In re Hanes
| Decision Date | 17 September 1997 |
| Docket Number | Bankruptcy No. 93-10238,Adversary No. 93-1292. |
| Citation | 214 BR 786 |
| Court | U.S. District Court — Virgin Islands, Bankruptcy Division |
| Parties | In re John W. HANES, Jr., Debtor. Susan H. CALDWELL, Executrix of the Estate of Hope Y. Hanes, Robert W. Kleinschmidt and Turney McKnight, Trustees of the Revocable Trust of Hope Y. Hanes, Plaintiffs, v. John W. HANES, Jr., Joseph Mitchell, Esq. and Reid & Preist, Defendants. |
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Jerry William Boykin, Michael Holm, Redmon, Boykin & Braswell, Alexandria, VA, for Plaintiffs.
Harvey B. Cohen, John C. Pasierb, Cohen, Gettings, Dunham & Davis, P.C., Arlington, VA, for debtor.
H. Bradley Evans, Jr., John E. Coffey, Michael Zupan, Hazel & Thomas, Alexandria, VA, for Joseph Mitchell and Reid & Priest, L.L.P.
MARTIN V.B. BOSTETTER, Chief Judge.
This case arises out of a family investment plan set up by the debtor, John W. Hanes, Jr. and his brother, David Hanes, designed to invest the assets of their parents' estates in an effort to minimize substantial estate taxes. Plaintiffs in this action are Susan H. Caldwell, the debtor's sister, as Executrix of the Estate of Hope Y. Hanes (the "Estate") and Robert W. Kleinschmidt and Turney McKnight, Trustees of the Revocable Trust of Hope Y. Hanes (the "Revocable Trust"). The Estate filed a six count adversary complaint against John W. Hanes, Jr. ("Hanes" or "John"), Joseph C. Mitchell, Esq. ("Mitchell") and Reid & Priest, LLP. The Revocable Trust filed claims only against Mitchell and Reid & Priest.
The Estate's complaint seeks a judgment against defendant Hanes declaring its unsecured claim nondischargeable under section 523 of the United Stated Bankruptcy Code. The Estate contends that Hanes, in his capacity as executor, trustee and attorney-in-fact for his parents' estates, "looted" the family fortune by "treachery." The Estate claims that as a result of Hanes' alleged misconduct it has been damaged in the amount of $9,040,320.13. The Estate further claims that its alleged damages are nondischargeable pursuant to 11 U.S.C. §§ 523(a)(2)(A), 523(a)(4) and 523(a)(6).
The Estate and the Revocable Trust1 have also filed claims against Mitchell and the law firm of Reid & Priest for attorney malpractice, negligence, fraud and conspiracy to defraud arising from their actions in allegedly aiding and abetting Hanes in wrongfully taking the money and property of Hope Y. Hanes and the various Trusts. The Estate and the Revocable Trust claim that Mitchell and Reid & Priest are jointly and severally liable for the alleged damages suffered by the Estate.
The Court conducted a seven day trial on all of the plaintiffs' claims which concluded on December 10, 1996. On February 3, 1997, the parties submitted post-trial briefs, and the Court took the matter under advisement. After considering the evidence presented at trial, the arguments of counsel, the post-trial briefs and the entire record of the case, the Court makes the following findings of fact and conclusions of law pursuant to Bankruptcy Rule 7052.
On January 26, 1983, John W. Hanes, Sr. ("Hanes, Sr." or "Mr. Hanes") signed his Last Will and Testament naming his sons, John W. Hanes, Jr. and David Hanes, as co-executors of his estate. Hanes, Sr.'s will established a testamentary trust for the benefit of his wife, Hope Y. Hanes ("Hope" or "Mrs. Hanes") which was known as the John W. Hanes Marital Trust (the "Marital Trust"). Hanes, Sr.'s will appointed John and David as Trustees of the Marital Trust. In addition, on June 4, 1985, Mr. and Mrs. Hanes turned over control of their financial affairs through powers of attorney to their sons, John and David.
The evidence at trial suggested that John W. Hanes, Sr. suffered from Alzheimer's Disease during his final years, and on December 24, 1987, he died at the age of 95. Hanes, Sr. was survived by his widow, Hope, and five children: John W. Hanes, Jr., Agnes ("June") Hanes McKnight, Ormsby ("Cis") Matthiessen, Susan Hanes Caldwell and David Gordon Hanes.2 Hanes, Sr. left an estate valued at approximately $14 million. Following his death, Hanes, Sr.'s assets were placed in the Marital Trust3 for the benefit of Mrs. Hanes for her life with the remainder to go to the remainderman, the five children of Hanes, Sr. At that time, the Marital Trust consisted of cash and securities worth $9,361,913.52.
Hanes, Sr.'s will gave his sons, John and David, broad discretionary powers as co-Executors and co-Trustees to administer and manage his estate. In addition, the powers of attorney executed by Mr. and Mrs. Hanes granted their sons broad plenary authority with respect to administration of their estates.
In late 1986 and early 1987, the Hanes brothers devised an investment plan for their parents' estates structured to minimize estate taxes. The family investment plan consisted of two parts. The first part was an annual gift program designed to utilize the maximum gift allowance to distribute money to the beneficiaries. The gift program used the trusts "Crummey" powers to transfer approximately $2.5 million without estate or gift tax to the beneficiaries.4 The gift program benefitted both estates. If the $2.5 million actually distributed had been subject to the 65% estate tax, the beneficiaries would have received only $875,000.
After the maximum gift tax exemption was utilized, the Hanes brothers devised the second part of the family investment plan which involved an estate planning technique known as the "corporate freeze." Under this plan, the Hanes brothers set up the Hanes Family Investment Limited Partnership ("HILP"). This was designed to provide a vehicle through which gifts from Mr. and Mrs. Hanes could be invested in order maximize gain for their beneficiaries while at the same time avoiding tax liability.5
A short summary of the facts is as follows. HILP borrowed money from banks and invested the money in various businesses. The plan was to invest in businesses that could later be sold at a profit free from estate taxes. One of the businesses the family partnership invested in was DCI Publications, a chain of newspapers in Northern Virginia. In the late 1980's and early 1990's, the recession hit the newspaper industry hard, and DCI was no exception. In early 1990, Hanes began negotiations to sell the newspapers. In the summer of 1990, Gannett News offered to purchase the newspaper chain for $22.5 million. However, in December 1990, Gannett abandoned the deal. In early 1991, Hanes began negotiating with The Washington Times Corporation as a source of outside financing for DCI. In order to ensure that the deal with the Washington Times was successful, Hanes began dismantling the family investment plan, retiring debt and infusing his personal capital into the newspapers. The deal went through, and the Times stepped in and operated the newspapers for more than a year. However, in September 1992, the Times pulled out of the deal. On January 21, 1993, both DCI and John W. Hanes, Jr. filed bankruptcy.
John W. Hanes, Jr. is the debtor in this Chapter 11 bankruptcy proceeding. Hanes is seventy one years old and a former long time resident of Alexandria, Virginia. He currently resides in Montana with his wife. After graduating from Yale in 1950, Hanes worked for the office of the High Commissioner in Germany for approximately 2 years. He was then recruited to work for the CIA, which he did for one year in Munich. He returned to the United States and became Special Assistant to Secretary of State John Foster Dulles, serving first as the junior assistant and later as the senior assistant to the Secretary. He later became Assistant Secretary of State, holding that position throughout the Eisenhower Administration.
In 1961, Hanes joined the investment firm of Wertheim & Co. as an associate and became a partner in 1964. He stayed with Wertheim for ten years. He later served on the board of directors for numerous corporations, including the Olin Corporation Board for thirty years and the Squibb Corporation for twenty seven years. He also served on the board of directors and finance committees of numerous educational institutions. Additionally, he was Chairman of the U.S. delegation to the World Health Organization, Vice-Chairman of the U.S. delegation to UNESCO, U.S. delegate to a half dozen meetings of the U.N. High Commissioner for Refugees and the Intergovernmental Commission for European Migration. He was U.S. representative and co-Chairman of the Caribbean Commission. He also served on the International Commission on the Rules of Judicial Procedure.
During all times relevant to this action, Hanes held positions as co-Executor of his father's estate; co-Trustee of the Marital Trust, the Revocable Trust and the Masemer Trusts; attorney-in-fact for his father and his step-mother. Hanes was also appointed co-Executor of his step-mother's will. Hanes was also a general partner of the Hanes Investment Limited Partnership along with his brother, David.
In 1987, Hanes became involved with the DCI Companies. He was a nominal owner of 50% of four of the fifteen DCI Companies, including Dominion Partners of Virginia, Inc. Hanes was Chairman of the Board of Directors for all of the DCI Companies which operated the newspapers.
The Estate of Hope Y. Hanes consists of the assets of Hope Y. Hanes who died widowed on August 12, 1992 at the age of 86. At the time of her death Mrs. Hanes was a resident of Millbrook, New York. The evidence adduced indicates that Mrs. Hanes was an intelligent and educated woman. She was a very successful business woman, and actively participated in her own business affairs. She operated a profitable horse-breeding business, netting more than $4 million from 1988 through 1990. Although she was occasionally...
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