Iowa Court Finds No Grounds for Removal of Trust Advisor

November 10, 2020 | Kitt Tovar

On November 4, 2020, the Iowa Court of Appeals determined that beneficiaries of a trust had not shown that a trust advisor should be removed from her role. The court found that any potential conflict of interest was waived when the settlor created the trust and that the advisor had not committed fraud, dishonesty, or abuse of discretion so as to require removal.

Background

A settlor established a revocable trust with 1,250 shares of stock in the family business as the only asset. The settlor named his two daughters as the trust beneficiaries and appointed two trust advisors from the family business. The trust document granted each trust advisor 625 voting shares of stock. At the time the defendant was appointed as a trust advisor, she was the vice president and corporate secretary of the business, as well as a member of the board of directors.

In 2014, the senior vice president, who served as the second trust advisor, informed the defendant that her position on the board was being eliminated. The defendant requested a special meeting to consider what she believed to be improper actions by the senior vice president and executive committee. After a board meeting, the defendant was removed as vice president. The senior vice president then asked the defendant to resign from the board. After she refused, the board voted to remove her as a director. The defendant did not attend this meeting and withheld her 625 voting shares in the vote regarding her removal as director. At the annual meeting the following year, the defendant again withheld her vote when considering new directors for the board. Afterwards, one of the beneficiaries asked the defendant to resign as a trust advisor and appoint her as the successor. The defendant refused and the trust beneficiaries brought this lawsuit.

The district court found the defendant did not have a conflict of interest and that her refusal to vote her shares was not fraudulent, dishonest or done in bad faith. Therefore, the court denied the request to remove her as the trust advisor. The beneficiaries appealed.

Fiduciary Duty as Trust Advisor

The parties agreed Illinois law controlled the interpretation of the trust. On appeal, the plaintiffs claimed that the defendant had a conflict of interest when she refused to vote her shares and that she breached her fiduciary duty by acting on her own behalf rather than in the best interest of the beneficiaries.

A court may remove a trustee for breach of trust, misconduct, or disregard of fiduciary duties. However, this rule differs slightly if the trustee is an officer or employee of the business. A settlor may choose to have a trustee who is familiar with the business and has special expertise in the area. This trust settlor implicitly waives the potential conflict of interest that is created by this dual role of officer or employee and trustee.

A court should remove a trustee if there is evidence the trustee is harming the trust fund. Here, there was no evidence that the defendant caused any harm or danger to the trust. The board still had a quorum and was able to remove the defendant as director. One plaintiff admitted that the defendant could have voted “yes,” “no,” or “vote withheld” and that would have satisfied the defendant’s fiduciary duty.

Here, the defendant simply did not vote, but the trust document did not require her to do so. A disagreement between a trust advisor and beneficiary does not constitute a conflict of interest or grounds for removal. The court affirmed the district court’s holding that the trust beneficiaries did not prove that the trust advisor’s inaction amounted to fraud, dishonesty, or abuse of discretion; or was done in bad faith; or that she had a conflict of interest that required her removal.