Authored by: Paul J. Sowell, Esq.
The recent case of Karo v. Wachovia Bank, N.A., 2010 WL 1930118 is a prime example of how a bank acting as a co-trustee successfully defended against a claim that it breached its duty of prudence by holding a concentrated stock position.
In 1966, Rosalie S. Karo established the Karo Inter Vivos Residual Trust for the benefit of her husband, Toney, and her descendants. Through a series of mergers, Wachovia ended up as a co-trustee of the trust along with Rosalie’s husband, Toney. At the time Wachovia Bank became a co-trustee, the trust owned 60,000 share of Wachovia common stock, which represented approximately 65 percent of the Trust’s assets. On several occasions between 2003 and 2007, Wachovia recommended to the co-trustee and trust beneficiary that the trust diversify its assets, but the family withheld consent to do so and in fact signed several letters of retention acknowledging Wachovia’s advice. The family remained steadfast in its dedication to holding the stock.. As fate would have it, Wachovia’s stock price suffered a substantial decline taking the value of the trust down with it.
A remainder beneficiary of the trust filed, among other claims, that Wachovia breached its fiduciary duty of prudence by failing to diversify the trust portfolio, leaving a disproportionate volume of trust assets in Wachovia stock. The Prudent Investor Rule, as codified in Va.Code § 26-45.4 and § 55-548.04, lays out the standard of care that a trustee must exercise in managing a trust. This rule requires that the trustee “invest and manage trust assets as a prudent investor would … considering [all] circumstances of the trust … [and] exercising reasonable care, skill, and caution.” Va.Code § 26-45.4.
The court sided with Wachovia on the issue of breach of fiduciary duty of prudence on three grounds:
- The Court found that terms of the trust waived the requirements of the Prudent Investor Rule as it related to the Trust property at the Trust’s creation (specifically including stock of the corporate trustee and related companies) and any investments later transferred to the Trust. Specifically, the terms of the trust allowed the Trustees “[t]o retain as permanent any now existing investments (including stock of the corporate Trustee or in any of its affiliates and holding companies) of the trust property and any investments hereafter transferred to the Trustees….”;
- The Court agreed with Wachovia that its duty as Trustee only required that its interpretation of the Trust language be reasonable and relied on in good faith. As the Uniform Trust Code states, “A trustee who acts in reasonable reliance on the terms of the trust as expressed in the trust instrument is not liable to a beneficiary for a breach of trust to the extent the breach resulted from the reliance.” Va.Code § 55-550.06. Virginia law further provides that “[a] trustee shall not be liable to a beneficiary for the trustee’s good faith reliance on a waiver of the [prudent investor rule].” Va.Code § 26-45.3. Wachovia’s interpretation of the Trust language was at least a reasonable interpretation and relied on in good faith; and
- The Court found that it was clear that Toney, as co-trustee, and the trust beneficiary consented to the retention of the Wachovia stock through the various signed letters of retention. The Court stated that a trustee is not liable to a beneficiary for breach of trust if the beneficiary consented to the conduct constituting the breach, released the trustee from liability for the breach, or ratified the transaction constituting the breach. As indicated by the facts, several documents were signed by both the co-trustee and the trust beneficiary acknowledging the retention of Wachovia stock despite the fact that it was unwise and contrary to Wachovia’s investment policies. There is no evidence that any of these retention documents were returned unsigned or that any party ever attempted to rescind these retention authorizations.
The Court was satisfied that the terms of the Trust, coupled with the co-trustee’s actions and beneficiary’s consent, did not demonstrate an actionable breach of duty of prudence on Wachovia’s part.