by Dan Conlisk
In establishing trusts, trust creators commonly appoint more than one trustee. Although they take various forms, these co-trustee arrangements frequently designate an individual trustee (a family member or friend) and an institutional trustee (a bank or trust company). The individual trustee may be chosen based upon his or her interest in investing, business experience or entrepreneurial inclinations. The institutional trustee may be selected to insure that the prudence standards that govern the investment of trust assets are followed. While this sort of co-trustee structure is often effective, the failure of either, or both, trustees to abide by fiduciary standards can lead to serious damages to the trust and the interests of its beneficiaries.
For example, an entrepreneurial individual trustee may view her access to trust funds as an opportunity to invest in her business ventures. An individual trustee with a desire to play the market may consider trust assets source of funds to do so. An institutional trustee may hesitate to intervene, or may allow the use of trust assets for such purposes, out of a desire not to upset the client relationship.
Ramsey v. Boatman’s First National Bank, 914 S.W.2d 384 (Mo. Ct. App 1996), held an institutional trustee liable in these sorts of circumstances. In Ramsey, trust appointed an individual (Campbell) and Boatman’s First National Bank (the “Bank”) as co-trustees. Campbell was the beneficiary’s son. He was a real estate developer, and convinced his mother (“Mother”) that the trust should invest in his real estate limited partnerships. Campbell also took numerous loans from the trust, even though Bank’s commercial loan department informed the Bank’s trust department of significant problems that the Bank was having with its personal loans to Campbell. Id. at 387. As a result, “the trust portfolio changed from a mix of mostly blue chip stocks, bonds and government securities to a substantial percentage of the trust holding interest in real estate limited partnerships and owning Hoit Campbell’s promissory notes.” Id. at 386. Campbell ultimately defaulted on $155,000 of loans taken from the trust. Id. at 387.
Mother successfully sued the Bank as co-trustee. The court of appeals affirmed the judgment against the Bank for a number of reasons. First, it held that – regardless of what Campbell told his Mother about the investments – the Bank had an independent obligation to explain to Mother the conflicts of interest inherent in investing in Campbell’s real estate ventures and in the loans Campbell was taking from the Trust. This was particularly important in light of the Bank’s policy of avoiding the placement of trust assets in such speculative investments. Id. at 388.
Second, the court admonished that the Bank could not rely upon Campbell, its co-trustee, to administer the trust properly. It explained that, where there is more than one trustee, “each trustee is under a duty to the beneficiary to participate in the administration of the trust and to use reasonable care to prevent a co-trustee from committing a breach of trust or to compel a co-trustee to redress a breach of trust.” Id. at 388. Thus, the Bank could not escape liability for Campbell’s imprudent investments by failing to participate in trust administration. Id.
Finally, the court emphasized that, as an institutional trustee, “a bank is generally chosen for objectivity and expertise. A bank cannot take a passive role in the administration of the trust for which it accepted a fiduciary responsibility as a trustee. If the trustee were obligated to merely do as instructed by a co–trustee, the role of trustee would be diminished to conduct less than that expected of a fiduciary.” Id.
Ramsey was decided before Missouri adopted the Uniform Trust Code (the “UTC”). Nonetheless, the obligations that the UTC places upon co-trustees are essentially the same. It requires that all co-trustees must participate in the administration of the trust subject to very limited exceptions. Mo. Rev. Stat. §456.7-703.1(3). It allows a co-trustee to avoid liability for the conduct of his/her co-trustee only if he or she exercised reasonable care to prevent the co-trustee from committing a serious breach of trust and acted to compel the errant co-trustee to remedy the breach. Id. at §456.7-703.1(6) & (7). As in Ramsey, one co-trustee may not passively allow another co-trustee to administer the trust and thereafter disclaim responsibility for the co-trustee’s misconduct.
Simply stated, co-trustees are jointly responsible for the administration of a trust. One cannot escape such responsibility for misconduct merely claiming that the other is at fault. Both are fiduciaries and ultimately must answer for the damages such misconduct causes.