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Summary of Opinion: Mesler v. Holly, No. 74-1099 (Fla. Dist. Ct. App. 2d Dist. Sept. 5, 1975)

Factual and Procedural Background

On April 9, 1970, settlor Frederick L. Way established two inter vivos trusts: a Florida trust and a "Massachusetts Fund" trust. The Florida trust named the settlor and Elaine J. Holly as co-trustees and provided that, upon the settlor's death, Elaine J. Holly would be the sole beneficiary during life, with remainder to the Massachusetts trust (whose principal beneficiaries were the settlor's great-grandchildren, the appellants). The settlor executed a will the following day that directed the residue of his estate to pour over into the Florida trust. O. Ray Gussler later became a successor co-trustee of the Florida trust.

Frederick L. Way died on October 20, 1972. Since then, Elaine J. Holly and O. Ray Gussler have acted as co-trustees, although Gussler's participation appears largely nominal; at one point he purportedly resigned but then reconsidered.

The plaintiffs-appellants (the settlor's great-grandchildren) filed an amended complaint for declaratory judgment and for other relief, including removal of Elaine J. Holly as trustee and for an accounting, asserting that the trustees had abused their authority under Paragraph EIGHTEENTH of the Florida trust by unreasonably invading principal to maintain Holly's "standard of living." The trial court dismissed the amended complaint for failure to state a cause of action. The plaintiffs appealed, and the District Court of Appeal reversed and remanded.

Legal Issues Presented

  1. Whether the appellants' amended complaint sufficiently alleged facts to state a cause of action challenging the trustees' exercise of discretion to invade principal under Paragraph EIGHTEENTH of the trust.
  2. Whether a grant of "absolute discretion" to trustees to distribute principal to "maintain the standard of living" of a lifetime beneficiary precludes judicial review and accountability to remaindermen.
  3. Whether allegations that the trustee is the sole lifetime beneficiary, has not furnished accounts, and is not confining invasions of principal to reasonable limits give rise to a sufficient inference of abuse of discretion to require the trustee to respond.
  4. Whether co-trustees are required to account to remaindermen prior to the remaindermen's eligibility for distribution.

Arguments of the Parties

Appellants' Arguments

  • Paragraph EIGHTEENTH does not grant an unbridled power to determine or establish a new standard of living; rather, the trustees' "absolute discretion" relates to the manner, mode, and extent of distributions to maintain the standard of living to which Elaine J. Holly had already "become accustomed."
  • The "standard of living to which she has become accustomed" is an ascertainable fact; appellants allege the trustees have exceeded that ascertainable standard by unreasonable and excessive invasions of principal.
  • Allegations that Holly is the sole lifetime beneficiary, has not furnished accounts, and that principal has been invaded unreasonably or excessively are sufficient to infer abuse of discretion and to warrant judicial response (e.g., accounting, removal, or other relief).

Appellees' Arguments (as reflected in trial court ruling)

  • The grant of "absolute discretion" vested full authority in the co-trustees to determine the standard of living for Elaine J. Holly and to distribute principal as they deemed necessary; such discretion is exclusive to the trustees.
  • Plaintiffs failed to allege facts showing the co-trustees exercised their discretion in bad faith, dishonestly, or inconsistently with the settlor's intent.
  • Even if Gussler had resigned, the settlor intended Elaine J. Holly to continue administering the trust as sole trustee.
  • Co-trustees were not required to account to remaindermen until the remaindermen were eligible for distribution.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
76 Am.Jur.2d Trusts §§ 182, 183 (1975) Trustee's duty to exercise good faith and to be judicious in administration despite broad discretion. Used to support the proposition that "absolute discretion" does not relieve a trustee of duties of good faith and judicious administration and that court review remains available.
Mahan v. Lummus, 160 Fla. 505, 35 So.2d 725 (1945) Trustee accountability to remaindermen where discretion is improperly, arbitrarily, or capriciously exercised. Cited to show that trustees remain accountable and that courts may review improper exercise of discretion affecting remaindermen.
A. Scott, Vol. III, § 187.5 (3d ed. 1967) Consideration that trustee who is sole lifetime beneficiary is a relevant factor in evaluating exercise of discretionary powers. Relied upon to support the court's recognition that a beneficiary-trustee's dual role is a viable consideration when reviewing discretionary invasions of principal.
In re Rockwell's Estate (N.Y. Sur. Ct. 1960), 26 Misc.2d 709, 205 N.Y.S.2d 928 Courts may review trustees' discretionary powers to invade principal; courts should not necessarily fix criteria but may review exercise. Used to support the proposition that the court may review the trustees' discretionary invasions of principal.
90 C.J.S. Trusts § 349 (1955) Trustee's fiduciary obligation to remaindermen to keep demands within reasonable limits. Cited to support the statement that a trustee-beneficiary has an obligation to confine invasions of principal within reasonable limits.
Connecticut Bank & Trust Co. v. Lyman, 148 Conn. 273, 170 A.2d 130 (1961) Even an unlimited power of invasion is subject to implied limitations to protect remaindermen. Applied to show implied limits exist on a trustee's power to invade principal notwithstanding broad language.
Rosen v. Rosen (Fla. Dist. Ct. App. 3d Dist. 1964), 167 So.2d 70 Trustees are accountable to courts and their performance may be controlled by the courts. Cited for the general principle that courts can supervise and control trustee performance when appropriate.

Court's Reasoning and Analysis

The District Court of Appeal began by framing the threshold issue as whether the amended complaint alleged facts sufficient to permit any relief. The appellate court concluded that the complaint did so allege and therefore the trial court erred in dismissing for failure to state a cause of action.

The court explained that although a settlor's intent is the guiding principle in interpreting a trust, and although absolute discretion granted to trustees is very broad, such discretion does not absolve trustees of their fiduciary duties. The court relied on authority establishing that trustees must act in good faith and judiciously and remain subject to judicial review when discretion is exercised improperly, arbitrarily, or capriciously.

The court emphasized several facts that heightened the concern for potential abuse: (1) the trustee (Elaine J. Holly) is the sole lifetime beneficiary, (2) the trustees were not required by the instrument to post a bond, (3) either trustee could withdraw funds from trust bank accounts, and (4) the instrument did not require the trustees to furnish inventories or accountings to remaindermen until the remaindermen became eligible for distribution. These factors, the court held, make the trustees' discretion particularly vulnerable to challenge by remaindermen and justify judicial scrutiny.

The appellate court held that allegations in the complaint that the trustee is the sole lifetime beneficiary, has not furnished accounts or reports, and is not confining invasions of principal to reasonable limits are sufficient to give rise to an inference of abuse of discretion and therefore require the trustee to respond. The court noted that, if evidence discloses abuse of discretion, the trial court can order appropriate adjustments to remedy past abuses and can impose preventive measures for the future.

The court expressly provided examples of remedial and preventive measures the trial court might order, including requiring bonding of trustees, periodic accountings to remaindermen, and other supervisory measures. The court reversed the trial court's dismissal and remanded the cause for further proceedings consistent with these principles.

Holding and Implications

REVERSED AND REMANDED.

Direct effect on the parties: The trial court's dismissal of the amended complaint for failure to state a cause of action was reversed, and the case was remanded for further proceedings consistent with the appellate opinion. As a result, the trustees must respond to the allegations and the trial court may, upon appropriate factual development, order remedies or supervisory measures if abuse of discretion is shown.

Specific actions the court identified as within the trial court's authority on remand include ordering adjustments to correct past abuses and imposing preventive measures such as requiring bonding of trustees, periodic accountings to remaindermen, and other supervisory steps to prevent future abuses. The opinion reiterates that even where trustees are granted broad or "absolute" discretion to invade principal, that discretion remains subject to fiduciary duties and judicial review where allegations of abuse exist.

Disposition

The judgment of the trial court dismissing the amended complaint was reversed and the cause remanded for further proceedings not inconsistent with the appellate opinion.


Authors of record and procedural information (as contained in the opinion):

Appeal from the Circuit Court for Pinellas County, Judge Robert F. Michael. Counsel of record: Orrin M. Gowen for appellants; John T. Allen, Jr. for appellees. Opinion by Chief Judge McNulty. Hobson and Scheb, JJ., concur.

ROBERT A. MESLER, JR., ET AL., APPELLANTS, v. ELAINE J. HOLLY AND O. RAY GUSSLER, TRUSTEES, APPELLEES.

McNULTY, Chief Judge.

Plaintiffs-appellants seek a declaration of their rights under a certain inter vivos trust created by Frederick L. Way, deceased. Their "amended complaint for declaratory judgment and for other relief connected therewith and for removal of Elaine J. Holly as trustee, for an accounting, and for other relief connected therewith" was dismissed for "failure to state a cause of action." We reverse.

The facts are these. On April 9, 1970 the settlor, Frederick L. Way, established two inter vivos trusts: A Florida trust, for the joint benefit of himself for life and appellee, Elaine J. Holly, and of which he and Elaine J. Holly were named co-trustees, and a "Massachusetts Fund" trust under which plaintiffs-appellants, the settlor's great grandchildren, were the principal beneficiaries. The Florida trust instrument provided that upon the death of the settlor the aforesaid Elaine J. Holly would be the sole beneficiary with remainder over to the aforementioned Massachusetts trust. In his will, which he executed the following day, the settlor provided that the residue of his estate pour over into the Florida trust. Appellee O. Ray Gussler is a successor to the decedent as a co-trustee of the Florida trust.

Frederick L. Way died on October 20, 1972, and since that time Elaine J. Holly and the aforesaid O. Ray Gussler have acted as co-trustees under the Florida trust, although it is apparent that Gussler has been acting as such more nominally than actually. Indeed, it appears, at one point he ostensibly resigned but reconsidered and now remains at least a nominal co-trustee.

The dispute herein centers essentially on a provision of the Florida trust which plaintiffs-appellants allege has precipitated an abuse on the part of the co-trustees in the administration thereof, as a consequence of which the remainder is being wrongfully depleted. The critical provision, Paragraph EIGHTEENTH, is as follows:

"A. The CO-TRUSTEES shall hold the trust estate for the use and benefit of ELAINE J. HOLLY under the following provisions:
* * * * * *
2. The CO-TRUSTEES may in their absolute discretion distribute so much of the principal of the trust estate as the CO-TRUSTEES deem necessary to maintain the standard of living to which ELAINE J. HOLLY has become accustomed.
* * * * * *
4. It is the intent of the SETTLOR to grant a life estate to ELAINE J. HOLLY with right of invasion of principal in order to maintain the standard of living to which ELAINE J. HOLLY has become accustomed." (Italics ours.)

Alleging that certain purposes for which the principal has already been invaded are unreasonable and excessive, appellants contend that this paragraph does not give unbridled discretion to the co-trustees to determine or establish a standard of living for Elaine J. Holly, but rather that the absolute discretion given relates solely to the manner, mode, and extent of distributing trust assets, including principal, in order to maintain the standard of living to which she had "become accustomed." This, they contend, is an ascertainable fact which has been exceeded in this case. Appellees, of course, argue that the "absolute discretion" is all inclusive and the trial court agreed with them.

In a lengthy and commendably erudite opinion and order the trial court correctly recognized that the settlor's intent is the polestar by which a trust instrument should be interpreted and construed. Accordingly, he concluded that since the settlor vested the co-trustees with absolute discretion to ". . . distribute so much of the principal of the trust estate as the co-trustees deem necessary to maintain the standard of living to which Elaine J. Holly has become accustomed," authority was vested solely in the trustees to determine Elaine J. Holly's standard of living and to distribute such principal as is necessary in their discretion for her to maintain that standard. Further, the trial court held that plaintiffs failed to allege any facts showing the co-trustees have exercised their discretion in bad faith, exercised their discretion dishonestly or not within the settlor's presumed intentions. Moreover, the court determined that while the allegations that Gussler had resigned as co-trustee were insufficient, that assuming, arguendo, he has resigned, that it was the settlor's intent for Elaine J. Holly to continue to administer the trust as sole trustee. Finally, the trial court found the co-trustees were not required to account to the beneficiaries until time of their eligibility for distribution.

Considered broadly, the threshold question before us is whether the appellants' amended complaint sufficiently sets forth facts on which plaintiffs could be awarded any relief. We hold that it does.

To begin with, even though a grant of "absolute discretion" to a fiduciary is very broad, it does not relieve a trustee from the exercise of good faith or from being judicious in his administration of the trust, which administration is always subject to review by the court in appropriate instances. Likewise, a trustee is always subject to accountability to remaindermen where discretion is improperly, arbitrarily or capriciously exercised.

76 Am.Jur.2d Trusts § 182, 183 (1975).

See Mahan v. Lummus (1945), 160 Fla. 505, 35 So.2d 725.

Moreover, the courts recognize that where, as here, a trustee is also the sole lifetime beneficiary, such factor is a viable judicial consideration in determining whether the trustee is properly exercising discretionary powers. Concededly, determination of Elaine J. Holly's standard of living is, in the first instance, a function and responsibility of the trustees. While perhaps a court should not fix the criteria for exercise of the discretionary power of the trustees to invade the principal, it certainly may review the exercise of such power. We think, too, that when a trustee is peculiarly influential in making such determination for her own benefit, her discretion in the premises becomes particularly vulnerable to a challenge by remaindermen. And, we apprehend the legitimacy of the plaintiffs' concern where, as here, (1) there is no requirement for the trustees to post a bond for faithful performance of their duties, (2) either trustee may withdraw funds from any bank account in the name of the trust and (3), as the trial court determined, there is no specific requirement in the trust instrument to furnish any inventory, accounting or other information to the remaindermen beneficiaries until their eligibility for receiving distribution. Clearly, a trustee who is also a beneficiary and who is given a power, or discretion, to invade the trust principal has a fiduciary obligation to the remaindermen to keep her demands within reasonable limits. Even an unlimited power of invasion is subject to implied limitations to protect the remaindermen.

Vol. III, A. Scott, § 187.5 (3 ed. 1967).

See In re Rockwell's Estate (N.Y.Sur.Ct. 1960), 26 Misc.2d 709, 205 N.Y.S.2d 928.

90 C.J.S. Trusts § 349 (1955).

See Connecticut Bank and Trust Company v. Lyman (1961), 148 Conn. 273, 170 A.2d 130.

We hold, therefore, that allegations that a trustee is the sole lifetime beneficiary, that she has not furnished any accounts or reports of her administration to the remaindermen and that she is not confining her invasions of principal to reasonable limits, as may be set out in the complaint, give rise to an inference of abuse of discretion by the trustee and are sufficient to require the trustee to respond. Trustees are accountable to the courts and their performance may be controlled by the courts. If the evidence discloses any abuse of discretion on the part of a trustee or co-trustees in distributing principal to a lifetime beneficiary, particularly if such beneficiary is a trustee, then the trial court can order appropriate adjustments to correct any abuses in the past and take steps ( e.g., to require bonding of trustees, periodic accountings to remaindermen and appropriate supervisory measures) to prevent abuses in the future.

See Rosen v. Rosen (Fla.App.3d 1964), 167 So.2d 70.

In view whereof, the judgment appealed from should be, and it is hereby, reversed and the cause is remanded for further proceedings not inconsistent herewith.

HOBSON and SCHEB, JJ., concur.

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MESLER v. HOLLY
(Sep 25, 1975)