Opinion ID: 888505
Heading Depth: 2
Heading Rank: 1

Heading: Did the Board violate its fiduciary duty by failing to use whatever principal and income of the Trust necessary to establish, improve and maintain the Museum?

Text: ¶ 49 The State argues that the Board breached its fiduciary duty to the Trust by choosing the cheapest options possible when establishing the Museum, by failing to acquire the Bair residence and grounds, and by delegating its duty to administer and manage the Museum to CMR on a year-to-year operating contract. ¶ 50 The Board responds that the Trust's primary purpose was general philanthropy, rather than the Museum, but that it nonetheless assumed the task of establishing the Museum judiciously. . . . In support of its claim, the Board points to testimony from Michael O'Leary, an architect with CTA, who testified that the Board expressed no reluctance or unwillingness to complete work that O'Leary felt was necessary to open the Museum. The Board also cites to testimony from Lee Rostad, a member of the Friends of the Bair and a former member of the Board. Rostad testified that, during her tenure on the Board, she voted in favor of every dollar spent and that she never moved the Board to dedicate more money to the Museum. ¶ 51 The Board further asserts that the Trust Agreement vested the Board with the absolute discretion to determine what amount of Trust income and principal was necessary to establish, improve, and maintain the Museum. The Board relies on the Restatement (Second) of Trusts for the proposition that, when a trust grants a board discretion to use whatever trust property the board deems necessary, a court should refrain from interfering with the board's discretion provided the board applies at least the minimum amount which could reasonably be considered necessary. . . . Section 187 cmt. e (1959). The Trustee then argues that the word necessary can have a multitude of meanings and asserts that the term required the Board to spend only the amount reasonably required for the Museum. The Board contends that it [c]learly . . . dedicated more than `the minimum amount which could reasonably be considered necessary' to the Museum. ¶ 52 Trustees have a duty to administer the trust according to the trust instrument and according to Montana law. Section 72-34-101, MCA. In accomplishing the trust's purposes, trustees must exercise the care, skill, prudence, and diligence of a prudent person. Section 72-34-114, MCA. A trustor may modify these standards by including express provisions in the trust instrument. Section 72-34-114, MCA. ¶ 53 The Board's and the Trustee's arguments emanate from their fundamental misunderstanding of the Trust Agreement. The Board and the Trustee share the misconception that the Museum did not constitute the Trust's primary purpose; as discussed under Issue I, the Museum constituted the Trust's primary purpose. Further, the plain language of the Trust Agreement contradicts the Board's claim of absolute discretion. The Trust Agreement provides that the Board is directed to use whatever principal and income of the [Trust] that is necessary to establish, improve and maintain the museum, and shall have full discretion and authority to administer and manage the same. (Emphasis added.) Though the Trust Agreement grants the Board discretion to administer and manage the Museum, it grants the Board no discretion regarding the amount of principal and income to use in establishing, improving, and maintaining the Museum. On the contrary, the Trust Agreement directs the Board to use the amount of principal and income that actually is necessary to establish the Museum. In carrying out this directive, the Board was required to give the Museum a fair opportunity to succeed; the Board was required to exercise the care, skill, prudence, and diligence of a prudent person. Section 72-34-114, MCA. ¶ 54 The Board and the Trustee misplace their reliance on the Restatement for a definition of the word necessary as the Restatement is both inapplicable to the language of the Trust Agreement and incongruent to Montana law. The Restatement provides that  if the trustee is empowered to apply so much of the trust property as he may deem necessary courts will not interfere with a trustee's discretion provided the trustee applies at least the minimum amount which could reasonably be considered necessary. . . . Restatement (Second) of Trusts § 187 cmt. e (emphasis added). As discussed in ¶ 53, however, the Trust Agreement specifically does not empower the Board to apply the amount of trust property it may deem necessary; rather, it requires the Board to spend the amount of principal and income that actually is necessary. ¶ 55 The Board's and the Trustee's proffered definition of necessary also clashes with our rules of interpretation, which require that we construe an instrument's words in their ordinary and grammatical sense. . . . In re Estate of Snyder, ¶ 10 (citations omitted). Further, we refuse to apply a limited interpretation of the word necessary, when the Trust Agreement itself contains no limiting language. Matter of Estate of Lindgren, 268 Mont. 96, 100, 885 P.2d 1280, 1282 (1994). In this case, we need not comprehensively define necessary because the Board's conduct in establishing, improving, and maintaining the Museum falls below even the limited definition offered by the Board and the Trustee. ¶ 56 Following Alberta Bair's death, the Board hired Leavengood Architects and CTA Architects Engineers to provide assessments and recommendations for converting the Bair Family residence into a museum. The Leavengood Study noted that converting a residence into a museum would require the overhaul of many systems . . . to protect the art collection and accommodate visitors. ¶ 57 The Leavengood Study and CTA's Master Plan informed the Board of many challenges and concerns presented by the Bair Ranch, including inadequate fire suppression systems, inadequate security systems to protect against theft, and inadequate air-handling systems to protect the Museum's collection. Based on the remoteness of location and the lack of a professional fire-fighting department, the Leavengood Study recommended that the Board install a fire-sprinkler system as part of its fire-protection system. Similarly, CTA's Master Plan indicated the need for a fire-sprinkler water supply, and CTA proposed three different options to the Board for procuring a fire-sprinkler water supply. The Leavengood Study recommended that the Board consider using closed-circuit monitors and security personnel to minimize the risks of theft during the Bair Family residence's transition to a museum and noted that a more comprehensive security system would be needed after the museum was established. Both the Leavengood Study and CTA's Master Plan also recommended installing a new air-handling system that would provide stable temperature and humidity levels to protect the Museum's objects and archives from deterioration. Additionally, both the Leavengood Study and CTA's Master Plan advised the Board to construct additional structures to facilitate the Museum. The Leavengood Study estimated the costs for pre-planning of the museum facility to be between $1,935,375 and $2,517,320, and CTA estimated the preliminary costs at $1,023,200. ¶ 58 Despite the recommendations from Leavengood and CTA, the Board failed to address the absence of a fire-sprinkler system  a concern Leavengood described as paramount, and that CTA described as a high priority safety and security item. The Board also failed to install a new air-handling system to protect the Museum's collection. The CTA budget finally approved by the Board featured a truncated version of CTA's already abbreviated Revised Project Cost Analysis  Minimum Operation, which estimated the cost of converting the Bair Ranch House to a museum at $328,000. The adopted proposal featured no improvements to the temperature and humidity systems or fire-sprinkler systems. The adopted proposal also included no mention of a security system or the construction of additional structures for the Museum. When it approved CTA's $328,000 proposal, the Trust was valued at approximately $23,000,000, and the Board had access to approximately $8,500,000 in Trust principal. ¶ 59 Though the Board ultimately spent approximately $600,000 on converting the Bair Ranch to the Museum, the Board failed to remedy the inadequate fire-protection system, the inadequate air-handling system, and to maintain an adequate security system. The Board also failed to construct additional buildings for the Museum. However, the Board cited to the absence of each of these items to support its decision to permanently close the Museum: according to the Board and the Trustee, the decision to close the Museum was based on multiple considerations, including the risk of theft; the risk of damage to fine art by keeping it in a house without proper environmental controls; the risk of fire and limited fire protection in the area associated; and space limitation[s] in the home that made it difficult to rotate and display the art and artifacts. . . . Though a security system initially was installed at the Museum, the record reveals that the Board later specifically rejected the installation of surveillance cameras at the Museum, and the Board's reliance on the risk of theft as a justification to close the Museum indicates that the Board failed to properly maintain the security system. By relying on these factors to justify closing the Museum, the Board implicitly acknowledged that addressing these deficiencies at the outset was necessary to properly establish and maintain the Museum. ¶ 60 The Board breached its duty to administer the Trust according to the trust instrument and breached its duty to administer the trust with the care, skill, prudence, and diligence of a prudent person when it failed to install a fire-prevention system, failed to install a proper air-handling system, failed to maintain an appropriate security system, and when it failed to build additional structures for the Museum. Sections 72-34-101 and 72-34-114, MCA. Although the Board considered the Bair Ranch's inadequate systems and buildings as factors supporting its decision to close the Museum, the Board's initial failure to address these limitations, especially in light of Leavengood's and CTA's recommendations, more accurately demonstrates the Board's failure to comply with its fiduciary duties to the Trust. The Board's failures to address the non-existent fire-sprinkler system, the deficient air-handling system, the insufficient security system, and the Museum's space limitations constitute breaches of the Trust Agreement's directive to use whatever principal and income of the [Trust] that is necessary to establish, improve and maintain the museum. . . . As the Board chairman so aptly observed in his 2003 email to the Trust members regarding repairs, the Museum was never really made `museum ready' in 1995 when it opened. We agree with the Board chairman's assessment. ¶ 61 The Board's failure to make the Museum museum-ready constitutes a breach of the Board's fiduciary duty to the Trust. Though the Board has consisted of different individual members since its inception, the current Board is liable for the breaches of predecessor Boards. The Board's Memorandum of Decision closing the Museum establishes that the current Board knew of situations constituting a breach of trust committed by the predecessor Boards and that the current Board failed to redress those breaches of trust. Section 72-34-504, MCA. ¶ 62 The State also argues that the Board breached its fiduciary duties to the Trust by leasing the house and grounds from a bank-controlled entity on terms that would not allow the Trust to recoup any investments in improvements. According to the State, the Trust Agreement clearly contemplated the purchase of the Bair residence and surrounding grounds. We agree. ¶ 63 We seek to determine the trustor's intent from the language of the trust agreement. Matter of Estate of Bolinger, 284 Mont. at 120, 943 P.2d at 985. After describing that the creation of the Museum had long been Alberta Bair's cherished aim and foremost desire[,] the Trust Agreement states: It is therefore Grantor's will that the Board of Advisors devote Grantor's entire residence, together with all personal property of lasting historical and artistic value located therein, and together with surrounding grounds and outbuildings necessary for such purpose, to the establishment of a museum. . . . In fulfilling its purposes of opening the museum . . . the Board of Advisors shall have the authority to acquire required additional land, erect and/or maintain existing structures suitable to the operation of a museum. . . . (Paragraph breaks omitted.) ¶ 64 In 1994, the Trustee entered into a five-year lease, with a three-year renewal option, for the Bair Family residence and the surrounding grounds and outbuildings with THE BAIR CO., a Montana corporation that later became the Bair Ranch Foundation. The lease provided that, at the end of the five-year term, the Trustee shall surrender the leased premises and improvements to [the Bair Ranch Foundation] in as good a condition as at the beginning of the term. Further, the lease provided that any nonremovable improvements or additions would become the Bair Ranch Foundation's property and that the Trustee was entitled to no compensation for the improvements or additions. The lease functioned as more than a token formality: the Trust Administrator testified that the Board would be required to obtain the Bair Ranch Foundation's permission before the Board could build another restroom at the Museum's visitor center. ¶ 65 The Trust Agreement simply does not authorize the Board to enter into a short-term lease to rent the residence and outbuildings; rather, it sets forth Alberta Bair's will that the Board devote the residence to the establishment of the Museum. The verb devote means 1. To give or apply (one's time, attention, or self) entirely to a particular activity, pursuit, cause, or person. 2. To set apart for a specific purpose or use. . . . 3. To set apart by or as if by a vow or solemn act; consecrate. . . . American Heritage Dictionary of the English Language 497 (4th ed. Houghton Mifflin Co.2000). The ordinary and grammatical sense of the verb devote carries more import than the Board grasped. In re Estate of Snyder, ¶ 10. In short, the Board could not set apart Alberta Bair's entire residence, the surrounding grounds, and the outbuildings for the establishment of a museum that would perpetuate the historic and artistic significance of the Bair Ranch when it possessed only a five-year lease and was required to ask for permission to build a restroom. Moreover, the Trust Agreement granted the Board the authority to acquire required additional land, erect and/or maintain existing structures suitable to the operation of a museum. . . . Underlying the use of the term additional is the presumption that the Board would already have acquired the residence and the surrounding outbuildings. We conclude that the Board's failure to purchase the Bair Family residence constitutes a breach of the Trust Agreement. ¶ 66 The State also argues that the Board breached its fiduciary duties when it delegated its duty to administer and manage the Museum to CMR rather than establishing a separate charitable entity to operate the Museum, as authorized by the Trust Agreement. The State points to the current Board chairman's statement  that the Museum band-aided itself along through it's [sic] 8 years of operations and Peter Hassrick's statement  that the Bair Museum was given what I would call `step-child' treatment and not afforded a fair chance to survive on its true merits  to illustrate the Board's failure. ¶ 67 The State's argument that the Board's delegation constitutes a breach of its duty to administer and manage the Museum presents a closer question because the Trust Agreement granted the Board full discretion and authority to administer and manage the Museum. Discretionary powers must be exercised reasonably. Section 72-34-129, MCA. We conclude that the Board did not breach its duty to the Trust when it delegated the Museum's management to CMR. The Board members had no prior experience managing a museum, and, though it may have been reasonable for the Board to establish a separate legal entity to manage the Museum, we cannot say that it was unreasonable for the Board to hire CMR to manage the operations of the Museum. Though Hassrick's and the Board chairman's comments arguably may suggest that the Board failed to comply with its duty under § 72-34-113, MCA, to exercise general supervision over CMR, that issue is not before the Court.