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HomeMy WebLinkAbout01-14-04 (2) ~ INRE: ESTATE OF LOY T. HEMPT IN THE COURT OF COMMON PLEAS CUMBERLAND COUNTY, PA NO. 21-77-231 ORPHANS COURT DIVISION ORDER AND NOW, this.l L{ day of 2004, upon consideration of the Kalbach Objectors' Motion in Limine to Preclude Attome Expert Testimony on Legal Issues and the response thereto, the motion is GRANTED. The Accounting Party's proffered expert witness, C. Thomas Work, Esquire, is precluded from testifying. INRE: ESTATE OF LOY T. HEMPT IN THE COURT OF COMMON PLEAS CUMBERLAND COUNTY, P A NO. 21-77-231 ORPHANS COURT DIVISION KALBACH OBJECTORS' MOTION IN LIMINE TO PRECLUDE ATTORNEY EXPERT TESTIMONY ON LEGAL ISSUES AND NOW, come the Kalbach Objectors, by and through their attorneys, METTE, EV ANS & WOODSIDE and hereby file the following: 1. One of the objections raised by the Kalbach Objectors is the breach of fiduciary duty by Gerald Hempt, Trustee of the Loy T. Hempt Trust, in (1) dividing the trust into three separate trusts, and then, (2) manipulating the allocation of Trust assets so that Mr. Hempt, who is also a Trust beneficiary, receives the specific Trust assets he wants to receive. In so doing, Mr. Hempt as Trustee acted with the specific intent of depriving another Trust beneficiary, Robert Kalbach, from receiving any of the assets he (Mr. Hempt as beneficiary) wanted to keep for himself and his close family members. 2. In response to Interrogatories asking about expert witnesses expected to testify at trial, Mr. Hempt has provided the expert report of an attorney, C. Thomas Work, Esquire, a report which is nothing more than a legal brief masquerading as expert testimony. A copy of Mr. Work's report is attached hereto as Exhibit "A." 3. In his report, Mr. Work opines, in part, as follows: . "The Division of the Trust into three separate trusts pursuant to 20 Pa. C.S. ~7191 was and is a legally valid division for the reasons discussed below." · "If any valuation used by the Trustee in making the division is held to be inaccurate, the Trustee should readjust the division to reflect the accurate valuation." · "The requirements of [Section 7191] ensure total fairness, and Trustee followed those requirements to the penny." · "Objectants offer no legal basis for confining the statute's use to the two purposes mentioned in the 1992 Comment. Here, the clear language of the statute expressly granted Trustee the authority to divide the Trust." · "Courts have held that a beneficiary has no right to demand an in kind distribution of property where the will contains language granting the Trustee discretion to sell property or distribute it in kind. Because Loy Hempt specifically included this language, the beneficiaries are not entitled to demand an in kind distribution of property." · "[T]he division of the Trust was a proper exercise of this statutory power by Trustee." · "Objectants' reliance upon the law at the time ofLoy's death is unfounded. ... The law at the time ofLoy's death is irrelevant." · "Section 7191 is constitutionally valid and its application does not result in the taking of property rights of any beneficiary. " 4. In his report, Mr. Work also sets forth twenty-one (21) separate footnotes which purport to supply legal authority for his propositions. 5. The supposed expert report identifying Mr. Work's proffered testimony is nothing more than a legal memorandum setting forth the legal arguments of Mr. Hempt; it is simply an attorney putting on a witness hat and attempting to tell the Court (in this case, the Auditor) what the law is. As such, it is improper. 6. Pa. Ru1e of Evidence 702 states, "If scientific, technical or other specialized knowledge beyond that possessed by a layperson will assist the trier of fact to understand the evidence or to determine a fact in issue, a witness . . . may testify thereto in the form of an opinion or otherwise." (Emphasis added.) 7. While no Pennsylvania cases addressing Ru1e 702 on this issue were found, the ru1e and rationale for excluding attorney opinion testimony on the law were succinctly summarized in McCormick on Evidence, ~ 12 at 53-54 (John W. Strong, ed., 5th ed. 1999): Regardless of the rule concerning admissibility of opinion upon u1timate facts, at common law courts do not allow opinion on a question of law, unless the issue concerns foreign law. Nor do the Federal Ru1es of Evidence permit opinions on law except questions of foreign law. One federal court raised the typical judicial attitude when it wrote that "in a trial there is only one legal expert- thejudge." (Footnotes omitted, emphasis added). See also, Haberern v. Kaup-p Vascu1ar Surgeons. Ltd., 812 F. Supp. 1376, 1378 (E.D. Pa. 1993). 8. The proffered testimony by expert witness Mr. Work does not address facts and would not assist the trier of facts to understand the evidence in this case. It is a bald attempt to influence the legal determinations which are properly to be made by the Court, not an issue of fact to be determined by the fact-finder. 9. Because the proffered testimony of Mr. Work is not properly admissible as expert testimony under Pennsylvania law, his testimony should not be allowed. WHEREFORE, the Kalbach Objectors respectfully request that the Auditor grant the within Motion and order that Mr. Work may not testify as an expert witness in these proceedings. Respectfully submitted, METTE, EVANS & WOODSIDE By: ~~.~t~ Daniel L. Sullivan, Esquire Sup. Ct. J.D. No. 34548 3401 North Front Street P. O. Box 5950 Harrisburg, PA 17110-0950 (717) 232-5000 - Phone (717) 236-1816 - Fax Attorneys for Kalbach Objectors Date: \ 1.118to"} EXHIBIT A , ,~~'- or /~-) STEVENS & LEE C'.'J A PROFESSIONAl. CoRPORATION 111 North, Sixth Street P. O. Box 679 Reading, P A 19603-0679 (610) 478-2000 Fax (610) 376-5610 www.stevenslee.com Direct Dial: (610) 478-2084 Email: ctw@stevenslee.com Direct Fax: (610) 988-0844 November 6, 2003 . Re: Estate ofLoy T. Hempt To Whom It May Concern: I have reviewed the document dated April 25, 2002 that divides the Residuary Trust under Will ofLoy T. Hempt (the "Trust") into three separate trusts, and the Will and Codicil of Loy T. Hempt ("Loy"). I have also reviewed the objections by the Kalbach and Mark families (the "Objectants") to the accoun.ting filed by Gerald L. Hempt as trustee of the Trust (the "Trustee") and the reply of the Trustee to those objections. . The division of the Trust into three separate trusts pursuant to 20 Pa e.s. ~ 7191 was and is a legally valid division for the reasons discussed below. If any valuation used by the Trustee in making the division is held to be inaccurate, the Trustee should readjust the division to reflect the accurate valuation. The division of the Trost into three separate trUsts pursuant to 20 Pa. C.S. ~ 7191 was and is a legally valid division for the reasons discussed below. If any valuation used by the Trustee in making the division is held to be inaccurate, the Trustee should readjust the division to reflect the accurate valuation. 1. Trustee acted in conformity with the terms of the Trust and under the authority of 20 Pa C.S. & 7191 when dividinlZ the Trust into three seoarate trusts. Trustee divided the Trust into three separate trusts on April 25, 2002.- The trust division was made pursuant to 20 Pa. C.S. ~ 7191(a), which provides in part: . Cherry Hill . Reading . Harrisburg . Scranton · Lancaster . Lehigh Valley . Valley Forge . Wilkes-Barre . Philadelphia . Wilmington SLl 39SS11vt/03877,OOl , ~. 'r /-') STEVENS & LEE /-, A PROFESSIONAl. CORPORATION November 6, 2003 Page 2 "A trustee may, without court approval, divide a trust into separate trusts, allocating to each separate trust either a fractional share of each asset and each liability held by the original trust or assets having an appropriate aggregate fair market value and fairly representing the appreciation or depreciation in the assets of. the original trust as a whole." Because the Trust directs that on Jean Hempt's death, the principal shall be distributed 40% to the Hempt family, 40% to the Mark family and 20% to the Kalbach family, Trustee divided the Trust in precisely this way. The fair market value of each new trust is equal to the respective remainder interest of the corresponding branch of the family in the Trust. Each new trust also contains a proportionate share of the appreciation of the Trust. For example, the new trust for the eventual benefit of the Kalbach family contains exactly 20% of the fair market value and 20% of the appreciation of the Trust assets. The requirements of the statute ensure total fairness, and Trustee followed those requirements to the penny. The statute allows the non-pro rata division of trust assets so long as each new trust recei~~e proper proportion of both fair-market value, and appreciation. Each,. group of beneficiaries does receive its pro rata' share of fair market value and its, share of potential capital gains tax liability. Trusteedetennined the fair market value of all Trust assets and meticulously divided them proportionately based on this valuation. Objectants rely on the Official Comment to the 1992 amendment to 20 Pa. C.S. ~ 7191. The 1992 amendment repealed the requirement of the beneficiaries' consent to the division ofa trust. The 1992 Comment stated that this administrative change would be useful in the qualification of trusts as qualified shareholders for Subchapter S corporation and generation- skipping tax ~urposes.l The 1992 Comment merely Hlustrateshcw theamer.ded stamteisttsefulin light of relatively recent changes in the tax law. It is not an exhaUstive list of all situations in which it may be used.2 . The comments to the pre-1992 versions of the statute discuss other pUrposes for dividing . a trust, including pursuing different investment policies of the beneficiaries and reducing administrative difficulties where beneficiaries have different rights to invade principal.3 In fact, this statute was often used where the beneficiaries of separate shares of one trust had different 1 1992 Official Comment to 20 Pa. C.S. ~ 7191. 2 Besides, where the statute is clear on its face, it is improper to look to the comment for the meaning of the statute. 1 Pa. C.S. ~ 1921. . . 3 1949 Official Comment to 20 Pa. C.S. ~ 7191. SLl 39SS11vlI03877.001 ~. 1 .--') STEVENS & LEE /'j A PROFESSIONAl. CORPORATION November 6t 2003 Page 3 investment objectives. For example, one older beneficiary might want to have his trust invested in bonds to maximize income and another younger beneficiary might want his trust invested in stocks to maximize growth. Pursuing both of these conflicting investment objectives in a single trust would be impossible. Dividing the one trust into two separate trusts allows each trust to pursue its own investment program. Objectants offer no legal basis for confining the statutets use to the two purposes mentioned in the 1992 Comment. Here, the clear language of the statute expressly granted Trustee the authQrity to divide the Trust. Finally. to the extent Objectants are arguing that Loy's Will specifically t&ected that the Hemptt Mark and Kalbach families each receive a fractional portion of each asset in the Trust, a review of Loyt s will shows Loy never intended the beneficiaries to have such rights. Loy'gave his trustees broad discretion to manage the assets of the Trust. He did not give the Trost beneficiaries any vested rights to any of the original property in the Trost. In fact the Trost contains a specific provision giving the trustees the discretionary power to sell assets at any time during the existence of the Trust and to make distribution in cash or in kind when the Trust . terminates.4 This.specific authorization in the Trust negates any alleged "right" of the beneficiaries to demand a distribution of property in kind. Courts have held that a beneficiary has no right to demand an in kind distribution of property where the will contains language granting the trustee discretion to sell property or distribute it in kind.s Because Loy Hempt specifically included this language, the beneficiaries are not entitled to demand an in kind distribution of property. n. Section 7191 applies to th~ Trust. Objectants contend that the legislature did not intend the 1999 amendment to 20 Pa. C.S.' ~ 7191 to apply to the Trost, because the Trost was created prior to the amendmentt s enactment; therefore, Trustee had no legal authority to.divide the Trust without Court approval. This argument is erroneous. The original version of ~ 7191 was enacted in 1949 and provided: "The court, for cause shown and with the consent of all parties in interestt may divide a trust into two or more separate trusts. " 4 Paragraphs (c) and (g) of article NIN1lI of the Will. , Abdoe Estate. 20 Fiduc. Rep. 2d 159t 165 (Lawrence Co. Orphans' Court 1999). See also McTalZUe's Estate. 18 . A.2d 532,534 (Pa. Super. Ct 1941). . SL139SS11vlI03877.001 l' f /-) STEVENS & LEE ,r"" . , A PROFESSIONAL CORPORATION November 6, 2003 Page 4 The 1949 Act stated it was effective as of January 1, 1950.6 The Act did not specify whether this power to divide was applicable to trusts created prior to the statute's enactment. However, without seeing the need for any discussion, courts applied this statute to trusts existing prior to the statute's enactment.7 '. The only reported case under ~ 7191 was under this 1949 version of the statute, which required all parties in interest to.consent to the division and court approval. In Stotesbury Trust. 3 Fiduc. Rep. 505 (Montgomery Co. Orphans' Ct. 1953), the guardian ad litem appointed to represent minor and unborn beneficiaries of the trust objected to the division of the trust. The guardian asserted that the 1949 statute could not constitutionally be applied to a trust created prior to the statute's enactment. The. Court summarily rejected this argument:< stating: "it would not appear that there is any constitutional objection on account of the retroactive feature of the act as applied to this case because the beneficiaries receive the exact proportion of the property that they would otherwise receive." The guardian had conditionally consented to the division, if the Court deemed the statute constitutional; thus, the division was allowed. The Court felt the applicability of the statute to existing trusts was so apparent that there was no need for a lengthy discussion of the issue. In 1992 the statute was amended to remove the requirement that all parties in interest consent to the division and instead to require notice to all parties in interest as directed by the court.s Again, the legislature used the same language regarding the applicability of this amendment - "shall apply beginning with the effective date.',9 Because the legislature did not specify that the 1992 amendment's applicability was limited to instruments executed on or after its effective date, the amendment's applicability is not related to the date the instrument was executed. ~ 7191, as amended in 1999, provides in part: n(a). A ,trustee may, without court approval, divide a trust into separate trusts,. allocating to' each separate trust either a fractional share.of each asset ana ew:h liability held'bytheoriginal"trustor assets having an appropriate aggregate fair market value and f~r1y 6 See Act of April 18, 1949, Pub. L. 512, No. 121, ~ 105 (1949). 7 See Stotesburv Trost. 3 Fid. Rep. 505, 508 (Montgomery Co. Orphans' Ct 1953). 8 As amended in 1992, ~7191 provided: "The court. for cause shown, may authorize the division ofa trust into two or more separate trusts upon such terms and conditions and with such notice as the court shall direct" 9 ~ Act of December 16, 1992, Pub. L. 1161, No. 152, ~ 27(e)(1992). SLl 39551Ivl103877.001 . . //", ' STEVENS & LEE A PROFESSIONAL CoRPORATION November 6, 2003 Page 5 representing the. appreciation or depreciation in the assets of the original trust as a whole."lo As in 1949 and 1992, in 1999 the legislature specified that the statute "shall apply beginning with the effective date. . ..," which was December 12, 1999.11 The consistent use of this language after the courts had interpreted it to mean the statute applied to existing trusts shows the legislature. assumed the meaning of this language was self-evident. The fact that there are no other reported cases challenging Stotesbury and the applicability of the 1949 or amended statute to existing trusts further supports the conclusion that this statute has always been regarded as applicable to existing trusts. There is no reason to suppose that the legislature intended the 1999 amendment to apply differently from the 1949 statute or the 1992 amendment. Quite the contrary. Because the legislature made the original version of ~ 7191 applicable to trusts existing prior to its enactment, it is reasonable to assume the legislature intended the subsequent amendments also to apply to trusts existing prior to the amendment. The amended statute grants trustees the power to divide trusts, a power previously reserved to the courts. Obviously the drafters of future trusts could include'this power in their trust instruments if they saw a need to do so. Consequently; the statute is of little use' for new trusts. But for old trusts the statute can be'very useful. The statute was, and has always been, intended as a remedy for circumstances unforeseen when trusts were previously created. The comments to ~ 7191 substantiate this conclusion that the statute was enacted as a remedy to apply to trusts existing prior to its enactment. One of the comments to the 1992 version of ~ 7191 states that the statute is "intended to aid in the qualification of trusts as qualified shareholders for Subchapter S corporation purposes as well as for generation skipping tax purposes.,,12 These instances would normally occur in pre-existing trusts. Trustee divided the Trust into three separate trusts on April 25, 2002, which was after the effective date oftheamepdedstatute. Thus, the division of the Trust was a proper exercise of this statutory power by TI1lstee. Objectants appear to argue that Trustee seeks to use this statutory power retroactively. Objectants state that there is a general presumption against giving a statute retroactive effect.13 10 20 Pa. e.s. ~7191(b) provides: "(b) With court approval. - The court, for cause shown, may authorize the division of a trust into two or more separate trusts upon such terms and conditions and with such notice as the court shall direct." This subsection b is identical to ~ 7191 as amended in 1992. 11 See Act of October 12, 1999, Pub. L. 422, No. 39, ~ 13(8) (1999). 12 1992 Official eonnnent to 20 Pa. e.s. ~ 7191. 13 1 Pa. e.s. ~ 1922(3). SLl 395511 vl103877.(JOl .. . . '--') STEVENS & LEE ,'--) A PROFESSIONAL CoRPORATION November 6,. 2003 Page 6 Even though this statement of the law is correct, Objectants misunderstand the application of the law to the facts' of this case. Trustee has not requested that the division of the Trust be made retroactive to the original date of the creation of the Trust or any other date prior to the effective date of the statute on December 12, 1999. Rather, Trustee has merely used the statutory power prospectively - on April 25, 2002, after December 12, 1999 - to an existing trust. Objectants confuse the use of the terms "retroactively applied" and "prospectively applied" as to an existing trust. Objectants' reliance upon the law at the time of Loy's death is unfounded. 20 Pa. C.S. ~ 7191 is the applicable law regarding the Trust as of'the effective date of that statute. The law at the time of Lay's death is irrelevant~ m. The application of & 7191(a) to the Trust is constitutionallv valid. Objectants contend that the application of20 Pa. C.S. ~ 7191(a) to the Trust constitutes a constitutional violation because it is a "taking of property!' Objectants contend that the division of the Trust deprives some of the beneficiaries ofa vested right in the trustproperty. In Estate ofBemardiv. Bemardi.14 the Court noted "one of the stronger presumptions in our law is that an enactment of the legislature is constitutional.. . ." The Court then reiterated the ''well established" rule that "the burden of proving clearly and unmistakably the unconstitutionality of a legislative enactment is upon the person so asserting."IS The legislature typically applies statutory changes to matters of trust administration to existing trusts and such changes are not considered "takings." For example;-the Principal and 14 22 Fid. Rep. 2d 282,285 (Cumberland Co. Orphans' Ct. 2001), incorrectly cited by Objectants as 22 Fid. Rep. 282. . 15 See id. (citations omitted). 16 Stotesburv Trust, 3 Fid. Rep. 505,508 (Montgomery Co. Orphans' Ct. 1953) ("{I]t would not appear that there is any constitutional objection on account of the retroactive feature of the act as applied to this case because the beneficiaries receive the exact proportion of the property they would otherwise receive.''). SLI 39SSllvIl03877.001 -1 I I '. . . /--) STEVENS & LEE ......") A PROFESSIONAL CoRPORATION November 6, 2003 Page 7 Income Act changed the definition of what trust property is "income." In Arrott Estate.17 the Pennsylvania Supreme Court specifically held that the application of the Act to receipts and disbursements received and made by existing trusts after the enactment of the statute did not result in an unconstitutional taking of property. "Although enjoying a vested right to income, [an income beneficiary] has no vested interest in a definition or method of ascertaining income.,,18 The Court held that the Act changed only the method of ascertaining the beneficiary's specific property interest and did not take away a vested property right. This same result was reached in Catherwood Trust.19 in which the Pennsylvania Supreme Court held that the application. of the Principal and Income Act to existing trusts was valid and did not result in an unconstitutional taking of property, The Court made clear that beneficiaries have no vested'property rights ''to any particular m~de or method of ascertaining what is or is not income. ,,20 Consistent with the holdings in Arrott Estate and Catherwood Trust, the legislature has applied many other statutory changes to matters of trust administration to trusts existing when the statutory change is made (but only to acts performed after the legislative change), including: 20 Pa. C.S. ~ 6102 (termination of trusts), 20 Pa. C.S. chapter 37 (apportionment of death taxes21), and 20 Pa. C.S. ~7203 (the prudent investor rule). . Section 7191 is constitutionally valid and its application does not result in a taking of property rights of any beneficiary. ~ C. Thomas Work CTW:bjd 17 Arrott Estate. 421 Pa. 275 (1966). 18 See id. at 282. 19 Catherwood Trust. 405 Pa. 61 (1961). 20 See id. at 74. 21 The Supreme Court held that the application oflegislation that provided for the apportionment of death taxes among the beneficiaries to an existing trust was an "administrative provision governing the distnbution of estates..... and thus was constitutional. Harvev Estate.. 350 Pa. 53, 57 (1944). - SLI 39SSllvll03877.001 . , .. CERTIFICATE OF SERVICE I certify that I am this day serving a copy of the foregoing document upon the person(s) and in the manner indicated below, which service satisfies the requirements of the Pennsylvania Rules of Civil Procedure, by depositing a copy of same in the United States Mail at Harrisburg, Pennsylvania, with first-class postage, prepaid, as follows: Ivo V, Otto, Esquire MARTS ON, DEARDORF, WILLIAMS & OTTO 10 East High Street Carlisle, P A 17013 Joel Zullinger, Esquire ZULLINGER & DAVIS 14 North Main Street Suite 200 Chambersburg, PA 17201 Respectfully submitted, METTE, EVANS & WOODSIDE By: ~1-~ Daniel L. Sullivan, Esquire Sup. Ct. I.D. No. 34548 3401 North Front Street P. O. Box 5950 Harrisburg, P A 1711 0-0950 (717) 232-5000 - Phone (717) 236-1816 - Fax Attorneys for Kalbach Objectors Date: i 2.h~lo3 386807vl IN 1m: ESTATE OF LOY T. BEMPT, Deceased : IN THE COURT OF COMMON PLEAS ()F :Cl1MBERLAND COUNTY, PENNSYLVANIA :ORPHAN'S COURT DMSION : NO: 21-77-231 NOTICE OF BEARING BY AUDITOR THE BEARING before the Auditor, William A. Duncan, Esquire, in the above matter is scheduled for February 17, 18 and 19th, 2004 at 9: 00 a.m. in the 2nd Floor Hearing Room of the Old Courthouse, Carlisle, Pennsylvania. At this hearing, you and your witnesses may appear and be hear4. By: WilHam A. ~uncan, Auditor TO: Ivo Otto, ill, Esquire Martson DeardorfWilliams & Otto 10 East High Street Carlisle, PA 17013 Joel R. Zullinger, Esquire Zullinger & Davis 14 North Main Street, Suite 200 Chambersburg, P A 17201 Richard Stevenson, Esquire McNees, Wallace & Nurick, LLC 100 Pine Street P.O. Box 1166 Harrisburg, P A 17108 Howell C. Mette, Esquire Daniel L. Sullivan, Esquire Vicky Ann Trimmer, Esquire 3401 North Front Street P.O. Box 5950 Harrisburg, P A 17110-0950 DATE: January 14, 2004