As part of wealth planning, trustees are frequently put in charge of corporate entities in which the trust owns an interest.  When it comes to the trustee’s corporate duties and actions with respect to the corporate entity, what is the appropriate standard of care?  Is it a corporate level fiduciary standard or is it the heightened trustee level fiduciary standard? Jurisdictions are split on this issue.  The Georgia Supreme Court in the case of Rollins v. Rollins, is the latest state to weigh in on the issue.  In reaching its opinion, the Georgia Supreme Court resolved some issues, set some thresholds, and left open a few questions.

To understand the Court’s opinion, we must first understand the structure of the trusts and family entities involved.  O. Wayne Rollins established ten irrevocable trusts, the Rollins Children’s Trust (“RCT”), and nine Subchapter S-trusts, each for the benefit of his nine grandchildren.  The Settlor’s sons, Gary and Randall, were two of the three trustees of the RCT.  Only Gary, however, is a trustee of the S-trusts.

The RCT was established in 1968 and was initially funded with Rollins, Inc. stock.  The Settlor created several family entities to hold assets within the RCT: ROL, Inc., LOR, Inc., the Rollins Grandchildren’s Partnership (“RGP”) and the Rollins Holding Company (“RHC”).

Later, in 1986, the Settlor created the Subchapter S-trusts.  The original assets of the S-trusts were interests in LOR.  The Settlor later created another family entity two years later, RIF, which was held within the S-Trusts.

The two sons of the Settlor, Gary and Randall, shared voting control of the family entities.

Breach of Fiduciary Duty Claims

Four of the nine beneficiaries of the S-trusts sued the trustees alleging breach of trust and breach of fiduciary duty.  The trial court granted summary judgment to the trustees, but the Georgia Court of Appeals reversed and remanded, having ruled that the trustees may be held to trustee-level fiduciary standards with regard to the family entities.  The Georgia Supreme Court, however, determined that the Court of Appeals got it wrong when it came to the appropriate fiduciary standard.

The Georgia Supreme Court opened its analysis by stating that the general rule may be that actions taken by the trustees in their capacities as managers of family entities should be scrutinized according to the heightened trustee-level fiduciary standard instead of the more deferential standards that apply to the conduct of corporate entity managers.  Thus, the Supreme Court seems to have left the precise contours of the “general” rule open for later consideration.  Notwithstanding what may be the “general” rule, the Court held that the general rule did not apply here because (1) the intention of the settlor as manifested in the terms of the trust trumped the general rule, and (2) because the trusts held only a minority interest in the family entities.

Turning to the settlor’s intent, the Court found that the Settlor took “great pains” to ensure that the trustees could not take actions within the family entities solely to benefit the trust beneficiaries unless those actions were also in the interest of the other shareholders.  What were these “great pains”?  The Settlor made his son, Gary, the sole trustee of the S-trusts, but gave him shared control of LOR, RHC, and RIF with his other son, Randall, who had no obligation to the beneficiaries in their capacities as beneficiaries of the S-trusts.  Furthermore, the Court noted that the Settlor was a “man of considerable business experience.”  As such, the Court concluded that, as a sophisticated businessman, the Settlor certainly knew what he was doing when he created the potentially conflicting interests.  The Settlor, the Court reasoned, must have necessarily waived the rule of undivided loyalty by expressly conferring upon the trustee the power to act in a dual capacity.  The Court found it significant that the Georgia General Assembly codified this common law maxim in the 2010 Georgia Trust Code (trustees may act in a dual capacity where the trust estate owns an interest in a corporate or business enterprise, so long as it is “fair to the beneficiaries”).

The Court focused on the fact that the trusts held only a minority interest in the family entities.  Where a trust owns only a minority interest, the Court stated that it was generally best to allow the trustees to act in the interest of all the shareholders and to require that they be held to a corporate level fiduciary standard when acting as directors.  The Court left open the question of whether a different rule would apply if the trustees either controlled or held a majority interest in the family entities.

Accounting Claims

The plaintiffs also sought an accounting of the family entities.  While the RCT provided that beneficiaries are to receive “statements disclosing the condition of the trust estate” no more than every six months, the S-trusts were silent on the issue of accountings.

The trial court refused to order a judicial accounting of the family entities that held trust assets, in part, because the plaintiffs ultimately received a report on trust assets through discovery.  The Georgia Court of Appeals, however, concluded that the plaintiffs were entitled to an accounting of the family entities.  Again, the Georgia Supreme Court disagreed – at least for now.  While the Court of Appeals’ decision may ultimately prove correct that the families were entitled to a full accounting, the Supreme Court found that it failed to give due deference to the trial court’s finding that what was provided in discovery was sufficient.