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HomeMy WebLinkAbout10-25-04 JRZ April 30, 2004 IN THE COURT OF CODON PLEAS OF THE 9th JUDICIAL DISTRICT CtJKBBRLAND COUNTY, PENNSYLVANIA Estate of Loy T. Hempt, Deceased Orphans' Court Division No. 21-77-231 Trust Created Under Item Fifth of the Will BRIBF ON BEHALF OF W. ROBBRT KARK, FORRBST H. MARK AND STEVEN B. MARK ProDosed Findinas of Fact 1. The parties entered into a stipulation of facts which are set forth in Kalbach Exhibit 1 and incorporated by reference herein. 2. Gerald L. Hempt was never formally appointed personal representative of the estate of Loy T. Hempt. (Kalbach Exhibit 19) . j 3. Gerald L. Hempt was not properly appointed trustee of the Loy T. Hempt trust in that no notice of the 1996 petition for appointment filed with the Court was given to Robert Kalbach, Sr. (P. 52, L. 18-24). 4. Robert Kalbach, Sr., was unaware of the petition set forth in Exhibit 3 of the petition designated Kalbach Exhibit 3 requesting that George Hempt be named as co-guardian of the estate of Jean Hempt and no formal notice was given to him (P. 15, L. 9-2). s. Robert Kalbach, Sr., had no notice of a petition designated as Kalbach Exhibit 4 to make gifts out of the estate of Jean Hempt (P. 19, L.21-23). 6. Robert Kalbach, Sr., was never consul ted by Gerald L. Hempt or anyone else about decisions regarding the Loy T. Hempt trust (P. 23, L. 19-21). 7. Robert Kalbach, Sr., was never consulted by Gerald L. Hempt or anyone representing him concerning the decision to divide the Loy T. Hempt trust into three trusts (P. 27, L. 7-25 and P. 26, L. I- ll) . 8. Robert Kalbach, Sr., disagrees with the trustee's decision to exclude him from shares of stock in Hempt Bros. Inc., C. A. Hempt Estate and Valley Land Company in the division of the Loy T. Hempt trust into three trusts (P. 28-29). 9. The effective date for division of the Loy T. Hempt trust into three trusts was April 25, 2002; however, planning for the division by Gerald L. Hempt and his attorney, Robert Freedman, had gone on for over a year prior to the actual division (P. 64, L. 21-22). 10. The division of assets of the Loy T. Hempt trust into three trusts was amended by the trustee on July 12, 2002 (P. 107). 11. As of March 1, 2001, Gerald L. Hempt never informed the Mark brothers or Mr. Kalbach of the idea of splitting the trust, or questioned what assets they may have desired, nor did he ask Attorney Freedman to do so (P. 68-69). 12. During the course of planning for splitting of the Loy T. Hempt trust into three trusts, Mr. Freedman represented the Loy T. Hempt trust, (P. 123, L.24) Gerald L. Hempt individually, (P. 125, L. 1) and the C. A. Hempt estate (P. 142). 13. Mr. Freedman's initial letter concerning division of the trust assets on March 1, 2002, was addressed to both Gerald L. Hempt and George F. Hempt (Kalbach Exhibit 8). Page 2 A. Mr. Freedman's initial letter states in part: "it is not possible to apportion all of Hempt Bros. stock to you." 14. Mr. Freedman addressed a letter to Gerald L. Hempt on April 11, 2001 (Kalbach Exhibit 10), which states in part: A. "I also considered various other transactions in order to help you and George acquire greater positions to some of your family businesses." B. It is my understanding based on our meeting that you want to increase your ownership in Valley Land Company ("Valley Land") from 11%' (11 shares) to 51% (51 shares) and in C. A. Hempt Estate from 12.5% (3,000 shares) to 37.5% (9,000 shares). This means you need to acquire an additional 40 shares of Valley Land, and an additional 6,000 shares of C. A. Hempt. At the same time you and George would like to ensure that Robert Kalbach does not receive any additional shares of Hempt Bros., Inc. ("Hempt Bros."). George wants to receive as many additional shares of Hempt Bros. as possible. Mr. Freedman states in a letter addressed to Gerald L. Hempt dated May 7, 2001 (Kalbach Exhibit 11) in part: "This division does not take into consideration your goals of obtaining significant additional ownership of Valley Land Company or C. A. Hempt Estate, Inc. ("C. A. Hempt"). 15. Mr. Freedman in a letter addressed to George F. Hempt and Gerald L. Hempt dated May 15, 2001 (Kalbach Exhibit 12) states in part: "The upcoming meeting of C. A. Hempt shareholders is a good opportunity to propose a buy-sell agreement for signature by all of the shareholders. I have prepared and enclose a draft of a buy- sell agreement for C. A. Hempt." 16. Gerald L. Hempt believed Mr. Freedman was acting on behalf of the Loy T. Hempt trust at the shareholders' meeting of C. A. Hempt Estate where the buy-sell agreement was discussed (P. 66, L. 6-7). 17. Mr. Freedman in a letter addressed to Gerald L. Hempt dated May 15, 2001 (Kalbach Exhibit 14) states in part: "I did a revision of a basic division of the trust with the goals of you and George receiving equally the maximum number of shares of Hempt Bros. and Robert Kalbach not receiving any shares of Hempt Bros." Page 3 . 18. Mr. Freedman in a letter addressed to Gerald L. Hempt dated April 23, 2002, (Kalbach Exhibit 15) states in part: "A. We have talked for some time about dividing this trust and now seems like a good time to do it rather than waiting any longer. B. The value of Hempt Bros. is in accordance with the buy- sell agreement which is book value as of some months ago. c. The value of the C. A. Hempt Estate is the medium range of values that I did about a year ago." 19. Mr. Freedman in a letter dated July 12, 2002, addressed to Gerald L. Hempt (Kalbach Exhibit 16) states in part: "Kalbach continues to receive no family businesses." 20. A buy-sell agreement covering all shares of Hempt Bros. Inc. was in force at the time of the division of the trust assets in the Loy T. Hempt trust (Hempt Exhibit 6). 21. Dorothy H. Mark is the only shareholder who ever voluntarily sold her shares in Hempt Bros. Inc., which was done in 1976 for book value (P. 269). 22. The Internal Revenue Service is not bound by the formula price in a buy-sell agreement for establishing a business's value for Federal Estate and Gift Tax purposes (P. 366). 23. The Loy T. Hempt trust has paid Robert Freedman up to the time of the filing of its account $50,016.55. 24. As of January 31, 2002, Jean D. Hempt had a trust account in her name valued at $1,531,047.67 (Kalbach Exhibit 20). Page 4 - 25. As of May 30, 2003, the Jean D. Hempt trust contained a Merrill Lynch portfolio valued at $1,937,469.02 (Kalbach Exhibit 7) . 26. Over the course of the administration of the Loy T. Hempt trust, a total of $870,040.00 of income and $20,653.99 in principal was distributed to Jean Hempt by the trustee. 27. Trustee is given specific authority under the will of Loy T. Hempt to consider the funds available to Jean Hempt when determining whether to distribute income and principal to Jean Hempt . 28. The remainder beneficiaries of the Loy T. Hempt trust objecting to the trustee's valuation of trust assets and distribution of trust assets into three separate trusts represent the interests entitled to 60% of the total trust assets upon the death of Jean Hempt. ProDosed Conclusions of Law 1. Gerald L. Hempt's paYments on behalf of Jean Hempt, despite her substantial assets, together with his petition requesting the right to distribute $675,000.00 plus $10,000.00 for each intestate beneficiary of Jean Hempt, is a conflict of interest and a breach of fiduciary duty to Robert Kalbach as a residuary heir of the Loy T. Hempt estate. 2. In creating three separate trusts from the trust under will of Loy T. Hempt, the trustee has a fiduciary obligation to fairly distribute those assets free of any motives for self-enhancement. 3. The fact that Gerald L. Hempt and other members of his family do not wish to have Robert Kalbach Sr. as a shareholder of Hempt Bros. Inc. due to their "uneasy" relationship is inunaterial in Page 5 - assigning assets under 20 Pa. C.S.A. Section 7191. 4. In making distributions in the Loy T. Hempt trust to three separate trusts in a manner to avoid Robert Kalbach Sr. receiving any shares in the Hempt Bros. Inc., Valley Land Company or C. A. Hempt Estate, Inc., represents a breach of the trustee's fiduciary duty in that he was seeking to reach his own goals and objectives. 5. Trustee Gerald L. Hempt breached his fiduciary duty in directing his attorney to find a method of distribution that would place greater control in trustee and his family of the family-owned business without considering detriment to the other beneficiaries. 6. Trustee is subject to surcharge in the amount of counsel fees of Robert Freedman paid by trust where counsel was working to advance the trustee's personal agenda, thus breaching his duty of undivided loyalty to all beneficiaries. 7. Where assets of a trust include three closely held companies with complex valuation issues, it is a breach of fiduciary duty to assign stock in those companies to three separate trusts absent the agreement of all beneficiaries or prior Court approval. 8. In that objectors to the trustee's account had to expend legal fees to reverse the trustee's actions, trustee as a result of breaching his fiduciary duty is subject to surcharge in the amount of those legal fees. 9. The buy-sell agreement between shareholders of Hempt Bros. Inc. is not triggered by a distribution under 20 Pa. C.S.A. Section 7191 (a). Any distribution thereunder to be based on the fair market value of Hempt Bros. Inc. stock absent the consideration of the shareholder agreement. 10. 20 Pa. C.S.A. Section 7191 as amended in 1992 and 1999 is not retroactive and does not govern decedent's 1964 will and the trust created thereunder upon Loy T. Hempt's death in 1977. As a result Page 6 trustee should have petitioned the Court for approval to any division of the trust into three separate trusts prior to doing so. 11. The application of Section 7191 as amended to a trust created prior to its amendment in 1999 is a violation of the constitutional provisions afforded objectors and illegal taking of property under Section 1 of the Fourteenth Amendment of the United States Constitution and Article 1, Section 17, of the Pennsylvania Constitution. 12. Gerald L. Hempt's appointment as trustee is invalid because of the lack of notice to Robert Kalbach, Sr., of the filing of the petition and date set for hearing. 13. Gerald L. Hempt's conflict of interest and self-dealing in his capacity of trustee justifies his removal as trustee. 14. The fact that the trustee sought the advice of counsel is insufficient to prevent surcharging him where he sought to advance his personal interests with the advice of counsel. DISCt1SSION I. INTRODUCTION: An overarching theme in all the objections of the Mark brothers to the account filed by Gerald Hempt is that he has a fiduciary duty to all of the beneficiaries of the trust under the will of Loy T. Hempt. The Pennsylvania Supreme Court in Denlinqer Estate, 449 Pa. 393, 396; 297 A.2d 478 (1972), set forth the duty of the fiduciary as follows: "He is required to use such common skill, prudence and caution as a prudent man, under similar circumstances, would exercise in the management of his own estate; and if he negligently causes a loss to an estate, he may properly be surcharged for the amount of such loss." Further, the trustee has the duty of undivided loyalty to the beneficiaries of a trust, requiring trustee to administer the trust solely in the interest of the beneficiaries. The rule prohibits self-dealing in that a trustee may not deal with trust property for Page 7 the benefit of himself or third parties. It also prohibits conflicts of interest where the trustee places himself in a position inconsistent with the trust. See Estate of McCredy, 323 Pa. Super. 268, 470 A.2d 585 (1983). In defining self-dealing the Pennsylvania Supreme Court in Banes Estate. 452 Pa. 388, 395; 305 A.2d 223 (1973) cited approvingly language from a prior Supreme Court case Noonan Estate. 361 Pa. 26, 31; 63 A.2d 80 (1949): "the test of forbidden self- dealing is whether the fiduciary had a personal interest in the subject transaction of such a substantial nature that it might have affected his jUdgement in material connection." Noonan Estate, supra, was further cited "where there is self-dealing on the part of a fiduciary, it is immaterial to the question of his liability in the premises whether he acted without fraudulent intent or whether the price received for his sale of trust property was fair and adequate. . .". The general rules stated above will serve as a basis to support the three broad categories of objections raised by the Mark brothers. II. DISIVION OP LOY T. HEHPT TROST INTO THREB SBPARATE TROSTS : A. The trustee relies on 20 Pa. C.S.A. Section 7191 (a) for authority to divide the residuary trust created under the will of Loy T. Hempt into three separate trusts. He argues that so long as he assigns the assets by considering each asset's fair market value and appreciation or depreciation, the remainder beneficiaries cannot object to the outcome no matter how unfair it may be to them. The Mark brothers agree that the trustee could divide the trust on a prorata basis without Court approval and that this would be eminently fair to all parties. However, they do not agree that a trust such as this one with three closely held family corporations can be valued on a non-prorata basis in a precise enough manner to provide equality of distribution among the three separate trusts. I could find no Court cases interpreting Section 7191 (a). The original purpose for Section 7191 (a) was to aid in the qualification of a trust as a qualified shareholder for Subchapter S purposes as well as for generation-skipping tax purposes, and to have this done without the need to get Court approval. In applying Section 7191 (a) to this case, I suggest that the legislature did not intend to reach an unfair result to any beneficiary. In fact Section 7191 (a) gives two methods for Page 8 - dividing the trust into separate trusts. However, if the nature of the assets lead to an unfair result in dividing the assets, then the legislature has provided another alternative, subparagraph (b) of Section 7191 allows for the trustee to get Court approval prior to dividing the trust. In this case the trustee desires to use Section 7191 (a) to accomplish his own goals, as acknowledged by his counsel, Mr. Freedman, in a series of letters to trustee. Trustee's goal was to deprive Robert Kalbach, Sr., of any stock in Hempt Bros. Inc., and to gain a greater interest in Valley Land Company. He did not ask the Mark brothers or Robert Kalbach, Sr., what preferences they might have as to assets in the trust, and did not consult with them on the matter prior to filing his account. No consideration was given to which assets might have greater potential for appreciation in value. As an example of how the Mark brothers were harmed by the trustee's attempt to reach his "goal," under the division of the trust implemented by the trustee, the Max Hempt family which trustee is a member would receive no cash and miscellaneous items, no Allied Irish bank stock, but instead 70 shares in Valley Land Company, 1,328 shares of Hempt Bros. Inc., and 1,235 shares of C. A. Hempt Estate. By comparison the Mark family would receive cash in the amount of $547,651.00 and miscellaneous property, 43,618 shares of Allied Irish Bank stock, 19 shares of Valley Land Company stock, 795 shares of Hempt Bros. Inc., and 4,765 shares of C. A. Hempt Estate. Finally, Robert Kalbach, Sr., would receive 41,239 shares of Allied Irish Bank stock and cash in the amount of $355,510.00. Loy T. Hernpt created this trust with a life estate to Jean Hempt who has resided most of her life in the Woods School due to her mental retardation. He apparently wanted to ensure that his niece had adequate resources for her care. The Mark brothers and Robert Kalbach, Sr.'s share of the trustee's distribution hold most of the income producing property as well as readily liquid assets. The share of Max C. Hempt' s heirs holds no income-producing property except for 1,235 shares of C. A. Hempt Estate. Their share of the distribution is largely illiquid. Therefore, the trustee, in order to meet any unexpected expenses of Jean Hempt, would have to utilize the Mark and Kalbach separate trusts for there would be very little to be gotten from the Max Hempt trust. In this example the effect of the trustee's division of assets into three separate trusts is two-fold. One, he puts himself in a position to be unable to meet any need of Jean Hempt on an equal basis from all three trusts. He places the potential of completely eliminating the Max Hempt heirs from the need to care for Jean Hempt and places that burden on the Mark and Kalbach families. Page 9 - . Attorneys for the accountant argue that this is all very speculative. However, I ask the auditor to keep in mind that Loy T. Hempt in creating this trust had no idea what Jean Hempt's needs might be and so because he could only speculate, he created a trust for her benefit. Trusts are created because we don't know what the future may bring. When trustee attempts to divide the original trust, he has no other basis then speculation on the possible need of the life beneficiary to determine whether his division is fair because he doesn't know what the future may bring. It is impossible to believe that the legislature intend to allow a trustee to use Section 7191 (a) to gain greater control of family business to the detriment of other beneficiaries. In fact the legislature obviously intended that in cases where the nature of the assets make it questionable that a division of assets could be done fairly, trustee may petition the Court prior to distribution so that all parties may be heard. Based on the foregoing argument, the trustee should be directed to either return all assets into one trust, or fund the three separate trusts on a prorata basis. B. In the alternative, the Mark brothers have objected to the use of Section 7191 for a trust that was created in 1977. Section 7191 of the Probate, Estates and Fiduciaries Code, was amended in 1992 and 1999 to provide for authorization of the residuary trustee into three separate trusts. However, no reference is made to its retroactive effect. Under Section 1926 of the Statutory Construction Act of 1972, 1 Pa. C.S.A. Section 1926, no statute is to be construed to be retroactive unless clearly and manifestly so intended by the General Assembly. Further, subsection 3 of Section 1922 of the Statutory Construction Act creates the presumption that the General Assembly does not intend to violate the Constitution of the United States or Pennsylvania. The law at the time of Loy T. Hempt's death in 1977 was that the whole principal of a trust must be kept in tact absent the consent of all beneficiaries. See Official Comment, Section 7191 at 20 Pa. C.S.A., Section 7191. The use of the 1990 amendment to Section 7191 without the consent of all the remainder interests would constitute the taking of a pre-existing property interest without due process of law in contravention of Section 1 of the Fourteenth Amendment to the Constitution of the United States and would violate Article I, Section 17, of the Pennsylvania Constitution which specifically prohibits the passage of any law impairing the obligations of contracts. Page 10 Based on the above reasoning the trustee should be ordered to return all of the assets into one trust and manage them .. accordingly. C. BREACH OF FIDUCIARY DUTY: Utilizing Section 7191 (a) of the Probate, Estates and Fiduciaries Code. For the sake of argument let us assume that Section 7191 applies to this case. In utilizing Section 7191 (a) the trustee still has a fiduciary duty to all of the beneficiaries of the Loy T. Hempt trust. To utilize the statute in a manner that is not solely int he interest of all beneficiaries is to breach his duty of undivided loyalty to all beneficiaries. Where the trustee directs his counsel to achieve his personal goals and not goals of all beneficiaries, he has breached his duty of undivided loyalty. Banes Estate. supra. The Court found that the trustee was in the conflicting positions of trustee, beneficiary and creditor. In this case, Mr. Hempt, the trustee, is in the conflicting position of trustee, remainder beneficiary, and personal ownership of shares in the three family corporations in which the trust also own shares. Even if the auditor finds that the assets of the Loy T. Hempt trust can be divided into three trusts under Section 7191 (a), the breach by the trustee of his fiduciary duty of undivided loyalty to all beneficiaries requires that the assets be returned to one trust for the protection of all beneficiaries including the life income beneficiary. III. SURCHARGE OF TRUSTEE: The Mark brothers seek to surcharge the Trustee for breach of his fiduciary duty in a number of areas consisting of the following: A. Expenses in the amount of $44,818.20, which were paid on behalf of Valley Land Company. These expenses should have been paid by the COrporation itself and not the estate or trust of Loy T. Hempt. B. Reimburse the trust for the sum of $50,016.55 representing the legal fees of Robert Freedman of Dechert Price, together with reimbursement for any legal fees paid by the estate or trust for Robert Freedman on the filing of the accounting. Page 11 C. Reimburse the obj ectors for counsel fees of the obj ectors in an amount to be determined. The Pennsylvania Supreme Court in the case of In Re Trust of Mintz. 444 Pa. 189, 282 A.2d 295 (1971), acknowledges the general rule that where a fiduciary acts in good faith under the advise of competent counsel, he is not liable for mistakes of law or for errors of judgment. The Court also stated that when a fiduciary acts upon the advise of counsel, such fact is a factor to be considered in determining good faith but is not a blanket immunity in all circumstances. In the case at bar, it is clear from the letters written by Mr. Freedman to the trustee that Mr. Freedman had received his marching orders from the trustee and those were to meet the "goals" of the trustee in dividing the Loy T. Hempt Trust. Counsel for the trustee say that he should not be surcharged for anything that he has done because he relied on the advice of counsel. However, as the Supreme Court notes, that is not the sole determination of good faith, which is the standard by which the trustee is to be held. In this case it is clear that Mr. Hempt was not considering any of the other beneficiaries but was looking out for his own family's interests in attempting to secure Hempt Bros. stock in their name and reduce the amount which would go to the Mark brothers and completely eliminate any amount going to Robert Kalbach. In his testimony Mr. Freedman indicated that at various times while working on a number of different allocations of the trust assets he was working for Mr. Hempt individually, the Loy T. Hempt Trust, and the C.A. Hempt Estate. In the Course of one letter to Mr. Hempt, Mr. Freedman indicated that he was representing different entities in different paragraphs of the letter. The fact that the trustee had his own agenda and had not even asked the Mark or Kalbach interests their opinion is reflective of the fact that the trustee did not act in good faith despite the fact that he was consulting with counsel. IV. REMOVAL OP TROSTEE: The Mark brothers position is that Gerald Hempt should be removed as trustee. Testimony at the auditor's hearing indicated that no notice of the petition to appoint Gerald Hempt as trustee of the Loy T. Hempt trust was given to Robert Kalbach and that in itself, should be sufficient grounds for the Court to remove Mr. Hempt. In addition Mr. Hempt's conduct is sufficient to remove him as trustee. Section 7121 of the Probate, Estates and Fiduciaries Code states as follows: "The grounds and the procedure for the removal or discharge of a trustee and his surety and the effect of such a removal or discharge shall be the same as are set forth in the following provisions of this title relating to the removal and discharge of a personal representative and his surety...". Accordingly, cases that deal with removal of an executor or administrator would have precedent for the removal of a trustee. Page 12 - In a case involving removal of an executor, the Pennsylvania Supreme Court in In Re: Estate of Dobson, 490 PA 476, 482, 17 Atlantic 2nd 138 (1980), held that where a conflict of interest or self-dealing is apparent from the circumstances, there is no need to demonstrate that the fiduciary acted in bad faith or with fraudulent intent. Indeed, conflict of interest apparent from the circumstances may justify removal of the executor. The Dobson case involved sale of a Subchapter S corporation stock back to the corporation. The beneficiaries under the will contended that the sale price was below market value. The executor had no independent appraisal done at the time of sale and the executor's wife was an officer, director and shareholder of the corporation who purchased the stock. The Supreme Court noted that the executor's wife owed a duty to the corporation to purchase the shares at the lowest price while the executor owed a duty to sell the shares at the highest price. The Court recognized a clear conflict of interest. The facts of Dobson are not so far removed from Our case, where there has been considerable conflicting testimony as to the value of Hempt Bros. stock. The trustee has argued that the buy/sell agreement covering Hempt Bros. stock limits the value to book value while the beneficiaries claim that the transfer into the trust should not trigger the buy/sell and the value of Hempt Bros. stock should be considerably more than the amount used by the trustee in dividing the trust. Here, Gerald Hempt has a personal interest in Hempt Bros., Inc. with personal stock holdings and it would be in his best interests in order to secure more of Hempt Bros., Inc. and keep it out of the hands of Robert Kalbach, Sr. to have the Hempt Bros., Inc. stock valued at its lowest possible price. Where, he to be considering the ultimate benefit of all beneficiaries, it is in their interest to have a greater price. This conflict of interest is so apparent from the circumstances that the Court should remove Mr. Hempt and replace an independent trustee who has no personal interest in determining any valuation. Respectfully submitted, ZOLLINGER - DAVIS, PC By oe R. Supreme 14 North Main Suite 200 Chambersburg, PA 17201 Page 13 -- .