The Supreme Court of Minnesota has affirmed two lower court decisions holding that a series of incidents involving a breach of trust can cumulatively justify removal of the trustee for “significant” breach of trust, even though some of the breaches alone might not justify removal.  It has affirmed the removal of one of the trustees of the Otto Bremer Trust, a $2 billion private foundation located in St. Paul, under the state’s version of the Uniform Trust Code.

The Trust was created by Otto Bremer in 1944 and funded with shares of the financial institution he founded, now known as the Bremer Financial Corporation (called the “Bank” in the Supreme Court opinion).  He transferred the remaining ownership interest in the Bank to the Trust upon his death to be used for charitable purposes.

Brian Lipschultz, a grandson of an original trustee appointed by Bremer, became a trustee of the Trust in 2012.  “Probably from the day he arrived,” he began using Trust resources for his personal purposes, including staff time, computer and mailing resources and as a registered office for his personal business.  When staff members complained to the Trust’s controller in 2019, the Trust calculated the value of the misuse from 2017 to 2019 to be $1875.  Lipschultz returned the money and paid the tax on self-dealing reported to the IRS.  He did not pay the costs of the legal and accounting fees the Trust incurred in connection with remediating the self-dealing.

Also in 2019, executives at the Bank began exploring a potential merger with another company.  An investment bank valued the Bank at nearly twice what the Trust had reported to the IRS in 2018 and used to determine its required 5% distribution.  Lipschultz became concerned that the Trust could not receive enough in dividends to meet the distribution requirement if calculated on the basis of the new valuation.  The Trust trustees serving on the Bank board wanted the Bank to be sold, but the other directors voted to terminate sale discussions.

Lipschultz developed a plan to replace the current Bank board with pro-sale members and also caused the Trust to sell 725,000 Bank shares to 11 separate buyers.  The Bank refused to register the shares to the new buyers and sued the Trust trustees.  The trial court in the current case dealing with removal of Lipschultz from the Trust board found that during the dispute Lipschultz “displayed a crude, vulgar, and otherwise offensive brashness that has no place in the charitable world.”

The Bank situation caused the state Attorney General to investigate and to file a petition in August 2020 to remove the three trustees of the Trust.

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The Bank situation also gave rise to other incidents that became part of the AG’s case to dismiss the three trustees.  In November, 2020, Lipschultz expressed frustration to the CEO of Junior Achievement, to which the Trust had made a $1 million grant in 2017 and also made a five-year $500,000 program related investment.  He complained that Junior Achievement had not stood by the foundation trustees in their legal challenges from the Bank and the Attorney General.  The CEO felt that the funding might be in jeopardy if Junior Achievement did not lobby the Attorney General on the trustees' behalf.  An additional $1.2 million grant request was held up and after another conversation with Lipschultz, the CEO said she felt “disrespected and bullied.” She said that she had been treated “more poorly” by the Trust than by any donor in her career.  Junior Achievement then decided to return the $1.2 million and sever its relationship with the Trust.

During the AG investigation, Lipschultz, who had authority under the Trust to appoint his successor and had named his cousin as successor in 2018, refused to identify the successor when asked by the AG.  He only revealed the identity of his successor while on the witness stand during the trial.

The trial court found each of these incidents to involve a breach of fiduciary duty and removed Lipschultz from the Board of the Trust.  The trial court found that his actions had collectively constituted a “significant breach of trust” under section 501C.0706(b)(1) of the state version of the Uniform Trust Code and also that removal served the “best serves the interests of the beneficiaries and the Trust” under section 501C.0706(b)(3).  The trial court did not remove the other two trustees.  On appeal by Lipschultz, the Minnesota Court of Appeals affirmed.  (See Nonprofit Issues®, Vol. XXXIII, No. 1.)

At the Supreme Court, Lipschultz argued that the trial court and the Court of Appeals applied an incorrect legal standard regarding a trustee and that the trial court abused its discretion when it removed him.  Lipschultz decried the trial court’s claim that his conduct with respect to selling the Bank “had no place in the charitable world” and argued it was not a proper legal standard to apply under the Act.  The Court said it was merely another way to discuss the proper standard and not a new standard in itself.

Lipschultz argued that none of his actions was a serious breach of trust individually or even when considered cumulatively.  But the Court cited the drafters’ official Comment to the Uniform Trust Code, which says that a “serious breach of trust may consist of a single act that causes significant harm or involves flagrant misconduct” or “a series of smaller breaches, none of which individually justify removal when considered alone, but which do so when considered together.”  It said the Court of Appeals had affirmed that “Lipschultz engaged in a series of breaches that collectively constitute a serious breach of trust” under the law.

The Supreme Court reviewed three of incidents in detail.

Lipschultz argued that his self-dealing could be “de minimis” in “the larger scheme of things.”  But the Court said there is “no ‘de minimis defense’ to whether self-dealing violates the duty of loyalty.”  “Even if the [trial] court would not have removed Lipschultz for this behavior alone, it is a part of a concerning series of breaches that may justify removal,” it said.

The Court said that “perhaps the most concerning of Lipschultz’s breaches of trust was his breach of the duty of loyalty when interacting with Junior Achievement,” a grantee.  The duty of loyalty, it said, prohibits a trustee from placing the trustee’s own interests above those of the beneficiaries of the trust.  The trial court had found that he had breached his duty of loyalty when he “misused grantmaking power to further his own personal objectives and resentment.”

The Court found that Lipschultz’s conduct not only harmed Junior Achievement, but also “reflects a breach of the loyalty more broadly owed to the accomplishment of purposes beneficial to the community, and for which the Attorney General is empowered to petition as the representative of the community.”

Finally, the Court decided that Lipschultz violated his duty to disclose “fully, frankly, and without reservation all facts pertaining to the trust” when he had failed to tell the Attorney General, who has the rights of a qualified beneficiary of the Trust, the name of his successor. 

Because the Court affirmed the decision to remove the trustee for a significant breach of trust, it said it did not have to review whether it was also proper to remove the trustee because it best serves the interest of the beneficiaries.  (In the Matter of the Otto Bremer Trust, Supreme Ct., MN, No. A22-0906, 2/7/24.)

YOU NEED TO KNOW

Because the Uniform Trust Code has been adopted in 35 states and the District of Columbia, and because it is intended to be interpreted uniformly among the states that have adopted it, this case is likely to have wide application.  The conclusion that a series of “smaller” breaches may combine to be considered a “significant” breach was spelled out in the Comments to the removal section of the statute by its drafters.  But the examples of beating up on a grantee for purposes unrelated to the charitable purposes of the trust and of withholding information from the Attorney General may not have been so clear from the language of the Act.