Commerce Bank, N.A. v. Ogden, Newell, Welch

• Decision Date: 08 January 1999
• Docket Number: No. 94-51-CIV-J-16 A.,94-51-CIV-J-16 A.
• Parties: COMMERCE BANK, N.A., et al., Plaintiffs, v. OGDEN, NEWELL, AND WELCH, et al., Defendants.
• Court: U.S. District Court — Middle District of Florida

81 F.Supp.2d 1304

COMMERCE BANK, N.A., et al., Plaintiffs, v. OGDEN, NEWELL, AND WELCH, et al., Defendants.

No. 94-51-CIV-J-16 A.

United States District Court, M.D. Florida, Jacksonville Division.

January 8, 1999.

J. Thomas Cardwell, Denise D. Dell, Akerman, Senterfitt & Eidson, P.A., Orlando, FL, for Plaintiffs.

Andrew Seiden, Seiden, Alder, Rothman, Petosa & Matthewmann, P.A., Boca Raton, FL, for Defendants.

ORDER

JOHN H. MOORE, II, District Judge.

This case is before the Court on Defendants' Motion for Partial Summary Judgment with Regard to Count VIII of the Plaintiffs' Second Amended Complaint, and, Specifically, Plaintiffs' Claim for Punitive Damages and Memorandum of Law in Support Thereof (Doc. # 257), Defendants' Motion for Partial Summary Judgment with Regard to Count I through VII and IX of Plaintiff's Second Amended Complaint and Memorandum of Law in Support (Doc. # 260) and Plaintiffs' Motion for Partial Final Summary Judgment (Doc. # 283).

I. Background

Like a good novel, this case revolves around a document that is considered ancient by the Federal Rules of Evidence. In 1960, H. Boone Porter, the founder of Porter Paints, met with Cecil Bailey of the Rogers, Towers and Bailey law firm in Jacksonville, Florida. The result of that and other discussions was the production of both a will and a deed of trust for H. Boone. The deed of trust was designed to create a "double generation skipping trust" which would benefit Porter during his lifetime, his wife and then his son (the Reverend Porter), Reverend Porter's children and then finally, their children.

The generation skipping trust, obviously, provided great tax advantage to H. Boone. By creating and using the trust, the corpus of the trust would be taxed at his death but then would not be taxed again until his great-grandchildren died. This provided the benefit of the trust to the family for several generations without the reductive impairment that would occur if the corpus were taxed at each transfer between generations.

The key to the preparation of the deed of trust was compliance with the laws, rules, regulations and codes of the United States internal revenue laws. On July 11, 1960, Bailey wrote to H. Boone forwarding a proposed draft of the will and the deed of trust. After receiving Bailey's letters, H. Boone sent a copy of the papers to Squire Ogden of the Ogden, Newell & Welch law firm in Kentucky. Squire Ogden was the attorney for H. Boone's paint company and, according to letters filed with the complaint, the attorney which Porter trusted. Squire Ogden reviewed the drafts sent to him and made comments about the instruments, which Ogden forwarded to H. Boone, which H. Boone subsequently sent to Bailey who made the changes suggested by Ogden. One of the changes made in the instrument created a provision allowing Reverend Porter to assume a co-trustee position with the corporate trustee (a bank trust section). Furthermore, at some point during the transmission of those papers, paragraph 8 of the deed of trust came to state the following:

8. The Trustee is authorized to pay, out of principal of the trust property, to or for the benefit of any beneficiary who at the time is entitled to receive income from the trust property, hospital, nursing, and medical expense of any such beneficiary, and also such amounts as may be considered advisable for the maintenance, support and welfare of any such beneficiary; but the amount or amounts of any such payments shall be determined by the Trustee in its sole discretion.

The Plaintiffs now complain the inclusion of the word "welfare" in the above paragraph has caused the purposes of the trust to fail. That is, the Plaintiffs complain the inclusion of the word welfare will yield a taxable event at the death of Reverend Porter.

Under the current tax law (although there is some dispute), the key to non-taxability of the corpus is the corpus must not be attributable to the beneficiary's estate. The current tax laws provide for non-taxability of the corpus to the beneficiary when the beneficiary has no, or very limited control, over it. That is, the tax laws provide that those things which shall be included in a decedent's estate include items over which the decedent has a general power of appointment. Trusts which have a general power of appointment provision exercisable by the beneficiary/decedent are, therefore, included in the death estate, i.e. taxable. Section 2514 of the Internal Revenue Code provides that:

A power to consume, invade, or appropriate property for the benefit of the decedent which is limited by an ascertainable standard relating to the health, education, support or maintenance of the decedent shall not be deemed a general power of appointment.

The Internal Revenue Service has interpreted and promulgated a rule which interprets this section as providing an allowance for limited powers of appointment. In other words, limited powers of appointment, those limited by an ascertainable standard, will not yield a general power of appointment in the beneficiary/decedent. As such, limited powers of appointment will not yield inclusion of the trust corpus in the estate of the decedent/beneficiary. However, "[a] power to use property for the comfort, welfare or happiness of the holder of the power is not limited by the requisite standard." Treasury Regulation § 20.2041-1(c)(2). Thus, a provision in a trust instrument which allows for the paying out of the corpus to the beneficiary for his or her welfare is not limited and is treated as a general power of appointment.

The crux of the case at bar is simply that the Plaintiffs believe, upon the death of Reverend Porter, that the trust corpus will be included in his estate for tax purposes. The trust is alleged to be worth about 19 million dollars. The Plaintiffs argue that the inclusion of the word "welfare" and several other incidents described below were the result of professional malpractice and that the failure of Squire Ogden and the Ogden-Newell firm to notify Reverend Porter of this resulted in a breach of fiduciary duty. The Plaintiffs complain the subsequent described events are also professional malpractice and breach of fiduciary duty.

The Plaintiffs include also claims of professional malpractice for several events that occurred subsequent to the original signing and establishment of the trust. Specifically, the Plaintiffs complain Squire Ogden prepared a will for Reverend Porter which also created a trust substantially similar to the trust created for H. Boone. Further, the Reverend's trust instrument created a clause which allowed it to be incorporated into the trust created by H. Boone.

Plaintiffs also argue that in 1965 Squire Ogden drafted an instrument for H. Boone called a Clifford Trust which affected certain aspects of the 1960 deed of trust. The Plaintiffs argue at the time the Clifford Trust was drafted Squire Ogden should have detected the welfare issue in the 1960 deed of trust and taken steps to correct it. The Clifford Trust was designed to benefit the Reverend and his children.

The Plaintiffs next complain that Squire Ogden provided advice to H. Boone in 1966 concerning tax issues relating to the prepayment of estate taxes. Plaintiffs assert at that time Squire Ogden should have again detected the welfare word issue in the deed of trust. They argue this failure to detect again constituted malpractice.

The Plaintiffs next argue that Squire Ogden advised H. Boone in 1968 about his estate plan and the addition of an amendment to it and the 1960 deed of trust. The amendment allowed the Corporate Trustee of the Trust to not be incorporated under Florida corporate law. Again, the Plaintiffs complain of malpractice and breach of fiduciary duty.

Furthermore, the Plaintiffs complain when the Ogden-Newell firm handled the probating of H. Boone's estate in 1969, the Firm should have then detected the welfare word issue in the trust instrument. Furthermore, the Plaintiffs complain that the Ogden-Newell firm should have advised the Reverend to disclaim his power of appointment relating to the trust.

Finally, the Plaintiffs complain that in 1971 the estate tax return for the deceased H. Boone was audited and the Ogden-Newell law firm represented the estate in that audit. The Plaintiffs argue that the welfare issue should have been detected at that time, too. Shortly after the audit, the Ogden-Newell firm represented the Reverend in a removal proceeding which replaced the corporate trustee of the trust.

In 1990 the Reverend became aware of the welfare word issue. He was informed that the current state of the federal tax law would, to some extent, examine state law to determine how the word "welfare" was treated under state law. The attorneys he engaged informed him that the area of the law was unsettled in Florida. At that time the Reverend caused the Florida Legislature to be lobbied and the law of Florida to be changed. The law was changed so that the inclusion of the word "welfare" in a Florida trust instrument did not give the trustee the ability to do more than disperse limited amounts of the corpus and thereby comply with the limiting requirements of the internal revenue laws.

Subsequent to the change in Florida law, the Reverend hired the D.C. law firm of Miller and Chevalier to request a private letter ruling from the Internal Revenue Service. The I.R.S. was given the facts of the case at bar, including the changes in the Florida law, and requested to provide their opinion. The I.R.S., on the facts presented, stated that they would not find the trust to be a part of the Reverend's estate. However, the Plaintiffs state in their Second Amended Complaint:

97. Notwithstanding the extraordinary mitigation efforts undertaken by Plaintiffs, the ultimate issue of whether the Trust's assets are includable in the Reverend Porter's taxable estate pursuant to Section 2041 of the I.R.C. is dependant upon the rules...