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HomeMy WebLinkAbout10-03-08 (2)~? ~~ OC I -3 ~i., 8. 32 IN RE: IN THE COURT OF COMMON I~~~~S',~QiF', . ESTATE OF LOY T. HEMPT CUMBERLAND COUNTY,1#~~Y~V~~t~ C~ ORPHANS' COURT DIVISION NO.21-77-231 APPELLANT'S STATEMENT OF ERRORS COMPLAINED OF ON APPEAL Pursuant to Pa. R.A.P. 1925 and the Court's order of September 12, 2008, Appellant Gerald L. Hempt ("Gerald"), Trustee of the Loy C. Hempt Residuary Trust (the "Trust") respectfully submits this Statement of Errors Complained of on Appeal. Set forth below are the rulings and errors that Appellant intends to challenge in his appeal. 1. The Court erred in ruling that Gerald should be removed as trustee of the Trust and in appointing a successor trustee for the Trust. The Court found that Gerald must be removed as the Trustee of the Trust because of conflicts of interest arising from Gerald's personal interests as an heir of the guardianship estate of Jean Doris Hempt ("Jean") and Gerald's personal business interests in Hempt Brothers, Inc., Valley Land, Inc., and C.A. Hempt Estate, Inc. The Court erred in failing to apply to Gerald the exception to the conflicts rule that provides that where the person creating a trust sets up a situation of conflicting interests, the person creating the trust is deemed to waive those conflicts of interest. Flagg's Estate, 73 A.2d 411, 414 (Pa. 1950); Steele Estate, 103 A.2d 409, 413 (Pa. 1954). The Court incorrectly reasoned that the exception could not be applied to Gerald because he is acourt-appointed successor trustee rather than one of the original trustees. No case has stated that the exception is available only to the original trustee. Furthermore, Pennsylvania law provides that a successor trustee "shall have all of the powers, duties and liabilities of the original trustee" and a successor trustee has the same power to act as the original trustee and the same broad discretion, unless the settlor provides otherwise. 20 Pa. C.S.A. § 7135. Under the circumstances, including the fact that Gerald's appointment as trustee was requested by an original trustee and was made by the Court with knowledge of Gerald's positions, the exception to the conflicts of interest rule should have been applied to Gerald, and he should not have been removed as trustee. Additionally, because Gerald should not have been removed as trustee, the Court erred in appointing a successor trustee to the Trust. 2. The Court Erred in Surcharging Gerald Hempt for the Trust Distributions Made to Jean Doris Hempt. The Court surcharged Gerald for the distributions made to Jean after the death of Max C. Hempt, when Gerald was the sole trustee of the Trust. This was error. The Trust was created to provide for Jean's care during her life, and it expressly granted the trustee sole and absolute discretion to distribute the principle and income for Jean's support. Thus, there can be no breach of duty unless the trustee's actions constitute an abuse of discretion. See, Geron v. Kennedy, 112 A.2d 181, 183 (Pa. 1955) (citing Restatement (Second) of Trusts § 187). Gerald continued the same income distribution practice that was carried on by the prior trustees and co-trustees in the Trust. There was no abuse of discretion by Gerald. The Court incorrectly concluded that Gerald engaged in self-dealing. Therefore, Gerald should not have been surcharged for continuing the established practice of making partial income distributions from the Trust to pay for Jean's care. Moreover, even if the distributions were improper (which they were not), surcharging Gerald for the distributions made to Jean does not appropriately remedy the alleged wrong; it makes some beneficiaries whole, gives others a windfall, and sanctions a trustee who simply continued a long-established practice of income distributions. Thus, if the distributions were improper 2 (which they were not), the trustee should not have been surcharged, and instead should have been directed to recover the distributed amounts from Jean's guardianship estate. 3. `The Court Erred in Surcharging Gerald Hempt for the Attorneys' Fees Paid for Legal Services to Divide the Trust. The Court, in error, surcharged Gerald for the attorneys' fees incurred in dividing the Trust. All aspects of the Trust Division were completed pursuant to advice of counsel and within the requirements of the relevant statute. 20 Pa. C.S. § 7191. Gerald reasonably believed that the Trust division would help to preserve the value of the companies whose stock was held by the Trust, and he obtained appraisals to value the trust assets. Gerald did not act dishonestly, with improper motive, in bad faith, or beyond the bounds of a reasonable judgment. Gerald should not have been surcharged for the attorneys' fees incurred in dividing the Trust. 4. .The Court Erred in Setting Aside the Division of the Trust The Ccurt also concluded, in error, that the Trust division should be set aside for the reasons set forth by the Auditor and because Gerald, in accomplishing the division, breached fiduciary duties "to avoid a conflict of interest, not to engage in self dealing, and to act primarily for the benefit of the beneficiaries...." The Court applied the wrong standard in reviewing Gerald Hempt's actions as trustee. Gerald did not act in bad faith in dividing the Trust, and the Court should not have set aside the Trust division. See, Flagg's Estate, 73 A.2d at 415 and Steele Estate, 103 A.2d at 413-14. Even if the Court declined to apply the deferential standard set forth in Flagg's Estate and Steel's Estate, the division of the Trust should have been reviewed under the abuse of discretion standard under 20 Pa. C.S. § 7191. The Trust Division was effected for valid and proper reasons, and was not an abuse of the trustee's discretion. The trustee properly valued the Trust's assets and considered the detriment 3 to the Trust's assets that would likely result if the asset allocation was postponed until after Jean's death. There was no evidence that illiquidity of the three separate trusts might result in disproportionate distributions to Jean. Additionally, the Court erred in finding that the values attached to the family businesses by the trustee were significantly less than their actual value. There was no evidence to support that finding. Respectfully Submitted, McNEES WALLACE & NURICK LLC By ~ 1 Donald B. Kaufinan (I.D. o. 49674) 100 Pine Street P.O. Box 1166 Tel: (717) 237-5373 Fax: (717) 260-1708 Attorneys for Gerald L. Hempt, Trustee of the Loy C. Hempt Residuary Trust Dated: October 3, 2008 4 CERTIFICATE OF SERVICE The undersigned certifies that a true and correct copy of the foregoing was served this date by hand delivery upon: The Honorable Edward E. Guido Cumberland County Court of Common Pleas 1 Courthouse Square Carlisle, PA 17013 And by first class mail, postage prepaid, upon: John Yaninek, Esq. 717-232-5000 Vlette, Evans & Woodside 3401 North Front Street Harrisburg, PA 17110-1462 {Attorney for the Kalbachs) Joel Zullinger, Esq. 717- 264-6029 Zullinger & Davis 14 North Main Street, Suite 200 Chambersburg, PA 17201 (Attorney for the Marks) Donald B. Kaufinan (I.D. .49674) 100 Pine Street P.O. Box 1166 Harrisburg, PA 17108 Tel. (717) 232-8000 Fax. (717) 237-5300 Attorneys for Appellant Dated: October 3, 2008