Opinion
1684-CV-0897 BLS 1
10-13-2016
J. Joseph O'Donnell et al. v. Maryellen O'Donnell et al No. 135385
Edward P. Leibensperger, Justice
Filed October 14, 2016
MEMORANDUM AND ORDER ON DEFENDANTS' MOTION FOR PARTIAL SUMMARY JUDGMENT
Edward P. Leibensperger, Justice
This is a dispute among members of the family of James J. O'Donnell, III (" JJO") who died on May 4, 2011. Plaintiffs are children of JJO and his first wife (deceased). Defendants are JJO's second wife, Maryellen, and the long-time lawyer, Joseph F. Ryan, for JJO and the real estate company that constitutes the major asset left by JJO. In addition, the real estate company, Parklake Realty Corp., is named as a nominal defendant for plaintiffs' derivative claims of corporate waste and mismanagement, including the failure to pay dividends. The present motion does not challenge the claims by plaintiffs as shareholders of Parklake, brought both as direct and derivative claims, alleging breach of fiduciary duty and corporate waste and mismanagement. Instead, this motion for partial summary judgment seeks to dismiss claims alleging breach of fiduciary duty in connection with purchases of shares in Parklake by an insurance trust and by the company from the estate of JJO. Specifically, the motion requests the dismissal of Count III of the Verified Amended Complaint (" complaint") alleging breach of fiduciary duty by Ryan as trustee of the insurance trust. In addition, however, the motion requests that the court eliminate from the other counts of the complaint any allegations by plaintiffs for breach of fiduciary duty arising from transactions in the insurance trust and the estate of JJO. Defendants contend that such allegations are barred by plaintiffs' previous consents or by operation of law.
The complaint alleges that Maryellen and Ryan in their fiduciary capacities as directors and, in Maryellen's case, controlling shareholder, of Parklake caused Parklake to consent to the purchase of a number of shares from the JJO estate in a manner that allegedly benefitted Maryellen to the detriment of plaintiffs. Because the sale by the estate was accomplished as part of a plan to provide cash to the estate to pay estate taxes, and those transactions were approved by the Probate and Family Court, defendants argue that plaintiffs are barred in this action from challenging the transactions. Accordingly, defendants want all allegations in the complaint concerning purchases of shares in Parklake held by the estate, whether by the insurance trust or as a redemption by Parklake, to be stricken or dismissed.
BACKGROUND
At the time of his death, JJO owned 96.7% of the shares of Parklake. The remaining 3.3% of the shares were owned by his ten children in equal amounts. Parklake owned and operated three apartment buildings in Brighton, Massachusetts. Following JJO's death, Ryan was appointed executor of JJO's estate. Appraisals of JJO's interest in Parklake were ordered. The appraisals valued JJO's shares of Parklake as being worth approximately $10.2 million.
Pursuant to JJO's will, his shares of Parklake poured into a 1997 trust. Ryan is the sole trustee of the trust. The trust provides that a marital trust be established to hold for the benefit of Maryellen and her two children (fathered by JJO) shares of Parklake in such number to constitute 55% of the voting shares. This provision gave Maryellen voting control of the corporation.
Parklake's share structure was 7, 500 voting shares and 7, 500 non-voting shares.
The 1997 trust directed that the remainder of the shares, both voting and non-voting, of Parklake be distributed, free of trust, to the eight children of JJO and his first wife. These eight children are described in the trust as the " older children." The four plaintiffs in this action are " older children."
According to Ryan, the estate was " cash poor" meaning that there was not enough liquid assets in the estate to pay the Federal and state estate taxes. The combined estate tax was calculated to be approximately $1 million. Thus, Ryan presented a plan to the older children for the payment of the taxes. The plan was presented to the older children because the terms of the 1997 trust provided that the trustee shall satisfy a request from the executor for funds to pay estate taxes from " property set aside for purposes of funding the Family Trust. If the assets of the Family Trust are insufficient to satisfy in full such request then the assets of the Marital Trust may be used to satisfy any excess or remaining portion." The term " Family Trust" is not defined in the instrument but Ryan, as trustee, interpreted the term to refer to the property--the remaining shares of Parklake other than the voting shares held by the Marital Trust-- to be distributed to the older children. Thus, Ryan required that the estate taxes be paid by the older children who would receive the property in the Family Trust, with no contribution from the Marital Trust or Maryellen.
On May 20, 2011, Ryan wrote to the older children. He enclosed copies of JJO's will, the 1997 trust instrument, and a 1986 insurance trust. Ryan stated that he was the trustee under the insurance trust, as well as the 1997 trust. Ryan referenced estate taxes and stated that he was analyzing ways to address the issue of payment.
The insurance trust, established by JJO in 1986 (prior to the 1997 will and trust), held a life insurance policy on the life of JJO, and some other assets. Upon the death of JJO, the policy provided cash to the trust in the approximate amount of $1 million. According to the terms of the insurance trust, its assets were divided into Share A and Share B. Share A, consisting of 55% of the value of the trust property, was for the benefit of Maryellen. Share B, consisting of the remaining 45%, was for the benefit of the older children. Upon the death of JJO, the eight older children were entitled to payment of the net income of Share B, and distribution of the property in Share B on the date five years from the death of JJO. Share A was to be paid over to Maryellen at the same time, although she was entitled to distribution of the principal of Share A at her request. The insurance trust says nothing, one way or the other, about use of its assets to pay estate taxes owed by the estate of JJO based upon the value of property included in the estate.
Ryan states in his affidavit that it was the intent of JJO to make Share B available to the older children to assist them in the payment of estate taxes upon the death of JJO. Plaintiffs dispute that assertion, and rightly point out that they have had no opportunity to take discovery regarding JJO's intent. For that reason, I disregard, for purposes of this motion, Ryan's assertion regarding JJO's intent in establishing the insurance trust.
On September 15, 2011, Ryan sent a letter to the older children presenting three options for providing cash to the estate for the payment of estate taxes. Ryan pointed out that, as executor, he was responsible for seeing that all estate taxes were paid and that he could not distribute shares of Parklake to the older children until the taxes were paid. The three options presented by Ryan were (1) the older children contribute cash to the estate to pay the taxes, (2) the older children borrow funds from the insurance trust and contribute cash to the estate, and (3) the estate sell non-voting shares (which, otherwise, would be distributed to the older children) to Parklake for cash to provide liquidity to the estate.
On October 1, 2011, there was a meeting with Ryan at Ryan's office attended, in person or by telephone, by all of the older children. According to Ryan, but disputed by plaintiffs, there was a consensus reached at the meeting to proceed with option three.
On November 2, 2011, Ryan wrote again to the older children. Among other things, Ryan indicated that he planned to sell, as executor of the estate, non-voting shares of Parklake to Share B of the insurance trust. This idea was not one of the options outlined in Ryan's September 15, 2011, letter. The November 2, 2011, letter described the estimated value of a share of voting and non-voting shares. The sale would allegedly generate $450,000 to satisfy a portion of the estate taxes. The non-voting shares purchased by the insurance trust would be held by the insurance trust until the assets of the trust, including the shares, would be distributed to the older children. In addition, Ryan proposed that Parklake redeem shares from the estate in an amount to pay the remaining amount of taxes estimated to be owed. Ryan included a form for the older children to sign to indicate agreement with the proposal to sell shares back to Parklake (the form did not address the proposal to use the insurance trust to buy shares). He renewed his advice to the older children to seek independent counsel.
Plaintiffs, Joseph O'Donnell and Brian O'Donnell, returned the form to Ryan confirming, " I concur with, and assent to, your plan to redeem Non-Voting Parklake Shares sufficient to pay all Massachusetts and Federal Estate taxes and to meet all other payment obligations of the Estate." According to Ryan's affidavit, Ryan received signed consent forms from " the majority" of the older children.
On December 28, 2011, Parklake's board of directors (Maryellen, Ryan and Francis Hogan) voted to redeem from the executor of JJO's estate (Ryan) 500 non-voting shares at $633.24 per share for a total of $318,620. The non-voting shares were among the shares that would have been distributed by the 1997 trust to the older children.
Also, in January 2012, Ryan, as executor, sold 500 non-voting shares of Parklake to the Share B portion of the insurance trust. Again, the sale generated $318,620 for the estate.
On January 27, 2012, Ryan corresponded with the older children to describe, among other things, the completion of the transactions described above. Ten months later, on November 29, 2012, Ryan wrote to the older children describing continuing negotiations regarding the amount of Federal estate taxes. He described planned additional purchases by Parklake and the insurance trust to provide cash to the estate to pay the expected Federal taxes. Finally, on April 9, 2013, Ryan reported to the older children a resolution with the Internal Revenue Service regarding the amount of Federal estate taxes. He noted that there was a very substantial amount that would have to be paid. Ryan stated " I propose to raise those additional funds by requesting Parklake to redeem from the Estate more Parklake non-voting shares."
Insurance Trust Accounts
In his affidavit, Ryan states that " [n]one of the older children questioned that this [use of Share B of the insurance trust to purchase shares of Parklake from the executor] was the intended use of their share of the Insurance Trust." On February 7, 2013, Ryan sent to the older children his Second Account as trustee of the insurance trust. This account was for the period from JJO's death to December 31, 2012. The account reported the purchase by the Share B portion of the insurance trust of 500 non-voting shares of Parklake in January 2012. The accounting also showed an adjustment to the purchase price of the non-voting shares by $150 from $637.24 per share to $787.24 per share as a result of an IRS audit. In his communication of the account to the older children, Ryan stated " PLEASE TAKE NOTICE that if you do not object to the Account by a writing sent to me by certified mail within sixty days of your receipt of the Account you will be deemed to have assented to the Account." In his affidavit, Ryan states that none of the older children objected to the account. Plaintiffs do not dispute this assertion with any contrary facts supported by affidavits or evidence. See SUMF ¶ 66.
Plaintiffs dispute this assertion, as contained in the Statement of Undisputed Material Facts (" SUMF") ¶ 62. They cite a November 23, 2015, letter from current counsel. (Ex. 65.) Of course, this letter came long after the transactions and the accountings reporting the transactions.
On November 1, 2013, Ryan sent another accounting of the insurance trust to the older children. This was an interim accounting covering the period from January 1, 2013 to September 30, 2013. Again, Ryan notified the older children that " [u]nder the terms of the Trust, unless you object in writing within sixty days of receipt of an accounting, mailed certified mail, you are deemed to have assented to it." Ryan indicated that it was his plan to issue a final accounting of the insurance trust in early January 2014, and to make a final distribution of the trust's property at that time. The interim account referenced the purchase by the insurance trust of 117 additional shares of non-voting shares from the estate as a result of a " refund of overpayment of value of 500 shares." In other words, the previous adjustment of the purchase price by $150 per share for the 500 non-voting shares of Parklake, was being reversed. The amount paid by the insurance trust for the adjustment would be used to buy 117 additional shares.
The interim account also described the distribution by the insurance trust in April 2013, of all of the non-voting shares of Parklake (that had previously been purchased from the estate) to the older children. The correspondence included a form to be returned to Ryan by each of the older children indicating, among other things, whether he or she assented to the account.
In his affidavit, Ryan states that he received signed assent forms from all of the older children except for plaintiff, Patrick O'Donnell. The signed forms of assent from plaintiffs, Joseph, Brian and Daniel O'Donnell are in the record.
Finally, on January 13, 2014, Ryan wrote again to the older children, enclosing a " final accounting for Share B of the Trust, which now has been distributed in full to you and the other seven beneficiaries of Share B." Once more, Ryan notified the older children that they must object in writing within sixty days of receipt of the accounting or be deemed to have assented to the accounting. In his affidavit, Ryan states that he received no objections from any of the older children except for Patrick. Plaintiffs do not dispute the fact of no written objection. SUMF ¶ 71.
Plaintiff, Patrick O'Donnell, sent to Ryan the form that had been attached to Ryan's November 1, 2013, letter and accounting. Patrick indicated " I do not assent, see previous letter." Patrick's form is dated January 15, 2013, which is, beyond doubt, a typo. Patrick admits in his affidavit that he sent the form back to Ryan in January 2014. The letter was mailed, according to a copy of the envelope, on January 16, 2014.
The parties dispute what correspondence was the " previous letter" referred to by Patrick in the form noting his objection. In an affidavit, Patrick asserts that the " previous letter" was a 29-page letter to Ryan dated October 8, 2013. (Ex. 71.) For purposes of this motion, I accept Patrick's representation that the " previous letter" was his October 8, 2013, letter (the " objection letter").
I have reviewed the 29-page objection letter. The bulk of the letter concerns the operation of and accounting for Parklake. Nowhere in the letter is there stated an objection to the purchases by the insurance trust of non-voting shares of Parklake held by the estate. In his affidavit submitted in opposition to partial summary judgment, Patrick asserts that the objection letter listed " my objections to the actions [Ryan] had taken as Executor of my father's estate, Trustee of the 1986 Insurance Trust of which I was a beneficiary, and a Member of the Board of Directors of Parklake Realty Corp." The affidavit fails to specify any particular sentence or phrase constituting an objection to the transactions detailed in the accounting for the insurance trust.
Estate Accounts
As executor of the estate of JJO, Ryan filed accountings with the Probate and Family Court (" Probate Court"). The accountings detailed the sales by the estate of Parklake non-voting shares held by the estate to the insurance trust and to Parklake as a redemption. It is undisputed that Ryan reported the sales by the estate in his first and second accounts to the Probate Court and the accounts were " allowed" by the court. SUMF ¶ 63. The first and second accountings covered the period from July 7, 2011 (when Ryan was appointed as executor) to December 31, 2014. Brian, Joseph and Daniel O'Donnell signed and returned assent and waiver forms to the first accounting. Patrick O'Donnell filed a Notice of Appearance and Objection on July 31, 2014. Subsequently, in August 2014, Patrick filed a Withdrawal of Objection and assent. With respect to the second accounting filed by Ryan as executor, all four plaintiffs submitted signed forms to the Probate Court assenting to and waiving objection to the accountings.
On September 24, 2015, Ryan forwarded to the older children a Petition for Order of Complete Settlement and Third and Final Account. Ryan received assents to the Third and Final Account from all of the older children except Joseph and Patrick O'Donnell. Ryan, therefore, filed the Third and Final Account as a contested matter. Present counsel for plaintiffs entered an appearance in the matter in the Probate Court. A judge of the Probate Court held a hearing. On July 25, 2016, the judge ruled that the older children assented to the transactions described in the first and second accounts. Specifically, with respect to their objection to the redemption of shares by Parklake, the court found " that the redemptions were reported, and assented to, in the First and Second Accounts which have already been approved and a Decree has issued on each Account. Therefore the Objectors are barred from raising these objections to the final distribution of the stock." Ex. 66.
DISCUSSION
Summary judgment is appropriate where there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. Mass.R.Civ.P. 56(c); Cassesso v. Commissioner of Corr., 390 Mass. 419, 422, 456 N.E.2d 1123 (1983). The moving party bears the burden of affirmatively demonstrating the absence of a triable issue and that the summary judgment record entitles the moving party to judgment as a matter of law. Pederson v. Time, Inc., 404 Mass. 14, 16-17, 532 N.E.2d 1211 (1989). The moving party may satisfy this burden either by submitting affirmative evidence negating an essential element of the opposing party's case or by demonstrating that the opposing party has no reasonable expectation of proving an essential element of its case at trial. Flesner v. Technical Communications Corp., 410 Mass. 805, 809, 575 N.E.2d 1107 (1991). Once the moving party establishes the absence of a triable issue, the party opposing the motion must respond with evidence of specific facts establishing the existence of a genuine dispute. Pederson, 404 Mass. at 17. An adverse party cannot defeat a motion for summary judgment merely by resting on its pleadings and assertions of disputed facts, rather it must set forth specific facts with affidavits, deposition testimony, answers to interrogatories, or admissions on file showing that there is a genuine issue for trial. Mass.R.Civ.P. 56(c). When deciding a motion for summary judgment, the court views the evidence in the light most favorable to the nonmoving party, but does not weigh evidence, assess credibility, or find facts. Attorney Gen. v. Bailey, 386 Mass. 367, 370-71, 436 N.E.2d 139 (1982).
Count III
In Count III of the complaint plaintiffs allege that Ryan, as trustee of the insurance trust, breached fiduciary duties owed to the older children by causing the insurance trust to purchase non-voting shares from the estate. Specifically, it is alleged that by using only the portion of the insurance trust held for the older children to buy shares from the estate, and not using the portion of the trust held for Maryellen to purchase shares, Ryan violated his fiduciary duty as trustee. In his motion for partial summary judgment, Ryan seeks dismissal of Count III because (a) plaintiffs, with full knowledge, failed to object to the transactions and, therefore, are deemed to have consented, (b) plaintiffs' claims are barred by G.L.c. 203E, § 1005(a), and (c) plaintiffs are barred from complaining given the approval of the accounts by the Probate Court.
Article FOURTH, paragraph (b) of the insurance trust addresses accountings provided to the beneficiaries by the trustee. The paragraph states that the assent by the beneficiaries to an accounting, in the absence of fraud or manifest error, is binding and conclusive upon the beneficiaries. Moreover, " [t]he failure of any such person to object to any such account by a writing, mailed postage prepaid by certified mail, to the Trustee within sixty days of the first delivery or mailing to such person of a copy of the account shall be deemed to be an assent by such person." It is evident that the purpose of such a provision is to allow a trustee to obtain finality with respect to transactions reported in an accounting.
The evidence is undisputed that Ryan, as trustee of the insurance trust, sent to the older children beneficiaries of the trust a Second Account on February 7, 2013. The accounting fully disclosed the purchase by Share B of the insurance trust of 500 non-voting shares from the estate. Ryan's affidavit establishes that the plan to make the purchases was fully disclosed to the older children. Moreover, plaintiffs do not dispute Ryan's statement in his affidavit that none of the older children objected to the Second Account. Finally, plaintiffs do not contend, nor could they, that the purchase of shares by the insurance trust was accomplished by fraud. Accordingly, pursuant to the terms of the trust, plaintiffs' claim for breach of fiduciary duty by Ryan as trustee is barred.
On November 1, 2013, Ryan rendered another accounting to the older children. This interim accounting fully disclosed the purchase of another 117 non-voting shares by Share B of the insurance trust. In addition, this accounting documented the distribution to all of the older children of all of the non-voting shares of Parklake purchased from the estate. According to Ryan, assents to the transactions described in the accounting were obtained from all of the older children except Patrick O'Donnell. Patrick O'Donnell returned the form to Ryan by regular mail dated January 15, 2014, more than sixty days from the date of receipt of the accounting. More importantly, the form sent by Patrick O'Donnell, viewed in the light most favorable to him, failed to indicate an objection to the transactions in the insurance trust. As a result, Ryan is entitled to enforce the terms of the trust that bind beneficiaries to their deemed assent to the transactions for failure properly to object.
A third and final accounting from Ryan as trustee of the insurance trust was sent to the older children on January 13, 2014. This accounting ran through January 7, 2014, when all remaining assets in Share B of the insurance trust were distributed. According to Ryan, and not disputed, plaintiffs Joseph, Brian and Daniel O'Donnell did not object to the final accounting. As described above, Patrick O'Donnell had previously withheld his assent to the second accounting by correspondence mailed on January 16, 2014. He failed, however, to object to the purchase from the estate of non-voting shares of Parklake by Share B of the insurance trust. The record does not reflect any objection by Patrick O'Donnell specifically to the third and final accounting.
The acceptance by all of the older children of the non-voting shares of Parklake held by the insurance trust is further evidence of their assent to the transactions.
A second ground for Ryan's motion to dismiss Count III is the application of G.L.c. 203E, § 1005(a). That section, entitled " Limitation of action against trustee" requires that an action alleging breach of trust by a trustee must be commenced within six (6) months of receipt of a final account showing termination of the trust relationship. As described, Ryan's January 13, 2014, correspondence to the older children distributed all of the assets of Part B of the insurance trust to the older children, thereby terminating the trust relationship. This action challenging Ryan's conduct as trustee of the insurance trust (Count III) was commenced on March 16, 2016. Accordingly, Count III is barred as untimely.
Finally, Ryan argues that the allowance by the Probate Court of accountings that disclosed the sale by the estate of non-voting shares to the insurance trust acts to bar Count III. There is currently pending before the Probate Court a contest over allowance and approval of Ryan's final accounting as personal representative of the estate. The Probate Court has already ruled that the older children assented to the transactions in Parklake's non-voting shares described in earlier accountings. This court should not, and need not, revisit that issue. See Mass.R.Civ.P. 12(b)(9).
In sum, plaintiffs' Count III against Ryan for breach of fiduciary duty in his capacity as trustee of the insurance trust is barred. Count III must be dismissed.
Other Paragraphs of the Complaint
Defendants' motion for partial summary judgment also seeks to strike paragraphs 1, 11, 20, 27-41, and 55-56 of the complaint. It is argued that these paragraphs which describe the actions by Ryan and Maryellen as directors of Parklake with respect to the redemption of Parklake non-voting shares from the estate and the purchase by the insurance trust of non-voting shares from the estate should be stricken because the transactions were either assented to or approved by the Probate Court. While, as described above, plaintiffs' claims against Ryan as trustee of the insurance trust and as personal representative of the JJO estate are barred, the complaint asserts claims in Counts I, II and IV with respect to the corporate side of the transactions. Count I is a putative derivative claim on behalf of Parklake alleging waste, but also alleging that the corporation was harmed by the approval by Maryellen and Ryan, in their corporate capacities, of the sale of Parklake shares by the JJO estate. Count II is a direct claim by plaintiffs as shareholders alleging the same conduct and asserting that the approval of the sales of Parklake shares by the JJO estate harmed plaintiffs, individually. Count IV seeks an accounting from the corporation.
Both the redemption transaction with the JJO estate and the purchase by the insurance trust of non-voting shares from the estate required the consent and approval by Maryellen and Ryan as directors and, in the case of Maryellen, controlling shareholder, of Parklake. Read generously, plaintiffs' complaint asserts that such consent and approval of the transactions by defendants in their corporate capacities were unfair to plaintiffs as shareholders of Parklake.
Defendants do not move, at this time, for summary judgment to dismiss Counts I, II and IV. It is premature at this stage, prior to discovery, to conclude that the allegations in the challenged paragraphs should be stricken as " redundant, immaterial, impertinent or scandalous." Mass.R.Civ.P. 12(f). As plaintiffs articulate their claims for breach of fiduciary duty against Maryellen and Ryan in their corporate capacities, the transactions involving the sale by the estate of non-voting shares may be relevant. Therefore, I decline to strike the paragraphs.
In addition, I decline to issue a declaration, at this pre-discovery stage of the action, that plaintiffs' claims of harm in Counts I and II, allegedly as a result of the approval by defendants to cause the corporation to consent to the sales of its shares by the JJO estate, are barred by principles of claim or issue preclusion. Such claims were not litigated in the Probate Court. See Custom Kits Company, Inc. v. Tessier, 83 Mass.App.Ct. 1125, 985 N.E.2d 874 (Rule 1:28 decision) (2013), 2013 WL 1666742.
CONCLUSION
The motion by Joseph F. Ryan for summary judgment dismissing Count III of the complaint is ALLOWED. Otherwise, defendants' motion for partial summary judgment is DENIED.