By Philip L. Hatchett, Estate, Trust & Wealth Transfer

Corporate fiduciaries are always conscious of the potential for lawsuits from unsatisfied beneficiaries. The case of Karo v. Wachovia Bank, N.A., decided in Virginia’s Eastern District last year, is a helpful illustration of the Court finding in favor of a bank trustee challenged with a claim for breach of fiduciary duty.

In the Karo case, Wachovia Bank and Toney Karo were serving as Co-Trustees of the Karo Trust for the benefit of the settlor’s son, Drew Karo, and Drew Karo’s minor child (the settor’s grandchild), identified as W.A.K. Sixty-five percent of the Trust’s assets consisted of 60,000 shares of Wachovia stock. Several times between 2003 and 2007, Wachovia recommended to Toney Karo and Drew Karo that the Trust sell some of the Wachovia stock in order to diversify its holdings. The Karos refused to agree to the sale of the Wachovia stock and executed Letters of Retention, stating their intent to retain ownership of the stock. When the stock declined in value, W.A.K., the minor beneficiary, brought suit arguing that Wachovia violated its fiduciary duties as Trustee by failing to diversify the Trust’s assets.

The Court ruled in favor of Wachovia, holding that the bank did not breach its fiduciary duty. The Prudent Investor Rule may be modified or waived by the provisions of a trust agreement, provided that the language of the document expressly manifests an intention to do so by referencing the “prudent man” or “prudent investor” rule, by referencing the power to make speculative investments or by expressly granting authority to acquire or retain a certain type of asset. The Karo Trust included language that the Trustees could act “as they in their uncontrolled discretion may deem advisable,” could “retain as permanent any now existing investments (including stock of the corporate Trustee or in any of its affiliates and holding companies) of the trust property and any investments hereafter transferred to the Trustees,” and could “invest the trust property and from time to time alter, change, or vary such investments and reinvestments.” The Court held that such language was sufficient to waive the Prudent Investor Rule, and accordingly, Wachovia was not liable for breach of fiduciary duty for retaining the Wachovia stock.

The Uniform Trust Code provides that a trustee is not liable for a breach of trust if the beneficiary consented to the conduct. The Court held that Toney Karo and Drew Karo clearly consented to retain the Wachovia stock by the execution of the Letters of Retention, and accordingly, waived their rights to claim that Wachovia committed a breach of trust. The Court did not fully address whether Drew Karo’s waiver also served as a waiver on behalf of Drew’s son, the minor beneficiary W.A.K. The Uniform Trust Code provides that a parent is able to bind and represent a minor child’s interest, but only if there is no conflict between the parent and child. The Court acknowledged that some of the distributions to Drew Karo were family-related and that both Drew and W.A.K. had an interest in the long term growth of the assets; accordingly, the Court expressed doubt that their interests were in conflict.

The Court’s holding in the Karo case is an important example of a corporate fiduciary taking appropriate precautions in its trust administration process and ultimately prevailing when challenged. The fact that Wachovia Bank recommended on multiple occasions to the other Co-Trustee and adult beneficiary that the trust assets be diversified must have carried weight with the Court. The Letters of Retention execution by Toney Karo and Drew Karo provided Wachovia with tangible evidence of the Karo family’s desire to retain the stock. There are many reasons why a trust may hold assets in a manner that is not consistent with the Prudent Investor Rule. As the Karo case indicates, careful planning by a corporate fiduciary in such circumstances can result in the successful defense of a claim for breach of fiduciary duty.

Philip L. Hatchett is a partner in the firm’s Newport News office. He is also a Certified Public Accountant and serves businesses and individuals in the areas of estate planning and administration, tax, litigation, real estate, and corporate law.

The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2024.