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Trustee must be impartial in beneficiary dispute, COA rules

 

Considering a question of first impression in the state, the North Carolina Court of Appeals has ruled that a trial court erred by ordering distributions from a disputed trust to some putative beneficiaries, but not others, and declining to freeze the trust.

Robert Lane Falls Jr. died in 2015 at the age of 74 and was survived by his wife, Dianne C. Sellers, and his three adult children from his first marriage: Mary Cooper Falls Wing, Ralph Lane Falls III and Louise Falls Cone. Cone and Falls III also had surviving children.

In 2011, Falls Jr. had created a revocable trust, naming Goldman Sachs Trust Company as the acting trustee and naming Wing, Falls III, and two of Falls III’s children as the beneficiaries of 90 percent of the trust’s assets. But the following year, Falls Jr. underwent brain surgery and later began to suffer a series of serious physical and mental health problems, resulting in recurring hospitalization, and rehabilitative care. For the rest of his life, he relapsed into heavy drinking, experienced depression, manic episodes and complications with bipolar disorder.

During this time, Falls Jr. executed six amendments to the trust, each time changing the successor trustee and altering, eliminating, or adding various beneficiaries. The final amendment gave 25 percent to Sellers—who Falls Jr. married the same day—35 percent to Cone and her husband, and 20 percent to each of Cone’s two children. After Falls Jr.’s death, Goldman Sachs paid distributions from the trust to Sellers and Cone pursuant to the final amendment.

Wing and Falls III challenged the validity of the amendments. Despite having notice of their claims, the trustee continued making distributions. Sellers and Cone filed a motion seeking an order directing Goldman Sachs to pay the cost of defending the trust as amended; Wing countered with a motion to freeze the trust. The trial court granted the motion to pay and denied the motion to freeze, and Wing and Falls III appealed.

Judge John M. Tyson, writing for the court in an Oct. 20 opinion, reversed that ruling, holding that a trustee has a duty to remain neutral regarding competing claims between putative beneficiaries.

“The trust does not need defending in the case before us because there is no contest to the validity of the trust,” he wrote. “This dispute is between the rightful beneficiaries, and the trust is not in peril. Goldman Sachs has breached their duty of neutrality by deciding who the rightful beneficiaries are before pending litigation has resolved that issue.”

Before reaching the merits, Tyson had to deal with a jurisdictional issue. The trial court didn’t certify its order pursuant as immediately appealable, but Wing argued that substantial rights were affected and that waiting would work injury to her and Falls III. Tyson agreed.

Goldman Sachs had already distributed more than $2 million from the trust to Sellers and Cone for expenses and legal fees they incurred in opposing Wing and Falls III’s claims, more than 40 times the amount found in earlier cases to be significant, Tyson noted. Further, a ruling purporting to determine who is entitled to money affects a substantial right, and the deprivation of immediate appellate review clearly disadvantaged Wing and Falls III.

“Goldman Sachs, as purported trustee, held trust funds whose beneficiaries are in dispute, but nonetheless distributed funds to one group, while the trust beneficiaries’ case is pending … If Wing and Falls III succeed in their challenges to the amendments to the trust, the court’s ruling on defendants’ motion to pay adversely affects their equitable interests in the disbursed and depleted assets of the trust.”

That having been sorted out, Tyson concluded that the order to freeze trust distributions should have been granted since North Carolina statutes require a trustee to “administer the trust as a prudent person would, by considering the purposes, terms, distributional requirements, and other circumstances of the trust,” as well as “act impartially towards all purported beneficiaries.”

While Goldman Sachs argued that as a trustee, it had a duty to defend the trust, Tyson explained that the trust itself was not being challenged. Instead, Wing and Falls III were objecting to the trustor’s capacity to execute the amendments and to determine the rightful beneficiaries of the trust.

The duty of—and liability for—distribution to disputed beneficiaries was an issue of first impression in North Carolina, but several other states (including California, Connecticut, New Jersey, Nevada, and Ohio) have considered similar scenarios and found inequity in allowing the trust to fund one side of the dispute in a contest over beneficiaries.

“Goldman Sachs asserts attorney’s fees are ‘costs of administration’ and a valid expense if incurred by the trustee while defending the trust,” Tyson wrote. “Here, the trust does not require defending, rather, as purported beneficiaries, defendants seek to use trust assets to maintain their positions. The trustee is not required to pay attorney fees or legal costs unless the res of the trust is in peril.”

Tyson reversed the motion to pay order and remanded to the trial court for entry of an order allowing the motion to freeze.

Raleigh attorney J. Anthony Penry of Penry Riemann represented Falls III.

“The takeaway from the decision is that a trust cannot distribute the res to one set of beneficiaries and not another where the issue of which beneficiary is supposed to take is involved,” Penry said. “The procedural issue about what constitutes a substantial right has wider applicability, but the case will have more of an impact on trusts and estates as a matter of first impression.”

Johnny M. Loper of Womble Bond Dickinson in Raleigh, who represented Wing, did not respond to a request for comment. Neither did Eva G. Frongello, of Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan in Raleigh, who represented Goldman Sachs.

The 21-page decision is Wing v. Goldman Sachs Trust Co. (Lawyers Weekly No. 011-274-20). The full text of the opinion is available online at nclawyersweekly.com.


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