Widow's Wishes Cost Regions Trust $1 Million Verdict

by George Waldon  on Monday, Oct. 15, 2001 12:00 am  

Three heirs of a Little Rock doctor last month won a $1 million verdict against Regions Trust for breach of fiduciary duty.

A U.S. District Court jury awarded $500,000 in actual damages and $500,000 in punitive damages to Clint Allen of Beverly Hills, Calif., Richard Allen of Allen, Texas, and Vivian Allen Mangan of Little Rock.

The jury found that Regions Trust officials failed to equally protect the interests of all the beneficiaries of the Hoyt R. Allen Residuary Trust.

Regions Trust and its predecessors, Commercial National Bank and First Commercial Trust, allowed Hoyt Allen's widow, Martha, to dictate that the trust assets be invested only in tax-free bonds to provide her with income. This strategy did little to increase the value of the trust for the other beneficiaries who divided the assets after her death in 1999.

"You at least go through a process to decide what the right thing to do is," said Jim Penick of the Eichenbaum Liles & Heister law firm in Little Rock, who represented the Allen heirs. "The evidence here is they did absolutely nothing."

Dale Wintroath, senior vice president and chief administrative officer of Regions West Trust in Little Rock, declined to comment on the case. Neither Ken Alderman, executive vice president Regions Bank's Trust Group in Birmingham, Ala., nor Michael O'Brien, executive vice president and manager of Regions West Trust in Little Rock, could be reached for comment.

"I'm not in a position to say much, but I can tell you we filed a motion to set aside the judgment [on Oct. 9]," said Bill Waddell of the Friday Eldredge & Clark law firm in Little Rock, who represented Regions in the case.

That motion asks for a new trial and claims assumptions made about the potential value of the trust were irrelevant.

The dispute began when the trio of plaintiffs began asking questions about the trust after the death of their grandmother, Martha Allen. Regions Trust eventually provided financial statements that revealed that the value of the trust assets grew by only about $17,000 after 22 years. It was valued at about $115,000 at the time of Martha Allen's death.

"Initially, they were resistant to give us the information, and we had to get an attorney," said Vivian Mangan. "Now, we know that basically they did what my grandmother asked them to do. She was adamant about keeping the trust in tax-free bonds."

Martha Allen was the life beneficiary of the trust, making her the sole recipient of all income derived from the trust investments until her death.

The other beneficiaries were Clint Allen, Richard Allen, Mangan and four other grandchildren, known as remaindermen. After her death, they were to divide the assets of the trust as directed by their grandfather's will.

An expert witness testified that trust officials should have diversified the trust assets to meet the different investment objectives of the beneficiaries.

Greg Lathrop, president of Lathrop Investment Management Corp. of Little Rock, reviewed trust statements from December 1977 through October 1999 as part of the case.

According to his calculations, the annualized change in the principal, or corpus, of the trust was less than 1 percent. During this same period, inflation increased by more than 4.6 percent.

"Had the corpus of the trust increased at simply the inflation rate, the principal amount of the trust to date would have been approximately $264,738 as of Oct. 29, 1999.

"Therefore in 'real' dollars, the corpus of the trust was not preserved or increased, and in fact, was substantially wasted," Lathrop concluded.

Lathrop went on to suggest that Regions Trust could have increased the value of the portfolio for Martha Allen and for the remaindermen if it had diversified the assets of the trust.

He ran projections to show what the value of the trust could've been if trust officers had used a 50/50 or 70/30 mix of stocks and tax-free bonds from December 1977 to December 1999.

Using the Standard & Poor's 500 Stock Index as the benchmark for the equities, the 50/50 scenario would've produced $67,514 in distributable income to Martha Allen, and the value of the underlying assets for the three Allen grandchildren would've been $565,894.

The 70/30 scenario would've generated distributable income of $94,520 for Martha Allen, and the portfolio left to the Allen grandchildren would've been $838,216.

"Regions Bank favored the income beneficiary, Martha L. Allen, to the detriment of the remaindermen of the Trust by holding only fixed income securities, with limited growth prospects and purchasing power protection," Lathrop said in a sworn statement on Aug. 9.

In its motion for a new trial, Regions argues that any investments in equities would have been made through a personal trust common stock fund, not an S&P index.

The stage was set for the verdict when U.S. District Judge James Moody made an April 10 ruling on Regions Bank's motion for a summary judgment.

"The language of the will does not relieve the defendant of the duty to act prudently ... Regions had a general obligation to diversify and to be impartial to the beneficiaries."

The trial lasted five days in September, and the jury returned its verdict in about two hours.

Diversification Question

The three grandchildren also were beneficiaries of a second trust, but most of it went to the other four grandchildren. That trust was created by Martha Allen.

It had assets of more than $3 million and included a mix of stocks and bonds at the time of her death. The remainder trust was focused exclusively on tax-exempt bonds.

"We asked to see trust statements from both trusts to have an accounting," said Vivian Mangan. "This question popped up because one was diversified, and the other wasn't."

Regions Trust was slow to explain why the two trusts were managed so differently, Mangan said. Officials also delayed releasing the trust funds to the heirs and attempted to get them to sign a release of liability.

When the heirs balked, the matter spilled into the courtroom. Regions Trust sued the heirs in Pulaski County Chancery Court.

Trust officials wanted the court to formally rule who the proper heirs of the residuary trust were. Regions Trust also sought a ruling that the accounting was proper and a blanket discharge that would release it from any liability.

The three Allen heirs, in return, filed a complaint in Pulaski County Circuit Court arguing the dispute concerned a matter of equity. They alleged that Regions Trust, as the discretionary trustee, breached its fiduciary duty by showing favoritism to the investment wishes of Martha Allen.

The dispute ultimately was moved into U.S. District Court.

The complaint later was amended to ask for punitive damages after the three heirs uncovered internal e-mails between trust officials during discovery. Those communications indicated Regions officials thought there was a problem with the way they administered the trust.

An e-mail dated May 8, 2000, from Rex Kyle, a trust officer at Regions, to Dale Wintroath, his supervisor, noted:

"In an extensive review of the file, I believe we have some liability based primarily that in the 10 plus years we administered the account there was not any investment in equities.

"To the best of my knowledge it seems that Mrs. Allen may have held a gun to our head implying that she would move her $3 million trust if we made equity investment."

Kyle alludes to a scenario where Martha Allen threatened to move her larger trust account unless all the remainder trust assets were invested in tax-free bonds.

Despite the e-mail, Regions Trust officials denied that any such threat, veiled or otherwise, factored into their investment decisions on behalf of the trust.

An excerpt from the Regions Financial Corp. Trust Division Policy Manual outlines the balancing act required of trust officers:

"In the absence of authority to the contrary in the governing instrument" — in this case, the doctor's will — "a fiduciary account must be impartially administered as between beneficiaries of the same class or successive beneficiaries.

"While impartially administering an account and carrying out the wishes of the grantor, it is important to maintain a sympathetic, tactful and personal relationship with the immediate beneficiaries.

"The interests of the ultimate beneficiaries (remaindermen) must also be carefully considered."

Regions trust officials claimed the will gave them the leeway to follow Martha Allen's instructions. However, the will didn't spell out that she should receive preferential treatment. It did make clear there were two sets of beneficiaries, and by law, Regions Trust was to protect the interests of both.

"A lot of these trust officers don't understand the law or their obligations," said Jim Penick, the heirs' attorney.

Trust History
By George Waldon

Dr. Hoyt R. Allen died on Feb. 13, 1972, and the Hoyt R. Allen Residuary Trust began with assets of municipal bonds worth about $90,000 and a $10,000 certificate of deposit.

The original trustees were his second wife, Martha, and Hoyt E. Allen, his son from his first marriage.

They oversaw the administration of the trust until March 1977 when they both resigned as trustees. Hoyt E. Allen cited poor health as his reason for stepping down, and Martha Allen didn't want to be the sole trustee.

Oversight of the trust shifted to the trust department of Commercial National Bank, which later became First Commercial Trust and, ultimately, Regions Trust.

The original beneficiaries were Hoyt E. Allen, 50 percent; Elizabeth Allen Harris, his step-daughter, 25 percent; and Hoyt Allen Carter (Harris) of Calico Rock, her son.

Hoyt E. Allen, a Little Rock contractor, and Elizabeth Allen Harris both died before Martha Allen.

Hoyt E. Allen's share of the trust (about $57,000) was divided equally among Clint Allen, Rick Allen and Vivian Allen Mangan.

The 25 percent ($28,699) allotted to Elizabeth Allen Harris was divided equally among her children, Amy Carlton of Colorado Springs, Colo.; William Harris, Canon City, Colo.; Martha Haugen of Sacramento, Calif., and Hoyt Allen Harris of Calico Rock.

These four also received the lion's share of assets from the Martha L. Allen Revocable Trust, with assets of $3 million.

 

 

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