Recent Cases of Interest to Fiduciaries - January 2012

Giraldin v. Giraldin, 2011 Cal. App. LEXIS 1222 (September 26, 2011).

The California Court of Appeals applied the well-established principle that a trustee of a revocable trust only owes duties to the settlor so long as the settlor is living and competent, and as a result reverses a $5 million surcharge award against the trustee who facilitated the settlor's $4 million dollar investment in the trustee's failed company. The court also reversed the lower court's application of the doctrine of election as a bar to a window's community property claims where she had accepted trust distributions after the settlor's death.

In 2002, Bill Giraldin established a revocable family trust naming one of his sons, Tim, as trustee. The trust provided for the distribution of net income and discretionary principal to Bill during his lifetime, and thereafter for the creation of a trust for the benefit of Bill's wife, with the remainder passing at her death equally to their nine children. Bill reserved the right to revoke or amend the trust in writing. Bill also executed a will leaving his separate property and his share of all community property to his trust, with Tim as executor.

Thereafter, Bill invested $4 million in Tim's company, SafeTzone, through payments to the company from February of 2002 through May of 2003. After the final payment, the company issued stock to Bill that he then transferred to his trust. At the time of Bill's death in 2005, the trust's interest in the company was essentially worthless. Four of Bill's children sued Tim as trustee for breach trust, and Mary petitioned to confirm her community interest in two homes and all of the remaining trust assets. The children objected to Mary's petition arguing that all of the assets were in the trust, and because she accepted trust distributions she could not disavow the trust by claiming a community property interest.

The probate court held that Tim breached his duties as trustee by (1) directing the transfer of trust assets to the company to serve his own interests and (2) failing to preserve trust assets and consider the interests of the remainder beneficiaries when making investments. The court also found that Bill lacked the mental capacity to approve the investment in the company and that the transaction documents signed by Bill did not amount to a direction by Bill to make the investment. The probate court surcharged Tim in the amount of $4,376,044 for the investment in the company and another $625,619 for the other trust disbursements.

The probate court also rejected Mary's petition on the grounds that the doctrine of spousal election applied to the trust, and by accepting benefits from the trust she lost her right to pursue community property rights. Tim and Mary both appealed.

On appeal, the California Court of Appeal of California reversed the surcharge against Tim on the grounds that: (1) Tim only owed duties to Bill during his lifetime and therefore the children lacked standing; (2) remainder beneficiaries have no enforceable property rights in a revocable trust until it becomes irrevocable; (3) the death of the settlor does not grant the remainder beneficiaries retroactive rights; (4) the children could not enforce any duties owed to Bill because the only beneficiary under the will was the family trust and the claims were not for Bill's benefit since Bill authorized the transaction; (5) Bill retained his rights to the trust since he was not adjudicated to be legally incompetent and did not restrict his own rights by making the trust irrevocable, and that included the right to do "financially risky or downright stupid things"; and (6) by acting as trustee, Tim had not agreed to act as a de facto conservator.

The court also reversed the decision dismissing Mary's claims on the grounds that: (1) Bill only transferred his community share of property to the trust; (2) Mary's share was never made subject to the trust; (3) there was no inconsistency between Mary's claim and her acceptance of trust benefits; and (4) the probate court erred by holding Mary was forced to elect between her claim and the trust benefits.

DeWind v. JP Morgan Chase & Co., 2011 U.S. Dist. LEXIS 147715 (December 22, 2011)

The Georgia federal district court refused to hear beneficiary claims against a trustee for breach of duty, improper investments, and federal and state racketeering, even though some beneficiaries resided in Georgia. The court rejected the claims because the claims sounded primarily in tort and were quasi in rem, and the trust corpus was located and managed in Wisconsin and not Georgia.

Trust beneficiaries sued the trustee in a Georgia federal district court seeking an accounting. Before the trustee answered the suit, the beneficiaries amended their complaint to add claims of legal malpractice, breach of fiduciary duty, negligent misrepresentation, negligence, fraudulent misrepresentation, conversion, breach of contract, breach of (1) the Wisconsin Uniform Prudent Investor Act, (2) the California Uniform Management of Institutional Funds Act ("UMIFA"), (3) the California probate code, (4) the Colorado UMIFA, and (5) the Georgia prudent investor rule, and federal and Georgia, Florida, California, and Colorado racketeering.

The trustee filed an accounting action in Wisconsin state court and moved to dismiss the federal complaint for lack of subject matter jurisdiction or personal jurisdiction, and improper service. The trustee argued that the action was quasi in rem and because the trust assets were not physically in Georgia, the Georgia federal court had no power over the res and therefore could not hear the case.

Relying on Princess Lida of Thurn and Taxis v. Thompson, 305 U.S. 456 (1939), the George federal court held that it lacked jurisdiction in the case because: (1) the trust mismanagement claims sounded primarily in tort were quasi in rem; (2) the trust corpus did not reside in Georgia; (3) the trust was managed in Wisconsin; and (4) the only connection to Georgia was the residence of some beneficiaries in Georgia. The court rejected the beneficiaries reliance on Marshall v. Marshall, 547 U.S. 293 (2006) as being...