Dunkley v. Peoples Bank & Trust Co.

• Decision Date: 12 December 1989
• Docket Number: Civ. No. 89-3021.
• Citation: 728 F. Supp. 547
• Court: U.S. District Court — Western District of Arkansas
• Parties: William A. DUNKLEY, III, Plaintiff, v. PEOPLES BANK & TRUST COMPANY, Defendant Third Party Plaintiff, v. Lawrence C. RUSCHKE, Third Party Defendant.

728 F. Supp. 547

William A. DUNKLEY, III, Plaintiff, v. PEOPLES BANK & TRUST COMPANY, Defendant Third Party Plaintiff, v. Lawrence C. RUSCHKE, Third Party Defendant.

Civ. No. 89-3021.

United States District Court, W.D. Arkansas, Harrison Division.

December 12, 1989.

COPYRIGHT MATERIAL OMITTED

Charles L. Harwell, Cypert, Crouch, Clark & Harwell, Springdale, Ark., for plaintiff.

Stephen W. Jones, Jack, Lyon & Jones, Little Rock, Ark., for defendant third party plaintiff.

Michael E. Kelly, Smith & Kelly, Yellville, Ark., for third party defendant.

MEMORANDUM OPINION

H. FRANKLIN WATERS, Chief Judge.

Plaintiff, William A. Dunkley, III, a citizen of Illinois, sued defendant, Peoples Bank & Trust Company, an Arkansas banking corporation with its principal place of business in Arkansas, in relation to certain actions taken by the defendant as trustee under a trust agreement making plaintiff one of the beneficiaries. Plaintiff contends that the trustee made payments of income and principal of the trust to another of the trust beneficiaries, Lawrence W. Ruschke, and that such distributions were not authorized by the controlling trust instrument and were contrary both to the terms of the trust agreement and applicable law. Plaintiff seeks an accounting and damages from the trustee, and for return of the trust assets allegedly wrongly distributed to Lawrence Ruschke.

Defendant bank answered and brought into the lawsuit, as a third-party defendant, Lawrence C. Ruschke, the person to whom the distributions were made. Mr. Ruschke was, at the time he was brought into the lawsuit, and still is, a resident and citizen of Wisconsin. Mr. Ruschke answered and counterclaimed against the bank, seeking an accounting and an order of the court directing the bank to distribute to him all remaining income and principal in the trust. Because there is a complete diversity of citizenship between the parties, and because the amount in controversy exceeds the jurisdictional amount established by 28 U.S.C. § 1332, the court has jurisdiction of the subject matter, and it appears that it also has jurisdiction of the parties.

I. The Facts

On December 2, 1984, Anna T. Ruschke, the widow of William A. Dunkley, Jr. who died in 1969, married Lawrence Ruschke, a widower since 1983. The record does not reflect the age of Ms. Dunkley at that time, but it appears that Mr. Ruschke was in his mid-sixties. At the time of the marriage, Mrs. Ruschke had one adult son by her previous marriage, William A. Dunkley, III, and Mr. Ruschke had four adult sons by his previous marriage. After Anna T. Dunkley and Lawrence Ruschke met, they "dated" for less than a year and then began to discuss marriage. They both appeared to have some concern about their children and their separate estates. In his deposition Mr. Ruschke disclosed that he talked with his attorney about "second marriages" and that "you know, the very thing that happens in second marriages is money." He says that, during a visit together in Florida where he had moved from his previous home in Illinois, she indicated that she was interested in creating trusts to protect their estates. In his deposition, Mr. Ruschke says that, "they contacted the lawyers, we went to the bank, Barnett Bank, and contacted the trust officer because she thought she wanted to go trust and I didn't think I would like trust." He went on to say that: "I heard too much bad things about trusts and I didn't want nothing to do with them. But she insisted she wanted — she'd like to have trusts." After these discussions between them, and discussions with lawyers and officers of the Barnett Banks Trust Company, N.A., they had their lawyer draft and they executed trust agreements which largely mirrored each other. Mrs. Ruschke's trust, which was received as joint exhibit 1, was dated and executed on March 11, 1985. According to a schedule of property attached to the trust agreement, Ms. Ruschke conveyed to the trustee property previously owned by her of a value of $191,735.29. The assets of the trust at the time of creation were certificates of deposits and savings accounts in various banks and savings and loan associations in excess of $137,000, cash in excess of $21,000, and mortgages of a value of in excess of $33,000.

The trust agreement provided that upon the death of Mrs. Ruschke, her estate would be divided into two trusts, one in the name of her spouse, and the other to be known as the "family trust". The relative proportions of her estate to be placed in each of these trusts was to be determined by a formula contained in Article IV of the trust agreement which was essentially designed to minimize federal estate taxes due upon her death. It appeared that, with one possible exception, all parties agree that, because of the size of her estate on her death, a proper application of the formula contained in the trust instrument resulted in no spousal trust being created, and all of the assets of the trust after her death being held in the "family trust". During the trial, Mr. Ruschke's attorney advised the court that Mr. Ruschke did not agree that that was the case, but the court finds that a proper application of the formula contained in the trust agreement clearly causes this result.

Because it appears from the evidence at the trial that Mr. Ruschke confused and probably continues to confuse his rights granted by the spousal trust with those granted to him in the provisions in relation to the family trust, and because it is not at all clear that the trust officer of the defendant bank properly understood the differences in the rights granted by these two provisions, it is, perhaps, appropriate to explain in some detail these provisions. As is usually the case with this type of trust created to minimize federal estate taxes, the spousal trust provisions provided that the entire income would be paid to the surviving spouse, and that the surviving spouse, during his lifetime, had the right to withdraw from the trust "as much or all of the principal of the trust named for my spouse as my spouse from time to time may direct in writing." Additionally, he had the right, upon his death, to appoint by will to any person any remaining undistributed net income or principal. In other words, if a spousal trust had been created, Mr. Ruschke would have had the absolute right to take all or any part of it during his lifetime, a power that he seemed to believe he had in relation to the family trust.

However, contrary to his belief, the family trust contained very specific provisions which were, in the court's view, intended by Mrs. Ruschke to insure that Mr. Ruschke, during his lifetime, would be adequately cared for, and that any portion of her estate not necessary for that purpose would go to her son, William A. Dunkley, III.

The pertinent portions of the trust agreement in this respect are as follows:

ARTICLE V

As of the date of my death, but after providing for the payments, if any, required by Article III of this instrument, and the allocation, if any, required by Article IV of this instrument, the trustee shall retain the balance of the trust principal (including property to which the trustee may be entitled under my will or from any other source) in a separate trust named the Family Trust. The Family Trust shall be administered as follows:

A. If my spouse survives me, then commencing as of the date of my death and during the life of my spouse, the trustee shall distribute to my spouse from time to time as much of the net income and principal of the Family Trust, even to the extent of exhausting principal, as the trustee believes desirable from time to time for the health, support in reasonable comfort, education, best interests, and welfare of my spouse, considering all circumstances and factors deemed pertinent by the trustee; provided, however, that:

1. Any undistributed net income shall be accumulated and added to the principal of the Family Trust, as from time to time determined by the trustee;

2. My primary concern during the life of my spouse is for the health and support in reasonable comfort of my spouse, and the trustee need not consider the interest of any other beneficiary in making distributions to my spouse for those purposes under this paragraph;

3. Insofar as the trustee deems it advisable, no principal of the Family Trust shall be distributed to my spouse as long as any principal remains in the trust named for my spouse.

B. If my spouse survives me, then upon the death of my spouse the trustee shall distribute all of the principal in the Family Trust as then constituted and any accrued or undistributed net income thereof, to my son, WILLIAM A. DUNKLEY, per stirpes.

ARTICLE VI

The provisions of this Article shall apply to each trust held under this instrument:

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C. Among the circumstances and factors to be considered by the trustee in determining whether to make discretionary distributions of net income or principal to a beneficiary are the other income and assets known to the trustee to be available to that beneficiary and the advisability of supplementing such income or assets.

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F. If at any time after my death the trustee shall determine that the value of the trust is less than forty thousand dollars, the trustee, without further responsibility may (but need not) distribute the trust to the beneficiary for whom the trust is named, or, in the case of the Family Trust, to my spouse, if then living, or if my spouse is not then living, to my son, WILLIAM A DUNKLEY, per stirpes.

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ARTICLE VII

A. The trustee shall have the following powers with respect to each trust held under this instrument, exercisable in the discretion of the trustee:

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8. To pay all expenses incurred in the administration of the trust, including reasonable compensation to any trustee, and to employ or appoint and pay reasonable compensation to accountants, depositaries, investment counsel, attorneys,

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