Attorneys & Professionals
A recent trial victory on behalf of a major banking client clarifies three key points of law in Ohio fiduciary litigation. In June 2012, a Vorys trial team led by Daniel J. Buckley and Lisa Babish Forbes defended a trustee in a five-day bench trial against numerous breach of fiduciary duty claims brought by successor trustees and beneficiaries. Last month, the court issued a defense verdict on all 13 claims. This decision provides critical interpretation of the Ohio Trust Code on the issues of
- the applicable standard of proof,
- the enforceability of trust language that limits the liability of trustees, and
- statutes of limitations applicable to breach of fiduciary duty claims.
National City Bank, which is now a part of PNC Bank, National Association (PNC), had been the trustee of the irrevocable trust at issue for more than 50 years. The primary beneficiary of the trust, Lorance W. Lisle, was a wealthy man who rarely drew funds from the trust and consistently advised the trustees of his intention that the trust funds be invested in equities for the long term. Mr. Lisle's three adult children (who became the primary beneficiaries after their father's death in 2007) and two successor trustees alleged, among other things, that National City Bank ought to have foreseen the market collapse of 2008, and should have liquidated the entire portfolio and invested in 10-year treasury bonds in 1999. Plaintiffs also claimed that the Bank should have known that Mr. Lisle was incompetent to serve in the role of sole member of the Advisory Committee, as prescribed by the trust document, despite consistent cogent communication with Mr. Lisle, no notice of any incapacity from family members, and no finding of incompetence by any court during Mr. Lisle's lifetime.
High Standard of Proof: Clear and Convincing Evidence
The court ruled that the burden of proof for breach of fiduciary duty claims is "clear and convincing" evidence. Plaintiffs were unable to meet this burden, which requires "more than a mere preponderance of evidence" and will produce in the mind of the trier of facts a "firm belief or conviction as to the facts sought to be established." Lansdowne v. Beacon Journal Pub. Co., 32 Ohio St.3d 176, 180-181, 512 N.E.2d 979 (1987).
Exculpatory Clause Upheld
The court also upheld the exculpatory clause contained in the trust at issue. Many trusts contain exculpatory clauses designed to limit the liability of the trustee to acts of "bad faith," "willful default," or other egregious behavior. The Ohio Trust Code provides that language in a trust that purports to relieve a trustee of liability is "unenforceable to the extent it relieves the trustee of liability for breach of trust committed in bad faith or with reckless indifference to the purposes of the trust or interests of a beneficiary or was inserted as the result of abuse by the trustee of a fiduciary or confidential relationship to the settlor." (R.C. 5810.08) The language of the exculpatory clause in this trust relieved the trustee of liability for all acts done in "good faith, or for any mistake or error of judgment, or otherwise, except for bad faith or willful default." Plaintiffs argued that reckless indifference was different from willful default and that the exculpatory clause was unenforceable because it sought to exculpate the trustee for acts of reckless indifference to the purposes of the trust or interest of a beneficiary.
The court disagreed, holding that the exculpatory clause was enforceable. The court held that the terms in the Trust Code were "remarkably similar" to the trust language and explained that the term "willful default" in the trust language incorporates the concept of "reckless indifference" from the Trust Code because "both require wanton misconduct."
Plaintiffs testified at trial about a series of acts that they argued could be aggregated to show reckless indifference, even though none was reckless in isolation. The court held that "the cumulative effect of a series of acts, even when they involved poor judgment or even negligence" do not translate into a claim of bad faith, citing Griffith v. Buckeye Union Ins. Co., 10th Dist. No. 86 AP-1063, 1987 Ohio App. LEXIS 8971 (Sept. 29, 1987).
In the absence of an exculpatory clause, a corporate trustee is held to a higher professional standard under R.C. 5808.06 in light of its "special skills." Here, however, the court found that the Bank's trust department had not acted in bad faith or willful default of its duties and, thus, the Bank was not liable.
Pre-Trust Code Statutes of Limitations Barred Claims Against Trustee
In addition to holding in the Bank's favor on the merits, the court also ruled that most of the plaintiffs' claims were barred by statutes of limitations. This question is not as straightforward as one might expect.
Notwithstanding the update to the Ohio Trust Code in 2007 and its provision of a specific statute of limitations for breach of trust claims, the court did not apply the Trust Code statute of limitations (R.C. 5810.05) because another provision of the Trust Code properly applied. The Trust Code's "application" provision (R.C. 5811.03), which is tucked away under the innocuous heading of "Miscellaneous Provisions," provides that if a statute of limitations has commenced to run under an earlier statute, that statute continues to apply even if it has been repealed or superseded. This provision absolutely barred most of plaintiffs' claims, without the need for proof concerning discovery of the alleged breach or, in the language of the Trust Code, when the beneficiary "knew or should have known of the breach of trust." (See R.C. 5810.05(C)).
Prior to January 1, 2007, claims that alleged breach of fiduciary duty were governed by R.C. 2305.09, which is the general four-year "other tort" statute of limitations. The court held that this statute's discovery rule (for fraud) did not apply to toll the statute for breaches of fiduciary duty, citing Stokes v. Berick, 11th Dist. No. 98-L-094, 1999 Ohio App. LEXIS 6264 (Dec. 23, 1999). Thus, this pre-Trust Code statute of limitations barred all of plaintiffs' claims that accrued more than four years before the case was filed — without any question of when the alleged breach was or should have been discovered.
Another pre-Trust Code statute of limitation (R.C. 1339.69) provided that beneficiaries must challenge matters disclosed in written reports from trustees within two years of receiving the report. National City Bank, in this case, provided detailed reports that satisfied the statutory requirements. The court held that all claims concerning matters disclosed in those reports two years before the filing of the complaint were barred.
This decision is a significant win not only for PNC, but also for trust departments throughout Ohio. The clear articulation of the heightened burden of proof for breach of fiduciary duty claims will make it more challenging for plaintiffs to win, and their decision whether to bring suit more difficult. Plaintiffs may not aggregate conduct over many years to establish bad faith and, thus, a breach of fiduciary duty. And, finally, the application of pre-trust Code statutes of limitations — without a discovery rule — may provide an increased measure of peace to trustees and former trustees.
Plaintiffs have appealed this decision to the Sixth District Court of Appeals. Please contact your Vorys attorney for further information or updates as this matter proceeds.
Case information: Newcomer v. National City Bank, Williams County, Ohio Probate Court, Case No. 074003 (Judge Daniel Gershutz, presiding).
Date of decision: September 24, 2012