In re Baylis

• Decision Date: 10 December 2002
• Docket Number: No. 02-1364.,No. 02-1415.,02-1364.,02-1415.
• Citation: 313 F.3d 9
• Parties: In re: Carl E. BAYLIS, Debtor. Constance B. Rutanen; Ella Quevillon, by and for the Estate Of Robert S. Quevillon; Theresa J. Alexander, Plaintiffs, Appellees/Cross-Appellants, Robert D. Quevillon; Marc Quevillon; Paula L. Flowers; John Quevillon, Plaintiffs, v. Carl E. Baylis, individually and in his capacity as co-trustee of the Antonia Quevillon Trust, Debtor, Appellant/Cross-Appellee.
• Court: U.S. Court of Appeals — First Circuit

313 F.3d 9

In re: Carl E. BAYLIS, Debtor. Constance B. Rutanen; Ella Quevillon, by and for the Estate Of Robert S. Quevillon; Theresa J. Alexander, Plaintiffs, Appellees/Cross-Appellants, Robert D. Quevillon; Marc Quevillon; Paula L. Flowers; John Quevillon, Plaintiffs, v. Carl E. Baylis, individually and in his capacity as co-trustee of the Antonia Quevillon Trust, Debtor, Appellant/Cross-Appellee.

No. 02-1364.

No. 02-1415.

United States Court of Appeals, First Circuit.

Heard October 11, 2002.

Decided December 10, 2002.

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David M. Nickless with whom Nickless and Phillips was on brief for appellant.

Katherine A. Robertson with whom Robert A. Gelinas and Bulkley, Richardson and Gelinas, LLP were on brief for appellees.

Before LYNCH, Circuit Judge, STAHL, Senior Circuit Judge, and HOWARD, Circuit Judge.

LYNCH, Circuit Judge.

This case addresses the rules that should be applied in determining when a fiduciary of a trust is in "defalcation while acting in a fiduciary capacity," and so may not be discharged from those debts in bankruptcy under 11 U.S.C. § 523(a)(4) (2000). The issue is one of first impression for this court.

I.

We describe the facts as they are set forth in the decision of the Massachusetts Supreme Judicial Court (SJC), as supplemented by the state probate court findings, in the underlying state litigation which gives rise to the judgment debt against Carl Baylis, the bankrupt debtor.

In 1969, Antonia Quevillon, the settlor of the Antonia Quevillon Trust, consulted Baylis, an attorney, regarding the disposition of the apartment buildings she owned and operated. At that time, she was seventy years old and in poor health. She had no prior relationship with Baylis. Baylis drafted the trust into which she transferred her property. The property consisted of eight apartment buildings in Massachusetts: six in Southbridge and two in Worcester. Baylis also drafted an exculpatory clause into the trust which stated that "[e]ach trustee shall be liable only for his own willful misconduct or omissions in bad faith."

Quevillon died on May 10, 1971. After her death, the trust was to provide income to her children for a period of twenty years at which point it would terminate, and the trust property was to be divided equally among the children of Marcel Quevillon, a son of the settlor. (It did so terminate on May 10, 1991.)

Baylis and Estelle Ballard, daughter of the settlor and one of the income beneficiaries, were appointed co-trustees; they served from May 1971 to May 1991. Ballard agreed to manage the property for $50 per week, and was paid from December 1973 through May 1991, for a total of $45,100. Not only did Ballard derive her income from managing the buildings, but she also lived in one unit, and the trust paid her utilities and provided items such as cable television and a washing machine. Baylis did not discuss any management fees with the settlor. By his own admission, he almost entirely abdicated his responsibilities as trustee to Ballard, who alone actively managed the property.

The property appreciated substantially in value from $256,000 in 1971 to $1.3 million in 1986, but paid the income beneficiaries only $48,813 between 1971 and 1985. The trustees had discretion to sell the trust property, and the trust did pay taxes and other expenses from the estate out of income derived from profits and the sale of a building in 1971. The trust sold another building in 1984.

The income beneficiaries were taxed on the capital gains but did not receive any actual distribution of money. Concerned, the income beneficiaries met in 1985 with the co-trustees to discuss the lack of income from the trust property. The trustees acknowledged that each of the income beneficiaries was owed $82,000. This represented the amount, with interest, of the difference between the actual distributions received and the amount on which each of the beneficiaries had been taxed since May 10, 1971. Baylis told the beneficiaries that the trust was broke. At that meeting, it was decided that the property would be sold and the proceeds invested in government bonds. Ballard did not object to selling the properties.

In late 1985, the trustees began accepting offers on the remaining six buildings. By January 1986, they had received an offer of $215,000 from Mr. and Mrs. Young for two of the Southbridge properties. The Ramshorn Realty Trust, in the business of purchasing and selling apartment buildings since 1986, made another offer, subject to the availability of financing, of $1.425 million for the other four properties. Ramshorn had recently sold substantial assets and had cash on hand to make a down payment. Both purchasers paid deposits of $1,000. The six properties were later appraised for only $1.3 million, significantly below the offers received of $1.64 million.

Ballard, however, desired to own the properties herself. She also intended that the properties not be sold out of the family. Baylis, knowing this, presented the offers to her by letter dated February 5, 1986 and gave her an opportunity to match them, but it was soon evident that she could not finance the purchase. Baylis tried to cajole her into agreeing to sell to the offerors. She then refused to sell the property and later testified that she had not considered the interests of either the income beneficiaries or the remaindermen in making that decision.

Even though Ballard had refused to sell the property, Baylis forwarded purchase and sale agreements to the prospective buyers on May 20, 1986. The buyers signed the agreements by June 3, 1986 and put down additional deposits. Baylis hoped to close on December 31, 1986, thinking that date would be advantageous for capital gains treatment. Baylis signed the agreement; Ballard refused to sign. Baylis did not go to probate court for instructions.

Baylis instead responded to Ballard on July 22, 1986 by proposing that Ballard would receive the two properties for which $215,000 had been offered, and would allow the other sale, to Ramshorn, to proceed. He did this although the Youngs had signed a Purchase and Sale Agreement that he himself had prepared. Ballard agreed to this proposal, subject to conditions. Baylis did not inform the Youngs of this development. He had appraisals done in anticipation of a license to sell the properties. The Youngs learned of this proposed sale to Ballard and sued the trust, the trustees, and Baylis in his individual capacity. The lawsuit sought specific performance of the Purchase and Sale Agreement, and it alleged that Baylis had committed fraud.

The trustees were served with the suit on December 13, 1986; after being served, Ballard then decided that she would not sell at all. As she put it, a sale would have left her "out in the cold with nothing." The trust settled the case with the Youngs and paid the legal expenses associated with the suit. The Youngs' case continued against Baylis individually for fraud. The trust paid $7,000 for defense of the case against Baylis and $15,000 to settle it.

Baylis had prepared and filed a petition in Probate and Family Court for a license to sell the property in December 1986. The SJC later found, however, that Baylis did not disclose to the court Ballard's refusal to consent to the sale:

Baylis's complaint, however, did not challenge Ballard's refusal at all. Instead the complaint he presented to the court stated that Ballard had submitted her resignation to Baylis and that he had accepted it. The judge, not knowing that Ballard was wrongfully refusing to consent, deferred judgment subject to obtaining Ballard's signature. Baylis never followed up by informing Ballard that she might be in breach of her fiduciary duty by not signing nor did he ask the judge to compel Ballard to agree to the sale. Because Baylis did not file a petition explaining to the judge that the sale would be in the best interests of the beneficiaries and that Ballard was improperly blocking the sale, he did not take the steps reasonably necessary to prevent Ballard from breaching her duty.

Rutanen v. Ballard, 424 Mass. 723, 678 N.E.2d 133, 140 (1997).

The income beneficiaries filed suit in probate court against the trustees on May 23, 1988. The trust terminated on May 10, 1991, and the property was transferred to the remaindermen, who intervened in the suit. At that time, the estimated value of the property was $1.081 million. The probate court found that the Youngs and Ramshorn were ready, willing and able to purchase the trust properties, and Ballard and Baylis breached their fiduciary duties by failing to sell the properties in 1986. It also found that Baylis "knowingly allow[ed] Ms. Ballard to breach her fiduciary duties without taking any action."

Baylis claimed that the exculpatory clause he had drafted protected him. The probate court found that these breaches of fiduciary duty were in bad faith and therefore beyond the protection of the clause, and that even if the breaches were not in bad faith, the exculpatory clause was not enforceable because Baylis, a co-trustee, drafted the language, and the settlor was of ill health and had not been advised to seek the advice of outside counsel.

The probate court awarded judgments of $330,079.95 to the beneficiaries and $607,900.27 to the remaindermen on findings that the co-trustees had violated their fiduciary duties.¹ The damages included both the net proceeds from the sales and the profits resulting from the planned investment in six-month Treasury bills. Rutanen v. Ballard, No. 88E0072-G1, slip op. at 22-23 (Prob.Ct.Mass. Apr. 15, 1993); Rutanen v. Ballard, No. 88E0072-G1, slip op. at 1-2 (Prob.Ct.Mass. Nov. 4, 1993) (supplemental judgment).

On appeal, the Massachusetts Supreme Judicial Court affirmed the probate court's decision, but solely on the ground that Baylis acted negligently and was not shielded by the exculpatory...