Benson v. Rosenthal

• Decision Date: 16 May 2016
• Docket Number: CIVIL ACTION NO: 15-782 SECTION: "H"(2)
• Parties: THOMAS BENSON v. ROBERT ROSENTHAL ET AL.
• Court: U.S. District Court — Eastern District of Louisiana

THOMAS BENSON v. ROBERT ROSENTHAL ET AL.

CIVIL ACTION NO: 15-782 SECTION: "H"(2)

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF LOUISIANA

May 16, 2016

ORDER AND REASONS

Before the Court are Defendants' Motions for Judgment on the Pleadings (Docs. 54, 55). For the following reasons, the Motions are denied.

BACKGROUND

This is an action for declaratory judgment. Plaintiff Thomas Benson, appearing as grantor of several trusts, asks this Court to declare that his attempt to exchange certain assets held by those trusts for other assets of equivalent value was effective. Over the course of several years, Plaintiff established various trusts for the benefit of his daughter, Renee Benson, and two grandchildren, Rita Benson LeBlanc and Ryan LeBlanc. Plaintiff created three trusts in 2009 (the "2009 Trusts"), three trusts in 2012 (the "2012 Trusts"), a Grantor Retained Annuity Trust in 2012 ("2012 GRAT Trust"), and a Grantor Retained Annuity Trust in 2014 ("2014 GRAT Trust").¹ Notwithstanding the dispute at issue, these trusts hold ownership interests in various entities that in turn own valuable property, including the New Orleans Saints and Pelicans franchises, the New Orleans Fox television affiliate, automobile dealerships, and the Benson Tower and Champions Square development.² Plaintiff asked Defendant Robert Rosenthal to serve as trustee of these trusts. In 2015, Rosenthal resigned as trustee of the 2012 trusts and appointed Defendant Mary Rowe in his place.

The aforementioned trust documents provide Plaintiff with the power to reacquire or exchange property of the trust with property of equivalent value without the approval of the trustee. In January of 2015, Plaintiff exercised this power and sent correspondence to Defendant Rosenthal, stating his intention to exchange the trust assets for promissory notes of equivalent value. This correspondence was sent to Rosenthal on January 12, 2015 but intended to make the exchange effective as of January 1, 2015. With the January 12 correspondence, Plaintiff included a preliminary schedule of values of the trust assets, a Notice of Exchange of trust assets, and blank promissory notes containing a valuation adjustment clause that would operate to adjust the notes automatically to a later-determined appraised value. The transfer alsoincluded certain real estate and the forgiveness of nearly $100 million of indebtedness owed to Plaintiff by some of the trusts.

Rosenthal refused to execute the documents required to complete the exchange, stating that such an exchange requires a simultaneous transfer of property. He also stated that an unsecured promissory note is "not an appropriate trust investment" and that he must "make his own independent verification that the assets to be exchanged are of equivalent value [with the trust assets]" before the exchange could occur.³

On January 24, 2015, Plaintiff supplemented his exchange request with additional documents, including certifications of the values of each trust signed by Plaintiff, collateral assignments granting the trusts security interests, and seven promissory notes for values based on the most recent valuations available. These promissory notes also contained valuation adjustment clauses. Plaintiff's supplements failed to assuage Rosenthal's concerns, and he again rejected the exchange, stating that there had "not yet been an exchange of assets of equivalent value."⁴

On August 24, 2015, after filing this suit, Plaintiff again supplemented the Notice of Exchange in accordance with the valuation adjustment clauses included in the promissory notes. Plaintiff had retained Empire Valuation Consultants ("Empire") to conduct a valuation of the assets that he sought to remove from the trusts as of December 31, 2014. Empire's services had been used in the valuation of assets of the trusts on prior occasions and had been relied upon by Rosenthal. Based on Empire's updated valuation of the trustassets, Plaintiff delivered to Defendants thirteen new promissory notes of specific values and collateral assignments securing each of those notes. Defendants again rejected Plaintiff's exchange.⁵ Plaintiff seeks a judgment from this Court declaring that the exchange was effective.

Defendant Rowe's motion asks this Court to dismiss Plaintiff's action on several grounds. Defendant Rosenthal has adopted these arguments by reference in his own motion and expounded upon them. Defendants move this Court for a judgment holding either that (1) Plaintiff's attempted substitution was, in fact, a request for a loan, which the trustee had the discretion to deny, or that (2) Plaintiff's purported substitution did not occur on January 1, 2015 and occurred, at the earliest, on August 24, 2015, if Plaintiff can prove that he exchanged property of equivalent value.

LEGAL STANDARD

Rule 12(c) provides that a party may move for judgment on the pleadings, after pleadings are closed but early enough not to delay trial.⁶ The standard for determining a Rule 12(c) motion is the same as a Rule 12(b)(6) motion to dismiss.⁷ To survive a Rule 12(b)(6) motion to dismiss, a plaintiff must plead enough facts "to state a claim to relief that is plausible on its face."⁸ A claim is "plausible on its face" when the pleaded facts allow the court to "draw the reasonable inference that the defendant is liable for the misconductalleged."⁹ A court must accept the complaint's factual allegations as true and must "draw all reasonable inferences in the plaintiff's favor."¹⁰ The court need not, however, accept as true legal conclusions couched as factual allegations.¹¹ To be legally sufficient, a complaint must establish more than a "sheer possibility" that the plaintiff's claims are true.¹² The complaint must contain enough factual allegations to raise a reasonable expectation that discovery will reveal evidence of each element of the plaintiff's claim.¹³ If it is apparent from the face of the complaint that an insurmountable bar to relief exists and the plaintiff is not entitled to relief, the court must dismiss the claim.¹⁴ The court's review is limited to the complaint and any documents attached to the motion to dismiss that are central to the claim and referenced by the complaint.¹⁵

LAW AND ANALYSIS

Defendants ask this Court to make one of two findings: (1) that the exchange attempted by Plaintiff was a loan, which the trustee properly refused or (2) that Plaintiff's purported substitution was ineffective. This Court will address each argument in turn.

A. Attempted Exchange as Loan

The trusts at issue are "intentionally defective grantor trusts." This term refers to a trust intentionally formed to avoid estate tax on the trust'sassets.¹⁶ This is accomplished by including clauses that either give the grantor the power to reacquire trust assets by substituting assets of equivalent value or allow the grantor to borrow trust assets without adequate interest or security.¹⁷ By retaining this power, the grantor is treated as the owner of those assets for tax purposes pursuant to 26 U.S.C. § 675. In doing so, the grantor becomes subject to income, gift, and capital gain taxes on those assets, but the assets are not treated as part of his estate.¹⁸

Three trust provisions are at play in this dispute. First, each trust states that neither the trustee nor the grantor may exchange or dispose of any part of the principal of the trusts for "less than an adequate consideration in money or money's worth."¹⁹ Next, the trusts state that the trustee has the right "to loan to the Grantor up to 100% of trust assets" but that such a loan shall be made "upon the terms and conditions as are deemed appropriate by the Trustee" ("Loan Provision").²⁰ The trusts then grant the grantor the power to substitute trust assets for other assets of equal value without the approval or consent of the Trustee ("Substitution Provision").²¹

Defendants argue that Benson's proposed exchange was in fact a loan pursuant to the Loan Provision, rather than a substitution pursuant to theSubstitution Provision. Defendants argue that Plaintiff's attempted exchange was a loan because he sought an extension of credit from the trusts. In support, Defendants cite to both non-binding case law and IRS Revenue Rulings. This Court finds, however, that the Defendant's reliance on these authorities is misplaced.

First, Defendants cite to In re Condiotti, an unpublished case from the Colorado Court of Appeals, in which the grantor of an intentionally defective grantor trust attempted to substitute the full value of the trust's assets for a promissory note.²² First, the court held that the trustee had the power to determine whether the proposed transaction was a substitution or a request for a loan. It also held that the record before it supported the probate court's factual finding that the transaction was an attempt to exercise the loan power.²³ The court made this finding based on the language of the trust and the grantor's intent at the time that it was created.²⁴ Relying on Colorado precedent, the court considered the following questions in determining whether the transaction was a loan: "1. Do the parties 'stand in the relationship of debtor and creditor?' 2. Was a promissory note executed? 3. Was interest 'agreed to or paid?' 4. Did the parties agree that the recipient would repay the money received?"²⁵ The Colorado court answered these questions in the affirmative. In making its holdings, the court relied on two sources also cited herein by Defendant. In Rothstein v. U.S., the Second Circuit held that theexchange of an unsecured promissory note used by the grantor to purchase trust assets was a loan.²⁶ The Condiotti court also relied on the Revenue Ruling 85-13, in which the IRS held that a grantor's "receipt of the entire corpus of an irrevocable trust in exchange for an unsecured promissory note given to the trustee, the grantor's spouse, constituted an indirect borrowing of the trust corpus."²⁷

Defendants contend that each of...