March 28, 2013
Authored by: Luke Lantta
The potential fallout for an individual trustee who has breached a fiduciary duty can extend beyond a judgment against him or her. In In re Application of Wiseman, the Supreme Court of Ohio held that a bar applicant who “engaged in prohibited self-dealing while serving as the fiduciary of a trust” would not be admitted to the state bar.
Although the Ohio Supreme Court identified additional “underlying improprieties” that prohibited the applicant’s admission to the bar, the court separately identified “probate litigation” and “breach of fiduciary duties as trustee of life insurance trust” as several of the grounds for disapproving the applicant’s application for admission to the state bar. Let’s take a brief look at these two issues which might give already-licensed attorneys some pause about serving as fiduciaries. Because if it’s grounds for denial of admission to the state bar, can the same conduct be grounds for reprimand, censure, suspension or disbarment?
Probate Court Litigation
With respect to the probate litigation considered by the court, the applicant sued his father (who himself was trustee of a trust) seeking an accounting, a distribution from the trust, and removal of his father as trustee of the trust. The applicant’s father filed a counterclaim alleging that the applicant and his wife had accepted a loan from the trust but then failed to execute a note and mortgage to secure the loan. The probate court that heard the case refused to remove the applicant’s father as trustee. The probate court also entered a judgment against the applicant and his wife for the value of the loan plus interest.
Breach of Fiduciary Duties as Trustee
The applicant was trustee of a life insurance trust. The applicant’s father stopped paying the premiums for the life insurance policy held by the trust. As trustee, the applicant could elect to cash in the policy, which would preserve the cash value of the policy, or he could use the cash value of the policy to maintain the policy. The applicant initially used the cash value of the policy to pay the premiums but when the cash value diminished to approximately $75,000, he elected to surrender the policy.
While the trust instrument allowed unequal distribution of trust assets in certain circumstances, it did not allow the trustee to unilaterally make distributions to himself. Distributions to the trustee had to be authorized by the next eligible successor trustee. The applicant claimed that he distributed trust funds to himself for “reinvestment,” but then ultimately admitted that he had spent all but $256 of the $75,000 for his own benefit. The parties to that dispute ultimately reached a settlement agreement.
Based on the probate court litigation, the breach of fiduciary duties as trustee of the life insurance trust, and several other issues identified in the Ohio Supreme Court’s opinion, the applicant was denied admission to the Ohio State Bar.