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On April 28, 2005, the Pennsylvania Superior Court ruled in favor of a charitable trust and against the corporate trustee. The trustee, Wachovia Corporation, as successor to First Union Bank, had requested that it be paid additional fees for services previously rendered to the W.W. Smith Charitable Trust. The issue came up when First Union made a required accounting for the period July 1, 1983, through December 31, 1999. The will creating the trust specifically addressed trustee compensation, providing:
My corporate trustee shall be entitled to reasonable compensation annually for services rendered, not to exceed in any year an amount equal to five percent (5%) of the then current annual income of the trust fund.
The orphans' court...
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rejected the request on November 8, 2001, concluding that the law in effect at the time Mr. Smith executed his codicil precluded payment of compensation from the principal of the trust to First Union. First Union also requested that its future compensation be adjusted upward. The orphans' court ruled that the codicil dictated that corporate trustee's compensation, capped at five percent of income, "is no longer realistic" and "that the current compensation to First Union is at such a low rate to tend to defeat the very purpose of the trust to a point where a competent corporate fiduciary would be reluctant to proceed with the trustee's duties because of inadequate compensation." The court also ruled that the evidence did not demonstrate that any other corporate fiduciary was "ready, willing and able" to assume the trusteeship at the designated rate of compensation. The orphans' court, therefore, modified the compensation provision of the codicil to award the corporate trustee compensation computed at 25/100 of 1% of the total asset value of the trust.
The Superior Court upheld the orphans' court holding to the extent the ruling provided that no additional compensation would be paid to the trustee for past services. The trustee has argued that a statutory change permitted it to seek additional compensation. The Superior Court looked to Section 7185(c) of the Pennsylvania Statutes , which provides as follows:
Compensation prescribed by will or other instrument.- Where the compensation of a fiduciary is expressly prescribed either by provisions of a will or deed of trust or other instrument under which he is acting or by provisions of an agreement between him and the creator of a trust, nothing in this section shall change in any way the rights of any party in interest or of the fiduciary.
The court rightly concluded that since the contract was clear, it was not required by the statute to go beyond the four corners of the contract. While the statutory rules may have changed since the will was drafted, those rules addressed situations where the terms of the trust didn't address the compensation issue.
The Superior Court reversed the ruling of the orphans' court modifying the trustee's compensation on a prospective basis. The Superior Court said:
The Pennsylvania Supreme Court has set forth the standard for allowing additional compensation to a trustee:
It is well settled that where there is a valid agreement between settlor and trustee fixing the terms of the trustee's compensation, courts must ordinarily enforce the terms of the agreement without making an independent determination of whether the terms are reasonable ... An exception to the general rule, in circumstances where the trustee has performed extraordinary services beyond those contemplated by the parties or where the compensation fixed by the agreement is so low that the unwillingness of a competent trustee to continue or undertake to administer the trust would defeat or substantially impair its purposes, is well recognized.
In re Duncan Trust, 480 Pa. 608, 614, 391 A.2d 1051, 1055 (1978).
The court then went onto to adjust the burdens of proof that the orphans' court had imposed on the parties, with the upshot being that the Superior Court reversed the orphans' court, concluding that First Union was not entitled to a fee increase because it had not met the burden of proof.
The Superior Court decision was 9-0. While Wachovia/First Union can appeal the decision to the Pennsylvania Supreme Court, we suspect that the Wachovia/First Union has an uphill battle given the decisive nature of the Superior Court's decision.
We first mentioned this case several weeks ago in a general post on corporate trustee fees and and charitable trusts. While the law will of course vary from jurisdiction to jurisdiction, the message in this case is clear: Those setting up charitable trusts should be very clear in specifying the amount of the fees to paid, as well as the procedure for adjusting fees. Charities need to be vigilant in monitoring fees charged by trustees to make sure that the fees paid adhere to the terms of the trust.
Click here for a copy of the opinion.
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