Welcome to the inaugural issue of the Waller Lansden Financial Services Update. In each issue, we hope to provide helpful insights, practical advice and information on recent developments within the banking and financial services industry. In this issue, we address the issue of fiduciary liability and risk mitigation. Providing timely and complete reports to beneficiaries of fiduciary activities reduces the risk of fiduciary liability and allows fiduciaries in both Tennessee and Alabama to invoke powerful statutory tools in their defense should they be sued.
Fiduciaries: The Importance Of Regular Reporting To Beneficiaries
Fiduciaries - both corporate and individual - often find themselves operating and making difficult decisions in the midst of competing constituencies. For example, as a trustee, a fiduciary must make decisions concerning the administration of a trust while also taking into account the concomitant effect of those decisions on the interests of income beneficiaries and remainder beneficiaries. As an executor or administrator, a fiduciary must make decisions concerning the administration of an estate while balancing the effect of those decisions on the interests of beneficiaries, creditors and applicable taxing authorities.
These situations often set the stage for conflict and litigation against fiduciaries. Although some conflict (and litigation) may be unavoidable, there is a tool that all fiduciaries should keep in mind in order to mitigate their own fiduciary liability: regular, complete and transparent reporting of fiduciary activities and decision-making.
A recent case from the Tennessee Court of Appeals confirms this principle. Wherry v. Union Planters Bank involved the alleged negligent administration of a trust. In 1964, the decedent, Mrs. Archer, established a $1.7 million trust and named herself as sole lifetime beneficiary of the trust with her estate being the residual beneficiary. Union Planters was named the trustee of the trust and was given sole discretion to manage the trust investments.
Mrs. Archer had a fairly affluent lifestyle, which is described by the court as "Tara-like" - an apparent reference to the Tara Plantation, which is the fictional home of Scarlett O'Hara in Gone with the Wind. Her lifestyle was supported, in part, by the regular payments made to her from her trust. The salaries of several domestic employees (cooks, maids, butlers and chauffeurs) also were paid directly from the trust. All told, from 1964 until the decedent's death in 1999, the bank distributed to Mrs. Archer (or other third parties at her instruction) nearly $2.3 million.
From 1964 until her death in 1999, the bank sent Mrs. Archer monthly statements describing the trust activities. When the trust terminated (at her death), it was worth approximately $880,000.
The plaintiffs, co-executors of the decedent's estate, brought a lawsuit against the bank on behalf of the estate for negligent administration of the trust and argued that the bank failed to maximize the rate of return on the trust assets. Discovery ensued. In depositions, the plaintiffs described Mrs. Archer as financially unsophisticated, believing that it was "tacky" for ladies to discuss financial matters.
After completion of discovery, the bank filed a motion to dismiss the lawsuit arguing that Mrs. Archer had ratified the bank's management of trust assets by failing to object to its decision- making over the 35-year life of the trust. The plaintiffs, in response, argued that Mrs. Archer could not have ratified the bank's decision because "she lacked the capability, motivation, or basic interest in involving herself in the handling of the trust." They argued that Mrs. Archer was financially unsophisticated and would not have been able to challenge the bank's management of the trust during her lifetime.
The trial court sided with the bank. On appeal, the Court of Appeals affirmed the trial court's ruling and concentrated its analysis and decision on the doctrine of ratification. Specifically, the court determined that ratification by silence can occur "when a party with knowledge of the transaction fails for a reasonable time to protest" as long as that same party "is informed of the facts necessary to form an opinion." The issue of financial sophistication for the appellate court was simply irrelevant - as long as Mrs. Archer was legally competent, she had the ability to ratify the decision-making of the bank as reported to her on the monthly statements delivered to her "Tara-like" estate. Since she failed to raise any complaint with respect to the decision-making of the fiduciary during her lifetime, her estate also was precluded from making any complaint after her death.
Although not discussed by the appellate court in its decision, the statutory provisions of both the Tennessee Uniform Trust Code (codified in 2004) (TUTC) and the Alabama Uniform Trust Code (codified in 2007) (AUTC) further bolster the reasoning employed by the Wherry court. First, both the TUTC and the AUTC explicitly codified the common law concept of ratification discussed in the Wherry case. According to both the TUTC and the AUTC, a trustee is not liable to a beneficiary for breach of trust if the beneficiary ratified the transaction unless the beneficiary did not know of the beneficiary's rights or of the material facts relating to the breach.
In addition, both the TUTC and the AUTC provide for an accelerated statute of limitations in cases where the fiduciary provides a report of the trust's activities to the beneficiary. For example, in Tennessee, a beneficiary has one year after the date the beneficiary was provided a report to commence a proceeding against a trustee for breach of trust. In Alabama, the accelerated statute of limitations is two years. In either state, however, providing a report of trust activities to a beneficiary significantly accelerates what would otherwise be a very long statute of limitations - failure to report will extend the statute of limitations to as much as three years after the removal, resignation or death of the trustee or termination of the trust.
Complete, transparent and open communication, then, is a key part of any strategy to mitigate potential liability for fiduciaries. Not only does it encourage interaction and discussion between and among fiduciaries, beneficiaries and other constituencies, it also rewards the fiduciary with tools that the fiduciary can employ in its own defense in any future dispute with those same persons. Remember to leave a paper trial - send a complete written report of your fiduciary activities to the beneficiary on a regular basis and keep a copy in your files.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
