Probate & Trust Law Section Conference Manual ... - Minnesota CLE

HSBC appealed an order determining that it, as cotrustee of a revocable
trust, was negligent and that it was “liable for all damages occasioned by
its negligence.” The objectant, who was the grantor and beneficiary,
created the trust and served as a cotrustee along with his father and the
bank. Upon the death of the grantor’s father, his uncle was named
cotrustee; however, his uncle renounced his position as trustee. In 2006,
the bank petitioned to resign as trustee and to settle the “intermediate
account.” The objectant raised multiple objections to the accounting. The
Surrogate’s Court concluded that the bank had violated the prudent
investor standard by failing to comply with its internal policies and
procedures with respect to investing in high-risk private ventures. The
court also held that the exclusionary clause provided in the trust agreement
did not absolve the bank of liability. On appeal, however, the court
determined that equity could not permit the objectant, who served as a
cotrustee, to recover damages from the bank arising from any purposed
breaches of their joint administration of the trust.
3. In the Matter of the Judicial Settlement of Knox, 947 N.Y.S.2d 292
(N.Y. App. Div. 2012). (See related case in outline at II. B. 2.) The
trustee violated its fiduciary duty by not diversifying its concentrated
position despite language in the trust agreement authorizing
retention. Grantor, the co-founder of Woolworth Company, established
trust agreement in 1957 for the benefit of his son’s issue and gave the
trustee the power to invest “without regard to diversification….” The trust
agreement also provided that the trustee may advise with counsel and shall
be fully protected from any action. The trial court found that the trustee
should have divested the trust of certain assets, including its holdings in
Woolworth Company. Common law provides that a trustee is bound to
employ such diligence and such prudence as a prudent person would
employ in his or her own affairs. Effective in 1995, the Prudent Investor
Act created a new standard which provides that a trustee shall exercise
reasonable care, skill and caution to make and implement investment and
management decisions as prudent investor would for the entire portfolio.
It is not sufficient that hindsight might suggest that another course of
action would have been more beneficial. Also, it is well-established that
the retention of securities from the grantor may be found to be prudent
even when the purchase of the same might not. In cases of conflict
between governing law and the document, the document controls. In such
cases, in order to warrant a surcharge, the trustee must have acted with
negligence or failure to act prudently. The Court held that the Woolworth
stock should have been divested from the trust once it stopped paying
dividends and its price began to drop. The beneficiaries also contended
that the retention of certain concentrations also violated the trustee’s duty
to diversify. The Court held that the mere fact that a trust might have been
able to earn more money through other investments does not establish a
breach of trust; therefore, the trustee did not commit a breach of fiduciary
duty when holding the overweight positions.
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