To what legal standard must a trustee adhere when he or she also participates in the control of a family or closely held business? Courts continue to grapple with this question. The high courts in both Georgia and Nebraska have recently provided their own analyses.
The Georgia Decisions: Rollins v. Rollins
We first blogged about an appellate level decision in the Rollins v. Rollins case in November 2013. Since then, the Georgia Supreme Court has provided instruction on the issue and remanded the case to the Georgia Court of Appeals for further consideration.
The Rollins case involves heirs to the fortune amassed by O. Wayne Rollins through Orkin pest control and other ventures. Before Wayne died in 1991, he set up the Rollins Children's Trust (RCT) for his grandchildren. He also set up a subchapter S trust for each of his nine grandchildren. The ten trusts were funded by various family business entities. Wayne's sons, Gary and Randall, shared voting control for each entity. Gary and Randall were also trustees of the RCT, and Gary alone was the trustee of the nine S-trusts.
When the brothers imposed a "monitoring program" on the grandchildren, as a condition of receiving distributions, the legal feud erupted, with the grandchildren bringing claims for breach of trust and breach of fiduciary duties.
The appellate court initially ruled that Gary and Randall's actions related to or taken through the family entities held within the trusts, and under their control, were subject to the heightened trustee-level fiduciary standard, as opposed to the more deferential standards applicable to the conduct of non-trustee business managers.
In reversing the appellate court's holding, the Georgia Supreme Court first cited a passage from a New York Surrogate's Court opinion:
The extent to which a court may interfere with the conduct of corporate affairs by the directors of an estate owned corporation, is a question that does not lend itself to a simple answer.... [T]he problem is one that usually falls "somewhere between the field of the law of corporations and that of the law of estate and trust administration. Its solution will generally be dictated by considerations of policy and the relative rights and interests of estate beneficiaries, creditors of the corporation and other stockholders, as well as the power, authority and opportunities of the executor director."
In re Estate of Schnur, 39 Misc.2d 880, 242 N.Y.S.2d 126, 132 (N.Y.Sur.Ct.1963).
The supreme court explained that the heightened trustee-level fiduciary standard could not be applied to Gary and Randall's actions as corporate managers for two reasons: first, "the cardinal rule in trust law is that the intention of the settlor is to be followed"; and second, because the trusts held only minority interests in the family entities. The court found that the settlor, O. Wayne Rollins, did not intend for the trustees to take actions at the family entity level solely to benefit plaintiffs as S-trust beneficiaries; the trustees' actions also had to account for the interests of the other shareholders, and thus a trustee-level duty could not have been Wayne's intent with respect to Gary and Randall's corporate duties.
The high court also held that where trusts hold only minority interests in the entities at issue, it is best to allow the trustees to act in the interest of all shareholders and to impose only the deferential corporate-level fiduciary standard with respect to the trustee's corporate duties and actions. The court remanded the case to the appellate court to determine whether the trustees' management of the family entities satisfied the more deferential corporate fiduciary standard.
But the supreme court's opinion did not provide guidance as to when an action constitutes a corporate action versus a trust action. And indeed, on remand, the appellate court determined that, in applying the high court's holding, questions of fact remained as to whether Gary and Randall's particular actions were taken in their capacity as corporate manager, partner, or trustee. Lacking the answers to such questions, the appellate court remanded the case to the trial court to make such fact-specific determinations.
The Nebraska Decision: In re Estate of Stuchlik
The Stuchlik matter involved a claim for removal of co-trustees for alleged breaches of fiduciary duty. The high court was faced with the question of whether a probate court had jurisdiction to consider conduct undertaken by the trustees in managing a limited partnership. The probate court had ruled that it lacked jurisdiction to hear evidence concerning the trustees' actions relating to the partnership.
The pertinent facts in Stuchlik were as follows. As part of their estate plan, Edward and Margaret Stuchlik conveyed their farm real estate into a limited partnership. Edward and Margaret were initially the general partners and 100 percent owners. They eventually gifted limited partnership interests of 22.19 percent to each of their three sons – John, Edward II, and Kenneth. The parents each retained a 16.72 percent limited partnership interest and a one percent general partnership interest.
When Edward died, all of his assets, including his limited partnership interest, were transferred to the family trust. Margaret and Kenneth were named co-trustees. The trust provided that all income and assets were to support Margaret during her lifetime. Upon her death, the assets were to be distributed according to certain provisions, the most salient being that the real estate held by the limited partnership would be distributed among the sons, each receiving specified parcels. John was to receive the parcel known as the "home place," where he and his family had lived for the better part of 20 years.
But upon Edward's death, the partnership allegedly entered into below-market leases with John's siblings, thus reducing the value of the trust. Margaret also entered the home place with Kenneth and Edward without John's consent, changed the locks, and informed John that the home would be demolished. John brought suit in the probate court to remove Margaret and Kenneth as co-trustees of the family trust. The probate court concluded that it could not remove the trustees based on their conduct pertaining to the partnership because it lacked jurisdiction over any partnership matters.
But the high court recognized that 16.72 percent of the partnership, including a 1 percent general partnership interest, was held by the family trust. The court held that co-trustees' actions with respect to the partnership were therefore relevant to their fitness as trustees and the question of whether they breached their fiduciary duties to John as a beneficiary.
In support of its holding, the court repeatedly cited Neb. Rev. Stat. § 30–3867(f), which states that:
In voting shares of stock or in exercising powers of control over similar interests in other forms of enterprise, the trustee shall act in the best interests of the beneficiaries. If the trust is the sole owner of a corporation or other form of enterprise, the trustee shall elect or appoint directors or other managers who will manage the corporation or enterprise in the best interests of the beneficiaries.
Id. (emphasis in original). Citing this same statute, the court further instructed that "when an entity is held by a trust, and particularly where a controlling share of that entity is exercised against the best interests of any trust beneficiary, it is a breach of the duty of loyalty." Thus, the Nebraska Supreme Court seemed to impose a higher standard upon trustee-managers than did the Georgia high court.
Ultimately, the Stuchlik court held that it was possible that Margaret and Kenneth managed the partnership so as to treat John's interest in the trust unfairly, and that the probate court did indeed have jurisdiction to hear evidence of such allegations on remand. The court also emphasized that trustees have a duty to act impartially and without personal favoritism or animosity, implying that such could have been at play with respect to Margaret and Kenneth's partnership decisions.
The court did caution that any evidence regarding the partnership must pertain to possible breaches of Margaret's and Kenneth's fiduciary duties in their capacities as co-trustees – not in their capacities as partners. However, it is unclear whether the court provided this instruction solely with respect to the jurisdictional issue faced by the probate court on remand, or with respect to the appropriate fiduciary standard to apply to the trustees' actions, or both.