Trust Modifications to Remove Trustees

Can the beneficiaries of a trust agree to a modification of the trust in accordance with 20 Pa.C.S. § 7740.1 that allows them to remove and replace a corporate trustee without any showing that the trustee can be removed in accordance with 20 Pa.C.S. § 7766?

That is the issue that is addressed in Trust under Agreement of Edward Winslow Taylor, and the Orphans’ Court said “no” (O.C. Phila. No. 3563IV of 1939,  8/18/14), but the Superior Court has said “yes” (2015 PA Super 199, 9/18/2015), (dissent by Platt, J.).  Unfortunately, there are problems with the Superior Court opinion and the possible consequences of that opinion, and there is a reasonable likelihood of an appeal to the Supreme Court.

Updated 12/10/15: An application for reargument filed by Wells Fargo Bank was denied on 11/25/2015.

Updated 11/13/2017: The Supreme Court reversed the Superior Court.  Trust under Agreement of Edward Winslow Taylor, 164 A.3d 1147, 15 EAP 2016 (Pa. 7/19/2017), rev’g 124 A.3d 334, 2015 PA Super 199, (9/18/2015).

Background

In 1928, the settlor, Edward Winslow Taylor, executed an agreement of trust, which he later amended, and the later amendment appointed the Pennsylvania Company for Insurance on Lives and Granting Annuities as trustee.  Wells Fargo Bank eventually became trustee following a number of mergers.

The current income beneficiaries of the trust are the settlor’s four great-grandchildren, and the trust will terminate in 2028, which is 20 years after the death of the settlor’s grandchild.  In 2009, Wells Fargo Bank filed an account of the trust, and petitioned for the division of the trust into four trusts, one for each great-grandchild, and for the appointment of each great-grandchild as the co-trustee of his or her own trust, which petition was granted.

In 2013, three of the four income beneficiaries petitioned for a modification of the trust in order to allow the income beneficiaries of the trust to remove the corporate trustee then serving “without cause,” and appoint a substitute corporate trustee.

The Orphans’ Court Opinion

Judge Herron, writing for the Orphans’ Court of Philadelphia County, denied the petition.  In ruling on a motion by Wells Fargo Bank for a judgment on the pleadings, Judge Herron found that he could not approve the petition under 20 Pa.C.S. § 7740.1(d) because the exclusive provisions for removing trustees are found in 20 Pa.C.S. § 7766, and the petitioners did not allege any grounds for removal under § 7766.

Judge Herron noted that § 7766 was modeled on the Uniform Trust Code (UTC), but that the relevant provision of the UTC also allowed removal of a trustee when all of the beneficiaries agreed, and the Pennsylvania legislature did not enact that provision.

Judge Herron also found that “the interrelationship between sections 7740.1 and 7766 create a clear ambiguity with the Pennsylvania Uniform Trust Act.”  The beneficiaries denied that § 7766 should apply, and yet the beneficiaries were attempting to use the general modification provisions of § 7740.1 to allow the removal a trustee.  “[W]here there is a conflict between a general statutory provisions and a more specific provision, the specific provision controls,” citing 1 Pa.C.S. § 1933.

The court therefore concluded that:

It was clearly not the manifest intention of the Pennsylvania legislature to allow beneficiaries to remove a trustee based on their agreement and without satisfying the requirements of section 7766 where the settlor made no provision for trustee removal.  The beneficiaries’ attempt to use the broad modification provisions in section 7740.1 to eviscerate section 7766 must therefore yield to the specific removal provisions of section 7766.

The Superior Court Opinion

The Superior Court, in its opinion by Justice Lazarus (who had served on the Orphans’ Court of Philadelphia County), found that § 7740.1 was “clear and unambiguous on its face,” containing “no language excluding from its ambit the modification of trustee-removal provisions.”  The court therefore rejected all attempts to apply rules of statutory construction, including 1 Pa.C.S. § 1933, and specifically rejecting consideration of legislative history that supported the conclusions of the Orphans’ Court.

Commentary: Problems with the Superior Court Opinion

Although the Superior Court opinion is certain and decisive, it is not persuasive, and there are dicta in the opinion that are troubling in their implications.

Specific versus General

The Superior Court recognized that the Orphans’ Court had employed “the rules of statutory construction,” citing and quoting 1 Pa.C.S. § 1933 in a footnote.  The court then went on to state that Orphans’ Court “improperly” applied the rules of statutory construction to interpret a statute “that is, in fact, unambiguous on its face.”  In rejecting the application of § 1933,  the Superior Court was in error, and failed to understand the meaning and purpose of § 1933.

1 Pa.C.S. § 1933 reads in its entirety as follows:

Whenever a general provision in a statute shall be in conflict with a special provision in the same or another statute, the two shall be construed, if possible, so that effect may be given to both. If the conflict between the two provisions is irreconcilable, the special provisions shall prevail and shall be construed as an exception to the general provision, unless the general provision shall be enacted later and it shall be the manifest intention of the General Assembly that such general provision shall prevail.

There is nothing in § 1933 about whether a statute is ambiguous.  In fact, the clear purpose of the statute is to deal with conflicts between unambiguous provisions.  You have a clear, unambiguous general rule, and a clear, unambiguous special rule.  Which prevails?  Section 1933 tells us that the specific prevails over the general.

That was the result in Pennsylvania Associated Builders and Contractors, Inc., v. Commonwealth Dept. of General Services, 593 Pa. 580, 932 A.2d 1271 (2007).  In that case, there was found to be a conflict between 62 Pa.C.S. §§ 322(6) and 513.  The Supreme Court held that the Commonwealth Court had erred in looking to legislative history to interpret § 513 because that section was unambiguous.  However, because that section conflicted with § 322(6), the Supreme Court applied 1 Pa.C.S. § 1933 to find that § 513 was a more specific provision than § 322(6) and so § 513 applied to the case before it.  The decision of the Superior Court in Taylor Trust is therefore contrary to the holdings of the Supreme Court in Pennsylvania Associated Builders and Contractors.

The directive in § 1933 that two conflicting statutes shall be construed so that “effect may be given to both” is also unaddressed by the Superior Court.  The interpretation of the Orphans’ Court gives effect to both § 7740.1 and § 7766, because its holding was that trust modifications can be allowed for almost anything other than the removal of trustees, and the removal of trustees is governed by § 7766.  As the dissent by Justice Platt points out, under the Superior Court’s approach,  § 7766 would be “largely eviscerated” (the same word used by the Orphans’ Court in its opinion), because beneficiaries will be able to modify the trust to give themselves the power to remove and replace corporate trustees, and then exercise that power to remove a trustee for reasons not specified in § 7766.

Intent to Remove: Catch-22

One of the reasons the Superior Court rejected the conclusions of the Orphans’ Court (and would apparently deny that § 7766 has been “eviscerated”) is that the Superior Court did not believe that the beneficiaries were seeking to remove Wells Fargo Bank as trustee.  “Rather, Appellants requested strictly to amend the trust to provide the flexibility to allow the beneficiaries to remove the trustee if, at some future point, they saw fit to do so.”

Implicit in the court’s distinction between a desire to remove a trustee and a desire to “provide the flexibility” to remove a trustee in the future is the recognition that there is in fact a conflict between §§ 7740.1 and 7766.   If the beneficiaries actually intended the modification to be a first step towards the removal of the current trustee, the Superior Court would seem to agree that the intent of the beneficiaries would be a problem.  (Why else discuss the issue and state the Orphans’ Court was “imputing motives to the Appellants [beneficiaries] based on assumptions not supported by the record”?)

There are several problems with making the actual intent of the beneficiaries relevant to the modification of the trust:

  • The resolution of the conflict between §§ 7740.1 and 7766 that was chosen by the Orphans’ Court is a simple legal rule:  Beneficiaries cannot modify a trust to allow the removal of a trustee.  The Superior Court has instead chosen a murky path in which the motives of the beneficiaries become relevant and must be determined.
  • The Superior Court has done exactly what it rebuked the Orphans’ Court for, because it has taken a clear and unambiguous statute and adding conditions unsupported by any language within the statute, allowing trustee removal conditions in some cases but not others, without any support whatsoever in the statutory language.  (And no, “material purpose” won’t cut it, for the reasons discussed below.)
  • If the lack of a current intent to remove the trustee is relevant to the decision of whether a modification is allowable, then the Superior Court has created a classic “Catch-22.”

For those not familiar with Joseph Heller’s novel Catch-22, the title referred to a (hopefully imaginary) rule that was in place in World War II.  Airmen who were insane were not required to fly combat missions, but had to request that they be released from combat duty.  The “Catch-22” was that asking to be released from combat duty was evidence of sanity, so the request would be denied.

According to the Superior Court, beneficiaries can have the power to remove and replace trustees as long as they don’t want to exercise the power.  If they actually want to exercise the power, they can’t have it.  Catch-22.

Taking the opinion of the Superior Court to its logical conclusion, every lawyer representing every beneficiary of every trust with a corporate trustee should now file a petition to modify the trust to allow the beneficiaries to remove and replace the trustee.  They might not want to replace the trustee now, but they might want to do it later, and if they want to do it now, then they can’t modify the trust, so they have to petition to modify the trust now, while they still don’t want to exercise the power.  (And the power to remove and replace can be useful even if the beneficiaries are generally satisfied with the current trustee, because it gives the beneficiaries greater leverage in dealing with the trustee on issues such as fees and investment policies.)

Effect of Legislative History

The Superior Court rejected consideration of the comments to § 7740.1 and § 7766, as well as the comments to their counterparts in the Uniform Trust Code, stating that “‘[on]ly when the words of a statute are ambiguous should a court seek to ascertain the intent of the General Assembly through consideration of statutory construction factors found in [s]ection 1921(c),” citing Commonwealth v. Brown, 981 A.2d 893, 898 (Pa. 2009).

This rejection of any consideration of legislative history might be a matter of judicial discipline (although the dissent labeled it “judicial activism”), but it is a critical issue because the legislative history is clearly contrary to the result reached by the court.

The Superior Court rejected the application of rules of statutory construction by quoting Cavallini v. Pet City & Supplies, Inc., 848 A.2d 1002, 1006 (Pa. Super. 2004), for the proposition that “It is only when the words of a statute are not explicit that a court may resort to other considerations in order to ascertain legislative intent.”  But the quoted language is from the dissenting opinion, and the dissenter was quoting language from Commonwealth, Dept. of Transportation v. Taylor, 576 Pa. 622, 841 A.2d 108 (2004), which was explicitly applying and interpreting 1 Pa.C.S. § 1921(c).

Section 1921(c) does indeed refer to the “contemporaneous legislative history,” and the subsection applies only when “the words of the statute are not explicit,” but in this case the issue is not legislative history in general, but the comments and explanations of the Advisory Committee on Decedents’ Estates Laws of the Joint State Government Commission, which drafted the Uniform Trust Act, and so the relevant statute is not 1 Pa.C.S. § 1921(c), but 1 Pa.C.S. § 1939, which provides as follows:

The comments or report of the commission, committee, association or other entity which drafted a statute may be consulted in the construction or application of the original provisions of the statute if such comments or report were published or otherwise generally available prior to the consideration of the statute by the General Assembly, but the text of the statute shall control in the event of conflict between its text and such comments or report.

The standard here is different from § 1921(c), because the report of the committee which drafted the statute “may be consulted in the construction or application” of the statute, but the text of the statute “shall control in the event of a conflict” between the statute and report.  There is no requirement that the statute in question be ambiguous or “not explicit,” but only that there be a question about its “application.”

Section 7740.1 was enacted as part of the Pennsylvania Uniform Trust Act (PUTA), 20 Pa.C.S. Ch. 77, which was modeled on the Uniform Trust Code (UTC) promulgated by the National Conference of Commissioners on Uniform State Laws (NCCUSL).  The Report of the Decedent’s Estates Task Force of the Joint State Government Commission, which recommended the adoption § 7740.1 as part of the PUTA, stated that “The official comments [in the report] may be used in determining the intent of the General Assembly” (citing 1 Pa.C.S. § 1939) and that “Where the UTC provisions have been substantially retained, the UTC comments are applicable to the extent of the similarity.”  The Advisory Committee Report also states the PUTA sections that are substantially similar to the UTC section contain a reference in the heading to the UTC section number.

The heading to section 7740.1 refers to “UTC 411” and the NCCUSL comments to UTC 411 plainly state that “Section 706 [enacted in Pennsylvania as 20 Pa.C.S. § 7766] is the exclusive provision on removal of trustees.”  So UTC 411 (20 Pa.C.S. § 7740.1) was never intended to be a vehicle by which trustees could be removed from office.

Also relevant to the interpretation and application of § 7740.1 is 1 Pa.C.S. § 1927, ” Construction of uniform laws,” which states that:

Statutes uniform with those of other states shall be interpreted and construed to effect their general purpose to make uniform the laws of those states which enact them.

This section is paraphrased and cited in the Advisory Committee report immediately following the reference to UTC comments, demonstrating the expectation and intent of the committee that the PUTA would be construed in a manner consistent with the goal of uniformity.  UTC 411 was not intended to allow for the removal of trustees, and there is no evidence that the Pennsylvania legislature intended to create a non-uniform version of UTC 411, so 1 Pa.C.S. § 1927 would dictate that 20 Pa.C.S. § 7740.1 should be interpreted and construed in a way to make the law uniform throughout the states that have enacted UTC 411.

Neither the Brown nor the Cavallini decisions considered the application of comments of committees that drafted statutes, or the construction of uniform laws in accordance with § 1927, and the reliance of the Superior Court on those decisions in disregarding the comments to UTC 411 undermines the soundness of the court’s opinion.  If the Superior Court had addressed the issues raised by §§ 1933 and 1927, the court might still have taken refuge in the “unambiguous” nostrum, but the issues should have been addressed.

On Remand:  “Material Purpose” and “Adequately Protected”

The Superior Court did not merely reverse the Orphans’ Court and allow the modification, but reversed and remanded “for proceedings in accordance with the dictates of this opinion.”  Procedurally, that was necessary because the Orphans’ Court had granted a motion for a judgment on the pleadings to dismiss the petition by the beneficiaries, and there was no cross-motion for judgment by the petitioners, so there had not yet been any determination of whether there were material facts in dispute or any hearings to take any evidence on any facts that might be in dispute.  Nevertheless, one wonders what might need to be decided by the Orphans’ Court on remand.

As noted above, the Orphans’ Court apparently needs to determine the actual motives of the petitioners in bringing the petition (although how those motives are relevant to the language of § 7740.1 is not explained by the Superior Court).

Based on the language of §§ 7740.1(b) and (d), only two issues seem to remain:

  • Whether the proposed modification is “inconsistent with a material purpose of the trust” within the meaning of § 7740.1(b); and
  • Whether the interests of beneficiaries other than the petitioners “will be adequately protected” within the meaning of § 7740.1(d) (which applies because not all beneficiaries have consented to the modification).

It could easily be found that having a corporate trustee is a material purpose of the trust, but the proposed modification is consistent with that purpose, requiring that the beneficiaries who remove a corporate trustee also appoint a new corporate trustee.  The only way the replacement of a corporate trustee could be inconsistent with a material purpose of the trust would be if the appointment of a particular corporate trustee was found to be a material purpose.  But this settlor did not appoint Wells Fargo Bank as trustee, because Wells Fargo Bank became trustee as the successor in interest following a series of mergers and reorganizations.  (In fact, Wells Fargo Bank did not even exist in Pennsylvania in 1938, when the trust was created.)  And the idea that successors in interest to a corporate trustee should continue to serve as trustee might not only be the intention of a settlor but could be “material purpose” of a trust is too absurd to consider seriously.

The proposed modification would allow the sui juris income beneficiaries (or a majority of them if there are more than five) to exercise the power to remove and replace the corporate trustee.  Are the the non-consenting income beneficiaries and successor beneficiaries adequately protected?  There will be a corporate trustee regardless of what trustee is appointed as successor, and that corporate trustee will have same duties of loyalty, impartiality, prudent administration, and other fiduciary duties that are applicable to any other trustee.  While it is certainly possible that income beneficiaries will seek a trustee that is more favorably inclined to their interests than the interests of other beneficiaries, the other beneficiaries will still have all of the protections of the UTA against any successor corporate that might violate any of its duties to the beneficiaries, so it is difficult to see how non-consenting beneficiaries might need any additional protection.

So, if the modification of a trust to modify a trust to remove and replace a corporate trustee is permissible under § 7740.1, it is probably game over, and the Orphans’ Court will have little choice but to approve the proposed modification.

What Next?

My initial reaction to the decision was that the Pennsylvania Bankers Association was likely to lobby for statutory changes to change the result of the Superior Court decision, but it is more likely that the decision will be appealed to the Supreme Court by Wells Fargo Bank.  And there would seem to be good grounds for an appeal, given the inconsistency between the Superior Court’s opinion and the reasoning of the Supreme Court in Pennsylvania Associated Builders and Contractors.

In the meantime, as noted above, a request for reargument or reconsideration has been filed with the Superior Court, and perhaps the court will reconsider.

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