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).

Around The Water Cooler this morning, we’re discussing the ongoing Benson litigation, House and Senate Republicans respond to IRC Section 2704 Proposed Regulations, and tax appointment clauses through the lens of the Tom Clancy Estate.

Just when you thought the Benson litigation involving the New Orleans Saints and New Orleans Pelicans was over, it picks back up.  As Gal Kaufman explains, the matter is now heading back to court to wrestle over the swap powers in the trusts and the valuation of the nonvoting interests in the professional sports teams.

In response to the Proposed Regulations under IRC 2704 which would severely limit valuation discounts associated with family limited partnerships and limited liability companies, House and Senate Republicans called for Treasury Secretary Lew to not move forward with the proposed regulations and have introduced legislation which would quash the proposed regulations.

Jean Stewart takes us through the Tom Clancy Estate litigation which highlights the importance of tax apportionment provisions particularly in blended families.

This is the second installment of a series of posts that examine recent litigation against bank trustees in Mississippi.  To read the first, please see Regions Hit with $4M Judgment over Trust Mismanagement.

 

Thomas Longnecker was the long-time owner and president of The Amory Garment Company, a garment manufacturing business based in Amory, Mississippi.  At the time of Thomas’ death, the company was the oldest industry and the largest employer in Amory.  After Thomas’ death and in the wake of NAFTA, the company experienced large scale layoffs and was eventually sold for $20 million.

Thomas’ Last Will and Testament created a number of trusts for his wife, daughter, and grandchildren, and Thomas’ widow, Margaret, established a trust for their daughter and grandchildren and a partnership with their grandchildren.

As a result of its 60-year history with the Longnecker family, The Peoples Bank and Trust Company (now Renasant Bank) was appointed to serve as a trustee of the various trusts created by Thomas and Margaret.  One of the fundamental duties of a trustee is to prudently invest the assets of the trust.  Based on the testimony of the bank’s representative (its “30(b)(6) designee”), in the 1980’s Renasant saw the use of investment managers as a way to grow the bank.  The bank thought it could avoid the costs and contingent liabilities of a fiduciary by delegating its investment responsibility as a trustee to outside investment advisors.  At the same time, the bank thought it could split fees with the outside investment advisors and still recognize substantial income from its trust department.

Based on this philosophy, Renasant recommended to Lisa Donovan and her children (Thomas and Margaret’s daughter and grandchildren and the beneficiaries of the various trusts) that Oakwood Capital Management, an investment management firm based in Los Angeles, handle the investment of the trust assets.  Oakwood recommended its Concentrated Value Equity Strategy, and Renasant employees claimed that the Oakwood Strategy would be “very conservative” and “very safe.”  Renasant then entered into Investment Management Agreements which delegated its trust investment duties to Oakwood who would have full power “to supervise and direct the investments” of the various trusts.

A large portion of the trust assets were invested in Oakwood’s Concentrated Value Equity Strategy.  The majority of the assets in the Concentrated Value Equity Strategy were invested in Doral Financial Corporation, whose primary asset was Doral Bank, a bank based in Puerto Rico that originated and securitized mortgages.  After revelations surfaced that Doral Bank was engaged in accounting fraud (described by Renasant as “a massive Enron-style fraud”), the price of Doral Financial Corporation shares collapsed (from $49 per share to $15 per share) and the value of Oakwood’s Concentrated Value Equity Strategy plummeted.  As a result, the various trusts and related entities lost approximately $1.8M.  Doral Bank was later closed by government regulators and Doral Financial Corporation filed for Chapter 11 bankruptcy.

The trust beneficiaries filed suit against Renasant (and Oakwood) and claimed that Renasant breached its duty to prudently invest the trust assets, breached its duty to diversify the trust assets (55% of the stocks owned by the trusts were invested in one company, Doral Financial Corporation), and breached its duty to monitor Oakwood.

Since the litigation settled halfway through trial, there is no ruling on liability issues like lack of diversification, imprudent delegation and monitoring, and failure to prudently invest the assets of the trusts.  However, several facets of the litigation are worth highlighting:

  • As Trustee of the trusts established for the grandchildren of Thomas and Margaret Longnecker, Renasant made a number of distributions to the grandchildren.  Those distributions were subject to generation-skipping transfer taxes (“GSTT”).  However, as seen all too often with other trusts, Renasant never provided annual notices to the grandchildren that the distributions were subject to GSTT and failed to provide the annual IRS forms.  Renasant admitted as much in its publicly filed pleadings.  In fact, at that time, Renasant did not even know that the distributions were subject to GSTT, and one trust officer went so far as to testify that he did not remember addressing GSTT on any of the trusts administered by Renasant from 1999-2004.
  • The attorney for the beneficiaries adroitly subpoenaed the reports of all relevant examinations of Renasant Bank from both the FDIC and the Mississippi Department of Banking and Consumer Finance.  The Commissioner of the Mississippi Department of Banking and Consumer Finance resisted the subpoena by filing a Motion to Quash.  The FDIC, on the other hand, did comply with the Subpoena and although it took approximately two years, the FDIC did in fact produce the reports of all relevant examinations of Renasant Bank.
  • The Investment Management Agreements contained an arbitration clause.  The beneficiaries first filed a claim for arbitration against Oakwood and Renasant in Los Angeles.  The beneficiaries then filed suit against Oakwood and Renasant in the Chancery Court of Monroe County, Mississippi.  Renasant promptly filed a petition for injunctive relief.  The Chancery Court granted Renasant’s petition and ordered the beneficiaries to pursue claims against Renasant solely in the Chancery Court of Monroe County.  Likewise, Oakwood filed a Motion for an Order Compelling Arbitration.  After the Chancellor denied Oakwood’s Motion, Oakwood took an interlocutory appeal to the Mississippi Supreme Court which reversed the Chancellor’s ruling and entered a judgment compelling arbitration and staying litigation of all claims against Oakwood in Monroe County Chancery Court.  So, in essence, the beneficiaries were put in the unenviable and expensive position of having to maintain the arbitration claims against Oakwood in California while at the same time pursuing claims against Renasant in Monroe County Chancery Court.
  • Among other arguments, Renasant actually maintained that it “delegated investment advisory and management functions to Oakwood, and is therefore not responsible for any damages suffered in whole or in part by the [beneficiaries].”  Even if the delegation was prudent, Renasant had a continuing duty to monitor Oakwood.
  • Finally, in what might best be characterized as travelling “through the looking glass,” outside counsel who defended Renasant Bank in the matter was also a member of the bank’s Board of Directors.

Around The Water Cooler this morning, we’re discussing trustees gone wild, exculpatory clauses, and presidential politics.

  • It appears that the democratic ticket in this year’s general presidential election is not the only candidate who might have issues with a private foundation.  In Bloomberg BNA, staff reporter Colleen Murphy details alleged self-dealing at the Trump Foundation.
  • In Lexology, Luke Lantta at Bryan Cave details and provides commentary on In re Scott David Hurwich 1986 Irrevocable Trust, an Indiana case in which the state Court of Appeals limited the relief from liability provided by an exculpatory clause in the trust agreement.
  • Dawn Markowitz, legal editor at Trusts & Estates, provides an in depth analysis of a court opinion handed down this month in the Southern District of California which found personal liability for unpaid estate taxes.