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Trusts & Estates – Uniform Transfers to Minors Act – Accounting – Interest – First Impression — Attorney’s Fees – Speculative Investment

Trusts & Estates – Uniform Transfers to Minors Act – Accounting – Interest – First Impression — Attorney’s Fees – Speculative Investment

Belk v. Belk (Lawyers Weekly No. 12-07-0583, 52 pp.) (Douglas McCullough, J.) Appealed from Mecklenburg County Superior Court. (W. Erwin Spainhour, J.) N.C. App. Full-text opinion.

Holding: Where the Uniform Transfers to Minors Act is silent as to the contours of the accounting remedy provided for in G.S. § 33A-19(a) and (d), we hold that a trial court may award interest on funds wrongfully disbursed, representing the loss of appreciation on such funds.

We affirm the trial court’s order requiring respondent to reimburse his daughter’s Uniform Transfers to Minors Act (UTMA) accounts in the amount of $73,269.80, plus interest totaling $58,944.24, and attorney’s fees in the amount of $138,043.55.

The trial court awarded interest on the wrongfully removed funds, accruing from the date the funds were removed, as a reimbursement of the lost income to the custodial account. Contrary to respondent’s argument, the trial court was not purporting to award prejudgment interest under G.S. § 24-5(b). The only reason the trial court mentioned G.S. § 24-1 was because that statute establishes a legal rate of interest, which was employed by the expert witness in calculating the amount of interest that would have accrued on the withdrawn funds had they not been improperly removed by respondent.

The question of what remedies are available in an accounting action under the UTMA presents an issue of first impression in this state.

The greater weight of authority among other jurisdictions deciding this issue allows an award of interest, representing the loss of appreciation of the funds wrongfully disbursed, as an element of damages recoverable in an accounting action under UTMA.

We agree with the trial court’s conclusion that respondent should be liable for the interest that would have accrued on the amount of the funds wrongfully disbursed from the UTMA accounts, because, as the trial court reasoned, “If the Respondent had not improperly expended and invested Petitioner’s custodial funds, the minor would have had the benefit of those funds growing in the custodial account.” In addition, we find no error by the trial court in selecting the legal rate of interest in calculating the amount of interest owed by respondent, given that such rate is established by statute.

Attorney’s Fees

G.S. § 6-21 enumerates certain types of cases in which attorneys’ fees may be included as a part of the costs awarded by the trial court. One such action is “any action or proceeding which may require the construction of any will or trust agreement, or fix the rights and duties of parties thereunder.”

The National Conference of Commissioners on Uniform State Laws noted that the UTMA “might be considered a statutory form of trust….” Leading treatises and courts in other states agree.

We believe the generic provision in G.S. § 6-21(2) allowing for the award of attorney’s fees in an action to fix the rights and duties of a party under a trust agreement encompasses actions under UTMA for the removal of a custodian and resulting accounting, such as the present case. When the court must order an accounting and determine the personal liability of the custodian under

G.S. § 33A-19(a) or when the court must order the removal of a custodian under G.S. § 33A-18(f), the court is necessarily engaged in an action to determine the rights and duties of the custodian on the custodial account, a statutory form of trust agreement, thereby triggering the statutory authority under G.S. § 6-21(2) to award attorney’s fees in such actions.

The greater weight of authority allows for an award of attorney’s fees in actions against an UTMA custodian for removal and an accounting.

Further, there is ample authority providing for not only an award of attorney’s fees in this case, but also for that award to be assessed against respondent personally, as custodian, rather than against the corpus of the UTMA account. The goal of a breach of fiduciary duty action under the UTMA is to make the minor beneficiary whole, which cannot be accomplished if the minor, either personally or by way of her account funds, must expend more in attorney’s fees to recover the lost corpus of the account than its original value.

In In re Trust Under Will of Jacobs, 91 N.C. App. 138, 370 S.E.2d 860 (1988), this court emphasized, “General common law principles hold that a trustee’s breach of trust subjects him to personal liability.”

The trial court characterized respondent’s conduct as “egregious.” Respondent undoubtedly would have been personally liable for the attorney’s fees at issue, were this an ordinary breach of trust action. Where the conduct of the trustee or custodian is egregious and warrants removal, as found by the trial court in the present case, we believe our case law and statutory authority allow for the taxing of attorney’s fees and costs against the trustee or custodian in a personal capacity.

We hold that there exists statutory authority in this state to tax attorney’s fees against respondent in a personal capacity as a result of his egregious conduct in breaching his fiduciary duties as a custodian under the UTMA.

As to the reasonableness of the amount of the award, respondent’s sole argument is that an award of attorney’s fees cannot, as a matter of law, be greater than 15 percent of the claim. Respondent relies on West End III Partners v. Lamb, 102 N.C. App. 458, 402 S.E.2d 472 (1991), which involved the collection of an outstanding debt under a promissory note. The present case involves neither the collection of an outstanding debt on a note nor the application of the provisions, including the 15 percent cap, of G.S. § 6-21.2. Respondent’s reliance on Lamb is entirely misplaced, and respondent’s argument on this issue is without merit.

The record contains ample competent evidence supporting the trial court’s conclusion that the amount of attorney’s fees awarded in this case was reasonable.

Risky Investment

Respondent invested $51,868.92 of his daughter’s money in a highly speculative, risky venture capital fund. Although the “prudent investor” standard permits high-risk investment of a small portion of an account corpus, G.S. Chapter 33A explicitly adopts a strict variation of the “prudent person” rule for UTMA accounts.

In making investments of trust funds, the trustee is under a duty to make such investments and only such investments as a prudent man would make of his own property having in view the preservation of the estate and the amount and regularity of the income to be derived. Accordingly, a trustee is not generally authorized to make or retain trust investments that are speculative, even where they are of such promise and character that a prudent person might make them for himself.

Under the applicable prudent person rule, an UTMA custodian is forbidden from investing even a small portion of the custodial funds speculatively, which includes investment in new enterprises. Under the prudent person rule, any speculative investment is a breach of trust.

There is ample evidence in the record, including testimony by respondent himself, referring to Piedmont Ventures as a “venture capital fund” that invested in “start-up companies.” The trial court’s finding of fact that the Piedmont Ventures investment was highly risky and speculative and inappropriate for the UTMA funds is supported by competent evidence and supports the trial court’s conclusion of law that such disbursement was in violation of his fiduciary duty under the UTMA.



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