In Re Scheidmantel
868 A.2d 464, 2005 Pa. Super. 6, 2005 Pa. Super. LEXIS 5 (2005)
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Rule of Law:
A corporate trustee that holds itself out as having special skill commits gross negligence if it implements a diversification strategy based on general investment principles without inquiring into the specific, known, and deteriorating circumstances of the life beneficiary, thereby altering the trust's investment objectives contrary to the beneficiary's needs and the trust's purpose.
Facts:
- In 1998, Stella N. Scheidmantel created a revocable trust, naming her husband, Paul E. Scheidmantel, as the lifetime beneficiary (Life Tenant) and their three children as the remaindermen.
- The trust was funded primarily with a large, concentrated holding of FWBI common stock, which later became stock in SKYF, the parent company of the successor trustee, Sky Trust.
- Stella Scheidmantel died on March 3, 1999, which made the trust irrevocable.
- In August 1999, the Life Tenant's health declined severely, and he moved into a nursing home, where his condition continued to deteriorate rapidly.
- In June 2000, a new portfolio manager for Sky Trust, Thomas Oehmler, without consulting the beneficiaries or inquiring about the Life Tenant's health, changed the trust's investment objective from 'safety and income' to 'balanced' and extended its time horizon from 3-7 years to 7-10 years.
- In the fall of 2000, Oehmler began selling large portions of the high-dividend SKYF stock to diversify into mutual funds with long-term growth potential. One sale of 8,000 shares occurred immediately before the ex-dividend date, causing the trust to lose an 800-share stock dividend.
- The Life Tenant died on December 9, 2000.
- On December 29, 2000, twenty days after the Life Tenant's death, the Trustee purchased shares in three additional mutual funds, despite its duty being to liquidate and distribute the trust's assets.
Procedural Posture:
- The Remaindermen, Paul E. Scheidmantel, Jr. and Paula S. Wescott (Objectors), filed objections to the Trustee's First and Final Account in the trial court (Orphans' Court division).
- The trial court conducted a hearing on the matter.
- On March 17, 2003, the trial court entered an opinion and order finding the Trustee had committed gross negligence and imposing a surcharge.
- The Objectors filed exceptions to the trial court's order.
- The Trustee, Sky Trust, filed a notice of appeal to the Superior Court of Pennsylvania, which was quashed as interlocutory because the trial court had not yet ruled on the exceptions.
- The trial court then ruled on the exceptions and entered a final order confirming the account as absolute, as modified.
- The Trustee (appellant) filed a timely appeal to the Superior Court of Pennsylvania from this final order.
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Issue:
Does a corporate trustee commit gross negligence by diversifying a trust's assets based on general principles without inquiring into the life tenant's rapidly deteriorating health and short life expectancy, thereby altering the trust's investment objectives and time horizon in a manner contrary to the trust's purpose?
Opinions:
Majority - Hudock, J.
Yes, a corporate trustee commits gross negligence under these circumstances. Although the trust instrument lowered the standard of care to gross negligence, Sky Trust held itself out as an expert and is therefore held to a standard of superior skill. Gross negligence is conduct more egregious than ordinary negligence, involving a conscious act or omission in reckless disregard of a legal duty and its consequences. The trustee's failure to make any inquiry into the Life Tenant's deteriorating health and short life expectancy was a reckless disregard of its duty. This failure made its decisions to change the trust’s objective to long-term growth and to extend its time horizon unreasonable and outside the bounds of reasonable judgment. While diversification can be prudent, it is a tool, not a goal in itself; the specific diversification strategy employed here was grossly negligent because it ignored the trust's primary purpose of providing for the Life Tenant and was initiated when there was no possibility of realizing long-term growth. The trustee's actions, including selling stock right before the ex-dividend date and purchasing assets after its duty to distribute had arisen, constituted a breach of its fiduciary duty warranting a surcharge.
Analysis:
This case establishes that a trustee's fundamental duty to know the beneficiary's circumstances is paramount and cannot be obviated by broad discretionary powers or a liability clause limiting liability to gross negligence. It serves as a significant precedent cautioning corporate fiduciaries against applying boilerplate, one-size-fits-all investment strategies. The ruling clarifies that a diversification plan, while generally prudent, can be deemed grossly negligent if its implementation is completely detached from the specific, factual realities of the trust, such as a beneficiary's short life expectancy. This decision reinforces the principle that fiduciary duties require active, informed, and tailored management specific to the needs and objectives of each individual trust.
