French v. Wachovia Bank, N.A., s. 11–2781

• Decision Date: 17 July 2013
• Docket Number: Nos. 11–2781,11–3437.,s. 11–2781
• Citation: 722 F.3d 1079
• Parties: Brian FRENCH, David French, Jeanna French, and Paula French Van Akkeren, Plaintiffs–Appellants, v. WACHOVIA BANK, N.A., Defendant–Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

722 F.3d 1079

Brian FRENCH, David French, Jeanna French, and Paula French Van Akkeren, Plaintiffs–Appellants,

v.WACHOVIA BANK, N.A., Defendant–Appellee.

Nos. 11–2781, 11–3437.

United States Court of Appeals, Seventh Circuit.

Argued June 6, 2012.

Decided July 17, 2013.

Christopher T. Hale (argued), Attorney, Hale & Wagner, Milwaukee, WI, for Plaintiffs–Appellants.

Michael B. Apfeld (argued), Attorney, Godfrey & Kahn S.C., Milwaukee, WI, for Defendant–Appellee.

Before EASTERBROOK, Chief Judge, and WOOD and SYKES, Circuit Judges.

SYKES, Circuit Judge.

This case raises questions about the duties of loyalty and prudence in the law of trusts. Jim French founded a successful manufacturing firm in 1968 and later sold it for a handsome sum. As part of his estate plan, French executed two interlocking irrevocable trusts to benefit his four children upon his death. In 2004 he decided that his trust company was not meeting his investment goals and moved the accounts to Wachovia Bank, N.A.

Among the underperforming investments in the trust portfolio were two whole life insurance policies. After months of evaluation and consultation with French and his lawyers, Wachovia replaced the old policies with new ones providing the same death benefit for significantly lower premiums. This transaction yielded a hefty but industry-standard commission for Wachovia's insurance-brokerage affiliate. The trust beneficiaries—French's adult children—were taken aback by the size of the commission and sued Wachovia for breach of fiduciary duty.

Their primary claim alleges self-dealing. The Frenches contend that Wachovia breached its duty of loyalty by reinvesting trust assets through its insurance affiliate, resulting in a large commission. On cross-motions for summary judgment, the district court rejected this claim, relying on an express conflict-of-interest waiver in the trust document. The court also held that the transaction was neither imprudent nor undertaken in bad faith. The court entered summary judgment for Wachovia and ordered the Frenches personally to pay the bank's costs and attorney's fees.

We affirm. Under the terms of the trust instrument, Wachovia had broad discretion to invest trust property without regard to conflicts of interest, risk, lack of diversification, or unproductivity. This language overrides the common-law prohibition against self-dealing and displaces the prudent-investor rule. The duty to administer the trust in good faith always remains, but there is no evidence that the bank acted in bad faith. Finally, because Wachovia acted in good faith, the award of attorney's fees is proper under Wisconsin trust law.

I. Background

In 1968 French founded the J.L. French Company, a manufacturing firm located in Sheboygan, Wisconsin. The company made component parts for small engines and was very successful. In 1996 French sold the business for approximately $200 million. He and his late wife's estate owned most of the stock, and his four children—Brian, David, Jeanna, and Paula (Van Akkeren)—held the rest, so the sale made the French family very wealthy.¹

Kathy Gray, an attorney and partner at the Milwaukee law firm of Quarles & Brady, LLP, advised the French family on estate-planning matters. In 1991 French consulted her about establishing a trust to benefit his children upon his death. Pursuant to his instructions, Gray prepared and French executed a set of trust documents creating two interlocking irrevocable trusts structured as follows: (1) The assets in Trust # 1 distribute in equal shares to French's children upon his death but the trust pays no distributions during his lifetime; and (2) Trust # 2 pays income to Trust # 1 on an annual basis and will distribute its assets to Trust # 1 on French's death.

As of 2004, when our story begins, Trust # 2 held mostly stocks and bonds and was valued at approximately $24 million; Trust # 1 was valued at more than $5 million, not counting the death-benefit value of the two life-insurance policies at the heart of this dispute. Only Trust # 1 is relevant here, so from now on we will refer to a single trust even though there are two.

French initially placed the trust in the care of a Sheboygan attorney but over time lost confidence in the attorney's stewardship and moved the trust to First Bank. He later moved the trust again, this time to the Northern Trust Company. By 2004 French had grown dissatisfied with Northern Trust's conservative investment philosophy and modest rate of return. Of particular concern were two life-insurance policies in the trust's portfolio. The policies—one issued by Pacific Life and the other by Prudential Life—had a death benefit of $5 million each. To maintain that benefit, however, the trust had to pay increasingly steep premiums. In 2004 the annual premium for the Pacific Life policy was $164,000, and the premium for the Prudential policy was scheduled to jump by more than $40,000.

So French began to look for a new trustee with a better investment strategy. His daughter Paula urged him to talk to her stockbroker at Wachovia Securities about moving the trust to Wachovia Bank. In early 2004 French held an initial meeting with Fred Church, a Wachovia vice president, at French's vacation home in Naples, Florida. Gray, the French family's attorney, was also present. At French's request Church and his associate, Steve Schumacher of Wachovia Insurance Services, commenced an evaluation of the trust portfolio to identify potential areas for improved profitability. In late May Gray sent Wachovia information about the two insurance policies held by the trust. On July 22 Church wrote to Gray confirming Wachovia's willingness to take over as trustee and identifying options to improve the trust's insurance assets. On August 3 Gray and her partner John Bannen, an insurance specialist at Quarles & Brady, met with Church in Milwaukee to discuss the range of options. Because of a communication snafu, however, French did not have adequate notice and could not attend the meeting. He was upset and remained so even after Bannen summarized the meeting in a detailed memorandum.

In September French instructed Gray to discontinue the insurance analysis, so for a time Bannen and Church did nothing further. In mid-October Church received word from Gray that French wanted to retain Wachovia as trustee after all. After some delay on Northern Trust's end, Wachovia took over as trustee effective December 29, 2004.

This revived the earlier discussion about life-insurance options. French directed Church to find a better deal and provided the necessary personal and medical information for Wachovia to shop around for quotes. Working with Bannen, Church and Schumacher identified several possibilities, which Bannen summarized in a memo to French dated March 31, 2005. One proposal was to switch to new no-lapse life-insurance policies issued by John Hancock Life; these policies guaranteed the same death benefit but at a much lower premium. In the memo Bannen highlighted the pros and cons of the proposed swap. Most importantly, the trust would get the same insurance for far less money. The lower, fixed premiums for the two John Hancock policies—estimated savings: $620,000—would purchase the same $5 million per policy death benefit as the Pacific Life and Prudential policies. The no-lapse guarantee ensured that the contracts would pay the promised death benefit as long as the premiums were paid.

On the other hand, the trust would lose the flexibility of the Pacific Life and Prudential policies, which accumulated cash value that could be recouped if the policies were surrendered before French's death. But Bannen and Church could not foresee any scenario under which early surrender would be necessary or desirable. The trust had significant assets and was well diversified, made no distributions during French's lifetime, and the beneficiaries were already very wealthy. Church deemed the loss of flexibility unimportant to the overall goals of the trust. The main point of having life insurance in the investment mix was to reap the death benefit, not the cash surrender value, which would never exceed the death benefit in any event.

Church and Schumacher met with French on March 31 to discuss these options; Bannen participated by phone. When the meeting ended, Schumacher gave French two blank John Hancock policy applications to take with him. The following week French signed the applications in blank and returned them to Wachovia Insurance, and Schumacher's assistant filled in the necessary information. On April 12 the managing director of Wachovia's Trust Department signed the applications and also executed the required IRS forms documenting the exchange. Schumacher submitted the applications to John Hancock but held back on authorizing the surrender of the Pacific Life and Prudential policies pending final approval from French. The new John Hancock policies issued at the end of the month.

In the meantime, Church sent Gray a proposed conflicts waiver identifying Wachovia Insurance Services, an affiliate of Wachovia Bank, as the broker for the insurance exchange, and also disclosing that Wachovia Insurance would receive a commission on the transaction. This prompted a new round of discussions between Gray and Church about the possibility of rebating the commission, or alternatively, commensurate fee concessions by the trustee. Neither was legally permissible. French balked at the terms of the conflicts waiver, which included a broad release of “any claim” arising out of Wachovia's purchase of new insurance on behalf of the trust. He refused to sign.

But as trustee Wachovia did not need French's authorization to proceed with the exchange, and the bank ultimately concluded that it did not need the conflicts waiver either. After consulting legal counsel and reviewing the terms of the trust instrument, Church notified Gray that Wachovia was withdrawing its request that French sign...