Opinion
Nos. 573 EDA 2003, 1330 EDA 2003.
Filed: December 4, 2003. Petition for reargument granted: February 10, 2004.
Appeal from Decree/Amended Adjudication February 14, 2003, in the Court of Common Pleas of MONTGOMERY County, ORPHAN'S COURT, at No. 77922.
BEFORE: STEVENS, OLSZEWSKI, and BECK, JJ.
The Opinion by Judge Olszewski and the Dissenting Opinion by Judge Beck Filed: December 4, 2003 have been withdrawn. The Application for reargument was granted on February 10, 2003.
¶ 1 This case is before us on appeal from an amended adjudication of the Orphans' Court, Montgomery County (Drayer, J.), which finalized a routine auditing of the W.W. Smith Charitable Trust.
¶ 2 There are two issues presently before us: (1) whether a trustee of a perpetual charitable trust may be compensated from the principal of the trust, and if so, whether the compensation clause in W.W. Smith's codicil (the trust document) expressly prohibits compensation from the trust principal; and (2) whether extraordinary circumstances exist such that the corporate trustee is entitled to an increase in compensation. We find that the trustee of a charitable trust may be compensated from the principal of the trust, that the compensation clause in the codicil does not prohibit such compensation, and that extraordinary circumstances do exist to permit First Union to obtain an increase in compensation. We therefore AFFIRM in part, REVERSE in part, and REMAND to the Orphans' Court of Montgomery County for further proceedings.
I. Facts and Procedural History
¶ 3 William Wikoff Smith executed a codicil to his legally-executed will on June 8, 1973. This codicil set up the W.W. Smith Charitable Trust, to be substantially funded from Kewanee Oil stock. The codicil named Mary Smith as an uncompensated individual trustee and Philadelphia National Bank as a compensated corporate trustee. Philadelphia National Bank was to be reasonably compensated, but compensation was capped at an amount equal to 5% of the income. Mr. Smith died in 1976, at which time the trust was formed. First Union accepted administration of the trust (as successor-in-interest to Philadelphia National Bank).
¶ 4 Shortly thereafter, the trustees decided to sell the Kewanee Oil stock and invest the proceeds in various other securities. These investments caused the value of the trust to increase from $50,741,301 to $169,873,999 in 1998, and to $179,576,657 by 2000.
¶ 5 First Union provides a number of additional services to the trust. For quite some time, First Union provided the trust with office space at no rental charge. Around January 31, 2001, however, First Union began to require rent from the trust. First Union also provides two of its own employees to the trust on a full-time basis. Other First Union personnel assist with the trust administration on a regular basis. First Union also holds monthly meetings to facilitate trust administration. As a result, a number of First Union executives are flown into Philadelphia for these monthly meetings.
¶ 6 Up until this point, First Union has been compensated at 5% of trust income. The problem that First Union faces is that the trust's assets are currently invested in securities that produce only a modest amount of income while the value of the principal has rapidly grown over the years. As a result, First Union argues that its compensation, considering the size of the trust and the amount of time and resources expended in administrating the trust, is insufficient.
¶ 7 An audit of the trust is conducted every 15 years. During the audit commenced in 2000, First Union moved to increase its compensation and additionally requested an award of interim compensation from the principal. Mary Smith filed a motion for partial summary judgment on the issue of interim compensation that the court granted in part and denied in part. The court held that First Union was not entitled to interim principal compensation for its previous ordinary expenses, but held that First Union could pursue its claim for previous extraordinary expenses.
¶ 8 Following the trial on the 15-year audit, the parties filed post-trial motions and one additional hearing on the issue of increased compensation was held. In its final ruling, the court held that First Union was entitled to increased compensation for future services equal to 0.0025% (or 25 basis points) of the total asset value of the trust. The court, however, did not award First Union compensation for extraordinary services finding that no extraordinary services were rendered.
¶ 9 On January 28, 2003, the court issued a final adjudication of the audit. The adjudication was amended on February 14, 2003, and incorporated the court's prior holdings regarding compensation. Mrs. Smith and First Union have filed appeals and cross-appeals to the amended adjudication. Both appeals were consolidated pursuant to Pa.R.A.P. 2136. We shall first consider First Union's appeal (No. 1330 EDA 2003) followed by Mary Smith's appeal (No. 573 EDA 2003).
Smith's appeal was filed at Docket No. 573 EDA 2003. First Union's appeal and cross appeal were filed at Docket No. 1330 EDA 2003.
II. First Union's Appeal (No. 1330) — Trustee Compensation from Principal of a Charitable Trust
¶ 10 In Pennsylvania, trustees are entitled to "reasonable and just" compensation that takes "into account the market value of the trust at the time of the allowance, and calculate[s] such compensation on a graduated percentage." 20 Pa.C.S.A. § 7185(a). W.W. Smith's codicil provides that the corporate trustee "shall be entitled to reasonable compensation annually for services rendered, not to exceed in any year an amount equal to five percent (5%) of the then current annual income of the trust fund." W.W. Smith Codicil, Article IV. The question presented is whether this language precludes First Union from additional compensation for ordinary expenses based upon the principal of the trust.
A. Applicability of § 7185 and Related Case Law to Pre-1982 Charitable Trusts
¶ 11 In the past, Pennsylvania has prohibited trustees of perpetual trusts from earning compensation from the principal of the trust under the Taxis Rule: "[i]n the absence of an express direction, interim corpus compensation to the trustee of a charitable trust is not allowable." In re Dolfinger's Estate, 45 Pa. D. C. 2d 404, 408 (O.C. Montg. Co. 1968). The Taxis Rule was the converse of the rule established for private trusts. See In re Estate of Breyer, 379 A.2d 1305, 1308 (Pa. 1977) (stating that trustee compensation from the principal has been permissible since 1953 for non-perpetual trusts).
¶ 12 The purpose for the Taxis Rule was to prevent depletion of the corpus of the trust. Pender Estate, 68 Pa. D. C. 2d 265, 270 (O.C. Montg. Co. 1974) (citation omitted). "This rationale dates back to a time when a trustee could only invest trust funds in bonds, which would not appreciate in value. Thus, at that time, trusts' principal could not grow in value. This is no longer the case today. . . ." Amicus Curiae Brief at 13.
¶ 13 In 1982, therefore, the "Taxis Rule" was legislatively overturned. The Commonwealth Legislature amended § 7185(b) to read:
The fact that a fiduciary's service has not ended or the fact that the trust has not ended or the fact that the trust is perpetual shall not be a bar to the fiduciary's receiving compensation for his services out of the principal of the trust. Whenever it shall appear either during the continuance of a trust or at its end, that a fiduciary has rendered services for which he has not been fully compensated, the court having jurisdiction over his accounts, shall allow him such original or additional compensation out of the trust income or the trust principal or both, as may be necessary to compensate him for the services theretofore rendered by him. The provisions of this section shall apply to ordinary and extraordinary services alike.
20 Pa.C.S.A. § 7185(b). The Legislature intended this amendment to apply to charitable trusts.
This amendment is intended to make clear that compensation may be awarded out of principal whenever the court finds it appropriate under the circumstances, even when the trust is a perpetual charitable trust.
20 Pa.C.S.A. § 7185 (1982 Official Comment).
¶ 14 The amendment was applicable only to trusts that were created on or after February 18, 1982. Section 13 of Act 1982, Feb. 18, P.L. 45, No. 26. Since the 1982 amendment was not retroactive to pre-1982 trusts, perpetual and charitable trusts did not receive "equal treatment" under Pennsylvania law.
In 1967, the Supreme Court made a 1953 amendment retroactive, permitting courts to award compensation out of the corpus of a trust to pre-1953 private trusts. In re Estate of Ehret, 235 A.2d 414 (Pa. 1967). Pre-1982 charitable and perpetual trusts were not accorded the same retroactivity afforded private trusts under Ehret after the passage of the 1982 amendment.
¶ 15 To correct this imbalance, the Legislature made § 7185 retroactive to pre-1982 trusts. Section 14 of Act 1984, Oct. 12, P.L. 929, No. 182. This enactment made it clear that the intent of the Pennsylvania Legislature was to make the law relating to both private and charitable trusts the same. As a result, prior case law regarding private trusts is equally enforceable against charitable trusts.
B. Compensation Clause in the W.W. Smith Codicil
¶ 16 The next question becomes whether the compensation clause in W.W. Smith's codicil precludes any compensation from the principal of the W.W. Smith Charitable Trust.
¶ 17 Generally, the will or the trust instrument will control even in the presence of a conflicting statute. See 20 Pa.C.S.A. § 7185(c). If there is a provision in the will regarding compensation of a trustee, then the intent of the testator, as evidenced by the will, must prevail. See In the matter of the Indenture Agreement of Lawson, 607 A.2d 803, 805 (Pa.Super. 1992) ( discussing In re Kennedy Trust, 72 A.2d 124 (Pa. 1950)).
¶ 18 The intent of the testator is determined by examining:
(a) all the language contained in the four corners of his [the Testator's] will and (b) his scheme of distribution and (c) the circumstances surrounding him at the time he made his will and (d) the existing facts. . . .
In re Estate of Burleigh, 175 A.2d 838, 839 (Pa. 1961) (citations omitted). Therefore, if Mr. Smith intended for the compensation clause to preclude compensation from the principal when taking into account the four corners of the will and codicil, his scheme of distribution, the surrounding circumstances, and the existing facts, then § 7185 does not apply. If, however, there is ambiguity as to Mr. Smith's intent, technical rules (such as § 7185) may be utilized to construe the provision. Id.
¶ 19 First Union argues that the compensation clause was silent as to compensation from the principal. Therefore, under the holdings of In re Kennedy Trust ( 72 A.2d 124 (Pa. 1950)), In re Reed ( 357 A.2d 138 (Pa. 1976)), and In re Lawson ( 607 A.2d 803 (Pa.Super. 1992)), and the retroactivity amendment to § 7185, First Union argues that the compensation clause permits compensation to be paid from the principal.
¶ 20 Mary Smith argues that Kennedy Trust, Reed, Lawson, and § 7185(b) do not apply because the compensation clause is clear and does not provide for any additional compensation to be paid from the principal of the trust.
¶ 21 We find that the compensation clause in the codicil is ambiguous as to compensation from the principal of the trust, and therefore, we must resort to § 7185 to assist in the interpretation of the clause. By so doing, we hold that compensation may be paid from the principal of the trust.
1. Applicability of Kennedy, Reed, and Lawson
¶ 22 Both parties cite to Kennedy Trust, Reed, and Lawson to support their arguments.
¶ 23 In Kennedy Trust, the parties argued over compensation upon the termination of the trust. The trust deed provided for a 5% monthly commission on the trust income, but did not specifically provide for any termination compensation. Kennedy Trust, 72 A.2d at 125. In fact, the trust deed was "silent as to the compensation payable to the trustees upon the termination of their fiduciary duties." Kennedy Trust, 72 A.2d at 126. The Pennsylvania Supreme Court found that
[a] prima facie right to remuneration for such services is not to be overridden by a mere implication drawn from incidental mention in the deed of trust of five per cent commission to the trustees on income. That reference occurs in the paragraph which prescribes the manner in which the trustees are to determine, from time to time, the net income available for current distribution and evidences no intended bearing on the extent of the trustees' full remuneration.
Id. In finding that the trustees were entitled to termination compensation from the principal, the Court found that there was "no suggestion that the deductible commission on income was to be in complete discharge of the trustees' services with respect to corpus." Id.
¶ 24 In Reed, a similar dispute arose. The trustee petitioned for termination compensation. The trustee had previously been compensated at a rate of $4,000 per year (later raised to $8,000) from the income of the trust. Upon the trustee's death, the trustee's estate presented a claim for termination compensation to be paid from the trust's principal. Reed, 357 A.2d at 139-40. The Supreme Court held that termination compensation was permissible under § 7185 because the trust deed was silent as to termination compensation and "[o]nly compensation from income was `expressly prescribed' by the provisions of the will." Reed, 357 A.2d at 141.
¶ 25 Finally, in Lawson, we found that the compensation clause "which provides for compensation from income [does] not to preclude termination compensation." Lawson, 607 A.2d at 805. We stated that the compensation clause regarding periodic income "by its terms applies only to compensation `during the continuance of the trust'." Id.
¶ 26 It is important to note that these three cases involve private trusts. Because we interpret the Legislature's action in making § 7185 retroactive to pre-1982 trusts as legislative intent to streamline the law between private and charitable trusts, these cases may guide our decision in the case at bar.
¶ 27 All three cases, however, can be distinguished from the situation here. These three cases involve termination compensation for which there was no provision made for in any of the trust instruments. None of these cases directly involve periodic income during the life of the trust. Also, in each case, the trust instrument at issue had some provision regarding income during the life of the trust. In fact, in Lawson, we recognized that the compensation clause regarding periodic income "by its terms applies only to compensation `during the continuance of the trust'." Lawson, 607 A.2d at 805.
¶ 28 In the case at bar, periodic income during the perpetual life of the trust, not termination compensation, is at issue, and there is a clause in the trust instrument regarding such periodic income. While Kennedy Trust, Reed, and Lawson may assist us in determining whether to grant additional income based upon the principal of the trust, they are not controlling. We must therefore attempt to determine the intent of the testator by applying the Burleigh factors.
2. Intent of Mr. Smith — Burleigh analysis
¶ 29 In its entirety, the compensation clause states that:
My individual trustee shall serve as such without compensation. My corporate trustee shall be entitled to reasonable compensation annually for services rendered, not to exceed in any year an amount equal to five percent (5%) of the then current annual income of the trust fund. Codicil, Article IV. This is the language that we must use to determine Mr. Smith's intent.
¶ 30 A similar case was decided by our Supreme Court in Estate of Cahen ( 394 A.2d 958 (Pa. 1978)). The compensation clause in Cahen stated that the "compensation of (Pittsburgh National), based upon the gross income collected hereunder, shall be three and one-third (3 1/3%) per centum," and that, at the termination of the trust, the trustee would receive between 1% and 3% of the principal of the trust. Cahen, 394 A.2d at 960. The Court found that this compensation clause expressly prescribed for both interim and termination compensation and prohibited any other disbursements of compensation contrary to these terms. Cahen, 394 A.2d at 962.
¶ 31 Cahen is distinguishable from the instant case because the plain language of the Cahen compensation clause clearly indicated the intent of the settlor. In the case at bar, it is uncertain whether Mr. Smith meant for the 5% to be drawn solely from the income, solely from the principal, or from both. It is also uncertain whether Mr. Smith intended to preclude compensation from the principal. Because intent regarding additional compensation from the principal cannot be determined solely from the four corners of the instrument, we examine his distribution scheme, the surrounding circumstances, and existing factors. Burleigh, 175 A.2d at 839.
¶ 32 Mary Smith, referring us to Articles V and VII of the codicil, emphasizes that "Mr. Smith did, in fact, know how to direct that an expense only be charged to income." Smith Brief at 22 n. 8. Article V directs that the trustees shall be reimbursed "from the income of the trust fund for all expenses incurred directly in connection with the preparation and filing" of the trust accounting. Codicil, Article V. Article VII directs that any bond premium paid as a result of a court order "shall be a charge against income." Codicil, Article VII.
¶ 33 These provisions do indicate that Mr. Smith could allocate certain expenses to be paid from the trust income. These do not, however, clearly indicate that trustee compensation was to be drawn solely from income, at the exclusion of the principal. In Articles V and VII, Mr. Smith stated that these expenses are to be paid "from the income" or "charge[d] against income." Mr. Smith clearly indicated from where he wanted these expenses to be drawn.
¶ 34 The compensation provision, however, is not as clear. Article IV, states that income in any year was not to exceed "an amount equal to five percent (5%) of the then current annual income." Codicil, Article IV. This language may indicate that he wanted to limit compensation to only income. Alternatively, it may indicate that the 5% cap was only applicable to compensation drawn from the income. Finally, it may indicate that the 5% cap was applicable to all compensation, regardless if it was drawn from principal or income. Articles V and VII, therefore, do not provide much clarity to the compensation clause.
¶ 35 We next look to the surrounding circumstances at the time the codicil was executed. Mrs. Smith argues that the language in the compensation clause was influenced by the law as it existed at the time of execution. For support of this contention, she cites Breyer. While acknowledging that the law as it existed at the time of execution may have an impact upon intent, our Supreme Court found that the trust document contained a clear compensation clause that barred interim compensation from the trust principal and therefore reference to the old rule was unnecessary (which also prohibited interim compensation from principal in private trusts). Breyer, 379 A.2d at 1310. Therefore, the testator in Breyer indicated his preference for the old law by drafting a clear compensation clause.
¶ 36 Mr. Smith was not as clear as the testator in Breyer. His compensation clause, regardless of prior law, does not provide a clear indication of his preference for the pre-1982 law, which prohibited compensation from the principal. Had his language been clearer, we would have no problem finding that the pre-1982 law influenced his intent. Since he provided us with no clear indication, we must apply the law as it existed at the time the suit was brought. In re Estate of DeRoy, 392 A.2d 1355, 1358 (Pa. 1978); In re Arrott Estate, 217 A.2d 741, 745 (Pa. 1966); In re Kellerman Estate, 88 A. 865, 868-69 (Pa. 1913).
¶ 37 Finally, we look to the facts as they existed at the inception of this suit. We note that for the account period, First Union was being paid from the interest in an amount equaling 5% of the trust income. This fact carries little weight since First Union properly challenged the level of compensation intended by Mr. Smith. We also note that there has been a change of circumstances. We discuss this issue in more detail in part III, infra. 3. Application of § 7185
¶ 38 Since Mr. Smith's intent cannot be accurately established because the compensation clause is ambiguous, we are permitted to use the rules set forth by the legislature for the enforcement and interpretation of the codicil. "[T]echnical rules or cannons of construction should be resorted to only if the language of the will is ambiguous or conflicting or the testator's intent is for any reason uncertain." Burleigh Estate, 175 A.2d at 839.
¶ 39 Section 7185(b), as amended in 1982, permits compensation for a trustee's services "out of the principal of the trust," including a perpetual charitable trust.
Whenever it shall appear . . . during the continuance of a trust . . . that a fiduciary has rendered services for which he has not been fully compensated, the court . . . shall allow him such original or additional compensation out of the trust income or the trust principal or both, as may be necessary to compensate him for the services theretofore rendered by him. The provisions of this section shall apply to ordinary and extraordinary services alike. 20 Pa.C.S.A. § 7185(b). Accordingly, First Union is entitled to either income, or principal, or both, that would fully compensate it for its services and ordinary expenses.
First Union is not entitled to compensation for past extraordinary expenses because the Orphans' Court denied such compensation in its order dated June 26, 2002, and First Union did not appeal that decision.
¶ 40 It should be noted that we make no finding that such additional compensation for past ordinary services is warranted. The Orphans' Court never determined if additional compensation was appropriate for past ordinary services because it found that, as a matter of law, First Union was not entitled to any additional compensation from the principal. Since we reverse this determination, First Union will now have to demonstrate to the Orphans' Court that it is entitled to such additional compensation.
III. Mary Smith's Appeal (No. 573) — Modification of Trustee Compensation
¶ 41 Mary Smith argues that the Orphans' Court erred when it found that First Union was entitled to an increase in future compensation.
¶ 42 When a court considers modifying the compensation agreement set forth in a contract or trust instrument between the settlor and the trustee, it must find that extraordinary circumstances exist before modifying the agreement. In re Duncan Trust, 391 A.2d 1051, 1055 (Pa. 1978). Our Supreme Court defined extraordinary circumstances as
circumstances where [1] the trustee has performed extraordinary services beyond those contemplated by the parties or [2] where the compensation fixed by the agreement is so low that the unwillingness of a competent trustee to continue or undertake to administer the trust would defeat or substantially impair its purposes . . .
Id. (emphasis added).
¶ 43 The lower court found that First Union was entitled to an increase in its future compensation. The lower court supported its opinion by finding that the
change in investment income is a significant change of circumstance that could not have been anticipated by Mr. Smith or the corporate trustee. The significant increase in the assets of this trust in and of itself increases the responsibilities of the corporate trustee. The Will first indicates that the corporate trustee is entitled to `reasonable compensation.' The subsequent `cap' of five percent (5%) of income is no longer realistic.
After consideration of all the evidence, the Court concludes that the current compensation to First Union is at such a low rate as to tend to defeat the very purpose of the trust to the point where a competent corporate fiduciary would be reluctant to proceed with the trustee's duties because of inadequate compensation. . . . The evidence in this case did not reveal any corporate fiduciary that was `ready, willing and able' to become the corporate trustee of this trust at the current rate of compensation being received by First Union.
Trial Court Opinion, 6/26/2002, at 4-5 (footnotes omitted). After applying Duncan Trust analysis, the court ordered that additional compensation for future services be paid in the amount of 0.0025% (or 25 "basis points") of the total asset value of the trust. Because the lower court applied the correct analysis, we review the record to determine whether the evidence submitted was sufficient for such a finding.
¶ 44 First, we note that Mrs. Smith effectively waived the issue herein discussed because of her failure to raise for our review both parts of the Duncan Trust analysis of the lower court. Mrs. Smith did argue that there was a fiduciary "ready, willing and able" to administer the trust. Mrs. Smith did not, however, raise the issue that circumstances occurred that were beyond the contemplation of the original parties. See Smith Brief at 3. She did address the issue briefly in footnotes. See Smith Brief at 12 n. 2; Reply Brief at 5 n. 5. But these passing references do not amount to her properly raising the issue for our review, especially in light of the fact that she stated that the issue is not presently before us. Reply Brief at 5. Since she did not raise the issue in her Statement of Questions Involved (and did not address the issue in the body of her argument), we cannot consider whether the lower court was correct in finding that extraordinary services were provided and that these services were beyond the contemplation of the parties. Pa.R.A.P. 2116(a); Commonwealth v. Heggins, 809 A.2d 908, 912 n. 2 (Pa.Super. 2002).
¶ 45 As a result of this waiver, Mrs. Smith's entire argument on the issue of whether there was a trustee ready and willing to administer the trust is moot. The Duncan Trust test is disjunctive. A party seeking to modify a compensation agreement in a trust instrument need only show either the circumstances were beyond the original contemplation of the parties or that there is no other capable corporate fiduciary. Duncan Trust, 391 A.2d at 1055. Since Mrs. Smith waived her right to contest the lower court's finding of circumstances beyond the original contemplation of the parties, the lower court's finding must be upheld. This uncontested lower court finding is sufficient to satisfy the disjunctive Duncan Trust test. Therefore, we must affirm the lower court's modification of compensation for future services.
¶ 46 Had the issue not been waived, we would still affirm the lower court. When reviewing the final order of an Orphans' Court, we must not disturb the factual findings absent a manifest error.
Our standard of review from a final order of the Orphans' Court Division requires that we accord the findings of an Orphans' Court, sitting without a jury, the same weight and effect as the verdict of a jury; we will not disturb those findings absent manifest error; as an appellate court we can modify an Orphans' Court decree only if the findings upon which the decree rests are not supported by competent or adequate evidence or if there has been capricious disbelief of competent evidence.
In re Benson, 615 A.2d 792, 793 (Pa.Super. 1992). We believe that the lower court relied on competent and adequate evidence.
¶ 47 There was sufficient evidence to show that there were extraordinary services being performed that were not in the contemplation of Mr. Smith and Philadelphia National Bank (predecessor-in-interest to First Union). Mr. Smith believed that the trust would be funded primarily by a single asset: the Kewanee Oil stock. It was because the stock was sold and the proceeds skillfully invested that the principal dramatically increased. Mary Smith admitted that W.W. Smith would never have thought that the trust would have grown so large. See N.T., 11/14/2001, at 184-86. The increase in principal was due to the careful management and investment decisions made by the trustees. Given that the trustee's actions resulted in a dramatic increase in the size of the principal while income decreased, First Union demonstrated that the current compensation level for a trust account of that size deserved additional compensation.
While a "mere increase in the dollar value of the estate or trust is, of course, insufficient by itself to warrant extra compensation," if that "increase occurs as the result of a carefully investigated and specialized investment, it no longer is merely incidental to the management of the trust, but has become a result of that management, and such efforts should be reasonably compensated." Rea Trust, 28 Pa. D. C. 2d 433, 437 (O.C. Montg. Co. 1962).
¶ 48 Had the Kewanee Oil stock remained the trust's only asset, the principal may never have increased to its current level. Therefore, the increase in principal, and the increase in trust administration as a result (i.e., increased grant requests) were beyond the contemplation of the parties at the time the codicil was executed.
¶ 49 Mrs. Smith argues in her reply brief that First Union was aware of these changed circumstances at the time it succeeded Philadelphia National Bank. Smith Reply Brief at 5 n. 5. While this may be true, the test in Duncan Trust is whether circumstances have changed beyond those contemplated by the parties. Duncan Trust, 391 A.2d at 1055. The fact that First Union was aware of the changes is irrelevant unless Mr. Smith was also aware that those changes were possible. Since Mrs. Smith testified that her late husband would not have thought that the principal would grow as large as it has grown, both First Union and Mr. Smith were not aware of the circumstances at the time of the trust's creation. Therefore, extraordinary circumstances exist to permit modification.
¶ 50 Second, there were no corporations willing to administer the trust under the current compensation terms. Each of the corporations offered by Mary Smith stated that they would be willing to take over the administration of the trust only if substantial changes were made. For example, Bryn Mawr Trust proposed eliminating the full time trust administrator. Bryn Mawr also proposed increasing compensation. Without changes, none of the offered corporations were willing to take over for First Union.
¶ 51 Although First Union admitted that they would be willing to continue the trust administration without increased compensation, this admission does not defeat First Union's argument. If First Union continued to administer the trust at the current compensation level, the purposes of the trust would be substantially impaired. In fact, impairments began while this appeal was pending. For example, First Union now requires the trust to pay rent on the First Union office space that is used by the trust. It is foreseeable that services that allow the administration of this trust to run smoothly ( i.e., the First Union staff assigned full time to the trust's offices) will diminish or be eliminated altogether as a result of the low compensation. Even if First Union's admission defeats this argument, the fact that the current situation is beyond what was originally contemplated is sufficient to modify First Union's compensation.
¶ 52 Finally, Mrs. Smith argues that the lower court impermissibly placed the burden of proof on her, instead of on First Union. Mrs. Smith is correct in stating that First Union has the burden of proof. "[T]he burden of proof is on the party disputing its [the trust's] validity or terms." Barnes Foundation, 683 A.2d at 899. But the standard which First Union must meet is not that there exists no willing competent trustee (a subjective/anecdotal burden), but that the compensation is so low that no competent trustee (an objective standard) would be willing to serve and that the trust would be substantially impaired. First Union did demonstrate this through the evidence.
¶ 53 There is sufficient evidence to find that there were extraordinary services being provided that were outside the contemplation of Mr. Smith. No competent trustee would be willing to continue or undertake to administer the trust absent a substantial impairment of the trust's purposes. As a result of the low compensation, there exists extraordinary circumstances that would permit an increase future compensation payments to the corporate trustee.
IV. Conclusion
¶ 54 The amended adjudication dated February 14, 2003, is hereby AFFIRMED in part, REVERSED in part, and REMANDED to the Orphans' Court of Montgomery County for further proceedings not inconsistent with this decision. Jurisdiction is relinquished.
¶ 55 Judge Beck files a Dissenting Opinion.
¶ 1 I respectfully dissent. I believe the majority incorrectly casts the issue herein as whether compensation for the trustee of a perpetual charitable trust may be taken from the principal of the trust. Instead, we must determine only whether First Union, as corporate trustee, is entitled to remuneration in excess of that prescribed in the trust document. My review of the trust document and the applicable law lead me to the conclusion that the trial court erred when it increased the amount of compensation to First Union.
¶ 2 The relevant terms of the codicil that created the trust provide that the corporate trustee "shall be entitled to reasonable compensation annually for services rendered, not to exceed in any year an amount equal to five percent (5%) of the then current annual income of the trust fund." There is no question that the "income" of the trust has not increased at the same rate as the trust's total asset value. Indeed, the trust's assets have increased in value from $50,741,301 when it was created in 1976 to more than $162 million. First Union's compensation based on income has remained about the same (though in excess of $250,000 in each of 1997 and 1998). First Union claims it should be entitled to receive compensation based on the total asset value of the trust, as a result of this change in economic realities, and in recognition of its extraordinary service to the trust over the years.
¶ 3 The trial court agreed, and changed the formula for First Union's prospective annual compensation to 25/100 of 1% (25 basis points) of the total asset value of the trust. The majority affirms this decision, and remands the matter to the trial court for a determination of what additional compensation out of the principal First Union may deserve for its past performance. I cannot agree that these results are allowed by the trust document or the applicable law.
¶ 4 First, I consider 20 Pa.C.S.A. § 7185, which governs compensation to trustees. It is true that Section 7185 is now applicable to perpetual charitable trusts, even those created before 1982, and generally allows "compensation to the trustee as shall in the circumstances be reasonable and just, and may take into account the market value of the trust at the time of the allowance." 20 Pa.C.S.A. § 7185(a). The statute further provides:
(b) Allowed out of principal or income. — The fact that a fiduciary's service has not ended or the fact that the trust is perpetual shall not be a bar to the fiduciary's receiving compensation for his services out of the principal of the trust. Whenever it shall appear either during the continuance of a trust or at its end, that a fiduciary has rendered services for which he has not been fully compensated, the court having jurisdiction over his accounts, shall allow him such original or additional compensation out of the trust income or the trust principal or both, as may be necessary to compensate him for the services theretofore rendered by him. The provisions of this section shall apply to ordinary and extraordinary services alike.
20 Pa.C.S.A. § 7185(b).
¶ 5 First Union seizes upon subsection (b) to support its bid for more money, and the majority here agrees. However, in my view, the matter is controlled by subsection (c) of the statute:
(c) Compensation prescribed by will or other instrument. — Where the compensation of a fiduciary is expressly prescribed either by provisions of a will or deed of trust or other instrument under which he is acting or by provisions of an agreement between him and the creator of a trust, nothing in this section shall change in any way the rights of any party in interest or of the fiduciary.
20 Pa.C.S.A. § 7185(c). The trust instrument in this case clearly sets forth the maximum yearly compensation for the corporate trustee First Union, and therefore the terms of Section 7185(a) and (b), which permit additional compensation, " shall not change in any way" First Union's rights. See Estate of Cahen, 483 Pa. 157, 394 A.2d 958 (1978) (where trust instrument clearly prescribed terms of compensation for corporate trustee, trustee was not entitled to additional compensation under § 7185(a) and (b)); Estate of Breyer, 475 Pa. 108, 379 A.2d 1305 (1977) (same). The statute does not authorize additional compensation to First Union for past performance of either "ordinary" or "extraordinary" services, and I would affirm the trial court on this question.
First Union did not challenge in this appeal the trial court's decision denying its request for "extraordinary" expenses, only its decision on "ordinary expenses."
¶ 6 Our case law also undermines First Union's position — and the trial court's decision — that First Union is entitled to a prospective increase in its annual compensation, despite the clear language of the trust document limiting that compensation. Our Supreme Court has set forth the standard for allowing additional compensation to a trustee:
I cannot agree with the majority's statements regarding Mary Smith's waiver of arguments on this issue. I find instead that she has made proper argument to this Court based on the relevant case law, both regarding changed circumstances and other competent trustees.
It is well settled that where there is a valid agreement between settlor and trustee fixing the terms of the trustee's compensation, courts must ordinarily enforce the terms of the agreement without making an independent determination of whether the terms are reasonable . . . An exception to the general rule, in circumstances where the trustee has performed extraordinary services beyond those contemplated by the parties or where the compensation fixed by the agreement is so low that the unwillingness of a competent trustee to continue or undertake to administer the trust would defeat or substantially impair its purposes, is well recognized. . . .
In Re Duncan Trust, 480 Pa. 608, 391 A.2d 1051, 1055 (1978) (citations omitted). Under Duncan, in order to support a claim for more compensation, a trustee must show it performed extraordinary services (which the trial court did not find here) or that "the compensation fixed by the agreement is so low that the unwillingness of a competent trustee to continue or undertake to administer the trust would defeat or substantially impair its purposes." Id.
¶ 7 In allowing a change in the compensation formula, the trial court in this case did not follow the Duncan standard, but instead held that First Union was entitled to more compensation because other competent trustees would be " reluctant" to take on administration of the trust under its original terms. Trial Court Opinion, dated 6/26/02, at 4. Being "reluctant" is not the same thing as being "unwilling." Indeed, any contracting party who, with the benefit of hindsight, decides he made a bad deal would be "reluctant" to proceed with his performance. But our contract law does not permit such a result. See In re Kennedy Trust, 364 Pa. 310, 314, 72 A.2d 124 (1950) (entitlement to trustees' compensation is not a matter of the law of trusts, but of the intent of the parties as evidenced by their contract).
The "reluctance" standard apparently comes from a 1957 Orphans' Court decision called Coleman Estate, 12 Pa. D. C. 2d 548 (Montg. Cty. 1957), where a request to increase compensation was not opposed by any party. Obviously, Coleman is not precedential.
[W]here a trustee seeks to avoid the terms of the agreement by showing extraordinary services beyond the contemplation or reasonable expectation of the parties, the proof of their extraordinary nature, as well as their extent and value to the trust, must be clear and convincing; it is not sufficient merely to show that the terms agreed upon by the parties no longer appear, with the benefit of hindsight, to be reasonable for the services actually performed.
Duncan, 480 Pa. at 615, 391 A.2d at 1055 (citations omitted).
¶ 8 First Union nonetheless argues that our cases have held that where the trust document itself is silent with respect to a trustee's remuneration, the courts may provide for such compensation.
[If] a deed or will creating a trust is silent as to the compensation to be paid the trustee, he is entitled to receive a reasonable allowance on the income passing through his hands during the term of the trust and, at the end of the trust, reasonable compensation from the corpus for his care and preservation thereof . . . [I]f the instrument creating the trust provides what the trustee's compensation shall be, such provision is binding on all parties concerned.
Kennedy, supra at 314, 72 A.2d at 126 (citations omitted). See also In re Reed, 467 Pa. 371, 357 A.2d 138 (1976) (additional compensation on termination of trust allowed where trust document was silent on that issue); In re Indenture Agreement of Lawson, 607 A.2d 803, 805 (Pa. Super. 1992) (termination compensation allowed where trust document was silent on the matter). However, even if these decisions related to perpetual charitable trusts, which they do not, they are still distinguishable because the trust document in this case is not silent with regard to the corporate trustee's compensation.
¶ 9 I read the instant trust document as expressly prescribing the full extent of the corporate trustee's annual compensation for services. To the extent that the amount prescribed appears to be inadequate by today's standards, I would nevertheless hold that First Union is bound by the trust's terms as by any other contract. Without a showing that it or any other competent trustee is unwilling to proceed with the administration under the circumstances, First Union is not entitled to additional compensation under the applicable law. First Union itself conceded that it would continue to administer the trust even without increased compensation, R.R. at 356a, and that is sufficient proof that the standard has not been met. In addition, the record shows that other entities would indeed be willing to take on the trust under its compensation terms.
Mary Smith suggests the reasons why First Union has an incentive to remain as corporate trustee are obvious: the trust is a well-known Philadelphia charity with assets in excess of $162 million, and from which First Union consistently receives fees of over $200,000 annually. R.R. at 664a. For the years of 1984 through 1998, for example, First Union received from $217,526 in 1985 to $298,730 in 1990. R.R. at 7a-8a; 323a-24a; 641a. The trust is First Union's single largest relationship in its Philadelphia Charitable Fund Group, and the second largest relationship in the entire bank. R.R. at 452a-53a.
Specifically, representatives of both Harleysville National Bank and Trust Company and Bryn Mawr Trust Company testified that they were willing to take on the trust under the 5% of income remuneration cap. R.R. at 560a; 575a; 584-86a. Though the witnesses who testified on behalf of these potential corporate trustees in certain instances made suggestions regarding ways the administration could be made more profitable, or stated that they might prefer more beneficial compensation strategies, they did state they would nonetheless accept trusteeship of the trust under its terms.
¶ 10 Furthermore, though First Union makes much of the allegedly extraordinary services it has provided gratis to the trust over the years, such as rent-free office space, a dedicated trust officer, and investment analysts at monthly meetings, the trial court did not find that these particular services are "beyond the contemplation or reasonable expectation of the parties," or that their elimination would impair the administration of the trust; "proof of their extraordinary nature, as well as their extent and value to the trust, must be clear and convincing" in order to avoid the terms of the trust documents. Duncan, supra at 615, 391 A.2d at 1055.
First Union is no longer providing the trust rent-free office space, R.R. at 892a, and intended to revisit its decision to offer the other services if it had been denied additional compensation from the court. R.R. at 537a-38a. Of course, First Union is free to negotiate additional fees for services it provides that are not required by the trust documents, and the parties are also free to enter into new contracts for additional compensation to First Union's agreed terms.
¶ 11 I would hold that First Union has not met its burden under Duncan to merit an increase in its compensation for administration of the instant charitable trust. I would reverse the trial court's decision increasing First Union's prospective compensation, and affirm its decisions denying First Union's requests for interim compensation for ordinary and extraordinary services.