Opinion ID: 6335857
Heading Depth: 2
Heading Rank: 1

Heading: Violation of Statutory and Fiduciary Duties.

Text: 1. Statutory Violations. In enacting the Uniform Trust Code, the legislature codified comprehensive provisions governing many situations which would occur in trust management. As to termination of a trust, KRS 386B.8- 170, Distribution upon Termination, and KRS 386B.8-180, Duties of Trustee upon Termination, appear applicable to the Trust at issue in this case. As an initial matter, the Bank phrased its motion in the district court as one under subsection KRS 386B.8-170, which provides, as follows: (1) Upon termination or partial termination of a trust, the trustee may send to the beneficiaries a proposal for distribution. The right of any beneficiary to object to the proposed distribution terminates if the beneficiary does not notify the trustee of an objection within thirty (30) days after the proposal was sent, but only if the proposal informed the beneficiary of the right to object and of the time allowed for objection. (2) Upon the occurrence of an event terminating or partially terminating a trust, the trustee shall proceed expeditiously to distribute the trust property to the persons entitled to it, subject to the right of the trustee to retain a reasonable reserve for the payment of debts, expenses, and taxes. (3) A release by a beneficiary of a trustee from liability for breach of trust is invalid to the extent: (a) It was induced by improper conduct of the trustee; or 9 (b) The beneficiary, at the time of the release, did not know of the beneficiary's rights or of the material facts relating to the breach. (emphasis added). The record does not reveal and, importantly the Bank failed to allege, that its proposal for distribution informed Worrall of his right to object and of the time allowed for objection. See PNC Bank, Nat’l Ass’n v. Edwards, 590 S.W.3d 818, 820 (Ky. 2019) (removing bank trustee advised beneficiary of her right to object to any action or omission and of the time allowed for objecting). As a result, section 1 of KRS 386B.8-170 is inapplicable to any resolution of this matter.7 By contrast, KRS 386B.8-170(2) and KRS 386B.8-180 do apply. The former required the Bank, as trustee, to “proceed expeditiously to distribute the trust property to the persons entitled to it[.]” The record discloses that the Bank for over a year conditioned distribution on Worrall’s executing an overly broad release and when he objected, it failed to follow the statutory procedures of KRS 386B.8-180. This latter statute sets forth a number of items to be provided to the beneficiary when a trust terminates by its terms: “the fair market value of the net assets to be distributed, a trust accounting for the prior five (5) years and an estimate for any items reasonably anticipated but not yet received or disbursed, the amount of any fees, including trustee fees, 7To be clear, a trustee’s failure to notify a beneficiary of the right to object and the timing of an objection only renders section (1) of KRS 386B.170 inapplicable to termination. Sections (2) and (3) of this statute still apply. 10 remaining to be paid, and notice that the trust is terminating.” KRS 386B.8- 180(1)(a). The immediately following subsection provides for a hearing in the district court to resolve a beneficiary’s objections as set forth in written notice provided to the trustee. KRS 386B.8-180(1)(b). The requirement of written objection and district court hearing, however, only ensues after the proper delivery to the beneficiary of the items required by KRS 386B.8-180(1)(a).8 Again, the Bank did not allege, and the record does not contain, the required notice and information required by the initial subsection. Worrall, and the Bank as well, clearly and unambiguously brought to the attention of the district court, in its truncated hearing, that the Bank was requiring a release and indemnification agreement in order for Worrall to obtain distribution of the Trust. Any argument that this issue was not preserved is plainly disproved by the record. See Fischer v. Fischer, 348 S.W.3d 582, 591 (Ky. 2011) (stating that “the answer to the question of how much specificity of grounds is required [for preservation] is resolved by simply saying that enough must be stated to establish the basis of the movant's argument so that the trial court has the opportunity to consider that basis in making a ruling[]”); see also Skaggs v. Assad, ex rel. Assad, 712 S.W.2d 947, 949 (Ky. 1986) (noting matter in question was not preserved because neither party 8 In fact, the Bank’s “simple release” provided that trust statements were available on request. Under this statute, the notice requires delivery to the beneficiary of five-years’ accounting. While five-years’ worth of trust statements detailing assets held, bought and sold, and itemizations of receipts and disbursements likely would satisfy the accounting requirement, a boilerplate provision that “statements of the activities in the Trust are available upon request” clearly does not. 11 submitted a request, oral or written, to the trial court[]). The Bank’s action was in direct violation of KRS 386B.8-180(5): “[n]o trustee [of a] trust shall request that any beneficiary indemnify the trustee against loss in exchange for the trustee forgoing a request to the court to approve its accounts at the time the trust terminates or at the time the trustee is removed or resigns . . . .”9 The Bank’s trust officer admitted this violation; Bank counsel’s November 8, 2019, letter contained the violation;10 and Bank counsel directly advised the district court of the violation at the January 8 hearing. While we might agree that prudent practice dictates a trustee’s attempt to receive such a document, however titled, it is simply beyond the pale for a trustee to extort such a document when the legislature has provided an adequate mechanism and remedy for the settlement and distribution of trust assets. 2. Breach of Fiduciary Duties. Worrall argues that the Bank violated its fiduciary duty to administer the Trust by liquidating the Trust’s assets. This issue was similarly preserved by Worrall’s oral objection to the liquidation 9 This section states, in full: No trustee trust [sic] shall request that any beneficiary indemnify the trustee against loss in exchange for the trustee forgoing a request to the court to approve its accounts at the time the trust terminates or at the time the trustee is removed or resigns, except as agreed upon by the parties pursuant to paragraph (b)1. or 2. of subsections (1) and (2) of this section. 10 We must note the irony of Bank counsel’s letter asserting “Option two” as “court intervention and use of all legal avenues available” since the Bank pursued avenues NOT legally available, i.e., failure to comply with statutory requirements and liquidation of trust assets. 12 and request for an in-kind distribution. We agree with Worrall that the Bank violated its fiduciary duties in administering the Trust. As noted by Professor Scott, “[t]he extent of the duties and of the powers of a trustee depends primarily upon the terms of the trust.” 2 Austin Wakeman Scott, Scott on Trusts § 164 (3d ed. 1967); see KRS 386B.1-030(2) (providing that “[t]he terms of the trust prevail over any provision of this chapter[]”); KRS 386B.8-010 (requiring the trustee to “administer the trust in good faith, in accordance with its terms and purposes and the interests of the beneficiaries[]”). Mr. Thompson’s will, in the provisions of Article Seventh, directed the trustee “at the death of my said daughter, . . . said shares of stock shall in that event be paid over to her estate.” Obviously, the Trust’s corpus had been diversified over Mrs. Worrall’s lifetime,11 but Mr. Thompson’s direction was to distribute the Trust’s assets in kind. While authority may exist that distribution in cash was permissible, in Lucas v. Mannering, 745 S.W.2d 654, 655-56 (Ky. App. 1987), the court held that notwithstanding a fiduciary’s power to sell real estate, the fiduciary’s authority to do so was not unqualified and could not override the beneficiaries’ desire to receive distributions in-kind. The record discloses absolutely no reason justifying liquidation of the Trust’s corpus to cash. From the Bank’s point of view, Worrall very well may have been difficult to deal with. He apparently sought removal of the Bank as 11 The original trust corpus was 8,000 shares of the Class B common stock of Glenmore Distilleries Company. 13 trustee and then failed to follow through to secure his own appointment as trustee. He may have procrastinated in securing his own appointment as executor under Mrs. Worrall’s will. He may have indicated his agreement to sign the Bank’s “simple release” and then reneged. He may have done all those things and been unpleasant to deal with. But those failings do not justify the punitive and vindictive actions of the Bank in seeking a liquidation of the Trust’s assets, again, when the legislature has provided an adequate mechanism and remedy for the settlement and distribution of trust assets. 3. Remedies. The question remains, what may be the remedies for the Bank’s statutory and fiduciary violations? KRS Chapter 386B.10 provides a number of remedies that may be applicable. “A violation by a trustee of a duty the trustee owes to a beneficiary is a breach of trust.” KRS 386B.10010(1). Remedies for breach of trust may include “redress a breach by paying money, restoring property, or other means[,]” KRS 386B.10-010(2)(c); “order[ing] a trustee to account[,]” KRS 386B.10-010(2)(d); “reduc[ing] or deny[ing] compensation to the trustee[,]” KRS 386B.10-010(2)(h). In addition to the specific remedies as set out in KRS 386B.10-010, KRS 386B.10-020(1) provides as a remedy, “the greater of: (a) [t]he amount required to restore the value of the trust property and trust distributions to what they would have been had the breach not occurred; or (b) [t]he profit the trustee made by reason of the breach.” The beneficiary may also be entitled to “costs and expenses, including reasonable attorney’s fees.” KRS 386B.10-040. 14 The remedies to which Worrall is entitled are to be addressed by the Jefferson District Court on remand. At a minimum, we anticipate that Worrall is entitled to an accounting for the Bank’s actions as trustee for the five years prior to Mrs. Worrall’s death, as well as following her death.12 In addition, as monetary damages, Worrall is entitled to reimbursement for any capital gains tax he was required to pay;13 denial and reimbursement of the Bank’s trustee’s and attorney’s fees during calendar year 2019 and thereafter; reimbursement of any commissions incurred by the Bank in liquidating the Trust’s assets; reimbursement of the Receiver’s fee, $5,000; and payment of Worrall’s attorney’s fees. The district court is also to calculate Worrall’s entitlement to reimbursement for any loss in the value of the investments to which he was entitled and wrongfully deprived. In other words, as to the Trust’s assets existing on December 31, 2019, i.e., prior to liquidation, the district court is to ascertain the value of those assets as of the date of this opinion (“current value”). In the event the current value exceeds the value Worrall was paid 12 If this accounting discloses violations of the Bank’s duties, Worrall may be entitled to damages for those violations in addition to the remedies set forth in this opinion. 13 We find curious the Bank’s claim that Worrall would not be entitled to reimbursement of capital gains tax since “these taxes would eventually have to be paid.” Capital gains tax under the current tax code is only payable following the sale of a capital asset. See IRS Topic No. 409, Capital Gains and Losses (https://www.irs.gov/ taxtopics/tc409) (last accessed Mar. 25, 2022) (stating that upon the sale of “a capital asset, the difference between the adjusted basis in the asset and the amount . . . realized from the sale is a capital gain or a capital loss[]”). But for the Bank’s malfeasance, Worrall may have delayed indefinitely the sale of any trust assets and thereby delayed or avoided payment of any such taxes, or perhaps sold any appreciated assets in a year when he had offsetting capital losses from other assets. 15 following the extrajudicial liquidation in January 2020, that value represents the damage Worrall has suffered as a result of the Bank’s breach of its duties. As to the Bank’s arguments that “[a] trustee does not breach any duty by following a Court’s instruction[,]” and it cannot “be held liable in any way, for costs that flow from it following a court order directing it how to distribute Trust assets[,]” we note that this matter was one involving neither competing interests of two or more beneficiaries, nor a novel or questionable course of action fairly debatable under either the law or facts. Under such scenarios, yes, a trustee should request court intervention and decision pursuant to KRS 386B.2-010.14 This matter, by contrast, involved a routine termination of a trust and a single beneficiary who merely objected to signing an overly broad release and indemnification agreement proffered by the trustee, seeking insulation from any possible liability in its administration of the trust. In other words, it arose from the Bank, as trustee, placing its corporate interests above those of its beneficiary. In KRS 386B.8-180, the legislature has sought to provide a fair and balanced mechanism for resolving an impasse such as occurred here, protecting the interests of both the trustee and the beneficiary(ies). The Bank’s clear remedy was not the action taken; rather, it 14 In matters involving trust termination or removal of a trustee, the more specific statute, KRS 386B.8-180, governs over the general statute, KRS 386B.2-010, which authorizes court intervention in trust administration. See Commonwealth v. Phon, 17 S.W.3d 106, 107 (Ky. 2000) (holding that “[w]hen there appears to be a conflict between two statutes, as here, a general rule of statutory construction mandates that the specific provision take precedence over the general[]”). In PNC Bank, we addressed the interplay between KRS 386B.8-180 and KRS 386B.2-030, another general jurisdictional statute. 590 S.W.3d at 821-23. 16 was to give the notice and information required in KRS 386B.8-180(1)(a) and follow the procedure set out in subsection (1)(b) of that statute. If the Bank had merely followed the statutory procedure, its interests and those of Worrall would have been protected. This procedure was available to the Bank at all times following Worrall’s appointment as executor under Mrs. Worrall’s will. Because the Bank chose to ignore the statutory remedy, to disregard the trust terms for distribution, and to lead the district court to clear error, it justifiably bears responsibility for any and all damages suffered and proven by Worrall. Finally, the Bank’s argument that reversal would result in reinstating the Trust, reappointing Bank as trustee and restoring the Trust’s assets to the Bank is unavailing. Worrall sought an accounting from the Bank and an inkind distribution. The district court is to order an accounting, KRS 386B.10010(2)(d), and appropriate damages. KRS 386B.10-010(2)(c), KRS 386B.10020(1)(a). The district court is neither compelled to nor should it reinstate the Trust or reappoint the Bank as trustee.