Opinion
C. A. KC-2012-0547
02-18-2021
JANET K. HOWLAND, INDIVIDUALLY, et al. Plaintiffs v. JOHN H. HOWLAND, INDIVIDUALLY, et al. Defendants
For Plaintiff: Peter J. Brockmann, Esq. Frank F. Sallee, Esq. R. Daniel Prentiss, Esq. For Defendant: Lawrence L. Goldberg, Esq. Matthew T. Oliverio, Esq.
For Plaintiff: Peter J. Brockmann, Esq. Frank F. Sallee, Esq. R. Daniel Prentiss, Esq.
For Defendant: Lawrence L. Goldberg, Esq. Matthew T. Oliverio, Esq.
DECISION
LICHT, J.
"He thought his mother had more money than a lot of corporations in the State of Rhode Island."
David Syner
This case tells the sad saga of Katherine L. Howland, a wealthy woman who meticulously planned the disposition of her assets with the help of leading professionals and with input from her children. Since her death, which occurred on February 10, 2009, her children have battled with each other for over a decade thus preventing her estate from being closed and her wishes fulfilled. This familial war has cost dearly in terms of dollars and impacting the legacy of a fine Rhode Island family. The tinder for this conflagration were long-standing disputes between a brother and a sister, and one of these siblings, based on advice of counsel who had never participated in the planning or administration of the estate, used the failure to dot and cross a couple of "I's" and "T's" as the matchstick to ignite it.
However, before the Court proceeds any further, it will identify and define a glossary of names, exhibits, documents, and terms referred to in the trial which will be employed throughout this Decision.
Hopefully, this exercise will enable the reader to better follow the Decision and, if necessary, refer back to the glossary when an abbreviation or term is used.
A
Defined Terms
RBS Citizens, N.A. is a named defendant in the Second Amended Complaint, but Paragraph 140 states that it is a nominal defendant. Moreover, even though it was served, it never filed an answer and was never mentioned at trial.
"Janet" refers to Janet Howland, Plaintiff.
"Frances" refers to Frances Gammell-Roach, Plaintiff.
Because there are so many individuals named Howland, all members of the Howland family will be referred to by their first names. Since Ms. Gammell-Roach is a Howland sibling and everyone else is referred to by his or her first name, the Court refers to her by her first name as well. In using first names, the Court means no disrespect.
"Peter" refers to Dr. Peter Howland, Plaintiff.
"John" refers to John Howland, Defendant.
"Howland Sibling(s)" or "Sibling(s)" refers individually to Frances, Janet, Peter, or John and collectively to all four of them.
"Carol" refers to Carol Howland, Defendant and John's spouse.
"Kohlenberg" refers to Max Kohlenberg, Defendant, an estate planning attorney and Administrator CTA of Katherine L. Howland's estate and the Independent Trustee of various trusts described below.
"Howland Defendants" refers to John, individually and as Trustee of various trusts, and Carol as Trustee of various trusts.
2. Other Key Individuals and Witnesses
"Kay" refers to Katherine L. Howland, mother of the Howland Siblings.
"Allen" refers to Allen Howland, husband of Kay and father of the Howland Siblings.
"KLH Management Team" means the Katherine L. Howland Management Team which consisted of Kay, the Howland Siblings, Field, Syner, Forman, Kennedy, Paster, and Kay's investment advisors.
"Kennedy" refers to Mary Louise Kennedy, an estate planning attorney at Edwards & Angell, LLP, who prepared Kay's Will and various other estate planning documents.
"Paster" refers to Benjamin Paster, an estate planning attorney who advised Kay on her estate plan and prepared certain estate planning documents.
"Syner" refers to David J. Syner, Kay's CPA and the CPA for her Estate and various Trusts.
"Forman" refers to Stephen Forman, CFO of Bradford Soap, Inc.
"Field" refers to H. James Field, Jr., who served as independent trustee for various trusts created by Kay until he resigned.
"Gray" refers to Nicholas Gray, a licensed Massachusetts attorney.
"Previti" refers to Frank Previti, a CPA who testified as an expert witness.
"Hemmendinger" refers to Thomas Hemmendinger, a licensed Rhode Island attorney.
"Cacchiotti" refers to John A. Cacchiotti, Jr., a CPA.
3. Key Assets or Properties
"Bradford Soap" refers to Bradford Soap Works, Inc., the Howland family business.
"Manning Street" refers to the carriage house condominium located on the east side of Providence, Rhode Island where Kay resided until she moved to Laurelmead.
"Harmony Hill" refers to Kay's beachfront home located in Matunuck, Rhode Island and was sometimes referred to at trial or in exhibits as Matunuck.
"Whale Boat Point" refers to a beachfront home acquired by John and Carol next to Harmony Hill.
"Bradford Note" means the 2002 promissory note in the amount of $517,987 from John to Kay which enabled John to purchase Kay's Bradford Soap stock. (Pls.' Trial Ex. 4.)
"WBP Mortgage" refers to the mortgage dated February 14, 2002 on Whale Boat Point (Pls.' Trial Ex. 17.)
"2002 WBP Note" means the first promissory note in the amount of $1,260,000 with an interest rate of 4.54 percent from John and Carol to Kay, which enabled John and Carol to acquire the Whale Boat Point property in Matunuck, Rhode Island. (Pls.' Trial Ex. 16.)
"2003 WBP Note" means the second promissory note from John and Carol to Kay relating to the Whale Boat Point property in the amount of $1,260,000 with an interest rate of 4.09 percent. (Pls.' Trial Ex. 30.)
"HH FLP" means the Harmony Hill Family Limited Partnership. (Pls.' Trial Ex. 32.)
"Succotash LP" means the Succotash Limited Partnership.
4. Key Documents
"Will" means the Last Will and Testament of Katherine L. Howard dated September 13, 2001. (Pls.' Trial Ex. 3.)
"Codicil" refers to the First Codicil of Katherine L. Howland dated March 5, 2002. (Pls.' Trial Ex. 18.)
"1997 Trust" means the Katherine L. Howland Trust - 1997 as amended in its entirety on June 24, 2003 (Pls.' Trial Ex. 29) and as further amended on March 20, 2008 (Pls.' Trial Ex. 53.)
"2003 Trust" means the Katherine L. Howland Irrevocable Trust - 2003. (Pls.' Trial Ex. 28.)
"Manning Street Trust" means the Katherine L. Howland Irrevocable Trust - 2002 dated January 29, 2002 for Manning Street of which Kay and Field are trustees. (Pls.' Trial Ex. 8.)
"Harmony Hill QPRT 1" means the Howland Family Personal Residence Trust - 2002 dated January 29, 2002 which owned 50 percent of Harmony Hill, of which Kay and Field were the original trustees. (Pls.' Trial Ex. 10.)
"Harmony Hill QPRT 2" means the Katherine L. Howland Personal Residence Trust - 2002 dated January 29, 2002 which owned the other 50 percent of Harmony Hill, of which Kay and Field were the initial trustees. (Pls.' Trial Ex. 9.)
"CFH Trust" means the 1998 trust of which Carol is the sole trustee. (Pls.' Trial Ex. 2.)
"CFH PRT" means the Carol F. Howland Personal Residence Trust - 2002 of which Carol is the sole trustee. (Pls.' Trial Ex. 23.)
"JHH PRT" means the John H. Howland Personal Residence Trust - 2002 of which John is the sole trustee. (Pls.' Trial Ex. 22.)
"IGWE Trust LLC" means an investment trust created by Allen passing to Frances.
"Equalization Note" is the note from any Sibling pursuant to either the 1997 Trust or the 2003 Trust as described below in Section D.2.c. and d.
B
Travel
The fighting among the Howland Siblings to divide Kay's estate continued for three years after Kay's death before a lawsuit was filed. This suit was commenced in May 2012, and while there was initial activity in the case, it did not progress very far until January 2018 when it was assigned to the Out-County Business Calendar over the objection of the Howland Defendants. The Court required the parties to enter a Scheduling Order that was amended three times. A vigorous and contentious motion practice ensued. The Complaint was amended twice.
The battle culminated in a nineteen-day bench trial, which took place sporadically over several months. The Howland Defendants objected strenuously to proceeding to trial because of the COVID-19 pandemic. The Court overruled their objection on several occasions, articulating its reasons on the record. A summary of the COVID-19 precautions and accommodations made by the Court can be found in its Order dated July 29, 2020. The Court noted, "[t]he [Howland] Defendants have . . . not been housebound since the initial outbreak, having dined at the Dunes Club without wearing masks, having lunched at the Point Judith Country Club and having traveled by automobile [to] Florida." Prior to the conclusion of the trial, the Howland Defendants travelled to New Hampshire during Thanksgiving week when the Governor, Director of Health, and the Center for Disease Control were urging people to stay home for the holiday because of the second surge of the pandemic. The Howland Defendants chose not to appear in person but followed the proceedings by WebEx or audio live streaming except when the technology malfunctioned.
The trial was to have started in mid-April 2020, but due to the COVID Orders from the Supreme Court, the case did not proceed. It was rescheduled to July 13, 2020 but was delayed until July 27, 2020 because one of the Howland Defendants had been exposed to a server at the Point Judith Country Club who had tested positive for COVID-19. Because of COVID-19 issues in the office of the Howland Defendants' attorney, the trial was further continued until July 30, 2020. On the fourth day of trial, the parties, at the suggestion of the Court, agreed to mediate the case with a Providence attorney. The mediation took place on September 2, 2020 but was unsuccessful. The trial resumed on September 22, 2020 and paused after October 16, 2020 because counsel for one of the parties' counsel had to undergo elective surgery. The trial was again continued because of the unfortunate passing of the father of one of the attorneys. Once the trial was ready to resume, the Presiding Justice had issued a protocol urging in-person activity in the courtroom be kept to a minimum. Since the final two witnesses were going to appear remotely anyway, the trial was conducted by WebEx on November 18-20, 2020 and finally concluded on December 2, 2020. Post-trial briefs were submitted, and closing argument was on December 18, 2020.
At trial, the Plaintiffs presented the following witnesses: Frances, Kennedy, Syner, Previti, Kohlenberg, and Gray. Previti was qualified as an expert in the valuation of financial instruments and accounting. (Trial Tr. 15:13-15, Sept. 23, 2020.) Gray was qualified as an expert in the duties and responsibilities of trustees. (Trial Tr. 70:2-4, Oct. 14, 2020.) Plaintiffs also read portions of Paster's deposition and then, without objection, the Howland Defendants moved for the admission of the entire Paster deposition into the record. Plaintiffs offered over 150 exhibits.
At the Court's request, the Plaintiffs had provided a binder with over 171 exhibits tabbed with consecutive numbers. However, the Plaintiffs chose not to offer all of them. Consequently, there are gaps in the numbering system of the exhibits which were admitted or offered for identification. For example, the Plaintiffs never offered the documents behind tab 1 in their binder, and thus, the first Plaintiffs' exhibit is Exhibit 2.
The Howland Defendants presented two expert witnesses. Cacchiotti was qualified as an expert in the valuation of notes and businesses. (Trial Tr. 63:11-16, Oct. 15, 2020.) Hemmendinger, Rhode Island's Uniform Commercial Code Commissioner, was qualified as an expert on commercial paper bills and notes. Id. at 139:16-18. They also examined Peter and John. The Howland Defendants admitted exhibits which approximated seventy-five documents or email conversations. Defendant Kohlenberg was questioned by his attorney, and he presented two exhibits.
Prior to trial, the Howland Defendants submitted their binder of exhibits using numbers also, but when admitted Howland Defendants' exhibits were assigned letters. Therefore, on occasion during trial, the Howland Defendants' exhibits were sometimes referred to by the number in their binder. In those instances, the Court attempted to correct the record.
The Court will not engage in the exercise of providing a detailed summary of each witnesses' testimony. Much of the testimony was repetitive and cumulative. Rather, the Court will weave essential testimony and the important documents into this Decision where it is necessary to support its findings of fact and conclusions of law.
C
Standard of Review
In a non-jury trial, "[t]he trial justice sits as a trier of fact as well as of law." Hood v. Hawkins, 478 A.2d 181, 184 (R.I. 1984). "Consequently, he weighs and considers the evidence, passes upon the credibility of the witnesses, and draws proper inferences." Id. "The task of determining the credibility of witnesses is peculiarly the function of the trial justice when sitting without a jury." Walton v. Baird, 433 A.2d 963, 964 (R.I. 1981). "It is also the province of the trial justice . . . to draw inferences from the testimony of witnesses . . . ." Id. See also Rodriques v. Santos, 466 A.2d 306, 312 (R.I. 1983). Pursuant to Rule 52(a) of the Superior Court Rules of Civil Procedure, the Court will proceed to make the following findings of fact and conclusions of law.
D
Findings of Fact
1. Family and Corporate Background
During World War II, Allen served in the Navy, and while in the Navy, he married Kay. When he returned from the war, he went to work at Bradford Soap, which at the time was owned by the McIver family. He climbed the corporate ladder and began to acquire stock in the company. By 1967, he was the CEO and majority shareholder, and by the early 1990s, Allen had acquired all of the stock of the McIver family. Allen and Kay had four children - Frances, Janet, Peter, and John. Each of the Howland Siblings had his or her own children. As Allen and Kay accumulated wealth, they were committed to sharing it with their children and grandchildren. For example, they gave them stock in Bradford Soap and paid the college tuitions for their grandchildren. It appears that to minimize estate taxes, they took advantage of the annual gift tax exclusion by making gifts to their children and grandchildren. At some point, for estate planning and corporate control purposes, Bradford Soap was recapitalized to create common and non-voting preferred shares. Only those working in the company owned common shares.
In the late 1970s, John was working as a security analyst in New York, and Kay asked him to come back to Rhode Island to assist his father at Bradford Soap so that Allen could plan his retirement. By 1983, John had become the President of Bradford Soap, and after Allen's death on October 15, 2000, he became Chairman of the Board and has remained such to the present day. A year and a half or two years after John began working at Bradford Soap, Frances joined the company. She worked in several support areas, including finance and IT. Frances left in 1999. Frances and John disagree on the reasons for her departure. Whatever the reasons, they have no bearing on the decisions that the Court must make in this case. However, the Court can infer that events surrounding Frances' departure from Bradford Soap undoubtedly contributed to the strained relations between John and Frances so pervasive in the events described in this case.
Apparently, sometime in 2010, approximately one year after Kay's death, Frances unsuccessfully sought to place Bradford Soap in receivership. The litigation, however, resulted in a corporate restructuring in 2015, whereby the preferred stock of Frances and the children of Janet and Peter (Trial Tr. 15:8-10, Nov. 19, 2020.) was redeemed so that the only remaining shareholders were John, his immediate family, and a limited liability company which his family controlled. Again, the details of this dispute do not in any way affect the Court's decision, but again, they provide a background to understand the contentiousness that existed among the Howland Siblings, especially between Frances and John. Shortly after Allen's death, John approached Syner, who had his own accounting practice, to be part of a team that oversaw his mother's finances. "He (John) . . . thought his mother had more money than a lot of corporations in the State of Rhode Island so he wanted to organize it as if it was a board of a company." (Trial Tr. 7:24-8:2, Aug. 4, 2020.) Consequently, John organized the KLH Management Team, which consisted of the Howland Siblings, Syner, Kennedy, Field, Forman, and Kay's investment advisors. The KLH Management Team's responsibilities were "[t]o oversee [Kay's] finances, investments, the estate tax planning, normal accounting functions, paying bills and managing [Kay's] finances." Id. at 10:2-4.
2. The Estate Planning Documents
a. Equalization
Each fact witness who served on the KLH Management Team made it abundantly clear that Kay's estate planning goals were to minimize her estate taxes and to treat her children equally so that most of the transfers made to any of the Howland Siblings during her lifetime were accounted for by an appropriate adjustment after her death. Each witness referred to these adjustments as the equalization process.
To understand and analyze the various estate planning documents and transactions that took place, it is essential to know, as Kennedy testified, "my dealings with Kay found her to be consistent over a fourteen-year period that the distributions to her children were to be equal." (Trial Tr. 68:9-11, July 31, 2020.) To accomplish such a result, estate planning attorneys frequently use what is referred to as a "hotchpot" clause. A hotchpot is created by adding a clause to the trust or will that, when dividing up an estate after death, accounts for gifts made to beneficiaries during the decedent's lifetime as well as any specific bequests or devises contained in the will or trust itself. With a hotchpot clause, such gifts, bequests, or devises are "brought into hotchpot," added to the value of the residue before it is divided up, and then deducted from the recipient's share. In other words, a hotchpot clause is a method of ensuring an equal division of the estate among children by adjusting the share each child receives by the amount received prior to death or in a specific bequest or devise. During the trial, the term hotchpot was rarely employed. The same concept, however, was referred to as "equalization" or "the equalization process." What assets were subject to equalization or "in the hotchpot" is the most significant issue the Court must decide in this case.
Kay's principal estate planning documents were the Will and the Codicil, the 1997 Trust, and the 2003 Trust.
b. The Will and Codicil (Pls.' Trial Exs. 3, 18.)
The Will disposed of whatever assets Kay owned in her individual name, in essence her probate estate. It provided for the payment of her debts and expenses and bequeathed her tangible personal property equally to her children. The Codicil gave her stock in the Dunes Club and her interest in the lease of Cabana No. 63 equally to Frances and John. The Will is commonly referred to as a "pour-over will" because everything else she owned in her own name or in the so-called residue of her estate was to be distributed or "poured over" into the 1997 Trust and distributed in accordance with its terms. The Will named John, Frances, and Field as Executors.
c. The 1997 Trust (Pls.' Trial Exs. 29, 53.)
The 1997 Trust was created on January 2, 1997. (Pls.' Trial Ex. 171.) Because it was revocable, it could be amended by Kay. Prior to 2003, it was amended in its entirety three times and in addition there were three other amendments. These amendments are of little import because the operative version is the Amendment in Entirety dated June 24, 2003. (Pls.' Trial Ex. 29.) There was one amendment thereafter on March 20, 2008 (Pls.' Trial Ex. 53.), which will be discussed below.
Article FOURTH in the 1997 Trust makes certain specific distributions. First, any promissory note with Kay as payee and a child of hers as maker was to be distributed to that child. Second, she created an "Educational Trust" to pay for the undergraduate tuition of any grandchild who had not yet finished college. Lastly, she gave the proceeds of a life insurance trust to Peter and Janet.
Article FIFTH is the hotchpot or equalization clause. It divides the balance of the trust estate into equal shares for her children. In computing the shares, the Article adds back (1) the value of property passing to John under the provisions of the Manning Street Trust, the Harmony Hill QPRT 1 and the Harmony Hill QPRT 2; (2) any tuition, other than for college, paid for any grandchild is charged to that grandchild's parent's share; (3) the value of any promissory note given to a child pursuant to Article FOURTH; (4) the amount by which the distribution from the insurance trust to either Janet or Peter exceeds $500,000; and (5) the value of any interest in the IGWE Trust LLC passing to Frances. Those "add-backs" only occur if they were not made in the 2003 Trust.
The value of any property in (1) above was to be determined by an appraiser selected by the Independent Trustee, as if the property were included in her estate for federal estate tax purposes but in no event less than the value of the real estate at the time the various trusts were established. The value of any promissory note in (3) above was to be valued "as determined in the federal estate tax proceedings relating to my estate." However, the final amendment, dated March 20, 2008, deleted the reference to federal estate tax purposes and substituted "[t]he value of any promissory note."
If the add-backs in (1) to (5) above reduce any of the Howland Siblings' share below zero, then such Sibling shall deliver to the trustees, within nine months after Kay's death, cash or Equalization Note for the amount below zero. The Equalization Note was to have a five-year term with interest at the applicable federal rate. In the event such Sibling failed to deliver the cash or Equalization Note, then "for all purposes of this trust he and all his issue shall be deemed to have predeceased" Kay. (Pls.' Trial Ex. 29, Article Fifth 1. (h)). This provision is referred to by estate professionals as an in terrorem or penal clause.
d. The 2003 Trust (Pls.' Trial Ex. 28.)
The 2003 Trust was created on June 24, 2003. Article THIRD divides the trust estate into equal shares and then contains a hotchpot or equalization clause. In computing the shares, it adds back (1) the value of property then held in the Manning Street Trust, the Harmony Hill QPRT 1 and the Harmony Hill QPRT 2; (2) any tuition, other than for college, paid for the child of any of her children; (3) the amount by which the distribution from the insurance trust to either Janet or Peter exceeds $500,000; and (4) the value of any interest in the IGWE Trust LLC. The value of any property was to be determined by an appraiser selected by the Independent Trustee as if the property were included in her estate for federal estate tax purposes but in no event less than the value of the real estate at the time the various trusts were established.
Again, the clause was included that if the add-backs in (1) to (4) above reduce any of the Howland Siblings' share below zero, then such Sibling shall deliver to the trustees, within nine months after Kay's death, in cash or Equalization Note the amount below zero.
e. Principal Differences between the 1997 and the 2003 Trusts
• Unlike the 1997 Trust, the 2003 Trust was irrevocable and could not be amended.
• Unlike the 1997 Trust, the 2003 Trust did not distribute any promissory note owed to Kay by one of the Howland Siblings.
• When referring to the add-back for property, the 1997 Trust uses the phrase "passing to" John pursuant to the Harmony Hill QPRTs and the Manning Street Trust and the 2003 Trust uses "then held" by the Harmony Hill QPRTs and the Manning Street Trust.
• There is no in terrorem clause in the 2003 Trust.
• In the 2003 Trust, there is no reference to add-backs made in the 1997 Trust.
3. Kay's Real Estate
Kay had three residences-Manning Street in Providence, Harmony Hill in South Kingstown and a condominium in Florida. On December 20, 2001, Kennedy wrote to the Howland Siblings, copying the rest of the KLH Management Team. The letter began, "As you know, we have been reviewing your mother's estate plan with the intent of reducing estate taxes by reducing the value of the real estate holdings she owns." (Pls.' Trial Ex. 5.) The letter then put forth the following, "John has expressed a strong interest in both the Providence [i.e. Manning Street] and Succotash Road [i.e. Harmony Hill] properties. If any of the rest of you would like to commit now to the eventual ownership of one of these properties, I would appreciate hearing from you by January 11 . . . ." Id. No one else expressed any interest, so the following plan was implemented on January 29, 2002. Kennedy summarized the plan in a letter and memo dated April 23, 2002. (Pls.' Trial Ex. 20.)
First, because none of the Howland Siblings wanted the Florida property it was to be transferred to the existing Succotash LP and ultimately sold when Kay no longer used it. Kay created three trusts on January 29, 2002-the Manning Street Trust, the Harmony Hill QPRT 1, and the Harmony Hill QPRT 2. (Pls.' Trial Exs. 8, 9, 10.) While Kay had the right to occupy these properties during her lifetime, subject to certain conditions as set forth in the trust documents, John was to receive these properties on her death. On the same day, Kay executed three deeds which conveyed a 50 percent interest in Harmony Hill to the Harmony Hill QPRT 1, a 50 percent interest in Harmony Hill to the Harmony Hill QPRT 2 and a 20 percent interest in Manning Street to the Manning Street Trust. The remaining 80 percent interest in Manning Street was sold to the Manning Street Trust on May 3, 2002 for a note from the Trust.
While these transactions incurred some gift tax payments, the effect was to remove the real estate from Kay's estate.
4. The Promissory
a. Bradford Note (Pls.' Trial Ex 4.)
As previously mentioned, Allen, in the late 1980s, split the ownership of Bradford Soap into common (voting) and preferred (non-voting) stock as part of his estate planning in order to permit him to make gifts of preferred stock to his children. (Trial Tr. 27:9-17; 29:19-30:3; 34:16-22, July 30, 2020.); (Trial Tr. 66:15-67:10, Aug. 3, 2020.) When Frances terminated her employment, her voting stock was converted to non-voting shares. After Allen's death, all Bradford Soap voting stock was owned by John and Kay. Under the 1999 version of the 1997 Trust (Pls.' Trial Ex. 85.), John was to receive these shares on Kay's death, and these shares were the only items accounted for in the equalization clause.
Under the original version of the 1997 Trust, Kay's voting stock was distributed equally to Frances and John and was subject to equalization. (Pls.' Trial Ex. 171.) At that time, Frances was still employed at Bradford Soap and owned common stock.
In 2001, John decided that he did not want to wait for his mother to die to acquire total ownership of the voting stock of Bradford Soap. Kay agreed to sell him her shares in exchange for the Bradford Note in the amount of $517,987. The Bradford Note was dated December 10, 2001 and carried an interest of 3.97 percent and had a term of ten years with annual installments of principal and interest. (Pls.' Trial Ex. 4.) However, prior to Kay's death, John only paid interest and no principal. Those interest payments were made either in cash or by offsetting the interest against certain rental payments that Kay owed John for rent on Harmony Hill.
The 1997 Trust was amended in its entirety on November 4, 2002, and instead of distributing the Bradford Soap stock which Kay no longer owned, it provided that any promissory notes payable to her by a child would be distributed to that child and accounted for in equalization. (Pls.' Trial Ex. 90.)
b. The Whale Boat Point
i. The 2002 WBP Note (Pls.' Trial Ex. 16.)
In 2002, John and Carol decided to purchase the property known as Whale Boat Point, next to Harmony Hill, on Succotash Road in South Kingstown because John wanted to be near his mother when she summered at Harmony Hill. However, he needed money to acquire the property, so Kay agreed to lend John and Carol the funds. On February 14, 2002, John and Carol executed a note for $1,260,000 payable to Kay. The principal was payable in nine years. The interest rate was 4.54 percent payable in monthly installments. The 2002 WBP Note was secured by the WBP Mortgage executed the same date by Carol individually and as Trustee. (Pls.' Trial Ex. 17.) The 2002 WBP Note and the WBP Mortgage were assigned to the 1997 Trust on March 6, 2002.
The property was placed in the CFH Trust, so she signed as Trustee and individually.
ii. The 2003 WBP Note (Pls.' Trial Ex. 30.)
On April 28, 2003, John sent an email to the KLH Management Team, in which, under the heading "Estate Tax Planning Discussions," he wrote:
"The other good news is that we have reduced the projected estate tax bite by over $2.0 million since the KLH [Management] Team was formed. The 'not-so-good-news' is that the estate tax bite is still in the $3.0 million range. Steve Forman, Jim Field, Dave Syner and I all agreed that we had a fiduciary responsibility to do what we could to address that issue . . . so we retained the services of Ben Paster. He reported that all of what the KLH Team had done so far was 'in good order'. Ben then recommended a number of possible moves . . . the most promising of which is to form a second Family Limited Partnership made up of high basis assets (notably the Whaleboat Point Note and the assets in the AHH Trust). Then KLH would sell her limited interests in [the] new Limited Partnership to her children and/or grandchildren in return for interest bearing notes. It is all quite complicated . . . ." (Pls.' Trial Ex. 25.)
This "complicated" transaction was presented to the KLH Management Team at its May 13, 2003 meeting. The first step was to create a new family limited partnership. The 2002 WBP Note would be refinanced to provide for a 30-year term and a lower interest rate. The new family limited partnership would be funded with the 2003 WBP Note and other assets. Kay was to own a 97 percent limited partnership interest and a 1 percent general partnership interest, and the Howland Siblings would each own a 0.5 percent general partnership interest. Kay would then sell her 97 percent interest in the new limited partnership together with her 69 percent interest in Succotash LP to a "defective trust" in exchange for a promissory note. The note from the limited partnership would be forgiven at the rate of $220,000 per year as a gift from Kay to her children and grandchildren. This plan was to result in significant estate tax savings.
A defective trust is one wherein, for income tax purposes, the Settlor is the owner, while for estate tax purposes, the assets in the trust are not includible in the Settlor's taxable trust.
To effectuate the plan, a number of steps were taken. First, on June 24, 2003, Kay created the 2003 Trust. Then, on July 1, 2003, John and Carol, individually and as Trustees of the CFH Trust, executed the 2003 WBP Note for $1,260,000 payable in thirty years with a 4.9 percent interest rate. The 2003 WBP Note stated that it was secured by the WBP Mortgage. On July 7, 2003, Kay and the Howland Siblings executed the Limited Partnership Agreement of HH FLP, and a Certificate of Limited Partnership was filed with the Rhode Island Secretary of State. (Pls.' Trial Exs. 32, 31.) On July 8, 2003, Kay, as Seller, and Kay and Field as Trustees of the 2003 Trust, as Purchaser, entered into an agreement to sell to the 2003 Trust a 97 percent limited partnership interest in HH FLP and a 69.34 percent limited partnership interest in Succotash LP. The purchase price was $2,655,423 payable in the form of a promissory note from the Trustees of the 2003 Trust and guaranteed by the Howland Siblings. On the same day, the note and guaranty were executed. (Pls.' Trial Exs. 26, 26A, 26B.) What was never done, however, was an endorsement of the 2003 WBP Note and an assignment of the WBP Mortgage to the 2003 Trust or the HH FLP.
The document says June 8, but this must be a typographical error because it refers to the trust dated June 24, 2003. Since the document could not refer to a trust not yet created, the Court will infer that this agreement should have been dated July 8 not June 8.
5. The Dunes Club
"The Dunes Club is a historic, highly elite, private beach club . . . in Narragansett, Rhode Island. The club occupies 28 acres of land fronting Narragansett Bay . . . closer to Narrow River are member cabanas. These are small rooms with ground-level porches that have chairs and tables for relaxation and dining as well as storage for chairs, umbrellas and surfboards. These are staffed by two cabana stations, and cabana lease holders have access to a special cabana menu that changes daily." Wikipedia, The Dunes Club, https://en.wikipedia.org/wiki/The_Dunes_Club (last visited Jan. 29, 2021).
Kay, John, and Frances were all members and shareholders of the Dunes Club, but only Kay had a cabana lease. The cabana was a significant issue for John and Frances, and the Court surmises that this cabana played a major role in the deterioration of the relationship between Frances and John.
On March 5, 2002, Kay executed the First Codicil to her Will, and she bequeathed her stock in the Dunes Club and her lease on Cabana No. 63 equally to John and Frances, per stirpes. (Pls.' Trial Ex. 18.) At the time, neither Peter nor Janet lived in Rhode Island, so presumably they would have had no interest in the Dunes Club. On December 22, 2004, Kay wrote to the Dunes Club that in accordance with Article XI of the cabana lease, she designated John and Frances to become the lessees of Cabana No. 63 upon her death. (Defs.' Trial Ex. JJJ.) On January 14, 2005, John wrote to Frances stating that the Dunes Club would only allow one lessee, so he did not send Kay's December 22, 2004 letter. Instead, according to a conversation he had with Kay, he drafted a new letter dated January 6, 2005, stating that he would be the successor lessee. He gave this letter to Syner for delivery to the Dunes Club. However, he stated that there should be an agreement so that Cabana No. 63 could be "shared and enjoyed by all of Mom and Dad's children and grand children - and perhaps someday great great grandchildren." Id. Apparently, Frances did not receive the January 14, 2005 communication. On August 30, 2005, John, again, wrote Frances asking her to draft a sharing agreement. (Pls.' Trial Ex. 43.) There is no evidence that such an effort was ever made. Syner sent the January 2005 letter to the Dunes Club.
A transcript of this conversation is Defs.' Trial Ex. F. While it is referred to in the Howland Defendants' post-trial memorandum, the Howland Defendants' own Exhibit List indicates that Ex. F was not a full exhibit. Whether it was or not, it would not change the Court's decision on the Dunes Club issue.
On July 20, 2007, Kay sent a notarized letter to the Dunes Club designating Frances as the successor lessee. (Pls.' Trial Ex. 47.) Syner, unaware of the July 2007 letter, on May 21, 2008, asked the Dunes Club to confirm that the lease would be assigned to John upon Kay's death. (Defs.' Trial Ex. KKK.) He never received a response.
6. Modifications to Kay's Estate Plan from 2003 to Kay's Death
A number of events occurred between 2003 and Kay's death on February 10, 2009, which have a bearing on or are the underpinning of the issues in this case.
In early 2004, the 2003 Trust purchased a new life insurance policy on Kay, requiring Kay to resign as trustee. John formally accepted the office of successor trustee effective April 28, 2004. (Pls.' Trial Ex. 36.)
In 2005, John guaranteed an obligation of Bradford Soap, and to support that guaranty, the lender wanted John to have a stronger personal balance sheet. To accomplish that result, John sought to have Harmony Hill transferred to him personally. On May 11, 2005, John instructed Syner to "make arrangements to get the QPRT documents . . . to Dave Megan so he can change the title on [Harmony Hill] to my name . . . As you know, my Guaranty said I would have it done by this Friday . . . ." (Pls.' Trial Ex. 154.) On May 12, 2005, Kay and Field as Trustees of the Harmony Hill QPRT 1 and the Harmony Hill QPRT2 conveyed by Trustees' Deeds Harmony Hill to John individually. (Pls.' Trial Ex. 42.)
In 2006, Kay moved to Laurelmead, an assisted living facility in Providence, and she ceased to occupy Manning Street and Harmony Hill. John expressed a desire to move to Manning Street and wanted it conveyed to him from the Manning Street Trust. Frances objected (Pls.' Trial Ex. 51.), and this transfer never occurred. John never moved to Manning Street.
Sometime in 2006, John stopped making payments on the 2003 WBP Note and the Bradford Note. However, because he had acquired Harmony Hill, Kay was to pay him rent. Rather than a cash transaction, Syner credited Kay's rent payments against interest due on the Bradford Note. John testified that Kay consented to his not making payments on the 2003 WBP Note. (Trial Tr. 41:5-8, Dec. 2, 2020.) Moreover, in late 2008, Syner was asked to become a co-Trustee of the 2003 Trust and the Manning Street Trust. However, he was "concerned about accepting [the] appointment . . . in light of John's continuing nonpayment of amounts due on the Whalepoint Note and Manning Street expenses. Accordingly, [he] has conditioned his agreement to serve as co-trustee upon the beneficiaries' consent to the 2003 Trust's continuing accrual of interest due from John and the nonpayment of expenses for the 2002 Trust [Manning Street]." (Pls.' Trial Ex. 57.) The Howland Siblings then consented in writing to his appointment. (Pls.' Trial Ex. 58.)
By late 2007, it became apparent that Kay's health was failing. In early 2008, Kennedy, due to illness, ceased being actively involved with the KLH Management Team. On January 23, 2008, in preparation for a KLH Management Team meeting to be held on January 25, 2008, Paster prepared a memo to his file on the subject "Kay Howland Estate Planning 2008 Battle Plan." (Pls.' Trial Ex. 49.) His concern was that if Kay died in 2008, she would have a potential federal and Rhode Island estate tax liability of $1.2 million. He recommended a number of actions, one of which was the termination of the HH FLP. Another was changing the beneficiaries of Kay's IRA from her grandchildren to her children except for John. That would then reduce the amount that John would owe Frances, Peter, and Janet under the hotchpot clause. On January 31, 2008, Syner sent an email to the KLH Management Team attaching a memorandum summarizing the January 25, 2008 meeting. (Pls.' Trial Ex. 50.) He expressed concern that, because of Kay's health, her life expectancy was reduced from thirteen years to less than three. Item 7 discussed the change in IRA beneficiaries, and Item 13 discussed the termination of the HH FLP and distributing its assets to the 2003 Trust.
Steps were then taken to implement the plan. On March 20, 2008, Kay executed a first amendment to the 2003 Restatement by the Entirety of the 1997 Trust. As discussed above, that changed for equalization purposes the valuation method of the IRA and of any note a child owed Kay. (Pls.' Trial Ex. 53.) On May 29, 2008, a Certificate of Amendment to Certificate of Limited Partnership of HH FLP was filed with the Secretary of State. (Pls.' Trial Ex. 54.) That certificate removed Kay as general partner and substituted the 2003 Trust as the general partner of HH FLP. On June 10, 2008, Syner updated the KLH Management Team attaching a memorandum indicating the status of the January battle plan. (Pls.' Trial Ex. 55.) Item 5 stated, "Kay's general partnership interests in [HH FLP] and Succotash have been valued and the related Purchase and Sale agreements have been signed. The checks have been issued by the [2003 Trust] to buy these general partnership interests. We are in the process of liquidating the [HH FLP] with the assets transferred to the [2003 Trust]." (Pls.' Trial Ex. 55.) On December 31, 2008, Paster updated the Howland Siblings, which included the statement, "The 2003 Trust currently holds securities (received upon dissolution of [HH FLP]) . . . and [the 2003 WBP Note] . . . with an outstanding principal balance of $1,187,652." (Pls.' Trial Ex. 57.)
On February 10, 2009, Kay passed away.
7. Events After Kay's Death Leading to the Complaint
Tensions between John and Frances escalated immediately after Kay's death. On March 16, 2009, John emailed Syner expressing concerns that Frances had removed valuable tangible property from Kay's apartment at Laurelmead, although she said she took them for "safe-keeping." (Defs.' Trial Ex. PPP.) Around that time, John contacted the Dunes Club to effectuate the transfer of the cabana lease to his name in accordance with what he believed were his mother's wishes as she had expressed them in January 2005. The Dunes Club advised him of the 2007 letter whereby Kay indicated she wanted Frances to become the lessee upon her death. He reached out to Paster who advised him to obtain the services of his own attorney and John engaged Bolotow. (Trial Tr. 4:6-14, Dec. 2, 2020.)
At the time of Kay's death, Kennedy was retired. On April 28, 2009, Paster wrote to the Howland Siblings and withdrew from representation of the estate or trusts. (Pls.' Trial Ex. 98.) Thus, the two professional architects of Kay's estate plan were no longer involved to carry out her wishes. Syner continued to prepare pro forma estate distribution spreadsheets, each with an equalization calculation. John, however, challenged certain valuations of the assets and questioned certain calculations. Around the same time, Frances sought to place Bradford Soap into receivership, and although that did not occur, litigation ensued.
John and Frances became Trustees of the 1997 Trust in March 2009. (Pls.' Trial Exs. 61, 116.) John, Frances, and Field were the named Executors in Kay's Will. However, by October 2009, nothing had been done to administer the estate. Frances acknowledged that it was not "workable" for her and John to be Executors because they were not speaking to one another. (Trial Tr. 86:4-13, July 30, 2020.) The Howland Siblings ultimately agreed to engage Kohlenberg as administrator of Kay's estate.
On October 30, 2009, Kohlenberg outlined his roles as administrator and as legal counsel with respect to Kay's estate and estate plan generally. Kohlenberg identified his tasks as the "development of a mutually acceptable and equitable methodology for the division of [Kay's] tangible personal property, . . . developing mutually acceptable methodologies for the valuation of properties transferred by [Kay] before her death, and . . . documenting and securing any obligations between you that flow from those . . . valuations." (Pls.' Trial Ex. 109.) Kohlenberg also pointed out that his service as executor and counsel to Kay's estate did not constitute individual representation of any one of the Howland Siblings. Id. The Howland Siblings consented to this engagement in writing. Id. Kohlenberg also informed the Howland Siblings that they may wish to have separate counsel. Id.
On December 17, 2009, the Probate Court for the City of Providence appointed Kohlenberg Administrator of Kay's estate. On December 22, 2009, Kohlenberg wrote to the Howland Siblings and identified the priorities to be addressed: "(a) how [Kay's] tangible personal property is to be divided among you, (b) how the Manning St. and Matunuck [Harmony Hill] properties are to be valued, and (c) how the equalization of your respective shares under [Kay's] will and trust will be accomplished." (Pls.' Trial Ex. 67, at 1.)
Kohlenberg also became the Independent Trustee of the 1997 and 2003 Trusts (effective April 5, 2010, following Field's resignation as same). (Pls.' Trial Ex. 69.); (Defs.' Trial Ex. GGG.)
Kohlenberg then proposed a method to allocate the tangible property. A revolving order of selection of items was attached to his letter. If the process involved any of the Siblings receiving in excess of 25 percent of the value of the tangibles, the excess value would reduce his or her share of the residue of the estate. Id. at 2.
As to the second issue, although Harmony Hill and Manning Street were not in Kay's probate or taxable estate, valuations were needed for the equalization process. (Trial Tr. 72:9-11, Aug. 4, 2020.) Kohlenberg also suggested a process for coming to values for the real estate. Essentially, he proposed a list of three appraisers for each property, from which he would choose one after getting the Siblings' input. Assuming there were no objections to those initial appraisals, the valuations would be used for equalization purposes; however, if any of the Siblings objected to either of the appraisals, that Sibling could then hire an appraiser(s) at his or her expense. If the difference between the two appraisals was less than 5 percent, an average of the two would be used. If, however, the difference was greater than 5 percent, then the two appraisers would pick a third appraiser mutually agreeable to them, and the valuation from that third appraiser would be final and binding on all. (Pls.' Trial Ex. 67, at 3.)
As to the issue of equalization, Kohlenberg suggested that if it were to be determined that John must provide an Equalization Note, then as security, "mortgages on real property would be appropriate, given that it is principally the transfer of real properties that underlie the necessity of the equalizing note." Id. at 4.
All of the Howland Siblings accepted Kohlenberg's proposal both as to the tangibles and the valuation of Harmony Hill and Manning Street. (Trial Tr. 89:11-16, July 30, 2020.); (Trial Tr. 84:15-20, Sept. 30, 2020.) The tangibles were divided according to Kohlenberg's selection order, and the total value each Sibling received has been reflected on Syner's spreadsheets. See, e.g., Pls.' Trial Ex. 149, line entitled "Household Items-Ins list." Kohlenberg's valuation process also commenced in a timely manner.
The first appraisal of Harmony Hill was received on May 11, 2010, and it valued the property as of Kay's date of death at $835,000. (Pls.' Trial Ex. 70.) The appraisal of Manning St. was not received until November 18, 2010 because the appraiser at first had used the wrong date of death. The revised appraisal valued Manning Street at $450,000. (Defs.' Trial Ex. DD.) While acceptable to Frances, Peter, and Janet, John was not satisfied with these values and he engaged his own appraisal firm, which, on October 20, 2010, produced valuations of Harmony Hill at $570,000 and of Manning Street at $379,000. (Defs.' Trial Ex. CC.) Since the appraisals were more than 5 percent apart, a third round of appraisals was required pursuant to Kohlenberg's valuation process. Peter M. Scotti (Scotti) was chosen to provide the final valuation on Manning Street, which was received on October 12, 2011, and valued the property at $415,000. (Pls.' Trial Ex. 145.) Around the same time, White Appraisal Co. was chosen to provide the final valuation on Harmony Hill and valued it at $725,000. (Pls.' Trial Ex. 144.)
For years, the parties had agreed that Harmony Hill was to be included in the equalization process. However, on August 23, 2010, Kohlenberg met with John, Bolotow, and Syner. Bolotow argued that Harmony Hill should not be included in the equalization process. He said that Harmony Hill was not included in the equalization of the 2003 Trust because it was not "then held" at the time of Kay's death. He further contended that the "passing to" language of the 1997 Trust applied only to passing at Kay's death, and since John received it prior to her death, it was not subject to equalization. (Pls.' Trial Ex. 122.) However, John said he wished to sell Manning Street and if the other Siblings would substitute the sales price for the appraisal in the equalization process, he would accept the Harmony Hill valuation and not challenge its inclusion in equalization. The next day, Kohlenberg wrote to Kennedy and Maureen Kane outlining his discussion with Bolotow and John.
While he did not think much of Bolotow's argument, Kohlenberg proved prophetic when he wrote, "I think [Bolotow's] analysis is certainly contrary to Kay's intentions, but if John and Fran[ces] are really determined to go at it then I do think the ambiguity will be sufficient to tie everyone up in court for a long time. Since John and Fran[ces] are already in court over Bradford Soap I don't know how much the threat of litigation will lead anyone to compromise." (Pls.' Trial Ex. 123.)
Notwithstanding the contentions made at the August 23, 2010 meeting, as stated above, John participated in the Kohlenberg valuation process.
On October 8, 2010, Kohlenberg wrote to Peter: "At this point . . . the only impediment to closing the estate and distributing all of the assets is John's dissatisfaction with the appraisals that we obtained for [Manning Street] and [Harmony Hill]." (Pls.' Trial Ex. 125.)
On the last day of 2010, Bolotow emailed Kohlenberg explaining that John was busy with a Bradford Soap transaction, sometimes referred to as the Corinthian deal, and had put the estate and equalization matters on the back burner. (Pls.' Trial Ex. 130.) At that point, John approved of the equalization process in principle but still had questions about the valuations of the two properties and whether he was willing to have Harmony Hill included in the equalization process. Id. He also made a settlement proposal which Kohlenberg forwarded to the other Siblings. Apparently, it was not acceptable because, on March 9, 2011, Kohlenberg met with John, Bolotow, and Syner to discuss a possible resolution of the estate. During that meeting, John proposed $1,200,000 for a total of the two valuations and stated that if his siblings did not agree to that, he would "disengage" on estate settlement indefinitely. (Pls.' Trial Ex. 132.)
Frances and Janet agreed to John's proposal to use $1,200,000 as a total value for the two properties; they responded accordingly and added a few additional conditions, including: (a) the "equalization note" should be secured by mortgages; (b) any Succotash LP distributions to John, Carol, or their estate planning entity, Loon LP, must be used to pay down the equalization note; (c) Carol must also sign on; and (d) John must give up any claim to the Dunes Club cabana lease, although Frances would make it available on a reasonable basis. (Pls.' Trial Ex. 135.) John's response the next day, as reported by Kohlenberg, was: "I reluctantly agreed to offer $1.2 million and have been regretting it as I've seen the Manning Street situation get worse and worse. Now that I see all the ridiculous conditions that my sisters want to attach I have no hesitation about withdrawing my offer . . . I'll just wait until I sell Manning Street and then we can see where things stand at that point." Id.
Kohlenberg had held off the third round of appraisals hoping a settlement could be reached. In June 2011, he came to the conclusion that a resolution was unlikely, and he and Syner restarted the agreed upon valuation process. (Pls.' Trial Ex. 137.) While the third round of appraisals were being done, John continued to instruct Syner to adjust, calculate, and recalculate the various numbers used in the pro forma equalization calculations. For example, in an email dated August 7, 2011, John instructed Syner to rerun the numbers, using a total real estate value of $1,000,000 and raised questions about equalization. (Defs.' Trial Ex. U.)
In October 2011, a new issue arose. Bolotow suggested for the first time that the 2003 WBP Note might not belong to the 2003 Trust. (Defs.' Trial Ex. O.) If it were not, it would be an asset of Kay's taxable and probate estate, thus passing through her Will to the 1997 Trust. In such a circumstance, the 2003 WBP Note would have been transferred on Kay's death to John.
By the end of 2011, it was apparent that the administration of Kay's estate and the 1997 and 2003 Trusts could not proceed by agreement. There were still valuation issues, and John was claiming that Harmony Hill was not to be included in the equalization process and the 2003 WBP Note belonged in the 1997 Trust. Frances, Peter, and Janet were concerned that the 2003 WBP Note was in arrears and that John owed them a significant equalization amount.
In light of the stalemate, Janet and Frances filed a Complaint on May 21, 2012. The Complaint will be described infra.
8. Events After Filing of the Complaint
There was extensive evidence, both in testimony and documents, about activities that occurred after the filing of the original Complaint. Much of that evidence related to efforts to resolve the differences among the parties. Very little, if any, of this evidence was objected to, pursuant to Rule 408 of the Rhode Island Rules of Evidence, as offers to compromise. Rather, both sides seemed to offer it for another purpose, as permitted by Rule 408; namely, to support or oppose a breach of fiduciary duty claim. To the extent such evidence bears on the Court's resolution of any claims, it will be discussed below.
It is of interest to note that Peter was not a Plaintiff in the original Complaint. Initially, he blamed Frances for the failure to settle the estate. He even wrote Syner and Kohlenberg on December 14, 2010, "I ask that you recognize the evil Fran[ces] has done and work to stop this before she takes us all down with her." (Defs.' Trial Ex. V.). He testified that he had been receiving his information about the dispute and the litigation from John. Then, as he talked to Syner and Kohlenberg, he began to change his view. In October 2016, he met with John and was advised that John was seeking to exclude the 2003 WBP Note and Harmony Hill from equalization. This "shocked and disturbed [him]." (Trial Tr. 131:12-132:19, Oct. 16, 2020.) Peter, thus, became a plaintiff in the Second Amended Complaint.
9. The Second Amended Complaint and Counterclaim
On May 21, 2012, Janet and Frances, individually and as Trustees of the 1997 Trust filed a Complaint against (1) John, individually, as Trustee of the 1997 and 2003 Trusts, the JHH PRT, the CFH PRT and the CFH Trust; (2) Carol, individually and as Trustee of the CHF PRT and CFH Trust; and (3) Kohlenberg as Administrator of Kay's estate and as Trustee of the 1997 and 2003 Trusts. The Plaintiffs filed an Amended Complaint on October 20, 2017 and a Second Amended Complaint on April 20, 2018. The Second Amended Complaint added Peter as a Plaintiff and RBS Citizens, N.A. as a Defendant. The Second Amended Complaint contained nine Counts:
See supra note 2.
• Count 1 seeks a declaratory judgment as to the ownership of the 2003 WBP Note.
• Count 2 seeks a declaratory judgment that the WBP Mortgage secures the 2003 WBP Note.
• Count 3 seeks a declaratory judgment determining that Harmony Hill is included in the equalization process.
• Count 4 seeks a declaratory judgment that John and his issue predeceased Kay.
• Count 5 seeks a reformation of the 2003 Trust to provide an in terrorem clause to ensure that an equalization note is provided.
• Count 6 seeks a declaration that the Bradford Note has not been distributed to John.
• Count 7 seeks a declaration that the 2003 WBP Note has not been distributed.
• Count 8 is a claim for breach of fiduciary duty by John as Trustee of the 1997 Trust.
• Count 9 is a claim for breach of fiduciary duty by John as Trustee of the 2003 Trust.
The Howland Defendants filed an Answer to the Second Amended Complaint, which included eighteen defenses and a counterclaim. The Counterclaim is against the Plaintiffs and
Kohlenberg in his capacity as Administrator and Trustee and seeks distribution to John of what John claims is owed to him pursuant to Kay's estate planning documents, in accordance with the Howland Defendants' interpretation of them. It also seeks to have the WBP Mortgage discharged.
On March 30, 2018, Kohlenberg filed a Petition for Instructions seeking guidance on what actions he should take with respect to the 2003 WBP Note and other matters concerning his duties as Administrator and Trustee.
Both Plaintiffs and Kohlenberg responded to the Counterclaim by seeking its dismissal.
All parties have requested an award of attorney's fees.
E
In this section, there may be additional findings of fact necessary for the Court to reach its legal conclusions.
1. The 2003 WBP Note
a. Ownership
The Plaintiffs contend that the 2003 WBP Note is an asset of the 2003 Trust; that it is in default; and John and Carol must pay it in full. The Howland Defendants assert that at the time of her death, Kay was the owner of the 2003 WBP Note and thus it poured over to the 1997 Trust. As such, the Howland Defendants claim that, in accordance with Article FOURTH 1., the 2003 WBP Note should be distributed to John. They further contend that the value for equalization purposes of the 2003 WBP Note be significantly discounted. All parties acknowledge that if Kay owned the 2003 WBP Note at the time of her death, it would be included in her taxable estate. Therefore, the Rhode Island Estate Tax Return would need to be amended and additional taxes, interest, and potentially penalties would be owed to the State of Rhode Island.
The provenance of the 2003 WBP Note, according to Plaintiffs, is as follows:
• On February 14, 2002, John and Carol borrowed $1,260,000 from Kay to acquire the Whale Boat Point property. To evidence the borrowing, John and Carol as individuals and Trustees of the CFH Trust executed the 2002 WBP Note. They secured the 2002 WBP Note with the WBP Mortgage.
• In 2003, Paster suggested that the term of the 2002 WBP Note be "stretched" and the interest rate lowered. That resulted in the 2002 WBP Note being refinanced by the 2003 WBP Note.
• The 2003 WBP Note was transferred to the newly formed HH FLP.
• Kay then sold her limited partnership interest in HH FLP to the 2003 Trust.
• In 2008, HH FLP was terminated and its assets, including the 2003 WBP Note, became assets of the 2003 Trust.
On several occasions in their testimony, both Paster and John used the terms "refinance" or "refinancing" in referring to the 2003 WBP Note.
The Howland Defendants claim that the 2003 WBP Note is in the 1997 Trust which is based on the following:
• On March 6, 2002, the 2002 WBP Note and the WBP Mortgage were assigned by Kay to the 1997 Trust. (Pls.' Trial Ex. 19).
• When the 2003 WBP Note was executed, it was payable to Kay and not the 1997 Trust.
• The 2003 WBP Note was neither assigned nor endorsed to the HH FLP.
• The termination of the HH FLP never occurred because the General Partners other than Kay never executed any documents effectuating such termination.
Even before Paster formally joined the KLH Management Team, John told Frances, Peter, and Janet about Paster's "most promising" suggestion "to form a second Family Limited Partnership made up of high basis assets (notably the Whaleboat Point Note and the assets in the AHH Trust). Then [Kay] would sell her limited interests in [the] new Limited Partnership to her children and/or grandchildren in return for interest bearing notes. It is all quite complicated . . . ." (Pls.' Trial Ex. 25.)
The following steps were taken to effectuate the plan:
• On June 24, 2003, Kay created the 2003 Trust. (Pls.' Trial Ex. 28.) • On July 1, 2003, John and Carol executed the 2003 WBP Note.
• On July 7, 2003, Kay and the Howland Siblings executed the HH FLP Limited Partnership Agreement. (Pls.' Trial Ex. 32.)
• On the same day, a Certificate of Limited Partnership was filed with the Rhode Island Secretary of State. (Pls.' Trial Ex. 31.)
• On July 8, 2003 (see footnote 10 above), Kay individually entered into a Purchase Agreement with herself and Field as Trustees of the 2003 Trust, whereby Kay was to transfer her 97 percent limited partnership interest in HH FLP and her 69.34 percent limited partnership interest in Succotash LP to the 2003 Trust for $2,655,423. (Pls.' Trial Ex. 26.)
• Simultaneously, the Trustees executed a promissory note in that amount (Pls.' Trial Ex. 26A.), which note was guaranteed by the Howland Siblings.
John acknowledges that when he signed the 2003 WBP Note, it was his expectation that it would be transferred to the HH FLP. (Trial Tr. 10:11-25, Nov. 20, 2020.)
Subsequent to the execution of the plan, there is an abundance of evidence that the 2003 WBP Note belonged to the HH FLP. The HH FLP Financial Statements for December 31, 2003 listed the 2003 WBP Note as an asset. (Pls.' Trial Ex. 35.). Syner represented that all subsequent financial statements of the partnership also listed the 2003 WBP Note as an asset. See, e.g., Pls.' Trial Ex. 56. A federal gift tax return was filed in connection with the transaction. The payments John made on the 2003 WBP Note through 2006 were to the HH FLP. Kennedy, Paster, and Syner all considered that the 2003 WBP Note was an asset of HH FLP. Paster, when asked why he believed HH FLP was the owner of the 2003 WBP Note, testified, "[t]he fact that one, it was Kay's intention and we had been treating it as an asset for all purposes, accounting purses [sic], tax purposes, as part of the annual review that all family members had been reviewing for six years prior thereto, with no question regarding the appropriateness of that reporting." (Pls.' Trial Ex. 157.); (Paster Dep. 164:1-8, Feb. 21, 2019.)
Even after Kay's death, no one, including John, considered the 2003 WBP Note an asset of Kay or the 1997 Trust. It was not included in the inventory filed with the Providence Probate Court (Pls.' Trial Ex. 105.) It was not reported as an asset in the Rhode Island Estate Tax return. (Pls.' Trial Ex. 162.) John did not think it was an asset of the 1997 Trust, because if he had, he would not have had to make any payments on it because it would have been distributable to him. Yet he made payments on the 2003 WBP Note on August 31, 2010 by check payable to the HH FLP. (Pls.' Trial Ex. 75.) Even prior to that, on July 23, 2009, John, as a General Partner of HH FLP wrote to BNY Mellon "although the asset known as 'Mtge Note for Carol H. Howland 4.09% 7/1/2033' is held as an asset [on your books] of the Partnership" (Pls.' Trial Ex. 65.) On August 7, 2011, John wrote Syner raising questions about a June 30, 2011 estate analysis prepared by Syner which had two line items "2003 Irrevocable Trust - Whaleboat Point Note- Principal" and "2003 Irrevocable Trust - Whaleboat Point Note- Interest." While John inquired about other items on the spreadsheet, he never questioned the items that placed the 2003 WBP Note in the 2003 Trust.
Even though HH FLP had been terminated, apparently BNY Mellon was custodian for the HH FLP assets and because Kay did not sign certain legal documents prior to her death, it had not changed the ownership on its books. (Pls.' Trial Ex. 81.) What documents that were not signed were not identified during the trial.
The evidence is overwhelming that the 2003 WBP Note was intended to be in the 2003 Trust. The Howland Defendants contend that while it may have been everyone else's intent, it was "contrary to [Kay's] clear intent because she never signed any documents to transfer the Note to another entity." Defs.' Post-Trial Mem., 34. According to the Howland Defendants, the fact that Kay executed the assignment of the 2002 WBP Note and the WBP Mortgage to the 1997 Trust corroborates her lack of intention to transfer the 2003 WBP Note to HH FLP. Id. at 37.
This contention that Kay did not intend the 2003 WBP Note to be transferred to HH FLP borders on the incredulous, and there is a plethora of evidence that leads to the exact opposite conclusion. There is not a scrap of evidence that supports the Howland Defendants' view of "[Kay's] clear intent."
Kennedy, Syner, and Paster were emphatic that they represented Kay, individually, and Kay, as Trustee of the various trusts, and not the KLH Management Team or any of its members. Several witnesses testified that, prior to moving to Laurelmead in 2006, Kay attended meetings of the KLH Management Team unless she was in Florida. She also received all the materials that the KLH Management Team received, so she was aware of the plan. Specifically, she was copied on a letter dated August 1, 2003 from Kennedy to the Howland Siblings where Kennedy, in the second paragraph, writes, "Kay, as you know, has formed a new partnership, Harmony Hill FLP, to own . . . the $1,260,000 note from John and Carol." (Pls.' Trial Ex. 33.) Paster and Kennedy both asserted that they explained the strategy, the details, and the documents relating to any estate planning, and Kay completely understood. So, if Kay did not intend the HH FLP to own the 2003 WBP Note, she could have easily responded to Kennedy's letter by replying, "Whoa, Mary Louise, I had no such intention for the HH FLP to own that note from John and Carol." But she did not.
Everyone, including John, agreed that one of Kay's primary estate planning goals was to minimize her estate taxes. (See, e.g., Pls.' Trial Ex. 25.) If the transfer of the 2003 WBP Note was not transferred to the HH FLP because there is no assignment document, then Kay's 69.34 percent interest in the Succotash LP also was never transferred to the HH FLP because there is no assignment document for it. Similarly, the mortgage from David Howland could not have been in HH FLP because there would have been no funds in the partnership to lend to him. Thus, those assets would now have to be reported on an amended Rhode Island Estate Tax Return and substantial taxes plus over ten years of interest would be due. Perhaps even penalties would be assessed. It is also possible that the inclusion of such assets in her taxable estate could result in her estate exceeding the threshold which would require the filing of a federal estate tax return. Kay would have never intended for such a result to occur, given one of her estate planning goals.
Based, not on a preponderance but on all of the evidence, Kay intended the 2003 WBP Note to be transferred to the HH FLP. However, it is true that one of the "i's" not dotted was a document of assignment or an endorsement of the 2003 WBP Note to HH FLP, thus requiring the Court to address the question of whether the lack of such a document or endorsement defeats Kay's intent.
It is unclear why such a document was not prepared. This was the first time Kennedy and Paster had worked together on Kay's estate plan. They each apparently believed that the other was handling this item, and it fell through the cracks.
The Uniform Commercial Code (UCC) provides two routes by which someone can convey the value of a note to another person: (1) by indorsing it to another specified person, G.L. 1956 § 6A-3-201; or (2) by delivery to another person for the purpose of giving the recipient the right to enforce it. Id. § 3-203(a). According to Thomas Hemmendinger, Rhode Island's Uniform Commercial Code Commissioner, such a transfer "vests in the transferee any right of the transferor to enforce the instrument, . . . ." Id. § 3-203(b). (Trial Tr. 23:17-24; 30:16-19, Oct. 16, 2020.) ("If the purpose of the transfer is to transfer ownership of the note, then it should make the . . . recipient, the person entitled to enforce the note.") Id. at 30:16-19.
The solitary difference between these two methods of conveying the value of a promissory note is one of presumption. See UCC Editor's Notes, § 3-203, ¶ 2.
"Because the transferee's rights are derivative of the transferor's rights, those rights must be proved. Because the transferee is not a holder, there is no presumption under Section 3-308 that the transferee, by producing the instrument, is entitled to payment. The instrument, by its terms, is not payable to the transferee and the transferee must account for possession of the unindorsed instrument by proving the transaction through which the transferee acquired it. Proof of a transfer to the transferee by a holder is proof that the transferee has acquired the rights of a holder. At that point the transferee is entitled to the presumption under Section 3-308."
Thus, a subsequent possessor of the note with no indorsement, who received the note through a transfer for the purpose of giving the recipient the right to enforce the note is the owner of the note. In New Bedford Institute for Savings v. Calcagni, 676 A.2d 318, 319 (R.I. 1996), the transfer of promissory notes pursuant to a purchase and sale and assumption agreement, but without indorsement of the notes to the transferee, vested in the transferee "all the right that the transferor had to the proceeds" of the note, subject only to defenses that the maker of the note may have had against the transferor.
The elements of the 2003 Trust were evident to all and were first described by John in an email to the KLH Management Team, when he described that Paster would join the team and his most promising suggestion was to remove, in John's words, "high basis assets (notably the Whaleboat Point Note and the assets in the AHH Trust [Succotash LP])" from her taxable estate. (Pls.' Trial Ex. 25.) As described above, five steps were then taken to effectuate the plan. One of those steps was John executing the 2003 WBP Note with the expectation and intention that it would be transferred to the HH FLP. (Trial Tr. 10:11-15; 18:19-24, Nov. 20, 2020.) Kay delivered the 2003 WBP Note to Kennedy, her agent, both as an individual and as a Trustee and an integral member of her estate planning team. As an individual, Kay was a General Partner of the HH FLP, who then entered into a Purchase and Sale Agreement with herself as Trustee of the 2003 Trust to convey certain assets to the 2003 Trust. She received, as an individual, a note from the 2003 Trust, which was also delivered to her agent. The Howland Defendants contend that the delivery of these notes was solely for safekeeping. There is no testimony that supports that conclusion, and the Court believes otherwise.
Kay was concerned about collecting these notes. That is why she had Carol and John sign the 2003 WBP Note individually and not just as trustees of their real estate trusts. That is why she had the Howland Siblings guarantee the note from the 2003 Trust. Looking at all the circumstances surrounding Kay's meticulous estate planning, the Court finds that Kay delivered the 2003 WBP Note to Kennedy, her agent, for the purpose of enforcement. It was then transferred to Paster, as he was counsel to Kay in her capacity as a General Partner in HH FLP and a Trustee of the 2003 Trust. Since Paster was the architect of the 2008 Battle Plan, he received the 2003 WBP Note as Kay's agent for the purpose of enforcement. He then transferred it to Kohlenberg for the same purpose.
The Howland Defendants also contend that the liquidation of the HH FLP was never completed. Again, this conclusion ignores the evidence. On January 23, 2008, Paster sent to the KLH Management Team a memo entitled "KAY HOWLAND ESTATE PLANNING 2008 BATTLE PLAN." Item 2. b. is "Terminate FLP" and subparagraph iii. states "HH FLP will distribute balance of assets (John's note represents 71% of FLP holdings) to 2003 Irrevocable Trust . . . ." (Pls.' Trial Ex. 49.) An Amendment to the Certificate of Limited Partnership was filed with the Secretary of State on May 29, 2008, stating that the new General Partner was the 2003 Trust. (Pls.' Trial Ex. 54.) On June 10, 2008, Syner wrote to the KLH Management Team, attaching a memo dated June 6, 2008 that says that the 2003 Trust had issued checks to purchase the HH FLP General Partnership interests of Kay and the Howland Siblings. (Pls.' Trial Ex. 55.) On August 29, 2011, Syner wrote Bolotow and advised him that the 2003 Trust owned the 2003 WBP Note. He further gave a listing of assets and liabilities of the 2003 Trust. The liabilities included "notes owed to Kay's 4 children . . . from the sale of their General Partnership interests in HHFLP" (Pls.' Trial Ex. 81.) So, whether it was by way of checks or notes, the 2003 Trust acquired all the General Partnership interests. At that point, the 2003 Trust owned 100 percent of the HH FLP (the 97 percent limited partnership interest transferred in 2003 and the 3 percent general partnership interest). Since there was only one owner, by operation of law, the partnership ceased to exist. The 2003 Trust financials for April 30, 2008 and April 30, 2009 confirm that the HH FLP no longer existed, and its assets were listed as trust assets. (Pls.' Trial Ex. 62.)
The actual memorandum says "Trust" not HH FLP, but that error was corrected by Paster in his deposition.
Even if, as the Howland Defendants contend, the HH FLP was never liquidated, it would be of no consequence because the 2003 Trust owned the HH FLP, which owned the 2003 WBP Note.
The Court concludes as a matter of law that the Plaintiffs have established by more than a preponderance of the evidence that (1) the 2003 WBP Note was transferred to the HH FLP; (2) the HH FLP was terminated in 2008; and (3) the 2003 Trust owns all the assets formerly owned by the HH FLP. As such, the 2003 WBP Note is an asset of the 2003 Trust.
b. Collection of the 2003 WBP Note
The Plaintiffs request judgment for the full amount of the 2003 WBP Note plus interest at the statutory rate of 12 percent per annum. They contend that they, as beneficiaries, had the right to sue to collect the 2003 WBP Note when the Trustees failed to act. However, the Second Amended Complaint contains no such prayer for relief. Plaintiffs argue that Rule 15(b) of the Rhode Island Superior Court Rules of Civil Procedure allows pleadings to be amended to conform to the evidence, and therefore, the Court should grant the relief now requested.
The 2003 WBP Note states that in the event of an uncured default, the holder "may declare the entire unpaid principal balance hereunder immediately due and payable without notice." (Pls.' Trial Ex. 30.) There is no evidence of any such declaration. In August 2011, Kohlenberg wrote that he was preparing a letter to John noting that default accelerates the note. (Pls.' Trial Ex. 139.) However, no such letter was ever produced at trial.
As to the interest rate, there is no default rate in the note. Plaintiffs contend that the statutory prejudgment rate should apply. The Court disagrees. General Laws 1956 § 9-21-10 provides that if there is a rate stated in the contract then there is no prejudgment interest allowed. Therefore, unpaid interest on the outstanding principal of the 2003 WBP Note shall be calculated at the rate of 4.09 percent, as stated in the Note.
The Court denies Plaintiffs' request for judgment on the 2003 WBP Note. Rather, it will instruct Kohlenberg as to what action he shall undertake to collect the 2003 WBP Note.
c. The WBP Mortgage
The mortgagor of the WBP Mortgage is Carol, individually and in her capacity as Trustee of the CFH Trust, and it was provided as security for the 2002 WBP Note. On July 1, 2003, in those same capacities, she executed the 2003 WBP Note as a borrower, wherein she promised that "[t]his Note is secured by a Mortgage Deed of the Borrower dated February 14, 2002 herewith (the 'Mortgage') covering certain real estate located in South Kingstown, Rhode Island." "[A]n Event of Default as described and defined in the Mortgage" is an event of default under the Note. The lender may "exercise any of its [rights] . . . under the Mortgage." The Borrower waives "notice of any . . . default under the Mortgage." (Pls.' Trial Ex. 30.)
The mortgagors' intention that the 2003 WBP Note would be secured by the WBP Mortgage is unambiguous. John testified that when he and his wife executed the 2003 WBP Note, he intended that it was to be secured by the WBP Mortgage. (Trial Tr. 25:4-11; 26:13-24, Nov. 20, 2020.)
The Howland Defendants called Hemmendinger to opine that the 2003 WBP Note was not secured by the WBP Mortgage and that since Carol and John, individually, were accommodation parties to the 2003 WBP Note, their collateral was impaired, affording them a surety defense to the 2003 WBP Note. While the Court has acknowledged its respect for Hemmendinger and his knowledge of the Uniform Commercial Code, it must take issue with his conclusions.
John and Carol, in their individual capacities, were not accommodation parties. Section 6A-3-419(a) states that an accommodation party is one who incurs liability on an instrument "without being a direct beneficiary of the value given for the instrument." (Section 6A-3-419(a)) (emphasis added).
Carol and John were the beneficiaries of the CFH Trust. Moreover, the trust was revocable, so Carol could take ownership of the property at any time, which she did on June 28, 2002 when, as Trustee, she conveyed 50 percent of the property to herself and 50 percent to John. John and Carol then conveyed the property to the JHH PRT and CFH PRT, respectively. They were Trustees and beneficiaries of these trusts which were created. These trusts afforded certain tax benefits to their estates. (Pls.' Trial Exs. 2, 22, 23.); (Defs.' Trial Ex. ZZZ.) The Whale Boat property was their primary residence. While the 2003 WBP Note says that Carol and John were signing it individually and as trustees of the CFH Trust, they were really only signing it individually because the CFH Trust no longer existed, and John was never a trustee of that trust. Based on a preponderance of the evidence, the Court finds as matters of fact and law that John and Carol were direct beneficiaries of both the 2002 and 2003 WBP Notes, not accommodation parties, and they have no surety defense.
Turning to the WBP Mortgage, it states that it secures the 2002 WBP Note "and any extensions or renewals thereof, or modifications thereto." (Pls.' Trial Ex. 17.) While
Hemmendinger stated that the 2003 WBP Note does not qualify as an extension, renewal, or modification of the 2002 WBP Note, the Court disagrees. The 2003 WBP Note extended the term and modified the interest rate of the 2002 WBP Note. Id. Hemmendinger acknowledged that there is no requirement under Rhode Island law that a mortgage deed describe the obligation for which it serves as security. Rather, the attachment of a mortgage to a particular loan is a matter of the evidence surrounding the transactions. "I think what Rhode Island law is that there has to be sufficient evidence to tie the mortgage to an obligation." (Trial Tr. 45:16-18, Oct. 16, 2020.) By a preponderance of the evidence, the Court concludes as a matter of law that the 2003 WBP Note is secured by the WBP Mortgage.
d. The Value of the 2003 WBP Note
Because the Court has concluded that the 2003 WBP Note is owned by the 2003 Trust, there is no need to address the issue of its value for equalization purposes because it was not distributable to John.
2. Harmony Hill
a. Equalization
On January 29, 2002, Kay transferred 50 percent of Harmony Hill to the Harmony Hill QPRT 1 and the other 50 percent to the Harmony Hill QPRT 2. The QPRTs provided that Kay could live rent free at Harmony Hill for the initial term, which was one year and three years, respectively. Thereafter, Kay could live there so long as she wished, provided she paid rent. At her death, if the QPRTs still owned Harmony Hill, it would be transferred to John.
On May 12, 2005, Kay and Field as Trustees of the QPRTs transferred Harmony Hill to John. John could not recall the reason for the transfer. (Trial Tr. 101:1-24, Nov. 20, 2020.) Bradford Soap was refinancing its debt, and John was personally required to guarantee the loan. John was anxious to have the transfer made because he had shown it on his balance sheet, but he claimed the "wheels had already been set in motion" prior to the transfer. Id. at 104:17-105:5. The Court finds that John's faulty memory lacks credibility. The Court finds that there would have been no reason to transfer Harmony Hill from the QPRTs to John except to assist him with the Bradford Soap financing.
Everyone believed from the time Kennedy initiated the idea of the QPRTs in late 2001 (Pls.' Trial Ex. 5.) until August 23, 2010, that Harmony Hill was included in the equalization process. John confirmed that in his testimony:
"Q Did you believe in 2005 that by getting the property [Harmony Hill] prior to your mother's death you would be able to shield it from the equalization process?
"A No.
"Q You believed in 2005 that this conveyance to you would have no effect on the equalization process, correct?
"A That was my understanding in 2005.
"Q And when did your understanding change?
"A As a result of advice from counsel." (Trial Tr. 106:13-21, Nov. 20, 2020.)
On August 23, 2010, Kohlenberg met with Bolotow and John. For the first time, Bolotow raised the issue about Harmony Hill not being in the equalization. He argued that Article THIRD, Paragraph 1(a) of the 2003 Trust refers to property "then held" in the Harmony Hill QPRTs passing to John as included in equalization. (Pls.' Trial Ex. 28.) (Emphasis added.) When Kay died, those QPRTs did not exist and thus held no property, so there was nothing to include in equalization under the 2003 Trust. As to the 1997 Trust, Bolotow argued that the language of Article FOURTH, paragraph 1. (b), which referred property "passing" to John being included in equalization, had to mean "passing at death" and that to capture prior distributions, it would "[n]eed to say which is passing or has passed previously." (Pls.' Trial Ex. 122.)
The Howland Defendants believe that the documents are clear and unambiguous that Harmony Hill is not included in the equalization process. The Court agrees that the documents are clear and unambiguous, but while they are correct about the 2003 Trust, the Court's reading of the 1997 Trust leads to an opposite conclusion.
The Howland Defendants make much of the title "AT MY DEATH" of Article FIFTH of the 1997 Trust. Apparently, they failed to read Article EIGHTH, paragraph 1, which states, "[t]he headings contained in this trust are for convenience only and shall not affect in any way the meaning or interpretation of this trust."
They next argue that paragraph 1 of Article FIFTH starts, "At my death . . . ." However, they ignore the words following, which are "my trustees shall distribute the trust estate . . . ." Harmony Hill is not part of the trust estate because the trust estate consists of what poured over pursuant to Kay's Will, which was what she owned at her death. There is no dispute Kay did not own Harmony Hill at her death, but that first sentence has a proviso, and subparagraph (b) of that proviso is the equalization process. It includes "any property passing to John . . . under the provisions of any of" (emphasis added) the Harmony Hill QPRTs. It does not say passing to John "at my death." Kay and the drafters of the document knew how to use those words because similar words can be found at least eight times in the 1997 Trust. Yet, they did not put those words after "passing to John." Rather, it used the phrase "under the provisions of."
Article FOURTH, paragraph 1 of each Harmony Hill QPRT states, "While I am living, my trustees shall at any time or times pay all or any portion of the net income and principal . . . to such one or more of my child . . . ." (emphasis added). In Article SECOND, paragraph 3, "my child" is defined as John. (Pls.' Trial Exs. 9, 10.) John received Harmony Hill pursuant to that provision by two Trustees' Deeds. Each deed began, "We, [Kay and Field], in our capacity as Trustees of [Harmony Hill QPRT] . . . by virtue of the power conferred upon us by said Trust . . . ." (Pls.' Trial Ex. 42.) Thus, John received Harmony Hill pursuant to the provisions of the Harmony Hill QPRTs.
There is further support that the Court's reading of the 1997 Trust is correct. The 2003 Trust and the operative amendment in its entirety of the 1997 Trust were signed on the same day, June 24, 2003. The two Trusts work in tandem when it comes to equalization. Article FIFTH, paragraph 1(g) of the 1997 Trust states that there will be no equalization for any item included in the equalization process under the 2003 Trust. This provision ensured that John would not be charged twice. If Kay had intended that only if Harmony Hill was "passing at death" to John, then she would not have needed to refer to it at all in the 1997 Trust because had the Harmony Hill QPRTs still owned Harmony Hill, it would have been property "then held" for purposes of the 2003 Trust.
Paster came to the same conclusion. He acknowledged that he was aware that Harmony Hill was transferred to John prior in 2005. He was then asked if that pre-death transfer would mean that "the value of Harmony Hill would be included [in John's chargeback?]" He replied, "[No]." The next question was, "[I]s that consistent with Kay's intent regarding how Harmony Hill should be treated?" Paster answered, "Yes. Equalization would be done with her revocable [1997] trust provisions." (Paster Dep. 95:8-96:13, Feb. 21, 2019.) Paster affirmed this interpretation on cross-examination. See id. at 186:2-9, Feb. 21, 2019.
The Court concludes as a matter of law that Harmony Hill passed to John under the provisions of the Harmony Hill QPRTs and is to be included in the equalization process required by the 1997 Trust.
The Court's conclusion "is entirely consistent with the intentions of [Kay] . . . in the copious extrinsic evidence in the record." Haffenreffer v. Haffenreffer, 994 A.2d 1226, 1233 (R.I. 2010).
If, somehow, it was determined that the language "any property passing to John . . . under the provisions of any of" the Harmony Hill QPRTs was determined to be ambiguous, then the Court would have to determine Kay's intent. While the Court believes it unnecessary, it will, without providing great detail, identify the overwhelming evidence of that intent.
Kennedy initiated this plan on December 20, 2001 in a detailed letter to the Howland Siblings, with a copy sent to Kay. In that letter, she wrote, "Finally, there would be a mechanism incorporated in your mother's estate plan to adjust for the value of the allocated property at the time of her death . . . the child's share reduced by that amount. If the value of the real estate then exceeded the child's share, he or she would have to make up the difference." (Pls.' Trial Ex. 5.)
John talked about "equalizing the ultimate distribution of KLH's estate amongst her four children . . . ." (Pls.' Trial Ex. 14.) He acknowledged Harmony Hill as part of equalization in subsequent emails. (Pls.' Trial Exs. 41, 52.) As quoted above, John, in his testimony, acknowledged that, until Bolotow raised the issue, he believed Harmony Hill was included in equalization. Kennedy wrote about equalization in letters on April 23, 2002, November 5, 2002, and August 1, 2003. (Pls.' Trial Exs. 20, 24, 33.) Syner included Harmony Hill in all equalization schedules prepared after the transfer of Harmony Hill to John. Frances and Peter also believed that Kay intended Harmony Hill to be included in equalization.
The best evidence of Kay's intent is the testimony of the drafter of the 1997 Trust. Kennedy testified as follows:
"[M]y dealings with Kay found her to be consistent over a fourteen-year period that the distributions to her children were to be equal. I never heard her say anything to the contrary. I believe that John acquiesced in that general presentation of the facts to his siblings and his mother. I do not believe that Kay was engaged in a sub rosa transfer of additional assets to John which she would not admit to her other children. I would find that to be contrary to her character as I knew it. I further believe that in any event that the interpretation of the 1997 trust as amended as of her death talks about properties passing to John from the QPRT trusts and does not refer to the specific date of her death as the date of that passing and that the adjustment provision in the 2003 trust therefore compels the adjustment." (Trial Tr. 68:9-23, July 31, 2020.)
The Court finds that, by more than a preponderance of evidence, it was Kay's intent to include Harmony Hill in the equalization process even if it was transferred from the Harmony Hill QPRTs during her lifetime.
b. Value of Harmony Hill
The Howland Defendants argue that if this Court decides that Harmony Hill is included in the equalization calculation, then the value to be used should be the lowest appraisal value of $570,000, because that is the value that conforms most closely to Kay's expressed intent to value real estate property, "as if it were included in my estate for federal estate tax purposes." Article FIFTH, paragraph 1. (b) of the 1997 Trust states that if any property in the Harmony Hill QPRTs is included in the equalization process, the 'value' of "such property shall be . . . as of [the date of] my death . . . as determined by" a qualified appraiser chosen by my independent trustee, as if such property were includable in my estate for federal estate tax purposes.
On December 22, 2009, Kohlenberg proposed a process for valuing these properties. He would have Harmony Hill and Manning Street appraised. If any Sibling objected, he or she could select another appraisal. If the two appraisals were within 5 percent of one another, they would be averaged. If further apart, the two appraisers would pick a third appraiser whose valuation would be final. All the Howland Siblings agreed to the process. John did not like the initial appraisals, which for Harmony Hill was $835,000. (Pls.' Trial Ex. 70.) He selected his own appraiser, and the Harmony Hill appraisal was $570,000. (Defs.' Trial Ex. CC.) The two appraisers selected a third appraiser, who valued the property at $725,000. (Pls.' Trial Ex. 144.)
The Howland Defendants complain that, despite John's repeated requests, Kohlenberg, admittedly, did not instruct the appraisers that their appraisals would be for "estate tax purposes" as required by the 1997 Trust. However, they offered no evidence in terms of expert testimony or citation to any Internal Revenue Code section or Internal Revenue Service regulation or ruling that valuation for estate tax purposes is anything other than fair market value. In fact,
"The value of every item of property includible in a decedent's gross estate . . . is its fair market value at the time of the decedent's death . . . The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts." 26 C.F.R. § 20.2031-1, Treas. Reg. § 20.2031-1 (emphasis added).
All the appraisers opined on the market value of Harmony Hill as of the date of Kay's death. The Howland Defendants also did not call any of the appraisers who valued Harmony Hill to testify that their appraisals would be any different had they been asked to value the property for "estate tax purposes."
Kohlenberg, on his own, could have selected an appraiser and the Howland Siblings would have been bound by that result. Instead, he solicited input from the Howland Siblings, who all willingly participated. The fact that John did not like the result does not require the Court to accept the value of his appraiser.
The Court declares that the value of Harmony Hill for equalization purposes is $725,000.
3. Manning Street Value
There is no dispute that Manning Street is included in the equalization process pursuant to the 2003 Trust. The Howland Defendants again disputed the value for the same reason that they challenged the value of Harmony Hill. The parties participated in the same process as was done for Harmony Hill. The same reasoning applies, and the Court declares that the value of the third appraisal performed by Peter Scotti in the amount of $415,000 is the value to be used for equalization purposes.
John claims a credit of $85,000 for expenses paid by him related to the sale of Manning Street. Syner did include such a credit on plaintiffs' Trial Exhibit 149, but he had a notation "(John to provide details)" and footnote, "Pending items to be resolved." The Court does not understand why expenses related to the sale of Manning Street in 2011 would be chargeable to the other beneficiaries since the property passed to John upon Kay's death in 2009. In Defendants' post-trial memorandum, at page 51, they claim that "Paster agreed [that such expenses] should be subtracted from the value of the property used in the equalization." The Court has read Paster's deposition, and he did not so testify. He said that, "If [there was] a liability on the books of the trust, it would have to be paid before distribution of the net assets of the trust to John." (Paster Dep. 29:14-17, Feb. 22, 2019.) No evidence of such a trust liability was ever presented. Paster was also asked if a residential property did not have a kitchen and "other . . . diminishing factors," would it have a reduced value. He replied that such factors should be considered by a real estate appraiser in the valuation of the property. Id. at 31:8-32:3.
The Court infers that the trust to which Paster refers is the Manning Street QPRT.
Even if these factors were to reduce the value of Manning Street in equalization, the Court recalls no evidence providing the details of those expenses. Also at page 51 of their post-trial memorandum, the Howland Defendants direct the Court to Plaintiffs' Trial Exhibits 149 and 157 and the Howland Defendants' Trial Exhibit QQ for support of their claim for credit. As just stated, Exhibit 149 indicates that John is to provide details of the expenses, and Exhibit 157 is Paster's deposition. In Exhibit QQ, Syner asks, "Do you have a list of expenses that you incurred relating to Manning [Street] that I can include in the analyses? I will still footnote these expenses as an issue to be resolved . . ."
The Court concludes as a matter of law that the Howland Defendants have failed to prove that they are entitled to any credit for the Manning Street expenses.
4. The Bradford Note
a. The In Terrorem Clause
The Bradford Note was held by Kay at the time of her death. Therefore, it poured over to the 1997 Trust, which provided that any note payable to Kay by one of her children would be distributable to that child and the value of the note would be accounted for in the equalization process. If the value of property that a child had received, which is subject to equalization, exceeds the value of that child's share of the 1997 Trust, then that child, within nine months of Kay's death, shall deliver the amount of the excess in cash or by a promissory note. If the child fails to do so, then it will be presumed that that child and his issue predeceased Kay. In short, in such circumstances, that child and his family are disinherited. This provision is commonly called an "in terrorem" or "penal" clause.
The Plaintiffs contend that John's failure to deliver the equalization note should invoke the in terrorem clause. Nine months after Kay's death, there was no executor or administrator in place. Until fourteen months after her death, there was no Independent Trustee whose responsibility it was to calculate the amount of any equalization note. The values of Harmony Hill and Manning Street, essential to the equalization calculation, were not determined until October 5, 2011, some thirty-three months after Kay's death. While Syner prepared equalization schedules, they were drafts and never finalized, so the precise amount of the note was never determined. This litigation then commenced in early 2012.
Based on the foregoing, the Court will not invoke the in terrorem clause.
b. Value of the Bradford Note
While the parties agree that the Bradford Note is included in the equalization process, they dispute what value should be assigned to the Note. Article FIFTH, paragraph 1(d) of the original 1997 Trust provided, "[t]he value (as determined in the federal estate tax proceedings relating to my estate) of any indebtedness given to a child of mine . . . shall be deemed to be part of the trust estate hereunder and a part of the share therein distributable [to] such child of mine or such issue." The 1997 Trust was amended in 2008, deleting the above parenthetical about federal estate proceedings. By 2008, it was evident that because of the estate planning done by Kay, with the advice of the KLH Management Team, there would be no federal estate tax proceedings. Perhaps, since that section of the trust was being amended anyway, the language involving the value of the note was cleaned up. In any event, the Court infers nothing from this amendment. As discussed above when discussing the value of Harmony Hill, value for estate tax purposes is nothing other than fair market value.
The amendment also addressed the change in IRA beneficiaries which was part of Paster's 2008 Battle Plan and that was the primary purpose of the amendment. (Defs.' Trial Ex. LLL.)
Paster testified as follows:
"A. IRS valuation for estate tax purposes is to be fair market value of the asset on date of death.
"Q. Is that different from just using the word valuation?
"A. I think not.
"Q. So you think the terms are interchangeable.
"A. Yes, for purposes of the trustees making the adjustments as required by this trust." (Pls.' Trial Ex. 157.); (Paster Dep. 23:4-12, Feb. 22, 2019.)
The IRS Regulations state:
"The fair market value of notes, secured or unsecured, is presumed to be the amount of unpaid principal, plus interest accrued to the date of death, unless the executor establishes that the value is lower . . . If not returned at face value, plus accrued interest, satisfactory evidence must be submitted that the note is worth less than the unpaid amount (because of the interest rate, date of maturity, or other cause) or that the note is uncollectible, either in whole or in part . . . ." 26 C.F.R. § 20.2031-4, Treas. Reg. § 20.2031-4.
Paster testified that in his experience with valuation for estate tax purposes, he would engage a firm with expertise in "valuing closely-held businesses, as well as financial instruments." (Paster Dep. 21:13-15, Feb. 22, 2019.) He specifically mentioned a firm in Princeton, New Jersey, which had been involved in thousands of valuations and were regular experts in United States Tax Court proceedings. Paster said that such firms take into account factors such as marketability, history of payment, collateral, and ability to pay of the obligor in their valuations. Id. at 23:13-24:5.
The Howland Defendants presented Cacchiotti as an expert in valuing businesses and promissory notes. With respect to the Bradford Note, on direct examination, he said he would discount it 35 percent for marketability, 10 percent for payment history, and 10 percent for lack of collateral, for a total of 55 percent. On cross-examination, he was confronted with his deposition testimony, where he said he would only discount the note by 45 percent. When further pressed, he said he would revert to his prior testimony of a 45 percent discount. When asked which 10 percent factor he would eliminate, he said lack of collateral.
The Court affords no weight to Cacchiotti's testimony for several reasons. First, he showed a lack of familiarity with the facts. On cross-examination, he removed the 10 percent discount for lack of collateral, and yet there was no collateral. He was unaware that the note had been paid by way of the rent credit applied by Syner. Then, taking a clue from defense counsel's objection, he contended that the credit was not really payment. Even after the Court posed a hypothetical about a journal entry which deducted from someone's monthly salary an amount to pay off a debt to the company, he felt that might be payment in an accounting sense, but he was not sure it constituted payment of a promissory note. (Trial Tr. 109:22-110:22, Oct. 15, 2020.) On a number of occasions, when asked how he arrived at 35 percent for lack of marketability, he testified it was a number to which the IRS frequently acquiesced. However, he offered no support from a regulation, ruling, case, or treatise to validate his contention. When asked about how the interest rate and term of the note factored into his valuation, he stated that those items were included in marketability. Yet, he showed no calculations as to how those items were factored into the 35 percent discount. He also failed to investigate the ability of John to pay the note, which would have a bearing on its collectability. The Howland Defendants cite two cases where promissory notes were valued in estates by experts: Harper v. Commissioner of Internal Revenue, 83 T.C.M. (CCH) 1641 (T.C. 2002) and Smith v. United States, 923 F.Supp. 896, 904 (S.D.Miss. 1996). In both cases, the experts provided sophisticated present value analyses comparing market interest rates to the rate in the note and other factors. In Smith, the expert assigned values to seven different factors.
The Plaintiffs presented Gray as an expert in the duties and responsibilities of a trustee. He testified that he was familiar with equalization clauses:
"[I]t is my opinion that the value of the note shall be the -for purposes of equalization, should be the value of - whatever is owed on that note at the time of death… Because in the context of equalization, the purpose of including the note at all is to try to do justice and equity among all of the equal shares of the beneficiaries. That intent would be frustrated if another value was used, in my opinion." (Trial Tr. 8:6-14, Oct. 15, 2020.)
While Gray's testimony was credible and logical, it is not consistent with the language of the 1997 Trust. If Kay had intended to use the face value of the notes for equalization, the Trust could have been drafted with those words. Instead, "value" is used. As previously discussed, value is fair market value.
Both Paster and the IRS have set forth factors that are to be considered in determining fair market value of a note. However, there is no credible evidence in this case on how to quantify those factors. As stated above, Cacchiotti failed to articulate how he arrived at 35 percent for lack of marketability. There was no analysis of the interest rate or term of the Bradford Note, which would affect its value. He was unaware that prior to Kay's death, payments were made on the Note. He never inquired as to John's ability to pay. He did say he would discount a note by 10 percent if it was unsecured by any collateral but gave no authority for that figure. Then, on cross-examination, he dropped that discount. The Court is left with no alternative but to accept the value used in the Rhode Island Estate Tax return of $517,987.
5. Equalization Issues
The Plaintiffs presented through Syner a calculation of the Equalization Note, which is Plaintiffs' Trial Exhibit 149. The Howland Defendants attached to their post-trial memorandum their own spreadsheet in a slightly different format and using their view of the value of assets and their view of which trust held which assets. The Court rejects both submissions. There is a fundamental flaw in Syner's analysis. He has done only one equalization calculation, and yet each trust requires its own equalization process. Article FIFTH, Paragraph 1. (g) of the 1997 Trust states that the equalization adjustments will be made only to the extent that they were not made pursuant to the 2003 Trust. There is no comparable clause in the 2003 Trust, which leads the Court to conclude that equalization pursuant to the 2003 Trust must be calculated first.
The Howland Defendants have labeled their spreadsheet as Exhibit BBBB. Exhibits are evidence but the Court will not accept evidence after a party has rested. The Court will instead treat the Howland Defendants' calculations in Exhibit BBBB as argument.
Plaintiffs' Trial Exhibit 149 contains numerous items for which there was no testimony, such as various loan receivables from family members and certain securities. For lack of any other evidence, the Court accepts those values except where specifically challenged by any of the parties.
a. Equalization in the 2003 Trust
The items to be added back in the 2003 Trust equalization calculation are (1) Manning Street; (2) non-undergraduate expenses for any grandchild reduced by the applicable estate tax rates; (3) any amounts Frances received from the IGWE Trust LLC; and (4) any distributions from the life insurance trust payable to Peter and Janet in excess of $500,000 each.
As discussed above, Manning Street is in the 2003 Trust equalization while Harmony Hill is in the 1997 Trust equalization. The Court has previously found the value of Manning Street to be $415,000. The add-back for college expenses as presented by Syner is wrong, as the amount must be multiplied by one minus the Rhode Island Estate Tax rate paid by Kay's estate, and there is no evidence that Syner made that calculation. There was no testimony that Frances received any amount from the IGWE Trust LLC other than the amount shown on Plaintiffs' Exhibit 149.
As to the insurance trust, Syner testified that the $18,374 excess over $1,000,000 represented the interest earned between the date of Kay's death and the date when the funds were distributed to Janet and Peter. (Trial Tr. 49:1-5, Sept. 30, 2020.) Unlike other chargebacks which used date of death values, the clause dealing with the life insurance refers to amounts received from the life insurance trust in excess of $500,000 each. Therefore, Janet and Peter must each account for $9187.
The Howland Defendants urge the Court to use a current value of Succotash LP for calculating any equalization obligation. The assets of Succotash LP are principally marketable securities. The Howland Defendants offer no basis or authority for this assertion. Equalization is to be calculated using values as of the date of Kay's death. If a different date is used for Succotash LP, then why would not a different date be used for valuing Harmony Hill, Manning Street? Therefore, Kohlenberg must determine the date of death value of Succotash LP, as well as the "Other Investments."
The Howland Defendants also contend that Peter's share should be charged with the David Howland mortgage. There is no basis in the 1997 Trust for that conclusion. The mortgage is an asset of the 2003 Trust, and it is not added back in the equalization process. If Peter elects to pay the mortgage on his son's behalf with a charge against his share, that arrangement can be worked out among Peter, David, and the Independent Trustee.
b. Equalization in the 1997 Trust
The items to be added back in the equalization calculation for the 1997 Trust that are not included in the equalization calculation for the 2003 Trust are (1) 85 percent of the amounts received by Peter, Frances, and Janet from the IRA or $209,849.11 each; (2) the Bradford Note at $517,987; and (3) Harmony Hill at $725,000.
The Howland Defendants dispute the so-called 1209 Account. (Defs.' Trial Ex. T.) The 1209 Account had three categories of items. The first was Manning Street expenses. However, Syner testified that he did not include this category on Exhibit 149. (Trial Tr. 84:9-14, Sept. 29, 2020.)
The second category was for deck improvements in the amount of $10,633 at Harmony Hill. While Syner acknowledged that these were disputed by John, he testified that the improvements were made when John owned the property and Kay was living there. (Trial Tr. 80:3-9, Sept. 29, 2020.) Since John benefitted from the deck, the Court properly finds it chargeable to him.
The third category in the 1209 Account was interest on the Bradford Note. Once the initial term of the Harmony Hill QPRTs expired, Kay owed rent for her use of the premises. Apparently, John stopped paying interest on the Bradford Note starting in 2006. Syner credited the rent owed by Kay at the rate of $2000 per month from January 2007 until the date of her death. The Howland Defendants contend that Syner committed two errors in this calculation. First, they contend he should have credited $2500 based on the appraisal done by Coastal Properties which had been requested by Syner. (Defs.' Trial Ex. S.) The Howland Defendants are correct that a fair market rental was required to be charged. Since there was no evidence that $2000 per month was a fair market rent, the Court agrees with Howland Defendants that $2500 is the appropriate rental.
The Howland Defendants further contend that the credit should have been given once the initial term of each QPRT ended, which would have been on January 29, 2003 and January 29, 2005, respectively. There is no evidence whether rent was paid or not paid prior to 2007. Even assuming no rent was paid until May 12, 2005, when John acquired Harmony Hill, the rent was owed to the Trustees of the Harmony Hill QPRTs. While it is true that John or his children were to receive the net income of the QPRTs, his claim, if any, is against the Trustees of the QPRTs, namely Field and Kay, for the net income from January 29, 2003 until May 12, 2005. After he acquired Harmony Hill, the rent claim would be against Kay, or her estate, for rent from May 12, 2005 through December 31, 2006. To the Court's knowledge, no such claim was ever filed. Furthermore, there is no provision in the 1997 Trust that allows John to offset those claims in the equalization process.
Syner did credit rent against the Bradford Note beginning in 2007 for twenty-six months, but he only credited $2000 per month and he should have credited $2500 per month. Consequently, the 1209 Account should be reduced by $13,000.
Syner listed two other "adjustment items" on Exhibit 149 that the Court will exclude. There should be no chargeback for Frances' daughter Laura's three years of college because only non-college tuition is subject to equalization. Lastly, the adjustment for "CJ's excess distributions from the KLH Crut" was never explained and it is not an equalization item mentioned in either trust.
6. The Dunes Club Cabana No. 63 Lease
The dispute over the Dunes Club Cabana No. 63 Lease was an accelerant for the fire that raged between John and Frances. The background to this dispute was described above but a brief recitation is in order. On March 5, 2002, Kay executed the First Codicil to her Will and she bequeathed her stock in the Dunes Club and her lease on Cabana No. 63 equally to John and Frances, per stirpes. (Pls.' Trial Ex. 18.) Next, on December 22, 2004, Kay wrote to the Dunes Club that she designated John and Frances to become the lessees of Cabana No. 63 upon her death. (Defs.' Trial Ex. JJJ.) On January 14, 2005, John wrote to Frances stating that the Dunes Club would only allow one lessee, so he did not send Kay's December 22, 2004 letter. Instead, he drafted a new letter dated January 6, 2005, stating that he would be the successor lessee. On July 20, 2007, Kay sent a notarized letter to the Dunes Club designating Frances as the successor lessee. (Pls.' Trial Ex. 47.)
Within three weeks of Kay's death, John approached the Dunes Club to have the lease transferred to his name based on the January 2005 letter. He was advised that the Club had both Kay's January 2005 letter naming John and Kay's July 2007 letter naming Frances in their files. Apparently, the matter was referred to the Dunes Club Board, which passed a motion assigning the Cabana Lease to Frances. John protested but to no avail.
Both the 2005 and 2007 letters, which Kay wrote regarding the Dunes Club, were not an immediate assignment of her interest in lease. Rather she assigned the lease upon her death and thus the letters were testamentary. However, they failed to meet the requirements for a testamentary bequest. Kohlenberg included the Dunes Club stock as an asset in both the Inventory filed in the Providence Probate Court (Defs.' Trial Ex. CCC.) and in the Rhode Island Estate Tax Return. (Pls.' Trial Ex. 162.) The First Codicil to her Will, even though it predated the letters, was a properly executed testamentary bequest, and the Court concludes as a matter of law that the Dunes Club stock and the interest in Cabana No. 63 were part of Kay's probate estate.
7. Breach of Fiduciary Duty
a. The Law and the Allegations
Section 76 of Restatement (Third) Trusts imposes a duty on a trustee "to administer the trust, diligently and in good faith, in accordance with the terms of the trust and applicable law." Restatement (Third) Trusts § 76(1) (Am. Law Inst. 2007). Comment b to that section states that it is an affirmative duty, and "a trustee may commit a breach of trust by improperly failing to act . . . ." Id. § 76 cmt. b. Section 78 of Restatement (Third) Trusts provides: "(1) Except as otherwise provided in the terms of the trust, a trustee has a duty to administer the trust solely in the interest of the beneficiaries . . . (2) Except in discrete circumstances, the trustee is strictly prohibited from engaging in transactions that involve self-dealing or that otherwise involve or create a conflict between the trustee's fiduciary duties and personal interests." Id. § 78. The duty of loyalty includes the duty to avoid self-dealing but also other types of conflicts of interest that "may prevent the trustee from exercising independent and disinterested judgment on behalf of the trust." George Gleason Bogert, The Law of Trusts and Trustees; a Treatise Covering the Law Relating to Trusts and Allied Subjects Affecting Trust Creation and Administration, with Forms § 543, at 332 (3d ed. 2019) .
Our Supreme Court has stated:
'"Broadly speaking it is clearly established that a trustee must give undivided loyalty to the trust confided to his care and to its beneficiaries. It is the policy of the law to see that in administering the trust he shall not be tempted in any way by conduct or circumstances to act otherwise than with complete loyalty to the trust and its interest. He must at all times exercise a high standard of honor and avoid all situations and transactions that tend to call his good faith into question and to create in himself rights possibly conflicting with those of the beneficiaries.'" Sinclair v. Industrial National Bank of Providence, 89 R.I. 461, 469, 153 A.2d 547, 552 (1959) (quoting Dodge v. Stone, 76 R.I. 318, 323-24, 69 A.2d 632, 634-35 (1949)).
In Sinclair, the Bank, as Trustee, held stock in the Outlet Company. It also had lent money to one of the beneficiaries and took an assignment of her residuary interest in the trust to secure her loan. The Bank entered into an agreement to sell shares of the Outlet Company stock and Mr. Sinclair, another beneficiary, sought to enjoin the sale. The Court found a conflict of interest between the Bank's dual roles as both a Trustee and a creditor, because the Bank planned to use some of the proceeds to pay off the loan. The Court upheld the grant of a preliminary injunction preventing the sale.
The Plaintiffs contend that John breached his fiduciary duties as a trusted financial advisor to his mother and as Trustee of the 1997 and 2003 Trusts in numerous ways.
As to the 1997 Trust, the Plaintiffs contend in their Second Amended Complaint that John did not pay the Bradford Note; he tried to exclude Harmony Hill from the equalization process; and he has interfered, causing delay in the administration of the Trust. As to the 2003 Trust, Plaintiffs' assertions are that John did not pay the 2003 WBP Note and, as Trustee, made no effort to collect it and has delayed the administration of the Trust.
b. John's Testimony as to His Duty
When being cross-examined on his duties as a Trustee, John was coy. When asked about his view of his responsibilities as a Trustee, he replied, "I needed to have access to and get the advice of professionals relating to that-that related to activities of that trust." (Trial Tr. 59:25-60:10, Nov. 20, 2020.) When asked what constituted a fiduciary duty, he responded, "[t]o avail [himself] of the opinions of professionals that were involved in organizing and putting together this particular trust." Id. at 60:18-20. While his responsibilities and duties were broader than those statements, the record demonstrates that he never sought professional advice in his capacity as a Trustee. The only professional that he consulted was Bolotow. After much jousting, John conceded, "[l]et me be clear. I engaged Mr. Bolotow in my personal capacity." Id. at 77:25-78-1.
c. Acts Prior to Kay's Death
The Second Amended Complaint does not include a count for breach of fiduciary duty prior to Kay's death. Even if the Complaint were amended to include such a count, the Complaint was filed on May 21, 2012. If John breached any duty prior to Kay's death, the Court concludes any claim regarding such breach is barred by the statute of limitations because it was not filed prior to February 10, 2012.
d. The Bradford Note
The Bradford Note is an asset of the 1997 Trust and, as such, John became the equitable owner of that note when Kay died. The fact that it has yet to be delivered is of no consequence, as his obligation to make payments on it ceased as of her death. Therefore, there can be no breach of any fiduciary duty with regard to the Bradford Note.
e. The 2003 WBP Note
After being somewhat evasive, John acknowledged that his failure to pay the 2003 WBP Note was detrimental to the other beneficiaries. The Howland Defendants contend that the law allows beneficiaries to be Trustees. Of course, it does, but Trustee beneficiaries are not allowed to act as Trustee in a manner adverse to other beneficiaries. A Trustee cannot put his or her personal interest above the interest of the other beneficiaries. "Furthermore, when a beneficiary serves as trustee or when other conflict-of-interest situations exist, the conduct of the trustee in the administration of the trust will be subject to especially careful scrutiny." Restatement (Third) Trusts § 37 cmt. f(1) (Am. Law Inst. 2003).
The Howland Defendants argue that because no action was taken when John ceased to make payments while Kay was alive and because Frances, Peter, and Janet joined him in releasing Syner with respect to John's failure to pay the 2003 WBP Note when Syner became Trustee of the 2003 Trust in 2008, John was somehow relieved of pursuing collection of the 2003 WBP Note. This assertion is another example of the Howland Defendants picking and choosing facts to support their position. Throughout the trial, they vigorously asserted that the 2003 WBP Note was never transferred to HH FLP, that HH FLP was never terminated, and thus, that the 2003 WBP Note was never in the 2003 Trust. Yet, if the 2003 WBP Note was not in the 2003 Trust, why did John release Syner from any liability in not collecting on it?
Their contention that Kay's forbearance relieves John as Trustee from seeking to collect the 2003 WBP Note has no support in the law. "The trustee is not excused from enforcing a claim merely because the settlor would not have pressed it or because of generous feelings for the obligor." Mark L. Ascher, Austin Wakeman Scott & William Franklin Fratcher, Scott and Ascher on Trusts § 3.17.9 (5th ed. 2006). The "general rule" is that "all demands must be pressed, even to the extent of bringing suit or else the trustee will be liable for any loss caused by unjustified forbearance." Id. § 2A.177.
John cannot claim that, because he was contesting whether the 2003 WBP Note was in the 2003 Trust, he had no personal obligation to pay it and thus no obligation as Trustee to seek to collect it. The assertion that the 2003 WBP Note was not in the 2003 Trust did not arise until it was raised by Bolotow in October 2011, nineteen months after John accepted the responsibilities of being a Trustee of the 2003 Trust. On August 31, 2010, John wrote Syner that he would be fully caught up on the payments by the end of 2010. (Pls.' Trial Ex. 74.) Yet, he never made another payment.
John was questioned why he did not seek to collect the Note.
"Q And your personal interest as a delinquent obligor on the Whaleboat Point Note was in a direct conflict with the interests of the beneficiaries . . . of that note; isn't that true?
" . . .
"A Yes.
"Q What did you do to resolve yourself from that conflict?
"A I was continually consulting with the professionals that had been involved in planning my mother's estate and subsequently involved in managing the estate." (Trial Tr. 71:18-72:6, Nov. 20, 2020.)
A few moments later he was asked directly: "[O]n whose authority did you decline to pursue this delinquent obligation?" His reply: "I was acting throughout this period . . . upon [the] advice of the professionals involved." Id. at 74:9-12.
John's testimony on this point lacks any credibility. He did not identify anyone by name. But the only professional remaining who had been on the KLH Management Team was Syner, and the only other professional involved in managing the estate was Kohlenberg. Neither testified that he advised John not to pay the 2003 WBP Note or to dispute that the 2003 WBP Note was in the 2003 Trust. While, appropriately, no one inquired into the advice he received from Bolotow, the Court can infer that if he was acting on the advice of a professional, it had to be his personal attorney who had never been involved in planning or administering Kay's estate or trusts.
The Howland Defendants argue that it was Kohlenberg's duty to collect the 2003 WBP Note. While there are certain decisions left to the Independent Trustee, on all other matters, except for ministerial matters, the 2003 Trust does not authorize a Trustee to act alone.
The conflict with the 2003 WBP Note was compounded when John asserted that it was not part of the 2003 Trust but rather part of Kay's estate. If that were the case, then Succotash LP and the David Howland mortgage would have also been in her estate. The result would have been an amended Rhode Island Estate Tax return with additional taxes, interest, and perhaps penalties. This position, which may have benefitted John personally, certainly was in conflict with his fiduciary duty as a Trustee. When confronted with these conflicts, John failed to follow the limited sense of responsibility that he identified in his testimony. He never sought legal advice from anyone other than his personal attorney. Based upon a preponderance of the evidence presented, the Court concludes as a matter of law that John breached his fiduciary duty as Trustee of the 2003 Trust by not taking any steps to collect the 2003 WBP Note and by contending that it was not an asset of the 2003 Trust.
f. Harmony Hill
As discussed above, John conceded that until Bolotow raised the issue, he believed that his mother intended that Harmony Hill was included in equalization. He also acknowledged that excluding Harmony Hill from equalization would be advantageous to him and detrimental to the other Trust beneficiaries. Moreover, he used this issue to gain leverage in settlement negotiations. According to Kohlenberg, on August 23, 2010, John told him that if Frances did not agree to his proposal, he "may challenge the inclusion of Matunuck [Harmony Hill] in the adjustment at all." (Pls.' Trial Ex. 122.)
Once again, John pursued his own interest to the detriment of the other beneficiaries he served as Trustee. And once again, John failed to seek legal advice in his capacity as a Trustee. He only sought advice as a beneficiary and, in so seeking, relied solely on the advice of his personal attorney.
Based upon a preponderance of the evidence presented, the Court concludes as a matter of law that John breached his fiduciary duty as Trustee of the 1997 Trust by asserting that Harmony Hill was not subject to equalization.
g. Administration of the Trusts
John's responsibility as a Trustee was to work with Kohlenberg to administer the 1997 and 2003 Trusts. The trust documents authorized Kohlenberg, alone, as Independent Trustee, to pick an appraiser to value Manning Street and Harmony Hill for equalization purposes. Kohlenberg instead proposed a process, described above, whereby the beneficiaries could also select an appraiser to have input into the process. Each of the beneficiaries, including John, agreed to the proposal. Notwithstanding this agreement, John repeatedly sought to ignore the process because he was not satisfied with the results. John repeatedly sought lower property valuations, which would result in lower equalization amounts for John's account, and correspondingly lower proceeds to the other three beneficiaries. John's assertion that only 80 percent of the value of Manning Street be used for the equalization process also created a conflict between John personally and the other beneficiaries. As confirmed by Kohlenberg and Paster, there was no basis for this contention. John also sought to have the value of Manning Street pegged at whatever it would fetch at sale in the latter half of 2011, nearly three years after the date of Kay's death, which was the date the Trusts had set as the valuation date. This constant harping on the values delayed the agreed upon valuation process and the administration of the estate and trusts.
As previously discussed, John, on his own and through his attorney, asserted that the 2003 WBP Note was in the 1997 Trust and that Harmony Hill should not be included in the equalization formula. Kohlenberg believed these issues were raised as "bargaining strategies" and the real issue was "the value of the real estate." (Trial Tr. 12:13-21, Oct. 5, 2020.) Kohlenberg also believed that but for these issues, he could have wound matters up in ninety days. Id. at 12:23-13:2.
While John raised these issues as an individual, he did so while serving as a Trustee, and, again, acting in his own interest impeded Kohlenberg's ability to wind up the estate and trusts to the disadvantage of the other beneficiaries. Kohlenberg estimated that his last direct contact with John was around August 23, 2010 because "it became clear to [him] that this was going to be a matter directed by Mr. Bolotow." Id. at 22:3-6.
The most compelling evidence that John had no interest in administering the trusts diligently and in good faith was the testimony of Peter. The Court found Peter to be forthright and credible, and his testimony was supported by contemporaneous notes and emails. (Pls.' Trial Exs. 168-170.)
Initially, Peter authored several emails to Syner and/or Kohlenberg blaming Frances for the delay and for being an "acting-out child." (Defs.' Trial Exs. V, W.) He said John had been his source of information. He was not a Plaintiff when the original Complaint was filed in 2012, but his opinion began to change as he talked to Syner and Kohlenberg.
Then, in September 2016, Peter met John who advised him
"that his legal team had come up with a strategy whereby they could eliminate the Whaleboat Point Note from what he would owe the estate . . . based . . . in part on non-payment of the note and marketability . . . plus the fact that Harmony Hill . . . was done prior to death and ultimate assessment, based upon what his lawyers advised him, was that he actually did not owe the $1.7 million to the estate that . . .Syner advised me and had calculated, but in fact, he would be owed just under $300,000 from the estate . . . ." (Trial Tr. 131:17-132:7, Oct. 16, 2020.)
Peter responded that he was "shocked and disturbed." Id. at 132:18-19. Peter then described John's reaction to Peter's displeasure:
"[John] recognized that I was not pleased because that would have significantly reduced my personal inheritance and thought I might have retired. . . . he then offered to make me whole through a gifting by which the sisters would get the reduced inheritance but I would be made whole to the basic value Dave Syner had originally calculated. . . . the gift that would make me whole would be in exchange for my releasing any claim to the monies John . . . owed to [Kay's] estate." Id. at 132:20-133:8.
Peter subsequently became a Plaintiff in this matter.
Once again, the evidence is overwhelming that John's actions or inactions were motivated by his own personal interests without regard to his fiduciary duty to the other beneficiaries.
Based upon a preponderance of the evidence presented, the Court concludes as a matter of law that John breached his fiduciary duties as Trustee of the 1997 Trust and the 2003 Trust by failing to administer those trusts faithfully and diligently.
h. Unclean Hands
The Howland Defendants contend that even if John breached his fiduciary duties, the Court should apply the equitable doctrine of unclean hands to deny any recovery to the Plaintiffs.
The doctrine of unclean hands "is not a license to destroy the rights of persons whose conduct is unethical. The rule is that unrelated bad conduct is not to be considered against the plaintiff. It is only when the plaintiff's improper conduct is the source, or part of . . . his equitable claim, that he is to be barred because of this conduct. What is material is not that the plaintiffs' hands are dirty, but that he dirties them in acquiring the right he now asserts." Rodriques, 466 A.2d at 311. The doctrine of unclean hands '"becomes operative only when a complainant must depend on his own improper conduct to establish his rights against the other parties to the suit."' School Committee of City of Pawtucket v. Pawtucket Teachers Alliance, Local No. 930, 101 R.I. 243, 257, 221 A.2d 806, 815 (1966) (quoting Cirillo v. Cirillo, 77 R.I. 223, 226, 74 A.2d 440, 442 (1950)).
The Howland Defendants assert that the doctrine should apply to Kohlenberg. The Court does not see the applicability of the doctrine to Kohlenberg, who only seeks instructions from the Court and not relief against John for his breach of his fiduciary duties.
Ironically, they contend that Kohlenberg's failure to collect the 2003 WBP Note and make decisions regarding equalization absent consensus by the parties was a breach of his fiduciary duty. In other words, had Kohlenberg sued on the 2003 WBP Note and assigned it to the 2003 Trust (which John admitted was Kay's intention), picked his own appraiser in lieu of the process to which the beneficiaries all agreed, and calculated the equalization including Harmony Hill (as John admitted was his and Kay's intention), then the estate would have been administered. Again, the Howland Defendants pick and choose when to read the trust documents. As long as John remained a Trustee, the only act referred to above that the Independent Trustee could have done alone, was selecting an appraiser for Manning Street and Harmony Hill. There is no provision in either trust that would authorize Kohlenberg alone to sue on the 2003 WBP Note or to determine what is included in the equalization process.
What the Howland Defendants also ignore is that pursuant to the terms of both trusts, John could have delegated his authority on any matter to Kohlenberg. Alternatively, he could have resigned, and there was no requirement to replace him. He chose to do neither.
There is another action the Independent Trustee can do acting solely and that is to decide "all the details of and procedures" of the equalization process including the equalization note. The Howland Defendants contend that, notwithstanding that provision, Kohlenberg could not propose security for the equalization note, and by so doing, he violated his fiduciary duty. The Court rejects that interpretation and conclusion.
As to Peter, they contend it would be inequitable for him to obtain relief from John because he defended John in the early years after Kay's death. That argument ignores Peter's testimony that those views were based solely on what John told him and that Peter was "shocked and disturbed" when he found out the positions John was taking to benefit his own interest. The Court concludes that Peter has the cleanest hands of all.
Janet resides in California. She never testified and very few of the documents in evidence describe any of her actions. The Court infers that just as Peter's view was shaped by his conversations with John, Janet seems to have looked to Frances to determine what was happening. Janet's support for Frances related to responses to settlements offered by John. Even if this were considered bad conduct, it was not the cause of John acting, while a Trustee, in his own interest to the detriment of the other beneficiaries. The Court concludes that the doctrine of unclean hands does not apply to Janet.
Turning to Frances, the Howland Defendants presented a laundry list of actions of Frances, which they conclude preempts her entitlement to relief for John's breach of his fiduciary duty. Many of the complaints occurred prior to Kay's death, and the Court will not consider these because they do not relate to administering the estate or the trusts. The Howland Defendants believe Frances misappropriated some of Kay's tangible personal property. However, the documentary evidence is conflicting. (Defs.' Trial Exs. PPP, QQQ.) Ultimately, Kohlenberg designed a process for the tangibles, the Howland Siblings divided the property according to that process, and Syner accounted for the dollar value each Sibling received in his analysis.
The Howland Defendants also claim that by bringing the Bradford Soap lawsuit, Frances distracted John from the issues necessary to settle the estate. There can be no doubt that the suit exacerbated the already existing tensions between Frances and John. However, the issues in that litigation had no bearing on the administration of Kay's estate or trusts. John actually excused his inability to attend to estate and trust matters to his need to focus on the Bradford Soap lawsuit and a transaction important to Bradford Soap called "the Corinthian deal." What he overlooks is that he was paying attention to his personal business interests and ignoring his duty to administer the trusts.
The Howland Defendants also take great offense towards Frances' action with regard to the Dunes Club and claim this dirties Frances' hands. They overlook the fact that John took similar action. Both John and Frances somehow obtained a letter from Kay transferring at her death the Cabana No. 63 lease. They both made sure the letters were delivered to the Dunes Club. It was John who, within weeks of his mother's death, went to the Club to ensure the transfer to him was made only to discover the letter transferring the lease to Frances. Both then appeared before the Board, who sided with Frances.
While she declined to be a co-executor of Kay's estate, Frances did accept the responsibility as a Trustee of the 1997 Trust. The Court finds that in her approach to the resolution of the valuation of Manning Street and Harmony Hill and other issues, she was motivated more by her personal interest including her enmity for John (which admittedly was mutual) than by her responsibilities as a Trustee. The Court concludes that while her conduct was nowhere as egregious as John's, she still breached her fiduciary duty, and her actions contributed to the delay in the administration of the 1997 Trust. However, the Court also concludes that none of her actions constituted bad conduct that caused John to breach his fiduciary duties under the 2003 Trust.
8. Reformation of the 2003 Trust
In Count 5 of the Second Amended Complaint, Plaintiffs seek to reform the 2003 Trust to add the in terrorem clause that is in the 1997 Trust. The Court will not do so for three reasons.
First, based on the Court's rulings in this case, there does not appear to be an equalization note required in the 2003 Trust. Second, even if there were one, the Court would not apply the in terrorem clause for the same reasons it is not applying it with respect to the 1997 Trust. Lastly, there is no testimony from the drafters that Kay intended this clause to be in this trust and that it was just a scrivener's error to omit it. Actually, the opposite is the case. Paster, the drafter of the 2003 Trust, testified that he did not include a penalty clause because there was no need for it. (Paster Dep. 110:7-19, Feb. 21, 2019.)
9. Counterclaim
The Howland Defendants filed a terse Counterclaim against the Plaintiffs and Kohlenberg.The Counterclaim principally seeks distribution of the trusts' assets in accordance with the Howland Defendants' interpretation of the documents. The Court has rejected most of those contentions and sees no need to repeat itself here. There is some reference to slander of title in the Counterclaim, but no evidence was introduced that would support such a finding. If the Howland Defendants were referring to the WBP Mortgage, the Court has already addressed that issue.
The appropriate procedure for any defendant to seek relief against a co-defendant is by way of crossclaim. However, at oral argument, counsel for the Howland Defendants conceded that they were not seeking monetary damages nor disgorgement of fees from Kohlenberg.
F
Summary and Remedies
1. Count 1
Based on the foregoing findings of fact and conclusions of law, the Court declares that the 2003 WBP Note is an asset of the 2003 Trust. As will be discussed below, the Court will instruct Kohlenberg to seek to collect the 2003 WBP Note.
2. Count 2
Based on the foregoing findings of fact and conclusions of law, the Court declares that the 2003 WBP Mortgage secures the 2003 WBP Note.
3. Count 3
Based on the foregoing findings of fact and conclusions of law, the Court declares that Harmony Hill is included in the equalization calculation pursuant to the 1997 Trust.
4. Count 4
Based on the foregoing findings of fact and conclusions of law, the Court declines to declare that John predeceased his mother pursuant to the terms of the 1997 Trust and Count 4 is dismissed.
5. Count 5
Based on the foregoing findings of fact and conclusions of law, the Court declines to reform the 2003 Trust, and Count 5 is dismissed.
6. Count 6
In Count 6, Plaintiffs seek a declaration that the Bradford Note has not been distributed to John. The allegations in that Count are that John failed to pay the annual interest and that, if found to be distributed, it will result in substantial tax to the estate. Syner testified that interest on the Note was paid by way of a rent credit to Kay for her occupancy of Harmony Hill. As to the additional tax, Syner testified it relates to the capital gains tax on the sale by Kay of the Bradford Soap stock. That tax was deferred until the principal of the Note was paid. The tax would eventually have to be paid. The Court declares that the Bradford Note shall eventually be distributed to John but that no interest is due from him after the date of Kay's death.
7. Count 7
In Count 7, the Plaintiffs ask the Court to declare that the 2003 WBP Note has not been distributed to any person or entity. The Court cannot distinguish between this request and Count 1, but it will reiterate that the 2003 WBP Note is an asset of the 2003 Trust.
8. Counts 8 and 9
Section 37 of Restatement (Third) Trusts allows for the removal of a trustee "for cause by a proper court." Restatement (Third) Trusts § 37 (Am. Law Inst. 2003). Section 95 of that Restatement provides "the remedies of trust beneficiaries are equitable in character and enforceable against trustees in a court exercising equity powers." Restatement (Third) Trusts § 95 (Am. Law Inst. 2012). Having breached his fiduciary duty of loyalty and duty to properly administer the 1997 and 2003 Trusts, the Court removes John as Trustee. Having breached her duty to properly administer the 1997 Trust, the Court removes Frances as Trustee.
Bogert, The Law of Trusts and Trustees, § 862 provides for the payment of money damages for a breach of trust. Section 100 of Restatement (Third) Trusts (2012) § 101 expounds upon the remedies flowing from a breach of trust and charges the trustee with "the amount required to restore the values of the trust estate and trust distributions to what they would have been if the portion of the trust affected by the breach had been properly administered . . . ."
The damages that have been occasioned by John's breaches of his fiduciary duties are the expenses the trusts incurred from the delay in administering the two trusts and the cost of the Independent Trustee defending this suit and petitioning for instructions, excluding the annual accounting fees incurred for preparing and filing the trusts' and estate's income tax returns. John, as a beneficiary of the trusts, is already responsible for one fourth of those expenses. In addition, however, judgment shall enter against John for those expenses relating to both the 1997 and 2003 Trusts from the date the original Complaint was filed to the date final judgment is entered, which are chargeable to Peter and Janet, who were the innocent victims of his breach of his fiduciary duties, and those expenses chargeable to Frances for the 2003 Trust only. Frances will not be assessed any monetary damages from her breach of her fiduciary duty, but she shall remain responsible for her one quarter share of the trust's expenses for the 1997 Trust.
Additional damages that the beneficiaries have incurred because of John's breach of fiduciary duty is John's failure to pay the equalization amount(s) due under the two trusts. The equalization amount(s) were to be paid nine months after Kay's death in cash or by a promissory note payable over five years at the applicable federal rate. As has been discussed, those amount(s) could not have been determined by that deadline. However, but for this lawsuit, any equalization amount(s) would have been fully paid by this time. Consequently, the loss of interest on the equalization amount(s) are additional damages suffered by the three beneficiaries other than John. As an additional equitable remedy, judgment shall enter against John for the interest at the applicable federal rate on the date suit was commenced from that date until the date judgment is entered.
9. Attorneys' Fees
The Plaintiffs next request an award of attorneys' fees. Our Supreme Court consistently reaffirms its ''staunch adherence to the 'American rule' that requires each litigant to pay its own attorney's fees absent statutory authority or contractual liability." Moore v. Ballard, 914 A.2d 487, 489 (R.I. 2007); see also Alyeska Pipeline Service Co. v. Wilderness Society, 421 U.S. 240, 247 (1975) ("In the United States, the prevailing litigant is ordinarily not entitled to collect a reasonable attorneys' fee from the loser.").
The Plaintiffs point to no statutory or contractual basis for the award of attorneys' fees in this case. The Court does have "inherent power to fashion an appropriate remedy that would serve the ends of justice," Moore, 914 A.2d at 489 (quotation omitted). The cases cited by our Supreme Court fashioning an award of attorneys' fees to serve the ends of justice have involved redress for matters that occurred during litigation. See Truk Away of Rhode Island, Inc. v. Macera Brothers of Cranston, Inc., 643 A.2d 811, 817 (R.I. 1994) (the grant of a wrongful injunction); Vincent v. Musone, 574 A.2d 1234, 1235 (R.I. 1990) (undue delay in seeking to amend a complaint); Moran v. Rhode Island Brotherhood of Correctional Officers, 506 A.2d 542, 544 (R.I. 1986) (a sanction for contumacious conduct). This case does not fall in this category of cases, and the Court declines to award Plaintiffs' attorneys' fees.
The Court notes the difference from the attorneys' fees incurred by Kohlenberg in this litigation. Those fees are a trust expense, and thus a portion of the measure of the damages incurred as a result of John's breach of his fiduciary duties.
G
Instructions to Independent Trustee
Initially, on March 30, 2018, Kohlenberg filed a rather limited Petition for Instructions. Over the objection of the Howland Defendants, the Court, pursuant to Rule 15(b) of the Rhode Island Superior Court Rules of Civil Procedure, allowed Kohlenberg to expand his request when testifying on direct examination. (Trial Tr. 23:11-31:24, Oct. 5, 2020.) Many of the questions address issues the Court has already decided. Therefore, where the Court has already decided an issue, it will not repeat itself but rather will respond by providing instructions as to what action Kohlenberg shall take as the Administrator CTA and the sole and Independent Trustee of the 1997 and 2003 Trusts. In instructing Kohlenberg, the Court is exercising its equitable powers to achieve results it believes are fair and just in the circumstances of this litigation.
1. Equalization a. The 2003 Trust
Attached as Exhibit A is the Court's pro forma calculation of the equalization for the 2003 Trust. The Court uses the term pro forma because it is for illustrative purposes and final calculations need to be made. Kohlenberg will be required to make the following adjustments and calculations:
• the date of death value of Succotash LP as well as the "Other Investments;"
• the amount of unpaid interest on the outstanding principal of the 2003 WBP Note as of the last payment in 2006 through date of Kay's death; and
• the add-back for college expenses by multiplying that amount by one minus the Rhode Island Estate Tax rate paid by Kay's estate, as there is no evidence that Syner made such a calculation.
Exhibit A can be summarized as follows. The Net Value of the 2003 Trust (before deduction for expenses) is $3,003,185.36. The add-backs total $734,477.47 for a total equalization amount of $3,737,662.83. That means each Sibling's share should be $934,415.71. However, John already received from the add-back items $531,208.00, so his distributable share of the trust is $403,207.71. Peter received $27,245.00, so his share is $907,170.71. Frances has received $73,210.47, so her share is $861,205.24. Lastly, Janet has received $102,814.00, so her share is $831,601.71. These amounts are just estimates, and until Kohlenberg does the adjustments required by the Court, the exact amounts cannot be known.
It appears that there will be no Equalization Note due under the 2003 Trust.
b. The 1997 Trust
Attached as Exhibit B is the Court's pro forma calculation for equalization under the 1997 Trust. Kohlenberg will also have to update the spreadsheet to include actual expenses and taxes rather than the estimates used by Syner.
Exhibit B can be summarized as follows: The Net Value of the 1997 Trust (before adjustment for actual taxes and expenses) is $232,331.47. The add-backs total $1,872,597.30 for a total equalization amount of $2,104,928.77. That means each Sibling's share should be $526,232.19. However, John already received from the add-back items $1,242,987.00, so his Equalization Note is $716,754.81. Peter, Frances, and Janet each received $209,849.11, so each of their shares is $316,383.08. These amounts are estimates, and until Kohlenberg does the adjustments required by the Court, the exact amounts cannot be known.
c. Expenses
To the extent the distribution which the Court authorized by the sale of a portion of the Succotash LP securities exceeded the 2003 Trust's obligations, that excess will be treated as a receivable from the 1997 Trust. Moreover, since the 2003 WBP Note is one of the principal assets of the 2003 Trust, until it is paid in full, Kohlenberg shall make no distribution to John.
Kohlenberg will need to allocate expenses between the 1997 Trust and the 2003 Trust and then calculate which expenses were incurred prior to the commencement of this litigation and which were incurred after, excluding accountant's fees related to preparing and filing the trusts' and estate's annual income tax returns. Each Sibling's share will be charged 25 percent of those expenses incurred prior to the litigation. Judgment shall enter against John for 100 percent of the expenses of the 2003 Trust incurred after the commencement of the litigation and 75 percent of such expenses for the 1997 Trust. Judgment shall enter against Frances for 25 percent of the expenses of the 1997 Trust incurred after the litigation commenced.
d. Equalization Note(s)
It appears that there will be no Equalization Note due under the 2003 Trust.
Kohlenberg shall prepare the Equalization Note(s) and all procedures and details related thereto, including security if he believes it warranted.
2. 2003 WBP Note and WBP Mortgage
Since the Court has declared that the 2003 WBP Note is an asset of the 2003 Trust and the note is secured by the WBP Mortgage, Kohlenberg shall take immediate action to collect the 2003 WBP Note. He shall then calculate the interest from the date of Kay's death to the date thirty days after judgment is entered. In accordance with the terms of the 2003 WBP Note, he shall credit the payments made by John in 2010 to unpaid interest. He shall then calculate the principal amount that was due between the last payment in 2006 and the date thirty days after judgment enters. Upon entry of judgment, he will declare the 2003 WBP Note in default and advise John and Carol that if they do not bring the 2003 WBP Note current (for overdue principal and interest payments) within thirty days of such notice, he will accelerate the 2003 WBP Note and commence foreclosure proceedings in accordance with the terms of the WBP Mortgage.
Moreover, since the 2003 WBP Note is one of the principal assets of the 2003 Trust, until it is paid in full, Kohlenberg shall make no distribution to John.
In light of John's breach of fiduciary duty to the 2003 Trust beneficiaries, which among other matters prevented any action to collect the 2003 WBP Note, equity leads the Court to toll the statute of limitations on the 2003 WBP Note and any of its unpaid periodic payments from the date of Kay's death to the date of final judgment after all appeals, if any, have been exhausted.
3. Bradford Note
Kohlenberg shall deliver the Bradford Note to John when he executes and delivers the Equalization Note(s) and cures the default in the 2003 WBP Note.
4. The Dunes Club
The Court previously determined that the inter vivos letters from Kay to the Dunes Club were not valid testamentary bequests and that the First Codicil to her Will governed the disposition of the Dunes Club stock and the cabana lease. Apparently, the stock and lease are now in Frances' name. Kohlenberg shall arrange that half of the stock shall be transferred to John. Kohlenberg shall endeavor to request of the Dunes Club that the lease be placed in both the names of Frances and John. If unsuccessful, the lease shall remain in the name of Frances because that is the last expression by Kay. However, in either event, Kohlenberg shall prepare a sharing agreement that will allow both John and Frances to use Cabana No. 63. While Kohlenberg shall seek input from both John and Frances as to the terms of the agreement, he shall have the absolute and unfettered discretion to determine the terms of the sharing agreement, and both Frances and John shall abide by his decision.
5. Further Proceedings
Within thirty days of the publication of this Decision, Kohlenberg will prepare (1) revised Exhibits A and B; (2) the calculation and allocation of expenses in accordance with this Decision; (3) the Equalization Note(s) and any security documents; and (4) the sharing agreement for Cabana No. 63 at the Dunes Club. He will deliver those documents to counsel for the parties and the Court.
If any party believes there are errors in the calculations or the documents, an objection must be filed with the Court and opposing counsel within seven (7) days after receipt. The Court will hold a hearing to approve the calculations and documents on April 2, 2021 at 2:00 p.m.
This Court shall retain jurisdiction to the extent Kohlenberg, or any successor Trustee, needs to petition for instructions regarding the 1997 and/or 2003 Trusts.
H
Conclusion
Counsel for Kohlenberg shall draft an order and proposed judgment in conformance with this Decision and circulate to counsel for the Plaintiffs and the Howland Defendants for their comment. If there is disagreement as to the form and content of the order and/or judgment, the parties shall meet and confer in good faith to attempt to resolve the dispute. If unable to agree, the matter will be submitted to the Court for resolution at the hearing on April 2, 2021.