In 1992, Ann Mark created two irrevocable trusts for the benefit of her three children. In 1997, Jared Scharf became the successor trustee for the trusts, and used some of those assets to form a separate trust for each of Ms. Mark’s three children. Each of the trusts stated that they were governed by New York law.

In 2010, the trustee invested funds from those trusts into a hedge fund in which his son was a principal. In 2011, after the hedge fund generated a return, the trustee advised Ms. Mark and her children that he intended to increase the investment in the hedge fund, and advised them in writing that his son was a principal. Thereafter, the hedge fund suffered substantial losses. In 2013, Ms. Mark and her children demanded that the trustee withdraw the investments from the hedge fund. The trustee refused, and Ms. Mark and her children filed a lawsuit seeking his removal as trustee, and seeking reimbursement for the losses that resulted from his investments.

Although the overall value of the trusts increased significantly, the investments in the hedge fund resulted in losses.

Both sides filed cross-motions for summary judgment. The trial court granted the trustee’s summary judgment motion, finding that the trust instruments permitted the trustee to make the investment in issue because it authorized him “to hold and retain all property received from any source without regard to … the trustee’s personal interest in such property….”

On appeal, the Superior Court, Appellate Division disagreed. Applying New York law, it reversed the order granting summary judgment in favor of the trustee, and granted partial summary judgment to Ms. Mark and her children. The Appellate Division found that the trustee’s investment in the hedge fund constituted a conflict of interest. It explained that the motion judge had mistakenly interpreted the trust language: although the trust insulated the trustee from inaction regarding trust property, it did not do so with respect to investments of trust property. Thus, although the trust protected the trustee when he took no action with respect to trust property, it did not protect the trustee from liability for making investments that breached his duty of undivided loyalty to the beneficiaries: “[the trustee] violated his fiduciary duty to the beneficiaries because this investment created a conflict of interest that resulted in a financial loss to the trusts.”

Although the trustee argued that the hedge fund investment represented only a negligible portion of the trust assets, the appellate court noted that this argument related to damages, not to liability. The appellate court reversed the motion judge’s decision, and granted partial summary judgment as to liability against the trustee.

A copy of In the Matter of the May 1, 1992 Mark Family Trust  can be found here – In the Matter of the May 1, 1992 Mark Family Trust

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