In this update:
Hale v. Moore, 2005 CA
001895 (Kentucky Court of Appeals, January 4, 2008) – Kentucky Court of
Appeals affirms decision setting aside agreement signed by beneficiaries and
applying tax apportionment statute of state of domicile, and finding
compensation paid to attorney-executor excessive.
Taubman v. U.S. Bank,
2007 Cal. App. Unpub. LEXIS 8594 (October 24, 2007) – California Court
of Appeals affirms $7.2 million surcharge against special trustee for self
dealing on procedural grounds, but refuses to impose double surcharge due to
lack of finding of bad faith by trustee.
Matter of Hyde, 2007 BY
Slip Op 7960 (New York Supreme Court Appellate Division, October 25, 2007)
– New York Appellate Division affirms dismissal of surcharge claims against
corporate trustees for failure to diversify stock concentrations on
technical grounds and due to reasonable process of trustees and
consideration of multiple factors in deciding to retain the stock.
Welch v. Weiner, 2007
Mich. App. LEXIS 2704 (December 4, 2007) – Michigan Court of Appeals
reverses probate court and orders disclosure of information to beneficiary,
and orders removal of trustee for failure to disclose information.
J. P. Morgan Trust
Company v. Siegel, 2007 Fla. App. LEXIS 14613 (September 19, 2007) –
Florida Court of Appeals affirms trial court decision ordering bank to
return or reimburse to the trust attorneys’ fees paid out of trust where the
fees were paid without court approval in an action to settle accountings
after the bank was put on notice of likely surcharge claim through
beneficiary’s discovery responses.
Matter of Irene R. Winger,
2007 N.Y. Misc. LEXIS 4656 (New York County Surrogate’s Court, June 12,
2007) – New York Surrogate’s Court denies non-beneficiary family member
holding a contract right to funds received by a beneficiary the right to
intervene and raise objections to trustee’s accountings.
Hartman v. Walker, 2007
Va. Cir. LEXIS 212 (2007) – Virginia circuit court overrules demurrer
and allows suit to proceed with claims against trustees for failure to
provide beneficiary with reasonable income and favoring remainder
beneficiaries over income beneficiary, and failure to disclose information
about offers to purchase assets held by entity owned in trust.
Hale v. Moore, 2005 CA 001895 (Kentucky Court of
Appeals, January 4, 2008)
Claudia Sanders, widow of the late Colonel Sanders of Kentucky Fried Chicken
fame, died in 1996 a resident of Shelby County, Kentucky, leaving a will,
codicil, and revocable trust. The lawyer that drafted Mrs. Sanders’ estate
planning documents, Maria Fernandez, was named as executrix under the will and
was appointed by the court to serve in that capacity without objection. Wachovia
Bank was the trustee under Mrs. Sanders’ revocable trust agreement.
The will provided for the payment of Mrs. Sanders’ debts, costs, and taxes, a
modest specific bequest to a church, and for the remaining assets to be
distributed to the revocable trust. The trust which was governed under its terms
by Pennsylvania law, provided a “pour back” to the estate for the payment of
debts, costs, and taxes, and for the distribution of the trust assets in twelve
shares to various relatives, with the share set aside for Mrs. Sanders’ deceased
daughter to be distributed to two colleges.
Mrs. Sanders’ assets included commercial and residential real property
managed by a North Carolina corporation that she created. Upon Mrs. Sanders’
death, Fernandez claimed to also have taken over as CEO of the corporation until
its dissolution in 2003. Fernandez and her law firm, in the course of
administering Mrs. Sanders’ estate, also administered the estates of Mrs.
Sanders’ sister and son and charged the expenses to Mrs. Sanders’ estate without
authorization in Mrs. Sanders’ will. There were no engagement letters for any of
the work done by Fernandez or her firm.
In 1999, Wachovia Bank as trustee under Mrs. Sanders’ trust agreement was
prepared to distribute the trust assets, but the estate was not yet settled.
Wachovia obtained an agreement of all beneficiaries to distribute the trust
assets to Fernandez for distribution to the beneficiaries, to apply Pennsylvania
law to the apportionment of estate taxes, and to discharge Wachovia from any
further obligations as trustee.
On the federal and state estate tax returns for Mrs. Sanders’ estate,
Fernandez listed her executor’s fee as $175,000. Fernandez billed only $7,227 of
this to the probate estate. The remainder of the fee was billed to the trust
($50,000) and the corporation (over $110,000) for unspecified work, and
Fernandez admitted doing only nominal work for these entities.
In 2000, some of the beneficiaries began expressing concerns about
Fernandez’s actions, and the fifth accounting was settled by the district court
over the concerns of some beneficiaries. In 2004, five of the beneficiaries
expressed concerns about Fernandez’s fees, and filed exceptions to the sixth
accounting with the district court objecting to the fees, objecting to the
amount of the distributions to the two colleges (which were not reduced for a
portion of estate taxes - unlike the shares for the individual beneficiaries
which were reduced for taxes), and seeking an accounting.
Late in 2004, the district court held a hearing on the objections. Following
the hearing and before a decision by the district court, the beneficiaries filed
a new action in the circuit court against Fernandez. Fernandez moved to dismiss
on jurisdictional grounds, which the court ultimately granted and the
In January of 2005, the district court approved Fernandez’s sixth accounting,
approving the fees paid to Fernandez as reasonable and approving the
distributions to the charities on the basis that Pennsylvania law controlled the
apportionment of taxes rather than Kentucky law. Pennsylvania law governed the
trust, and did not apportion tax to the charities while Kentucky law governed
the probate estate, and did apportion tax to the charities. The beneficiaries
filed a motion to vacate the district court’s decision on jurisdictional
grounds. The district court rejected the beneficiaries’ motion and approved the
seventh and final accounting filed by Fernandez. The beneficiaries filed an
appeal of the district court’s decision with the circuit court.
In January of 2006, the circuit court reversed the district court and ruled
that the apportionment of taxes was governed by Kentucky law, that the releases
signed by the beneficiaries were void because of the failure of Fernandez to
provide the beneficiaries with material facts about the releases and tax
apportionment, and the taxes should have been paid “off the top” with a
corresponding reduction in the shares for the colleges. The circuit court also
reversed the district court’s approval of the fees paid to Fernandez finding
that Fernandez had charged an excessive fee, and remanded the case to the
district court for further proceedings. Fernandez appealed.
The jurisdictional appeal and the appeal of the circuit court’s decision
against Fernandez were consolidated. On appeal the Kentucky Court of Appeals
approved the circuit court’s jurisdiction and voided any action of the district
court after the filing of the complaint with the circuit court.
The Court of Appeals affirmed the circuit court’s application of Kentucky law
to the apportionment of taxes on the basis of Kentucky being Mrs. Sanders’
domicile and the Court’s conclusion that nothing in the will evidenced intent by
Mrs. Sanders to give the colleges special treatment. The Court of Appeals
disregarded the release signed by the beneficiaries that provided for the
application of Pennsylvania law, on the basis that the taxes were paid well
before the release was signed, the beneficiaries were not fully apprised of the
consequences of signing the releases by either Fernandez or Wachovia, and
therefore the releases were suspect.
The Court of Appeals also affirmed the circuit court’s finding that Fernandez
had charged an excessive fee on the basis that Fernandez (1) based the fee on
the value of the gross taxable estate rather than probate estate, contrary to
the Kentucky statute, (2) took a fee far in excess of the fee allowed by statute
without being able to explain why, (3) only performed ordinary and minimal
tasks, (4) failed to provide an itemized bill for services, (5) outsourced most
of the substantive work, (6) failed to disclose the fees paid out of the trust
and the corporation to the district court, and failed to provide actual services
to those entities, (7) served as both attorney and executor without permission
in the will contrary to Kentucky law, and (8) improperly settled other estates
and charged the costs to Mrs. Sanders’ estate.
Taubman v. U.S. Bank, 2007 Cal. App. Unpub.
LEXIS 8594 (October 24, 2007)
Janice Taubman (“Mrs. Taubman”) created a revocable trust in 1990 with
herself as trustee. When she died in 1999, the corporate predecessor to U.S.
Bank, N.A. became trustee (there was also an individual successor co-trustee
that died before the actions at issue in the lawsuit). Under the trust
agreement, Mrs. Taubman’s interests in various legal entities that owned a
shopping center and tourist attraction in San Diego called Seaport Village were
held in a sub-trust for her daughter Anne (Anne’s Trust). Anne individually
owned one of the many corporate entities involved in the operational structure
of Seaport Village. Mrs. Taubman’s interest in other businesses unrelated to
Seaport Village were held in a sub-trust for her son Richard.
Under the trust agreement, Mrs. Taubman named Richard and his son Wyatt as
contingent beneficiaries of Anne’s Trust in the event that Anne failed to
survive Mrs. Taubman by 10 years. Anne was named as special trustee of Anne’s
In 2002, Anne sued to remove and surcharge the Bank as trustee of Anne’s
Trust alleging that the Bank favored Richard in the administration. In 2003, the
Bank sued to suspend Anne’s powers as special trustee of Anne’s Trust alleging
that Anne had concealed from the Bank and Richard a significant transaction that
depleted Anne’s Trust and provided Anne with personal gain. Shortly thereafter,
the Bank sued to permanently remove Anne as special trustee and to compel an
accounting. Richard also sued Anne raising the same claims as the Bank.
The trial court granted the Bank’s first request and suspended Anne’s powers
as special trustee. Following an eight-day trial, in September of 2003 the trial
court denied Anne’s claims against the Bank and granted the Bank’s and Richard’s
claims, and permanently removed Anne as special trustee for breach of fiduciary
duty. The basis for the trial court’s finding of breach of fiduciary duty
justifying Anne’s removal as special trustee was (1) Anne’s purchase of a debt
obligation owed by one the Seaport Village entities at a 40 percent discount,
(2) charging the obligor-entity interest on the full face value of the note, (3)
selling a third party corporation a 50 percent interest in the note by
transferring to the corporation a controlling interest in the obligor-entity as
well as interests in various other Seaport Village entities, (4) arranging for
the third party corporation to pay the $7.2 million purchase price to a
non-trust company controlled by Anne, and (5) actively concealing the
transaction from the Bank and Richard. The trial court found that this series of
transactions entered into by Anne as special trustee was in breach of her
fiduciary and for her personal benefit.
The trial court rejected Anne’s defense that she was the sole beneficiary of
the trust because of the provision of the trust that provided Richard with an
interest in the event that Anne did not survive 10 years from Mrs. Taubman’s
death (which had not expired at the time of the transaction). The trial court
rejected Anne’s defenses that the transaction were at the corporate level and
did not concern the trust, and that the Bank’s only recourse was to file a
derivative action rather than a fiduciary action, and ordered that Anne provide
an accounting of her actions as special trustee including the payment of $7.2
million to Anne’s corporation.
Anne appealed her removal as special trustee and the denying of her claims to
remove the Bank as trustee. In 2004, the Court of Appeals rejected Anne’s
arguments and affirmed the trial court. While this first appeal was pending,
Anne submitted the accounting, and the Bank and Richard objected to the
accounting and sought to surcharge Anne for more than $11 million for breaches
of fiduciary duty as special trustee.
Following a second eight-day trial, the trial court found Anne liable to the
trust for $8.8 million, but rejected the bank’s and Richard’s request for a
double surcharge for bad faith. Anne appealed, and the Bank and Richard
cross-appealed on the refusal to impose the double surcharge. While the appeals
were pending, the Bank and Richard filed post judgment motions to charge Anne
with their attorneys’ fees and costs. The trial court awarded the Bank and
Richard that part of their attorneys’ fees and costs related to remedying
problems with the trust administration caused by Anne’s actions, but not for the
costs of the litigation.
On appeal, the Court of Appeals affirmed the surcharge against Anne on the
basis that her appeal was untimely. The Court of Appeals noted that the trial
court’s factual findings concerning Anne’s breach of fiduciary duty were part of
the trial court’s decision removing her as special trustee. Because Anne did not
contest those findings during her appeal of that earlier decision, the Court of
Appeals held that she could not appeal them in her second appeal on the
The Court of Appeals affirmed the trial court’s refusal to impose a double
surcharge because the trial court’s finding that Anne did not act in bad faith
was supported by evidence in the record. On technical grounds, the Court of
Appeals affirmed most of the trial court’s surcharge against Anne for a portion
of the Bank’s and Richard’s attorneys’ fees, other than charging Anne with
certain expert witness fees which the Court of Appeals reversed.
Matter of Hyde, 2007 BY Slip Op 7960 (New York
Supreme Court Appellate Division, October 25, 2007)
Charlotte Hyde and Nell Cunningham were the daughters of Samuel Pruyn, who
founded Finch Pruyn, a large manufacturer in Glenn Falls, New York. Following
their deaths, Hyde’s estate was held in several testamentary trusts, and
Cunningham’s estate was held in an inter vivos trust. This case involved two
Hyde trusts and the Cunningham trust, each of which was funded with large
concentrations of Finch Pruyn stock. Each trust granted the trustee “absolute
discretion” but contained no directions concerning the Finch Pruyn stock.
This case involved objections to accountings for a twenty-year time period
filed by Glens Falls National Bank and Trust Company and an individual
co-trustee for the Hyde trusts, and an accounting for more the same twenty-year
period filed by Banknorth, N.A. and an individual co-trustee for the Cunningham
The trust beneficiaries objected to the accountings (interestingly, the
objections were only to the actions of the corporate trustees, and not to the
individual co-trustees) alleging breach of fiduciary duty and seeking surcharge
for failure to diversify the trust investments. The trustees moved for summary
judgment to dismiss the objections, which was denied by the Surrogate’s Court.
At the conclusion of a lengthy trial, the Surrogate’s Court dismissed all of the
objections. The beneficiaries appealed.
On appeal, the Appellate division affirmed the dismissal of the claims
against the trustees, for the following reasons:
With respect to one of the Hyde trusts, while the
bank was purportedly appointed as trustee on June 19, 1995, the bank was not
actually made aware of the appointment until 2004, and therefore the bank
could not be liable for actions taken before its knowledge of the
With respect to the other Hyde trust, the
Appellate division found that the bank made a reasonable determination that
it was in the interests of the beneficiaries not to diversify the Finch
Pruyn stock, after considering (1) the liquidity of the stock, (2) the fact
that the corporation was closely held and with an unusual corporate
structure which discouraged liquidation, (3) the lack of marketability, (4)
the disinterest of the company in buying the stock, (5) the comments made in
meetings with financial advisors, investment bankers, and brokerage houses
that a fair price for the stock could only be obtained through sale of the
entire company, (6) the general economic condition of the trust, (7) the tax
consequences of the sale, (8) the needs of the beneficiaries, (9) tax costs
of a sale, (10) the significant dividends paid out with respect to the
stock, and (11) the indications of the settlor’s desire that the stock
remain in the family.
Similarly, with the respect to the Cunningham
trust, the Appellate division found that the bank reasonably determined it
was not in the best interests of the beneficiaries to sell the stock at a
discounted price merely for the sake of diversification, upon considering
the lack of liquidity, the unmarketability of the stock, and the unusual
corporate structure, and because the bank regularly explored the market for
the stock, kept well informed of the company’s financial condition, and
regularly reviewed corporate reports (the Appellate Division rejected the
beneficiaries’ argument that the bank should have obtained third party
reports of the company’s condition at additional costs).
Welch v. Weiner, 2007 Mich. App. LEXIS 2704
(December 4, 2007)
Alice Gustafson (“Alice”) established a trust in 1976. In 1998, Alice filed
for divorce from her husband, but they reconciled and she dismissed the divorce
proceedings. Alice amended her trust in 2000 to make her husband a trustee and
also purportedly a partial co-settlor of the trust for all of the assets other
than the “Article 5” portion of the trust. Alice died in 2003, leaving her
husband as trustee.
In 2003, the husband’s attorney sent Patricia Welch a check for $50,000 drawn
on the trust’s account, which was accompanied by a letter informing Patricia
that she was one of the contingent trust beneficiaries and that the husband as
trustee was making an advance payment to Patricia and would be doing so annually
until the future legacy was fully paid.
Patricia sought additional information about the trust, but was denied a copy
of the trust instrument. She then sued in 2003, seeking an accounting, a copy of
the trust instrument, removal of the trustee, and for sanctions. The probate
court denied her claims, and she appealed.
On appeal, the Michigan Court of Appeals reversed the probate court, and
found that Patricia was entitled to a copy of the trust instrument and an
accounting, on the basis that (1) the settlor had not overridden the disclosure
obligations in the trust agreement, (2) the trust was irrevocable because Alice
was deceased and the husband was not a settlor of the Article 5 portion of the
trust that was at issue in the case, and (3) Patricia was a current beneficiary
of the trust because the trustee had already made a distribution to her from the
The Court of Appeals also ordered the trial court on remand (with a new
probate judge) to remove the trustee for failing to disclose information to
Patricia. Because the Court of Appeals did not have a copy of the trust
instrument in the record, the Court of Appeals remanded with respect to
Patricia’s other claims including a claim for surcharge.
J. P. Morgan Trust Company v. Siegel,
2007 Fla. App. LEXIS 14613 (September 19, 2007)
Dorothy Rautbord (“Dorothy”) created a revocable trust that, as amended,
provided for her support during her lifetime and at her death for certain
specific bequests and distribution of the remainder in equal shares to her
surviving children. J. P. Morgan took over as trustee in 1995. Dorothy died in
2002 survived by three children.
In 2003, the bank filed an action to settle its accounts through 2002, and
requested a discharge of liability and fees and costs. Two of the children
objected to the accounting on the basis of lack of detail, improper
distributions, and excessive attorneys’ fees. In response to discovery sent by
the bank, the children filed 30 pages of detailed allegations of breach of
fiduciary duty by the bank. The children also filed a petition seeking to remove
the bank as Dorothy’s personal representative alleging the same breaches of
fiduciary duties detailed in the response to discovery in the trust action. The
trial court dismissed the petition.
In November of 2003, the trial court granted the bank partial summary
judgment in the trust action, finding that the children lacked standing to
challenge any trust distributions prior to their mother’s death. On appeal, the
Court of Appeals reversed on the issues of standing.
In 2006, the children filed a new lawsuit against the bank. The bank did not
use the trust assets to pay its attorneys’ fees in defending against this
lawsuit, and reimbursed the trust for the fees it erroneously paid from the
trust in connection with this lawsuit.
Later in 2006, the bank and the children entered into a stipulation whereby
the bank made partial distributions to the children and agreed not to pay
further attorneys’ fees from the trust without court approval. Following the
stipulation, the parties each moved for partial summary judgment on the issue of
whether it was proper for the bank to pay its attorneys’ fees from the trust in
connection with the 2003 action filed by the bank to settle its accounts.
The trial court ruled that the children’s discovery answers should have
alerted the bank to the claims by the children of breach of fiduciary duty, even
though no actual pleading had been filed against the bank alleging breach of
fiduciary duty. The trial court ordered the bank to contact any law firm that
received fees from the trust from the date of the discovery answers forward and
demand return of the fees, and reimburse the trust for any amounts that were not
recovered from the law firms. The bank appealed.
On appeal, the Florida Court of Appeals noted that a 2005 statutory change
provided that court approval of payment of fees is not required until an actual
pleading is filed alleging breach of fiduciary duty, but that the new statute
was not in effect in 2003 at the time the discovery answers were filed. The
Court of Appeals therefore affirmed the trial court on the basis that the bank
should have known from the discovery answers that it would face a surcharge
action, and at that point should no longer have paid its attorneys’ fees from
the trust without court approval.
Matter of Irene R. Winger, 2007 N.Y. Misc.
LEXIS 4656 (New York County Surrogate’s Court, June 12, 2007)
Irene Winger (“Irene”) created in trust with $4 million and named Bank of New
York as trustee. A year later, at age 85, Irene a man 35 years her junior. Soon
thereafter, her nephew sued to be appointed as her conservator, but a
non-relative was appointed. The nephew, a niece, and Irene’s husband then
settled litigation (that also involved Irene’s conservator) in which they agreed
to split any property that they received from Irene’s estate after her death.
The bank filed its first accounting in 1992, which was settled in 1993 by
court order. In 1994, Irene died testate and left her residuary estate worth
several million dollars to her husband, after several bequests to family and
friends (but nothing to her niece and nephew who were Irene’s closest blood
The bank filed to settle its final accounting, and Irene’s executor filed
exceptions. The nephew sought to intervene in the accounting action and raise
the same objections as the executor, and additional objections based on
allegations that the bank (1) permitted theft of the trust assets by Irene’s
paid companion (who was beaten to death by one of Irene’s friends in Irene’s
presence in 1993), (2) failed to oversee the companion’s performance, (3) failed
to prevent the conservator from paying the companion excessive compensation, (4)
conspired with the conservator to conceal facts, (5) was responsible for
physical injury to Irene inflicted by the companion when inebriated, and (6) was
responsible for Irene’s emotional distress from seeing the companion beaten to
death in front of her.
The Surrogate denied the nephew’s motion to intervene on the basis that the
nephew has no interest in the matter, and the executor alone may sue on behalf
of the decedent. The Surrogate also noted that some of the objections raised by
the nephew were resolved in the suit the nephew previously filed against the
conservator and settled. The Surrogate rejected the nephew’s argument that the
settlement with the husband to share in the estate proceeds gave him an interest
in the estate, and stated that the nephew’s “connection to the estate is only
tenuous and indirect”, and that while the settlement with the husband gave the
nephew a right to share in whatever the husband ultimately receives, those
rights “do not go so far as to assign to him the husband’s rights as beneficiary
in the estate”. The Surrogate held that “a mere contract obligee of a
beneficiary of the estate – would not even have standing to appear in an
accounting for the estate, much less in an accounting for a related entity such
as the trust…such decisions recognize that accountings would be threatened with
needless complication and confusion if persons with remote and possibly
unenforceable claims against beneficiaries were allowed to participate as
Hartman v. Walker, 2007 Va. Cir. LEXIS 212
(Charlottesville Circuit Court, 2007)
Pauline Hartman (“Mrs. Hartman”) died testate in 1991. Under her will, she
established separate trusts for her son and daughter. On the death of a child,
the will directed that the trust assets revert to the other child, and
thereafter to Mrs. Hartman’s grandchildren. The son, the daughter, the
daughter’s child, and BB&T were named as co-trustees of the son’s trust.
Each trust was funded with equal shares in two family entities, a limited
partnership and a corporation. Both companies hold title to unimproved real
estate, some of which generates rental income for the two entities. The daughter
was general partner with control of the partnership. Although the assets held in
the entities were valued at $14.5 million, the son’s trust only distributed
minimal income to the son (in 2005, the son received less than $19,000 from his
The son sued the other co-trustees for failing to approve measures to
increase the income payments, failing to disclose offers to the partnership to
purchase some of the land at a price above its appraised value, and developing
partnership land at partnership expense without the son’s knowledge or consent.
The son alleged that the actions of the co-trustees were taken to deprive the
son of income and benefit the remaindermen, all of whom are the children of the
daughter. The son sought removal of the co-trustees and surcharge in the amount
of $800,000. The son also alleged failure to diversify the trust investments.
The co-trustees demurred, and argued that the trust terms permitted the
co-trustees to maintain undiversified investments, they were relieved from
complying with the Prudent Investor Act and the Principal and Income Act, the
will authorized the co-trustees to provide the son with no income at all, and
the trust assets could be maintained for the benefit of the remainder
beneficiaries and at the expense of the son.
The court overruled the demurrer. The court concluded that the Prudent
Investor Act and the Principal and Income Act apply to the son’s trust, and that
the son alleged sufficient facts to survive demurrer. The court noted that while
neither Act specifically demands that a beneficiary be paid a “reasonable
income”, they do contemplate that beneficiaries will be impartially favored, and
that trusts will be managed so as to fulfill the intent of the testator, “which
may in fact require that a reasonable net income be provided”. The court also
noted that the son was entitled to information to enable him to enforce his
rights under the trust or to prevent or redress a breach of trust. The court
notes that the other co-trustees may have breached their duties to the son to
the extent they failed to provide the son with information about offers for
partnership assets, and that while the will gives the trustees significant
authority, the authority to act and the proper exercise of that authority are
McGuireWoods Fiduciary Advisory Services
Fiduciary Advisory Services assists financial institutions in a wide array
of areas in which questions or concerns may arise. This includes advising
corporate trustees on how to avoid litigation before it arises and how to
address litigation when it does arise.
For further information on the recent cases cited above or McGuireWoods
Fiduciary Advisory Services, please contact our lawyers.