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 judgmentÂ·” 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.
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], Â¶?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 Â¶?3.
(3) [Respondent] successfully prosecuted the suit for [Beneficiary], achieving a large settlement. Id. at Â¶?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 Â¶?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 Â¶?6.
(4)[sic] [Respondent] was designated as “Trust Protector” under the terms of the Trust Agreement. See Exhibit A, Trust Agreement Â¶?5.4; ?Exhibit B-Affidavit of [Respondent] Â¶?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.
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 lifetimeÂ·” 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 Â· is conferred in a fiduciary capacity Â·”; ?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 Â· 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.
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 advisersÂ· ‘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 â€¤ 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 â€¤ 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.
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 caseâ€¤’ 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).
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 â€¤ 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 â€¤ 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 expendituresâ€¤ [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 Â· 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 advocateÂ·” 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).
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.
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 errorÂ· [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.
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
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 advisersÂ· ‘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 quadriplegicÂ·(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 handlingÂ·(3) Ponder successfully prosecuted the suit for [Robert], achieving a large settlementÂ·(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.[‘] Â·(4) Exhibit A is a true and accurate copy of the [Trust]Â·(4) [sic] [Ponder] was designated as ‘Trust Protector’ under the terms of the [Trust]Â·
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 Â· [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.
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.,
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,
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
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.
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.
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.
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.
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.  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). 
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.  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.  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.
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.
 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).
 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.
 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).
 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).
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,
JDR CONTRACTING, INC., Defendant,
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
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.
MOORE v. MOORE 111 S.W.3d 530 (2003)
Posted on: March 15, 2017 at 6:15 am, in
MOORE v. MOORE
111 S.W.3d 530 (2003)
Charles M. MOORE, Plaintiff-Respondent,
Melanie D. MOORE, Defendant-Appellant.
Missouri Court of Appeals, Southern District, Division Two.
June 30, 2003.
Motion for Rehearing or Transfer Denied July 22, 2003.
Application for Transfer Denied August 26, 2003.
John P. Heisserer, Rice, Spaeth, Heisserer, Summers & Remley, Cape Girardeau, for appellant.
Richard G. Steele, Bradshaw, Steele, Cochrane & Berens, Cape Girardeau, for respondent.
Motion for Rehearing or Transfer to Supreme Court Denied July 22, 2003.
[ 111 S.W.3d 532 ]
JOHN E. PARRISH, Judge.
Melanie D. Moore (wife) appeals the determination in a dissolution action that certain trust assets were separate property of Charles M. Moore (husband). This court affirms the dissolution judgment in part, reverses it in part, and remands.
Husband, as settlor, established the Charles Matthews Moore Irrevocable Trust (CMMIT) November 25, 1984.1 Husband is the beneficiary of that trust. The trustees are James H. Moore and Dorothy Moore, husband’s parents. Initially, the trust was funded with assets distributed to husband as beneficiary of another trust.
Husband and wife married in 1989. After that date, husband’s parents conveyed a 308-acre farm to the trust as a gift. In addition, the trust purchased 837 acres of farm property from husband’s parents.2 The purchase price for the 837 acres was $614,150. A down payment of $14,150 was paid by the trust. The balance of the purchase price was represented by a promissory note on behalf of the trust that required ten annual installment payments in the amount of $89,417.69 each. At the time of the dissolution trial, nine of the ten installment payments had been made. The funds used to make those payments were generated by trust income.
The CMMIT instrument provides that the trustees can terminate the trust after husband attained age 25. It further provides that at age 35, or anytime thereafter, husband has the option to terminate the trust, but in any event the trust will terminate upon husband attaining age 50, at which time both principal and income shall be paid and distributed by the trustees to the beneficiary free and discharged from the trust. The trustees did not terminate the trust when husband reached age 25. Husband was 35 years old March 13, 1998. At the time of trial, he had not exercised his right to terminate the trust.
The trial court entered judgment dissolving the marriage and awarding custody of the parties’ three children. Husband and wife were awarded joint legal custody. Husband was awarded “primary physical custody” and wife was granted visitation as provided by a parenting plan prescribed by the court. No child support was awarded. Husband was directed to provide health insurance coverage for the children under a health benefit plan through his employer or union and was declared “liable for one-half of any uncovered medical or dental costs.”
Marital property was identified and divided between husband and wife. The judgment identified and set over nonmarital property to each spouse.
The trial court held with respect to the assets and earnings of the trust:
The assets and earnings from the assets of the [CMMIT] of November 25, 1984, have been continuously titled in and remain the property of a separate entity, i.e., [t]he [CMMIT] of November 25, 1984. Unless and until such time as those assets are severed from the trust by virtue of a distribution from the trust to [husband] individually, the trust assets remain the separate property of the [CMMIT] of November 25, 1984.
The [CMMIT] of November 25, 1984, and the assets owned by said Trust are found to be non-marital and to the extent
[ 111 S.W.3d 533 ]
[husband] has a residual interest or future expectancy as Beneficiary of said Trust, said contingent interest is awarded to [husband] as non-marital. Said non-marital asset has a value of approximately $1,682,106.00.
Wife presents one point on appeal. She contends the trial court erred in finding that all assets of CMMIT were nonmarital property and in setting aside the trust and all its assets to husband. She argues that this was an erroneous declaration and misapplication of law; that husband’s beneficial interest in the trust was subject to division under § 452.3303 because his interest in the trust was tantamount to full ownership of the trust property.
In a dissolution of marriage proceeding, a trial court is required to “set apart to each spouse such spouse’s nonmarital property and shall divide the marital property and marital debts….” § 452.330.1. Marital property is:
(1) Property acquired by gift, bequest, devise, or descent;
(2) Property acquired in exchange for property acquired prior to the marriage or in exchange for property acquired by gift, bequest, devise, or descent;
(3) Property acquired by a spouse after a decree of legal separation;
(4) Property excluded by valid written agreement of the parties; and
(5) The increase in value of property acquired prior to the marriage or pursuant to subdivisions (1) to (4) of this subdivision, unless marital assets including labor, have contributed to such increases and then only to the extent of such contributions.
Wife contends husband’s interest as sole grantor-beneficiary with the power of revocation was tantamount to ownership of the trust assets outright; that a significant part of the trust property is marital property that was subject to division and distribution in the dissolution of marriage proceeding. She argues that because of the trial court’s erroneous determination to the contrary, the distribution of marital property was inequitable.
This court’s review is undertaken pursuant to Rule 73.01(c). The judgment will be affirmed unless there is no substantial evidence to support it, the judgment is against the weight of the evidence, or the judgment erroneously declares or applies the law. Robertson v. Robertson,3 S.W.3d 383, 384 (Mo.App.1999).
In considering the nature of property that is held in trust, the function and methodology of trusts must be considered.
The fundamental nature of a trust is the division of title; the trustee being the holder of legal title and the beneficiary that of equitable title. Farris v. Boyke,936 S.W.2d 197, 200 (Mo.App. 1996); McDaniel Title Co. v. Lemons,626 S.W.2d 686, 690 (Mo.App.1981). Moreover equitable interests can vest in the same fashion as legal interests. Lehmann v. Janes,409 S.W.2d 647, 655 (Mo.1966); Hereford [v. Unknown Heirs], 365 Mo. 1048, 292 S.W.2d  at 294 [(Mo.banc 1956)]. The legal title can vest in the trustee, while simultaneously, the equitable title can vest in the beneficiary. Lehmann, 409 S.W.2d at 655-56; Hereford, 292 S.W.2d at 294. A vested equitable estate in fee can be alienable, i.e., in the absence of provisions prohibiting alienation, or can be passed through inheritance. See Lehmann, 409 S.W.2d at 655; Jarboe v. Hey, 122 Mo. 341, 26 S.W. 968, 969
[ 111 S.W.3d 534 ]
(1894) (recognizing existence of equitable fees); Bredell, et al. v. Collier, et. al., 40 Mo. 287 (1867); Lich v. Lich, 158 Mo.App. 400, 138 S.W. 558, 562 (1911). Once the trust terminates, the legal title, which was vested in the trustee, then vests in the equitable title holder, the two titles merge, and the equitable title holder becomes the owner of a full fee interest. Lehmann, 409 S.W.2d at 655.
Mercantile Trust Co., N.A. v. Hardie, 39 S.W.3d 907, 913 (Mo.App.2001).4
The issue on which this appeal turns is the terms of the CMMIT instrument that gave husband authority to terminate the trust upon his attaining age 35. This occurred March 13, 1998, during the marriage. The judgment dissolving the marriage was entered November 27, 2001.
The parties have cited no authority to this court in which this issue has been addressed in Missouri, nor has this court’s independent research disclosed Missouri cases or statutes that resolve the question presented. The issue is discussed, however, in Divorce, Separation and the Distribution of Property, J. Thomas Oldham 2002 § 8.05[b] (1987). Oldham suggests, “Most cases that have arisen to date suggest that trust monies will only be deemed `acquired’ during marriage if the spouse received the money, or had a right to demand receipt of the money, before divorce.” Id. Cases from other jurisdictions support Oldham’s statement.
In Matter of the Marriage of Burns,573 S.W.2d 555 (Tex.Civ.App.1978), the husband was beneficiary of six trusts at the time his marriage was dissolved. He was grantor of three of the trusts. His parents and grandparents created the others. He was not a trustee of any of the trusts. One of the trusts provided for distribution of corpus and income to husband on May 28, 1982. The others were “discretionary trusts” or “spendthrift trusts” (or both).
Texas is a community property state. The applicable statute provided that community property consisted of “the property, other than separate property, acquired by either spouse during marriage.” Burns, 573 S.W.2d at 557. In Burns, the wife sought a determination that trust income was community property. The trial court held, under the terms of the trusts, the income was separate property. That determination was affirmed because the income had not been distributed to the husband during the marriage, nor did he have the right to require distribution of the income. The court based its decision on the fact that “neither spouse actually or constructively acquired the undistributed trust and estate income during the marriage.” Id. Burns differs from this case in that the husband in Burns had no control over the distribution of trust assets that produced the income the wife sought to have declared community property.
Matter of the Marriage of Long, 542 S.W.2d 712 (Tex.Civ.App.1976), reached a different result due to the husband being entitled to possession of trust assets during the marriage. In that case, the parties married June 26, 1969. Their marriage was dissolved October 7, 1975. Prior to the marriage, the husband’s parents established a trust that provided for distribution of one-half the corpus to him when he reached 25 years of age. The remaining one-half would be distributed to him and the trust would terminate when he reached age 30. The husband reached age 25 August 14, 1974, during the parties’ marriage. He elected not to seek distribution of the
[ 111 S.W.3d 535 ]
one-half of the corpus that he could have received at that time. His wife argued that the income on the trust funds was community property. The court held that income earned on the one-half of the trust corpus the husband could have receive at age 25 from the date he attained age 25 until the date of the dissolution of the parties’ marriage was community property.
In Solomon v. Solomon,531 Pa. 113, 611 A.2d 686 (1992), the wife was beneficiary of a trust created by her father. By the terms of the trust, she could withdraw one-half of the trust corpus at age 35. She could withdraw the remaining one-half and terminate the trust when she attained age 40. The wife reached age 35 during the marriage. The parties’ marriage had been dissolved by the time she was 40.
The applicable Pennsylvania statute was similar to § 452.330.2. It defined marital property as all property acquired by either party during the marriage with certain exceptions. Solomon, 611 A.2d at 688 n. 4. Solomon held that the increase in value of a spouse’s separate property was marital property, 611 A.2d at 690, and income from that property was marital property, 611 A.2d at 690 n. 9. The income earned on one-half the corpus from the time wife acquired a right to possess it at age 35 was declared to be marital property. 611 A.2d at 690.
This court finds the reasoning in Burns, Long and Solomon persuasive. The respective state statutes regarding what is community property in Texas and what is marital property in Pennsylvania with respect to increases on one party’s separate property are similar to § 452.330.2. Income received from nonmarital property subsequent to marriage is marital property in Missouri. In re Marriage of Box,968 S.W.2d 161, 164 (Mo.App. 1998).
Here, husband had the right to terminate his trust when he attained age 35. This court holds husband constructively received the trust assets at that time. The trial court erred in not classifying the income the trust generated from that date until the date of the dissolution of the parties’ marriage as marital property.
Furthermore, the evidence was that three payments of $89,417.69 each were made on indebtedness on real estate held by the trust following husband attaining age 35 in 1998 and before the dissolution in 2001. Thus, marital property may have contributed to any increase in the value of trust assets from 1998 to the date of the dissolution of the marriage in 2001. Increases in non-marital property during a marriage as a result of payments with marital funds are marital property. § 452.330.2(5). The trial court erred in not considering whether any increase in value to that property would be marital property. “Under the `source of funds’ rule applied in Missouri, property is considered to be acquired as it is paid for, and incremental property values are allocated proportionately to either marital or nonmarital estates according to the source of funds used to purchase or improve the property.” Alexander v. Alexander,956 S.W.2d 957, 961 (Mo.App.1997).
In reaching its conclusion, this court considered the cases relied on by husband in contending no error occurred in the trial court’s classification of marital and nonmarital property. The cases, however, are inapplicable to the facts in this case. Hoffmann v. Hoffmann,676 S.W.2d 817 (Mo. banc 1984), involved stock in a closely held corporation acquired by the husband prior to marriage. However, the husband was not a controlling shareholder and could not unilaterally declare or withhold dividends.
In Williams v. Frisbee,419 S.W.2d 99 (Mo. banc 1967), an attempt at garnishment of a trust’s assets to satisfy a beneficiary’s
[ 111 S.W.3d 536 ]
debts was denied due to spendthrift provisions in the trust. The court concluded the assets could not be reached to satisfy the beneficiary’s indebtedness absent actual distribution of those assets. Those are not the facts in this case.
Similarly, in State ex rel. Nixon v. Turpin,994 S.W.2d 53 (Mo.App.1999), and Tidrow v. Director, Missouri State Division of Family Services,688 S.W.2d 9 (Mo.App.1985), assets of trusts were not “available” for a beneficiary’s care (Tidrow) or to provide reimbursement for incarceration costs (Turpin) because the beneficiary had no control over their disbursement. In this case, upon attaining age 35 husband controlled whether trust assets would be distributed free of the trust.
“The trial court in a dissolution proceeding is not required to make an equal distribution of the marital property.” In re Marriage of Rickard,818 S.W.2d 711, 719 (Mo.App.1991). The distribution is required, however, to be fair and equitable. Id. In this case, the value of the trust property is such that it could materially affect the equitable distribution of marital property. The part of the judgment classifying marital property and nonmarital property and the distribution thereof is reversed. In all other respects the judgment is affirmed. The case is remanded for the trial court to classify marital and nonmarital property in a manner that is consistent with this opinion and to then distribute the marital property between the parties. The trial court may, in its discretion, permit additional evidence to be presented on remand.
PREWITT, P.J., and SHRUM, J., concur.
Tom H. CONNOLLY, Trustee v. Jerome S. BAUM, Garrett Adam Baum, Courtney Jill Baum, Tom W. Lamm
Posted on: March 15, 2017 at 6:15 am, in
22 F.3d 1014
In re Jerome S. BAUM, Debtor.
Tom H. CONNOLLY, Trustee, Plaintiff-Appellant,
Jerome S. BAUM, Garrett Adam Baum, Courtney Jill Baum, Tom
W. Lamm, Defendants-Appellees.
United States Court of Appeals,
April 26, 1994.
Curt P. Kriksciun of The Connell Law Firm, Denver, CO, for plaintiff-appellant.
Harry M. Sterling (David M. Tenner, also of Gelt, Fleishman & Sterling, with him on the brief), Denver, CO, for defendants-appellees.
Before LOGAN and BRORBY, Circuit Judges, and SEAY, Chief District Judge.*
LOGAN, Circuit Judge.
Plaintiff Tom H. Connolly, Trustee in Bankruptcy, appeals the district court’s grant of summary judgment denying him relief and upholding the validity of two trusts the assets of which plaintiff sued to include in Jerome S. Baum’s bankruptcy estate. On appeal, plaintiff argues that the trusts are void as shams or because of merger of legal and equitable interests.
In October 1983, Baum (debtor or settlor) established and filed of record a trust instrument entitled the Baum Children Trusts, creating two irrevocable trusts denoted as the Garrett Adam Baum Trust and the Courtney Jill Baum Trust and naming Tom W. Lamm as trustee. Garrett Adam Baum and Courtney Jill Baum are debtor’s children. Debtor transferred into the trusts his residence, some furniture and fixtures, and a collection of antique clocks. Debtor reserved the right to live in the residence under the following terms:
For so long as the Settlor shall be living, he shall [have] the right to occupy [the] residence free of rental so long as the Settlor timely services all encumbrances against such residence, and pays all taxes, insurance and utilities on such residence or associated with its occupancy by the Settlor. Further, in the event of the death of the Settlor, and if Rachael Elizabeth shall then be the spouse of the Settlor as contemplated in paragraph 10.4 below, and if the said Rachael Elizabeth Baum survives the Settlor, then, until the earlier to occur of the death of Rachael Elizabeth Baum or the second anniversary of the date of her remarriage, the said Rachael Elizabeth Baum shall have the right to occupy such property as her principal residence free of rental so long as she shall timely service all encumbrances against such residence, and pays all taxes, insurance and utilities on such residence or associated with her occupancy.
Appellant’s App. 98-99. Debtor also reserved to himself and his wife the right to require the trustee to sell the residence and purchase another home as substitute trust property
so long as the expenditures required by the trusts herein created in order to secure a new residence together with any contributions by the occupant, shall not be in excess of the net proceeds of sale of the old residence, and so long as the trusts herein created are exposed to no greater liabilities or risks of loss than those to which the trusts are exposed prior to the sale of the old residence.
Id. at 99.
When debtor created the trusts he and his wife were experiencing marital difficulties and wanted to preserve certain separate property for their children from their prior marriages. The trusts authorized the trustee to distribute income or principal based on the “best interests” of the children beneficiaries as determined by the trustee. Id. at 96, 97, 101-02. The trusts contemplated distributions for the “support,” “comfort and convenience” of those beneficiaries. Id. at 102. At the time the trusts were created, debtor had a net worth of over $1,000,000; he had total debts of less than $115,000, consisting of about $19,000 owed to his ex-wife and $90,000 to $95,000 on a mortgage on the residence. Appellant’s App. 83-84.
About six years later, in 1989, debtor filed for Chapter 7 bankruptcy. Plaintiff was appointed trustee and filed this action to recover the trust property for the bankruptcy estate, asserting: (1) the creation of the trusts constituted transfers in trust for the benefit of the debtor and thus were void under Colorado law; and (2) debtor used trust property as his own, effecting a merger of legal and equitable interest in the property of the trusts.1 The bankruptcy court referred the case to the district court, whose grant of summary judgment upholding the validity of the trusts was appealed to this court.
We review a district court’s order granting summary judgment de novo, applying the same legal standard used by the district court under Fed.R.Civ.P. 56(c). Anaconda Minerals Co. v. Stoller Chem. Co., 990 F.2d 1175, 1177 & n. 3 (10th Cir.1993). We view the record “in a light most favorable to the parties opposing the motion for summary judgment.” Deepwater Invs., Ltd. v. Jackson Hole Ski Corp., 938 F.2d 1105, 1110 (10th Cir.1991). “Summary judgment is appropriate when there is no genuine dispute over a material fact and the moving party is entitled to judgment as a matter of law.” Russillo v. Scarborough, 935 F.2d 1167, 1170 (10th Cir.1991). Once the moving party meets its burden, the burden shifts to the nonmoving party to demonstrate a genuine issue for trial on a material matter. Bacchus Indus., Inc. v. Arvin Indus., Inc., 939 F.2d 887, 891 (10th Cir.1991). “[T]he nonmoving party may not rest on its pleadings but must set forth specific facts showing that there is a genuine issue for trial as to those dispositive matters for which it carries the burden of proof.” Applied Genetics Int’l, Inc. v. First Affiliated Sec., Inc., 912 F.2d 1238, 1241 (10th Cir.1990) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 324, 106 S.Ct. 2548, 2553, 91 L.Ed.2d 265 (1986)).
The bankruptcy estate includes, “[e]xcept as provided in subsections (b) and (c)(2) of this section, all legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. Sec. 541(a)(1). For purposes of Sec. 541, the nature of a debtor’s interest in property generally is determined by state law. Butner v. United States, 440 U.S. 48, 54-55, 99 S.Ct. 914, 917-918, 59 L.Ed.2d 136 (1979). Thus, if the trusts are shams or otherwise void under Colorado law the trust property is includable in the bankruptcy estate.
Plaintiff’s arguments fall into two categories: The trusts were void at their inception, or at least voidable if necessary for the benefit of creditors, regardless of how they may have been operated; or, alternatively, the trusts are shams because of the way they were operated.2
We consider the void or voidable argument first.
A Colorado statute voids “[a]ll deeds of gifts, all conveyances … of goods, chattels, or things in action, or real property, made in trust for the use of the person making the same shall be void as against the creditors existing of such person.” Colo.Rev.Stat. Sec. 38-10-111. Plaintiff was not an existing creditor at the time the trusts were created in 1983. He became entitled to stand in the shoes of all creditors existing at the time bankruptcy was filed in 1989; but there is no showing that debtor’s ex-wife was a creditor in 1989, or that the mortgage holder in 1983 is claiming to share the bankruptcy estate.
Colorado courts would also hold void in a suit on behalf of creditors a trust in which the settlor is the sole beneficiary or has the sole power to reach the trust property. Kaladic v. Kaladic, 41 Colo.App. 419, 589 P.2d 502, 505 (1978) (holding illusory and fraudulent a spendthrift trust that ex-wife attempted to create with marital assets shortly before divorce, naming herself as sole beneficiary). The trusts at issue before us are irrevocable. By their terms settlor is not the sole beneficiary, and he does not have the power to revest the trust property in himself.
Debtor is a beneficiary in that he has the right to occupy the residence during his life and use the furnishings, subject to a duty to keep up payments on any mortgage and to pay all taxes, insurance and utilities. The trust does not have spendthrift provisions–which would be ineffective in any event–to prevent current creditors from reaching settlor’s interest. See id. Therefore, regardless of the success of plaintiff’s other arguments, the value of debtor’s life estate can be reached for the benefit of his creditors unless it is protected by Colorado’s homestead exemption. See Colo.Rev.Stat. Sec. 38-41-201 (limiting homestead exemption to $30,000). However, debtor presented factual support for his assertion that his own beneficial interest in the trusts was minimal; he paid $1652 per month for debt service, taxes and insurance, Appellant’s App. 83, 98, while the rental value of the property was between $1250 and $1500 per month. Id. at 93.
Arguably debtor’s right to occupy the residence gives him the right to use and enjoy the furnishings and clocks transferred to the trusts. There are cases holding that a life estate in consumable personal property is the equivalent to full fee simple title. See, e.g., Seabrook v. Grimes, 107 Md. 410, 68 A. 883 (1908). It is unlikely, however, that the furnishings and clocks transferred to the trust would be regarded as consumable. In any event debtor presented evidence that all but four of the clocks had been sold and the proceeds turned over to the children beneficiaries to pay their educational expenses and that all furniture except one desk and mirror had been given to the children some years ago.
Colorado law provides the following elements are required to establish an express private trust: “(1) the settlor’s capacity to create a trust; (2) his intention to create a trust; (3) a declaration of trust or a present disposition of the res; (4) an identifiable trust res; (5) a trustee; and (6) identifiable beneficiaries.” In re Estate of Granberry, 30 Colo.App. 590, 498 P.2d 960, 963 (1972) (citing Restatement (Second) of Trusts Sec. 17, et seq.; G. Bogert, Trusts and Trustees Sec. 41, et seq. (2d ed.)); see also Estate of Brenner, 37 Colo.App. 271, 547 P.2d 938, 941 (1976). Settlor possessed the capacity in 1983 to create the trusts; he stated his intention in writing; his declaration was in a formal document duly executed and recorded; he transferred assets to establish an identifiable res; he named a trustee and identifiable beneficiaries. Thus, the trusts in the instant case are valid on their face. The trusts were executed for a purpose other than avoidance of creditors, to provide for children of a prior marriage in the context of settlor’s marital problems. Unless the trusts are shams on the basis of their operation we must affirm the district court’s judgment that the trusts are valid.
Plaintiff asserts that in practice certain of the essential elements to establish valid trusts–intent, identifiable trust res, and a trustee–were rendered ineffective by the action of debtor and the trustee, and thus the trusts are shams. The burden of proof rests on the plaintiff, of course, to show that what appear on their face to be valid trusts are indeed shams.
We have not discovered, and the parties have not directed our attention to, any Colorado trust cases dealing specifically with creation of a sham trust by a debtor. We acknowledge, however, that there is persuasive authority in other contexts, particularly corporate and tax cases, that when a person in a position analogous to debtor here retains too much control over transferred property, ignores legal formalities, and uses the property as his own, the property is treated as owned by the transferor rather than the entity that is the nominal owner. We have reviewed the cases relied on by plaintiff, but they are all distinguishable from the instant case.
In support of his sham trust argument, plaintiff alleges that debtor retained extensive control over the trust properties, citing debtor’s retained authority to veto the sale of the home and to request replacement of that home with one of his choosing. But we note the trust instrument limits the amount spent to procure such a residence to the net proceeds of the sale plus additional contributions made by settlor, and limits the liabilities and risks of loss to that existing before the sale. Debtor’s summary judgment motion was supported by evidence which if true, establishes that the trusts were settled and indeed operated for the benefit of his children. He provided deposition testimony that the clocks were sold to provide cash for the named beneficiaries’ needs, and that nearly all of the furniture was distributed to the beneficiaries to furnish their apartments. He presented evidence that he paid out monthly more for debt service, taxes, and insurance than the fair rental value of the residence.
Plaintiff asserts that the trustee failed to administer the trusts. In support, he cites the trustee’s deposition testimony that he had no inventory of the furniture and fixtures nor of their value, that he had no specific recollection as to the sale of any of the trust property, that he had no records concerning transactions involving trust property, and had “done almost nothing” in his role as trustee. Appellant’s App. 217. Plaintiff thus presented evidence that the named trustee failed to properly administer the trusts, and that settlor carried out most of the trustee’s duties. The trustee did sign and file tax returns and signed all papers respecting transfers of additional assets held in the trust and for a second mortgage placed on the residence.3
However, even if debtor acted as trustee, it does not follow that the trust is a sham. Cf. Estate of Brenner, 37 Colo.App. 271, 547 P.2d 938 (1976) (for estate purposes trust valid though settlor was sole trustee, sole income beneficiary for his lifetime, with reserved power to amend and revoke the trust). Plaintiff produced no evidence to rebut the deposition testimony of debtor and the trustee that the trust property with respect to which settlor acted was used solely for the benefit of the children beneficiaries. Plaintiff produced no factual evidence of self-dealing by debtor. The most questionable transaction was the second mortgage placed on the residence, later paid off, and the lack of records as to where the proceeds of the loan were held pending their payout for educational expenses of the children. But even considering the post-summary judgment deposition testimony of debtor’s wife, plaintiff cannot show that the proceeds were used other than for the sole benefit of the children beneficiaries. We hold that plaintiff has failed to meet his burden of creating a material issue of fact concerning the allegation that the trusts were shams operated for debtor’s benefit. See Applied Genetics, 912 F.2d at 1241 (party opposing summary judgment must set forth specific facts showing a genuine issue for trial).
Plaintiff also argues that the trusts failed by reason of merger of legal and equitable interests. The essence of a valid trust is separation of the legal and equitable interests in property, with legal title held by the trustee, and the beneficial interest vested in the beneficiaries. If at any point all of the legal and equitable interests are held by one person or entity, the interests merge and the trust fails. See, e.g., In re Klayer, 20 B.R. 270 (Bankr.W.D.Ky.1981) (merger of legal and equitable where a settlor was trustee and sole beneficiary). Courts have found merger where the settlor as trustee engaged in self-dealing and used trust property to secure his own debts, see In re Flanzbaum, 8 B.R. 971 (Bankr.S.D.Fla.1981). However, as long as the interests are in some way different, in the absence of self-dealing there is no merger. See id.; Estate of Brenner, 547 P.2d at 942 (where settlor named himself as trustee, with income for life and right to withdraw any or all property, or revoke trust, no merger because there were residual beneficiaries who had vested interests) (citing Denver Nat’l Bank v. Von Brecht, 137 Colo. 88, 322 P.2d 667 (1958)).
Even though debtor performed many of the duties of the trustee, there were other beneficiaries, there were limitations on debtor’s life estate in the residence, and there was no evidence of self-dealing. Plaintiff has failed to raise a genuine issue as to whether the legal and equitable interests in the trusts merged.
We therefore AFFIRM the judgment of the district court. We deny debtor’s motion to strike plaintiff’s reply brief.
The Honorable Frank H. Seay, Chief Judge, United States District Court for the Eastern District of Oklahoma, sitting by designation
Plaintiff also contended the transfer was a fraudulent conveyance, but has not appealed the summary judgment on the fraudulent conveyance claim
Debtor asserts that plaintiff did not raise the issue of sham trusts below, except as to the Colorado statute on self-settled trusts. We have reviewed the pleadings and hold that plaintiff did raise the broader issue in his first and third claims for relief
Apparently debtor transferred some limited partnership interests to the trusts which later proved worthless. The trustee acted for the trust in one major lawsuit. Appellant’s App. 242-45
JOANNE R. DEAN, et al., Plaintiffs, v. UNITED STATES OF AMERICA, Defendant.
Posted on: March 15, 2017 at 6:14 am, in
DEAN v. UNITED STATES
UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF MISSOURI, WESTERN DIVISION
December 4, 1997
JOANNE R. DEAN, et al., Plaintiffs,
UNITED STATES OF AMERICA, Defendant.
The opinion of the court was delivered by: LAUGHREY
This case was tried to the Court on November 4 and 5, 1997. Plaintiffs, as the Trustees of the George and Catherine Irrevocable Trust, assert that a wrongful levy was made on trust assets by the Internal Revenue Service (“IRS”). The government claims that the levy was proper because George and Catherine Mossie are delinquent taxpayers and the George and Catherine Irrevocable Trust is merely the alter ego of these delinquent taxpayers. The trustees claim that the trust is not the alter ego of George and Catherine Mossie, therefore, the seizure of trust property by the IRS was wrongful and the property should be returned to the trust.
The Court makes the following findings of fact and conclusions of law.
FINDINGS OF FACT
1. In 1950, George W. Mossie married Catherine P. Mossie.
2. In 1967, George W. Mossie and Catherine P. Mossie separated and lived apart from one another and continue to do so. During this separation, the Mossies continued to perform their respective functions in the various family businesses and were amicable in their relationship with each other.
3. Prior to their separation, the Mossies had four children, Tom Mossie, Joanne R. Mossie (Dean), Janet A. Mossie and Linda L. Mossie.
4. In 1987, the Mossies decided to equally divide part of the real property owned in their individual names. The division was done because of their long-term separation and upon the advice of their estate planning counsel. On February 23, 1987, deeds were prepared and the property was conveyed into their respective 1987 revocable trusts.
5. In September of 1987, George W. Mossie was severely injured in an automobile accident and thereafter underwent multiple surgeries which rendered him disabled. In 1988, Catherine P. Mossie suffered a life-threatening illness from which she was not expected to recover. She also had surgery in 1989. Because of these illnesses, George and Catherine Mossie decided to transfer their assets into an irrevocable trust for the sole benefit of their children. This was done on advice of their estate planning counsel.
6. In November of 1989, the Mossies executed the George and Catherine Irrevocable Trust (hereinafter 1990 Irrevocable Trust) naming Joanne Mossie Dean and Janet A. Mossie as the trustees. The following assets were to be transferred into the irrevocable trust.
a. 20,000 shares of Summit Structural Steel.
b. Fifteen duplex units, which had been acquired in 1975 in the name of George and Tom Mossie.
c. Lake investment property which was used for family vacations.
7. The foregoing assets were not transferred into the trust until December 4, 1990. The delay was caused by the ill health of George and Catherine Mossie.
8. When the Mossies transferred their assets into the trust on December 4, 1990, they did not know that their 1988 tax return was being audited by the IRS. At that time, they did not know that they would be assessed back taxes by the IRS. Eventually, the IRS audited the Mossies’ 1987, 1988, 1989, and 1990 jointly-filed tax returns and did assess back taxes against them.
9. At the time the assets were transferred into the 1990 Irrevocable Trust, the Mossies had a net worth sufficient to cover their current liabilities and the tax liability that was eventually assessed against them by the IRS.
10. After a proceeding in the United States Tax Court to determine the tax deficiency owed by the Mossies for their jointly-filed returns for tax years 1987, 1988, 1989, and 1990, the IRS assessed back taxes and penalties against the Mossies in the amount of $ 281,093.95.
11. On February 8, 1993, the Internal Revenue Service assessed a trust fund recovery penalty in the amount of $ 109,125.71 against George W. Mossie, Tom Mossie and Summit Structural Steel, relating to the unpaid employment taxes withheld from the wages of the employees of Summit Structural Steel pursuant to I.R.C. ? 6672. This assessment was made against George W. and Tom Mossie because they were persons required to collect and truthfully account for and pay over to the United States the federal social security and income taxes withheld from the wages of the employees of Summit Structural Steel, Inc., for the taxable quarter ending June 30, 1992.
12. On May 4, 1994, two additional real estate holdings were transferred into the 1990 Irrevocable Trust.
a. The west 70 feet of Lot 2, Highway Lane Addition, a subdivision in Lee’s Summit, Missouri.
b. Lot 85, Braeside Addition, a subdivision in Lee’s Summit, Jackson County, Missouri, also known as 311 Lincolnwood.
c. Log 4, Ziegler Addition, a subdivision in Lee’s Summit, Jackson County, Missouri.
These properties were titled in the name of Alamo Real Estate Company, a company owned by George and Catherine Mossie, which was dissolved in 1994 because of financial difficulty.
13. In 1995, notices of a federal tax lien were filed with the Recorder of Deeds for Jackson County, Missouri, and Morgan County, Missouri, against property held in the names of Joanne R. Dean and Janet A. Mossie, as co-trustees of the 1990 Irrevocable Trust. These liens were levied against the trustees as the nominees or alter egos of George W. Mossie and Catherine P. Mossie.
14. The 1990 Irrevocable Trust is not the nominee or alter ego of delinquent taxpayers George W. Mossie and Catherine P. Mossie.
15. The assets of the 1990 Irrevocable Trust are controlled by the Plaintiff trustees and not George W. Mossie and Catherine P. Mossie.
a. Except for a brief period at the beginning of the trust when Catherine Mossie used old checks to pay for rental property expenses, all trust checks are signed by the trustees. Catherine Mossie used the old checks because she did not want to waste them.
b. All deeds and other transfer documents are signed by the trustees.
c. All tax returns are executed by the trustees.
d. All promissory notes are executed by the trustees.
e. All management decisions concerning the trust and its property are made by the trustees, not Catherine or George Mossie.
16. George and Catherine Mossie do receive some benefits from the trust.
a. The trustees permit Catherine Mossie to live at 311 Lincolnwood Drive, which has been the family home for the last 33 years. Catherine Mossie does not pay rent to live at 311 Lincolnwood Drive. Catherine Mossie does pay the utilities at 311 Lincolnwood Drive.
b. The trust also provides a car to Catherine Mossie and George Mossie which is available for their personal use.
c. The trustees would permit George and Catherine Mossie to stay at the family vacation home, but only Catherine has gone there since 1990 and only once or twice.
17. George Mossie did not significantly benefit when the trust loaned $ 275,000 to Summit Structural Steel to pay employment taxes and penalties for the period ending June 30, 1992. At the time of the loan, the majority shareholder of Summit Structural Steel was the 1990 Irrevocable Trust, and the minority shareholder was Tom Mossie. When the employment taxes of Summit Structural Steel were paid off, the trust and Tom Mossie, as owners of the corporation, were the primary beneficiaries. It would be illusory to say that the loan was, therefore, for the benefit of George Mossie merely because he was also liable as an officer of the corporation.
18. George and Catherine Mossie receive no money from the trust except reimbursement for minimal expenses incurred on behalf of the trust and for gasoline and auto maintenance.
19. George and Catherine Mossie have provided benefits to the trust.
a. Catherine Mossie presently manages fifteen duplex rental units which are owned by the trust. She also managed the units when they were owned by her husband and her son. She receives no compensation from the trust for her management of the rental units. She received no compensation for managing the rental property when it was owned by her husband and son.
b. Catherine Mossie is the bookkeeper for the trust and is not paid for this service.
c. George Mossie infrequently helps with the rental units by picking up parts needed for repairs.
20. After the transfer of the rental units to the trust, Catherine Mossie’s responsibilities were decreased and were assumed by the trustees. Tom Mossie and the trustees now are actively involved in the maintenance, cleaning and repair of the rental units. The trustees make the ultimate management decisions concerning the rental property.
21. Other than to recommend the bank and to introduce the trustees to the bank officers, neither George nor Catherine Mossie helped the trustees to get a loan from the LaMonte Bank to pay employment taxes owed by Summit Structural Steel.
CONCLUSIONS OF LAW
Pursuant to 6321 and 6322 of the Internal Revenue Code (26 U.S.C., “the Code”) a tax lien in favor of the United States attaches to all properties and rights to property of a delinquent tax payer from the date the tax liability is assessed. Glass City Bank of Jeanette, Pa. v. United States, 326 U.S. 265, 267-68, 90 L. Ed. 56, 66 S. Ct. 108 (1945). The federal tax lien continues until the tax liability is fully satisfied or becomes unenforceable due to lapse of time. 26 U.S.C. ? 6322; Guthrie v. Sawyer, 970 F.2d 733, 735 (10th Cir. 1992).
The United States may also file tax liens against property held by a third party, (i.e., person other than the taxpayer) where the third party is the nominee or alter ego of the taxpayer. When such a lien has been filed, the United States may levy upon the property. See, e.g., G.M. Leasing Corp. v. United States, 429 U.S. 338, 350-51, 50 L. Ed. 2d 530, 97 S. Ct. 619 (1977); F.P.P. Enters. v. United States, 830 F.2d 114, 117-18 (8th Cir. 1987); Loving Saviour Church v. United States, 728 F.2d 1085, 1086 (8th Cir. 1984).
A third party who claims an interest in the property seized by the government may challenge the seizure in a wrongful levy action in the United States District Court pursuant to Code ? 7426. In such an action, the initial burden is on the Plaintiff to prove (1) an interest in the property and (2) the tax assessment is for taxes owed by another taxpayer. The burden then shifts to the government to produce substantial evidence showing a nexus between the property and the taxpayer. The Plaintiff has the ultimate burden of proving that the levy was wrongful and should be overruled. Xemas, Inc. v. United States, 689 F. Supp. 917, 922 (D. Minn. 1988), aff’d, 889 F.2d 1091 (8th Cir. 1989), cert. denied, 494 U.S. 1027, 108 L. Ed. 2d 610, 110 S. Ct. 1472 (1990).
It appears that state law controls the question of whether a third party is the alter ego of the taxpayer. Aquilino v. United States, 363 U.S. 509, 513, 4 L. Ed. 2d 1365, 80 S. Ct. 1277 (1960); Morgan v. Comm’r of Internal Revenue, 309 U.S. 78, 82, 60 S. Ct. 424, 84 L. Ed. 585 (1940). “In the application of a federal revenue act, state law controls in determining the nature of the legal interest which the taxpayer had in the property . . . sought to be reached by statutes.” Id. at 82. While Aquilino and Morgan seem to clearly indicate that state law controls in a wrongful levy case such as this, there has been confusion over the issue. It appears that some federal courts have considered more than state law to determine whether a third-party is the alter ego of the taxpayer, e.g., James E. Edwards Family Trust by Edwards v. United States, 572 F. Supp. 22, 24-25 (D.N.M. 1983); Loving Saviour Church, 728 F.2d at 1086; Valley Finance, Inc. v. United States, 203 U.S. App. D.C. 128, 629 F.2d 162 (1980) (“Given the diversity of corporate structures and the range of factual settings in which unjust and inequitable results are alleged, it is not surprising that no uniform standard exists for determining whether a corporation is simply the alter ego of its owner.” 629 F.2d at 172.) One court has held, however, that the question of whether state or federal law controls is of little importance because the standards are so similar. “The issue under either state or federal law depends upon who has ‘active’ or ‘substantial control.'” Id. at 728 (citations omitted). While the Court believes that Aquilino and Morgan require application of state law in this case, the Court’s conclusion would be the same even if the additional factors suggested by the government and considered in other federal cases were also taken into account.
While the Missouri courts have never considered the alter ego doctrine in the context of a trust, the doctrine has been applied in the corporate context where an effort is being made to pierce the corporate veil. Collet v. American Nat’l Stores, Inc., 708 S.W.2d 273, 283 (Mo. App. 1986). In such cases, the Missouri courts use a three-part test. An individual will be deemed to be the alter ego of a corporation when:
1) The individual completely dominates and controls the finances, policy and business practice of the other corporation.
2) Such control was for an improper purpose such as “fraud or wrong, or . . . unjust act in contravention of [a third parties’] legal rights.”
3) The alter ego’s control of the corporation caused injury to the third party. National Bond Finance Co. v. General Motors Corp., 238 F. Supp. 248, 256 (W. D. Mo. 1964), aff’d, 341 F.2d 1022 (8th Cir. 1965); K.C. Roofing Center v. On Top Roofing, Inc., 807 S.W.2d 545 (Mo. App. 1991). The alter ego doctrine, however, will only apply where a corporation has “no separate mind, will or existence of its own.” Thomas Berkeley Consulting Eng’r, Inc. v. Zerman, 911 S.W.2d 692, 695 (Mo. App. 1995).
Because there is no Missouri law applying the alter ego doctrine to trusts, the court assumes that the same standard applied in the corporate context would be applied to trusts. At a minimum, Missouri law would require a showing that the alter ego of the trust so dominated it that the trust had “no separate mind, will or existence of its own.” Thomas Berekely, 911 S.W.2d at 695. Applying this standard to the 1990 Irrevocable Trust, it is clear that the trust is not the alter ego of George and Catherine Mossie.
Like thousands of aging adults, George and Catherine Mossie created a trust for the benefit of their children, making it irrevocable as their health deteriorated. They did not rely on a mail order product peddled by tax protesters. They set up their trust with an estate planner from a sophisticated law firm. They executed the documents necessary to transfer the legal title of their assets to the trust, and, other than a brief period when Catherine Mossie wrote checks for the rental property using old personal checks rather than trust checks, the trustees executed all documents requiring signatures by the owner of the trust property. Tax returns were executed by the trustee. Checks were signed by the trustees. The trustees decided how to spend trust assets, when to make repairs on the rental property, and the rent to be paid by tenants. The trustees borrowed and repaid money in the name of the trust. In other words, the legal control of the trust assets has consistently been exercised by the trustee, not the taxpayer. These trusts were not a sham and did “coincide with economic reality.” F.P.P. Enters., 830 F.2d at 117. Also see James Edwards Family Trust, 572 F. Supp. at 24. While it is true that there is a family relationship between the trustees and the taxpayers, the taxpayers had forever given up the right to control the disposition of the trust property and whatever advice the taxpayer gives to the trustee can be ignored. The government minimizes the importance of legal title and legal control, but the ancient law of trust is grounded in just such distinctions.
The government is correct that practical control is an important consideration, but the Court finds that the balance weighs in favor of the taxpayer on this question as well. After the trusts were created, the behavior of the trustees and settlors changed. The trustees made the decisions about the assets and also became more actively involved in the cleaning, maintenance and rental of the duplexes. While Catherine Mossie continues to be involved in the maintenance of the rental property, it is clear that she does not control the decision-making. George Mossie is no more involved in the rental property than any parent who occasionally helps their children with business advice or runs an errand for them to pick up supplies. It is not unusual for parents to continue to help their children, even after the parents’ assets are placed in trust. Indeed, even where a parent’s assets are transferred in fee simple presently to the children, most parents continue to help. Indeed, even if parents have never transferred any property to their children, parents help children with their property. That is how families do function and should function. It would substantially undermine trust law if such behavior was sufficient to characterize the settlor as the alter ego of the trust and negate the validity of the trust.
The trust does not support George and Catherine Mossie. They receive no money from the trust except reimbursement for minimal expenses incurred on behalf of the trust. It is true that they both drive cars owned by the trust for their personal use and Catherine Mossie lives in the family home. But these facts alone are insufficient to characterize the trust as the alter ego of the taxpayers. A beneficiary of the trust could sue the trustees for failing to comply with a term of the trust, but small deviations from the trust are not enough to invalidate the whole trust.
The government attempted to show that the $ 275,000 loan made to Summit Structural Steel, Inc. was for the benefit of George Mossie because he was chairman of the board and, in that capacity, was liable for the past-due employment taxes of the corporation. Tom Mossie, however, owned 49 per cent of the stock of Summit Structural Steel and, as president of the corporation and a stockholder, was also liable for the employment taxes. More importantly, the trust owned 51 per cent of the stock and would be directly liable if the taxes were not paid. Any benefit to George Mossie under these circumstances is illusory and is certainly not enough evidence that the trust had “no separate mind, will, or existence of its own.” Thomas Berkeley, 911 S.W.2d at 695.
The fact that the trustee’s parents were permitted to use the family vacation property is de minimis given that they had little or no contact with the vacation property, did not use it even when it was in their own name and such sharing would be expected. It is also significant that at the time the property was placed in trust, the taxpayers had sufficient assets to meet their tax liability and to provide for their own personal expenses. There is no evidence that the trust was created for an improper purpose.
The cases cited by the government in support of their argument that the alter ego doctrine is applicable to this case are not persuasive because they are factually distinguishable. The government’s authority falls into two categories. The first group of cases involve trusts established by or with the assistance of tax protestors. The so-called “family” trusts give the settlor complete access to the trust property so that the settlor can use it for self-support. This is because the trustee is completely controlled by the settlor. Loving Saviour Church, 728 F.2d at 1086. (The taxpayer transferred all assets to a trust and the trust transferred the assets to a church which was established and controlled by the taxpayer. The taxpayer/settlor received all his support from the church which received all the income from the taxpayer’s chiropractic practice); F.P.P. Enters. 830 F.2d at 117 (The trust lacked the essential elements of a trust. The trust failed to identify beneficiaries and the taxpayer, not the trustee, exercised control over the trust property. The taxes on the trust property and the expenses paid to maintain the trust property were deducted from the personal income tax of the taxpayer.)
In the second group of cases cited by the government, corporations have been found to be the alter ego of the taxpayer because the taxpayer controls the corporate entity. Wilcox v. United States, 983 F.2d 1071 (6th Cir. 1992) (Table); 1992 WL 393581 (unpublished per curium opinion) (The corporation and trust were the alter ego of taxpayer/anesthesiologist because the taxpayer commingled corporate, individual and pension property and as the only shareholder and officer of the corporation and as the only trustee of the pension had complete control over the disposition of corporate and pension property. Wolfe v. United States, 798 F.2d 1241 (9th Cir. 1986), cert. denied, 482 U.S. 927, 96 L. Ed. 2d 697, 107 S. Ct. 3210 (1986) (Wolfe was deemed to be the alter ego of corporation/taxpayer because Wolfe was the sole shareholder of the corporation and, as the director and president of the corporation, made all corporate decisions without consulting with the other directors. Corporate expenses, including personnel costs, were paid from a sole proprietorship operated by Wolfe and all income of the corporation was put into the sole proprietorship’s bank account); Ames Investment, Inc. v. United States, 819 F. Supp. 666 (E.D. Mich. 1993), aff’d, 36 F.3d 1097 (6th Cir. 1994) (A corporation was formed to purchase and manage real estate. The first property purchased was a house which was used as the personal residence of the taxpayer who was a shareholder and director of the corporation. This house was the most valuable asset of the corporation. It was never rented or used as an office. There were never any corporate meetings and there was no capitalization of the corporation or any profit from the corporation.)
The common thrust of all these cases is that the alter ego doctrine will apply when the delinquent taxpayer is really in control of the corporation or trust and so dominates it that the corporation or trust form exists, but there is no substance to it. As already discussed, the 1990 Irrevocable Trust is a valid trust instrument, created for a valid purpose, comports with economic reality, and the trustees, in most aspects, have respected the terms of the trust. To permit the alter ego doctrine to apply in such a case would require an expansion of the alter ego doctrine which the Court is unwilling to do without clearer direction from Congress or the Missouri courts. The Court, therefore, finds that the levies by the IRS against the assets of the George and Catherine Irrevocable Trust of December 4, 1990, was unlawful. The property seized by the IRS pursuant to the levies shall be returned to the trustees and all tax liens related to the unlawful levies shall be released. The Plaintiffs’ request for damages and attorneys’ fees is denied.
One troubling aspect of this case is the fact that the family home was deeded to the trust but Catherine Mossie has continued to control and occupy the home since the formation of the trust. The trustees acknowledged at trial that they and the Mossies have always understood that Catherine Mossie would continue to occupy the house until her death. Catherine Mossie also holds a deed of trust against the house which secures a promissory note in favor of Catherine Mossie. That promissory note is in default and has been since the property was transferred into trust. Catherine Mossie has the beneficial interest in the property during her lifetime and holds the key to the legal title at any time that she chooses to foreclose on the property. While it is true that the trust holds legal title until foreclosure, effectively Catherine Mossie controls the future disposition of the family home. While an argument could be made that the house was never a part of the trust, even though legal title was transferred to it, the government has insisted during this litigation that the house was properly placed in trust and is subject to the trust. The government’s position, therefore, forecloses a finding that the house is subject to the IRS levy because it is the property of the delinquent taxpayer, Catherine Mossie, not the property of the trust. The Court’s decision in this case, however, does not preclude the IRS from levying on property owned by Catherine Mossie, such as the promissory note and deed of trust on the property at 311 Lincolnwood. The only issue before this Court, however, is whether the levy by the IRS against the assets of the trust was wrongful. The Court has rejected the government’s argument that the 1990 Irrevocable Trust is the alter ego of George and Catherine Mossie and, therefore, the IRS levy on the trust property was wrongful and the trust property must be returned to the trust and the liens released from the trust property.
Accordingly, it is hereby ORDERED that:
1. Judgment be entered in favor of Plaintiff trustees.
2. The property of the 1990 Irrevocable Trust which has been seized by the IRS to satisfy the tax liability of George and Catherine Mossie shall be returned to the trustees.
3. The 1995 tax liens filed with the Recorder of Deeds for Jackson County, Missouri, and Morgan County, Missouri, against property held in the name of Joanne R. Dean and Janet A. Mossie as co-trustees of the 1990 Irrevocable Trust shall be forthwith release.
4. The Plaintiffs’ request for damages and attorneys’ fees is denied.
NANETTE K. LAUGHREY
U.S. District Judge
Kansas City, Missouri
Estate of Sanford v. Commissioner – 308 U.S. 39 (1939)
Posted on: March 15, 2017 at 6:14 am, in
U.S. Supreme Court
Estate of Sanford v. Commissioner, 308 U.S. 39 (1939)
Estate of Sanford v. Commissioner of Internal Revenue
Argued October 18, 19, 1939
Decided November 6, 1939
308 U.S. 39
CERTIORARI TO THE CIRCUIT COURT OF APPEALS
FOR THE THIRD CIRCUIT
1. A gift in trust, with reservation of power in the donor to alter the disposition of the property in any way not beneficial to himself, is incomplete, and does not become subject to gift tax under the Revenue Act of 1924, § 319, so long as the donor retains that power. P. 308 U. S. 41.
2. The federal gift tax is supplementary to the estate tax; the two are in pari materia, and must be construed together. P. 308 U. S. 42.
An important purpose of the gift tax was to prevent, or compensate for, avoidance of death taxes. P. 308 U. S. 44.
3. The gift tax statute does not contemplate two taxes upon gifts not made in contemplation of death, one upon the gift when a trust is created or when the power of revocation, if any, is relinquished, and another on the transfer of the same property at death because the gift previously made was incomplete. P. 308 U. S. 45.
4. Transfers in trust, not taxable as gifts because the donor has reserved power to change the beneficiaries, become subject to death taxes when he dies. P. 308 U. S. 46.
5. Art. I of Treas.Reg. 67, under the Revenue Act of 1924, was not directed at relinquishments of reserved power to select new beneficiaries other than the donor, and did not purport to govern cases of reserved power different from or in addition to the power to revest the title in the donor. P. 308 U. S. 48.
At most, the regulation is ambiguous, and not persuasive in determining the true construction of the statute.
6. Art. III, Reg. 79, amendment of 1936 under the Revenue Act of 1932, which declares that a gift is complete and subject to tax when “the donor has so parted with dominion and control as to leave in him no power to cause the beneficial title to be revested in himself,” is, by its terms, applicable only to gifts made after June 6, 1932, and is of significance here only so far as it is declaratory of the correct construction of the 1924 Act. P. 308 U. S. 49.
7. A stipulation purporting to reveal the administrative practice in applying the gift tax law held too vague and indefinite to afford basis for a judicial construction of the statute. P. 308 U. S. 49.
Page 308 U. S. 40
8. A stipulation as to questions of law cannot bind the Court. P. 308 U. S. 51.
9. Administrative practice may be persuasive in determining the construction of a statute of doubtful meaning where the practice does not conflict with other provisions of the statute and is not so inconsistent with decisions of the courts as to produce inconsistency and confusion in the administration of the law. P. 308 U. S. 52.
But the Court does not give effect to an unpublished administrative construction, on which taxpayers have not relied, which conflicts with its own decisions and with a later administrative practice conforming to lower court rulings.
10. The reenactment of the gift tax statute of 1924 by the Revenue Act of 1932 was not a legislative approval of an administrative practice which had not been disclosed by Treasury Regulation, ruling, or decision, and which does not appear to have been established before the adoption of the later Act. P. 308 U. S. 53.
103 F.2d 81 affirmed.
Certiorari, 307 U.S. 618, to review a judgment which sustained a decision of the Board of Tax Appeals affirming a deficiency assessment based on the gift tax provision of the Revenue Act of 1924.
MR. JUSTICE STONE delivered the opinion of the Court.
This and its companion case, Rasquin v. Humphreys, post, p. 308 U. S. 54, present the single question of statutory construction whether, in the case of an inter vivos transfer of property in trust, by a donor reserving to himself the
power to designate new beneficiaries other than himself, the gift becomes complete and subject to the gift tax imposed by the federal revenue laws at the time of the relinquishment of the power. Co-relative questions, important only if a negative answer is given to the first one, are whether the gift becomes complete and taxable when the trust is created or, in the case where the donor has reserved a power of revocation for his own benefit and has relinquished it before relinquishing the power to change beneficiaries, whether the gift first becomes complete and taxable at the time of relinquishing the power of revocation.
In 1913, before the enactment of the first gift tax statute of 1924, decedent created a trust of personal property for the benefit of named beneficiaries, reserving to himself the power to terminate the trust in whole or in part, or to modify it. In 1919, he surrendered the power to revoke the trust by an appropriate writing in which he reserved “the right to modify any or all of the trusts,” but provided that this right “shall in no way be deemed or construed to include any right or privilege” in the donor “to withdraw principal or income from any trust.” In August, 1924, after the effective date of the gift tax statute, 43 Stat. 313, § 319 et seq., decedent renounced his remaining power to modify the trust. After his death in 1928, the Commissioner, following the decision in Hesslein v. Hoey, 91 F.2d 954, in 1937, ruled that the gift became complete and taxable only upon decedent’s final renunciation of his power to modify the trusts, and gave notice of a tax deficiency accordingly.
The order of the Board of Tax Appeals sustaining the tax was affirmed by the Court of Appeals for the Third Circuit, 103 F.2d 81, which followed the decision of the Court of Appeals for the second circuit in Hesslein v. Hoey, supra, in which we had denied certiorari, 302 U. S. 756. In the Hesslein case, as in the Humphreys case now
before us, a gift in trust with the reservation of a power in the donor to alter the disposition of the property in any way not beneficial to himself was held to be incomplete, and not subject to the gift tax under the 1932 Act so long as the donor retained that power.
We granted certiorari in this case May 15, 1939, 307 U.S. 618, and in the Humphreys case May 22, 1939, 307 U.S. 619, upon the representation of the Government that it has taken inconsistent positions with respect to the question involved in the two cases, and that, because of this fact and of the doubt of the correctness of the decision in the Hesslein case, decision of the question by this Court is desirable in order to remove the resultant confusion in the administration of the revenue laws.
It has continued to take these inconsistent positions here, stating that it is unable to determine which construction of the statute will be most advantageous to the Government in point of revenue collected. It argues in this case that the gift did not become complete and taxable until surrender by the donor of his reserved power to designate new beneficiaries of the trusts. In the Humphreys case, it argues that the gift upon trust with power reserved to the donor, not afterward relinquished, to change the beneficiaries was complete and taxable when the trust was created. It concedes by its brief that “a decision favorable to the government in either case will necessarily preclude a favorable decision in the other.”
In ascertaining the correct construction of the statutes taxing gifts, it is necessary to read them in the light of the closely related provisions of the revenue laws taxing transfers at death, as they have been interpreted by our decisions. Section 319 et seq. of the Revenue Act of 1924, 43 Stat. 253, 313, reenacted as § 501 et seq. of the 1932 Act, 47 Stat. 169, imposed a graduated tax upon gifts. It supplemented that laid on transfers at death, which had long been a feature of the revenue laws. When the gift tax
Page 308 U. S. 43
was enacted, Congress was aware that the essence of a transfer is the passage of control over the economic benefits of property, rather than any technical changes in its title. See Burnet v. Guggenheim, 288 U. S. 280, 288 U. S. 287. Following the enactment of the gift tax statute, this Court, in Reinecke v. Northern Trust Co., 278 U. S. 339, held that the relinquishment at death of a power of revocation of a trust for the benefit of its donor was a taxable transfer. Cf. Saltonstall v. Saltonstall, 276 U. S. 260; Chase National Bank v. United States, 278 U. S. 327, and, similarly, in Porter v. Commissioner, 288 U. S. 436, that the relinquishment by a donor at death of a reserved power to modify the trust except in his own favor is likewise a transfer of the property which could constitutionally be taxed under the provisions of § 302(d) of the 1926 Revenue Act, reenacting in substance 302(d) of the 1924 Act, although enacted after the creation of the trust. Cf. Bullen v. Wisconsin, 240 U. S. 625; Curry v. McCanless, 307 U. S. 357; Graves v. Elliott, 307 U. S. 383. Since it was the relinquishment of the power which was taxed as a transfer, and not the transfer in trust, the statute was not retroactively applied. Cf. Nichols v. Coolidge, 274 U. S. 531; Helvering v. Helmholz, 296 U. S. 93, 296 U. S. 98.
The rationale of decision in both cases is that “taxation is not so much concerned with the refinements of title as it is with the actual command over the property taxed” (see Corliss v. Bowers, 281 U. S. 376, 281 U. S. 378; Saltonstall v. Saltonstall, supra, 276 U. S. 261; Burnet v. Guggenheim, supra, 288 U. S. 287), and that a retention of control over the disposition of the trust property, whether for the benefit of the donor or others, renders the gift incomplete until the power is relinquished, whether in life or at death. The rule was thus established, and has ever since been consistently followed by the Court, that a transfer of property upon trust, with power reserved to the donor either to revoke it and recapture the trust property or to modify its terms
so as to designate new beneficiaries other than himself is incomplete, and becomes complete so as to subject the transfer to death taxes only on relinquishment of the power at death.
There is nothing in the language of the statute, and our attention has not been directed to anything in its legislative history, to suggest that Congress had any purpose to tax gifts before the donor had fully parted with his interest in the property given, or that the test of the completeness of the taxed gift was to be any different from that to be applied in determining whether the donor has retained an interest such that it becomes subject to the estate tax upon its extinguishment at death. The gift tax was supplementary to the estate tax. The two are in pari materia, and must be construed together. Burnet v. Guggenheim, supra, 288 U. S. 286. An important, if not the main, purpose of the gift tax was to prevent or compensate for avoidance of death taxes by taxing the gifts of property inter vivos which, but for the gifts, would be subject in its original or converted form to the tax laid upon transfers at death. [Footnote 1]
Section 322 of the 1924 Act provides that, when a tax has been imposed by § 319 upon a gift the value of which is required by any provision of the statute taxing the estate to be included in the gross estate, the gift tax is to be credited on the estate tax. The two taxes are thus not always mutually exclusive, as in the case of gifts made in contemplation of death, which are complete and taxable when made, and are also required to be included in the gross estate for purposes of the death tax. But § 322 is without application unless there is a gift inter vivos which is taxable independently of any requirement that it shall be included in the gross estate. Property transferred in trust subject to a power of control over its disposition reserved to the donor is likewise required by § 302(d) to be included in the gross estate. But it does not follow that the transfer in trust is also taxable as a gift. The point was decided in the Guggenheim case, where it was held that a gift upon trust, with power in the donor to revoke it, is not taxable as a gift because the transfer is incomplete, and that the transfer, whether inter vivos or at death, becomes complete and taxable only when the power of control is relinquished. We think, as was pointed out in the Guggenheim case, supra, 288 U. S. 285, that the gift tax statute does not contemplate two taxes upon gifts not made in contemplation of death, one upon the gift when a trust is created or when the power of revocation, if any, is relinquished and another on the transfer of the same property at death because the gift previously made was incomplete.
It is plain that the contention of the taxpayer in this case that the gift becomes complete and taxable upon the relinquishment of the donor’s power to revoke the trust cannot be sustained unless we are to hold, contrary to the policy of the statute and the reasoning in the Guggenheim case, that a second tax will be incurred upon the donor’s relinquishment at death of his power to select new beneficiaries, or unless, as an alternative, we are to abandon our ruling in the Porter case. The Government does not suggest, even in its argument in the Humphreys case, that we should depart from our earlier rulings, and we think it clear that we should not do so, both because we are satisfied with the reasoning upon which they rest and because departure from either would produce inconsistencies in the law as serious and confusing as the inconsistencies in administrative practice from which the Government now seeks relief.
There are other persuasive reasons why the taxpayer’s contention cannot be sustained. By § 315(b), 324, 43 Stat. 312, 316, and more specifically by § 510 of the 1932 Act, the donee of any gift is made personally liable for the tax to the extent of the value of the gift if the tax is not paid by the donor. It can hardly be supposed that Congress intended to impose personal liability upon the donee of a gift of property so incomplete that he might be deprived of it by the donor the day after he had paid the tax. Further, § 321(b)(1), 43 Stat. 315, exempts from the tax gifts to religious, charitable, and educational corporations and the like. A gift would seem not to be complete, for purposes of the tax, where the donor has reserved the power to determine whether the donees ultimately entitled to receive and enjoy the property are of such a class as to exempt the gift from taxation. Apart from other considerations, we should hesitate to accept as correct a construction under which it could plausibly be maintained that a gift in trust
Page 308 U. S. 47
for the benefit of charitable corporations is then complete, so that the taxing statute becomes operative and the gift escapes the tax even though the donor should later change the beneficiaries to the non-exempt class through exercise of a power of modify the trust in any way not beneficial to himself.
The argument of petitioner that the construction which the Government supports here, but assails in the Humphreys case, affords a ready means of evasion of the gift tax is not impressive. It is true, of course, that, under it, gift taxes will not be imposed on transactions which fall short of being completed gifts. But if, for that reason, they are not taxed as gifts, they remain subject to death taxes assessed at higher rates, and the Government gets its due, which was precisely the end sought by the enactment of the gift tax.
Nor do we think that the provisions of § 219(g) of the 1924 Act have any persuasive influence on the construction of the gift tax provisions with which we are now concerned. One purpose of the gift tax was to prevent or compensate for the loss of surtax upon income where large estates are split up by gifts to numerous donees. [Footnote 2]
Congress was aware that donors in trust might distribute income among several beneficiaries, although the gift remains so incomplete as not to be subject to the tax. It dealt with that contingency in § 219(g), which taxes to the settlor the income of a trust paid to beneficiaries where he reserved to himself an unexercised power to “revest in himself title” to the trust property producing the income. Whether this section is to be read as relieving the donor of the income tax where the power reserved is to modify the trust, except for his own benefit, we do not now decide. If Congress, in enacting it, undertook to
define the extent to which a reserved power of control over the disposition of the income is equivalent to ownership of it, so as to mark the line between those cases, on the one hand, where the income is to be taxed to the donor, and those, on the other, where, by related sections, the income is to be taxed to the trust or its beneficiaries, we do not perceive that the section presents any question so comparable to that now before us as to affect our decision. We are concerned here with a question to which Congress has given no answer in the words of the statute, and it must be decided in conformity to the course of judicial decision applicable to a unified scheme of taxation of gifts, whether made inter vivos or at death. If Congress, for the purpose of taxing income, has defined precisely the amount of control over the income which it deems equivalent to ownership of it, that definition is controlling on the courts even though, without it, they might reach a different conclusion, and even though retention of a lesser degree of control be deemed to render a transfer incomplete for the purpose of laying gift and death taxes.
The question remains whether the construction of the statute which we conclude is to be derived from its language and history should be modified because of the force of treasury regulations or administrative practice. Article I of Regulations 67, under the 1924 Act (adopted without any change of present significance in Article III, Regulations 79, under the 1932 Act) provides that the creation of a trust where the grantor retains the power to revest in himself title to the corpus of the trust does not constitute a gift subject to the tax, and declares that,
“where the power retained by the grantor to revest in himself title to the corpus is not exercised, a taxable transfer will be treated as taking place in the year in which such power is terminated.”
Petitioner urges that
the regulation is, in terms, applicable to the trust presently involved because it was subject to a power of revocation in favor of the donor before the enactment of the gift tax which was later relinquished. But we think, as the court below thought, that the regulation was not directed to the case of the relinquishment of a reserved power to select new beneficiaries other than the donor, and did not purport to lay down any rule for cases where there was a reserved power different from or in addition to the power to revest the title in the donor. At most, the regulation is ambiguous, and without persuasive force in determining the true construction of the statute. Burnet v. Chicago Portrait Co., 285 U. S. 1, 285 U. S. 16, 285 U. S. 20. The amended regulation of 1936 under the 1932 Act, Art. III, Reg. 79, removed the ambiguity by declaring that the gift is complete, and subject to the tax when “the donor has so parted with dominion and control as to leave in him no power to cause the beneficial title to be revested in himself.” But this regulation is, by its terms, applicable only to gifts made after June 6, 1932, and is of significance here only so far as it is declaratory of the correct construction of the 1924 Act.
Petitioner also insists that the construction of the statute for which he contends is sustained by the administrative practice. That practice is not disclosed by any published Treasury rulings or decisions, and our only source of information on the subject is a stipulation appearing in the record. It states that, in the administration of the gift tax under the 1924 and 1932 Acts and until the decision in the Hesslein case, it was
“the uniform practice of the Commissioner of Internal Revenue, in adjusting cases of the character of that here involved, to treat the taxable transfer subject to gift tax as occurring when the transferor relinquished all power to revest in himself title to the property constituting the subject of
Page 308 U. S. 50
and that three hundred cases “of such character” have been closed or adjusted in conformity to this practice.
This definition of the practice appears as a part of a stipulation of facts setting forth in some 126 printed pages the original trust deed of December 24, 1913, and thirteen modifications of it between that date and the final relinquishment of the power of modification on August 20, 1924. They reveal a varied and extensive power of control by the donor over the disposition of the trust property which survived the relinquishment, in 1919, of the power of revocation for his own benefit, and with which he finally parted after enactment of the gift tax. The description of the practice as that resorted to in adjusting “cases of the character of that here involved” presupposes some knowledge on our part of what the signers of the stipulation regarded as the salient features of the present case which, although not specified by the stipulation, were necessarily embraced in the practice. Administrative practice, to be accepted as guiding or controlling judicial decision, must at least be defined with sufficient certainty to define the scope of the decision. If relinquishment of the power of revocation mentioned by the stipulation was of controlling significance in defining the practice, that circumstance was not present in the Hesslein case or in the Humphreys case. Whether, in any of the three hundred cases mentioned in the stipulation, the relinquishment of the power of revocation was followed by the relinquishment inter vivos of a power of changing the beneficiaries like that in this case does not appear.
Such a stipulated definition of the practice is too vague and indefinite to afford a proper basis for a judicial decision which undertakes to state the construction of the statute in terms of the practice. Moreover, if we regard the stipulation as agreeing merely that the legal
questions involved in the present case have uniformly been settled administratively in favor of the contention now made by the petitioner, it involves conclusions of law of the stipulators both with respect to the legal issues in the present case and those resolved by the practice. We are not bound to accept as controlling stipulations as to questions of law. Swift & Co. v. Hocking Valley Ry. Co., 243 U. S. 281, 243 U. S. 289.
Without attempting to say what the administrative practice has actually been we may, for present purposes, make the assumption most favorable to the taxpayer in this case that the practice was as stated by the Government in its brief in the Humphreys case — viz., that, until the decision in the Hesslein case,
“the Bureau consistently took the position that the gift tax applied to a transfer in trust where the grantor reserved the right to modify the trust but no right to revest title in himself.”
But the record here shows that no such practice was recognized as controlling in 1935, when the present case first received the attention of the Bureau. On February 21, 1935, the Assistant General Counsel gave an opinion reviewing at length the facts of the present case and the applicable principles of law, and concluded on the reasoning and authority of the Guggenheim and Porter cases that the gift was not complete and taxable until the relinquishment in August, 1924, of the power to modify the trust by the selection of new beneficiaries. In April, 1935, the matter was reconsidered and a new opinion was given which was finally adopted by the assistant secretary who had intervened in the case. This opinion reversed the earlier one on the authority of the Guggenheim case. It was at pains to point out that, in that case, the Court had held that the relinquishment of the power of revocation was a taxable gift, but it made no mention of the fact that there, unlike the present case, there was no power of modification which survived the relinquishment of the
power of revocation, which was crucial in the Porter case. Neither opinion rested upon or made any mention of any practice affecting cases where such a power of modification is reserved. After the decision in the Hesslein case, the ruling of the Bureau in this case was again reversed, and notice of deficiency sent to the taxpayer.
From this record, it is apparent that there was no established administrative practice before the opinion of April, 1935, [Footnote 3]
and, if the practice was adopted then, it was because of a mistaken departmental ruling of law based on an obvious misinterpretation of the decisions in the Porter and Guggenheim cases.
Administrative practice may be of persuasive weight in determining the construction of a statute of doubtful meaning where the practice does not conflict with other provisions of the statute and is not so inconsistent with applicable decisions of the courts as to produce inconsistency and confusion in the administration of the law. Such a choice, in practice, of one of two possible constructions of a statute by those who are expert in the field and specially informed as to administrative needs and convenience tends to the wise interpretation and just administration of the laws. This is the more so when reliance has been placed on the practice by those affected by it.
But courts are not bound to accept the administrative construction of a statute regardless of consequences, even when disclosed in the form of rulings. See Helvering v. New York Trust Co., 292 U. S. 455, 292 U. S. 468. Here, the practice has not been revealed by any published rulings or action of the Department on which taxpayers could have relied. The taxpayers in the present cases are contending
for different rulings. In Harriet Rosenau v. Comm’r, 37 B.T.A. 468, as in the Humphreys case, the taxpayer contended that the date when the power to change the beneficiary is renounced is controlling. The petitioner here, who contends that the date of relinquishment of the power of revocation is controlling, rather than the date of surrender of power of modification, set up his trust and relinquished the power of revocation before the gift tax was enacted. The reenactment of the gift tax statute by the 1932 Act cannot be said to be a legislative approval of the practice which had not been disclosed by Treasury regulation, ruling, or decision, and which does not appear to have been established before the adoption of the 1932 Act. Cf. McCaughn v. Hershey Chocolate Co., 283 U. S. 488, 283 U. S. 492; Massachusetts Mutual Life Ins. Co. v. United States, 288 U. S. 269, 288 U. S. 273; Helvering v. New York Trust Co., 292 U. S. 455, 292 U. S. 468.
The very purpose sought to be accomplished by judicial acceptance of an administrative practice would be defeated if we were to regard the present practice as controlling. If a practice is to be accepted because of the superior knowledge of administrative officers of the administrative needs and convenience, see Brewster v. Gage, 280 U. S. 327, 280 U. S. 336, there is no such reason for its acceptance here. The Government, by taking no position, confesses that it is unable to say how administrative need and convenience will best be served. If, as we have held, we may reject an established administrative practice when it conflicts with an earlier one and is not supported by valid reasons, see Burnet v. Chicago Portrait Co., 285 U. S. 1, 285 U. S. 16, we should be equally free to reject the practice when it conflicts with out own decisions. A change of practice to conform to judicial decision, such as has occurred since the decision in the Hesslein case, or to meet administrative exigencies, will be accepted as controlling when consistent with our decisions. Morrissey v. Commissioner,
296 U. S. 344, 296 U. S. 354. Here, we have an added, and we think conclusive, reason for rejecting the earlier practice and accepting the later. The earlier, because in sharp conflict with our own decisions, as we have already indicated, cannot be continued without the perpetuation of inconsistency and confusion comparable to that of which the Government asks to be relieved by our decision.
MR. JUSTICE BUTLER took no part in the consideration or decision of this case.
The gift tax provisions of the Revenue Act of 1924 were added by amendments to the revenue bill introduced on the floor of the House and the Senate. Cong.Rec. Vol. 65, Part 3, pp. 3118-3119; Part 4, pp. 3170, 3171; Part 8, p. 8094. The sponsor of the amendment in both houses urged the adoption of the bill as a “corollary” or as “supplemental” to the estate tax. Cong.Rec. Vol. 65, Part 3, pp. 3119-3120, 3122; Part 4, p. 3172; Cong.Rec. Vol. 65, Part 8, pp. 8095, 8096.
The gift tax of 1924 was repealed when Congress, concurrently with the enactment of § 302(c) of the Revenue Act of 1926, 44 Stat. 70, 125, 126, establishing a conclusive presumption that gifts within two years of death were made in contemplation of death, and therefore subject to the estate tax. A gift tax was reenacted by § 501 of the Revenue Act of 1932, 47 Stat. 169, shortly after it was decided, in Heiner v. Donnan, 285 U. S. 312, that the legislative enactment of such a presumption violated the Fifth Amendment.
Section 501(c) of the 1932 Act added a new provision that transfers in trust, with power of revocation in the donor, should be taxed on relinquishment of the power. This was repealed by § 511 of the Act of 1934, 48 Stat. 680, 758, because Burnet v. Guggenheim, 288 U. S. 280, had declared that such was the law without specific legislation. H.R. No. 704, 73rd Cong., 2d Sess., p. 40; Sen.Rep. No. 558, 73rd Cong., 2d Sess., p. 50.
See references to Congressional Record, Footnote 1
In the petition for certiorari filed in November, 1937, in Hesslein v. Hoey (No. 556), the government asserted that the 300 cases referred to in the stipulation in this case had been decided so recently that the time for filing claims for refunds had not expired.
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Why did his Irrevocable Trust Fail? Brown, Bankruptcy No. 09-22962 Case Study
Posted on: March 15, 2017 at 6:13 am, in
The case study of re: Brown, Banktuptcy No. 09-22962, US Bankruptcy Ct., D. Utah (2012) wherein his irrevocable trust failed. But why did his irrevocable trust fail? We look at the causes of why his irrevocable trust was open to creditors.
Brown, Bankruptcy No. 09-22962 Case Study: Why did his Irrevocable Trust Fail?
On May 30th, 2012, a federal bankruptcy court in Utah decided a case involving several irrevocable trusts ostensibly controlled by Douglas Brown [In re: Brown, Bankruptcy No. 09-22962, US Bankruptcy Ct., D. Utah (2012)]. Because of the mismanagement of the trusts, the trusts did not survive the attack.
The Brown case is just one in a line of cases that are attempting to minimize the use of irrevocable trusts for asset protection. An irrevocable trust is an excellent way to estate plan to protect assets for the benefit of your family, but only if drafted and executed correctly,” explains Rocco Beatrice of Estate Street Partners, LLC. Many wealthy families successfully use an irrevocable trust to pass assets to their children and grandchildren.”
An irrevocable trust is simply a sort of holding tank where one can place assets, thus becoming property of the trust, that are controlled by a trustee in accordance with the written rules of the trust. Once an individual places assets in the holding tank, the individual does not own the assets anymore; the trust does. This keeps the assets safe from anyone trying to acquire assets from the individual (although sometimes there is a look-back period) because the individual doesn’t own them anymore. Put simply, a creditor cannot take what a debtor doesn’t own. Assets in a trust are then safe for future generations.
In the event of a lawsuit or bankruptcy, creditors increasingly search for a chink in the armor of these trusts. A solid trust is a great start, but you need ongoing support from someone who knows what you need to do to honor the trust,” warns Mr. Beatrice. If a trust creator missteps and creates a situation where there is some doubt as to whether the trust is real or a fiction on paper, the trust could be in jeopardy.” Mr. Beatrice believes that many lawyers draft a trust and then don’t sufficiently explain how they work or what is needed for them to remain intact and do not follow up with the client.
In Douglas Brown’s case, while being investigated and tried by the IRS for back taxes, Mr. Brown created several trusts in which he placed a vacation home and a business. Mr. Brown then filed for bankruptcy and claimed that he did not own these assets, rather they were owned by the trusts.
Mr. Brown lost his case, because although the assets were in the trusts on paper, he was still controlling the assets as if they were not. The trustee allowed him to do as he pleased and did not participate in the management of the assets. The bankruptcy court gave Mr. Brown’s creditors access to his assets. Even if Mr. Brown had not treated the assets as his own, ignoring the trusts, he would have had to deal with the issue of fraudulent conveyance,” explains Mr. Beatrice.
Debtors search to find mistakes in the trust document or how the person creating the trust treats the assets. As the creator of a trust, one can receive some benefits of the trust, but you have to honor the trust for it to stand. You can’t just have a trust on paper. The trust needs to own the assets,” explains Mr. Beatrice, and when done correctly, an irrevocable trust is one of the best ways to control, protect and give assets to your family.”
IN RE HICKS
Posted on: March 15, 2017 at 6:12 am, in
IN RE HICKS
In re: James Tillman HICKS, Jr., a/k/a J. T. Hicks, Jr., a/k/a Sonny Hicks, Debtor; Benjamin C. ABNEY, Trustee, Plaintiff v. James Tillman HICKS, Jr., the Citizens and Southern National Bank, and Lois Reagan Hicks, Defendants
Case No. 80-01342A, Adversary No. 81-1877A
UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF FLORIDA
UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF GEORGIA ATLANTA DIVISION
22 B.R. 243; 1982 Bankr. LEXIS 3653
July 26, 1982
COUNSEL: [**1] Benjamin C. Abney, Esq., Carr, Abney, Tabb & Schultz, N.W., Atlanta, Georgia, for Plaintiff.
Jeffrey Starnes, Esq., Conyers, Georgia, (attorney for James Tillman Hicks, Jr.).
C. R. Vaughn, Jr., Esq., Vaughn & Barksdale, Conyers, Georgia, (attorney for C&S National Bank and Lois Reagan Hicks).
JUDGES: W. Homer Drake, United States Bankruptcy Judge.
OPINION BY: DRAKE
This case is before the Court on the plaintiff’s Complaint for Declaratory Relief to determine what interest, if any, the debtor may have in certain property held in trust pursuant to his father’s will. The plaintiff alleges that the interest held by the debtor is a vested remainder and that the debtor held this interest when he filed his bankruptcy petition. If this interest exists, it would be part of the estate of the debtor under 11 U.S.C. § 541(a)(5)(A). In re McLoughlin, 507 F.2d 177 (5th Cir. 1975). The defendants contend that the interest which the debtor has under his father’s will is contingent and not vested. The parties have filed Motions for Summary Judgment and submitted briefs in support thereof.
The will in question is that of James Tillman Hicks, Sr., the debtor’s father. Mr. [**2] Hicks, Sr. died May 29, 1970, almost ten years prior to the time the debtor filed his petition in bankruptcy on April 24, 1980. The Citizens and Southern National Bank (“C&S”) and Lois Reagan Hicks are trustees of the residuary trust created pursuant to Item V of the Last Will and Testament of J. T. Hicks, Sr. Lois Reagan Hicks, who was the wife of J. T. Hicks, Sr., and the mother of the debtor, is currently alive. She was given a life estate and the power of appointment which enabled her to direct the trustee to turn over any of the corpus of the trust to any descendant of J. T. Hicks, Sr. or to pay any income from the trust to any descendants of J. T. Hicks, Sr. Lois Reagan Hicks has not exercised this power of appointment.
The power of appointment held by Lois Reagan Hicks gives her total discretion as to the division of the trust corpus among the descendants of J. T. Hicks, Sr. The [*245] vesting of the debtor’s interest in the estate is contingent upon one of two events. The first is the exercise of the power of appointment by Lois Reagan Hicks. The plaintiff contends that this Court should find a vested interest in J. T. Hicks, Jr. Essentially, that would require [**3] the Court to compel Mrs. Hicks to exercise her power of appointment. Section 36-602 of the Ga. Code states that: “Equity may not compel a party, having a discretion, to exercise the power of appointment;”. Based on Ga. Code § 36-602, this Court finds that it cannot compel the exercise of a discretionary power of appointment. See also In re McLoughlin, supra.
Lois Reagan Hicks was given a life estate in the trust created under the will of J. T. Hicks, Sr. Under Georgia law, when a will creates a life estate for the widow, the remainder interest does not vest in the remaindermen until the death of the life tenant, and the estates of the remaindermen who predecease the life tenant are not entitled to an interest in the estate. Ruth v. First National Bank of Atlanta, 230 Ga. 490, 197 S.E.2d 699 (1973). Accordingly, the interest created in the children of J. T. Hicks, Sr. is a contingent remainder. The Ruth case illustrates the second way by which J. T. Hicks, Jr.’s interest could vest, i.e. J. T. Hicks, Jr. would have to survive the life tenant, Lois Reagan Hicks. Because the estate created in the children is a contingent remainder, it is not property of the [**4] debtor’s estate under 11 U.S.C. § 541(a)(5)(A) and therefore it is not subject to the claim of the trustee in bankruptcy. Thornton v. Scarborough, 348 F.2d 17, 22 (1965).
In a recent case, the Fifth Circuit Court of Appeals held that under Georgia law, a father’s will created contingent remainders in his children who are required to survive a mother – life tenant because until her death, her survivors were unascertained persons. In re McLoughlin, 507 F.2d 177, 182 (1975). Since Lois Reagan Hicks is in life and was alive at the time the debtor filed his bankruptcy petition, the beneficiaries of the trust cannot be ascertained, and their interests are contingent. Id. at 181. Because the interest created in the debtor is a contingent remainder, it is non-transferrable under Georgia law. Id. at 181.
Therefore, for the above-stated reasons, the debtor’s interest in J. T. Hicks, Sr.’s will is a contingent remainder and is not subject to the claim of the trustee in bankruptcy as property of the estate under the ambit of 11 U.S.C. § 541. The plaintiff’s Motion for Summary Judgment is hereby denied and the defendants’ Motion for Summary Judgment is granted.
IT IS SO [**5] ORDERED.
At Atlanta, Georgia, this 26 day of July, 1982.
W. HOMER DRAKE, UNITED STATES BANKRUPTCY JUDGE