United States: "Fridenberg" Decision Brings New Reason To Pennsylvania Trust Law

On August 24, 2009, the Superior Court of Pennsylvania issued a major decision in the field of Pennsylvania trust law, holding in Estate of Anna E. Fridenberg, Deceased, that corporate fiduciaries are no longer bound by the long-discredited rule of Williamson's Estate, which had forbidden them from receiving compensation for services as a trustee in certain trusts created in the first half of the twentieth century or earlier.

In 1938, Mrs. Fridenberg executed a will that created a charitable trust for the support of what today is Albert Einstein Medical Center. The trust went into effect upon the death of Mrs. Fridenberg in 1940. Mrs. Fridenberg appointed Fidelity–Philadelphia Trust Company as both her executor and trustee, and the bank received a commission for its services as her executor.

At that time, a 1917 statute, a reenactment of a law dating to the Civil War era, provided that no fiduciary who received compensation from principal as an executor could also be paid commissions from principal for ordinary services as the decedent's trustee. The Legislature repealed that statute in 1945, but in 1951, the Supreme Court of Pennsylvania, in Williamson's Estate, held that the Legislature had no power to repeal the prohibition of dual executor and trustee commissions with respect to trusts created before the date of the repeal. The Court reasoned that establishment of a trust under the old law created vested rights under an implied contract, and any change in that law to permit the trustee to charge additional commissions would violate the due process rights of the trust beneficiaries under the United States Constitution. Following the Williamson decision, the Legislature made repeated efforts to repeal the bar on dual commissions for trusts created before 1945, but some of those efforts were struck down on the authority of Williamson.

In 2006, Wachovia Bank, as the corporate successor to Fidelity–Philadelphia Trust Company, filed an account of its administration of the trust in the Orphans' Court of Philadelphia and sought compensation for its services as trustee from June 1998 through March 2005. Wachovia did not seek compensation for its services as trustee in the 58 years during which it served as trustee up to June 1998. Wachovia argued that it should be entitled to reasonable compensation for its work as a trustee and that the rule of Williamson's Estate no longer was good law in light of repeated statements by the Legislature of an intent to abrogate that rule. The charitable beneficiary, Einstein, did not file an objection to Wachovia's request, but the Attorney General, exercising his parens patriae role regarding Pennsylvania charities, opposed it, arguing that the Orphans' Court was bound to follow Williamson, despite the Legislature's enactment of laws seeking to change the Williamson result. Judge Joseph O'Keefe of the Orphans' Court agreed with the Attorney General, holding that he was required to follow Williamson and thus rejecting Wachovia's request for additional compensation.

Wachovia then retained Schnader to handle an appeal to the Superior Court. The case was handled by an appellate team consisting of Ralph Wellington, Carl Solano, and Bruce Merenstein, with the assistance of Mark Carlidge from the Firm's Trusts and Estates Department. Carl Solano argued the case before a panel consisting of Judges Correale Stevens, Richard Klein, and John Kelly on March 31, 2009.

In the appeal, Wachovia argued that the Superior Court should defer to the Legislature's repeated attempts to repeal the rule barring fiduciaries from receiving compensation as both executors and trustees for estates created before 1945. It explained that the Legislature had made known its desire to repeal the rule by enactments in 1945, 1953, 1972, 1982, and 2006. Although the Supreme Court in Williamson had held that the due process clause did not permit the Legislature retroactively to permit compensation for services rendered before repeal of the 1917 statute, there should be no constitutional prohibition against allowing prospective application of new legislation allowing compensation for services rendered after the legislative repeals went into effect. Wachovia also explained that the analysis of vested rights under the United States Constitution that formed the basis for the Williamson decision no longer was followed in more recent United States Supreme Court jurisprudence, so that Williamson no longer was a correct statement of federal due process law. Because Williamson had been based only on the federal due process clause – and not on any provision of the Pennsylvania Constitution – the Superior Court therefore was free to follow the more recent precedents, rather than Williamson.

Wachovia further explained that the rule of Williamson made no sense for modern trustees. The rule dated back to the nineteenth century, when trustees acted mostly as conservators of a trust corpus. Today, on the other hand, trustees follow "modern portfolio" theories that focus on maximizing total return for the trust — regardless of whether that return is from principal or income. This requires an active and sophisticated management of the trust assets, requiring trustees to engage in tasks unheard of when the prohibition against dual commissions was adopted. Indeed, modern trustee services are analogous to what might be considered "extraordinary services" by a trustee in the nineteenth and early twentieth centuries, which always were considered an exception to the rule forbidding payment of additional compensation to the fiduciary.

In its decision in favor of Wachovia, the Superior Court, in an opinion by Judge Kelly that was joined by Judge Stevens, agreed that the Orphans' Court had erred in holding that it was bound by Williamson. The Court noted that the Pennsylvania Supreme Court itself had said in a later decision that Williamson should be limited to its facts. Whatever significance Williamson might have to the Legislature's attempt to repeal the 1917 bar against additional compensation in 1945, it did not address the constitutionality of the subsequent enactments by the Legislature attempting to do the same thing, and those enactments were entitled to a presumption of constitutionality. The Court agreed that the substantial increase in administrative responsibilities of trustees in recent decades justified the Legislature's efforts to permit recovery of additional compensation. The Court remanded the case for reconsideration of Wachovia's compensation request in light of its opinion. In his dissent, Judge Klein agreed that the outcome ordered by the majority "is both logical and preferable in light of the duties required of a trustee/executor," but opined that, in light of Williamson, that result had to be ordered by the Supreme Court, not Superior Court.

The Superior Court's decision is of great significance to corporate trustees of charitable trusts. Hundreds of such trusts exist in the Commonwealth that were established before 1945 and were governed by the Williamson rule. For that reason, the Pennsylvania Bankers' Association filed an amicus brief in support of Wachovia's position. While non-charitable perpetual trusts also were subject to the rule, most of those have terminated by now, leaving charities as the main subject of this law. Administration of charitable trusts requires a great deal of work, and the Williamson rule forbidding compensation if the trustee (or its corporate predecessor) had also served as the executor of the will under which the testamentary trust was created meant that trustees were required to do all of that work for free. The rule created an incentive for the trustee to seek to withdraw from its fiduciary role, a result that would contradict the testator's choice of trustee, disrupt the long-established relationship between the trustee and the trust, and provide no benefit to the trust in the long run because any new trustee would not be bound by the Williamson rule (since that trustee would not have already been compensated as the executor of the will creating the trust). The Court's decision thus brings reason to an area of trust law that had escaped reason for far too long, despite numerous attempts by the Legislature to correct the inequities Williamson had ordered.

www.schnader.com

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