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).
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.
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 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.”