An appellate court in Georgia has allowed a residual beneficiary of her mother’s trust to sue a University to recover a $1 million contribution allegedly given by the trustee without authority.  It has affirmed a trial court decision refusing to dismiss the claim. (Reinhardt University v. Castleberry, Ct. of App. GA, No. A12A1651, 11/8/12.)

When Joan Hasty Castleberry’s father died in 2003, he left money in several trusts for the benefit of his wife during her life, with the remainder to be divided among his three children.  He named his son, William Hasty, Jr., as trustee.

While the wife was still alive, Hasty, who was also a trustee of what was then known as Reinhardt College, pledged $1.5 million to the school.  Through a series of financial transactions, he effectively transferred about $1 million from the trust to the school to partially satisfy the pledge.

Castleberry claimed that her brother owed a fiduciary duty to her and the other remainder beneficiaries and had committed a breach of trust by making the gift without authority, thus reducing her remainder interest. Although she sued her brother in a separate suit, she claimed that the University could not enjoy the benefits of the gift without violating the principles of equity.  She sought to impose a “constructive trust” to recover the funds for her benefit.

The University moved to dismiss the case on the theory that a constructive trust was a remedy, not a direct cause of action.  It also argued that as a matter of policy it should be allowed to keep the money because it relies heavily on donations and that a practice of investigating the sources of donated funds would be impractical and would impact charitable giving.  The courts rejected the contentions.

Rejecting the University’s case citations and citing the state Supreme Court for its own position, the Court of Appeals said:  “To the extent that Hasty was not authorized to transfer the funds, they are subject to a constructive trust — even in the hands of the University and even without allegation of wrongdoing on the University’s part.  Moreover, the University has failed to demonstrate any merit in its assertion that its heavy reliance on donations would divest equity of the power to enforce a constructive trust under the circumstances of this case.  Construed in the light most favorable to Castleberry and resolving all doubts in her favor, Castleberry’s complaint sufficiently stated a claim for relief.”

The case was remanded for further proceedings.               

YOU NEED TO KNOW

The case does not say whether the trustee made the pledge as an individual or as trustee of the woman’s trust.  If the pledge was made as an individual, and even if the University has to return this fund to the trust for distribution to the other children, the University may have a claim for the full $1.5 million pledge against the trustee in his individual capacity.