Education & Workforce Development

BEHIND THE NEWS: Beneficiaries of Lilly largesse lose bid to spank bank

September 19, 2005

Round one goes to National City Bank of Indiana.

An Indianapolis judge last week signaled he plans to dismiss litigation filed by two big beneficiaries of Ruth Lilly's estate, Washington, D.C.-based Americans for the Arts and the Chicago-based Poetry Foundation. The groups charged the bank bungled management of her assets, costing them tens of millions of dollars.

Judge Charles Deiter on Sept. 12 canceled a 10-day trial that was to start Sept. 26 and asked the bank to submit a proposed order dismissing the 2-year-old case.

That's not the end of the line, however. Attorneys for the plaintiffs said they plan to appeal to the Indiana Court of Appeals.

Value fell

At issue in the case are two Ruth Lilly trusts funded in January 2002 with 3.8 million Eli Lilly and Co. shares worth $285 million. The charities say trustee National City failed to diversify the trusts until the second half of the year, when Lilly shares were slumping, resulting in a $102 million decline for 2002.

Under the terms of the trusts, the Poetry Foundation is to receive 35 percent and Americans for the Arts is to receive 30 percent of what's called the remainder-the amount left after annual payments of $12 million to Ruth Lilly cease upon her death and annual payments of $3.6 million to six nieces and nephews cease after five years.

Indianapolis-based Lilly Endowment, which is entitled to 35 percent of the remainder, is not a plaintiff but says in court papers it wants its share of any recovery.

National City Bank, a unit of Cleveland-based National City Corp., serves as both trustee of Ruth Lilly's estate-planning vehicles and guardian of her estate. It was the bank's plan, approved by Judge Deiter in late 2001, that provides an estimated $100 million for the Poetry Foundation, publisher of Poetry magazine, and an estimated $85 million for Americans for the Arts, an arts education group.

In court filings, bank attorneys suggest ingratitude.

"This case is about two charities, given an interest at the bank's insistence, that just want more money than ... they were graciously provided for in Ms. Lilly's estate," bank attorneys wrote.

Vindication?

National City spokesman Terri Wilson last week pointed to Deiter's plan to dismiss the case as validation of the bank's management of the trusts.

But Robert Coleman, a Chicago attorney representing the Poetry Foundation, said it suggests the court is letting the bank off the hook for "gross negligence."

Both trusts are what's known as charity remainder annuity trusts, or CRATs. In court papers, the charities say one of the principal advantages to forming the CRATs was the ability to sell the Lilly shares tax free. Otherwise, the tax bill might have been staggering, since the shares had a tax basis near zero.

According to court papers filed by the charities, bank officials had indicated they planned to diversify the trusts swiftly but inexplicably didn't.

In fact, court records show, at least two National City investment managers had deep concerns about the lack of diversification. In an internal March 2002 e-mail, David Sommer wrote: "We still have at least 75 percent of the portfolio in one stock (RISK!)."

Andrew Haddock said in a deposition that the trusts still weren't diversified when he took over managing them five months later. Worse, he soon learned that at least one major beneficiary was concerned about the concentration, raising the specter of litigation.

"I was really stuck," he said in his deposition. "I mean, I felt like I was behind the eight ball. I was looking for some guidance as to why the concentrations had not been eliminated in short order."

Broad authority

In court papers, the bank said trust documents gave it broad authority to hold the stock "despite any resulting risk" and argued it diversified within a reasonable time.

It also argued-in effect-no harm, no foul. Since the end of 2002, court records note, the value of the trusts has rebounded to better than 97 percent of the original amount.

But that argument is nonsensical, said Coleman, the Poetry Foundation attorney, since it fails to take into account that the trusts would be worth far more today if the early losses hadn't occurred.
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