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All opinions are subject to modification and technical correction prior to official publication in the North Carolina Reports and North Carolina Court of Appeals Reports. In the event of discrepancies between the electronic version of an opinion and the print version appearing in the North Carolina Reports and North Carolina Court of Appeals Reports, the latest print version is to be considered authoritative.
NORTH CAROLINA COURT OF APPEALS
Filed: 2 September 2008
BEULAH R. HEINITSH,
v. Henderson County
No. 04 CVS 734
WACHOVIA BANK, NATIONAL
ASSOCIATION f/k/a FIRST
UNION NATIONAL BANK, N.A.,
AGNES H. WILLCOX, JOHN S.
HEINITSH, ISABEL H. NICHOLS,
and REGINALD D. HEINITSH, JR.,
Appeal by plaintiff from order entered 14 July 2007 by Judge
Ben F. Tennille in Henderson County Superior Court. Heard in the
Court of Appeals 1 April 2008.
Smith Moore LLP, by Larry B. Sitton and Manning A. Connors,
Bell, Davis, and Pitt, P.A., by William K. Davis and Kevin G.
Williams, for defendant-appellee.
Beulah R. Heinitsh (plaintiff) appeals from an order denying
her motion for summary judgment and granting summary judgment in
favor of Wachovia Bank, National Association f/k/a First Union
National Bank, N.A. (defendant). We affirm.
Facts and Procedural History
Reginald Heinitsh, Sr. (Mr. Heinitsh) executed a will creating
a testamentary trust (the Trust) and designating plaintiff as the
income beneficiary and Mr. Heinitsh's four adult children - Agnes H. Willcox, Reginald D. Heinitsh, Jr., John S. Heinitsh and Isabel
H. Nichols - as the contingent remainder beneficiaries (the
remainder beneficiaries). After Mr. Heinitsh's death on 27
September 1992, controversies arose between plaintiff and the
remainder beneficiaries. Pursuant to a settlement and release
agreement executed by plaintiff and Reginald D. Heinitsh, Jr., Mr.
Heinitsh's estate was closed and the Trust was funded with eighty
percent (80%) of Mr. Heinitsh's residual estate as directed by his
will. The remaining twenty percent (20%) of his estate was paid
directly to plaintiff.
Mr. Heinitsh's will appointed defendant as trustee for the
Trust. Mr. Heinitsh's will also provided that the net income of
the Trust was to be paid directly to plaintiff. The relevant
portions of Mr. Heinitsh's will are as follows:
9.06 (h)(4) In the exercise of its discretion,
my trustee is directed to maximize the income
of the Trust, by allocating, wherever
possible, receipts, income, and gains to
income, and by allocating payments, expenses,
and losses to principal.
. . .
9.12 TRUSTEE'S INVESTMENT OBJECTIVES: In the
administration of the [Trust], the trustee is
directed to maximize the income of the Trust,
notwithstanding a lack of growth in the
principal thereof. It shall be the duty of
the Trustee to maximize the benefit under such
Trust available to my wife, and the Trustee
shall subordinate growth and protection of
principal to such objective. It is my
understanding that an increased risk of
diminution in principal may result from such
The principal asset of the Trust was an approximately 48%
interest in the issued and outstanding shares of Lake Toxaway
Company (LTC), a company Mr. Heinitsh formed in 1960 as a real
estate development company in Lake Toxaway, Translyvania County,
North Carolina. Each year, LTC paid a portion of its net income to
its shareholders, including defendant as trustee of the Trust.
Defendant would then disperse the dividends from LTC to plaintiff
as income from the Trust.
In 2002, defendant discovered that LTC began liquidating the
majority of its real estate inventory during 2001 without notice to
defendant. LTC informed defendant that it would no longer operate
as a real estate development company but as a retail real estate
brokerage business. Because of its structural change, LTC
generated capital gains income that far exceeded historical or
projected income. After seeking advice from legal and accounting
professionals, defendant concluded that portions of the
distributions from LTC to the Trust for tax years 2000 and 2001, as
well as most of the projected distributions for tax years 2002 and
2003, should be allocated to principal. Due to defendant's
conclusions, a dispute regarding classification of the
distributions for tax years 2000 through 2003 arose between
plaintiff and the remainder beneficiaries. Plaintiff contended
that the distributions were income; the remainder beneficiaries
contended the distributions were principal.
The amount of the distributions paid by LTC to the Trust for
tax years 2001 and 2002 totaled $6,886,491.00 (the disputed funds). Defendant paid plaintiff $2,021,660.00 from the 2001 distributions
and retained $4,864,831.00 (the retained funds). On 6 February
2003, plaintiff filed an action against defendant and the remainder
beneficiaries seeking a declaratory judgment that the disputed
funds be classified as income. Plaintiff also alleged defendant
breached its fiduciary duties by, among other things, failing to
invest the retained funds in a more productive income producing
asset. During the time the classification of the funds was
disputed, defendant placed the retained funds into a single money
On 30 January 2004, plaintiff filed a motion to enforce the
trust provisions and compel defendant to maximize the income from
the retained funds. On 30 March 2004, plaintiff's motion to
maximize the income from the retained funds was granted and
defendant was ordered to invest the disputed funds as principal
pending the outcome of the litigation. Defendant complied with the
court order on 14 April 2004.
On 24 December 2004, plaintiff and the remainder beneficiaries
reached a settlement agreement. The agreement provided that all
but $2,000,000.00 of the disputed funds should be treated as income
for trust accounting purposes and paid to plaintiff. A partial
consent judgment approving of the parties' settlement agreement was
entered on 20 June 2005. Plaintiff's breach of fiduciary duty
claim against defendant was still pending.
On 28 February 2006, plaintiff and defendant filed motions for
summary judgment on the remaining breach of fiduciary duty claim.On 14 June 2007, the trial court granted defendant's motion for
summary judgment and denied plaintiff's motion. Plaintiff appeals.
The main issue on appeal is whether the trial court erred by
concluding there was no genuine issue of material fact regarding
plaintiff's claim that defendant breached its fiduciary duty by
investing the retained funds in a money market fund.
Standard of Review
The standard of review on appeal from a summary judgment order
is de novo. Howerton v. Arai Helmet, Ltd., 358 N.C. 440, 470, 597
S.E.2d 674, 693 (2004). The question is whether there is any
genuine issue of material fact and whether the moving party is
entitled to a judgment as a matter of law. Gattis v. Scotland
County Bd. of Educ., 173 N.C. App. 638, 639, 622 S.E.2d 630, 631
(2005) (citation omitted).
The trustee of an irrevocable testamentary trust is a
fiduciary. N.C. Gen. Stat. § 32-2 (2007) (fiduciary includes a
trustee under any trust); see also In Re Testamentary Tr. Of
Charnock, 158 N.C. App. 35, 41, 579 S.E.2d 887, 891 (2003). As a
fiduciary, the trustee is required by statute to observe the
standard of judgment and care under the circumstances then
prevailing, which an ordinarily prudent person of discretion and
intelligence, who is a fiduciary of the property of others, would
observe as such fiduciary[.] N.C. Gen. Stat. § 32-71 (2007).
More specifically, [a] trustee shall invest and manage trustassets as a prudent investor would, by considering the purposes,
terms, distribution requirements, and other circumstances of the
trust. N.C. Gen. Stat. § 36C-9-902(a) (2007). Indeed, this
statutory standard aligns with the fundamental rule that courts
must give effect to the intent of the testator or settlor when
interpreting trust instruments. Wachovia Bank of North Carolina,
N.A. v. Willis, 118 N.C. App. 144, 147, 454 S.E.2d 293, 295 (1995).
A trustee may consider needs for liquidity, regularity of income,
and preservation or appreciation of capital in investing and
managing trust assets. N.C. Gen. Stat. § 36C-9-902(c)(7) (2007).
However, the trustee shall exercise reasonable care, skill, and
caution. N.C.G.S. § 36C-9-902(a).
In exercising reasonable care, a trustee must use sound
judgment and prudence, and in the discharge of his or her duties,
he or she must exercise due diligence . . . . 90A C.J.S. Trusts
§ 323 (2002). If the acts of a trustee are questioned, the court
must look at the facts as they existed at the time of their
occurrence and the acts of the trustee must be judged in light of
the circumstances affecting his or her action. Id. Courts will
defer to a trustee's judgment when it is shown that the trustee has
been faithful and diligent. Id.
As noted by the trial court, there is surprisingly little
guidance regarding situations such as the one before us. Looking
to general principles of the law of trusts for guidance, our
research has revealed the law of trusts allows trustees to retain
funds during pending litigation. See 90A C.J.S. Trusts § 515(2002) (A trustee is not chargeable with interest where funds are
retained without using them during a contest between rival
claimants, or until the court determines to whom the money is to be
paid.); see also Id. § 482 (A trustee who has a reasonable
expectation that he or she may be called on to make a distribution
at an early date may hold cash uninvested for a reasonable time for
the purpose of making such distributions.); Bogert, The Law of
Trusts and Trustees, § 863 (Rev. 2d ed.) (Occasionally the trustee
has a good reason for holding the trust property in an unproductive
condition and he will not be liable to pay to the beneficiary
either interest or the value of the use measured in any other way.
. . . [W]here the trustee is holding the money to await the
determination of conflicting claims to it, . . . there may be no
liability to pay interest.).
A similar situation to the case before us was addressed in
Liberty Title & Trust Co. v. Plews, 61 A.2d 297 (N.J. Ch. 1948),
modified on other grounds, 70 A.2d 784 (N.J. Super. Ct. App. Div.
1950), aff'd in part and rev'd in part on other grounds, 77 A.2d
219 (N.J. 1950). In Plews, a trustee retained funds received after
the death of the life tenant of a trust. Id. The parties assumed
a distribution could be made rather quickly. Id. However, after
litigation consumed more time than originally anticipated, the
beneficiaries attempted to collect interest from the trustee for
failing to invest the funds. Id. at 298. The court, in denying
the beneficiaries request, stated [a] fiduciary who has a
reasonable expectation that he may be called upon at an early dateto make distribution may, for a reasonable time, hold the cash he
has in hand uninvested for the purpose of making such
Plaintiff argues defendant's duties under the will required it
to maximize the income in favor of plaintiff, and defendant
breached its duties by investing the retained funds in a money
market fund because the fund produced a low rate of return.
We are not persuaded that defendant breached its fiduciary
duty by investing the retained funds in a money market account
while awaiting the resolution of the parties' litigation. We agree
with plaintiff that the specific objectives of the will required
defendant to make investment decisions that would benefit
plaintiff, even if the very same decisions would result in a
diminution of the principal. However, we do not agree that this
mandate applied to the situation at hand.
Here, defendant was not faced with a decision regarding how to
invest the retained funds. Rather, defendant was faced with
deciding whether the retained funds should be dispersed to the
plaintiff as income or whether the retained funds should be
invested as principal. Because defendant, in the course of
carrying out its trustee duties, discovered that a significant
amount of LTC's assets were liquidated, it was required to inform
plaintiff and the remainder beneficiaries of its discovery and its
chosen course of action. Had plaintiff not objected to defendant's
characterization of the funds, defendant would have invested thefunds in a manner consistent with the trust principal and the
will's mandate. However, plaintiff objected to the funds being
characterized as principal and litigation ensued. Here, as in
, defendant was faced with the possibility that the litigation
could be short-lived. Defendant focused on keeping the retained
funds in a liquid investment vehicle and preventing any dimunition
of the funds. In doing so, defendant chose to invest the funds in
a liquid and virtually risk-free money market account.
In this case, defendant demonstrated reasonable care by taking
precautionary steps to protect the retained funds and investing the
funds in a liquid and risk-free money market account until the
pending litigation was resolved.
(See footnote 1)
Holding the retained funds
during the pending litigation was reasonable in light of the
circumstances and defendant did not breach its fiduciary duty to
plaintiff. We note, however, while we recognize that Plews
suggests a fiduciary may hold the funds during a pending
litigation, the better practice may be to interplead the funds
during the pendency of the litigation.
(See footnote 2)
Viewing the evidence in the light most favorable to the non-
moving party, we conclude no genuine issue of material fact existsregarding whether defendant breached its fiduciary duty.
Therefore, the order of the trial court is affirmed. This
assignment of error is overruled.
Because of our holding, we need not address plaintiff's
remaining assignments of error.
Judges WYNN and JACKSON concur.
As an aside, plaintiff also argues defendant attempted to
abdicate its fiduciary obligations by submitting a letter to the
parties seeking indemnification for any diminution in the retained
funds if invested in other investment vehicles. However, a trustee
may seek release from the beneficiaries for acts performed that may
be a breach of the trust agreement. See
90A C.J.S. Trusts § 329
We note defendant suggested interpleading the funds in a
letter to the parties dated 29 July 2003.
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