In Re Schwan

#23525-r-JKM
2006 SD 9

IN THE SUPREME COURT
OF THE
STATE OF SOUTH DAKOTA

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IN THE MATTER OF MARVIN M. SCHWAN
1992 GREAT, GREAT GRANDCHILDREN’S
TRUST

* * * *
APPEAL FROM THE CIRCUIT COURT OF
THE SECOND JUDICIAL CIRCUIT
MINNEHAHA COUNTY, SOUTH DAKOTA
* * * *

HONORABLE JOSEPH NEILES
Judge

* * * *

MARK F. MARSHALL of
Davenport, Evans, Hurwitz & Attorneys for appellants Trustees
Smith, LLP of Marvin M. Schwan 1992 Great,
Sioux Falls, South Dakota Great Grandchildren’s Trust.

ERIC J. MAGNUSON
LARRY R. HENNEMAN of Attorneys for appellants Trustees
Rider, Bennett, LLP of Marvin M. Schwan 1992 Great,
Minneapolis, Minnesota Great Grandchildren’s Trust.

THOMAS J. WELK Attorneys for appellees, Guardian
DARIN W. LARSON of Ad Litem Lorrie Schwan-Okerlund,
Boyce, Greenfield, Pashby & Welk Mark D. Schwan, David J. Schwan,
Sioux Falls, South Dakota and Paul M. Schwan.

ALLEN I. SAEKS Attorneys for appellees, Guardian
JANE F. GODFREY of Ad Litem Lorrie Schwan-Okerlund,
Leonard, Street & Deinard, P.A. Mark D. Schwan, David J. Schwan,
Minneapolis, Minnesota and Paul M. Schwan.

* * * *

ARGUED ON OCTOBER 5, 2005

OPINION FILED 01/25/06
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MEIERHENRY, Justice

[¶1.] Trustees of the Schwan Great, Great Grandchildren’s Trust (3G Trust)

appeal from an order regarding accounting and trustee’s fees wherein the circuit

court disapproved of trustee fees paid to the trustee Lawrence Burgdorf. We

reverse.

FACTUAL AND PROCEDURAL BACKGROUND

Estate Plan of Marvin M. Schwan

[¶2.] Marvin M. Schwan (Schwan) was the founder and chief executive

officer of Schwan Food Company (Schwan Food), formerly known as Schwan’s Sales

Enterprises, Inc., a large frozen food company based in Marshall, Minnesota.

Before his death, Schwan established a comprehensive estate plan which included a

will, a revocable trust, and various other trusts. Part of Schwan’s estate plan was

to transfer his Schwan Food shares to entities created by the estate plan. Thus,

upon Schwan’s death, all of his Schwan Food voting and nonvoting stock was

transferred from the revocable trust, which then held the stock, to the Schwan

Foundation Trust (Foundation), a charitable trust. His estate plan also provided for

Schwan Food to redeem the stock from the Foundation. A majority of the voting

stock eventually was transferred to the 3G Trust, which was created for the benefit

of Schwan’s unborn great, great grandchildren and descendents. This appeal

involves the 3G Trust and the Foundation.

[¶3.] Schwan named himself, his brother Alfred Schwan (Alfred), and

Schwan’s long-time friend and associate Lawrence Burgdorf (Burgdorf) as co-

trustees of the 3G Trust and the Foundation. Alfred and Burgdorf had worked with

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Schwan for many years in the management of Schwan Food. Alfred served as chief

executive officer and chairman of the board, and Burgdorf served as director of

corporate contributions. The three men served as co-trustees of the Foundation and

3G trusts until Schwan’s death. After Schwan’s death, Alfred and Burgdorf

continued to serve as trustees.

[¶4.] Under the terms of the 3G Trust, a separate succession committee

selects successor trustees and sets annual trustee fees. The original members of the

succession committee were Schwan, Alfred, Burgdorf, and a fourth individual. Only

Alfred and Burgdorf remain from the original committee. Three new members have

been added. The committee sets trustee fees based on the guidelines in the 3G

Trust document. The guidelines require that the annual trustee fees be “not less

than One Hundred Thousand Dollars ($100,000) and not more than Two Hundred

Thousand Dollars ($200,000).” The trustee fees are offset: (1) by compensation

earned as a trustee from other Schwan trusts; or (2) by compensation earned as an

employee of Schwan Food or an “affiliated organization.” Whether the Foundation

is considered an “affiliated organization” of Schwan Food forms the basis of this

dispute.

[¶5.] The Foundation was created as a charitable trust under section

501(c)(3) of the Internal Revenue Code of 1986. The Foundation instrument

originally appointed Schwan, Alfred, and Burgdorf as trustees. When this dispute

arose, Alfred and Burgdorf served as its sole trustees.1 Like the 3G Trust, the

1. A third trustee was not appointed after Marvin’s death. Under the trust
instrument, the Foundation may operate with only two trustees.

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Foundation instrument also established a trust succession committee responsible

for setting fees and appointing successor trustees of the trust. The Foundation

instrument, however, merely provided that the trustees receive “reasonable

compensation” without an offset provision.

Events Following Schwan’s Death

[¶6.] Schwan died on May 9, 1993. As directed by his estate plan, the

trustees of his revocable trust transferred all of Schwan’s voting and nonvoting

stock in Schwan Food to the Foundation. Thus, after Schwan’s death, the

Foundation owned a majority of the voting and nonvoting stock of Schwan Food.

Pursuant to Schwan’s estate plan directive, Schwan Food subsequently redeemed

all of the stock held by the Foundation. This transaction effectively stripped the

Foundation of any ownership interest in Schwan Food2 and fully funded the

Foundation. At the time that this action arose, the Foundation had assets of

approximately one billion dollars.

[¶7.] In 1996, Burgdorf resigned from his position as Schwan Food’s director

of corporate contributions. He then became the executive director of the

Foundation.3 In addition, he continued to serve as a trustee for both the

Foundation and the 3G Trust. The Foundation paid Burgdorf an annual director’s

2. The 3G Trust now owns a majority of the voting stock in Schwan Food and as
of December 31, 2003, the assets of 3G Trust were valued at $54 million. The
Grandchildren’s Trust, another of the trusts Schwan established, owns about
99% of the nonvoting stock in Schwan Food.

3. The propriety of Burgdorf serving in that capacity is not at issue in this
appeal.

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salary of $150,000. The 3G Trust paid him annual trustee fees of $150,000.4 The

propriety of Burgdorf receiving trustee fees from 3G Trust in addition to his

Foundation director’s salary first arose in 2003. Burgdorf and Alfred, as trustees of

the 3G Trust, addressed the issue of whether the 3G Trust provision required an

offset.5 They concluded that the offset provision did not apply because the

Foundation and Schwan Food were not “affiliated organizations.”

[¶8.] In early 2004, the 3G trustees sought court supervision of the 3G

Trust. The trustees asked the court to appoint Schwan’s children6 to serve as

guardians ad litem for the 3G Trust beneficiaries, Schwan’s yet unborn great, great

grandchildren and future descendents. The circuit court ordered supervision and

appointed Schwan’s children as guardians ad litem (guardians).

[¶9.] In June 2004, the 3G trustees petitioned for court approval of the

payment of trustee fees. The guardians objected to Burgdorf’s trustee fees.7 They

4. Burgdorf received the trustee fees for 2003 and the first two quarters of 2004.

5. In January 2003, a third trustee was appointed for the 3G Trust. While it is
disputed whether the decision regarding the offset was made before or after
the appointment of the third trustee, it is undisputed that the third trustee
did not take part in the decision.

6. Marvin’s four children are Lorrie Schwan-Okerlund, Mark Schwan, David
Schwan, and Paul A. Schwan.

7. In their brief, the guardians argue that Burgdorf “was in a conflict of interest
position” and that “[p]ursuant to his duty of loyalty to the beneficiaries,
Burgdorf should not have even participated” in the decision concerning the
offset. The trial court made no findings in that regard nor did the guardians
file a notice of review. Consequently, this argument is not properly before the
Court.

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claimed that the offset provision of the 3G Trust required the reduction of

Burgdorf’s trustee fees by the amount of Burgdorf’s Foundation director’s salary.

[¶10.] The circuit court ruled that the trustees of the 3G Trust did not have

absolute power to interpret the trust’s terms and that the court had the power to

review the trustees’ interpretation. The circuit court then determined that the

Foundation and Schwan Food were “affiliated organizations” for the purposes of the

3G Trust’s offset provision. Consequently, the court ordered the reduction of fees

received by Burgdorf as trustee of the 3G Trust by the amount of his salary as

executive director of the Foundation. Burgdorf and Alfred, as trustees of the 3G

Trust, now appeal.

ISSUE

Whether the circuit court erred by interpreting the trust provision to
require an offset of Burgdorf’s salary as executive director of the
Foundation against his trustee fee from the 3G Trust.

STANDARD OF REVIEW

[¶11.] The interpretation of the terms of a trust is a question of law and is

reviewed de novo. See In re Estate of Stevenson, 2000 SD 24, ¶¶7, 14, 605 NW2d

818, 820-21; cf. In re Estate of Klauzer, 2000 SD 7, ¶10, 604 NW2d 474, 477

(providing that a trial court’s interpretation of a will is reviewed de novo).

DECISION

[¶12.] The duty of the court is to carry out the wishes of the trust creator.

Estate of Stevenson, 2000 SD 24, ¶14, 605 NW2d at 821. In order to do so, we look

to the language of the trust instrument. Id. “In interpreting a trust instrument, we

must first attempt to ascertain and give effect to the settlor’s intention. Thus, we

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must interpret the instrument as written.” Id. In the 3G Trust instrument,

Schwan specifically designates the amount and manner of determining trustee fees

for the 3G Trust. The 3G Trust provides:

Trustees’ Fees; Committee Fees. Each Trustee shall receive an
annual fee (in addition to reimbursement of reasonable
expenses), payable in quarterly installments, determined by the
Trustee Succession Committee in an amount not less than One
Hundred Thousand Dollars ($100,000) and not more than Two
Hundred Thousand Dollars ($200,000), which limits shall be
increased annually on the anniversary of the signing of this
instrument by the percentage, if any, by which the United
States Department of Labor Consumer Price Index for All Urban
Consumers for the district which includes Marshall, Minnesota,
shall have increased prior to said anniversary. Said fee shall
be offset by any Trustee’s fees earned during the year by a
Trustee as Trustee of another trust created by the
Grantor, and shall be offset by the aggregate amount of
the salaries and other cash compensation, if any, received
during the year by a Trustee from Schwan’s Sales
Enterprises, Inc., or an affiliated organization or from any
one or more organizations whose stock or other securities are
held in trust hereunder other than an organization less than 2%
of any class of whose stock or other securities of any class is held
in trust hereunder.

(emphasis added).8 This trust provision clearly requires that each trustee “receive

an annual fee (in addition to reimbursement of reasonable expenses).” The annual

amount is set by the 3G Trust Succession Committee “in an amount not less than

One Hundred Thousand Dollars ($100,000) and not more than Two Hundred

Thousand Dollars ($200,000).” The language of the 3G Trust specifically requires

that the annual fee “be offset by any Trustee’s fees earned during the year as a

Trustee of another trust created by [Schwan].” The language further requires an

offset by salaries from affiliated organizations.

8. Schwan’s Sales Enterprises, Inc. is now known as Schwan Food Company.

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[¶13.] This dispute involves the meaning of the term “affiliated organization.”

The language in question specifies that trustee fees from the 3G Trust are offset as

follows:

Said fee . . . shall be offset by the aggregate amount of the
salaries and other cash compensation, if any, received during
the year by a Trustee from Schwan’s Sales Enterprises, Inc., or
an affiliated organization . . . .

In other words, the question is which organizations did Schwan regard as affiliated

with Schwan Food. To answer the question, we must first look at the words he

chose to use in expressing his intention and in the words he did not choose.

[¶14.] The trial court equated the phrase “affiliated organization” with the

term “affiliate” found in the Uniform Trusts Act and relied on the legislative

definition of “affiliate” found in SDCL 55-4-1(1). The problem with equating these

two terms, as the guardians point out in their brief, is that the plain meaning of the

term “affiliated organization” is different from the term “affiliate.” In the 3G Trust

document, Schwan included the term “affiliate” in the overall definition of

“Schwan’s Sales Enterprises, Inc.” (Schwan Food). In the 3G Trust, Schwan

directed that “[a]ny reference to ‘Schwan’s Sales Enterprises, Inc.’ in this document

shall be deemed to refer to said corporation . . . and to any affiliate of said

corporation.” (emphasis added). The trust provides:

Provisions Relating to Schwan’s Sales Enterprises, Inc. The
Grantor expects to transfer to the Trustees certain voting
securities of Schwan’s Sales Enterprises, Inc., and expects that
such securities will be the sole or principal holding of the
Trustees. Any reference to “Schwan’s Sales Enterprises, Inc.” in
this document shall be deemed to refer to said corporation, to
the proceeds of any reorganization, merger, division or similar
transaction affecting its identity or capitalization, and to any
affiliate of said corporation (including, without limitation, any

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member of a controlled group as defined in section 1563 of the
Code in which said corporation is included). A principal purpose
of the Grantor in establishing this trust is to provide for the
continuation and prosperity of Schwan’s Sales Enterprises, Inc.,
under centralized management. . . .

(emphasis added). Since any “affiliate” is already included in any reference to

Schwan Sales Enterprises, Inc., the offset “from Schwan’s Sales Enterprises, Inc.”

already includes an offset from its affiliates. Thus, the additional phrase requiring

an offset from “an affiliated organization” suggests something in addition to and

different from the term “affiliate.”

[¶15.] One of the principles of interpretation requires us to attempt, as much

as possible, to give meaning to all the words and provisions in the trust. See Estate

of Klauzer, 2000 SD 7, ¶10, 604 NW2d at 477; In re Bock’s Estate, 85 SD 113, 115,

177 NW2d 734, 735. In applying this principle when interpreting a will, we stated,

“[i]n ascertaining a testator’s intent all the words and provisions appearing in his

will must be given effect as far as possible, and none should be cast aside as

meaningless. To hold otherwise would be to convict a testator of performing useless

acts.” Bock’s Estate, 85 SD at 115, 177 NW2d at 735 (citation omitted). This same

principle applies to ascertaining a settlor’s intent in a trust document. When

interpreting provisions of a trust, ordinary words are given their usual and ordinary

meaning. See Rowett v. McFarland, 394 NW2d 298, 301 (SD 1986).

[¶16.] Consequently, we look to the usual and ordinary meaning of the words

Schwan used. Schwan does not use the noun “affiliate” in the offset provision. The

noun he uses is “organization.” Salaries from organizations either “affiliated” with

Schwan Foods or whose stock or securities are held by the 3G Trust are required to

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be offset. The focus is on the word “organization.” To substitute the term “affiliate”

for the term “an affiliated organization” would render the word “organization”

redundant and meaningless. Thus, to give effect to the term “an affiliated

organization,” we assume that Schwan must have intended an entity other than an

“affiliate” of Schwan Food as defined elsewhere in the trust.

[¶17.] “Organization” is defined as “something organized” or “a group of

people that has a more or less constant membership, a body of officers, a purpose,

and usually a set of regulations.” Webster’s Third New International Dictionary

1590 (1986). The modifying word “affiliated,” means “attach[ed] as a member or

branch” or positioned or associated “in close connection.” Id. at 35. It therefore

follows from these definitions that the common and ordinary meaning of the phrase

“affiliated organization,” in the context of the 3G Trust, means an organization

closely associated with Schwan Food.

[¶18.] Historically, the Foundation was closely associated with Schwan Food.

There were times in the administration of the Schwan trusts and estate plans when

the Foundation would have been considered an affiliated organization of Schwan

Food. At one point, all of Schwan’s voting and nonvoting stock in Schwan Food was

held by the Foundation. Thus, at Schwan’s death, the Foundation controlled a

majority of the voting and nonvoting stock of Schwan Food. At that time, it would

have met the broad category of “an affiliated organization.” The affiliation,

however, changed, after Schwan’s death. Schwan’s estate plan directed that

Schwan Food was to redeem all of the stock held by the Foundation. Upon

redemption of the stock, the affiliation of the two organizations was severed. The

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infusion of cash resulting from the redemption funded the Foundation. The control

of the stock shifted to Schwan Food and subsequently, in part, to the 3G Trust. At

the time Burgdorf assumed the Foundation director position, the Foundation was

no longer affiliated with Schwan Food, nor is it today. Therefore, under the plain

meaning of the 3G Trust’s terms and based upon the facts, we conclude that the

Foundation is not an affiliated organization of Schwan Food.

[¶19.] The trial court’s only basis for finding an affiliation is the indirect

connection between Schwan Food and the Foundation through the people who

currently serve as the trustees of the 3G Trust. The trial court reasoned as follows:

the 3G Trust controls Schwan Food; Burgdorf and Alfred are trustees of the 3G

Trust; Burgdorf and Alfred are also trustees of the Foundation; therefore, Burgdorf

and Alfred control both Schwan Food and the Foundation, making the Foundation

an “affiliate” of Schwan Food. The trial court arrived at his conclusion by finding

the phrase, “an affiliated organization” ambiguous and turning to statutory

definitions of “affiliate” and “person.”9

9. The trial court applied statutory definitions in SDCL 55-4-1(1) and (2) to
arrive at the following analysis:

The Foundation is controlled by the Trustees of the Foundation, i.e.,
Burgdorf and Alfred. [Schwan Food] is controlled by the Board of
Directors, who answer to the stockholders. Alfred is Chairman of the
Board of Directors of [Schwan Food], and the 3G Trust owns over 50%
of the voting stock of [Schwan Food], giving the trustees of the 3G
Trust control over [Schwan Food], and control over the Board of
Directors of the company. Alfred and Burgdorf are two of the three
trustees of the 3G Trust. Therefore, Alfred and Burgdorf collectively
have control of [Schwan Food]. Alfred and Burgdorf, as sole trustees of
the Foundation, and as the majority of the trustees in control of the 3G
Trust, control both the Foundation and [Schwan Food]. Under South
(continued . . . )
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[¶20.] The trial court’s finding of affiliation based solely on the individual

identities of the trustees is in error. South Dakota trust law specifically states that

“[u]nless it is otherwise provided by the trust instrument, or an amendment thereof,

or by court order, all powers of a trustee shall be attached to the office and shall not

be personal.” SDCL 55-4-2. Therefore, for both the 3G Trust and the Foundation,

the powers of the trustee attach to the office, not to the individual holding the office.

The trustee’s power exists independent and regardless of the individual in the

position. The 3G and Foundation trusts have separate and independent boards of

trustees. Each board of trustees has a separate trustee succession committee. In

both trusts, the established succession committee has the power to appoint

individuals as trustees. Although Alfred and Burgdorf currently serve as trustees

for both trusts, clearly the terms of the trust do not require or even contemplate

such overlap in the future. Thus, under the facts of this case, the identities of

individuals acting as trustees cannot be used to connect the Foundation and

Schwan Food in order to make them “affiliated organizations.”

[¶21.] Even if the term “affiliated organizations” is considered ambiguous, as

the trial court determined, we cannot say that the interpretation and application by

the trustees was unreasonable or in bad faith. Ambiguity requires the court first to

look at the other provisions of a trust to determine the testator’s intent. In doing so,

_________________________
(. . . continued)
Dakota law, the Foundation and [Schwan Food] are therefore under
common control and are affiliated organizations.

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it is apparent that Schwan intended to give the trustees broad discretion in their

interpretation of ambiguities. He directed in the 3G Trust as follows:

All powers and discretion given to the Trustees shall be
exercisable in their sole discretion, and all their decisions and
determinations (including determinations of the meaning and
reference of any ambiguous expression used in this instrument
or the identification of any beneficiary) made in good faith and
in the exercise of a reasonable judgment shall be conclusive
upon all persons . . . .

Under South Dakota law, “discretionary power conferred upon a trustee is

presumed not to be left to his arbitrary discretion but may be controlled by the

circuit court, if not reasonably exercised, unless an absolute discretion is clearly

conferred by the declaration of trust.”10 SDCL 55-3-9.

[¶22.] In this case, the trust provision gives the trustees “sole discretion” to

exercise their powers and discretion within the bounds of good faith and reasonable

judgment. This discretion includes decisions concerning the meaning of any

“ambiguous expression” of the trust instrument. Although the guardians may not

agree with the determination of the trustees, we cannot say the trustees’

determination was unreasonable.

[¶23.] We reverse.

[¶24.] GILBERTSON, Chief Justice, and SABERS, KONENKAMP, and

ZINTER, Justices, concur.

10. Regardless of whether a trustee receives any compensation, the trustee must
also “use at least ordinary care and diligence in the execution of his trust.”
SDCL 55-3-10.

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