$200M Drop in Trust Fund Fund Is Worth Suit

(CN) - Managers of a billion-dollar trust fund will have to answer claims that they made poor and self-serving investing choices, though the losses did not affect the entire lifetime distributions for the beneficiary, the 7th Circuit ruled.

Mary Scanlan is the daughter of Martin Bucksbaum, the founder of General Growth Properties (GGP), "one of the largest traded real estate investment trusts in the United States, with $34 billion in total market capitalization and $3 billion in annual revenues," according to the judgment.

Bucksbaum established six trusts for Scanlan to be distributed "as the trustee deems to be necessary for her support" or "in her best interests." The law firm of Neal, Gerber & Eisenberg acted as trustee through two of its partners, Marshall Eisenberg and Earl Melamed.

In 2007 and 2008, Eisenberg and Melamed approved the trusts' purchase of hundreds of millions of dollars of additional GGP stock, although GGP stock already "constituted over 65 percent of the trusts' assets."

When GGP declared bankruptcy in April 2009, the stock plummeted and Scanlan's trusts suffered more than $200 million in losses.

Scanlan sued the law firm and the two individual partners, alleging that the purchases of GGP stock were not made in her best interest, but served the lawyers' own financial interests as shareholders of GGP and their interest in retaining GGP as a client.

A Chicago federal judge ruled that Scanlan lacked standing because she could not show "facts showing a likelihood that the corpus of the trusts would ever be insufficient to pay all of her discretionary distributions to which she might become entitled during her lifetime."

But the 7th Circuit concluded otherwise last week, finding that Scanlan "has a required stake in her suit; she has a legally protected interest in the trusts' corpus and in the proper administration of that corpus."

"The appellees urge us to conclude that Scanlan only has an interest in her potential distributions, rather than the trusts' corpus." Judge William Bauer wrote for a three-judge panel.

"The trustee could, under the appellees' reasoning, reduce the assets by 90 percent - to a paltry $100 million - and still be sheltered from a breach of trust claim," he added.

But this reasoning "ignores the fiduciary relationship between a beneficiary and a trustee and is practicably unworkable because the question inevitably becomes: at what point is the trust's corpus diminished to such an extent that the trustee can no longer make a future distribution?" Bauer added. "The appellees cannot answer this question. Nor can we."

"Scanlan's standing should not turn on whether her 'best interests' and 'support' needs, whatever they may be, will be met," Bauer concluded.

Scanlan's attorney, Frederick J. Sperling with Schiff Hardin, welcomed the ruling. "The court's decision vindicates Ms. Scanlan's right to pursue her claims against the trustee of her trusts and her lawyers," Sperling said.

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