When trustees are deadlocked over an administration issue the Pennsylvania Uniform Trust Act, 20 Pa. C.S. §7763(a.1), provides the trustees or any party in interest with a vehicle to break the deadlock.
A settlor can provide in the trust document a division of responsibilities among co-trustees and can require an odd number of trustees, with the hope that there will always be a majority of co-trustees supporting the administrative action. However, the Settlor might not provide for an odd number or other events may occur that result in a situation where there is an equal number of votes and the trustees cannot reach agreement over the issue to be decided.
In such a situation, the UTA permits any trustee or party in interest to petition the court for a judicial resolution of the deadlock. Section 7763(a.1) provides:
When a dispute arises among trustees as to the exercise or nonexercise of any of their powers and there is no agreement by majority of them, unless otherwise provided by the trust instrument, the court in its discretion, upon petition filed by any of the trustees or any party in interest, aided if necessary by the report of a master, may direct the exercise or nonexercise of the power as it deems necessary for the best interest of the trust.
20 Pa. C.S. §7763(a.1).
A recent deadlock case before the Pennsylvania Superior Court involved a charitable trust and a corporate trustee with equal voting power to the combined voting power of two individual trustees. The trustees were deadlocked over the amount to distribute for the year and as to appropriate recipient charities. In re John E. Jackson and Sue M. Jackson Charitable Trust, Appeal of Polly J. Townsend and William R. Jackson, Jr., 2017 Pa. Super. 350 (Nov. 7, 2017). The corporate trustee petitioned the Orphans’ Court to break the deadlock, which it did. Specifically, the Orphans’ Court limited the distributions for the year in question to the minimum amount necessary to avoid the imposition of confiscatory excise tax (approximately 5% of the trust’s net assets, less any excess distributions made in the five preceding tax years) and also made the decision as to whom the distributions should be made because of the deadlock on the issues of percentage amount and appropriate distributees. Of relevance to this White Paper, the Superior Court held that the corporate trustee was within its rights to seek judicial intervention under Section 7763(a.1). Although it also stated that the Orphans’ Court had discretion under the statute to decline to order relief if it concluded that the deadlock was not legitimate or was more amendable to resolution without its intervention,1 the Superior Court concluded that the Orphans’ Court did not abuse its discretion in limiting the distributions for the year in question to 5%, and remanded the case for an evidentiary hearing to determine grantor intent with regard to distributions and what, if anything, should be done regarding the distributions that were already made for the year in question. The Superior Court’s Opinion went on to provide that, had the Orphans’ Court conducted a hearing and considered evidence, it could issue an order resolving the dispute among the trustees, Section 7763(a.1) giving the Court precisely that authority. “Such an exercise of authority under Section 7763(a.1) is not an illegal usurpation of trustees’ power, for it is specifically authorized by the UTA.”
In reaching its conclusion, the Superior Court in Jackson looked at the Supreme Court opinion in Obici Trust, 390 Pa. 180, 134 A.2d 900 (Pa. 1957), which addressed a deadlock among trustees under the pre-UTA statute. The trustees there disagreed over who to appoint as a successor to one trustee who had died, a decision which the Supreme Court found had to be made unanimously. The Orphans’ Court had failed to address the question as to the private trusts at-issue, but the Supreme Court held that where disagreement made the unanimous selection of a successor impossible, a court may be called upon to effectuate the settlor’s intention that the vacancy be filled. Id. at 195, 907. The Court remanded the matter to the Orphans’ Court instructing it to have notice served on the parties in interest, receive nominations from them and thereafter direct the appointment of a successor trustee. Id. at 196, 908. No evidentiary hearing was ordered.
It should be noted that, by its terms, Section 7763(a.1) does not mandate or even contemplate the necessity for an evidentiary hearing. Nor does the Restatement, Third, of Trusts, which provides in pertinent part:
e. Breaking deadlocks. If multiple trustees are deadlocked with regard to the exercise of a power, on application of a co-trustee or beneficiary a proper court may direct exercise of the power or take other action to break the deadlock.
Restatement Third, Trusts §39. Similarly, Illustration 5 to Section 39 states that where trustees cannot agree on charities to receive distributions, the court may make selections, ordinarily among charities proposed by the trustees, making no mention of a hearing.
Whether there is an inconsistency between the Superior Court opinion in Jackson and the Supreme Court in Obici as to whether a hearing is required may depend upon the circumstances. But one thing that is apparent is that the courts have the power to break a deadlock among trustees by casting the deciding vote.
- The Superior Court noted that section 7763(a.1) is patterned after Section 3328(b) of the Fiduciaries Code, 20 Pa. C.S. §3328(b), which, using similar language, provides for judicial discretion to address disagreements among personal representatives.