Opinion
No. C6-97-299.
Filed September 16, 1997.
Appeal from the District Court, Ramsey County, File No. C056295959.
Mark G. Stephenson, (for appellants Objectors).
Steven G. Mahon, Tracy M. Smith, (for respondent First Trust National Association).
Considered and decided by Klaphake, Presiding Judge, Davies, Judge, and Foley, Judge.
This opinion will be unpublished and may not be cited except as provided by Minn. Stat. §. 480A.08, subd. 3 (1996).
UNPUBLISHED OPINION
Appellants are objectors to the trustee's accounting for the period from May 1986 through December 1994. Appellants contend the district court erred in determining that the trustee (1) acted in accordance with the trust instrument in distributing principal from the trust and (2) did not breach its fiduciary duties. We affirm.
FACTS
The Trust Instrument
On December 11, 1935, Richard and Rachel Lilly created a trust for the benefit of their son, John Cunningham Lilly. In 1956, at Richard Lilly's request, the trust was placed under court jurisdiction, respondent First Trust National Association (First Trust) was appointed corporate trustee, and Richard Lilly and David Lilly were appointed individual cotrustees. Since 1968, First Trust has been the sole trustee. Appellants Cynthia Augur, Nina Castelluccio, and Pamela Krans are remainder beneficiaries of the trust, who object to distributions of trust principal that occurred between May 1, 1986 and December 31, 1994. The distributions were made in the form of payments to John Lilly and loans to the remainder beneficiaries.
First Trust relies on the following trust provision as authority for the distributions in the form of payments to John Lilly:
The net income from the trust estate shall be paid to or for the use and benefit of the settlors' son, John Cunningham Lilly, in monthly or other convenient installments during his lifetime.
In the event of ill health, accident or other misfortune happening to said John Cunningham Lilly, or if the income from the trust, together with the income which he shall be receiving from other sources, shall be insufficient for his maintenance, support, and education, the trustees are hereby authorized and empowered to pay to him or for his benefit such sum or sums out of principal of the trust estate as they, in their sole discretion, shall deem necessary or proper under the circumstances.
First Trust contends that the loans were permissible under a provision that authorized the trustee to invest and reinvest the trust estate or any part thereof in such manner and in such securities or other property, personal or real, and upon such terms and for such length of time as the trustee shall deem meet and proper, without any limitation on their power and authority so to do * * * [and] without regard to the restrictions placed by law, statutory, or judicial, upon trustees.
The trust contained the following remainder provision:
Upon the death of said John Cunningham Lilly, the principal of the trust estate, together with all accumulations of income thereon, if any, shall be transferred, paid over, and delivered share and share alike to his issue * * *.
First Trust's expert witness, attorney John Byron, testified that based on his reading of the trust and comparing it to other trusts, "the settlor's intent was to provide for the maintenance of the lifestyle of his son." Byron opined that the trust provision allowing principal distributions for "maintenance, support, and education" was a broad standard because particularly with trusts drafted during this time period in the '30's and '40s, you often saw restrictive terms for distribution for income beneficiaries because settlors and their advisers were living through a period of very difficult times. Um, compared to what I have seen in some of those documents, I'd say this is quite a broad specification purposes.
Byron believed that the primary purpose of the trust was to provide for John Lilly. He explained:
[N]ormally when I draft trusts for children, I am thinking about those children and not unborn future remainder people, but you have to put something in there because it is bad practice not to provide for distribution of the remainder.1986-1994 Distributions
First Trust presented the following evidence about how it decided whether to grant John Lilly's requests for distributions. Prior to 1986, John Lilly was the primary beneficiary of another trust from which he received substantial annual distributions. That trust was depleted in 1986 and terminated with court approval. As of May 1, 1986, the trust at issue in this case was the only trust available for John Lilly's support.
James Donner, trust officer from 1986-1990, testified that First Trust relied primarily on John Lilly to establish the amount of his budgets, but also relied on his financial statements. Although Donner did not specifically recall, he thought First Trust also considered John Lilly's tax returns and spoke to his financial advisers. Donner testified that in establishing John Lilly's budgets, First Trust attempted to evaluate the amount of money John Lilly needed for maintenance, support, and education in light of other sources of income for John Lilly and historical distribution patterns. First Trust attempted to establish a budget that was appropriate for the trust and capable of sustaining John Lilly's lifestyle. Donner testified that he frequently submitted John Lilly's requests for principal distributions to the discretionary distribution committee for approval or denial.
In June 1987, Donner and Jon Theobald, manager of the St. Paul trust office, traveled to California to meet with John Lilly to discuss trust administration and to establish a budget for John Lilly. Donner testified that they explained to John Lilly the effect of principal distributions on the trust. Prior to the meeting, John Lilly had submitted a proposed 1987 budget of $245,000. Following the meeting, the budget for distributions from the trust was set at $156,789.74. Donner testified that John Lilly's requests for payments exceeded the budget and that First Trust often denied John Lilly's requests for principal distributions. Initially, First Trust distributed fixed amounts of money to John Lilly each month. But because John Lilly requested additional distributions for items that should have been covered under the budget, First Trust began making payments directly to the person to whom the money was owed in an effort to control distributions.
Theobald testified that in deciding whether to make principal distributions from the trust, the approach taken by First Trust was to provide the discretionary distribution committee with background information, what prior distributions had been made, what was the size of the trust, reference to the governing instrument language that provided for discretionary distributions, and then the account officer would make a recommendation based on or after a recitation of all of that background for the committee.
The committee then would approve, disapprove, or modify the request.
From 1990-1994, Leonard Ilges was the trust officer responsible for administering the John Lilly trust. Ilges testified that when he became the administrator, the approved annual budget for John Lilly, which was still set at $150,000 per year, was based on the trust's earning power and John Lilly's lifestyle. Ilges testified that John Lilly's other sources of income and the historical patterns of distribution were considered in setting his budget. Ilges testified that First Trust reviewed John Lilly's budget annually and that he discussed the budget with his supervisor, a senior trust officer, the discretionary distribution committee, and the account administration committee. Ilges also testified that when John Lilly requested a distribution not covered under the budget, he independently evaluated the request to determine whether the distribution would be appropriate and that First Trust denied some of John Lilly's requests for distributions not covered under the budget. A memo Ilges wrote in 1992 stated that despite discussions with John Lilly during the previous two years about the limited resources available from the trust, John Lilly continued to make significant demands on trust resources.
In June 1994, Jotham Blodgett became the administrator for the John Lilly trust. His testimony indicates that he followed the same procedures in administering the trust as did his predecessors. Byron opined that First Trust's administration of the trust met the community standard for a corporate trustee.
DECISION
1. Appellants argue that the trust instrument does not allow the trustee to consider John Lilly's lifestyle when determining the amount necessary for his support. When construing a trust, the court must give effect to the trustor's intent as determined from the instrument as a whole. In re Mayo , 259 Minn. 91, 95, 105 N.W.2d 900, 903 (1960). Construction of a written document is subject to de novo review. In re Hill , 499 N.W.2d 475, 482 (Minn.App. 1993), review denied (Minn. July 15, 1993). But if the trust instrument is ambiguous, extrinsic evidence may be admitted to resolve the ambiguity. Towle v. First Trust , 194 Minn. 520, 522, 261 N.W. 5, 7 (1935).
[W]here critical evidence in the case turns on extrinsic evidence about the settlor's intent and disputed expert opinions about the language of the trust instrument, a "clearly erroneous" standard of review applies.
Hill , 499 N.W.2d at 482.
The trust allows principal distributions in the form of payments to John Lilly if John Lilly's income from the trust and other sources is "insufficient for his maintenance, support, and education." The parties dispute the meaning of the term support. Jean Chaput, appellants' expert witness, testified that support should be construed as a restrictive standard, based on an average or reasonable person's standard, without reference to John Lilly's lifestyle. Byron, however, testified that the term support should be broadly construed with reference to John Lilly's lifestyle.
The constructions urged by both parties are consistent with the definition of the term support. See Black's Law Dictionary 1291 (6th ed. 1990) (definition of support). The term therefore is ambiguous. See Krogness v. Best Buy Co. , 524 N.W.2d 282, 286 (Minn.App. 1994) (contract term that is reasonably susceptible of more than one meaning is ambiguous), review denied (Minn. Jan. 25, 1995).
Based on his reading of the trust and comparing it to other trusts during the same time period, Byron opined that the trust provision allowing principal distributions for John Lilly's support was a broad standard and that "the settlor's intent was to provide for the maintenance of the lifestyle of his son." In a report admitted into evidence, Byron concluded that when John Lilly's parents created the trust for John Lilly, they intended to provide generously for him. Based on Byron's testimony and report, we cannot conclude that the district court erred in determining that John Lilly's lifestyle was a proper factor for First Trust to consider in determining an appropriate level of support for John Lilly.
Appellants also argue that the district court improperly construed the trust instrument as granting First Trust unlimited discretion to make distributions from the trust principal. Appellants argue that the district court failed to understand that First Trust could only exercise its discretion to make distributions from the principal if John Lilly's income from the trust and other sources was insufficient to provide for his maintenance, support, and education. We disagree. In its findings, the district court specifically quoted the language from the trust instrument authorizing principal distributions if the trust income, together with income from other sources, was insufficient for John Lilly's maintenance, support, and education.
2. Appellants' next contention is that First Trust breached its fiduciary obligations in making distributions from the trust principal to John Lilly. Relying on In re Trust Known as Great Northern Iron Ore Properties , 308 Minn. 221, 225, 243 N.W.2d 302, 305 (1976), appellants argue that the critical evidence in this case was documentary and therefore this court need not defer to the district court's assessment of the evidence. We disagree.
Minn.R.Civ.P. 52.01, as amended in 1985, effectively overruled Great Northern , and the standard of review of the trial court's findings is "clearly erroneous." The rule states:
Findings of fact, whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the trial court to judge the credibility of the witnesses.
The rule does not distinguish between oral or documentary evidence. Consequently, the reviewing court should not reverse the trial court unless it is left with the definite and firm conviction the trial court made a mistake.
First Trust Co. v. Union Depot Place Ltd. Partnership , 476 N.W.2d 178, 181-82 (Minn.App. 1991), review denied (Minn. Dec. 13, 1991) (citation omitted).
The evidence and its reasonable inferences must be viewed in the light most favorable to the prevailing party. We will not overturn the trial court's findings of fact * * * unless they are clearly erroneous, regardless of whether the findings are based on oral or documentary evidence.
In re A.R.G.-B. , 551 N.W.2d 256, 261-62 (Minn.App. 1996) (citation omitted).
A trustee may not exercise its discretion in a manner that defeats the trustor's intent or the purpose of the trust. United States v. O'Shaughnessy , 517 N.W.2d 574, 577 (Minn. 1994) (citing Restatement (Second) on Trusts § 187 cmt. j (1959)). But [s]o long as the trustees act in good faith, from proper motives, and within the bounds of reasonable judgment, the court will not interfere with their decisions.
Id. (citing IIA Austin W. Scott William F. Frather, The Law of Trusts § 155 (4th ed. 1987) [hereinafter Scott on Trusts ]).
Appellants first argue that First Trust violated its duty to John Lilly. A trustee owes a duty to the beneficiary in administering the trust to exercise such care and skill as a man of ordinary prudence would exercise in dealing with his own property * * *.
Restatement (Second) of Trusts § 174; see also State ex rel. Pope v. Germania Bank , 106 Minn. 164, 170-71, 118 N.W. 683, 686 (1908) (accord).
The trust allows the trustee to make distributions from the trust principal if John Lilly's income from the trust, together with his income from other sources, is "insufficient for his maintenance, support, and education." The trust grants the trustee "sole discretion" to determine whether principal distributions are "necessary or proper under the circumstances." The plain language of the trust instrument and Byron's testimony show that this standard grants the trustee broad discretion to make distributions from the trust principal.
Appellants argue that First Trust did not consider John Lilly's income from other sources. But First Trust presented evidence that it considered John Lilly's financial records, and Donner and Ilges both testified that they considered John Lilly's other sources of income when setting his budget. The fact that the evidence did not particularize John Lilly's other sources of income does not indicate that First Trust did not consider them. To hold as appellants suggest would improperly restrict the trustee's broad discretion to administer the trust.
Appellants also contend that First Trust was unaware of John Lilly's living expenses. But one of the purposes of Donner and Theobald's trip to California was to evaluate John Lilly's lifestyle. Moreover, the proposed budgets and requests for additional distributions submitted by John Lilly explained how the money would be spent.
First Trust presented evidence that it made efforts to get John Lilly to limit his spending, but John Lilly ignored First Trust's advice. Donner and Theobald traveled to California to meet with John Lilly to discuss trust administration and to establish a budget for him. They explained to John Lilly the effect on the trust of principal distributions. Nonetheless, John Lilly continued to make significant demands on the trust. First Trust presented evidence showing, that in an effort to control distributions, it referred requests for principal distributions to a discretionary distribution committee for consideration. This committee often denied John Lilly's requests for principal distributions, and made payments directly to John Lilly's creditors. The May 1992 memo written by Ilges stated that during the previous two years, Ilges had discussions with John Lilly about the limited resources available from the trust, but John Lilly continued to make significant demands on trust resources. The record shows John Lilly continued to make significant demands on trust resources during 1993 and 1994.
Appellants object to principal distributions paid directly to John Lilly's children. But evidence indicated that providing financial support for his children was part of John Lilly's lifestyle. Appellants also suggest that by 1987 John Lilly may have been incompetent to understand his financial affairs. But Theobald testified that when he and Donner visited John Lilly in 1987, John Lilly appeared to be competent and in good health, participated in and followed the discussion about his budget and trust assets, and seemed very bright.
First Trust distributed over $700,000 in trust principal to and for the benefit of John Lilly between 1986 and 1994. Viewing the evidence, as we must, in the light most favorable to First Trust, First Trust considered John Lilly's lifestyle and his other sources of income in making the distributions, carefully reviewed his requests for principal distributions, and made efforts to limit his spending. The distributions were made pursuant to John Lily's request after First Trust had advised him of the trust's limited resources and the effect of principal distributions on the trust. The record supports a conclusion that First Trust did not violate the duty owed to John Lilly.
Appellants' next contention is that First Trust breached its duty to preserve the trust corpus for the benefit of the remainder beneficiaries.
If by the terms of a trust the trustee is directed to pay the income to a beneficiary during a designated period and on the expiration of the period to pay the principal to another beneficiary, the trustee is under a duty * * * to the latter beneficiary to take care to preserve the trust property for him.
In re Great Northern Iron Ore Properties , 263 N.W.2d 610, 621 (Minn. 1978) (quoting Restatement (Second) of Trusts § 232, cmt. b).
In the cases relied on by appellants, there was evidence that the trustor intended trust assets to be preserved for remainder beneficiaries. In Congdon v. Congdon , 160 Minn. 343, 352, 200 N.W. 76, 79 (1924), the trust provided for the corpus of the trust fund, as it existed at the time of the creation of the trust, to be held to the end of the trust period for the benefit of the remaindermen designated in the said instrument.
In Great Northern , the trustor assigned the remainder interest to a known entity. See Great Northern , 263 N.W.2d at 614 nn. 1, 3 (trustor assigned reversion interest to Great Northern seven years after trust was created).
Here, because John Lilly did not have any children when the trust was created, the identity of the remainder beneficiaries was unknown at the time the interest was assigned. The remainder provision of the trust instrument contains no restrictive language that would interfere with the broad discretion granted to the trustee to provide for John Lilly and does not indicate any intent to preserve trust assets for the benefit of remainder beneficiaries. The trust provides that upon John Lilly's death, the principal of the trust estate, together with all accumulations of income thereon, if any , shall be transferred, paid over, and delivered share and share alike to his issue * * *.
(Emphasis added.)
The plain language of the trust instrument shows that it was established for the benefit of John Lilly during his lifetime and not for the benefit of any remainder beneficiaries. This construction is supported by Byron's testimony. Byron testified that the primary purpose of the trust was to provide for John Lilly. He explained:
[N]ormally when I draft trusts for children, I am thinking about those children and not unborn future remainder people, but you have to put something in there because it is bad practice not to provide for distribution of the remainder.
Finally, appellants argue that First Trust acted improperly in making loans against the trust principal to remainder beneficiaries. The trust authorized the trustee to invest and reinvest the trust estate or any part thereof in such manner and in such securities or other property, personal or real, and upon such terms and for such length of time as the trustee shall deem neat and proper, without any limitation on their power and authority so to do * * *.
The plain language of the trust instrument granted First Trust broad discretion to make investment decisions. Investment is defined as the "placing of capital or laying out of money in a way intended to secure income or profit from its employment." Black's Law Dictionary , 741. The loan agreements required the remainder beneficiaries to repay the principal upon demand, together with interest of 8% per year. The agreements fall within the definition of an investment because they provide for 8% interest. Because appellants did not present evidence regarding the rate of return other investments would have produced, they failed to establish that First Trust acted improperly in making the loans. See Matter of Irrevocable Inter Vivos Trust, Etc. , 305 N.W.2d 755, 761 (Minn. 1981) (objector must establish that trustee acted imprudently or negligently). Appellants argue that the remainder beneficiaries did not have the means to repay the loans, but do not cite evidence supporting that position.
Byron opined that First Trust's administration of the trust met the community standard of care for a corporate trustee. Viewing the evidence in the light most favorable to First Trust, as we must, the evidence shows that in administering the trust, First Trust acted in good faith, from proper motives, and within the bounds of reasonable judgment and did not breach any duties owed to John Lilly or the remainder beneficiaries. The record supports the district court's conclusion that First Trust acted properly in administering the trust.
Because we are affirming the district court's decision, we do not reach the estoppel and res judicata issues raised by First Trust.