Thursday, January 2, 2014

The Missouri Court of Appeals recently issued an opinion in Robert T. McLean Irrevocable Trust v. Ponder,[1] a case involving the question of whether a Trust Protector could be held liable in not exercising the right to remove and replace the Trustees of a special needs Trust.

The Robert T. McLean Irrevocable Trust (the “Trust”) was created with settlement proceeds from Robert McLean’s (“Robert”) personal injury case.  Ponder was appointed “Trust Protector” of the Trust with the right to remove the Trustee and appoint a successor Trustee.  The Trust Protector was also given the right to appoint a successor Trust Protector and to resign as Trust Protector.  The Trust also provided that the “Trust Protector’s authority was conferred in a fiduciary capacity” and that the Trust Protector was not liable for any actions taken “in good faith.”  The Trust did not provide Ponder with any power or duty to supervise the Trustees or direct their activities.

The initial Trustees resigned within the first couple of months and Ponder appointed a successor Trustee, who served as such for two years until 2001, when the successor Trustee resigned.  Ponder then appointed another successor Trustee and resigned as Trust Protector.  Linda McLean, Robert’s mother, (“Linda”) was appointed as successor Trustee a year later when the second Trustee appointed by Ponder also resigned.  From 1999 to 2002, the assets of the Trust substantially decreased in value.  Linda brought suit against all parties who had ever served as Trustee or Trust Protector, including Ponder. The petition alleged that Ponder “breached his fiduciary duties to Robert and acted in ‘bad faith’ ” by failing to monitor the expenditures of the Trustee and by failing to prevent the Trustee from making certain expenditures.  The trial court initially granted Ponder’s motion for summary judgment, which the Missouri Court of Appeals, in a prior reported decision, reversed stating that allegations in the petition remained in controversy and presented genuine issues of material fact.  The case was remanded to the trial court for discovery and trial as to whether Ponder owed any duties as Trust Protector and to whom any such duties were owed.  Just before trial, the trial court issued an order setting out its legal findings concerning Ponder’s duties.  The trial court “deferred to the language of the Trust for direction in determining the duties of the Trust Protector,” and stated that the Trust Protector’s authority “is limited to the power to remove”,  and “under the terms of the trust agreement, the Trust Protector had no obligation to monitor the activities of the Trustee.”  After the Trustee fully presented her case, the trial court granted Ponder’s motion for a directed verdict, which the Trustee appealed.

The Court of Appeals upheld the trial court’s decision, finding that there was no evidence of any loss of Trust value resulting from Ponder’s actions or inactions.  The Court stated that to succeed in a breach of fiduciary duty case, the plaintiff must produce evidence that a fiduciary duty existed, that duty was breached, and damage occurred as a direct result of such breach.  The dialogue between the trial court and the Trust’s counsel set out in the Court’s opinion reflects the trial court’s conclusion in granting the directed verdict that, even though the Trust account statements showed a decrease of $1,000,000 in Trust value, there was absolutely no evidence of any breach of any duty Ponder may have had that directly resulted in that decrease in the Trust assets, or “as to how [the Trust value] was depleted”, or as to what exact expenditures, if any, were inappropriate, the dollar amount of such expenditures and how action by Ponder as Trust Protector to remove the Trustee could have eliminated those expenditures.  Accordingly, the Court agreed with the trial court as to the lack of evidence of any damage due to Ponder’s failure to remove the Trustee and affirmed the trial court’s directed verdict.

Although the Court did not engage in any detailed analysis of the liability or role of Trust Protectors, the Court left standing in silent agreement the trial court’s analysis that the Trust Protector only has the authority given in the trust instrument.  This case is a reminder of the need to take care to be very specific and complete in drafting Trust Protector provisions, addressing the capacity in which the Trust Protector serves and the exact authority intended to be given.  The trust instrument should specifically state that the Trust Protector is not a fiduciary, unless the authority given the Trust Protector’s would fulfill the role normally undertaken by a Trustee.

[1] 2013 WL 5761058 (2013).

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