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State Supreme Court turns away Lilly beneficiaries:

March 19, 2007

It seemed like a feel-good story for the ages. Heiress Ruth Lilly's estimated $185 million gift to two fledgling arts groups made headlines around the globe when the news broke five years ago.

Then events took a dramatic turn. The organizations-the Chicago-based Poetry Foundation and the Washington, D.C.-based Americans for the Arts-charged their fortunes should be far larger. They sued National City Bank of Indiana, alleging it bungled management of Lilly's assets, costing them tens of millions of dollars.

A tale this colorful deserves a dramatic climax, but it's not to be. The Indiana Supreme Court this month quietly declined to hear the arts groups' appeal of probate court and appeals court rulings favoring the bank.

Attorneys aren't commenting, but this is almost certainly the end of the line. The case primarily involves Indiana law-on which the state Supreme Court is the final arbiter. And the U.S. Supreme Court would be unlikely to consider the dispute, which focuses on the bank's management of two trusts funded with Eli Lilly and Co. stock, anyway.

To be sure, it's been a bloody battle. Attorneys for the arts groups alleged "gross negligence." Attorneys for National City said bank officials had done nothing wrong-and cast the arts groups as ingrates.

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

Bank's role

Court involvement in the affairs of the 91-year-old Lilly-the sole surviving great-grandchild of the pharmaceutical firm's founder-is nothing new. Way back in 1981, a judge concluded she was incapable of managing her property and appointed a local bank, now National City, to serve as conservator of her estate. Last fall, as her health declined, a judge went a step further, appointing two of her six nieces and nephews to serve as personal guardians.

Lilly has been reclusive most of her life, weighed down by physical ailments and depression. As an adult, she's rarely appeared in public, even as she emerged as one of the nation's top philanthropists. In 2002, her fortune was valued at more than $1 billion, and a National City official testified the Lilly relationship was the bank's biggest.

She remains a whopper of a client, even though in the intervening years the bank disbursed millions of dollars to beneficiaries, following the terms of a new estate plan adopted in 2001. National City continues to oversee accounts and trusts worth hundreds of millions of dollars.

At issue in the legal tangle with the arts groups are two Ruth Lilly trusts created under the new estate plan, funded in January 2002 with 3.8 million Lilly shares worth $285 million. The charities say 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 millions more go to her nieces and nephews.

Indianapolis-based Lilly Endowment, which is entitled to 35 percent of the remainder, wasn't a plaintiff but said in court papers it wanted to share in any recovery.

Lack of diversification

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

In fact, court papers 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!)."

In court papers, however, the bank said it had every right to remain concentrated in Lilly shares. It cited language in trust documents that gave it broad authority to hold the stock "despite any resulting risk."

The Indiana Court of Appeals, in a ruling last October, found that argument persuasive. It noted that attorneys for the beneficiaries were involved in creating the new estate plan and raised a wealth of objections before it went into effect. During that process, the court wrote, no one raised concern about that language.

"They are not now entitled to turn back the clock and claim that, in hindsight, the clauses are problematic and unenforceable," the court said.
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