Preview:

FOR PUBLICATION

ATTORNEYS FOR APPELLANTS: DALE W. EIKENBERRY DANIEL D. TRACHTMAN Wooden & McLaughlin LLP Indianapolis, Indiana SHAWN P. RYAN South Bend, Indiana

ATTORNEYS FOR APPELLEE: JEFFERY A. JOHNSON PATRICIA E. PRIMMER ROBERT J. PALMER May Oberfell Lorber Mishawaka, Indiana

FILED
of the supreme court, court of appeals and tax court

Mar 02 2009, 9:05 am

IN THE COURT OF APPEALS OF INDIANA
IN RE: MATTER OF THE STUART COCHRAN ) IRREVOCABLE TRUST, ) ) CHANELL and MICAELA COCHRAN, ) ) Appellants-Petitioners, ) ) v. ) ) KEYBANK, N.A., ) ) Appellee-Respondent. )

CLERK

No. 71A04-0806-CV-384

APPEAL FROM THE ST. JOSEPH CIRCUIT COURT The Honorable Michael G. Gotsch, Judge Cause No. 71C01-0404-MI-0059

March 2, 2009 OPINION - FOR PUBLICATION

BAKER, Chief Judge

Appellants-petitioners Chanell and Micaela Cochran (the Beneficiaries) appeal the trial court's order entering final judgment in favor of appellee-respondent KeyBank, N.A. (KeyBank), on the Beneficiaries' petition seeking an accounting and alleging that KeyBank had breached its obligations as Trustee. The Beneficiaries argue that the trial court erroneously concluded that KeyBank did not violate the prudent investor rule and or breach its duties as trustee. Finding no error, we affirm. FACTS On December 28, 1987, Stuart Cochran created an irrevocable trust (the Trust) and named his two daughters, Chanell and Micaela, as the Beneficiaries. At that time, the Beneficiaries were two and four years old, respectively. In 1989, Stuart's wife, now Mary Kay Vance, filed for divorce and was awarded full custody of the children. Stuart funded the Trust with life insurance policies and was assisted by an insurance advisor, Art Roberson. Elkhart National Bank was the initial trustee; subsequently, Pinnacle Bank (Pinnacle) was named as a successor trustee. Pinnacle served as the trustee until 1999. In January 1999, Pinnacle called Vance and informed her that it no longer wished to serve as trustee because of Stuart's insistence on having third parties--specifically, himself, his sister, and Roberson--involved in the trustee's decisionmaking process. Pursuant to the terms of the Trust, Vance was required to appoint a successor trustee. Vance retained an attorney, and in January 1999, they met with a KeyBank representative to discuss moving the Trust to KeyBank. On February 3, 1999, Vance appointed KeyBank as successor trustee.

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The 1999 Exchange and the VUL Policies At approximately the same time she received notice that Pinnacle intended to resign as trustee, Vance received a call from Roberson, who provided new recommendations regarding the insurance policies held by the Trust. Specifically, Roberson recommended that the three life insurance policies and one annuity then held by the Trust be replaced with two new life insurance policies--a ManuLife Variable Universal Life policy and an American General Variable Universal Life policy (collectively, the VUL policies).1 At the time KeyBank assumed the duties of successor trustee, the Trust's assets consisted of three life insurance policies and one annuity and with a collective net death benefit of $4,753,539.00. As noted above, however, Roberson had recommended an exchange of policies, replacing these policies with the two VUL policies. When KeyBank assumed its duties, the underwriting for the exchange of policies had been approved and Stuart had already submitted to the physical exams. In February and March 1999, KeyBank approved the transaction and the exchange of policies took place (the 1999 Exchange), with a new total death benefit of $8 million. Following September 11, 2001, the stock markets took a dramatic decline. The downward trend in the markets had an adverse effect on the value of the mutual fund investments contained in the VUL policies. In fact, in 2001, the policies lost money,

The trial court observed that, in general, "VUL policies do not feature a guaranteed death benefit or a stipulated guaranteed premium sufficient to sustain the policy for the life of the insured, as do whole life and various other kinds of insurance policies. . . . According to insurance experts, unlike a whole life policy, a VUL policy requires a more active management and monitoring." Appellant's App. p. 15-16.
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meaning that the cost of insurance and the carriers' administrative charges were greater than the income generated by the investments; in 2002, the losses were even greater. The Oswald Review In the spring of 2003, KeyBank retained Oswald & Company (Oswald), an independent outside insurance consultant, to audit the VUL policies. At that time, Stuart was fifty-two years old and the VUL policies had a combined death benefit of $8,007,709. Oswald first considered the American General VUL policy, finding, in pertinent part, as follows: We feel the financial strength ratings for the carrier are excellent. . . . . . . Based on a hypothetical gross interest rate of 8% and current cost of insurance, the policy is shown to remain in force through Stuart's age 71. Based on a hypothetical gross interest rate of 0% and the guaranteed cost of insurance the policy is shown to remain in force to Stuart's age 58. The net investment loss for [the] period of 1/1/2001 to 3/31/2001 was $12,189.39. . . . *** RECOMMENDATION This policy is rated as a Category Three (3) policy (on a scale from one to five, with one being the best). This is due to the fund performance of the policy and the fact that additional future premiums may be required. The policy should be audited every two to three years or more often if the underlying fund performance remains lower than projected, the carrier's financial strength ratings decline or there are policy loans or withdrawals taken. Appellants' App. p. 312-13. Oswald reached similar conclusions regarding the ManuLife VUL policy: 4

We feel the financial strength ratings for the carrier are very good to excellent. . . . . . . Based on a hypothetical gross interest rate of 8% with current cost of insurance, the policy is shown to remain in force through policy year 22 [Stuart's age 70]. Based on the guaranteed cost of insurance and a hypothetical gross interest rate of 0%, the policy is shown to remain in force through policy year 12 [Stuart's age 60]. *** The net investment loss for the policy year ending on January 4, 2003 was $36,672.43 . . . . RECOMMENDATION This policy is rated as a Category Three (3) policy (on a scale from one to five, with one being the best). The policy should be audited every two to three years or more often if the underlying fund performance is lower than projected, the carrier's financial strength ratings decline or if there are further policy withdrawals. Id. at 315. Therefore, in the trial court's words, "[t]he Oswald review indicated that it was likely that the two existing policies would lapse before [Stuart] reached his life expectancy of 88 years." Appellants' App. p. 16. Moreover, because Stuart's "financial fortune had also taken a negative turn by this point in time, he had no financial wherewithal to supplement the trust with additional resources or through the purchase of additional policies of life insurance." Id. at 17. As Oswald conducted its review of the VUL policies, Roberson completed his own review of alternative policies. Roberson eventually proposed to KeyBank that a John

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Hancock policy be purchased to replace the two VUL policies. The John Hancock policy offered a lump sum death benefit of $2,787,624 that was guaranteed to age 100. KeyBank requested Oswald to review the John Hancock policy. Representatives of those companies exchanged some emails, in which an Oswald employee noted that the John Hancock policy "drastically reduces" the expected death benefit, asking, "[i]s this . . . what [your] client wants to do?" Id. at 318. The KeyBank representative replied in the affirmative, stating that "[i]t is [Stuart's] intention to reduce his life insurance coverage to the amount seen on the John Hancock illustrations." Id. at 317. After Oswald reviewed the John Hancock policy and compared it to the two VUL policies, it concluded as follows: We feel the financial strength ratings for John Hancock are very good. . . . The proposed John Hancock illustration shows no further premiums and projects coverage at current mortality and interest rates, to remain inforce [sic] to Stuart's age 100. At guaranteed mortality and interest rates the policy is projected to remain inforce [sic] to age 100. Pros of exchanging to John Hancock Policy:  Since proposed John Hancock is a non-[VUL] policy, there will [be] less fluctuation in the cash values.  The proposed John Hancock policy offers guaranteed coverage to age 100 of $2,787,624.  No ongoing premiums are required to maintain the proposed coverage of $2,787,624. Cons of exchanging to John Hancock Policy:  There will be a new contestability period and suicide period in the new policy.

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 There will be new expense charges, including commissions . . .  There will be surrender charges incurred of . . . $107,764. RECOMMENDATION If the client feels comfortable with the points referenced in this report and feels comfortable with the proposed John Hancock policy and the concomitant results associated with this transaction, then purchase is recommended. Our recommendation is contingent upon underwriting. Should his underwriting come back other than Super Preferred Nontobacco, as illustrated, then we will need to review the resultant changes. If purchased, the John Hancock policy will be rated as a Category One (1) policy (on a scale from one to five, with one being the best). No further audits are necessary unless this carrier's ratings decline. Id. at 334-35. In an email, an Oswald employee summarized its conclusion: We're sure the guarantees in this John Hancock product have a lot of appeal to [Stuart] given the fact of his substantial investment losses in his current [VUL] policies. Given the facts that he is moving to a fixed product with the death benefit guaranteed to age 100 and $0 future outlay, our recommendation would be to move forward with the proposed John Hancock coverage if the client is comfortable with the reduction in death benefit. Id. at 317. After reviewing Oswald's analyses of the respective policies and considering the recommendations contained in the reports, in June 2003, KeyBank decided to retire the VUL policies and purchase the John Hancock policy in their stead (the 2003 Exchange). After Stuart underwent a medical exam, John Hancock underwriters rated him as a preferred risk rather than a super preferred. That classification resulted in the guaranteed benefit being 7

$2,536,000 rather than $2,787,624. The Oswald employee who had performed the analysis testified that this change would not have altered Oswald's ultimate recommendation. In January 2004, Stuart died unexpectedly at the age of 53. The Trust received $2,536,000 in life insurance proceeds for the Beneficiaries' benefit. On April 2, 2004, the Beneficiaries filed a petition to docket the Trust and to require KeyBank to account. On March 7, 2005, KeyBank filed a petition to reform the trust and for approval of its accounting. The Beneficiaries filed a counterclaim and claim for surcharge, arguing, among other things, that KeyBank had breached its fiduciary duties as Trustee. A bench trial was held on August 28-30, 2007, on the issues raised in the Beneficiaries' counterclaim and claim for surcharge, with all other issues being reserved for a later time. On May 29, 2008, the trial court entered findings of fact and conclusions of law, ruling in KeyBank's favor. Among other things, the trial court concluded as follows: CONCLUSIONS OF LAW AND ANALYSIS *** (20) The ultimate question facing this Court . . . is whether the actions of the Trustee, KeyBank, were consistent with the Settlor's intent as expressed in the Trust document and met its fiduciary duties to the Beneficiaries. In essence, based on the circumstances facing the Trust in 2003, was it prudent for the Trustee to move the trust assets from insurance policies with significant risk and likelihood of ultimate lapse into an insurance policy with a smaller but guaranteed death benefit? This Court concludes that this conduct was consistent with the standard established by the prudent investor rule. (21) KeyBank and its representative acted in good faith to protect the corpus of the Trust based on the downturn in the stock markets and 8

the prospect that the existing policies would lapse before the expected life expectancy of the Settlor. (22) In hindsight, due to the unexpected demise of the Settlor at age 53, KeyBank's decision resulted in a significant reduction in the death benefit paid to the beneficiaries. However, from the perspective of the Trustee at the time of its decision, it was prudent to protect the Trust from the vagaries of the stock market and from predicted lapse of the existing policies. It might also have been prudent to take a "wait and see" approach, however, the prudent investor standard gives broad latitude to the Trustee in making these types of decisions. (23) Had the insurance policies lapsed, the Beneficiaries would have received no distribution from the Trust. Certainly, that outcome was not within the intent of the Settlor at the time he established this Trust. (24) Frankly, financial trends outside of the control of the Trustee or the Beneficiaries were the direct and proximate cause of the problem facing the Trust in 2003. While it would have been preferable for the Trustee to provide regular accountings to the Beneficiaries, the receipt of timely financial reports by the Beneficiaries would not have changed the negative financial condition of the Trust. (25) The Beneficiaries want this Court to focus on the defects in KeyBank's decisionmaking process, and while the Court recognizes that this process was certainly less than perfect with respect to the Cochran Trust, the Court concludes that it would need to engage in sweeping conjecture, which is not supported by the evidence, to find that damages resulted to the Beneficiaries based on the circumstances presented here. (26) Accordingly, this Court concludes that KeyBank did not breach its fiduciary responsibility to the Trust or the Beneficiaries, and the lack of financial reporting to the Beneficiaries and the decision to the [sic] reinvest the corpus of the Trust in a guaranteed insurance policy was not the proximate cause of damages to the Beneficiaries. (27) In conclusion, by insuring [sic] that the Trust was funded by a guaranteed death benefit in the sum of $2,536,000.00, KeyBank acted in good faith to protect the interests of the Beneficiaries and to 9

comply with the directives of the Settlor as contained in the Trust document. Id. at 22-24. The Beneficiaries now appeal. DISCUSSION AND DECISION I. Standard of Review The trial court entered findings of fact and conclusions of law pursuant to Indiana Trial Rule 52(A). We may not set aside the findings or judgment unless they are clearly erroneous. Menard, Inc. v. Dage-MTI, Inc., 726 N.E.2d 1206, 1210 (Ind. 2000). First, we consider whether the evidence supports the factual findings. Id. Second, we consider whether the findings support the judgment. Id. "Findings are clearly erroneous only when the record contains no facts to support them either directly or by inference." Quillen v. Quillen, 671 N.E.2d 98, 102 (Ind. 1996). A judgment is clearly erroneous if it relies on an incorrect legal standard. Menard, 726 N.E.2d at 1210. In conducting our review, we give due regard to the trial court's ability to assess the credibility of witnesses. Id. While we defer substantially to findings of fact, we do not do so to conclusions of law. Id. We do not reweigh the evidence; rather, we consider the evidence most favorable to the judgment with all reasonable inferences drawn in favor of the judgment. Yoon v. Yoon, 711 N.E.2d 1265, 1268 (Ind. 1999). II. The Prudent Investor Act The Beneficiaries first argue that the trial court erroneously concluded that KeyBank's actions leading up to the 2003 Exchange did not violate the Indiana Uniform Prudent

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Investor Act (PIA). Ind. Code

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