Americans For The Arts v. Ruth Lilly Charitable Remainder Annuity Trust

855 N.E.2d 592 (2006)

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Nature of the Case

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Facts

Ruth is the sole surviving great-grandchild of Eli Lilly, the founder of Eli Lilly & Company (Lilly). Ruth is the sole surviving great-grandchild of Eli Lilly, the founder of Eli Lilly & Company (Lilly). In 1981, the Probate Court appointed P to be the conservator of Ruth's estate. In 2001, the probate court directed P to draft a new estate plan for Ruth, and on November 27, 2001, P petitioned the probate court to implement certain changes in the estate plan pursuant to a statute permitting a court to authorize a conservator to: make gifts, outright or in trust, on behalf of the protected person to or for the benefit of prospective legatees, devisees or heirs, including any person serving as the protected person's guardian, or to other individuals or charities, to whom or in which it is shown that the protected person had an interest . . . . (1) Ruth, while subject to conservatorship protection but without court involvement, had executed twenty-two testamentary documents disposing of in excess of $1 billion that likely would have generated years of costly and burdensome litigation upon her death; and (2) Ruth's existing plan generated significant unnecessary taxes. National City, therefore, hoped to simplify, streamline, and improve the financial efficiency of the estate plan. P sent notice to all interested parties, including Ds, enclosing the petition and proposed estate plan and giving notice of a hearing. The parties were represented by sophisticated legal counsel. The attorneys were paid nearly $250,000 in legal fees from Ruth's estate. They spent well over 400 hours reviewing the proposed estate plan, proposing a number of changes, and raising extensive objections to the proposed plan. None of Ds objected to paragraph 10(b) of the trust documents. The probate court ultimately approved P's estate plan. No one appealed. The plan created two charitable remainder annuity trusts. Both name the same three charities as remainder beneficiaries--(Ds) The Poetry Foundation (Poetry), which is to receive 35% of the remaining assets, Lilly Endowment, Inc. (Lilly Endowment), which will also receive 35% of the remaining assets, and Americans for the Arts (AFTA), which will receive 30% of the remaining assets. D is the trustee of and has sole investment discretion for, both trusts. The trust documents clearly allowed P (b) To retain indefinitely any property received by the trustee and invest and reinvest the trust property in stocks, bonds, mortgages, notes, shares of stock of regulated investment companies or other property of any kind, real or personal, including interests in partnerships, limited liability companies, joint ventures, land trusts or other title-holding trusts, investment trusts or other business organizations as a limited or general partner, shareholder, creditor or otherwise, and any investment made or retained by the trustee in good faith shall be proper despite any resulting risk or lack of diversification or marketability and although not of a kind considered by law suitable for trust investments. On January 18, 2002, the trusts were funded as planned entirely with Lilly stock--3,155,404 shares in # 1 and 657,376 shares in # 2. Lilly stock was selling at approximately $75 per share, giving the combined initial value of approximately $286 million. By March 2002, P had formulated a draft Investment Policy Statement. P sold significant portions of the Lilly stock by July 2002, and by October 2002, most of the Lilly stock--the value of which had declined significantly since January 2002--had been sold and the trusts were fully diversified. P petitioned the probate court to approve its formulation and implementation of the diversification of the investment in Eli Lilly. Poetry and AFTA (Ds) objected and counterclaimed, alleging that the bank's delay in diversifying was negligent, a breach of fiduciary duty, and a violation of the Indiana Uniform Prudent Investor Act (PIA). P argued that its actions were permitted by paragraph 10(b). P argued that the first clause eliminated its duty to comply with the PIA and that the latter clause exculpated it from any liability for failing to timely diversify the assets. Ds claimed that: (1) P was not excused from complying with the PIA, (2) the exculpatory clause is invalid because the bank, as trustee, put it in the trusts to protect itself, and (3) Indiana Code section 30-4-3-32(b) prohibits trustees from being exculpated against liability for 'reckless indifference to the interest of the beneficiaries.' The probate court granted P's motion for summary judgment. Ds appealed.