Opinion ID: 2709540
Heading Depth: 1
Heading Rank: 3

Heading: trustee

Text: (B) Powers and Duties (1) Without limiting powers incidental to the purposes of the trust or otherwise existing by law, the trustee and all successors shall have, without approval of any court, the power: 14 Nos. 11-2781 & 11-3437 to retain, invest and reinvest in any property without regard to whether the same may be authorized by law, regardless of any risk, lack of diversification or unproductivity involved; . . . to continue as trustee and to deal with any trust hereunder without regard to con- flicts of interest; . . . and in general, without limitation by reason of the foregoing, to do any and every act and thing that the trustee would have the right to do as trustee under applicable common and statutory law or as the absolute owner of property provided that all powers shall be exercised exclusively in a fiduciary capacity. James L. French Irrevocable Trust of 1991 #1, Article III(B)(1), App. of Pls.-Appellants 40-41 (emphasis added). The italicized language is quite clear. As the district court aptly put it, the clause “specifically allows the trustee to deal ‘without regard to conflicts of interest.’ It is hard to imagine how the authorization to self-deal could be described more clearly.” French, 800 F. Supp. 2d at 987. In an effort to escape this clarity, the Frenches focus on the phrase “to continue as trustee and to deal with any trust hereunder”; they claim that this language restricts application of the conflicts waiver to newly created trusts that come into being under the general authority granted in the trust instrument. This strikes us as a strained reading of the language. Read more naturally, the clause “any trust hereunder” authorizes the trustee to deal with both the current trust and any Nos. 11-2781 & 11-3437 15 others later created “without regard to conflicts of interest.” Stated more succinctly, “any trust hereunder” naturally includes Trust #1 itself. The Frenches also point out that “self-dealing” and “conflict of interest” are not synonymous terms. True, but that doesn’t help their argument. Self-dealing is one type of a conflict of interest. See R ESTATEMENT (T HIRD ) OF T RUSTS § 78 cmts. (d) & (e). The trust’s use of the general term “conflicts of interest” necessarily includes the more specific kind of conflict of interest that consists of “self-dealing.” In other words, the trust language broadly waives all conflicts of interest, including transactions involving self-dealing. Finally, the Frenches rely on the provision in the trust instrument instructing the trustee to administer the trust in an “exclusively fiduciary capacity.” This provision simply states the obvious—the trustee is a fiduciary. It does not withdraw or defeat the conflicts waiver found earlier in the document, which is both clear and specific. In short, the trust instrument expressly authorized Wachovia to proceed with the insurance transaction even though its insurance affiliate would earn a commission. The Frenches next argue that the transaction was such a bad investment that it amounted to a violation of the bank’s duty of prudence. See generally R ESTATEMENT (T HIRD ) OF T RUSTS § 77 (2007) (explaining a trustee’s fiduciary duty of prudence). In Wisconsin, as in many states, the common-law prudent-investor rule is codified under the Uniform Prudent Investor Act. See W IS. S TAT. 16 Nos. 11-2781 & 11-3437 § 881.01; see also R ESTATEMENT (T HIRD ) OF T RUSTS § 91 cmts. (b), (c) & (d) (2007) (discussing the widespread codification of the common-law prudent-investor rule via the Uniform Prudent Investor Act). The Act provides that a “fiduciary shall invest and manage assets as a prudent investor would, by con- sidering the purposes, terms, distribution requirements, and other circumstances of the estate, trust, conservatorship, or guardianship. In satisfying this standard, the fiduciary shall exercise reasonable care, skill, and caution.” W IS. S TAT. § 881.01(3)(a). The Act goes on to list a variety of factors that a fiduciary “shall consider” in making investment decisions, including “[g]eneral economic conditions,” the “possible effect of inflation or deflation,” the “expected tax consequences of investment decisions,” the “expected total return from income and . . . appreciation,” “liquidity” needs, “regularity of income,” and the “[o]ther resources of the beneficiaries,” among other factors. Id. § 881.01(3)(c). The district court assumed that the statute applied and concluded that Wachovia had not violated it. The Frenches attack this holding on appeal, and Wachovia, needless to say, defends it. But the bank also raises an important threshold question, one that the district court chose not to address: Does the language of the trust instrument override the prudent-investor rule? The answer determines the applicable legal standard because by its terms the Act establishes only a “default rule” that “may be expanded, restricted, eliminated, or otherwise altered by the provisions of a will, trust, or court order.” Nos. 11-2781 & 11-3437 17 Id. § 881.01(2)(b); see also R ESTATEMENT (T HIRD ) OF T RUSTS § 91 cmts. (b) & (d). The section of the trust instrument that we block- quoted earlier contains just such a contractual workaround: “[T]he trustee . . . shall have . . . the power . . . to retain, invest and reinvest in any property without regard to whether the same may be authorized by law, regardless of any risk, lack of diversification or unproductivity involved . . . .” French Trust, supra, Article III(B)(1), App. of Pls.-Appellants 40 (emphasis added). This language displaces the prudent-investor rule. The trustee is always obligated to administer the trust in good faith, however. See Estate of Koos v. Koos, 69 N.W.2d 598, 605-06 (Wis. 1955); Welch, 290 N.W. at 782; see generally R ESTATEMENT (T HIRD ) OF T RUSTS § 96 (2012) (explaining that exculpatory clauses in trust instruments do not remove liability for breaches of trust committed in bad faith). Because the prudent-investor rule does not apply, we review the trustee’s action only for bad faith. This brings us to the Frenches’ fallback bad-faith argument, and here again we agree with the district court; there is no evidence of bad faith. Indeed, all the evidence points in the opposite direction: The insurance exchange was undertaken in good faith, and indeed Wachovia satisfied the higher standard of the Uniform Prudent Investor Act, as the district court held. See French, 800 F. Supp. 2d at 989-91. It is undisputed that the Pacific Life and Prudential policies were expensive. To maintain the $5 million death benefit, the annual premiums were very large and 18 Nos. 11-2781 & 11-3437 increasing. When French moved the trust account from Northern Trust to Wachovia, he pressed the bank to save money and grow the trust corpus. Exchanging the Pacific Life and Prudential policies for the new, no-lapse policies issued by John Hancock maintained the same death benefit and saved $620,000 in premium costs. Although the old policies accumulated cash surrender value and the John Hancock policies did not, this loss of flexibility was insignificant because the insurance was held for its death benefit, not its cash value. In other words, the trust did not need life-insurance cash value as a tool; the trust was well diversified in other assets. By all accounts the insurance exchange made very good business sense. The only possible reason to maintain insurance that accumulated cash-redemption value was to maintain greater flexibility. But absent some reason to think that the redemption option would be used (and none is offered), Wachovia’s decision to reinvest in the new, less-expensive policies was eminently reasonable and was certainly made in good faith. That Wachovia’s insurance affiliate earned a substantial commission does not amount to bad faith; the trust instrument permitted this kind of self-dealing, and the insurance exchange was a “win-win” for both the trust and the bank. See John H. Langbein, Questioning the Trust Law Duty of Loyalty: Sole Interest or Best Interest?, 114 Y ALE L.J. 929, 980-89 (2005) (discussing transactions that benefit both the trust and the trustee, especially in the era of professional financial-services administrators). The Frenches insist that by initially seeking their father’s consent and then going ahead with the exchange Nos. 11-2781 & 11-3437 19 unilaterally, Wachovia acted in bad faith. This argument is a nonstarter. Unless the trust instrument specifically requires it, a trustee does not need the consent of the settlor or the beneficiaries to make investment decisions about trust assets. See R ESTATEMENT (T HIRD ) OF T RUSTS § 75 (2007); see also id. § 82(1)(c) cmt. d (2007). Here, the trust instrument gave Wachovia total discretion to “retain, invest and reinvest in any property.” The Frenches also argue that they were entitled to know the exact size of the commission before the transaction was consummated. It is true that a trustee has a duty to keep beneficiaries “reasonably informed of changes involving the trusteeship and about other significant developments concerning the trust and its administration, particularly material information needed by beneficiaries for the protection of their interests.” R ESTATEMENT (T HIRD ) OF T RUSTS § 82(1)(c); see also Zastrow, 718 N.W.2d at 60 (referring generally to a trustee’s duty to disclose relevant information to beneficiaries). Because the importance of any given action of a trustee will vary by the terms, goals, and size of a trust, there are no hard and fast rules to determine when a development is sufficiently “significant” to trigger the duty to notify beneficiaries. Rather, the trustee is obligated to “exercise reasonable judgment in determining what matters have such significance.” R ESTATEMENT (T HIRD ) OF T RUSTS § 82(1)(c) cmt. (d). Generally speaking, only “important adjustments being considered in investment or other management strategies” need be disclosed. Id. 20 Nos. 11-2781 & 11-3437 This single transaction was not so significant that the bank had a duty to provide detailed information about it in advance; the exchange of one insurance policy for another, while maintaining the identical death benefit, is not a significant adjustment in investment strategy. Regardless, Wachovia did, in fact, keep the Frenches in the loop from start to finish. Jim French specifically instructed Wachovia to look for other insurance options. The French family’s lawyers at Quarles & Brady worked in tandem with Church and Schumacher over many months to evaluate the proposed exchange. Jim French signed the application forms and was kept informed every step of the way, and the Frenches had notice that Wachovia Insurance would earn a commission. Indeed, their lawyers negotiated before the fact for a rebate or a reduction in Wachovia’s fees. The record does not support a finding of fiduciary breach based on Wachovia’s failure to give the beneficiaries advance notice of the size of the commission. B. Attorney’s Fees and Costs The Frenches also challenge the district court’s award of attorney’s fees and costs. We “review the district court’s award of attorney’s fees for abuse of discretion and its legal analysis and methodology de novo.” Johnson v. GDF, Inc., 668 F.3d 927, 931 (7th Cir. 2012). Under Wisconsin law the trial court may shift a prevailing trustee’s defense costs to the trust if the court finds that the trustee acted honestly and in good faith. McGeoch Bldg. Co. v. Dick & Reuteman Co., 40 N.W.2d 577, 579 (Wis. 1950); In re Estate of Cole, 78 N.W. 402, 406 (Wis. 1899). Having Nos. 11-2781 & 11-3437 21 found no evidence of bad faith, the district court held that Wachovia was entitled to recover its attorney’s fees and costs. Usually the fees and costs are paid from the corpus of the trust, but here the district court ordered the Frenches personally to pay. There is no dispute that the court has the equitable power to do this. See Cleveland v. Second Nat’l Bank & Trust Co., 149 F.2d 466, 469 (6th Cir. 1945); duPont v. S. Nat’l Bank of Hous., Tex., 771 F.2d 874, 885 (5th Cir. 1985); Brisacher v. Tracy-Collins Trust Co., 277 F.2d 519, 524 (10th Cir. 1960); see also Robert L. Rossi, 2 A TTORNEYS’ F EES § 11:63 (3d ed. 2011) (collecting cases). The court held that the equities favored ordering the beneficiaries to pay the trustee’s attorney’s fees and costs. The successor trustee was not a party, and the court concluded that requiring Wachovia to pursue its fees award in a separate action against the new trustee would needlessly “multiply costs and delay the inevitable.” The court also noted that the successor trustee had agreed to reimburse the Frenches for their own attorney’s fees. Finally, the court observed that the Frenches “are of substantial means” and “can determine the proper allocation of the . . . fee award amongst themselves and the successor trustee.” This decision was entirely sensible. To attack it, the Frenches simply rehash their merits arguments about self-dealing and bad faith, which we have already rejected. We find no abuse of discretion. A FFIRMED. 7-17-13