Brian French v. Wachovia Bank
2013 U.S. App. LEXIS 14399
7th Cir.2013Background
- Jim French founded a successful 1968 manufacturing firm and later sold it for a large sum.
- French created two interlocking irrevocable trusts to benefit his four children, with Trust #2 providing income to Trust #1 and then to the children.
- In 2004 French moved the trust to Wachovia because Northern Trust’s investment approach was unsatisfactory.
- Two underperforming life-insurance policies (Pacific Life and Prudential) carried $5 million death benefits but high premiums; Wachovia proposed replacing them with John Hancock no-lapse policies with the same death benefits at lower premiums, yielding substantial commissions.
- Wachovia’s affiliate would earn a $512,000 commission plus 2% of future premiums for ten years; the trust instrument contained a broad conflicts-of-interest waiver.
- Beneficiaries sued Wachovia in state court, the case was removed to federal court, and the district court granted summary judgment for Wachovia, including attorney’s-fees costs against the beneficiaries; the Seventh Circuit affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Wachovia breached loyalty by self-dealing through its insurance affiliate. | Frenches contend self-dealing violated the trust’s loyalty duty. | Wachovia argues the trust instrument expressly authorized conflicts of interest. | No breach; conflicts waiver valid and dispositive. |
| Whether the prudent-investor rule applied or was displaced by the trust’s express waiver. | Prudent-investor rule should govern unless overridden by the instrument. | Instrument explicitly permits dealing without regard to conflicts; waiver overrides the rule. | Prudent-investor rule displaced by the waiver; only bad faith review remains. |
| Whether Wachovia acted in bad faith in executing the insurance exchange. | Policy swap was imprudent and driven by improper motives. | Exchange was prudent, made in good faith, with comparable death benefits and cost savings. | No bad faith; actions upheld under good-faith standard. |
| Whether the decision to disclose commission details was required before consummation. | Beneficiaries deserved advance disclosure of the commission. | Disclosure of the size of the commission was not required given contemporaneous involvement and notice. | No fiduciary breach; disclosure was not mandated for this adjustment. |
| Whether attorney’s-fees award against beneficiaries was proper. | Affirmative; fees awarded to the trustee were proper given lack of bad faith. |
Key Cases Cited
- Praefke v. Am. Enter. Life Ins. Co., 655 N.W.2d 456 (Wis. Ct. App. 2002) (self-dealing and trust duties context)
- Estate of Koos v. Koos, 69 N.W.2d 598 (Wis. 1955) (trustee duty of good faith; general fiduciary standard)
- Welch v. Welch, 290 N.W.758 (Wis. 1940) (conflicts waiver and broad trustee powers)
- Jefferson Nat’l Bank v. Cent. Nat’l Bank, 700 F.2d 1143 (7th Cir. 1983) (equitable nature of trust claims and jury trial considerations)
- Central States, Southeast & Southwest Areas Pension Fund v. Slotky, 956 F.2d 1369 (7th Cir. 1992) (ERISA-style mixed standard of review for summary judgment)
- Central States, Southeast & Southwest Areas Pension Fund v. Nagy, 714 F.3d 545 (7th Cir. 2013) (applies mixed standard of review where undisputed facts exist)
- Central States, Southeast & Southwest Areas Pension Fund v. Fulkerson, 238 F.3d 891 (7th Cir. 2001) (ERISA-related review framework cited by court)