Hodges v. Johnson

Facts

The settlor of the 2004 trusts was Hodges, Sr. Jr. is one of the settlor's three biological children. The settlor's other biological children are Nancy Hodges-Friese and Janice Hodges. Barry and Patricia are the settlor's two step-children. The settlor died in August 2015. Sr. founded Hodges Development Company (HDC), a successful real estate holding and development company. According to the defendants, HDC is “the parent entity of the Hodges enterprises.” McDonald was Sr.'s attorney. Saturley, who is also an attorney, has represented both Sr. and HDC. Johnson has worked for HDC since 1984 and is now its President. He holds minority shares in two HDC entities, and is a beneficiary of a revocable trust established by Sr. Under the terms of that revocable trust, Johnson is to receive $500,000 for his past service to HDC and an additional $500,000 over time for his continued service to HDC. Some of Sr.'s children and step-children have worked for HDC and/or its subsidiaries. Barry worked for HDC for approximately 36 years, rising to the position of Senior Vice President, before his employment was terminated in October 2012. When Barry's employment was terminated, he was working for HDC part-time, although he was paid a full-time salary. His underemployment was a source of friction. Jr. also worked for the family business. In April 2012, he was informed that he would not be appointed President of HDC, but that Johnson would assume that position instead. Sr. moved out of the family home, Barry had a heart attack and a divorce action between [Sr. and his then-wife, Joanne M. Hodges,] … ensued. Jr. returned to HDC headquarters and discovered that armed guards had been hired allegedly to protect Sr. and Johnson from Barry. Jr. was fired from HDC in August 2012. In 2004, the settlor created two irrevocable trusts, the 2004 GST Exempt Trust and the 2004 GST Non-Exempt Trust. Both were products of decanting, but that decanting is not in dispute. When the two trusts were first created, Johnson was the sole trustee. Saturley was later appointed to be Johnson's co-trustee. The beneficiaries of both trusts are Joanne and the settlor's five children and step-children and their “descendants,” as defined by the trust instruments. The primary assets consist of all of the non-voting stock of HDC. The non-voting stock represents more than 98% of all HDC stock. The voting stock was held by Sr. The paramount purpose of the 2004 trusts was to provide for the continuation of HDC after the settlor's death by eliminating the need to liquidate HDC assets in order to pay estate taxes. The 2004 trusts currently hold stock in Hodges Portsmouth, LLC and Hodges Pembroke, LLC and the income generated by those limited liability companies. Both trusts are irrevocable and both trust instruments contain a provision in which the settlor specifically acknowledged that he had “no right or power, whether alone or in conjunction with others, in whatever capacity, to alter, amend, modify or revoke” the trust instrument “or to designate the persons who shall possess or enjoy the trust property or its income.” During the settlor's lifetime, the trust beneficiaries had a right to withdraw from the trust whenever property was contributed to it. That right was exercisable within 60 days following a contribution. The trustees were allowed to “distribute all or any portion of the net income and principal of the trust to any one or more of the group consisting of [Joanne], [the settlor's] descendants, and distributee trusts, in such amounts and at such times as the Trustee, in the Trustee's discretion, may determine.” Upon the death of the settlor and of Joanne, provided that all five children are then living, the trust corpus is to be divided into five separate trusts for each of the settlor's children and step-children and their respective descendants. With respect to the separate trusts for the settlor's children and step-children, each trust instrument allows the trustee(s) to “distribute all or any portion of the net income and principal of the trust to any one or more of the group consisting of the child and his or her descendants in such amounts and at such times as the Trustee, in the Trustee's discretion, may determine.” There was no obligation for a Trustee to equalize such distributions among the beneficiaries. Joanne was deemed the primary beneficiary of the trust and her welfare, enjoyment, and comfort should be regarded as paramount to the conservation of the trust for the benefit of concurrent or remainder beneficiaries. The trustee is allowed to accumulate income without allocation and at any time thereafter to add such income so accumulated to the principal of the trust. Both trust instruments also contain a “No Contest Provision” revoking any interests that beneficiary may have. The trust instruments establish a “Committee of Business Advisors,” who, by majority vote, have the exclusive authority, upon the settlor's death or incapacity or upon such earlier date as he may designate, to make all business decisions for his closely-held business interests.  The initial members of the committee were Johnson, Barry, Jr., Nancy, and a fifth member to be appointed by Sr. The trust instruments empowered the settlor, while living and competent, to amend the provisions related to “the appointment, resignation, removal, and number” of the members of the Committee of Business Advisors, as well as “their powers, duties, and liability.” In 2012, the members of the committee were: Johnson, McDonald, Saturley, Nancy, and Diane Benoit. It was Sr.'s desire that Business Interests not be distributed to any beneficiary, but rather remain in trust, so that they may be managed by the Committee of Business Advisors, if appropriate. The Trustee shall not distribute any Business Interest to or for the benefit of any beneficiary without the written consent of a majority of the Members of the Committee if the Committee is then in existence. It was also Sr.'s strong desire that each such business retain, and not distribute to its shareholders and owners, cash and other liquid assets, so as not to endanger the viability of such business. Sr. retained McDonald to assist him in his estate plans who advised Sr. that, although the 2004 trusts are irrevocable, the trustees of the 2004 trusts could decant the trust assets into distributee trusts that could be created for the benefit of some, but not necessarily all, of the beneficiaries of the 2004 trusts. The goal of Sr. was to reduce the beneficial interests of Barry and Patricia. McDonald explained it all to Johnson and Saturley and that they had the discretion to decant the assets of the 2004 trusts into new trusts. He also told them that he would be willing to serve as the decanting trustee. The first decanting was accomplished and Barry and Patricia were specifically excluded from the definition of “descendants” contained in the trust documents. In 2012, Sr. again approached McDonald for a new round of decanting. As a result of the 2012 decanting, all three plaintiffs were specifically excluded from the definition of “descendants.” The 2012 decanting superseded and replaced the 2010 decanting.  In 2013, McDonald was approached by either Sr. or Saturley to decant the trusts again in order to eliminate Joanne's beneficial interests. The 2013 decanting removed the beneficial interests   of Joanne, in addition to excluding the three plaintiffs from the definition of “descendants.” The 2013 decanting superseded and replaced the 2012 decanting. The 2004 trust assets were not actually transferred then into the new trusts. The 2010, 2012, and 2013 decanting documents provide for the transfer of trust assets “immediately upon the [settlor's] death.” In April 2014, Ps asked the court to declare the decantings void ab initio and to remove Johnson and Saturley as trustees. The trial court ruled in Ps' favor. The court found that “the deeply personal and harsh nature of the decantings, along with the testimony of … McDonald, suggests that they were undertaken and completed at the request, with the blessing, and at the direction of Sr.” The trial court invalidated the decantings on the ground that Ds accomplished them without considering Ps' beneficial interests. Ds appealed.

Issues

Rule of Law

Holding and Decision

Legal Analysis

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