We are, hopefully, limping back from the Great Recession.   It is no surprise that fiduciaries (trustees and personal representatives) face difficult challenges in managing assets during the downturn and that those challenges continue.

Against this backdrop comes a significant case from the Court of Special Appeals examining the power of the Circuit Court to remove a trustee for failing to sell a large real estate tract, despite the clamoring by some of the beneficiaries.   Beneficiaries, it has been said, usually want to know only two things – how much and when.

Miller v. Rosewick Road Dev. LLC (Sept. 25, 2013) involved a large, undeveloped property in Charles County.   The property had various “issues” – including limited road access, no water and sewer access, environmental problems, and an uncertain highest and best use.   The trustees were charged with positioning and selling the property.   They engaged engineers, planning and zoning lawyers, and others to maximize value.   In August 2007, a subsidiary of Trammell Crow entered into a sales contract for the property for $10.5 million.   Unfortunately, the economy turned south, lenders ran for the hills, the due diligence period had not yet run, and the developer bailed.

In 2009 another offer was made on the property, but only for $3 million.   This offer was made by an outfit associated with the developer/appellee (Rosewick) who had been acquiring interests in the trust from various beneficiaries.   The developer, as beneficiary, filed suit to remove the trustees for failing to accept the low ball offer.   The Circuit Court removed the trustees.

The trustees believed that the value of the property was on the upswing along with the real estate market in general in Charles County.   Accordingly, they were holding out for a price closer to the pre-Great Recession price.   Indeed, the advisors for the trustees gave them this advice.

The Circuit Court, however, agreed with the appellee that the trustees were being stubborn and inflexible in refusing to accept the low offer.   That coupled with the length of time that the process of marketing and sale was taking formed the basis for the removal.

Removal of a trustee is governed by Est. & Trusts § 15-112 which enumerates various mandatory and discretionary bases for removing a trustee.   Here, the trustees were removed for failing to perform their fiduciary duties and/or failing to completely administering the fiduciary estate.

The investment standards for fiduciaries, of course, involve the common law duty of prudence.   That duty requires the trustee “to secure the fair market value of the property and to employ that degree of care, skill and judgment that a reasonably prudent man would exercise in the conduct of a similar sale.”   [The Miller court quoting from an earlier court of special appeals decision.]

Although a determination of whether a trustee is acting prudently in any given situation is profoundly a factual determination, the Court of Special Appeals held that the Circuit Court had no basis to remove the trustees under the totality of the record of the case.   Miller is a significant case for several reasons.   It provides a roadmap of the sort of methodology that a trustee ought to employ as part of his or her duty of prudence in investment decisions.   Specifically, the Court of Special Appeals examined the following factors when determining the prudence of a trustee’s decision to sell real property:

1.                 Efforts to determine the value of the property;

2.                 Methodology in offering the property for sale;

3.                 Efforts to obtain the best offer before closing a sale.

The case is a reminder that prudence is made up of business judgments and that a court cannot apply a knee-jerk test based on results alone to determine whether or not a trustee has violated the duty of prudence.   Here, the Circuit Court looked at the length of time that the property was on the market without a sale being consummated and concluded that there must be a breach of fiduciary duty.   The test, however, is not based on results alone but on the judgments informing the trustee’s investment process.   The Miller appellate decision is a victory for a nuanced definition of the common law principle of prudence.