Siegel v. JP Morgan Chase Bank
What is believed to be the longest and nastiest breach of trust lawsuit in State of Florida history is still going strong, after over a decade, many appeals, and several weeks of trial. The latest trial of the case was completed earlier this year and is once again going to appeal. The probate court, after a two week trial, handed JP Morgan a complete and total victory over the beneficiaries of the estate and trust.
Dorothy Rautbord died in 2002, survived by three adult children. She lived an opulent Palm Beach lifestyle, collecting art, frequenting Palm Beach charity galas, and making significant charitable gifts. She also had a history of making significant gifts to her various family members, staff, and friends.
In 1990, Ms. Rautbord executed a Revocable Trust, which was amended a number of times. At all times relevant, JP Morgan Chase (“JPMorgan”), or its predecessors, was the corporate trustee.
During Ms. Rautbord’s lifetime, the 1990 Trust provided that the Trustee shall distribute income and principal for Ms. Rautbord’s support, maintenance, health, comfort and general welfare, as determined by the Trustee “in its sole discretion.”
Upon her death, the 1990 Trust was to be distributed to her three children, Simon, Judy, and Dan.
In 1991, Ms. Rautbord made Judy her attorney in fact pursuant to a power of attorney. The power of attorney was very broad. The 1990 Trust, however, contained a limitation which stated that all “powers of amendment, modification, and revocation shall be personal to [Ms. Ratbord] and shall not vest in or be exercisable by any person or corporation acting in any fiduciary or like relationship ***”
Dan and Simon challenged a number of actions undertaken by JPMorgan and/or Judith regarding distributions, disbursements and gifts made from the Trust, including support and maintenance for Ms. Rautbord, creating new trusts from the corpus of the existing 1990 Trust, and making significant gifts to third parties during Ms. Rautbord’s lifetime. Some of the withdrawals were made with a series of revocation letters executed by Judith, pursuant to which amounts were withdrawn from the 1990 Trust.
2006 Appellate Opinion – Standing
JPMorgan issued an accounting to Dan and Simon. JPMorgan filed a trust complaint seeking to ratify the accounting and specifically to ratify the principal distributions made under the alleged authority of the revocation letters executed by Judith.
The trial court granted summary judgment to JPMorgan Chase on the grounds that Dan and Simon had no standing to challenge the withdrawals from the 1990 Trust, because the trust was revocable at that time. The trial court reasoned that the brothers had “no present interest in the trust during the time that the decedent was alive.”
In , 920 So.2d 89 (4th DCA 2006), the appellate court reversed, holding that the brothers did have adequate standing. The first issue was whether New York or Florida law applied. The Court held that the concept of “standing” was one of substantive law, as opposed to procedural law. As such, the standard for determining choice of law is decided under the “significant relationship” test. Under the significant relationship test, the Court held that New York law applied because the trust from 1995 to 2002 was a New York trust governed by New York law.
The Court noted some New York law under which beneficiaries of revocable trusts do not have standing to challenge actions made by the settlor/trustee during the settlor/trustee’s lifetime. The Court distinguished this precedent as follows:
A different situation arose in this case, where the settlor was not the trustee. When a person or entity different from the settlor removes property or money from a revocable trust, those withdrawals could conceivably be made without the settlor’s knowledge or consent. In this situation, we hold that, under New York law, after the death of the settlor, the beneficiaries of a revocable trust have standing to challenge pre-death withdrawals from the trust which are outside of the purposes authorized by the trust and which were not approved or ratified by the settlor personally or through a method contemplated through the trust instrument. By outside the purposes of the trust we mean any expenditures that were not “appropriate or advisable for the support, maintenance, health, comfort or general welfare of” Mrs. Rautbord.
The Court further explained:
Without this remedy, wrongdoing concealed from a settlor during her lifetime would be rewarded. One “should not be permitted to escape the duty to account for property which . . . [a] decedent put into [one’s] possession and over which [one] exercised control both before and after the decedent’s death.” La Vaud v. Reilly, 67 N.E.2d 242, 244 (N.Y. 1946).
2007 Appellate Opinion on Attorney Fees
During the pendency of the litigation, JPMorgan paid for its attorneys out of assets of the 1990 Trust, even though its actions had been called into question by the brothers. The trial court, at the request of the brothers, ordered that the fees be returned to the Trust. This decision was affirmed in , 965 So.2d 1193 (4th DCA 2007). Even though no pleading alleging breach of trust had been filed, the Court held that JPMorgan should have known it was in a conflict of interest position.
In Shriner and Brigham, the filing of a pleading against a trustee in his individual capacity created a conflict of interest that required the trustee to seek court approval before paying its attorney’s fees from trust assets. These cases provide scant guidance on the question of what else could suffice to create such a conflict. J.P. Morgan argues that under the trial court’s ruling all trustees are placed in a position of uncertainty as to when to seek court approval before paying attorneys’ fees from trust assets. However, we hold that in this case J.P. Morgan should have known from the Siegels’ answers to interrogatories in the 2003 action that it would face an action based on the alleged breaches of fiduciary duty and trust mismanagement. At the very least, J.P. Morgan should have realized it was in a position of conflict at that point. Based on the foregoing, we affirm.
Florida law has since been to require that a pleading alleging breach of trust be pending before a trustee is required to seek the payment of fees.
2011 Appellate Opinion on Legal Conclusions of Trial Court
The parties proceeded to trial on the issues in the case. Before the taking of any evidence, however, the trial court made a number of “legal” decisions, which essentially operated as a judgment in favor of JPMorgan. The appellate court, in , 71 So.3d 935 (4th DCA 2011), essentially reversed these rulings, as follows.
The trial court held that the brothers essentially lacked standing to make the challenges. The appellate court reversed on this point:
In any event, the trial court and parties did not interpret Siegel I correctly. Our opinion in Siegel I determined that the Siegels did have standing to challenge the trustee’s actions, because they had a direct interest in the corpus of the trust after their mother’s death. The issue of whether the withdrawals and expenses were appropriate and authorized was not a preliminary standing question but the entire substance of the proceeding, i.e., whether the trustee and attorney-in-fact breached their fiduciary duties. The trial court incorrectly treated the question of whether the withdrawals were appropriate and authorized as a question of standing. We do not conclude that the Siegels consented to this interpretation or waived their right to challenge specific expenses as unauthorized.
The appellate court then addressed the issue of the extensive gifting from the Trust, and essentially held that the gifts should be viewed as a breach of trust.
The trial court found that the trustee had the power to pay gifts from the trust, because the power of attorney contained a specific power of the attorney-in-fact to make gifts. Because the gifts were within that broad power, the trustee acted appropriately in making expenditures for such gifts as requested or directed by Novak. The gifts were part of a long history of generosity on behalf of the settlor, and they were “appropriate or advisable for the support, maintenance, health, comfort, or general welfare of Ms. Rautbord.” The court was incorrect in its interpretation of the trust instrument.
The trust agreement gives no power to the trustee to make gifts. The trustee does have the power to invade the principal for the welfare of the settlor. Specifically, the trustee had the power to disburse income and principal “for the support, maintenance, health, comfort, or general welfare of the Settlor.” The power of attorney, on the other hand, gives the attorney the power to gift as follows:
To make any gift, either outright or in trust, to any individual (including my Attorney-in-Fact) or any charitable organization,provided that any such gift either (i) shall be reasonably consistent with any pattern of my giving or with my estate plan or (ii) shall not exceed the annual exclusion available from time to time for federal gift tax purposes.(Emphasis added).
Significantly, the power of attorney also prohibited the attorney-in-fact from invading the principal of the trust by stating that the attorney in fact was not granted the power “[t]o amend, modify or revoke, in whole or in part, or withdraw any of the principal of, any trust over which I have reserved or have been granted such power .…”. The trust agreement specifically provided that the power of amendment, modification, and revocation were personal to the settlor and could not be exercised by her attorney-in-fact. Thus, the power of attorney specifically prohibited the attorney-in-fact from exercising the power Mrs. Rautbord reserved to herself to revoke the trust. The Siegels claim that the attorney-in-fact attempted to do just that by signing letters of partial revocation to the Trustee to withdraw principal. The trial court’s ruling on standing prevented this issue from being litigated.
Despite the lack of power of the trustee to make gifts, the trustee made gifts and permitted Novak to withdraw principal to pay other gifts. The trustee had no authority to make gifts itself. We can find no legal support which holds that gifts to others can constitute payments for the “comfort or general welfare” of the beneficiary of a trust. Nevertheless, such a finding must be based upon a factual record, which the trial court did not have in concluding otherwise.
The appellate court then instructed that the issue of excessive spending from the Trust on Ms. Rautbord needed to be addressed by determining whether such spending was an abuse of discretion.
The trust instrument gives the trustee authority to “pay to or apply for the benefit of the Settlor, at any time or from time to time, so much or all of the net income and principal thereof as the trustee, in its sole discretion, shall deem appropriate or advisable for the support, maintenance, health, comfort or general welfare of the Settlor.” Under New York law, even though the trustee has the sole discretion to determine the appropriateness of expenditures, it does not foreclose all inquiry by a court of the proper use of such discretion. See In re Lyons’ Estate, 13 Misc.2d 287, 176 N.Y.S.2d 769 (N.Y. Sur. 1958). “[T]he court has the responsibility to ensure that the trustees do not abuse their discretion. Accordingly, the court has the authority to correct abuses in the exercise of absolute discretion that are arbitrary or the result of bad faith.” In re Goodman, 7 Misc.3d 893, 901, 790 N.Y.S.2d 837 (N.Y. Sur. 2005). Where distributions fall within a class of expenditures authorized by the trust, a trustee must still act reasonably and with good faith in carrying out the terms of the trust.
2012 Appellate Opinion on Legal Fees
After JPMorgan prevailed in the last round of proceedings, but prior to the reversal of its victory, JPMorgan sought attorney fees. While the case was on appeal, the trial court awarded several million dollars of attorney fees to JPMorgan. In , 100 So.3d 783 (4th DCA 2012), the appellate court reversed the trial court’s award of attorney fees. “Where a court awards prevailing party attorney’s fees and the underlying judgment is vacated, the attorney’s fee judgment must also be vacated.”
The Trial (Finally)
After a decade of litigation, the trial on the matter was finally held. The trial court essentially exonerated JP Morgan in full, in (Palm Beach County Circuit Court, Case No. 502003SP001282, Feb 10, 2014).
The Disputed Gifts
The trial court held that the gifts were not improper, under several distinct theories. First, the trial court observed that it could not determine based on the evidence presented whether any particular gift was funded with principal, as opposed to income. The court did find, however, that the income of the Trust exceeded the gifting that was made during the relevant time period.
The court also held that the gifting was in Ms. Rautbord’s best interest, based on her history of generous gift giving throughout her life.
In the most important part of the trial court’s decision, the court attempted to harmonize the prior appellate court decisions with the evidence presented:
The Siegels contend that Siegel II effectively foreclosed the possibility that expenditures made for the purpose of gifting could properly fall wihtin the purposes authorized by the Revocable Trust. However, Siegel II held only that the language of the Revocable Trust, in and of itself, does not provide sufficient authority to gifting by the Trustee. The appellate court held that a factual determination must be made to conclude whether the challenged gifts were, in fact, made for Ms. Rautbord’s comfort or general welfare. The Court finds that gifts were made by Judy and authorized by JPMorgan for the comfort and general welfare of Mrs. Rautbord for the reasons stated above.
The Lavish Lifestyle
Challenges to many expenditures and decisions were made, all of which were rejected by the trial court. Two in particular stand out. The first was the decision to move Ms. Rautbord from her large apartment into a smaller apartment with caregivers, instead of into assisted living, which would have been less expensive.
It is clear to the Court that Judy’s actions and decisions to move Mrs. Rautbord into the Brazilian Court were made with the purest of intentions. Judy strived to give her mother a safe living environment with trusted caregivers devoted to Mrs. Rautbord and her needs, while maintaining to the greatest extent possible Mrs. Rautbord’s dignity and accustomed lifestyle. Based on the evidence presented, Judy’s actions were made in good faith.
The second expenditure was for an apparently lavish 90th birthday party for Ms. Rautbord.
The evidence at trial demonstrated that Mrs. Rautbord enjoyed celebrating her birthday, and often threw lavish birthday parties for herself. At least one witness made mention of the party that Mrs. Rautbord threw for her 85th birthday party, and the elegant “red dress” she wore at that party. Mrs. Rautbord’s 90th birthday party did not appear to be as lavish as prior parties (for example, it was held at her Palm Beach Towers condominium unit rather than at the Palm Beach country Club). * * * Specifically, the greater weight of the evidence supported the notion that the birthday party expenditure was a milestone life event to be celebrated and one in which Mrs. Rautbord greeted guests and appeared to enjoy herself.
There were many other questioned expenditures which consumed trial for weeks. All of the challenges were rejected by the trial court.