PA Supreme Court Finds It Unlawful To Modify A Trust To Add A Portability Provision

Trust Under Agreement of Edward Winslow Taylor, 2017 Pa. LEXIS 1692 (July 19, 2017), petition denied 2016 Phila. Ct. Com. Pl. LEXIS (Pa. CP. Oct. 2016), affirmed 2017 Pa. Super. 275 (Pa. Super. Ct., Aug. 23, 2017).

Beneficiaries of the Trust Under Agreement of Edward Winslow Taylor (“Trust”) appealed from the order of the Court of Common Pleas of Philadelphia County, Orphans’ Court Division, denying their petition to modify a trust agreement without court approval to allow removal of a corporate trustee “without cause” and appoint a successor corporate trustee.

On February 9, 1928, Edward Winslow Taylor (“Settlor” or “Edward”) executed an Agreement of Trust, which he amended on April 20, 1928, and September 15, 1930. In the initial trust document, Edward appointed The Colonial Trust Company, whose principal place of business was Philadelphia, as trustee.  In the September 25, 1930, amendment, Taylor named the Pennsylvania Company for Insurance on Lives and Granting Annuities, successor by merger of The Colonial Trust Company.  Wells Fargo Bank, N.A. (“Wells Fargo”) was the successor in interest of the original trustee. Id. at *1-2.

Throughout the duration of the Trust, Edward’s children and various relatives served as the individual co-trustee. Id. at *2-3.  The Trust was to terminate 20 years after the death of the last survivor of the Settlor, his wife, or his children (– in this case, on May 4, 2028.) Id. at *3.

In August 2009, Wells Fargo filed a Fourth and Final Account of its administration of the trust. With this accounting, Wells Fargo sought court approval under 20 Pa.C.S.A. § 7740.7(b) to divide the Trust into four separate trusts for each of the Settlor’s son’s four surviving children. The trustee also sought court approval of the appointment of each child to serve as co-trustee with Wells Fargo of his or her own trust.  This court approved the division of the Trust and the appointment of each of the children as co-trustees by a December 7, 2009, Adjudication. The Trust was subsequently divided into four separate trusts, each with an approximate value of $1.8 million. Id.

On September 4, 2013, three of the four surviving income beneficiaries of the Trust [“Petitioners”] filed a petition to modify the Trust agreement. Petitioners seek to modify paragraph FIFTEENTH of the Trust Agreement to allow for the removal of a corporate trustee, in the future, without petitioning a court for approval.

On Wells Fargo’s motion for judgment on the pleadings, the Orphans’ Court denied the petition to modify the Trust. Id. at *4.  The Orphans’ Court found that the restrictions on trustee removal in 20 Pa.C.S.A. § 7766 must be satisfied to allow modification of a trust under 20 Pa.C.S.A. § 7740.1, and to allow for the removal of a corporate trustee.  Petitioners appealed.

The Superior Court reversed the Orphans’ Court decision, finding that the modification provision (20 Pa.C.S.A. § 7740.1) operates independently of the trustee removal provision (20 Pa.C.S.A. § 7766). The Superior Court held:  “Contrary to the findings of the Orphans’ Court, section 7740.1 is clear and unambiguous on its face, and must be applied as such. As written, the statute contains no language excluding from its ambit the modification of trustee-removal provisions.” Id. at *18.  The Superior Court remanded the case to the Orphans’ Court to adjudge the request to modify the Trust on its merits. Id. at *20.

Wells Fargo filed a petition for allowance of appeal with the Supreme Court. The Supreme Court granted that petition and framed the issue that it will consider as follows:

whether the Superior Court erred in holding that trust beneficiaries may circumvent the requirements for removal of a trustee in Section 7766 of the Trust Act, 20 Pa.C.S.A. § 7766, by amending the trust under 20 Pa.C.S.A. § 7740.1.

In a unanimous opinion, the Supreme Court reversed and concluded “that the UTA does not permit the removal and replacement of a trustee without Orphans’ Court approval in accordance with section 7766.” Id. at *2.  Specifically, “the scope of section 7740.1 of the UTA does not extend to modification of trust agreements to permit the removal and replacement of trustees.  Instead, as the [Uniform Trust Code] comment to section 7740.1 reflects, section 7766 of the UTA is the ‘exclusive provision regarding removal of trustees.’” Id. at *33.

In the Supreme Court appeal, Wells Fargo, inter alia, argued that the Superior Court had erred in reviewing Section 7740.1 in isolation, without consideration of the UTA as a whole and Section 7766 in particular.  Wells Fargo further argued that, if the Supreme Court affirmed, then beneficiaries would be able to remove trustees without going through the more burdensome court removal process and, therefore Section 7766 would be rendered superfluous.  In addition, Wells Fargo pointed out the Superior Court’s failure to consider “the [Joint State Government Commission] comment following section 7740.1, which provides that section 7766 is the ‘exclusive provision on removal of trustees,’” or the legislative history by which Pennsylvania’s General Assembly declined to adopt a provision from the Uniform Trust Code by which a trust’s beneficiaries could unanimously remove a trustee. Id. at *12.  Wells Fargo also argued that “Pennsylvania has always shown great deference to the settlor’s selection of the trustee and has never allowed trust beneficiaries to amend a trust to add a portability clause.” Id. at *14.

The beneficiaries argued that portability clauses are common in modern trust instruments, particularly in light of the substantial restructuring of the banking industry in recent decades. They argued that they should be given the same flexibility of beneficiaries of modern trusts, and that the settlor could not have contemplated the changes in the banking world or that the local trustee he named, The Colonial Trust Company, would ultimately become San Francisco-based Wells Fargo.  The beneficiaries also argued that Section 7766 was a “default rule” in circumstances in which a trust agreement was silent on trustee removal (i.e., if the trust agreement contains a removal provision, then that trumps the statute). Id. at *14-15.  Moreover, Section 7766 does not limit modifications under Section 7740.1, including the addition of a portability clause. Id. Thus, they argued, Wells Fargo created a statutory conflict that does not exist, so the issue should be resolved under the plain meaning of Section 7740.1, without resort to the rules of statutory construction.

The Supreme Court initially concluded that the Superior Court erred by not applying rules of construction to Section 7740.1(b). The Court stated that when interpreting one section of a statute, it must be read with reference to all sections of the statute (i.e., the entire UTA), because that puts the section at issue into context. Id. at *18-19.  As such, it determined that it must construe and consider together Section 7740.1 and Section 7766. Id.

The Court concluded that a latent ambiguity existed because both parties’ interpretations of the statutes were plausible. Id. Moreover, neither statute specifically addressed the issue before the Court.  As such, it resorted to the canons of construction.  The Court noted that the standards for modification under Section 7740.1 require the beneficiaries to show only that the modification was not inconsistent with a material purpose of the trust and, where less than all beneficiaries joined in the request, that the interests of the nonconsenting beneficiaries would be adequately protected. Id. at *21-23.

It also set forth the numerous requirements for removal under Section 7766, which requires the moving party to prove by clear and convincing evidence that (a) removal is in the best interest of the beneficiaries; (b) removal is not inconsistent with a material purpose of the trust; (c) the beneficiaries have identified a suitable successor; and (d) at least one of the following conditions is present: (i) the trustee has committed a serious breach of trust; (ii) there is a demonstrated lack of cooperation between cotrustees that substantially impairs the administration of the trust; (iii) the trustee has not effectively administered the trust as a result of unfitness, unwillingness or persistent failures; or (iv) there has been a substantial change in circumstances, other than a corporate reorganization, such as a merger or consolidation. Id. The Court observed that a modification under Section 7740.1 would avoid the numerous findings of fact and conclusions of law that would be required in a removal action pursuant to Section 7766.

To bolster its analysis – and recognizing that the General Assembly may have been ambiguous with respect to where it would to allow modification – the Supreme Court considered pre-UTA Pennsylvania common law and the legislative history. It reviewed prior statutes and case law whereby removal and replacement of a trustee were permitted under circumstances where the Orphans’ Court found good cause existed to do so, and concluded that “[t]he enactment of section 7766 reflects the General Assembly’s intent to retain these principles in connection with the removal and replacement of a trustee.” Id. at *27-28.

With respect to legislative intent, the Court turned to Section 706(b)(4) of the Uniform Trust Code (upon which Section 7766 was based). That section permits a court to remove a trustee upon the unanimous consent of the trust beneficiaries, provided the removal serves the best interests of all the beneficiaries, is not inconsistent with a material purpose, and a suitable successor trustee is available.  The Joint State Government Commission recommended adopting this provision, but it was rejected by the Senate Judiciary Committee.  The Supreme Court also observed that two other states that have also adopted the UTC – Iowa and Ohio – included explicit language that their modification provisions may not be used to effect the removal of a trustee, citing Iowa Code Ann. §633A.2203 and Ohio Rev. Code Ann. §5804.11. Id. at *20-21.

Finally, the Supreme Court referred to the Uniform Trust Code comment to its section 411, upon which Section 7740.1 was based. It noted that the prefatory comment to the UTA provides that “sections of the UTA that are substantially similar to their [Uniform Trust Code] counterparts are indicated by a reference to the [Uniform Trust Code] section number in the UTA section headings, and that the [Uniform Trust Code] comments for these designated provisions ‘are applicable to the extent of the similarity.’” Id. at *29.  Because the heading to Section 7740.1 contains a reference to Uniform Trust Code section 411, the Court concluded it may consider the comment to section 411.  That comment, which also references modification under section 65 of the Restatement (Third) of Trusts, provides that “Section 706 is the exclusive provision on removal of trustees.”  Thus, the Supreme Court concluded:

By enacting section 7740.1 of the UTA in light of this comment, the legislative intent with respect to the interplay between sections 7740.1 and 7766 is clear – the scope of permissible amendments under section 7740.1 does not extend to modifications to add a portability clause permitting beneficiaries to remove and replace a trustee at their discretion; instead, removal and replacement of a trustee is to be governed exclusively section 7766.

Id. at *31.

The Court rejected the beneficiaries’ argument that the comment to section 411 regarding exclusivity must be considered in light of the fact that the Uniform Trust Code permits beneficiaries to unanimously remove the trustee, whereas the UTA does not. The Court stated that the exclusivity language was intended to distinguish the Restatement’s broader treatment of modification with those in the Uniform Trust Code, under which the beneficiaries’ ability to modify trusts is more limited. Id. at *32.