In the context of Ohio law requiring clear and convincing evidence of the trustee’s bad acts, bad faith, willful default or reckless indifference, it is quite difficult to prevail against a trustee who is merely negligent, careless or sloppy.
In Newcomer v. National City Bank (Ohio 6th App 2014), An Ohio appellate court refused to aggregate a series of potentially negligent acts, and in so doing affirms the finding of a lack of bad faith, willful default, or reckless indifference.
Exculpatory Clauses Under Ohio Law
In Newcomer, a successor trustee sued the prior corporate trustee for a series of allegedly bad acts. The trust as drafted contained an exculpatory clause, which provided that the trustee:
shall not be liable for any act or thing done or omitted to be done in good faith, or for any mistake or error of judgment, or otherwise except for bad faith or willful default.
Under Ohio law, such exculpatory clauses are enforceable so long as they do not protect conduct that is the result of willful default, bad faith, or reckless indifference.
Trustee Intentional Bad Acts Versus Bad Management
The successor trustee sued the prior corporate trustee for a list of a number of allegedly negligent and otherwise bad acts, including overcharging trustee fees, failure to maintain proper records, failure to invest the trust properly, failure to pay proper taxes, and an overall failure to administer the trust properly.
The real complaint was that the trust fell in value as a result of the market crash of 2008, and the successor trustee essentially argued that the various alleged procedural defects in the way in which the trust was managed should subject the trustee to liability for the loss in value of the portfolio. The successor trustee argued that the portfolio of blue chip companies should have been liquidated in 1999 and converted into bonds. The appellate court summed up the argument as follows:
On appeal appellants argue that the testimony of [fact and expert witnesses] at trial demonstrated that a prudent investor would have liquidated the portfolio and converted the proceeds to treasury bonds. Appellants contend that market conditions were such that it was a reckless indifference to the interest of trust beneficiaries not to liquidate the Trust portfolio in 1999.
To any trust lawyer, when the trial court frames your argument in such a way as to appear unreasonable, your chance of success is not high. The successor trustee is essentially arguing that the prior trustee should have had sufficient clairvoyance to anticipate a market crash nine years into the future and should have liquidated a portfolio of blue chip stocks then.
The Ohio appellate court nevertheless went through each alleged trustee bad act and affirmed the trial court’s findings that each such alleged trustee bad act was not the result of bad faith, willful default, or reckless indifference.
The successor trustee argued that the cumulative effect of the alleged negligent and careless trustee acts should amount to an overall finding of bad faith, willful default or reckless indifference under Ohio law. The Court rejected the cumulative trustee bad acts theory under Ohio law.
No Cumulative Trustee Bad Acts Under Ohio Law
Ohio law imposes a heightened clear and convincing burden of proof for bad faith conduct. The net effect of the refusal of the court to aggregate a series of arguably negligent (although not necessarily reckless or bad faith) trustee bad acts, with the heightened clear and convincing burden of proof may be to make to difficult to successfully sue a trustee in the State of Ohio.
On the other hand, when the primary damage claim is that a portfolio of blue chip stocks should have been liquidated into bonds nine years prior to a market crash, perhaps the overall weakness of the claim would have resulted in a loss no matter what the evidentiary standard might have been. A more common theory of damages brought against trustees, such as a failure to properly diversify, might still be successful under Ohio’s pro-trustee regime.