The family at the center of this case made its money investing in New York and Florida real estate (starting in the 1920s), and they’ve been feuding with each other over that fortune for decades. For that backstory you’ll want to read this 1994 2d Cir opinion.
Fast forward to 2008. One of the surviving heirs was a woman named Ada Turkish who had two children, a son named Arthur and a daughter named Carole. According to the 3d DCA, Mrs. Turkish clearly favored her son.
The record before this Court reflects that, despite Arthur’s lack of significant outside employment for decades, he nonetheless maintained an extravagant lifestyle. His mother, Mrs. Trask, was aware of, participated in, and enjoyed Arthur’s lifestyle, and opted to finance his lifestyle through distributions from Trust Number One and other substantial gifts.
In contrast to her brother, Carole survived on Social Security. The contrast between the siblings was a key theme throughout the litigation, as reported by the DBR in Grandchildren going to court over real estate trust money:
The plaintiff, Carole Brody, 75, lives with her daughter in a two-bedroom apartment in Aventura and buys what she needs on her monthly Social Security stipend. The brother, defendant Arthur S. Turkish, lives in a luxury home in Broken Sound Club, one of the most prestigious country clubs in Boca Raton.
Mrs. Turkish’s gifts to Arthur triggered over $3 million in unpaid gift taxes. Her lawyers negotiated a settlement with the IRS that reduced her gift-tax liability down to $1,022,500. Apparently short on cash, Mrs. Trask chose to fund her tax payment by asking Arthur to funnel cash to her from “Trust Number One,” a trust she’d previously created for the benefit of Arthur and his sister Carole. Arthur was a co-trustee of this trust (his sister Carole wasn’t). Arthur said yes, and exercised his authority as trustee to make a $1,022,500 trust distribution to himself; he then gave these funds to his mom who used the money to pay the IRS and signed a promissory note to pay Arthur back.
When sister Carole got wind of the tax-payment deal between mom and Arthur, she objected, arguing that the $1 million gift tax payment was primarily for Arthur’s benefit (think: self-dealing by Arthur). This factual point was accepted by the trial court, as reflected in the 3d DCA’s opinion:
[FN 1]: It is undisputed that Mrs. Trask made numerous and substantial gifts to Arthur, and therefore, the IRS settlement directly benefitted Arthur because Arthur would have been responsible for a large portion of any gift tax liability as he was the one who received a large portion of the gifts.
Arthur (as trustee) and Carole (as beneficiary) settled this dispute by entering into a Supplemental Release Agreement (“SRA”). Under the terms of the SRA, Arthur agreed to assign his mom’s $1 million promissory note back to their trust, which presumably would make the trust whole. However, unbeknownst to Carole, mom didn’t have the financial wherewithal to pay the loan. The promissory note was virtually worthless.
What’s it take to make sure a trustee/beneficiary settlement agreement’s binding?
The general rule in Florida is that parties deal with each other at arm’s length when settling disputes, so a settlement agreement can’t be invalidated simply because one side misleads the other (see here), or one side makes false representations to the other during a mediation conference (see here).
But what if the settling parties are a trustee and his beneficiary, is it still every man for himself? Not so much. Under F.S. 736.1012, a settlement agreement between a trustee and a beneficiary is voidable if “at the time of the consent, release, or ratification, the beneficiary did not know … of the material facts relating to the breach.” Florida’s statue tracks the text of Uniform Trust Code Section 1009 verbatim. And according to the commentary to UTC Section 1009, if the trustee’s actions constituted self-dealing, full disclosure isn’t enough; under those circumstances a beneficiary’s release is binding “only if the transaction was fair and reasonable.”
In this case the trust was governed by New York law, which has a common-law rule similar to F.S. 736.1012 for enforcing trustee/beneficiary settlement agreements. As observed by the 3d DCA, under New York law a trustee/beneficiary settlement agreement is binding only if the trustee makes “full disclosure” to the beneficiary:
Under New York law, the SRA, as a supplement to the RRA, is binding only if the Co-Trustees made a “full disclosure.”
An agreement to discharge the fiduciary and settle an account will be binding provided (1) all interested parties who would be necessary parties in a judicial proceeding settling the account sign the agreement; (2) the fiduciary has made full disclosure . . . in an account circulated to all signatories to the agreement; and (3) all signatories to the agreement are competent adults. Failure to make full disclosure will nullify the release.
In re LeoGrande, 821 N.Y.S. 2d 862, 867 (N.Y. Surr. 2006) (internal citations and quotation marks omitted; emphasis added); see also Matter of Birnbaum, 117 A.D. 2d 409, 416 (N.Y. App. Div. 1986) (noting that a “Release and Discharge” obtained by fiduciary from a beneficiary is “voidable” by the beneficiary “if the fiduciary fails to disclose material facts which he knew or should have known, if he used the influence of his position to induce the consent or if the transaction was not in all respects fair and reasonable”).
And because mom’s promissory note wasn’t worth the paper it was written on, and this material fact wasn’t affirmatively made known to Carole, the SRA wasn’t binding, which resulted in Arthur having to pay his sister back half of the tax-money distribution, or $511,250. Here’s how the 3d DCA put it:
In the instant case, although the facts recited in the SRA were accurate, the Co–Trustees failed to make a “full disclosure” to Carole, a beneficiary—that the promissory note Arthur agreed to “contribute” to Trust Number One in exchange for Carole’s release was virtually worthless because Mrs. Trask did not have the ability to repay the promissory note during her lifetime and there would be insufficient estate assets to pay the promissory note upon her death … Therefore, we affirm the trial court’s ruling that the SRA is invalid due to Arthur’s failure to disclose material facts.
What’s the take away?
If you’re a trustee negotiating a settlement agreement with a beneficiary, the burden is on you to make sure your beneficiary affirmatively represents and warrants that he or she has full knowledge of all material facts related to the deal, that the deal’s “fair and reasonable” (from the beneficiary’s point of view), and that these rep’s and warranties are documented and reflected in the text of your agreement. A “knowing” waiver of rights is a big deal in marital agreements as well. Family law lawyers have had decades to develop contractual rep’s and warranties to address this issue. I think those agreements are excellent models for trustees to use when drafting settlement agreements with their beneficiaries.
Can you rely on trust accountings and 6-month limitation notices to make sure a trustee/beneficiary settlement agreement’s binding?
Arthur argued that even if the SRA was voidable based on his failure as trustee to disclose material facts to Carole, her claim for breach of trust against him was barred because the tax-payment deal had been fully disclosed in a trust accounting she’d been served with, and this accounting contained a six-month limitation notice under F.S. 736.1008(2), which provides as follows:
Unless sooner barred by adjudication, consent, or limitations, a beneficiary is barred from bringing an action against a trustee for breach of trust with respect to a matter that was adequately disclosed in a trust disclosure document unless a proceeding to assert the claim is commenced within 6 months after receipt from the trustee of the trust disclosure document or a limitation notice that applies to that disclosure document, whichever is received later.
So again the issue is: were the material facts “adequately disclosed” to the beneficiary (Carole)? According to F.S. 736.1008(4)(a), a “trust disclosure document adequately discloses a matter if  the document provides sufficient information so that a beneficiary knows of a claim or  reasonably should have inquired into the existence of a claim with respect to that matter.”
The 3d DCA again ruled against Arthur. Why? Same reason the SRA failed: mom’s promissory note was worthless, and this material fact hadn’t been “adequately disclosed” to Carole (in fact, it wasn’t disclosed to her at all). Here’s how the 3d DCA explained this ruling:
The 2008 accounting … fails to disclose that the promissory note that Arthur contributed to Trust Number One was basically worthless … Further, the 2008 accounting for Trust Number One did not provide Carole with sufficient information that reasonably should have led her to inquire into her claim against the Co–Trustees. Therefore, the six-month statute of limitations set forth in section 736.1008(2) is not applicable because the matter was not “adequately disclosed in a trust disclosure document.” As such, Carole’s claims for breach of fiduciary duty … were not time barred.
I don’t think you can make sense of this case unless you look at it through the prism of trustee self-dealing. If a trustee wants a beneficiary to waive off on that kind of transaction, the burden of proof is always going to be on the trustee.
Which means a trustee shouldn’t assume generally applicable “disclosure” standards are going to shield him from a self-dealing claim. Which in turn means that an accounting-disclosure defense is unlikely to work unless you make it 100% clear that you’ve engaged in self-dealing, and why the transaction isn’t in the best interest of your beneficiaries. If you invite a beneficiary to sue you, and tell her why she could sue, and she still ignores you, then you might just possibly get away with barring future claims by relying on a six-month limitation notice under F.S. 736.1008(2). This kind of explicit disclosure does exist in SEC filings (which are voluminous and way more detailed than a standard trust accounting). I’m sure if you spent some time rummaging around those filings you could find model disclosure text.
For a thoughtful and well-reasoned alternate take on this case, you’ll want to read an excellent Florida Bar Journal article written by Patrick Duffey and Cady Huss entitled Full Disclosure: The Unexpected Ambits and Annals of the Adequate Disclosure Doctrine. Their thesis is that the facts and circumstances of Arthur’s accounting were enough to trigger Carole’s “reasonable inquiry” duty, which means Arthur’s trust-accounting defense should have worked. Here’s an excerpt:
Here, the beneficiary was separately represented by counsel and actively engaged with the trustee as an adversary with respect to the very matter at issue on appeal. She freely entered into the settlement agreement that gave rise to the contested promissory note. The underlying circumstances — that is, the necessity of the funds to pay a settlement with the IRS — would put any reasonable person on notice that, at a minimum, the mother lacked liquid assets to make payment on the note. The trustee made no affirmative representations as to the mother’s solvency. Title to the condominium was nothing more than a red herring: The promissory note was not secured by the property (nor did it purport to be) and had the condominium been owned outright by the mother, it would have been protected homestead not subject to the claims of creditors — including the trust. That holding then leads to an important question: Can a trustee ever rely on the inquiry prong in reporting trust operations to beneficiaries in accountings and other trust disclosure documents?
Bottom line, trustee/beneficiary settlement agreements involving pending claims of self-dealing are minefields that can blow up on you no matter how scrupulously well intentioned the trustee might be or how solid your legal advice is. If you find yourself advising a trustee trying to negotiate a settlement agreement with a beneficiary involving pending claims of self-dealing or any other pending breach of fiduciary duty claims, you’ll want read the Turkish opinion and Patrick and Cady’s excellent article. And you’ll also want to make sure your client appreciates the risks and uncertainties going in. Forewarned is forearmed.