In re Esther Caplan Trust FBO Arlene Sova – 9/1/2011

September 8, 2011

Arizona Court of Appeals Division One Holds That Courts Must Utilize the Six Factors Set Forth in Restatement (Second) of Trusts § 187 to Determine Whether a Trustee Abused Its Discretion.

Esther Caplan’s will created a trust for the lifetime benefit of Arlene Sova who, along with Citigroup Trust-Delaware, NA (“Citigroup”), is a co-trustee of the trust.  Sova is entitled to all trust income during her lifetime.  Caplan’s grandchildren are remainder beneficiaries of the trust (“Remainder Beneficiaries”).  The trust allows Citigroup, in its “sole discretion,” to make principal distributions to Sova if there is a “need to encroach” on the trust corpus. 

In 2006, Sova asked Citigroup to make principal distributions to her.  After requiring Sova to provide it financial information, Citigroup began making distributions.  The Remainder Beneficiaries complained to Citigroup about the distributions, and in July 2009 Citigroup filed a petition seeking judicial approval of its past and future distributions.  The trial court approved the past distributions.  With respect to future distributions, it (1) ordered Sova to provide financial information annually to Citigroup, (2) ordered Citigroup to follow its policies and procedures to determine if distributions were appropriate, (3) ordered Citigroup to send the Remainder Beneficiaries statements disclosing all income and principal distributions, and (4) explained that if the Remainder Beneficiaries challenged distributions, the Court would review the items Citigroup relied upon and would review all person financial information “in camera.”  The Remainder Beneficiaries timely appealed. 

The Arizona Appeals Court affirmed as modified.  The Court first addressed the past distributions and held that they were proper because Citigroup satisfied the minimal notice requirements of A.R.S. § 14-7303, which required trustees to “keep the beneficiaries of the trust reasonably informed of the trust and its administration.”  The Remainder Beneficiaries received copies of the trust, monthly statements and year-end reports, and responses to their questions from Citigroup.  The Court rejected the Remainder Beneficiaries’ argument that A.R.S. § 14-10813(A) required Citigroup to notify them before making principal distributions to Sova and share her financial information.  The Court explained that this statute did not even apply because it became effective and replaced A.R.S. § 14-7303 after the challenged distributions were made.

The Court then addressed the requirements of A.R.S. § 14-10813(A), which requires trustees to, among other things, “keep the qualified beneficiaries of the trust reasonably informed about the administration of the trust and of the material facts necessary for them to protect their interests.”  The Court held that the portion of the trial court’s order concerning future distributions was consistent with that statute.

The Court next rejected the Remainder Beneficiaries’ argument that they had a role in substantive decision-making about principle distributions to Sova, explaining that the trust provides Citigroup with sole discretion.  The Court explained, however, that if the Remainder Beneficiaries assert that Citigroup has abused its discretion by making a distribution, the trial court must utilize the six factors set forth in Restatement (Second) of Trusts § 187 to determine if there was an abuse.  See A.R.S. § 14-10106(B).  The Court also rejected the Remainder Beneficiaries’ objections to the in camera review process, explaining that such review appropriately balanced Sova’s interest in privacy and the Remainder Beneficiaries’ interest in ensuring that Citigroup acts within its discretion. 

Finally, the Court awarded Citigroup its attorneys’ fees and costs pursuant to A.R.S. § 14-11004, which allows reimbursement from a trust for reasonable fees, including attorneys’ fees, incurred in the good faith defense or prosecution of a judicial proceeding involving the administration of the trust.  The Court found that Citigroup acted in good faith.

Judge Downie authored the opinion; Presiding Judge Portley and Judge Orozco concurred.