Robert McLean was left a quadriplegic in an auto accident in 1996. Robert hired attorney Patrick Davis, who referred attorney J. Michael Ponder to represent Robert. Ponder was soon successful in settling the case for a large amount. In 1999, the net settlement proceeds were placed into a Trust to take care of Robert's long-term needs.
The Trust was created for Robert's benefit by his grandmother, and Merrill Lynch Trust Company, FSB and David Potashnick were named as the Trustees.
The Trust also provided for a Trust Protector, and trial attorney Ponder was named as this Trust Protector.
For a background on the concept of the Trust Protector, see my 2012 article "Trust Protectors -- What They Are And Why Probably Every Trust Should Have One" at http://onforb.es/PcwWCm
As defined by the Trust document, Ponder as the Trust Protector had three powers:
(1) The Trust Protector could remove a Trustee;
(2) The Trust Protector could appoint a Successor Trustee; and
(3) The Trust Protector could resign as Trust Protector.
If the drafter of the McLean Trust had stopped there, then this case probably would not have arisen at all. But the drafter added the following as section 5.4 of the Trust document, thus storing up future trouble for Ponder:
5.4 Trust Protector. The "Trust Protector" of such trust shall be [Ponder]. The Trust Protector's authority hereunder is conferred in a fiduciary capacity and shall be so exercised, but the Trust Protector shall not be liable for any action taken in good faith.
Otherwise, the Trust Protector had no power to supervise the Trustees or tell them what to do, which powers and directions were instead in the Trust Document.
It is to be recalled that Attorney Davis originally got the case and referred it to Attorney Ponder, who settled it for Robert. In fact, Davis and his law firm referred a lot of good business to Ponder -- their relationship was far from disinterested or at arm's length.
In 1999, the Original Trustees (Merrill Lynch Trust and Potaschnick) resigned. Exercising his powers as Protector, Ponder then appointed Davis and his law firm as Trustees, along with Daniel Rau.
In 2001, Davis resigned as Trustee. Ponder, against exercising his powers as Protector, appointed Brian Menz to take Davis' place as a Trustee. Simultaneously, Ponder himself resigned as Trust Protector, and appointed Tim Gilmore as the new Trust Protector to take his place.
This same year, 2001, Robert was declared to be incompetent by the local court, and Linda and Paul McLean (Robert's parents) were appointed as Robert's legal guardians.
In 2002, Brian Menz resigned as a Trustee, and Linda McLean was appointed by Gilmore as the replacement Trustee.
By 2004, the Trust was depleted, and so the Trust did what many a Trust does when it runs out of money -- it sued all the previous Trustees as well as Trust (now Ex-)Protector Ponder.
After some initial skirmishing, Ponder filed a Motion to Dismiss. To cut to the end, Ponder's Motion to Dismiss was granted by the trial court, and (all the other defendants having settled) his case twice wound up before the Missouri Court of Appeals, which -- the second time -- issued the lengthy Opinion that I will now discuss because it is interesting as to the duties of a Trust Protector such as Ponder.
The Court of Appeals described the Trust's claims against Ponder as follows:
The petition alleged Ponder had breached his fiduciary duties to Robert and acted in "bad faith" in one or more of the following respects: (1) failed to monitor and report expenditures; (2) failed to stop Trustees when they were acting against the interests of Robert; and (3) placing his loyalty to the Trustees and their interests above those of Robert. The petition also claimed that in the summer of 2000, Robert and his attorney informed Ponder that the Successor Trustees were inappropriately spending Trust funds.
As mentioned, Ponder's Motion to Dismiss was granted. It was also appealed by the Trust to the Court of Appeals in 2009, which in the first appeal [Footnote 1] found that the Trust's Petition stated a viable claim for breach of fiduciary duty and that factual issues prevented summary judgment in Ponder's favor.
Commenting on the legal duties of a Trust Protector, the Court of Appeals held in its 2009 Opinion that:
no recorded Missouri case has ever dealt with the function or duties of a 'Trust Protector.' The term 'trust protector' does appear in the official comment to section 808 of the Uniform Trust Code and states that section 808 "ratif[ies] the use of trust protectors and advisers.... 'Advisers' have long been used for certain trustee functions, such as the power to direct investments or manage a closely-held business. 'Trust protector,' a term largely associated with offshore trust practice, is more recent and usually connotes the grant of greater powers, sometimes including the power to amend or terminate the trust." UNIFORM TRUST CODE Section 808 (2005). Missouri has adopted section 808 of the Uniform Trust Code as section 456.8–808, RSMo Cum.Supp.2006. The statute itself does not use the term 'trust protector' but more generically states, in pertinent part: "A person, other than a beneficiary, who holds a power to direct is presumptively a fiduciary who, as such, is required to act in good faith with regard to the purposes of the trust and the interests of the beneficiaries. The holder of a power to direct is liable for any loss that results from breach of a fiduciary duty."
In this first appeal, the Court of Appeals remanded the case back to the trial court to determine exactly what duties Ponder owed to the Trust and to whom Ponder owed those duties.
On remand, Ponder moved for Summary Judgment, which was denied, and the case was set for trial. After another year of extensive briefing, The Court dismissed all but one claim against Ponder, and the remaining single claim against Ponder was set for trial.
Trial was set for October 26, 2011. As so often happens in litigation, the day before the trial commenced, the trial court entered an Order that excluded the Trust's expert witness, local Kirkwood, Missouri, estate planning attorney Hardy C. Menees, and famous Boston estate planning attorney Alexander A. Bove, Jr., as to certain issues on the ground that their testimony went to questions of law that were the province of the judge to decide -- a common, and often if not usually successful, grounds for courts to exclude such witnesses in cases such as these.
(As an aside, your writer has never met Mr. Menees, but considers Alexander Bove a good friend, and Alexander has also been a mentor to my law partner, Chris Riser, who succeeded as Chair of the American Bar Association's Asset Protection Planning Committee after Alexander's exemplary term.)
After the Trust has put on its case, and even before Ponder had put on his own evidence in defense, Ponder moved the Court for a Directed Verdict (which in English means that the Trust had failed to prove its case so badly that there was no need for him to go forward with his own proof), and the Court granted Ponder's motion.
The Trust appealed -- again, it is this Second Appeal with which we are concerned with here -- and alleged a number of reason why the trial court again got the case wrong. As many of these alleged errors were poorly presented and summarily dealt with by the Court of Appeals, we'll focus here on only the most salient issue.
The Court considered the Trust's claim that Ponder breached his fiduciary duty owed to the Trust, arguing that Ponder was made aware in December, 1999, that the Trustees were inappropriately wasting Trust assets, but Ponder did nothing about it. The proof of this, according to the Trust, was that in 2000 the Trust still had more than $500,000 in assets but as of 2002 only $180,000 remained.
However, the trial court pointed out that the Trust presented no proof of waste, other than one year there was money in the Trust and in a subsequent year the Trust had little in it. Suffice it to say that after a half-decade of litigation with numerous opportunities to investigate what happened to the money, this was nothing like satisfactory proof of a breach of Ponder's fiduciary duties.
While the Trust also put on evidence that 22% of the Trust assets were paid out for various things in the last quarter of 1999 alone, the Trust failed to show that these expenditures were inappropriate. Instead, the Trust argued that the Trust assets should have been preserved and invested so that the Trust principal was more-or-less maintained. This, of course, is just a variation of the Trust's "one day it was there, one day it wasn't" theme, which of course does not prove-up improper expenditures:
Although the Trust's brief lists dollar amounts spent by the Trust on various items, this listing amounts to nothing more than a mere recital of the amount spent with no explanation as to why the purchases were inappropriate and how Ponder's alleged breach caused the inappropriate purchases.
Thus, the Court of Appeals affirmed the trial court's holding that the Trust had failed to prove what damages, if any, were attributable to Ponder's failure to exercise his powers in December, 1999.
Indeed, what seemed to hurt the Trust's case as much as anything was that the Trust claimed that Ponder should have removed the Trustees in December, 1999 -- and then introduced evidence of large questionable expenditures in months and years preceding December, 1999. While those expenditures might have been evidence that Ponder should have been suspicious of the then-Trustees by December, 1999, those pre-December, 1999, items could not of course by any damages for Ponder's failing to act in December, 1999. In other words, even had other trustees been appointed in December, 1999, they could not have magically made up the pre-December, 1999, losses.
ANALYSIS
The now-familiar concept of the Trust Protector is still relatively new within the normal glacial pace of the development of trust law. A Westlaw state-law search of the term "Trust Protector" reveals only 41 reported opinions that even include that term, and all but a small handful do not even deal with what a Trust Protector is, or the character of their duties, but instead just mention the term in passing.
Here, the trial court largely got it right --, the Trust Protector clearly owed fiduciary duties to the Trust under section 5.4 of the Trust Document, but the Trust failed to prove-up damages that resulted from any breach of those fiduciary duties.
But this case illustrates exactly why the Trust Protector should not have fiduciary duties, which is that the Trust Protector should be able to exercise wholly independent discretion to fire Trustees without worrying about whether the Trust Protector will be sued by somebody.
The original office of the Trust Protector was indeed very limited -- the Trust Protector had one power, and one power only, which was to fire the Trustee.
In the asset protection context, the idea was that if a creditor had gotten its hooks into a Trustee, the Trust Protector would then step in and fire that Trustee, a new one would be appointed, and the creditor would have to start over with attacking the new Trustee (if the creditor could even get jurisdiction over the new Trustee, keeping in mind that asset protection trusts in those days were frequently domiciled in offshore debtor havens).
The Trust Protector couldn't even appoint a new Trustee; that was a later invention (and not necessarily a good one). Instead, once the Trust Protector had fired a Trustee, reference was then made to the Successor Trustee provisions of the Trust Document. The idea here was a Trustee should not be susceptible to influence by a creditor, impatient beneficiary, or anybody else to fire a good Trustee and replace that Trustee with a Successor who failed to fulfill the purposes of the Trust.
Having made this expansion of the Trust Protector's office, it was then easy to start adding more and more duties and obligations such that some Trust Protectors are de facto (if not du jure) Co-Trustees who simply bear the nom de plume of Trust Protector.
But this gets us away from the our real goal of a Trust Protector, which is to protect the Trust from corruption, and not to remove the Trust's vertebrae so that it can be easily manipulated by the Settlor or Beneficiaries.
Making the Trust Protector a fiduciary, with all that entails, is a particularly bad idea for the reasons mentioned -- namely, the Trust Protector should be above the Trust and all who deal with it, and should not be susceptible to being sued by anybody.
Having said that, it is the dirty secret of trust planning that Trustees -- including large and highly reputable institutional Trustees -- will sometimes go "off the reservation" and conduct themselves in a manner antithetical to the purposes of the Trust. Whether it is the outright embezzlement of Trust assets, or simply soaking the Trust for Trustee's fees, there are at any given time dozens of cases pending in your local probate court to remove Trustees or clawback Trust assets.
While the Trust Protector has the right to fire such an errant Trustee, it should probably not be the job of the Trust Protector to constantly monitor the Trustee's activities or be responsible for losses. Instead, either the Beneficiaries should be charged with monitoring the Trustee's activities (for their own protection, if nothing else), or an independent Co-Trustee should appointed for that specific purpose. These other parties can then complain to the Trust Protector, who can then investigate and fire the errant Trustee if warranted.
Which is for me to suggest that the best model for a Trust Protector is the original model -- the Trust Protector has but one power, and that one power is to fire the Trustee, nothing more, nothing less.
But if you are going to give the Trust Protector fiduciary duties, then the Trust Document should also very substantially protect the Trust Protector -- much moreso than an ordinary Trustee is protected. The Trust Protector should be given an immediate and absolute right to require that the Trust defend the Trust Protector from any litigation (which substantially deters most frivolous lawsuits since the defense moneys are immediately paid from the Trust), and the Trust should be required to pay for E&O insurance for the benefit of the Trust Protector.
The worst thing that a drafter can do is to give the Trust Protector the bad half of the loaf, i.e., make the Trust Protector a fiduciary, but not protect the Trust Protector as a fiduciary.
That is really the lesson of this case. Here, Ponder had to face litigation, presumably out of his own pocket, from 2005 to 2013 (and perhaps beyond if this goes up to the Missouri Supreme Court), because he was made a fiduciary, but not protected as a fiduciary.
The case also illustrates that if a drafter is going to make the Trust Protector a fiduciary, then the those fiduciary duties need to be clearly and specifically set out -- otherwise, the Trust Protector has the potential to be sued if anything goes wrong with the Trust even if the Trust Protector did not know about it, which is another way of saying that here the Trust Protector was implicitly charged with reviewing every slight thing that went on in the Trust.
Again, these problems are all avoided if we revert to the original, very limited office of the Trust Protector as having the one and only power to fire the Trustee without making the Trust Protector a fiduciary.
Having said that, it probably is acceptable if the Trust Protector has the power to name Successor Trust Protectors so long as they are completely independent from other parties to the Trust, since that additional slight power does not give rise to fiduciary duties by the Trust Protector to the Trust. But even there, the better solution might be to provide for Successor Trust Protectors in the Trust Document, so that the Trust Protector can only resign and nothing more.
It is all too easy for drafters to become "too smart" and thus outwit themselves with elaborate provisions, and contemporary Trust Protector provisions are often examples of the phenomena.
Not only the barebones original office of the Trust Protector, but also the military acronym KISS -- Keep It Simple, Stupid -- are best remembered here.
CITE AS:
Robert T. McLean Irrevocable Trust v. Ponder, 2013 WL 5761058 (Mo.App., Oct. 24, 2013). Full Opinion at http://goo.gl/7ph9u0
Footnote 1. Robert McLean Irrevocable Trust v. Patrick Davis, P.C., 283 S.W.3d 786 (Mo.App.S.D.2009).
This article at http://onforb.es/1abb3rz and http://goo.gl/zkzi2p
