800 F. Supp. 2d 975
E.D. Wis.2011Background
- This is a diversity action in which the Frenches seek to recover losses from WBNA's exchange of two life insurance policies for John Hancock no-lapse policies during WBNA's tenure as trustee of Jim French's irrevocable trusts.
- Trust 1 and Trust 2 are irrevocable, with Trust 1 receiving distributions from Trust 2 and ultimately distributing assets to Trust 1 beneficiaries after Jim French's death; the trusts' governing instrument is Wisconsin law.
- WBNA authorized as successor trustee engaged in a 1035 exchange, exchanging two existing policies (Pacific Life and Prudential) for John Hancock no-lapse policies with a guaranteed death benefit but diminishing cash value.
- The no-lapse policies’ cash value was expected to be lower or nonexistent, while the new policies carried a larger guaranteed death benefit; total cash value in May 2005 was about $2.2 million, with existing trust cash value set to be reduced.
- WBNA and its affiliate WIS disclosed potential conflicts of interest and pursued a waiver; the Frenches’ counsel was involved, and there were negotiations over possible commissions and trustee fee concessions.
- Commissions from the exchange totaled about $512,000 initially, plus ongoing annual commissions (~2% of premiums) for ten years, totaling roughly $548,000 paid to WIS, with the amount not disclosed prior to the exchange.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether WBNA's self-dealing was authorized by the trust | Frenches contend self-dealing was unauthorized. | Trust language allows dealing with trust assets without conflict considerations. | WBNA authorized to self-deal under the trust. |
| Whether the self-dealing was undertaken in good faith | WBNA acted in bad faith to enrich affiliates. | WBNA conducted lengthy due diligence and acted in the trust's best interests. | Self-dealing occurred but in good faith. |
| Whether the prudent investor standard applies and if the exchange was prudent | No-lapse policies harmed cash value and were imprudent. | Exchange diversified risk, reduced premiums, and provided guaranteed death benefits; prudent under the circumstances. | 1035 exchange was prudent; prudent investor rule applied. |
Key Cases Cited
- Pegram v. Herdrich, 530 U.S. 211 (2000) (fiduciary loyalty duties and conflicts guidance)
- In re Hanes, 214 B.R. 986 (Bankr. E.D.Va. 1997) (undivided loyalty and self-dealing concepts)
- Renz v. Beeman, 589 F.2d 735 (2d Cir. 1978) (trustee consent and beneficiary interests)
- Zastrow v. Journal Comm'n, Inc., 718 N.W.2d 51 (Wis. 2006) (conflicts and loyalty in fiduciary duties)
- Praefke v. Am. Ent. Life Ins. Co., 655 N.W.2d 456 (Wis. Ct. App. 2002) (specific authorization required for self-dealing)