United States District Court, D. Maryland
NEAL A. POTTS Plaintiff,
BRYAN H. POTTS ET AL., Defendants.
REPORT AND RECOMMENDATION
J. MARK COULSON, Magistrate Judge.
On April 30, 2015, pursuant to 28 U.S.C. 636 and Local Rule 301, Judge Quarles, referred this case to me for a Report and Recommendation regarding Plaintiff Neal A. Potts' ("Plaintiff" or "Neal") Motion to Compel Defendant Trustees to Distribute Trust Assets to Plaintiff for his Litigation Related Costs Pursuant to This Court's Superintending Powers ("Motion to Compel"). (ECF Nos. 85 & 91). The Court has reviewed Plaintiff's Motion, related memoranda, supplemental briefing and applicable law. For the reasons presented below, I recommend that Plaintiff's Motion to Compel be DENIED without prejudice for lack of federal jurisdiction.
This case arises from the establishment of trusts created by the parents of Neal, Bryan Potts ("Bryan"), Andrea Potts and Phillip Potts ("Phillip") to benefit their four children (collectively, the "Trusts"), for which Bryan and/or Phillip serve as trustees. (ECF No. 52 at ¶¶ 4, 6-7). Upon the death of their parents, the assets of the various trusts "were to be divided into [four] shares equally" between the four Potts children. ( Id. at ¶ 12). Neal's share was placed into the Neal Potts Trust and the Neal Potts Skip Trusts ("the Neal Trusts"). (ECF No. 52 at ¶ 12). On November 30, 2007, acting as Personal Representative, Bryan opened an Estate in the Orphan's Court. ( Id. at ¶ 23). In 2009, Bryan and Phillip executed a "confidential settlement agreement" with their sister Andrea that distributed a cash payment of $1, 250, 000 to Andrea. ( Id. at ¶ 25). Neal alleges that Bryan and Phillip knew they lacked the authority to terminate Andrea's trust, that the disbursement was considerably larger than his share, and that the distribution violated the terms of the Trusts and the brothers' fiduciary duties to Neal. ( Id. ). On October 30, 2009, Bryan filed a Final Administration of Account which, after accepted by the Orphan's Court, effectively closed the Estate. ( Id. at ¶ 27). After the closure of the Estate, Neal alleges several instances of self-dealing by Bryan and Phillip in violation of the Trusts including transferring ownership of seven of the eight Trust properties out-of-trust and to themselves, using certain properties as collateral to borrow against, and selling certain properties while failing to account for the proceeds. ( Id. at ¶¶29-37). After several requests by Neal for an accounting of all the various trusts, he finally received a document entitled "SUMMARY OF ACCOUNT Neal Potts Trust U/A 11/29/90 For Period of 10/30/2009 Through 11/1/2012", which indicated that Bryan-who was not the Trustee of the Neal Trusts "took assets from Plaintiff's trusts for his own personal use and profit at Plaintiff's expense." ( Id. at ¶ 46). Specifically, the Summary of Account indicated that Bryan had used money from the Neal Trusts to purchase, remodel and sell properties in Baltimore City. ( Id. at ¶ 47). It also listed several unexplained disbursements including payments to "BMW of Towson." ( Id. ). makes in his Amended Complaint relate in some way to the creation and/or administration of all these Trusts. ( See ECF No. 52, generally ).
This case was initiated on July 9, 2013 when Neal sued Bryan and Phillip and Phillip's wife Diane Potts ("Diane") for breach of trust and other state law claims. Defendants moved to dismiss the claim for failure to state a claim and lack of jurisdiction based on the probate exception. (ECF No. 24). In addition to opposing the motion, Neal also moved for leave to file an amended complaint in which he removed the allegations challenging the administration of the Estate in Orphans' Court and instead challenged Bryan's and Phillip's management of the Trusts and alleged misappropriation of trust assets. (ECF No. 32). In denying Defendant's motion to dismiss for lack of jurisdiction Judge Quarles found that the claims asserted in Neal's Amended Complaint did not fall within the probate exception and thus maintained federal diversity jurisdiction. (ECF No. 49 at 16). Accordingly, the claims pending at this time include: Count I - Violations of Trust Instruments and Maryland Law by Trustees/Plaintiff's Fiduciaries Defendants' Concealment and Failure to Provide an Accounting and Information; Count II - Violations of the Trust Instrument and Maryland Law to Set Aside Conveyances or Redress Breach Defendant Bryan H. Potts; Count III - For Violations of the Trust Instrument and Maryland Law to Set Aside Conveyances or Redress Breach Defendant Phillip L. Potts; Count IV - For Violations of the Trust Instrument and Maryland Law Constructive Trust Defendants Bryan H. Potts and Phillip L. Potts; Count V - Conversion Defendants Bryan H. Potts and Phillip L. Potts; Count VI - Unjust Enrichment Defendants Alicia Potts and Diane W. Potts; Count VII - Removal as Trustees Defendants Bryan H. Potts and Phillip L. Potts. (ECF No. 52).
The case has since been proceeding with discovery; the current Scheduling Order sets the fact discovery deadline as July 1, 2015, expert discovery deadline as January 15, 2016 and dispositive pretrial motions deadline as February 1, 2016. (ECF No. 81). On March 19, 2015 Plaintiff filed his Motion to Compel requesting that this Court exercise its "equitable power" pursuant to Md. Code, Est. & Trusts Art., §14.5-201 and "intervene actively in the administration of [his Trusts]" by "distribut[ing] $25, 000 to Plaintiff's counsel or the Court's registry...to reimburse Plaintiff's counsel for advanced costs...and immediately replenish Plaintiff's expert's retainer to ensure those expert fees are paid for a considerable time." ( See ECF No. 85-1; see also Md. Code, Est. & Trusts Art., §14.5-201). In further support of his Motion to Compel, Neal cites the distribution standard in the Neal Trusts which he alleges "requires the Trustees to pay Neal such amounts of the principal that are reasonable and necessary for the emergency support, maintenance and health needs of Plaintiff." ( Id. at 2).
Defendants argue that the Motion to Compel should be denied because: (1) the Court has not and should not assume in rem jurisdiction over the Neal Trusts; (2) the instruments creating and governing the Neal Trusts do not permit the trustees to invade the principal to pay Neal's litigation costs; (3) even if Neal was successful in this litigation he is not entitled to legal fees; and (4) previous distributions for other types of legal fees were permitted and do not support the distributions Neal requests now. (ECF No. 87-1). Upon review of the filings I felt that two important issues had not been thoroughly addressed by the Parties and requested supplemental briefing on "whether the Motion is so closely related to the underlying case that this Court should exercise supplemental jurisdiction [and]... whether the probate exception would bar federal jurisdiction over this Motion..." (ECF No. 92). The Parties have both filed supplemental briefing on these issues and the Court is now prepared recommend a ruling.
A. The Maryland Trust Act-Judicial Proceedings
Sections 14.5-201 et seq. of the Estates and Trusts Article, as added in 2014, effective January 1, 2015, as part of the Maryland Trust Act, provides for judicial proceedings to enforce trusts. Specifically, it provides that on the invocation of the court's jurisdiction by an interested person, the court may intervene actively in the administration of a trust. §14.5-201(a). Neal cites to §14.5-201(d) for the proposition that "this Court may exercise its equitable power over the Trusts created for the benefit of Plaintiff." (ECF No. 85-1 at 1). However, it is important to consider that subsection in context. Section 14.5-201, titled "Court Intervention in Administration of Trust" is the first of three subsections under Subtitle 2-Judicial Proceedings of the Maryland Trust Act and it reads in its entirety:
(a) On the invocation of the court's jurisdiction by an interested person, on the court's own motion, or as otherwise provided by law, the court may intervene actively in the administration of a trust, fashioning and implementing remedies as the public interest and the interests of the beneficiaries may require.
Continuing judicial supervision
(b) A trust is not subject to continuing judicial supervision unless ordered by the court.
Judicial proceedings involving a trust
(c) A judicial proceeding involving a trust may relate to a matter involving the administration of the trust, including a request for ...