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Nevin v. Union Trust Co., revised 4-6-99
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MAINE SUPREME JUDICIAL COURT Reporter of Decisions
Decision: 1999 ME 47
Docket: Han-98-389
Argued: December 1, 1998
Decided: March 12, 1999
Panel:WATHEN, C.J., and CLIFFORD, RUDMAN, DANA, SAUFLEY, ALEXANDER, and
CALKINS, JJ.
CROCKER NEVIN{1} et al.
v.
UNION TRUST COMPANY
and
HALE & HAMLIN et al.
ALEXANDER, J.
[¶1] This matter is before the Court on report by the Superior Court
(Hancock County, Mead, J.) pursuant to M.R. Civ. P. 72(c) to consider
whether plaintiffs' claims of negligence, breach of contract and breach of
fiduciary duty are time barred.
[¶2] In its rulings on the defendants' motions for a summary
judgment, the court determined that:
1. The individual beneficiaries of the estate lacked
standing to assert claims against the estate planning law firm;
and
2. Claims against all defendants were largely barred by the
statutes of limitation, 14 M.R.S.A. §§ 752, 753-A (1980 & Supp.
1998), as accruing more than six years prior to February 1,
1995.
[¶3] Because there were some issues regarding events occurring after
February 1, 1989, the summary judgment did not finally resolve all claims.
Accordingly the parties, by agreement, reported the issues to this Court,
pursuant to M.R. Civ. P 72(c). As part of the report, the parties stipulated
that a ruling by this Court that the plaintiffs' claims arising from acts
occurring or alleged to have occurred before February 1, 1989, are barred by
the applicable statutes of limitation "will completely and finally dispose of
plaintiffs' claims and of any claims of the beneficiaries of the Estate of
Jennie Learned, whether occurring or alleged to have occurred before or
after February 1, 1989 . . . ." With this stipulation, plaintiffs abandoned
claims for any events occurring after February 1, 1989, and assured that
consideration of the report on the merits was appropriate.{2}
[¶4] Because we determine that plaintiffs' claims against Union Trust
Company (Union Trust) are not time barred, we vacate the summary
judgment order regarding Union Trust. We affirm the judgment regarding
the law firm and the individual attorneys.
[¶5] We review the grant of a summary judgment for errors of law,
viewing all the properly presented evidentiary materials in a light most
favorable to the party against whom the summary judgment was entered.
Denman v. Peoples Heritage Bank, Inc., 1998 ME 12, ¶ 3, 704 A.2d 411,
413. "We undertake an independent review of the record to determine if
there is a genuine issue of material fact and if the moving party was entitled
to a judgment as a matter of law." Searles v. Trustees of St. Joseph's
College, 1997 ME 128, ¶ 4, 695 A.2d 1206, 1208.
Case History
[¶6] The facts as developed for purposes of the summary judgment
may be summarized as follows:
[¶7] At some time in 1976, Jennie Fassett Learned contracted with
Union Trust to provide her with custodial account services. After 1985, the
principal assets subject to Union Trust management were two valuable
properties in Blue Hill. In 1985, William Clark, a Union Trust officer,
recommended that Learned form a corporation to hold her Blue Hill real
estate. The recommended purpose for forming the corporation was to
reduce potential estate taxes by transferring real estate to the corporation
and then making annual gifts of stock to Learned's four children.
[¶8] In furtherance of that proposal, Clark introduced Learned to
Atherton Fuller, an attorney with the law firm of Hale & Hamlin. After
Learned met Fuller, she retained him and his firm to prepare a will, draft a
durable power of attorney and form a corporation named the Nevin
Corporation (Corporation).
[¶9] The Corporation was organized with Learned, the sole
shareholder, receiving two thousand shares of stock in exchange for her
Blue Hill real estate. The durable power of attorney assigned to another
Union Trust officer, Robert Boit, all authority to manage Learned's business,
corporate and financial affairs - including the preparation and filing of tax
returns. The will that Fuller drafted included a provision devising all
Learned's stock in the Corporation remaining upon her death to her
children. The articles of incorporation of Nevin Corporation provided that
transfers of stock could only be made between Learned and her children.
[¶10] Fuller was designated as clerk of the Corporation and undertook
certain ongoing duties in managing the Corporation's legal affairs, including
preparing stock certificates and arranging the annual transfers of stock of
the Corporation in amounts worth $10,000 to each of Learned's children.
In furtherance of this responsibility, gifts of stock intended to have a total
value of $40,000 a year were made to the children in each of the years 1985
through 1988. Fuller also performed other duties, including, in 1987,
contacting the Town of Blue Hill regarding taxation of the real estate of the
Corporation.
[¶11] In 1988, another Hale & Hamlin lawyer, Jeffrey Jones, replaced
Fuller as clerk of the Corporation and assumed Fuller's duties regarding
oversight of the Corporation's legal affairs. Jones recommended to Learned,
and Learned agreed to create an irrevocable trust transferring the Nevin
Corporation stock that Learned still owned to Union Trust as the trustee. In
December 1988, Jones prepared the instruments creating this irrevocable
trust. The trust instruments prepared by Jones violated the Corporation's
articles of incorporation by transferring shares in the Corporation to an
entity other than Learned or her children.
[¶12] There were no $10,000 gifts of shares of stock to each of the
children in 1989. This was because Jones and Union Trust apparently
concluded that before gifts of stock could be made, the real estate would
need to be appraised to assure that the value of the gifts was in the
individual amounts of $10,000 intended by Learned. The gifts resumed in
1990.{3}
[¶13] Learned died on September 16, 1992. Her estate, consisting
primarily of the two Blue Hill properties, had a value in excess of
$3,000,000.
[¶14] In 1994, the Internal Revenue Service (IRS) disallowed the
benefits to the estate that were expected to result from the transfer of the
real estate to the Corporation and the succeeding transfer of the shares to
the trust because corporate formalities had not been observed and the
transactions were regarded as a sham. As a result, the IRS assessed
additional taxes, interest and penalties of more than $400,000 against the
Learned Estate. The exact nature of the plaintiffs' liability and damages
claims are not entirely clear in the record and must be addressed on
remand.
[¶15] The corporate formalities that the IRS determined had not
been properly observed included: (i) complying with the articles of
incorporation; (ii) obtaining a corporate tax identification number; (iii) filing
corporate tax returns; (iv) collecting rent from Learned and her children as
they occupied the property; (v) having leases for use of the property; and,
(vi) having a bank account to collect lease proceeds and pay corporate
expenses to maintain the property. Arguably, these are formalities that
reasonably competent attorneys and trust departments should have
recognized and observed.
[¶16] Despite the importance of observing corporate formalities in
order to get the planned IRS tax benefits, it is undisputed that none of the
defendants ever informed Learned of the necessity of following these
corporate formalities. Also, none of the defendants followed these legally
required corporate formalities during the term of their representation of
Learned and their management of the affairs of the Corporation and the trust
between creation of the Corporation in 1985 and the trust in 1988 and
Learned's death in 1992. It is also undisputed that Jones drafted
documents which explicitly violated the corporate charter by failing to
respect the restrictions on transfers indicated in the corporate bylaws and
arranging for transfer of the corporate stock to the trust.
[¶17] On November 16, 1994, after the IRS action, Jones sent a letter
to the personal representative and beneficiaries of the estate advising that
they may have a cause of action against Hale & Hamlin for malpractice
arising from either the failure to render proper advice about or manage the
Corporation in a way which complied with IRS requirements.
[¶18] In early 1995, as the possibility of a negligence and legal
malpractice action loomed, all the parties to this action entered into an
agreement to toll the applicable statutes of limitation "for a period of six
months, from February 1, 1995 until August 1, 1995."
[¶19] On November 15, 1995, the personal representative and the
beneficiaries filed this action against Union Trust, Hale & Hamlin, Fuller and
Jones alleging, as to each, negligence, breach of contract and breach of
fiduciary duty. The essence of the claim is that the defendants in their
management of the Corporation and the trust, failed to observe and respect
the corporate formalities required by law to qualify for favorable tax
treatment, or to advise Learned to take those actions.
[¶20] After the action was joined and some discovery was taken, all
defendants moved for a summary judgment. The court granted a partial
summary judgment to all defendants.
[¶21] Regarding Union Trust, the court granted a summary judgment,
determining that the statute of limitations, 14 M.R.S.A. § 752,{4} barred any
claim against Union Trust arising out of actions occurring before February 1,
1989.
[¶22] Regarding the attorneys, the court concluded that the
beneficiaries of the estate lacked standing to maintain an action against the
estate planning lawyers of the deceased. As to the personal representative's
claims, the court concluded that the statute of limitations, 14 M.R.S.A.
§ 753p;A, barred any claim against the lawyers arising out of acts occurring
before February 1, 1989.{5}
[¶23] Because the summary judgment orders left the potential for
some claims regarding events after February 1, 1989, the orders were not
final judgments except for the individual beneficiaries' claims against the
attorneys. Accordingly, to facilitate this appeal, the parties, by agreement,
and with approval of the court, reported the matter in accordance with the
provisions of M.R. Civ. P. 72(c). As part of the report, the parties entered a
stipulation, previously discussed, that a ruling by this Court that the
plaintiffs' claims arising from acts occurring or alleged to have occurred
before February 1, 1989 are barred by the applicable statutes of limitation
"will completely and finally dispose of plaintiffs' claims whether occurring
or alleged to have occurred before or after February 1, 1989 . . . ."
Claims Against Union Trust Company
[¶24] The parties agree that the claims against Union Trust are
governed by 14 M.R.S.A. § 752. Section 752 provides that civil actions must
be commenced "within 6 years after the cause of action accrues," but does
not specify when the cause of action accrues. When the Legislature does not
give explicit directions, "definition of the time of accrual . . . remains a
judicial function." Anderson v. Neal, 428 A.2d 1189, 1191 (Me. 1981).
Generally, we have defined the time of accrual as "the time the plaintiff
sustains a judicially cognizable injury." Chiapetta v. Clark Assocs., 521 A.2d
697, 699 (Me. 1987).
[¶25] In some cases we have held that the cause of action does not
accrue until the plaintiff discovers or reasonably should have discovered the
cause of action. See Myrick v. James, 444 A.2d 987, 996 (Me. 1982)
(foreign-object surgical malpractice);{6} Anderson, 428 A.2d at 1192
(negligent search of title by attorney).{7} In Anderson, we held that
application of the discovery rule is appropriate only when there exists a
fiduciary relationship between the plaintiff and defendant, the plaintiff must
rely on the defendant's advice as a fiduciary, and the cause of action was
virtually undiscoverable absent an independent investigation that would be
destructive of the fiduciary relationship. See Anderson, 428 A.2d at 1192.
[¶26] In its ruling on the motions for a summary judgment, the trial
court appeared to attach particular significance to the 1985 date for
execution of the corporate documents and the 1988 date for execution of
the trust documents. Further, the trial court apparently determined that
there were no ongoing duties associated with management of the
Corporation or oversight of the trust that were the responsibility of Union
Trust. Thus, in the trial court's view, any acts of negligence, breach of
contract or breach of fiduciary duty were complete with the execution of the
documents. This is also the position taken by Union Trust on this appeal.
This narrow view of the extent of Union Trust's duties is not consistent with
the record viewed in a light most favorable to the plaintiffs.
[¶27] Union Trust held itself out to Learned as an entity to whom
management of important financial matters could be entrusted. Specifically,
a factfinder could find that Union Trust led Learned to believe that it would
assure that the necessary accounting, tax and legal responsibilities would be
complied with in a manner consistent with its responsibility to exercise
"the care and skill as a person of ordinary prudence would exercise" in the
management of the assets. See Restatement (Second) of Trusts § 174
(1959). That management responsibility and duty to the beneficiaries of its
trusts not to be negligent did not end once the corporate and trust
documents were executed. According to the record, Union Trust had a
significant role in the ongoing management of Learned's financial affairs
from 1976 forward until her death in 1992. In 1985, Union Trust increased
its role in Learned's affairs by recommending creation of the Corporation
and the transfer of the real estate to the Corporation. It also took a durable
power of attorney giving it authority to manage Learned's business,
corporate and financial affairs. Union Trust assumed an even greater role in
1988 with the creation of the irrevocable trust and the transfer of the shares
of corporate stock to Union Trust for its management.
[¶28] By the time of the creation of the trust in 1988, Union Trust
had assumed significant and ongoing management responsibilities with
respect to the accounting, tax and legal issues regarding management of
Learned's assets. Because of the degree of management responsibility it had
assumed, it was Union Trust's fiduciary responsibility to assure that the
necessary corporate formalities were followed to qualify the real estate
assets of her estate for most favorable tax treatment. Had Union Trust
properly fulfilled its responsibilities with regard to management of the
corporate affairs, including assurance that corporate formalities were
complied with, in the period between creation of the Corporation and the
power of attorney to Union Trust in 1985, creation of the trust in 1988, and
Jennie Learned's death in 1992, the problems with the IRS may have been
avoided. The alleged breaches of duty by Union Trust that serve as the basis
for the claims of negligence, breach of contract and breach of fiduciary duty
were breaches of ongoing trust responsibility that occurred in significant
part during Union Trust's management of Jennie Learned's assets in the
period 1985 through the stipulated cut-off of actionable claims, February 1,
1989.
[¶29] Union Trust, in holding itself out to the plaintiffs and to the
public, as competent to accept fiduciary responsibility and manage
significant assets necessarily holds itself out as capable of insuring
compliance with the requisite accounting, tax and legal requirements
incident to its responsibilities.
[¶30] Because Union Trust had assumed a fiduciary responsibility to
manage Learned's assets, Learned could not have been expected to discover
any negligence in Union Trust's management of her assets. Accordingly, the
discovery rule articulated in Anderson, 428 A.2d at 1192, applies to accrual
of the action against Union Trust. On this record, the action is not time
barred as a matter of law.
On to Part 2.
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