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HomeMy WebLinkAbout06-01-04 (5) ESTATE OF LOY T. HEMPT Deceased IN THE COURT OF COMMON PLEAS CUMBERLAND COUNTY, PENNSYLVANIA ORPHANS' COURT DIVISION TRUST CREATED UNDER ITEM FIFTH OF THE WILL NO. 21-77-231 REPLY BRIEF ON BEHALF OF ACCOUNTANT Gerald L. Hempt, trustee of the Residuary Trust under article FIFTH ofthe Will ofLoy T. Hempt, hereby files this Reply Brief in response to the Kalbach Brief (filed by Robert Kalbach, Sr., Robert Kalbach, Jr. and Richard Kalbach) and the Mark Brief (filed by Robert Mark, Forrest Mark and Steven Mark). These objecting parties are .referred to collectively as the "Objectants" . The Trustee's position is set out in his Account and accompanying Petition, his Reply to Objectants' Objections, his Brief, and this Reply Brief. Kalbach's Brief characterizes the Trustee's actions as a conspiracy, manipulative, grabbing, machinations, egregious, brazen, outrageous, preposterous, confiscation and patently absurd. This Reply Brief ignores those flights of literary imagination and sticks to the proven facts and the law, and responds to allegations and arguments raised in Objectants' Briefs which were not fully addressed previously. Self-Dealine: Generallv Objectants' Briefs begin on a wrong foot. They cite a number of cases for the propositions that a trustee owes a duty of loyalty to the trust and its beneficiaries, and must not self-deal or place himself in a position in which his duties as trustee conflict with his personal interests. Kalbach Briefp. 3-7, Mark Brief, p. 7-8. As stated in Trustee's Brief the Objectants studiously ignore a clear and long-standing exception to the conflicts of interest rule. Where the person (such as Loy) creating a trust (sueh as the Trust) sets up a situation of conflicting interests (such as appointing as a Trustee a person who is involved in the management of a business whose stock is an asset of the Trust and who is a remainderman of the Trust), the person creating the Trust (such as Loy) is deemed to waive any conflict of interest. Steele Estate, 103 A.2d409, 413, 377 Pa. 250,258 (1954) ("... the doctrine of self-dealing does not apply where the testator knowingly places his trustee or a trust beneficiary in a position which he knew might conflict with the interest of the Trust or beneficiaries thereof, and gave her power to act in a dual capacity."); Flagg Estate, 73 A.2d 411, 414,365 Pa. 82, 88 (1950) ("[t]he testator, having the power to do so, created the conflict which became a fact or condition in the administration and devolution of his property,,).2 This legal exception to the self-dealing rules is even expressed in the testator's will.3 The Trustee has done nothing to put himself in a position of conflicting interests. Rather, Loy T. Hempt and the Court placed the Trustee in a position of conflicting interests, thereby waiving any claim of self-dealing because of his multiple roles. Trustee's Brief Pages 4 - 6. 2 Although the Kalbach Brief cites Flagg Estate, it does not cite it for the principle for which it stands; 3 Loy's will specifically allows the Trustee individually to purchase stock from the Trust "without liability for self-dealing." Article TENTH, paragraph (e) ofLoy's Will. 2 This fact makes an important difference. If a trustee self-deals, the courts will undo the deal without regard to its fairness. So, for example, if a trustee individually purchases property from a trust of which he is a trustee, the courts will unwind the transaction even ifit was entirely fair. But if the testator put the trustee in a conflicting position, the courts do not undo the deal but instead may surcharge the trustee ifhe acted in bad faith or abused his discretion. Objectants' Briefs completely ignore this essential point. Objectants state that the fact that the Trustee divided the Trust in a manner so as to limit the Mark and Kalbach families' ownership of the family businesses is in itself evidence of self- dealing.4 The Trustee's actions were motivated not as part of a sinister plot against the Mark and Kalbach families but to limit the role of a disgruntled former employee who is a competitor. This benefited the company and all its stockholders including the Marks. The Trustee valued the Trust assets in a fair manner relying upon expert valuations. There was no attempt to cheat the Marks and Kalbachs. Although the Trustee analyzed many scenarios regarding ownership of the family businesses, in none of these scenarios did the Trustee violate the statute or deprive the Marks and Kalbachs of their due. 4 Objectants also complain that the Trustee did not consult with them before dividing the Trust. But the Trustee was not under a duty to do so. "This Court has already dismissed as 'meritless' the argument that a fiduciary improperly failed to consult beneficiaries regarding investment policy." Hamill Estate, 487 Pa. 592, 600 (1980). 3 I. The division of the Trust should be confirmed. The Objectants have requested that the division of the Trust be reversed. The Trustee's Brief discusses this issue at length.5 The specific allegations in the Objectants' Briefs not fully addressed in Trustee's Brief are as follows: A. Neither the law nor equity requires the Trust income be divided 40/40/20. The Objectants have suggested that the division of the Trust was improper because each divided trust did not receive a proportionate ,share ofthe projected future income ofthe Trust. As explained in Trustee's Brief,6 there is no requirement that the Trust income be divided proportionately among the three new trusts, but if, in the future, the Trustee pays more than 40% of Jean's expenses from the Mark trust or more than 20% of Jean's expenses from the Kalbach trust, the Marks or Kalbachs could then justifiably complain. But such a complaint is premature at the present time. In any case, such a concern is ill-founded because the Trustee intends to pay Jean's living expenses from the divided trusts proportionately (40/40/20). The Trustee has the authority to pay both income and principal to Jean, so the Trustee can make payments to Jean from the three trusts in a 40/40/20 ratio even though the actual income earned by the three trusts is not proportionate. 5 6 Pages 7 - 14 of Trustee's Brief. Page 13 of Trustee's Brief. 4 Further, the Trustee of the Hempt divided trust has the authority to borrow money7 and could and would borrow money to pay the Hempt trust's share of Jean's expenses. So the fact that the Hempt divided trust contains primarily illiquid non-income producing assets is irrelevant. Thus, the argument in the Mark Brief (p. 9) that the Trustee could not pay 40% of Jean's expenses from the Hempt trust is incorrect. B. of assets. The power to divide the Trust is not limited to specific purposes or certain types The Objectants suggest that the statute enabling trustees to divide trusts, 20 Pa. C.S. ~ 7191, can be used only for limited purposes and only for certain types of assets. The statutory language neither says nor suggests this, and Objectants have not cited any legal authority in support of their legal conclusion. Objectants suggest that the use of the power to divide a trust should be limited to situations where there is a tax reason for such division. This reads the broad language of the statute too narrowly and improperly treats the illustrative comments by the drafters ofthe statute as exhaustive of all illustrations. For example, it was well known to the drafters of the statute and to experienced trust lawyers that often trusts for two or more beneficiaries are divided so that the trustee can adopt different investment policies for each beneficiary when their needs and goals differ; such a division has nothing to do with taxes. 7 Article NINTH, paragraph (e) of Loy's Will. 5 While Objectants state in passing that the statute envisions the use of the power to divide a trust for "trust administration reasons",8 the Objectants then disregard the fact that the Trustee had valid trust administrative reasons to divide the Trust. The division of the Trust resolved now future disputes which would have likely occurred on termination of the Trust, such as: who could vote the stock (the Trustee or remainderman?); whether Hempt Brothers, Inc. could bid on Commonwealth highway construction contracts (since Mr. Kalbach might be an owner of Hempt Brothers, Inc. stock, two bidders would have a common owner); and whether these assets could be sold (who would be the owner with the power of sale?). A delay in resolving these issues after Jean's death would affect the operations and values of these businesses, in turn negatively impacting the value of the Trust assets. Resolving them now is better for everyone. The Objectants argue that because some ofthe assets of the Trust were difficult to value, the power to divide could not be exercised. Courts and fiduciaries routinely value hard to value assets for tax purposes, for equitable distribution purposes upon divorce, for dissenters' rights in company mergers, and in other situations. The division of a trust should not be an exception. Perhaps the Objectants are confusing their claim that the Trustee abused his discretion in the manner he valued and divided the assets (discussed below) with an inability to divide the Trust. The Trustee agrees that if the assets were inaccurately valued (which the Auditor has the 8 Page 30 of Kalbach's Brief. 6 authority to decide), the Trustee should adjust the division ofthe Trust,9 but the division should not be undone. Trust. C. The Trustee properly valued the assets of the Trust for purposes of dividing the As explained in Trustee's brief, 10 the Trustee properly valued the Trust assets. The Trustee examined the possibility of dividing the Trust before the valuation of the Trust assets was completed and initially used estimated values of the assets. There is nothing sinister in this. The letters from Robert L. Freedman to the Trustee clearly state that the drafts of the division used the "estimated fair market value" of the assets.... and that "( w]e should consider getting updated appraisals (of the assets]."l! While it is true that the Trustee went through many drafts before reaching a final division, the exhibits that the Objectants point to indicate that the Trustee was meticulous in complying with the statute and ensuring that each divided trust received a proportionate share of fair market value and tax cost basis. While the Kalbach trust received none of the family businesses in the final division, the Mark trust did receive shares in these businesses. The lengths to which Kalbach's emotional analysis carries him is shown in Kalbach's Brief, p. 34., fn. 14, in which he questions whether the Allied Irish Bank stock his trust received 9 !O See Trustee's Brief, page 12, regarding use ofa more current book value of Hempt Brothers, Inc. stock. Pages 10 -12 of Trustee's Brief. Kalbach Exhibit 8. 11 7 "would be viable in the future." In fact, after the division of the Trust the Trustee wrote Mr. Kalbach regarding whether he would like the Trustee to retain or to sell that stock, since his trust's investments were heavily concentrated in that one stock. Mr. Kalbach's counsel wrote to the Trustee saying that he refused to comment one way or the other. The Trustee thereafter sold the stock at a price higher than the price used in dividing the Trust. Hempt Brothers. Inc. The Objectants attempt to dispute the valuation of Hempt Brothers, Inc. by wishing away the buy-sell agreement. First, the Objectants rely on inheritance, estate and gift tax valuation cases, which often disregard buy-sell agreements. These tax cases are irrelevant, because Pennsylvania has consistently upheld the validity and enforceability of buy-sell agreements for all other purposes, even though the valuations in them may not be binding on the tax authorities. Mather Estate, 189 A.2d 586, 591 (Pa. 1963). In the real world it is clear that no willing buyer would pay more for an asset than he could sell it for. Kalbach's expert witness attempted to evade this obvious fact by speculating that the stockholders might amend or rescind the buy-sell agreement (they had not done so in 40 years and no reason was advanced why they would do so now or why if they did so they would loosen rather than tighten it), or that the Company might be sold or liquidated (although the testimony was that neither a sale nor a liquidation was in any way under consideration or likely to be considered). Such baseless and erroneous speculation to wish away the buy-sell agreement 8 merely serves to illustrate the fact that the buy-sell agreement is the key in determining the value of the stock. Objectants express shock that the valuation required by the buy-sell agreement - book value - may be substantially lower than the liquidation value of the company. Such a situation is quite a common occurrence, and doubtless was the case when Loy T. Hempt himself signed the buy-sell agreement. CA. BernDt Estate. Inc. The Objectants offered no evidence at the hearing to dispute the Trustee's valuation of C.A. Hempt Estate, Inc. stock. In their brief the Kalbach Objectants: (i) attempt to shift the burden of proof onto Trustee to disprove Objectants' unsubstantiated allegations that this asset was not properly valued, when legally the Objectants have the burden of contesting the figures shown in the Trustee's account; 12 and (ii) argue that the Trustee should not have used a lack of marketability discount - although the stock clearly is not readily marketable - or a minority interest discount (although the Trust's stock is only 25% of the outstanding stock). This last point deserves some amplification to show how far Kalbach's zeal has misled him. Kalbach's Brief, pages 27-28, states that the 6,000 shares ofC. A. Hempt Estate, Inc. 12 "There can be no doubt that the person attempting to prove an account incorrect must sustain the burden of establishing his position." Dunn Estate, 54 Pa. D. & C. 2d 760,761 (Mercer Co. Orphans' Ct. 1972). Accord: Lux Estate, 480 Pa. 256, 289 A.2d 1053 (1978). 9 owned by the Trust "represent control ofthe corporation which, Gerald L. Hempt and Robert L. Freedman were bound and determined to move to Gerald L. Hempt." His brief recites that had this stock been divided pro rata (40/40/20), the four Hempt siblings together would have had, after Jean's death, a total of 11,543 shares out of a total of 24,000 shares. This is less than half. The implication is that the Trustee divided the Trust differently to give him and his siblings control ofthe company. What Kalbach's Brief fails to mention is that the way the Trustee actually divided the Trust, after Jean's death the four Hempt siblings would own only 10,378 shares. In other words, as a result of the actual division made by the Trustee, the Trustee and his siblings will receive 1,165 fewer shares of C.A. Hempt Estate, Inc. then they would have received had the Trust assets been divided pro rata. This is hardly transferring control to Gerald L. Hempt. In fact, after Jean's death the Mark and Kalbach families together will own more than 50% of the shares ofC.A. Hempt Estate, Inc. under either the Trustee's actual division or a pro rata division. Valley Land Companv As explained in Trustee's brief,13 Objectants' expert ultimately conceded that the 45% discount from the appraised value of the Valley Land Company's assets was appropriate to 13 Pages 10 - 11 of Trustee's Brief. 10 reflect the taxes and expenses which would be due on a sale of the land.14 Accordingly, ultimately no evidence was presented at the hearing to dispute the Trustee's valuation. The Objectants' Briefs suggest that a control premium should be applied to the value of the Valley Land stock. But it is doubtful that a control premium is relevant in the context of a company which has no employees and whose only asset is one parcel of raw land. In any case, having failed to introduce any evidence on the subject Objectants cannot now raise such a contention. The figures in the Trustee's Account are prima facie correct. D. The law in effect at the time the Trustee divided the Trust governs: the statute is Constitutional: there is no taking ofObiectants' property. Objectants' arguments on these points were carefully and conclusively rebutted in the Trustee's Reply to Objectants' Objections, pages 19 - 26. II. The Trustee did not abuse the discretion S!ranted to him bv the terms of Lov T. BemDt's will in DavinS! the bulk of the life tenant's eXDenses from the income of the Trust. The Trustee's Reply to Objectants' Objections thoroughly discusses this issue, and points out that the accounting shows the Trustee accumulated about one-third of the Trust's income (Objectant Kalbach apparently thinks all of it should have been accumulated) and that Loy T. Hempt's will gave the Trustee "sole and absolute discretion" to determine how much income and principal to distribute to Jean (Loy's will, Article FIFTH, paragraph 1) and in making that 14 Objectants in their brief state that the tax consequences of a sale of the company's assets were improperly determined by the Trustee who assumed the company would be taxed as a C Corporation, despite the company's recent S Corporation election. However, Objectants then admit that now and at least for the next eight years the company will be taxed as a C Corporation; thus, the current valuation of the company must assume the present rate of tax as a C Corporation. Kalbach's Briefpage 25. 11 determination to consider Jean's own resources "to such extent" as the Trustee deemed proper (Loy's will, Article ELEVENTH). The Kalbach Brief (but not the Mark Brief) argues that there is some financial benefit to the Trustee personally in the manner in which he exercised his discretion, and therefore he acted in bad faith. There is no evidence whatsoever that the Trustee ever considered the financial effect on himself from his continuing the long-standing distribution policy. Whether that policy financially benefited him, after considering the effect of taxes, is unproven. 15 Even if it did benefit him, it would also have benefited the Mark family and thus benefited 80% of the Trust's remaindermen. Moreover, had the Trustee followed the Kalbach suggestion and distributed nothing to Jean, the Marks could complain that doing so favored Kalbach but disfavored them. Consequently there is no way to fully satisfy everyone. In this situation it does not make sense to criticize the Trustee for distributing about two-thirds ofthe income and accumulating about one-third. III. Obiectants have not proved that the Trustee abused his discretion so no surchar!!e is warranted: the beneficiaries must pay their own le!!al fees. In this case at most Objectant Kalbach has argued that he was financially disadvantaged by the manner in which the Trustee exercised the "sole and absolute discretion" granted to the Trustee by the Will ofLoy T. Hempt to determine how much to distribute from the Trust to Jean Hempt, and that, concomitantly the Hempt and Mark beneficiaries were benefited. But he has IS A similar objection was rejected in Eby Estate, 6 Pa. D. & C.3d 371, 390 (Lancaster Co. Orphans' Ct. 1977), in which the Court stated: "We have not attempted to work out the arithmetic thereof, nor are we of the opinion that the duty of the trustee is required to include estate planning." 12 not proved the Trustee abused his discretion. Compare Eby Estate, 6 Pa. D. & C.3d 371 (Lancaster Co. Orphans' Ct. 1977), in which the Court held the trustee acted reasonably in distributing all the trust income to the life tenant, although the life tenant had resources of her own and the trust provided that the trustee should distribute such amounts as the trustee "in its sole discretion, shall deem necessary, using such amount as is not available... from [the life tenant's] own resources." "It is only in very exceptional cases that an exceptant to the account of an executor, administrator or trustee in the Orphans' Court will be allowed counsel fees out of the fund. The rule in such cases is that the exceptant must pay his own counsel fee." Sowers' Estate, 383 Pa. 566,572-573 (1956). The Supreme Court of Pennsylvania has identified two general lines of cases providing exceptions to this general rule: 1) those cases in which the litigant's action protected an estate or fund from fraud or illegal claims and 2) those cases in which due to one litigant's efforts a fund was brought before a court or a fund already before the court was augmented by new assets. Estate ofTose, 482 Pa. 212,221-223 (1978). Neither of those exceptions to the well-established general rule applies here. These exceptions are interpreted narrowly. See Estate of Wanamaker, 314 Pa. Super. 177 (1983), which affirmed the lower court's refusal to allow a beneficiary's attorney to recover fees from the trust on the grounds that his actions had not contributed to the creation of a common 13 fund although his actions had contributed to enhancing the selling price of the trust's principal asset. 16 If the Auditor nevertheless determines that Kalbach's counsel fees are payable from the Trust, a hearing would be necessary to establish the proper amount of such fees. 16 14 IV. Conclusion. For the reasons set forth above and in the Trustee's original Brief, and in the Trustee's Reply to Objectants' Objections, the Accounting should be confirmed as filed, and all of the Kalbach Objections and Mark Objections should be dismissed. Dat+ \ ,2004 Iv . Otto, III Attorney ill #27763 Martson, Deardorff, Williams & Otto 11 East High Street Carlisle, PA 17013 Donald B. Kaufman Attorney ill # 49674 McNees Wallace & Nurick LLC 100 Pine Street P.O. Box 1166 Harrisburg, P A 171 08 Attorneys for the Trustee, Gerald L. Hempt 15 CERTIFICATE OF SERVICE I, Victoria L. Otto, an authorized agent of Marts on Deardorff Williams & Otto, hereby certify that a copy of the foregoing Reply Brief on Behalf of Accountant was served this date by depositing same in the Post Office at Carlisle, P A, first class mail, postage prepaid, addressed as follows: Joel R. Zullinger, Esquire ZULLINGER - DAVIS, PC 14 North Main Street Chambersburg, P A 17201 Howell C. Mette, Esquire Daniel L. Sullivan, Esquire Vicky Ann Trimmer, Esquire METTE EVANS & WOODSIDE 3401 North Front Street P.O. Box 5950 Harrisburg, P A 17110-0950 MARTSON D= WILLIAMS & OTTO By "~~ Victoria L. Otto Ten East High Street Carlisle, P A 17013 (717) 243-3341 Dated: r /,2-66 <j 16