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Trust fund trustees must face allegations of breach of trust

One of the basic rules of a trust fund is that the trustee, the person who manages the trust fund, has an obligation to make sure that he or she always acts in good faith and with the benefit of the beneficiaries of the fund in mind. This applies in every state of the union, including New Jersey.

So what happens if the beneficiary of a multi-billion-dollar trust spots a loss of $200 million? There's still so much value in the fund that she isn't likely to be left without the money she might need (which is why the fund was set up in the first place). But if she feels the trustees of the trust fund dropped the ball, does she have a right to question the trustees in a suit? The trustees say no. A federal appeals court says yes.

The case is being brought by Mary Scanlan, the daughter of the founder of General Growth Properties, a huge, traded, real estate investment trust. Court documents put the value of this fund at $34 billion with annual revenue potential of $3 billion. Scanlan's father set up a number of trusts with his wealth and issued orders that trustees should distribute the wealth according to his daughter's needs and her best interests.

According to the suit, the trustees allegedly used Scanlan's trust fund money to buy hundreds of millions of dollars of the GGP investment trust. The purchase came even though her trusts were already heavy with GGP stock. In 2009, GGP declared bankruptcy. Its stock price tanked. Scanlan's funds lost $200 million. She sued claiming the trustees had acted not in her interest, but their own.

One federal court judge in Chicago ruled that Scanlan didn't have the right to sue because the loss her funds suffered didn't threaten her ability to get all the distributions she might be entitled to or need in her lifetime.

But the three-judge appeals court reversed that decision recently. It ruled that Scanlan has a stake in the integrity of the trust funds and their administration and so she has a right to sue. The judges said that if they accepted the position that she had no standing, the trustees would, in essence, be free to drain the trust funds to a relative fraction of their original value without Scanlan having any recourse.

Source: Courtroom News, "$200M Drop in Trust Fund Fund Is Worth Suit," Rose Bouboushian, Jan. 27, 2012

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