,” UTC Section 706 provides that a court may remove a trustee if removal is requested by all of the qualified beneficiaries and the court finds that removal “best serves the interests of all of the beneficiaries and is not inconsistent with a material purpose of the trust.”  In Edward Winslow Taylor, Irrevocable Trust, only three of the four beneficiaries wanted to remove the Trustee, Wells Fargo.  Since all of the beneficiaries did not agree to remove Wells Fargo as the Trustee, they could not use the no fault removal provision of UTC Section 706.  So, the beneficiaries came up with an end around.  They filed a petition in the Court of Common Pleas of Philadelphia County to modify the trust agreement using Pennsylvania’s version of UTC Section 411 in order to add a provision to the trust agreement which would permit a simple majority of the beneficiaries to remove the Trustee.  Their petition to modify the trust agreement was denied by the Court of Common Pleas, and the beneficiaries appealed to the Superior Court of Pennsylvania, an intermediate appellate court, which sided with the beneficiaries and blessed the modification.  Wells Fargo then appealed to the Pennsylvania Supreme Court, and, not surprisingly, the Pennsylvania Bankers Association filed an Amicus Curiae brief in support of reversal of the Superior Court’s decision.

A Win for the Trustees

On appeal, in a unanimous decision, the Pennsylvania Supreme Court reversed the decision of the Pennsylvania Superior Court and set aside the trust modification.  The Court held that allowing the beneficiaries, through modification of the trust, to do something which UTC Section 706 expressly prohibits (that is, removal of a trustee without court approval and unanimous consent of all beneficiaries) would circumvent the very purpose of UTC Section 706 and render it useless.  The Court ruled that UTC Section 706 is the exclusive provision for removal of a trustee and that beneficiaries cannot use the modification statute to add a provision to a trust agreement which would permit the removal of a trustee.

The Problem

A significant number of trust documents which were drafted and executed before the 1990’s do not include a “portability provision” which gives the beneficiaries the power to remove and replace a trustee.  Portability provisions only became widely prevalent in the past few decades.  Many older trust agreements were actually prepared by the very banks which were named as the Trustee, or the banks provided specific language to the grantor’s attorney to include in the trust agreement.  The banks obviously had no incentive to include a clause which would provide the beneficiaries with the power to remove and replace the bank.  Likewise, many grantors, those who established trusts, typically had no incentive to include a clause providing the beneficiaries with the power to remove and replace the trustee.  When these trusts were drafted decades ago, many banks were small businesses which delivered a high level of customer service.  The grantors typically had personal relationships with the bank employees in the trust department and other bank staff.  As the banking industry has experienced a tidal wave of mergers and acquisitions over the past few decades, the grantor’s small bank has long since been gobbled up, and trust beneficiaries find themselves frustrated with the lack of attention and personal service.  Indeed, as the Pennsylvania Supreme Court itself noted in its opinion, the original trustee of the Edward Winslow Taylor Trust, the Colonial Trust Company in Philadelphia, through a series of mergers became Wells Fargo, the 3rd largest bank in the United States headquartered in San Francisco.

A Way Forward?

So, does this court opinion mean that beneficiaries are helpless in the face of a trustee which is not responsive or meeting expectations?  No.  Can the trustee hold the trust at ransom?  No.  There are alternatives to free a trust from an indifferent or incompetent trustee.  If you have questions or concerns about your Trustee, an attorney with deep experience in trust law may be able to help.

A. M. Publishing recently released its 2017 Trust Performance Report.  The Trust Performance Report is based on an annual survey of financial institutions which offer trust administration services.

The aggregate data in the 2017 Trust Performance Report and its sister publication, Fiduciary Earnings and Expenses, reveals, in general, two conclusions: (1) the market rewards those trust service providers which have a tightly focused service offering and (2) the independent trust company model is more successful than the bank trust department model.  The following data points back up the conclusion:

  • The survey data demonstrates that the highest profit margin institutions limit operations, typically focusing on three or fewer service offerings.  Of those that specialize, the overwhelming majority focus on a combination of personal trusts, employee benefits, and investment management services.  Bank trust divisions continue to favor a full-service model.  92% of high profit margin independent trust companies specialize; only 57% of high profit margin bank trust departments specialize.
  • The only institutions which are contemplating selling or outsourcing their trust operations were bank trust divisions.  No independent trust company reported that they are contemplating selling its trust operations.
  • Executives at independent trust companies consistently and by a wide margin report lower stress and concern than do bank trust division or national trust company executives, especially when it comes to meeting account, revenue, and net income targets.

Other interesting data points:

  • P. I. E. assets (personal trust, investment management, and employee benefits assets) account for only 14% of industry assets but generate a whopping 50% of industry gross revenue.
  • To generate $1 of revenue requires $753 of P. I. E. assets.
  • Traditional P. I. E. assets grew overall by 7%.
  • 15% of bank trust departments reported one or more fee increases in 2016.
  • Growing new business is more important to bank trust executives than meeting revenue and net income targets (81% of executives surveyed responded that meeting new accounts was an important concern).

Traditionally, each party to a lawsuit must pay their own fees and expenses, including attorney fees.  Courts typically award litigation fees and expenses against another party only in cases where the other party engaged in egregious conduct such as bad faith or fraud.  Not so in trust litigation.  Section 1004 of the Uniform Trust Code provides a fee-shifting mechanism where litigation fees and expenses may be charged against another party even in the absence of egregious conduct.

Section 1004 of the Uniform Trust Code provides that “in a judicial proceeding involving the administration of a trust, the court, as justice and equity may require, may award costs and expenses, including reasonable attorney’s fees, to any party, to be paid by another party or from the trust that is the subject of the controversy.”  The fee shifting statute’s standard  for awarding costs and expenses is “as justice and equity may require;” certainly a different standard than the traditional standard of egregious conduct like bad faith or fraud.  “As justice and equity may require” is a standard that gives broad discretion to a court to award fees and expenses against another party.  Often times, a court will make a determination on whether to award a beneficiary’s litigation costs against the trustee based on a determination of whether the litigation has been beneficial to the trust.  This is the standard that an Ohio court recently used.

In McHenry vs. McHenry, 2017-Ohio-1534, the Ohio Fifth Appellate District awarded fees and expenses to the beneficiary of the trust.  In McHenry, the plaintiff beneficiary claimed that the trustee breached its fiduciary duty.  The Court agreed and awarded $13,364 to the beneficiary for damages and awarded the beneficiary $49,444 in attorney fees.  On appeal the defendant trustee argued that the attorney fee award was excessive given the relatively small damage award.  In essence, the defendant trustee argued that the Court should apply a rule of proportionality when awarding attorney fees.  The Court rejected the defendant trustee’s argument and held that “a rule of proportionality in trust cases would make it difficult for beneficiaries with meritorious claims against the trustee, but with relatively small potential damage claims, to seek redress in the court.”

Parties to trust litigation should be acutely mindful of the fee shifting statute.  If they are not, they may have to pay not only their attorney’s fee but the other side’s attorney’s fee as well.

Court Awards Punitive Damages in Breach of Fiduciary Duty Suit Against Regions

A Chancery Court in Mississippi has entered a final Order (as amended) awarding punitive damages to the Plaintiffs in their suit against Regions Bank for breach of fiduciary duty, a case we’ve looked at in the past (see Regions Hit with $4M Judgment over Trust Mismanagement).  The total damage award is $6,464,254 as follows:

  • $3,363,326 actual damages;
  • $1,000,000 punitive damages;
  • $966,740 attorneys’ fees;
  • $175,867 expenses;
  • $958,321 pre-judgment interest at 8% from date suit was filed through the date the Court’s Order on liability was entered;
  • In addition, the Court awarded post-judgment interest at 8% from the entry of its Final Judgment.

Some of the compelling findings of the court include:

  • “[T]his Court finds that the overall breach of duty to be reprehensible.”
  • “Regions knew they were required to conduct a needs analysis, yet they never did.  There were hundreds of transactions conducted over the course of 11 years and not once did Regions take into consideration the needs of Mrs. Sheppard to maintain her present standard of living.  They were giving her money any time she asked for it, distributing principal when income was available in the trust, and they never swept the account.  They violated their own policies and this rises to the level of reckless behavior.”
  • “The court also notes that Regions’ actions and intentional concealment regarding the Trust really set the family on a course that would have been very different if Regions had performed its duties. . .  Evidence reveals that [Regions’] actions had a severe impact on the family and the Trust.  Ironically, the impact on the family Trust was exactly what Mr. Sheppard was trying to ensure never happened.”
  • “A substantial punitive damages verdict would send Regions the message that it cannot utilize a ‘let the buyer beware’ mentality when it serves as a fiduciary.”
  • The trust officer’s supervisor testified that he didn’t properly supervise the trust officer “because he knew very little about trusts.”
  • “Evidence revealed that [the investment manager assigned to the Trust] took orders from Birmingham (Regions’ headquarters) and she never questioned why the entire principal was being disbursed from the trust in such a manner.”

Trustees and Proprietary Products

Elsewhere, over at Bloomberg BNA, Daniel Hauffe looks at another case in Mississippi involving Regions Bank.  In his article, Prudence in Violating the Prudent Investor Act, Hauffe offers some precautionary measures when a Trustee invests trust assets in its own proprietary financial products.

Decanting

At Wealth Management, David Silvian and Phyllis Johnson ask, Do Trustees Have a Duty to Consider Decanting?

High Investment Concentration

Finally, one of the largest banks in the world, Fifth Third Bank, has found itself in the middle of a claim that it failed to diversify the assets of a trust settled by one of the founders of the Standard Register Company.  Margarida Correia explains in Fifth Third Battles heirs of Standard Register Founders.

 

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It is not uncommon for tensions to develop between a trustee and trust beneficiaries.  In such cases, trust beneficiaries may want to remove a trustee and appoint a different trustee.  Some causes of beneficiary complaints include poor trustee communication, poor investment results, decisions about the distributions of trust income and principal, and the failure to report and account to trust beneficiaries, among others.

In removal proceedings, at one end of the spectrum is a trustee who prudently carries out its fiduciary duties with careful judgment and beneficiaries who are impatient and foolish.  At the other end of the spectrum is a trustee who breaches its fiduciary duties to prudently administer the trust, allows the trust assets to diminish or engages in self-dealing.  Cases involving either end of the spectrum are typically relatively simple for a court to decide.  In the first example, a beneficiary’s petition to remove and replace the trustee is denied.  In the second example, the trustee is removed (and, depending on the nature of its breaches, may be subject to far worse).  In between the two ends of the spectrum are many cases which are much more challenging for a court to determine.

Before the promulgation and adoption of the Uniform Trust Code by a majority of the states, removing a trustee was largely a matter of a Court applying common law to a particular petition to remove a trustee.  Typically, common law required some act of egregious conduct before removing a trustee.  Now, in the absence of a provision in the trust instrument regarding trustee removal, the Uniform Trust Code provides a definite standard to use when a Court determines whether to remove a trustee when the Trustee has not breached its fiduciary duties (referred to as “No Fault Removal,” which we have previously looked at here).  Uniform Trust Code Section 706(b)(4) provides that a court may remove a trustee if “[1] removal is requested by all of the qualified beneficiaries, and [2] the court finds that removal of the trustee best serves the interests of all of the beneficiaries and [3] is not inconsistent with a material purpose of the trust. . . .”  The requirements in [1] and [2] are straight forward.  The requirement in [3] that removal must not be inconsistent with a material purpose of the trust begs the question, “What is a material purpose of the trust?”  The Kansas Court of Appeals recently weighed in on this question.

MATERIAL PURPOSE

A finding of [a material] purpose generally requires some showing of a particular concern or objective on the part of the settlor.

In the case of In re Trust of Hildebrandt, the beneficiaries of a trust petitioned a Kansas court to remove a law firm which was serving as the trustee of the trust and replace the law firm with the beneficiary’s niece.  The law firm trustee challenged its removal.  On appeal to the Kansas Court of Appeals, the central issue was whether the appointment of the law firm as the trustee of the trust constituted a “material purpose” of the trust.  The law firm argued that their appointment as trustee did, in fact, constitute a material purpose of the trust, while the trust beneficiaries argued that the appointment of the law firm did not constitute a material purpose of the trust.

In finding that the appointment of the law firm did not constitute a material purpose of the trust, the court cited the Restatement (Third) of Trusts: “A finding of [a material] purpose generally requires some showing of a particular concern or objective on the part of the settlor.”  The law firm trustee argued that the concern and objective of the settlor in appointing the law firm a trustee was to ensure administration by an independent, third-party trustee (rather than a family member as the trust beneficiaries desired).

In looking at the specific language of the trust instrument, the Kansas Court of Appeals found nothing which expressly indicated why the settlor chose the law firm as the trustee.  If anything, the evidence suggested that the idea of appointing the law firm as the trustee was not the settlor’s idea but was in fact the idea of the attorney in the law firm who drafted the instrument.  Therefore, the court found that the law firm was unable to establish that its appointment as trustee constituted a material purpose of the trust, removed the law firm, and appointed the niece as trustee.

TAKE AWAY

The Uniform Trust Code’s no fault removal statute gives trust beneficiaries more tools to seek the removal of a trustee and appointment of a new trustee.  In no fault removals, it is critical to examine the specific language in the trust instrument in order to determine what the material purposes of the settlor were when he or she appointed a specific trustee.  Specifically, it is necessary to determine whether the settlor had a particular concern or objective which led the settlor to appoint the trustee which the beneficiaries want to remove.

A. M. Publishing recently released its quarterly Trust Performance Report, which tracks the trust industry’s asset and revenue data. The following are a few highlights:

  • Asset growth rates are improving.
  • Revenue growth rates are also improving although revenue growth rates lag asset growth.
  • According to the 2016 Fiduciary Earnings and Expenses report, investment in training remains low.
  • Efficiency improved for all peer groups except the smallest institutions.
  • In 2014, 75% of trust institutions that forecasted raising one or more fees, did so.  In 2015, 60% did so.  More institutions report that their focus is on policing their existing fee schedule to ensure full implementation.
  • The top performers, by asset growth rate, include HSBC Bank (167%), Amboy Bank (99%), Advantage Trust (94%), and Iberiabank (90%).

What might the estate tax look like in a Trump administration?  Ashlea Ebeling of Forbes offers an in-depth look at President Elect Trump’s estate tax plan which boils down to repeal of the estate tax (and possibly the gift tax and the generation skipping transfer tax) plus the imposition of a capital gains tax on assets left to heirs over a $10 Million threshold.

 

This is the final installment of a series of posts that examine recent litigation against bank trustees in Mississippi.  For the prior installments, please see Regions Hit with $4M Judgment over Trust Mismanagement and Renasant Settles Trust Mismanagement Litigation.

While it is critical for a corporate Trustee to have a process, it is equally important that a corporate Trustee not only follow its process but also document adherence to the process.  The story that follows demonstrates the result when a corporate Trustee has a process but the process is not followed or documented (and a cover-up ensues).

THE TRUST

When Dr. William Rosenblatt, a prominent physician, passed away in 1991, his Last Will and Testament created a trust for the benefit of his children and grandchildren.  Dr. Rosenblatt appointed Trustmark National Bank to serve as one of the co-Trustees of the trust.  The head of Trustmark’s Personal Trust Department was the trust officer assigned by Trustmark to manage the trusts.

The Last Will and Testament provided that the primary purpose of the trust is “to maintain . . . my children, or their issue . . . in the standard of living to which they are accustomed.”  In order to further the purpose of the trust, the Last Will and Testament required the Trustee to distribute all of the net income to Dr. Rosenblatt’s children, Cy and Dee.  In addition to mandatory distributions of net income, the Trustee had the discretion to invade the corpus of the trust and distribute trust principal in order to meet any “emergency needs” of Cy and Dee in which the trustee in its sole discretion determines and justifies.  Upon the death of Cy and Dee, the trust would then terminate and the assets of the trust would pass to Cy’s children and Dee’s children (the remainder beneficiaries).

From 1991 when Dr. Rosenblatt passed away until 2002, Trustmark distributed all of the net income to Cy and Dee.  Cy and Dee made no requests for principal distributions until 2002, when the trust was split into two trusts, one for Cy and one for Dee.  After the trust was split into two trusts, each trust was valued at approximately $3.8 Million.

THE INVASIONS OF CORPUS

In 2002, Trustmark began to invade and distribute the corpus of Dee’s trust which ultimately sparked litigation.  In 2002, Trustmark made a distribution of principal in the amount of $32,000 so Dee could purchase a Lexus vehicle.  Over the next 6 years, Trustmark invaded the corpus of the trust 150 times and distributed over $1.75 Million to Dee.

The distributions of principal stopped in 2008.  In August of that year, Dee requested a distribution of principal in the amount of $65,000 to pay a bill at a high-end clothing store.  It was at that time that Trustmark contacted one of the remainder beneficiaries, Dee’s daughter Meg, and asked for her consent before Trustmark made the distribution.  When she was informed of the number and amount of principal invasions between 2002 and 2008, Meg was shocked and refused to give her consent to the distribution.  In 2009, Meg sued Trustmark for numerous breaches of fiduciary duty.  Sadly, as seen too often in trust litigation against bank trustees, Trustmark promptly sued the beneficiaries of the trust.

TRUSTMARK’S POLICIES AND PROCEDURES

As the Court noted in its Opinion, whether the 150 invasions of corpus totaling over $1.75 Million were for “emergency needs” as required by the Last Will and Testament will never be known because Trustmark did not follow the proper procedures to find out.  Trustmark’s Policies and Procedures state that committee approval is required if any distribution of income or principal is discretionary and that complete information regarding the beneficiary’s needs, standard of living and other resources shall be considered by the committee members in making the decision to exercise the discretionary distribution.  In addition, The FDIC Audit Manual requires that the reason for each invasion be documented in the file.

Contrary to Trustmark’s Policies and Procedures, committee approval was never sought or obtained for any of the 150 invasions of corpus.   The Court explained the process of invading the trust as such: Dee would leave a voice message with the trust officer who would then give his assistant instructions to transfer funds to Dee.  As the Court noted, “this all occurred without Trustmark following any of its procedures.”

Likewise, contrary to the FDIC Audit Manual requirement that the reason for each invasion be documented in the trust file, Trustmark had no forms or documentation on any of the 150 corpus invasions.

THE COVER-UP

Since he had not received committee approval for or documented any of the 150 invasions of corpus, the head of Trustmark’s Personal Trust Department forged “Request for Encroachment” forms which contained the signatures of other trust officers.  He then placed these forms in the minutes of the Administrative Committee in order to create the appearance that the committee in fact did approve the 150 invasions of corpus.

THE COURT’S RULING

In a scathing Opinion, the Court found Trustmark liable for multiple breaches of fiduciary duty.  In so finding, the Court described Trustmark’s actions as “willful, grossly negligent and overall egregious,” “grossly derelict,” and “reckless and egregious.”

THE DAMAGES

The Court imposed the following damages:

  • Removed Trustmark as the Trustee;
  • Imposed a surcharge on Trustmark in the amount of $1,755,750;
  • Charged Trustmark interest at a rate of 3% compounded annually for each and every invasion of corpus, beginning on the last day of the year in which each distribution was made (a total of approximately $300,000);
  • Awarded the Plaintiff all of her Attorneys’ fees (a total of $321,630);
  • Charged all costs to Trustmark;
  • Charged post-judgment interest against Trustmark; and
  • Awarded the Plaintiff punitive damages in the amount of $100,000.

The Court specifically noted that a punitive damage award of $100,000 is “nominal considering Trustmark’s egregious conduct and substantial net worth.”  The Court found that Meg benefitted from some of the trust distributions, e.g., for her wedding.  The Court held that “had Meg not benefitted from Trustmark’s grossly negligent conduct, an award of punitive damages would likely have been greater.”

Around The Water Cooler this morning, we’re talking about inflation and Clinton vs. Trump on the estate tax:

  • Thompson Reuters has released its projected inflation-adjusted Estate, Gift, and Generation-Skipping Transfer (GST) Tax Exemptions:
    • Estate, Gift, and GST Tax Exemptions:  $5,490,000 (up from $5,450,000 in 2016)
    • Gift Tax Annual Exclusion:  $14,000 (the same as in 2016)
    • Special Use Valuation Reduction Limit:  $1,120,000 (up from $1,100,000 in 2016)
    • Amount of estate tax deferral on farm or closely-held business interests:  $1,490,000 (up from $1,480,000 in 2016).