In Estate of Worrall v. J.P. Morgan Bank, an April 28, 2022 opinion, the Kentucky Supreme Court determined that J.P. Morgan Bank committed a breach of its statutory and fiduciary duties under the Kentucky Uniform Trust Code by failing to distribute and terminate a trust as required by the trust’s terms and black letter law.
The Facts of Estate of Worrall v. J.P. Morgan Bank
James Thompson died in 1958. Thompson’s will established a testamentary trust for his daughter, Phillis (the “Trust”).
The bequest in trust was of specific shares in one company’s stock, as to which the then trustee had discretion to pay out to his daughter. The final dispositive sentence reads, “[u]nless sooner terminated, this Trust shall terminate at the death of my said daughter, and said shares of stock shall in that event be paid over to her estate.” J.P. Morgan Bank was the trustee of the Trust.
Phillis died in 2018, and her son, James Worrall was appointed as executor of her estate. Worrall was also the sole beneficiary of Phillis’ estate.
Over the course of 2019, the Bank filed at least three motions asserting its desire to liquidate the assets of the Trust and pay the proceeds into the Registry of the Court.
The Bank claimed the liquidation, attendant payment of trustee’s and attorney’s fees, and release of the trustee was necessitated by Worrall, as his mother’s Executor, “repeatedly refus[ing] to sign a receipt and release as required by the [Bank] to liquidate and transfer the assets to the Executor.”
The Bank had sent a November 8, 2019 letter to Worrall, stating:
As we discussed, our firm has been retained by J.P. Morgan, Trustee of the James Thompson Trust Under Will f/b/o Phillis Worrall (the ”Trust”). Pursuant to the terms of the trust, now that Ms. Worrall has died, the Trustee is to distribute all remaining assets to the estate of Phillis Worrall.
We see two options for how the Trustee can distribute the assets to the estate: Option one is for your client, James Worrall, as Executor of the Estate of Phillis Worrall, to sign the attached simple release form from the Trustee and accept the assets into the estate. Option two is a more formal and expensive option, which would include court intervention and the use of all legal avenues available. We are willing to allow Mr. Worrall to choose which option he would like to pursue, but our client will proceed one way or the other in order to meet their[sic] fiduciary duty to terminate the Trust.
If Mr. Worrall would like to proceed under option one, please deliver the attached release agreement to me by November 22. If I have not received anything by that date, we will begin to seek court intervention immediately.
The attached release contained a provision by which the signatory:
2. Releases and discharges JP Morgan Chase Bank, N.A., individually and as the Trustee, from all claims, demands, suits, actions, liabilities and responsibilities of any kind, arising from or related to the entitlement that is described in this instrument.
3. Approves of the Accounts of Trustees [sic] JP Morgan Chase Bank N.A. since inception of the Trust and acknowledges that statements of the activities in the Trust are available upon request.
4. Agrees to return any or all of the property described above, to JPMorgan Chase Bank, N.A., upon demand, if recourse thereto becomes necessary for the payment of taxes, expenses, costs or other demands in connection with the administration of the Trust, and agrees to indemnify the Trustee against all such demands or claims, to the extent the property described above is subject to such demands or claims.
Worrall did not want to sign an indemnification, and expressed this to the District Court Judge. After a three-minute hearing, the District Court entered the Bank’s tendered Order directing the Bank to liquidate the Trust’s assets, paying trustee’s and attorney’s fees, transferring remaining proceeds to the Receiver of the Court; releasing the Bank as Trustee pursuant to KRS 386B.8-170, and releasing previous registration of the Trust.
Worrall’s appeals reached the Kentucky Supreme Court.
Breach of Kentucky Trust Code By Demanding Indemnification and Failing To Properly Pursue Distribution
KRS 386B.8-170, part of the Kentucky Uniform Trust Code, applies to distribution upon termination of a trust and provides, as follows:
(1) Upon termination or partial termination of a trust, the trustee may send to the beneficiaries a proposal for distribution. The right of any beneficiary to object to the proposed distribution terminates if the beneficiary does not notify the trustee of an objection within thirty (30) days after the proposal was sent, but only if the proposal informed the beneficiary of the right to object and of the time allowed for objection.
(2) Upon the occurrence of an event terminating or partially terminating a trust, the trustee shall proceed expeditiously to distribute the trust property to the persons entitled to it, subject to the right of the trustee to retain a reasonable reserve for the payment of debts, expenses, and taxes.
(3) A release by a beneficiary of a trustee from liability for breach of trust is invalid to the extent:
(a) It was induced by improper conduct of the trustee; or
(b) The beneficiary, at the time of the release, did not know of the beneficiary’s rights or of the material facts relating to the breach.
The record does not reveal and, importantly the Bank failed to allege, that its proposal for distribution informed Worrall of his right to object and of the time allowed for objection. Therefore, the Kentucky Supreme Court determined that section 1 of KRS 386B.8-170 did not apply to any resolution of the case, but that section 2 of KRS 386B.8-170 and KRS 386B.8-180 did apply.
Section KRS 386B.8-170(2) required the Bank to proceed expeditiously. Instead, for over a year the Bank conditioned distribution on Worrall executing an overly broad release. When Worrall objected, the Bank failed to follow the procedures set forth in KRS 386B.8-180, which sets forth a number of items to be provided to the beneficiary when a trust terminates by its terms, as follows:
the fair market value of the net assets to be distributed, a trust accounting for the prior five (5) years and an estimate for any items reasonably anticipated but not yet received or disbursed, the amount of any fees, including trustee fees remaining to be paid, and notice that the trust is terminating.” KRS 386B.8-180(1)(a). The immediately following subsection provides for a hearing in the district court to resolve a beneficiary’s objections as set forth in written notice provided to the trustee. KRS 386B.8-180(1)(b). The requirement of written objection and district court hearing, however, only ensues after the proper delivery to the beneficiary of the items required by KRS 386B.8-180(1)(a).
Here, the Bank did not provide the required notice and information required by Kentucky statute. Instead, the Bank breached the statute and violated its terms:
[T]he Bank was requiring a release and indemnification agreement in order for Worrall to obtain distribution of the Trust. The Bank’s action was in direct violation of KRS 386B.8-180(5): “[n]o trustee [of a] trust shall request that any beneficiary indemnify the trustee against loss in exchange for the trustee forgoing a request to the court to approve its accounts at the time the trust terminates or at the time the trustee is removed or resigns. . . .”
The Bank’s trust officer admitted this violation; Bank counsel’s November 8, 2019, letter contained the violation;10and Bank counsel directly advised the district court of the violation at the January 8 hearing. While we might agree that prudent practice dictates a trustee’s attempt to receive such a document, however titled, it is simply beyond the pale for a trustee to extort such a document when the legislature has provided an adequate mechanism and remedy for the settlement and distribution of trust assets.
Breach of Fiduciary Duties In Administering the Trust
Worrall argued that the Bank violated its fiduciary duty to administer the Trust and thus committed a breach of trust under Kentucky law by liquidating the Trust’s assets.
Mr. Thompson’s will, in the provisions of Article Seventh, directed the trustee “at the death of my said daughter, . . .said shares of stock shall in that event be paid over to her estate.” Obviously, the Trust’s corpus had been diversified over Mrs. Worrall’s lifetime, but the Settlor’s direction was to distribute the Trust’s assets in kind.
The Kentucky Supreme Court reasoned:
While authority may exist that distribution in cash was permissible, in Lucas v. Mannering, 745 S.W.2d 654, 655-56 (Ky. App. 1987), the court held that notwithstanding a fiduciary’s power to sell real estate, the fiduciary’s authority to do so was not unqualified and could not override the beneficiaries’ desire to receive distributions in-kind. The record discloses absolutely no reason justifying liquidation of the Trust’s corpus to cash. From the Bank’s point of view, Worrall very well may have been difficult to deal with. He apparently sought removal of the Bank as trustee and then failed to follow through to secure his own appointment as trustee. He may have procrastinated in securing his own appointment as executor under Mrs. Worrall’s will. He may have indicated his agreement to sign the Bank’s “simple release” and then reneged. He may have done all those things and been unpleasant to deal with. But those failings do not justify the punitive and vindictive actions of the Bank in seeking a liquidation of the Trust’s assets, again, when the legislature has provided an adequate mechanism and remedy for the settlement and distribution of trust assets.
Remedies For Bank’s Breach of Statutory and Fiduciary Duties
KRS Chapter 386B.10 provides a number of remedies that may be available for breach of trust under Kentucky law, including:
- Compel the trustee to redress a breach of trust by paying money, restoring property, or other means;
- Order a trustee to account;
- Reduce or deny compensation to the trustee
In addition, KRS 386B.10-020(1) provides as a remedy, “the greater of: (a) [t]he amount required to restore the value of the trust property and trust distributions to what they would have been had the breach not occurred; or (b) [t]he profit the trustee made by reason of the breach.” The beneficiary may also be entitled to “costs and expenses, including reasonable attorney’s fees.” KRS 386B.10-040.
The Kentucky Supreme Court left the remedies for the Bank’s breach of trust to the District Court on remand, but gave some clear guidance:
At a minimum, we anticipate that Worrall is entitled to an accounting for the Bank’s actions as trustee for the five years prior to Mrs. Worrall’s death, as well as following her death.12 In addition, as monetary damages, Worrall is entitled to reimbursement for any capital gains tax he was required to pay; 13 denial and reimbursement of the Bank’s trustee’s and attorney’s fees during calendar year 2019 and thereafter; reimbursement of any commissions incurred by the Bank in liquidating the Trust’s assets; reimbursement of the Receiver’s fee, $5,000; and payment of Worrall’s attorney’s fees. The district court is also to calculate Worrall’s entitlement to reimbursement for any loss in the value of the investments to which he was entitled and wrongfully deprived. In other words, as to the Trust’s assets existing on December 31, 2019, i.e., prior to liquidation, the district court is to ascertain the value of those assets as of the date of this opinion (“current value”). In the event the current value exceeds the value Worrall was paid following the extrajudicial liquidation in January 2020, that value represents the damage Worrall has suffered as a result of the Bank’s breach of its duties.
Finally, the Kentucky Supreme Court made one final comment regarding the Bank’s breach of trust, chastising the Bank for the argument that it could not be liable because the court ordered it to distribute the assets:
This matter… involved a routine termination of a trust and a single beneficiary who merely objected to signing an overly broad release and indemnification agreement proffered by the trustee, seeking insulation from any possible liability in its administration of the trust. In other words, it arose from the Bank, as trustee, placing its corporate interests above those of its beneficiary. In KRS 386B.8-180, the legislature has sought to provide a fair and balanced mechanism for resolving an impasse such as occurred here, protecting the interests of both the trustee and the beneficiary(ies). The Bank’s clear remedy was not the action taken; rather, it was to give the notice and information required in KRS 386B.8-180(1)(a) and follow the procedure set out in subsection (1)(b) of that statute. If the Bank had merely followed the statutory procedure, its interests and those of Worrall would have been protected. This procedure was available to the Bank at all times following Worrall’s appointment as executor under Mrs. Worrall’s will. Because the Bank chose to ignore the statutory remedy, to disregard the trust terms for distribution, and to lead the district court to clear error, it justifiably bears responsibility for any and all damages suffered and proven by Worrall.
The Takeaway: Follow the terms of the trust and the Kentucky Uniform Trust Code in administering and distributing a trust, or risk being found liable for breach of trust. Read about other Kentucky Supreme Court here and here.