Surcharge litigation plays a prominent role in this issue’s round-up of fiduciary cases, including those that illustrate the risks of discretionary distributions and delays in distributing assets.


Trust terms can’t eliminate duty to act in good faith—In Martin v. Martin, 2012 Tex. App. LEXIS 2146 (Tex. App. 2012), the Texas Court of Appeals applied the well-established principle that trust terms can’t eliminate the duty of a trustee to act in good faith. It upheld a jury’s finding that the trustee breached his duty. The court, however, overturned the jury’s award of compensatory and mental anguish damages on the grounds that, under Texas law, damages resulting from the devaluation of corporate stock are damages incurred by the corporation. The beneficiaries, as equitable shareowners, had no independent right to recover damages for corporate losses.


Surcharge for excessive discretionary distributions—In Reliance Trust Company v. Candler, et al., 2012 Ga. App. LEXIS 336 (2012), a trustee was surcharged for excessive and arbitrary discretionary distributions to the beneficiary of a marital trust. In addition to being the trust beneficiary, the surviving spouse was also a co-trustee and held a limited power of appointment (POA) over the trust assets. The grandchildren, who received the assets through exercise of the POA, sued after the spouse’s death, and a jury awarded a surcharge judgment against the corporate fiduciary for making $1 million in distributions out of a trust worth $2.1 million. The Georgia Court of Appeals affirmed the decision on the grounds that the trustee breached its fiduciary duties by failing to preserve a fair balance between the surviving spouse and the grandchildren and making decisions arbitrarily.


Executor surcharged for delays in distributing closely held stock, conditioning distributions on the beneficiaries signing releases and allowing a court to order a discounted sale of stock—The decedent died in 1987 and under her will, gave her Class A non-voting stock in the company to 10 beneficiaries. The stock was valued for estate tax purposes at $403.35 per share. In 1991 and 1993, the executor asked the beneficiaries to sign a release and indemnity, but the beneficiaries refused and the stock wasn’t distributed. By 1995, the stock still hadn’t been distributed, and the dispute between the executor and the beneficiaries escalated. Although it wasn’t previously interested, in 1995 the company approached the executor and offered to buy the stock for $145.36 per share, on the condition that the beneficiaries approve the offer. The executor provided the offer materials to the beneficiaries, but didn’t request additional information, review the offer or do independent research. Several beneficiaries approved the offer, but others didn’t. The executor petitioned the probate court for distribution of the stock. At the hearing, a company representative appeared and urged the sale of the stock to the company. The court ordered the sale at $145.36 per share. Two years later, the company was sold and the holders of the Class A stock received $1,667.38 per share in the sale. The beneficiaries sued the executor for unduly delaying distribution of the stock, improperly requiring receipts, releases and indemnification as a legal precondition to distribution and failing to act in the best interests of the beneficiaries in the court proceedings by not appealing the probate court’s order. In Lawton, et al. v. Bank of America, 2011 U.S. Dist. LEXIS 95052 (R.I., Aug. 24, 2011), the district court ruled for the beneficiaries. The court also found that the executor breached its duties by failing to check the accuracy of the data, investigate the business to appraise the stock or negotiate the sales price and by collaborating with the company on the proceedings.


Surcharge for failing to make required trust distribution—Similarly, in Jacobson v. Sklaire, 2012 Fla. App. LEXIS 6373 (2012), the trustees were found liable for a beneficiary’s legal fees for refusal to make a required trust distribution.


Double damages for distributions for trustee’s benefit made pursuant to invalid amendment—The California Court of Appeals not only affirmed, but also increased a surcharge award against a lawyer serving as trustee for distributing assets pursuant to trust amendments. The amendments affected partial revocation, requiring consent of the co-trustees, which wasn’t obtained. The eight amendments allowed the settlor of the trust to remove $1.770 million from the trusts for his minor daughters. In Nederlander, et al. v. Papiano, 2012 Cal. App. Unpub. LEXIS 1717 (March 6, 2012), the Court of Appeals increased the surcharge award to include double damages against the trustee for bad faith in allowing amendments to extract payment of lawyer’s fees out of the trust assets. 


Other recent cases of interest:


A court rejected a settlement agreement that discharged a corporate co-trustee without naming a replacement, as required by the trust terms, finding that it was an improper trust modification (Bellamy v. Langfitt, 2012 Fla. App. LEXIS 6379 (2012)).

A court found that a 2010 decedent’s trust formula funding provision directed all assets to a marital trust, because there was no federal estate tax that applied to the estate (Steingass v. Steingass, 2012 Ohio 1647 (Ohio Ct. App. 2012)).

A court found an income beneficiary liable for gift taxes owed by a terminated grantor retained income trust (United States v. MacIntyre, 2012 U.S. Dist. LEXIS 42487 (S.D. Texas 2012)).

A lifetime beneficiary of an irrevocable life insurance trust isn’t entitled to death benefit proceeds (Leventhal v. Montelione, 2012 Cal. App. Unpub. LEXIS 2964 (Cal. App.2d Dist. 2012)).

A trustee is entitled to purchase trust assets at a properly conducted auction, following notice to the beneficiaries (In the Matter of the Estate of Bernadine J. Moncur, 2012 SD 17 (2012)). 

A beneficiary doesn’t have standing to sue on behalf of a trust without first seeking to compel the trustee to bring the claim (Swendsen v. Corey, 2012 U.S. Dist. LEXIS 24203 (Idaho, Feb. 22, 2012)). 

A co-trustee was removed and denied compensation for actions as chairman of a bank owned in part by a trust (Wilbourn v. Wilbourn, 2012 Miss. App. LEXIS 232 (2012)). 

A suit for instructions construing trust terms and a settlor’s intent doesn’t bar a later claim to modify trust terms (Reed v. JP Morgan Chase Bank, NA, 2011 OK 93 (2011)).

A court reversed a dismissal of beneficiary claims based on laches (Merrill Lynch Trust Company v. Mary F.C. Campbell, 2011 Del. Ch. LEXIS 205 (Jan. 24, 2011)).

A suit against a trustee for breach of duty isn’t a contest that triggers a forfeiture clause (Bank & Trust Co., et al. v. Young, et al., 2012 Ky. App. LEXIS 40 (Feb. 24, 2012)).

A court dismissed a suit attempting to remove a corporate trustee, because only the predecessor bank was named in the trust documents (Clower, et al. v. Wells Fargo Bank, 2012 U.S. Dist. LEXIS 30093 (E.D. Texas, March 7, 2012)). 

The limitations period in a trust instrument barred claims against a trustee for breach of his fiduciary duty (In re Estate of Alden v. Alden, 2011 VT 64 (Vt. 2011)). 

A bank holding trust accounts wasn’t liable for a trustee’s breach of the trust (Frank Calandra, Jr. Irrevocable Trust v. Signature Bank Corp., 816 F. Supp.2d 222 (S.D.N.Y. 2011)).