Trustee's Unauthorized Distribution to Father of Minor Beneficiary is a Breach of the Trust Agreement and a Breach of Fiduciary Duty

Posted on November 18, 2008 by Michael Rigney

WOOLARD v. WOOLARD (October 29, 2008)

John F. Woolard established a trust in 1983. His infant son, John C. Woolard, was the sole beneficiary. John F. named his brother Robert as trustee. The Trust Agreement allowed Robert to distribute its assets for the sole benefit of John C. The trust allowed Robert to apply payments directly for John C.’s benefit or, in his sole discretion, directly to John C. , to John C.’s legally appointed guardian, or to a Uniform Gifts to Minors Act custodian. It did not specifically allow direct payments to John F., although it did prohibit loans to him. John F. initially funded the trust with $500. At one point, it contained over $800,000. When John F. died in 2002, the value of the trust was $18,000. Between 1990 and 2001, Robert distributed more than $850,000 directly to John F. Robert kept no record of the purpose of the distributions and never asked John F. for receipts. John C. brought an action against Robert for mismanagement of the trust. The district court granted John C.’s motion for summary judgment. The court found that Robert had breached the express terms of the trust and had violated his statutory and fiduciary duties. Robert appeals.

In their opinion, Judges Bauer, Cudahy, and Williams affirmed. The Court found that Robert’s reliance on certain aspects of the Illinois Trusts and Trustees Act (“Act”) was misplaced. The Act simply provides default rules applicable to a trust that otherwise does not specify the trustee’s rights and duties. John F.s trust did specifically limit the trustee’s powers. Robert’s distributions to John F. were not allowed. In making those distributions, Robert breached the express terms of the trust. The Act requires a trustee to provide an annual accounting to the beneficiaries. The accounting must give the status of the funds, list all receipts and disbursements, and provide the source and purpose of all payments. A trustee’s failure to provide an accounting, observed the Court, is an independent cause of action. The Court rejected Robert’s argument that the monthly brokerage account statements were sufficient to constitute the accounting. The brokerage records did not indicate the purpose of any distribution from the account. Therefore, they cannot constitute an adequate accounting under the Act. Finally, the Court agreed that the record amply supported the finding that Robert breached his fiduciary duty. A trustee has an obligation to manage the trust pursuant to its terms and be as diligent as he would with his own affairs. The Court noted that Robert never even asked John F. for receipts or for an explanation of what he was doing with the money. The Court made a special note of the six months when John C. was seventeen when Robert distributed over $300,000 to John F. The record did not support any semblance of diligence by Robert.

Tags: , , , ,

Suit by Heir on Behalf of Estate is a Suit by a Legal Representative and Subject to Citizenship Treatment of 28 U.S.C. §1332(c)(2)

Posted on October 2, 2008 by Michael Rigney

GUSTAFSON v. ZUMBRUNNEN  (October 1, 2008)

George Skille, a citizen of Wisconsin, left most of his estate to his grandchildren and appointed one of them, Georgia Gustafson, his personal representative. After his death, Gustafson sued Skille’s widow (his second wife) in state court to recover money from a joint bank account for the estate. That suit was settled. Gustafson then brought suit in federal court seeking the balance of the account, attorneys’ fees from the first suit, and punitive damages. The suit named Skille’s lawyer (and the lawyer’s firm) and the bank where Skille and his wife had a joint account. The suit alleged that the lawyer had “tortiously interfered” with the grandchildren’s expectation of inheritance and that the bank had been negligent. The defendants were all citizens of Wisconsin, but none of the grandchildren were. The defendants moved to dismiss for lack of diversity on the ground that a legal representative of an estate is treated as a citizen of the state in which the decedent was a citizen under 28 U.S.C. §1332(c)(2). Gustafson responded by seeking leave to amend her complaint to name each of the eight grandchildren as plaintiffs, but none in a representative capacity. Once she realized that that would result in the individual demands falling below the jurisdictional threshold, she instead filed an amended complaint in which only one grandchild (Susan Gustafson) was named as a plaintiff, suing on behalf of the estate but not as a legal representative. The district court dismissed for lack of federal jurisdiction. Susan Gustafson appeals.

In their opinion, Judges Bauer, Posner, and Wood affirmed. The Court noted that Wisconsin law allows suits for tortious interference in these circumstances. It also allows a person with an interest in an estate to sue on behalf of the estate to recover assets for the estate - but only in the situation in which the personal representative has failed to do so. In that case, the suit would not be a suit by a legal representative and §1332(c)(2) would not apply. Here, although Georgia removed herself from the suit and is “failing” to recover assets that allegedly belong to the estate, she is doing so in collusion with Susan and Susan’s suit is on behalf of the estate. The Court also held that 28 U.S.C. §1332(c)(2) is not limited in its application to one person. Instead, it treats any legal representative of an estate as having the citizenship of the deceased. If it were otherwise, the Court warned, any estate could artificially manufacture or destroy diversity by naming a representative with the correct citizenship – a result counter to the purpose of the statute.

Tags: , ,