Trust Investment Rules — Kansas Style

Justin Whitney (J.D. Candidate 2008, Washburn University School of Law) has recently published his Comment entitled Taking the Trust Out of Trustee: The Kansas Supreme Court’s Standard for Reasonable Reliance Means Investors Should Proceed Cautiously When Altering the Prudent Investor Rule (McGinley v. Bank of Am., 109 P.3d 1146, Kan. 2005.), 46 Washburn L.J. 245 (2006).

Here is the conclusion of his article:

The Kansas Supreme Court held that McGinley’s power to direct investments justified the Bank’s failure to monitor the safety of her Enron investment.  The decision is problematic because reliance on trust instructions becomes unreasonable when a professional trustee fails to explain the effect of a waiver.   Additionally, it is unfair to rely on trust instructions as justification for ignoring the safety of directed trust investments in light of changed circumstances. Instead, a trustee should have a duty to monitor risks posed by changes in circumstances over time. The court should have imposed a duty on the Bank to evaluate and respond to the new risk of loss that developed when the Enron allocation exceeded 15%. The increase in McGinley’s Enron concentration represented an unsafe change in circumstances, which the Bank had a duty to monitor and address.

Instead, the court opted not to enforce the principle of informed consent nor the duty to monitor changed circumstances.  Even more shocking, the court enabled the Bank to collect fees on an asset for which it had no responsibility to manage prudently.  Consequently, the court lowered the standard for reasonable reliance and eroded the protection afforded by the duty to serve the beneficiary’s best interest. In doing so, the court also squandered the chance to stress the importance of diversification and the advantages of modern portfolio theory. While other jurisdictions have an enviable history of cases upholding the best interest of beneficiaries, the disappointing truth is that the Kansas Supreme Court missed the opportunity to do the same.