In January 2023, the Minnesota Court of Appeals issued two opinions regarding the removal of trustees. Generally, trustees are a person or group appointed by the original creator of the trust to manage the assets of a trust for an individual or a company. Trustees can resign, and trust agreements usually provide for successor trustees. But in certain circumstances, disagreements can arise – leading co-trustees, beneficiaries, or other people interested in a trust to seek a court order to force a trustee out.
These cases illustrate how courts consider petitions to remove trustees and provide important insights for trustees and beneficiaries of Minnesota trusts.
The Minnesota Trust Code’s Provision on Removing Trustees
By statute, a court can remove a trustee if:
1) the trustee has “committed a serious breach of trust,”
2) a lack of cooperation between co-trustees “substantially impairs the administration of the trust,”
3) the trustee is unfit, unwilling, or persistently fails to administer the trust effectively, or
4) due to a “substantial change in circumstances” or on the request of all beneficiaries, removing the trustee is in the interests of all the beneficiaries and is “not inconsistent with a material purpose of the trust” and a suitable successor trustee is available.
Two Recent Court of Appeals Decisions Discussing Trustee Removal
- Swanson v. Wolf
In Swanson v. Wolf, the Minnesota Court of Appeals drew a line in the sand between a district court’s in rem and in personam jurisdiction—a distinction that, before Swanson, generally had no impact on the remedies sought by petitioners. (In fact, it was a distinction that did not exist until the Uniform Trust Code was adopted in Minnesota in 2015.) With regard to a trust, in rem jurisdiction refers to the court’s authority over the trust itself, while in personam jurisdiction refers to the court’s authority over a trustee. Following the Swanson decision, the Court of Appeals left petitioners who seek judicial relief under the Minnesota Trust Code—including, but potentially not limited to, removal of a trustee—with a new, uncharted dilemma: to plead or not to plead in personam jurisdiction? That is the question.
In Swanson, Marcia Swanson petitioned the district court to, among other things, remove her sister, Denise Wolf, as trustee of a trust established by their father. Wolf objected to Swanson’s petition and moved to dismiss it, arguing that the district court lacked jurisdiction to remove her. Wolf’s position was, essentially, that despite the court’s in rem jurisdiction over the trust, the district court lacked in personam jurisdiction over her. The Court of Appeals, in what may be considered a surprising decision, agreed.
As the Court of Appeals explained: “In a trust matter, the district court may exercise in rem jurisdiction, in personam jurisdiction, or both, depending on which form of jurisdiction the petitioner invokes.” The court defined the two different jurisdictions as follows: “While a judgment in rem affects the interests of all persons in designated property, a judgment in personam imposes a personal liability or obligation on one person in favor of another.” Petitions that fail to expressly invoke in personam jurisdiction default to in rem jurisdiction.
From these principals, the Court of Appeals then determined that a district court must have in personam jurisdiction to remove a trustee: “Because in rem jurisdiction is over the trust estate and in personam jurisdiction is over the person, we discern that to issue an order granting a petition to remove a trustee, the district court must exercise in personam jurisdiction. … To hold otherwise,” the court explained, “would collapse the distinction between the two types of proceedings.”
The Minnesota Court of Appeals’ decision in Swanson will have a profound impact on the way petitions to remove trustees must be pled. Trust and estate litigators in Minnesota can no longer rely on in rem jurisdiction when bringing a petition to remove a trustee. The true effect of the court’s decision in Swanson, however, is yet to be seen. While the court has held that a proceeding for removal of a trustee must be brought in personam, there are 23 matters for judicial relief under section 501C.0202 under the Minnesota Trust Code, including approving payment of a trustee’s fees and requiring a trustee to account. The Swanson decision may raise questions as to which type of jurisdiction is necessary to achieve the other 22 types of relief.
- Matter of Otto Bremer Trust
In Matter of Otto Bremer Trust, the Court of Appeals affirmed the district court’s removal of one of three trustees of a large charitable trust that held approximately $2 billion in assets. Removing the trustee was proper, the Court of Appeals said, because the cumulative effect of the trustee’s several “improprieties” amounted to a serious breach of trust. Perhaps most significantly, the trustee made several aggressive attempts to implement a “hostile takeover” of a company whose shares were held by the charitable trust. In short, Minnesota trustees are expected to be Minnesota nice.
The facts of the Bremer Trust case are fairly complex. To summarize, the trust was managed by three trustees, who had authorization and discretion to determine the methods and processes for carrying out the trust’s charitable purpose. In 2019, the three trustees were Brian Lipschultz and two other individuals. The trust had been established by Otto Bremer, who, during his life, had also created a holding company, Bremer Financial Corporation (BFC), for his investments in various community banks. His charitable trust was originally funded with shares of the BFC. The trust and the BFC remained linked throughout the years, such that the trustees of the trust were members of the BFC board.
Lipschultz, who became a trustee in 2012, admitted to using trust resources for personal uses. Specifically, Lipschultz admitted to using “staff time, postage, and computer resources” between 2017 and 2019 that amounted to approximately $1,875, which he reimbursed to the trust. Still, this self-dealing led the IRS to impose a self-dealing tax on the trust, and caused the trust to incur additional accounting fees (which Lipschultz did not reimburse to the trust).
In 2019, the board of the BFC considered whether to sell BFC. The trustees, including Lipschultz, were interested in selling; the remaining board members of the BFC were not interested in selling. Lipschultz orchestrated a plan for a “hostile takeover” of the BFC board. The plan was to sell the trust’s nonvoting shares to investors, convert those shares to voting shares, and thus obtain more than 50% of the voting power over the BFC between the trustees and the investors. At that point, Lipschultz and the investors would replace the BFC board members. Lipschultz pursued this plan aggressively, texting a consultant hired to investigate the plan that Lipschultz expected lawsuits “the likes of which sleepy St. Paul has never seen” and that he “look[ed] forward to observing the carnage.” Further, Lipschultz told associates that he had substantial resources—namely, the Trust assets—to fund a protracted legal battle.
Lipschultz also exerted pressure on charitable beneficiaries of the charitable trust to support his plan. Specifically, Lipschultz told the CEO of a nonprofit, which had been a trust beneficiary for years, that she needed to “prove” that the nonprofit was “the trustees’ partner” if the nonprofit wanted to obtain future funding.”
The court found that these actions constituted a series of breaches of trust—Lipschultz’s admitted “self-dealing. aggressive behavior during the BFC sale, and abuse of grant-making powers”—which, considered together, amounted to a serious breach of trust justifying his removal. The court went on to find that Lipschultz “displayed a crude, vulgar, and otherwise offensive brashness that has no place in the charitable world.”
The Court of Appeals affirmed. The court rejected Lipschultz’s argument that his self-dealing—which amounted to less than $2,000—was de minimis when considering that the trust held approximately $2 billion. The court pointed out that there is no de minimis defense when self-dealing violates the duty of loyalty. The court also concluded that Lipschultz’s hostility and aggressive pursuit of a sale of BFC resulted in “actual vindictive acts of administration”—specifically in his interactions with the nonprofit.
While the holding of Bremer Trust is tied closely to its facts, the case still teaches trustees an important lesson: the law holds trustees to a higher standard of behavior. Trustees cannot abuse their power. Trustees should be professional and civil in their interactions with others—even when, and perhaps even especially when, there is disagreement about the administration of the trust.
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Maslon’s Trust & Estate Litigation attorneys welcome your questions about trusts, trustees, and legal precedent in this often complex area of law.