Case Law Summaries

Merrill Lynch Pierce Fenner & Smith Incorporated v. Nora-Johnson

• Opinion Date: May 23, 2002
• Business Law
• E-Mail

TRUSTEES—The default rule is that where there are co-trustees they must act unanimously, but there are circumstances, mostly to protect the trust assets or the beneficiary, where a co-trustee may act alone.

A brother and sister acted as co-trustees of a trust for their mother. The trust account was transferred to a stockbrokers’ office. When the account was transferred, the co-trustees signed a “Trustee Certification Form” advising the broker that under the trust the company could accept orders and other instructions only from “[a]ll [the trustees] who must act jointly.” Subsequently, various stock trades were made by the broker with only the brother’s consent, and without the sister’s knowledge. The trust lost thousands of dollars on those trades. When the sister discovered that the trades had been made, she commenced an arbitration action against the brokerage firm and the broker, charging them “with making unsuitable trades that compromised the interests of the trust beneficiary.” She also alleged that the trades were made without her consent, contrary to the Trust Certification Form which required consent from both co-trustees. Her brother did not join in the request for arbitration nor did the brother join in as a co-plaintiff when the broker sought to enjoin the arbitration. The lower court dismissed the broker’s complaint, ordering that the arbitration should take place because the lower court did not “think that the [trust] agreement intend[ed] to prohibit one of the trustees to take an action to protect[] the assets of the trust.” In fact, the lower court thought that it was “almost an obligation on the part of the trustee who was not consulted about the trading to bring some kind of action to restore the losses to the trust.” On appeal, the Appellate Division agreed. The general law is that when “there are two or more trustees, the powers conferred upon them can properly be exercised only by all trustees unless it is otherwise provided by the terms of the trust.” The Court went on to explain that there are some situations where a single trustee might properly act alone. The actual language of the trust did not specifically permit action by only one trustee, but on the other hand, it did not prohibit unilateral trustee action. Among the powers specifically granted to the trustees, was the power “to adjust, compromise or arbitrate claims or demands.” The Court did not read that provision or any of the others cited by the broker or contained in the trust agreement “as requiring both trustees to act together before commencing an arbitration to protect the trust funds.” Further, according to the Court, “[m]ost significantly, the agreement also provide[d] that the word ‘Trustees ... shall be construed to include the Trustee, Trustees, any co-Trustee or co-Trustees herein or hereinafter designated ... and all references to such Trustees shall be construed in a singular or plural, and in such gender as the sense of circumstances require.’” As a result, the Court concluded that the sister, as trustee, had “a personal obligation to compel proper administration of the trust,” and it was appropriate for her to commence the action. Lastly, the Court believed that the sister had “a colorable claim to arbitrate ... regarding the asserted trades that she claim[ed] were both unsuited for the trust’s investment objectives and contrary to the instructions the trustees provided [to the broker] in the Certification Form.”

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