A 2010 New Hampshire court case has dragged a successful real estate developer’s family through trying times—testing family bonds from all angles. On Aug. 18, 2010, Judge Gary R. Cassavecchia of the Hillsborough County Probate Court issued a ruling that has trusts and estates practitioners still talking. His lengthy ruling addresses the multiple complaints brought by Elizabeth Tamposi (Betty) against her brothers, Samuel A. Tamposi, Jr. (Sam, Jr.) and Stephen Tamposi (Steve) in their role as investment directors for a trust.
We Are Family
Samuel A. Tamposi, Sr. (Sam, Sr.) was a hugely successful real estate developer from New Hampshire. Sam, Sr. had six children including Sam, Jr., Betty and Steve. In his plans for his million dollar estate, Sam, Sr. established the SAT, Sr. Trust (trust) in 1992. The trust was amended multiple times after its creation—the pertinent provisions of which affirmed that the trustee may retain “real estate interests” as a substantial part or all of the trust property and named Sam, Jr. and Steve as investment directors.1 The trust was to be divided into 12 separate trusts for Sam, Sr.’s children and their children. Perhaps most importantly, Article 14 of the trust contained an in terrorem clause specifying that should any person challenge the trust’s validity and attempt to have it set aside or contest any part of it, that person would forfeit his right in the trust.
Upon Sam, Sr.’s death in 1995, his estate was valued at $20.5 million, consisting of various real estate holdings, limited partnerships and corporations. Sam, Jr. and Steve assumed responsibility as investment directors for the 12 subtrusts.
In 2005; Betty purchased a house and land for $1.79 million and started renovations totaling $2.5 million above the purchase price. Betty and the other beneficiaries had received distributions from the trust from 2007 through 2009 at about $1.5 million per year. Betty had also spent about $925,000 on prior lawsuits and mediation involving the family trust.
It’s All in the Intent
In 2007, Betty chose Julie Shelton, her longtime friend and an inexperienced trust officer, as her trustee. Through many emails and phone calls among Julie, Sam, Jr. and Steve (as investment directors), meetings were made and then cancelled—amounting to no face-to-face contact between the new trustee and the investment directors. In the summer of 2007, Julie and Betty began interviewing litigation attorneys to, as they testified, discuss a malpractice suit. The court in this instant case, however, determined it was “reasonable to infer from their actions and the exhibits that their search for legal counsel included discussion of further litigation over the trusts.”2 Later, in September 2007, Julie sent a letter to the investment directors asking them to provide $2 million within seven days for cash needs of the beneficiaries.
Betty then brought the instant lawsuit against Sam, Jr. and Steve, alleging various causes of action. The first alleged that the investment directors breached their fiduciary duty by failing to acknowledge the appropriate role of the trustee (we can infer this stemmed from their refusal to issue the $2 million in seven days). Betty argued that Julie had sole responsibility to determine appropriate distributions from the trusts, and the investment directors’ responsibility was to provide funds when and in the amount requested by the trustee. The court found that the trust instrument determines the powers and duties of the trustee and as such, determined that Sam, Sr. conferred on Sam, Jr. and Steve “unequivocal authority to make investments decisions and rendered their decisions neither reviewable nor reversible by the trustee.”3
Based on Sam, Sr.’s intent and the trust instrument specifically giving the investment directors such a wide berth for investment decisions, Sam, Jr. and Steve also held the power of distribution. The court discussed the different possible uses of a trust and determined that this trust was created to further them all—and that the investment directors’ loyalty to the trust purposes and their actions enhancing its value were all in direct line with Sam, Sr.’s intent that the trustee have no ability to access all of the trust assets.
Special Circumstances
Betty’s next cause of action alleged that the investment directors breached their fiduciary duty by failing to appropriately invest trust assets to assure sufficient liquidity. Betty argued that the investment directors overly invested in undivided minority interests in real estate and business entities. As an expert witness for Betty, John Langbein, a professor at Yale Law School testified that the investment directors “have a continuing duty to diversify trust assets to afford sufficient liquidity to meet the … distribution requests of the trustee.” He stated also that it wouldn’t benefit the beneficiaries to hold assets that were illiquid or undiversified.
The court disagreed with Betty (as well as Professor Langbein) and found on two fronts that the investment directors were acting prudently. First, the court found that the trust instrument itself alters the prudent investor rule that would otherwise disallow the investment in under-diversified assets and holds them to a lesser standard of care than a trustee (good faith and ordinary diligence, as opposed to reasonable care, skill and caution).
The court also—and perhaps more interestingly—found that the Comments to the Prudent Investor Act4 specify that a settlor’s desire to retain a family business may be a special circumstance that would justify not diversifying a trust. The court also noted that Prof. Langbein himself suggests that in certain circumstances, maintaining a family business may be an appropriate reason for non-diversification of trust assets and may not violate the “benefit-the-beneficiaries” rule.5
The court held that Sam, Sr. had wanted the family business continued for the equal benefit of his children and that the maintenance of the family business constituted a special circumstance exonerating the investment directors from a duty to further diversify.
Terror…em
While Betty brought many other causes of action against the investment directors, the one that practitioners are still discussing is the investment directors’ cause of action seeking the court’s enforcement of the in terroremclause. While most commonly seen in a will, the clause in the trust causes any person who challenges the validity or provisions within the trust to immediately forfeit his right under the trust.
The court discussed the validity of in terrorem clauses, finding that “Where the intention of the testator is clear and no question of public policy is involved either in the nature of the provision attached or the way the will came in to being, effect will be given to such a no-contest clause…”6
The court analyzed Betty’s behavior, noting that her lawsuit contested several provisions of the trust including, among others,the role of the investment directors (by challenging them in a breach of fiduciary action as well as challenging their specific investments); authority of investment directors to retain assets in common with other sibling trusts; and their right to retain substantial trust assets as or in real estate (again, in her challenge to their investment decisions). The court held that in bringing and prosecuting the litigation, Betty acted in bad faith. Because she challenged the investment directors’ role and specific investments—both of which were expressly provided in the trust document as well as through Sam, Sr.’s intent—her lawsuit was a challenge to the trust provisions.
While the court’s upholding of the clause was surprising, even more shocking was the court’s determination that the forfeiture Betty had brought upon herself—based on the trust instrument wording—would occur “at the time that a person commenced or joined in proceedings to oppose the trust or any provision of the trust.” The court determined that Betty had been using trust provisions she wasn’t entitled to since 2007—when she began challenging the trust through the lawsuit. The impact of this ruling—which Betty is now appealing—would cause Betty to turn over her distributions from the trust (approximately $1.5 million a year) as well as the money spent on the purchase and renovations of her home. According to the Nashua Post, Betty could end up owing her siblings about $17 million.7
While this case opens several issues for trust practitioners to ponder—including the wording of trust instruments as well as the extent of trust managers’ responsibilities—it’s good to learn from Betty’s mistakes.
Stay tuned to Trusts & Estates to see whether Betty’s appeal will be successful or whether her litigation has truly broken the cement that binds the Tamposi family together.8
Endnotes
1. Shelton, Tamposi v. Tamposi, Jr. & Tamposi, 316-2007-EQ-0219 (August 2010).
2. Ibid.
3. Ibid.
4. See National Conference of Commissioners on Uniform State Laws 2002, Comment to Uniform Prudent Investor Act (UPIA), Section 2, Diversification. www.nccusl.org. RSA 564-B:9-903 has the exact language of UPIA, Section 3.
5. John Langbein, Burn the Rembrandt? Trust Law’s Limits on the Settlor’s Power to Direct Investments, 90 B.U. L. Rev. 375, 394 (2010), see also a review of Langbein’s article at www.subscribers.trustsandestates.com/reviews/edward_j_finley_review_feb_2010/.
6. Compare Burtman v. Butman 97 N.H. 254, 259 (1952).
7. See www.nashuatelegraph.com/news/864235-196/a-matter-of-trust.html.
8. The author would like to thank Ginger Matthews at Perspecta Trust in New Hampshire for her assistance and review of this article. She would also like to thank Scott Baker at Perspecta Trust in New Hampshire for bringing this case to her attention.