Court Opinion

ID: 7920836
Source: CourtListenerOpinion
Date Created: 2022-09-08 22:22:35.207473+00
Date Added: 2024-06-11T16:33:02.068413
License: Public Domain

ADKINS, J.,
Dissenting.
Just last term, this Court reiterated that “in no state are trustees, whether individuals or corporations, held to a stricter account than in Maryland.” D’Aoust v. Diamond, 424 Md. 549, 605, 36 A.3d 941 (2012) (citation and quotation marks omitted). The Majority’s opinion in this case is a sharp *40departure from that principle. The Majority sees “material” differences between the protection the trustee sought under a release and indemnification agreement and the protection it could obtain from the court. Despite that, the Majority approved this practice. This will encourage more widespread use of such unlawful releases, and enable banks and other trustees to cite this case to justify other breaches as one “of degree rather than kind.” Maj. Op. at 29, 54 A.3d at 728.
Alternatively, the Majority holds that, even if the release and indemnification agreement breached the trustee’s duty of loyalty, a beneficiary may always consent to a breach of trust. In so holding, the Majority ignored the issue of whether the trustee provided the beneficiaries with full and complete information, which is required in any dealings between trustees and beneficiaries, and concluded all too swiftly that the beneficiaries in this case were in a position to give a “valid, informed” consent.
I do not share the Majority’s view and respectfully dissent. In this case, the trust beneficiaries (“Beneficiaries”) sought a declaratory judgment on the issue of whether “PNC’s policy of requiring [a broad release and indemnification prior to the distribution of trust funds] violates Maryland law.”1 For the reasons set forth below, I would hold that it does. I would add that, although beneficiaries may consent to a breach of trust, they can only do so when they have full and complete information regarding the transaction.
I. PNC’s Practice of Seeking Release and Indemnification
No one disputes that it is PNC’s common practice to seek release and indemnification agreements such as the one at *41issue in this case. All along, PNC has characterized such agreements as “customary” and “a prevalent practice.” In this case, the preamble to the Release and Indemnification Agreement (“Agreement”) recited that the Beneficiaries “requested” trust fund distribution “without the filing, audit and adjudication” of the final accounting by a court, when in fact they had not.2 After the Beneficiaries protested, pointing out that it “is not true” that they made such a request, PNC continued to insist that it would not “be in a position” to make distributions without the Agreement. It explained that, even though there was no request, “[tjhis is standard language and is based on the fact that there is no reason to petition the Circuit Court to terminate the trust.”3 Without any explanation of why “there is no reason” to seek court approval of the final accounting, or the differences between the proposed Agreement and distribution pursuant to a court order, PNC asserted: “the majority of beneficiaries prefer to terminate their trust via private agreement instead of petitioning a court.”4
II. The Impermissible Breadth of the Agreement
No one denies that the Agreement would give PNC broader protection from liability than a court order. The Circuit *42Court noted that “it must have been frustrating to have this demand for the extremely broad Waiver Release and Indemnity Agreement that was used____”5 (Emphasis added.) The Majority concluded that there were “material [differences that] represent a fairly sizeable increase in the amount of protection PNC would have received” under a court order. Op. at 29, 54 A.3d at 728 (emphasis added). Yet, the Majority condones PNC’s self-initiated upgrade in protection, at the risk and the expense of the Beneficiaries.

“Material ” Differences the Majority Noticed

The Majority acknowledges two aspects in which the Agreement went too far. First, the Agreement “sought protection for PNC in its role as trustee and ‘in its corporate capacity.’ ” Maj. Op. at 29, 54 A.3d at 728. The Majority admits that this clause would allow PNC to “effectively use its position as trustee to obtain a release for its securities division, which would appear at odds with the duty of loyalty.”6 Id. n. 10. Second, the Agreement “also sought a right to indemnification for ‘all’ costs arising from the administration of the Trust, rather' than all costs reasonably and properly incurred.” Id. at 29, 54 A.3d at 728 (emphasis added). Inexplicably, however, after assessing these differences as “representing] a fairly sizeable increase in the amount of protection PNC would have received,” the Majority proceeds to hold that the Agreement is “not so broad and one-sided as to place impermissibly PNC’s interests before those of [the Beneficiaries].” Id. at 26-27, 54 A.3d at 726-27.
The dichotomy between the Majority’s perception of the “material” differences and its holding is striking. The Majority minimizes the differences by later characterizing them as “differences ... of degree rather than kind,” id. at 29, 54 A.3d *43at 728, but this rationalization is unconvincing. In my view, these two “material” differences should have led the Court to conclude that the Agreement was overly broad and entitled the Beneficiaries to declaratory relief in their favor.

The Indemnification Clause

Supplementing the two “material” differences noted by the Majority, I add a third, arguably the most significant one: the indemnification of PNC from “any and all liabilities, relating in any way to its administration of the Trust.” Unlike a court order approving trust funds distribution, which would have discharged PNC from liability to the Beneficiaries, but not third parties; and unlike the limited common-law indemnity right, this broad indemnification clause shifts all liability for the trustee’s actions to the beneficiaries, even if the liability arose out of the trustee’s own negligence. This shift is significant because a trustee’s negligence is a risk it assumes in undertaking the often-lucrative7 position as a trustee.
The Majority, however, fails to see this third material difference by focusing exclusively on the release clause and whitewashing the indemnification clause, reading it in such a way that it only pertains to expenses, surcharges, and costs, but not to claims, liabilities, and causes of action by third parties.8 The Majority’s reading of the Agreement is wrong. Paragraph 6 of the Agreement states that, by signing, the beneficiary “[rjeleases, indemnifies, and holds PNC ... harmless from and against any and all losses, claims, demands, surcharges, causes of action, costs and expenses (including *44legal fees).” From a grammatical standpoint, paragraph 6 consists of two complete predicates or clauses: (1) a release and (2) an indemnification of PNC against “against any and all losses, claims, demands, surcharges, causes of action, costs and expenses (including legal fees).”
The Majority, however, dilutes the indemnification clause into something it considers palatable by redacting the terms “any claims,” “demands,” and “causes of action” and limiting it to “surcharges,” “costs,” and “expenses.”9 Maj. Op. at 26-27, 54 A.3d at 726-27. This allows the Majority to conveniently avoid the analysis of PNC’s attempt to get the Beneficiaries to agree to indemnify it against all possible claims. Instead, the Majority quickly addresses only (1) a release from liability to the beneficiaries, id. at 27, 54 A.3d at 727, concluding that a release would have been similar to res judicata resulting from a court order, and (2) indemnification, i.e. reimbursement, for expenses, holding that trustees are entitled to reimbursement for reasonable expenses. The Majority’s one-sided analysis of the release and indemnification clause comes at a great cost to all trust beneficiaries.
Under common law, upon full disclosure by the trustee, a beneficiary generally may agree to release a trustee from *45liability for “breach of trust” and “thereby extinguish such cause of action as may exist.” George G. Bogert & George T. Bogert, The Law of Trusts and Trustees § 943 (rev.2d ed.1981). Similar to a release, when a trustee or another interested party petitions a court for trust fund distribution under Maryland Rule 10-501, the court’s approval of the final accounting “renders res judicata, matters which were open to dispute, whether or not actually disputed.” See also Restatement (Second) of Trusts § 220 cmt. a (1959). What this means for our purposes is that once the court approves a final accounting, a beneficiary is barred from suing the trustee on a claim that was or could have been addressed by the court in the first instance. See Anne Arundel County Bd. of Educ. v. Norville, 390 Md. 93, 106-07, 887 A.2d 1029, 1036-37 (2005).
Barred claims are, for example, a claim for loss by the beneficiary caused by breach of duty of loyalty, breach of duty of impartiality, breach of trust by selling trust property, breach of trust by improperly investing funds, and breach of trust by failing to make proper investment. Restatement (Second) of Trusts § 183, §§ 206 through 212. So long as the trustee makes no “misrepresentation or concealment in presenting [the] account or in obtaining the approval of the court,” the court’s approval of the final accounting renders these beneficiaries’ claims against the trustee res judicata. Restatement (Second) of Trusts § 220 cmt. a. A release or res judicata, however, does not go as far as the Agreement.10 Unlike res judicata that only bars relitigation of the same or *46similar claim by the same parties,11 an agreement to indemnify “is a promise to safeguard or hold the indemnitee harmless against either existing and/or future loss liability” to “a third person, or against loss resulting from the liability.” 41 Am. Jur.2d Indemnity § 4. Thus, no court approval of a final accounting would ever have the effect of indemnifying the trustee against third-party claims.
These third-party claims may be significant, too. The Restatement (Second) of Trusts gives examples:
[ ] A is a trustee of a tailoring business. He negligently allows the floor of the premises to fall into disrepair. A customer falls through the floor and breaks an arm. Although A is liable to B, he is not entitled to indemnity out of the trust estates.
[ ] A is trustee of an apartment house. By statute owners of apartment houses are required to maintain escapes. A fails to provide such a fire escape. The house burned and as a result of the lack of a fire escape B is in the fire. Although A is liable to B, he is not entitled to indemnity out of the trust estate.
[ ] A is trustee of a grocery business. He employs B to deliver groceries. A knows that B is not a competent driver. In delivering groceries by automobile B negligently runs over C. Although A is liable to C, he is not entitled to indemnity out of the trust estate.
Restatement (Second) of Trusts § 247 cmt. d.
As these examples illustrate, under common law, a trustee’s right to indemnification is limited. Indemnity for liability upon a contract with third parties or for liability in tort to third persons is only available to a trustee if the liability “was *47properly incurred” and the trustee “was not personally at fault in incurring the liability.” Restatement (Second) of Trusts § 246, § 247.12
Not so for PNC under the Agreement. The Agreement sought to expand PNC’s protection — at the Beneficiaries’ expense — to include “any and all losses, claims, demands [and] causes of action.” In this regard, the Agreement is impermissibly broad. I see no justification for shifting liability for potential misdeeds of the trustee over to the beneficiaries.
III. Lack of Full and Complete Disclosure
The Majority brushes off the Trustee’s over-reaching, preferring instead to focus on the doctrine that “a trustee may engage in self-interested course of action so long as the beneficiaries provide valid, informed consent.” Maj. Op. at 26, 54 A.3d at 726 (citations omitted). In supporting its conclusion that a valid and informed consent would have negated a breach of the duty of loyalty, the Majority quotes comment c(3) to Section 78 of the Restatement (Third) of Trusts, which, inter alia, states: “A particular transaction that would otherwise violate a trustee’s duty of loyalty may be authorized by consent properly obtained from or on behalf of all of the trust beneficiaries.” Maj. Op. at 26, 54 A.3d at 726. To the Majority, PNC’s efforts to get the Beneficiaries to sign the Agreement are “at bottom, [an] arm’s length request to exchange increased protection and indemnity for a quicker and less costly distribution of trust funds.” Id. at 29, 54 A.3d at 728. The Majority comforts itself with the idea that the Beneficiaries “retained the choice to accede to that request, *48... negotiate one not as broad in its protection of PNC, or simply reject it____” Id.
The Majority’s analysis of consent, however, misses an important point: a beneficiary cannot properly consent to a breach of fiduciary duty without having full and complete information relating to the breach.13 Restatement (Third) of Trusts § 78 cmt. g (for a beneficiary’s consent to be valid, the trustee “must be able to show that the dealings were fair and that all relevant and material information that was known, or that should have been known, by the trustee was communicated to the beneficiary or beneficiaries involved.”). This Court has emphasized that in all dealings between trustees and beneficiaries, the beneficiary must have “full information and complete understanding of all the facts” pertaining to an otherwise-prohibited transaction. McDaniel v. Hughes, 206 Md. 206, 220, 111 A.2d 204, 210 (1955).
This is particularly true when the trustee has superior knowledge of the transaction at issue, such as when the trustee is an attorney for the beneficiaries and is “experienced in the law.” Id. In those instances, “[transactions for the personal advantage of a trustee ... are even more improper than similar dealings between laymen,” and “[t]o sustain such a tranaction [sic] the trustee must show that there was a full and complete disclosure on his part of all the facts essential to an intelligent understanding by the beneficiaries of the subject matter and the consequences of the transaction.” Id. at 221, 111 A.2d at 211.
PNC did not provide the Beneficiaries with full information explaining their rights or the consequences of their signing of the Agreement.14 Importantly, PNC failed to explain to the *49Beneficiaries how the liability protection it sought under the Agreement was more favorable to the bank than the protection it would have received upon the court’s approval of a final accounting.15
Furthermore, PNC’s demanding tone demonstrates that PNC failed to give the Beneficiaries “full and complete information” or explain that they were free to reject the Agreement’s sweeping provisions and go to court. In at least two communications with the Beneficiaries, PNC stated that— unless the Beneficiaries executed the Agreement — it would not be “in a position” to distribute the trust funds. For instance, in the closing line of the letter accompanying the Agreement, PNC stated: “Upon receipt of the executed Releases from all of the distributees, we will be in a position to have the cash disbursed.” (Emphasis in original.) Even the Circuit Court, which ultimately held that there was no “demand,” 16 agreed that “any reasonable person looking at PNC’s correspondence would understand that PNC Bank was not going to release funds until all of the beneficiaries had signed off on this agreement.” 17
Unlike the Majority, I do not find comfort in the Beneficiaries’ purported ability to reject a disadvantageous proposal. *50As a fiduciary — and especially as a fiduciary with superior knowledge on the transaction in issue — PNC was only permitted to engage in negotiations of an agreement advantageous to it upon full and complete disclosure to the Beneficiaries of all relevant information. See McDaniel, 206 Md. at 220, 111 A.2d at 210. This record reveals no such disclosure.18 We should not condone the practice of a bank’s asking beneficiaries to provide the bank insurance against the bank’s own blunders.
For these reasons, I dissent.
Chief Judge BELL and Judge GREENE have authorized me to say that they join this dissenting opinion.

. In addition to the declaratory judgment on this issue, in their Complaint filed on April 28, 2008, the trust beneficiaries ("Beneficiaries”) sought loss of income, prejudgment interest, and attorney fees, all resulting from PNC's insistence that the Beneficiaries release and indemnify PNC prior to the trust distribution. The Complaint’s other two counts were for declaratory relief in relation to the inheritance tax and PNC’s final distribution fee. I concur in the Majority’s holdings with respect to these other counts.

. The Waiver, Receipt, Release and Indemnification (“Agreement”) began by stating:
the parties in interest have requested that PNC distribute the Trust assets to the beneficiaries ... without the filing, audit and adjudication ... with a court of competent jurisdiction ..., and PNC has agreed to do so, provided that the parties in interest waive the filing with and auditing of an account of PNC’s administration of the Trust with the Court and release and indemnify PNC from any and all claims and liabilities relating in any way to its administration of the Trust.

. Elaborating further, PNC maintained that the release and indemnification agreement in lieu of seeking approval of an accounting by a court "is based more on practice than the procedure of asking the Distributees if they want to incur additional expenses to Petition the Court, legal fees, etc. Accordingly, there is no formal ‘request.’ ”

. According to PNC, “Trustees, both institutional and individual, request such Agreements on a daily basis.”

. The Circuit Court went on to say that although "it must have been frustrating ... it was not improper."

. Without further elaboration, the Majority chose to read this broad clause narrowly by noting in a footnote that "such [corporate capacity] language would not extend protection to other services provided to the trust by PNC.” Maj. Op. at 29 n. 12, 54 A.3d at 728 n. 12. I would, instead, declare this provision illegal and unenforceable.

. Section 14-103 of the Trusts and Estates Article sets forth the percentages for income commissions, corpus commissions, sales commissions, and final distribution allowances. Md.Code Ann., Est. & Trusts (1974, 2002 Repl.Vol.), § 14-103. The percentages of income commissions vary, depending on the nature and the size of the trust’s income. For instance, the commissions "upon all income from real estate, ground rents, and mortgages collected in a year” are six percent. Id. at (b)(1).

. The gravity of such a mis-reading is magnified when the risk is not disclosed to the Beneficiaries, as I discuss below.

. The Majority’s reading of the term "indemnifies” only in conjunction with the terms "surcharges,” "costs,” and "expenses” does not comport with the parties' understanding of the clause. PNC did not limit the indemnification clause to expenses as the Majority did. Indeed, in the preamble to the Agreement, PNC expressly stated that by way of the Agreement, the beneficiaries would "release and indemnify PNC from any and all claims.” The Beneficiaries also read the term "indemnifies” to pertain not only to expenses but to the other terms contained within paragraph 6 of the Agreement, including "any and all losses, claims, demands [and] causes of action.” To illustrate, in his letter to the motions court, one of the beneficiaries complained:
I do not own a law dictionary; but, in my dictionary of the English language, the word "indemnify,” is defined as: "compensate (someone) in respect of harm or loss; secure (someone) against legal responsibility for their actions.” ... So, in order for me to receive my inheritance, my 25% of the Trust, I have to agree to indemnify the bank from any claims, losses, liabilities, legal fees etc. related to this Trust. This is an intolerable situation.... I [will not] sign a document, which promotes deflection of personal responsibility from the bank onto me.

. The parties appreciated this difference too. At the last summary judgment motion hearing, the Beneficiaries’ counsel emphasized this difference, arguing that, although PNC continuously referred to the Agreement as a “Release Agreement,” “[i]t wasn't [just] a release. It was a waiver and indemnification in which PNC Bank asked the beneficiary to indemnify and hold harmless PNC from its entire administration of the trust estate.” At oral argument before this Court, PNC likewise acknowledged that “[T]he release is probably better than a court order” because it contains an indemnity clause. Oral Argument at 10:34, Hastings v. PNC Bank, NA (No. 109, Sept. Term 2011), available at http://www.courts.state.md.us/coappeals/webcastarchive. html#apri!2012.

. As this Court has explained on more than one occasion, res judicata bars "the same parties from litigating a second lawsuit on the same claim, or any other claim arising from the same transaction or series of transactions and that could have been — but was not — raised in the first suit.” ’ Anne Arundel County Bd. of Educ. v. Norville, 390 Md. 93, 106, 887 A.2d 1029, 1036 (2005) (quoting Black’s Law Dictionary 1336-37 (8th ed.2004)(emphasis added)).

. Similarly, the current Draft of the Restatement (Third) of Trusts discusses the "now-prevalent practice” of authorizing third parties to file suits against the trustee in its representative capacity, "whether or not the trustee is personally liable, with the trustee protected from personal liability to the extent the trustee acted properly.” Restatement (Third) of Trusts, (Tentative Draft No. 6, March 14, 2011), § 106, Reporter’s Notes. Under the Draft, a trustee acts "properly” if it has not "committed a breach of trust” or “is [not] personally at fault” for the liability. Id. at § 106.

. Furthermore, in obtaining the consent, the "trustee must not violate other fiduciary duties, such as the duty of prudence or impartiality----” Restatement (Third) of Trusts § 78 cmt. g.

. As discussed earlier, the Agreement not only failed to contain full information, but it also contained a misrepresentation. The Agreement stated that the Beneficiaries — rather than PNC — was the party initiating distribution of trust funds without court approval. Although this may seem like a minor misrepresentation, because there are four beneficiaries in this case (each receiving the Agreement), this statement has a great potential to mislead. After all, each of the four beneficiaries may *49have gotten the impression that the other three beneficiaries had requested distribution of trust funds in this manner, when, in fact, they had not.

. As a PNC lawyer has written, it may be "time consuming and difficult to get beneficiaries to understand” the process of trust termination. Robert Owings, Esq., C.F.P., PNC Bank, Closing Up Shop: Wrapping Up the Trust, in Being the Trustee: Understanding Role and Responsibilities 173 (MSBA 2012). But, as a trustee, PNC owes trustee beneficiaries the duty to provide full and complete information.

. PNC seemingly was impatient with explanations. Although the Beneficiaries insisted upon explanation of PNC’s tax and fees calculations, those requests seem to have irritated PNC. In one letter to the Beneficiaries, PNC wrote: “The trust document that you request is in your possession.... Your other questions about fees and taxes are adequately addressed in [prior] correspondence to you. Nevertheless, I will attempt to dissect this for you.’’

. The Beneficiaries did not appeal this finding.

. The court went on to say that “although that certainly is the import of PNC's correspondence as well as Mr. Lyons [sic] correspondence on behalf of PNC Bank, PNC Bank didn’t in fact do that. They did release some of the money. Unfortunately that happened just as the Plaintiffs [sic] law suit was in the mail to the Court to be filed.”