April 26, 2016; Argus Leader (Sioux Falls, SD)

NPQ reported last week on a South Dakota case involving the woes of the $1 billion charitable foundation established by frozen food magnate Marvin Schwan a year before his death in the mid-1990s and now reduced to about $440 million in assets. Cases heard on appeal often address issues of legal interpretation rather than issues of fact, and this case is no exception to that rule.

The appeal was brought by two of Marv Schwan’s sons who serve on the trustee succession committee, or TSC, established in the trust’s documents to oversee the trust’s operations and, if necessary, remove and replace trustees. Mark and Paul Schwan serve on the TSC with three current foundation trustees and two additional non-trustee members. A majority of the TSC members, the trustees, and the foundation’s seven beneficiary nonprofits all oppose efforts by the Schwans to gain access to detailed documents explaining foundation investment losses of $600 million. Much of the losses are the result of unsuccessful Caribbean resort property investments made through more than 100 offshore corporations, including corporations on whose boards one or more trustees served as directors.

Issues raised in the hour-long oral arguments dealt with definitions, legal standing, and a need for the court to provide guidance. Do Mark and Paul Schwan have legal standing to gain access to the detailed records? That depends on the definition of “fiduciary” and “beneficiary” as found in South Dakota law. Must one have a financial interest to be a beneficiary? South Dakota’s statutes also appear to support varying interpretations, both broad and narrow, of the term “interest” as applied to a trust.

The Schwans argue that they are fiduciaries because, as members of the TSC, they are named in the trust document and have specific duties related to the trust’s governance. The trustees and beneficiaries argue that they are not beneficiaries or trustees because they do not exercise the governance powers of a trustee and do not have a financial interest in the foundation. The trustees and beneficiaries argue that the trial court didn’t address the issue of whether the Schwans are fiduciaries, so the state supreme court shouldn’t address it, either.

Related to this is the issue of whether, under state law, fiduciary duty is individual or collaborative. If a majority vote of the TSC accepts summary records as presented by the foundation’s trustees, implicitly considering such an act an appropriate exercise of the committee’s fiduciary duty, can one or more individuals on the TSC demand additional information, claiming it as necessary to the exercise of their individual fiduciary duty?

The role of the South Dakota Attorney General’s office is interesting, as the ultimate defender of beneficiaries’ interests for foundations established under state law. They are supporting the trustees and beneficiaries in attempting to stop the Schwans from getting access to more information. The intriguing fact is that the AG’s office and beneficiaries have already seen the thousands of pages of detail denied to the Schwans. The trustees and beneficiaries have negotiated a settlement offer with the foundation that includes removing three of five current foundation trustees. The agreement, however, is conditioned on the S.D. Supreme Court ruling against the Schwans. The AG found that there was no crime committed in association with the foundation’s operations and management, and that no one profited from the $600 million in foundation investment losses. However, the AG’s office stated during oral arguments that they did not address whether there was a breach of fiduciary duty by the trustees. The Schwans note that that is the role of the TSC on which they serve. The fact that the AG’s office didn’t investigate breach of fiduciary duty by foundation trustees, even with its access to the detailed records, is another reason the Schwans and the TSC need access.

The attorney for the Schwans closed his rebuttal argument by noting that his legal team had been unable to find a single example in case law anywhere in the U.S. where a court had denied legal standing to a person or people with specific duties outlined in a trust document.

The court’s decision will be released later this year. Depending on the outcome, state laws governing accountability and legal standing may need to be changed, and the attorney general will have some key questions to answer about whether his role as the trustee of last resort for the state’s nonprofits includes making sure directors and trustees are held accountable to their fiduciary duties.—Michael Wyland