The Empire Strikes Back? PA Supreme Court Agrees to Hear Wells Fargo Appeal in Taylor Trust

Edward Winslow Taylor, Intervivos Trust, No. 3563IV of 1939 (O.C. Phila. 08/08/14), rev’d, 124 A.3d 334 (Pa.Super. 2015), No. 692 EAL 2015 (Pa) (April 12, 2016)

In a landmark opinion last October, the Pennsylvania Superior Court held that beneficiaries of a trust administered by a Corporate Trustee, yet lacking an explicit “portability” aka “remove and replace” provision, could in fact modify that trust to add such a provision, even over the current Corporate Trustee’s objection. [Edward Winslow Taylor, Intervivos Trust (“Taylor Trust”)]

As predicted in the post I wrote on that opinion, the Pennsylvania Supreme Court recently agreed to hear Wells Fargo’s appeal on the matter. Clearly, the Supreme Court understands this is an important issue requiring clarity, because the Court typically rejects without even considering most appeals.

Whatever the Court decides will have broad and important implications for all trust and estate practitioners. In the meantime, there are some interesting points to review as we await the forthcoming opinion.

The Crux of Taylor Trust

To me, the question at hand in Taylor Trust is this: Does it violate a material purpose of a trust to allow the beneficiaries to modify it to add a portability provision, allowing the beneficiaries to remove the current Corporate Trustee and replace it with another Corporate Trustee?

Since at least the 1980s, estate planners have routinely, if not by default, included portability provisions in every trust they create. These provisions typically give either a majority or unanimous group of beneficiaries the right to remove and replace the Corporate Trustee chosen by the Settlor.

Older trusts seldom included these provisions. Interestingly, many of those older trusts were drafted by or in heavy consultation with the very banks named in those documents as Corporate Trustees.

Settlor’s Intent is Paramount in Trust Interpretation

Courts strive mightily to uphold Settlor’s intent. The best place to find such intent is in the trust document itself. Today, certain Trustees of older trusts contend that the absence of a portability provision in a trust document means that the Settlor intended not to give the trust beneficiaries that right. I respectfully disagree. When a trust document merely names a Trustee and fails to speak to the issue of removing or replacing that Trustee, this tells me that the Settlor probably never knew and was never made aware that she could have granted or explicitly denied her beneficiaries such a right. In my world, silence does not equate intent.

A Disconnect in the Argument

In my experience as an Orphans’ Court litigator who regularly tangles with banks of all shapes and sizes on behalf of unhappy trust beneficiaries, there are three banks in the Commonwealth of Pennsylvania that routinely balk at adding portability provisions – BNY Mellon, N.A., PNC Bank, N.A., and Wells Fargo Bank, N.A. It’s important to note that each of these banks became the large entities they are today by swallowing up many smaller banks and trust companies. In the process, they also swallowed up the trusts of countless families whose trust settlor forebears never even heard of them.

Yet, each of these three banks repeatedly objects to amending trusts to include portability provisions, typically citing “Settlor’s intent.” It just doesn’t add up.

“No-Fault Trustee Removal”: Why the Controversy?

As discussed in my earlier post, the well-written opinion of Superior Court Judge Anne E. Lazarus for the majority in Taylor Trust is a close cousin of the Superior Court’s important opinion in McKinney Trust, 67 A.3d 824 (Pa. Super. 2013). In McKinney, the Superior Court allowed the beneficiaries – none of whom lived in Pennsylvania and whose ancestor entrusted his funds to a small bank that was later acquired by PNC – to remove and replace PNC under Pennsylvania’s Uniform Trust Act. The Superior Court in McKinney did not force the beneficiaries to first prove that PNC’s conduct required its removal under traditional “fault-based” grounds such as defalcation or waste of assets. Instead, the McKinney Court held that Pennsylvania’s Uniform Trust Act authorized the “no-fault trustee removal” of PNC. More recently, the Superior Court in another matter quoted McKinney’s “no-fault trustee removal” language favorably. [Fumo Trust, 104 A.3d 535, 549-51 (Pa. Super. 2014).]

In Taylor Trust, however, the beneficiaries did not even seek the removal of Wells Fargo. They sought only to amend the trust at issue to give them the right to remove and replace Wells Fargo at any point in the future. The Honorable John W. Herron of the Philadelphia Court of Common Pleas, Orphans’ Court Division, however, looked past the beneficiaries’ stated intent and concluded that the request to modify the trust was essentially a ruse. He suggested that the Taylor Trust beneficiaries secretly intending to remove Wells Fargo at their first opportunity – thereby bypassing the more onerous “fault-based” trustee removal provisions of 20 Pa.C.S.A. §7766.

In overruling Judge Herron, the Superior Court emphasized the fact that the petition sought only to modify the trust and not to remove Wells Fargo. Another trusts and estate law blogger, Daniel Evans, Esquire, suggested in a recent blog post that the Superior Court’s analysis on that point was akin to that of the famous Joseph Heller novel, Catch-22, as follows:

“the title referred to a (hopefully imaginary) rule that was in place in World War II. Airmen who were insane were not required to fly combat missions, but had to request that they be released from combat duty. The ‘Catch 22’ was that asking to be released from combat duty was evidence of sanity, so the request would be denied. According to the Superior Court, beneficiaries can have the power to remove and replace trustees as long as they don’t want to exercise the power. If they actually want to exercise the power, they can’t have it. Catch 22.”

I agree with Mr. Evans (at least on that point), and I hope that the Supreme Court affirms the Taylor Trust outcome, yet removes any “beneficiaries’ intent” component. I see no valid reason to prevent any beneficiary from amending a trust to include a portability provision – whether she intends to remove the Corporate Trustee immediately or not. Remember: portability provisions are not without restrictions. They typically require a unanimous or majority vote of the current beneficiaries. They also require a replacement Corporate Trustee that meets generally accepted minimum standards. In other words, the sky is not falling here.

Why Portability Provisions in Trusts Matter

The existence of a portability provision ensures that a Corporate Trustee doesn’t become complacent about either its investment decisions or its customer service. Otherwise, the beneficiaries might choose to remove and replace it with a competitor. Without these provisions, banks and trust companies have little incentive to provide their best service to these trusts.

No bank or trust company that conducts its business with proper regard for its investment and trust administration duties needs to fear portability provisions. Indeed, plenty of them welcome portability provisions into documents that had never contained them previously. Ever since Pennsylvania implemented its version of the Uniform Trust Act in 2006, estate planners all across Pennsylvania have prepared and their clients and their trustees have executed countless Non-Judicial Settlement Agreements modifying trusts. The single most common modification is no doubt the addition of a portability provision.

Because 20 Pa.C.S.A. §7740.1 prohibits parties from entering into Non-Judicial Settlement Agreements that violate a trust’s “material purpose,” every one of these agreements recites that the “modification does not violate a material purpose of the trust.”

For the Superior Court to be wrong and Judge Herron to be right, then, the Supreme Court will need to conclude that modifying the trust to add a portability provision will in fact violate a material purpose of that trust, notwithstanding the fact that the Settlor in Taylor entrusted his funds not to Wells Fargo, but to a much smaller predecessor, and that the Settlor did not state in the document that the Corporate Trustee could never be removed.

What would such a decision mean for all of the trusts that were modified to include portability provisions via Non-Judicial Settlement Agreements since 2006?  Hopefully those modifications will survive any future attacks. If the Supreme Court reverses the Superior Court, however, then estate planners can forget about drafting Non-Judicial Settlement Agreements adding portability clauses going forward.

Did the Supreme Court Forecast Its Ultimate Ruling?

While the Supreme Court’s decision to grant Wells Fargo’s Petition for Allowance of Appeal is noteworthy, so is the language used in the Court’s Order agreeing to hear the appeal.

The Supreme Court stated, “[t]he issue presented by petitioner and rephrased for clarity is whether the Superior Court erred in holding that trust beneficiaries may circumvent the requirements for removal of a trustee in Section 7766 of the Trust Act, 20 Pa. C.S.A. § 7766, by amending the Trust Under 20 Pa.C.S.A. §7740.1.”

One might suspect that the unidentified Justice who penned that “Per Curiam” (Supreme Court speak for “anonymous”) Order using the word “circumvent” has already decided to reverse the Superior Court.

Despite that pessimistic note, I am hopeful that when the issues are properly briefed and argued, the Pennsylvania Supreme Court will affirm the Superior Court’s Taylor Trust opinion – and even expand on it by eliminating any need to analyze the alleged intent of any given beneficiary who wishes to add a portability provision to a trust that is otherwise silent on whether the Corporate Trustee can be removed.

As I often tell clients who ruminate about the meaning of an adversary’s silence on any issue, “silence means nothing more than silence.”  For the Pennsylvania Supreme Court, or anyone else, to conclude that the absence of a portability provision in a trust means anything more than that the Settlor never knew about or considered one would be an epic mistake.

Despite suggestions to the contrary by Judge Herron and presumably by the author of the Per Curiam Supreme Court Order, allowing trust beneficiaries to modify trusts to add portability provisions will also not render useless the traditional “fault-based” removal provisions of 20 Pa.C.S.A. §7766. After all, countless Settlors did explicitly prohibit the trust beneficiaries from removing and replacing their Corporate Trustees. And there is no shortage of trusts in which a majority of the beneficiaries will never agree on anything, much less modifications to the trust. Furthermore, countless trusts name individual trustees whose conduct will be policed via the traditional “fault-based” rules.

When you boil it all down, the addition of portability provisions to some trusts may result in some Corporate Trustees losing their jobs if their investment or customer relations performance require that. By the same token, those same Corporate Trustees will now have an expanded opportunity to acquire new trust business previously locked up in other banks. Again, portability provisions have restrictions requiring one Corporate Trustee to be replaced by another Corporate Trustee. So this issue is, in fact, no big deal, and the Pennsylvania Supreme Court can affirm the Superior Court’s wise Taylor Trust decision without doing any actual damage to Pennsylvania trust law or administration.

Isn’t competition good for every industry? Should any Corporate Trustee keep its job forever even when the Settlor never expressly provided for that in the trust document? To ask those questions is to answer them, and I hope that the Pennsylvania Supreme Court, which is privileged to consider matters of public policy in rendering its decisions, asks those questions when it sits down to decide the Taylor Trust appeal.