Slow distribution of funds breached fiduciary duty

The trustee of a York County estate breached her fiduciary duties by not distributing proceeds to her stepfather and his company, as required by the trust, the South Carolina Court of Appeals has ruled.

Judge D. Garrison Hill, writing for a unanimous panel, found that while trust protectors have the authority to resolve such disputes, in this case the trust protector declined to do so, making the York County Circuit Court the proper venue to resolve the matter.

When Deborah Dereede died, her daughter, Courtney Feeley-Karp, became the trustee responsible for executing her mother’s revocable trust. In this capacity, Feeley-Karp was supposed to sell her mother’s house and distribute the proceeds to pay off any remaining mortgage and a promissory note owed to her stepfather Hugh Dereede’s company. Any remaining money was to be split by Hugh and the other beneficiaries.

When the house sold, Dereede demanded immediate payment for his share, but Feeley-Karp believed she couldn’t distribute the proceeds until she was certain of the trust’s net assets and enough time had passed for any creditor’s claims to expire. Dereede sued, and York County Circuit Court Judge S. Jackson Kimball III found that Feeley-Karp had breached her fiduciary duty by not distributing the funds quickly enough and that while she had acted in good faith, she was still liable for her opponents’ attorneys’ fees.

Hill noted that because Feeley-Karp’s duty to execute the trust was absolute, not discretionary, she had violated the trust when she failed to distribute proceeds from the house sale “as soon as practicable.” While Feeley-Karp’s actions were not taken in bad faith, her hesitation in distributing funds was still a mistake for which she was liable.

“Karp risked no personal liability by following Deborah’s intent to expedite distribution of the house sale proceeds, as the Trust Code insulated her and allowed creditors to follow the money and recover against the distributee,” Hill said. “Once it is determined the trustee has failed to carry out the express terms of a trust, good faith ‘counts for nothing’ in the breach of trust calculus.”

Feeley-Karp had argued that the trial court lacked subject matter jurisdiction because the trust gave exclusive jurisdiction to a trust protector to resolve any disputes. Attorneys from both sides said that they believe this is the first time that a state appeals court has ruled on the issue of trust protectors, which came into being only in 2013.

The trust, in this case, said that the trust protector may unilaterally resolve any dispute, claim or conflict between beneficiaries. It also said that “no one may file or instigate a claim in a court of law without first submitting the claim to the Trust Protector for resolution” and the protector can then give any claimant the authority to file and maintain a court action.

Hill said that while Deborah’s intent was for a trust protector to have binding authority, “under certain circumstances,” to resolve disputes like the one that triggered the lawsuit, because the trust protector was not appointed until months after litigation had begun and because the trust protector declined to resolve the dispute, the York County Circuit Court was the proper venue.

“Whatever the contours of the trust protector’s authority, we hold that under the circumstances here they do not extend to stripping the trial court of subject matter jurisdiction,” Hill said.

Dan Ballou and John Gettys Jr. of Morton & Gettys in Rock Hill represented Dereede and his company on appeal. He said that the court’s opinion shows that even when trustees act in good faith, if they don’t follow a trust’s instructions, they can be held personally liable for a breach of the trust.

“She made the argument that her actions were in good faith, but the court said you still have to follow the trust,” Ballou said. While the issue of the trust protector is a relatively new one, Ballou said that this opinion shows that for a trust protector to work, they must be established before litigation commences.

“We took the position that this was a permissive instrument and that you couldn’t take away the right of the court to adjudicate, and the trustee waived the right to rely on the trust protector’s authority,” he said.

Desa Ballard and Harvey Watson II of Ballard & Watson in West Columbia represented Feeley-Karp on appeal, along with Peter Nosal and Thomas Jeter II of Nosal & Jeter in Fort Mill.

Ballard said that confusing provisions in the trust made the process difficult for her client and that she was merely following the legal advice she was given in taking the time to assess the entire estate before making distributions. She said that her client intends to seek discretionary review from the state’s Supreme Court.

“If the decedent’s wishes can be thwarted by simply filing suit and precluding a Trust Protector from acting, the concept will be rendered meaningless,” Ballard said.

The 10-page decision is In Re: Deborah Dereede Living Trust (Lawyers Weekly No. 011-036-19). The full text of the decision is available online at sclawyersweekly.com.

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