Estate and Trust Dispute Center of Ohio

Ten years after the first enactment of the Ohio Trust Code, in Zook, et al. v. JP Morgan Chase Bank National Association, et al., 10^th Dist. No. 15AP-751, 2017-Ohio-838, the Tenth District Ohio Court of Appeals gave insight into protections under the Ohio Trust Code afforded trustees against beneficiary claims and a provided a roadmap for a beneficiary to challenge such protection.

In Zook, the Trustee provided to remainder beneficiaries entitled to a final trust distribution a “Receipt, Release and Refunding Agreement” which included terms to finalize the Trust administration, distribute assets and “release the Bank [Trustee] for the administration of the trust[.]” Id. ¶8.  More specifically, the document signed by the remainder beneficiaries contained language a) releasing the Trustee for claims and liabilities from the “inception” of the Trust, b) that “ratified, affirmed, and approved” the Trustee’s actions, and c) that required the beneficiary defend and indemnify the Trustee from beneficiary claims. Id. ¶9. After distribution of the Trust assets took place, the beneficiaries claiming unknown information came to light about the trust administration filed a lawsuit against the Trustee for breach of fiduciary duty, negligence and accounting.  Id. ¶ 10.

Following an oral hearing, the trial court granted the Trustee’s motion for summary judgment on the basis that the beneficiaries signed releases that barred any breach of fiduciary duty claim and negligence claims against the Trustee. Id. ¶ 17.  The Court of Appeals focused on the “validity and preclusive effect” of the releases signed by the beneficiaries.  Id. ¶22.  The Court of Appeals recognized that Ohio law permits a court action or, alternatively, a release to “settle all questions of responsibility with respect to the trustee’s actions.” Id. ¶23.  The Court of Appeals noted Ohio law allows the beneficiaries the opportunity to avoid the binding effect of a signed release if the release is induced by improper conduct of trustee, the beneficiary did not know of his/her rights, or the beneficiary was not aware of the material facts relating to the breach.   The Court of Appeals reviewed only two issues: 1) what is the proper burden of proof required for a beneficiary to try and avoid the release and 2) whether the beneficiary was aware of the material facts relating to the breach.  Id. ¶29.

The Court of Appeals concluded that in the absence of the narrow allegation of trustee self-dealing, once a trustee presents an executed release the burden shifts to the beneficiary to demonstrate that an exception applies to preclude application of the release.  In reviewing the trial court record, the Court of Appeals agreed that the beneficiaries had information that was “known or available” to them that would provide actual or constructive knowledge of the materials facts relating to the breach.  Id. ¶43.  The Court of Appeals particularly focused on information about the family company that “was a matter of public record” and then the beneficiary’s receipt of other information demonstrating the family company was no longer part of the trust.  Id. The Court of Appeals concluded that the beneficiaries were imputed with the knowledge (aka constructive knowledge) of materials facts to apprise them that a breach may have occurred with regard to the operation of the family company.  Accordingly, the Court of Appeals determined the trial court properly found the beneficiaries were bound to the release they signed and were not allowed to bring a separate lawsuit.

The lesson here applies to both the trustee and the beneficiary.  As one tool to gain finality in its trust administration, a trustee can use a private agreement to obtain a release and indemnification for its administration. If a beneficiary considers signing a release, the beneficiary needs to conduct due diligence to understand what he or she is giving up because signing the release may very well foreclose any future complaint of trustee misconduct.    A trustee and beneficiary may wish to seek legal counsel in a situation where finality is being sought prior to distribution of a trust.