On December 2, 2009, Mark McFarland and Marty Jackson, members of the Firm’s Business Practice Group, obtained summary judgment in favor of a client who had been sued in his capacity as the former Trustee of two (2) trusts. Plaintiffs, a beneficiary of the trusts and the current Successor Co-Trustees of the two (2) trusts, brought an action in the District Court of Johnson County, Kansas against the former Trustee seeking damages and reimbursement for attorneys’ fees and expenses in excess of $500,000.00 for alleged violations of the Uniform Trust Code, K.S.A. 58a-101 et seq. and the Uniform Prudent Investor Act, K.S.A. 58-24a01 et seq.
Although plaintiffs alleged the former Trustee violated the Uniform Trust Code, Mark and Marty argued that plaintiffs’ claims focused ultimately on the former Trustee’s investment and management activities. The Court agreed and further found that plaintiffs’ alleged damages flowed from the alleged negligent investment of the trusts’ assets not from administration of the trusts.
The Court then concluded that the Uniform Prudent Investor Act, not the Uniform Trust Code, governed plaintiffs’ claims. The Court relied on K.S.A. 58a-901 which provides, “[n]otwithstanding any provisions of the Kansas uniform trust act to the contrary, K.S.A. 58-24a01 et seq. [the Kansas Uniform Prudent Investor Act] and amendments thereto shall govern the investment and management of trust assets.” (Emphasis added) Additionally, the Court found persuasive the Kansas Supreme Court’s holding in McGinley v. Bank of America, N.A., 279 Kan. 426, 435, 109 P.3d 1146 (2005), which states “despite the arrival of the KUTC, the Uniform Prudent Investor Act . . . still governs the investment and management of trust assets.”
Having successfully argued that plaintiffs’ claims were based upon investment and management activities and, therefore, the Uniform Prudent Investor Act governed, Mark and Marty next argued that the trust instruments eliminated, or at least restricted and altered the prudent investor rule set forth in the Uniform Prudent Investor Act.
The trusts in this case were created in 1996. In 1996, Kansas law relating to the investment of trust funds “expressly recognized that the trust instrument can modify the fiduciary’s obligations under the prudent investor rule and, in so doing, shield[s] the fiduciary from liability when it relies upon those trust provisions.” See, McGinley v. Bank of America, N.A., 279 Kan. 426, 433, 109 P.3d 1146, 1151 (2005). The Uniform Prudent Investor Act, K.S.A. 58-24a01 et seq., was enacted in 2000. K.S.A. 58-24a01(b) retained the power of a trust instrument to restrict, eliminate or otherwise alter the “default” prudent investor rule.
In this case, the trust instruments contained the following provisions relative to the trustee’s power to invest:
“To invest and reinvest any and all funds coming into his possession for investment in such securities or property, real or personal, as he may in his absolute and uncontrolled discretion deem proper and suitable, including corporate stocks of all classes, and units or interests in any common trust fund operated by said Trustee solely for the investment of funds in his care as a fiduciary or co-fiduciary, without limitation by any statute, custom, or rule or law, now or hereafter existing, relating to the investment of trust funds; and to hold and retain as an investment for the trust estate, without accountability for loss, any and all of the property or securities which may be delivered, transferred or conveyed to him hereunder by the Donor without any duty to convert or diversify, although they may not be of the character generally regarded by law or custom as proper investments for trust funds.” (Emphasis added.)
* * *
“All powers and discretion granted to the Trustee hereunder are exercisable by the Trustee only in a fiduciary capacity. Except for his willful default, a Trustee shall not be liable for any act, omission, loss, damage or expense whatsoever arising from the performance or non-performance of his duties hereunder.” (Emphasis added)
This Court concluded that the prudent investor rule was eliminated by these provisions of the trust instruments. The Court further found that plaintiffs had not offered any facts suggesting “willful default” by Defendant. Accordingly, the Court granted summary judgment in favor of the Firm’ client.
If you are a Trustee, or have a client that is or was a Trustee, and litigation has been or is threatened, then contact Mark or Marty to schedule a consultation.
From my experience, almost every real estate professional has unwittingly violated the Real Estate Settlement Procedures Act (RESPA) at some point in their career. You probably want to know what constitutes a violation, which we will get to. First, I find it effective to explain the potential penalties, which include the following:
• Up to a $10,000 fine, or
• Imprisonment for up to one year, or both
• Treble (triple) damages for any actual damages (closing costs)
• Court costs, and reasonable attorneys fees
If that doesnt get your attention, you must value you money and freedom less than I do. In general RESPA applies to real estate professionals in two instances:
1. Prohibition of kickbacks and unearned fees [12 USC 2607]
2. Sellers requiring a specified title company [12 USC 2608]
The first one is pretty straight forward, you are not to "accept any fee, kickback or thing of value pursuant to any agreement or understanding" that is related to or part of a real estate settlement service involving a federally regulated mortgage loan. To put it plainly, you can not get referral fees from your friendly hometown closing company.
The second one, although not directly applicable to the real estate professional, is still important. As a fiduciary (trusted adviser), you have a duty to disclose what you know to your client. Dont let your sellers make the sale conditional on a certain title insurance company, or they will be opening themselves up to treble (triple) damages for the amount paid for the title insurance, and you will have one very unhappy client.
As you often hear, "certain exclusions may apply" which pertains to RESPA as well. There are certain real estate transactions and mortgages that are not covered by RESPA, but to be safe the $50 kickback is hardly worth the risk.
How long should I keep my Real Estate Transaction files?
It is a common question with two competing principles: Regulations vs. Statute of Limitations.
Since most of you are Real Estate Professionals in Missouri and Kansas, I will limit the analysis to these states. Both jurisdictions require that a Real Estate Broker maintain his/her files relating to any Real Estate Transaction for three (3) years.
Missouri - 20 CSR 2250-8.160 - Retention of Records
Kansas Administrative Regulation No. 86-3-10
Most Brokers are proponents of destroying any file older than three (3) years. It is understandable, it helps to clear out valuable storage space. In many brokers minds, it may also help them to avoid liability. While the first thought may be partially correct, the second is patently false.
Missouri and Kansas have different Statute of Limitations applicable to negligence and fraudulent misrepresentation claims:
Missouri - 5 years
Kansas - 2 years.
This post doesnt apply as much to Kansas transactions since the Commission requires retention for a time period longer than the Statute of Limitation, but Missouri has a troublesome 2 year gap.
I will tell you from experience that the worst case for an attorney is one where the client has no records to dispute the claims, other than a Real Estate Professionals foggy memory of events that happened over five years ago. To help prove my point, I want you to close your eyes, picture a client from five years ago and tell me who inspected their property and what the inspection report said. Obviously, this exercise is nonsense because it is impossible.
The bottom line is anyone acting as a Real Estate Broker in a Missouri transaction needs to retain his/her files for 5 years. Scan them, and store them on CD, hard drive, back-up disks, online storage, etc. There are many options with little cost, so find one you like and do it.
If you destroy the file, and you get sued, you may have just destroyed your best defense. Open up your check book.
Would you buy a house that was the site of a homicide or suicide? Many people could care less, but many people are adamantly opposed; this puts sellers and their agents in an interesting position when it comes to disclosure.
There is no doubt that disclosing this information will “stigmatize” the property, and at least in the eyes of many, make it unsuitable for living or cause a price reduction. These effects hurt both the seller’s and the agent’s bottom line. So what do you do?
Missouri has enacted a statute for guidance: MO Statutes 442.600
The fact that a parcel or real property…may be psychologically impacted [site of homicide, suicide or occupant had HIV/AIDS]…shall not be a material or substantial fact that is required to be disclosed…
It goes on to say that no cause of action can be brought against a real estate agent or broker that failed to disclose the fact.
As usual Kansas has different rules, or here a lack of rules on the subject. Kansas Statutes and Cases have not yet addressed this issue which leaves the point up for discussion.
Kansas requires the disclosure of “material facts.” It would ultimately be up to a jury to decide what is “material." So, think of your view, your spouse’s view, and your friends views on this subject and try to determine which stance is reasonable. If you think a reasonable person could think the value is affected by the information, then you should probably disclose it.
On the flip side, if you do disclose it you are dooming your client to less money. Does that breach your fiduciary duty? What if you’re wrong and Kansas law ends up similar to Missouri’s law?
Say hello to Rock and Hard Place. The key is, that in Kansas you must be up front with your client. Tell them they are not yet required to disclose, but a jury may disagree with their ultimate decision if they choose not to. All the while you must realize that if you tell them to disclose and they get less money they may want to sue you for your “faulty” advice.
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In addition to a commitment to the legal profession, Wallace Saunders employees are dedicated to their communities as well. Our firm recognizes the importance of contributing to the development of our communities, and we feel an obligation to give back to the communities in which we live and operate.
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Susan L. Coyle
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