Trustee Liability and Chapter 93A
FIDUCIARY MISCONDUCT MAY BE FOUND TO VIOLATE THE MASSACHUSETTS CONSUMER PROTECTION ACT
Toward the end of 2005, the Massachusetts Court of Appeals rendered a decision, Quinton v. Gavin, 64 Mass. App. Ct. 792 (2005), that has caught the attention of the legal community for its possible wide reaching impact on those acting as professional trustees. The decision involved the imposition of sanctions upon a trustee under the Regulation of Business Practices For Consumer Protection Act, M.G.L. c. 93A (the "Act"), in the wake of his gross violation of fiduciary duties on behalf of his clients. But, the question remains: was this decision the product of the egregious conduct of the defendant or a broader general application of the act upon the conduct of fiduciaries as a whole?
The defendant in Gavin was about as unsavory a character as you can find. A certified public accountant and financial advisor, Mr. Gavin solicited clients to use his services as a trustee so that he could establish bogus trusts and financial arrangements for his personal gain. For more than a decade, the defendant bilked his customers by receiving excessive fees for the creation and funding of trusts (through the unlicensed practice of law) and then using the trusts as his personal piggy banks by making loans to himself for nominal to no interest. As the court pointed out, "(Mr. Gavin) never had the best interest of his clients in mind. His purpose ab initio was to deceive and plunder." In the face of these egregious breaches of his fiduciary duties, the judge found that the defendant acted intentionally and in bad faith.
In five related cases, Quinton, Delorey, Budrow, Doucette and Lynch a Superior Court judge found Gavin to be in violation of the Consumer Protection Statute, c. 93A, Sec. 9. On appeal to the Massachusetts Appeals Court, the court affirmed the lower court decision, outlining its findings of fact and conclusions of law in a seventy page decision in which the judge found Gavin to be a reprehensible character who swindled the plaintiff's for more than a decade and compounded the illegality by engaging in deceptive litigation tactics and lying at trial.
In Quinton, Thomas and Helen McCarthy, an elderly couple with no children placed $882,000 into a trust for the benefit of their grandniece Teresa Quinton. Gavin said he was investing it in government mortgages but used the money for personal and business purposes. He also made unsecured, low interest loans to himself and businesses owned by him. He made restitution of $1,017,000 but the court ordered him to pay another $296,445.
In Delorey, that court found that Gavin had loaned out the Deloreys' money at low interest rates to himself as in the Quinton case. He ordered restitution and then trebled the amount which is allowed under 93A for deceptive practices.
In Budrow, Gavin created a trust for Norma Tirrell, The Sheltie Trust, which was intended to benefit Tirrell's two daughters, Linda Klietz and Martha Budrow. Upon Tirrell's death, Gavin split the trust into two trusts, the Admil and the Ahtram trusts. The court found there was no benefit upon Klietz and Budrow and was effectuated for the sole purpose of doubling trustee fees. The court ordered a repayment of the fees.
In Doucette, Gavin loaned out $50,000 from a trust created by Jeanette Doucette for the benefit of her three sons. The judge awarded the Doucette plaintiffs damages of $66,000 on the theory that the loan which was imprudent and yielded no profits, should have generated returns of twelve percent per annum, or $6,000 a year for eleven years.
In Lynch, Arlene Lynch created a trust ostensibly for the benefit of four relatives, but, in reality for her own support and expenses. The court found that Gavin held all of the trust assets in constructive trust for Lynch. Among the assets placed in the trust was a life insurance policy which had lapsed. As such, the court required that Gavin pay Lynch $10,000, the listed value in the trust records.
From a fiduciary law standpoint, the interest in this case arises from the fact the court trebled the damages and awarded legal fees pursuant to section 9 of the Act. The defendant unsuccessfully argued that the Act should not apply despite citing specifically to two cases, Steele v. Kelley, 46 Mass. App. Ct. 712 (1999), and Lattuca v. Robsham, 442 Mass. 205 (2004), that he claimed barred application of the Act in the fiduciary context. The court, however, stated that these cases where not directly applicable to the current situation as each involved a private grievance between parties to the same business venture. The court noted that these cases do not provide a blanket exemption for trustees against claims brought under the Act, but instead are consistent with the requirement that the violation arise from "trade or commerce" as opposed to a private dispute. Because the defendant advertised his services as an independent trustee and financial advisor in the ordinary course of business, the court had no trouble finding that he was engaged in trade or commerce. Finally, because it was clear that his intentions from the outset were for his own personal gain as opposed to the well being of his client's assets, the court would not allow the defendant to use his status as a trustee to shield him from liability under the Act.
Whether or not this result is merely the product of the egregious facts involved, the court has clearly articulated a new application of the Act to a group previously believed to be out of its reach. The question remains, however, to what degree must the fiduciary abuse his office for the Act to apply?
Barring instructions to the contrary in the controlling document, the trustees are bound by the Massachusetts Prudent Investor Act and Massachusetts Principal & Income Act. These acts give trustees great flexibility to provide a more modern investment approach and allocate the gains realized between income and remainder beneficiaries as a whole. As a result, a trustee is not forced to invest for the benefit of one class of trust beneficiary to the detriment of the other. With this greater flexibility, however, there is a higher standard of care imposed upon trustees. In light of this higher standard of care, is there greater risk of scrutiny from trust beneficiaries and application of the Act when a trustee fails to meet the standard of care under the statutes?
In light of the Gavin decision, this question has some commentators concerned. But, it is important to remember the level of behavior the court was punishing. His actions were "designed to bilk unwitting consumers" for purposes of private financial gain. Although the court classified these actions as part of a trade or commerce, it continually focused on the defendant's intentional and deceptive conduct.
Given the broad scope of the Act, it should not be a great surprise that a court eventually concluded trustee and fiduciary activities exist as part of trade or commerce in certain settings. As the court pointed out, the Act has applied to similar business professionals such as attorneys, stock brokerages, and medical care providers. Providing a blanket exclusion for trustees and other fiduciaries would be contrary to the intent of the Act since such activities can clearly be solicited in a business context.
Professional trustees and fiduciaries should be cognizant of the Gavin decision going forward and take steps necessary to implement solid risk prevention procedures. However, the recent inclusion of these activities within the reach of the Act should not be cause for major alarm. Unfortunately, it is difficult to predict to what length the courts will expand the application of the Act as it will require a case-by-case analysis. The facts as presented in Gavin were so far to one end of the spectrum, the only concrete insight gleaned from the case is the applicability of the Act to professional trustees.
Unfortunately there is no roadmap articulating the level of trustee conduct that will garner scrutiny. But, when looking at the Act, it is important to remember that its language speaks of intentional or deceptive behavior. In essence, a level of wrongdoing that is deliberate, immoral, and unscrupulous. Therefore, it is arguable that something more than an intentional violation of the statutory standard of care is necessary for the Act to apply to trustee conduct.