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Home My WebLink About06-01-04 (3) INRE: ESTATE OF LOY T. HEMPT IN THE COURT OF COMMON PLEAS CUMBERLAND COUNTY, PA ORPHAN'S COURT DIVISION NO. 21-77-231 REPLY BRIEF OF KALBACH OBJECTORS LOY T. HEMPT'S APPOINTMENT OF MAX HEMPT AS TRUSTEE DOES NOT SHIELD GERALD L. HEMPT, A SUCCESSOR TRUSTEE, FROM THE CONSEQUENCES OF HIS SELF-DEALING AND BREACHES OF FIDUCIARY DUTY. The attempt by the Trustee, Gerald L. Hempt, to excuse his course of self-dealing and breaches of fiduciary duties on the basis that Loy T. Hempt appointed his father, Max Hempt, as a trustee, must fail. The fallacy and illogic of this reasoning is revealed when the matter is viewed retrospectively to the time that Loy T. Hempt executed his Will. The pertinent matters include: 1. Loy T. Hempt did not, at any time, name Gerald L. Hempt as a trustee or co- trustee. 2. Instead, Loy T. Hempt named his wife, Margaret Hempt, as co-executor and co- trustee with Max Hempt. 3. Loy T. Hempt named his niece, Dorothy Mark, the mother of the Mark Objectors, as a successor co-trustee with Max Hempt upon the death of his wife, Margaret. It should be presumed that appointment of a co-trustee from the Mark branch of the family, rather than another trustee from the Hempt branch of the family, represented Loy's attempt to restrain any favoritism by Max Hempt as to his family, as opposed to the Mark family. 4. In 1964 and 1969, Pennsylvania law was clear that: (a) In making distribution in kind, each beneficiary of an estate or trust would be entitled to a pro rata share of each asset. See, 20 Pa. C.S.A. ~3534. (b) Division of a single trust into two or more separate trusts could only be accomplished by Order of Court. See. 20 Pa. C.S.A. ~7191. (c) The appointment of a successor co-trustee after the death of Dorothy Mark would be accomplished by Order of Court after notice to all parties in interest, including remaindermen. See. 20 Pa. C.S.A. ~71 01. Thus, Loy T. Hempt can be credited with acknowledging that Max Hempt would be both an officer, director, employee and shareholder in Hempt Brothers, Inc. and a co-trustee of the Loy T. Hempt Trust, without threatening the interests of the Kalbach and Mark families, who constitute 60% of the Trust's ultimate remainder beneficiaries. It defies logic to assume that because Loy T. Hempt knew that Max Hempt was involved in Hempt Brothers, Inc., this fact, taken in the context of the existing Pennsylvania probate and estate law in 1964 and 1969, and the counter-balancing effect of successive co-trustees, allows Gerald L. Hempt to engage in self- dealing for his personal benefit, commencing with his improper appointment as a co-trustee in 1996 and culminating in the illegal and improper division of the Trust in 2002. Cases cited by Trustee do not support Trustee's position that he is in any fashion protected from removal simply by reason of his father's appointment as a co-trustee by Loy T. Hempt. In fact, when read carefully, these cases are further authority for the removal of Gerald L. Hempt as Trustee. In Flagg Estate. 365 Pa. 82, 73 A.2d 411 (1950), the testator, Stanley G. Flagg, in his Will, gave preferred stock in a family corporation to his son, S. Griswold Flagg, 3d, and Pennsylvania Company, Inc. as trustee in trust for his daughter and her issue. The trustees 2 offered some of the trust's preferred stock for redemption by the corporation and the daughter objected. The trial court upset the redemption because the son had a conflict of interest, stating as follows (as quoted in the Supreme Court Opinion): "In voting for redemption, Mr. Flagg was duty bound to serve the best interests of the trust, and was also duty bound to serve the best interests of the corporation. He could not do both at once. It is unnecessary to decide which interest he did in fact serve; the existence of the conflict of interests ipso facto disqualified him from acting. .. Again, it is unnecessary to determine whether he was in fact influenced even to the slightest degree by any selfish motive in voting for redemption; it is the conflict of interest rather than bad faith which is the determinative factor." 365 Pa. at 88 (emphasis in original). The Supreme Court reversed on the basis that a trustee with a conflict of interest created by testator (appointing an individual as a trustee who is also a corporate officer) is not per se justification for judicial intervention. The Court, however, qualified this holding with the caveat that the Court will review the administration to pass on potential breaches of trust in this conflicted situation. The Court stated: "The testator, having the power to do so, created the conflict which became a fact or condition in the administration and devolution of his property to be observed by his executors and trustees. This administration is subject to the scrutiny of the courts, who restrain or otherwise pass on charges of breach of trust. 365 Pa. at 88 (emphasis added). 3 . . The Court went on to note: Testamentary provisions must be given effect, notwithstanding the existence of the self-dealing rule; it is not the abstract conflict but the administration that is decisive and administration is subject to the control of the court." 365 Pa. at 92 (emphasis added). 1 In addition, Steele Estate, 377 Pa. 250, 103 A.2d 409 (1954), also cited by Trustee, stands for the same proposition and quotes Flagg at length; Le., appointment as a co-fiduciary by testator negates the application of a per se disqualification of a fiduciary for conflict of interest, but does not insulate the fiduciary from the Court's determination that the conduct of the fiduciary constituted a breach of trust. In Steele Estate the co-fiduciary was also found to have acted in good faith. In both Flagg and Steele. the conflict involved a fiduciary who was specifically placed in that role by the testator. In this instant case, Gerald L. Hempt was not named by Loy T. Hempt to be a fiduciary. He is a successor trustee appointed under challenged circumstances. Trustee cites no authority for the proposition that the Court, through appointment of a successor, can and does perpetrate a waiver by the original testator. Such a rule makes no sense and should be adopted as a rule in these proceedings. To the contrary, Pennsylvania courts have long acknowledged that the deference extended to a fiduciary actually selected by a settlor/testator is 1 It is also a particular point of distinquishment that the Flagg court emphasized as an introduction to its analysis, "It may be stated at the outset that the uncontradicted evideace is that there is no fraud and that the trustees and the corporation acted in good faith in making the redemptions." 365 Pa. at 84. That is hardly the case here. 4 . . . . not observed when the fiduciary has been appointed by the court. See, In re Crawford's Estate, 340 Pa. 187, 16 A.2d 521 (1940); Estate ofOshiver. 406 Pa. Super. 531, 594 A.2d 746 (1991). Hence, Loy T. Hempt's appointment of Max Hempt as a trustee does not, in any fashion, . in fact or law, insulate and protect Gerald Hempt from his course of self-dealing as Trustee. He must be removed from that position. Respectfully submitted, METTE, EVANS & WOODSIDE By: ~1-~ Howell C. Mette, Esquire Sup. Ct. I.D. No. 7217 Daniel L. Sullivan, Esquire Sup. Ct. I.D. No. 34548 Vicky Ann Trimmer, Esquire Sup. Ct. I.D. No. 49679 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 DATED: ~ \, ~ooL\ 5 . . 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 III Esquire MARTS ON, DEARDORF, WILLIAMS & OTTO 10 East High Street Carlisle, P A 17013 Donald Kaufman, Esquire McNEES, WALLACE & NURlCK 100 Pine Street P.O. Box 1166 Harrisburg,PA 17108-1166 Joel Zullinger Esquire ZOLLINGER & DAVIS 14 North Main Street Suite 200 Chambersburg, P A 17201 Respectfully submitted, METTE, EVANS & WOODSIDE ~1-~ By: Howell C. Mette, Esquire Sup. Ct. I.D. No. 7217 Daniel L. Sullivan, Esquire Sup. Ct. I.D. No. 34548 Vicky Ann Trimmer, Esquire Sup. Ct. I.D. No. 49679 3401 North Front Street P. O. Box 5950 Harrisburg, P A 1711 0-0950 (717) 232-5000 - Phone (717) 236-1816 - Fax DATED:~\I~Q~-; 399689vl