Court refuses to dismiss claim that trustee was negligent in failing to inform beneficiaries about GST taxes owed on trust distributions, but dismissed claims that trustee had a duty to modify the trust to avoid the taxes.

Under his will, Edward H. Johnson created a marital trust for the benefit of his wife, Bernice. The marital trust assets were divided into a generation-skipping tax (GST) exempt trust and a GST nonexempt trust. At Bernice’s death in 1998, the assets of the marital trusts passed to two charitable remainder trusts, one GST exempt and one GST nonexempt trust. The charitable remainder trusts had eight income beneficiaries and three charitable remainder beneficiaries, Belmont University, the Salvation Army and McKendree Manor. The trust terms provided the income beneficiaries distributions for 10 years and thereafter the trust assets passed outright to the charities. One of the income beneficiaries, Peggy Grow, died before the expiration of the 10-year period and her two children, Floyd Hobbs and Cynthia Bevington, became income beneficiaries of the charitable trusts. Unlike their mother, Floyd and Cynthia were skip persons for GST purposes and the distributions they received from 2004–2008 were subject to the GST tax in the nonexempt trust.

Legg Mason did not realize the distributions were subject to GST tax. Following the termination of the charitable trusts, Legg Mason advised Floyd and Cynthia that the distributions were subject to payment of back taxes and interest as follows: (1) for the distributions to Floyd, taxes of $434,840 and late payment interest of $69,167; and (2) for the distributions to Cynthia, taxes of $434,840 and late payment interest of $69,137. Floyd and Cynthia did not have assets to pay the taxes, so they each obtained a line of credit secured by assets of a separate trust created by their mother (the “Stock Trust”). In order to repay the line of credit, Floyd, as trustee of the Stock Trust, liquidated shares of PepsiCo stock.

On Jan. 21, 2009, Floyd and Cynthia sued Legg Mason, alleging breach of fiduciary duty and negligence and seeking damages. Legg Mason moved for partial summary judgment as to the damages and sought to exclude the testimony of certain witnesses.

After determining that Tennessee law applied under Mississippi choice-of-law principles and based on the governing instrument, the court first addressed what duty Legg Mason owed to Floyd and Cynthia. The court found that Legg Mason had abided by the terms of the trust, rejected the argument that Legg Mason had a duty to seek modification of the trust to minimize GST tax liability under Tennessee law, and granted Legg Mason’s motion for partial summary judgment as to the GST tax liability. Next, the court found that Legg Mason was not liable for losses incurred by the sale of the PepsiCo stock that was sold to discharge the tax liability. The court noted that the argument for stock liquidation loss was predicated on an erroneous assumption that the price per share would be greater at some point in the future when the plaintiffs would hypothetically seek to repurchase the PepsiCo stock. Because the plaintiffs had not shown that the stock liquidation loss was reasonably certain and more than a mere possibility, the court granted Legg Mason’s motion for summary judgment on the issue.

Lastly, the court addressed Floyd and Cynthia’s claims for emotional and punitive damages. The court found that where the plaintiffs had not alleged any fraud, malice or like motives as required under Tennessee law to recover for emotional damages, Legg Mason’s motion for summary judgment was appropriate on the emotional damages claim. With respect to the punitive damages claim, the court found that where the plaintiffs did not allege any intentional, fraudulent or malicious acts, to recover punitive damages, the plaintiffs had to offer evidence that Legg Mason acted recklessly under Tennessee law. The court deferred the decision regarding punitive damages and ordered the parties to present Tennessee law in support of their positions at the trial concerning the liability portion of the plaintiffs’ case. Finally, the court determined that Legg Mason’s motion to exclude expert testimony was moot based on the remaining elements of the plaintiffs’ claims.

The plaintiffs filed a motion for reconsideration. The court granted the motion for reconsideration, finding that the court had erred in assuming that modification of the trust to minimize GST tax liability was the only theory of liability the plaintiffs advanced. The court found that the court’s prior opinion failed to consider the plaintiffs’ argument that Legg Mason was negligent in failing to notify the plaintiffs of issues surrounding the GST tax liability as part of a trustee’s duty to keep trust beneficiaries reasonably informed under Tennessee Code section 35-15-813(a)(1). The court upheld the original determination that Legg Mason had no duty to modify the trust. The court found the previous opinion regarding stock liquidation losses and emotional damages to be sound and denied the motion for reconsideration on these issues.

Next, the court found that Legg Mason’s motions to exclude expert testimony were not moot and determined that the motions required consideration. The court allowed the plaintiffs’ proposed expert testimony as to the duty a trustee owes a beneficiary. The court affirmed its finding that the proposed expert testimony as to damages arising from the sale of the PepsiCo stock should be excluded based on its prior rejection of the plaintiffs’ stock liquidation loss theory.