Which Bad Act Broke the Camel's Back? Minnesota Supreme Court Rules Trustees May Be Removed for a Series of Small Breaches

The Minnesota Supreme Court recently affirmed the rulings of the Court of Appeals and district court that the removal of one of three trustees of a large charitable trust that held approximately $2 billion in assets was appropriate because the cumulative effects of the trustee's multiple "improprieties" amounted to a serious breach of the trustee's duties. The Feb. 7 decision reminds fiduciaries and attorneys that Minnesota courts can remove a trustee over a series of small breaches.

As discussed in our Court of Appeals decision legal alert, the trust was established by Otto Bremer, who, during his life, also created a holding company, Bremer Financial Corporation ("the bank"), for his investments in various community banks. The bank operates as a regional financial entity through its wholly owned subsidiary, Bremer Bank. Otto Bremer's charitable trust was originally funded with shares of the bank. The trust and the bank remained linked throughout the years, such that the trustees of the trust were members of the bank board.

The trust is managed by three trustees, who have 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.

Lipschultz, who became a trustee in 2012, admitted to using trust resources for personal uses "probably from the day [he] arrived at the Otto Bremer Trust," the court quoted him as saying. Specifically, Lipschultz admitted to using "staff time, postage, and computer resources" between 2017 and 2019 that amounted to approximately $1,875 (which does not account for any value of potential misuse between 2012 and 2019). He later reimbursed the trust after staff members raised concerns about Lipschultz's use of trust assets, but the trust incurred a self-dealing tax and additional accounting and legal fees due to Lipschultz's actions, which Lipschultz did not reimburse to the trust.

In 2019, the bank board considered whether to sell the bank. The trustees, including Lipschultz, were interested in selling as it would benefit the trust, but the remaining board members of the bank were not interested in selling. Frustrated, Lipschultz orchestrated a plan for a "hostile takeover" of the bank board. The plan was to sell the trust's nonvoting shares to investors, convert those shares to voting shares, and thereby obtain more than 50% of the voting power over the bank between the trustees and the investors.

Lipschultz aggressively pursued this plan and appeared willing to follow through with it regardless of the consequences. Lipschultz texted a consultant that he wanted investors "who live for this kind of thing" and that he was "looking forward to observing the carnage" if the bank tried to withhold investor shares. Lipschultz expected lawsuits comparable to "an aerial bombardment, the likes of which sleepy St. Paul has never seen." When investors did not sue after the bank refused to recognize the sale of stock, Lipschultz was frustrated since he assumed the investors were “aggressive animals that would swoop in and go for the [bank's] jugular without any coordination required.” Further, Lipschultz told associates that he had substantial resources to fund a protracted legal battle—the trust's resources.

Lipschultz also exerted pressure on charitable beneficiaries of the trust to support his plan. Specifically, Lipschultz told the CEO of a nonprofit, which had been a trust beneficiary for years and for whom the trust was the largest donor, that the nonprofit needed to "prove" that it was the trustees' partner if it wanted to obtain future funding. Following Lipschultz's actions, the nonprofit returned the trust's $1.2 million donation and severed ties with the trust.

The district court found that Lipschultz's actions—his admitted "self-dealing, aggressive behavior during the bank sale, and abuse of grant-making powers"—when considered together, amounted to a serious breach of trust justifying his removal. The court also found that Lipschultz had "displayed a crude, vulgar, and otherwise offensive brashness that has no place in the charitable world." The Court of Appeals affirmed.

The Minnesota Supreme Court affirmed the lower courts rulings that a series of smaller breaches may constitute a "serious breach of trust." The Minnesota Supreme Court stated that the official comments to the Uniform Trust Code apply to Section 501C.0706(b), which includes this standard.

While the holding of Bremer Trust is closely tied to its facts, the case still teaches trustees an important lesson—minor breaches of trustee's duties can be grounds for removal if these breaches become pervasive and commonplace. Trustees should be professional and civil in their interactions with others, even when, and perhaps especially when, there is potential conflict related to trust administration.