Karo v. Wachovia Bank, N.A. – Federal District Court in Virginia grants summary judgment in favor of Wachovia Bank as co-trustee on claims of breach of fiduciary duty arising out of loss in value of bank stock comprising 65 percent of the trust portfolio.
Bank of America v. Carpenter – Illinois Appellate Court reverses trial court’s modification of trust terms to shorten the duration of the trust and affirms summary judgment in favor of Bank of America as trustee on claims of breach of fiduciary duty for failing to seek construction of trust terms.
First Charter Bank v. American Children’s Home – North Carolina Court of Appeals affirms application of virtual representation under the Uniform Trust Code and refuses to find an implied reversion to the testator’s estate at the termination of a charitable trust that did not expressly provide for distribution upon termination of the trust.
N.K.S. Distributors Inc. v. Tigani – Delaware Chancery Court refuses motion by trust beneficiary to compel production of communications between attorney and trustee on the grounds of the attorney-client privilege for advice in connection with matters adverse to the beneficiary.
In 1966, Rosalie Karo created a trust for the benefit of her husband, Toney, her son Drew, and her grandson W.A.K. (a minor), with Toney and Central National Bank as co-trustees. The trust was originally funded primarily with Central National Bank stock. Through a series of bank mergers, Wachovia Bank became co-trustee and the trust assets included Wachovia stock that constituted 65 percent of the trust portfolio.
On several occasions between 2003 and 2007, Wachovia recommended to Toney and Drew that the trust diversify the bank stock, but Toney and Drew refused and signed several letters acknowledging Wachovia’s advice, authorizing the retention of the stock and indemnifying Wachovia. Thereafter, the bank stock declined in value.
In 2008, Toney disclaimed his income interest in the trust. In 2009, Drew disclaimed his remainder interest in the trust. Then, in 2009, W.A.K., through his mother as his “next friend,” sued Wachovia in state court alleging that Wachovia breached its fiduciary duties by failing to diversify the trust assets, failing to assert control as sole trustee, allowing Drew to act as co-trustee, making improper distributions, improperly soliciting disclosure letters, and failing to monitor or warn about the declining value of the bank stock. The beneficiary also sought to remove Wachovia as trustee. In response, Wachovia brought a third-party complaint against Drew to enforce the indemnification letters and removed the suit to the U.S. District Court for the Eastern District of Virginia.
On competing motions for summary judgment, the court granted summary judgment in favor of Wachovia and dismissed most of the claims against the bank.
The court rejected the claim that Wachovia breached its duty of prudence by failing to diversify the trust assets on the grounds that: (1) by authorizing the permanent retention of the assets originally transferred to the trust (which included the assets received as a result of bank mergers, as opposed to assets purchased by the trustee), the trust terms waived the requirements of the Prudent Investor Rule for those assets; (2) Wachovia reasonably relied on those trust terms, and therefore is not liable for breach resulting in that reliance; and (3) Toney signed several letters (including one through Drew as his power of attorney) withholding his consent as co-trustee to the sale of the stock. Because of a lack of state court decisions interpreting the virtual representation provisions of the Virginia Uniform Trust Code, the court declined to rule on whether W.A.K.’s claims were barred by Toney and Drew’s consent to the retention of the stock.
The court rejected the claim that Wachovia failed to act as sole trustee and should have treated Toney as an “unavailable co-trustee” on the grounds that: (1) the trust terms required the joint action of the co-trustees; (2) although relatively passive, Toney assisted in the trust administration by signing the retention letters and authorizing a withdrawal from the trust, and the plaintiffs could not demonstrate any specific instance of a knowing failure by Toney to act as co-trustee; and (3) Wachovia gave advice to Toney concerning the stock that he chose to disregard, and therefore Wachovia was powerless to act. Likewise, the court rejected the claim that Wachovia should have given advice to Toney about the investment quality of its own stock because, in light of banking laws prohibiting self-dealing and insider trading, Wachovia satisfied its duties by disclosing its conflict of interest to Toney and Drew and giving them the ultimate authority to direct the investment of the Wachovia stock.
The court rejected the claims that Wachovia breached its duty of loyalty on the grounds that: (1) Drew’s signing of the retention letters did not convert him to a co-trustee, and plaintiffs did not point to any other action elevating his status to co-trustee; (2) there was no evidence that Toney failed to act as co-trustee, and W.A.K.’s disagreement with his grandfather’s investment decisions had no effect on the trustees’ duties; (3) the content of the retention letters was factually and legally sound; (4) trust distributions to Drew in the amount of $200,000 to pay off his personal debt to Wachovia provided for Drew’s welfare and comfort and were therefore authorized by the trust terms; and (5) because the retention of the bank stock was authorized by the trust terms, Wachovia was not required to seek aid and direction from the court.
Hartley Harper died in 1932, and under his will established a trust to provide income first to his wife for her lifetime, then to his brother Frederick for his lifetime, and then in equal shares to Frederick’s children and their descendants per stirpes. The trust provided for the termination of the trust upon the death of all of Frederick’s descendants, and the distribution of the trust assets upon termination in equal shares to Hartley’s step-daughter, step-grandson, and sister-in-law, or their descendants per stirpes. The trust also included a perpetuities savings clause that provided for the termination of the trust 21 years after the death of the last survivor of “all the beneficiaries named or described who are living at the date of [Hartley’s]death.”
A dispute arose among the income beneficiaries and the presumptive remainder beneficiaries concerning the termination date of the trust. Bank of America, as trustee, took the position that the terms of the trust were clear and that, pursuant to the perpetuities savings clause, would terminate 21 years after the death of all of the beneficiaries described in the entire will who were living at Hartley’s death in 1932 (with the result that the termination date could not yet be determined because three measuring lives were still living). The remainder beneficiaries argued that the trust was ambiguous and susceptible to four possible interpretations, and advocated an interpretation that narrowed the measuring lives for purposes of the perpetuities savings clause, with the result that the trust should have terminated in favor of the remainder beneficiaries back in 1992.
In 2007, the trustee filed a complaint to convert the trust to a total return unitrust with the hopes of reducing tensions between the income and remainder beneficiaries. A group of 53 remainder beneficiaries filed a counterclaim seeking a declaration that the trust was ambiguous and should have been terminated in 1992, and alleging breach of fiduciary duty by the trustee for failing to seek a determination of the trust’s termination date. The trial court denied the trustee’s and the remainder beneficiaries’ motions for summary judgment on their preferred interpretations of the trust, and deemed the remainder beneficiaries to have moved for summary judgment on a third interpretation of the trust that would result in the termination of the trust in 2013.
The trial court then granted summary judgment in favor of the remainder beneficiaries on the third interpretation, finding that the term “all the beneficiaries” for purposes of the measuring lives for the trust perpetuities savings provision should be limited to only “income beneficiaries,” with the result that the trust would terminate in 2013. The trial court granted summary judgment in favor of the bank on the claim of breach of fiduciary duty.
On appeal, the Illinois Appellate Court reversed the trial court’s ruling on the termination date of the trust on the grounds that: (1) the will used the phrase “all the beneficiaries” to identify measuring lives that would trigger the perpetuities period, and the plain and ordinary meaning of this phrase did not limit the measuring lives to only income beneficiaries; (2) the terms of the will (including the use of the perpetuities savings clause) evidence a clear intent to provide for the income beneficiaries for as long as possible without violating the rule against perpetuities; (3) there was no support for the argument that the testator meant something other than what the will plainly provided or that there was scrivener’s error; and (4) because the will was clear and unambiguous, the trial court improperly reformed the terms of the will to accelerate the termination date of the trust contrary to the testator’s intent.
The Appellate Court affirmed summary judgment in favor of the trustee on the breach of duty claims on the grounds that the trustee had no duty to seek construction of a trust where the terms are clear and unambiguous, and because the remainder beneficiaries could not prove any damages.
Joseph Cannon died in 1930 leaving a will and two codicils. Under his will, Joseph directed his executors to “turn over” to Citizens Bank and Trust Co. as trustee all of his bank stock to be held for 99 years in a trust called the Christmas Trust and to distribute the trust net income equally to 10 named charities on the condition that the charities provide their inmates with “happiness and cheer at Christmas Time.” In the event any named charity ceased to exist or failed to carry out Joseph’s directions, the trustee was authorized to divert their share to another charity selected by the trustee. The will also provided that the trustee was the sole and final judge in matters pertaining to the trust administration. The will, however, was silent on the distribution of the trust assets at the end of the 99 year trust term. In contrast, a separate trust created under the will for Joseph’s secretary provided for reversion to Joseph’s heirs at the secretary’s death.
In 2007, the trustee filed suit seeking a determination whether the trustee had the power under the will to determine the charities entitled to receive trust assets at the termination of the trust. The trustee named the estates of Joseph’s wife and three children (who were the residuary beneficiaries under Joseph’s will) as parties to the suit, along with the current charitable beneficiaries of the trust.
The trustee could not locate a person willing to re-open the estate of one of Joseph’s children, Anne. The trial court therefore held that Anne’s estate was virtually represented and bound by the other estates pursuant to the North Carolina Uniform Trust Code. The trial court also held that: (1) the Christmas Trust was a “wholly charitable trust”; (2) the estates of Joseph’s wife and children have no reversionary interest in the trust; and (3) the court may apply cy pres to prevent a failure of the trust at the termination of the 99-year trust term. The executor of the estate of one of Joseph’s children appealed.
The North Carolina Court of Appeals rejected the executor’s argument that Anne’s estate was not properly before the trial court on the grounds that: (1) the North Carolina Uniform Trust Code codified the long-recognized doctrine of virtual representation; (2) even though persons with an interest in Anne’s estate were aware of and attempted to participate in the proceedings, no person actually sought or was willing to be named as personal representative of Anne’s estate, and therefore Anne’s estate was not “known” or “locatable,” and there virtual representation was permissible; (3) no argument was presented as to why the interests of the other estate were not “substantially identical” to the interest of Anne’s estate, and therefore allowing virtual representation by the other estate was not error.
The Court of Appeals declined to consider whether the entire matter was ripe for adjudication even though the trust was not to terminate for another 30 years because there was no assignment of error to the trial court’s conclusion that the matter was ripe in order to facilitate the ongoing trust administration.
The Court of Appeals affirmed the trial court’s determination that the estates of Joseph’s wife and children have no reversionary interest in the trust on the grounds that: (1) a gift by implication (i.e. a remainder gift to the estates of Joseph’s wife and children) is not favored in the law and cannot rest on mere conjecture; (2) Joseph provided a reversionary interest for his family in the secretary’s trust, but failed to provide one for the Christmas Trust; (3) Joseph could not have reasonably believed his wife and children would survive the 99-year term of the Christmas Trust; and (4) construing the whole will, Joseph must have intended the remaining trust assets to be distributed to the then-entitled charitable beneficiaries at the trust termination.
Bob Tigani was the trustee of a 1986 trust for his own lifetime benefit, and also had the power to appoint the successor beneficiaries of the trust from a class including Bob’s sons, Chris and Bob Jr., and their descendants. In 2000, Bob exercised his power to name Chris as sole successor beneficiary of the trust. The trust was the majority shareholder of N.K.S. Distributors Inc. In litigation between Chris and the company, Chris moved to compel production of communications between Bob and his counsel concerning the trust. Bob’s counsel refused to produce document on the basis of attorney client privilege.
The Delaware Court of Chancery rejected Chris’s argument that under Riggs National Bank v. Zimmer a trustee must produce to a beneficiary all communications containing legal advice pertaining to the trust or the trustee’s performance of his duties. The court distinguished Riggs on the basis that in this case, Bob’s attorneys were advising Bob on problems with the company that Bob believed Chris was causing, and therefore the legal services could not be deemed to be performed for Chris’s benefit. The court noted that nothing in the law provided justification for the beneficiary of a trust to receive privileged documents where, as in this case, the documents were prepared on behalf of a trustee in preparation for litigation between a successor beneficiary and the trustee. The court further distinguished Riggs on the basis that Chris’s interest in the trust was contingent and subject to Bob’s power, and therefore he was entitled to lesser rights than a primary beneficiary.
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Dana G. Fitzsimons, Jr. is the author of this release.