Addressing Incomplete or Lost Records During Fiduciary Administration

“Addressing Incomplete or Lost Records During Fiduciary Administration,” that’s the subject of today’s ACTEC Trust and Estate Talk.

Transcript/Show Notes

This is Travis Hayes, ACTEC Fellow from Naples, Florida. The general rule is that a fiduciary has an obligation to maintain records as to its administration of an estate or trust. But what is the duty if there is an issue with the records? What options are available when a fiduciary is confronted with missing information and lost records?

ACTEC Fellows Steve Mignogna of Voorhees, New Jersey, and Amanda DiChello of Wilmington, Delaware, join us today to share best practices and how to address issues relating to a fiduciary’s records retention. Welcome, Steve and Amanda.

Steve Mignogna: Thank you, Travis. We appreciate the opportunity and thank you, Amanda, for joining me. Amanda is with M&T Bank Wilmington Trust so she brings the perspective from that of a corporate fiduciary, although she was in private practice as well and I am in private practice, so we come from those two directions. I should also note along those lines that while Amanda was kind enough to join us here, any opinions or statements she expresses are those of her personally and not those of the M&T Bank Wilmington Trust Company for which she works. With that said, let’s dive into the substance of the presentation.

Fiduciary Obligation to Maintain Records

As Travis mentioned, we start with that general rule that most of us are familiar with, that a fiduciary has an obligation to maintain records. Not a dispute about that, and the obligation also relates to other duties of a fiduciary, such as collecting and safeguarding assets and acting with prudence, loyalty, and impartiality.

A Fiduciary’s Roll When Records Are Incomplete

What we want to talk about is the common and thorny problem that arises when the fiduciary has incomplete records. This happens in the real world. It happens because (i) there may not be the knowledge of a fiduciary, especially an individual fiduciary, to maintain the records, (ii) the passage of time, (iii) the merger of corporate fiduciaries, or (iv) the passing of an individual fiduciary. We’ve all dealt with situations where an individual fiduciary passes, and then the family of that person has to deal with where the records were kept or if they still exist.

Now, admittedly, we hope that this problem will be mitigated in the coming years by the trend of electronic record keeping. So that will help, but we’ll still have situations where the administration has not been approved and, therefore, records for a given time are still needed. So while we do think the problem may diminish over time, we don’t think it will ever go away, and it certainly remains ripe in the current situation.

Strategies for Locating Missing Records

The challenge presented for a private practitioner like me in dealing with lost or missing records is making sure the client has truly searched all locations. Sometimes, records are found in an unexpected place, like the drawer of a retired trust officer or in warehouses. Sometimes, the law firm may have records if the law firm has done work for the fiduciary in the past. Sometimes, court records will help fill the gaps in the records. Prior counsel may have done work and, if the attorney is still available, may have records that help fill the gap of the lost records. And, even at the more extreme level, I’d say, is the option of asking beneficiaries if they have records because, at times, they receive account statements or other records regarding the administration of the estate or trust. The last option is certainly not preferable, but it’s one that sometimes is taken just to try to fill the void in the records as much as possible.

Addressing Missing Records

Ultimately, to solve the problem, if the records cannot be located, the fiduciary has several options, but the main ones are usually the following:

• First, appropriate disclosures can be made, and a nonjudicial agreement in most states can be done to approve the administration despite the incomplete records.
• There can also be a notice to, or advising the parties in interest, of the issue and seeking their waiver of claims in the event that for some reason a full-blown, nonjudicial settlement agreement is not available.
• The receipt of parties in interest of records and account statements can also help, especially in certain jurisdictions, if the Uniform Trust Code or otherwise allows that notices given to the parties in interest could foreclose them from bringing claims.

Judicial Solutions and Court Considerations

Finally, a fiduciary can bring a judicial application and divulge the problem, and try to have it solved through the court proceeding. Whether the courts are receptive to that or not – Amanda will get into it in a moment – but those applications rely on a number of factors, including what happened. For example, if the records are not available due to some calamity such as a hurricane or a fire or flood, those matters tend to be more sympathetic than if it was some type of negligence or breach of duty where the records were lost or gone missing. With that backdrop, I’ll let Amanda chat with us for a bit about some of the ways the courts have handled these situations.

Court Handling of Record-Keeping Cases

Amanda DiChello: Sure, and so you know we’ve been along the topic of discussing good practices for trying to locate records that may be missing or inadequate, as well as how to solve the problem. As Steve mentioned, the case law really sheds some information for us on exactly how the courts look at these situations. In other words, who has the burden of proof in these situations? And what, if anything, can the case law teach us about the content of the books and records themselves?  In other words, what are the records? And what should the records be comprised of?

Burden of Proof in Fiduciary Record-Keeping

If you just look at it – and I’m not going to talk about any specific case here because I just don’t have time on this particular podcast. I’m going to sort of do a high-level summary of what the cases ultimately hold and, you know, the opinions that the courts have reached. I have to start, of course, with the burden of proof in a records case.

Essentially, while this may vary by jurisdiction, generally speaking, in a contested accounting proceeding, it’s the fiduciary who has the initial burden of proving that it’s fully accounted for all of the assets of the trust and that the account is accurate and complete. Then, the party challenging the account bears the burden of coming forward with evidence to establish that the account is inaccurate or incomplete. Then, upon satisfaction of that burden, the burden shifts back to the fiduciary to prove by a “fair preponderance of the evidence” that the account is accurate and complete. What if the fiduciary cannot meet its burden by a fair preponderance of the evidence? What if the books and records actually aren’t there or simply are inadequate?

Inadequate Record-Keeping Consequences

I’d like to focus briefly on common law and the Restatement Third for that because most of the case law on this subject addresses either the Restatement Third or some variation of it, which has been adopted by the particular jurisdiction at issue.

And so the Restatement Third says the following: “A trustee who fails to keep proper records is liable for any loss or expense resulting from that failure. A trustee’s failure to maintain necessary books and records may also cause a court in reviewing a judicial accounting to resolve doubts against the trustee. And these failures by trustees may furnish grounds for any of the following: reducing or denying compensation altogether, removal of the fiduciary, or for charging the trustee with the cost of corrective procedures or of having to conduct otherwise unnecessary accounting proceedings in court.“

The Risk of Surcharge

Now, I’m also going to talk about the scariest of all the ramifications, which is not specifically addressed in the Restatement, but I think you all know where this is going. And that’s a scary word called a surcharge. And we know that for the court to impose a surcharge, two things have to be established by a preponderance of the evidence. There’s got to be a breach of fiduciary duty and there has to be a related or proximate damage. Then, once those have been established, the burden then shifts to the fiduciary to prove that there was no connection between the breach and the loss.

Best Practices for Record-Keeping

In summary with respect to the records case law, in a lot of cases, it’s the lack of or inadequate records that actually impedes or prevents the fiduciary from fully accounting for their actions or from demonstrating the reasonableness – the fiduciary reasonableness – of their actions or inactions where the trouble is found.

So, now that we know how these cases sort of play out on a very high, you know, general level, I think it’s very useful to use these cases and the court’s thinking to help us decide what best practices should be for collecting and maintaining the records themselves.

Best Practice for Records

When we think about trust records, one of the first types of records that comes to mind is, of course, the transactional records, right? The books and the records of the trust transactions. In other words, what we would ordinarily use to prepare an accounting. And then, of course, there are tax records and there are other transactional types of records. But another very important category of records, which the case law shows us is highly important, are the records of the trustee’s actions or, in some cases, inactions and the rationale for such actions or inactions. So while the transactional records are certainly important and critical to properly accounting for the trustee’s administration, the case law shows us that there are also other equally important records that could be critical in a surcharge case.

With this in mind, analyzing what those records should be, I think is something that should be considered on a case-by-case basis, depending on the particular facts of the administration of the trust or estate. Something to think about going forward when determining what are the trust records, and what records should be maintained in the first place.

Duration of Record Maintenance

Then I wanted to raise an additional issue, which is how far back is it important to maintain the records? There is some case law that raises the question about whether it’s closed versus active trusts –  for example, trusts for which interim accountings have already been filed, trusts for which maybe NJSA settlement agreements or even court adjudications have been issued. Even in those instances, there is some case law that demonstrates that it is possible to reopen some of these matters on a showing of fraud or manifest error, for example.

These types of cases also raise questions for good decision-making as it relates to how long the records are maintained and whether they’re maintained, perhaps indefinitely or not, in order to best protect the fiduciary.

Impact of Inadequate Record-Keeping on Fiduciary Defense

As a final matter, I wanted to talk about one case that’s come out of Texas recently, which raises a question to consider about whether or not the inaction or the failure to maintain the records adequately is in and of itself a breach of fiduciary duty that would prevent the fiduciary from defending itself with the exculpatory language within the instrument.

I think it raises a question for everybody to consider as to whether or not exculpatory clauses would not protect the fiduciary in such an instance. I think the issue remains to be determined with sufficient case law at this point. But I think it’s a good question to consider as well. It goes back to Steve’s point of the general obligation, that’s really not in contest, that a fiduciary does have the duty and obligation to maintain adequate books and records and the duty to properly account for its administration.

Travis Hayes: Thank you, Amanda and Steve, for educating us on best practices for addressing the situation when there are incomplete or lost records relating to a trust or estate administration.

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