HomeMy WebLinkAbout21-2010-1039
FRANK A. MOSHER, ANNE CORBIN, : IN THE COURT OF COMMON PLEAS OF
and EILEEN MOSHER FREEBY, : CUMBERLAND COUNTY, PENNSYLVANIA
Petitioners :
:
v.: ORPHANS’ COURT NO: 21-10-1039
:
PAUL M. MOSHER, :
Respondent :
:
IN RE: PETITION FOR OBJECTIONS TO ACCOUNTING OF THE MOSHER
FAMILY IRREVOCABLE TRUST
ORDER OF COURT
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AND NOW
, this 20 day of October, 2011, upon consideration of the Petition for
Objections to Accounting, the briefs filed by the parties and after oral argument;
IT IS HEREBY ORDERED AND DIRECTED
that:
GRANTED
1. Petitioner’s Objections to Accounting is .
2. Respondent’s transfer of stock from his spouse to the Trust is voided in that said
transfer constitutes self-dealing as defined under 20 C.S.A. §7772(b) and (c), and it was barred
by the Company’s Shareholder Agreement because of the adverse effect it has on the Trust.
3. That Respondent, Paul M. Mosher, shall be surcharged for any loss caused to the trust
as a result of his voidable action found in Paragraph 2 above. The Court notes for the record that
Respondent, Paul M. Mosher has agreed to his removal as Trustee of the Mosher Family
Irrevocable Trust and that Silas Mosher has been appointed as Successor Trustee of said Trust.
By the Court,
______________________________________
M.L. Ebert, Jr., J.
Howell C. Mette, Esquire
Ronald L. Finck, Esquire
Attorneys for Petitioners
Bruce J. Warshawsky, Esquire
Attorney for Respondent
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FRANK A. MOSHER, ANNE CORBIN, : IN THE COURT OF COMMON PLEAS OF
and EILEEN MOSHER FREEBY, : CUMBERLAND COUNTY, PENNSYLVANIA
Petitioners :
:
v. : ORPHANS’ COURT NO: 21-10-1039
:
PAUL M. MOSHER, :
Respondent :
:
IN RE: PETITION FOR OBJECTIONS TO ACCOUNTING OF THE MOSHER
FAMILY IRREVOCABLE TRUST
OPINION AND ORDER OF COURT
EBERT, J., October 20, 2011 -
PROCEDURAL HISTORY
On October 14, 2010, Frank Mosher, Anne Corbin, and Eileen Mosher Freeby
(“Petitioners”) filed a Petition for Citation to Account, seeking an Accounting of the Mosher
Family Irrevocable Trust (“Trust”) from Paul Mosher (“Respondent”) in his capacity as trustee
of the Trust. This court then issued a Citation upon Respondent to show cause why he should not
be directed to file an Accounting of his actions as trustee of the Trust. Respondent filed an
Answer to Petitioner’s Petition, which Petitioners said was adequate to inform them of
Respondent’s activities for purposes of filing Objections to Accounting, which were filed
December 30, 2010. This court also ordered parties to file briefs addressing certain issues this
court found pertinent.
BACKGROUND
Frank A. Mosher and his spouse Virginia Mosher are the grantors of The Mosher Family
Irrevocable Trust, created for the purpose of acquiring and collecting on one life insurance policy
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on the lives of Frank and Virginia to pay to the Trust’s beneficiaries. The Trust was created
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Objections to Accounting, filed December 30, 2010 ¶¶1, 7 [hereinafter Objt. to Acct., ¶ __]
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pursuant to a Trust Agreement dated August 3, 1993. The couple’s two daughters, Anne Corbin
and Eileen Mosher Freeby, are the beneficiaries of the Trust, each daughter having a half share to
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be paid out immediately upon the death of the survivor of Frank and Virginia. The couple’s son,
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Paul M. Mosher, is the sole trustee. As of December 31, 2008, the insurance policy on Frank
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and Virginia provided a death benefit of $545,256.25 and a cash value of $267,046.00.
Frank and Virginia owned Security Savings System, Inc. (“Company”), a printing company
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that prints financial documents. Paul and his spouse Jean Mosher both worked for the
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Company. Paul was the president of the Company until November of 2009 when he and Frank
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had a disagreement. At no time have Anne or Eileen ever been involved in the oversight or the
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management of the Company. At the time of Virginia’s death on July 12, 2009, Paul and his
spouse owned 30.5% each of common stock of the Company, Frank owned 24.29%, and
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Virginia owned 14.71%. On July 12, 2009, Virginia died testate, passing her common stock in
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the Company to Frank as trustee of a testamentary trust established by Virginia’s will. In
October of 2009, Paul and Jean submitted letters of resignation and requested that Frank either
purchase their stock in the Company or transfer all of the Company’s stock from Virginia’s
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estate to Paul and Jean. Frank declined these requests.
Paul as trustee borrowed $200,000 against the life insurance policy to purchase his spouse’s
12,070 shares of the Company common stock for $150,000, paid immediately, and $150,000
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Objt. to Acct., ¶3
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Objt. to Acct., ¶4
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Objt. to Acct., ¶6
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Objt. to Acct., ¶9
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Objt. to Acct., ¶14
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Objt. to Acct., ¶18
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Objt. to Acct., ¶ 29
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Objt. to Acct., ¶20
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Objt. to Acct., ¶24
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Objt. to Acct., ¶25
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Objt. to Acct., ¶ 30
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payable within 60 days of Frank’s death. The Trust purchased Jean’s 12,070 shares in September
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of 2010. Paul and Jean further attempted to revoke the IRS “S” corporation status of the
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Company on September 1, 2010. The Shareholder’s Agreement between Paul, Jean, and the
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Company explicitly prohibits revoking the Company’s “S” corporation status.
DISCUSSION
The main issue presented is whether Respondent violated his fiduciary duty to the
beneficiaries, Respondent’s sisters, as trustee of the Trust established by Respondent’s parents
when he sold Company stock to the Trust from his spouse for $150,000. This Court directed the
parties to file briefs discussing: 1) the effect of 20 Pa. C.S.A. § 7772(b) and (c) on the sale of
stock between Respondent as trustee and his spouse; 2) does the Shareholder’s Agreement allow
revocation of the Company’s “S” corporation status; and 3) does the transfer have an adverse
effect on the Trust?
I.Title 20 C.S.A. §§ 7772(b) and (c) allows Petitioners to void Respondent’s
transfer of stock between his spouse and the Trust.
Pennsylvania case law establishes a duty of loyalty owed by a trustee to the beneficiaries
of a trust. See In re Noonan Estate, 63 A.2d 80, 83 (Pa. 1949). In light of the duty of loyalty,
Pennsylvania has a rule prohibiting self-dealing by the trustee, because otherwise the trustee is
not acting to fulfill the trust’s purpose, but rather a third party’s. Id. (citing Beeson v. Beeson, 9
Pa. 279, 284 (Pa. 1848)). “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 judgment in material connection.” Id. (citing In re Downing Estate, 57 A.2d 710, 712 (Pa.
Super. 1948), affirmed per curiam 59 A.2d 903 (Pa. 1948)). “It matters not that there was no
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Objt. to Acct., ¶38
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Objt. to Acct., ¶36
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Join Stipulation of Facts, filed August 17, 2011 Exhibit C [hereinafter Joint Stipulation, __]
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fraud meditated and no injury done; the rule [forbidding self-dealing] is not intended to be
remedial of actual wrong, but preventive of the possibility of it.'" Id. at 84.
The Pennsylvania Legislature has codified the case law in the Pennsylvania Uniform
Trust Act (“PUTA”), which is modeled after the Uniform Trust Code (“UTC). Both the PUTA
and UTC adopt the concept that a trustee owes a duty of loyalty to the beneficiaries and shall
administer the trust solely for the benefit of the beneficiaries. 20 Pa. C.S.A. § 7772(a); UTC §
802(a). However, there are differences in the drafting, most noticeably in §§ 7772(b) and (c),
which provide greater protections against self-dealing by a trustee. The PUTA is controlling in
this case, with §§ 7772(b) and (c) being particularly relevant sections. §§ 7772(b) and (c) are
reproduced below:
(b)Effect of conflict of interest. --Subject to the rights of persons dealing with or
assisting the trustee as provided in section 7790.2 (relating to protection of
person dealing with trustee -- UTC 1012), a sale, purchase, exchange,
encumbrance or other disposition of property between a trust and either the
trustee in the trustee's individual capacity or one of the persons identified in
subsection (c) is voidable by a court upon application by a beneficiary
affected by the transaction unless:
1.the transaction was authorized by the trust instrument;
2.the transaction was approved by the court;
3.the beneficiary did not commence a judicial proceeding
within the time allowed by section 7785 (relating to
limitation of action against trustee);
4.the beneficiary consented to the trustee's conduct,
ratified the transaction or released the trustee in
compliance with section 7789 (relating to beneficiary's
consent, release or ratification -- UTC 1009); or
5.the transaction involves a contract entered into or claim
acquired by the trustee before the person became or
contemplated becoming a trustee.
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(c)What constitutes conflict of interest. --A sale, purchase, exchange,
encumbrance or other disposition of property is presumed to be affected by a
conflict between personal and fiduciary interests if it is entered into by the
trustee with:
1.the trustee's spouse;
2.the trustee's parent or a spouse of the parent;
3.a descendant of the trustee's parent or a spouse of the
descendant;
4.an agent of the trustee unless the trustee is a corporation
and the agent is an affiliate of the corporation or the
transaction is authorized by section 7209 (relating to
mutual funds);
5.a corporation or other person or enterprise in which the
trustee or a person that owns a significant interest in
the trustee has an interest that might affect the trustee's
judgment, but this paragraph does not apply to an
affiliate of a corporate trustee or to a transaction
authorized by section 7209; or
6.the trustee personally.
(emphasis added).
Under the PUTA, Petitioners are entitled to, and this Court is able to, void the sale of
Jean’s stock to the Trust. Under § 7772(c), the legislature sets out a default rule that a purchase
between a trust and the trustee’s spouse is presumed to be affected by a conflict of interest.
Under § 7772(b), the effect of a conflict of interest is to make the sale voidable by an affected
beneficiary of the trust unless the transaction falls into an explicit exception in § 7772(b).
Therefore, Petitioners are entitled to void the sale of Jean’s stock to the Trust unless Respondent
can show the sale falls into one of the exceptions. Alternatively, § 7772(c) creates a rebuttable
presumption of a conflict of interest, and Respondent may avoid the application of § 7772(b) if
he can rebut the presumption.
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Respondent has failed to show that his purchase of his spouse’s stock falls into one of §
7772(b)’s exceptions and he has failed to rebut the presumption of a conflict of interest under §
7772(c).
Respondent argues that because the Trust instrument authorizes him as the trustee to
invest in corporate stock or buy assets of any kind, which would include his spouse’s stock, §
7772(c) does not apply. This argument misinterprets the purpose for Pennsylvania’s policy
against self-dealing: preventing a trustee from entering a position where he might be motivated
to act against the interests of the beneficiary. The act of self-dealing is being guarded against,
thus regardless of whether the Trust authorizes self-dealing by a literal reading of the Trust
document itself, § 7772(c) applies to guard against acts of self-dealing. Respondent could have
avoided the protections applied by § 7772(b) via (c) if he conducted the transaction so that it fell
into one of § 7772(b)’s exceptions. Because Respondent’s conduct does not qualify his
transaction as an exception under § 7772(b) and Respondent cannot rebut the presumption of a
conflict of interest, Petitioners are entitled to void Respondent’s purchase of his spouse’s stock
by the Trust.
II.Respondent is unable to revoke the Company’s “S” corporation status
per the Shareholder’s Agreement.
The Company was originally formed as an “S” corporation, a special corporation type.
The basic operation of such a company is to generate income, which is then distributed to the
shareholders, who then pay individual income taxes. See Internal Revenue Code § 1363(b). The
main benefit of “S” corporations is that the corporation itself does not pay income taxes, but still
provides tax deductions to the shareholders who individually pay taxes. Id. This allows the
shareholders to reap the benefits of the limited liability of a corporation while avoiding the
“double tax” that corporations and shareholders have to pay. Thus, there is a significant benefit
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for “S” corporation shareholders to maintain a corporation’s “S” status. However, trust entities
generally cannot own “S” corporation stock unless they fit within the exceptions set forth in the
Internal Revenue Code § 1362(d). The Trust in this case does not fall within any of the
exceptions in § 1362(d).
When Respondent and his spouse received their shares of Company stock, they executed
a Shareholder’s Agreement (“Agreement”) between themselves, the Company, Petitioner Frank
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Mosher, and Virginia Mosher, who was still living at the time. Paragraph 7 of the Agreement,
reproduced below, discusses shareholders’ responsibilities with regards to the “S” corporation
status:
(a)Election. Each Shareholder acknowledges that [Security Savings System, Inc.]
and each other Shareholder have entered into this Agreement with the
understanding and expectation that the company will be taxed as an “S
corporation” under
(i)the tax laws of the United States,
(ii)the tax laws of the Commonwealth of Pennsylvania; and
(iii)unless otherwise agreed to by more than 50% of the Shareholders, under
the tax laws of each state where such status is available and in which at
any time the Company does business or any Shareholder is resident
Each Shareholder (and each Shareholder’s spouse) shall take all necessary and
appropriate steps and execute all necessary and appropriate consents and other
documents required to make each election to be taxed as an S corporation
effective under the laws of the United States and the respective states in which
the Company files an election to be an S corporation.
(b)Power of Attorney. Each Shareholder (and each shareholder’s spouse) hereby
irrevocably constitutes and appoints the President of the Company…his or her
true and lawful attorney-in-fact and agent, to execute…all consents,
instruments…that may be required…to continue the valid existence of the
company as an S corporation…
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Joint Stipulation, Exhibit C
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The two sections state a clear intention by the shareholders, including Respondent, to
create the Company as an “S” corporation and maintain that status. Furthermore, Respondent, as
President, is charged with acting to “continue the valid existence of the Company as an S
corporation….” By transferring stock from Respondent’s spouse to the Trust, an entity which
cannot own “S” corporation stock, Respondent as President of the Company would revoke the
Company’s “S” corporation. See Internal Revenue Code § 1362(d). This Court thus holds
Respondent, under the terms of the Agreement, is barred from revoking the Company’s “S”
corporation status.
Respondent argues that under paragraph 7, the Company’s “S” corporation can be
revoked under the Agreement’s terms if more than fifty percent of the shareholders agree.
Petitioners disagree, arguing that the text of paragraph 7 implies Respondent’s cited provision
only applies to states other than Pennsylvania. In Banks Eng’g Co., Inc. v. Polons, the
Pennsylvania Supreme Court held that “courts should follow the rules of contract interpretation
generally applicable when parties to a contract disagree as to the meaning of its terms.” 752 A.2d
883, 887 (Pa. 2000).
The Agreement is clearly a contract, and thus principles of contract interpretation must be
applied. “In contract interpretation, ‘determining the intention of the parties is a paramount
consideration.’” Anchel v. Sheau, 762 A.2d 346, 352 (Pa. Super 2000) (quotingHutchison v.
,
Sunbeam Coal Corp.519 A.2d 385, 389 (Pa. 1986)). “[A] contract must be construed as a
whole and the parties' intentions must be ascertained from the entire instrument; effect must be
given to each part of a contract.” Purdy v. Purdy, 715 A.2d 473, 475 (Pa. Super. 1998)
(citingCarosone v. Carosone, 704 A.2d 633 (Pa. 1997)) (internal citations omitted). A court
should only find ambiguity when a term is "reasonably susceptible to more than one
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meaning." West Conshohocken Restaurant Assocs., Inc. v. Flanigan, 737 A.2d 1245, 1248 (Pa.
Super. 1999). If there is no ambiguity, then a court should not re-write the terms of the contract
or give meaning that conflicts with the language used. See Glen-Gery Corp. v. Warfel Constr.
Co., 734 A.2d 926, 929 (Pa. Super. 1999).
Paragraph 7 of the Agreement provides that the Company will be taxed as an “S”
corporation under: (1) the laws of the United States, (2) the laws of the Commonwealth of
Pennsylvania, and (3) unless otherwise agreed to by more than 50% of the Shareholders, under
the tax laws of each state where such status (or similar status) is available and in which at any
time the Company does business or any Shareholder is resident. The Agreement thus creates
three sets of tax laws under which the Company may be governed: the federal tax code,
Pennsylvania’s tax code, and any other state tax code of a state the Company conducts business
in. Respondent argues that the above cited provision allows for shareholders to revoke the “S”
corporation status, provided more than fifty percent of the shareholders agree. This line of
thought goes against the language of the Agreement, which makes a special provision for the
laws of Pennsylvania, where the language Respondent relies on does not apply. The language
Respondent relies on thus only applies to states other than Pennsylvania. Therefore,
Respondent’s actions were barred by the Shareholder’s agreement and the Company’s “S”
corporation status must be preserved.
III.The revocation of the “S” corporation status adversely affects the Trust.
As a result of Respondent’s transfer, the Trust owns stock in the Company purchased
from Respondent’s spouse. Petitioners argue that this has adversely affected the Trust because
the value of the stock to the Trust’s beneficiaries is lower than the value of the money to the
beneficiaries. Respondent’s transfer will actually deprive the beneficiaries of some benefit of the
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Trust by purchasing stock worth less than the purchase price. Respondent argues that the transfer
does not adversely affect the Trust because the stock is in fact worth much more than the
purchase price paid.
The Pennsylvania Supreme Court has previously held a trustee can redeem stock held by
a trust over the objections of a beneficiary, even if such an action was affected by a conflict of
interest. See In re Flagg Estate, 365 Pa. 82, 92 (Pa. 1950). In Flagg, the decedent devised shares
of stock to his son, who then became the majority shareholder in a company both the decedent
and the son managed. Id. at 85. The decedent also created a trust, which was given a number of
shares from the decedent and sons’ company that were intended to pay income to decedent’s
daughter, who was also the son’s sister. Id. These shares were redeemable for a certain cash
value, and per his power as the majority shareholder, the son redeemed the shares for the benefit
of the son’s company. Id. The Court recognized the act was one of self-dealing and affected by a
conflict of interest, but reversed the Superior Court in affirming the share redemption. Id. at 92.
However, in Flagg, the Court focused on several key factors that justified the trustee’s actions: 1)
there was no fraud on the part of the trustee; 2) the trustee had acted in good faith; and 3) the
challenged action is within the provision of the will. Id. at 88. In rejecting the lower court’s
ruling that a conflict of interests relationship ipso facto disqualified the son from acting as
trustee, the Court looked at the decedent’s will, which clearly indicated the decedent intended to
create the conflict of interest relationship in how he executed the will. Id. at 89. The Court
implicitly reasoned that the existence of a conflict of interest, if created by testamentary will,
would not bar a trustee from acting in a way consistent with that same testamentary will. See id.
at 92.
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In the case sub judice, the facts are distinguishable from those in Flagg. There is no will
or testamentary intent creating a conflict of interest relationship between Respondent and
Petitioners. The facts suggest Petitioner Frank Mosher and his deceased spouse intended to avoid
any conflicts because they had wanted to balance the benefit they gave to their son, who was
made president of the Company, with the gifts they wanted to give their daughters, who were to
receive life insurance money collected on Frank and Virginia Mosher. Furthermore, the facts
indicate Respondent likely did not act in good faith when he as trustee of the Trust purchased his
spouse’s stock. Respondent was more than likely aware of the consequences of his transfer of
stock, particularly the effects on the Company and the comparative values of the stock and the
money to Respondent’s sisters. Respondent’s decision to act soon after having a fall out with his
father adds even more support to this conclusion. Based on that line of reasoning, it seems more
likely than not Respondent effectively acted to liquidate his spouse’s shares of stock, defrauding
Petitioners Anne and Eileen in the process. Despite Respondent’s argument that the shares of
stock are more valuable than the money used to purchase them, the fact that Petitioners Anne and
Eileen are unable to use or manage those shares to their benefit weighs heavily in favor of
finding the transfer did not benefit the Trust. This court thus concludes Respondent’s transfer
adversely affected the Trust, and therefore, Respondent did not act in the best interests of the
beneficiaries.
Accordingly the following order is entered:
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th
AND NOW
, this 20 day of October, 2011, upon consideration of the Petition for
Objections to Accounting, the briefs filed by the parties and after oral argument;
IT IS HEREBY ORDERED AND DIRECTED
that:
GRANTED
1. Petitioner’s Objections to Accounting is .
2. Respondent’s transfer of stock from his spouse to the Trust is voided in that said
transfer constitutes self-dealing as defined under 20 C.S.A. §7772(b) and (c), and it was barred
by the Company’s Shareholder Agreement because of the adverse effect it has on the Trust.
3. That Respondent, Paul M. Mosher, shall be surcharged for any loss caused to the trust
as a result of his voidable action found in Paragraph 2 above. The Court notes for the record that
Respondent, Paul M. Mosher has agreed to his removal as Trustee of the Mosher Family
Irrevocable Trust and that Silas Mosher has been appointed as Successor Trustee of said Trust.
By the Court,
______________________________________
M.L. Ebert, Jr., J.
Howell C. Mette, Esquire
Ronald L. Finck, Esquire
Attorneys for Petitioners
Bruce J. Warshawsky, Esquire
Attorney for Respondent
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