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ROBERT McLEAN IRREVOCABLE TRUST v. Patrick Davis, Jan 26/09

Posted on: March 15, 2017 at 6:19 am, in

ROBERT T. MCLEAN IRREVOCABLE TRUST v. PATRICK DAVIS, P.C. No. SD 28613.

Edward F. Luby, St. Louis, MO, for Appellants. Joseph C. Blanton Jr., Sikeston, MO, for Respondents.
Linda McLean (“Appellant”), trustee of the Robert T. McLean Irrevocable Trust (“the trust”) and mother of trust beneficiary Robert McLean (“Beneficiary”), brought various tort claims against several predecessor trustees and attorney J. Michael Ponder (“Respondent”), the “Trust Protector,” alleging they had improperly administered the trust and depleted its assets. Respondent filed a motion to dismiss or, in the alternative, for summary judgment that was granted by the trial court. Because we find Respondent did not establish that he was entitled to a judgment in his favor as a matter of law on each and every claim brought against him, we reverse and remand.
I. Standard of Review
Our first task is to determine the applicable standard of review. In this case, the trial court purportedly granted both Respondent’s motion to dismiss and his alternative motion for summary judgment. While appellate review of the grant of either a motion to dismiss or for summary judgment is de novo, Jordan v. Willens, 937 S.W.2d 291, 293 (Mo.App. W.D.1996), there is a difference between the two when it comes to determining the appropriate lens through which we are to view the facts. See Magee v. Blue Ridge Prof’l Bldg. Co., 821 S.W.2d 839, 842 (Mo. banc 1991).
When reviewing the grant of a motion to dismiss, all facts alleged in the petition are deemed true and construed liberally in favor of the plaintiff. Dent Phelps R-III School Dist. v. Hartford Fire Ins. Co., 870 S.W.2d 915, 917 (Mo.App. S.D.1994). If, on the other hand, a defendant goes beyond an attack based solely on the face of the petition and files a motion for summary judgment, the plaintiff cannot rest on the averments in its petition and “an appellate court looks not just to the petition but to all pertinent materials presented to the trial court to determine if there is any material fact issue and that the moving party was entitled to judgment as a matter of law.” Id. (citing Magee, 821 S.W.2d at 842); ?Rule 74.04(c).1
Here, Respondent’s motion to dismiss was combined with an alternative motion for summary judgment. Attached to that motion was an exhibit (a copy of the trust) and a statement of uncontroverted facts with a supporting affidavit. Appellant’s response admitted these uncontroverted facts and also included several exhibits of her own.
Generally, a trial court must give notice to the parties when it treats a motion to dismiss as a motion for summary judgment, but notice is not required when the parties acquiesce to such treatment. Mitchell v. McEvoy, 237 S.W.3d 257, 259 (Mo.App. E.D.2007) (treating appellate review of a motion to dismiss as one for summary judgment where both parties presented matters outside the pleadings, neither party objected, and both parties agreed that the motion was treated as a motion for summary judgment).2
Here, both parties presented materials outside the pleadings and, as the trial court noted in its order and judgment, “treated the matter as a summary judgment·” Our standard of review is therefore the one which governs the granting of a motion for summary judgment. Summitt v. Roberts, 903 S.W.2d 631, 633 (Mo.App. W.D.1995); ?Hyatt Corp. v. Occidental Fire & Casualty Co., 801 S.W.2d 382, 392 (Mo.App. W.D.1990) (“It is axiomatic that when a party introduces evidence beyond the pleadings, a motion to dismiss its complaint is automatically converted to a motion for summary judgment.”). The evidence is viewed in the light most favorable to the non-moving party, and all reasonable inferences from the record are drawn in favor of the non-movant. Behrenhausen v. All About Travel, Inc., 967 S.W.2d 213, 216 (Mo.App. W.D.1998).
II. Facts and Procedural Background
Viewing the record presented to the trial court in the light most favorable to Appellant, the salient facts are as follows. In 1996, Beneficiary was involved in an automobile accident that left him a quadriplegic. Beneficiary ultimately hired Respondent to represent him in a personal injury lawsuit arising from that accident. The case settled for a large sum of money. Beneficiary’s grandmother set up the trust at issue and it was eventually funded with the settlement proceeds. The trust was a “Special Needs Trust” designed to supplement benefits Beneficiary received from various governmental assistance programs. The trust named Merrill Lynch Trust Company and David Potashnick as trustees and designated Respondent the “Trust Protector.” The function and duties of a “Trust Protector” is a question of first impression in this Court.3 Section 5.4 of the trust described the role and duties of the “Trust Protector” as follows:
5.4 Trust Protector. The “Trust Protector” of such trust shall be [Respondent]. The Trust Protector’s authority hereunder is conferred in a fiduciary capacity and shall be so exercised, but the Trust Protector shall not be liable for any action taken in good faith.
5.4.1 Removal of Trustee. The Trust Protector shall have the right to remove any Trustee of the trust under this Agreement. If the Trust Protector removes a Trustee, any successor Trustee appointed by the removed Trustee shall not take office. The Trust Protector may, by written instrument, release the Trust Protector’s power to remove a particular Trustee and such release may be limited to the releasing Trust Protector or made binding upon any successor Trust Protector.
5.4.2 Appointment of Successor Trustee. The Trust Protector shall also have the right to appoint an individual or corporation with fiduciary powers to replace the removed Trustee or whenever the office of Trustee of a trust becomes vacant.
5.4.3 Resignation of Trust Protector; ?Successor. Any person serving as Trust Protector may resign. The Trust Protector may appoint one or more persons to be successor Trust Protector to take office upon the death, resignation, or incapacity of the Trust Protector or any person serving as protector. The Trust Protector may be one or more persons, whether individuals or corporations. If more than one person is serving as Trust Protector, they shall act by majority.
When the original trustees resigned, Respondent exercised his power under the trust and appointed the law firm of Patrick Davis, P.C., Patrick Davis (“Davis”), and Daniel Rau (“Rau”) as successor trustees. Davis and Patrick Davis, P.C. were originally retained by Beneficiary to represent him on his personal injury claim, but Davis then referred Beneficiary on to Respondent who thereafter handled the suit. Appellant’s petition alleges that Davis, Rau, and Patrick Davis, P.C. had referred many legal clients to Respondent over the years and those referrals had netted Respondent substantial fees, a portion of which were then shared back with Davis, Rau, and Patrick Davis, P.C.
Appellant’s petition claims that in 2000, Beneficiary and his attorney informed Respondent that Davis, Rau, and Patrick Davis, P.C. were inappropriately spending trust funds.4 In July of 2001, Davis resigned as trustee. At that same time, Respondent resigned as Trust Protector, but not before appointing Tim Gilmore (“Gilmore”) as successor Trust Protector and Brian Menz (“Menz”) to take Davis’s place as a successor trustee.
In July of 2002, Menz resigned as trustee, and Appellant was appointed as his successor. In April of 2005, Appellant then brought this suit against former trustees Davis, Rau, and Menz and against former Trust Protectors Respondent and Gilmore. In the portions of her petition concerning Respondent, Appellant claimed, inter alia, that Respondent had breached his fiduciary duties to [Beneficiary] and acted in bad faith in one or more of the following respects:
a. He failed to monitor and report expenditures;
b. He failed to stop Trustee [sic] when they were acting against the interests of the Beneficiary; ?and
c. By placing his loyalty to the Trustees and their interests above those of [Beneficiary] to whom he had a fiduciary obligation.
(emphasis added).
Respondent then filed his motion to dismiss or, in the alternative, for summary judgment. Attached to that motion was a copy of the trust, a memorandum in support of the motion, and a statement of uncontroverted facts with accompanying affidavit. The entirety of Respondent’s statement of uncontroverted facts consisted of the following six paragraphs:
(1) [Beneficiary] was seriously injured in an automobile accident in 1996 causing him to become a quadriplegic. See Exhibit B-Affidavit of [Respondent], ¶?2.
(2) As a result of the injury, [Beneficiary] hired Patrick Davis and Patrick Davis, P.C. to assist him with a products liability suit who then referred the case to [Respondent] for further handling. Id. at ¶?3.
(3) [Respondent] successfully prosecuted the suit for [Beneficiary], achieving a large settlement. Id. at ¶?4.
(3)[sic] Due to significant medical expenses which had been paid by Medicare and the need to continue [Beneficiary’s] eligibility for all available government programs, the proceeds of the settlement were placed in a Special Needs Trust known as the “Robert T. McLean Irrevocable Trust U/A/D March 31, 1999.[sic] Id. at ¶?4.
(4)[sic] Exhibit A is a true and accurate copy of the Robert T. McLean Irrevocable Trust U/A/D March 31, 1999. Id. at ¶?6.
(4)[sic] [Respondent] was designated as “Trust Protector” under the terms of the Trust Agreement. See Exhibit A, Trust Agreement ¶?5.4; ?Exhibit B-Affidavit of [Respondent] ¶?7.
By leave of court, Appellant filed an amended response to Respondent’s motion that admitted each of these uncontroverted facts, attached three letters allegedly penned by Respondent as exhibits, and included a section entitled “Additional Facts that are Uncontroverted.”?5 In reply, Respondent filed a response admitting that the trust designated him as a fiduciary and gave him the “power” to remove trustees and appoint new ones. Respondent also filed an additional legal memorandum in support of his motion to dismiss and/or for summary judgment.
The trial court granted Respondent’s motion to dismiss, or in the alternative, for summary judgment in an order and judgment entered July 27, 2005. Appellant thereafter filed a motion for “new trial” or to amend the judgment under Rule 78.04; ?a motion to request leave to file an amended petition under Rule 55.33; ?and a motion under Rule 74.04(d) as a case not fully adjudicated on the merits. The trial court originally granted Appellant leave to file her second amended petition, but later determined that its granting of leave was inadvertent and set it aside. Respondent filed a memorandum in opposition to Appellant’s motion for “new trial.”
On October 6, 2005, the trial court entered another order and judgment denying all of Appellant’s post-judgment motions and noting that “all allegations against [Respondent] and his firm were ruled against [Appellant] and no claims against [Respondent] and his firm are currently pending nor will the Court allow any such claims to be added by amendment.”?6 In this second order and judgment, the trial court “clarified” its previous order and judgment which had granted both Respondent’s motion to dismiss and motion for summary judgment as follows:
due to the fact that [Respondent] had no legal duties to supervise the Trustees, the Court found both that [Appellant’s] Amended Petition failed to state a claim upon which relief can be granted and that there were no genuine issues of material fact and that [Respondent] was entitled to Summary Judgment as a matter of law. The Court notes that the parties treated the matter as a summary judgment and submitted extensive briefs and statements of material uncontroverted facts. [Respondent] was entitled to summary judgment and the Court’s prior ruling will be amended so that it is clear that both the Motion to Dismiss and the Motion for Summary Judgment were granted. Apart from the clear violations of the summary judgment rule, none of the additional facts which [Appellant] has presented for the Court’s consideration in the most recent filings would, if considered, change the Court’s view that [Respondent] was entitled to summary judgment. The Court notes that [Appellant] has attempted to assert various additional theories against [Respondent] and his law firm. However, [Appellant] has provided no reason why it could not have asserted those theories earlier and, in any event, none of the purported theories against [Respondent] or his firm in the most recent proposed Amended Petition are legally valid.
The remaining parties settled their claims, and the trial court dismissed the case at the request of the parties. Appellant now appeals the trial court’s grant of Respondent’s motion to dismiss and alternative motion for summary judgment.
III. Discussion
Appellant raises six points of alleged error on appeal. Because we find summary judgment should not have been granted for the reason set forth in Appellant’s second point, we do not address Appellant’s other five points of alleged error.
In Point II, Appellant alleges Respondent was not entitled to judgment as a matter of law on her claim for breach of fiduciary duty.7 An adequately pleaded claim for breach of fiduciary duty consists of the following elements: ?”1) the existence of a fiduciary relationship between the parties, 2) a breach of that fiduciary duty, 3) causation, and 4) harm.” Koger v. Hartford Life Ins. Co., 28 S.W.3d 405, 411 (Mo.App. W.D.2000). To prevail on his motion for summary judgment, Respondent, as the defending party, must establish undisputed facts that negate any one of these essential elements. Horne v. Ebert, 108 S.W.3d 142, 146 (Mo.App. W.D.2003).
Respondent’s motion attacked two of these four essential elements by asserting: ?1) neither Missouri law nor the trust agreement created a duty for Respondent to monitor or supervise the trustees; ?and 2) no causation can be established because the Beneficiary had an alternative means of obtaining relief in that he could have requested a court of equity to remove a trustee for improper actions pursuant to RSMo section 456.190 (1994) (repealed 2004).
We will first address Respondent’s argument as to lack of causation. Respondent’s suggestions in support of his motion for summary judgment cited now repealed section 456.190 and two cases in support of his claim that he could not have caused any damages Beneficiary may have suffered because Beneficiary had an alternative means of relief available to him. Each of those cases, Deutsch v. Wolff, 994 S.W.2d 561, 566-67 (Mo. banc 1999), and Siefert v. Leonhardt, 975 S.W.2d 489, 492-93 (Mo.App. E.D.1998), addressed whether a beneficiary had standing to bring a cause of action against a trustee. Neither case dealt with the question of whether any failure to seek such relief would negate the existence of the element of causation in a tort or contract action for damages. Respondent also failed to supply any uncontroverted facts that would have shown how and when either Beneficiary or Appellant could have availed themselves of this now repealed remedy. As the movant below, Respondent had the burden to show a right to prevail as a matter of law on this issue and failed to do so.
That failure leaves us with the question of whether Respondent has shown, as a matter of law, that he had no duty to monitor or supervise the trustees.
A legal duty owed by one to another may arise from at least three sources: ?(1) it may be proscribed by the legislative branch; ?(2) it may arise because the law imposes a duty based on the relationship between the parties or because under a particular set of circumstances an actor must exercise due care to avoid foreseeable injury; ?or (3) it may arise because a party has assumed a duty by contract (agreement) whether written or oral.
Lumbermens Mut. Cas. Co. v. Thornton, 92 S.W.3d 259, 263 (Mo.App. W.D.2002) (citing Scheibel v. Hillis, 531 S.W.2d 285, 288 (Mo. banc 1976)).
Respondent does not dispute that he accepted the role of “Trust Protector” or that he was designated by the trust as a fiduciary in that role. Respondent simply contends that because Missouri law imposes no specific duties on a “Trust Protector,” he had only those duties specifically set forth in the trust agreement and that those express duties did not include any duty to supervise the trustees or direct them to act in any particular manner.
Difficult even for legal commentators to adequately define, the term “duty” has been used in different ways by both commentators and by courts. Prosser used “duty” in terms of the issue of existence of a legal duty but not in terms of what duty or its measure. WILLIAM L. PROSSER & W. PAGE KEETON, THE LAW OF TORTS § 30 at 164 (5th ed.1984). Others have used the term “duty” to encompass and include not only the issue of its existence but also its measure (breach) and its scope. 1 DAN B. DOBBS, THE LAW OF TORTS § 226 at 578 (2d Ed.2001). Consideration of the uses of the term “duty” is of far more than simply theoretical interest. Proper and clear application of its various uses determines the vital distribution of roles between judge and jury. It is universally agreed (or at least held) that the question of whether a duty exists is a question of law and, therefore, a question for the court alone. Similarly, it is agreed that whether the duty that exists has been breached is a question of fact for exclusive resolution by the jury.
Thornton, 92 S.W.3d at 266. Once someone assumes a duty they would not otherwise have, either by contract or conduct, he or she may be held liable in tort if an injury results from a negligent performance of the assumed duty. See Bowan ex rel. Bowan v. Express Medical Transporters, Inc., 135 S.W.3d 452, 457-58 (Mo.App. E.D.2004).
Because no legal duties for a trust protector have been imposed by the Missouri legislature, any such duties may only arise from the nature of the relationship between the parties or the language of the trust. The trust does not specify how or when the Trust Protector is to carry out his “authority” to remove trustees and appoint their successors. The trust only states that the Trust Protector’s “authority” is conferred in a “fiduciary capacity.” One who acts as a fiduciary assumes at least the basic duties of undivided loyalty and confidentiality. See Klemme v. Best, 941 S.W.2d 493, 495 (Mo. banc 1997). Although no universal definition of “fiduciary duty” applies to every fact situation, in general, a fiduciary is defined as “[a] person who is required to act for the benefit of another person on all matters within the scope of their relationship; ?one who owes to another the duties of good faith, trust, confidence, and candor.” Black’s Law Dictionary 658 (8th ed.2004) (emphasis added). After making the Trust Protector a fiduciary, the trust then specifically stated that the Trust Protector will “not be liable for any action taken in good faith.” This creation of a qualified immunity from liability for the Trust Protector for actions taken in good faith implies the existence of at least some duty of care and that no such immunity from liability would apply for actions taken in bad faith.
An important question of material fact also exists in the instant case as to who this fiduciary duty of good faith is owed to. Appellant assumes it is owed to the Beneficiary, but the trust provision that created the position of Trust Protector does not explicitly indicate who or what is to be protected. Another portion of the trust states that “[i]t is the Trustor’s intent that this Trust Agreement constitute a plan for the financial management of the trust estate for the benefit of the Beneficiary for his lifetime·” While this text does not provide specific guidance as to the specific fiduciary duties owed by the Trust Protector, it indicates that the trust was created for the purpose of investing Beneficiary’s settlement proceeds in a prudent manner and it is possible the Trust Protector’s fiduciary duties are owed to the trust itself and might include a duty to protect the trust itself from foreseeable injury.
Because the trust grants the Trust Protector the power to remove and appoint trustees in a “fiduciary capacity,” an additional possible inference favorable to Appellant would be that the grantor expected the Trust Protector to exercise his power of trustee removal if the trustee at issue was acting against the purpose of the trust. That the intent of the grantor could have been that the Trust Protector exercise some sort of supervisory duties over the trustees might also be implied by the fact that section 5.4.1 of the trust gave the Trust Protector the ability to nullify a removed trustee’s designation of his or her successor and thereby prevent that person from serving.8 What duties and responsibilities the grantor intended the Trust Protector to have are not clearly set forth in the language of the trust, and that intent is a significant and contested issue of material fact.
In any event, the provision that the Trust Protector will “not be liable for any action taken in good faith” certainly allows an inference that the Trust Protector could be susceptible to liability for actions taken in bad faith; ?a claim Appellant makes in her petition. Whether Appellant will be able to prove the scope of Respondent’s duties of care and loyalty and a breach thereof is not the issue before us. Appellant has pleaded the elements necessary to state a claim for breach of a fiduciary duty by claiming that: ?1) the trust agreement provides that the “Trust Protector’s authority · is conferred in a fiduciary capacity ·”; ?2) the Trust Protector had a duty to monitor the trustees to make sure they were acting in the best interest of the Beneficiary; ?3) because the Trust Protector failed to monitor the trustees they were able to squander trust assets; ?and 4) the trust assets were improperly depleted in an amount exceeding $500,000. Respondent’s statement of six uncontroverted facts does not establish, as a matter of law, that Appellant will be unable to prove at least one of these elements.
The trial court’s judgment is reversed and the cause is remanded for further proceedings consistent with this opinion.
I concur in the result reached in the principal opinion. I do so, as did Rahmeyer, J., reluctantly. My reluctance results from the trust’s designation of a “trust protector” when that term has not been previously accepted or otherwise defined by statute or court opinions of this state. Trusts are, in my opinion, dangerous devices when they undertake to break new ground insofar as designating obligations or rights of a nature not theretofore established by statute or prior judicial determination. In my opinion, a valid criticism of trusts, in general, is that there is limited supervision for their administration. If no controversy arises, it is unlikely that this would be a problem. However, if a problem or dispute arises with respect to a trust’s administration, it is not unusual for lengthy, expensive litigation to follow or for an interested party to conclude that, because of time and expense constraints, it is impractical to pursue judicial determination of a controversy. For that reason I suggest that breaking new ground by using procedures other than those time-proven in the law is something that should not be encouraged.
The principal opinion sets forth the provisions of section 5.4 of the trust. That provision identifies the role of the “trust protector.” It states the trust protector’s authority (not duties, but authority) is “conferred in a fiduciary capacity.” It provides that “the Trust Protector shall not be liable for any action taken in good faith.”
Feinberg v. Adolph Feinberg Hotel Trust, 922 S.W.2d 21, 25 (Mo.App.1996), explains, when evaluating the reasonableness of a trustee’s actions, that “a court must apply any objective standards which were expressed in the trust instrument.” Or, stated differently, the applicable trust instrument defines the objective standards to be used in evaluating the reasonableness of a trustee’s actions. It appears to me that this same standard is apropos for evaluating any authority granted by the terms of a trust. On that basis, I contend that any actions taken (or in this case not taken) by the person denoted as the trust protector can only be judged on the basis of whether his actions, or inactions, occurred in a manner contrary to the precise language in the trust document in question. Here, the trust provides that “[t]he Trust Protector’s authority · is conferred in a fiduciary capacity and shall be so exercised, but the Trust Protector shall not be liable for any action taken in good faith.” Thus, absent the trust protector doing something in bad faith, he is not liable for his conduct. Arguably, the petition’s allegation that the trust protector acted in bad faith creates a fact issue that could not be determined by what the trial court had before it in the motion for summary judgment. For that reason alone, I concur in the result reached.
I reluctantly concur that the trial court erred in granting summary judgment on Appellant’s claim that the Trust Protector breached his fiduciary duty as set out in the contract; ?however, I write separately to emphasize the limited holding. I agree that there is no duty as a matter of law as a “trust protector,” but I do not agree that as a matter of law the duty of the Trust Protector was to the beneficiary, at least not in the traditional sense, nor do I equate the right to remove trustees and appoint successors with a duty to remove trustees and appoint successor trustees. Furthermore, Appellant’s allegation that the Trust Protector was informed that the trustees were inappropriately spending trust funds is not the same as an allegation that the Trust Protector was acting in bad faith.
I am simply persuaded that, based on the record before the trial court, the trial court did not have a sufficient basis to determine that the contract did not impose any fiduciary duty on the Trust Protector. As noted by the majority opinion, whether there was a duty to monitor or supervise the trustees only comes about in this case by reason of the contract. I do not believe it is appropriate for this Court to make up the duties of a trust protector out of whole cloth. Only by liberally construing the petition, as we must, do I find the inference that a failure to monitor the trustees was an act of bad faith. Because of the procedural posture of this case, the record is absolutely void of any indication whatsoever what the contract meant by the appointment of a trust protector in this very specific type of trust, a special needs trust. The contract was prepared by a law firm; ?whatever the reason to add a trust protector to this trust has not been flushed out in the summary judgment motions. When these issues are fleshed out by a more complete record, a determination can be made whether this trustee has any claim against the Trust Protector. For that reason, I concur in the holding that the trial court erred in granting summary judgment on the claim of a breach of fiduciary duty.
FOOTNOTES
1. Unless otherwise indicated, all references to rules are to Missouri Court Rules (2008) and all references to statutes are to RSMo 2000.
2. We should note that the far superior practice is for the trial court to give notice to the parties that the matter will be treated as a motion for summary judgment and order them to file amended motions and responses that comply with Rule 74.04. This procedure makes it much easier for the parties and judge at the trial court level (and any reviewing court on appeal) to identify exactly which facts are either contested or agreed upon.
3. As both parties note in their briefs, no recorded Missouri case has ever dealt with the function or duties of a “Trust Protector.” The term “trust protector” does appear in the official comment to section 808 of the Uniform Trust Code and states that section 808 “ratif[ies] the use of trust protectors and advisers· ‘Advisers’ have long been used for certain trustee functions, such as the power to direct investments or manage a closely-held business. ‘Trust protector,’ a term largely associated with offshore trust practice, is more recent and usually connotes the grant of greater powers, sometimes including the power to amend or terminate the trust.” UNIFORM TRUST CODE Section 808 (2005). Missouri has adopted section 808 of the Uniform Trust Code as section 456.8-808, RSMo Cum.Supp.2006. The statute itself does not use the term “trust protector” but more generically states, in pertinent part: ?”A person, other than a beneficiary, who holds a power to direct is presumptively a fiduciary who, as such, is required to act in good faith with regard to the purposes of the trust and the interests of the beneficiaries. The holder of a power to direct is liable for any loss that results from breach of a fiduciary duty.” Section 456.8-808.4, RSMo Cum. Supp. 2006.
4. Respondent denied this averment in his answer but did not address it in his motion to dismiss or alternative motion for summary judgment. As a result, the assertion remains a contested question of material fact.
5. The original response is not included in the legal file.
6. Although a trial court has discretion in determining whether or not to grant a request for leave to file an amended pleading, Rule 55.33(a) states such leave “shall be freely given when justice so requires.”
7. Appellant’s point is not a model of compliance with Rule 84.04. It does not state concisely the legal reasons for Appellant’s claim of reversible error or explain in summary fashion why, in the context of this case, those legal reasons support the claim of reversible error. However, we are mindful of our obligation to liberally construe the rules of civil procedure so as to promote justice and minimize the number of cases disposed of on procedural grounds. As the granting of a summary judgment is reviewed de novo and we can determine the legal defect alleged, we will decide the matter on its merits. Jos A. Bank Clothiers, Inc. v. Brodsky, 950 S.W.2d 297, 300-02 (Mo.App. E.D.1997). Appellant’s point also claims that she had properly asserted a claim for legal malpractice. This portion of her point has no merit. The only reference to legal malpractice is in the title to the count at issue and none of the necessary elements of a claim for legal malpractice are pleaded therein.
8. In pointing out these possibilities as favorable inferences, we are not saying that any such duty was actually created by the language used in this trust.
DON E. BURRELL, Presiding Judge.
PARRISH, and RAHMEYER, JJ., Concurs in result in separate opinion.

ROBERT McLEAN IRREVOCABLE TRUST v. Michael PONDER, Oct 24/13

Posted on: March 15, 2017 at 6:19 am, in

ROBERT McLEAN IRREVOCABLE TRUST MARCH 31 1999 McLEAN v. PONDER. No. SD 31767.

Edward F. Luby, of St. Louis, MO, and Kenneth Blumenthal and Lopa Blumenthal of Hazelwood, MO, for appellant. Joseph C. Blanton, Jr., of Sikeston, MO, for respondent.
The Robert T. McLean Irrevocable Trust U/A/D March 31, 1999, by Linda McLean, as Trustee (“the Trust”), appeals from the “Judgment” sustaining J. Michael Ponder’s (“Ponder”) “Motion ․ for Directed Verdict at the Close of Plaintiff’s Evidence” and granting judgment in favor of Ponder. The Trust asserts eleven points of trial court error. We affirm the Judgment of the trial court.
Factual 1 and Procedural Background 2
Robert McLean (“Robert”)3 was involved in an automobile accident in 1996 that left him a quadriplegic. Robert originally hired attorney Patrick Davis to represent him in a product liability suit arising out of the accident. Davis then referred Robert to Ponder, who successfully prosecuted the suit for Robert by settling the case for a large sum of money. The net settlement proceeds were placed in the Trust. Due to significant medical expenses paid by Medicaid and the need to continue Robert’s eligibility for all available government assistance, the Trust contained “Supplemental Needs Provisions” under “Article II” of the Trust. Lettie May Brewer, Robert’s grandmother, was named as “Trustor”; Merrill Lynch Trust Company, FSB and David Potashnick, were named as “Trustee[s]”; and Ponder was named as “Trust Protector.” The Trust provided for three specific powers for the Trust Protector in subparagraphs 5.4.1, 5.4.2, and 5.4.3. The Trust Protector could: (1) remove a Trustee; (2) appoint a Successor Trustee; and (3) resign as Trust Protector.
Section 5.4 of the Trust described the role and duties of the “Trust Protector” as follows:
5.4 Trust Protector. The “Trust Protector” of such trust shall be [Ponder]. The Trust Protector’s authority hereunder is conferred in a fiduciary capacity and shall be so exercised, but the Trust Protector shall not be liable for any action taken in good faith.
5.4.1 Removal of Trustee. The Trust Protector shall have the right to remove any Trustee of the trust under this Agreement. If the Trust Protector removes a Trustee, any successor Trustee appointed by the removed Trustee shall not take office. The Trust Protector may, by written instrument, release the Trust Protector’s power to remove a particular Trustee and such release may be limited to the releasing Trust Protector or made binding upon any successor Trust Protector.
5.4.2 Appointment of Successor Trustee. The Trust Protector shall also have the right to appoint an individual or corporation with fiduciary powers to replace the removed Trustee or whenever the office of Trustee of a trust becomes vacant.
5.4.3 Resignation of Trust Protector; Successor. Any person serving as Trust Protector may resign. The Trust Protector may appoint one or more persons to be successor Trust Protector to take office upon the death, resignation, or incapacity of the Trust Protector or any person serving as protector. The Trust Protector may be one or more persons, whether individuals or corporations. If more than one person is serving as Trust Protector, they shall act by majority.
The Trust did not provide Ponder with any powers or duties to supervise the Trustees or to direct their activities, but did outline the rights, duties, directives, and powers of the Trustees.
In May 1999, when the original Trustees resigned, Ponder exercised his power under the Trust and appointed Patrick Davis and his law firm, Patrick Davis, P.C. (collectively “Davis”), and Daniel Rau, as Successor Trustees. The Successor Trustees had referred legal clients to Ponder over the years and those referrals netted Ponder fees, a portion of which were then shared with Davis and his firm.
In July 2001, Davis resigned as a Successor Trustee. At that same time, Ponder resigned as Trust Protector, but not before appointing Tim Gilmore (“Gilmore”) as Successor Trust Protector and Brian Menz (“Menz”) to take Davis’s place as a Successor Trustee.
In July 2002, Menz resigned as a Successor Trustee, and Linda McLean (“Linda”), Robert’s Mother, was appointed as Successor Trustee.
In 2001, Robert was determined to be incompetent by the Circuit Court of Scott County, and Linda and Paul McLean were appointed Robert’s guardians.
In August 2004, the Trust brought suit against all persons who had served either as a Successor Trustee or as Trust Protector under the Trust, including Ponder. The Trust’s “First Amended Petition” was filed on April 6, 2005. The petition alleged Ponder had breached his fiduciary duties to Robert and acted in “bad faith” in one or more of the following respects: (1) failed to monitor and report expenditures; (2) failed to stop Trustees when they were acting against the interests of Robert; and (3) placing his loyalty to the Trustees and their interests above those of Robert. The petition also claimed that in the summer of 2000, Robert and his attorney informed Ponder that the Successor Trustees were inappropriately spending Trust funds. While Ponder’s firm was a named defendant in the petition, its registered agent was never served, no mention of the firm was made anywhere in the petition, and no relief was requested against the firm.
On May 10, 2005, Ponder filed a “Motion to Dismiss or, in the Alternative, for Summary Judgment.” Attached to that motion were copies of the Trust, a memorandum in support of the motion, and a statement of uncontroverted facts with accompanying affidavit.
On July 27, 2005, the trial court sustained Ponder’s Motion to Dismiss or, in the Alternative, for Summary Judgment.4 The trial court’s order also struck Ponder’s law firm from the caption. The claims against the other defendants were ultimately settled and a “Judgment of Dismissal” was entered by the trial court on January 25, 2007.5 Several months later, the Trust requested leave to file an appeal out of time, which was granted by this Court on July 25, 2007. The “Notice of Appeal” listed “Linda McLean, as Trustee of Robert T. McLean Irrevocable Trust U/A/D March 31, 1999” as “Plaintiff/Petitioner,” and no other appellants were listed.
The matter proceeded on appeal with the Trust as the only appellant. The function and duties of a “Trust Protector” was a question of first impression before this Court in Robert McLean Irrevocable Trust v. Patrick Davis, P.C., 283 S.W.3d 786 (Mo.App.S.D.2009), on appeal.6 This Court issued its opinion finding that the Trust stated a claim for breach of fiduciary duty and that a genuine issue of material fact existed as to whether Ponder breached a fiduciary duty.7 Id. at 794-95. This Court remanded the case to the trial court to determine the duties owed by Ponder as Trust Protector and to whom he owed those duties.8 Id. at 795. Specifically, this Court ordered the cause “remanded for further proceedings consistent with [the] opinion.” Id.
Following remand, the Trust sought leave to amend the petition. The trial court denied this request on August 6, 2009. The Trust then filed a “Writ of Prohibition and/or Mandamus” in this Court seeking to overrule the trial court’s denial of leave to amend. This Court denied the Trust’s writ on August 25, 2009.
On November 16, 2009, Ponder filed a “Motion for Summary Judgment”; the Trust filed its response on January 15, 2010. The trial court denied Ponder’s Motion for Summary Judgment and later set the case for trial on November 29, 2010.
On July 21, 2010, the Trust filed a motion for default judgment or in the alternative to compel, and requesting leave to amend the petition. The trial court allowed the Trust to file its “Fourth (Substituted) Amended Petition” and removed the case from the November 2010 trial setting. This petition alleged Ponder ignored information he received regarding the Trustees, did not investigate the depletion of the Trust assets, did not question the actions of the Trustees or take any action, and as a result the Trust was damaged. Following the filing of the Fourth (Substituted) Amended Petition, Ponder filed a motion to dismiss Counts I, III, IV, V and VI, and all personal claims of Robert.
Following additional briefing on all pending motions, the trial court entered its order dismissing Counts I, III, IV, V and VI, as well as Robert’s personal claim as set forth in Count II, as being “barred by applicable statutes of limitations.” The trial court denied Ponder’s motion to dismiss Count II as to the Trust; i.e., “Linda McLean, Trustee.”
Following this ruling, multiple motions were filed by both parties, including motions for summary judgment. The trial court heard argument on all pending motions, and denied all pending motions, including both motions for summary judgment.9 The case was later set for jury trial on October 26, 2011.
On October 20, 2011, shortly before the jury trial, the trial court issued its legal findings as to Ponder’s duties. The trial court deferred to the language of the Trust for direction in determining the duties of the Trust Protector, which included section 5.4 (5.4.1-5.4.3) cited above, and noted those provisions gave the Trust Protector “the authority to remove a Trustee.” The trial court further found the terms of the Trust evidence “the independence of the Trustee from control or supervision of the Trust Protector.” The trial court further found the Trust Protector’s authority “is limited to the power to remove[,]” and “under the terms of the trust agreement, the Trust Protector had no obligation to monitor the activities of the Trustee.” The trial court went on to note that it was
not of the opinion that the Trust Protector could simply ignore conduct of a Trustee which threatened the purposes of the trust.
To the extent that any conduct took place, and to the extent that the Trust Protector was made aware of such conduct, a duty may have arisen by the Trust Protector in his fiduciary capacity to remove a trustee.
On October 25, 2011, the trial court entered its order excluding any testimony by the Trust’s expert witnesses, Alexander A. Bove, Jr. (“Bove”), and Hardy Menees (“Menees”), relating to the duties Ponder owed as Trust Protector, because those duties were for determination by the trial court, and excluding any opinions those experts might offer as to whether expenditures from the Trust were appropriate or inappropriate as the Trust failed to disclose such opinions prior to trial.
Trial commenced on October 26, 2011, and the Trust rested on October 28, 2011. Ponder filed his “Motion ․ for Directed Verdict at the Close of Plaintiff’s Evidence” (“Motion”) contending that the Trust had failed to set forth evidence of: (1) duty; (2) breach of duty; (3) liability; (4) causation; (5) damages suffered as a result of Ponder allegedly failing to remove the Trustees; (6) bad faith on the part of Ponder; or (7) conduct supporting punitive damages. The trial court, after hearing argument of the parties, granted Ponder’s Motion. This appeal followed.
The Trust raises eleven claims of trial court error on appeal: (1) dismissing claims of Robert individually and Linda as Trustee, as barred by the statute of limitations, or if barred, the statute of limitations was tolled due to Robert’s incapacity; (2) failing to articulate the proper standard of care for fiduciaries; (3) granting Ponder’s Motion because the Trust “presented a submissible case”; (4) granting Ponder’s Motion because the trial court “failed to acknowledge [Ponder’s] involvement in the creation and administration of the Trust and their attorney client relationship”; (5) requiring the Trust to prove bad faith; (6) excluding expert testimony of Menees; (7) excluding expert testimony of Bove; (8) issuing a “withdrawel [sic] instruction” regarding the testimony of James McClellan (“McClellan”);10 (9) excluding and disregarding testimony of Linda as to the “wrongful exclusion of [Robert] from the trust property”; (10) substituting “its own judgment for that of the fact finder finding against the weight of the evidence on facts based on erroneous legal reasoning as Respondents [sic] affirmative defenses were legally inapplicable and should have been stricken”; and (11) “entering a judgment for Ponder because the verdict is only against the weight of the evidence but as made without the evidence and the cumulative affect [sic] of the courts [sic] rulings were against the weight of the evidence and indicate a judicial bias and deprived [the Trust] of a fair trial.”
Ponder contends that: (1) Robert’s individual claims and Linda’s claims as Trustee were barred by the statute of limitations or doctrine of law of the case; (2) the duties of Ponder as Trust Protector were “specifically limited by the terms of the Trust and significantly differed from those of the trustee”; (3) Ponder had no power under the Trust to order Trustees to take or refrain from taking any action; (4) no attorney-client relationship existed between Ponder and the Trust; (5) the Trust was “obligated to show bad faith” and failed to introduce evidence Ponder acted in bad faith; (6) the trial court properly excluded testimony from Menees because the testimony constituted a legal opinion; (7) the trial court properly excluded testimony of Bove because the testimony related to questions of law; (8) a withdrawal instruction regarding McClellan’s testimony was proper because the testimony related to claims not before the trial court or regarding damages to the Trust; (9) Linda’s testimony regarding the exclusion of Robert from the Trust property was properly excluded because it was not related to any pending claim or damages; (10) and the Trust failed to present evidence to establish the element of damages and failed to “show where in the record [the Trust] presented evidence of damages or identif[ied] any error on the part of the trial court.”
The Trust’s Points Relied On and Argument
Rule 84.04(c) and (e) require all statements of fact and all factual assertions in the argument have “specific page references to the relevant portion of the record on appeal, i.e., legal file, transcript, or exhibits.” The Trust failed to consistently provide such references in both its Statement of Facts and Argument sections; oftentimes the Trust’s references were unclear, incorrect, or simply did not support the statement or assertion.
The points relied on in the Trust’s brief are also deficient in that some points are multifarious and in certain cases, fail to state the legal reasons for a claim of reversible error. While it is within our authority to dismiss this appeal as a whole for these violations of briefing requirements, we are reluctant to do so because Ponder’s brief does address some points directly. As a result, we choose to review some, but not all of the Trust’s points relied on ex gratia, In re CAM., 282 S.W.3d 398, 405 n. 5 (Mo.App.S.D.2009), as opposed to a dismissal.
Because of our disposition of the issues, the Trust’s points will be addressed out of order and some points will be addressed together.
Point X: Damages–the Trust Failed to Prove Damages
We begin our analysis with Point X:
THE COURT ERRED IN GRANTING A JUDGMENT IN FAVOR OF RESPONDENTS AND DIRECTING THE VERDICT HEREIN AND FAILING TO SET ASIDE ITS VERDICT BECAUSE APPELLANT SUBMITTED A SUBMISSIBLE CASE TO THE TRIER OF FACT AND THE COURT IN ERROR SUBSTITUTED ITS OWN JUDGMENT FOR THAT OF THE FACT FINDER FINDING AGAINST THE WEIGHT OF THE EVIDENCE ON FACTS BASED ON ERRONEOUS LEGAL REASONING AS RESPONDENTS AFFIRMATIVE DEFENSES WERE LEGALLY INAPPLICABLE AND SHOULD HAVE BEEN STRICKEN AND AMPLE EVIDENCE OF DAMAGES AND CAUSATION WAS SUBMITTED TO THE COURT.[11]
Ponder’s Motion filed at the close of the Trust’s evidence included a claim that the Trust failed to set forth evidence of damages suffered as a result of Ponder allegedly failing to remove the Trustees–“the one power he had.” The trial court found the “positions presented in [Ponder’s] [M]otion and the argument in support thereof” were well taken, sustained the Motion, and entered judgment in favor of Ponder. On appeal, the Trust argues “[t]he [trial c]ourt disregards the weight of the evidence and invaded the province of the fact finder by entering a directed verdict as [the Trust] presented substantial evidence to which reasonable minds can differ.” Because we find the Trust failed to present evidence that the alleged breach of fiduciary duty caused harm or damage to the Trust, we find the Trust did not make a submissible case and the trial court did not err in granting Ponder’s Motion.
Standard of Review
In reviewing the grant of a motion for directed verdict, this Court ‘must determine whether the plaintiff made a submissible case․’ Dunn v. Enterprise Rent-A-Car Co., 170 S.W.3d 1, 3 (Mo.App.2005). ‘A case may not be submitted unless each and every fact essential to liability is predicated upon legal and substantial evidence.’ Investors Title Co. v. Hammonds, 217 S.W.3d 288, 299 (Mo. banc 2007). ‘An appellate court views the evidence in the light most favorable to the plaintiff to determine whether a submissible case was made.’ Tune v. Synergy Gas Corp., 883 S.W.2d 10, 13 (Mo. banc 1994). ‘The plaintiff may prove essential facts by circumstantial evidence as long as the facts proved and the conclusions to be drawn are of such a nature and are so related to each other that the conclusions may be fairly inferred.’ Morrison v. St. Luke’s Health Corp., 929 S.W.2d 898, 900 (Mo.App.1996). ‘Whether the plaintiff made a submissible case is a question of law subject to de novo review.’ D.R. Sherry Const., Ltd. v. Am. Family Mut. Ins. Co., 316 S.W.3d 899, 905 (Mo. banc 2010). Further, with respect to evidentiary rulings, the trial court ‘enjoys considerable discretion in the admission or exclusion of evidence, and, absent clear abuse of discretion, its action will not be grounds for reversal.’ State v. Mayes, 63 S.W.3d 615, 629 (Mo. banc 2001).
Moore v. Ford Motor Co., 332 S.W.3d 749, 756 (Mo. banc 2011).
When reviewing, we must view the evidence and reasonable inferences from the evidence “in the light most favorable to the plaintiff, giving him or her the benefit of all reasonable inferences[.]” Englezos v. The Newspress and Gazette Co., 980 S.W.2d 25, 30 (Mo.App.W.D.1998). While the granting of a direct verdict is a drastic measure by the trial court, “liability cannot rest upon guesswork, conjecture, or speculation beyond inferences that can reasonably decide the case[.] For this reason, direction of a verdict will be affirmed if any one of the elements of the plaintiff’s case is not supported by substantial evidence.” Id. (internal quotations and citations omitted).
Analysis
At trial, the Trust alleged Ponder breached his fiduciary duty owed to the Trust. The Trust’s breach-of-duty claim was based on the Trust’s contention that Ponder was made aware in the summer of 2000 that Trustees were spending Trust money inappropriately and depleting Trust assets, but he took no action. The Trust further alleged Ponder ignored the information, did not investigate further into the depletion of Trust assets, and did not question the Trustees’ actions. The Trust’s Fourth (Substituted) Amended Petition alleged at that time “substantial financial assets of the Trust existed upon information and belief this amount exceeded Five Hundred Thousand dollars ($500,000).” The Trust’s petition claimed it was damaged as a direct result of Ponder’s breach of fiduciary duty in that: “The Special Needs Trust has been wasted, depleted, and diminished to essentially nothing.”
At trial, Menees testified that Ponder should have removed Trustee Davis “in December ․ of 1999 at or around year-end December of 1999.”12
To prevail on a breach of fiduciary duty, a plaintiff must show: (1) the existence of a fiduciary duty; (2) a breach of that fiduciary duty; (3) causation; and (4) harm. Koger v. Hartford Life Ins. Co., 28 S.W.3d 405, 411 (Mo.App.W.D.2000). Here, the parties agreed the “harm” to the Trust would be depletion of assets of the Trust; obvious losses dollar wise. See Zakibe v. Ahrens & McCarron, Inc., 28 S.W.3d 373, 383 (Mo.App.E.D.2000) (finding harm to defendant because there was substantial evidence that plaintiff’s action resulted in the creation of a large receivable on behalf of American Showcase which over time amounted to $455,184; this amount was never paid to defendant by American Showcase; defendant had to bear the cost of carrying this receivable, which testimony showed was $50,000 per year; and defendant suffered cash flow problems due to this large receivable).
Ponder’s Motion alleged there was “absolutely no evidence of any damages ․ that were caused as a result of the alleged failure by [Ponder] to remove Mr. Davis[,]” and Ponder’s counsel orally argued the same. The trial court allowed the Trust’s counsel to respond to the oral argument of Ponder’s counsel in support of Motion. With respect to evidence of damages, the Trust alleged Ponder “blew” the Trust’s money because “he was contacted on numerous occasions about expenditures․ [H]e was contacted about some of the most egregious expenditures[.]” The trial court asked the Trust’s counsel “what testimony did I hear about damages?” and Trust responded “Lots.” When questioned for a more specific response, the following discussion took place:
THE COURT: Well, you’re going–
[TRUST COUNSEL]: Well, we talked-
THE COURT:–to have to be a–
[TRUST COUNSEL]: Okay.
THE COURT:–little more specific if you want–
[TRUST COUNSEL]: We talked about depreciation–
THE COURT:–me to consider it.
[TRUST COUNSEL]: We talked about depreciation and [Ponder] admitted that the stereo system was a diminished asset.
THE COURT: What was the evidence that it was depreciated?
[TRUST COUNSEL]: Well, he testified that it was, he said–
THE COURT: How much?
[TRUST COUNSEL]: I don’t know. He didn’t give a precise exact value and I don’t believe that the case law requires that we give a precise exact value of the damages. I don’t know of any case, it certainly doesn’t for punitive damages because that’s impossible.
THE COURT: I’m not worried about punitive right now.
[TRUST COUNSEL]: Well, okay, but you know that is what we believe is a submissible position in the case. It would be impossible for us, to precisely calculate damages in an exact amount, it’s impossible.
THE COURT: Let me ask you this, we are dealing with a trust and the damages to the trust would be the depletion of the assets.
[TRUST COUNSEL]: Uh-huh.
THE COURT: Okay, this is not a personal injury case where we are talking about pain and suffering–
[TRUST COUNSEL]: No, right.
THE COURT:–and trying to figure out what it might be down the road.
[TRUST COUNSEL]: No.
THE COURT: The trust would have obvious losses.
[TRUST COUNSEL]: Right.
THE COURT: My question to you is, what testimony was there of obvious losses to the trust today dollar wise?
[TRUST COUNSEL]: Well, that’s–
THE COURT: I mean there have to be.
[TRUST COUNSEL]: The Merrill Lynch documents, it’s obvious the Merrill Lynch documents speak for themselves.
THE COURT: The Merrill Lynch documents show there was a depletion of the trust assets–
[TRUST COUNSEL]: Of almost a million dollars ($1,000,000.00).
THE COURT:–but those documents don’t say why.
[TRUST COUNSEL]: I don’t believe that they have to say why.
THE COURT: You just think that if the trust depletes that’s enough to show bad faith on the part of a Trust Protector who is not a Trustee?
[TRUST COUNSEL]: I think that if a trust is depleted almost in its entirety in a sixteen month period roughly that is absolutely, that is absolutely not only bad faith I’m going to say this I think it’s immoral, I think it’s–
THE COURT: Well, you didn’t have any testimony about immorality today.
[TRUST COUNSEL]: Well,–
THE COURT: I’m not asking you to just make stuff up. Did you have any testimony today of anybody saying that it was immoral?
[TRUST COUNSEL]: Well, it’s definitely bad faith. A man who sits by and watches a trust, it’s wrong, slowly be depleted almost in its entirety–
THE COURT: You know the problem you have with this is you don’t have any evidence as to how it was depleted.
[TRUST COUNSEL]: Well–
THE COURT: You don’t have any evidence today–
[TRUST COUNSEL]: Okay.
THE COURT: Excuse me.
[TRUST COUNSEL]: All right.
THE COURT:–of what happened after the correspondence involving Mr. McClellan, whenever that was, and the testimony that we had up to that point was that over a three month period of time there had been a diminution of the trust in the approximate amount of maybe four hundred fifty thousand dollars ($450,000.00), okay.
[TRUST COUNSEL]: Right.
THE COURT: The testimony was that [Ponder] didn’t know about anything before that, do you agree with that?
[TRUST COUNSEL]: No, I don’t agree with that and–
THE COURT: Okay. I’ll just tell you what, that’s what the evidence was.
[TRUST COUNSEL]: Okay.
THE COURT: You may not agree, but that’s what the evidence was.
[TRUST COUNSEL]: Okay.
THE COURT: Thereafter there was absolutely no evidence of any expenditures made by the Trustees, none.
[TRUST COUNSEL]: Okay.
THE COURT: All that you have is you are saying that the amount of the trust decreased. That’s all that you have.
[TRUST COUNSEL]: Okay. Well, I mean I disagree with that.
THE COURT: Tell me what’s different. Tell me what you presented in front of the jury–
[TRUST COUNSEL]: Well, we presented–
THE COURT: Let me finish. Not what you think, but what they heard.
[TRUST COUNSEL]: We presented evidence of waste, absolute waste. They spent money; they spent his money on things that were not–
THE COURT: What were they?
[TRUST COUNSEL]:–absolutely necessary. The [sic] hired his own personal friend and ripped my client off.
THE COURT: What testimony was there–
[TRUST COUNSEL]: He hired–There was testimony about Mark Gill. That it was totally unnecessary for his security. Huh–
THE COURT: Now, you have a house out there that you are saying was broken into and you are saying that Mr. Gill’s security purpose weren’t needed?
[TRUST COUNSEL]: He was there while it happened and they continued to have him on it.
THE COURT: Okay. So what was the value that was assigned–
[TRUST COUNSEL]: Well, they–
THE COURT: Wait a minute, let me ask you a question. Through the testimony today what was the value that was assigned that due to the failure to remove or get rid of Mark Gill that the trust diminished?
[TRUST COUNSEL]: They wasted money. Okay, I will go through their documents, using their documents is the prima facie evidence of the depletion of the trust.
THE COURT: Using their documents–
[TRUST COUNSEL]: Yeah, right.
THE COURT:–do those show checks written?
[TRUST COUNSEL]: They show the check register.
THE COURT: Are you saying that each and every check written was in bad faith and diminution of the trust?
[TRUST COUNSEL]: Well, first of all I want to articulate that’s a bad thing. I don’t believe that is the standard. I talked to [Menees] and–
THE COURT: We’re not talking to [Menees] right now. We’re having argument about [Ponder]’s motion.
[TRUST COUNSEL]: Okay.
THE COURT: My question to you is, are you saying that each and every expenditure in that check register–
[TRUST COUNSEL]: Uh-huh.
THE COURT:–is evidence of bad faith on the part of [Ponder]? That’s my understanding of what you’re saying.
[TRUST COUNSEL]: I don’t believe that we have to sit there and specifically say numerically which item–That is almost impossible to do. Huh, Mark Gill, they spent, I mean if I’m reading correctly, it comes out to roughly from three hundred, roughly over forty thousand dollars ($40,000.00) and, I mean, there are other calculations. It also referred to Ronnie Wallace beginning 2/26 to 12/27. These expenditures are completely unnecessary. We think that Mark Gill was an unnecessary expense. Huh–
THE COURT: I’m still trying to figure out any dollar amount.
[TRUST COUNSEL]: I don’t believe that we are required–
THE COURT: My understanding of what your argument is to me today is that you don’t have to present evidence of damages.
[TRUST COUNSEL]: No, that is not my argument here today, Your Honor. What I’m saying is I don’t believe that we have to precisely quantify a precise numerical amount. That would be impossible for us to do. But we can prove that there was waste. Mark Gill for example is one. I think the waste is obvious to anybody that takes a look at it. And we have had several–I mean anybody who looks at this knows it’s a total mess; it’s a disaster.
THE COURT: Oh this is a disaster I agree with you on that.
[TRUST COUNSEL]: Uh-huh.
THE COURT: But the thing about it is the only thing I can deal with is what’s been presented to this jury–
[TRUST COUNSEL]: Right.
THE COURT:–the last three days. [TRUST COUNSEL]: Right.
The trial court found the Trust “never put anything in front of [the] jury where they could make a determination of any damages caused by [Ponder].” The trial court further noted the Trust had no testimony of applying a dollar figure to any conduct the Trust alleged Ponder performed in bad faith, and the Trust’s experts both testified they were not experts on damages. The trial court concluded the court saw “nothing · which would allow [the trial court] to do anything other than grant the [M]otion.”
On appeal, Ponder maintains his position that the Trust failed to “adduce evidence that the breach of fiduciary duty caused damage to [the Trust.]” We agree.
There was no expert testimony presented by the Trust linking Ponder’s alleged breach of fiduciary duty with harm or damages to the Trust. Menees testified Ponder should have removed the Trustees in December 1999 for several reasons, but the reason relevant to this appeal was the depletion of the Trust assets through spending twenty-two percent of the whole trust corpus during the last quarter of 1999. However, Menees acknowledged this money was spent prior to Ponder being approached by anyone on behalf of the Trust or Robert to remove the Trustees. There was no evidence presented that a new successor trustee, if timely appointed by Ponder in December 1999, could have recouped any of the previously dissipated Trust assets. As a result, the twenty-two percent depletion of the Trust assets cannot, by the Trust’s own expert testimony, be a damage the Trust incurred due to Ponder’s alleged breach.
Furthermore, Menees never testified (nor did any other witness) as to what would have happened if Ponder had appointed different trustees in December 1999.13 With respect to damages, Menees specifically testified:
[PONDER’S COUNSEL]: All right. And so you are not here to testify about what damage occurred to the trust by virtue of what you believe was Mr. Ponder’s failure to properly remove the Trustee, correct?
[MENEES]: Yes, sir.
Menees gave his expert opinion on Ponder’s alleged breach of duty and when that breach of duty took place. However, Menees did not testify as to what damage occurred because Ponder did not remove the Trustees in December 1999, nor did he identify any inappropriate expenditures of the Trust funds after December 1999.
The Trust’s argument is that because the Trust decreased in value as shown in the exhibits, the Trust proved damages due to Ponder’s alleged breach. In its brief, the Trust argues:
Here, The Trust funds were squandered. Then fiduciaries made no attempt to preserve the trust corpus. On August 31, 1999 the Robert McLean Irrevocable Trust had a value of at least 1,022.051.00 In 1999 Respondent Michael Ponder was Trust Protector and owed a fiduciary duty to his beneficiary. The fiduciaries owed duties to preserve the trust.
The Trust contained roughly (180,000) thousand Dollars in 2002 when Michael Ponder was Trust Protector. The Trust was also in debt to nursing staff. The Trust property was damaged The trust corpus had dwindled so to the point where the beneficiary could not maintain his living expenses.. Considering the debt this could be considered a total loss. Because of Respondents refusal to insist that the fiduciaries perform their legally required tasks of maintaining, protecting, preserving, and making the trust property the trust purpose was destroyed.
Tim Gilmore’s warning to Ponder sadly proved to be true: Pat Davis is going to run this thing into the ground. Robert Mclean, Ronnie Wallace, Johnny Martin James McCellen, and others warned Michael Ponder numerous times begging him to exercise his fiduciary power. “You need to appoint somebody.
The trust was destroyed. The record reveals the co-fiduciaries practice of purchasing inappropriate wasteful items such as: Electronics, $147,808.66 was Pets, ($19,655.17.819,.) The Trust made $291,767.33 in unnecessary adaptations to the home. $50,000.00 was spent on a fence that should have cost a maximum of $18,000.00. Money was spent on attorney’s fees. spent on a Satellite System and expenses. $13,209.64 was spent on household supplies and maintenance. The Trust had one beneficiary.
The fiduciaries made no effort to preserve the trust corpus. Even the most elementary investor could have realized a gain with a trust corpus from which Ponder and Davis started out. Gilmore testified even the most basic returns could yield four or five percent. And the money should have lasted more than year and a half. The Trustee and the Protector completely ignored their own financial data they acquired in the Life Care Plan. Respondents gave no consideration to the inflationary projections of economist Bruce Domazlicky.
The beneficiary was left without adequate funds left to be cared for by his mother. The evidence is that this trust was left without sustainable funds to care for the beneficiary and keep of the house. The house, which never should have been purchased, ultimately foreclosed upon is a result of the mismanagement of funds.
(Emphasis in original) (Taken from Appellant’s brief verbatim).
The Trust further argues the trial court “made no analysis of the financial records show [sic] almost a total loss to the trust.”14 However, the Trust fails to specifically state or identify how these records show loss to the Trust due to Ponder’s alleged breach of duty, nor did the Trust identify at trial, or even now, what unnecessary spending or purchases were made after December 1999 that would not have been made if Ponder had replaced the Trustees in December 1999.
Although the Trust’s brief lists dollar amounts spent by the Trust on various items, this listing amounts to nothing more than a mere recital of the amount spent with no explanation as to why the purchases were inappropriate and how Ponder’s alleged breach caused the inappropriate purchases.15 In addition, the exhibits cited by the Trust include purchases made during the twelve months ending December 31, 1999. Any purchases prior to December 31, 1999, cannot be claimed as harm or damage to the Trust in light of Menees’ testimony that Ponder should have removed the Trustees in December 1999.16
While the Trust maintains it presented “substantial evidence of damages,” we find the Trust failed to point us to any evidence of damage and harm to the Trust due to Ponder’s alleged breach that was before the jury. Rule 84.04(e) requires all factual assertions in arguments supporting the Trust’s points include “specific page references to the relevant portion of the record on appeal, i.e., legal file, transcript, or exhibits.” The Trust provided no such references pointing to damage or harm caused by Ponder’s alleged breach, which are our tools to verify factual assertions made in support of appellate arguments and are essential to effective functioning of appellate courts. See Demore v. Demore Enterprises, Inc., 2013 WL 3509386, at *4 (Mo.App.S.D. July 15, 2013).
A party’s mandated compliance with Rule 84.04(e) “provides [this Court] with the tools with which to verify the accuracy of the factual assertions in the argument upon which a party relies to support its argument.” Pattie v. French Quarter Resorts, 213 S .W.3d 237, 240 (Mo.App.S.D.2007) (internal quotation and citation omitted). ” ‘[W]ithout such compliance, this [C]ourt would effectively act as an advocate of the non-complying party, which we cannot do. This court cannot spend time perusing the record to determine if the statements are factually supportable.’ ” Lombardo v. Lombardo, 120 S.W.3d 232, 247 (Mo.App.W.D.2003) (quoting McCormack v. Carmen Schell Constr. Co., 97 S.W.3d 497, 509 (Mo.App.W.D.2002)).
The Trust points this Court to the whole record of expenditures, but fails to specifically identify the evidence before the jury showing which expenditures would not have happened but for Ponder’s negligence. Only by doing the Trust’s work could we know if the 875-page transcript and 9 volumes of exhibits (containing more than 475 pages) support its argument in Point X. Lombardo, 120 S.W.3d at 247. “We cannot seine this record for that purpose or to remedy this rule violation without becoming a de facto advocate·” Demore, 2013 WL 3509386, at *3; see also Shaw v. Raymond, 196 S.W.3d 655, 659 n. 2 (Mo.App.S.D.2006).
The element of harm or damages cannot “rest upon guesswork, conjecture, or speculation beyond inferences that can reasonably decide the case [.]” Englezos, 980 S.W.2d at 30 (internal quotation and citation omitted). Here, the Trust failed to prove Ponder’s alleged breach of fiduciary duty caused harm or damage to the Trust. For that reason, the Trust’s Point X is denied.
Points II, III, IV and V are Moot Since the Trust Failed to Prove Damages
In Points II through V, the Trust argues the trial court erred in granting the directed verdict and judgment in favor of Ponder because the Trust presented a submissible case of Ponder’s breach of duty laid out in each point. These points are moot in light of our finding that the Trust failed to present the jury with evidence of damages or harm to the Trust due to the alleged breach of duty. The Trust’s Points II through V are therefore denied.
Point I: Trial Court’s Dismissal of Counts I, II, III, IV and V
For its first point, the Trust contends the trial court erred in dismissing the individual claims of Robert, and Linda as Trustee, in Counts I, II, III, IV and V of the Trust’s Fourth (Substituted) Amended Petition on February 10, 2011. The Trust argues that the trial court “gave no legal reasons for its determinations as to when statute purportedly expired or legal rationale as to its order. The Court is in error by not applying the doctrine of relation back, or the disability provisions of § 516.170 or § 516.290. to a disabled individual. Because of relation back or disability the statute none Appellants claims are barred.” (Taken from Appellant’s brief verbatim). We disagree.
Standard of Review
“Our review of a trial court’s decision to grant a motion to dismiss is de novo.” Atkins v. Jester, 309 S.W.3d 418, 422 (Mo.App.S.D.2010). The trial court’s order dismissing the counts relating to the individual claims of Robert and Linda provides the counts were “barred by applicable statutes of limitation.” However, we will not disturb a correct decision of the trial court simply because the trial court gave a wrong or insufficient reason for the decision. See Edgar v. Fitzpatrick, 377 S.W.2d 314, 318 (Mo. banc 1964).
Analysis
The original petition in this matter was filed on August 6, 2004, and listed only one plaintiff: “LINDA McLEAN, as Trustee of the Robert T. McLean Irrevocable Trust U/A/D March 31, 1999.” A First Amended Petition was filed on April 6, 2005, with the same listed plaintiff.
On July 27, 2005, the trial court sustained Ponder’s Motion to Dismiss or, in the Alternative, for Summary Judgment, and judgment was entered in favor of Ponder and against the Trust.17 The claims against the other defendants were ultimately settled and a “Judgment of Dismissal” was entered by the trial court on January 25, 2007. Several months later, the Trust requested leave to file an appeal out of time, which was granted by this Court on July 25, 2007. The Trust, and only the Trust, appealed the trial court’s decision to grant Ponder’s motion to dismiss and summary judgment. McLean, 283 S.W.3d at 786.
On July 27, 2007, a Notice of Appeal was filed listing “Linda McLean, as Trustee” as the only appealing appellant. See id. Neither Robert (either individually or through his guardians) nor Linda individually, appealed the trial court’s judgment in favor of Ponder. In fact, it was not until this matter was remanded for further proceedings by this Court in McLean, that Linda was added “individually” as a plaintiff in the Fourth (Substituted) Amended Petition on September 14, 2010.
Rule 81.01(a) provides the “notice of appeal shall specify the parties taking the appeal.” (Emphasis added). The only party appealing the trial court’s previous order granting Ponder’s motion to dismiss and summary judgment was the Trust. Following review of the appeal, we ordered the case remanded for further proceedings consistent with that opinion, to include only the Trust as plaintiff. McLean, 283 S.W.3d at 795. For that reason, the individual claims of Linda and Robert were properly dismissed by the trial court.
As to the claims of the Trust dismissed in the counts in issue, we need not address the Trust’s alleged error in light of our finding of no damages or harm to the Trust. To prevail in actions for legal malpractice, breach of fiduciary duty, negligent misrepresentation, negligent infliction of emotional distress, and negligent retention as contained in the Trust’s counts in issue, a party must show injury, harm or damage. See Klemme v. Best, 941 S.W.2d 493, 495 (Mo. banc 1997); Koger, 28 S.W.3d at 411; Renaissance Leasing, LLC v. Vermeer Mfg. Co., 322 S.W.3d 112, 134 (Mo. banc 2010); Thornburg v. Federal Express Corp., 62 S.W.3d 421, 427 (Mo.App.W.D.2001); Gibson v. Brewer, 952 S.W.2d 239, 246 (Mo. banc 1997). In light of our finding that the Trust failed to present substantial evidence of harm or damage to the Trust, we need not address the Trust’s claims as to the dismissed counts.
The Trust’s Point I is denied.
Points VIII and IX: Testimony Regarding Refusal to Allow Robert to Return to Trust Property
In Points VIII and IX, the Trust argues the trial court erred in excluding testimony regarding the refusal to allow Robert to return to his residence, owned by the Trust, and giving a withdrawal instruction regarding that testimony.
Standard of Review
“Trial courts have broad discretion over the admissibility of evidence and appellate courts will not interfere with their decisions unless there is a clear showing of abuse of discretion.” Pittman v. Ripley County Memorial Hosp., 318 S.W.3d 289, 294 (Mo.App.S.D.2010). Abuse of discretion is when the trial court’s ruling is clearly against the logic of the circumstances and is so unreasonable and arbitrary that it shocks the sense of justice and indicates a lack of careful, deliberate consideration. Hancock v. Shook, 100 S.W.3d 786, 795 (Mo. banc 2003).
Similarly, deciding whether to give a withdrawal instruction is within the trial court’s discretion. Haffey v. Generac Portable Products, LLC, 171 S.W.3d 805, 810 (Mo.App.S.D.2005).
‘Withdrawal instructions may be given when evidence on an issue has been received, but there is inadequate proof for submission of the issue to the jury; when there is evidence presented which might mislead the jury in its consideration of the case as pleaded and submitted; when there is evidence presented directed to an issue that is abandoned; or when there is evidence of such character that might easily raise a false issue.’
Id. (quoting Stevens v. Craft, 956 S.W.2d 351, 355 (Mo.App . S.D.1997)). “There is no abuse of discretion if reasonable persons could differ about the propriety of the trial court’s decision.” Stevens, 956 S.W.2d at 355.
Analysis
Both points argue testimony from Linda and McClellan regarding the refusal to allow Robert access to his residence should have been admitted. The record shows when the issue surrounding this testimony came up, the trial court allowed the parties to present their respective arguments on the matter, and carefully considered the admissibility of this evidence. The basis of the trial court’s ruling was that the testimony of Linda and McClellan was not relevant to damage to the Trust. The only plaintiff in the lawsuit was the Trust;18 and the only claim pending at trial was that Ponder breached the fiduciary duty he owed to the Trust. The trial court found the exclusion of Robert from the property was not relevant to any damages because it would only qualify as non-economic damages to the Trust,19 and “it’s an impossibility for a trust to suffer the [non-economic] damages as defined by Missouri Statutes.”
The ruling of the trial court was within its sound discretion, it was not clearly against the logic of the circumstances, and it was not so unreasonable and arbitrary as to shock the sense of justice and indicate a lack of careful, deliberate consideration. The Trust’s Points VIII and IX are denied.
Points VI and VII: Expert Testimony Excluded
The Trust’s Points VI and VII involve the exclusion of expert testimony from Menees and Bove regarding Ponder’s duties as Trust Protector. The Trust’s position regarding the exclusion of expert testimony was not clearly set out in the Trust’s brief. The points relied on claim error in entering judgment for Ponder and refusing to set aside Ponder’s Motion. However, in the argument sections, the Trust argues “[t]he Order 25, 2011[sic] [excluding expert testimony regarding Ponder’s duties,] is legally and factually inaccurate [,]” and the trial court erred “by refusing to allow [the Trust] to read the deposition of [Bove] into evidence.” The Trust then sets forth the proffered testimony from the witnesses. Finally, the Trust closes by arguing the trial court erred in “anointing itself the decider of all disregarding the experience and learned. This is prejudicial and reversible error· [T]he [trial c]ourt undeniably erred by refusing to allow [the Trust] to read the deposition of [Bove].”
The Trust failed to mention, much less develop, the trial court’s alleged error of “entering judgment” for Ponder and “refusing to set aside [Ponder’s] motion for directed verdict disregarding and excluding” expert testimony in the Trust’s argument section. See Citizens for Ground Water Protection v. Porter, 275 S.W.3d 329, 348 (Mo.App.S.D.2008). The Trust leaves this Court with no choice but to find these claimed legal errors abandoned:
An argument must explain why, in the context of the case, the law supports the claim of reversible error. It should advise the appellate court how principles of law and the facts of the case interact. A claim of legal error in a point relied on which is not supported by any argument is considered abandoned. Plaintiffs’ failure to provide the factual context of these alleged errors in either their point relied on or their argument leave this court with nothing more than Plaintiffs’ bare assertions of legal error. In this vacuum, any effort by this court to address these claimed legal errors would require us to act as an advocate for Plaintiffs by scouring the record for factual support of these claims. This we cannot and will not do.
Id. (internal quotations and citations omitted).
Here, the Trust provided nothing more than bare assertions of legal error; i.e., error in entering judgment, with no factual and legal basis for the claimed error. We cannot and will not attempt to piece together the Trust’s argument and what the Trust meant because to do so, would require this Court to act as the Trust’s advocate.20
The Trust’s Points VI and VII are denied.
Point XI
The Trust’s final point relied on is that:
THE COURT ERRED IN FAILING TO GRANT APPELLANTS MOTION FOR SET ASIDE THE VERDICT AND ENTERING A JUDGMENT FOR RESPONDENT BECAUSE THE VERDICT IS ONLY AGAINST THE WEIGHT OF THE EVIDENCE BUT AS MADE WITHOUT THE EVIDENCE AND THE CUMULATIVE AFFECT OF THE COURTS RULINGS WERE AGAINST THE WEIGHT OF THE EVIDENCE AND INDICATE A JUDICIAL BIAS AND DEPRIVED APPELLANT OF A FAIR TRIAL.
(Taken from Appellant’s brief verbatim).
Point XI and the corresponding argument, do not comply with Rule 84.04. First, the point relied on presents multifarious claims–it claims error in failing to grant the Trust’s motion to set aside the verdict and entering judgment for Ponder because: (1) the verdict is “only against the weight of the evidence but as made without the evidence”; and (2) the cumulative “affect” of the trial court’s rulings were against the weight of the evidence, show judicial bias, and deprived the Trust of a fair trial. A point relied on that combines allegations of error not related to a single issue violates Rule 84.04. Improper points relied on, including multifarious points, preserve nothing for appellate review. Martin v. Reed, 147 S.W.3d 860, 863 (Mo.App.S.D.2004).
In addition, the Trust failed to fully develop the argument and explain why, in the context of the Trust’s case, the law supports the claims of error in the Trust’s Point XI. See Osthus v. Countrylane Woods II Homeowners Ass’n, 389 S.W.3d 712, 716 (Mo.App. ED.2012) (holding an argument section should advise the court how the facts of the case and principles of law interact).
Finally, the Trust’s argument contains claimed errors not included in the point relied on. For example, the Trust argued:
The Court error entered its judgment disregarding Appellants motion in limine. Appellant in error allowed Respondent to propound hearsay evidence regarding Tim Gilmore’s addiction. Respondents excuse he was aware of Gilmore’s habit is the product of Gilmore having the integrity and forthright nature to admit this in testimony. The Court further improperly allowed Respondent to attribute fault to non-parties.
(Taken from Appellant’s brief verbatim).
There is no mention of trial court error in ruling on the Trust’s motion in limine in the Trust’s Point XI, nor mention of error in allowing Ponder to attribute fault to non-parties. Rule 84.04(e) provides the “argument shall be limited to those errors included in the ‘Points Relied On.’ ” See Osthus, 389 S.W.3d at 716 (holding “an appellant’s brief also must contain an argument section that substantially follows each “Point Relied On[.]”). The argument section of Point XI fails to follow the corresponding point relied on, defeating the very purpose of a point relied on: “to provide the opposing party with notice as to the precise matters that must be contended with and to inform the court of the legal issues presented for review.” Id. at 715; Rule 84.04(d).
Therefore, because the Trust’s Point XI fails to comply with Rule 84.04, it preserves nothing for our review. Osthus, 389 S.W.3d at 717. “This court should not be expected either to decide the case on the basis of inadequate briefing or to undertake additional research and a search of the record to cure the deficiency.” Id. All of these reasons justify our dismissal of Trust’s Point XI.
The trial court’s Judgment is affirmed.
INSTRUCTION NO. 2
FOOTNOTES
1. We note the Trust’s brief violates Rule 84.04(c) in that portions of the Statement of Facts fail to include specific, accurate, or clear references to the record on appeal. In addition, the Trust’s brief is full of typographical errors, incomplete sentences, and sentences that appear to have missing words. Many of these errors make it difficult to determine the Trust’s argument.All rule references are to Missouri Court Rules (2013).
2. We borrow freely from this Court’s recitation of the facts in Robert McLean Irrevocable Trust v. Patrick Davis, P.C., 283 S.W.3d 786 (Mo.App.S.D.2009), without further attribution.
3. For clarity and ease of analysis, we have chosen to refer to some of the parties by their first names. We mean no disrespect in doing so.
4. The trial court’s order was later amended to reflect that Ponder’s motion to dismiss and motion for summary judgment were both sustained.
5. In the body of the Judgment of Dismissal the date is denoted as January 25, 2006, which we assume is a typographical error as the document is file-stamped by the circuit clerk as January 25, 2007.
6. As we pointed out previously,no recorded Missouri case has ever dealt with the function or duties of a ‘Trust Protector.’ The term ‘trust protector’ does appear in the official comment to section 808 of the Uniform Trust Code and states that section 808 “ratif[ies] the use of trust protectors and advisers· ‘Advisers’ have long been used for certain trustee functions, such as the power to direct investments or manage a closely-held business. ‘Trust protector,’ a term largely associated with offshore trust practice, is more recent and usually connotes the grant of greater powers, sometimes including the power to amend or terminate the trust.” UNIFORM TRUST CODE Section 808 (2005). Missouri has adopted section 808 of the Uniform Trust Code as section 456.8-808, RSMo Cum.Supp.2006. The statute itself does not use the term ‘trust protector’ but more generically states, in pertinent part: “A person, other than a beneficiary, who holds a power to direct is presumptively a fiduciary who, as such, is required to act in good faith with regard to the purposes of the trust and the interests of the beneficiaries. The holder of a power to direct is liable for any loss that results from breach of a fiduciary duty.”McLean, 283 S.W.3d at 789 n. 3.
7. The entirety of Ponder’s statement of uncontroverted facts consisted of the following six paragraphs:(1) [Robert] was seriously injured in an automobile accident in 1996 causing him to become a quadriplegic·(2) As a result of the injury, [Robert] hired Patrick Davis and Patrick Davis, P.C. to assist him with a products liability suit who then referred the case to [Ponder] for further handling·(3) Ponder successfully prosecuted the suit for [Robert], achieving a large settlement·(3) [sic] Due to significant medical expenses which had been paid by Medicare and the need to continue [Robert]’s eligibility for all available government programs, the proceeds of the settlement were placed in a Special Needs Trust known as the ‘Robert T. McLean Irrevocable Trust U/A/D March 31, 1999.[‘] ·(4) Exhibit A is a true and accurate copy of the [Trust]·(4) [sic] [Ponder] was designated as ‘Trust Protector’ under the terms of the [Trust]·
8. McLean noted “[w]hether [the Trust] will be able to prove the scope of [Ponder]’s duties of care and loyalty and a breach thereof is not the issue before us.” 283 S. W.3d at 795.
9. Due to a conflict in the trial court’s schedule, the case was removed from the May 2011 trial setting.
10. McClellan offered testimony that Robert was denied access to his residence on Kevin Lane, which was owned by the Trust, and suffered damages as a result. With respect to this testimony, the trial court issued the following withdrawal instruction:The evidence of the Trustee’s refusal to allow [Robert] to return to the Trust property on Kevin Lane in Sikeston, Missouri, and any damages [Robert] personally suffered as a result is withdrawn from the case and you are not to consider such evidence in arriving at your verdict.
11. This point relied on is one example of the multifarious nature of the Trust’s points relied on. The point relied appears as written.
12. In support, Menees cited correspondence involving Ponder in which he talks “about the possibility of removal · [s]o removal is at least in the air and [Ponder] is aware of the possibility and certainly aware of his power to do so.”
13. Menees did acknowledge Robert would have had expenses after December 1999 even if Ponder had replaced the Trustees.
14. The Trust cites Exhibits 26 through 29 in support: Exhibit 26 is Stereo One documents showing purchases made in November 1999; Exhibit 27 is an affidavit by Merrill Lynch; Exhibit 28 is documents from the lawsuit foreclosing on the real estate owned by the Trust due to default; also labeled as Exhibit 28 is Mark Gill’s criminal records/history; and Exhibit 29 is records from accountants regarding the Trust.
15. For example, the Trust cites $13,209.64 spent on household supplies and maintenance, but does not explain why these expenditures were inappropriate or cite trial testimony as to why these expenditures were inappropriate. Surely, it was necessary to spend some money on household supplies and maintenance of the home for over a one-year time period. Without further explanation as to what portion of the expenditures were inappropriate, the Trust fails to establish harm or damage to the Trust.
16. For example, the Trust cites $147,808.66 spent on electronics and cites pages 380-82 from the legal file in support thereof. Upon review of those pages, more than two-thirds of the money spent on electronics was spent on or before December 31, 1999.
17. The judgment was entered in favor of Ponder and against the Trust by the trial court’s amendment of its order on October 6, 2005.
18. As noted in response to the Trust’s Point I, Robert’s individual claims were properly dismissed by the trial court prior to trial.
19. Any economic damage to Robert, individually, due to his exclusion from the property, was irrelevant because he was not a party to the lawsuit.
20. If we were to examine any further, the advocate requirement would become even more apparent. “It is within the sound discretion of the trial court to determine the admissibility of expert testimony and we will not reverse unless there is a clear abuse of that discretion.” Hobbs v. Harken, 969 S.W.2d 318, 321 (Mo.App.W.D.1998).Whether a duty exists is “purely a question of law.” Lopez v. Three Rivers Elec. Co-op., Inc., 26 S.W.3d 151, 155 (Mo. banc 2000). See also McLean, 283 S.W.3d at 794 (noting it is “universally agreed (or at least held) that the question of whether a duty exists is a question of law and, therefore, a question for the court alone. Similarly, it is agreed that whether the duty that exists has been breached is a question of fact for exclusive resolution by the jury.”) (internal quotation and citation omitted). The opinion of an expert on issues of law is generally not admissible because such testimony “encroaches upon the duty of the court to instruct on the law.” Howard v. City of Kansas City, 332 S.W.3d 772, 785 (Mo. banc 2011) (internal quotation and citation omitted).It is clear that to the extent the testimony of Menees and Bove involved questions of law, the trial court properly excluded the evidence. However, for our purposes, it is unclear which portions of expert testimony the Trust alleges should have been admitted or how the exclusion of testimony was an abuse of discretion. It appears that the Trust’s true complaint with respect to expert testimony is with the trial court’s October 25, 2011 order sustaining Ponder’s motion in limine “excluding expert testimony of either Bove or Menees as to the duties of [Ponder] under the terms of the trust[.]” However, the Trust randomly cites testimony and/or argument with no further explanation. It is not this Court’s role to attempt to develop arguments not raised by the Trust, because to do so would be to become an advocate for the Trust “by speculating on facts and arguments that have not been asserted.” Law Offices of Gary Green, P.C. v. Morrissey, 210 S.W.3d 421, 424 (Mo.App.S.D.2006) (internal quotation and citation omitted).
WILLIAM W. FRANCIS, JR., C.J.
NANCY STEFFEN RAHMEYER and P.J., DANIEL E. SCOTT, J., CONCUR.

An Irrevocable Trust May Provide Tax Benefits

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Irrevocable Trusts – Not as Frightening as You Might Think!: Part 3

Read “Irrevocable Trusts – Not as Frightening as You Might Think!: Part 2” Here
For those who avoid irrevocable trusts because they worry about extra taxes, it is true that if you don’t set it up correctly a trust with earned income must file an income tax return. Earned income may include rental income, interest or dividends. However, if it is setup correctly; eg. if the spouses retain a limited power of appointment, they should not incur any increased tax liability as a result of establishing the trust.
A special power of appointment typically means that the grantor has special powers in the trust that do not affect its asset protection benefits. A special limited power of appointment is considered a grantor trust, which does not need to pay income taxes. The income flows through the trust to the grantors, or the husband and wife. They would pay taxes on trust income at the lower individual income tax rate rather than trust rates. In essence, the husband and wife would pay the same income tax that they paid prior to establishing the trust.

Potential Capital Gains Benefits

The estate inclusion also provides a significant tax benefit known as a step-up in basis for capital gains tax purposes. If a parent transfers an asset that has increased in value, the parent’s cost basis carries over to the child. That means, when the asset is eventually sold, the child will be assumed to have taken the asset at the same price as the parents and required to pay capitals gains taxes on the full increase in value. In our example with the Massachusetts couple, if the parents obtained their stock at $100,000 and transferred it as a gift to the children with a value of $500,000, the children are given a cost basis of $100,000. If they later sell the stock for $500,000, the children will realize and recognize a $400,000 capital gain, which translates to approximately $100,000 in federal capital gains tax liability.
Instead, if the parents transferred the stock to an irrevocable trust, the stock would be includible in the gross estate of the parents and given only a step-up in basis. The step-up in basis means the stock is valued as of the date of the parent’s death, not the time of purchase. If our parents put their home into an irrevocable trust with a fair market value of $500,000, the children’s cost basis is $500,000. Therefore, if the children sold the home soon after their parents’ deaths, there would be little or no capital gains to be taxed. As far as the children are concerned, this is a much more desirable outcome. This benefit is not available to individuals who transfer assets to their children as gifts.
In conclusion, the UltraTrust type of irrevocable trust is the only type of trust that allows parents to transfer assets in a manner that will provide protection from their creditors, including the costs of long-term care, and their children’s creditors (including ex-spouses) while allowing the parents to benefit from the assets comprising the trust during their lives. In addition, this trust provides some estate and income tax benefits for both the parents and their heirs. Therefore, the irrevocable trust is about as close as a couple can come to having their cake and eating it, too.

An Irrevocable Trust vs. a Life Estate: Pro’s and Con’s

Posted on: March 15, 2017 at 6:18 am, in

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Irrevocable Trusts – Not as Frightening as You Might Think!: Part 2

Read “Irrevocable Trusts – Not as Frightening as You Might Think!: Part 1” Here
Many couples consider using a life estate to protect their homes rather than transferring property into a trust. Creating a life estate requires executing a deed that transfers ownership of the property to the grantee, yet gives the owners the legal right to live on the property as long as either of them lives. This approach can ultimately protect homeowners from having the property taken to pay for long-term care, but can also create huge unnecessary problems.
If the children experience financial difficulty during the life of the parents, creditors may be able to put a lien on the residence. They could not force a foreclose on the lien while the parents were alive, but the existence of the lien would still cause problems for the children when the property transfers following the death of both parents. If a child gets divorced, the house in a life estate is considered a marital asset and the ex-spouse could get half.

Life Estate Creates Conflicts of Interest

A life estate also means that the parents cannot sell the home without the consent of all children that hold the remainder interest. A child that wants to keep the home in the family can stop the parents from selling.

Life Estate Creates Capital Gains Issues

If the parents sell after transferring the property to their children, the children would be assessed a capital gains tax. In 2013, the capital gains tax rate on real estate is 25%. The tax is based on the difference between the purchase price of the house and the sales price. Consider the hypothetical Massachusetts couple with two children and a house worth $500,000. Assume the property cost $100,000. If the parents transfer the property to their children, retaining a life estate, and later decide to sell, all four individuals are considered owners. The children would be assigned approximately 50% of the cost basis in the property and approximately half of the sale proceeds. That means that each child would be assumed to have earned income of $100,000 from the sale, minus $25,000 of the cost basis, which leaves a capital gain of $75,000. Each child would then have to pay approximately $18,750 in capital gains taxes on the parents’ home.
This unjust outcome becomes even more unfair when the capital gains tax exclusion is factored into the equation. The law allows a capital gains tax exclusion of up to $500,000 for a married couple on a person’s primary residence. That means, if the parents lived in the property and used it as their home for at least two years during a five-year period before the sale, they are allowed to exclude up to $500,000 of the sale’s proceeds from being taxed. Since each parent’s share of the sale proceeds is only $100,000, they pay no taxes – yet their children get a tax bill solely because the parents transferred the property to them before selling it. Also bear in mind that, had the parents not transferred the property to their children, their capital gains would have been $400,000, and no capital gains taxes would have been owed. When looking at these numbers, it is clear that transferring the property to the children and retaining a life estate may not benefit the children. It may also cause strife if the children refuse to sell because of the potential tax liability. Remember that the parents cannot sell without the children’s agreement.

Irrevocable Trust Benefits vs. a Life Estate

If the couple decided instead to transfer the home to an irrevocable trust, they could still retain a joint life estate. However, the remainder interest would belong to the trust. In this scenario, the parents could sell the home without their children’s consent and without facing the capital gains tax issues in the prior example. The couple would be considered the owners for income tax purposes and could take the full benefit of the capital gains exclusion following a sale. They would pay no capital gains tax. In addition, creditors of the children would have no access to the property during the parents’ lives and the trust would give the couple some protection against their own creditors.

An Irrevocable Trust May Protect Assets from Paying for Long-Term Care

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Irrevocable Trusts – Not as Frightening as You Might Think!: Part 1

Many people hear the words “irrevocable trust” and think that the irrevocable nature of the instrument requires inflexibility and rigidity, or that they will lose control over their assets. This is a common myth. As this series of articles will show, an irrevocable trust may enable an individual to retain a significant degree of control over assets during life, while providing for protection from creditors and reducing tax liability for the person’s heirs following death. Putting assets into an irrevocable trust also may help to reduce the risk that a child’s creditor or ex-wife will take the assets while the parent is alive.
One very big concern that has been growing recently is the possibility that a person’s hard-earned assets will be taken to cover the costs of necessary long-term medical care, leaving nothing to transfer to the healthy spouse, children, or other loved ones. Long-term care costs have been rising, and the law allows Medicaid to look back up to five years to take assets that have already been transferred. For that reason, it is important to come up with a strategy to protect these assets while a person is healthy, before the need for long-term medical care arises. The longer that a person waits to protect assets, the more likely it is that the assets will not be protected. One way for parents to avoid having their assets confiscated to pay for long-term medical care is to place the assets in an irrevocable trust as part of a comprehensive estate plan.
Consider a hypothetical married 70-year-old couple in good health with two children that lives in Massachusetts. They own a home worth approximately $500,000 and have approximately $300,000 in other assets. The couple wants to protect their assets from being taken to pay creditors, including long-term care providers, and to avoid the costs associated with probate. One solution for this couple may be to transfer all or some of their assets to an irrevocable trust. The husband and wife would be the donors to the trust and would choose an independent trustee to manage their trust during their respective lifespans. The trustee, would have the ability to pay necessary expenses from the trust assets. Using an independent trustee can give a person a much greater sense of safety than transferring assets to outright children as gifts.
In this example, when the husband and wife pass away, any assets put into an irrevocable trust are not included in the person’s estate for the calculation of Medicaid assistance, the estate tax, or probate. In Massachusetts, the state can only take assets included in the probated estate to pay for long-term medical care. The probated estate includes assets owned individually at the time of death. Assets owned by an irrevocable trust are not owned in the individual’s name and therefore are not part of the probated estate. Therefore, these assets are not subject to Medicaid’s estate recovery provision in Massachusetts. That means, ultimately, that assets in the trust will be preserved for the person’s heirs.

Top 7 Differences Between an Irrevocable Trust and Revocable Trust

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Irrevocable trusts and revocable trusts differences are critical and key to making an informed decision about the best device available for a family’s situation in estate planning. These two devices are very different in effect and each serves very different purposes. Here are some of the major differences between the two devices which can help in determining which type of trust is more suitable to an individual’s needs.

1. Ownership of the Property

Once assets are placed in an irrevocable trust, the property no longer belongs to the Grantor; it now belongs to the trust. That does not mean that one can no longer live in the house that they have lived for 30 years or that one can no longer drive the car owned by the trust, it just means that you don’t own it. Just like renting a house or leasing a car, the assets are still there for your benefit and a trust can sell the house and buy another that can be lived in. A properly set-up, implemented, and funded irrevocable trust can provide the best possible protection of assets from claims by creditors, as the assets have literally changed ownership. This is very different from a revocable trust situation where the Grantor retains completed ownership of the property.

2. Modification

An irrevocable trust agreement generally cannot be changed, amended, modified or revoked even with a court order, thus offering the coveted asset protection, whereas a revocable trust allows the instrument to be modified or revoked at the Grantor’s discretion; this means that the assets in a revocable trust are still available for anyone to take. The term ‘irrevocable’ generally implies that the trust cannot be changed under any circumstances, but this may not be the case: A special power of appointment in the trust document may allow the Grantor the freedom to modify the named beneficiaries at his discretion without affecting the benefits of the irrevocable trust.

3. Estate Taxes

With an irrevocable trust, since the Grantor no longer owns the property, it is not included in calculations of the total value of property at the time of death. With a revocable trust, since the Grantor still owns the property, the value of the property in the trust will be included in the calculation of the total value of property at the time of death.

4. Protection of Assets

With an irrevocable trust, since the assets in the trust no longer belong to the Grantor, they are generally protected from creditors or from other claimants. This serves to protect assets from the claims of creditors, Medicaid, and even divorcing spouses. This device has been used to avoid Medicaid restrictions which require an elderly person who is going into a nursing home to spend a majority of his own money before Medicaid provisions kick in (referred to as spend-down provisions). This advantage also comes into play for individuals seeking to shield assets from legal claims. In opposition, with a revocable trust, the assets are not protected: since the Grantor retains full control and power over the assets, he is still liable for legal claims against the assets.

5. Medicaid Planning Purposes

With an irrevocable trust, one of the prime benefits sought during elder planning is to enable the elderly Grantor to obtain Medicaid benefits if he moves into a nursing home: By placing assets into an irrevocable trust five years ahead of the actual need, the Grantor has secured his assets for the benefit of named beneficiaries. This does not work in the case of revocable trusts, where the Grantor remains ownership of the assets.

6. Appointment of Trustee

With an irrevocable trust, the Trustee generally is, and should be, an independent person chosen by the Grantor in order to create a fiduciary duty to protect the assets – family members as a Trustee does not offer this same benefit. The Trustee will manage the assets in the trust and is bound by its provisions. By having a Trustee who is a separate entity from the Grantor, it is apparent that the Trustee is exercising independent control over the trust assets. With a revocable trust, the Grantor often also serves as the Trustee, maintaining control over the assets in the trust.

7. Income Tax Return

With an irrevocable trust, generally, the trust has its own tax identification number (EIN), files a 1041, and then either pays the tax itself (not typical) or issues a K-1 to the Grantor (or the Beneficiaries if Grantor is deceased) for income which flows through to the recipient’s 1040 return through Schedule E. With a revocable trust, there is no such discrepancy, the taxpayer files everything on their 1040 as if they personally owned the assets that generated income – because they do own the assets if they are within a revocable trust!
After reviewing the major differences between irrevocable and revocable trusts, it is clear that the main purpose of an irrevocable trust is to protect assets: It prevents the property from being included in the valuation of total assets of the decedent at the time of death, thereby protecting the assets within the trust from estate taxes as well as the probate process, and it protects the assets from creditors because they no longer own the asset. In contrast, the main purpose of a revocable trust is to avoid the process of probate, thus simplifying the transfer of assets to named beneficiaries and removing the probate court from the process. Deciding whether one of these two devices will meet the needs of the Grantor depends upon the ultimate goals for the trust.
As with all estate planning, the laws can change, so a consultation with an expert is advised before determining which device is more appropriate for the individual situation.

John J. FRANCIS v. UNITED JERSEY BANK

Posted on: March 15, 2017 at 6:17 am, in

87 N.J. 15 (N.J. 1981)
432 A.2d 814
John J. FRANCIS, Hugh P. Francis and J. Raymond Berry,
Trustees of Pritchard & Baird Intermediaries
Corp., Pritchard & Baird, Inc., P & B
Intermediaries Corp., and P & B, Inc.,
Plaintiffs-Respondents,
v.
UNITED JERSEY BANK, Administrator of the Estate of Charles
H. Pritchard, Lillian P. Overcash, Executrix of the Estate of Lillian G. Pritchard and
Lillian P. Overcash,
Defendants-Appellants.
Supreme Court of New Jersey.
July 1, 1981
[432 A.2d 815]
Argued May 5, 1980.
[432 A.2d 816]
Clive S. Cummis, Newark, argued the cause for defendants-appellants (Sills, Beck, Cummis, Radin & Tischman Newark, attorneys; Thomas J. Demski, Newark, of counsel and on the brief; Kenneth F. Oettle, Newark, on the brief).
Hugh P. Francis, Morristown, argued the cause for plaintiffs-respondents (Francis & Berry, Morristown, attorneys).
The opinion of the Court was delivered by
POLLOCK, J.
The primary issue on this appeal is whether a corporate director is personally liable in negligence for the failure to prevent the misappropriation of trust funds by other directors who were also officers and shareholders of the corporation.
Plaintiffs are trustees in bankruptcy of Pritchard & Baird Intermediaries Corp. (Pritchard & Baird), a reinsurance broker or intermediary. Defendant Lillian P. Overcash is the daughter of Lillian G. Pritchard and the executrix of her estate. At the time of her death, Mrs. Pritchard was a director and the largest single shareholder of Pritchard & Baird. Because Mrs. Pritchard died after the institution of suit but before trial, her executrix was substituted as a defendant. United Jersey Bank is joined as the administrator of the estate of Charles Pritchard, Sr., who had been president, director and majority shareholder of Pritchard & Baird.
This litigation focuses on payments made by Pritchard & Baird to Charles Pritchard, Jr. and William Pritchard, who were sons of Mr. and Mrs. Charles Pritchard, Sr., as well as officers, directors and shareholders of the corporation. Claims against Charles, Jr. and William are being pursued in bankruptcy proceedings against them.
The trial court, sitting without a jury, characterized the payments as fraudulent conveyances within N.J.S.A. 25:2-10 and entered judgment of $10,355,736.91 plus interest against the estate of Mrs. Pritchard. 162 N.J.Super. 355, 392 A.2d 1233 (Law Div. 1978). The judgment includes damages from her negligence in permitting payments [432 A.2d 817] from the corporation of $4,391,133.21 to Charles, Jr. and $5,483,799.02 to William. The trial court also entered judgment for payments of other sums plus interest: (1) against the estate of Lillian Pritchard for $33,000 accepted by her during her lifetime; (2) against the estate of Charles Pritchard, Sr. for $189,194.17 paid to him during his lifetime and $168,454 for payment of taxes on his estate; and (3) against Lillian Overcash individually for $123,156.51 for payments to her.
The Appellate Division affirmed, but found that the payments were a conversion of trust funds, rather than fraudulent conveyances of the assets of the corporation. 171 N.J.Super. 34, 407 A.2d 1253 (1979). We granted certification limited to the issue of the liability of Lillian Pritchard as a director. 82 N.J. 285, 412 A.2d 791 (1980).
Although we accept the characterization of the payments as a conversion of trust funds, the critical question is not whether the misconduct of Charles, Jr. and William should be characterized as fraudulent conveyances or acts of conversion. Rather, the initial question is whether Mrs. Pritchard was negligent in not noticing and trying to prevent the misappropriation of funds held by the corporation in an implied trust. A further question is whether her negligence was the proximate cause of the plaintiffs’ losses. Both lower courts found that she was liable in negligence for the losses caused by the wrongdoing of Charles, Jr. and William. We affirm.
I
The matrix for our decision is the customs and practices of the reinsurance industry and the role of Pritchard & Baird as a reinsurance broker. Reinsurance involves a contract under which one insurer agrees to indemnify another for loss sustained under the latter’s policy of insurance. Insurance companies that insure against losses arising out of fire or other casualty seek at times to minimize their exposure by sharing risks with other insurance companies. Thus, when the face amount of a policy is comparatively large, the company may enlist one or more insurers to participate in that risk. Similarly, an insurance company’s loss potential and overall exposure may be reduced by reinsuring a part of an entire class of policies (e. g., 25% of all of its fire insurance policies). The selling insurance company is known as a ceding company. The entity that assumes the obligation is designated as the reinsurer.
The reinsurance broker arranges the contract between the ceding company and the reinsurer. In accordance with industry custom before the Pritchard & Baird bankruptcy, the reinsurance contract or treaty did not specify the rights and duties of the broker. Typically, the ceding company communicates to the broker the details concerning the risk. The broker negotiates the sale of portions of the risk to the reinsurers. In most instances, the ceding company and the reinsurer do not communicate with each other, but rely upon the reinsurance broker. The ceding company pays premiums due a reinsurer to the broker, who deducts his commission and transmits the balance to the appropriate reinsurer. When a loss occurs, a reinsurer pays money due a ceding company to the broker, who then transmits it to the ceding company.
The reinsurance business was described by an expert at trial as having “a magic aura around it of dignity and quality and integrity.” A telephone call which might be confirmed by a handwritten memorandum is sufficient to create a reinsurance obligation. Though separate bank accounts are not maintained for each treaty, the industry practice is to segregate the insurance funds from the broker’s general accounts. Thus, the insurance fund accounts would contain the identifiable amounts for transmittal to either the reinsurer or the ceder. The expert stated that in general three kinds of checks may be drawn on this account: checks payable to reinsurers as premiums, checks payable to ceders as loss payments and checks payable to the brokers as commissions.
Messrs. Pritchard and Baird initially operated as a partnership. Later they formed several corporate entities to carry on their [432 A.2d 818] brokerage activities. The proofs supporting the judgment relate only to one corporation, Pritchard & Baird Intermediaries Corp. (Pritchard & Baird), and we need consider only its activities. When incorporated under the laws of the State of New York in 1959, Pritchard & Baird had five directors: Charles Pritchard, Sr., his wife Lillian Pritchard, their son Charles Pritchard, Jr., George Baird and his wife Marjorie. William Pritchard, another son, became director in 1960. Upon its formation, Pritchard & Baird acquired all the assets and assumed all the liabilities of the Pritchard & Baird partnership. The corporation issued 200 shares of common stock. Charles Pritchard, Sr. acquired 120 shares, his sons Charles Pritchard, Jr., 15 and William, 15; Mr. and Mrs. Baird owned the remaining 50. In June 1964, Baird and his wife resigned as directors and sold their stock to the corporation. From that time on the corporation operated as a close family corporation with Mr. and Mrs. Pritchard and their two sons as the only directors. After the death of Charles, Sr. in 1973, only the remaining three directors continued to operate as the board. Lillian Pritchard inherited 72 of her husband’s 120 shares in Pritchard & Baird, thereby becoming the largest shareholder in the corporation with 48% of the stock.
The corporate minute books reflect only perfunctory activities by the directors, related almost exclusively to the election of officers and adoption of banking resolutions and a retirement plan. None of the minutes for any of the meetings contain a discussion of the loans to Charles, Jr. and William or of the financial condition of the corporation. Moreover, upon instructions of Charles, Jr. that financial statements were not to be circulated to anyone else, the company’s statements for the fiscal years beginning February 1, 1970, were delivered only to him.
Charles Pritchard, Sr. was the chief executive and controlled the business in the years following Baird’s withdrawal. Beginning in 1966, he gradually relinquished control over the operations of the corporation. In 1968, Charles, Jr. became president and William became executive vice president. Charles, Sr. apparently became ill in 1971 and during the last year and a half of his life was not involved in the affairs of the business. He continued, however, to serve as a director until his death on December 10, 1973. Notwithstanding the presence of Charles, Sr. on the board until his death in 1973, Charles, Jr. dominated the management of the corporation and the board from 1968 until the bankruptcy in 1975.
Contrary to the industry custom of segregating funds, Pritchard & Baird commingled the funds of reinsurers and ceding companies with its own funds. All monies (including commissions, premiums and loss monies) were deposited in a single account. Charles, Sr. began the practice of withdrawing funds from the commingled account in transactions identified on the corporate books as “loans.” As long as Charles, Sr. controlled the corporation, the “loans” correlated with corporate profits and were repaid at the end of each year. Starting in 1970, however, Charles, Jr. and William begin to siphon ever-increasing sums from the corporation under the guise of loans. As of January 31, 1970, the “loans” to Charles, Jr. were $230,932 and to William were $207,329. At least by January 31, 1973, the annual increase in the loans exceeded annual corporate revenues. By October 1975, the year of bankruptcy, the “shareholders’ loans” had metastasized to a total of $12,333,514.47.
The trial court rejected the characterization of the payments as “loans.” 162 N.J.Super. at 365, 392 A.2d 1233. No corporate resolution authorized the “loans,” and no note or other instrument evidenced the debt. Charles, Jr. and William paid no interest on the amounts received. The “loans” were not repaid or reduced from one year to the next; rather, they increased annually.
The designation of “shareholders’ loans” on the balance sheet was an entry to account for the distribution of the premium and loss money to Charles, Sr., Charles, Jr. and William. As the trial court found, the [432 A.2d 819] entry was part of a “woefully inadequate and highly dangerous bookkeeping system.” 162 N.J.Super. at 363, 392A.2d 1233.
The “loans” to Charles, Jr. and William far exceeded their salaries and financial resources. If the payments to Charles, Jr. and William had been treated as dividends or compensation, then the balance sheets would have shown an excess of liabilities over assets. If the “loans” had been eliminated, the balance sheets would have depicted a corporation not only with a working capital deficit, but also with assets having a fair market value less than its liabilities. The balance sheets for 1970-1975, however, showed an excess of assets over liabilities. This result was achieved by designating the misappropriated funds as “shareholders’ loans” and listing them as assets offsetting the deficits. Although the withdrawal of the funds resulted in an obligation of repayment to Pritchard & Baird, the more significant consideration is that the “loans” represented a massive misappropriation of money belonging to the clients of the corporation.
The “loans” were reflected on financial statements that were prepared annually as of January 31, the end of the corporate fiscal year. Although an outside certified public accountant prepared the 1970 financial statement, the corporation prepared only internal financial statements from 1971-1975. In all instances, the statements were simple documents, consisting of three or four 81/2 X 11 inch sheets.
The statements of financial condition from 1970 forward demonstrated:
Those financial statements showed working capital deficits increasing annually in tandem with the amounts that Charles, Jr. and William withdrew as “shareholders’ loans.” In the last complete year of business (January 31, 1974, to January 31, 1975), “shareholders’ loans” and the correlative working capital deficit increased by approximately $3,200,000.
The funding of the “loans” left the corporation with insufficient money to operate. Pritchard & Baird could defer payment on accounts payable because its clients allowed a grace period, generally 30 to 90 days, before the payment was due. During this period, Pritchard & Baird used the funds entrusted to it as a “float” to pay current accounts payable. By recourse to the funds of its clients, Pritchard & Baird not only paid its trade debts, but also funded the payments to Charles, Jr. and William. Thus, Pritchard & Baird was able to meet its obligations as they came due only through the use of clients’ funds.
The pattern that emerges from these figures is the substantial increase in the monies appropriated by Charles Pritchard, Jr. and William Pritchard after their father’s withdrawal from the business and the sharp decline in the profitability of the operation after his death. This led ultimately to the filing in December, 1975, of an involuntary petition in bankruptcy and the appointments of the plaintiffs as trustees in bankruptcy of Pritchard & Baird.
Mrs. Pritchard was not active in the business of Pritchard & Baird and knew virtually nothing of its corporate affairs. She briefly visited the corporate offices in Morristown on only one occasion, and she never read or obtained the annual financial statements. She was unfamiliar with the rudiments of reinsurance and made no effort to assure that the policies and practices of the corporation, particularly pertaining to the withdrawal of funds, complied with industry custom or relevant law. Although her husband had warned her that Charles, Jr. would “take the shirt off my back,” Mrs. Pritchard did not pay any attention to her duties as a director or to the affairs of the corporation. 162 N.J.Super. at 370, 392 A.2d 1233.
After her husband died in December 1973, Mrs. Pritchard became incapacitated and was bedridden for a six-month period. She became listless at this time and started to drink rather heavily. Her physical condition [432 A.2d 820] deteriorated, and in 1978 she died. The trial court rejected testimony seeking to exonerate her because she “was old, was grief-stricken at the loss of her husband, sometimes consumed too much alcohol and was psychologically overborne by her sons.” 162 N.J.Super. at 371, 392 A.2d 1233. That court found that she was competent to act and that the reason Mrs. Pritchard never knew what her sons “were doing was because she never made the slightest effort to discharge any of her responsibilities as a director of Pritchard & Baird.” 162 N.J.Super. at 372, 392 A.2d 1233.
II
A preliminary matter is the determination of whether New Jersey law should apply to this case. Although Pritchard & Baird was incorporated in New York, the trial court found that New Jersey had more significant relationships to the parties and the transactions than New York. The shareholder, officers and directors were New Jersey residents. The estates of Mr. and Mrs. Pritchard are being administered in New Jersey, and the bankruptcy proceedings involving Charles, Jr., William and Pritchard & Baird are pending in New Jersey. Virtually all transactions took place in New Jersey. Although many of the creditors are located outside the state, all had contacts with Pritchard & Baird in New Jersey. Consequently, the trial court applied New Jersey law. 162 N.J.Super. at 369, 392 A.2d 1233. The parties agree that New Jersey law should apply. We are in accord.
III
Individual liability of a corporate director for acts of the corporation is a prickly problem. Generally directors are accorded broad immunity and are not insurers of corporate activities. The problem is particularly nettlesome when a third party asserts that a director, because of nonfeasance, is liable for losses caused by acts of insiders, who in this case were officers, directors and shareholders. Determination of the liability of Mrs. Pritchard requires findings that she had a duty to the clients of Pritchard & Baird, that she breached that duty and that her breach was a proximate cause of their losses.
The New Jersey Business Corporation Act, which took effect on January 1, 1969, was a comprehensive revision of the statutes relating to business corporations. One section, N.J.S.A. 14A:6-14, concerning a director’s general obligation makes it incumbent upon directors to discharge their duties in good faith and with that degree of diligence, care and skill which ordinarily prudent men would exercise under similar circumstances in like positions.
(N.J.S.A. 14A:6-14)
This provision was based primarily on section 43 of the Model Business Corporation Act and is derived also from section 717 of the New York Business Corporation Law (L.1961, c.855, effective September 1, 1963). Commissioners’ Comments 1968 and 1972, N.J.S.A. 14A:6-14. Before the enactment of N.J.S.A. 14A:6-14, there was no express statutory authority requiring directors to act as ordinarily prudent persons under similar circumstances in like positions. Nonetheless, the requirement had been expressed in New Jersey judicial decisions.
A leading New Jersey opinion is Campbell v. Watson, 62 N.J.Eq. 396, 50 A. 120 (Ch.1901), which, like many early decisions on director liability, involved directors of a bank that had become insolvent. A receiver of the bank charged the directors with negligence that allegedly led to insolvency. In the opinion, Vice Chancellor Pitney explained that bank depositors have a right to rely upon the character of the directors and officers (and upon the representation) that they will perform their sworn duty to manage the affairs of the bank according to law and devote to its affairs the same diligent attention which ordinary, prudent, diligent men pay to their own affairs; and … such diligence and attention as experience has shown it is proper and necessary that bank directors should give to that business in order to reasonably protect the bank and its creditors against loss. ” (Id. at 406, 50 A. 120)
[432 A.2d 821] Because N.J.S.A. 14A:6-14 is modeled in part upon section 717 of the New York statute, N.Y.Bus.Corp. Law § 717 (McKinney), we consider also the law of New York in interpreting the New Jersey statute. See Suter v. San Angelo Foundry & Machine Co., 81 N.J. 150, 161-162, 406 A.2d 140 (1979) (approving the propriety of examining as an interpretative aid the law of a state, the statute of which has been copied).
Prior to the enactment of section 717, the New York courts, like those of New Jersey, had espoused the principle that directors owed that degree of care that a businessman of ordinary prudence would exercise in the management of his own affairs. Kavanaugh v. Gould, 223 N.Y. 103, 105, 119 N.E. 237, 238 (Ct.App.1918); Hun v. Cary, 82 N.Y. 65, 72 (Ct.App.1880); McLear v. McLear, 265 A.D. 556, 560, 266 A.D. 702, 703, 40 N.Y.S.2d 432, 436 (Sup.Ct.1943), aff’d 291 N.Y. 809, 53 N.E.2d 573, 292 N.Y. 580, 54 N.E.2d 694 (Ct.App.1944); Simon v. Socony-Vacuum Oil Co., 179 Misc. 202, 203, 38 N.Y.S.2d 270, 273 (Sup.Ct.1942), aff’d 267 A.D. 890, 47
N.Y.S.2d 589 (Sup.Ct.1944); Van Schaick v. Aron, 170 Misc. 520, 534, 10 N.Y.S.2d 550, 563 (Sup.Ct.1938). In addition to requiring that directors act honestly and in good faith, the New York courts recognized that the nature and extent of reasonable care depended upon the type of corporation, its size and financial resources. Thus, a bank director was held to stricter accountability than the director of an ordinary business. [1] Hun v. Cary, supra, 82 N.Y. at 71; Litwin v. Allen, 25 N.Y.S.2d 667, 678 (Sup.Ct.1940).
In determining the limits of a director’s duty, section 717 continued to recognize the individual characteristics of the corporation involved as well as the particular circumstances and corporate role of the director. Significantly, the legislative comment to section 717 states:
The adoption of the standard prescribed by this section will allow the court to envisage the director’s duty of care as a relative concept, depending on the kind of corporation involved, the particular circumstances and the corporate role of the director. (N.Y.Bus.Corp. Law § 717, comment (McKinney))
This approach was consonant with the desire to formulate a standard that could be applied to both publicly and closely held entities. The report of the Chairman and chief counsel of the New York Joint Legislative Committee to Study Revision of Corporation Laws stated that the statute “reflects an attempt to merge the interests of public issue corporations and closely held corporations.” Anderson & Lesher, The New Business Corporation Law, xxvii, reprinted in N.Y.Bus.Corp. Law § 1 to 800 xxv (McKinney). [2]
Underlying the pronouncements in section 717, Campbell v. Watson, supra, and N.J.S.A. 14A:6-14 is the principle that directors must discharge their duties in good faith and act as ordinarily prudent persons would under similar circumstances in like positions. Although specific duties in a given case can be determined only after consideration of all of the circumstances, the standard of ordinary care is the wellspring from which those more specific duties flow.
As a general rule, a director should acquire at least a rudimentary understanding of the business of the corporation. Accordingly, a director should become familiar [432 A.2d 822] with the fundamentals of the business in which the corporation is engaged. Campbell, supra, 62 N.J.Eq. at 416, 50 A. 120 Because directors are bound to exercise ordinary care, they cannot set up as a defense lack of the knowledge needed to exercise the requisite degree of care. If one “feels that he has not had sufficient business experience to qualify him to perform the duties of a director, he should either acquire the knowledge by inquiry, or refuse to act.” Ibid.
Directors are under a continuing obligation to keep informed about the activities of the corporation. Otherwise, they may not be able to participate in the overall management of corporate affairs. Barnes v. Andrews, 298 F. 614 (S.D.N.Y.1924) (director guilty of misprision of office for not keeping himself informed about the details of corporate business); Atherton v. Anderson 99 F.2d 883, 889-890 (6 Cir.1938) (ignorance no defense to director liability because of director’s “duty to know the facts”); Campbell, supra, 62 N.J.Eq. at 409, 50 A. 120 (directors “bound to acquaint themselves with … extent … of supervision exercised by officers”); Williams v. McKay, 46 N.J.Eq. 25, 36, 18 A. 824 (Ch.1889) (director under duty to supervise managers and practices to determine whether business methods were safe and proper). Directors may not shut their eyes to corporate misconduct and then claim that because they did not see the misconduct, they did not have a duty to look. The sentinel asleep at his post contributes nothing to the enterprise he is charged to protect. Wilkinson v. Dodd, 42 N.J.Eq. 234, 245, 7 A. 327 (Ch.1886), aff’d 42 N.J.Eq. 647, 9 A. 685 (E. & A. 1887).
Directorial management does not require a detailed inspection of day-to-day activities, but rather a general monitoring of corporate affairs and policies. Williams v. McKay, supra, at 37, 18 A. 824. Accordingly, a director is well advised to attend board meetings regularly. Indeed, a director who is absent from a board meeting is presumed to concur in action taken on a corporate matter, unless he files a “dissent with the secretary of the corporation within a reasonable time after learning of such action.” N.J.S.A. 14A:6-13 (Supp.1981-1982). Regular attendance does not mean that directors must attend every meeting, but that directors should attend meetings as a matter of practice. A director of a publicly held corporation might be expected to attend regular monthly meetings, but a director of a small, family corporation might be asked to attend only an annual meeting. The point is that one of the responsibilities of a director is to attend meetings of the board of which he or she is a member. That burden is lightened by N.J.S.A. 14A:6-7(2) (Supp.1981-1982), which permits board action without a meeting if all members of the board consent in writing.
While directors are not required to audit corporate books, they should maintain familiarity with the financial status of the corporation by a regular review of financial statements. Campbell, supra, 62 N.J.Eq. at 415, 50 A. 120; Williams, supra, 46 N.J.Eq. at 38-39, 18 A. 824; see Section of Corporation, Banking and Business Law, American Bar Association, “Corporate Director’s Guidebook,” 33 Bus.Law. 1595, 1608 (1978) (Guidebook); N. Lattin, The Law of Corporations 280 (2 ed. 1971). In some circumstances, directors may be charged with assuring that bookkeeping methods conform to industry custom and usage. Lippitt v. Ashley, 89 Conn. 451, 464, 94 A. 995, 1000 (Sup.Ct.1915). The extent of review, as well as the nature and frequency of financial statements, depends not only on the customs of the industry, but also on the nature of the corporation and the business in which it is engaged. Financial statements of some small corporations may be prepared internally and only on an annual basis; in a large publicly held corporation, the statements may be produced monthly or at some other regular interval. Adequate financial review normally would be more informal in a private corporation than in a publicly held corporation.
Of some relevance in this case is the circumstance that the financial records disclose the “shareholders’ loans”. Generally [432 A.2d 823] directors are immune from liability if, in good faith, they rely upon the opinion of counsel for the corporation or upon written reports setting forth financial data concerning the corporation and prepared by an independent public accountant or certified public accountant or firm of such accountants or upon financial statements, books of account or reports of the corporation represented to them to be correct by the president, the officer of the corporation having charge of its books of account, or the person presiding at a meeting of the board. (N.J.S.A. 14A:6-14)
The review of financial statements, however, may give rise to a duty to inquire further into matters revealed by those statements. Corsicana Nat’l Bank v. Johnson, 251 U.S. 68, 71, 40 S.Ct. 82, 84, 64 L.Ed. 141 (1919); Atherton, supra, 99 F.2d at 890; LaMonte v. Mott, 93 N.J.Eq. 229, 239, 107 A. 462 (E. & A. 1921); see Lippitt, supra, 89 Conn. at 457, 94 A. at 998. Upon discovery of an illegal course of action, a director has a duty to object and, if the corporation does not correct the conduct, to resign. See Dodd v. Wilkinson, 42 N.J.Eq. 647, 651, 9 A. 685 (E. & A. 1887); Williams v. Riley, 34 N.J.Eq. 398, 401 (Ch.1881).
In certain circumstances, the fulfillment of the duty of a director may call for more than mere objection and resignation. Sometimes a director may be required to seek the advice of counsel. Guidebook, supra, at 1631. One New Jersey case recognized the duty of a bank director to seek counsel where doubt existed about the meaning of the bank charter. Williams v. McKay, supra, 46 N.J.Eq. at 60, 18 A. 824. The duty to seek the assistance of counsel can extend to areas other than the interpretation of corporation instruments. Modern corporate practice recognizes that on occasion a director should seek outside advice. A director may require legal advice concerning the propriety of his or her own conduct, the conduct of other officers and directors or the conduct of the corporation. In appropriate circumstances, a director would be “well advised to consult with regular corporate counsel (or his own legal adviser) at any time in which he is doubtful regarding proposed action ….” Guidebook, supra, at 1618. Sometimes the duty of a director may require more than consulting with outside counsel. A director may have a duty to take reasonable means to prevent illegal conduct by co-directors; in any appropriate case, this may include threat of suit. See Selheimer v. Manganese Corp., 423 Pa. 563, 572, 584, 224 A.2d 634, 640, 646 (Sup.Ct.1966) (director exonerated when he objected, resigned, organized shareholder action group, and threatened suit).
A director is not an ornament, but an essential component of corporate governance. Consequently, a director cannot protect himself behind a paper shield bearing the motto, “dummy director.” Campbell, supra, 62 N.J.Eq. at 443, 50 A. 120. (“The directors were not intended to be mere figure-heads without duty or responsibility”); Williams v. McKay, supra, 46 N.J.Eq. at 57-58, 18 A. 824 (director voluntarily assuming position also assumes duties of ordinary care, skill and judgment). The New Jersey Business Corporation Act, in imposing a standard of ordinary care on all directors, confirms that dummy, figurehead and accommodation directors are anachronisms with no place in New Jersey law. See N.J.S.. 14A:6-14. Similarly, in interpreting section 717, the New York courts have not exonerated a director who acts as an “accommodation.” Barr v. Wackman, 36 N.Y.2d 371, 329 N.E.2d 180, 188, 368 N.Y.S.2d 497, 507 (Ct.App.1975) (director “does not exempt himself from liability by failing to do more than passively rubber-stamp the decisions of the active managers.”). See Kavanaugh v. Gould, supra, 223 N.Y. at 111-117, 119 N.E. at 240-241 (the fact that bank director never attended board meetings or acquainted himself with bank’s business or methods held to be no defense, as a matter of law, to responsibility for speculative loans made by the president and acquiesced in by other directors). Thus, all directors are responsible for managing the [432 A.2d 824] business and affairs of the corporation.
N.J.S.A. 14A:6-1 (Supp.1981-1982); 1 G. Hornstein, Corporation Law and Practice § 431 at 525 (1959).
The factors that impel expanded responsibility in the large, publicly held corporation may not be present in a small, close corporation. [3] Nonetheless, a close corporation may, because of the nature of its business, be affected with a public interest. For example, the stock of a bank may be closely held, but because of the nature of banking the directors would be subject to greater liability than those of another close corporation. Even in a small corporation, a director is held to the standard of that degree of care that an ordinarily prudent director would use under the circumstances. M. Mace, The Board of Directors of Small Corporations 83 (1948).
A director’s duty of care does not exist in the abstract, but must be considered in relation to specific obligees. In general, the relationship of a corporate director to the corporation and its stockholders is that of a fiduciary. Whitfield v. Kern, 122 N.J.Eq. 332, 341, 192 A. 48 (E. & A. 1937). Shareholders have a right to expect that directors will exercise reasonable supervision and control over the policies and practices of a corporation. The institutional integrity of a corporation depends upon the proper discharge by directors of those duties.
While directors may owe a fiduciary duty to creditors also, that obligation generally has not been recognized in the absence of insolvency. Whitfield, supra, 122 N.J.Eq. at 342, 345, 192 A. 48. With certain corporations, however, directors are seemed to owe a duty to creditors and other third parties even when the corporation is solvent. Although depositors of a bank are considered in some respects to be creditors, courts have recognized that directors may owe them a fiduciary duty. See Campbell, supra, 62 N.J.Eq. at 406-407, 50 A. 120. Directors of nonbanking corporations may owe a similar duty when the corporation holds funds of others in trust. Cf. McGlynn v. Schultz, 90 N.J.Super. 505, 218 A. 408 (Ch.Div.1966), aff’d 95 N.J.Super. 412, 231 A.2d 386 (App.Div.) certif. den. 50 N.J. 409, 235 A.2d 901 (1967) (directors who did not insist on segregating trust funds held by corporation liable to the cestuis que trust ).
In three cases originating in New Jersey, directors who did not participate actively in the conversion of trust funds were found not liable. In each instance, the facts did not support the conclusion that the director [432 A.2d 825] knew or could have known of the wrongdoing even if properly attentive. McGlynn, supra, 90 N.J.Super. at 509, 511, 218 A.2d 408 (director from Chicago not “in a position to know the details of the corporation’s business” not liable for conversions that occurred over four month period); General Films, Inc. v. Sanco Gen. Mfg. Corp., 153 N.J.Super. 369, 371, 379 A.2d 1042 (App.Div.1977), certif. den. 75 N.J. 614, 384 A.2d 843 (1978) (director and sole shareholder not liable for conversion by dominant principal, her husband, in misappropriating proceeds of single check); Ark-Tenn Distrib. Corp. v. Breidt, 209 F.2d 359, 360 (3 Cir. 1954) (president who was not active in corporation not liable for conversion of trust funds received in single transaction). To the extent that the cases support the proposition that directors are not liable unless they actively participate in the conversion of trust funds, they are disapproved.
Courts in other states have imposed liability on directors of non-banking corporations for the conversion of trust funds, even though those directors did not participate in or know of the conversion. Preston-Thomas Constr. Inc. v. Central Leasing Corp., 518 P.2d 1125 (Okl.Ct.App.1973) (director liable for conversion of funds entrusted to corporation for acquisition of stock in another corporation); Vujacich v. Southern Commercial Co., 21 Cal.App. 439, 132 P. 80 (Dist.Ct.App.1913) (director of wholesale grocery business personally liable for conversion by corporation of worker’s funds deposited for safekeeping). The distinguishing circumstances in regard to banks and other corporations holding trust funds is that the depositor or beneficiary can reasonably expect the director to act with ordinary prudence concerning the funds held in a fiduciary capacity. Thus, recognition of a duty of a director to those for whom a corporation holds funds in trust may be viewed as another application of the general rule that a director’s duty is that of an ordinary prudent person under the circumstances.
The most striking circumstances affecting Mrs. Pritchard’s duty as a director are the character of the reinsurance industry, the nature of the misappropriated funds and the financial condition of Pritchard & Baird. The hallmark of the reinsurance industry has been the unqualified trust and confidence reposed by ceding companies and reinsurers in reinsurance brokers. Those companies entrust money to reinsurance intermediaries with the justifiable expectation that the funds will be transmitted to the appropriate parties. Consequently, the companies could have assumed rightfully that Mrs. Pritchard, as a director of a reinsurance brokerage corporation, would not sanction the comingling and the conversion of loss and premium funds for the personal use of the principals of Pritchard & Baird.
As a reinsurance broker, Pritchard & Baird received annually as a fiduciary millions of dollars of clients’ money which it was under a duty to segregate. [4] To this extent, it resembled a bank rather than a small family business. Accordingly, Mrs. Pritchard’s relationship to the clientele of Pritchard & Baird was akin to that of a director of a bank to its depositors. All parties agree that Pritchard & Baird held the misappropriated funds in an implied trust. That trust relationship gave rise to a fiduciary duty to guard the funds with fidelity and good faith. Ellsworth Dobbs, Inc. v. Johnson, 50 N.J. 528, 553, 236 A.2d 843 (1967); General Films, Inc. v. Sanco Gen. Mfg. Corp., supra, 153 N.J.Super. at 372-373, 379 A.2d 1042.
As a director of a substantial reinsurance brokerage corporation, she should have known that it received annually millions of dollars of loss and premium funds which it held in trust for ceding and reinsurance companies. Mrs. Pritchard should have obtained and read the annual statements of financial condition of Pritchard & Baird. Although she had a right to rely upon financial statements prepared in accordance [432 A.2d 826] with N.J.S.A. 14A:6-14, such reliance would not excuse her conduct. The reason is that those statements disclosed on their face the misappropriation of trust funds.
From those statements, she should have realized that, as of January 31, 1970, her sons were withdrawing substantial trust funds under the guise of “Shareholders’ Loans.” The financial statements for each fiscal year commencing with that of January 31, 1970, disclosed that the working capital deficits and the “loans” were escalating in tandem. Detecting a misappropriation of funds would not have required special expertise or extraordinary diligence; a cursory reading of the financial statements would have revealed the pillage. Thus, if Mrs. Pritchard had read the financial statements, she would have known that her sons were converting trust funds. When financial statements demonstrate that insiders are bleeding a corporation to death, a director should notice and try to stanch the flow of blood.
In summary, Mrs. Pritchard was charged with the obligation of basic knowledge and supervision of the business of Pritchard & Baird. Under the circumstances, this obligation included reading and understanding financial statements, and making reasonable attempts at detection and prevention of the illegal conduct of other officers and directors. She had a duty to protect the clients of Pritchard & Baird against policies and practices that would result in the misappropriation of money they had entrusted to the corporation. She breached that duty.
IV
Nonetheless, the negligence of Mrs. Pritchard does not result in liability unless it is a proximate cause of the loss. Kulas v. Public Serv. Elec. and Gas Co., 41 N.J. 311, 317, 196 A.2d 769 (1964). Analysis of proximate cause requires an initial determination of cause-in-fact. Causation-in-fact calls for a finding that the defendant’s act or omission was a necessary antecedent of the loss, i. e.., that if the defendant had observed his or her duty of care, the loss would not have occurred. Ibid., W. Prosser, Law of Torts § 41 at 238 (4 ed. 1971). Further, the plaintiff has the burden of establishing the amount of the loss or damages caused by the negligence of the defendant. H. Henn, Law of Corporations § 234 at 456 (2 ed. 1970). Thus, the plaintiff must establish not only a breach of duty, “but in addition that the performance by the director of his duty would have avoided loss, and the amount of the resulting loss.” 1 Hornstein, supra, § 446 at 566.
Cases involving nonfeasance present a much more difficult causation question than those in which the director has committed an affirmative act of negligence leading to the loss. Analysis in cases of negligent omissions calls for determination of the reasonable steps a director should have taken and whether that course of action would have averted the loss.
Usually a director can absolve himself from liability by informing the other directors of the impropriety and voting for a proper course of action. Dyson, “The Director’s Liability for Negligence,” 40 Ind.L.J. 341, 365 (1965). Conversely, a director who votes for or concurs in certain actions may be “liable to the corporation for the benefit of its creditors or shareholders, to the extent of any injuries suffered by such persons, respectively, as a result of any such action.” N.J.S.A. 14A:6-12 (Supp.1981-1982). A director who is present at a board meeting is presumed to concur in corporate action taken at the meeting unless his dissent is entered in the minutes of the meeting or filed promptly after adjournment. N.J.S.A. 14:6-13. In many, if not most, instances an objecting director whose dissent is noted in accordance with N.J.S.A. 14:6-13 would be absolved after attempting to persuade fellow directors to follow a different course of action. Cf. McGlynn, supra, 90 N.J.Super. at 520-521, 529, 218 A.2d 408 (receiver had no case against director who advised president that certain funds should be escrowed, wrote to executive committee to that effect, and objected at special meeting of board of directors); Selheimer v. Manganese Corp., supra, 423
[432 A.2d 827] Pa. at 572, 584, 224 A.2d at 640, 646 (dissenting minority director in publicly held corporation absolved because he did all he could to divert majority directors from their course of conduct by complaining to management, threatening to institute suit and organizing a stockholders’ committee).
Even accepting the hypothesis that Mrs. Pritchard might not be liable if she had objected and resigned, there are two significant reasons for holding her liable. First, she did not resign until just before the bankruptcy. Consequently, there is no factual basis for the speculation that the losses would have occurred even if she had objected and resigned. Indeed, the trial court reached the opposite conclusion: “The actions of the sons were so blatantly wrongful that it is hard to see how they could have resisted any moderately firm objection to what they were doing.” 162 N.J.Super. at 372, 392 A.2d 1233. Second, the nature of the reinsurance business distinguishes it from most other commercial activities in that reinsurance brokers are encumbered by fiduciary duties owed to third parties. In other corporations, a director’s duty normally does not extend beyond the shareholders to third parties.
In this case, the scope of Mrs. Pritchard’s duties was determined by the precarious financial condition of Pritchard & Baird, its fiduciary relationship to its clients and the implied trust in which it held their funds. Thus viewed, the scope of her duties encompassed all reasonable action to stop the continuing conversion. Her duties extended beyond mere objection and resignation to reasonable attempts to prevent the misappropriation of the trust funds. Campbell, supra, 62 N.J.Eq. at 427, 50 A. 120.
A leading case discussing causation where the director’s liability is predicated upon a negligent failure to act is Barnes v. Andrews, 298 F. 614 (S.D.N.Y.1924). In that case the court exonerated a figurehead director who served for eight months on a board that held one meeting after his election, a meeting he was forced to miss because of the death of his mother. Writing for the court, Judge Learned Hand distinguished a director who fails to prevent general mismanagement from one such as Mrs. Pritchard who failed to stop an illegal “loan”:
When the corporate funds have been illegally lent, it is a fair inference that a protest would have stopped the loan, and that the director’s neglect caused the loss. But when a business fails from general mismanagement, business incapacity, or bad judgment, how is it possible to say that a single director could have made the company successful, or how much in dollars he could have saved? (Id. at 616-617)
Pointing out the absence of proof of proximate cause between defendant’s negligence and the company’s insolvency, Judge Hand also wrote: The plaintiff must, however, go further than to show that (the director) should have been more active in his duties. This cause of action rests upon a tort, as much though it be a tort of omission as though it had rested upon a positive act. The plaintiff must accept the burden of showing that the performance of the defendant’s duties would have avoided loss, and what loss it would have avoided. (Id. at 616)
Other courts have refused to impose personal liability on negligent directors when the plaintiffs have been unable to prove that diligent execution of the directors’ duties would have precluded the losses. Briggs v. Spaulding, 141 U.S. 132, 11 S.Ct. 924, 35 L.Ed. 662 (1891) (no causal relationship because discovery of defalcations could have resulted only from examination of books beyond duty of director); Hoehn v. Crews, 144 F.2d 665 (10 Cir. 1944) (failure of bank director to publish notice of liquidation of bank not proximate cause of loss to creditors who did not know at time of liquidation that they had a claim); Virginia-Carolina Chem. Co. v. Ehrich, 230 F. 1005 (E.D.S.C.1916) (close supervision of daily corporate affairs necessary to notice wrongdoing; failure to attend meetings not causally related to loss); LaMonte v. Mott, supra [432 A.2d 828] (director who had been in office for less than two years and had conducted only one examination held not liable); Sternberg v. Blaine, 179 Ark. 448, 17 S.W.2d 286 (Sup.Ct.1929) (“(n)o ordinary examination usually made by directors of a country bank, however careful, would have discovered” misappropriations); Holland v. American Founders Life Ins. Co., 151 Colo. 69, 376 P.2d 162 (Sup.Ct.1962) (conduct “not a contributing cause of the loss sustained because director did not neglect his duty as secretary-director”); Wallach v. Billings, 277 Ill. 218, 115 N.E. 382 (Sup.Ct.1917), cert. den. 244 U.S. 659, 37 S.Ct. 745, 61 L.Ed. 1376 (1917) (inactive director not liable because no allegation in complaint that losses caused by director negligence or that director could have prevented losses); Allied Freightways, Inc. v. Cholfin, 325 Mass. 630, 91 N.E.2d 765 (Sup.Jud.Ct.1950) (director not liable where losses resulted from general mismanagement and director, in the reasonable exercise of her duties, could not have discovered illegal payments from examination of corporate books); Hathaway v. Huntley, 284 Mass. 587, 188 N.E. 616 (Sup.Jud.Ct.1933) (negligent director not liable for bankruptcy losses caused by husband’s policy of business expansion and not discernible in books by use of reasonable care and diligence); Martin v. Hardy, 251 Mich. 413, 232 N.W. 197 (Sup.Ct.1930) (six-month sale of stock below cost resulting in $37,000 loss to corporation not causally related to director negligence); Henry v. Wellington Tel. Co., 76 Ohio App. 77, 63 N.E.2d 233 (Ct.App.1945) (though directors failed to comply with formalities of statute, that failure did not result in loss).
Other courts have held directors liable for losses actively perpetrated by others because the negligent omissions of the directors were considered a necessary antecedent to the defalcations. Atherton, supra (directors liable for bank losses proximately caused by failure to supervise officers and to examine auditor’s reports); Ringeon v. Albinson, 35 F.2d 753 (D.Minn.1929) (negligent director not excused from liability for losses that could have been prevented by supervision and prompt action); Heit v. Bixby, 276 F.Supp. 217, 231 (E.D.Mo.1967) (directors liable for 40% commissions taken by co-directors because directors’ “lackadaisical attitude” proximately caused the loss); Ford v. Taylor, 176 Ark. 843, 4 S.W.2d 938 (1928) (bank directors liable for losses due to misappropriations of cashier who “felt free to pursue (misconduct) without fear of detection by the directors through their failure to discharge the functions of their office”); Vujacich v. Southern Commercial Co., supra, (unless some showing of protest made, director liable for loss resulting from misappropriation of co-director); Chicago Title & Trust Co. v. Munday, 297 Ill. 555, 131 N.E. 103 (Sup.Ct.1921) (complaint states good cause of action alleging inactive directors responsible for officer’s defalcations occurring as consequence of omission of directors’ duty of supervision); Coddington v. Canaday, 157 Ind. 243, 61 N.E. 567 (Sup.Ct.1901) (directors liable for losses resulting from bank insolvency due to improper supervision and concomitant acceptance of worthless notes); Bentz v. Vardaman Mfg. Co., Miss., 210 So.2d 35 (Sup.Ct.1968) (nonattendance at director meetings no relief from director liability for losses resulting from action taken at meetings); Tri-Bullion Smelting & Development Co. v. Corliss, 230 N.Y. 629, 130 N.E. 921 (Ct.App.1921) (directors liable for misappropriations by treasurer resulting from negligence of directors); Neese v. Brown, 218 Tenn. 686, 405 S.W.2d 577 (Sup.Ct.1964) (directors who abdicate control liable for losses caused by breach of trust by those left in control if due care on part of inactive directors could have avoided loss).
In assessing whether Mrs. Pritchard’s conduct was a legal or proximate cause of the conversion, “(l)egal responsibility must be limited to those causes which are so closely connected with the result and of such significance that the law is justified in imposing liability.” Prosser, supra, § 41 at 237. Such a judicial determination involves not only considerations of causation-in-fact and matters of policy, but also common sense and logic. Caputzal v. The Lindsay Co., 48 N.J. 69, 77-78, 222 A.2d 513 (1966).
[432 A.2d 829] The act or the failure to act must be a substantial factor in producing the harm. Prosser, supra, § 41 at 240; Restatement (Second) of Torts, § 431, 432 (1965).
Within Pritchard & Baird, several factors contributed to the loss of the funds: comingling of corporate and client monies, conversion of funds by Charles, Jr. and William and dereliction of her duties by Mrs. Pritchard. The wrongdoing of her sons, although the immediate cause of the loss, should not excuse Mrs. Pritchard from her negligence which also was a substantial factor contributing to the loss. Restatement (Second) of Torts, supra, § 442B, comment b. Her sons knew that she, the only other director, was not reviewing their conduct; they spawned their fraud in the backwater of her neglect. Her neglect of duty contributed to the climate of corruption; her failure to act contributed to the continuation of that corruption. Consequently, her conduct was a substantial factor contributing to the loss.
Analysis of proximate cause is especially difficult in a corporate context where the allegation is that nonfeasance of a director is a proximate cause of damage to a third party.
Where a case involves nonfeasance, no one can say “with absolute certainty what would have occurred if the defendant had acted otherwise.” Prosser, supra, § 41 at 242. Nonetheless, where it is reasonable to conclude that the failure to act would produce a particular result and that result has followed, causation may be inferred. Ibid. We conclude that even if Mrs. Pritchard’s mere objection had not stopped the depredations of her sons, her consultation with an attorney and the threat of suit would have deterred them. That conclusion flows as a matter of common sense and logic from the record. Whether in other situations a director has a duty to do more than protest and resign is best left to case-by-case determinations. In this case, we are satisfied that there was a duty to do more than object and resign. Consequently, we find that Mrs. Pritchard’s negligence was a proximate cause of the misappropriations.
To conclude, by virtue of her office, Mrs. Pritchard had the power to prevent the losses sustained by the clients of Pritchard & Baird. With power comes responsibility. She had a duty to deter the depredation of the other insiders, her sons. She breached that duty and caused plaintiffs to sustain damages.
The judgment of the Appellate Division is affirmed.
For affirmance Justices SULLIVAN, PASHMAN, CLIFFORD, SCHREIBER, HANDLER and POLLOCK 6.
For reversal none.
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Notes:
[1] The obligations of directors of banks involve some additional consideration because of their relationship to the public generally and depositors in particular. Statutes impose certain requirements on bank directors. For example, directors of national banks must take an oath that they will diligently and honestly administer the affairs of the bank and will not permit violation of the banking laws. Moreover, they must satisfy certain requirements such as residence, citizenship, stockholdings and not serving as an investment banker. 12 U.S.C.A. § 77-78. See generally R. Barnett, Responsibilities & Liabilities of Bank Directors (1980).
[2] Section 717 was amended in 1977 (L.1977, c.432, § 4, effective September 1, 1977) to provide that directors must exercise a “degree of care” in place of a “degree of diligence, care and skill.” The report of the Association of the Bar of the City of New York Committee on Corporation Law states the amendment did not alter but clarified and reaffirmed existing law. Report No. 178 on S254-A and A245-A, 544.
[3] Our decision is based on directorial responsibilities arising under state statutory and common law as distinguished from the Securities Act of 1933, 15 U.S.C. § 77a et seq., and the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq. Nonetheless, we recognize significant developments in directorial liability under both Acts and related rules and regulations of the Securities and Exchange Commission. For example, an outside director may be liable in negligence under section 11 of the 1933 Act for the failure to make a reasonable investigation before signing a registration statement. Escott v. Barchris Constr. Corp., 283 F.Supp. 643, 687-689 (S.D.N.Y.1968); see also Feit v. Leasco Data Processing Equip. Corp., 332 F.Supp. 544, 575-576 (E.D.N.Y.1971) (outside director who was partner in law firm for corporation considered an insider). The Securities and Exchange Commission has made it clear that outside directors should become knowledgeable about a company’s business and accounting practices so that they may make “an informed judgment of its more important affairs of the abilities and integrity of the officers.” Securities Exchange Act of 1934, Release No. 11,516 (July 2, 1975). With respect to actions under section 10 of the 1934 Act and Rule 10b5, which prohibit false statements in the purchase or sale of securities, liability is not imposed for mere negligence, but only if one acts with scienter, i. e., the intent to deceive, manipulate or defraud. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976) outside accountant not liable in negligence for failure to conduct a proper audit).
Recently the United States Supreme Court described the Federal Securities Acts in the area of director liability as “regulatory and prohibitory in nature it often limits the exercise of directorial power, but only rarely creates it.” Burks v. Lasker, 441 U.S. 471, 99 S.Ct. 1831, 1837, 60 L.Ed.2d 404 (1979). In Burks, the Court described corporations as creatures of state law and declared “it is state law which is the font of corporate directors’ powers.” Ibid. See generally Goldstein & Shepherd, “Director Duties and Liabilities under the Securities Acts and Corporation Laws,” 36 Wash. & Lee L.Rev. 759, 763-773 (1979).
[4] Following the Pritchard & Baird bankruptcy, New York, a reinsurance center, adopted legislation regulation reinsurance intermediaries. One statute codified the industry standard by prohibiting reinsurance intermediaries from commingling their funds with funds of their principals. N.Y. Ins. Law § 122-a(9) (McKinney Supp. 1980-1981).
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ROOT JEWELLERS, INC, v. JDR CONTRACTING, INC

Posted on: March 15, 2017 at 6:17 am, in

233 N.J.Super. 125 (N.J.Super.A.D. 1989)
558 A.2d 59
ROOT JEWELERS, INC., Plaintiff-Respondent,
v.
JDR CONTRACTING, INC., Defendant,
and
Donald Bouffard and Joseph Bouffard, jointly, severally,
individually or in the alternative, Defendants-Appellants.
Superior Court of New Jersey, Appellate Division.
May 17, 1989
Submitted March 22, 1989.
Klehr, Harrison, Harvey, Branzburg, Ellers & Weir, for defendants-appellants (Carol Ann Slocum, Philadelphia, on the brief).
Frank H. Rose, Cherry Hill, for plaintiff-respondent.
Before Judges KING, BRODY and ASHBEY.
The opinion of the court was delivered by
BRODY, J.A.D.
This is an action based upon a $42,829.50 judgment by default that plaintiff obtained against appellants in Virginia. Appellants were the principals and officers of defendant JDR Contracting, Inc., a defunct New Jersey corporation. They contend that the judgment is not entitled to full faith and credit because Virginia did not have personal jurisdiction over them. Judge Gottlieb disagreed and entered a summary judgment for plaintiff. We affirm.
JDR had contracted with plaintiff, a retail jeweler, to renovate its store in Virginia. The only time appellants were in Virginia was when they attended a meeting at the construction site to resolve a dispute regarding the progress of the work. The Virginia action followed after the parties were unable to settle the matter.
The basis for appellants’ liability under Virginia law was JDR’s failure to obtain from Virginia a certificate of authority to do business there. Va.Code § 13.1-119 (since repealed) provided in relevant part:
If a foreign corporation transacts business in this State without a certificate of authority, its directors, officers and agents doing such business shall be jointly and severally liable for any contracts made or to be performed in the State….
Although on its face the statute appears to render all officers of a corporation personally liable when their corporation transacts business in Virginia without a certificate of authority, the Virginia Supreme Court has interpreted the statute more narrowly:
While the language of the statute may be sufficiently comprehensive to embrace all officers, agents, and employees of such company, no matter where they reside, it is also, we think, under well-settled rules of interpretation, susceptible of the construction that it was only intended to include such officers, agents, and employees as are or have been in the State aiding in carrying on the prohibited business. [Richmond Standard Steel [558 A.2d 60] Spike and Iron Co. v. Dininny, 105 Va. 439, 53 S.E. 961 (1906).]
That interpretation has more recently been restated in Miller and Rhoads v. West, 442 F.Supp. 341, 345 (E.D.Va.1977):
On its face, the original law did not appear to place any restrictions upon which officers and directors could be held personally liable. [Footnote omitted.] However, in 1906 the Virginia Supreme Court held that [the statute] has no application to officers, agents and employees who are nonresidents of the State and who have never been present in the State engaged in carrying on the business of the company, but only includes such officers, agents and employees as are, or have been, in this State aiding in carrying on the prohibited business.
Thus by entering Virginia to advance the “carrying on” of the prohibited contract, appellants, though nonresidents of that State, became personally liable as officers for JDR’s contractual obligations.
Appellants do not question the validity of the statute. They argue, however, that their liability under the statute does not automatically empower Virginia courts to exercise personal jurisdiction over them. We agree that one does not necessarily follow from the other, but we conclude that it does here.
Due process limits a state’s personal jurisdiction over a nonresident to actions where the nonresident has had “certain minimum contacts” within the state so that maintenance of the action does not offend traditional notions of fair play and substantial justice. International Shoe Co. v. Washington, 326 U.S. 310, 66 S.Ct. 154, 90 L.Ed.2d 95 (1945).
Virginia has codified the International Shoe criteria in Va.Code § 8.01-328.1(A), its long-arm personal jurisdiction statute, which provides in relevant part:
A court may exercise personal jurisdiction over a person, who acts directly or by an agent, as to a cause of action arising from the person’s:
1. Transacting any business in this Commonwealth;
2. Contracting to supply services or things in this Commonwealth; …
The provisions of the long-arm statute have been restated in John G. Kolbe, Inc. v. Chromodern Chair Co., 211 Va. 736, 180 S.E.2d 664, 667 (1971):
It is manifest that the purpose of Virginia’s long arm statute is to assert jurisdiction over nonresidents who engage in some purposeful activity in this State to the extent permissible under the due process clause. [Citation omitted.] Since the statute provides “Transacting any business in this State” (emphasis added), it is a single act statute requiring only one transaction in Virginia to confer jurisdiction on its courts….
Refining further the criteria of the long-arm statute, the court in Viers v. Mounts, 466 F.Supp. 187, 190 (W.D.Va.1979) said:
It is evident, therefore, that a single act committed in Virginia by a nonresident is sufficient to invoke the protection of the jurisdictional statute with respect to any cause of action arising therefrom if by that one act the nonresident can be said to have engaged in some purposeful activity in Virginia….
We now come to appellants’ single argument on appeal. They acknowledge that their presence in Virginia to resolve the dispute under the contract was sufficient to empower that state to exercise its jurisdiction over them. They argue, however, that because their purposeful activity was related to plaintiff’s contract with JDR, they were acting solely as JDR officers and therefore Virginia could only exercise its jurisdiction over them as agents of JDR and not as individuals. We disagree.
As we have seen, the Virginia Supreme Court, recognizing that it would be unfair to render nonresident officers as a class liable for the prohibited contracts of their corporation, required that in order to become personally liable an officer must in effect have had a minimum contact with Virginia respecting the “carrying on” of the contract. That same concern for fairness to a nonresident, but with respect to the exercise of personal jurisdiction over [558 A.2d 61] him, also led the United States Supreme Court to require that in order to be subject to the jurisdiction of a court a nonresident defendant must have had a minimum contact with the forum state.
Thus when appellants entered Virginia as JDR officers to carry on the unauthorized business of the corporation, they thereby rendered themselves personally liable and that single act, being a purposeful activity in Virginia related to the cause of action asserted against them as individuals, also constituted the minimum contact with Virginia that empowered it to exercise personal jurisdiction over them in that cause.
Finally, we note that appellants were served with a copy of the Virginia complaint. That pleading refers to the provisions of Va.Code § 13.1-119 as the basis for their personal liability. They therefore cannot, and indeed do not, contend that they were without notice of their peril when they chose to default.
Affirmed.

Equity Stripping, Equity Vesting, Irrevocable Trusts: Pros/Cons

Posted on: March 15, 2017 at 6:17 am, in

In Article I on protecting the family home we discussed strategies that don’t work on protecting the personal residence: the homestead exemption, tenants by the entirety, tenancy in common, and joint tenancy. In article II we discussed the Revocable Living Trust, the Qualified Personal Residence Trust (QPRT), Limited Liability Companies (LLC), Limited Partnerships, family Limited Partnerships (FLLP), and Corporations as additional methods that don’t work. The final segment, article III we will discuss the more practical approaches to protecting the personal residence: Equity Stripping, Equity Vesting, and Irrevocable Trusts.

Equity stripping

The words sound exotic, it means to simply take out large amount of debt on an important asset or to encumber the asset secured by the underlying asset. The theory is simple; if an asset is riddled with debt, then the creditor is unlikely to bother with trying to sue the owner for the asset, thus, asset protection.

Equity vesting

Equity vesting, is the repositioning of your vested equity in your home or other commercial real estate through equity mortgage refinancing. Your borrowed cash is then used to buy wealth building cash-value life insurance to fund your tax-free retirement. The benefit is tax-free growth within an insurance company guaranteed rate of return and tax-free withdrawal through insurance policy loans.
The concept isn’t difficult. Experts like Doug Andrews, author of Missed Fortune 101, and Roccy DeFrancesco, author of The Doctor’s Wealth Preservation Guide and The Home Equity Management Guidebook, (get a free copy of this book by Google+ this page) define Home Equity Harvesting as “removing equity” from a personal residence through refinancing (or a home equity loan) where the money borrowed is placed into cash value life insurance. I know it sounds weird. Who in their right mind would want to take a loan out on their home in order to purchase life insurance? Here’s your answer: Think of life insurance as a tax free savings account. A properly structured cash value life insurance policy can grow “tax-free” (no income taxes on capital gains, interest and dividends) and be removed tax-free via policy loans, and when properly structured will distribute tax-free to heirs at the time of death. To properly structure the policy, it must be over funded with cash using the minimum allowable death benefit that will allow the client to borrow from the policy tax-free. You can read more on how to monetize your real estate by using widely accepted leverage on real estate form a well known author Roccy DeFrancesco, J.D. by getting your free book.
An example: Mr. Smith is 45 years old, married and has a home with a fair market value (FMV) today of $400,000. He has 2 children and a spouse where their combined household income is $78,000 a year. Assume the Smith’s purchased the home for $185,000 seven years ago and that the current debt on the home is $125,000. Assume the current home loan is 6.5% with mortgage payment of $935 a month.
Mr. Smith will use a home equity line of credit (not a refinance) and will remove $76,500 of equity from the home over a five year period (which creates a 50% debt to value ratio on the property).
Equity Vesting is removing equity from a home to reposition it into cash value life insurance. Therefore, Mr. Smith will access his new line of credit in the amount of $15,300 every year for five years to fund an over funded/low expense cash value life insurance policy.
It is assumed that the life insurance policy used is and equity indexed life insurance policy that has a 1% guarantee rate of return on the cash value, has its growth pegged to the S&P 500 index and locks in the gains annually. It is also assumed that the policy will return 7.5% annually (which is conservative since the S&P 500 has averaged over 11% for the last 20+ years).
Mr. Smith will retire when he is 65 years old and will withdraw money tax-free through policy loans from his cash value policy from age 66-90 (25-years). Mr. Smith would be able to take $23,000 each year for 25 years for a total amount of $575,000.
If Mr. Smith had a home where they could harvest $200,000 of equity to reposition into a cash value life insurance policy. Using the same assumptions from the above example Mr. Smith could borrow tax-free from his life insurance policy starting at age 66? $61,000 each year for 25 years for a total amount of $1,520,000.
FULL DISCLOSURE: the above Equity Vesting examples have used optimum data as an optimum example. Your particular situation will be different based on your age, your health, borrowing capacity, level of interest rates, deductibility and limitations of your interest deduction on mortgage, and other factors. Please contact us to run your numbers based on your facts. We can be reached at 508-429-0011 or contact us through the contact form using the above link (click the link at the top of the page beside the telephone icon).

Irrevocable Trusts

While equity vesting is not for everyone, the personal residence is best suited for an irrevocable trust with an independent Trustee. A simple “revocable” trust, also sometimes referred to as a land trust, will not protect your home from potential lawsuits, divorce, Medicaid/Nursing home. You must “divorce” yourself from owning your personal residence or for any other valuable asset you wish to transfer to your irrevocable trust. As in a typical divorce decree spelling out the terms of settlement, so too your Trust Agreement must spell out the terms and conditions of the Grantor (the owner) relinquishing his ownership to the Trustee for the benefit of the Grantor and his heirs. The Trustee cannot be the Grantor, his spouse, his children, or any one related to the original owner by blood or marriage. The Trustee “must be independent” and must act independently in decisions and actions. The independent Trustee’s sole fiduciary duty is to protect the assets transferred at all costs and must grow the assets in order to fund future expectations of the Beneficiaries.
To learn more about repositioning assets for wealth building, implementation of precise asset protection systems, tax minimization strategies, elimination of the probate process, and elimination of the only voluntary estate tax system, and tax efficient transfers to your next generation email us.
Rocco Beatrice, CPA, MST, MBA, CWPP, CAPP, MMB – Managing Director, Estate Street Partners, LLC. Mr. Beatrice is an “AA” asset protection, Trust, and estate planning expert.

Tenancy in Common & Joint Tenancy: Pros & Cons

Posted on: March 15, 2017 at 6:16 am, in

Tenancy in common

Don’t use this method as an asset protection device to hold your personal residence. Each spouse has a separate, but, undivided interest in the property. Each owner of property held as Tenants in Common owns an “undivided interest” in the property by a separate deed. For example, three people (all with separate families) own a vacation home as 1/3 owner, each Tenant has VESTED OWNERSHIP by his own deed/title to his share.
What’s wrong with tenancy in common:
Each tenant in common interest is an asset of each co-owner and is subject to each of his/her co-owner creditors. That’s simply too much risk, not only do you have to worry about your creditors, you have to worry about each of you co-owners creditors.
Interest in the property may be transferred by will. The ownership interest of a tenant in common is transferable. Unlike a joint tenancy, if a tenant in common dies, the interest in the property would pass to the heirs like all other asset or personal property.
All tenants have equal right to possession. The main problem with Tenants In Common is that the other tenant(s) can do whatever he/she wants with his/her interest. Like what? One tenant-in-common (T.C.) could take out a loan on his/her interest in the property. Additionally, the T.C. interest owned by one owner is subject to that owner’s creditors. So, if T.C. named John, owns a 1/2 interest in a $500,000 vacation condo as T.C. with his brother Frank, John’s 1/2 interest can be taken from him in a lawsuit or normal negligence case. There is no protection of that interest.
Summary of Tenancy in Common: Don’t use it. Tenancy in Common is NOT an asset protection device. The risk of separate ownership is the risk. You have no control over the final outcome. In cases where there are multiple owners, it’s difficult to have a consensus opinion acting as one without the risk of diverse opinions.

Joint tenants

Don’t use this as an asset protection device for your personal residence. Joint Tenancy (JT) is also known as Joint Tenancy with right of survivorship, is the most common method of holding title to real estate, bank accounts, broker accounts, and other assets. The problem here is that each spouse can wipe out the other, i.e. by withdrawing all of your joint money out of the bank account.
In PLAIN ENGLISH, owning property as a J.T. allows each J.T., each person the same equal rights of legal enjoyment, such as:
The right to use the “whole” property (with land, the right to occupy the entire property, with stocks or bank account money, or any other liquid investment, the right to “spend the whole amount, without prior permission.” Hello!, divorce?
The right to transfer the interest in the property “without asking permission” of the other co-owners.
A survival right, such as when a joint tenant dies, the share of the deceased tenant “automatically becomes that of the other co-owners.” Normally between married couples this is not a bad thing but owning other real estate with a joint tenant such as a vacation home is not a good idea because the other joint tenant’s family will receive title to the property.

Why is joint tenancy used? Simple: It avoids probate.

That sounds wonderful. So why shouldn’t we consider joint tenancy?
Joint Tenancy is uncontrollable. If one Joint Tenant sells his portion of the asset you have no power to sever your portion of the asset. You’re stuck with the new Joint Tenant.
Possible exposure of the assets to the creditor of the other Tenants. This is dangerously significant because any Tenant can transfer the asset (the whole asset) to someone/anyone without permission from any of the Joint Tenants. An example: your co-owner get sued by a business partner and gets a judgment against him, there are two options, one is that the creditor can ask the court to sell the asset to satisfy his claim of which you have no say in the matter, or you get the creditor to become your new co-owner. The bottom line is that Joint Tenancy is subject to the creditors of each co-owner.
Title in Joint Tenancy supercedes any provisions of a will. Joint Tenancy disinherits all other heirs, except the remaining Joint Tenant. This arises most often when a parent is trying to avoid probate and estate taxes on a piece of property and wants to give an equal share in the property to the children. The Joint Tenancy will supersede any provisions of the will.
Loss of estate tax protection.
Loss of step-up in basis upon the death of the first Tenant. You bought the house for $100,000 some years later the cost basis is still $100,000 there’s no step-up in basis at the time of death to restructure the tax consequences.
Possibility of a gift tax consequence may result from the transfer of property into Joint Tenancy.
Joint Tenancy supercedes any trust with the loss of all trust benefits.
Summary on Joint Tenancy: don’t use Joint Tenancy as an Asset Protection device. Although most married couples use this method of holding property as joint tenants, it’s not the best way to hold the marital property.
In subsequent articles we will discuss holding title by a Personal Residence Trust, Revocable Trusts, Irrevocable Trusts, Limited Liability Companies, and Corporations , and equity stripping as a way to hold the marital personal residence
Rocco Beatrice, CPA, MST, MBA, CWPP, CAPP, MMB – Managing Director, Estate Street Partners, LLC. Mr. Beatrice is an “AA” asset protection, Trust, and estate planning expert.