Opinion
No. 104,812.
2013-01-11
Malia A. SCHARTZ and Michael R. Ong, Trustees of the Vonley R. Bucklin Revocable Trust No. 1 and the Joyce A. Bucklin Revocable Trust No. 1, Appellants, v. Patrick N. BARKER, Appellee.
Appeal from Johnson District Court; Gerald T. Elliott, Judge. Michael R. Ong, of Ong Law Firm, P.A., of Leawood, for appellants. J. Mark Meinhardt, of Overland Park, for appellee.
Appeal from Johnson District Court; Gerald T. Elliott, Judge.
Michael R. Ong, of Ong Law Firm, P.A., of Leawood, for appellants. J. Mark Meinhardt, of Overland Park, for appellee.
Before PIERRON, P.J., MALONE, C.J., and BUKATY, S.J.
MEMORANDUM OPINION
PER CURIAM.
Malia Schartz and Michael Ong, cotrustees of the Vonley R. Bucklin Revocable Trust No. 1 and Joyce A. Bucklin Revocable Trust No. 1 (Trusts), appeal the district court's decision granting summary judgment in favor of former trustee, Patrick Barker, on their claims for breach of fiduciary duties. They argue that the district court erred in finding that the language of the Trusts relieved Barker of all his duties arising under the prudent investor rule of the Kansas Uniform Prudent Investor Act (UPIA), K.S.A. 58–24a01 et seq. , and thus Barker could not be held liable as a matter of law. They also argue that the district court erred in finding that the exculpatory clause of the Trusts shielded Barker from all liability except for his “willful default” and that they had failed to present evidence of a breach rising to the level of “willful default.”
We conclude the district court erred in determining that the language of the Trusts eliminated the prudent investor rule in its entirety and that Barker owed no duties arising thereunder. We also conclude the district court erred in finding that the exculpatory clause of the Trusts shielded Barker from liability. Because we find there were genuine issues of material fact precluding summary judgment, we reverse the district court's judgment and remand for further proceedings.
Factual and Procedural Background
In February 1996, Vonley Bucklin executed a revocable trust agreement naming himself as donor, trustee, and beneficiary. His wife, Joyce Bucklin, likewise executed a revocable trust agreement naming herself as donor, trustee, and beneficiary. The Trusts, which are identical in all respects relevant to this appeal, provide that upon the death of either of the donors, Patrick Barker shall serve as successor trustee and the Trusts shall be for the benefit of the surviving spouse. The Trusts further provide that upon the death of both spouses, the successor trustee shall divide the principal of the Trusts into two separate equal trusts, one for the benefit of the Bucklins' daughter, Malia Schartz, and the other for the benefit of the issue of Malia Schartz.
Joyce died in June 1996, at which time Vonley began serving as successor trustee for her Trust. After Vonley died in December 2002, Barker began serving as successor trustee for both Trusts, and he acted in this capacity through June 2006.
On October 18, 2007, the district court appointed Schartz and Michael Ong as cotrustees of the Trusts. That same day, Schartz and Ong (together, plaintiffs) filed a petition against Barker, alleging that in his administration of the Trusts he had breached his duties of loyalty, prudent administration, efficient administration, and proper delegation. Specifically, the plaintiffs alleged that Barker breached his duty of loyalty by comingling the Trusts' assets with Barker's personal assets and with his mother's personal assets in a speculative business venture that lost substantial value. The plaintiffs further claimed that Barker hired his son, Joshua Barker, to act as “fund manager” for both Trusts. The plaintiffs alleged that Joshua lacked any formal training in the profession of fund management and he lacked any prior experience in acting as an investment manager for assets held pursuant to trust instruments. The plaintiffs also alleged that Barker failed to conduct an inquiry as to the suitability of Joshua to act as fund manager for the Trusts and that Barker failed to send written notice to the beneficiaries that he intended to delegate investment functions to Joshua. The plaintiffs ultimately fixed damages related to Barker's breaches in excess of $400,000.
After the parties engaged in discovery, Barker filed a motion for summary judgment. He argued that the duties he was alleged to have breached all arose under the prudent investor rule of the UPIA, but that the language of the Trusts effectively eliminated the prudent investor rule and thus he could not be held liable for the breach of any duties arising thereunder. He further argued that under the language of the Trusts he could only be held liable for his “willful defaults” and that the plaintiffs had failed to come forward with any evidence that he had intentionally harmed the Trusts. The plaintiffs filed a response, arguing that the exculpatory language of the Trusts had to be read in light of the limiting provisions of the Kansas Uniform Trust Code (KUTC), K.S.A. 58a–101 et seq. , and thus the exculpatory language did not eliminate Barker's fiduciary duties of care. The plaintiffs contended that there were genuine issues of material fact as to whether Barker had breached his duties.
The district court held a hearing on the motion and adopted Barker's statement of uncontroverted facts, which established the existence and terms of the Trusts and Barker's role as successor trustee. The district court ordered that the pretrial order be amended and that the parties submit supplemental briefs explaining their positions as to each legal theory set forth in the amended pretrial order. In the amended pretrial order, the plaintiffs set forth the following legal theories and factual contentions in support thereof:
• Breach of duty of loyalty under K.S.A. 58a–802 (KUTC), K.S.A. 58–24a05 (UPIA), and Restatement (Third) of Trusts § 78 (2005) (common law). Barker breached this duty by hiring his son as fund manager for the Trusts and by investing the Trusts' assets in a speculative investment partnership in which he and his family members had also personally invested. As a result, the Trusts incurred financial losses.
• Breach of duty of prudent administration under the specific terms of the Trusts, K.S.A. 58a–804 (KUTC), and K.S.A. 58–24a02 (UPIA). Barker breached this duty by hiring his son, who lacked experience or training in fund management, as fund manager for the Trusts. Barker delegated investment decisions to his son and failed to take an active role in the administration and investment of the Trusts' assets. As a result of Barker's failure to properly manage the investment decisions, the Trusts incurred financial losses.
• Breach of duty of efficient administration under K.S.A. 58a–805 (KUTC) and K.S.A. 58–24a07 (UPIA). Barker breached this duty by hiring his son as fund manager and paying him excessive fees in light of his lack of experience and poor investment performance. As a result, the Trusts incurred financial losses.
• Breach of duty of proper delegation of duties and powers under K.S.A. 58a–807(b) (KUTC) and of investment and management functions under K.S.A. 58–24a09 (UPIA). Barker breached this duty by hiring his son, who lacked experience or training in fund management, as fund manager for the Trusts. Further, Barker failed to establish the scope and specific terms of delegated authority, failed to establish a procedure for monitoring investment performance and compliance with the scope of authority, failed to conduct an inquiry into his son's suitability to act as fund manager, and failed to send written notice to the beneficiaries of his intent to delegate investment decisions to his son. As a result, the Trusts incurred financial losses.
• Breach of duty of loyalty by self-dealing under K.S.A. 58a–802(c) (KUTC)
and K.S.A. 58–24a05 (UPIA). Barker breached this duty by hiring his son as fund manager for the trusts, by investing Trust assets in a speculative investment partnership in which he and his family members had also personally invested, and by exerting improper influence over Schartz to invest distributions she had received from the Trusts into a Barker family business venture. As a result, the Trusts incurred financial losses.
After reviewing the amended pretrial order and the parties' supplemental briefs, the district court held another hearing and granted Barker's motion for summary judgment. The district court determined that all five of the plaintiffs' claims ultimately focused on the investment and management of the Trusts' assets and that the key complaint was that the Trusts' assets were improperly invested and that the Trusts lost a substantial amount of money as a result-in other words, that Barker had breached his duties under the prudent investor rule. The district court determined that the UPIA, which governs a trustee's investment and management of trust assets, was the controlling law in the case. The district court further determined that under K.S.A. 58–24a01(b), the prudent investor rule could be altered or eliminated by the language of the Trusts. The district court then found that the following language in the Trusts eliminated the prudent investor rule:
“FIFTH: The [Successor Trustee], in the administration of the trust estate, shall have all of the following express powers in addition to and in furtherance of the general powers conferred to trustees under the laws of the State of Kansas, and the same in nowise shall be considered or construed as limiting or restricting the general power of the Trustee:
....
“(4) To invest and reinvest any and all funds coming into his possession for investment in such securities or property, real or personal, as he may in his absolute and uncontrolled discretion deem proper and suitable, including corporate stocks of all classes, and units or interests in any common trust fund operated by said Trustee solely for the investment of funds in his care as a fiduciary or co-fiduciary, without limitation by any statute, custom, or rule or law, now or hereafter existing, relating to the investment of trust funds; and to hold and retain as an investment for the trust estate, without accountability for loss, any and all of the property or securities which may be delivered, transferred or conveyed to him hereunder by the Donor without any duty to convert or diversify, although they may not be of the character generally regarded by law or custom as proper investments for trust funds.
....
“ TENTH: All powers and discretion granted to the Trustee hereunder are exercisable by the Trustee only in a fiduciary capacity. Except for his willful default, a Trustee shall not be liable for any act, omission, loss, damage or expense whatsoever arising from the performance or non-performance of his duties hereunder. In no event shall the Trustee be liable for any act, omission, loss, damage or expense whatsoever with respect to any act or omission of the Donor, or on account of any investment or action taken by the Donor or pursuant to the instructions of the Donor.”
Finally, the district court determined that under the language of the Trusts Barker could be held liable only for his willful defaults, meaning acts performed with an intent to do wrong or to cause injury. Because the district court found that the plaintiffs had failed to allege any acts by Barker rising to the level of willful default and because Barker owed no duties with respect to prudent investment, the district court concluded that Barker was entitled to judgment as a matter of law. The plaintiffs timely appealed.
On appeal, the plaintiffs argue that the district court erred in determining that the KUTC was inapplicable to their claims against Barker, which led the district court to disregard several important provisions of the KUTC. The plaintiffs further contend that the district court construed the exculpatory language of the Trusts too broadly because it failed to read the Trusts as a whole and in light of the relevant principles and provisions of the KUTC, UPIA, and common law. The plaintiffs assert that even if the exculpatory language of the Trusts could be construed as eliminating Barker's duties of care with respect to the Trusts, there were genuine issues of material fact as to whether Barker relied on the exculpatory language and whether his reliance was reasonable. Finally, the plaintiffs assert that there were genuine issues of material fact as to whether Barker breached his duties. Barker argues that the district court correctly determined that the KUTC was inapplicable and that the exculpatory language of the Trusts eliminated any duties of care he owed with respect to the investment and management of the Trusts' assets.
When the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law, summary judgment is appropriate. The district court is required to resolve all facts and inferences which may reasonably be drawn from the evidence in favor of the party against whom the ruling is sought. When opposing a motion for summary judgment, an adverse party must come forward with evidence to establish a dispute as to a material fact. In order to preclude summary judgment, the facts subject to the dispute must be material to the conclusive issues in the case. On appeal, the same rules apply; summary judgment must be denied if reasonable minds could differ as to the conclusions drawn from the evidence. O'Brien v. Leegin Creative Leather Products, Inc., 294 Kan. 318, 330, 277 P.3d 1062 (2012).
Additionally, resolution of this case requires this court to interpret the Trusts. The interpretation and legal effect of written instruments are matters of law over which this court exercises unlimited review. McGinley v. Bank of America, N.A., 279 Kan. 426, 431, 109 P.3d 1146 (2005). The primary function of a court in interpreting a trust is to ascertain the donor's intent as derived from the document as a whole. Once determined, the intent will be executed unless contrary to law or public policy. If the donor's intent can be clearly ascertained from the words used, there is no reason to employ rules of construction. Instead, a trust is enforced according to its express terms and provisions. In re Estate of Oswald, 45 Kan.App.2d 106, 112, 244 P.3d 698 (2010), rev. denied 292 Kan. 965 (2011). Finally, to the extent that the interpretation and legal effect of a Trust require the statutory interpretation of provisions of the KUTC and UPIA, this court's review is unlimited. See Unruh v. Purina Mills, 289 Kan. 1185, 1193, 221 P.3d 1130 (2009).
Kansas statutory law related to the creation and administration of express trusts falls under two categories: (1) general trustee powers, codified in the KUTC, K.S.A. 58a–101 et seq. ; and (2) prudent investor rules, codified in the UPIA, K.S.A. 58–24a01 et seq. See McGinley, 279 Kan. at 431–36. Although there is significant overlap between the KUTC and the UPIA, K.S.A. 58a–901 provides that the UPIA shall govern the investment and management of trust assets “[n]otwithstanding any provisions of the [KUTC] to the contrary.” Thus, where a claim against a trustee involves the investment and management of trust assets, the UPIA controls over the KUTC where the two overlap. See Kansas Judicial Council Probate Law Advisory Committee's comments on the Proposed Uniform Trust Code, Art. 9, Uniform Prudent Investor Act, pp. 173–74 (2000) (www.kansasjudicialcounsel.org/uniformtrust.shtml). But where the KUTC and UPIA do not overlap, it is reasonable to apply relevant provisions and principles of the KUTC even to claims involving the investment and management of trust assets. See McGinley, 279 Kan. at 431–36 (tracing the history of Kansas statutes related to general trustee powers and prudent investment and applying a synthesis of those statutes to claims involving investment of trust assets). Finally, where there is no relevant statutory provision, Kansas courts turn to the common law of trusts, including the applicable Restatement of Trusts, and principles of equity. K.S.A. 58a–106; see In re Estate of Somers, 277 Kan. 761, 767–69, 89 P.3d 898 (2004).
The district court granted Barker's motion for summary judgment on two separate but related bases. First, the district court found that the uncontroverted material facts, specifically the language of the Trusts themselves, eliminated the prudent investor rule of the UPIA. Thus, the district court found that Barker owed no duties arising thereunder and was entitled to judgment as a matter of law. Second, the district court found that even if Barker owed duties arising under the prudent investor rule, under the language of the Trusts he could not be held liable for breaches of those duties except for his “willful defaults.” Because the district court found that the plaintiffs had not come forward with any evidence rising to the level of willful defaults, the district court concluded that Barker was shielded from liability and was entitled to judgment as a matter of law.
Elimination of the Prudent Investor Rule
K.S.A. 58–24a01 is the opening provision of the UPIA. It states in relevant part:
“(a) Except as otherwise provided in subsection (b), a fiduciary who invests and manages trust assets owes a duty to the beneficiaries of the trust to comply with the prudent investor rule set forth in this act.
“(b) The prudent investor rule, a default rule, may be expanded, restricted, eliminated or otherwise altered by the provisions of a trust. A fiduciary is not liable to a beneficiary to the extent that the fiduciary acted in reasonable reliance on the provisions of the trust.”
The prudent investor rule set forth in K.S.A. 58–24a01 is comprised of three core fiduciary duties—prudence under K.S.A. 58–24a02, loyalty under K.S.A. 58–24a05, and impartiality under K.S.A. 58–24a06—as well as several duties ancillary to and in support of these core duties. See Restatement (Third) of Trusts, Introductory Notes to Chapters 15 and 17 (2005). See generally comments to the Uniform Prudent Investor Act, 7B U.L.A. 15(2006).
Barker contends that consistent with K.S.A. 58–24a01(b), the provisions of the Trusts eliminate the prudent investor rule in its entirety. He points specifically to the Trusts' language in Article Fifth (4), which states that the trustee has the power to invest and reinvest any and all funds coming into his possession “as he may in his absolute and uncontrolled discretion deem proper and suitable ... without limitation by any statute, custom, or rule or law, now or hereafter existing, relating to the investment of trust funds” and which further allows the trustee to hold or retain as an investment any property or security delivered under the Trusts “without accountability for loss ... [and] without any duty to convert or diversify, although they may not be the character generally regarded by law or custom as proper investments for trust funds.”
The plaintiffs make several arguments as to why the language of Article Fifth (4) does not eliminate the prudent investor rule. First, the plaintiffs contend that Article Fifth (4) applies only to the trustee's powers with respect to investments existing at the inception of the fiduciary relationship (called inception or legacy assets) and that the language does not apply to other investments made by the trustee. Second, the plaintiffs argue that regardless of whether Article Fifth (4) applies solely to legacy assets or more broadly to investments in general, the language does not alleviate the trustee from his duty to act with prudence and to exercise his discretion in good faith and in accordance with the terms and purposes of the Trusts and the interests of the beneficiaries. Third, the plaintiffs contend that Article Fifth (4) cannot be read as eliminating the trustee's duty of loyalty and that Barker has not pointed to any other provisions of the Trusts to that effect. Finally, the plaintiffs contend that even if Article Fifth (4) could be read as eliminating the prudent investor rule, there were genuine issues of material fact as to whether Barker reasonably relied upon that language in carrying out his investment decisions.
As to the plaintiffs' argument that Article Fifth (4) applies only to legacy assets, this court must determine the intent of the donors as gathered from the language of the Trusts as a whole. Article Fifth of the Trusts is the section which grants the trustee certain express powers in controlling, managing, investing, and reinvesting the Trusts' assets. Subsection (4) deals specifically with the trustee's power to invest and reinvest the Trusts' assets but contains two separate clauses. The first clause permits the trustee “[t]o invest and reinvest any and all funds coming into his possession for investment,” which by its plain terms applies to all funds regardless of how they became part of the Trusts' estate. The second clause permits the trustee “to hold and retain as an investment in the trust estate ... any and all of the property or securities which may be delivered, transferred or conveyed to him hereunder by the Donor,” which by its plain terms applies only to funds which have already been invested in property or securities and in that form became part of the Trusts' estate through transfers by the donors. Thus, only the second clause deals specifically with legacy assets. See Restatement (Third) of Trusts § 92, comment a, pp. 412–13 (2005) (defining legacy assets and explaining a trustee's duty with respect to legacy assets). The first clause of Article Fifth (4) applies broadly to all investment decisions made by the trustee and thus this court must consider whether the language of that clause eliminates or otherwise alters the prudent investor rule. Specifically, the clause allows the trustee to invest and reinvest funds
“as he may in his absolute and uncontrolled discretion deem proper and suitable, including corporate stocks of all classes, and units or interests in any common trust fund operated by said Trustee solely for the investment of funds in his care as a fiduciary or co-fiduciary, without limitation by any statute, custom, or rule or law, now or hereafter existing, relating to the investment of trust funds.”
The plaintiffs contend that “absolute and uncontrolled discretion” cannot be interpreted literally and that the trustee's broad discretion must still be exercised in good faith and in accordance with the terms and purposes of the Trusts and the interests of the beneficiaries—in other words, the language does not entirely eliminate the trustee's duty to act with some measure of prudence. The plaintiffs' argument finds support under the provisions of the KUTC and other sources of authority. K.S.A. 58a–814 states:
“Notwithstanding the breadth of discretion granted to a trustee in the terms of the trust, including the use of such terms as ‘absolute,’ ‘sole,’ or ‘uncontrolled,’ the trustee shall exercise a discretionary power in good faith and in accordance with the terms and purposes of the trust and the interests of the beneficiaries.”
Likewise, the prudent investor principles of the Restatement (Third) of Trusts, which are the basis for the UPIA, support the conclusion that even the broadest grant of discretion with respect to investment decisions does not completely relieve a trustee of his or her duty to act prudently in making those decisions. Restatement (Third) of Trusts § 87, comment d, pp. 246–47 (2005), which deals generally with judicial control of a trustee's discretionary powers, states in part:
“Once it is determined that the power in question is held in the role of the trustee, however, words such as ‘absolute’ or ‘sole and uncontrolled’ or ‘unlimited’ are not interpreted literally. It is contrary to sound policy, and a contradiction in terms, to permit the settlor to relieve a trustee of all accountability. [Citation omitted.] Even under the broadest grant of fiduciary discretion, a trustee must act honestly and ... ‘in a state of mind contemplated by the settlor.’ What this means is that courts will intervene to prevent trustees from acting in bad faith, or without regard to the terms and purposes of the trust or the interests of its beneficiaries....
“Within these limits, it is a matter of interpretation to determine the degree to which a settlor's use of language of extended discretion (e.g., ‘absolute discretion’) manifests an intention to modify the normal duties of the trustee and the normal grounds of judicial intervention in the exercise of discretionary power....
“Examination of the overall tenor of the language granting powers and other terms of trusts may lead to diverse, refined interpretations on a case-by-case basis. For example, a court may conclude that the language of extended discretion and other evidence before it manifests a settlor intention to authorize the particular trustee to act with a lesser degree of caution (e.g., to accept a greater degree of compensated risk), but not a lesser degree of care, than would otherwise be appropriate to the particular trust and its circumstances under the duty of prudence.” [Citation omitted.]
Restatement (Third) of Trusts § 91, comment g(1), pp. 395–96 (2005), deals specifically with broad discretion granted in the context of investment decisions. This provision states in part:
“Trust investment provisions sometimes purport to grant the trustee ‘absolute’ or ‘sole and uncontrolled’ discretion. Such language broadens the trustee's latitude in investment matters but is not unlimited, and the trustee is subject to liability for abusing it. Extended discretion of this type does not, for example, allow the trustee to personally borrow from the trust estate in violation of the normal duty of undivided loyalty.... Nor can the trustee invest recklessly or in a state of mind not contemplated by the settlor. See generally § 87, Comment d. Such extended investment discretion, however, is ordinarily interpreted as lessening the degree of caution or conservatism ordinarily required of the trustee (see § 90, Comment e ), and as permitting in general a greater than normal latitude in the development of an investment strategy....
“Ultimately, the effect of a grant of discretion or of extended discretion is a question of interpretation. Even language of extended discretion, however, is strictly construed so as ordinarily not to relieve the trustee of duties of loyalty and care, or of general responsibility for risk management.”
Finally, Bogert & Bogert, Trusts and Trustees § 560, pp. 84–85 (Rev.2d ed.1980, 2012 Supp.), states:
“Sometimes the trustee is given the power to invest in his absolute and uncontrolled discretion; in several recent cases the court found that the exercise of the trustee's discretion was imprudent and that the grant of discretion did not protect the trustee from liability for imprudent investments
....
“It would appear that the difference in the attitude of the courts towards ‘simple’ discretionary powers, on the one hand, and ‘absolute’ or ‘uncontrolled’ discretionary powers, on the other hand, is one of degree rather than of kind.... In addition to the commonly recognized factors used to determine whether there had been an abuse of discretion, a standard of reasonableness has been applied by the courts in judging the exercise of a discretionary power (whether simple or absolute), a standard implied from the settlor's intent and the purposes expressed in the trust instrument. With respect to court review of discretionary powers, this standard is consistent with the standard of care and skill of a prudent man and is based upon established fiduciary standards and principles.”
At least two relevant principles can be drawn from the above authorities. First, language in a trust which purports to grant a trustee “absolute,” “sole,” or “uncontrolled” discretion in making investment decisions cannot in itself completely relieve the trustee from his or her duties under the prudent investment rule. Second, and more generally, language in a trust which purports to alter or eliminate the prudent investor rule and the duties arising thereunder should be strictly construed so as not to defeat the principal purpose of a trust, which is to benefit its beneficiaries. See K.S.A. 58a–406.
Thus, the language in Article Fifth (4), which grants the trustee “absolute and uncontrolled” discretion in making investment decisions, cannot be read to relieve Barker from his duties under the prudent investor rule. This court must decide whether and to what extent the additional language stating that the trustee may make investments “without limitation by any statute, custom, or rule of law, now or hereafter existing, relating to the investment of trust funds” relieved Barker from his duties.
The parties have not cited any case in which such broad language has been examined as it relates to the prudent investor rule. But when reading the Trusts as a whole, it appears that this language merely eliminates any automatic restrictions on the type of investments that can permissibly be made by the trustee, but the language does not eliminate the prudent investor rule in its entirety. This construction of the language of Article Fifth (4) makes sense from a grammatical standpoint. The Trusts' language provides that the trustee may make investments in any securities or property that the trustee deems proper and suitable. The Trusts' language then describes the types of investments the trustee can make “including corporate stocks of all classes ... without limitation by any statute, custom, or rule or law.”
This construction of the language of Article Fifth (4) also makes sense in historical context. As explained in Introductory Note to Chapter 17 of the Restatement (Third) of Trusts, p. 288 (2005):
“[M]uch of the apparent and initially intended generality and adaptability of the prudent-man rule was lost as it was further elaborated in the courts and applied case by case. Decisions dealing with essentially factual issues were accompanied by generalizations understandably intended to offer guidance to other courts and trustees in like situations. These cases were subsequently treated as precedents establishing general rules governing trust investments. Specific case results and flexible principles often thereby became crystallized into specific subrules prescribing the types and characteristics of permissible investments for trustees.
“Based on some degree of risk that was abstractly perceived as excessive, broad categories of investments and techniques often came to be classified as ‘speculative’ and thus imprudent per se. Accordingly, the exercise of care, skill, and caution would be no defense if the property acquired or retained by a trustee, or the strategy pursued for a trust, was characterized as impermissible.”
This construction of the language in Article Fifth (4) also is consistent with other language in the Trusts. Article Fifth (1) and (2), which grant the trustee the power to sell or otherwise transfer Trust assets and to manage real estate held under the Trusts, require that the trustee act in a manner that he deems prudent and fair for the “best interest of the Trust Estate.” It would be inconsistent to require the trustee to act for the best interest of the Trusts and yet relieve him of any duty under the prudent investor rule. Furthermore, the second clause of Article Fifth (4), which deals with legacy assets, explicitly relieves the trustee of his duties to convert or diversify legacy assets, which are aspects of the duty of prudence. If the prudent investor rule were eliminated in its entirety, it would be unnecessary to explicitly eliminate certain duties with respect to legacy assets.
Furthermore, even if we determined that a broader construction of Article Fifth (4) is appropriate, i.e., as limiting or eliminating the duty of prudence in making investment decisions, it would be strained to read Article Fifth (4) as eliminating the duty of loyalty. As the plaintiffs acknowledge, the duty of loyalty is a default rule that may be modified, expressly or impliedly, by the terms of a trust. But it appears that the duty of loyalty may not be entirely eliminated:
“Even an express authorization [allowing the trustee to engage in certain self-dealing transactions], however, would not completely dispense with the trustee's underlying fiduciary obligations to act in the interest of the beneficiaries and to exercise prudence in administering the trust. Accordingly, no matter how broad the provisions of a trust may be in conferring power to engage in self-dealing or other transactions involving a conflict of fiduciary and personal interests, a trustee violates the duty of loyalty to the beneficiaries by acting in bad faith or unfairly.
“Whether and to what extent a trustee may be impliedly authorized to engage in self-dealing, or in other transactions that present loyalty issues, is inevitably a matter of interpretation. [Citations omitted.] ...
“... [E]ven the vital fiduciary duty of loyalty is a default rule that may be modified by the terms of the trust. This is so at least to the degree of allowing the settlor to eliminate strict prohibitions, such as that against self-dealing. [Citation omitted.] ... [As discussed above,] to some extent the duty of loyalty involves (as do other duties) more than default law—that is, that there are limits to the settlor's freedom, thereby protecting the fundamental fiduciary character of trust relationships recognized by law.” Restatement (Third) of Trusts § 78, comment c(2), p. 99 (2005).
Here, there is nothing in the language of the Trusts which explicitly authorizes the trustee to designate his family member to make investment decisions for the Trusts or to invest the Trusts' assets into businesses in which the trustee and/or his family members have also personally invested, actions which the plaintiffs allege constituted breaches of Barker's duty of loyalty. Given the central importance of the duty of loyalty, we conclude that the broad language of Article Fifth (4) cannot be construed as eliminating Barker's duty of loyalty.
Since the language of the Trusts did not eliminate Barker's duties under the prudent investor rule, we must determine whether the plaintiffs came forward with evidence establishing that there were genuine issues of material fact as to whether Barker breached his duties. The plaintiffs note in particular that there were many controverted facts as to whether Barker properly delegated his investment and management functions under K.S.A. 58–24a09. The plaintiffs argue that they presented evidence that Barker hired his son to act as fund manager but failed to develop any criteria for proper investments, failed to discuss the tax implications of investments, failed to review the performance of the investments, and failed to give investment advice, all of which caused the Trusts to incur substantial financial losses. Drawing all reasonable inferences in favor of the plaintiffs, a reasonable person could conclude that Barker had breached his duty of proper delegation under K.S.A. 58–24a09 and thus summary judgment was precluded on that claim. To the extent that each of the plaintiffs' other claims against Barker stemmed from his allegedly improper delegation to his son as fund manager and failure to oversee the investment of the Trusts' assets, summary judgment also was precluded on those claims.
In summary, the district court erred in determining that the language of the Trusts, in particular Article Fifth (4), eliminated the prudent investor rule in its entirety and that Barker owed no duties arising thereunder. We acknowledge that K.S.A. 58–24a01 provides that the prudent investor rule may be completely eliminated by the language of a trust, but we conclude that the language of the Trusts herein was insufficient to eliminate Barker's duty of prudence. Even if the language of the Trusts eliminated Barker's duty of prudence, the Trusts cannot be construed as eliminating his duty of loyalty. Thus, the district court erred in granting Barker's motion for summary judgment on the basis that he owed no duties under the prudent investor rule. Furthermore, the plaintiffs brought forth evidence from which a reasonable person could conclude that Barker breached his duties, and thus there were genuine issues of material fact precluding summary judgment. We need not address the plaintiffs' final argument that there were genuine issues of material fact as to whether Barker reasonably relied upon the language in Article Fifth (4) in carrying out his investment decisions.
Exculpatory Clause
In addition to finding that the prudent investor rule was eliminated in its entirety, the district court found that under the exculpatory clause of Article Tenth of the Trusts, Barker could only be held liable for his “willful default.” Because the district court found that the plaintiffs had failed to come forward with any evidence that Barker's alleged breaches rose to the level of willful default, the district court concluded that Barker was entitled to summary judgment. On appeal, the plaintiffs argue the exculpatory clause of Article Tenth is unenforceable under K.S.A. 58a–1008(a)(1), which provides that an exculpatory clause in a trust is unenforceable to the extent that it “[r]elieves the trustee of liability for breach of trust committed in bad faith or with reckless indifference to the purposes of the trust or the interests of the beneficiaries.”
There appear to be no Kansas cases which construe the phrases “willful default,” “bad faith,” or “reckless indifference” in the context of an exculpatory clause in a trust. Under PIK Civ. 4th 103.04, “willful conduct” is defined as “doing something with the intent of doing wrong or of causing injury to another person.” Under Black's Law Dictionary 1089 (9th ed.2009), “willful misconduct” is a “dereliction of duty; unlawful or improper behavior” which is “committed voluntarily and intentionally.” “Bad faith” is defined as “[d]ishonesty of belief or purpose.” Black's Law Dictionary 159 (9th ed.2009). And “reckless indifference” in the context of torts is a “[c]onscious disregard of the harm that one's actions could do to the interests or rights of another.” Black's Law Dictionary 842 (9th ed.2009).
We agree with the plaintiffs that “willful default” does not necessarily encompass actions or omissions done in “bad faith” or in “reckless indifference” to the interests of the beneficiaries. To this extent, the exculpatory clause of Article Tenth is unenforceable under K.S.A. 58a–1008, and Barker may still be held liable if his alleged breaches were committed in bad faith or with reckless indifference to the interests of the beneficiaries.
As discussed above, in opposing summary judgment, the plaintiffs presented evidence that Barker hired his son to act as fund manager but failed to develop any criteria for proper investments, failed to discuss the tax implications of investments, failed to review the performance of the investments, and failed to give investment advice, all of which caused the Trusts to incur substantial financial losses. Drawing all reasonable inferences in favor of the plaintiffs, a reasonable person could find that Barker's alleged improper delegation of investment decisions to his son and alleged failures in oversight were significant breaches of his fiduciary duties and that he committed these acts in bad faith or in conscious disregard of potential harm to the interests of the beneficiaries. Under these circumstances, the exculpatory clause of Article Tenth is unenforceable under K.S.A. 58a–1008(a)(1), and the district court erred in granting summary judgment to Barker based on the exculpatory clause.
Reversed and remanded for further proceedings.