Minnesota Appeals Court Addresses Accounting for Trustee’s Fees and Expenses

In a short decision, In re that Certain Indenture Date as of April 1, 2010 (MN Ct. App. April 3, 2017), the Court of Appeals of Minnesota recently addressed a challenge to the award of trustee fees and legal expenses brought by a municipal bondholder. The court held that a single bondholder, even with a relatively insignificant interest, had standing to challenge the accounting of the trustee on behalf of the entirety of the trust estate and that heavily redacted statements of counsel that did not provide adequate detail of its services were insufficient to support payment as reasonable expenditures of the trustee.

Background and District Court Holdings

In 2010, the city of Vadnals Heights in southeastern Minnesota decided to build a community and recreational center, financing the project with $26.8 million in municipal bonds. U.S. Bank was the trustee for the indenture governing the bonds. 

After the city defaulted under the indenture, the trustee commenced an action in the district court for Ramsey County, Minnesota, to approve the sale of the property. Following court approval, the property was apparently sold, with the trustee making interim distributions totaling $9.5 million to bondholders. Thereafter, U.S. Bank petitioned the district court to release and discharge it as trustee and to approve its fees and expenses. The district court held a hearing on the trustee’s petition in February 2015, after which it determined that the trustee’s fees and expenses were reasonable, authorized the trustee to make additional distributions, and determined that the trustee would be discharged after making a final distribution to bondholders. The district court also directed the trustee to file and distribute to known bondholders a summary of receipts and disbursements, which the trustee did in March 2015.

In June 2015, a bondholder owning bonds in the principal amount of $5,000 requested an accounting of the trustee’s fees and expenses, which totaled approximately $1 million. After a further hearing in November 2015, the district court ordered U.S. Bank to prepare a “properly detailed final accounting regarding Trustee and Trustee Counsel’s fees and expenses ... with enough information for [the bondholder] to reasonably determine whether the fees and expenses were legitimate and proper expenditures.” 

The district court ruled, as an initial matter, that any remedy resulting from the bondholder’s objection would be limited to the bondholder’s proportionate share of distributions. Subsequently, the district court approved the trustee’s final accounting and discharged the trustee. The bondholder appealed.

The Appellate Ruling

After disposing of the trustee’s objection to the timeliness of the bondholder’s objection, the court of appeals addressed the district court’s finding that the trustee’s fees and expenses were reasonable. 

The appellate court was satisfied that there was adequate documentation for the trustee’s own fees. In the words of the court, “U.S. Bank’s 12-page final accounting contains a limited amount of details about the tasks performed, the persons who performed the tasks, and the time spent on each task. But U.S. Bank attached 38 pages of documentation to the final accounting with itemized details of the tasks performed.” This was enough to support the district court’s determination of the reasonableness of the trustee’s own fees.

The documentation of the expenses for outside counsel was another story. Although U.S. Bank submitted invoices from its outside counsel, the invoices did not contain any detail of the services provided. “The invoices were either heavily redacted or were printed in such a way that the descriptions of each itemized task is simply not shown.” Without this information, the court of appeals said, it was impossible for the district court to determine “if the services of outside counsel were ‘reasonably made or incurred by the Trustee’ as required by the indenture trust document.” The appellate court therefore held that the district court erred in its finding that the expenses for outside counsel were reasonable.

Turning to the issue of a potential remedy, the court of appeals also overturned the district court’s holding that any remedy would have to be limited to the bondholder’s proportionate interest in the trust estate. In the absence of any provision on point in the indenture, the appellate court turned to the Restatement (Third) of Trusts (2012). The general rule of the Restatement (§ 100) is “[a] trustee who commits a breach of trust is chargeable with (a) the amount required to restore the values of the trust estate and the trust distributions to what they would have been if the portion of the trust affected by the breach had been properly administered or (b) the amount of any benefit to the trustee personally as a result of the breach.” A recently enacted Minnesota statute is to the same effect. (Minn. Stat. §501C.1002(a)(2016)) Given these principles, it was error on the part of the district court to conclude that any potential remedy should be limited to the bondholder’s proportionate share. 

Observations

While the holdings of the court of appeals were all made with reference to the specific terms of indenture for the City of Vadnals Heights bonds, those provisions are relatively standard.  Trustees are entitled to reasonable compensation for their services, and to reimbursement of counsel fees and other fees and expenses reasonably incurred by the trustee. Unsurprisingly, the Minnesota appeals court was not content with sketchy summaries or invoices lacking detail as to the services performed. The sense of the case is that, where services are described in meaningful detail, a court will not second-guess a trustee’s judgment as to the appropriateness of the services. But the supporting detail must be there. This potentially creates issues with invoices of counsel, where statements of work could be deemed a waiver of the attorney-client privilege, if not artfully crafted. (Perhaps, this was the reason the trustee provided redacted invoices of counsel in the case.) The decision of the court of appeals puts trustees and their lawyers on notice, however, that concerns over privilege will not excuse meaningful disclosure to the court and to bondholders of the work performed by counsel.

It is not clear what motivated a bondholder with a wholly insignificant interest in the bond issue ($5,000 out of $26.8 million in principal amount) to challenge the trustee’s accounting of its fees and expenses. Perhaps it may have been the amount of the fees relative to the recovery on behalf of the bondholders (apparently in the range of 10%), or a plaintiff’s counsel seeing an opportunity to earn attorney’s fees, or both. Whatever the reason, the court of appeals gave its imprimatur to what amounts to a derivative action on behalf of the trust estate for bondholders challenging trustee expenditures. With the prominence of the Minnesota courts in cases involving trustees, caveat sequester!