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HomeMy WebLinkAbout95-612 orphansRANDALL L. VALK, · IN THE COURT OF COMMON PLEAS OF Plaintiff/Petitioner · CUMBERLAND COUNTY, PENNSYLVANIA : vs. : ORPHANS' COURT DIVISION : DAUPHIN DEPOSIT BANK AND : TRUST COMPANY, a division : of DAUPHIN DEPOSIT CORP., : and RICHARD P. VALK, : Defendants/Respondents · NO. 21-95-612 DECREE NISI AND NOW, this z '1 ° day of March, 2000, the petition of Randall L. Valk seeking a citation for surcharge, including punitive damages, is DISMISSED. BY THE COURT, Michael L. Bangs, Esquire For the Petitioner David W. DeLuce, Esquire For Dauphin Deposit Bridget Montgomery, Esquire For Richard Valk :rlm RANDALL L. VALK, : IN THE COURT OF COMMON PLEAS OF Plaintiff/Petitioner · CUMBERLAND COUNTY, PENNSYLVANIA : vs. : ORPHANS' COURT DIVISION : DAUPHIN DEPOSIT BANK AND : TRUST COMPANY, a division · of DAUPHIN DEPOSIT CORP., : and RICHARD P. VALK, : Defendants/Respondents : NO. 21-95-612 OPINION AND DECREE NISI BEFORE HESS, J. This cases arises Out of a Trust Agreement dated May 28, 1964. The trust was established by Paul Valk and the res of the trust consisted of approximately ten percent of the outstanding shares of Valk Manufacturing Company. Three separate trusts were established: one for the petitioner, Randall L. Valk; one for his brother, Ted Valk; and the last for his brother, Rich~d A. Valk. Each individual trust consisted of two thousand shares of stock.~ The res of the trust, along with any accumulated income, was to be mined over to each beneficiary as each turned age thirty-one. The co-trustees of the trust were the Dauphin Deposit Bank and Trust Company and Richard P. Valk, Paul Valk's son and father of the three beneficiaries. Before the court is the petition of Randall Valk seeking a surcharge, including punitive damages, against the co-trustees alleging mismanagement of the trust. Also before the court are the objections to the First and Final Account filed by the co-trustees on or about July 8, 1999. The allegations of the petitioner are that Richard P. Valk, in his capacity as president of Valk Manufacturing Company, did acts which caused a diminution in value and loss of income to the l A reverse stock split lowering this number to 200 did nothing to change the value. 21-95-612 ORPHANS' COURT trust shares. These included paying excess compensation to the officers of Valk Manufacturing, failing to pay dividends, the misappropriation of a company patent and setting up a competing leasing company. The petitioner also contends that his name was forged over the years by Richard Valk. The petitioner also contends that Dauphin Deposit Bank and Trust Company, in its role as co-trustee, failed to monitor or prevent these acts. FINDINGS OF FACT During the trial of this matter, which spanned more than two days, there was disagreement among the witnesses as to some important facts. Given the considerable amount of time which has elapsed between the occurrence of certain events and the date of the trial, in some cases as long as fifteen to twenty years, we decline to suggest that any of the witnesses have been willfully false in their testimony. Where, however, there are questions concerning the accuracy of the testimony, we are prepared to resolve these issues of credibility in favor of the respondents. The Trust Agreement at issue in this case contains an exculpatory clause. It provides that the trustees are not liable or responsible for any loss or depreciation in the trust assets resulting from any error in judgment or from any act or omission except for their own willful misconduct. We are satisfied that the petitioner has failed to demonstrate willful misconduct in this case. Until 1991, Richard P. Valk was assisted in his corporate endeavors by John Hippensteel. Valk Manufacturing, which makes snow plows, was divided into two divisions, the plow division and blade division. Mr. Hippensteel had started with Paul Valk in October of 1952. By 1954, the corporation had erected a small building. By 1960, the corporation had begun to sell 21-95-612 ORPHANS' COURT snow plows. From 1961 until his retirement in 1991, Mr. Hippensteel was in charge of the plow division. Initially, Valk products were shipped in vehicles leased from Keen Leasing, Inc., driven by drivers employed by Valk. This changed when Richard P. Valk formed RPV Vehicle Leasing, Inc. This corporation was able to lease vehicles to Valk Manufacturing under very favorable terms. Its employees included drivers formerly employed by Valk. There were several reasons why RPV Vehicle Leasing, Inc. was organized. First, there was a concern that a union movement among Valk's drivers would spread throughout the entire plant. In addition, there was concern that a catastrophic motor vehicle accident would expose Valk Manufacturing to unacceptable liability. Finally, the terms which could be obtained through RPV Leasing were favorable. As RPV Leasing became profitable, Mr. Valk's compensation package was adjusted so that increasing proportions of his income were attributable to RPV Leasing and not to Valk. By the late 1980s, Mr. Valk's total annual income exceeded a million dollars. As much as half of this income came from RPV Leasing and royalty payments.2 Because of earlier discovery orders entered in this case, the plaintiff s expert was required to rely on estimates of Mr. Valk's income from Valk Manufacturing for a period of more than twelve years. Nonetheless, the record of this case shows that Mr. Valk's income grew from $160,056 in 1971 to $546,008 in 1989. The petitioner's conclusion that Mr. Valk's compensation was excessive is based on the Executive Compensation Assessor produced by the Economic Research Institute. 2 The royalty payments were made in connection with a patent for a snow plow. This patent had been obtained by Mr. Hippensteel and had been formulated with the assistance of employees of the Valk Manufacturing Company. At the direction of Mr. Richard Valk, this patent was held by RPV Leasing. Despite his promise to do so in the first few pages of his report, the petitioner's expert, Robert J. Murphy, C.P.A., fails to demonstrate specifically how the appropriation of this company patent adversely affected the value of Randall Valk's stock. Instead, these royalty payments are simply a part of the alleged "excessive compensation" paid to Richard Valk. Because we are satisfied that Mr. Valk's compensation is not excessive, we will not address the matter of the patent further. 21-95-612 ORPHANS' COURT The figures cited, however, are based on a mean of incomes of chief operating and chief executive officers. Moreover, the corporations involved were not necessarily closely held family corporations like Valk Manufacturing. We are satisfied that excessive compensation has simply not been established in this case. This corporation has been run by Mr. Richard Valk on a sound financial basis. Since 1974 it has been essentially debt-free. It is clear, therefore, that much of the growth of Valk Manufacturing has been accomplished on a cash basis. It is rare that closely held corporations such as this one declare dividends. While Mr. Valk has, in recent years, spent time in Florida, it is clear that his management of the company has been very much "hands on." The petitioner complains, among other things, about "add-backs" as a way of determining manager bonuses. The add-backs were used to reflect the expenses of the corporation. They were attributed to the divisions with an eye to obtaining a more accurate picture of profitability. This, in mm, assisted in the computation of bonuses and fostered healthy competition between the divisions. In the meantime, the petitioner argues that the nature and amounts of the "add-backs" reflect a history of excessive discretionary expenses paid out by the corporation. One such expense involved the salary of a captain to pilot a yacht. This yacht was used to woo potential customers of Valk Manufacturing. It was also used for management seminars for company personnel. We are unable to conclude that this expense, or any other cited in this case, is so disproportionate to the benefit derived as to be excessive. Petitioner also contends that, over the years, he was not told about his trust shares, and that there was a deliberate attempt to keep from him his shares of stock. While he may not have learned of the specifics of the trust, we are satisfied that this is as much his fault as anyone else's. 21-95-612 ORPHANS' COURT Mr. Randall Valk expressed little or no interest in the affairs of Valk Manufacturing over the years. After some years away from the company, he was asked to return to work at the plant and failed to do so. We are satisfied that, had he exercised any diligence, he would have known of the existence of his trust fund as early as 1982, if not earlier. In 1982 all of the shareholders of Valk Manufacturing Company, including Randall Valk, entered into a shareholders agreement. An exhibit to the shareholders agreement set out the shares of common stock owned by each shareholder and reflected the 200 shares then held in trust for the petitioner. The provisions of the shareholders agreement were explained by the corporate attorney, Elliott Braverman, Esquire. Even before the execution of the shareholders agreements in 1982, the fact that there were stocks being held in trust for the Valk sons was the subject of discussion at the family dinner table. Mr. Ted P. Valk, currently the majority shareholder of Valk Manufacturing, recollected that even as a young man he was aware of and proud of his ownership interest, albeit small, in the Valk Manufacturing Company. It is tree that sometime after Mr. Randall Valk's thirty-first birthday, the stock held in trust for him was put in his name. In order to accomplish this, Mr. Richard Valk signed a receipt for the stock using Randall Valk's name. Following a half-hearted effort on the part of the trustee to notify the beneficiary, the stock was placed in a vault, at Valk Manufacturing, for safe keeping. While we certainly do not condone these activities, the petitioner has neither alleged nor proven any damages which flow from the delay in his receiving his stock. Finally, we find as fact that the petitioner has suffered no loss in the book value of the stock. Instead, during the life of the trust, the stock not only increased in value, but markedly so. In 1965, the book value of Randall L. Valk's shares was $5,098.40. By April 30, 1998, the outstanding shares of the company owned by Randall L. Valk had a book value of $132, 292. 21-95-612 ORPHANS' COURT The value of each share had gone from $2.55 per share to $661.46 per share representing a rate of return over the period of 10.37 percent. DISCUSSION WITH CONCLUSIONS The petitioner makes much of the fact that Mr. Richard Valk put his own self-interest ahead of his role as trustee. It is tree that as head of a profitable company he was able to earn a comfortable living for himself. To the extent that this represented any conflict of interest with the trust, it was one understood by Paul Valk at the time the trust was formed. A settlor may waive the rule requiring a trustee to have undivided loyalty. The role can also be waived by implication, "where he knowingly places his trustee in a position which might conflict with the interest of the trust or its beneficiaries, and gives the trustee power to act in that dual capacity." Estate of McCredy, 323 Pa. Super. 268,470 A.2d 585 (1983 citing, inter alia, In re Kellogg's Trust, 35 Misc. 2nd 541,230 NYS.2d 836 (1962)) (family trust holding stock of family corporation). Here, as noted in the briefs filed by the respondents, the settlor created the family business and later placed some of the shares of that business in trust for his three grandsons. The settlor designated Richard P. Valk as trustee with the full knowledge and expectation that management and control of the family business would be taken over by him after the settlor stepped down. "Such succession, in addition to being fully intended by the Settlor when he created the Trust, was vital to the continued success of the family business. The Settlor would certainly not have risked the success of the business by exempting his son and future successor from its management for the sole purpose of making him Trustee over some minority shares of that business, the value of which was dependent on such a successful future." Brief in support of Dauphin Deposit Motion for Summary Judgment, pp. 13-14. 21-95-612 ORPHANS' COURT The fact that Mr. Richard Valk may have chosen to pay himself well and that that self- interest might somehow have conflicted with his role as trustee becomes an even less significant consideration when one considers the degree to which the value of Randall Valk's stock has increased during the existence of the trust. Here, in other words, there was not only no loss to the trust but a substantial gain. As noted by the court in Estate of Pew, 655 A.2d 521 (Pa. Super. 1994 at page 543): A trustee cannot be surcharged for a breach of duty unless the breach of duty caused a loss to the trust. One who seeks to surcharge the trustee for breach of trust must bear the burden of proving the particulars of the tmstee's wrongful conduct. The propriety of an investment by a trustee must be judged as it appeared at the time it was made and not as viewed in the light of subsequent events. The mere retention of stocks which the trustee received from the settlor is not, in itself' negligence. Especially when such stocks have produced a high rate of return for the trust over an extended number of years. Hindsight is not the test of liability for surcharge. To make afiersight the sole judge of the tmstee's prudence would be manifestly unfair. (citations omitted) Estate of Pew, 655 A.2d at 543-44. Thus, since there is no loss in this case, we seriously question whether the petitioner may now question any of the corporate decisions of Mr. Valk. Assuming that he can, however, under the terms of the trust agreement, the trustees are liable only for willful misconduct in the management of the trust. While there is a question as to whether the management of the trust extends to the operation of the corporation, we need not finally resolve it as we find no willful misconduct in any event. We reach the following conclusions with regard to the points raised by the petitioner: 21-95-612 ORPHANS' COURT 1. There was no active concealment of the existence of the trust. 2. The reasons for the formation of RPV Corporation were valid. The conduct of that company's operations was legitimate and not detrimental to Valk Manufacturing Company. 3. The plaintiff suffered no damage by virtue of the compensation of the officers of the corporation. 4. To the extent that any business decisions regarding a patent or the payment of expenses inured to the benefit of Mr. Richard Valk, they did not operate to the detriment of the corporation and were not, in any event, instances of willful misconduct with respect to his management of the trust. 5. The management of Valk Manufacturing Company and particularly its failure to pay dividends was consistent with commonly accepted business practices. 6. The stock, which comprised the corpus of the trust, increased in value during the life of the trust. 7. No liability and no damages of any kind have been established with respect to the respondent, Dauphin Deposit Bank and Trust Company. DECREE NISI AND NOW, this ~ q ' day of March, 2000, the petition of Randall L. Valk seeking a citation for surcharge, including punitive damages, is DISMISSED. BY THE COURT, K~~,t,t~. Hess, J. 21-95-612 ORPHANS' COURT Michael L. Bangs, Esquire For the Petitioner David W. DeLuce, Esquire For Dauphin Deposit Bridget Montgomery, Esquire For Richard Valk :rim