Trust manager sues for fees, gets hit for $13M
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Published: March 26, 2012
An investment manager who sued to get his fees from two trusts not only lost his case, he was hit for more than $13 million on a counterclaim.
After a six-day trial, an Alexandria jury found plaintiff John R. Erb liable for breach of contract, breach of fiduciary duty and fraud in his handling of the trusts of Henry and Joan Jonas, according to a report from Fairfax attorney A. Everett Hoeg III, who represented the defendant successor trustees.
Erb, the sole shareholder, officer and employee of the Alexandria investment management firm of de Teffe Capital Management Inc., served as the Jonases’ trustee for 18 years. The couple had established the trusts for estate tax planning purposes and relied on Erb to invest and manage the trusts’ funds.
Upon Henry Jonas’ death, Erb filed suit against the successor trustees for trustee’s and investment management fees of approximately $1.5 million.
The successor trustees answered the complaint, and during the course of discovery, a number of irregularities were uncovered.
The defendants claimed that, before the trusts were established, Erb had referred the Jonases to an attorney for preparation of the trust agreements and other estate planning documents. Erb asked the attorney to send the bill for legal services directly to him instead of to the Jonas.’ While the attorney billed only $6,500, Erb allegedly informed the Jonases that the legal fees totaled $35,000, which the couple then paid.
Erb also hired a CPA to prepare the annual income tax returns for the two trusts, according to Hoeg’s report. The accountant’s fees ranged from $125-$135 each, but Erb purportedly billed the trusts between $2,000 and $4,300 each year. The defendants further alleged that Erb manipulated the numbers he provided to the CPA in order to zero out the income so no federal tax would be due, and failed to file state fiduciary income tax returns.
In one of the trusts, the defendants alleged, Erb kept the investments in a money market account the entire time he served as trustee, yet charged a 2.5 percent annual fee for his services as a trustee and investment manager. In the other trust, he charged the same rate during an eight-year period where the only assets were a single bank account and cash, neither of which were actively managed.
According to Hoeg, the Jonases and their beneficiaries periodically asked for information on the trusts’ assets and fees, but Erb advised he could not share the information without jeopardizing the irrevocable tax status of the trusts. The family eventually consulted with an attorney, who advised them they were entitled to the information.
When pressured by the family, Hoeg said that Erb falsely reported the yearly performance of the trusts’ investments and, at times, understated the assets by more than $3 million.
Neither Erb nor his investment company were registered with the Virginia Securities Division, according to the report, and thus avoided regulatory oversight. The defendants claimed that Erb failed to maintain and preserve adequate and accurate records for the trusts and did not provide regular accountings to the beneficiaries.
Under the breach of contract claim, the jury awarded $1.2 million in compensatory damages. The trusts received $957,000 in compensatory damages for the breach of fiduciary duty claim, along with $5 million in punitives. The jury awarded an additional $5 million in punitives for the fraud claim, along with $1.2 million in compensatory damages. Most of the award was split evenly between the two trusts, with the exception of the compensatory damages for breach of fiduciary duty. Here, the jury awarded $600,000 to Joan Jonas’ trust and $357,000 to the trust of Henry Jonas.
Due to the provisions of the trust agreements, Nevada trust law applied to the breach of contract and breach of fiduciary claims. Under Nevada law, the punitive damages cap is three times the compensatory award, rather than Virginia’s statutory limit of $350,000.
Interesting article. Please contact us if you need legal advice.
Tucker Griffin Barnes P.C.
Charlottesville, VA
434-973-7474
The state of nevada trust law used to the violation of agreement and violation of fiduciary statements.
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Would you please re-state? Your comment doesn't make any sense to me and I am keenly interested in this particular case.
DeleteI live in CA and wonder why so many other states are not equally set up to protect TRUSTS and CONSERVATEES.
This Situation Is Quite Familiar As To What I Went Through With This Same Trust Manager, Unknowingly At the Time As I Was going Through Probate Litigation In South Florida And South Carolina Suffering A 10 Year Litigation. I will Say I'm SHOCKED To Say The Least To Know Of This, However After Reading Some Of The Discoveries Of This Misappropriations Have In Fact Caused Me To Wonder.
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