© By Jeffrey C. Blumenthal. All Rights Reserved.

    The U.S. Census Bureau has projected that the population aged 65 and older will more than double between 2012 and 2060, from 43.1 million to 92 million people[1]. As the population ages, the number of adults with dementia and other mental and physical infirmities that leave those adults unable to perform daily living activities is likely to skyrocket[2]. Consequently, the number of persons who will need a guardian to help them function should also rapidly rise. There are a number of issues that are regularly litigated in guardianship disputes or are likely to be litigated in the future. This memorandum addresses a number of those issues.

I.       The Purpose of a Guardianship for a Disabled Adult

    Article XI a of the Probate Act governs proceedings for the appointment of a guardian for a disabled adult in Illinois (755 ILCS 5/11a-1 et. seq.). Section 3(b) of Article XI (755 ILCS 11a-3(b)) provides that the purpose of a guardianship is “to promote the well-being of the disabled person to protect him from neglect, exploitation or abuse, and to encourage development of his maximum self-reliance and independence.” Mabry v. Roberts, (In Re Mabry), 281 Ill. App. 3d 76, 87 (1^st Dist. 1995).  Section 3(b) further provides that “[g]uardianship shall be ordered only to the extent necessitated by the individual’s actual mental, physical and adaptive limitations”. [3] Much of current guardianship law is informed by the Section 3(b)’s directives.[4]

         As the appellate court reasoned in In re Estate of Mackey, 85 Ill. App. 3d 235, 239 (3^rd Dist. 1980), the guardianship “provisions envisage and direct a careful look into the extent and nature of any disability and a tailoring of guardianship to the requirements and abilities of the individual, with the purpose of encouraging self-reliance and independence. That goal permeates a number of the provisions of the new Probate Act of 1975 in this area.” Accord: In re Estate of Fallos, 386 Ill. App. 3d 831,839(1^st Dist. 2008); See: In re Estate of Bennett, 122 Ill App. 3d 756 762 (2^nd Dist. 1984). See also: e.g., 755 ILCS 5/11a-17 (“The guardian shall assist the ward in the development of maximum self-reliance and independence.”)

      In re Estate of Bennett, 123 Ill App. 3d 756 (2^nd Dist. 1984), illustrates the trial and appellate court’s “careful” consideration and weighing of the evidence in applying Section 3(b)’s mandate of tailoring the guardianship to the needs of the disabled adult. In Bennett, supra, 123 Ill App. 3d at 758, the respondent suffered a stroke in 1979 and his wife filed a petition to have herself appointed as his plenary guardian in spring, 1981. Following respondent’s release from the hospital after his stroke, the husband went to live with his mother where he was being cared for by both his mother and sister for more than a year before the hearing on the guardianship petition (Id). In the fall of 1981, the mother and sister filed a cross-petition seeking an order that one or both of them be appointed as a limited guardian(s) for the respondent instead of the wife (Id).

    At the guardianship hearing, the wife, who had not had “any close contact with [her husband] in over a year”, testified as did a psychiatrist the wife had retained (Id. at 759). The wife and her expert testified that respondent had limited “physical and mental capabilities” and was in need of a plenary guardian (Id). However, there was also testimony from the respondent, his brother-in-law and his sister and mother, who lived with him during the year before the hearing (Id). This testimony indicated that, while respondent experienced “some confusion” he was generally alert, aware of his surroundings and his finances (Id.) He could feed, bathe and shave himself and could walk with the aid of a walker (Id). 

     In addition there was testimony from two other psychiatrists and a psychologist that while the respondent had some “residual” effects from the stroke, including slurred speech, impaired vision and difficulty walking, “he was alert and coherent” (Id). While the respondent had “a deficiency in conceptual abilities” that could result in gaps in his reasoning process, these experts testified that the respondent could manage his estate and financial affairs” with assistance and support from a limited guardian (123 Ill. App. 3d at 760). The evidence indicated that the respondent was content living at his mother’s home and that his health had improved there because of the “constant” care of his mother and sister (Id at 761).  Based on the evidence, the trial court rejected the wife’s request for the appointment of a plenary guardian and instead, appointed respondent’s sister and mother as co-limited guardians of his estate and person. (Id at 760 and 761).

    In affirming the trial court’s ruling, the appellate court reasoned at 123 Ill. App. 3d at 762:

The order determining that the respondent needs a limited guardianship… recognizes that the respondent can be disabled and lack some but not all of the capacity as specified in section 11a—3. (Citation omitted). The respondent requires limited assistance due to his speech impediment and the physical difficulty he encounters with writing and walking. He also has lapses of memory, but when he is provided with the necessary information, he is capable of reaching a responsible decision. The order conformed with the evidence adduced at the hearing. Although the respondent is a disabled person, he is not incapable of knowing what he wants to do. He merely needs assistance. The order is in keeping with the intent of the statute. (Citing 755 ILCS 11a-3(b)).

II.        Who is a “disabled person” within the meaning of

Guardianship Law

   The first issue in many guardianship disputes is whether the individual alleged to need a guardian is “disabled” within the statutory meaning. “Disabled person” is defined in section 11a- 2 (755 ILCS 5/11a-2) and “Development disability” is defined in section 11a-1 (755 ILCS 5/11a-1) of Article XI a.  A review of section 11a- 2 and decisions interpreting that section and predecessor provisions indicate that essentially any mental or physical condition that leaves a person 18 years or older unable to fully manage his or her person or estate can be sufficient for that person to be deemed “disabled” within the meaning of the guardianship provisions. 

    In Karbin v. Karbin, 2012 Ill. Lexis 1011*p.20, 977 N.E. 2d 154 (2012), the Supreme Court held that: “[Article 11a of] [t]he [Probate] Act defines a ‘disabled person’ to include anyone over the age of 18 who ‘is not fully able to manage his person or estate’ because of ‘mental deterioration,’ ‘physical incapacity, ’mental illness,’ or ‘developmental disability.’”(Quoting from the language of 755 ILCS 5/11a-2(a) and (b)).  Similarly, in In re Estate of Malloy, 96 Ill. App. 3d 1020, 1028 (1^st Dist. 1990), the Court stated “a disabled person is … defined by section 11a—2 of the Act, as a person who … for certain mental and physical causes … is not fully able to manage his person or estate.” As these cases suggest, the focus of the “disabled person” definition is not on the alleged mental or physical condition per se, but rather on the disability’s effect in rendering an individual unable to fully manage his or her personal or financial affairs.

     For example, in Estate of Galvin, supra, 112 Ill. App. 3d 677, 678-679(1^st Dist. 1983), the evidence showed that respondent had both physical limitations, as a result of a series of strokes and other medical conditions, as well as some mental fantasies/delusions. For example, respondent testified, on adverse examination, that “he invented the snow-mobile, at one time he had a pet-black widow spider and he could produce fire by pointing his finger.” However, the respondent also correctly testified that he owned a building, took care of his finances, could shop for himself, and could walk with the aid of a walker (Id at 679). The respondent further testified at 112 Ill App. 3d 679 that “he was able to take care of himself and did not want a guardian.” Based on the totality of the evidence, the trial court stated at 112 Ill. App. 3d 679-680: “There is no way in God’s world that I am going to adjudicate him a disabled person. He is physically suffering from some disability. … He is eccentric… but there is no way I am going to adjudicate him in need of a guardian…. He lives a bizarre, strange life. I might not want to do it, but unless you can make an offer of proof that is going to show me that he does not understand the things he is doing—, he understands.”

   The appellate court affirmed the trial court’s ruling denying the guardianship petition, notwithstanding that is was “clear that respondent suffers from some physical disability [brought on by a series of strokes, heart, cerebral, and arthritic conditions] and has some mental peculiarities.” (112 Ill. App. 3d at 681). However, in balancing the totality of the testimony, the appellate court reasoned at 112 Ill. App. 3d 682: “we cannot say the determination of the trial judge that respondent was not unable to manage his person and estate is contrary to the manifest weight of the evidence.”

   While the current guardianship statutory framework is more refined and restrictive than prior law, the prior statutes also focused on whether a mental or physical condition rendered an individual incapable of managing his person or estate. This is highlighted by earlier case law interpreting the prior statutory framework under which individuals who are now called “guardians” were previously designated as “conservators” and “disabled persons” were referred to as “incompetents”[5]. In McDonald v. LaSalle Nat’l Bank, 11 Ill. 2d 122, 124 (1957), the Supreme Court held: “The test [determining incompetency] … is … whether the person is capable of managing his own affairs.” In Loss v. Loss, 25 Ill. 2d 515, 517 (1962), the Supreme Court stated: “before physical incapacity is sufficient to permit … adjudication [of incompetency] and appointment [of a conservator], it must be such as to render the person ‘incapable of managing his person or estate.’” Likewise, in In re Estate of Stevenson, 44 Ill. 2d 525, 531 (1970), in rejecting a contention that the predecessor statute was unconstitutionally “vague, indefinite and uncertain”, the Supreme Court reasoned that: “The justification for the appointment of a conservator is founded primarily on the incapability of managing one’s person or estate and not on the cause of that incapability.”

    Finally, in In Re Estate of McPeak, 53 Ill. App. 3d 133, 136 (5^th Dist. 1977), the appellate court reversed the trial court’s order appointing a “conservator” because “the record was barren” of any credible facts, as opposed to unsupported opinion, showing that the respondent was incapable of managing her person or estate. McPeak, surpa, 53 Ill. App. 3d at 134, involved an 81 year old, whose “health was described as poor.” Petitioner, who one of the respondent’s two sons, and petitioner’s witnesses testified that the respondent was “forgetful, confused and repetitive” (Id). These witnesses further opined that respondent’s “mind was deteriorating and that she was not capable of taking care of herself.” (Id). However, the facts indicated that, a month before the guardianship petition had been filed, the respondent had voluntarily entered a nursing home and had given her other, non-petitioning son a power of attorney over her estate (Id). At the conservatorship hearing, five nursing home employees testified that the respondent was “mentally alert”, “kept herself clean and has insisted on keeping her surroundings neat and orderly.” (Id).

      In rejecting the claim that respondent’s poor health and physical limitations, which had prevented her from attending the conservatorship hearing, justified the appointment of a conservator, the McPeak Court stated, at 53 Ill. App. 3d 136, that: “to simply establish certain disabilities is alone insufficient to support the determination of incompetency, the evidence must also show the respondent’s incapability of managing her person or estate.” The appellate court found that the evidence of respondent’s actual conduct showed that she could make responsible decisions regarding her person and estate. As the McPeak Court reasoned at 53 Ill. App. 3d 156: “by purposefully entering a nursing home and executing [a] power of attorney in her son, [respondent] showed herself to be capable to protect herself and her property by intelligently and responsibly exercising her rights and recognizing her limitations.”

III. Proof that a person is “disabled” must be by clear and 

    convincing evidence and the necessity of medical evidence

     Section 11a-3 expressly requires that the proof that the person is “disabled” must be established by clear and convincing evidence. Karbin v Karbin, supra, 2012 Ill. Lexis 1011*p. 20, 977 N.E. 2d 154 (2012).[6] The Courts have further “recognize[d] that the adjudication of disability is a uniquely factual determination ….”  In Re Estate of Hickman, 208 Ill. App. 3d 265, 276 (4^th Dist. 1991); Accord; Barr v. Horwitz, 142 Ill. App. 3d 428, 433 (1^st Dist. 1986); Estate of Galvin v. Galvin, 112 Ill. App. 3d 677, 681-682 (1^st Dist. 1988).  See also: In re Estate of Silverman, 257 Ill. App. 3d 162, 168-169 (1^st Dist. 1994) (“Whether and to what extent a person needs a guardian is a factual determination…”). The import of the witnesses’ presentation in a guardianship matter is highlighted by the court’s statement in Estate of Galvin, supra, that: “We cannot envision an instance in which the observation of the witnesses, particularly the alleged incompetent, is more critical to the outcome of proceedings.” In Galvin, supra, 112 Ill. App. 3d at 679-680, it was the trial court’s observation of the respondent on the witness stand and the respondent’s testimony that lead the trial court to rule that the respondent knew what he was doing and did not need a guardian.

    Section 11a-9(a) (755 ILCS 5/11a-9(a)) provides that the petition for adjudication of disability and for appointment of a guardian should be accompanied by a report which “(1) describes the nature and type of the respondent’s disability; (2) evaluates the respondent’s mental and physical condition, and, if appropriate, his or her educational level, adaptive behavior and social skills; (3) states an opinion as to whether guardianship is needed; (4) recommends the most suitable living arrangement for the respondent or , if appropriate, a treatment or habilitation plan; and (5) contains the signatures of all those who performed the evaluation, at least one of whom must be a licensed physician.” In re Estate of Silverman, supra, 257 Ill. App. 3d at 169 (Paraphrasing from the statute’s language).

    While section 11a-9(b) expressly provides that: “[i]f … no report accompanies the petition, the court shall order appropriate evaluations… and a report to be prepared and filed …”, courts have ruled that such an order is not required where the respondent objects to the guardianship petition and submits a statutorily sufficient report that guardianship is unnecessary. In re Estate of Silverman, 257 Ill. 2d 162 (1^st Dist. 1983), a sibling filed a petition for guardianship alleging that his brother was being abused and subject to the undue influence of his sister-in-laws. The guardianship petition was not supported by a physician’s report. On the day that the petitioner filed a Motion to Compel a Supreme Court Rule 215 medical examination of his brother, the respondent filed a motion to dismiss the guardianship petition supported by both a statutorily sufficient report in the form of an affidavit from his long-time physician that, among other things, he was “mentally competent and able to make personal and financial decisions on his own.” Subsequently, the trial court denied the petitioner’s motion to compel a medical examination and granted the respondent’s motion to dismiss the guardianship petition. In affirming the trial court’s ruling that, under the circumstances, the trial court was not required to order a medical examination under Section 11a-9(b), the appellate court reasoned at 257 Ill. App.3d 171 that:

       We do not believe that the code provision requiring courts to order

       evaluations when petitions lack medical reports mandates such

       orders when respondents come forward with statutorily sufficient

       reports. The clear purpose of the provision is to insure that the court

       adjudicates disability based upon a reliable evaluation of the

       subject’s physical and mental status.

     In Williams v. Estate of Cole, 393 Ill. App. 3d 771,779 (1^st Dist. 2009), the trial court also granted a respondent mother’s motion to dismiss her daughter’s petition for guardianship based on the medical reports of her doctor and a psychiatrist that respondent had no cognitive disabilities and was capable of making her own personal and financial decisions that were submitted in connection with the motion to dismiss.     In affirming the ruling and rejecting the petitioner’s contention that the trial court should have granted her motion to order an independent medical examination, the appellate court, relying on the reasoning of the Silverman Court, stated: “Such a report is not necessary… where respondents come forward with ‘statutorily sufficient reports’”

    Similarly, in Hanley v. Hanley, 2013 Ill. App. Lexis 599, 995 N.E. 2d 596 (3^rd Dist. 2013) both the trial and appellate court rejected the petitioner’s contention that under Section 11a-9 (b), the court was required to order evaluations of his respondent father, where no report had been submitted with the son’s guardianship petition. In so ruling the Court relied on the reasoning from both In re Estate of Silverman, supra, and Williams v. Estate of Cole, supra. Accordingly, the Hanley Court granted the father’s Section 619 motion to dismiss the guardianship petition based on the medical reports and doctors’ affidavits, which the father had submitted from his treating neurologist and physician. 2013 Ill. App. Lexis 599 *pp. 16, 20, holding that the son had failed to rebut the affirmative matter presented his father. The Court reasoned that in light of the statutorily sufficient medical reports submitted by the respondent, he should not be subjected to “further unwarranted mental and physical evaluations”. Id. p. 67.

   What these cases indicate is that a guardianship petition may not be able to get beyond the pleading stage where a medical report is not submitted with the guardianship petition and the putative disabled person both objects to the petition and files a physician’s report that the respondent is not disabled within the meaning of the Probate Act and a guardianship is unnecessary.

IV. Additional Findings Required for Appointment of A Guardian

      Even where a person meets the statutory definition of being a “disabled person”, before a guardian for the person is appointed, section 11a-3(1) and/or (2) (735 ILCS 5/11a-3(1) or (2)) respectively require a showing by “clear and convincing evidence that “the disabled person lacks [the] capacity to [either]… make or communicate responsible decisions concerning the care of his person” and/ or… “is unable to manage his estate or financial affairs.” 

     As the court pointed out in In re Estate of Mackey, 85 Ill. App. 3d 235, 238 (3^rd Dist. 1980), even though an individual “may be a disabled person, in the statutory sense of not being fully able to manage his person, a guardian is not therefore permissible or appropriate if that person is capable of making and communicating responsible decisions concerning the care of his person. … Similarly, a person might be a disabled person but nevertheless not be in need of a guardian over his estate, because with help from others he is able to direct and manage his affairs and estate”. Accord: In re Estate of Galvin, 112 Ill. App. 3d 677, 681 (1^st Dist. 1983) See also: In re Estate of Hickman, 208 Ill. App. 3d 265, 276 (4^th Dist.1991).

     In re Estate of Fallos, 386 Ill. App. 831(4^th Dist. 2008) involved an individual who had been left partially paralyzed and wheel-chair bound as a result of a serious automobile accident. Years after a plenary guardian had been appointed, the disabled person sought to terminate the plenary guardianship, which the trial court did not do. In reversing the trial court’s ruling, the appellate court reasoned at 386 Ill. App. 3d 839 that: “Plenary guardianship is not appropriate where the respondent is capable of ‘intelligently direct[ing] others to perform tasks for him.” McPeak, 53 Ill. App. 3d at 136…. A person could be completely paralyzed and in need of 24-hour care over his person, yet, if he could intelligently direct others concerning the care of his person, plenary guardianship would not be appropriate.” (Citing to both In re Estate of Mackey, supra, and In re Estate of McPeak, supra). In Fallos, even though the ward could not wash, feed, or move himself, he was able to make and communicate responsible decisions concerning his personal care, and therefore, was not in need of a plenary guardian. In rendering its decision the Fallos Court specifically referred at 386 Ill. App. 3d 840 to 11a-3(a)(1)’s  “relatively high standard to appoint a guardian” by requiring “that the ward’s inability to make or communicate decisions regarding the care of his person … be proven by ‘clear and convincing’ evidence….”

V.    Is a Plenary Guardianship Required or Will a More Limited

         Guardianship of the Person and/or Estate Suffice

      As discussed in Section I of this memorandum, Section 11a- 3(b) of the Probate Act expressly provides that: “Guardianships shall be utilized only as is necessary to promote the well-being of the disabled person, to protect him from neglect, exploitation, or abuse, and to encourage development of the maximum self-reliance and independence. Guardianship shall only be ordered to the extent necessitated by the individual’s actual mental, physical and adaptive limitations.”   As also previously stated, under current guardianship law, a guardianship is supposed to be tailored to the needs of the disabled adult.  Pursuant to 755 ILCS 5/11a-12, entitled “Order of Appointment” and pertinent case law, a plenary guardianship may only be ordered under section 11a-12(b) where an individual is found to be “totally without capacity.” Where an individual is found “to lack some but not all … capacity…, and if the court finds that guardianship is necessary for the protection of the disabled person, his or her estate, or both, the court [is supposed to] appoint a limited guardian for the respondent’s person or estate or both,” as appropriate under the circumstances. (755 ILCS 5/11a-12(b)).See: Marby v. Roberts, 281 Ill. App. 3d 76, 87 (4^th Dist. 1995)

     The care which courts exercise in setting the scope of a guardianship is indicated in In re Estate of Barr, 142 Ill. App. 3d 428, 434 (1^st Dist. 1986) where the trial court’s order for appointment of a plenary guardian was reversed. In Estate of Barr, supra, the appellate court determined that while the respondent “has some mental peculiarities and he has selected a life style that would easily be described as eccentric,” the appellate court could not say that he was “unable to manage his person.” Accordingly, the appellate court remanded with instructions to appoint a limited guardian of the estate, restricted to managing the respondent’s share of his father’s estate.

    Similarly, in In re Estate of Fallos, 386 Ill. App. 3d 831,839 (4^th Dist. 2008), the appellate court reversed an order appointing a plenary guardian where a physically disabled adult was not totally without capacity as is required for the appointment of a plenary guardian under section 11a-3. In so ruling the court cited to In re Estate of Bennett, 122 Ill. App. 3d 756, 671-672 (2^nd Dist. 1984) where an individual had physical limitations but was not incapable of knowing what he wants to do”, and merely needed assistance in caring out his desires. Accordingly, the Bennett Court determined that a limited guardianship was more appropriate than a plenary guardianship, and furthered the statutory purposes of providing the least restrictive guardianship allowed under the circumstances. In contrast to the above cases, in In re Estate of Hickman, 208 Ill. App. 3d 265,278 (4^th Dist. 1991), the appellate court reversed the trial court’s ruling which held that respondent only needed a guardian for her estate. Based on evidence that respondent suffered from “impaired memory”, was “prone to confusion and disorientation,” and was “unable to make [appropriate] personal grooming decisions,” the appellate court remanded for the appointment of a guardian of the person, as well as for the estate.

VI.       Issues with respect to Guardianships for a Disabled

   Adult’s Person

    Clear and convincing evidence that a mental or physical condition has rendered an individual unable to make or communicate responsible decisions regarding his or her personal care must be shown before a personal guardian will be appointed. The fact that a person has chosen an “eccentric” or peculiar life-style is not a basis for appointing a personal guardian. Estate of Galvin, supra, and Estate of Barr, supra.  On the other hand, a personal guardian was appointed for an “elderly woman with a heart condition who wears a pacemaker and must take medication regularly”, based on evidence that she suffer[red] from an impaired memory”, was “prone to confusion and disorientation” and was unable to make appropriate grooming decisions. In re Estate of Hickman, 208 Ill. App. 3d 265,276 (4^th Dist. 1991).

     Section 11a-17, entitled “Duties of personal guardian (755 ILCS 5/11a-17),” provides that the personal guardian has such duties as the court orders and is generally charged with custody of the ward and making provision for the ward’s personal needs, including “support, care, comfort, health, education and maintenance.” In the recent case of Karbin v. Karbin, 2012 Ill. Lexis 1011* pp. 32-33, 977 N.E. 2d 154(2012), in holding that a personal guardian had the authority to institute a marital dissolution action on a ward’s behalf, the Illinois Supreme Court ruled that a guardian is imbued with such powers as may be implied from the provisions of the guardianship statutes. In People v. Kenya C. (In re K.C.), 323 Ill. App. 3d 839, 849 (1^st Dist. 2001), the appellate court held that: “The decision making authority of a plenary guardian of the person under section 11a-17 is exceedingly broad.” Similarly, in In re Estate of D.W., 134 Ill. App. 3d 788, 791(1^st Dist. 1985), the Court held that section 11a—17 of the Probate Act of 1975 vests a guardian with broad authority to act in the best interest of the ward”, including the authority to authorize an abortion for the ward. Thus, In Estate of D.W., supra, the appellate court reversed the trial court’s order denying a mother’s/guardian’s request to consent to an abortion on behalf of her severely mental handicapped adult daughter/ward.

    The personal guardian’s authority extends to control over who has visitation with the ward. Struck v. Cook County Public Guardian, 387 Ill. App. 3d 867 (1^st Dist. 2008). In Struck, supra, 387 Ill. App. 3d at 871, the Public Guardian, who was the plenary guardian of the ward, had restricted visitation between the ward and her adult son, who “had a history of agitating his mother and interfering with the Public Guardian’s care plan for ‘the ward’.” Subsequently, the trial court entered a series of orders denying the son’s motions for visitation with his mother. Thereafter, the parties entered into an agreed order allowing the son supervised visitation with his mother at her nursing home, provided he not speak to with her “about her treatment plan or medication if it causes her distress” and “about leaving the nursing home.” Id. at 873. The son violated the agreed visitation order and the court entered another order barring visitation, which order the son appealed. The appellate court held at 387 Ill. App. 3d 876 that “we find no authority in the Probate Act providing [the son] with standing to assert a right to visit with [his adjudicated, disabled mother] and to challenge the guardian’s decisions on this point. As the Court further stated: “Article 11a does not contain any provision providing that relatives can request visitation or other matters concerning the ward.”

     Notwithstanding the broad powers with which a personal guardian is imbued, there are limitations on those powers. For example, 11a-17(c), expressly provides that where health care decisions of a ward are covered by an existing health-care power of attorney, the agent who holds the power has the authority to make those health-care decisions, unless a court enters an order directing the personal guardian to so act.

 Under section 11a-17, a personal guardian does not have authority to involuntarily commit his ward to a mental health facility; and any involuntary commitment must adhere to the procedures specified in the Mental Health and Development Disabilities Code. In re Gardiner, 121 Ill. App. 3^rd 7, 10 (4^th Dist. 1984); Accord: Muellner v. Blessing Hosp., 335 Ill. App. 3d 1079 (4^th Dist. 2002).

     In Muellner, supra, the trial court’s order provided that the State Public Guardian could place the ward, who allegedly suffered from chronic paranoid schizophrenia with delusions, in a skilled-care nursing facility if the guardian determined that a less restrictive alternative would cause the ward substantial harm. The State Public Guardian authorized the placement of the ward in a nursing home’s behavioral unit. The ward appealed on the basis that, under chapter III of the Illinois Mental Health Code (the “Code”— 405 ILCS 5/3-100 et. seq.), here placement in the nursing home’s behavioral unit could not be made without first proceeding with her involuntary commitment under the Code. The appellate court agreed and reversed the trial court’s order allowing for the questioned placement. In so ruling, the appellate court determined that the subject facility could be deemed “a mental health facility” under the Code (Id. at 1084). The Court further held, at 335 Ill. App. 3d at 1083, that under “Section 3-200(a) of the Mental Health Code (citation omitted) … ‘[a] person may be admitted as an inpatient to a mental health facility for treatment of mental illness only as provided in’ chapter III of the Mental Health Code.”

    Additionally, unless there has been compliance with the requirements of the Health Care Surrogate Act (the “HCSA”, 755 ILCS 40/1 et. seq.), a personal guardian does not have authority to forego life sustaining treatment for a disabled person who does not have a living will or health care power of attorney so providing.  Lower v. Murphy (In re Austwick), 275 Ill. App. 3d 665, 668 (1^st Dist. 1995). The HCSA presumes that every individual has decision making capacity (Id). Under the HCSA, in order for the guardian to forego life sustaining medical treatment for his ward, the disabled person’s attending doctor must make a written determination that the subject patient/disabled person lacks “decisional capacity” and has a qualifying condition as defined by the Act (Id).(See also? 755 ILCS 40/20 (b-5)(1)). A “qualifying condition” which is defined in the HCSA as being a “terminal condition”, “permanent unconsciousness” or an “irreversible condition” certified in the patient’s medical records by the attending physician and concurred in by at least one other physician. (Id). (See also: 755 ILCS 40/10)[7].

     In In re Austwick, supra, 275 Ill. App. 3d 669, the court determined that an adjudication that a person was “disabled” under the Guardianship Act, was not tantamount to a determination that a patient lacked “decisional capacity” as that term is defined in the HCSA[8]. The Austwick Court affirmed the trial court’s ruling terminating a Do Not Resuscitate Order approved by a personal guardian because there was no proof of a written determination by the ward’s attending that she lacked decisional capacity as required by the HCSA (Id at 669-670). Nor was there a written finding in the ward’s medical file from her attending physician certifying that she had a “qualifying condition,”, let alone a concurrence in such determination by another physician, both of which are also required under the Act where a guardian seeks to forego life sustaining treatment (Id at 670). The Austwick Court ruled because there had not been compliance with the requirements of the HCSA, the DNR order that was entered at the direction of the guardian was defective.

     Because personal guardians are fiduciaries of their ward (In re Swieckicki, 106 Ill. 2d 111, 118 (1985), wherever the law is unclear or a guardian’s decision could be deemed controversial, the guardian can and should seek court approval before taking action so as avoid possible personal liability. “[O]nce a person is adjudicated disabled, that person remains under the jurisdiction of the court, even when a plenary guardian of the person has been appointed. Struck v. Cook County Public Guardian, 387 Ill. App. 3d 867, 877 (1^st Dist. 2008). Moreover, section 11a-17 expressly provides that the guardian acts “under the direction” of the court.

   Section 11a-17(e) “sets up a dual standard [of decision making] where guardians of disabled adults must make decisions for their wards…” In re Estate of K.E.G., 382 Ill. App. 3d 401,418 (1^st Dist. 2008).

  First, if possible, the guardian is to apply the “substituted judgment” standard of decision in making a personal decision for the ward. Under this standard, the “guardian must make decisions on behalf of the ward that conform “’as closely as possible to what the ward, if competent, would have done or intended under the circumstances.’” Struck v. Cook County Public Guardian, 387 Ill. App. 3d 867,875 (1^st Dist. 2008) quoting In re Mark W., 228 Ill. 2d 365, 374 (2008) quoting 755 ILCS 11a-17(e); See also: Mabry v. Roberts (In re Mabry), 281 Ill App. 3d 76, 87(4^th Dist. 1996). In other words, “the guardian is to attempt to discern what the ward would have wished is she were competent, and then substitute that judgment for their own.” In re Estate of K.E.G., 322 Ill. App. 3d 401, 418 (1^st Dist. 2008) citing to In re Estate of Greenspan, 137 Ill. 2d 1 (1990). “If there is clear and convincing evidence to demonstrate the course of action that the ward would have taken if competent, then those wishes take precedence over any best interest analysis.” Estate of K.E..G. supra, 322 Ill App. 3d at 418.

      However, “[i]f the preferences of the ward are unknown and remain unknown after reasonable efforts to discern them, decisions shall be made on the basis of the ward’s best interest as determined by the guardian. Struck, supra, 387 Ill. App. 3d at 875. Citing In re Estate of K.E.J., 322 Ill. App. 3d 401, 417-418 (1^st Dist. 2008) citing 755 ILCS 11a-17(e); See also: Mabry, supra, 281 Ill App. 3d at 87. While section 11a-17(e) provides criteria the guardian is to consider in making personal decisions for the ward under the “best interest” standard, in Struck v. Cook County Public Guardian, the court stated at 387 Ill. App. 3d 875 that: “the guardian is to consider only the ward’s best interest, and not the interests of the ward’s family, of society, or of the guardian himself”.

VII.         Issues with respect to Guardianships for a Disabled

                Adult’s Estate

        Clear and convincing evidence that a mental or physical condition has rendered an individual “unable to manage his estate or financial affairs” must be proffered before a guardian of a disabled’s estate may be appointed. 755 ILCS 5/11-a 3(a) (2); Mabry v Roberts (In re Mabry), 281 Ill. App. 3d 76, 88(1995). The estate guardian has broad powers under 11a-18, including “the care, management and investment of the estate”; and the estate guardian “shall manage the estate frugally and shall apply the income and principal…, so far as necessary for the comfort and suitable support and education of the ward, his minor and adult dependent children, and persons related by blood or marriage who are dependent… upon… him”. (Id.) See also: Mabry v. Roberts, 281 Ill App. 3d at 88. Upon petition of the guardian, the Court may authorize the estate guardian to run the ward’s business and “perform the ward’s contracts, including execution and delivery of legal instruments.” Mabry, supra, see also 755 ILCS 5/11a-18 (b.)  With court permission, the guardian may also enter into contracts for the ward (11a-18 (a-5) (5)) and unless the court appoints someone else, it is the estate guardian’s responsibility to represent the ward in all litigation (11a-18(c), Mabry, supra, 281 Ill. App. at 82.

     Among a host of specified broad powers, under 11a-18 (a-5), with court approval, the estate guardian may seek authorization to make gifts of income or principal for the ward, convey, release or disclaim contingent and expectant interests in property, powers as a trustee or personal representative, or as a donee of a power of appointment. “In ascertaining and carrying out the ward’s wishes the court may consider, but is not limited to, minimization of State or federal income taxes; and providing gifts to charities, relatives, and friends that would be likely recipients of donations from the ward”. (755 ILCS 5/11a-18(a-5)). In Zagorski v. Kaleta (In re Estate of Michalak), 404 Ill. App. 3d 75, 86 (1^st Dist. 2010) appeal denied 239 Ill. 2d 554 (2011), the appellate court held that: “[t]he trial court had the authority, pursuant to 11a-18(a-5), and particularly subsection 11a-18(a-5)11, to grant … the plenary guardian… the power to amend the terms of the trust…”

      Accordingly, the Zagorski appellate court affirmed the probate court’s order allowing the plenary (estate) guardian of a disabled adult to amend the ward’s revocable trust to both remove and replace the designated successor trustees, the Kaletas, who were former neighbors of the disabled adult and had both assisted and visited with her over the years, with the plenary guardian, a niece of the ward,  Zagorski, “who had limited contact with [the ward] over the years” (404 Ill. App. 3d at 97), and to remove and replace the neighbors, who were the remainder beneficiaries of the trust, with the niece guardian as the remainder beneficiary of the ward’s trust.

    The Zagorski appellate court approved of the trial’s courts order amending the ward Michalak’s revocable trust on the estate guardian’s motion, despite the fact that: (1) section 11a-18-(d) expressly provides, in pertinent part, that “[a] guardian of the estate shall have no authority to revoke a trust this is revocable by the ward”; and (2) section 11a-18   (a-5) 11, which arguably limits the right of a guardian to “modify[] by means of codicil or trust amendment the terms of the ward’s will or any revocable trust created by the ward, as the court may consider advisable in light of changes in applicable tax laws.”

    The Zagorski appellate court reasoned, at 404 Ill App. 3d 84-86, that when the limitation in section 11a-18 (a-5) 11 was read in the context of the entire 11a-18 (a-5) subsection, it should not be construed as restricting the probate court’s right to  approve a guardian’s proposed amendment to a ward’s trust. The decision greatly expands the guardian’s power over a ward’s estate plan and is intended to prevent abuse from those who would exploit a disabled person. However, the decision raises serious questions, as it may give an estate guardian the power to override and thwart a ward’s donative intentions and testamentary plan. This concern is heightened because, in an area where most “dispositive” facts must be proven by “clear and convincing” evidence, the Zagorski court held, at 404 Ill. App. 3d 96, that the guardian need only prove its factual basis for amending a revocable trust (and presumably a will) by the lesser “preponderance of the evidence” standard[9]. Given that disabled adults are vulnerable and predisposed to outside (undue) influence and suggestion, a higher evidentiary standard might be expected before a guardian is authorized to modify trust or will provisions.

           In  Zagorski, the court credited the guardian and guardian ad litem’s testimony over the testimony of the Polish-speaking attorney, who had initially prepared the subject trust and testified that he believed that the ward, Michalak, “did not have diminished or insufficient capacity and understood everything [the attorney] explained during their two consultations.” (404 Ill. App. 3d 78)[10]  In Zagorski, the court appears to have believed that the ward, Michalak, retained some “decisional/ dispositional” capacity despite having been adjudicated as disabled, which may be why the court gave “credit” to the testimony of the guardian and guardian ad litem.

         The facts of JP Morgan Chase Bank, N.A. v. Wemple, 396 Ill. App. 3d 88 (1^st Dist.  2009) better illustrate the reasons for allowing guardians, under the strict control of the courts, to amend and/or revoke provisions of trusts and wills under the court’s strict supervision. In Wemple, in February 2004, Henry, who was then 89 years old, and who was adjudicated as disabled slightly more than 2 years later in April 2006, purported to execute a new will leaving most of his five million dollar estate to his caretaker “Mick”, and his executor, Wemple (the “2004 Will”). At some point, in a separate action, the caretaker was held to have breached his fiduciary duties to Henry and to have engaged in a scheme to misappropriate large sums of money from Henry, who was found to be mentally infirm and unable to protect himself (“Henry 1”) While Henry 1 was pending, Henry’s guardian petitioned the probate court to replace the distributive provisions of Henry’s 2004 Will with a Codicil that mirrored the disposition provisions of Henry’s prior 1999 Will that the guardian alleged Henry’s true testamentary wishes. In addition, the guardian proposed a trust agreement that contained a number of features that benefited Henry including providing for payments for Henry’s care during his lifetime. The probate court approved the action and a subsequent appeal was dismissed on the basis that Wemple and the caretaker did not have standing to contest the guardian’s action because they merely had unenforceable expectancies under the replaced dispositive provisions of the 2004 Will.

VIII.  Disputes Over Who Should be Appointed Guardian

     Formal statutory requirements to be qualified as a guardian are minimal. Individuals can qualify as a guardian if the person is over 18 and a United States resident, who has not been adjudicated as disabled, is of sound mind and has never been convicted of a felony. 755 ILCS 11a-5(a). You don’t even have to be an Illinois resident to qualify as a guardian. Doyle v. Doyle (In re Estate of Doyle), 362 Ill. App. 3d 293, 304 (4^th Dist. 2005) appeal denied, 218 Ill. 2d 539 (2006).

    Pursuant to755 ILCS 11a-5(b):  “Any corporation qualified to accept and execute trusts in Illinois may be appointed guardian of the estate of a disabled person”; See: Howse v. Johnson (In re Estate of Johnson), 303 Ill. App. 3d 696, 704-705 (1^st Dist. 1999). “A parent of a disabled person may designate a person, corporation or public agency qualified under Section 11a-5 [755 ILCS 11a-5(a)], to be appointed as guardian or successor guardian of the person or of the estate or both.” 755 ILCS 11a-16.

     The appointment of a guardian is in the discretion of the court. In exercising that discretion, the court is supposed to give “due consideration” to the preference of the disabled person and to consider “the qualifications of the proposed guardian, in making its appointment.” 755 ILCS 5/11a-12(d).[11] However, the appointment of a guardian is ultimately predicated on the “best interests” of the ward and which individual or entity will best serve and protect the ward’s interests  (In re Estate of Debevec, 105 Ill. App.3d 891, 896-897 (5^th Dist. 1990).

       Accordingly, in In re Estate of Bania, 130 Ill. App. 3d 36 (1^st Dist. 1984). the court rejected the disabled person’s choices as guardian for both the person and the estate In Bania, supra, 130 Ill App. 3d at 40, the court rejected the disabled person’s choice of her niece by marriage as guardian of her person. The court’s rejection was premised on its suspicions of the niece’s possible self-interest because she had made an unexplained trip to the disabled person’s bank and did not clear up those doubts by testifying at the hearing on appointment of respondent’s guardians. The court, at 130 Ill. App. at 41, also rejected the respondent’s choice of guardian for her estate, by appointing a retired policeman, who was the son of the respondent’s cousin, had repeated contact with the ward, already managed two apartment buildings and had the time to manage the ward’s estate including her apartment building. In contrast, the person whom the ward wanted as estate guardian did not testify at the appointment hearing.

      Similarly, family members are generally given preference over non-family members as guardians because “it is presumed that relatives are more solicitous of an incompetent’s welfare than a non-relative.” In re Estate of Debevec, 105 Ill. App.3d 891, 896-897 (5^th Dist. 1990) quoting from In re Conservatorship of Browne, 54 Ill. App. 3d 556, 559-560     (3^rd Dist. 1977). However, where the evidence shows that the best interests of the ward will be served by appointing a non-family member, the Court will make that appointment. For example, in In re Estate of Johnson, 219 Ill. App. 3d 962 (5^th Dist. 1991), the State Guardian was appointed as guardian over a family member that was removed as guardian, where: (a) two factions of the ward’s family were feuding over the family member’s expenditures on the ward’s home; (b) the ward did not want the family member as guardian; and (c) the Guardian Ad Litem believed that a non-family should be appointed as ward’s guardian. The court rejected the contention that the state guardian, who was an outsider, should not be appointed where there was a family member who was willing to serve as guardian.

     The degree of family relationship is a factor that the court will consider in appointing a guardian, but, like the other referenced “preferences” it is not a controlling factor. Thus, in Schmidt v. Schmidt, 298 Ill. App. 3d 682(2^nd Dist. 1998),where the husband had taken good care of his disabled wife, the court gave preference to his spousal relationship in appointing him as his wife’s guardian over the wife’s brother and their  sibling relationship. In so holding, the Court stated at 298 Ill App. 3d 691: “[T]he trial court could properly consider the degree and quality of the relationship between [the respondent] and the proposed guardian as one of several factors in making the appointment.”

     Unlike the situation in Schmidt, in Howse v. Johnson (In re Estate of Johnson), 303 Ill. App. 3d 696, 705-706(1^st Dist. 1999), the court rejected a father’s contention that he was entitled to a statutory preference over an aunt in the determination as to who would be guardian over his daughter. In making its ruling, the court took into account that the ward had lived with the aunt for a long period of time, had a loving and close relationship with the respondent, took good care of respondent and that the respondent wanted her aunt to be her guardian.

     In contrast, the father had periods where he did not regularly visit with his daughter and had been arrears in mandated health insurance premium payments for his daughter. At 303 Ill. App. 705, the Howse Court listed the following factors that may be considered in determining who should be appointed guardian: “recommendations of persons with kinship or familial ties, the relationship between the disabled person and the party being considered for appointment, conduct by the disabled person prior to being adjudicated disabled which manifests trust or confidence in the proposed guardian, prior actions of the proposed guardian which indicate concern for the well-being of the disabled person, the ability of the proposed guardian to manage the incompetent’s estate, and the extent to which the proposed guardian is committed to discharging responsibilities which might conflict with his or her duties as guardian.”

        As the above cases indicate, in choosing among available candidates for guardian, the court is to weigh the evidence as to which candidate(s) for guardian will best serve and protect the interests of the ward. Thus, in In re Estate of Bennett, 122 Ill. App. 3d 756,761 (2^nd Dist. 1984), the court choose a mother and sister of the disabled person as co-guardians over the ward’s wife. In Bennett, the disabled person had been living with his mother for over a year before the guardianship hearing and had been improving health-wise, whereas the wife had little contact with her husband during that extended period. The court rejected the wife’s contention that she should have been selected because she shared property with the ward. As the court reasoned at 122 Ill. App. 3d at 76: “the primary concern in the selection of a guardian is the best interest and well-being of the disabled person.” Accord: Doyle v. Doyle (In re Estate of Doyle), 362 Ill. App. 3d 293, 303 (4^th Dist. 2005): In re Estate of Johnson, 219 Ill. App. 3d 962, 965(5^th Dist. 1991). See also, In re Estate of Robertson, 144 Ill. App. 3d 701, 712 (1^st Dist. 1986),

     In In re Estate of Robertson, 144 Ill. App. 3d 701 (1^st Dist. 1986), a daughter-in-law was selected as guardian over a granddaughter. In making its choice, the Court noted that the granddaughter, who had been living with the respondent for a number of years, had made questionable expenditures on vacations from the ward’s funds and on properties she co-owned with the respondent. In making the guardianship appointment, the court stated at 144 Ill. App. 3d at 712 that: “The court may consider such factors as past actions and conduct of proposed guardians, business experience, ages, and family situations.” Accord: Schmidt v. Schmidt, 298 Ill. App. 3d 682, 690 (2^nd Dist. 1998), In Robertson, the court specifically noted that there was “ample evidence” to support allegations of the granddaughter’s bad faith in her dealings with her grandfather, including destroying accounts that the ward had with other family members and moving the money to an account the granddaughter had with the ward and spending his money for her benefit.

VIII. Issues Relating to the Guardian Ad Litem

        Section 11a-10 (755 ILCS 5/11a-10) entitled “Procedures preliminary to hearing” provides for the appointment of a guardian ad litem (“GAL”) to report to the court on the respondent’s best interests except where the court determines that such an appointment is unnecessary for the respondent’s protection or a reasonably informed decision on the petition for adjudication and appointment of a guardian. Section 11a-10 further provides that the GAL shall personally observe the respondent prior to the hearing on adjudication and shall inform him of the contents of the petition and his rights under the Probate Act. Additionally, under section 11a-10, the GAL is also supposed to attempt to elicit the respondent’s position concerning his or her adjudication as disabled and the proposed guardian and change, if any, in residential placement or other changes that may result from the placement. The GAL’s personal observations and discussion with the respondent should be included in the GAL’s report to the court on the GAL’s views as to whether the respondent is “disabled” within the meaning of the Act and whether, the Petitioner should be appointed as guardian.

       In In re Mark W., 328 Ill. 2d 365, 374 (2008), the Supreme Court stated: “A guardian ad litem functions as the ‘eyes and ears of the court’, and not as the ward’s attorney. (Citing Mabry v. Roberts, 291 Ill. App. 3d 76, 88(4^th Dist. 1996)). The traditional role of the guardian ad litem is not to advocate for what the ward wants, but, instead, to make a recommendation to the court as to what is the ward’s best interests.” (Citing Mabry v. Roberts, supra).The role of the guardian ad litem is thus in contrast to the role of the plenary guardian of the person appointed pursuant to the Probate Act. Under section 11a-17 of the Probate Act, the plenary guardian makes decisions on behalf of the ward, and must, in general conform those decisions ‘as closely as possible to what the ward, if competent, would have done or intended under the circumstances.” In contrast, the GAL acts solely to further the best interests of the ward.

      As the appellate court stated in Mabry v. Roberts, at 291 Ill. App. 3d 88: “The GAL represents the ward’s best interests (as the GAL sees them), not the ward…. If the GAL and ward are in agreement, the GAL does in effect represent the ward. However, the court must appoint separate counsel if the ward requests it or if the ward and GAL take different positions. 755 ILCS 5/11a-10(b) (2) (West 1994). … [Moreover, “[o]nce a guardian of the estate has been named, it becomes that entity’s responsibility to represent the ward in all litigation. 755 ILCS 5/11a-18(c) (West 1994).Thus, a GAL is only required prior to [and at] the hearing on the respondent’s competence, although a court may still appoint a GAL or next friend to represent the ward’s interest in subsequent litigation.” Id. at 88-89.

    In Zagorski v. Kaleta, 404 Ill App. 3d 75, 87 (1^st Dist. 2010), the appellate court affirmed a trial court’s appointment of a guardian ad litem, to investigate the circumstances surrounding the creation of a trust agreement for an elderly lady, who was eventually declared disabled, In so ruling the Zagorski Court stated: “a guardian ad litem may be appointed to represent the interests of the disabled person and is specifically authorized ‘to defend the interests of the ward in court’” The Zagorski Court further found that “the language of section 11a-18(c) is sufficiently broad on its face, allowing the appointment of a guardian ad litem to ‘commence, prosecute or defend any proceeding’.” (Emphasis in original.) (Id.)

    Furthermore as the court articulated in Mabry v. Roberts, supra, at 291 Ill. App. 3d at 89 “The GAL does not represent the ward in a normal attorney-client relationship, in fact the GAL need not even be an attorney. (Citation omitted.) No attorney-client privilege exists between the GAL and ward (Citation omitted.) The GAL’s duty is to serve the ward’s best interest, not to serve the ward.”

IX. The Uniform Adult Guardianship and Protective Proceedings

       Jurisdiction Act

     The Uniform Adult Guardianship and Protective Proceedings Jurisdiction Act (“UAGPPJA”, 755 ILCS 8/101 et. seq.) became effective in Illinois on January 1, 2010. The UAGPPJA is intended to provide an efficient and logical process for determining guardianships of guardianships where more than one state may have a connection to the putative disabled person.

    Over the past decades, there has been a significant increase in the number of seniors who have homes in more than one state and therefore, have significant connections with multiple states. Moreover, as the society becomes more mobile and families become more fragmented, instances where parents and children live in separate states have greatly increased.

      The Act fixes jurisdiction for a guardianship or an ancillary proceeding in the adult’s home state as defined in the act, followed by possible jurisdiction in another state or states where the putative disabled adult has significant connections as defined in the Act(755 ILCS 8/203).   The UAGPPJA defines the home state, in 755 ILCS 8/201(2) as “the state in which the respondent was physically present… for at least six consecutive months immediately before the filing of the petition for the protective order of appointment of a guardian….” The Act is intended to facilitate communication and cooperation between the courts of different states where actions involving a disabled person may have been initiated. (See: eg: 755 ILCS 8-104-106).

   At present, there are no reported Illinois cases under the UAGPPJA.

By Jeffrey C. Blumenthal. © All Rights Reserved.

 

A.   PREFATORY COMMENT

             Exculpatory or limiting provisions of a trust will protect a trustee from liability provided the trustee does not engage in willful misconduct, acts in good faith and/or without reckless indifference to the interests of beneficiaries. Accordingly, if a trust instrument specifically provides that the trustee will not be held liable for negligence or for failure to diversify the holdings or for allowing the trust to hold a specific percentage of stock in a given company, those clauses are enforceable in Illinois and will protect the trustee from liability.

             However, exculpatory clauses should be drafted with care. Because exculpatory provisions are strictly construed, the clauses on which the trustee relies must be broad enough to justify the conduct being challenged. On the other hand, where exculpatory clauses are drawn to completely absolve the trustee from liability, at least under certain circumstances, there is a risk that the over-breadth could cause the court to rule that the clause is unenforceable as a matter of public policy. Additionally, where a trustee has derived a “profit” from a breach of trust, an exculpatory clause will not preclude a court from requiring the trustee to disgorge the profit; and could lead the court to deny the trustee fees for services rendered.

              Finally, in order to protect himself from claims of intentional or reckless misconduct or bad faith, a trustee should keep a written record of the reasons why any given significant discretionary decision was made, as well as documentation of the steps the trustee took in making the decision. Where a trustee believes that a significant or controversial decision that needs to be made could lead to litigation against the trustee, the trustee may wish to petition the Court for instructions before making that decision. Including the Court in the decision should insulate the trustee from liability.

B.   EXCULPATORY CLAUSES ARE GENERALLY ENFORCEABLE

          Paragraph 1 of Section 3 of the Trust and Trustees Act (“Trustees Act”), entitled “Applicability” (760 ILCS 5/3) provides:

A person establishing a trust may specify in the instrument, the rights. powers, duties, limitations and immunities applicable to the trustee, beneficiary and others and those provisions where not otherwise contrary to law shall control, notwithstanding this Act. The provisions of this Act apply to the trust to the extent that they are not inconsistent with the provisions of the instrument.

             “Through 760 ILSC 5/3 “the legislature intended that the settlor [i.e., the grantor]of a trust have the freedom to direct his bounty as he sees fit, even to the point of giving effect to a provision regarding the rights of beneficiaries that might depart from the standard provisions of the Act, unless ‘otherwise contrary to law’. In re Estate of Feinberg, 235 Ill. 2d 256, 267, 919 N.E. 2d 888, 335 Ill. Dec. 863 (2009). The exercise of discretion by the trustee is not subject to interference by the court absent proof of fraud, abuse of discretion or bad faith.” Carter v. Carter, 965 N.E. 2d 1146, 1153 (1^st Dist. 2012) appeal denied 2012 Ill. LEXIS 837(2012).

             Consistent with the statutory directive, Illinois Courts have repeatedly held that: “Although exculpatory provisions . . . do not enjoy special favor in the law, if they are inserted in a trust instrument they are generally held effective except as to breaches of trust committed in bad faith or intentionally or with reckless indifference to the interest of the beneficiary.” Axelrod v. Giambalvo, 129 Ill. App. 3d 512, 517, 472 N.E. 2d 840,844 (1^st Dist. 1984); Accord: MAJS Investment, Inc. v. Albany Bank & Trust Co., 175 Ill. App. 3d 478, 488, 529 N.E. 2d 1035, 1037 (1^st. Dist. 1988); Jewish Hosp. v. Boatmen’s Nat’l Bank, 261 Ill. App. 3d 750, 767 (5^th Dist., 1994) appeal den’d 157 Ill. 2d 503 (1994) (Exculpatory clause in a trust relieved co-trustee bank from liability for alleged negligence characterized as a breach of fiduciary duty); Metz v. Independent Trust Corp., 994 F. 2d 395, 400 (7^th Cir. 1993)[1]; But See:  Hashim v. First Nat’l Bank , 1994 U.S. Dist. Lexis 2187*45 (N.D. Ill. 1994) ( Summary Judgment denied in case involving an exculpatory provision, where there were disputed issues of fact as to whether the trustee acted in bad faith and/or with reckless indifference to the beneficiary’s interest.)

          In Axelrod v. Giambalvo, 129 Ill. App. 3d 512, 517, 472 N.E. 2d 840,844 (1^st Dist. 1984), owners of a certificate of beneficial interest in a trust that owned two 26 story cooperative apartment buildings brought an action against the managing trustees for numerous alleged breaches of trust. The trial court granted judgment for the defendant trustees relying on trust provisions that gave broad authority to the trustees and especially on an exculpatory provision contained in section 4.10 of the trust that provided at 129 Ill. App. 3d 512 at 517:

“Neither the Managing Trustees nor the Trustee shall be liable for errors of judgment in exercising any of the powers or discretions conferred hereby, nor for failure to sue for or collect any money or property belonging to the Trust, nor for any act or omission to act performed or omitted by the Managing Trustee… , nor for the acts of any agent in good faith and reasonable care… The Managing Trustees … shall be fully protected in respect of any action under the agreement taken or suffered by the Managing Trustee… in accordance with the opinion of counsel and in acting upon any resolution, vote, declaration, request, demand, order, notice, waiver, appointment, consent, certificate, affidavit or statement, or upon any other paper or document believed to be genuine.”

 The appellate court in Axelrod further held at 129 Ill. App. 3d 512 at 517:

“In Illinois language expressly exempting or exculpating a trustee from personal liability, if contained in the instrument creating the trust, has …been recognized.”

          The Axelrod Court reasoned at 129 Ill App. 3d 512 at 517 that: “In purchasing their interest in the trust, plaintiffs impliedly acquiesced in the exculpation set forth in section 4.10”.

             In MAJS Investment, Inc. v. Albany Bank & Trust Co., 175 Ill. App. 3d 478, 482, 529 N.E. 2d 1035, 1037 (1^st. Dist. 1988), the Court relied on Axelrod to dismiss an action that a trust beneficiary brought against the land trustee for sending notice of a foreclosure action on the property to the husband of the sole shareholder of the trust beneficiary rather than to the sole shareholder of the beneficiary or the beneficiary itself. While the trial court found that there was a technical violation of the bank’s duty to give notice of legal process to the beneficiary, the trust agreement contained an exculpatory clause relieving the land trustee from liability. The clause in MAJS, supra at 481 provided that: 

             It is further understood and agreed that neither the Albany

             Bank & Trust Company, N.A. individually or as Trustee,

             nor as successor or successors in trust, shall incur any

             personal liability or be subjected to any claim, judgment or

             decree for anything it or they , or their agent or attorneys, may

             do or omit to do in or about the said real estate or under the

             provisions of said deed or deeds in trust or this Trust Agreement,

             or any amendment thereof, or for injury to person or property

             happening in or about said real estate or for any improvident

             conveyances, any and all such liability being expressly waived

             and released. (Emphasis in original).

             In MAJS Investment, Inc. v. Albany Bank & Trust Co., 175 Ill App 3d 478, 481, 529 N.E. 2d 1035, 1037 (1^st. Dist. 1988), the appellate court agreed with the plaintiff land trust beneficiary that “exculpatory provisions are strictly construed against the person seeking its protection[2].” Accordingly, a draftsman of an exculpatory clause needs to make sure that the terms of the provision are broad enough to permit the possible Trustee action or inaction that the settlor seeks to immunize. This was not a real issue in the MAJS case because as the court pointed out the exculpatory provision expressly applied to “claims made against the defendant for doing or omitting to do anything” (Id.) Therefore, there could be no ambiguity as to whether the omission at issue was covered by the exculpatory clause. In fact, the plaintiff might have had a better result had it argued that the exculpatory clause was so overbroad that it was contrary to public policy. Since the exculpatory clause provided for blanket immunity, there was at least a colorable argument that the clause should be rejected as an improper attempt to exclude liability for intentional misconduct and/or reckless indifference to the interests of the beneficiary. See: e.g. discussed infra: Vena v. Vena, 387 Ill. App. 3d 389, 394, 397-398 (2^nd Dist. 2008) appeal denied 231 Ill. 2d 688 (2009) (Striking a trust provision as “an improper method for exculpating the trustee for serious misconduct”).

             In Metz v. Independent Trust Corp., 994 F. 2d 395 (7^th Cir. 1993), plaintiff sued in connection with an IRA account he had opened at the direction of his investment advisor. Plaintiff had executed a number of documents in connection with the investment, including an authorization allowing plaintiff’s investment adviser to withdraw the amount the plaintiff deposited in the IRA. After the documents were executed by the plaintiff, the investment advisor came to the defendant’s office to withdraw the amount that the plaintiff had deposited. Before allowing the investment adviser to withdraw the funds, the defendant’s in-house counsel asked the plaintiff by telephone as to whether he permitted the transaction and plaintiff assured the in-house attorney that he wanted it to proceed. Shortly thereafter, the investment adviser absconded with the money. Plaintiff sued the trustee for breaching the prudent man rule in failing to ascertain the background of the investment adviser before releasing the funds to him. The trial court entered summary judgment for the trustee and the 7^th Circuit affirmed.

              The Seventh Circuit first reviewed the terms of the subject trust agreement and determined that the defendant “was a nondiscretionary trustee who was merely obligated to follow the directives of [the plaintiff] and/or his agent [the investment advisor].” (Metz, supra, at 398).

The Court also recited a “hold harmless” provision from the trust agreement that provided:

             “the grantor agrees to hold the Trustee harmless from all

              Liabilities and expenses incurred in connection with any

              actions taken or failures to act in reliance upon the Grantor’s

               or his authorized agent’s written instructions, designations,

               and representations, or in the exercise of any right, power or

             duty of the Trustee in good faith and with reasonable care.” (Id).

             The Court thereafter recited other “disclaimers, hold harmless provisions, and full acceptance of liability and responsibility” provisions contained in the various documents that the plaintiff had executed that were inconsistent with the plaintiff’s claims of fiduciary breach.

              Among other things, the Court rejected the plaintiff’s contention that exculpatory provisions in a trust agreement violated the “Prudent Man Rule” for trust investments and management contained in 760 ILCS 5/5 of the Trustees Act. To the contrary, the Court stated that paragraph 6(b) of Section 5 of the Trustees Act (760 ILCS 5/5(6) (b)) specifically allows the creator of the trust (the Settlor) to provide different investment rules to govern his/her/its “gift”. As the Metz Court recognized, paragraph 6(b) provides that: “The provisions of this Section [relating to investments] may be expanded, restricted, eliminated, or otherwise altered by express provisions of the trust instrument. The trustee is not liable for the trustee’s reasonable and good faith reliance on those express provisions.”

   Accordingly the court interpreted the statute “to mean that exculpatory clauses are compatible with the prudent person rule.” (994 F. 3d 400). The Court buttressed its ruling by reference to Axelrod and MAJS Investment where exculpatory clauses in trust agreements were upheld. (Id). The court concluded its ruling by stating at 994 F. 3d 400 that: “We are of the opinion that the Illinois Trusts and Trustees Act as well as case law mandate judicial enforcement of a clear and unambiguous  exculpatory clause in a trust agreement unless the claimant demonstrates ‘bad faith’ or ‘reckless indifference’ on the part of the defendant,”

             In Jewish Hosp. v. Boatmen’s Nat’l Bank, 261 Ill. App. 3d 750, 767 (5^th Dist., 1994) appeal denied 157 Ill. 2d 503 (1994) the Court held that an  exculpatory clause in a trust relieved  a co-trustee bank from liability for alleged negligence, which the plaintiff charitable corporate beneficiaries had characterized as a breach of fiduciary duty in their complaint.

             In Jewish Hosp., supra, the exculpatory clause provided that:

             I specifically absolve my Trustee from any responsibility for

              any loss which may result to the trust or to others in connection

             with the exercise of the powers granted, except responsibility for

              willful misconduct.

             Citing to MAJS Investment, supra, 175 Ill. App. 3d 481, which in turn quoted from the Axelrod case, the Jewish Hospital Court held at 261 Ill. App. 3d 767 that: “Although exculpatory provisions … are not given special favor in the law, they are generally held effective except as to reckless or intentional breaches or those committed in bad faith.”

C.   AT LEAST UNDER CERTAIN CIRCUMSTANCES, AN EXCULPATORY CLAUSE THAT PURPORTS TO EXCLUDE

INTENTIONAL OR RECKLESS TRUSTEE MISCONDUCT MAY BE DEEMEND CONTRARY TO PUBLIC POLICY AND UNENFORCEABLE

             There are limits to what an exculpatory provision can provide. In Vena v. Vena, 387 Ill. App. 3d 389, 394, 397-398 (2^nd Dist. 2008) appeal denied 231 Ill. 2d 688 (2009), the Second District Appellate Court held that a trust clause providing that “an approval of the trustee’s accounts by a majority of the ‘income beneficiaries’ would have the same effect as court approval of the accounts”[3] was unenforceable. The court concluded that such a clause was contrary to public policy because of the limitations it placed on redress for serious intentional or reckless trustee misconduct. Id. at 394.

             In Vena, the trustee had filed a declaratory judgment action asking that the court rule that his accounts were approved pursuant to a provision in the trust agreement, which provided that approval of his accounts by a majority of the trust’s income beneficiaries- which had occurred- had the same effect as court approval. One of the beneficiaries objected and filed a counter-claim alleging that Vena had breached his fiduciary duties as trustee. The trial court granted summary judgment for the trustee and dismissed the counter-claim based on the majority approval provision. The trial court supported its decision  by referring to Restatement 3^rd of Trusts, §83, Comment d, which noted that under certain circumstances, a trust agreement may provide “that the trustee need only account or submit reports to a designated person…, and that the approval of the trustee’s account or report by that person shall discharge the trustee from liability”. (Id. at 392-393).

             The appellate court reversed, without deciding whether a provision calling for submission and approval of a trustee’s accounts and reports to a designated person, who could then discharge the trustee from liability, would be valid under Illinois law (Id at. 393).  The appellate court held that the majority approval mechanism did not provide for sufficient oversight of the trustees’ accounts and reports because placing responsibility for such approval in the majority was too “diffuse” to provide any meaningful overview. The Court reasoned that the individual beneficiaries that constituted the “majority” might not inform themselves as to the contents of the trustee’s reports or accounts before approving them and might not be accountable to the other beneficiaries (Id. at 399). Additionally, the majority approval mechanism gave the trustee too much control over arranging who constituted the majority that approved his accounts and reports. Specifically, the court was concerned that the trustee could manipulate the process by picking those beneficiaries most likely to approve his reports and accounts to form the majority (Id. at 300-400). The court believed that the process could give a trustee an incentive to favor a majority of the beneficiaries, who would then approve his actions, to the possible detriment of the minority. Accordingly, the appellate court viewed the majority approval process as not protecting the rights of the minority beneficiaries from possible serious misconduct by the trustee.

             Relying on the limitation on trustee exculpation articulated in Axelrod, supra, and its progeny, the Vena Court stated at 387 Ill. App. 3d 397 that:

“We do not think that the majority- approval provision is an

 effective mechanism for holding a trustee to his or her duty.

Thus, the provision is an improper method for exculpating the trustee of serious misconduct—of acts done in bad faith, of intentional breaches of trust, or of breaches of trust committed with reckless indifference to the interest of the beneficiary.”

D.   CARE NEEDS TO BE TAKEN IN THE DRAFTING OF AN EXCULPATORY PROVISION

             The dicta from MAJS Investment case and the holding in the Vena case indicate that care needs to be taken in drafting a trustee exculpatory clause. Because exculpatory provisions are strictly construed, the provision must be broad enough to provide the protection from possible liability to the trustee that the grantor wishes to provide. On the other hand, in certain circumstances an over-broad clause is subject to being stricken.  In Vena it was the process by which the trustee’s accounts were exculpated that the court deemed improper. The Vena Court found the subject exculpatory clause bad to the core because the “mechanism” employed to exculpate the trustee was improper. Because there was no way to interpret the exculpatory provision in Vena in a fashion which eliminated what the court found was improper in the provision, it was stricken. In contrast a clause which purports to provide blanket immunity like the clause involved in MAJS Investment can be construed in a more limited fashion by the Court without “rewriting” the entire provision. However, because exculpatory clauses do not enjoy special favor, it behooves the draftsman not to draw an exculpatory clause so broadly as to purport to immunize the trustee from bad faith, willful misconduct or reckless indifference to the interests of the beneficiaries. There is no good reason to run the risk that a court might not “blue pencil” an overbroad provision and could hold such a clause as being contrary to public policy and unenforceable.

E.   AN EXCULPATORY CLAUSE WILL NOT PRECLUDE A COURT

FROM REQUIRING A TRUSTEE TO DISGORGE A PROFIT RESULTING FROM A BREACH OF TRUST AND COULD LEAD THE COURT TO DENY THE TRUSTEE FEES FOR SERVICES RENDERED REGARDLESS OF AN EXCULPATORY CLAUSE

       In Countiss v. Whiting, 306 Ill. App. 548 (1^st Dist. 1940), trustees apparently mistakenly paid income to a husband from the decedent’s trust that should have been paid to her children. The trial court entered a decree requiring the husband to return the monies he had received from the trust with interest and held that the trustees had waived their right to compensation for their services.      In affirming the holding, the appellate court rejected the trustee’s contention that they had no liability, because the trust contained a clause providing:

          The Trustees shall not be liable for any action taken by them

          in good faith and believed by them to be within the discretion or

        power conferred upon them by this agreement, nor for any loss

        unless the same shall happen through their own willful default.

    In making its ruling, at 305 Ill. App. 556,  the Court referred to the Restatement 1^st of Trusts, § 222 (2) and stated: “We hold a trustee who pays to himself funds due to other beneficiaries of the trust is not rendered exempt from action by such a provision.” Accordingly, by their conduct the trustees “waived payment for services”.  The Restatement 2^nd of Trusts, § 222 (2) provides in pertinent part that “A provision in the trust instrument is not effective to relieve the trustee… of liability for any profit which the trustee has derived from a breach of trust.” It appears that the trustee’s erroneous actions in Countiss were simply the result of mistaken judgment. However, recent cases have referred to Countiss v. Whiting, 306 Ill App. 3d 548 (1940), as being part of a group of cases that involved exceptional circumstances, including contraventions of public policy, instances of bad faith and intentionally committed breaches and acts performed in reckless indifference to the welfare of beneficiaries (Axelrod v. Giambalvo, 129 Ill. App. 3d 512, 516 (1^st Dist. 1984);   Hashim v. First Nat’l Bank , 1994 U.S. Dist. Lexis 2187*45 (N.D. Ill. 1994)). In any event, there is no reason to believe that an Illinois Court would disregard the above referenced holding of Countiss and the position of the Restatement 2^nd of Trusts, §222 (2) that a trustee will be required to disgorge any profit he receives as a result of a breach of trust regardless of an exculpatory provision. Similarly, even where an exculpatory clause may preclude holding a trustee liable for a loss, as the Countiss Court ruled, the Trustee may still be denied compensation for erroneous judgment or negligent actions or omissions. See also: Sauvage v. Gallaway, 335 Il. App. 3545 (4^th Dist. 1948) (“If a trustee has neglected his duties, exercised bad faith in the conduct of his trust, or committed a breach of obligation in any way, he forfeits his right to compensation.”)

F.    ADDITIONAL STEPS TO AVOID LITIGATION

      In an effort to make an end-run around trustee exculpatory clauses, beneficiaries are likely to characterize questionable trustee conduct as either being taken in bad faith or amounting to willful misconduct or reckless indifference to the beneficiaries interests. In Burke v. Dolan, 1993 Mass Super. LEXIS 22*14 (Mass. Super. 1993), the court held that “an honest error in judgment” did not constitute a “willful default” or bad faith. In Burke, supra, at 12, the Court held that “bad faith… imports a dishonest purpose or some moral obliquity, i.e., a conscious doing of wrong. It means a breach of known duty through some motive of interest or ill will. It partakes of the nature of ‘fraud’.” Similarly, in McDonald v. First National Bank of Boston, 968 F.  Supp. 9, 14-15 (D. Mass. 1997), the Court held that bad judgment– the trustees’ act in holding a stock investment for a longer time that might normally be considered prudent –could not be construed as reckless indifference to the interest of the beneficiary.

       As a matter of self-protection, a trustee should document and keep a written record of the reasons behind any significant discretionary decision taken and how the trustee went about making the decision, including any input he received from the beneficiaries, as well as his communications he had with the beneficiaries in making that decision.     

      Finally, when in doubt or where the trustee is faced with a significant or controversial decision that the trustee believes could lead beneficiaries to make claims against him, the trustee should consider petitioning the Court for instructions. If the Court assists the trustee in reaching a decision on a discretionary matter, the Trustee should be insulated from liability.  

By Jeffrey C. Blumenthal. © All rights reserved.

            The purpose of this article is to set forth who has standing to bring an action in Illinois against third parties for the preservation and protection of a private trust. As the article explains, in most instances and subject to certain rules, only trustees have standing to bring the action against third parties who are not themselves trustees of the trust. Except in the narrow circumstances articulated in this article, a beneficiary does not have standing to bring suit on behalf of the trust against third parties who are not trustees of the trust at issue.

            Beneficiaries, including beneficiaries of discretionary trusts and certain contingent beneficiaries, have standing to maintain an action against a trustee for defalcation of duty. However, a contingent beneficiary’s interest must be vested and not subject to a condition precedent at the time suit is filed for that contingent beneficiary to have standing.

            In order to file a lawsuit in Illinois, a party needs “standing.” Standing means that a party has (and alleges) some injury in fact to a legally cognizable interest. Lincoln Title Company v. Nomanbhoy Family Limited Partners, 2013 Ill. App. (3d) 120999*18, 2013 Ill. App. LEXIS 723*21-22, 999 N.E. 2d 748 (3^rd Dist. 10/16/13). “[T]he claimed injury, whether ‘actual or threatened’ (citation omitted) must be (1) ‘distinct and palpable’ (citation omitted); (2) ‘fairly traceable to the defendant’s actions’ (citation omitted); and (3) ‘substantially likely to be prevented or redressed by the grant of the requested relief’” (citation omitted). Greer v. Illinois Housing Dev. Auth., 122, Ill. 2d 462, 492 (1988). “[T]he purpose behind the standing doctrine is to ensure that plaintiffs have a ‘personal stake in the outcome’ sufficient to ‘assure the concrete adverseness which sharpens the presentation of issues upon which the court so largely depends for illumination of difficult … questions.’” Scanlan v. Eisenberg, 669 F. 3d 838, 846 (7^th Cir. 2012).

            In the context of trust law it is usually only the trustee who has standing to sue third parties on behalf of the trust. Pursuant to 760 ILCS 5/4 and 5/4.11, a trustee has the power “[t]o compromise, contest, prosecute or abandon claims or other charges in favor of or against the trust estate”. In Godfrey v. Kamin, 2000 U.S. Dist. LEXIS 18213*12 (N.D. Ill. 2000), the District Court interpreted this power as meaning that “a trustee is the one who has the legal right to sue, not the beneficiary” Citing: United States ex. Rel. Mosay v. Buffalo Bros. Management, 20 F. 3d 739, 742 (7^th Cir. 1994). See also: Pierce v. Johnson Electric Co., 117 Ill. App. 3d 867, 868 (1^st Dist. 1983) (citing prior statute) (“[A] trustee generally has the power in Illinois to bring suit on behalf of the trust”.); Weisberger v. Weisberger, 954 N.E. 2d. 282, 289 fn. 2(1^st Dist. 2011) (Trustee may bring suit for return of funds on behalf of a trust).  Sullivan v. Kodsi, 359 Ill. App. 3d 1005, 1010 (1^st Dist. 2005) (A trust “can sue or be sued through its trustee in a representative capacity on behalf of the trust”.)  Restatement 2^nd of Trusts, §280, is in accord with Illinois law and provides that the trustee can maintain an action against a third person such as the trustee could “if he held the trust property free of trust”.

            Pursuant to 760 ILCS 5/10, where the trust provides for more than two trustees, a majority must agree on an action before it can be taken.  Thus, in Madden v. University Club of Evanston, 97 Ill. App. 3d 330, 333 (1^st Dist. 1981), where one of four trustees brought suit to foreclose a mortgage, the court dismissed the claim. The trial court ruled that the individual trustee lacked standing and the appellate court affirmed because, where there are more than two trustees, Section 10 of the Trust and Trustee’s Act (the “Trustee’s Act”) requires a majority of trustees to agree on an action before it is taken. In Madden, a majority of the trustees expressly disagreed with the dissenting trustee’s action of bringing a foreclosure action in connection with the trust property. The majority believed it was in the interests of the beneficiaries to hold onto to the property as long as possible. The Court noted that under 760 ILCS 5/10, the dissenting trustee was protected from liability because the statute provide that “a dissenting trustee has no liability for the acts of the majority.” 

            However, if a clause in the trust instrument gives extra weight to the determination of one or more trustees, that clause should give the “favored” trustee(s) standing to act despite the provisions of Section 10 of the Trustee’s Act.  Section 3 of the Trustee’s Act (760 ILCS 5/3) allows the settlor “to specify in the [trust] instrument the rights, powers, duties, limitations and immunities applicable to the trustee, beneficiary and others and those provisions where not otherwise contrary to law shall control notwithstanding” any contrary provision of the Trustee’s Act. Therefore, a trust grantor should be able to vary the rule on when a specified trustee, who dissents from the majority, has standing to sue or otherwise act on behalf of the trust.  As the appellate court held in Carter v. Carter, 965 N.E. 2d 1146, 1153 (1^st Dist. 2012) appeal denied 2012 Ill. Lexis 837 (2012):

Through 760 ILSC 5/3 “the legislature intended that the settlor [i.e., the grantor] of a trust have the freedom to direct his bounty as he sees fit, even to the point of giving effect to a provision regarding the rights of beneficiaries that might depart from the standard provisions of the Act, unless ‘otherwise contrary to law’. In re Estate of Feinberg, 235 Ill. 2d 256, 267, 919 N.E. 2d 888, 335 Ill. Dec. 863 (2009). The exercise of discretion by the trustee is not subject to interference by the court absent proof of fraud, abuse of discretion or bad faith.”

            While governed by a different statutory provision, Northern Trust Co. v. Continental Illinois Nat’l Bank & Trust Co., 43 Ill. App. 3d 169 (1^st Dist. 1976) is a case in which the decision of a corporate trustee was given precedence over a contrary position of two individual trustees because of the terms of the will that created the charitable trust in question. Specifically, the Northern Trust Court approved a charitable trust distribution plan suggested by the corporate trustee over the plan proposed by two individual trustees, because a provision of the will that created the testamentary charitable trust gave extra weight to the corporate trustee’s decisions and required the corporate trustee’s concurrence before action proposed by the individual trustees could go forward.  In making its ruling, the Northern Trust Court stated that this provision of the instrument that created the trust took the case out of the purview of an Illinois statute that required a majority of charitable trustees to agree on an action before it was taken–except where the language of the trust agreement or instrument provided otherwise.

            Case law further indicates that where a trust instrument requires the appointment of a corporate trustee before a serving individual trustee can take action, an individual trustee does not have standing to independently file a lawsuit on the trust’s behalf. Godfrey v. Kamin, 62 Fed Appx. 693 (7^th Cir. 2003). Instead, that individual trustee would have to await the appointment and agreement of the corporate trustee before an action could be filed. Where a deadlock exists between trustees as to a contemplated action, any of the trustees may file an action with the Court to obtain resolution of the deadlock. Madden v. University Club of Evanston, 97 Ill. App. 3d 133 (1^st Dist. 1981); See also: Northern Trust Co. v. Continental Illinois Nat’l Bank & Trust Co., 43 Ill. App. 3d 169 (1^st Dist. 1976)

            The general rule that beneficiaries lack standing to bring an action against third parties other than the trustee to protect the beneficiaries’ rights in the trust is highlighted by the decision in Axelord v. Giambalvo, 129 Ill. App. 3d 512, 519 (1^st Dist. 1984). In Axelrod, supra, the court held that trust beneficiaries had no standing to pursue derivative actions against former trustees where the successor trustees determined the costs of suit outweighed the potential recovery. The Court buttressed its ruling on Restatement 2^nd of Trusts, §282 (1) (1959) and Comment (e) to that section. Section 282 provides that in those situations where a trustee can maintain an action against a third party if the trustee held the property free of the trust, the beneficiary cannot maintain an action except in two limited situations set forth in two limited, inapplicable situations set forth in §282 (2) and (3). Comment (e) to the section provides that if the trustee properly exercises his discretion to not pursue litigation against a third party, the beneficiary has no right to maintain the action.

            Both §282 (2) and (3) of the Restatement (Second) Trusts,  reflect the limited circumstances under which beneficiaries have a right to bring an action against third parties (other than the trustee) to protect their interests in a trust. Pursuant to §282 (2) of the Restatement 2^nd of  Trusts (1959), “if the trustee improperly refuses or neglects to bring an action” against a third party on the trust’s behalf, then then the beneficiary may maintain an action against a third party and the trustee to protect the beneficiary’s trust interests. Pursuant to §282 (3) the beneficiary may also bring an action against a third party to protect the beneficiary’s interest in the trust where there is no serving trustee or the trustee cannot be subjected to the court’s jurisdiction.

            In the recent case of Tipsword v. I.D.F.A. Servs., 2011 U.S. Dist. LEXIS 71380 *18-21 (S.D. Ill. 2011), a District Court held that a beneficiary of a trust fund had standing, individually and as a class representative, to sue both the former trustee for breach of fiduciary duty, as well as third parties who were alleged to have knowingly aided and abetted the breach of fiduciary. In Tipsword standing existed based on the allegations that “the trustee of [the] trust is itself involved in culpable misconduct against the trust, necessitating the bringing of an action by a beneficiary of the trust. (2011 U.S. Dist. LEXIS 71380*18). The Tipsword Court quoted with approval to that portion of Section 869 in Bogert, Bogert & Hess, The Law of Trusts and Trustees (3d ed. 2000 & Supp. 2010) which provides:

            If the trustee refuses to bring the action, after demand, or fails to

            act, or the trusteeship is vacant, or the trustee has been absent for

            many years, or the trustee has an adverse interest, or has conspired

            to defeat the trust, or the trustee is held to be estopped to sue the

            third party, the beneficiary may bring the action against the third

person. The necessities of the case entitle the beneficiary to proceed directly. (2011 U.S. Dist. LEXIS 71380 *18-19).

            The court’s comments in Ready v. Ready, 33 Ill. App. 2d 145 (1^st Dist. 1961) also confirm that a trust beneficiary has standing to pursue litigation against a third party to protect the beneficiaries interest in the trust where a trustee improperly refused to bring such an action after the beneficiary’s demand. In Ready, the decedent left farm property to his wife and descendants through a testamentary trust. One of the trust beneficiaries brought a class action seeking an accounting purportedly on behalf of all the beneficiaries against an agent of the trustee. The agent argued that the beneficiary lacked standing and the Court held that:

            Only a person occupying the position of trustee can be required to

            account as such. 35 ILP Trusts, se. 202. If the trustee refuses to

            bring the action after demand, or refuses to act, the beneficiary

            may bring an action and the trustee, parties’ defendant. Bogart,

            Trusts and Trustees, vol. 4, part 1, sec. 870. The complaint in this

            case did not allege any demand on the Trustee nor any refusal on

the part of the Trustees to act. Ready, supra at 152 (Emphasis added).

            Although a trust beneficiary usually has standing to sue his trustee for breach of trust duties, where the beneficiary’s interest is contingent that interest must be “vested” for standing to exist. In other words, the contingent interest that is being relied upon to confer standing must be in existence at the time a law suit is filed and that interest is asserted as the basis for standing. If the contingent interest is dependent on the occurrence of a future event in order to come into existence–the future fulfillment of a condition precedent—there is no standing. While there are a number of Illinois cases that use expansive language in holding that even remote and contingent interests are sufficient to confer standing, in each of those cases, the contingent interest actually at issue was in existence at the time suit was filed and plaintiff’s standing was being challenged

            For example, in Barnhart v. Barnhart, 415 Ill. 303, 323 (1953), the Supreme Court held that “heirs at law”, who were contingent remaindermen of a decedent’s testamentary trust, had standing to seek an accounting from the trustees to preserve and protect their remainder interests in the trust property. In so ruling, the Supreme Court stated, at 415 Ill. 303 at 323, that “a contingent remainderman should not be denied the right to bring an action against the trustees … merely because his interest is remote and contingent….” While the Court’s language in Barnhart was broad, the plaintiffs’ contingent remainder interest in that case was fixed and in existence at the time the lawsuit was filed.

            In Burrows v. Palmer, 5 Ill. 2d 434 (1955), plaintiffs, contingent remaindermen, alleged that a trustee failed to transfer title of decedent’s apartment building to a trust as provided for in the residuary clause of the decedent’s will. The plaintiffs, sought a decree that the trustee held legal title to the real estate in his capacity as trustee, that the trustee be required to transfer title to a co-trustee, and that the Court retain jurisdiction of the trust to control the trust’s future administration. The Burrows Court stated at 5 Ill. 2d 434 at 440-441 that: “[A]lthough their interest is contingent and may not vest in possession…plaintiffs were entitled to maintain th[eir] action in equity in order to establish the trust in said property and to secure other relief necessary to protect and preserve said inheritance for the eventual owners.”  While it is true that the contingent remaindermen in Burrows were not assured of ever possessing the trust property, the contingent remaindermens’ rights were fixed at the time the lawsuit was filed and not dependent on some future event in order to come into being. 

            Similarly, in Giagnorio v Torkelson Trust, 292 Ill. App. 3d 318, 324 (2^nd Dist. 1997), the Appellate Court held that one contingent remainder beneficiary had standing to bring an action seeking to vitiate a trustee’s sales agreement with another contingent remainder beneficiary because the sale endangered the plaintiff’s interest in the trust. Like the above cases, in Giagnorio, the plaintiff’s contingent remainder interest in the trust was fixed and vested at the time suit was filed.

            In contrast to the above cases, in Schlosser v. Schlosser, 247 Ill. App. 3d 1044 (1^st Dist. 1993), the Court held that plaintiffs had no standing to set aside their grandmother’s 1981 inter vivos trust. The plaintiffs claimed that they had standing based on their grandmother’s 1976 will, which had been revoked by a 1981will. The Court found that the 1976 will did not provide standing because the grandchildren’s potential interests under that will were subject to condition precedents that had not been fulfilled at the time suit was filed.

            Specifically, in order for the grandchildren to receive trust benefits under the 1976 will, the plaintiffs had to be living at the time their father died. Because their father was still alive at the time the suit was filed, it was uncertain whether the condition precedent for the plaintiffs’ interest would be fulfilled and therefore, there was no standing.

The testamentary trust created by the grandmother’s 1976 will also provided for the possibility of discretionary support payments to the grandchildren. However, the court ruled that because such payments were subject to the discretion of the trustee, the discretionary interest was insufficient to confer standing to sue.  In so ruling, the court reasoned that whether the trustee’s would exercise his discretion to make such support payments constituted a condition precedent that “made it uncertain that the event necessary for vesting will occur.” (247 Ill. App. 3d at 1047) The court’s ruling on this point confuses the vesting of the right to possibly receive discretionary support payments, which occurred when the plaintiffs’ grandmother executed the instrument creating the trust, with the actual receipt of discretionary support payments, which was uncertain and dependent on the appropriate exercise of the trustee’s discretion in the future. In fact, in the recent case of Scanlon v. Eisenberg, 669 F. 3d 838, 843 (7^th Cir 2012) the Seventh Circuit ruled that the beneficiary of a discretionary support trust had standing to bring an action for breach of trust.

  The distinction between a vested, contingent interest that provides standing and an expectancy subject to a condition precedent that does not provide standing, was also addressed in Zagorski v. Kaleta (In re Estate of Michalak), 404 Ill. App. 3d 75 (1^st Dist. 2010). In Zagorksi, supra, Michalak, an elderly and possibly mentally disabled person, designated her neighbors, the Kaletas, as remaindermen of her trust.  Michalak’s niece, Zagorski, was subsequently appointed as Michalak’s guardian. After her appointment, Zagorski petitioned the court to amend the trust and eliminate the Kaletas as the trust remainderman and designate herself as the trust’s remainder beneficiary. The court approved Zagorski’s motion and the Kaletas appealed. In holding that the Kaletas had standing to challenge the trial court’s ruling, the appellate court noted at 404 Ill. App. 3d 75 at 84, “ the absence of any condition precedent to the Kaletas acquiring an interest in the real estate upon execution of the trust. Their enjoyment of the property would immediately materialize upon Michalak’s death, subject to no other conditions.” The court went on to note that “the Kaletas had an equitable remainder interest, which vested immediately upon the creation of the trust, and, therefore, they have standing to appeal the circuit court’s order”.

            The Restatement 3^rd of Trusts, §94 further provides that co-trustees, successor trustees and other persons who are acting on behalf of one or more beneficiaries have standing to sue a trustee for breach of duty. The Comment to 1(d) to §94 of Restatement 3^rd of Trusts indicates that if a trust beneficiary is under an incapacity suit may be brought by his personal fiduciary, whether natural or legal guardian or conservator or agent acting under a durable power of attorney.

            Comment to 1(d) to the above Restatement section further provides that a “settlor may reserve or confer upon others to enforce the trust. The holder of such a power has standing, on behalf of the beneficiaries to bring suit against the trustee, although the power does not prevent a beneficiary from acting on his or her own behalf”. The same comment recognizes that the “terms of a trust may reserve to the settlor or confer upon others a fiduciary power… to control or advise the trustee… or amend the trust. … Such a power enables the holder to sue on behalf of the beneficiaries, but only to enforce the trustee’s duties… with regard to that power.” For example, under 760 ILCS 5/§16.3, a trust protector, acting with respect to matters placed within the trust protector’s purview by the subject trust instrument, would have standing to sue the trustee.  

            Finally Comment to 1(d)(2) to §94 of Restatement 3^rd of Trusts provides that the Settlor of the Trust, in his capacity as such, does not have standing to maintain a suit against the trustee for breach of trust, absent state legislation to that effect. 

                                             By Jeffrey C. Blumenthal with Dan Felix © Reprinted by permission of 
                                             the Chicago Trustee Collaboratory

Introduction:

Attorneys Marshall Eisenberg and Earl Melamed of the large Chicago law firm Neal, Gerber and Eisenberg are/were tax and corporate attorneys for some of Chicago’s wealthiest families, such as the Pritzkers and their corporate entities, including the Hyatt Hotel System. As an apparent accommodation for their clients, and as a source of business for themselves and their law firm, Eisenberg and Melamed, began a Trust Company, known as General Trust Company, to act as a trustee for trusts, some or all of which were set up by their clients for themselves and their children. The case of Scanlon v. Eisenberg (caselaw.findlaw.com/us-7th-circuit/1592006.html ) discussed below indicates the legal pitfalls that a Corporate Trustee can face when the owners and officers of the Trustee play other, arguably conflicting, roles at the same time they are acting on behalf of the Trustee.

Summary of Scanlan v. Eisenberg, 669 F. 3d 838 (7^th Cir. 2012).

I.                   Facts

THE FAMILY, THE FAMILY BUSINESS & THE TRUSTS: Mary Bucksbaum Scanlan  (“Scanlan”) is the 44 year old daughter of Martin Bucksbaum, who, along with his brother, started General Growth Properties, Inc. (“GGP”), which develops shopping centers and became one of the largest Real Estate Investment Trusts (“REITS”) in the United States. GGP is traded on the New York Stock Exchange. Mary lives in Denver, Colorado and is not involved in the business.

When Scanlan was a child, her father and uncle established 6 trusts (the “Trusts”) naming her as the primary beneficiary. The trusts authorized the corporate trustee, General Trust Company (the “Trustee”) to distribute “all or as much of the net income or principal” or “both” of the trusts to Scanlan “as the Trustee deems to be necessary for her support” or “in her best interests”. Mary is the only one eligible to receive distributions from the Trusts her lifetime. Scanlan’s children are contingent remaindermen.

THE LAWYER/TRUSTEE/OFFICER/STOCK HOLDER/BOARD MEMBER: Neal Gerber & Eisenberg, LLP (the “Law Firm”) through two of its partners, Marshall Eisenberg (“Eisenberg”) and Earl Melamed (“Melamed”) generally represented Scanlan throughout her adult life. At the same time Eisenberg and Melamed also represented both GGP and the Trustee. Eisenberg was also an officer (secretary) of GGP from April, 1993 through October, 2008. Both Eisenberg and Melamed owned GGP stock. Eisenberg and Melamed controlled General Trust Company, the Trustee of Scanlan’s Trusts. Eisenberg is the majority owner, its president, a member of its board of directors, and one of three members of its Trust Committee. Melamed serves on General Trust Company’s Board of Directors, serves as its’ corporate secretary and is the second member of its Trust Committee.

THE SET UP FOR THE LOSS:  In 2007 and 2008, the Trusts purchased hundreds of millions of dollars of additional GGP stock. These purchases were financed with loans secured by the pledge of the Trusts’ assets. At the time of these purchases, the Trusts were already heavily invested in GGP stock, which constituted over 65% of the assets of Scanlan’s Trusts. Eiseberg and Melamed approved the Trusts’ additional GGP stock purchases as officers and directors of the Trustees, and the Law Firm, together with Eisenberg and Melamed, provided legal advice with respect to the stock purchase transactions.

In, 2009, GGP declared, what was then the largest real estate bankruptcy ever filed.  Scanlan’s Trusts lost more than $200 million due to a drop in value of the GGP stock purchases in 2007 and 2008.

THE ALLEGATIONS OF WRONG-DOING: Scanlan brought suit against the Trustee, the Law Firm and the Lawyers, Eisenberg and Melamed, on behalf of herself and on behalf of her children as contingent beneficiaries. The suit alleged that the 2007 and 2008 stock purchases were not in her best interests or her children’s best interests, but instead were to further

  (1) her lawyers own interests in retaining GGP as a client;

(2) the interests of other Bucksbaum family members who managed GGP and who were also clients of the lawyers;

(3) Eisenberg and Melamed’s interests as GGP shareholders; and

(4) Eisenberg’s interest as Secretary of GGP.

Scanlan claimed the Trustee breached its fiduciary duties of loyalty, prudence and disclosure, when it purchased the GGP stock in 2007 and 2008. Scanlan sued the lawyers for breach of fiduciary duty, malpractice, aiding and abetting the Trustee’s breach of fiduciary duty. Scanlan sought equitable relief, including (1) restoration of the Trust Corpus; (2) the removal of the Trustee; (3) an accounting and books and records request; (4) modification of the trusts to provide her with the power to remove the Trustee; (5) the disgorgement of attorneys’ fees; and (6) punitive damages.

The district court dismissed Scanlon’s suit on the basis that Scanlan lacked standing to sue because she was a discretionary trustee. Scanlan appealed. The Appellate Court reversed the dismissal holding that Scanlan had an interest that had been damaged by conduct alleged in the Complaint.

II. THE APPELLATE COURT’S REVERSAL OF THE
     TRIAL COURT’ S DISMISSAL ORDER AND HOLDING
     THAT SCANLAN STATED A CLAIM THAT COULD BE PURSUED.

THE LEGAL ISSUE OF STANDING: The Trial Court dismissed the case because Scanlan was a “discretionary” beneficiary, who could show no “injury in fact” because the Trusts were still worth 800 million dollars even after the losses incurred in the 2008 recession. Accordingly, Scanlan could not show that the trust monies would ever be insufficient to fund either any potential “support” need or “best interests” payments that she might need. The trial court reasoned that Scanlan’s legally protected interest arose solely out of her status as a discretionary beneficiary. Since Scanlan could not show that the Trusts would ever have insufficient funds to make any discretionary payments due her, Scanlan could no show injury in fact and had no standing.

THE APPELLATE COURT FOUND STANDING: The Seventh Circuit disagreed and held that Scanlan had standing to bring suit. The Appellate Court held that the issue of whether Scanlan had standing to bring suit as the beneficiary of discretionary trusts depended on the law that defined the rights of a discretionary beneficiary. In the Scanlan case, was Illinois law governed the trusts and Scanlan’s rights thereunder. The Seventh Circuit noted that, pursuant to the Restatement (Third) of Trusts, a beneficiary had standing to enjoin a breach of trust and contingent beneficiaries and persons eligible to receive discretionary payments as beneficiaries were also deemed to have standing to sue.

    The Court further reasoned that a fiduciary relationship existed between the Trustee and Scanlon as a result of Scanlon’s status as a beneficiary. Accordingly, the Trustee owed Scanlon a duty of loyalty and the Trustee was charged to act with the highest degree of fidelity and good faith. The Court further held at 669 F. 3d 844, that  as a matter of Illinois law, “a contingent beneficiary can bring an action against the Trustee—even though his interest is remote and contingent—to protect his possible eventual interest, i.e., to protect and preserve the trust res.” The Court held that, in Illinois, “a trustee owes the same fiduciary duty to a contingent beneficiary as one with a vested interest insofar as necessary for the protection of the contingent beneficiary’s rights to the trust property.” Id.

   At 669 F. 3d 845, the Appellate court reasoned: “[N]o authority requires a discretionary beneficiary to first allege that the trust corpus is insufficient to fund a distribution when bringing a claim for breach of trust.”

As the Court stated at 669 F. 3d 846: “Here, Scanlan is the beneficiary of several discretionary Trusts, and under those Trusts, she is currently eligible to receive all of the Trusts’ corpus. We established that Scanlan, as a beneficiary, is owed a fiduciary duty and that she has an interest in ensuring that the Trustee discharge its duties with fidelity and a certain degree of care. The Trustee and her lawyers, Scanlan claims, breached those fiduciary duties, causing the Trust corpus to lose approximately 200 million dollars. Under these circumstances, the Trustee’s and Lawyer’s dereliction of their fiduciary duties is a direct invasion of Scanlan’s protected interest in the prudent and loyal administration of the Trusts. Scanlan has therefore suffered an injury sufficient to satisfy Article III’s case and controversy requirement.”

III.           Postscript:

According to a March 27, 2014 Chicago Tribune Article, Scanlan has just reached a Settlement with the defendants in the suit.  While General Growth has survived its bankruptcy, the Bucksbaum family no longer has any interest in the company. Another recent Tribune Article of March 30, 2014 indicates that Mary’s brother or cousin, John Bucksbaum, who was the former CEO of GGP, has started a new real estate company and is developing urban residential real estate. Both Articles and the full opinion summarized above are provided as supplements to this memo.

IV.           QUESTIONS:

1)   The case does not say whether the Trust agreements required the Trustee to diversify investments, what if the Settlor specified that diversification of investments was not required and/or the Trustee could decide on the percentage of GGP stock the trusts could hold?

2)   What if the Trust agreements excused the Trustees’ “negligence” or did not require the Trustee to act with prudence?  Are those exculpatory clauses enforceable? Should they be?

Answer:

   Exculpatory or limiting provisions of a trust will protect a Trustee from liability provided the trustee acts in good faith and/or without reckless indifference to the beneficiaries. Accordingly, if a Trust Instrument specifically provides that the trustee will not be held liable for negligence or for failure to diversify the holdings or for allowing the trust to hold a specific percentage of stock in a given company, those clauses are enforceable and  will protect the Trustee from liability. However, because exculpatory provisions are strictly construed, the clauses on which the Trustee relies must be broad enough to justify non-diversification or not adhering to an objective “prudent man” standard with respect to the trust assets.

    Section 5 of the Illinois Trust and Trustees Act, entitled “Investments” (760 ILCS 5/5) provides in relevant part in paragraph 1 that: “The trustee has a duty to invest and manage trust assets as a prudent investor would considering the purposes, terms, distribution requirements, and other circumstances of the trust”. Paragraph 3 further provides that: The trustee has a duty to diversify the investments of the trust, unless, under the circumstances, the trustee reasonably believes it is in the interest of the beneficiaries and furthers the purpose of the trust not to diversify.”

However, despite the above investment rules, paragraph 1 of Section 3 of the Trustee’s Act, entitled “Applicability” (760 ILCS 5/3) provides:

        A person establishing a trust may specify in the instrument, the rights,
      powers, duties, limitations and immunities applicable to the trustee,
      beneficiary and others and those provisions where not otherwise contrary
      to law shall control, notwithstanding this Act. The provisions of this Act
      apply to the trust to the extent that they are not inconsistent with the
     provisions of the instrument.

Through 760 ILSC 5/3 “the legislature intended that the settlor [i.e., the grantor]of a trust have the freedom to direct his bounty as he sees fit, even to the point of giving effect to a provision regarding the rights of beneficiaries that might depart from the standard provisions of the Act, unless ‘otherwise contrary to law. In re Estate of Feinberg, 235 Ill 2d 256, 267, 919 N.E. 2d 888, 335 Ill. Dec. 863 (2009. The exercise of discretion by the trustee is not subject to interference by the court absent proof of fraud, abuse of discretion or bad faith.” Carter v. Carter, 965 N.E. 2d 1146, 1153 (1st Dist. 2012) appel den’d 2012 Ill LEXIS 837(2012).

 Moreover paragraph 6(b) of Section 5 of the Trustee’s Act (760 ILCS 5/5(6)(b))specifically allows the creator of the trust (the Settlor) to provide different investment rules to govern his/her/its “gift”. Paragraph 6(b) provides that: “The provisions of this Section [relating to investments] may be expanded, restricted, eliminated, or otherwise altered by express provisions of the trust instrument. The trustee is not liable for the trustee’s reasonable and good faith reliance on those express provisions.”

In Carter v. Carter, 965 N.E. 2d at 1157-1158, the appellate court relied on this precise paragraph in holding that the Trustee, who also held a life estate in the trust, did not breach any fiduciary duties owed to her step daughter, who held the remainder interest, by investing solely in tax free municipal bonds. The Carter Court held at 965 N.E. 2d 1158, that the grantor of the Trust “gave the [Trustee] authority to invest in any property without regard to diversification and, as such, altered the requirements of the prudent investor rule.” 

Moreover, other  Illinois Courts have consistently held that:

"Although exculpatory provisions . . . do not enjoy special favor in the law, if they are inserted in a trust instrument they are generally held effective except as to breaches of trust committed in bad faith or intentionally or with reckless indifference to the interest of the beneficiary." Axelrod v. Giambalvo, 129 Ill App 3d 512, 517, 472 N.E. 2d 840,844 (1st Dist. 1984); Accord: MAJS Investment, Inc. v. Albany Bank & Trust Co., 175 Ill App 3d 478, 488, 529 N.E. 2d 1035, 1037 (1st. Dist. 1988); Jewish Hosp. v. Boatmen’s Nat’l Bank, 261 Ill. App. 3d 750, 767 (5th Dist., 1994) appeal den’d 157 Ill. 2d 503 (1994)(Exculpatory clause in a trust relieved Co-Trustee bank from liability for alleged negligence characterized as a breach of fiduciary duty); Metz v. Independent Trust Corp., 994 F. 2d 395, 400 (7th Cir. 1993).

As the Axelrod Court further held at 129 Ill App 3d 517:

    “In Illinois language expressly exempting or exculpating a trustee from
   personal liability, if contained in the instrument creating the trust, has
   also been recognized.”

See also: Restatement of the Law of Trusts, 3d, §96 and Restatement of the Law of Trusts 2d, §222, both of which indicate that a trust instrument may contain exculpatory provisions relieving a trustee of liability for breach of trust for instances of ordinary negligence.

However, because “exculpatory provisions are strictly construed against the person seeking [their] protection” (MAJS Investment, Inc. v. Albany Bank & Trust Co., 175 Ill App 3d 478, 488, 529 N.E. 2d 1035, 1037 (1st. Dist. 1988)), the Trustee needs to make sure that the trust provision on which the Trustee relies is broad enough to permit the conduct in question.

Furthermore, in Vena v. Vena, 387 Ill. App. 3d 389, 394,397-398 (2nd Dist. 2008)appeal denied 231 Ill. 2d 688 (2009), the Second District Appellate Court held that a trust clause providing that “an approval of the trustee’s accounts by a majority of the ‘income beneficiaries’ would have the same effect as court approval of the accounts” (387 Ill App 3d at 390) was unenforceable as contrary to public policy because of the limitations it placed on redress for serious intentional or reckless trustee misconduct. Id. at 394.

Relying on the limitation on trustee exculpation articulated in Axelrod, supra, and its progeny, the Vena Court stated at 387 Ill App 3d 397 that:

We do not think that the majority- approval provision is an effective mechanism for holding a trustee to his or her duty.Thus, the provision is an improper method for exculpating the trustee of serious misconduct—of acts done in bad faith, of intentional breaches of trust, or of breaches of trust committed with reckless indifference to the interest of the beneficiary.

    ADDITIONAL QUESTIONS

3)   Is the moral of the Scanlan story that if you are acting as Trustee of Trusts, you should not simultaneously serve in any other position visa via the Trusts you are serving?

4)   Could the Trustee have avoided liability for the many conflicting roles if the Trustee had disclosed all of the conflicts in writing and received a written waiver of the disclosures from Mary Scanlan, for herself and on behalf of her children, the contingent remaindermen?

5)   Could the Trustee have avoided liability, notwithstanding that the owners of the Trustee were attorneys, who also represented General Growth Properties, Inc., if Scanlan had been represented by independent counsel and the Trustee had disclosed all of the conflicts in a writing reviewed by Mary and her independent counsel and if the Trustee had received a written waiver of the disclosures from Scanlan, for herself and on behalf of her children, the contingent remaindermen, that had been reviewed by Mary’s independent counsel before Mary signed it?

6)   Are the conflicts presented by this case inherently not waivable?

ANSWER:

   If you are serving as Trustee or advising one, you need to be careful what other roles the Trustee plays or might play in connection with the trust. Clearly serving as attorney for the Settlor, the Settlor’s company, and the beneficiary of the trust, as well as serving as an officer and owner of the Trust company that is acting as trustee- which is the situation in the Scanlan Case-, can place you in substantially conflicting positions that in certain circumstances– at least as far as lawyers are concerned – may not be curable by disclosure and the beneficiaries’ “knowing consent” of the conflicts even after review and explanation by independent counsel[1]. 

However, in many instances, if the trust instrument contemplates a specific conflict of interest, it can be waived. Illinois Courts have repeatedly held that:

         [A] trustee may occupy conflicting positions in handling the trust where the trust instrument contemplates, creates or sanctions the conflict of interest. The creator of the trust can waive the rule of undivided loyalty by expressly conferring upon the trustee the power to act in a dual capacity, or he can waive the rule by implication where he knowingly places the trustee in a position which might conflict with the interest of the beneficiaries.” Dick v. Peoples Mid-Illinois Corp., 242 Ill App 3d 297, 304 (1st Dist. 1993) citing with approval to In Re Estate of Halas, 209 Ill App. 3d 333, 344-345 (1st Dist. 1991) Accord: O’Brien v. O’Neill, 2007 U.S. Dist. LEXIS 14777*12 (N.D. Ill. 2007);  Regnery v. Meyers, 287 Ill App 3d 354, 362 (1st Dist. 1997).

      For example in Dick, the Court held that the Bank of Bloomington did not breach its duty as a successor trustee of a trust of which Plaintiff was one of the beneficiaries. In Dick, the bank, on behalf of the trust, held stock in the bank’s own holding company and supposedly “allowed” the holding company to accumulate profits instead of paying cash dividends, which payment, Plaintiff alleged, would have far more benefited the trust beneficiaries. Because the trust instrument specifically contemplated that the bank, as trustee, could own its’ own bank stock as a trust investment, the Court held that the conflict was waived. Plaintiff also alleged that the bank violated its duties as trustee by allowing Plaintiff’s brother to vote certain holding company stock that was owned by their father’s estate. The Court held, at 242 Ill App 305, that there was no breach of duty because the decedent’s will expressly provided that the bank could hold bank stock as a trust investment and that plaintiff’s brother was authorized to vote bank stock during the life of the trust.

      In In Re Estate of Halas, 209 Ill App. 3d 333 (1st Dist. 1991), the Court affirmed the ruling that George Halas Sr. had properly served as trustee of his grandchildren’s trust which owned corporate stock in the Chicago Bears[2]. The Court reasoned that Halas Sir could serve as his grandchildren’s trustee because the Settlor, Halas Sr.’s son, Mugs Halas, had expressly authorized his father to serve as trustee in the trust instrument despite the possibility of divided loyalties resulting from Halas Sr.’s own stock ownership in the Bears and stock ownership of his daughter. Based on the terms of the trust, the Court held that the duty of undivided loyalty that Halas Sr. would have otherwise had to his grandchildren had been waived. The Court further held that because Mug’s Halas executor had not shown that any actions of Halas Sr. were fraudulent or in bad faith [or grossly negligent], there was no sustainable claim for damages.

    The results in Dick and Halas  contrast with the result reached in In Re Estate of Hawley, 183 Ill. App. 3d 107 (5th Dist. 1989). In Hawley, decedent appointed his nephew, Richard Gregory (“Gregory”) as executor of his will and trustee of his testamentary trust. Certain of the Decedent’s assets or their residue, after liquidation, were distributed as will bequests and other assets or their residue poured into the testamentary trust. Decedent’s widow, Edna Hawley (“Edna”) had a life estate in the net income generated by the trust. Decedent’s assets included three parcels of farmland, one of which included a house and other farm related buildings.

   Gregory, as executor, caused the three farmland parcels to be auctioned off by an auctioneer, who employed Gregory’s son. At auction, Gregory’s son bought the parcel that had the house and other farm buildings on it. Gregory, in his dual capacity as executor and trustee, “purchased” one of the farmland parcels for the trust and then leased that farmland to his son. Edna, as holder of the life estate, then brought an action to remove Gregory as Trustee, which the Court granted.   

   In removing Gregory as Trustee, the Court recognized the rule that where trust instrument expressly allows contemplates, creates and/or sanctions a conflict of interest it may be permitted to exist; and, in that circumstance the duty of undivided loyalty which a trustee normally owes to the trust and its beneficiaries is waived. The Court did not remove Gregory either because of his dual position as executor or because he used trust assets to purchase the Estate farmland, since the decedent had sanctioned Gregory’s dual role and the purchase of the farmland for the trust was in the Trustee’s discretion under the terms of the trust instrument. However, there was nothing in the trust instrument which sanctioned the Trustee’s lease of the trust’s property to the Trustee’s son. The Court reasoned that the lease of the farmland to the trustee’s son created a non-sanctioned conflict of interest between the Trustee’s interests and those of his son, on the one hand, and the interests of the interests of the decedent’s wife, who held a life estate, on the other. Because the conflict was a continuing one, Gregory was removed.

 

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