1

The Honorable Lawrence L. Piersol, United States District Judge for the

District of South Dakota, sitting by designation.

United States Court of Appeals

FOR THE EIGHTH CIRCUIT

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No. 07-3543

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Jane Nelson; Bruce Nelson; U.S. Bank *

National Association, ND, *

*

Appellants, *

* Appeal from the United States

v. * District Court for the 

* District of North Dakota. 

First National Bank and Trust Company *

of Williston, *

*

Appellee. * 

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Submitted: June 12, 2008

Filed: October 1, 2008

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Before LOKEN, Chief Judge, COLLOTON, Circuit Judge, and PIERSOL,1

 District

Judge.

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COLLOTON, Circuit Judge.

The beneficiaries of the Leonard Nelson Trust, Jane Nelson and Bruce Nelson,

as well as the trustee, U.S. Bank National Association, N.D. (US Bank), appeal an

adverse grant of summary judgment on their North Dakota breach of fiduciary duty
2

The Honorable Daniel L. Hovland, Chief Judge, United States District Court

for the District of North Dakota.

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claim against the trust’s former trustee, First National Bank and Trust Company of

Williston (First National). We affirm the judgment of the district court.2

I.

Leonard Nelson established the Leonard Nelson Trust in 1998, naming First

National as trustee. The trust was designed, among other things, to pay the taxes due

on his estate, and to provide income to Leonard’s children, the plaintiffs, Jane and

Bruce Nelson. The trust contained 597,164 shares of Medtronic stock. The trust also

contained most of the interest in two limited partnerships, which in turn held 700,000

more shares of Medtronic stock, but the Medtronic stock held directly constituted 90

percent of the trust’s marketable assets – i.e., the assets available for paying the estate

tax.

The trust contains a provision, paragraph 17(b), stating that “any investment

made or retained by the trustee in good faith shall be proper despite any resulting risk

or lack of diversification or marketability and although not of a kind considered by

law suitable for trust investments.” (Appellant App. 269). Leonard also signed an

investment authorization stating that Medtronic was a proper investment and directing

the trust to retain it. Leonard died on June 5, 2006. At that time, First National

estimated that the estate taxes, due in nine months, would total $20 to $30 million.

On October 4, the Nelsons, pursuant to paragraph 25 of the Trust, removed First

National as trustee, and directed First National to act promptly to transfer the trust

assets to the successor trustee, US Bank. On October 26, First National wrote the

Nelsons requesting “to continue to manage the Trust assets.” On October 30, the

Nelsons’ lawyer wrote First National, notifying it that the Nelsons rejected its request,
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and instructing it to transfer the records and assets to US Bank. On November 8, First

National offered to sell the stock itself, but the Nelsons refused. On November 16,

First National completed the transfer of stock to US Bank. The next day, US Bank

sold all of the stock at one time, for $48.1375 per share, a price that reflects

commission and volume discounts. The closing price on November 17 was $48.71

per share.

The Nelsons and US Bank brought this diversity action in federal court. They

alleged that First National breached its fiduciary duties of care and prudence, which

they say dictated that First National liquidate the Medtronic stock within two weeks

of Leonard Nelson’s death on June 5, 2006. They argued that this immediate

liquidation was necessary to reduce their exposure to market risk, and to preserve the

assets of the trust to pay the estate tax that would be due in nine months. They argued

that they were damaged by this breach of duty, because in the two weeks after

Leonard’s death, the closing price of Medtronic stock fluctuated between $49.66 and

$51.83 per share, which is higher than the $48.71 per share closing price on November

17, the date on which US Bank sold all of the stock. 

Applying North Dakota law, the district court granted summary judgment for

First National. The court reasoned that First National had acted in reasonable reliance

on the express and implied terms of the trust, which provided for retention of the

Medtronic stock despite any resulting lack of diversification.

II.

This case is governed by North Dakota law in effect in 2006, which provided

that a trustee must comply with the State’s “prudent investor rule.” N.D.C.C. § 59-02-

08.1 (2006). This rule, in turn, dictates that the trustee must “exercise reasonable care,

skill, and caution.” § 59-02-08.2. The plaintiffs rely on testimony from their expert,

Ann Wernz, that a prudent trustee should “raise cash as soon as possible after the
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Appellants also argue that the district court erred by refusing to consider

Wernz’s affidavit, but the district court did say that it “considered” this affidavit

before ruling that it did not “create a genuine issue of material fact.”

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death of a grantor of a Revocable Trust” to pay taxes and reduce market risk, and that

given the composition of the trust, and the taxes coming due, First National should

have liquidated its Medtronic stock within two weeks of Leonard Nelson’s death.3

Based on this evidence concerning reasonable care expected of a trustee, the plaintiffs

contend that there is a genuine issue for trial concerning First National’s liability. 

The prudent investor rule in North Dakota, however, is a default rule that “may

be expanded, restricted, eliminated, or otherwise altered by the provisions of a trust.”

 § 59-02-08.1. The statute specifically provides that “[a] trustee is not liable to a

beneficiary to the extent that the trustee acted in reasonable reliance on the provisions

of the trust.” Id. First National contends that it acted in reasonable reliance on a

provision of the Nelson trust, namely, Paragraph 17(b). As noted, this paragraph

establishes that “any investment made or retained by the trustee in good faith shall be

proper despite any resulting risk or lack of diversification or marketability and

although not of a kind considered by law suitable for trust investments.” (Appellant

App. 269) (emphasis added).

The plaintiffs argue that this provision did not limit First National’s duties to

the duty of good faith. They assert that Paragraph 17(b) is merely a permissive clause

that permits otherwise unsuitable trust investments, and thus does not affect the

trustee’s fiduciary duties. See Restatement (Third) of Trusts § 91 cmt. f (2007)

(“[T]hat an investment is permitted does not relieve the trustee of the fundamental

duty to act with prudence.”); Donato v. BankBoston, N.A., 110 F. Supp. 2d 42, 49

(D.R.I. 2000). But the plain language of Paragraph 17(b) contradicts this assertion.

It states in material part that “any investment made or retained by the trustee in good

faith shall be proper.” (emphasis added). The trust thus limits First National’s

potential liability in investing and retaining trust investments to instances of bad faith,
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as well as acts that violate the irreducible minimum prohibitions on intentional or

reckless breaches of trust. See Perling v. Citizens and S. Nat. Bank, 300 S.E.2d 649,

651-53 (Ga. 1983) (construing a trust which dictated that “any investment retained by

the Trustee in good faith shall be proper, although of a kind or in an amount or

proportion not authorized by law as suitable for the Trustee”); Restatement § 87 cmt. d

(“Even under the broadest grant of fiduciary discretion, . . . courts will intervene to

prevent trustees from acting in “bad faith, or without regard to the terms and purposes

of the trust or the interests of its beneficiaries, or for some purpose or motive other

than the accomplishment of the purposes of the discretionary power,” and “may also

be called upon to prevent the trustee from failing to act, whether capriciously,

arbitrarily, or from a misunderstanding of the trustee’s powers or duties”). This

limitation is proper under N.D.C.C. § 59-02-08.1.

The most enlightening discussion of “bad faith” in North Dakota law is found

in In re LePage’s Trust, 269 N.W. 53 (N.D. 1936), which suggests that a trustee

granted wide discretion must nonetheless be subject to judicial scrutiny to ensure that

it acts “fairly and honestly,” and “without fraud or collusion.” Id. at 58. A trustee

who exercises its discretion “from any fraudulent, selfish, or improper purposes,” or

refuses to act for those reasons, is likely to be found in bad faith. See 2 Jairus Ware

Perry, A Treatise on the Law of Trusts and Trustees § 511 (7th ed. 1929) (“Perry on

Trusts”) (cited in LaPage’s Trust, 269 N.W. at 58); Trout v. Pratt, 56 S.E. 165, 169

(Va. 1907) (cited in LaPage’s Trust, 269 N.W. at 58).

Plaintiffs contend that even if First National’s liability is limited to acts

committed in bad faith, it still may be liable for negligence. They cite In re

Trusteeship of Williams, 591 N.W.2d 743, 748 (Minn. Ct. App. 1999), for the

proposition that a negligent act cannot be made in good faith. We disagree that

Williams stands for this proposition. The trust document in Williams relieved the

trustee of liability for good faith “mistakes or errors of judgment,” and under

Minnesota law “errors of judgment” are distinct from negligent acts. Id. at 746-48.
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Accordingly, the Minnesota court concluded that the trust document shielded the

trustee from liability only for errors of judgment made in good faith, not for

negligence committed in good faith. Id. at 748. In contrast, Paragraph 17(b) does not

limit its shield to errors of judgment; it shields “any investment made or retained by

the trustee in good faith.” Thus, the trust protects First National from liability for

ordinary negligence in investment decisions. See Perling, 300 S.E.2d at 653; cf.

Nesvig v. Nesvig, 676 N.W.2d 73, 80-82 (N.D. 2004) (holding that jury instruction on

good faith defense was improper because limiting defendant’s duty to that of good

faith immunized defendant from claims for negligence). 

In the alternative, plaintiffs argue that there is a genuine issue of fact concerning

whether First National acted in good faith. First, they contend that First National’s

actions after it was removed as trustee demonstrate that it acted in bad faith. They

point to evidence that even after repeated requests to transfer the stock to the new

trustee, and a letter informing First National that any requests to remain trustee would

be unwelcome, First National still did not transfer the stock until asking the Nelsons

to reconsider their decision to change trustees. They also suggest that First National

demonstrated bad faith by retaining $180,000 of the trust’s funds for two months after

it finally transferred the Medtronic stock to US Bank.

This evidence does not create a genuine issue of fact about whether First

National acted in bad faith in the two weeks following Leonard’s death. The cited

evidence pertains to actions by First National at later periods of time. The plaintiffs

conceded at oral argument that they have not advanced a claim based on actions that

occurred after First National was removed as trustee; they do not allege damage based

on First National’s delay in transferring the stock or its retention of the $180,000.

Evidence that First National may have acted in bad faith at another time, in different

circumstances, is not sufficient to create a submissible case as to whether its retention

of the Medtronic stock immediately after Leonard’s death was an act taken in bad

faith.
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Second, the plaintiffs argue that First National acted in bad faith because it did

not even consider selling the Medtronic stock immediately after Leonard Nelson’s

death. Plaintiffs argue that such a failure to act is inconsistent with good faith. We

disagree. A failure to act, like an act, may be in good faith or bad faith, just as it may

be negligent or prudent. There is no evidence that First National proceeded

dishonestly or with corrupt or selfish motives in respect to this particular inaction. See

Perry on Trusts § 511. In the two weeks after Leonard’s death, First National trust

officer Lavina Domagala reviewed the trust document, talked to Leonard’s attorney

to determine the meaning of the trust, spoke with an accountant, and set up a meeting

with the Nelsons. The Nelsons urge that these actions were insufficient to meet what

they assert is the normal standard of care for a trustee after the death of a settlor, but

the standard articulated by the Nelsons’ expert is not the standard that governed under

Paragraph 17(b) of the trust. Whether or not a trustee acting without the additional

protections of this trust would have been obliged to consider immediate liquidation

of the Medtronic stock after Leonard’s death, the plaintiffs have not produced

evidence that First National’s failure to contemplate that step was the result of

dishonesty, improper motive, or other bad faith.

Nor have the plaintiffs provided any evidence that First National’s reliance on

Paragraph 17(b) was unreasonable or in bad faith. Paragraph 17(b) is an integral part

of the trust, because it allowed First National to follow Leonard Nelson’s explicit

directive, contained in his investment authorization, that it retain his Medtronic stock

despite the consequent risk and lack of diversification. This directive was consistent

with his repeated indications that he felt that Medtronic stock was the best investment

for the trust. The plaintiffs argue that upon Leonard Nelson’s death, First National’s

preexisting duty immediately shifted to its polar opposite: whereas during Leonard’s

life, the bank was directed to retain all of the Medtronic stock, in the first days after

his death, it was required to liquidate all of it. They argue that when the trust became

irrevocable, the investment authorization became irrelevant, because the express terms
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of the trust called for the trust to pay the estate taxes, which would eventually require

selling the Medtronic stock. 

The trust instrument, however, gave no direction that the Medtronic stock

should be liquidated after Leonard’s death, and it placed no temporal limitation on

paragraph 17(b), which excused the trustee from liability for risk resulting from lack

of diversification or marketability. It was not unreasonable for the trustee, giving

weight to Leonard’s investment authorization, to retain the Medtronic stock so long

as it did not interfere with the trustee’s ability to meet its tax obligation. Just as the

trustee was authorized by Paragraph 17(b) to depart from the ordinary standard of

reasonable care for a prudent investor by failing to diversify holdings during

Leonard’s lifetime, it was authorized by Paragraph 17(b) to deviate from the standard

that the plaintiffs’ expert identifies as reasonable care for the period immediately after

Leonard’s death.

The nub of this dispute is not really about whether First National acted in a

manner that was adequate to pay the estate taxes. It is undisputed that First National

monitored the stock price daily to ensure that it did not drop so low as to interfere with

the trust’s ability to pay the taxes and there were plenty of proceeds from US Bank’s

sale of the Medtronic stock to pay the taxes when due. Rather, the damages sought

by the plaintiffs are with respect to the assets left over for their use and enjoyment

after the estate taxes were paid. These alleged damages are attributable to market risk

and a lack of diversification in the period after Leonard’s death, if not to the decision

of the plaintiffs or US Bank to sell nearly 600,000 shares of Medtronic stock on a

single day in November 2006. Claims alleging loss of value due to market risk and

lack of diversification are just the sort of claims from which First National was

protected by Paragraph 17(b) of the trust.

The judgment of the district court is affirmed.

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