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HomeMy WebLinkAbout99-150 orphansIN RE: : IN THE COURT OF COMMON PLEAS OF : CUMBERLAND COUNTY, PENNSYLVANIA ESTATE OF ORPHANS' COURT DIVISION ANNA M. BERNARD, Deceased, Late of Middlesex Township NO. 99-00150 Cumberland County, PA ORDER OF COURT AND NOW, ~i~~.,~ ~ ,2001, upon consideration of the Petition to Remove Executor filed in this matter, and after hearing thereon, it is hereby directed that Matthew J. Kostelac is hereby removed as co-executor and co-trustee of the estate of Anna M. Bernard, and hereafter Helen Cernugel shall serve as sole executor and trustee of the said Estate. Matthew J. Kostelac is hereby surcharged in the amount of $48,513.00 with interest from February 14, 2000. Judgment for counsel fees incurred by the Estate and Petitioners in connection with this matter shall be determined at a later date. By the Court,  p.j. Andrea Jacobsen, Esquire Matthev~ 52 East High Street 20 Deer Lane Carlisle, PA 17013-3085 Carlisle, PA 17013 For Petitioner Ivo V. Otto III, Esquire 10 East High Street Carlisle, Pa 17013 IN RE: : IN THE COURT OF COMMON PLEAS OF : CUMBERLAND COUNTY, PENNSYLVANIA ESTATE OF ORPHANS' COURT DIVISION ANNA M. BERNARD, Deceased, Late of Middlesex Township NO. 99-00150 Cumberland County, PA IN RE: OPINION BEFORE HOFFER, P.J.: FINDINGS OF FACT 1. Petitioner Helen N. Cernugel resides at 5060 Franklin Street, Harrisburg, PA 17111. 2. Petitioner Orrstown Bank is a State Banking Corporation organized and existing under the laws of the Commonwealth with Trust Office at 77 East King Street, Shippensburg, Cumberland County, Pennsylvania. Bradley S. Gerlach is Vice President and Trust Officer of Orrstown Bank. 3. By Order of August 29, 1977, to the caption: In Re Estate of Charles O. Bernard, An Alleged Incompetent, No. 1450, this Court found Charles O. Bernard to be incompetent and unable to handle his affairs and property and liable to dissipate it or become the victim of a designing person. 4. The Court appointed petitioner Helen N. Cernugel, and her husband, Anthony N. Cernugel, as Guardians of the Estate of Charles O. Bernard, an incompetent. 5. Helen N. Cernugel is the aunt, by marriage of Charles O. Bernard. Anthony Cernugel was the brother of decedent, Anna M. Bernard. 6. Anthony N. Cernugel died May 5, 1998. After his death, Helen Cernugel continued as sole guardian. 7. By Order of July 9, 1999, the Court appointed Orrstown Bank as a corporate co-guardian of the estate of Charles O. Bernard. 8. Bradley S. Gerlach is the Trust Officer of Orrstown Bank responsible for carrying out the responsibilities of the Bank as corporate co-guardian of the personal estate of Charles O. Bernard. 9. Anna M. Bernard, a resident of Cumberland County, Pennsylvania, died testate on February 3, 1999. 10. The Last Will and Testament of Anna M. Bernard and Codicil thereto were admitted to probate by the Register of Wills of Cumberland County on February 18, 1999. Copies of the Will and Codicil are before the Court as Exhibits. 11. Matthew J. Kostelac and Helen Cernugel were named under the Codicil as co-executors. They were duly qualified and proceeded to act in that capacity. 12. The principal beneficiary of Mrs. Bernard's estate is a trust for the benefit of her son, Charles O. Bernard, an incapacitated person who resides at 132 North Middlesex Road, Carlisle, Cumberland County, Pennsylvania. 13. The decedent estate of Anna M. Bernard is represented by the law firm of Martson, Deardorff, Williams & Otto. The attorney presently primarily 2 responsible for representation of the decedent's estate is Ivo V. Otto III. The paralegal responsible for estate administration concerns is Corrine Myers. 14. An Inventory of Mrs. Bernard's estate was filed in the Register of Wills of Cumberland County on November 3, 1999; the estate was composed of assets totaling $578,150.59. 15. Since the inception of their appointment as co-executors, Mr. Kostelac and Mrs. Cernugel have been in disagreement over matters affecting the administration of Mrs. Bernard's estate. 16. On July 29, 1999, Mr. Kostelac presented an oral request for reimbursement from the estate for an unspecified amount in connection with insurance proceeds Mrs. Bernard was due following a fire that extensively damaged decedent's home at 132 North Middlesex Road in 1998. 17. On August 12, 1999, Mr. Kostelac submitted calculations to estate counsel in support of his claim for payment from the estate in the amount of $54,509.29. 18. Mr. Kostelac advised estate counsel that his claim was based upon an oral promise of a gift from the decedent or, in the alternative, for prime contractor charges stemming from services provided related to construction on the home owned by the decedent. 19. Helen Cernugel, as co-executor, disputed Mr. Kostelac's claim for a gift, or for reimbursement for services, and refused to approve payment for the claim. 3 20. Matthew J. Kostelac verbally demanded payment from Martson, Deardorff, Williams & Otto, as counsel to Mrs. Bernard's estate. 21. Counsel refused to make payment absent Mrs. Cernugel's permission or an accounting and Court approval. 22. Martson, Deardorff, Williams & Otto prepared and filed the estate's Pennsylvania Inheritance Tax Return on November 3, 1999. The return included a claim for a deduction for the claim against the estate submitted by Kostelac. 23. The claim was set forth on Schedule I, Debts of Decedent, of the Pennsylvania Inheritance Tax Return. 24. On April 3, 2000, the Department of Revenue filed a Notice of Inheritance Tax Appraisement, Allowance or Disallowance of Deductions and Assessment of Tax in response to the return as filed. 25. The Department of Revenue disallowed the deduction for the reimbursement claim of Matthew Kostelac, explaining: "The deduction claimed for reimbursement has been disallowed. No evidence of a written contract of indebtedness between decedent and claimant was submitted." 26. Expenses of the Bernard Estate are paid by checks drawn on an estate checking account, with checks which require the signature of both executors. By arrangement with the co-executors, estate counsel maintains exclusive possession of the checkbook and the register and exclusive authority to issue checks on behalf of the estate. The statements for the account are mailed to 4 the Estate at the law office of estate counsel, and are reconciled by Corrine Myers. 27. It has been the practice of the law firm to obtain the signatures of both executors on blank checks and then hold those checks and use them as needed to pay routine and necessary expenses of the state as such expenses become due. 28. On or about January 2000, as part of the routine course of estate administration, a group of checks, including check No. 241, were signed in blank by Helen Cernugel and then returned by her to paralegal Corrine Myers. Shortly thereafter, Kostelac came to counsel's office and Ms. Myers gave him the same group of checks to sign. Kostelac signed the checks out of the presence of Ms. Myers and returned the checks to Ms. Myers. 29. When she received the check back, Ms. Myers did not confirm whether all the checks given to Kostelac were signed and returned to her. 30. On March 16, 2000, when she reviewed the bank statement and returned checks for the account, Ms. Myers, discovered that check no. 241, in the amount of $48,513.00, had been paid from the estate to Kostelac without her knowledge. 31. Kostelac misappropriated check no. 241 from estate counsel's law offices and issued it to himself without knowledge or approval of estate counsel. 32. Kostelac acted unilaterally, contrary to his obligation as a co-fiduciary, and in his own personal self-interest, and withdrew $48,513.00, from the estate 5 checking account. He expended the sum from his sole benefit without Mrs. Cernugel's knowledge or permission, contrary to her clear direction as co- executor, and without Court approval. 33. Kostelac failed to disclose his intention to issue a check for the disputed claim prior to his negotiation of the check and appropriation of the funds. He acted in flagrant disregard of the joint authority he shared with his co- executor. 34. Kostelac has interests adverse and antagonistic to the Estate of Anna M. Bernard, and to his duties, obligations, and responsibilities as a fiduciary of the estate. 35. Kostelac has a history of interests and conduct adversary to the interest of the Estate of Anna M. Bernard and the primary beneficiary of the Estate, Charles O. Bernard. 36. Kostelac has served his own interest in disregard to his obligation as personal representative of the Estate of Anna M. Bernard and at the expense of the beneficiary of the estate. 37. Kostelac entered into an agreement to provide custodial care for the beneficiary of the Estate, Charles O. Bernard. 38. On behalf of Orrstown Back as co-guardian of Charles O. Bernard, Bradley S. Gerlach investigated reports of Charles Bernard receiving poor quality of care at relatively high cost from Kostelac. Upon inquiry, Mr. Gerlach 6 recommended the termination of the agreement for services with Kostelac. Mrs. Cernugel concurred and Mr. Kostelac's services were terminated. 39. As a result of Matthew J. Kostelac's conduct, the personal estate of Charles O. Bernard has incurred unnecessary and considerable expenses including counsel fees and costs in presenting the petition for his removal, and expense related to the poor quality of care provided by Kostelac to Charles O. Bernard under the agreement. 40. Counsel fees for the Estate of Anna M. Bernard are charged on an hourly basis for professional services provided. 41. The conduct of Mathew J. Kostelac has been the direct cause of additional unnecessary and considerable counsel fees and other expenses related to difficulties in obtaining Kostelac's cooperation, and as a result of the wrongdoing. 42. Kostelac continues to have claims against the estate. 43. The malfeasance of Matthew J. Kostelac as Co-Executor has harmed the estate and the beneficiary by the loss of funds misappropriated and the expenses incurred as a result of his misappropriations of such funds and other wasteful conduct. 44. Matthew J. Kostelac and Helen Cernugel were named under the codicil to the Last Will and Testament of Anna M. Bernard, as co-trustees of the testamentary trust to be funded with the residue of the Bernard estate. 7 45. Based on his conduct as executor, the service of Matthew J. Kostelac as co- trustee of the testamentary trust is likely to jeopardize the administration of the trust and cause harm to the interests of the beneficiary. 46. Matthew J. Kostelac appeared at the initial hearing set on the petition for his removal as co-executor and co-trustee and requested a continuance to obtain counsel. 47. Matthew J. Kostelac was given notice of the continued hearing set on the Petition. He spoke to the Court's secretary and indicated he was aware of the hearing date. He advised her that he would be in further contact with the Court through counsel. He had not been in contact prior to the hearing. He did not appear personally or by counsel at such hearing. 48. No exculpatory evidence was presented by or on behalf of Kostelac with regard to the matters raised in the petition. 49. It would be irregular and improper to permit Kostelac to remain as co- executor and co-trustee, as Kostelac has administered the estate to benefit himself contrary to the interests of the beneficiary of the estate, an incapacitated person. CONCLUSIONS OF LAW 1. This Court has the power to remove a personal representative when he "...is wasting or mismanaging the estate, is or is likely to become insolvent, or has failed to perform an duty imposed by law; or ... when for any other reason the 8 interests of the estate are likely to be jeopardized by his continuance in office." 20 Pa.C.S.§ 3182. 2. Executors as well as other fiduciaries are under an obligation to make full disclosure to beneficiaries respecting their rights to deal with them with utmost fairness. In re Noonan's Estate, 361 Pa. 26, 29, 63 A.2d 80, 82 (1949). 3. A fiduciary is prohibited from engaging in self dealing and cannot allow his fiduciary role to be in conflict with his own interest. Self-dealing is forbidden in order to shield the beneficiary and to ensure the propriety of the fiduciary's conduct. Estate of Harrison, 745 A.2d 676, 679 (Pa. Super. 2000). 4. Matthew J. Kostelac acted in clear and intentional violation of his fiduciary duty owed to the estate by his unilateral payment to himself of $48,513.00, out of estate funds, secretly paying the funds to himself in furtherance of his own self-interest contrary to the decision of his co-executor, and against the advice of counsel. 5. Matthew J. Kostelac's determination of his own claim against the estate constituted prohibited self-dealing because his interest in the transaction was of such a nature that it affected his judgment in a material connection. In re Noonan's Estate, Supra,, 361 Pa. At 31,63 A.2d at 84. 6. An executor may be properly surcharged for any amount accepted in violation of his fiduciary duty whether or not his underlying claim against the estate was valid. Estate of Harrison, Supra, at 679. An executor who negligently causes loss to an estate may properly be surcharged for the 9 amount of such loss. Matter of Estate of Campbell, 692 A.2d 1098, 1102 (Pa. Super. 1997). 7. The evidence establishes that the malfeasance and self-dealing of Matthew J. Kostelac has harmed the estate and caused it loss and warrants his removal to protect the Estate from further peril. 8. The evidence establishes that the Estate has suffered a loss in the amount of the $48,513.00 paid by Matthew J. Kostelac to himself by check dated February 14, 2000, in violation of his fiduciary duty. 9. Those seeking to impose a surcharge against an executor bear the burden of proving the executor's wrongdoing. Where a significant discrepancy appears on the face of the record, the burden shifts to the executor to present exculpatory evidence to avoid the surcharge. Estate of Harrison, Supra., at 681-682. The Petitioners have met their burden in this matter. Matthew J. Kostelac has failed to present any exculpatory evidence to avoid the surcharge. 10. A surcharge against Matthew J. Kostelac is proper in this matter in the amount of the funds appropriated, $48,513.00, with legal interest from February 14, 2000, the date of his appropriation of the funds, plus counsel fees incurred by the Estate and Petitioners in connection with this matter. 10