Family Trust Dispute – Sometimes Nobody Wins

The verdict is in for the Moyer trust dispute in Portland – or rather the judge’s ruling is in:  Neither side wins. 

Wealthy Portland real estate developer Tom Moyer dropped out of high school and created a dynasty for his family, funding a massive trust ($400M) that became the focus of litigation as his health unfortunately declined.  In the family fight for control over who would be the trustee, family members took sides, lawyered up, and marched into litigation.  

The judge was not impressed:   "I just don’t think (this is what) your mom or dad would have wanted to happen," she said, before ruling that each side had to submit three new names of potential neutral sucessor trustees.  

Litigation is expensive, and family litigation is exhausting.  Only those involved know if there was an easier way to resolve the matter without a judicial ruling.  Sometimes there isn’t; sometimes the parties need to hear from the judge with the black robe.  And that’s what makes family fiduciary litigation so challenging – balancing the needs of the client with the realities of the potential legal outcome. 

 

“$1M is Enough For Anybody:” Reforming Unambiguous Trusts

When the Trust says jump, then the Trustee jumps, right?  Not necessarily.  When sufficient evidence instructs the Trustee otherwise, consider a petition to reform the Trust. 

In Frakes v. Nay, the Oregon Court of Appeals upheld a grant of summary judgment in favor of reforming certain terms of the Saling Family Trust to require only two, rather than three distributions of $500,000 to beneficiary Raymond Frakes. Even though the trust language unambiguously instructed the trustee to make a third round of distributions, the Petitioners (trustee Nay and beneficiary Carol and Velma Saling Foundation) offered sufficiently clear and convincing evidence that the settlors’ intended to give Frakes only two distributions for a total of $1,000,000. At trial, Frakes failed to present any relevant evidence of a contrary intent. Thus, the court found no genuine issues of material fact regarding the settlors’ intent, and allowed summary judgment for trust reformation under ORS 130.220.

ORS 130.220 allows a court to reform a trust to conform to the settlor’s intent, even if the express terms are unambiguous, if the party seeking reformation shows by clear and convincing evidence a mistake “of fact or law, whether in expression or inducement.” Here, the trust language unambiguously instructed distribution according to “paragraph 8.3.”  The Petitioners argued that this was a drafting error (a mistake of fact in expression), and that the language should have instead instructed distribution according to “paragraph 8.3.2.”  Under this latter paragraph, after the second distribution all remaining trust assets would go to the family foundation. Under paragraph 8.3, the trustee would have to make a third round of distributions (giving Frakes a total of $1,500,000) before the foundation received remaining assets.

The trial court found that the Petitioners offered sufficiently clear and convincing evidence that the settlors’ wanted the trust to distribute only $1,000,000 to Frakes. This included letters sent by the trustee to the settlors during the process of amending the trust which expressly stated only two distributions of $500,000 each would go to Frakes, and the trustee’s declaration that the settlors had told him of their intention that Frakes should receive no more than $1,000,000 from the trust. A paralegal who assisted in amending the trust also declared that settlor Carol had showed her a chart he had drawn which demonstrated that Frakes would receive $1,000,000 under the trust, and that Carol specifically told her that $1,000,000 “is enough for anybody.” Frakes himself acknowledged in his own deposition that, just prior to his death, Carol had directly said that he would receive two $500,000 distributions under the trust.

           

Best for Trustee To Obtain Signed Receipt and Release From Beneficiary

 

QUESTION: Can a trustee require a beneficiary to sign a receipt and release form?

ANSWER: Under Oregon law, it is likely that trustee can require a beneficiary to sign a receipt and release form so long as the beneficiary does not have a valid reason to object to the signing. (See prior Wealthlawblog.com article.)

DISCUSSION:

Case law suggests that a trustee may insist that a beneficiary execute a release where doing so is reasonable under the circumstances. See Masters v. Bissett, 101 Or App 163, 790 P2d 16 (1990).

In Masters, for example, the trustee conditioned the distribution of trust assets upon the beneficiaries’ execution of a document that would release him from any further claim arising out of the administration of the trust. Id.at 171. The beneficiaries, however, refused to sign the release because they were aware that the trustee had paid himself fees that he was not entitled to under the trust agreement. Id. The court determined that the demand for release was unreasonable under the circumstances. Id. The fact that the court considered whether the demand was reasonable, however, suggests that a trustee may compel a beneficiary to sign a release where it seems fair to do so.

Likewise, in First Midwest Bank/Joliet v. Dempsey, 157 Ill App 3d 307, 509 NE 2d 791 (1987), a trustee bank refused to distribute the trust property after the beneficiary refused to sign a receipt and release form in order to conclude the bank’s accounting. Id.at 310. The court concluded that the trustee’s action in withholding distribution to the beneficiary after the trust had terminated was proper. Id.at 315. One of the trustee’s privileges is to be compensated in its position as trustee, and it has a right to a determination of the propriety of its accounts before making a final distribution. Id. Thus, the trustee’s refusal to distribute the trust property without first receiving a receipt and release form was not willful and was within its rights as trustee. Id.

In contrast, other jurisdictions have held that a trustee’s refusal to release funds held by the trust until the beneficiary signs a release constitutes duress or coercion. See Ingram v. Lewis, 37 F2d 259, 263 (10th Cir. 1930) (stating that “it is legal duress for a trustee to refuse to turn over property to his beneficiary rightfully entitled thereto, except upon condition of signing a release.”); Kinney v. Lindgren, 26 NE 2d 471, 474 (Ill 1940) (holding that a release is ineffective if the trustee demands the release as a prerequisite to making a distribution to which the beneficiary is otherwise entitled).

Additionally, Oregon does not have a statute that prohibits the trustee from insisting that a beneficiary sign a release. In California, this action is specifically prohibited by Cal. Prob. Code § 16004.5(a). Because Oregon expressly allows for receipt and release forms, and because Oregon does not have a statute prohibiting the trustee from requiring the beneficiary to sign this type of form, there is indication that a trustee may compel this action.

 

Invalidating a Trustee’s Release

QUESTION: When can a receipt and release form for a trustee be invalidated by a beneficiary?

ANSWER: A receipt and release form is generally valid and may protect the trustee from liability but it may also be invalidated if it was induced by improper conduct on behalf of the trustee or where, at the time of the release, the beneficiary did not know of his or her rights or know of the material facts relating to any breach.

DISCUSSION: A beneficiary’s release of a trustee in Oregon from liability for breach of trust is valid so long as it does not violate the provisions of ORS 130.730 or ORS 130.840.

These statutes provide that a trustee is not liable to a beneficiary for a breach of trust if the beneficiary consented to the conduct, released the trustee from liability, or ratified the transaction. ORS 130.730(3)(a)(b); ORS 130.840(1)(2). Such provisions are intended to address the circumstance in which the trustee is reluctant to make a distribution until the beneficiary approves, but where the beneficiary will not approve unless the assets are distributed to him. 

A release will be invalid, however, if it was induced by improper conduct on behalf of the trustee or if the beneficiary was unaware of his rights or of material facts relating to the breach. ORS 130.730(3)(a)(b). Factors considered in determining whether the release was valid include: 1) adequacy of disclosure; 2) whether the beneficiary was financially or legally incapable; 3) whether the beneficiary was represented; and 4) whether the trustee engaged in improper conduct.

 

ORS 130.835 provides that an exculpatory clause included within a trust is unenforceable if it relieves a trustee from liability for a breach committed in bad-faith or  with reckless indifference to the purposes of the trust or interests of the beneficiaries. ORS 130.835(1)(a). Moreover, if the trustee drafted the clause, it is presumptively the result of abuse and is thus invalid. ORS 130.835(2). However, this presumption disappears if: 1) the settlor was represented by independent counsel who reviewed the exculpatory clause; or 2) the trustee proves that the clause is fair under the circumstances and that the clause’s existence and contents were adequately communicated to the settlor. ORS 130.835(2)(b). 

 

In considering whether an exculpatory clause within a trust is fair, courts consider: 1) the extent of the prior relationship between the settlor and the trustee; 2) whether the settlor received independent advice; 3) the sophistication of the settlor with respect to business and fiduciary matters; 4) the trustee’s reasons for inserting the clause; and 5) the scope of the particular provision inserted.

 

Exculpatory clauses contained within trusts will be enforced so long as they are fair and do not eliminate the trustee’s liability completely. Mest v. Dugan, 101 Or App 196, 199-200, 790 P2d 38 (1990).  

 

Trustee May Use Annual Report to Reduce Statute of Limitation

QUESTION: When an annual report or proposed distribution is provided to the beneficiary of a trust, can the statute of limitations be signficiantly reduced?

ANSWER: Likely, but the limitation for bringing an action based on an annual report is only applicable where the final report discloses specific information, including the existence of a potential claim.

DISCUSSION:

A. Proposal for Distribution
Upon the termination of a trust, the trustee may send out a proposal for distribution to the trust beneficiaries. ORS 130.730(1). If a beneficiary wishes to object to the proposal, he or she must notify the trustee of the objection within thirty days after the proposal was sent so long as the proposal notifies the beneficiary of the right to object.

Absent objections, the trustee should be able to treat the period beyond 30 days as a safe harbor for distribution purposes. Although the time limitation included in ORS 130.730(1) is not specifically referenced in the provision limiting actions against a trustee (ORS 130.845), the comment to ORS 130.845 provides that the limitations that it imposes are not the only means from barring an action by a beneficiary. Oregon Uniform Trust Code and Comments at 388. The comment states, for example, that claims may be barred by consent, release, and principles of equity under the common law of trusts. Id.

B. Trustee’s Report
A trustee must send a trustee report to the beneficiaries of the trust at least annually. ORS 130.710(3). This report must include information such as trust property and liabilities, the market values of trust assets, and receipts and disbursements of the trust. Id. Moreover, ORS 130.820, which relates to limitations of actions against a trustee, states that a beneficiary may not commence an action against a trustee more than one year following the date on which the beneficiary was sent a report that discloses the existence of a potential claim and that informs the beneficiary of the time allowed for commencing a proceeding. ORS 130.820(2). But that statute is very specific. ("A beneficiary may not commence a proceeding against a trustee more than one year after the date the beneficiary or a representative of the beneficiary is sent a report by certified or regular mail that adequately discloses the existence of a potential claim and that informs the beneficiary of the time allowed for commencing a proceeding. A copy of this section must be attached to the report. The report must provide sufficient information so that the beneficiary or representative knows of the potential claim or should have inquired into its existence.") Accordingly, a standardized annual report with a statement that the beneficiary will have one year to bring a claim based on the matters covered by the report will not be adequate. Id. Thus, if there is no potential claim to be disclosed, the one year limitation period will not apply. Rather, the six year statute of limitations for actions against a trustee contained in ORS 130.820 will apply.

C. Statute of Limitations
Two Oregon cases discuss the statute of limitations in the context of actions by beneficiaries against trustees. In Condon v. Bank of California, 92 Or App 691, 694-95, 759 P2d 1137 (1988), and McDonald v. U.S. National Bank, 113 Or App 113, 830 P2d 618 (1992), the beneficiaries sued the trustees for negligence in the administration of the trust. In both cases, the courts enforced the two year statute of limitations for negligence, although they also held that the discovery rule was applicable. 92 Or App at 694; 113 Or App at 115. (Note that these cases were decided prior to the enactment of ORS 130.820.)

 

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Wintercross Foundation Ruling: Millions in Damages

From time to time we will publish local opinons of interest:

Background: 

Plaintiff, director of a charitable organization (Wintercross) and the entities controlled by the organization (Jensen), engaged in self-dealing in the course of making investments on behalf of the organization.  Plaintiff failed to pay the mandatory charitable contributions, which resulted in tax penalties. During this time, however, Plaintiff maintained possession of items of personal property that could have been distributed to another qualifying entity, thus reducing or eliminating tax penalties. Plaintiff also structured the sale of an apartment complex that both she and Jensen had an ownership interest in such that she received cash and Jensen carried the balance of the deferred purchase price.  Then, when the purchaser was unable to pay, Jenson faced 100% of the loss.  Finally, acting against the advice of an accountant, Plaintiff invested the proceeds of that sale in a second apartment complex.  The value of the complex decreased substantially and resulted in a loss of millions in assets.  And, upon Jensen’s management and/or acquisition of each apartment complex, Plaintiff purchased a home that adjoined such complex.  Plaintiff then allowed maintenance personnel to occupy the home.  Although Plaintiff arranged for the complex to pay for both the mortgage and utilities associated with the home, title to the home remained with Plaintiff. Finally, Plaintiff used Jensen’s assets to pay for her attorney fees associated with this proceeding. 

 

Holding:

Plaintiff abused her authority as a director and officer of Wintercross and was removed, with millions awarded for damages. Although Plaintiff did not directly divert Wintercross assets to herself, she used her control to benefit personally when such benefits should have been allocated to Wintercross. Plaintiff did not act prudently when she: (1) refused to follow the advice of the accountant; (2) failed to make sensible investments, resulting in substantial loss; (3) failed ensure that the mandatory minimum charitable distributions were made; and (4) used the organization’s assets to fund a personal proceeding. The court determined that Plaintiff’s claim of ignorance was ill-founded and did not create a defense to her liability because she took on the responsibility of handling the affairs of Wintercross, and in doing so, engaged in self-dealing.

Ellis v. Department of Justice and Wintercross Foundation

Clatsop County Circuit Court Case No. 09-2215

Trust Mills Hit With $6.4M Fine

American Family Prepaid Legal Corporation and Heritage Marketing and Insurance Services Inc., with their co-owners, Jeffrey and Stanley Norman, just got nailed with a little under $6.4 million in fines from the Ohio Supreme Court for the illegal practice of law. 

The companies preyed on the elderly through telemarketing and in-person sales calls, with more than 3,800 acts of unauthorized law practice through a "trust mill" operation with overpriced and unnecessary legal plans and annuitities. 

The companies and their co-owners are now permanently barred from business in Ohio. 

TAKE AWAY:  Protect yourselves and your edlerly friends and family from these scams by obtaining qualified and reputable estate planning counsel.  When dealing with your personal and real property, get referrals from those you trust, check out the state bar association for complaints, and screen accordingly.  And as many times as you’ve heard it, I’ll say it again  – if it sounds too good to be true, it probably is. 

Recent Ruling: Constructive Trust & Life Insurance

From time to time we will publish recent local cases or legislative bills:

Tupper v. Roan, 227 Or App 391, — P.3d – (2009)

Background: As part of a divorce decree, the decedent promised to obtain a life insurance policy for the benefit of his wife as trustee for his child. Decedent never did this. Instead, he obtained a life insurance policy naming his girlfriend as the beneficiary. The ex-wife sued the girlfriend asking the court to impose a constructive trust on the portion of life insurance ($100,000 of the $600,000) that decedent promised to obtain.

Holding: In order to obtain constructive trust over the life insurance policy, the ex-wife must prove that the decedent gave the beneficiary property that originally belonged to the children and that the beneficiary knew or should have known of the wrongfulness of the decedent’s actions. The ex-wife must show the beneficiary is unjustly enriched. The fact that the divorce decree included a provision that stated the ex-wife would have constructive trust of any life insurance policy if he breached his obligation was unenforceable against the girlfriend because she was not a party to that agreement.

Note:  If not for the fact that the decedent was indeed deceased, his ex-wife would have killed him.