Article Archives >> Lead Stories >> April 16-30, 2008
Court Ousts Board That Breached
Duty in Deciding to Close Museum
Trustee told to appoint new Board
to run museum according to will
The Supreme Court of Montana has ousted a Board of directors who decided to close an historic family ranch museum and ordered the bank trustee to appoint a new group to run the Museum according to the donor’s will.
Acting on an appeal by the state Attorney General and some “friends” of the Museum, it has reversed a trial court decision that said the Board had “aptly managed and overseen” the Museum and had acted with ”considered forethought and reasoning” in deciding to close the facility. (In Re: Charles M. Bair Family Trust, No. DA 06-0586, 4/29/08.)
Alberta Bair created the Charles M. Bair Family Trust in 1990 to receive her estate upon her death. The trust created a five-person “Board of Advisors” with the power to make charitable grants and to “devote [her] entire residence, together with all personal property of lasting historical and artistic value… to the establishment of a Museum to be named the Charles M. Bair Family Museum, which shall be open for the educational benefit of the general public.” The Museum would have “first priority” on income from the trust, and the Board was directed to use “whatever principal and income” of the trust “necessary to establish, improve and maintain the Museum.” A bank was named trustee, but had only administrative duties. The Board made the substantive decisions.
Following Alberta Bair’s death in 1993, the Board retained several consultants and opened the Museum in 1996, with more than 14,000 visitors in its first season. With declines in attendance in subsequent years and a consultant’s report that “much more time, money and resources” would be required to maintain the Museum, the Board decided to suspend the operations.
The friends of the Bair threatened legal action and the Trustee asked the trial court to confirm that the Board could close the Museum. The Attorney General intervened on the side of the friends. When the Board determined to close permanently on the basis that the Museum had “ceased to meet the scholarly, educational and historical purposes” for which it was established, the Attorney General sought a summary judgment that the Board had breached its fiduciary duty. The trial court denied the summary judgment. It held that the creation of the Museum was desired by Alberta Bair but not required. After a four-day trial, the court found that the Board had successfully and appropriately managed its part of the trust’s financial affairs and had not acted arbitrarily or unreasonably in reaching its decision to close.
On appeal, the Supreme Court first held that the trust required the Board to create and operate the Museum. Although the Board maintained that the Museum was never the “driving force” behind the trust, the Supreme Court said the trust “provides a clear directive to the Board to create the Museum and provides the Board with direction and guidance on how to proceed.” It also provides “the means to fund the Museum with ‘whatever principal and income’ necessary from the trust.” At the time the Board decided to close the Museum, the trust was valued at about $55 million.
The Supreme Court then found that the Board had breached its fiduciary duty to the trust by establishing the Museum “judiciously” and not providing adequate fire-protection systems, air-handling systems to protect collections, and security systems to prevent theft. “By relying on these factors to justify closing the Museum, the Board implicitly acknowledged that addressing these deficiencies at the outset was necessary to properly establish and maintain the Museum,” the Court said.
“The Board’s failure to make the Museum ‘museum-ready’ constitutes a breach of the Board’s fiduciary duty to the trust,” it held. Although the Board has consisted of different individual members since its inception, “the current Board is liable for the breaches of predecessor Boards” and failed to redress those breaches of trust.
The Court also found that the Board had breached its fiduciary duty by failing to give the Museum “first priority” on the income that the Board distributed from the trust. Although the trust authorized grants to others, the Court said the Board breached its duty by not giving “first priority” to distributions of the amounts “necessary” to establish and operate the Museum.
Finally, the Court held that the Board breached its fiduciary duties to the trust by failing to determine that the Museum had “ceased to serve” its scholarly, educational and historical purposes. “The Board has hired at least five experts to advise the Board on the Museum’s operations,” the Court said. “None of the board’s experts have advised the Board that the Museum can no longer serve its public and educational purposes. On the contrary, the Board’s first expert, Leavengood, stated that the Museum had the ‘potential of being a world-class institution…. The museum’s future is bright and needs only careful guidance.’”
The Court said that instead of inquiring whether the Museum had ceased to serve its purposes, it sought instead to see if its purposes could be better served elsewhere. The Board “granted itself a power not granted by the Trust Agreement,” the Court said. “While the board’s quest to more effectively tell the Bair Family’s story may be commendable, it is nonetheless a breach of the Board’s duty to the Trust.”
The Court did not decide whether the “friends” group had a sufficient “special interest” in the trust to confer standing upon it since it was clear that the Attorney General had standing to support the charitable trust.
Although the Attorney General sought removal of the bank trustee as well as the Board, the Court said it was the Board, not the bank trustee, that had breached fiduciary duties. It reversed the trial court’s decision and instructed the bank trustee to appoint a new Board to follow the directions of the trust agreement and ensure that the Museum has “a fair opportunity to succeed.”
YOU NEED TO KNOW
The Attorney General and the Court have taken a very aggressive approach to the interpretation of this trust and the removal of the Board. The Board was caught by not spending money available to it to provide the systems necessary to make the Museum a viable entity and then using the failure to have the necessary systems the primary rationale for the closure.
Article Archives >> Lead Stories >> April 16-30, 2008
