Hatleberg v. Norwest Bank Wisconsin

• Decision Date: 07 July 2005
• Docket Number: No. 2003AP40.,2003AP40.
• Citation: 2005 WI 109,700 NW 2d 15
• Parties: Susan Hatleberg, Plaintiff-Respondent, v. Norwest Bank Wisconsin, n/k/a Wells Fargo Bank, Defendants-Appellants-Petitioners.
• Court: Wisconsin Supreme Court

2005 WI 109

700 NW 2d 15

Susan Hatleberg, Plaintiff-Respondent, v. Norwest Bank Wisconsin, n/k/a Wells Fargo Bank, Defendants-Appellants-Petitioners.

No. 2003AP40.

Supreme Court of Wisconsin.

Oral Argument: January 7, 2005.

Opinion Filed: July 7, 2005.

For the defendants-appellants-petitioners there were briefs by Dennis M. Sullivan, Stephanie Finn and Herrick & Hart, S.C., Eau Claire, and oral argument by Dennis M. Sullivan.

For the plaintiff-respondent there was a brief by Paul J. Gossens and Paul J. Gossens, S.C., Wauwatosa, and oral argument by Paul J. Gossens.

An amicus curiae brief was filed by John E. Knight, James E. Bartzen, Kirsten E. Spira and Boardman, Suhr, Curry & Field LLP, Madison, on behalf of the Wisconsin Bankers Association.

¶1 DAVID T. PROSSER, J

This is a review of a published decision of the court of appeals, Hatleberg v. Norwest Bank Wisconsin, 2004 WI App 48, 271 Wis. 2d 225, 678 N.W.2d 302. The court of appeals affirmed a judgment of the circuit court for Eau Claire County, Eugene Harrington, Judge, holding Norwest Bank (now known as and hereinafter referred to as Wells Fargo Bank) liable for breach of fiduciary duty in its capacity as trustee of an irrevocable trust set up by Susan Hatleberg's mother, Phyllis Erickson. Wells Fargo appeals, and we affirm on different grounds.

¶2 In this case, during its tenure as trustee, Wells Fargo became aware of a defect in a trust that it had not drafted. It did not reveal that defect to the grantor, Erickson. After Erickson's death, the trust was subject to increased tax liability due to the drafting defect. Hatleberg sued Wells Fargo on behalf of Erickson's estate, alleging several theories of liability. The circuit court concluded that Wells Fargo breached a duty to Erickson, and the court of appeals affirmed.

¶3 We reach the following conclusions: First, on the facts of this case, Wells Fargo had no duty to review the Erickson trust to ensure its effectiveness as an instrument to avoid estate taxes. The pertinent facts are that the trust instrument did not assign this responsibility to the trustee and the trustee did not draft the trust. Second, inasmuch as Erickson's estate suffered no physical harm, Wells Fargo was not subject to "Good Samaritan" liability under § 323 of the Restatement (Second) of Torts. Third, Wells Fargo negligently breached a duty to Erickson by continuing to advise her to contribute money to the trust to save estate taxes after it realized the trust was defective. Therefore, we affirm the decision of the court of appeals on different grounds and remand to the circuit court to allow it to determine whether there ought to be any adjustment in damages.

I. FACTS AND PROCEDURAL POSTURE

¶4 The Eau Claire bank now known as Wells Fargo has been called several names. In 1984 it was known as American National Bank and Trust Company. At some point in 1984, Ted Erickson, Phyllis Erickson's husband, met with Dale Sevig, American National's "Vice President and Senior Trust Officer," about estate planning possibilities.¹ On September 6, 1984, Sevig wrote a follow-up letter to Ted Erickson, expressing Sevig's interest in "hopefully help[ing] you with your estate and investment planning." Sevig attached extensive documentation and a suggested estate plan for the Ericksons.

¶5 Unfortunately, Mr. Erickson died in March 1985. On March 27, 1985, Sevig wrote another letter, this one to Mrs. Erickson, expressing condolences and soliciting her business: "[I]t will be quite easy to set up a trust account so we can help you on bill paying and watching your investments, plus whatever else needs to be done on your financial matters." Sevig's handwritten note on the letter indicates that he called Mrs. Erickson about the letter on April 8, 1985.² Eventually, she agreed to set up a revocable trust, with the bank serving as trustee. Sevig set up the revocable trust and handled many of Erickson's finances through it.³ The revocable trust is not at issue in this case.

¶6 Sevig also recommended that Erickson set up an irrevocable trust to reduce her estate taxes by taking advantage of the gift tax exemption.⁴ He offered to refer her to an attorney he believed to be an expert in estate planning who would draft the irrevocable trust. Erickson decided that she would set up an irrevocable trust, but she wanted her neighbor, Attorney Richard Duplessie, to draft the trust instrument. By his own admission, Duplessie was not an expert in estate planning; nevertheless, Erickson insisted that he draft the trust. Duplessie agreed to do so, essentially copying the instrument from a form book. Duplessie testified that Erickson intended the trust to provide a way for her to reduce her estate taxes.

¶7 The parties agree that the trust was defective because it did not contain "Crummey provisions."⁵ These provisions take their name from the Ninth Circuit's decision in Crummey v. Commissioner of Internal Revenue, 397 F.2d 82 (9th Cir. 1968). Crummey provisions give the trust beneficiaries a present interest in the trust, thereby bringing the trust corpus within the gift exception to the federal income tax, and removing it from the estate. Id. at 83-84. Because the beneficiaries gain a present interest, the funds are not considered part of the estate, and are not taxed upon distribution. See Mark Bradley et al., Eckhardt's Workbook for Wisconsin Estate Planners, § 8.246 at 85-86 (4th ed. 2003). In effect, the provisions require the trustee to notify the trust beneficiaries that they have some form of present interest in the trust funds. See id. If the beneficiaries are not given a present interest, the trust deposits do not qualify as gifts and therefore are not immune from federal taxation.

¶8 Initially, this error went unnoticed. In 1985 Erickson began to make deposits of $40,000 ($10,000 for each of four family members) annually into the irrevocable trust, and continued to do so for 11 years.

¶9 In 1988 Sevig noticed the absence of Crummey provisions in the trust during the bank's annual review of the trust provisions. He immediately notified Duplessie via a handwritten note, and attached suggested Crummey provisions that would "solve the gift tax exclusion problem." Until that time, Duplessie had never heard of Crummey provisions. Duplessie received the communication but informed Sevig that he believed the trust was adequate as written. Duplessie also thought Sevig's concern was irrelevant as it was too late to add the Crummey provisions. He "assumed that [because this was an irrevocable trust], that meant you couldn't amend it." Duplessie also (erroneously) believed the trust was "completely funded"; i.e., he believed Erickson would not make any further contributions to the trust principal. The trust was never amended.

¶10 Duplessie and Sevig independently admitted that neither one of them informed Erickson of the concerns about her trust. On the contrary, Sevig advised Erickson to continue to make trust contributions, which she did. Sevig stated: "I reviewed your trust for gifts made in 1990 and 1991 as follows: 1. $10,000.00 to Susan on 12-11-90. You can do so again in 1991 for the $10,000.00 annual exclusion. . . . Again, for estate tax purposes, it makes sense to do the gifts." (Emphasis added.) Hatleberg testified that Sevig told Erickson "there [were] absolutely no problems, everything was fine. She had nothing to worry about." In 1995 Sevig advised Erickson that "I think you can afford another round of gifts for the grandchildren."

¶11 Erickson continued to make gifts each year through tax year 1996. She deposited a total of $440,000 in the trust over the 11-year period between 1985 and 1996. She died in November 1998. Upon her death, Sevig wrote to her probate attorney: "The lack of [ ] `Crummey' provision[s] concerns one for her taxable estate." When the estate filed its tax return, it had to recapture the $440,000 in gifts and pay $173,644.00 in additional estate taxes. Hatleberg, who described herself as "stunned" at that development, called Sevig to demand an explanation; Sevig replied, "I prefer not to answer that question with you because I may have to face you in a court some day." When later questioned about what he meant by that, Sevig said, "We can smell these things."

¶12 On April 17, 2000, Hatleberg sued Wells Fargo and Duplessie, alleging negligence. Duplessie reached a $173,000 settlement with the estate and has been dismissed from the lawsuit. The remaining parties tried the case without a jury on July 23 and 24, 2002.

¶13 The circuit court rendered its decision on August 22, 2002. The court made extensive factual findings, of which the following are excerpts:

Finding No. 1: "Crucial to [Sevig's] advice was the tax savings that could be achieved for federal estate taxes."

Finding No. 4: "[T]he reduction of the estate tax liability was one of the essential purposes for the trust."

Finding No. 16: "Mr. Sevig and others at [Wells Fargo] discovered the fundamental flaw in the irrevocable trust in 1988. . . . [N]either Sevig nor any other representative of [Wells Fargo] did anything to alert Mrs. Erickson or her beneficiaries about the trust document flaws."

¶14 Later in its oral decision, the court added, "suffice it to say the primary purpose for the trust was to reduce the Ericksons' estate tax." The court concluded that Wells Fargo "had a duty to Phyllis Erickson and her beneficiaries to furnish complete and accurate information concerning the trust." The court held that Wells Fargo breached that duty, and that damages of $300,933.00 would make the estate whole. It concluded that Wells Fargo was entitled to an offset of approximately $173,000 due to the Duplessie settlement, and therefore owed the estate $127,993.00. Wells Fargo moved for reconsideration, asking, among other things, for the court to make findings assessing the comparative negligence of the parties. The court granted the motion and held that Wells Fargo...