Estate Planning

“Ohio law provides for two alternative mechanisms by which a trustee may conclude its roles as a trustee and finally settle all questions of responsibility with respect to the trustee’s action. The first option is a judicial proceeding under R.C. 5802.01 and 2721.05. As an alternative to such judicial proceedings, the trustee may obtain a release from beneficiaries under R.C. 5810.09, 5808.17(c) and 5808.02(B)(4).

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* * * [A judicially] expressed aversion to releases in fiduciary cases does not comport with the manifest intent of the legislature to allow such releases as a means of terminating a trust. R.C. 5810.09, 5808.17(c), and 5808.02(B)(4) all contemplate use of releases as routine in trust matters. * * *

Id. ¶ ¶ 23, 36. While the overarching takeaway from Zook is that judicial and non-judicial closure is legislatively afforded trustees, a close look at the case also reveals factual and procedural distinctions worthy of attention.

Relevant Facts

In Zook, a closely held advertising business had an appraised value of $1,036,000 on a probate inventory. Id. ¶ 8. The probate estate poured over into an inter vivos trust where the $1,036,000 appraised value was listed on trust account statements. Id. Upon the death of the settlor, the trust benefited the settlor’s surviving spouse and upon her death was outright distributable to the settlor’s children from a marriage other than to the surviving spouse. The trust gave the surviving spouse authority to operate and manage the advertising business pursuant to a management agreement to be entered into with the Trustee. Id. at ¶ 4. The surviving spouse immediately took over operation and control of the business but never entered into a management agreement with the Trustee. Id. The business went into rapid decline and, in part because the business “presented a significant risk of liability that could compromise the other assets still held by the trust,” the Trustee sold the business to the surviving spouse for $740.00. Id. at ¶ 6.

Upon the surviving spouse’s death, in lieu of the cost and delay associated with the Trustee seeking court approval of its administration and final accounting, the beneficiaries all ultimately signed a release presented by the Trustee that approved the Trustee accountings, the Trustee administration and further provided that “all acts, doings, administration, and omissions of [the Trustee] with respect to the Trusts are hereby ratified, affirmed and approved[.]” Id. at ¶ 9. Further language released, indemnified and held harmless (for damages and attorney fees) the Trustee in its fiduciary and corporate capacities. Id. After all beneficiaries signed the releases the Trustee made final distributions. Ultimately, several of the beneficiaries sued the Trustee for loss to the Trust due to the decline in value in the advertising business. Id. at ¶ 10.

After conducting an oral hearing on cross-motions for summary judgment, the trial court granted the Trustee summary judgment on the basis that the beneficiaries’ claims were barred by signed releases.² Some beneficiaries appealed and the only issue advanced by the beneficiaries’ on appeal was “the validity and preclusive effect of those releases[.]” Id. at ¶ 22.

Following the Court of Appeals’ acknowledgment that the Trust Code affords finality to the Trustee administration by way of judicial action or private agreement, the Zook Court conducted a de novo review of the trial court’s award of summary judgment. In affirming the award of summary judgment, the Zook Court addressed a threshold burden of proof issue and analyzed whether the beneficiaries were excused from their release.

Burden of Proof/Procedural Issue

The Court of Appeals held that “once the trustee presents an executed release, the burden shifts to the beneficiaries to demonstrate that an R.C. 5808.17(c) exception applies to invalidate the release.” Id. at ¶ 31. In agreeing with the trial court below, the Court of Appeals distinguished and rejected a prior holding of the First District Ohio Court of Appeals in Cundall v. U.S. Bank, N.A., 174 Ohio App.3d 421, 2007-Ohio-7067, rev’d on other grounds, 122 Ohio St.3d 188, 2009-Ohio-2523 which held that the Trustee bore the burden to establish “both the existence of the release and the validity thereof[.]”Zook, 2017-Ohio-838, at ¶ 31. The Zook Court noted that Cundall involved a self-dealing transaction where a trustee and beneficiary “coerced other beneficiaries” into a transaction encompassed by the Trustee’s release submitted to the beneficiaries. Id. at ¶ 32. In noting that the alleged conduct sought to be released was a self-dealing transaction predicated on fraud (coercive conduct), the Zook Court noted that the Cundall burden of proof was inapplicable. Id. at ¶ 35. As one of at least four grounds for distinguishing Cundall, the Court noted that:

* * * Releases perhaps, should remain highly scrutinized in self-dealing cases like Cundall, but we do not have such a case before us. On the facts here, we conclude that once the beneficiaries admit that they executed a release, the burden shifts to the party to seeking to invalidate it.”

Id. at ¶ 36.³ Accordingly, once the Trustee presents a release signed by beneficiaries that encompasses alleged claims, the burden shifts to beneficiaries to invalidate the release instrument.

Validity of Releases

R.C. 5808.17(c) states “A release by a beneficiary of a trustee from liability for breach of trust is in-valid to the extent that it was induced by improper conduct of the trustee or that the beneficiary, at the time of the release, did not know of the beneficiary’s rights or of the material facts relating to the breach.” While the trial court reviewed the evidence applicable to all three exceptions under R.C. 5808.17(c),⁴ the beneficiaries on appeal only sought review as to whether the appellants were “unaware of certain material facts concerning [the Trustee’s] actions[?]”Zook, 2017-Ohio-838, at ¶ 27. In summary, the beneficiaries claimed they were excused from the release since they were unaware of facts pertaining to the management of the advertising business and the devaluation of the business and resulting loss to the Trust corpus. Id.

The Zook Court noted that R.C. 5801.03(A) provides a definition of “knowledge” with respect to trust matters. The Zook Court held that R.C. 5801.03(A) imposes both an actual and constructive knowledge standard holding that beneficiaries “must be charged with constructive knowledge of not only matters of which they have actual knowledge, but facts that they would have ‘reason to know,’ R.C. 5801.03(A)[(3)]), from the perspective of an objective, reasonable person, including all matters that are of public record.” Zook, 2017-Ohio-838, at ¶ 39. Applying this standard, the Zook Court found that the beneficiaries were charged with constructive knowledge of information “freely available in the public record.” Id. at ¶ 41 (citing Lawyers Title Ins. Corp. v. MHD Corp., 6th Dist. No. E-10-007, 2010-Ohio-5174, ¶ 25). Charging beneficiaries with constructive knowledge of information in a public record is important because it prevents beneficiaries from ‘‘ ‘bury[ing] their head in the sand’ with matters affecting an inheritance or expectancy.” Zook, 2017-Ohio-838, at ¶ 41 (quoting Gracetech, Inc. v. Perez, 8th Dist. No. 96813, 2012-Ohio-700, ¶ 16, fn. 3). The Zook court concluded that the beneficiaries had constructive knowledge regarding material facts concerning the alleged breach of fiduciary duty since the probate inventory was a public record showing the advertising business valued at more than $1,000,000 (with a total estate of $1,470,000), that the will filed for probate as a matter of public record referenced the Trust, that the beneficiaries knew the advertising business had failed, and that after the surviving spouse died the periodic trust statements did not list the advertising business as a Trust asset. Id. at ¶ 43.⁵ Since the beneficiaries had constructive knowledge of the Trustee’s alleged breach of fiduciary duty they were unable to demonstrate being unaware of the material facts relating to the breach and, accordingly, the release terms remained binding upon them.

Conclusion

The Zook Court’s well-reasoned and detailed examination of the underlying facts confirms the validity of the statutory mechanisms providing finality to trust administration. Zook also gives insight into the types of facts and disclosures that may be of importance in drafting release agreements sufficient to withstand judicial scrutiny.

Endnotes

¹See, e.g., K. Moore, J. Furniss, “The Trustee’s Toolkit: Use of Releases in Achieving Finality,” 24 Probate Law Journal of Ohio 181, Issue 3, Jan/Feb 2014

²The trial court concluded that any alleged negligence claim was subsumed into the breach of fiduciary duty claim. Zook, 2017-Ohio-838, at ¶ 17.

³The Zook Court found Cundall also inapplicable because 1) it pre-dated the Trust Code, 2) even if the Trust Code was controlling law R.C. 5810.09 would not be applicable since the release was procured by alleged improper conduct of the trustee, and 3) the Ohio Supreme Court’s reversal of the Court of Appeals’ decision “did not reflect any approval of the First District’s decision on [the validity of the releases].” Zook, 2017-Ohio-838, at ¶ ¶ 33-35.

⁴While not reviewed for purposes of the appeal, the Court of Appeals opinion recites many of the trial court’s finding on the first two exceptions under R.C. 5808.17(c) which may provide useful to practitioners.

⁵Further, the Court of Appeals noted that while the Trustee did not affirmatively provide information regarding the alleged breach, the beneficiaries did not allege the Trustee “hid or refused to provide requested information.” Zook, 2017-Ohio-838, at ¶ 40 (citing Schwab v. Huntington Nat’l Bank, 516 Fed. Appx. 545 (6th Cir. 2013))