September 28, 2011
Authored by: Luke Lantta
Iowa’s Code contains strict limitations on what acts a conservator can take without prior court approval. For example, Iowa Code section 633.647 provides that “[c]onservators shall have the following powers subject to the approval of the court after hearing on such notice, if any, as the court may prescribe: . . . [t]o invest the funds belonging to the ward.” (Emphasis added.)
On their face, these limitations seem like a lot of unnecessary hassle, increase the fees and expenses of conservatorships, and potentially cause the conservatorship estate to miss out on financial opportunities. On the other hand, the statutory limitations would also seem to protect conservators who get the court’s blessing before taking any acts that might jeopardize the ward’s assets.
In In the Matter of the Conservatorship of Rose V. Alessio, the Iowa Supreme Court answered the question of what happens to a conservator who fails to get court approval before investing a ward’s property. The answer appears to be that prior approval doesn’t really matter. Conservator liability will rest on whether there is a showing that there was otherwise a breach of fiduciary duty owed by the conservator to the ward. First Community Trust, N.A. (“FCT”) was appointed as the conservator for Rose Alessio. Michael Leo, Rose’s grandnephew, was appointed as her guardian. Shortly after the appointment of the guardian and conservator, Leo claimed that he told the FCT trust officer that Rose was in poor shape mentally and medically. The trust officer denied that Leo mentioned Rose’s physical or mental health. About five months later, FCT’s trust investment committee met and implemented a 20/80 asset allocation for Rose’s portfolio. After this meeting, FCT invested the assets according to this strategy without obtaining court approval. About another four months after that, Rose died.
During the time that FCT managed the accounts, Rose’s investments declined in value. After Rose’s death, FCT filed an application seeking retroactive approval of its investments and disbursements. Leo alleged that FCT failed to follow a prudent investment strategy and violated Iowa law by failing to obtain court approval prior to making the investments.
Leo argued that the investments were imprudent, not necessarily because of the asset allocation, but because the conservatorship was for such a limited duration that any change in the investment allocation was unwarranted. Leo claimed that FCT failed to consider Rose’s physical status prior to changing the asset allocation. FCT countered that the trust committee did consider Rose’s circumstances before making the investment decision, and, if they had known that Rose was terminally ill, they would not have invested any assets in equities. Trust officer notes backed up FCT’s story.
Leo also argued that FCT’s failure to obtain prior approval of the investments meant that the court should hold FCT strictly liable for the ensuing losses. FCT countered that the investments were proper under the circumstances and it considered the needs of the ward, so it was irrelevant whether it received prior approval for the investments.
The trial court found that the investment strategy was not imprudent under the circumstances and, although FCT failed to follow Iowa law in obtaining prior approval of the investments, the conservatorship estate didn’t suffer any particular damage as a result of the unauthorized investments.
The Iowa Court of Appeals affirmed, finding that “[w]hen a conservator fails to obtain prior court approval, the conservator has violated section 633.647, and will be held liable for subsequent losses if the violation is subsequently determined to have been a breach of fiduciary duty . . . .”
The Iowa Supreme Court affirmed on the grounds that a conservator can only be personally liable if the conservator breaches a fiduciary duty. While Iowa law creates a statutory duty for a conservator to obtain prior approval of investments, it does not create liability for failure to do so.
Despite the Iowa Supreme Court’s ruling, the better practice for an Iowa conservator is to obtain prior court approval for investments. Prior approval protects a conservator against a later claim for breach of fiduciary duty. As the Iowa Supreme Court noted, a court would not allow a conservator to make an investment that breaches a fiduciary duty.