Consideration of the court decision and the trust administration issues in the case of Spencer v. Di Cola, 2014 Ill. App. (1st) 121173, 2014 Ill app LEXIS 289 (1st Dist. 5/1/14), rehearing denied, August 18, 2014, modified on denial of rehearing, 2014 Ill. App. (1st) 121585, 16 N.E.3d 1 (August 21, 2014).
Part One: The Lawsuit and the Legalities
Executive Summary:
- It can be hard to remove a sitting trustee. A trustee’s defense of his position is permitted, and not considered “self-serving” even if it goes against the family.
- Drafting pointer: a trust can provide in what situations a sitting trustee may be replaced.
- Court modifications of the trust are best memorialized with word-for-word changes to the trust document.
We’re taking a look at both the legal and practical lessons from a trust relationship that degenerated to the point of court hearing, appeal, and re-appeal.
The background for this lawsuit and appeal is simply this. The adult beneficiaries of the trust had appointed Di Cola as trustee some ten years earlier to fill a vacancy. According to the court, they later became unhappy with her distribution and investment decisions and requested she step down. She refused. They prosecuted a lawsuit claiming the trust gave them the power to remove her. Both the trial and appellate court disagreed.
THE LAWSUIT – the law and document favors the trustee.
Several legal points in the lawsuit are worth considering, as are the larger issues of what went wrong here.
As to the lawsuit, consider these three points. First, the interplay of different types of trustees created in the trust. In interpreting the Trust Agreement in its entirety, the Court drew distinctions between the position and powers of a “sitting” individual trustee, such as Di Cola, and what it meant to be a “successor trustee” under Article VIII (e) of the Trust Agreement.
Based on its interpretation of the Trust Agreement as a whole, the court reasoned that the “sitting” individual trustee has overall control of trust administration, whereas a “successor trustee” under Article VIII (e) (the Substitute Trustee Clause) is a trustee with such powers as the sitting trustee delegates and who is appointed for a limited purpose(s) and a limited duration. (See e.g.,¶23 on page 12: “[R]eading [Article VIII (e)] in its entirety demonstrates that a substitute trustee is one appointed for a specific purpose and a limited duration.”)
Based on the distinctions the Court drew between the “sitting” individual trustee, a term that was not used in the Trust Agreement, and the “successor trustee” under Article VIII (e) of the Trust Agreement, the court ruled that such a substitute trustee could not be a replacement for the trustee herself. The court further noted that Article VIII (a), which dealt with appointment of an individual trustee to fill a vacancy, had been modified in an earlier court proceeding to allow a majority of beneficiaries to appoint an individual trustee where the position was vacant. However, Article VIII(a) did not deal with the issue of replacing a “sitting” individual trustee with a different individual or corporate trustee.
The court further refused to rule that the power to remove the sitting individual trustee should be implied or, as the beneficiaries had argued that, “[f]or the Substitute Trustee Clause to have any real, consequential import to the beneficiaries, the beneficiaries must be able to appoint a substitute trustee as they deem fit.” Id, ¶ 25, p. 12.
- The significance: Better drafting could have helped here, although this may be a gap that’s best appreciated in hindsight. The draftsman could have provided in the Trust Agreement the conditions under which a sitting individual trustee could be replaced. In addition, the Trust Agreement could have more specifically set forth the rights and limitations of the beneficiaries with respect to the appointment and removal of successor trustees under Article VIII (e). Because these rights and limitations were not clearly delineated in the Trust Agreement, the beneficiaries had a colorable argument that a majority of the beneficiaries had the right to appoint a substitute trustee for purposes of their choosing.
Second, the impact of a prior modification of the trust. At paragraph 29 at page 14 of the Opinion, the court held a much earlier judicial modification of the trust to be ambiguous, primarily because that earlier court did not set out the modified provision verbatim. This ambiguity required the present court to restate the modified provision. And, as it happens, this provision addressed vacancies in the trustee role, including whether the role of corporate trustee was permanently or just temporarily being eliminated and whether the “court’s order authorized the appointment of a successor corporate trustee” (emphasis in original). Id, ¶ 31, p.15
- The significance: The early modification of the trust should have been expressly written out. Ambiguity was the result of relying on a general reference instead of writing out the modification word for word at the time of that earlier court action. Because of this lack of clarity, the beneficiaries had a good faith basis to make their argument. The litigation attorney, trust attorney or the trustee could have taken care of this writing around the time of that earlier court hearing.
Third, the court rejected the beneficiaries’ argument that if the trustee takes a position against the beneficiaries that the trust cannot pay for the trustee’s legal fees. The court stated the law as prohibiting a trustee from favoring one beneficiary over the other, which was not the case here.
- Interestingly, the court notes that because her position was authorized by the trust, defending her position as trustee was not “entirely self-serving.”
Part Two: Administration and The Family
Executive Summary:
- The litigation was expensive, and could have been out of proportion to the size of the trust.
- To what extent could the lawsuits have been avoided through:
- The development of a distribution policy statement for the limited funds in the trust?
- Better communication through the down market?
- Mediation as the family became increasingly alienated from the trustee?
We’re taking a look at both the legal and practical lessons from a trust relationship that degenerated to the point of court hearing, appeal, and re-appeal. Part One detailed the facts, legal arguments and the courts’ decisions. Here we will look more closely at what we can learn about trust administration.
Family Considerations:
The court’s comments open the door to consideration of what was going on with this well-litigated trust created for these descendants by their forebear Lyle Spencer, Sr., whose company Science Research Associates was bought out by IBM in 1964.
Given its narrow legal focus, the court’s decision necessarily gives bare attention to the larger human and family issues. Further, the court acknowledges its legal prerogative to state only those facts necessary for it to make a legal decision, which explains the simple background statement we started with in Part One.
Hidden are other facts:
First, the size of the trust. If our math is correct in following the court’s decision, the trust had some $900,000 in assets in 1984. There’s no indication how much was spent or earned in the 24 years to 2008, other than the court acknowledged the trustee’s request for it to take notice that the 2008-9 slump reduced the size of many investments. So, it may be well to consider a 20% loss from that downturn, and perhaps a further reduced amount given the probability of some payouts over those 24 years.
Second, is the identity of the beneficiaries, which included not just Lyle, Jr. but his minor children as well. So this is the trust for a nuclear family, though not including Junior’s current wife.
Third, is the list of facts not stated.
- There’s no indication the trustee adopted any distribution plan or budget.
- There’s also no indication that the trustee adopted any particular system for communications around financials or otherwise.
- There’s no indication of the other financial resources available to Lyle, Jr. and family. Apparently this was not a trust that required the trustee to take such resources into account.
- The cost of the litigation and appeal. The trust likely paid for the fees of the trustee’s defense, and the beneficiaries probably paid their own. The fees together easily totaled to many thousands of dollars, and may have been in deep five figures or more.
- Di Cola died around the time the trial court published its initial decision in May 2014. Di Cola’s death is mentioned by the Court in its modified opinion in August, 2014. Remarkably her death did not stop the court process to remove her as trustee!
Finally, the court did offer a better peek into what prompted the dissatisfaction with the trustee that at least one of the beneficiaries had chosen:
Some years later, Lyle’s current wife (notably, a non-beneficiary) requested funds from Di Cola for daycare and “pre-kindergarten tuition,” which Di Cola denied [based] on the trust’s language and the fact that several beneficiaries were covered by the trust, which required the trustee to be careful about how the funds were distributed over time. Other conflicts developed over claims that the beneficiaries were inadequately informed of the performance of investments. These several disagreements apparently prompted Lyle to file this suit against Di Cola.
(Quote marks and parenthetical are from the court. Brackets are from these authors.)
COMMENTS:
From the above, which is not without the benefits of hindsight, we observe:
Daycare and pre-kindergarten classes do not seem frivolous on their own. In deciding to be careful and not to be pay for those, what instead was the trustee planning on paying for? To what extent was the trustee’s interpretation of the grantor’s vision of distributions shared and communicated with the family?
Keeping the beneficiaries well-informed about the trust’s investments may not be required under the document, but it was unlikely forbidden. More to the point, such communications are reasonably calculated to keep adults more comfortable, if not confident, especially during a rocky financial period.
One can easily imagine possible fact patterns. The wife, already legally a stranger to the trust, becomes disgruntled from the denial of the trust’s payment of her child-rearing expenses. Economic pressure grows accordingly from this out-of-pocket expense, especially during the economic downturn, fueling frustration over the trustee’s denials and apparent silence over how money will be given to the family. The situation deteriorates to their request for the trustee to resign.
Though the court ruled there was no legal basis to remove Di Cola, her death ultimately resulted in a new trustee all the same.
Bottom line: Could this lawsuit have been avoided? Could this trustee and family enjoy a less conflicted relationship?
In hindsight, it’s easier to identify the patterns and problems, though we really don’t know enough to meaningfully weigh-in on this particular family. All the same, in the hopes of thinking we can learn— and avoid the trip to the courthouse the next time, the case is worthy of our study for the evolution of our better practices and better selves.
© 2015 – 2023 Daniel P. Felix, all rights reserved.
