Sometimes drawing pragmatic lessons from legal proceedings requires pulling elements from multiple court cases, but for the professional fiduciary standard, we only need one; the Estate of Maxedon (1997).
In this case, Edward Maxedon, a Kansas resident, placed farmland he owned into a trust for the benefit of his brother and sister to provide them with income during their lifetimes, after which a remainder interest would pass to their children. The trust terminated 20 years after the second sibling’s death. The People’s State Bank of Pratt served as trustee upon Edward’s death in 1953 until 1993, when the trustee sold the farmland and filed a petition for the court to approve the final distribution and the final accounting of the trust. The beneficiaries objected to the petition, claiming breach of fiduciary duty arising from the mismanagement of the trust assets (which were almost entirely comprised of the farmland, valued at $658,000 from 1982 to 1992 but sold for $479,000 in 1993). The “loss” in value seems to be the catalyst for the suit. The trial court found in favor of the trustee.
In their appeal, the beneficiaries alleged breach of fiduciary duty because the trustee did not diversify the trust assets in order to maximize trust income and protect the trust assets from market fluctuations, in accordance with the grantor’s intent when he created the trust. In conjunction with this claim, the beneficiaries asserted that, because the trustee was a bank with a dedicated trust department, it should be held to the higher professional fiduciary standard of care, which it failed to meet by failing to diversify the trust’s assets. As such, the appellate court was forced to directly address whether a professional trustee should be held to an elevated fiduciary standard, and if so, how that standard should be defined and how the trustee’s actions should be assessed in relation to that standard.
In addressing the beneficiaries’ claim that the bank should be held to a higher standard of care, the appellate court agreed with the beneficiaries, stating “we are convinced that the weight of authority suggests the standard of care of a bank trustee is higher than an ordinary individual nonprofessional trustee…”[i], but clarified their decision further by expanding the standard of care beyond banks, stating “The logic stated above strongly supports a notion that if a trustee who represents that he, she, or it is a professional trustee, then such trustee should be held to a higher standard of care.”
In confirming the doctrine of a professional fiduciary standard of care, the appellate court relied on general notions of consumer rights, existing elevated standards of care in similar service-oriented professions (medical, legal, and banking specifically mentioned) and on various trust-specific sources, including the Restatement (Second) of Trusts, which, published in 1957, states “…if the trustee has a greater degree of skill than that of a man of ordinary prudence, he is liable for a loss resulting from the failure to use such skill as he has.”[ii] In other words, the elevated professional standard of care for professional trustees is a well-supported, decades-old doctrine and the court convincingly imposed it upon the trustee.
Which leads to the pragmatic question – if a court imposes a standard of care that is not explicitly defined elsewhere, how can it define, let alone apply, the professional fiduciary standard? Thankfully, the appellate court addressed this dilemma, stating, “…the measure of such duty is that degree of care and diligence in management which is used by professional trustees generally in the same or a similar community.” In other words, the standard of care depends upon how other professional fiduciaries conduct their affairs. In order to determine how other trustees conduct their affairs and therefore what the community standard is, the court used the same technique courts routinely use in similar cases where professional conduct is in question; expert witness testimony.
Courts resort to expert witness testimony because the assessment of professional conduct is highly complex, multi-faceted, geographically divergent, variable over time and can only be rightly judged when the circumstances in which the conduct occurred are considered. In the case of trustees, the standard of care is dependent upon “the circumstances of the particular trust…” and the standard conduct of other professional trustees. Courts rely on expert witnesses to guide and inform the “trier of fact when the facts are somewhat alien in terminology and the technological complexities would preclude an ordinary trier of fact from rendering an intelligent judgment.”[iii]
As such, the appellate court concluded that “to establish the standard of care and a breach of that standard, it will ordinarily be necessary to present testimony of someone who is competent to testify as to whether the trustee’s actions conformed to the standard of care for a professional trustee.” And this is where the beneficiaries’ case broke down.
The beneficiaries presented as their witness a stockbroker who never worked for a bank, had no experience as a trust officer, had no experience working for a trust company, had no expertise in real estate, “nor was he aware of any standard of care a professional trustee would owe a beneficiary”. Unsurprisingly, the court found him unqualified as an expert on the professional fiduciary standard of care and disallowed his testimony. On the other hand, the bank’s expert witness was a former state banking commissioner who, during his tenure, established the state’s trust examiner’s system and appraised farms in and around Wichita during his spare time. He was both an expert in trust administration and real estate.
The case was decided on the credibility and testimony of the expert witnesses, specifically on their ability or inability to define the standard of conduct for that community. Although the beneficiaries successfully argued that an elevated standard should be applied (an easy argument to make), they failed to adequately define that standard and therefore, couldn’t prove that the trustee’s actions failed to meet that standard. This is the golden nugget of this case – the professional fiduciary standard as a concept is simple to justify and impose but pragmatically challenging to define and measure against because the standard is highly subjective and circumstantial. It’s an intrinsically ambiguous “he said / she said” proposition, and this ambiguity presents material risk for trustees.
So how can a professional individual trustee deal with this ambiguity? We suggest a few strategies. First, research the conduct of other professional trustees, individual and institutional, across your state. Because trust law is based on each state’s statutes, laws and regulations, it’s reasonably logical to conclude that your “community” benchmark will be other trustees in your state. Second, once you have an understanding of how your peers are conducting their affairs, assess your own policies, procedures, and decision-making systems. Recall that courts evaluate the process and conduct, not the outcome.
Third, modify your own policies, procedures and decision-making systems to adopt what you view as the best practices of your peers. If they have formal policies for making and auditing distributions, adopt your own or improve what you already have. If they have better annual accountings to beneficiaries, improve your annual accountings to beneficiaries. If they have policies and procedures to define a trust’s investment strategy and monitor their investment managers, adopt your own.
The point is to 1) understand what the standard of care in your community is and 2) to ensure that your processes and systems are among the best within your community. After you draft them, adhere to them. The best policies and procedures can be a liability if you draft them but don’t follow them. Consider customizing your policies and procedures to fit your trusts and beneficiaries, as well as your practice and existing workflows. And if you don’t have the skills or experience to adopt best practices, or have difficulty obtaining the information you need to evaluate how your peers are conducting themselves (you are asking your competition for their workflows and competitive tactics after all), find an expert in that space who understands what best practices entail and hire them to help you draft and adopt them.
In the end, the professional fiduciary standard is not something to be feared or apprehensive about; it’s an elevated standard of care that will facilitate a more efficient, repeatable and effective workflow that helps you serve your beneficiaries better and scale your practice faster. Understand what that standard is in your community and embrace it.
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[i] Case 76254: In re Estate of Maxedon – KS Courts
[ii] §174, comment a
[iii] Juhnke v. Evangelical Lutheran Good Samaritan Society, 1981
