Law Updates

Maryland Court of Appeals Finds that a Bank, acting as a Trustee, could Hold Disbursement of Trust Funds Contingent upon its Beneficiaries Signing a Broad Liability Release and Indemnification Agreement

Hastings v. PNC Bank, NA, No. 109 (Md. Sept. 27, 2012) | View pdf

(September 4, 2012) Wayne C. Heavener, Law Clerk.

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In Hastings v. PNC Bank, NA, the Maryland Court of Appeals found that a bank, acting as a trustee, neither (1) impermissibly put its own interests above that of the beneficiaries of a testamentary trust when requiring them to sign a broad liability release and indemnification form; nor (2) improperly calculated the appropriate inheritance tax owed on the trust by using the trust’s fair market value, rather than its remaining principal. Writing the majority opinion of the court, Judge Mary Ellen Barbera affirmed the Court of Special Appeals’ decision in favor of the trustee. Judge Sally Adkins dissented, and was joined by Chief Judge Bell and Judge Greene. Judge Adkins argued that the trustee’s broad liability and indemnification form offered the trustee materially different protection than it would otherwise be able to obtain from a court order, and was therefore improper.

In 1995, Marion W. Bevard executed a will that provided for the establishment of a trust, and appointed the Mercantile Safe Deposit and Trust Company (“Mercantile”) as trustee. Under the terms of the will, Marion’s sister, Rebecca Bevard was to be granted one share of the trust for the duration of her life, with a remainder interest created for Robert B. Kirkwood. Mr. Kirkwood died before Ms. Bevard, passing his remainder interest to his four (4) children: Barbara Hastings, R. Cort Kirkwood, Ann K. Robinson, and Robert Garth Kirkwood.

As collateral heirs to the trust, Robert’s children were obligated to pay a ten percent (10%) inheritance tax on their interests. PNC Bank (“PNC”), as Mercantile’s successor trustee filed an application to fix the inheritance tax with the Baltimore County Register of Wills. Before calculating the tax on the trust, PNC subtracted a one-half percent final distribution commission and a trustee fee from the trust’s fair market value. PNC applied the inheritance tax to the remaining amount, and tendered a check totaling $25,963.35 to the Register of Wills.

After paying the tax, PNC sent Robert and each of his children a Waiver, Receipt, Release and Indemnification Agreement (“Release Agreement”). The Release Agreement requested that the beneficiaries approve of the manner in which PNC administered the trust before disbursing the trust’s funds, and included a liability release stating:

[E]ach of the undersigned hereby: … Releases, indemnifies and holds PNC, in its corporate capacity and as Trustee, harmless from and against any and all losses, claims, demands, surcharges, causes of action, costs and expenses (including legal fees), which may arise from its administration of the Trust, including, but not limited to, the overall investment strategy of the Trustee, all decisions made and actions taken or not taken with regard to the administration of the Trust, and PNC’s distribution of the assets to the Beneficiaries as set forth on the attached schedule.

Hastings v. PNC Bank, NA, No. 109, slip op. at 6 (Md. Sept. 27, 2012). The beneficiaries launched two major objections: (1) that PNC’s liability release was too broad, and (2) that PNC misinterpreted the Tax-General Code Article in calculating its commission and the inheritance tax owed. In response, PNC released a partial distribution of the trust’s assets, retaining the remaining funds until the beneficiaries signed their Release Agreements.

Three (3) of Robert’s children— Barbara Hastings, R. Cort Kirkwood, and Ann K. Robinson (collectively, “Plaintiffs”)—filed a complaint seeking declaratory judgment in the Circuit Court for Baltimore County, alleging that PNC could not withhold the full amount of the trust contingent upon signing the Release Agreement. Plaintiffs also argued that PNC should have calculated the rate of tax based upon the principal of the trust, rather than its fair market value. Both PNC and Plaintiffs moved for summary judgment.

The Circuit Court for Baltimore County denied Plaintiffs’ motion, and entered judgment for PNC as to the issue of tax calculation. The court did not enter judgment as to the Release Agreement issue because it was unclear whether Plaintiffs lost income from the trust due to PNC’s request. Plaintiffs appealed to the Court of Special Appeals, and renewed their motion for summary judgment as to the Release Agreement issue. The Court of Special Appeals affirmed the Circuit Court’s decision as to the issue of tax computation, and also entered judgment for PNC as to the Release Agreement issue.

The Court of Appeals affirmed the Court of Special Appeals’ decision. The court held that PNC’s Release Agreement was not so one-sided as to place the bank’s own interests above that of the beneficiaries. Observing that PNC was entitled to some measure of protection and indemnity, the court concluded that PNC’s request was neither barred by statute nor common law. Therefore, the court stated, “PNC’s request for execution of the release and indemnity clause was only that—a request for consent to take a certain course of action.” Id. at 22. The court also concluded that PNC correctly included the income accrued on the assets of the trust in its tax computation. The court rejected Plaintiffs’ argument that the trust should have been valued at the remainder of Marion’s original contribution.

Writing in dissent, Judge Adkins disagreed that the Release Agreement was a permissible exercise of PNC’s authority as trustee. Rather, she stated that there was a material difference between the protections PNC received under the Release Agreement and that which would have been otherwise available under a court order. PNC failed to provide the beneficiaries with full information explaining their rights or consequences in signing the Release Agreement. Judge Adkins stated that “[the court] should not condone the practice of a bank’s asking beneficiaries to provide the bank insurance against the bank’s own blunders. “ Id. at 13.