In re the Trusts Under the Will of Crabtree
865 N.E.2d 1119, 2007 Mass. LEXIS 361, 449 Mass. 128 (2007)
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Rule of Law:
A professional trustee who breaches fiduciary duties by failing to properly administer separate trusts, commingling funds, creating unauthorized endowments, and charging excessive, undisclosed fees may be removed and surcharged, but such actions do not constitute "fraud on the Court" without clear and convincing evidence of an unconscionable scheme to corrupt the judicial process.
Facts:
- Lotta M. Crabtree, a vaudeville star, died in 1924, establishing eight testamentary charitable trusts, seven of which are currently active, each with a distinct charitable purpose and requiring separate administration.
- The largest trust, the Lotta Agricultural Fund (agricultural fund trust), was established to provide loans to graduates of the University of Massachusetts for agricultural pursuits and and financial assistance to needy students.
- In 1984, Robert G. Naughton and Francis J. Harney were appointed successor professional trustees for the seven Crabtree trusts (along with Joseph F. Lyons, who later died in 2000).
- The trustees regularly met for less than 1.5 hours weekly to discuss trust matters, finding administration not particularly onerous.
- The trustees consistently paid their flat monthly fees for all seven trusts, and all administrative expenses for all seven trusts, exclusively from the agricultural fund trust's account.
- The trustees established the Lotta M. Crabtree Endowment Fund at the University of Massachusetts in 1987, disbursing over $630,000 of income from the agricultural fund trust into it by 1999, despite the will requiring semi-annual income distribution directly to beneficiaries or as loans.
- The trustees calculated their compensation as a flat monthly fee ($3,500 per trustee) plus a quarterly percentage of combined trusts' income, leading to total fees of $149,223 for 1999 and $73,722 for the first half of 2000.
- The trustees did not keep itemized records of time spent on trust business and did not disclose in their accounts that the agricultural fund trust was used as an operating fund for all trusts or the existence and operation of the separate endowment.
Procedural Posture:
- On May 25, 2000, the trustees filed the fifth accounts for 1999.
- On November 29, 2000, Harney and Naughton filed the sixth and final accounts for January 1, 2000, through July 5, 2000 (date of Lyons's death).
- On November 17, 2000, the Probate and Family Court judge allowed all fifth accounts except for the agricultural fund trust account.
- On May 17, 2001, the Probate and Family Court judge ordered the trustees to file a detailed statement of time, compensation, and expenses, and appointed a Guardian Ad Litem (GAL) to review the agricultural fund trust's 71st and 72nd accounts.
- The trustees unsuccessfully appealed this order, and the Supreme Judicial Court affirmed the requirement to file reports and appoint a GAL in Matter of the Trusts Under the Will of Crabtree, 440 Mass. 177 (2003) (Crabtree I).
- On December 13, 2001, the trustees filed identical affidavits outlining time spent and fee calculations, "under protest."
- On April 9, 2002, the GAL filed a report recommending disallowing the fifth and sixth accounts, requiring restatement, and surcharging excessive fees and expenses.
- On June 19, 2002, the judge ordered a hearing and trial on the fifth account of the agricultural fund trust and the sixth account of all seven trusts.
- The trial was held on fourteen nonconsecutive days between January 7 and September 30, 2003.
- On July 29, 2004, the Probate and Family Court judge ordered the removal of trustees Naughton and Harney, surcharged them for excessive fees and administrative expenses, and found their undisclosed accounting practices constituted a "fraud on the Court."
- Naughton and Harney appealed the Probate and Family Court judgments.
- The Appeals Court affirmed the removal of the trustees (appellants Naughton and Harney) and the reduction in their fees in an unpublished memorandum and order (Matter of the Trusts Under the Will of Crabtree, 66 Mass. App. Ct. 1102 (2006)), but vacated the surcharge for administrative expenses and ruled the judge abused discretion by excluding certain expert testimony.
- On the trustees’ (appellants Naughton and Harney) petition for rehearing on the issue of fraud on the court, the Appeals Court issued an amended memorandum and order declining to reach the issue.
- Both the trustees (appellants) and the Guardian Ad Litem (appellee GAL) filed applications for further appellate review, which the Supreme Judicial Court granted.
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Issue:
Does a professional trustee's repeated breaches of fiduciary duty, including commingling trust funds, establishing an unauthorized endowment, and charging excessive, undisclosed fees, warrant removal and surcharge, and do these actions constitute "fraud on the Court" for the purpose of reopening previously settled accounts?
Opinions:
Majority - Marshall, C.J.
Yes, a professional trustee's repeated breaches of fiduciary duty, including commingling trust funds, establishing an unauthorized endowment, and charging excessive, undisclosed fees, warrant removal and surcharge; however, these actions do not constitute "fraud on the Court" for the purpose of reopening previously settled accounts. The Supreme Judicial Court affirmed the removal of trustees Naughton and Harney and the surcharge for excessive fees, but reversed the Probate and Family Court's finding of "fraud on the Court" and the surcharge for administrative expenses. The court reasoned that professional trustees are held to a higher standard of conduct, and disregard for the settlor's intent and breaches of fiduciary duties justify removal if detrimental to the trust. The trustees failed to demonstrate they discharged their duties with reasonable skill, prudence, and judgment. Specifically, the trustees breached their fiduciary duty by misusing the agricultural fund trust account as an operating fund for all seven trusts, effectively depriving its beneficiaries of substantial income. This undisclosed commingling of funds violates the duty to segregate distinct trust funds and cannot be excused by historical practice or lack of statutory specificity regarding accounting form, as it misrepresented facts and contravened substantive law. Furthermore, the trustees breached their fiduciary duty by creating and maintaining an unauthorized endowment at the University of Massachusetts using agricultural fund trust income without court approval or disclosure. This converted income meant for semi-annual distribution to beneficiaries into a parallel principal pool, directly contravening Crabtree's will and a 1971 court order. The court also found the trustees' fees excessive, noting the judge properly relied on comparative fee schedules from other trust management entities and evidence from trustee diaries to determine reasonable compensation. The trustees' failure to keep clear, accurate time records meant the consequences of this failure fell upon them. These breaches, especially the misuse of the agricultural fund trust and the unauthorized endowment, individually or in combination, were sufficient to justify removal, as they demonstrated a "basic lack of understanding" of their fiduciary obligations. However, the court reversed the finding of "fraud on the Court." This is a stringent legal term requiring clear and convincing evidence of an "unconscionable scheme calculated to interfere with the judicial system's ability impartially to adjudicate a matter." Examples include bribery or attorney involvement in perpetrating fraud. The trustees' conduct, while serious breaches of duty, did not rise to this level. The court also found no "fraud" as contemplated by G. L. c. 206, § 24, for reopening settled accounts. Unlike prior cases where facts were misrepresented and indiscernible from accounts, the Crabtree trustees' accounts accurately reflected the amounts charged, and the disproportionate charging to the agricultural fund trust was discernible, though the underlying reason (using it as an operating fund) was not explicitly disclosed. This was a breach of duty, not an affirmative factual misrepresentation intended to mislead the court. Finally, the court reversed the surcharge for administrative expenses. Trustees are generally entitled to indemnification for "proper expenses" incurred in trust administration, and Massachusetts law permits charging administrative expenses separately from fees, a practice disclosed in their accounts. Although the judge criticized how some expenses were incurred and the lack of specificity, he did not find the administrative expenses themselves unreasonable in type or cost. Therefore, relying solely on "customary" practices to surcharge for these expenses was an insufficient ground, especially given the substantial reduction in trustees' fees already imposed.
Analysis:
This case reinforces the high fiduciary standard expected of professional trustees, particularly emphasizing the duty to administer separate trusts distinctly, avoid commingling funds, and adhere strictly to the settlor's intent regarding distributions. It clarifies that while severe breaches of fiduciary duty warrant removal and surcharge, the bar for "fraud on the Court" is exceptionally high, requiring an unconscionable scheme to corrupt the judicial process, beyond mere nondisclosure or even severe maladministration. The decision also provides guidance on the discretionary power of probate judges in evaluating trustee compensation and expenses, emphasizing the trustee's burden to maintain clear records and the court's authority to reduce fees based on proper management standards.
