The year 2015 provided another bumper crop of decisions in trusts and estates disputes. While the courts generally experienced a nationwide decrease in the filing of civil lawsuits, trust and estate disputes continued to fill court dockets and a few noteworthy trends emerged. The last 12 months brought notable decisions in the areas of: a) jurisdiction, b) removal of a trustee, c) exculpatory clauses and d) undue influence. The new decisions are important guideposts and warning signs for families to consider in their trust and estate planning.
What Court Decides?
In 2015, courts continued to struggle with the issue of what court should decide cases that are brought by estate beneficiaries who assert a panoply of claims against the executor. Non-probate courts continued to affirm their exercise of jurisdiction over claims of executor wrongdoing, including those that are typically the province of probate courts, such as the removal of an executor. In retaining jurisdiction over these cases, the courts continued to develop the parameters of the “probate exception” articulated by the U.S. Supreme Court in Marshall v. Marshall, 547 U.S. 293, 311-12 (2006), which limited the exclusive jurisdiction of probate courts to the probating of a will, the administration of an estate or the disposing of property that is before the probate court.
Queen v. Schmidt, C.A. Nos. 10-2017 and 11-2117, 2015 WL 5175712 (D.D.C. Sept. 3, 2015), illustrates this trend. In Queen, a federal district court retained jurisdiction over a lawsuit brought by trustees and a personal representative, who was terminated by the alleged trust protector and replaced when some of the estate’s real property was sold against her wishes. Rejecting the defendants’ argument that the case belonged in probate court because it was inextricably intertwined with the administration of the decedent’s trust, the court refused to remand the case to the Superior Court, finding that the court had diversity jurisdiction and that the probate exception did not apply.
Similarly, in Geremia v. Geremia, 125 A.3d 549 (Conn. App. Ct. 2015), the Connecticut Court of Appeals held that the trial court erred when it found that only the probate court had jurisdiction over the plaintiffs’ claims of breach of fiduciary duty, tortious interference with reasonable expectation of inheritance, conversion, unjust enrichment and other claims arising out of the defendants’ pre- and post-death handling of the decedent’s assets. Noting that the probate court is a juridical body of limited jurisdiction created by statute, the court held that the trial court should have exercised jurisdiction over the plaintiffs’ claims, which were broader than the probate court’s jurisdiction. See also Potts v Potts, Civ. No. WDQ–13–1986, 2014 WL 4060031 (D. Md. Aug. 13, 2014)(claims for failure to provide a trust accounting, breach of trust, constructive trust, conversion, unjust enrichment and removal as trustees, relating to trust created by testator’s will, properly remained in federal court rather than in state probate court).
Removal of Trustees
In 2015, trustees continued to remain largely impervious to efforts to remove them through court action.
In In re Donald Briks Revocable Lifetime Tr. Agreement, No. A14-0318, 2014 WL 7011200 (Minn. Civ. App. Dec. 15, 2014), review denied (Feb. 25, 2015), the court refused to remove trustees who allegedly favored certain relatives over the plaintiff in making distributions from the trust and in other actions. Finding that the trustees acted in good faith, relied on practices observed by the trust settlor before his death, or could correct past failures, the court declined the request to remove the trustees.
Similarly, in In re Trust Fund Created Under Terms of Last Will and Testament of Baumgart, 868 N.W.2d 568 (S. D. 2015), the court refused to remove a trustee who allegedly committed breach of the trust by leasing land at below market rates to a relative by marriage, delaying in responding to requests for information, missing tax payments, failing to provide full liability insurance for trust property, and suffering from a conflict of interest. Finding that these alleged breaches were not individually or cumulatively serious, the court refused to remove the trustee.
Exculpatory Clauses
On the related question of exculpatory clauses, in 2015, courts found creative ways to hold misbehaving trustees liable for their wrongdoing, notwithstanding the existence of exculpatory provisions that excused all liability but gross negligence or willful misconduct.
For example, In Mennen v. Wilmington Trust, C.A. No. 8432-ML, 2015 WL 1914599 (Del. Ch. Apr. 24, 2015) (adopted by the trial court in, No. 8432, 2015 WL 4935373 (Del. Ch. Aug. 18, 2015), the court found that an exculpatory clause did not apply to the actions of a trustee who, in a failed effort to demonstrate his own investment acumen, reduced the trust corpus from more than $100 million to $25 million over a 20-year period. The trust instrument gave the trustee broad powers to manage the trust’s investments and an exculpatory clause excused all liability except that resulting from willful misconduct. In his lengthy report, the special master carefully reviewed each of the questioned investments made by the trustee and found that his conduct with regard to some, but not all, constituted willful misconduct. In so doing, the special master employed an unconventional definition of willful misconduct—that the trustee had ignored the best interests of the beneficiaries and instead championed companies he had endorsed to prove to his family and associates that he actually possessed some specialized knowledge and ability to identify and advise privately held companies.
In Chang v. Chang, GO48799, 2015 WL 5698025 (Cal. Ct. App. Sept. 29, 2015), the trust settlor appointed her physician son to be the trustee. In a series of actions both before and after his mother’s death, the trustee engaged in a broad range of self-dealing, to the detriment of his brother, who, along with himself, was a beneficiary of the trust. The trial court removed the trustee, citing his “appalling lack of comprehension of [his] fiduciary responsibilities,” and “an appalling lack of recordkeeping,” but expressly declined to make a specific finding of bad faith. On appeal, the trustee sought reversal of the trial court’s judgment that he repay substantial funds to the trust, relying on the exculpatory clause, which excused personal liability for acts undertaken in good faith and rendering the trustee liable only for willful wrongdoing or gross negligence. Plainly believing the trustee’s conduct not to have been undertaken in good faith, but stuck with the record created by the trial court, the court of appeals held that by inference from the trial court’s rulings and statements, the trustee’s conduct was the equivalent of gross negligence.
Going one step further, the court of appeals noted that if there was ambiguity in the trial court’s ruling on gross negligence, it had been incumbent upon the trustee to request an express finding of his good faith from the trial court, and as he failed to do so, the court of appeals was free to apply the “doctrine of implied findings” and conclude that the trustee was grossly negligent.
Undue Influence and Tortious Interference with Expectation of Inheritance
In 2015, disappointed beneficiaries continued to challenge the actions of family members by alleging undue influence and tortious interference with expectation of inheritance — a tort not yet widely recognized.
In Cresto v. Cresto, 358 P.3d 831 (Kan. 2015), the testator’s disinherited children from his two prior marriages brought a claim for declaratory judgment seeking a declaration that the testator’s third wife had exerted undue influence over him that resulted in them receiving nothing under his will, while she and her children from her prior marriage received the entire estate. Under Kansas law, a presumption of undue influence arises if the person who is alleged to have exerted the undue influence was in a confidential and fiduciary relationship with the testator and there were suspicious circumstances surrounding the making of the will. In Cresto, the court recognized a number of suspicious circumstances, including that the lawyer who drafted the will was in a romantic relationship with one of the favored beneficiaries; that the lawyer had given the testator a 75 percent discount on his legal bill for drafting the will; that the lawyer who drafted the will had failed to advise local counsel of the romantic relationship; that the plaintiffs, who had been beneficiaries in prior versions of the testator’s will were abruptly, and without notice, disinherited; and that the will provided that even family heirlooms were not to be kept in the family. On this basis, the Supreme Court of Kansas affirmed the ruling of the trial court (which had been reversed by the Court of Appeals) holding the will to be void.
In contrast, in Hart v. Hart, No. WWMCV 146007918S, 2015 WL 3555366 (Conn. Super. Ct. May 11, 2015), a son who received a smaller share of his mother’s estate than under prior iterations of the will, brought a seven count complaint against his brother for, among other things, “interference with an expectation of inheritance.” The court addressed whether Connecticut recognizes such a cause of action, and canvassed existing Connecticut precedent, the Restatement (Second) of Torts, and the torts hornbook Prosser Keeton on Torts, and concluded that interference with an expected inheritance is a valid cause of action. The court made special note of the difference between undue influence and interference with expected inheritance, stating that undue influence focuses on the mind of the testator and the defendant’s control over the testator, regardless of whether a tort has been committed, while interference with an expected inheritance focuses on the defendant’s expectations and independent tortious conduct, such as fraud, duress, defamation, or abuse of fiduciary duty. While recognizing the cause of action generally, the court found that the plaintiff had failed to plead that the defendant had interfered by tortious means, and accordingly failed to state a claim, requiring dismissal of that count.
CONCLUSION
It may be true that in human relations, there is nothing new under the sun, but the legal precedent regarding trust and estate disputes continues to evolve to deal with these relationships. Our jurisprudence continues to try to find ways to impose regularity, predictability and honesty on the most fundamental arena of our lives—family relationships.
Barbara S. Wahl is a partner at Arent Fox LLP law firm and is a litigator who specializes in fiduciary disputes as well as commercial litigation.
