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.