Court Opinion

ID: 4250644
Source: CourtListenerOpinion
Date Created: 2018-02-28 21:49:50.424247+00
Date Added: 2024-06-11T14:44:17.019697
License: Public Domain

IN THE COURT OF APPEALS OF IOWA

                                    No. 16-1904
                              Filed December 6, 2017

EELEN YOUNG EBLING and ABBY LYON MCDONALD,
     Plaintiffs-Appellees,

vs.

SARAH HASKEN,
     Defendant-Appellant.
________________________________________________________________

       Appeal from the Iowa District Court for Dubuque County, Thomas A. Bitter,

Judge.

       A former trust advisor appeals from the district court’s decisions, removing

the advisor and denying her the right to appoint her successor. REVERSED AND

REMANDED.

       Sean P. Moore of Brown, Winick, Graves, Gross, Baskerville &

Schoenebaum, P.L.C., Des Moines, for appellant.

       Darin S. Harmon and Kelsey J. Streinz of Kintzinger, Harmon, Konrardy,

P.L.C., Dubuque, for plaintiffs.

       Heard by Vaitheswaran, P.J., and Potterfield and McDonald, JJ.
                                         2

POTTERFIELD, Judge.

       Sarah Hasken appeals from the district court’s decisions, removing her as

trust advisor and denying her the right to appoint her successor advisor. Hasken

maintains both of the district court’s decisions were in error. Specifically, Hasken

claims her decision not to vote in one meeting and to “withhold” her vote at a

second meeting did not constitute breaches of her fiduciary duty as a trust advisor,

so the district court was wrong to remove her. In the alternative, she argues that

if the court’s decision to remove her stands, then she has the “inability” to serve

and should be allowed to appoint her successor—as provided for in the trust

instrument.

I. Background Facts and Proceedings.

       The George L. McDonald Trust at issue was established in 1970 for the

benefit of the plaintiffs, Eelen Young Ebling and Abby Lyon McDonald. Ebling and

Abby McDonald, adult daughters of George L. McDonald, are the sole income

beneficiaries of the trust. In the original action, there were a number of named

defendants; all of the defendants except for Hasken are residuary beneficiaries of

the trust. Only Hasken appealed the district court’s rulings. The corpus of the trust

is 1250 voting shares of A.Y. McDonald Industries, Inc. The trust instrument also

establishes two trust advisors, each of whom vote one-half of the trust’s shares.

The trust advisors are fiduciaries, and “no advisor shall have any power or authority

under any circumstance to act in a non-fiduciary capacity.” At the time Ebling and

Abby McDonald initiated this action, Sarah Hasken was one of the trust advisors

and Robert McDonald was the other.
                                           3

       As of August 2014, Hasken was the vice president of and a board member

for A.Y. McDonald Industries, Inc., as well as being one of the trust advisors.

       On August 21, Robert McDonald informed Hasken he was eliminating her

position as an officer of A.Y. McDonald Industries.

       In response, Hasken sent a letter to the other members of the board of

directors, asking them to call a special meeting to consider the action and informing

the board that she did not believe Robert McDonald or the executive committee

had the authority, under the bylaws, to take such action.

       Then, at a September 2014 board meeting, Robert McDonald and the board

of directors removed Hasken from her position as vice president.

       The day after she was removed as vice president, Hasken sent her fellow

board of directors another letter. In it, she warned the board of her belief “that [her]

purported termination as an officer of the company is a continuation of the efforts

of the executive committee to subvert the authority of the board of directors and to

marginalize the duly elected directors of the company.” She also included two

“other examples of the executive committee’s improper actions.”

       The next month, Robert McDonald asked for Hasken’s resignation from the

board of directors; she refused to resign. At a December special meeting of the

shareholders, Hasken was removed from the board. Hasken did not attend the

meeting, and she did not vote the 625 shares entrusted to her as a trust advisor

on the question of her removal from the board. The votes cast were sufficient to

remove Hasken. In her memorandum of authorities, Hasken states:

       As a result, since Hasken could not in good conscience vote for her
       own removal from the board and subsequent replacement with Ron
       [sic] McDonald’s inexperienced sister, and since voting against
                                             4

          those actions would have no-doubt led to accusations by Rob
          McDonald that voting ‘no’ created a conflict of interest, Hasken
          decided to withhold her vote upon advice of counsel in an
          abundance of caution since the outcome of the action was a
          foregone conclusion without her voting her shares.

          In March 2015, at the annual shareholder’s meeting, the shareholders were

asked to vote on the proposed slate of directors, which included Ebling but not

Hasken. Hasken attended the meeting, but she “withheld” her vote.

          The same month, Ebling’s attorney sent Hasken an email asking her to

resign her position as trust advisor and appoint Ebling her successor. Hasken

refused to resign as trust advisor, and Ebling and Abby McDonald then filed their

action.

          Their petition alleged Hasken

          ha[d] failed to perform the duties of a trust advisor, been negligent in
          managing the voting shares of A.Y. McDonald Industries, Inc., made
          mistakes in judgment sufficiently serious so as to indicate that the
          removal of her as trust advisor is necessary to save the trust
          property, and breached her fiduciary duty thus jeopardizing the value
          of the trust property and the interests of the beneficiaries thereof.

Ebling and Abby McDonald also asked the court to appoint Ebling as the successor

trust advisor.

          In February 2016, Ebling and Abby McDonald filed a motion for summary

judgment. In their motion, the plaintiffs alleged that Hasken “acted under an

impermissible conflict of interest” at the December 2014 special shareholders

meeting when she did not attend the meeting and took no action with the 625

shares allotted to her as advisor.        Ebling and Abby McDonald also asserted

Hasken breached her duty on March 13, 2015, when the only agenda item was

approving the slate of directors and Hasken “withheld” her vote. Ebling and Abby
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McDonald maintained that because both votes impacted her individually, the only

proper course of action for Hasken was to proxy her votes to a third party.

Additionally, Ebling and Abby McDonald asked the court to appoint Ebling as the

successor advisor to Hasken, noting that the trust instrument provides for the trust

advisor to name their own successor “[i]n the event of the death, resignation, or

inability” to serve; at the same time, Ebling and Abby McDonald argued that the

court’s removal of Hasken would not fall within either of three enumerated

categories.

       Hasken resisted the motion for summary judgment,1 maintaining the trust

instrument gave the trust advisor the right, but not the obligation, to vote one-half

of the 1250 shares. She claimed her decisions not to vote and to withhold her vote

did not implicate a fiduciary duty.

       In May, the district court granted in part the plaintiffs’ motion for summary

judgment, ruling:

              The facts here are not in dispute. The only dispute is whether
       Hasken’s failure or refusal to vote constitutes a breach of her
       fiduciary duty. Hasken herself admits that there was a conflict of
       interests [when, in] her memorandum of authorities, she describes
       “an obvious appearance of conflict of interest.” Perhaps the most
       fundamental duty of a trustee is to display complete loyalty to the
       interests of the beneficiaries and to exclude all self-interests. If the
       trustees’s individual interest is interjected into trust matters, he or she
       cannot remain independent or uninterested. . . .
              Hasken acted in her own self-interests, rather than putting the
       interests of the beneficiary first. . . . The undisputed facts
       demonstrate a conflict of interest and Hasken’s decision to act on her
       own behalf, rather than to protect the interests of the beneficiaries.
       The plaintiffs’ motion for summary judgment must be granted
       regarding the removal of Hasken as trust advisor.

1
 Hasken did not cross-move for summary judgment in her favor, and we consider the
summary judgment record on the motion of Ebling and Abby McDonald.
                                           6

(Citations omitted.) The court found there were genuine issues of material fact

regarding whether Hasken was “unable to serve,” within the meaning of the trust

provision allowing a trust advisor to appoint their successor.         Trial remained

scheduled on the issue of appointing a successor trust advisor, but the issue was

decided on briefs and argument.

       In October, the district court issued a ruling. The court found persuasive

Ebling and Abby McDonald’s argument that the court’s determining Hasken was

“unfit” to serve was distinct from the trust instrument’s provision allowing a trust

advisor to appoint their successor when they are “unable” to serve. Ebling and

Abby McDonald asserted Hasken was still “able” to serve, as evidenced by the fact

she did so for a number of years and was still physically capable of doing so. In

contrast, Hasken argued the language of the trust gave her the power to appoint

her successor if she met the dictionary definition of inability, that is, “if she lacked

the power, resources, or capacity to remain as trust advisor” and asserted the

reason for her inability to serve was irrelevant. The court noted:

       If Hasken had been removed because she misappropriated trust
       assets, it would be illogical to allow her to appoint her successor. . . .
               Ms. Hasken is clearly “able” to serve as a Trust Advisor. She
       simply chose to put her own personal interests ahead of the interests
       of the trust (and the beneficiaries). She would be unable to serve if
       she became very seriously ill or suffered a debilitating cognitive
       injury. She would be unable to serve if she moved to a remote
       location where communication with the other Trust Advisor and the
       beneficiaries was not possible.

The court then officially appointed Ebling as trust advisor, on the basis that the

second trust advisor was permitted to appoint the successor and Robert McDonald

had proposed Ebling.

       Hasken appeals.
                                           7

II. Discussion.

       A. Preliminary Matters.

       Although it is unclear from the record before us whether the district court

originally had personal jurisdiction over Hasken, she did not file a motion

challenging it, so any possible issue has been waived. See Iowa R. Civ. P.

1.421(1)(b) (stating that lack of personal jurisdiction is properly raised by a pre-

answer motion to dimiss), (4)(b) (providing the issue “shall be deemed waived” if

not contained in a pre-answer motion).

       Additionally, both parties agree that Illinois law controls in this case. Iowa

Code section 633A.1108(2)(a) (2015) provides that “the meaning and effect of the

terms of the trust . . . shall be determined by . . . the law of jurisdiction designated

in the terms of the trust, on the condition that at the time the trust was created the

designated jurisdiction had a substantial relationship to the trust.” Though we

apply Illinois law to the substantive questions involved in this appeal, we apply

Iowa law to the procedural matters. See Brooks v. Engel, 207 N.W.2d 110, 113

(Iowa 1973) (“[P]rocedural matters and matters pertaining to the remedy to be

applied must be determined by the law of the forum.”).

       We apply Iowa law to the procedural matters, and “[w]e review a ruling on

a motion for summary judgment for correction of errors at law.” Otterberg v. Farm

Bureau Mut. Ins. Co., 696 N.W.2d 24, 27 (Iowa 2005). “[W]e view the record in

the light most favorable to the nonmoving party and allow that party all reasonable

inferences that can be drawn from the record.” Wernimont v. Wernimont, 686

N.W.2d 186, 189 (Iowa 2004).

       B. Removal.
                                            8

       Hasken maintains the district court erred when it removed her as trust

advisor.   She claims she had no fiduciary duty to vote the trust’s shares.

Alternatively, she maintains that even if she breached a duty when she took no

action with the trust shares, she should not have been removed because there

was no harm or damages to Ebling and Abby McDonald.                   Ebling and Abby

McDonald respond that it was not the omission of voting that constituted a breach

of fiduciary duty but rather that Hasken’s decision not to vote at the December

2014 shareholders meeting was made in her own self-interest rather than in theirs.

They also assert that they need not establish they suffered damages in order to

have Hasken removed as trust advisor.

       We consider the parties’ second argument first. In an action for breach of

fiduciary duty, the plaintiffs have the burden to prove: “(1) a fiduciary duty on the

part of the defendant, (2) a breach of that duty, (3) an injury, and (4) a proximate

cause between the breach and the injury.” Janowiak v. Tiesi, 932 N.E.2d 569, 583

(Ill. App. Ct. 2010). But the plaintiffs did not plead an action for a breach of fiduciary

duty. Rather, they asked for the removal of a trust advisor, which is similar to the

removal of a trustee.

       The court has “inherent power” “to remove a trustee for breach of trust,

misconduct or disregard of fiduciary duties.” Altschuler v. Chicago City Bank &

Trust Co., 43 N.E.2d 673, 676 (Ill. 1942), rev’d in part on other grounds by Yedor

v. Chicago City Bank & Trust Co., 44 N.E.2d 604, 606 (Ill. 1942). And “the remedy

for a breach of trust or failure to perform a duty by the trustee is [her] removal and

the appointment of a new one.” Id. However, under Illinois law, where it is the

settlor’s intent to have trustees who are officers or employees, the general fiduciary
                                           9

rules are modified. See Tankersley v. Albright, 374 F.Supp. 538, 543 (N.D. Ill.

1974), rev’d on other grounds, 514 F.2d 956 (7th Cir. 1975).

       It is a common situation, for a testator who owns what he deems a
       good business, to include it in a trust and to appoint as one of the
       trustees, an officer or employee who is familiar with the business.
       His reasons are too patent to require comment. [The testator] chose
       among his trustees, two men who had been officers of the company
       since it was originally incorporated. It would be a strange rule of law
       to hold that the trustees were guilty of bad faith, self-dealing, or other
       improper conduct if they failed to resign their corporate positions, and
       thus discontinue the very reason for their selection.

Id. (alteration in original) (citation omitted). Where the testator, the trust document,

or historical practice in administration of the trust shows the trustee—or in this case

the trust advisor—is an active member of the company, the court will not interfere

on the basis of conflicts of interest unless the trustee’s act constitutes fraud, bad

faith, dishonesty, or an abuse of discretion. Id. “It is well established that a trustee

may occupy conflicting positions in handling the trust where the trust instrument

contemplates, creates, or sanctions the conflict of interest.” Dick v. Peoples Mid-

Illinois Corp., 609 N.E.2d 997, 1002 (Ill. App. Ct. 1993). “The creator of the trust

can waive the rule of undivided loyalty by expressly conferring upon the trustee the

power to act in a dual capacity, or he can waive the rule by implication where he

knowingly places the trustee in a position which might conflict with the interest of

the beneficiaries.” Id.

       Whether this modified standard is applicable here should be resolved during

the process of trial.     Arguably, the trust document specifically contemplates

potential conflicts of interest because the trust advisor is contemplated to be part

of the company. Paragraph 6 of the trust document provides “Nothing in this

paragraph 6 shall be construed as imposing on any advisor at any time acting
                                           10

hereunder any other additional obligation or liabilities with respect to his actions or

non-actions as a director, officer, employee, or stockholder” of the company. In

addition, the summary judgment record shows it has been a practice for the advisor

to be actively employed by and involved in the management of the company.

However, the trust instrument states, “The status of the advisor from time to time

acting hereunder shall be that of a fiduciary and no advisor shall have any power

or authority under any circumstances to act in a nonfiduciary capacity.”

       Even if a conflict of interest was not contemplated under the circumstances,

the district court erred in granting summary judgment. “Generally, a trustee owes

a fiduciary duty to a trust’s beneficiaries and is obligated to carry out the trust

according to its terms and to act with the highest degree of fidelity and utmost good

faith.” Faville v. Burns, 960 N.E.2d 99, 109 (Ill. App. Ct. 2011). “Further, a trustee

owes a fiduciary duty to serve the interests of the beneficiaries with total loyalty,

excluding all self-interests, and is prohibited from dealing with the trust’s benefit

for his [or her] own individual benefit.” Id.

       The district court concluded Hasken admitted there was a conflict of

interest—as a matter of law—in its ruling to remove her as trust advisor. We

disagree; as the court correctly quoted, Hasken admitted there was “an obvious

appearance of conflict of interest.” (Emphasis added.) In fact, she chose not to

act at the December 2014 special board meeting—on the advice of counsel—in

order to avoid such an appearance of conflict.

       Viewing the evidence in the light most favorable to Hasken, there is a

genuine issue of material fact whether Hasken’s decision not to vote the shares

allotted to her as trust advisor resulted in a conflict of interest. First, nothing in the
                                         11

language of the trust instrument obligates Hasken to vote the shares allotted to

her. Ebling and Abby McDonald concede in their brief that the trust instrument

does not create “a duty to vote the shares in absolutely every circumstance.”

Moreover, Hasken’s choice to take no action did not affect the ultimate vote; a

quorum was still present. And while it is undisputed Hasken’s decision not to vote

was against the wishes of the plaintiffs-beneficiaries, there is no evidence her

refusal to vote was against the interests of the beneficiaries. Cf. Spencer v. Di

Cola, 16 N.E.3d 1, 12 (Ill. App. Ct. 2014) (stating case law “does not prohibit a

trustee from interpreting a trust in a manner that is unfavorable to one beneficiary’s

wishes” (citing Northern Trust Co. v. Heuer, 560 N.E.2d 961(Ill. App. Ct. 1990))).

A beneficiary’s wish is not equivalent to a beneficiary’s interest. Id.

       “[R]emoval of a trustee is an extreme remedy.” Laubner v. JP Morgan

Chase Bank, N.A., 898 N.E.2d 744, 467 (Ill. App. Ct. 2008). And “[n]ot every

instance of mistake or neglect on the trustee’s part requires the removal of the

trustee.” Id. “The court should remove a trustee only if the trustee endangers the

trust fund and removal is clear.” Id. Moreover, “[p]ersonal hostility between a

trustee and a beneficiary is not a per se ground for removal of the trustee.” Id.

       Because there are genuine issues of material fact and we cannot say as a

matter of law that Hasken’s choice to take no action with the shares was against

the interests of the beneficiaries, we reverse the district court’s grant of summary

judgment removing Hasken as trust advisor.2 We remand for further proceedings.

       REVERSED AND REMANDED.

2
 Because we reverse the court’s ruling removing Hasken as a trust advisor, we need not
consider whether she would have had the right to appoint her successor.