Current Issues in Trust and Fiduciary Litigation

Transcription

1 Current Issues in Trust and Fiduciary Litigation David A. Baker Lauren M. Papenhausen Carlyn S. McCaffrey Michael Kendall Peggy A. Quinn June 19, Boston Brussels Chicago Düsseldorf Frankfurt Houston London Los Angeles Miami Milan Munich New York Orange County Rome San Diego Seoul Silicon Valley Washington, D.C. Strategic alliance with MWE China Law Offices (Shanghai) 2013 McDermott Will & Emery LLP. McDermott operates its practice through separate legal entities in each of the countries where it has offices. This communication may be considered attorney advertising. Previous results are not a guarantee of future outcome. The following legal entities are collectively referred to as "McDermott Will & Emery," "McDermott" or "the Firm": McDermott Will & Emery LLP, McDermott Will & Emery/Stanbrook LLP, McDermott Will & Emery Rechtsanwälte Steuerberater LLP, MWE Steuerberatungsgesellschaft mbh, McDermott Will & Emery Studio Legale Associato and McDermott Will & Emery UK LLP. These entities coordinate their activities through service agreements. This communication may be considered advertising under the rules regulating the legal profession.

2 Table of Contents 1) Fiduciary Risk and Litigation David A. Baker, Partner, McDermott Will & Emery 2) Exculpatory Clauses, Proactive Risk Management Accounting to/informing Beneficiaries and Attorney-Client Privilege for Fiduciaries Peggy A. Quinn, Partner, McDermott Will & Emery 3) Bifurcated Fiduciaries and In Terrorem Clauses Michael Kendall, Partner, McDermott Will & Emery 4) Delegation in Investment and Closely-Held Business Management Lauren M. Papenhausen, Partner, McDermott Will & Emery 2

3 Current Issues in Trust and Fiduciary Litigation June 19, 2013 Fiduciary Risk and Litigation David A. Baker Boston Brussels Chicago Düsseldorf Frankfurt Houston London Los Angeles Miami Milan Munich New York Orange County Rome San Diego Seoul Silicon Valley Washington, D.C. Strategic alliance with MWE China Law Offices (Shanghai) 2013 McDermott Will & Emery LLP. McDermott operates its practice through separate legal entities in each of the countries where it has offices. This communication may be considered attorney advertising. Previous results are not a guarantee of future outcome. The following legal entities are collectively referred to as "McDermott Will & Emery," "McDermott" or "the Firm": McDermott Will & Emery LLP, McDermott Will & Emery/Stanbrook LLP, McDermott Will & Emery Rechtsanwälte Steuerberater LLP, MWE Steuerberatungsgesellschaft mbh, McDermott Will & Emery Studio Legale Associato and McDermott Will & Emery UK LLP. These entities coordinate their activities through service agreements. This communication may be considered advertising under the rules regulating the legal profession.

4 Overview Plaintiff s Bar Discovers Fiduciaries Fiduciaries are increasingly the target of litigation New laws favor defense of fiduciary conduct Courts are slow to adapt Defenses often come down to conduct, not results Documenting proper conduct is half the battle Uniform Prudent Investor Act ( UPIA ) and Uniform Trust Code ( UTC ) are pro-fiduciary Investment outcomes and returns are increasingly the focus of fiduciary litigation 4

5 Adoption of Uniform Laws Uniform Trust Code ( UTC ) Adopted by Maine, New Hampshire and Massachusetts Uniform Prudent Investment Act ( UPIA ) Adopted by all New England states Uniform Principal and Income Act Adopted by Connecticut, Maine, Massachusetts and New Hampshire 5

6 Individual Trustee vs. Corporate Trustee Standards of care and conduct are generally the same UPIA is one exception professional fiduciaries held to higher standard under Prudent Investor Rule However, in Massachusetts and elsewhere, the Prudent Investor Rule may be expanded, restricted, eliminated or otherwise altered by the provisions of a trust Trustee with special skills or expertise generally has a duty to use such special skills or expertise Harder for individual trustees to get paid, even though often held to same standard as professional trustees Record keeping burdens difficult for individual trustees unless family office or agent maintains records 6

7 Investments Concentration Virtually all states now have mandatory duty to diversify Diversification is measured by single investment, not classes or types of investments Document can relieve duty But waiver must be express, and most litigation is over extent and validity of waiver (Tamposi) So, concentration is risky no matter what the document says Mazzola case in Massachusetts says if document waives duty, and if there is no reason to fear for the safety of the investment, and if there is no change in circumstances, then there is no obligation to sell trust assets in order to diversify 7

8 Investment Concentrations Concentrations are not legally defined Generally any investment of more than 10% overall trust value Concentration usually means one company, not one type of asset Evolving rules address risk inherent in any investment concentration 8

9 Overriding Duty to Manage Concentrations Even when the Trust Document waives duty to diversify, Trustee has duty to prudently manage risk inherent in concentrations Illinois has leading case (Goddard, 532 NE 2d ) on overriding duty to manage concentration, notwithstanding effective waiver of duty to diversify 9

10 Duty to Manage Concentration Risk Goddard is particularly important for closely held business managers Involves management of such a business for decades by trustee Trust Document clearly anticipated and permitted continued family control over business using trust holding Even acknowledged Grantor s desire to have particular family member remain in control using trust But no direction to retain the stock 10

11 Alternatives to Diversification Sale Hedging strategies Not always available Often a function of sales volume Can be costly Trust document may not allow Waiver But these are fraught with litigation Family Investment Exception 11

12 Family Investment Exception Complicated rule Differs state to state Can t buy your way into it must be inception asset Control not critical but important Can be a public company The Family Bible Conflicts if trustee is employee 12

13 Family Business Exception General Exception to duty to diversify under Prudent Investor Rule Facts and circumstances driven Much Case law debate about what it means Family Bible standard (Restatement Trusts 3 rd ) Unique Relationship to Family or Trust Standard (Hyde, 845 NYS 2d ); (Wood, 828 NE 2d 1072 Ohio 2005) Gets around diversification (immediate sale) but not prudent concentration management obligation 13

14 How Concentrations Impact Closely Held Management Most closely held trust management companies involve concentrations Control may be actual (over legal threshold) or effective (enough to drive market and elect management) Either case likely to be over 10% of market value of trust holding If you are running it you are holding it 14

15 What are the Standards? Closely held vs. Publicly traded Not much attention in case law given this distinction But standards should be different, given risks associated with concentrations and rules designed to deal with them 15

16 Private Holdings Diversification and concentration management are designed to limit uncompensated risk Concept generally applied to concentrations of public stock, where nobody pays you any more because you own a lot Expect a higher return on equity for a private company you control than passive portfolio, so the concept seems misplaced And, cases discuss the difficulty of disposing of private holdings (Hyde; US Trust v. Bohart, 495 A.2d 1034 Conn.1985), where diversification assumes you can dispose of the holdings 16

17 Public Holdings Concentration of Publicly Traded Holdings does implicate Uncompensated Risk No Case law on the argument that a controlling block may give added return that justifies the concentration Instead, Cases focus on relief from Duty to Diversify (Wood) and on overall return and value preservation as evidence of prudence (Knox, 947 NYS 2d ) 17

18 Trip to Court When diversifying anything that looks like a Special Circumstances Asset or Family Business, best to get broad consent or go to Court The factors that make the asset special can justify beneficiaries complaining about a trust disposition And, disposition is usually driven by problems or disagreement among beneficiaries 18

19 Standard for Concentration is Diversified Portfolio, Not Peak Value Damages (as opposed to conduct) will be measured against diversified, trust-grade investment portfolio No state has yet adopted a top of the market approach to diversification damages Prudent to track the indexes to see how the concentration holds up against indexes Nobody does this Measuring dates may be an issue in tracking performance 19

20 Investment Performance Litigation UPIA is a measure of conduct, not performance But you can t stand on conduct when you can t prove there s been any While some states have been inconsistent (Illinois), other states, including New York and California, toss out cases about failure to beat the indexes (Jakobson Trust, KuoChing) 20

21 Un- and Underproductive Investments Trustee often has duty to act with respect to unproductive or underproductive investments (Shear; Rutanen) Depending on circumstances, some exceptions may exist: Where assets are a family business (Shear) Where there is evidence that settlor intended to retain property even though it was or could become unproductive (Mazzola; Rutanen) Other factors courts may consider include whether assets were initially purchased by settlor and whether property constitutes the whole of trust assets 21

22 Documenting Investment Management Conduct Minutes of Trustee Meetings Hiring advisors who review portfolio Collecting beneficiary information required under UPIA Be particularly aware of other trusts and investments held for beneficiary Tax bracket Risk tolerance Make note of performance to indexes Awareness and consideration, not performance, is the key 22

23 Investment Mix Generally, particular investment allocations are not a basis for liability, regardless of the impact on portfolio value As long as the selection process and parameters are prudently decided and managed Over-weighting equities in a market that amplifies loss has been the focus of suits but no significant liability outcomes One Pennsylvania case has expressly rejected the overweighting investment category theory of liability (Scharlach) These are active trusts; outcomes in directed trusts can differ 23

24 Duty of Care Taxes Part of Duty of Care is to know your taxes and pay them timely and correctly Uniform case law that bad accountants or lawyers don t get you off the hook Just give you a claim against the accountant or lawyer GST tax is not well understood or properly administered Should know if trust is grandfathered (irrevocable on or before 10/22/86) If not, or if trust is grandfathered but has mixed inclusion ratio, should get counsel review on any death of any beneficiary or any distribution to anybody not a child or spouse of grantor 24

25 Duty of Care Distributions Terminating trusts generally should be subject to legal review and, if class gift ( Issue per stirpes; Then living descendants ), should resort to court proceeding Beneficiaries hate this Issues on current distributions usually involve amount as opposed to identity of beneficiary Most standards are discretionary and challenge is abuse Improper conduct in setting amount, not second-guessing But self-dealing issues can arise if trustee is current or future beneficiary (Rutanen) With income return rates low, this is increasing source of litigation 25

26 Mandatory Income Trusts Trusts that require current distribution of all accounting income are often mismanaged and the subject of litigation These are often Marital Deduction trusts and older QSST s ( S Corp. holding trusts) The rules for determining the accounting income required to be distributed are complicated Rules often are imprecise or require exercise of discretion Rules setting determination from business entities such as LLCs, Partnerships or S Corps. are complex and poorly understood Some states, such as Massachusetts, provide almost no guidance This issue will appear on an account and subject beneficiary to claim bar 26

27 Transitioning In and Out of Office Taking or leaving office can create liability (Tamposi) Duty to review (and sue over) administration of former trustee Can be relieved by trust document but still requires documentation It is never automatic If the source of authority is not clear, you could be a guarantor of security and investment value No way to win these cases except not to be there 27

28 Adopted Beneficiary Get a lawyer Law keeps changing (Anderson, 2012) Beware adult adoptions (Patricia S.) Beware old documents New rules are actually presumptions that can be overcome Beware Adopted Out rules 28

29 Out-of-Wedlock Beneficiary Get a lawyer In Massachusetts, for instruments executed after 4/16/87, the word issue must be construed to include all biological descendants, absent clear expressions of a contrary intent (Powers) Unconventional conceptions generally not treated as out-ofwedlock for any purpose Lots of litigation in this area It happens more and court culture about it is changing 29

30 Pre-Need Funeral and Perpetual Care Cemetery Trusts Subject to increasing litigation Use of funds issue in care trust Investment management and commingling, taxes issues in pre-need These are statutory or contractual, not common law trusts The distinction can be critical 30

31 Best Practices Recap Adopt administrative process, follow it, document it Hold regular trustee meetings; generate minutes Collect information from and meet regularly with beneficiaries Send out accounts regularly to all beneficiaries you want bound Document account practice and processing Track indexes and review concentrations at least bi-annually Court approval of difficult discretionary matters and accounts when appropriate Seek advice of counsel 31

32 Current Issues in Trust and Fiduciary Litigation June 19, 2013 Exculpatory Clauses, Proactive Risk Management Accounting to/informing Beneficiaries and Attorney Client Privilege for Fiduciaries Peggy A. Quinn Boston Brussels Chicago Düsseldorf Frankfurt Houston London Los Angeles Miami Milan Munich New York Orange County Rome San Diego Seoul Silicon Valley Washington, D.C. Strategic alliance with MWE China Law Offices (Shanghai) 2013 McDermott Will & Emery LLP. McDermott operates its practice through separate legal entities in each of the countries where it has offices. This communication may be considered attorney advertising. Previous results are not a guarantee of future outcome. The following legal entities are collectively referred to as "McDermott Will & Emery," "McDermott" or "the Firm": McDermott Will & Emery LLP, McDermott Will & Emery/Stanbrook LLP, McDermott Will & Emery Rechtsanwälte Steuerberater LLP, MWE Steuerberatungsgesellschaft mbh, McDermott Will & Emery Studio Legale Associato and McDermott Will & Emery UK LLP. These entities coordinate their activities through service agreements. This communication may be considered advertising under the rules regulating the legal profession.

33 Exculpatory Clauses What is an Exculpatory Clause? A term of a trust relieving a trustee of liability for breach of trust. Mass. UTC 1008(a) 33

34 Exculpatory Clauses Some Are Unenforceable under Mass. UTC Type of Conduct Relieved Origin of Exculpatory Clause 34

35 Exculpatory Clauses Type of Conduct Relieved Bad Faith or Reckless Indifference An exculpatory clause relieving trustee of liability for breach of trust committed in bad faith or with reckless indifference to the purposes of the trust or the interests of the beneficiaries is unenforceable. Mass. UTC 1008(a)(1) 35

36 Exculpatory Clauses Origin of Exculpatory Clause Inserted as a Result of Abuse by Trustee An exculpatory clause relieving a trustee of liability for breach of trust is unenforceable to the extent it was inserted as the result of an abuse by the trustee of a fiduciary or confidential relationship with the settlor. Mass. UTC 1008(a)(2) Key elements for unenforceability: Trustee has a fiduciary or confidential relationship with the settlor Exculpatory clause inserted as the result of abuse of that relationship by trustee 36

37 Exculpatory Clauses Situations Requiring Caution Trustee (or related law firm) drafted the exculpatory clause Trustee proposed required or sample exculpatory language for inclusion in the trust instrument Trustee already had a fiduciary or confidential relationship with the settlor when the exculpatory clause was drafted (e.g., attorney, fiduciary of a trust, agent under a power of attorney, etc.) 37

38 Exculpatory Clauses Adequate Disclosure Can Overcome An exculpatory term drafted or caused to be drafted by the trustee may be invalid as an abuse of a fiduciary or confidential relationship, unless the trustee proves that its existence and contents were adequately communicated to the settlor. Mass. UTC 1008(b). Be prepared to prove adequate disclosure Mass. UTC is less rigorous than the UTC, which says that the clause is invalid absent proof of adequate disclosure and proof that the clause is fair under the circumstances. UTC 1008(b) 38

39 Proactive Risk Management Accounting to/informing Beneficiaries Why a Trustee Should Account to/inform Beneficiaries Legal Reasons Because Generally You Must Practical Reasons Because It s Good for You 39

40 Proactive Risk Management Accounting to/informing Beneficiaries Legal Reasons to Account Because Generally You Must Trust instruments often require accounting If silent, state law controls Mass. UTC applies to all trusts created before, on or after its effective date of July 8, 2012, and to all judicial proceedings concerning trusts commenced on or after that date Mass. UTC requires trustee to account A trustee shall send an account to the distributees and permissible distributees of trust income or principal and to other qualified beneficiaries who request it, at least annually and at the termination of the trust. Mass. UTC 813(c) 40

41 Proactive Risk Management Accounting to/informing Beneficiaries Legal Reasons to Inform Because Generally You Must Mass. UTC requires trustee to keep qualified beneficiaries informed In general, on the trustee s own initiative A trustee shall keep the qualified beneficiaries of the trust reasonably informed about the administration of the trust. Mass. UTC 813(a) Upon reasonable request by a qualified beneficiary Unless unreasonable under the circumstances, a trustee shall promptly respond to a qualified beneficiary s request for information related to the administration of the trust. Mass. UTC 813(a) Upon certain events Within 30 days after acceptance of the trust or the trust becomes irrevocable, whichever is later, the trustee shall inform, in writing, the qualified beneficiaries of the trustee s name and address. The information shall be delivered or sent by ordinary first class mail. Mass. UTC 813(b) 41

42 Proactive Risk Management Accounting to/informing Beneficiaries Beneficiary Waiver of Right to Accounts/Information Approach with Caution A beneficiary may waive the right to accounts/information. Mass. UTC 813(d) But, a beneficiary may withdraw a waiver with respect to future accounts/information. Mass. UTC 813(d) And, a beneficiary waiver does not relieve the trustee from potential liability. Mass. UTC 813(d) 42

43 Proactive Risk Management Accounting to/informing Beneficiaries Settlor Waiver of Duties to Account/Inform Approach with Caution Mass. UTC appears to permit settlor to waive duties to account/inform Mass. UTC generally provides default rules that can be overcome by the settlor in the terms of the trust. Mass. UTC 105(a) Mass. UTC 105(b) specifies certain rules that cannot be overcome by the settlor, but the duties to account/inform are not among them Massachusetts specifically did not adopt UTC 105(b)(8) and (9), which would have prevented a settlor from relieving a trustee of certain duties to inform and notify qualified beneficiaries under UTC 813. See Report of the Ad Hoc Massachusetts Uniform Trust Code Committee published February 1, 2011, 105, cmt. 43

44 Proactive Risk Management Accounting to/informing Beneficiaries Settlor Waiver of Duties to Account/Inform Approach with Caution No post-mass. UTC case addressing settlor waiver of duties to account/inform Pre-Mass. UTC cases have required trustees to account even though the trust instrument relieved the trustee of that duty. Briggs v. Crowley, 352 Mass. 194, 224 N.E.2d 417 (Mass. 1967); see also, Ligotti v. Ligotti, 2008 Mass. App. Unpub. LEXIS 111 (Mass. App. Ct. May 13, 2008) But, Mass. UTC 106 provides that the Massachusetts common law of trusts and principles of equity supplement the Mass. UTC, except to the extent modified by it. It s not clear whether Mass UTC 105(a) modifies pre-mass. UTC common law on this point A trustee who acts in reasonable reliance on the terms of the trust instrument shall not be liable for a breach of trust to the extent the breach resulted from the reliance. Mass. UTC

45 Proactive Risk Management Accounting to/informing Beneficiaries Settlor Waiver of Duties to Account/Inform Approach with Caution A Court may seek to apply other Default and Mandatory Rules under Mass. UTC 105(b) to avoid enforcing a settlor s waiver of the duties to account/inform Mass. UTC 105(b) - The terms of a trust shall prevail over any provision of this chapter except: (2): the duty of a trustee to act in good faith and in accordance with the terms and purposes of the trust and the interests of the beneficiaries (3): the requirement that a trust have a purpose that is lawful and not contrary to public policy (10): the power of the court to take such action and exercise such jurisdiction as may be necessary in the interests of justice 45

46 Proactive Risk Management Accounting to/informing Beneficiaries Practical Reasons to Account/Inform Because It s Good for You Can limit the time for recipients to sue trustee Six months from receipt of final account or other statement including full disclosure and showing termination of trust relationship. Mass. UTC 1005 (a) Three years from receipt of final account lacking full disclosure if trustee informs beneficiary of location and availability of records for review. Mass. UTC 1005 (a) Three years from when beneficiary knew or reasonably should have known of claim. Mass. UTC 1005 (b) Limitations period established by settlor under terms of the trust Absent account/information provided to beneficiary, the statute of limitations on claims against the trustee may be open for a long time! Five years from cessation of trusteeship or termination of beneficiary s interest or the trust. Mass. UTC 1005(c) 46

47 Proactive Risk Management Accounting to/informing Beneficiaries Practical Reasons to Account/Inform Because It s Good for You Regular accounting decreases likelihood of under-distributing income for mandatory income trusts Failure to account/inform is a breach of fiduciary duty that can cause the trustee to lose credibility in court Informed beneficiaries are less likely to feel suspicious and alienated; happy beneficiaries are less likely to sue 47

48 Proactive Risk Management Accounting to/informing Beneficiaries What is an Accounting? Check trust instrument Mass. UTC 813(c) provides: The account of trust income and principal may be formal or informal, but shall include information relating to the trust property, liabilities, receipts and disbursements, including the amount of the trustee's compensation, a listing of the trust assets and, if feasible, their respective market values But note that full or adequate disclosure of issues for which the trustee seeks closure is necessary to achieve certain statutes of limitations under Mass. UTC

49 Proactive Risk Management Accounting to/informing Beneficiaries When Should the Trustee Account? Check trust instrument Mass. UTC 813(c) requires accounting at least annually and on termination of the trust 49

50 Proactive Risk Management Accounting to/informing Beneficiaries When Should the Trustee Inform? A trustee shall keep the qualified beneficiaries of the trust reasonably informed about the administration of the trust. Mass. UTC 813(a) Promptly upon qualified beneficiary s request for information related to the administration of the trust (unless unreasonable under the circumstances). Mass. UTC 813(a) Within 30 days after trustee accepts trust or trust becomes irrevocable, whichever is later. Mass. UTC 813(b) 50

51 Proactive Risk Management Accounting to/informing Beneficiaries To Whom Should the Trustee Account/Provide Information? Politically controversial, but more is generally better from a risk management perspective Minimum Required recipients under trust instrument (not always clear) Required account recipients under Mass. UTC 813(c) Distributees or permissible distributees of trust income or principal Any other qualified beneficiary who has sent the trustee a request Required recipients of other information under Mass. UTC 813 (a) and (b) Qualified beneficiaries 51

52 Proactive Risk Management Accounting to/informing Beneficiaries Who are Qualified Beneficiaries? Mass. UTC 103 defines qualified beneficiaries A qualified beneficiary is a beneficiary who, on the date the beneficiary's qualification is determined: (i) is a distributee or permissible distributee of trust income or principal; or (ii) would be a distributee or permissible distributee of trust income or principal if the trust terminated on that date. Mass. UTC

53 Proactive Risk Management Accounting to/informing Beneficiaries Who Are Qualified Beneficiaries? But, Mass. UTC 110 adds others treated as qualified beneficiaries Whenever notice to qualified beneficiaries of a trust is required, the trustee shall also give notice to any other beneficiary who has sent the trustee a request for notice. Mass. UTC 110(a) A charitable organization expressly designated to receive distributions under the terms of a charitable trust if, on the date the charitable organization's qualification is being determined, it (i) is a distributee or permissible distributee of trust income or principal or (ii) would be a distributee or permissible distributee of trust income or principal if the trust terminated on that date. Mass. UTC 110(b) A person appointed to enforce a trust created for the care of an animal or another non-charitable purpose, as provided in Mass. UTC 408 and 409. Mass. UTC 110(c) 53

54 Proactive Risk Management Accounting to/informing Beneficiaries Who Is Not a Qualified Beneficiary? Permissible appointees under a power of appointment, until power is exercised (not before power holder s death, if testamentary). UTC 103, cmt. Intermediate tiers of successive income or principal beneficiaries who would be eligible to receive distributions if the prior income interest terminated but the trust did not terminate. See Report of the Ad Hoc Massachusetts Uniform Trust Code Committee published February 1, cmt. Holders of powers of appointment. See Report of the Ad Hoc Massachusetts Uniform Trust Code Committee published February 1, cmt. Attorney General. See Report of the Ad Hoc Massachusetts Uniform Trust Code Committee published February 1, cmt. Anyone other than the settlor while a trust is revocable by the settlor and the settlor has capacity. Mass. UTC 603(a). A holder of a non-lapsing power of withdrawal is treated as a settlor to the extent of the property subject to the power. Mass. UTC 603(b) 54

55 Proactive Risk Management Accounting to/informing Beneficiaries To Whom Should the Trustee Account/Provide Information? (cont.) Strategic Anyone the trustee wants barred from bringing suit Anyone holding a power to direct the trustee A person who holds a power to direct [the trustee] is presumptively a fiduciary. Mass. UTC 808(c) The holder of a power to direct shall be liable for any loss that results from a breach of a fiduciary duty. Mass. UTC 808(c) 55

56 Proactive Risk Management Accounting to/informing Beneficiaries To Whom Should the Trustee Account/Provide Information? (cont.) Strategic Certain recipients can bar other recipients Recipients derivative takers (e.g., heirs and beneficiaries of the recipient) Representation under Article 3 of the Mass. UTC Mass. UTC 1005(a) indicates that the 6-month and 3-year statutes of limitations for final accounts cannot be triggered by delivery to a competent adult beneficiary s representative under Mass. UTC Article 3 A beneficiary is deemed to have received a final account or statement if, being an adult, it is received by the beneficiary personally. Mass. UTC 1005(a) (emphasis added) The 6-month and 3-year statutes of limitations for final accounts under Mass. UTC 1005(a) can be triggered by delivery to a minor or disabled beneficiary s representative under Mass. UTC Article 3 The 3-year statute of limitations running from when a beneficiary knew or reasonably should have known of a potential claim under Mass. UTC 1005(b) can be triggered by the beneficiary s representativ. 56

57 Proactive Risk Management Accounting to/informing Beneficiaries How to Account to/inform Beneficiaries [I]n a manner reasonably suitable under the circumstances and likely to result in receipt of the notice or document. Mass. UTC 109(a) Permissible methods include first-class mail, personal delivery or delivery to the person s last known place of residence or place of business. Mass. UTC 109(a) Note that Massachusetts did not adopt the portion of UTC 109(a) including a properly directed electronic message. See Report of the Ad Hoc Massachusetts Uniform Trust Code Committee published February 1, , cmt. 57

58 Proactive Risk Management Accounting to/informing Beneficiaries Prove It! Avoiding He Said/She Said Practical Options Obtain beneficiaries written acknowledgement of receipt Use a delivery option that confirms receipt or requires signature Send accounting out under a cover letter and retain an executed copy 58

59 Attorney-Client Privilege for Fiduciaries Massachusetts Attorney-Client Privilege Massachusetts Guide to Evidence 502(b): A client has a privilege to refuse to disclose and to prevent others from disclosing confidential communications made for the purpose of obtaining or providing professional legal services to the client as follows: - (1) between the client or the client's representative and the client's attorney or the attorney s representative, - (2) between the client s attorney and the attorney's representative, - (3) between those involved in a joint defense, - (4) between representatives of the client or between the client and a representative of the client, or - (5) among attorneys and their representatives representing the same client. 59

60 Attorney-Client Privilege for Fiduciaries Majority Rule in Fiduciary Situations A fiduciary/client enjoys the attorney-client privilege to the same extent as a non-fiduciary/client See, e.g. N.Y. C.P.L.R. 4503(a)(2)(A) (personal representative context); Fl. Stat ; Huie v. DeShazo, 922 S.W.2d 920 (Tex. 1996); Wells Fargo Bank, N.A. v. Superior Court of Los Angeles, 22 Cal. 4th 201 (Cal. 2000) Minority Rule in Fiduciary Situations Fiduciary Exception The attorney-client privilege does not apply when the communications and the attorney s engagement or advice relate to matters of administration See, e.g. Riggs National Bank of Washington, D.C. v. Zimmer, 355 A.2d 709 (Del. Ch. 1976) 60

61 Attorney-Client Privilege for Fiduciaries Massachusetts Massachusetts adopted the Uniform Trust Code, with modifications, effective July 8, The Mass. UTC does not address the attorneyclient privilege in fiduciary situations. Uniform Trust Code 813, cmt: The drafters of this Code decided to leave open for further consideration by the courts the extent to which a trustee may claim attorney-client privilege against a beneficiary seeking discovery of attorney-client communications between the trustee and the trustee s attorney. The courts are split because of the important values that are in tension on this question. 61

62 Attorney-Client Privilege for Fiduciaries The Supreme Judicial Court of Massachusetts has held that a trustee s attorney owes a duty of care only to the trustee, not the beneficiaries. Spinner v. Nutt, 631 N.E.2d 542, 547 (Mass. 1994) Supreme Judicial Court case, Symmons v. O Keeffe, 644 N.E.2d 631, 640 (Mass. 1995), held that where the trustee sought legal advice due to his concern over possible conflicts with the beneficiaries, the trustee was the client and he could preclude discovery by the beneficiaries of the legal memoranda in question. In Symmons: Approximately two years before the breach of fiduciary duty litigation commenced, the trustee sought legal advice due to his concern over possible conflicts with the beneficiaries The trustee s attorneys prepared legal memoranda related to the trustee s role as trustee and the possible appointment of co-trustees The beneficiaries sought production of these memoranda in discovery arguing that the trustee should not be able to invoke the attorney-client privilege against the beneficiaries The Court stated that in this matter the trustee was the client and upheld the privilege It is not clear what a Massachusetts court would hold in a situation with different facts 62

63 Attorney-Client Privilege for Fiduciaries Proactive measures Have beneficiaries acknowledge scope of representation and confidentiality of communications with fiduciary Maintain separate matter number, files, and billing for separate substantive matters Pay attorneys fees with the fiduciary s own funds Characterize engagement/advice as related to possible conflicts with the beneficiaries 63

64 Current Issues in Trust and Fiduciary Litigation June 19, 2013 Bifurcated Fiduciaries and In Terrorem Clauses Michael Kendall Boston Brussels Chicago Düsseldorf Frankfurt Houston London Los Angeles Miami Milan Munich New York Orange County Rome San Diego Seoul Silicon Valley Washington, D.C. Strategic alliance with MWE China Law Offices (Shanghai) 2013 McDermott Will & Emery LLP. McDermott operates its practice through separate legal entities in each of the countries where it has offices. This communication may be considered attorney advertising. Previous results are not a guarantee of future outcome. The following legal entities are collectively referred to as "McDermott Will & Emery," "McDermott" or "the Firm": McDermott Will & Emery LLP, McDermott Will & Emery/Stanbrook LLP, McDermott Will & Emery Rechtsanwälte Steuerberater LLP, MWE Steuerberatungsgesellschaft mbh, McDermott Will & Emery Studio Legale Associato and McDermott Will & Emery UK LLP. These entities coordinate their activities through service agreements. This communication may be considered advertising under the rules regulating the legal profession.

65 A Sampler of Current and Upcoming Issues in Trust Litigation Two current issues in trust & fiduciary litigation Division of duties among two or more grantorappointed fiduciaries in multi-participant trusts Enforcement of in terrorem clauses 65

66 Division of Duties Among Grantor- Appointed Fiduciaries Multi-participant trust: divides up trustee s traditional responsibilities among different individuals Examples: Investment advisor (family member, specialist) Distribution advisor Trust protector (amend trust, remove trustee, useful for offshore trusts SJC enforced concept in Jewett v. Brown, 65 N.E.2d 307 (Mass. 1946) 66

67 Division of Duties Among Grantor- Appointed Fiduciaries Alternative to delegation of duties by trustee Where trust structure is bifurcated, trustee is excluded or directed fiduciary UTC Section 208 Section 185 of the Restatement (Second) Puts power in grantor s hands Grantor, rather than trustee, divides traditional trustee duties among individuals/institutions Changes trustee s duty to monitor and limits trustee s joint and several liability 67

68 Division of Duties Among Grantor- Appointed Fiduciaries Few cases interpret overlap of fiduciaries duties and duty, if any, to monitor Statutory codification in many states leaves trustee potentially liable for actions of other individuals appointed by trust instrument Traditional view: Restatement (Second) Section 185 Directed trustee must follow direction unless it will violate terms of trust or violate applicable fiduciary duty Requires directed trustee to exercise oversight All Trustees must exercise reasonable care 68

69 Middle Approach UTC approach: Section 808: Reduces oversight, but still leaves potential liability Directed fiduciary must accept direction unless manifestly contrary to the terms of the trust or Trustee knows... [action is] a serious breach of fiduciary duty by directing fiduciary Still requires oversight 18 states including Massachusetts 69

70 Fiduciary Friendly Approach Fiduciary friendly approach: specific statutes endorsing grantor decision and eliminating liability for excluded/directed fiduciary 20 states, including New Hampshire and Delaware 70

71 Fiduciary Friendly Approach Example of fiduciary-friendly statute: New Hampshire Revised Statutes 564-B:7-711 Directed Trusts If the terms of the trust, an agreement of the qualified beneficiaries, or a court order requires a trustee, trust advisor, or trust protector to follow the direction of a trust advisor or trust protector and the trustee, trust advisor, or trust protector acts in accordance with such direction, then the trustee, trust advisor, or trust protector shall be treated as an excluded fiduciary. 71

72 Division of Duties Among Grantor- Appointed Fiduciaries New Hampshire Revised Statutes 564-B: No Duty to Review Actions of Trustee, Trust Advisor, or Trust Protector. (a) Whenever, pursuant to the terms of a trust an excluded fiduciary is to follow the direction of a trustee, trust advisor, or trust protector with respect to investment decisions, distribution decisions, or other decisions of the nonexcluded fiduciary, then, except to the extent that the terms of the trust provide otherwise, the excluded fiduciary shall have no duty to: (1) monitor the conduct of the trustee, trust advisor, or trust protector; (2) provide advice to the trustee, trust advisor, or trust protector or consult with the trustee, trust advisor, or trust protector; or (3) communicate with or warn or apprise any beneficiary or third party concerning instances in which the excluded fiduciary would or might have exercised the excluded fiduciary's own discretion in a manner different from the manner directed by the trustee, trust advisor, or trust protector. But trustee must keep co-fiduciaries reasonably informed 72

73 Division of Duties Among Grantor- Appointed Fiduciaries Shelton v. Tamposi, 62 A.3d 741 (N.H. 2013): Affirms grantor s intent to create bifurcated trust structure Investment director has complete control over investments Trustee controls distributions Trustee and 1 beneficiary claim trustee could force asset sale to fund distributions above ascertainable standard Upholds and enforces New Hampshire excluded fiduciary law, RSA 564-B:7-711 Affirmed Probate Court decision, which held that the trustee has no authority to direct retention or sale of assets and no duty to review the actions of the investment directors in making investment decisions. 73

74 Division of Duties Among Grantor- Appointed Fiduciaries Significance: New Hampshire upholds grantor s intent, and affirms excluded fiduciary statute which negates a duty to monitor other fiduciary appointed under trust Duemler v. Wilmington Trust Co. (2004) insulates bank/custodian serving as directed trustee from investment advisor s decisions 74

75 Litigation Risk In Shelton, NH statute and trust instrument admirably clear, yet petitioners still filed lawsuit. 14 states have no directed trust statute, and drafter must resolve all issues. In states where statutes are not as developed as in NH, drafter must anticipate and resolve all conflicts: Define and limit duties Specify obligations for oversight and to inform beneficiaries and others Specify mechanism to resolve dispute - - petition court Instrument can override default statute 75

76 In Terrorem Clauses Another source of litigation: application of in terrorem clause Historically common in wills, has become common in trusts Cuts a beneficiary out of the trust for challenging trust structure Generally, clause not applicable if beneficiary brought suit to enforce fiduciary duties, construe trust instrument, or seek advisory opinion on whether a potential lawsuit would violate in terrorem clauses 76

77 In Terrorem Clauses Example from Shelton If any person shall at any time commence or join in the prosecution of any proceedings in any court or tribunal to have this trust set aside or declared invalid or to contest any or all of the provisions included in this trust or to cause or to induce any other person to do so, then and in that event such person shall thereupon forfeit any and all right, title and interest in or to any portion of this trust, and this trust shall be distributed in the same manner as would have occurred had such person died prior to the date of execution of this trust. Nothing contained in this Article, however, shall preclude any beneficiary from enforcing, by litigation or otherwise, the trustee s duties under this or any other trust. 77

78 In Terrorem Clauses 49 of 51 jurisdictions enforce for wills, assume trust same Florida and Indiana will not enforce in terrorem clause 22 states follow UPC 2-517, not enforceable if plaintiff had probable cause Some states mix in good faith, etc. 14 states enforce regardless of probable cause - - New Hampshire 78

79 In Terrorem Clauses Trial court found that lawsuit challenged trust structure: Result: forfeiture, repayment, and attorneys fees Distributions during litigation? 79

80 In Terrorem Clauses Is Shelton decision typical? Many courts reluctant to enforce clauses because they work a forfeiture UTC does not address in terrorem clauses, and many states do not have applicable cases applying in terrorem clauses in trust context 80

81 In Terrorem Clauses In terrorem score card Enforced: Shelton (NH 2012) Tumminello (NY 2009) Tobias (Missouri 2004) Enforceable but not applicable: Calloway (GA 2013) Hamel (Kansas 2013) Di Portanova (Texas 2012) 81

82 Court Appeal Compelling facts in Shelton: 14 year average IRR > 14% Divide evenly to the penny 5 th lawsuit Premature liquidation would have had devastating tax consequences for 32 other beneficiaries Shelton trial judge: Why didn t you petition for instructions? 82

83 In Terrorem Clauses Lessons For drafters: compose carefully so court will have to enforce For plaintiffs: petition for instructions For everyone: It s all about the facts 83

84 Current Issues in Trust and Fiduciary Litigation June 19, 2013 Delegation in Investment and Closely-Held Business Management Lauren M. Papenhausen Boston Brussels Chicago Düsseldorf Frankfurt Houston London Los Angeles Miami Milan Munich New York Orange County Rome San Diego Seoul Silicon Valley Washington, D.C. Strategic alliance with MWE China Law Offices (Shanghai) 2013 McDermott Will & Emery LLP. McDermott operates its practice through separate legal entities in each of the countries where it has offices. This communication may be considered attorney advertising. Previous results are not a guarantee of future outcome. The following legal entities are collectively referred to as "McDermott Will & Emery," "McDermott" or "the Firm": McDermott Will & Emery LLP, McDermott Will & Emery/Stanbrook LLP, McDermott Will & Emery Rechtsanwälte Steuerberater LLP, MWE Steuerberatungsgesellschaft mbh, McDermott Will & Emery Studio Legale Associato and McDermott Will & Emery UK LLP. These entities coordinate their activities through service agreements. This communication may be considered advertising under the rules regulating the legal profession.

85 What is Delegation? The Restatement Position According to the Restatement, delegation is the doing of acts which the trustee can reasonably be required personally to perform The 1959 Restatement generally prohibited delegation of such acts The Restatement characterized three types of conduct as delegation if entrusted to a non-trustee: Exercising discretion regarding distributions Investment management Defending claims and the trust document 85

86 What is Delegation? The Uniform Trust Code The Uniform Trust Code (recently adopted in Massachusetts) allows for delegation to third party agents of any duties and powers of the trustee that a prudent trustee of comparable skills could properly delegate under the circumstances ( if it is prudent to do so ) Unless the trust document says otherwise Consistent with virtually all statutory delegation provisions, the UTC provides that the trustee must exercise reasonable care, skill and caution in: Selecting the agent Establishing the scope and terms of the delegation Periodically reviewing the agent s actions Monitoring the agent s performance and compliance with the terms of the delegation 86

87 What is Delegation? The Uniform Trust Code (cont d) The agent with delegated authority is subject to the fiduciary duties of the delegating trustee and submits to the jurisdiction of the courts of the state where the trust is administered The trustee is not liable for the actions of the agent if delegation complied with the statute Proper delegation can include the management of closelyheld businesses, though the UTC comments suggest such delegation may only be appropriate if an institutional fiduciary lacks capacity to manage the business 87

88 What is Delegation? The Uniform Prudent Investor Act The Uniform Prudent Investor Act (adopted in all New England states) allows delegation of investment and management functions that a prudent trustee of comparable skill could properly delegate under the circumstances Like the UTC, the UPIA requires due diligence in selecting the agent, establishing the scope of the delegation, and monitoring the agent s performance In most states that have adopted the UPIA, there is trustee exoneration for proper delegation under the statute 88

89 What is Delegation? The Uniform Prudent Investor Act (cont d) As with the UTC, the delegatee becomes subject to the jurisdiction of the courts in the situs state and is subject to the same fiduciary obligations as the trustee Delegation of investment management, including management of closelyheld businesses, is more common than delegation of other powers, and there are more variations in both prudent investor legislation and common law on permissibility and scope of delegation in this area The UPIA comments suggest that a material increase in the cost to the beneficiary of adding delegatees to perform these duties might be a breach of trust, making delegation of investment responsibility difficult if not impossible 89

90 What is Delegation? Massachusetts Law The Massachusetts Prudent Investment Act authorizes trustees to delegate investment and management functions if it is prudent to do so The only reported case on this statute, In re Trusts Under the Will of Crabtree, 499 Mass. 128 (2007), found trustees breached fiduciary duties where they abdicated control over the funds See also Millbank v. J.C. Littlefield, Inc., 310 Mass. 95 (1941) ( A trustee cannot delegate the entire administration of the trust to another. ) Delegated ministerial acts and administrative details are deemed to be the acts of the trustee, Kirschbaum v. Wennett, 60 Mass. App. Ct. 807 (Mass. App. Ct. 2004) 90

91 What is Delegation? Written Documents In every jurisdiction, delegation can occur by express terms of a trust instrument Delegation involves a formal transfer of responsibility for a given aspect of trust administration, as opposed to the fiduciary retaining the responsibility but obtaining professional or specialized advice Formal delegation should be accompanied by a formal delegation agreement; otherwise, agents may attempt to escape liability 91

92 Formal Delegation Agreements Delegation, particularly of investment authority and business management, should be accompanied by a formal agreement A formal agreement serves four important purposes: To evidence to all parties existence of formal delegation To provide express acknowledgement by agent of submission to jurisdiction and fiduciary standards and liability To force the discipline of the trustee s due diligence To document the existence of the due diligence and the acknowledgement and consent of the beneficiaries 92

93 Delegation and Acceptance of Investment Authority: Model Language All of the Trustee s rights and powers otherwise conferred on the Trustee regarding the investment of any property of the Trust, except the rights to monitor and terminate said [investment agent] and any other rights or powers reserved to the Trustee in this Agreement Acknowledgment of investment agent s duty to exercise reasonable care, obligation to comply with fiduciary standards of Prudent Investor Act, responsibility to comport with same standards as trustee, and submission to jurisdiction Demonstration of due diligence in selection and monitoring of agent 93