THE AMERICAN LAW INSTITUTE Continuing Legal Education. Representing Estate and Trust Beneficiaries and Fiduciaries July 24-25, 2014 Chicago, Illinois

Transcription

1 43 THE AMERICAN LAW INSTITUTE Continuing Legal Education Representing Estate and Trust Beneficiaries and Fiduciaries July 4-5, 014 Chicago, Illinois Releases and Their Challenges: A Panel Discussion of the Benefits, Limitations and Litigation of Trustee Releases By Charles W. Pieterse Whitman Breed Abbott & Morgan LLC Greenwich, Connecticut Elizabeth E.W. Weinewuth Vorys, Sater, Seymour and Pease LLP Cincinnati, Ohio

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3 45 RELEASES AND THEIR CHALLENGES: A PANEL DISCUSSION OF THE BENEFITS, LIMITATIONS AND LITIGATION OF TRUSTEE RELEASES MODERATOR: Prof. Robert Whitman, Esq. 1 PANELISTS: Charles W. Pieterse, Esq. Elizabeth E. W. Weinewuth, Esq. 3 INTRODUCTION Every day trustees seek releases from the beneficiaries of the trusts they administer. These transactions, closely scrutinized by courts, are fraught with difficulty because trustees and beneficiaries are bound together in a unique relationship that is not simply governed by the rules of contract. As renowned jurist Benjamin N. Cardozo so eloquently stated almost a century ago: Many forms of conduct permissible in a workaday world for those acting at arm s length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior. Meinhard v. Salmon, 49 N.Y. 458 (198). What special challenges are created, then, by the application of the punctilio of an honor the most sensitive to a trustee s request for a release? Or stated otherwise, how does the trustee s duty of loyalty to the beneficiary impact the negotiation, terms and enforceability of a release? This is the subject of our panel discussion a subject well framed by the 01 decision of the Court of Appeals of Maryland in the case of Hastings v. PNC Bank, 49 Md. 5, 54 A.3d 714 (Md. 01). Hastings v. PNC Bank, 49 Md. 5, 54 A.3d 714 (Md. 01). In 01, Maryland s highest court considered a beneficiaries challenge to a corporate trustee s request for a Waiver, Receipt, Release and Indemnification ( RRI ) in connection 1 Professor of Law, University of Connecticut Law School, Hartford, Connecticut. Whitman Breed Abbott & Morgan LLC, Greenwich, Connecticut. Mr. Pieterse gratefully acknowledges the assistance of Thomas P. O Connor, Esq. in the preparation of these materials. 3 Vorys Legal Counsel, Cincinnati, Ohio. Ms. Weinewuth gratefully acknowledges the assistance of Megan Westenberg, Esq. and Daniel Jacobs, Washington and Lee School of Law Class of 015, for their research assistance.

4 46 with the termination of a trust and the distribution of its assets. The beneficiaries claimed that the trustee demanded unanimous execution of the release and indemnity clause as a condition precedent to any distribution and such a demand violates the Maryland law of trusts by turning it on its head. *1-. In other words, the beneficiaries claimed not that the release itself was unenforceable (they never signed it) but that the request itself was a breach of the trustee s fiduciary duty. The trustee responded that Maryland law permitted it to seek court approval of an accounting of its service at the expense of the trust and that it was no breach of its fiduciary duty to request a release in lieu of that more costly approach. The court held that PNC was legally entitled to some measure of protection and indemnity: With or without the consent of the [beneficiaries], PNC was free under Rule to begin judicial proceedings to audit and terminate the Trust. Those proceedings eventually would have resulted in a court order that would have barred, as res judicata, all matters disputed and open to dispute in settling the Trust account. *9. The court ruled that the trustee s request for consent to a certain course of action (i.e. to proceed by agreement rather than by judicial accounting) did not violate its duty of loyalty to the beneficiaries and that the specific terms of the RRI were not so one-sided as to impermissibly place its interests above the beneficiaries. 4 This 4-3 decision included a strong dissent, which characterized the majority s opinion as a sharp departure from Maryland s practice and principal of holding trustees to the strictest account. *40. It warned that this decision would encourage more widespread use of unlawful releases and questioned whether the beneficiaries were in a position to give valid, informed consent to use of such unlawful releases. Id. The dissent also questioned whether PNC had requested the release or demanded it and used its refusal to provide distributions as leverage. 5 The dissenting justices argued that the requested release was impermissibly broad stating the majority condones PNC s self-initiated upgrade in protection, at the risk and the expense of the beneficiaries. *4. It accused the majority of whitewashing the indemnification clause, which it noted was far broader than any courtapproved account would provide to the trustee. The dissenting justices were also troubled by the tone of the request to the beneficiaries: PNC s demanding tone demonstrates that PNC failed to give the beneficiaries full and complete information or explain that they were free to reject the agreement s sweeping provisions and go to court. They stated: We should not condone the practice of a bank s asking beneficiaries to provide the bank insurance against the bank s own blunders. 4 The court did note that the release if it had been signed would not protect the trustee from liability arising from fraud, material mistake, or irregularity by the trustee. 5 PNC did make sizable distributions to the beneficiaries just before the lawsuit was filed, maintaining roughly half of the trust assets pending approval of a final accounting or execution of the RRI.

5 47 PANEL DISCUSSION OUTLINE A. What are the fiduciary duties that are implicated by a Trustee s request that a beneficiary sign a release? 1. Duty of loyalty. Duty of candor (including duty to disclose relevant information) B. Statutory and secondary authority governing releases: 6 1. UTC 1009 Beneficiary s Consent / Release / Ratification. UTC 817(c) Release Upon Termination of Trust 3. Restatement (Second) of Trusts Restatement (Third) of Trusts 97 C. Specific situations where Trustees typically seek releases: 1. Interim distributions. Upon termination of a Trust 3. Upon a change of Trustee 4. Upon settlement of a claim D. How broad may/should the release be? E. Is it permissible for a Trustee to request indemnification from a beneficiary? 1. Breadth of the indemnity. Trustee s common law right to indemnification 3. Refunding agreements 6 These authorities are reproduced in Appendix B. A survey of state statutes containing analogous provisions is contained in Appendix C. 3