Figel v. Wells Fargo Bank, N.A., 2011 WL 860470 (S.D.Fla. Mar 09, 2011)

Massachusetts Supreme Judicial Court Justice Samuel Putnam renders a decision in Harvard College v Amory (1830) 26 Mass (9 Pick) 446, establishing the “Prudent Man Rule,” which would influence ethical standards for money management and the investment philosophy of fiduciaries in America for subsequent generations.

The statue at the heart of this case is F.S. 518.11, Florida’s version of the Uniform Prudent Investor Act or “UPIA.” The UPIA’s primary purpose is to empower trustees to invest trust assets in accordance with modern portfolio theory.

If all trustees had to do was worry about maximizing investment returns, that would be hard enough. But we all know it’s a lot more complicated than that. Why? Because trustees also have simultaneous and equally important duties to make sure their trusts are generating enough cash to provide for their current beneficiaries’ immediate payment needs while also ensuring trust assets are properly preserved for remaindermen [click here for how savvy use of Florida’s Principal and Income Act can help trustees make this all work].

Recognizing that perfection is not the standard by which trustees are judged, all the law demands of them is “prudence” in how they go about balancing their complex, and sometimes conflicting, fiduciary duties. This is a test of conduct, NOT performance.

It’s not whether you win or lose, it’s how you play the game:

Coming back to F.S. 518.11. Under this statute trustees aren’t expected to be investment geniuses, just prudent. In this context being “prudent” = exercising “reasonable business judgment regarding the anticipated effect on the investment portfolio as a whole under the facts and circumstances prevailing at the time of the decision or action.” In other words, if the trustee exercises “reasonable business judgment” and takes all the steps a reasonable investor would take to properly manage his investment portfolio, it doesn’t matter if the trust’s stocks crater in value, he’s done his job and can’t be sued for damages. The linked-to case above tests this basic proposition. Here’s how the court summarized the beneficiary’s key claim:

Essentially, Plaintiffs claim that Wells Fargo could have earned a [$3-4 million] higher rate of return on the Figel Trust if it had invested the Figel Trust differently. Plaintiffs offer no other grounds for their claims. Importantly, Plaintiffs offer no evidence that Wells Fargo took any action in contravention of the terms of the Figel Trust.

If a trust beneficiary came to you with this kind of claim, you might be tempted to prove the trustee was a really lousy investor. That would be a mistake. In the trust context your focus needs to be on process, not performance. In this case the beneficiaries tried to win their case by proving that the trustee’s ineptitude as an investor cost them $3-4 million. Not surprisingly, this argument didn’t get them very far. The court concluded that even if they were right on the facts, as a matter of law their lawsuit failed. Here’s why:

[LAW]:

The Florida Probate Code provides that a “trustee shall invest trust property in accordance with chapter 518.” Fla. Stat. § 736.0901. Section 518.11 provides that a trustee has “a duty to invest and manage assets as a prudent investor would considering the purposes, terms, distribution requirements, and other circumstances of the trust.” Fla. Stat. § 518.11(1)(a). “No specific investment or course of action is, taken alone, prudent or imprudent .” Id. § 518.11(1)(b). Rather, “investment decisions and actions are to be judged in terms of the fiduciary’s reasonable business judgment regarding the anticipated effect on the investment portfolio as a whole under the facts and circumstances prevailing at the time of the decision or action.” Id. This is “a test of conduct and not of resulting performance.” Id.

[FACTS]:

No relevant disputed issues of fact exist in this case. Rather, the parties dispute the legal significance of the facts. In their supplemental brief, Plaintiffs submit the following:

Had Wells Fargo maintained a 70/30 split in asset allocation, with 70 percent in conservative investments, and 30 percent in equities, the Trust would have a market value of between approximately $3-4 million more than the value it currently has, and would have distributed approximately the same amount of money to Terry Figel.

DE 129 at 9.FN2 Accepting this fact as true, however, does not evidence a breach of trust. The record is replete with evidence that shows Wells Fargo invested the corpus of the Figel Trust in equities and other securities (i.e., in a manner consistent with the terms set forth in the Figel Trust and pursuant to Wells Fargo’s buy list). The record is also replete with evidence that Wells Fargo sent Terry Figel quarterly account statements that revealed the state of the Figel Trust. Indeed, the undisputed facts show that Wells Fargo made the investment decisions that it did in an attempt to provide both income for Terry and growth, both to replace principal distributions and to provide growth to benefit Spencer as the remainderman. Stated differently, Wells Fargo’s investment decisions were made largely to account for Terry’s constant requests for corpus distribution (which were contemplated and authorized by the Figel Trust instrument). Thus, based on the record before the Court, no reasonable fact-finder could find that Wells Fargo failed to exercise “reasonable business judgment regarding the anticipated effect on the investment portfolio as a whole under the facts and circumstances prevailing at the time of the decision or action.”