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Trustee's Self-Dealing Wasn't Breach; Heirs to Pay Atty's Fees

By Gabriella Khorasanee, JD | Last updated on

What happens when you are filthy rich and have lots of time on your hands? You sue your trustees of course, for breach of fiduciary duty. What happens when you lose the lawsuit? You have to pay your trustee's attorney's fees.

In a recent 7th Circuit case, the heirs not only lost their claim, but now owe attorney fees exceeding the amount they were suing for.

Sometimes, you shouldn't look a gift horse in the mouth.

Last week, the 7th Circuit decided a case brought by four beneficiaries, the children of multimillionaire Jim French. To benefit his children upon his death, Jim French created two interlocking irrevocable trusts for his children. French did not like the way the original trustees were managing the trust, and after several trustees, French named Wachovia Bank as the trustee.

Wachovia reviewed the assets of the trusts and found two life insurance policies that were draining resources because of steep annual premiums. Submitting several alternatives to French, it was decided to surrender the existing policies and obtain two policies through John Hancock. Wachovia Insurance Services acted as the broker, and submitted a conflicts of interest waiver to French to sign.

French refused, but upon reflection and consulting with legal counsel, Wachovia decided that it did not need the conflicts clause and proceeded with the insurance swap. As a result of the sale and purchase of new life insurance policies, Wachovia made a $512,000 commission, plus 2 percent of the new policies' annual premiums for 10 years. Both parties agreed that the commission, though significant, was within industry standards.

The French children, however, sued Wachovia for breach of fiduciary duty, and after several changes in venue, both parties moved for summary judgment. The district court granted Wachovia's motion for summary judgment finding no breach of fiduciary duty or self-dealing, and also awarded Wachovia attorney's fees and costs.

The 7th Circuit reiterated established trust law that states trustees owe beneficiaries a fiduciary duty and should not engage in self-dealing. The court, however, also noted that the language of a trust "may waive the general rule and authorize the trustee to engage in transactions that involve self-dealing."

Here, the explicit language of the French trust empowered the trustee "to continue as trustee and to deal with any trust hereunder without regard to conflicts of interest." Finding the language of the trust clear, the court noted that self-dealing transactions fall under the umbrella of "conflicts of interest." Finding that the change in life insurance policies "made good business sense," the court found Wachovia's actions "eminently reasonable and... certainly made in good faith."

The Milwaukee Journal Sentinel reports that in 2011 Wachovia's attorney fees were set at $675,174.58 -- far exceeding the original amount of $512,000 commission in question. Sometimes, you should just leave well enough alone.

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