Authored by: Paul J. Sowell, Esq.

A few weeks back, we took a look at some pertinent sections of the Restatement (Third) of Trusts: Prudent Investor Rule.  As discussed, Section 170 deals with a trustee’s duty of loyalty and states as follows:

(1) The trustee is under a duty to administer the trust solely in the interest of the beneficiaries.

(2) The trustee in dealing with a beneficiary on the trustee’s own account is under a duty to deal fairly and to communicate to the beneficiary all material facts the trustee know or should know in connection with the transaction.

There is a current case unfolding in Pennsylvania which illustrates a trustee’s potential breach of this duty. First, a bit of background. Milton S. Hershey, founder of the Hershey chocolate company, established a trust to fund the Milton Hershey School, a residential school for impoverished children. The terms of the trust provide that, “All revenues must be spent directly on the care and education of the children. No monies are allowed to be or are spent for any other purpose; there are no grants to other organizations or non- MHS related spending.”

In 2006, the Hershey Trust spent $12 million to buy the financially troubled Wren Dale Golf Club. The price for the Wren Dale Golf Club was in fact two to three times Hershey’s own appraisal in 2006.  As justification for the purchase, the trustees claim that the golf course land would serve as a buffer zone for the school from potential land development.  After acquiring the course, the trustees spent an additional $5 million to build a clubhouse, billed as Scottish-themed, with a restaurant and bar, and opened it to the public.

Despite the questionable basis for the golf club purchase as beneficial to the Milton Hershey School, a more intriguing issue has been raised as to the financial interest held in the golf course by one of the trustees of the trust, Richard H. Lenny.  It is alleged that Mr. Lenny had not informed the trust board on a disclosure form of his stake in the golf club, nor was any potential conflict raised during deliberations over the project. If true, and he materially benefited from the transaction, this may be a breach of his duty of loyalty to the trust. We will monitor this case as it progresses and report back on the blog as to any developments.