Ebling v. Hasken

IN THE COURT OF APPEALS OF IOWA
No. 16-1904
Filed December 6, 2017
EELEN YOUNG EBLING and ABBY LYON MCDONALD,
Plaintiffs-Appellees,
vs.
SARAH HASKEN,
Defendant-Appellant.
________________________________________________________________
Appeal from the Iowa District Court for Dubuque County, Thomas A. Bitter,
Judge.
A former trust advisor appeals from the district court’s decisions, removing
the advisor and denying her the right to appoint her successor. REVERSED AND
REMANDED.
Sean P. Moore of Brown, Winick, Graves, Gross, Baskerville &
Schoenebaum, P.L.C., Des Moines, for appellant.
Darin S. Harmon and Kelsey J. Streinz of Kintzinger, Harmon, Konrardy,
P.L.C., Dubuque, for plaintiffs.
Heard by Vaitheswaran, P.J., and Potterfield and McDonald, JJ.
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POTTERFIELD, Judge.
Sarah Hasken appeals from the district court’s decisions, removing her as
trust advisor and denying her the right to appoint her successor advisor. Hasken
maintains both of the district court’s decisions were in error. Specifically, Hasken
claims her decision not to vote in one meeting and to “withhold” her vote at a
second meeting did not constitute breaches of her fiduciary duty as a trust advisor,
so the district court was wrong to remove her. In the alternative, she argues that
if the court’s decision to remove her stands, then she has the “inability” to serve
and should be allowed to appoint her successor—as provided for in the trust
instrument.
I. Background Facts and Proceedings.
The George L. McDonald Trust at issue was established in 1970 for the
benefit of the plaintiffs, Eelen Young Ebling and Abby Lyon McDonald. Ebling and
Abby McDonald, adult daughters of George L. McDonald, are the sole income
beneficiaries of the trust. In the original action, there were a number of named
defendants; all of the defendants except for Hasken are residuary beneficiaries of
the trust. Only Hasken appealed the district court’s rulings. The corpus of the trust
is 1250 voting shares of A.Y. McDonald Industries, Inc. The trust instrument also
establishes two trust advisors, each of whom vote one-half of the trust’s shares.
The trust advisors are fiduciaries, and “no advisor shall have any power or authority
under any circumstance to act in a non-fiduciary capacity.” At the time Ebling and
Abby McDonald initiated this action, Sarah Hasken was one of the trust advisors
and Robert McDonald was the other.
3
As of August 2014, Hasken was the vice president of and a board member
for A.Y. McDonald Industries, Inc., as well as being one of the trust advisors.
On August 21, Robert McDonald informed Hasken he was eliminating her
position as an officer of A.Y. McDonald Industries.
In response, Hasken sent a letter to the other members of the board of
directors, asking them to call a special meeting to consider the action and informing
the board that she did not believe Robert McDonald or the executive committee
had the authority, under the bylaws, to take such action.
Then, at a September 2014 board meeting, Robert McDonald and the board
of directors removed Hasken from her position as vice president.
The day after she was removed as vice president, Hasken sent her fellow
board of directors another letter. In it, she warned the board of her belief “that [her]
purported termination as an officer of the company is a continuation of the efforts
of the executive committee to subvert the authority of the board of directors and to
marginalize the duly elected directors of the company.” She also included two
“other examples of the executive committee’s improper actions.”
The next month, Robert McDonald asked for Hasken’s resignation from the
board of directors; she refused to resign. At a December special meeting of the
shareholders, Hasken was removed from the board. Hasken did not attend the
meeting, and she did not vote the 625 shares entrusted to her as a trust advisor
on the question of her removal from the board. The votes cast were sufficient to
remove Hasken. In her memorandum of authorities, Hasken states:
As a result, since Hasken could not in good conscience vote for her
own removal from the board and subsequent replacement with Ron
[sic] McDonald’s inexperienced sister, and since voting against
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those actions would have no-doubt led to accusations by Rob
McDonald that voting ‘no’ created a conflict of interest, Hasken
decided to withhold her vote upon advice of counsel in an
abundance of caution since the outcome of the action was a
foregone conclusion without her voting her shares.
In March 2015, at the annual shareholder’s meeting, the shareholders were
asked to vote on the proposed slate of directors, which included Ebling but not
Hasken. Hasken attended the meeting, but she “withheld” her vote.
The same month, Ebling’s attorney sent Hasken an email asking her to
resign her position as trust advisor and appoint Ebling her successor. Hasken
refused to resign as trust advisor, and Ebling and Abby McDonald then filed their
action.
Their petition alleged Hasken
ha[d] failed to perform the duties of a trust advisor, been negligent in
managing the voting shares of A.Y. McDonald Industries, Inc., made
mistakes in judgment sufficiently serious so as to indicate that the
removal of her as trust advisor is necessary to save the trust
property, and breached her fiduciary duty thus jeopardizing the value
of the trust property and the interests of the beneficiaries thereof.
Ebling and Abby McDonald also asked the court to appoint Ebling as the successor
trust advisor.
In February 2016, Ebling and Abby McDonald filed a motion for summary
judgment. In their motion, the plaintiffs alleged that Hasken “acted under an
impermissible conflict of interest” at the December 2014 special shareholders
meeting when she did not attend the meeting and took no action with the 625
shares allotted to her as advisor. Ebling and Abby McDonald also asserted
Hasken breached her duty on March 13, 2015, when the only agenda item was
approving the slate of directors and Hasken “withheld” her vote. Ebling and Abby
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McDonald maintained that because both votes impacted her individually, the only
proper course of action for Hasken was to proxy her votes to a third party.
Additionally, Ebling and Abby McDonald asked the court to appoint Ebling as the
successor advisor to Hasken, noting that the trust instrument provides for the trust
advisor to name their own successor “[i]n the event of the death, resignation, or
inability” to serve; at the same time, Ebling and Abby McDonald argued that the
court’s removal of Hasken would not fall within either of three enumerated
categories.
Hasken resisted the motion for summary judgment,1 maintaining the trust
instrument gave the trust advisor the right, but not the obligation, to vote one-half
of the 1250 shares. She claimed her decisions not to vote and to withhold her vote
did not implicate a fiduciary duty.
In May, the district court granted in part the plaintiffs’ motion for summary
judgment, ruling:
The facts here are not in dispute. The only dispute is whether
Hasken’s failure or refusal to vote constitutes a breach of her
fiduciary duty. Hasken herself admits that there was a conflict of
interests [when, in] her memorandum of authorities, she describes
“an obvious appearance of conflict of interest.” Perhaps the most
fundamental duty of a trustee is to display complete loyalty to the
interests of the beneficiaries and to exclude all self-interests. If the
trustees’s individual interest is interjected into trust matters, he or she
cannot remain independent or uninterested. . . .
Hasken acted in her own self-interests, rather than putting the
interests of the beneficiary first. . . . The undisputed facts
demonstrate a conflict of interest and Hasken’s decision to act on her
own behalf, rather than to protect the interests of the beneficiaries.
The plaintiffs’ motion for summary judgment must be granted
regarding the removal of Hasken as trust advisor.
1
Hasken did not cross-move for summary judgment in her favor, and we consider the
summary judgment record on the motion of Ebling and Abby McDonald.
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(Citations omitted.) The court found there were genuine issues of material fact
regarding whether Hasken was “unable to serve,” within the meaning of the trust
provision allowing a trust advisor to appoint their successor. Trial remained
scheduled on the issue of appointing a successor trust advisor, but the issue was
decided on briefs and argument.
In October, the district court issued a ruling. The court found persuasive
Ebling and Abby McDonald’s argument that the court’s determining Hasken was
“unfit” to serve was distinct from the trust instrument’s provision allowing a trust
advisor to appoint their successor when they are “unable” to serve. Ebling and
Abby McDonald asserted Hasken was still “able” to serve, as evidenced by the fact
she did so for a number of years and was still physically capable of doing so. In
contrast, Hasken argued the language of the trust gave her the power to appoint
her successor if she met the dictionary definition of inability, that is, “if she lacked
the power, resources, or capacity to remain as trust advisor” and asserted the
reason for her inability to serve was irrelevant. The court noted:
If Hasken had been removed because she misappropriated trust
assets, it would be illogical to allow her to appoint her successor. . . .
Ms. Hasken is clearly “able” to serve as a Trust Advisor. She
simply chose to put her own personal interests ahead of the interests
of the trust (and the beneficiaries). She would be unable to serve if
she became very seriously ill or suffered a debilitating cognitive
injury. She would be unable to serve if she moved to a remote
location where communication with the other Trust Advisor and the
beneficiaries was not possible.
The court then officially appointed Ebling as trust advisor, on the basis that the
second trust advisor was permitted to appoint the successor and Robert McDonald
had proposed Ebling.
Hasken appeals.
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II. Discussion.
A. Preliminary Matters.
Although it is unclear from the record before us whether the district court
originally had personal jurisdiction over Hasken, she did not file a motion
challenging it, so any possible issue has been waived. See Iowa R. Civ. P.
1.421(1)(b) (stating that lack of personal jurisdiction is properly raised by a pre-
answer motion to dimiss), (4)(b) (providing the issue “shall be deemed waived” if
not contained in a pre-answer motion).
Additionally, both parties agree that Illinois law controls in this case. Iowa
Code section 633A.1108(2)(a) (2015) provides that “the meaning and effect of the
terms of the trust . . . shall be determined by . . . the law of jurisdiction designated
in the terms of the trust, on the condition that at the time the trust was created the
designated jurisdiction had a substantial relationship to the trust.” Though we
apply Illinois law to the substantive questions involved in this appeal, we apply
Iowa law to the procedural matters. See Brooks v. Engel, 207 N.W.2d 110, 113
(Iowa 1973) (“[P]rocedural matters and matters pertaining to the remedy to be
applied must be determined by the law of the forum.”).
We apply Iowa law to the procedural matters, and “[w]e review a ruling on
a motion for summary judgment for correction of errors at law.” Otterberg v. Farm
Bureau Mut. Ins. Co., 696 N.W.2d 24, 27 (Iowa 2005). “[W]e view the record in
the light most favorable to the nonmoving party and allow that party all reasonable
inferences that can be drawn from the record.” Wernimont v. Wernimont, 686
N.W.2d 186, 189 (Iowa 2004).
B. Removal.
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Hasken maintains the district court erred when it removed her as trust
advisor. She claims she had no fiduciary duty to vote the trust’s shares.
Alternatively, she maintains that even if she breached a duty when she took no
action with the trust shares, she should not have been removed because there
was no harm or damages to Ebling and Abby McDonald. Ebling and Abby
McDonald respond that it was not the omission of voting that constituted a breach
of fiduciary duty but rather that Hasken’s decision not to vote at the December
2014 shareholders meeting was made in her own self-interest rather than in theirs.
They also assert that they need not establish they suffered damages in order to
have Hasken removed as trust advisor.
We consider the parties’ second argument first. In an action for breach of
fiduciary duty, the plaintiffs have the burden to prove: “(1) a fiduciary duty on the
part of the defendant, (2) a breach of that duty, (3) an injury, and (4) a proximate
cause between the breach and the injury.” Janowiak v. Tiesi, 932 N.E.2d 569, 583
(Ill. App. Ct. 2010). But the plaintiffs did not plead an action for a breach of fiduciary
duty. Rather, they asked for the removal of a trust advisor, which is similar to the
removal of a trustee.
The court has “inherent power” “to remove a trustee for breach of trust,
misconduct or disregard of fiduciary duties.” Altschuler v. Chicago City Bank &
Trust Co., 43 N.E.2d 673, 676 (Ill. 1942), rev’d in part on other grounds by Yedor
v. Chicago City Bank & Trust Co., 44 N.E.2d 604, 606 (Ill. 1942). And “the remedy
for a breach of trust or failure to perform a duty by the trustee is [her] removal and
the appointment of a new one.” Id. However, under Illinois law, where it is the
settlor’s intent to have trustees who are officers or employees, the general fiduciary
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rules are modified. See Tankersley v. Albright, 374 F.Supp. 538, 543 (N.D. Ill.
1974), rev’d on other grounds, 514 F.2d 956 (7th Cir. 1975).
It is a common situation, for a testator who owns what he deems a
good business, to include it in a trust and to appoint as one of the
trustees, an officer or employee who is familiar with the business.
His reasons are too patent to require comment. [The testator] chose
among his trustees, two men who had been officers of the company
since it was originally incorporated. It would be a strange rule of law
to hold that the trustees were guilty of bad faith, self-dealing, or other
improper conduct if they failed to resign their corporate positions, and
thus discontinue the very reason for their selection.
Id. (alteration in original) (citation omitted). Where the testator, the trust document,
or historical practice in administration of the trust shows the trustee—or in this case
the trust advisor—is an active member of the company, the court will not interfere
on the basis of conflicts of interest unless the trustee’s act constitutes fraud, bad
faith, dishonesty, or an abuse of discretion. Id. “It is well established that a trustee
may occupy conflicting positions in handling the trust where the trust instrument
contemplates, creates, or sanctions the conflict of interest.” Dick v. Peoples Mid-
Illinois Corp., 609 N.E.2d 997, 1002 (Ill. App. Ct. 1993). “The creator of the trust
can waive the rule of undivided loyalty by expressly conferring upon the trustee the
power to act in a dual capacity, or he can waive the rule by implication where he
knowingly places the trustee in a position which might conflict with the interest of
the beneficiaries.” Id.Whether this modified standard is applicable here should be resolved during
the process of trial. Arguably, the trust document specifically contemplates
potential conflicts of interest because the trust advisor is contemplated to be part
of the company. Paragraph 6 of the trust document provides “Nothing in this
paragraph 6 shall be construed as imposing on any advisor at any time acting
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hereunder any other additional obligation or liabilities with respect to his actions or
non-actions as a director, officer, employee, or stockholder” of the company. In
addition, the summary judgment record shows it has been a practice for the advisor
to be actively employed by and involved in the management of the company.
However, the trust instrument states, “The status of the advisor from time to time
acting hereunder shall be that of a fiduciary and no advisor shall have any power
or authority under any circumstances to act in a nonfiduciary capacity.”
Even if a conflict of interest was not contemplated under the circumstances,
the district court erred in granting summary judgment. “Generally, a trustee owes
a fiduciary duty to a trust’s beneficiaries and is obligated to carry out the trust
according to its terms and to act with the highest degree of fidelity and utmost good
faith.” Faville v. Burns, 960 N.E.2d 99, 109 (Ill. App. Ct. 2011). “Further, a trustee
owes a fiduciary duty to serve the interests of the beneficiaries with total loyalty,
excluding all self-interests, and is prohibited from dealing with the trust’s benefit
for his [or her] own individual benefit.” Id.The district court concluded Hasken admitted there was a conflict of
interest—as a matter of law—in its ruling to remove her as trust advisor. We
disagree; as the court correctly quoted, Hasken admitted there was “an obvious
appearance of conflict of interest.” (Emphasis added.) In fact, she chose not to
act at the December 2014 special board meeting—on the advice of counsel—in
order to avoid such an appearance of conflict.
Viewing the evidence in the light most favorable to Hasken, there is a
genuine issue of material fact whether Hasken’s decision not to vote the shares
allotted to her as trust advisor resulted in a conflict of interest. First, nothing in the
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language of the trust instrument obligates Hasken to vote the shares allotted to
her. Ebling and Abby McDonald concede in their brief that the trust instrument
does not create “a duty to vote the shares in absolutely every circumstance.”
Moreover, Hasken’s choice to take no action did not affect the ultimate vote; a
quorum was still present. And while it is undisputed Hasken’s decision not to vote
was against the wishes of the plaintiffs-beneficiaries, there is no evidence her
refusal to vote was against the interests of the beneficiaries. Cf. Spencer v. Di
Cola, 16 N.E.3d 1, 12 (Ill. App. Ct. 2014) (stating case law “does not prohibit a
trustee from interpreting a trust in a manner that is unfavorable to one beneficiary’s
wishes” (citing Northern Trust Co. v. Heuer, 560 N.E.2d 961(Ill. App. Ct. 1990))).
A beneficiary’s wish is not equivalent to a beneficiary’s interest. Id.“[R]emoval of a trustee is an extreme remedy.” Laubner v. JP Morgan
Chase Bank, N.A., 898 N.E.2d 744, 467 (Ill. App. Ct. 2008). And “[n]ot every
instance of mistake or neglect on the trustee’s part requires the removal of the
trustee.” Id. “The court should remove a trustee only if the trustee endangers the
trust fund and removal is clear.” Id. Moreover, “[p]ersonal hostility between a
trustee and a beneficiary is not a per se ground for removal of the trustee.” Id.Because there are genuine issues of material fact and we cannot say as a
matter of law that Hasken’s choice to take no action with the shares was against
the interests of the beneficiaries, we reverse the district court’s grant of summary
judgment removing Hasken as trust advisor.2 We remand for further proceedings.
REVERSED AND REMANDED.
2
Because we reverse the court’s ruling removing Hasken as a trust advisor, we need not
consider whether she would have had the right to appoint her successor.