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Grueff v. Vito

Court of Special Appeals of Maryland

August 31, 2016

CANDACE GRUEFF
v.
MICHAEL VITO, et al.

          Eyler, Deborah, S., Graeff, [*] Hotten, JJ.

          Patrick L. Woodward, J., did not participate in the Court's decision to report this opinion pursuant to Md. Rule 8-605.1

          OPINION

          Eyler, Deborah, S., J.

         In this appeal, we hold that a broadly worded power to amend in an irrevocable trust instrument cannot be used by a majority of beneficiaries to divest a minority beneficiary of her interest in the trust when doing so would be contrary to the settlor's intent in creating the trust. We also hold that, under Maryland common law, a trustee of a revocable trust does not owe a fiduciary duty to contingent remainder beneficiaries while the settlor is alive.

         FACTS AND PROCEEDINGS

         This case concerns two trusts created by James B. Vito. James and his wife Mary, one of the appellees, have four children: Candace Grueff, the appellant, and Michael Vito, Judith Seal, and John ("Tim") Timothy Vito, also appellees.[1] The other appellees are James F. Brennan, III, Esquire, Paul H. Ethridge, Esquire, and the MFV Annuity Fund, LLC (the "Fund").

         The Irrevocable Trust

         On September 16, 1983, James established the James B. Vito Family Trust (the "Irrevocable Trust"), naming his four children as income and residuary beneficiaries. The trust instrument was signed by James and by Paul M. Vito, James's brother, whom James named as Trustee. It provides that the trust cannot be "altered, amended, revoked, or terminated, in whole or in part, by" the Settlor (James). James renounced for himself and his estate "any interest, either vested or contingent, including any reversionary right or possibility of reverter, in the principal and income of the Trust[.]"

         The trust was funded by a gift "for the immediate benefit" of the four Vito children of the fee simple interest in income-producing real property located in Rochester, New York, that James had contracted to purchase. The trust instrument allows for more assets to be added to the trust estate, and that happened over time. In particular, James, who amassed wealth in commercial real estate, formed various LLCs, which he managed, and made interests in the LLCs part of the trust estate of the Irrevocable Trust (and a Revocable Trust that we shall discuss below). These LLCs were designated "James Properties I, " "James Properties II, " and so forth. Over time, other assets were added to the trust estate as well.

         The Irrevocable Trust instrument provides at Item SECOND that "the Trustee shall at least once each year distribute all the net income and any capital gains of the trust to the beneficial owners in the shares set forth in Item SIXTH below in such partial or periodic distributions as he deems appropriate within his discretion." The shares, as set forth in Item SIXTH, are 25% to each child.

         By its terms, the Irrevocable Trust was to terminate after sixteen years from the date of execution, at which time the residuary trust estate would be distributed in equal portions to the four children. Likewise, there would be equal distribution to the beneficiaries if, before the trust terminated, all the trust assets were liquidated and all obligations, liens, and encumbrances on the trust property were satisfied.

         Item TENTH of the Irrevocable Trust reads as follows:

This Agreement may be revoked, altered or amended from time to time by an instrument in writing, signed by the holders of not less than seventy-five (75%) interest herein and delivered to the Trustee.

         There have been a total of five amendments to the Irrevocable Trust. On March 8, 1995, Michael, Judith, and Tim signed an amendment naming Brennan as Successor Trustee to Paul. On September 1, 1999, all four children signed an amendment extending the termination date for the trust to the earlier of James's death or December 31, 2019. They executed a third amendment on June 16, 2003, further extending the trust termination date to December 31, 2024, removing the alternate provision about James's death, and granting the Trustee authority to enter into certain indemnification agreements on behalf of the trust.

         At some point (not specified in the complaint), Paul resigned as Trustee and Brennan took his place.

         On June 24, 2011, in the Circuit Court for Montgomery County, Candace filed a petition seeking appointment as guardian of James's property. She alleged that he was mentally incompetent to handle his affairs. The opposing parties included Mary, Judith, Michael, and Tim. In early 2012, the parties settled the guardianship case by an agreement that Mary and Ethridge would be appointed co-guardians of James's property. On March 1, 2012, the court issued an order making those appointments. There was no judicial finding that James was disabled or incompetent.

         On May 4, 2012, Brennan resigned as Trustee. A little over two weeks later, on May 21, 2012, Judith, Michael, and Tim executed a fourth amendment to the trust ("Amendment IV") appointing Judith and Michael as Trustees in Brennan's place. One more amendment was made to the trust instrument, which we shall discuss infra.

         The Revocable Trust

         On August 11, 1999, James established the Revocable Trust, naming himself as Trustee. The trust was funded with commercial real estate holdings, including, as noted, interests in the various James Properties, LLCs, and other investments. On December 15, 2004, James executed an amendment to the Revocable Trust that completely restated its terms. In the definition section, it states that "'Trustee' refers to James B. Vito, Mary F. Vito and John F. Brennan while they is [sic] serving as Trustees, and to such other persons or corporations as may succeed [him/her] from time to time as Trustee pursuant to the provisions of Section 11 of this Agreement." (Emphasis omitted.) The amendment is signed by James, as Settlor and Trustee, and by Mary and Brennan, as Trustees.

         In the trust instrument (as restated), James expressly reserved the right to alter, amend, or revoke the trust, in whole or in part, at any time. Should he revoke the trust, all trust property covered by the revocation would revert to him. The trust instrument provides that, during James's lifetime, the income and principal from the trust estate are to be distributed to him, as necessary for his support. Upon his death, if Mary survives him, a certain sum of trust assets will be distributed to two marital trusts, for estate tax purposes, with the net income from those trusts, along with discretionary payments from principal, to be paid to Mary. The rest of the trust assets will make up the corpus of a new "Residuary Trust, " the net income from which shall be paid to Mary, the four children, and the descendants of the four children "for and during" their lifetimes, and amounts of the principal may be paid in proportions to them, at the Trustees' discretion. Upon Mary's death, or upon James's death if Mary predeceases him, the principal and any accrued undistributed income of the Residuary Trust shall be held in two trusts, one for estate tax purposes. The assets held in the other trust "shall be allocated among the descendants of the Settlor living at the time of the death of the survivor of the Settlor's spouse and the Settlor, per stirpes." Each share allocated to a child of the Settlor shall be placed in a separate trust for the benefit of that child, and shall be distributed to that child if the child has attained the age of 21. (The children all have been over the age of 21 for quite some time.)

         James executed a third amendment to the Revocable Trust on December 11, 2006. The amendment provided that upon Mary's death, or his death if Mary predeceases him, the Trustees shall distribute the trust's interest in Craig Air Center Corporation to Tim, and shall distribute its interest in the James Properties III, LLC to Michael's children, in equal shares. That amendment was signed by James, as Settlor and Trustee, and Mary and Brennan, as Trustees.

         On January 1, 2007, James assigned to Candace's son, outright and free and clear of any trust, a 10% interest in the James Properties II, LLC. Before then, 50% of that asset was held by the Revocable Trust, and the other 50% was held by the Irrevocable Trust. Thus, after the assignment, the Irrevocable Trust held a 50% interest in the asset, the Revocable Trust held a 40% interest in the asset, and Candace's son held a 10% interest in the asset. The assignment was executed by James, as assignor and Trustee, by Brennan, as the only other member of that LLC and Trustee, and by Candace's son, as assignee.

         On April 8, 2011, James, as Settlor and Trustee, and Mary and Brennan, as Trustees, executed a fourth amendment to the Revocable Trust ("Amendment Four"). That amendment states that upon Mary's death, or James's death if Mary predeceases him, the 40% interest in the James Properties II, LLC held by that trust will be allocated among the four children so as to include in Candace's 25% share the 10% share assigned to her son. Thus, Candace's three siblings each will receive a 25% interest in the James Properties II, LLC portion held by the Revocable Trust and Candace will receive a 15% interest in that asset, making the combination of her interest and that of her son 25%.

         On August 18, 2011, Mary and Brennan, as Trustees, executed assignments of the interests in the James Properties II, LLC and the James Properties VII, LLC held by the Revocable Trust to themselves as Trustees of the Mary F. Vito Revocable Trust. Those interests subsequently were assigned by the latter trust to the Fund.

         The Litigation and Post-Suit Amendment to the Irrevocable Trust

         On August 9, 2013, in the Circuit Court for Montgomery County, Candace filed an eight count complaint against Michael, Judith, Tim, Mary, Brennan, Ethridge, and the Fund.

         Counts I, II, IV, and V name Michael and Judith as defendants and concern the Irrevocable Trust. (There is no Count III in the Complaint.) The only counts against Michael and Judith of relevance to this appeal are Count I and part of Count V.[2] In Count I, Candace sought to remove Michael and Judith as Trustees of the Irrevocable Trust, on the ground that they misused the funds in the trust, both before and after they became Trustees. (Most of the dates of the alleged misuses of funds are not specified, but are in the years 2011 and 2012.) In Count V, Candace sought an accounting by Michael and Judith of the trust assets.

         Counts VI through IX name Mary and Brennan as defendants and concern the Revocable Trust. In Count VI, Candace sought to remove Mary and Brennan as Trustees. She alleged that they misappropriated and misallocated trust income; failed to make decisions that a reasonably prudent trustee would make in the administration of the trust; and failed to collect monies for the trust from third parties; and their actions were affected by conflicts of interest and bias. In Count VII, she sought damages, upon similar allegations, including that Mary and Brennan had failed to adequately manage, monitor, and control the trust assets; had drafted and signed, and had James sign, Amendment Four, moving assets out of the trust, when James was "demented"; and that they had breached their fiduciary duties and had acted negligently in managing the trust.

         Candace sought injunctive relief in Counts VIII and IX. She asked the court to set aside the August 18, 2011 assignments of the interests in the James Properties II and VII, LLCs from the Revocable Trust to the Mary F. Vito Revocable Trust, alleging that those assets later were transferred to the Fund, an entity owned and controlled by her three siblings. And finally, she asked the court to find that Amendment Four was void and to set it aside, on the ground that James was not competent when he executed it and was acting under the undue influence of Brennan, Judith, and Michael.

         Although Tim, Ethridge, and the Fund were named as defendants, no causes of action were stated against them.[3]

         On October 8, 2013, Mary and Brennan filed a motion to dismiss Counts VI through IX (being all the counts against them and all pertinent to the Revocable Trust). They argued that Candace lacked standing to sue. For Count VI, they relied upon Rule 10-712(b), which states that, on petition of an "interested person, " a court may remove a fiduciary, and upon Rule 10-103(f)(2), under which, they argued, an "interested person" must be a "current income beneficiary of the fiduciary estate[, ]" which in the case of a trust would be a current income beneficiary of the trust. They asserted that Candace was not an "interested person" because she was not a current income beneficiary of the Revocable Trust. Rather, James was the current income beneficiary because, under the terms of the Revocable Trust, the net income was to be paid to him, so long as he was alive. With respect to Counts VII through IX, they alleged that Candace lacked standing to sue under Maryland common law.

         On October 21, 2013-two months after Candace filed suit and before the court ruled on Mary and Brennan's motion to dismiss-Michael, Judith, and Tim executed a fifth amendment to the Irrevocable Trust ("Amendment V"). Amendment V changed Item SIXTH of the Irrevocable Trust to reduce Candace's 25% beneficial interest in the trust to zero and reallocate it among Michael, Judith, and Tim, resulting in each of them having a 33 1/3% beneficial interest. Then, on November 1, 2013, Michael and Judith filed a motion to dismiss Count I and to partially dismiss Count V of the complaint, which, respectively, sought their removal as Trustees of the Irrevocable Trust and an accounting of that trust. They attached a copy of Amendment V and argued that, by virtue of that amendment, Candace no longer was a current income beneficiary of the Irrevocable Trust and therefore lacked standing to sue, for the same reasons argued by Mary and Brennan with respect to the Revocable Trust.

         That same day, Tim and the Fund filed a motion to dismiss on the primary ground that neither one was named in any count in the complaint.

         Candace filed oppositions to all three motions to dismiss. With respect to Michael and Judith's motion, she argued that Amendment V to the Irrevocable Trust was not valid and therefore was not effective to divest her of her interest in that trust. Consequently, she remained a current income beneficiary of that trust with standing under Rules 10-712(b) and 10-103(f)(2)to petition to remove Michael and Judith as Trustees and to receive an accounting from them.

         In her opposition to Mary and Brennan's motion, Candace argued with respect to Count VI that, under Rule 10-103(f)(1) and (2), she did not need to be a current income beneficiary of the Revocable Trust to have standing to sue to remove them as Trustees; it was sufficient that she was an "heir" to James and that James was a disabled person. As to Counts VII through IX, Candace argued that she had standing under Maryland common law to challenge the actions of the Trustees that, in her view, had negatively affected the value of the trust assets.

         Finally, in response to Tim and the Fund, Candace argued that Tim was a necessary party, under Rule 2-211, because, as a residuary beneficiary of the Revocable Trust, he would be bound by the court's decision on her claims. Also, because Tim was one of the three beneficiaries who signed Amendment V to the Irrevocable Trust, it was necessary to include him as a party to resolve the question whether that amendment was valid. Candace argued that the Fund was a necessary party because it received the assets she was seeking to have returned to the Revocable Trust, and therefore its joinder was required for "complete relief" to be afforded.

         On December 19, 2013, the court held a hearing on the motions to dismiss and took them under advisement. It issued a written Opinion and Order, which was entered on January 29, 2014.

         The court found that Amendment V to Item SIXTH of the Irrevocable Trust was valid, under Item TENTH of the trust, and therefore was effective to eliminate Candace as a current income beneficiary of the trust. It agreed with Michael and Judith that Candace only could be an interested person, under Rule 10-103, and thus have standing to seek their removal as Trustees of the Irrevocable Trust, if she were a current income beneficiary; and that she could not seek an accounting from Michael and Judith of any Irrevocable Trust transaction after October 21, 2013, the date of Amendment V. The court dismissed Count I (seeking to remove Michael and Judith as Trustees of the Irrevocable Trust) and Count V (seeking an accounting).

         The court also dismissed Count VI (seeking to remove Mary and Brennan as Trustees of the Revocable Trust) on the ground that Candace had to be a current income beneficiary of the Revocable Trust to have standing, and James was the only current income beneficiary. The court further dismissed Counts VII, VIII, and IX, in which Candace made claims for negligence and breach of trust against Mary and Brennan and to set aside various assignments and amendments to the trust, rejecting ...


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