Rollins v. Rollins, a recent breach of trust and fiduciary duty case, addressed interesting issues at the appellate level regarding the dilemma that can ensue when two older family members are selected as trustees of a trust that holds interests in family owned enterprises. A settlor, also known as the person creating the trust, typically establishes a trust to hold interests in their business and frequently chooses trustees that are familiar with their business. The trustees oftentimes hold other interests in or positions within the business. The belief is that such individuals are in a position to understand the best interests of the business.
Yet the Rollins case shows how transferring the immense fortune of Rollins, Inc. unraveled into a long-fought battle between family elders and four grandchildren. The grandchildren were soon to receive these monies from the Rollins trusts as beneficiaries to Rollins, Inc.'s vast fortune from being the parent company of Orkin — the international pest control company — and a host of other brands.
As the case winded its way through the courts, lessons emerged for family owned business leaders and their legal counsel. Foremost, when selecting one or more trustees, settlors and experienced private wealth attorneys need to consider the issues that can arise as a result of the likely dual roles of an individual as trustee and business decision maker. These dual roles — one at the level of the business and one at the level of the trust — can produce conflicting duties and differing standards of review of conduct. What may be an acceptable decision at the business level, and evaluated with the benefit of the business judgment rule, may not be acceptable when viewed from the perspective of the duty a trustee owes to the beneficiaries.
How the Rollins Family Trust Battle Began
Over several years in the 1970s and 1980s, O. Wayne Rollins — the patriarch of the Rollins family — created a series of trusts and entities to hold and control businesses. All of the trusts were created for the grandchildren of Gary Rollins, a son of O. Wayne, and held interests in what the court described as a "web of family entities and holding companies." Of special note, four of the five trusts were subchapter S trusts and Gary Rollins was the sole trustee of these trusts. The trustees of the one other trust were an uncle, a family friend and Gary Rollins.
At the time of litigation, the court indicated that Mr. Rollins' businesses held assets worth an excess of several billion dollars. It also appeared that the five trusts involved in the litigation were designed with tax-planning objectives in mind.
Through a series of actions at the business-entity level, the trustees who acted as corporate directors restructured the business entities and created rules regarding the manner in which distributions from the entities would be made to the trusts. The children of Gary Rollins challenged the actions of their father and uncle. Their complaints included: demands for the two men to provide an accounting to the grandchildren about the affairs of the businesses; how the business restructuring reduced the liquidity of the assets held by the trusts; and how the business' rules on distributions breached the terms of the trusts. In effect, by restricting distributions from the entities to the trusts, the uncle's and father's decisions controlled distributions to the grandchildren in a manner that was not otherwise permitted under the trusts.
How the Level of Control and Aggregation of Interests Factors Into Trust Contests
The law generally requires a trustee to account to the beneficiaries regarding the condition of the trust and its assets. The issue in this trust litigation was whether the trustees were required to produce an accounting of the condition of the business interests. In other words, the trust held shares in the businesses, which were separate entities. The trustees objected that the beneficiaries were seeking information not about the activities of the trust per se — such as receipts, disbursements and values regarding the shares — but wanted the details of activities and transactions occurring at the business-entity level.
The trustees essentially argued that each trust role they held did not, in and of itself, represent control of the businesses. Without such control, they were not required to produce an accounting. The appellate court found otherwise and noted that a trustee who controls a business by virtue of ownership in the trust could be required to provide an accounting, at the trust level, to the beneficiaries for corporate-level activities and transactions. In addition, the court decided that a trustee who held a minority position in a business did not have authority or control over the business to produce corporate-level information. Thus, if the trustee could not require the business to produce an accounting, the trustee would not be required to provide an accounting at the trust level regarding such information.
The difference in the Rollins case was that none of the trustees held a controlling position. Only by virtue of the aggregate share ownership of all of the trusts did the trustees have control. As a result of considering the other trustees' positions, the court found that the trustees could be required to account at the trust level for activities occurring at the business-entity level since in aggregate they controlled the business.
How an Examination of Fiduciary Duties Can Influence a Verdict
The level of decision making and business-level activity remained the focus of the next challenge by the beneficiaries. The grandchildren argued that by virtue of the controlling position of the trustees, the activities of the trustees in their dual role as directors should be evaluated for compliance with fiduciary duties and standards for trustees. Essentially, while the actions in restructuring the businesses were corporate-level transactions, the beneficiaries successfully argued that the court should consider the effect of those actions on the beneficiaries under the fiduciary standard of duty at the trust level.
Be Proactive When Developing Wealth Transfer Arrangements
As the Rollins case shows, settlors, trusted advisers and private wealth lawyers need to examine the consequences of the likely aggregation of the various roles of individuals in respect to a trust and any business interests held by it. The actual level of control and resulting job duties can be determined when the wide range of trustee interests, whether personal or held in other trusts, are considered in tandem with other high-level roles the individual has in the business.
Anticipating the consequences — of dual roles or positions of control — allows settlers, advisers and legal counsel to address these matters proactively while drafting the trust instruments and structuring the businesses. Family business and shareholder rights attorneys help closely held businesses prevent these types of epic battles from ever making the headlines when sophisticated wealth planning and preservation strategies can be implemented early on.