Pennsylvania Trustee Liability for Investments – Important Law if You Own Your Own Company
Saturday, November 12th, 2011Is Being An Executor or Trustee More Dangerous Than You Think?
Yes! Even your own kids might sue you.
By: David M. Frees III JD
In many cases it might be. But, if you own your own business
you might want to pay particular attention to this case.
If you’re a business owner who wants the trustees of a trust to
keep the stock of your legacy then it’s very important to protect them
from liability so that they don’t feel compelled to sell it to
shield themselves from law suits like this one.
However, the exact rules and circumstances should be carefully
reviewed and discussed as part of your estate planning.
A review of the case is useful:
In a recent Pennsylvania case involving executor liability for investments
the Superior Court ruled in Estate of Warden, which can be found at
2010 PA Super 121 (July 9, 2010), the Pennsylvania Superior
court found in favor of trustees who failed to sell a business
predominantly because of specific language in the will to protect them.
The facts are interesting.
Under his will, Mr. Warden established a testamentary trust that was
funded with 110,000 shares of stock in his company, Superior Tube
Company, with a value of $1.5 million at the time of Mr. Warden’s
death in 1951. Superior Tube became SGI.
The trust terms provided that the trustees were not liable for any
actions taken in good faith. Does your will have this clause?
Should it?
Read on and then chat with your lawyer.
Mr. Warden expressed a preference for long-term investment performance
with respect to trust investments, and restricted the sale of the company
unless all trustees consented to the sale at a certain price. And, the trust
continued to hold the stock of the company through mergers and other
stock exchanges and name changes.
In 1987, Mr. Warden’s grandson successfully petitioned the court to be
appointed as successor trustee of the trust, to serve along with
Wachovia Bank, N.A.
No beneficiaries objected to the appointment.
Mr. Warden’s great-grandchildren, who held a 12.5% interest in the
trust income, thereafter filed objections to the trustees’ accountings
and sought to surcharge their father and Wachovia Bank as co-trustees.
The other beneficiaries, apparently satisfied with the investments,
did not file objections.
At the time the beneficiaries filed the suit, the value of the SGI stock
had increased from $1.5 million at Mr. Warden’s death to at least
$189 million.
The beneficiaries filed the suit after attending a family meeting where
they learned of an SGI operating loss of $66 million sustained from
2000 through 2003 that would result in a major reduction in their
dividend payments.
Following a 13-day trial, (imagine the legal fees on this one) the
trial court overruled the objections. They essentially ruled in favor
of the trustees. The beneficiaries appealed- more legal fees.
On appeal, the Pennsylvania Superior Court affirmed the trial court on
the grounds that:
(1) the higher standard of care for a corporate fiduciary does
not apply where the trust instrument explicitly mandates a different
standard of care such as the good faith standard;
(2) because Mr. Warden indicated a good faith standard in the trust
instrument, the trustees only breach their duty if they do not act in
good faith, which means if they intentionally acted with a
dishonest state of mind;
(3) the allegations that Wachovia failed to follow its policies, attend
SGI board meetings, review financial statements, or meet with the
co-trustee did not rise to the level of intentionally
dishonest behavior;
(4) because the trust terms required the consent of all co-trustees to the
sale of SGI stock, and did not provide a mechanism for breaking a tie
between Wachovia and the co-trustee, Wachovia
did not have a duty to compel the co-trustee to sell the SGI stock;
(5) the trustees were authorized by the trust terms to hold assets even
if they did not generate returns;
(6) a trust investment may fluctuate in value in a short-term time
period over the administration of a trust, but a short-term decline in
value is not a loss where the overall long-term performance of the
stock shows an increase in value;
(7) here, the asset increased from $1.5 million to $189 million, and
the beneficiaries’ focus on the alleged $300 million loss in value between
the 1990s and 2003 was inappropriate;
(8) the beneficiaries’ claims were barred by laches (a legal concept
designed to give people a fair time within which to bring their claims or to
be barred) because their grandmother never objected to the trustees’
actions, no other beneficiaries objected to the administration prior to 2004,
the beneficiaries did not demand an accounting until four years after
succeeding to their grandmother’s interest in the trust, and they were
aware of the high concentration of SGI stock 13 years before becoming
beneficiaries and four years after becoming beneficiaries before requesting
an accounting; therefore, the beneficiaries had an affirmative duty to inquire
and bring their claims sooner.
The bottom line?
If you Own a closely held business it might be sold upon your death.
But, if you want it to be held in a trust you’d better consider some
specific provisions to give the trustees guidance and to protect them
if they follow your rules.
For more information about estate planning, succession planning,
and exit planning for the owners of closely held and family owned
businesses, call or email me at 610-933-8069 or at dfrees@utbf.com
Attorney David M. Frees III
Thanks also to the firm of McGuire Woods Fiduciary Advisory Services and Steve
Leimberg for calling this case to our attention and for their savvy analysis.
