This is the first in a series of posts that will examine recent litigation against bank trustees in Mississippi.
After five years of litigation, last week a Chancery Court in Mississippi found that Regions breached numerous fiduciary duties with respect to the administration of the Patricia Hall Sheppard Trust and ordered Regions to pay in excess of $4M. (for full text of Court Orders, see Order and Opinion on liability and Order and Opinion on damages)
J. E. (“Buddy”) Sheppard, Sr. departed this life in 1997 leaving behind his wife, Patricia, and two children, Victoria and Bud. Buddy’s Last Will and Testament established a trust for the benefit of Patricia, and he appointed Deposit Guaranty National Bank, which through mergers and acquisitions became Regions, as the Trustee. The terms of the Last Will and Testament require that the Trustee distribute all of the net income, at least annually, to Patricia. In addition, the Trustee may distribute trust principal only if one of three conditions were met: (1) the net income is insufficient to enable Patricia to maintain her standard of living, (2) an emergency arises, or (3) Patricia has any health care needs. Upon Patricia’s death, 80% of the remaining trust property would be held in trust for the benefit of the children, Victoria and Bud.
The trust established for Patricia’s benefit was funded in 1998 with approximately $2.5M in liquid assets and 33 residential rental properties, which the court characterized as “the largest rental property portfolio in Mississippi.” Regions served as trustee from 1998 to 2011 when Patricia removed the bank as trustee and brought suit against Regions.
While the Court found many breaches of fiduciary duty, two are particularly concerning; those concerning distributions of principal and management of the real estate.
Distributions of Principal
The regular operating procedure was to give Patricia anything she asked for and he had no idea how Patricia spent the money that was disbursed.
During the time that Regions administered the trust, Patricia thought that she was receiving only distributions of income from the trust. In fact, Regions began distributing principal from the very outset of the trust, in 1998. In 2009, a trust officer informed Patricia that the trust principal had been severely eroded and that the liquid assets were worth less than a million dollars at the time. In fact, in the 13 years that Regions administered the trust, the trustee distributed trust principal 765 times in a total amount of $3,617,250. What makes matters worse is that while Regions was distributing trust principal, it was not even distributing all trust income, as mandated by the Last Will and Testament, in a number of years.
None of the distributions of trust principal were for emergency needs and only $10,898 were for health care related expenses. Presumably, the other distributions were to enable Patricia to maintain her standard of living. However, as the Court notes in its Opinion, “Regions never ascertained what [Patricia’s] standard of living consisted of”; that is, Regions never performed a needs analysis or determined what expenses Patricia had. As the trust officer testified, the regular operating procedure was to give Patricia anything she asked for and he had no idea how Patricia spent the money that was disbursed. The investment officer assigned to the trust testified that “we’d make distributions whenever she asked.” As the Court observed, Regions could never determine if the principal disbursements were maintaining Patricia’s standard of living because Regions never knew what her standard of living actually was.
Management of the Real Estate
The words reasonable and prudent are not synonymous with loosey-goosey.
Shortly after Regions began administering the trust, the bank delegated management of the real estate to Orville Hall, Mrs. Sheppard’s brother. As such, Orville was responsible for collecting rent, making repairs, and documenting vacancy rates. In delegating one of its functions as the trustee, Regions had a duty to exercise reasonable care in delegating management of the real estate and had a duty to review and monitor the agent’s actions. Regions’ failure in this regard is alarming. The Bank’s own in house trust real property manager testified that he:
- Did not know if anyone at the Bank was checking to ensure all rental payments were accounted for;
- Did not review Orville’s invoices;
- Did not know if Orville’s invoices for services and repairs were reasonable;
- Never monitored the net income of the rental property;
When asked if Regions’ management of the real property could be described as “loosey-goosey”, the Bank’s in house trust real property manager replied, “some of the procedures seemed to be a little on the lax side.” The court found that “the words reasonable and prudent are not synonymous with loosey-goosey.” Regions own expert witness testified that Regions did not have definitive rules, but testified that that was not necessarily a bad thing and that only the bottom line counts. As the court noted, “that sentiment is not correct in the terms of the duties that a trustee has with its beneficiary.”
In 2010, Regions began an investigation into the trust to determine if someone within the trust department was stealing money. The Bank’s internal investigator determined that Orville was reporting that rent was collected but that the rent was not accounted for in the bank’s records. In his report, the Bank’s internal investigator determined that the real estate was not being handled properly and that there was a failure of institutional controls. The investigator submitted his report to the Bank’s Human Resources department and assumed that Human Resources would meet with the trust department to discuss the report and make necessary changes within the trust department. However, the Human Resources Department never forwarded the report to the trust department and the Bank’s own in house trust real property manager testified that he saw the report for the first time on the witness stand. Not surprisingly, Orville, who in fact was not a licensed real estate broker, had little to no experience managing real estate, and spent most of his time in Tennessee while all of the real property was located in central Mississippi, disappeared while the Bank’s internal investigation was ongoing.
After entering its Order finding liability, the Court appointed two special masters to assess damages. One of the special masters resigned, and the other special master amended his report a number of times before submitting a final report. The Court adopted the special master’s final report and awarded damages in the amount of $3,363,026 plus prejudgment interest in the amount of 8%, for a total of over $4M.