In re Passarelli Family Trust Appeal of Passarelli, 122220 PASC, 71 MAP 2019

Docket Nº:71 MAP 2019
Opinion Judge:DONOHUE JUSTICE
Party Name:IN RE: PASSARELLI FAMILY TRUST APPEAL OF: MARGARET G. PASSARELLI
Judge Panel:SAYLOR, C.J., BAER, TODD, DONOHUE, DOUGHERTY, WECHT, MUNDY, JJ. Justices Baer, Todd, Dougherty and Wecht join the opinion. Chief Justice Saylo files a concurring and dissenting opinion in which Justice Mundy joins. SAYLOR CHIEF JUSTICE Justice Mundy
Case Date:December 22, 2020
Court:Supreme Court of Pennsylvania

IN RE: PASSARELLI FAMILY TRUST APPEAL OF: MARGARET G. PASSARELLI

No. 71 MAP 2019

Supreme Court of Pennsylvania

December 22, 2020

ARGUED: May 21, 2020

Appeal from the Order of the Superior Court dated March 28, 2019 at No. 3150 EDA 2016 Reversing the Chester County Court of Common Pleas, Orphan's Court, Decree dated September 19, 2016 at No. 1516-0101

SAYLOR, C.J., BAER, TODD, DONOHUE, DOUGHERTY, WECHT, MUNDY, JJ.

OPINION

DONOHUE JUSTICE

In this discretionary appeal, we are asked to determine the burden of proof for a settlor of an irrevocable trust in order to void the trust on grounds of fraudulent inducement in the creation of the trust. We hold that a settlor averring fraud in the inducement of an irrevocable trust must prove by clear and convincing evidence the elements of common-law fraud. In doing so, we reject the analysis set forth in In re Estate of Glover, 669 A.2d 1011 (Pa. Super. 1996), because it represents an inaccurate statement of the elements required to establish fraud in the inducement. We affirm the Superior Court's ruling that the complaining settlor did not prove fraud in the inducement.

I. BACKGROUND

Margaret Passarelli ("Wife") and Joseph Passarelli ("Husband") were married in November 1998 and have two children.1 Husband sold his software business in 2010 for $12 million dollars, but as of early 2015, Wife and Husband had not formed an estate plan. At or around this time, Wife was undergoing testing for cancer (a diagnosis that did not materialize). Husband took the initiative to meet with Attorney Michael Perna, a veteran scrivener, on May 14, 2015 to discuss estate-planning options, including the creation of an irrevocable trust. Over the next several days, Attorney Perna prepared estate documents, which he forwarded to Husband. On May 21, 2015, Wife and Husband met with Attorney Perna to discuss estate-planning matters. At the meeting, Attorney Perna presented Wife with documents for the creation of the Passarelli Family Trust (the "Trust") and spent most of an hour answering her questions, including whether the Trust would survive a divorce; he informed Wife that it would. It was Wife's desire to ensure that assets accumulated during their twenty years of marriage remained in their family. In particular, she wanted to secure the assets for the children of their marriage in the event Husband, at some future date, remarried and had more children. Wife's Brief at 8; N.T., 6/23/2016, at 18-19. At the end of the meeting, the parties executed the Trust document. On at least one occasion after executing the Trust document, Wife returned to Attorney Perna's office to execute additional estate-planning documents and documents necessary to transfer title in certain jointly held properties to the Trust. N.T., 6/23/2016, at 171-73. Pursuant to the Trust, Husband was trustee, Husband and Wife were settlors, and their children were additional beneficiaries. As trustee, Husband had discretion to distribute income to the settlors and their children. In the event the settlors died, the Trust would continue for the benefit of the children and their living issue. Passarelli Family Trust, 5/21/2015, ¶ 4(a).

The corpus of the Trust consisted of numerous assets totaling approximately $13 million, including two real estate property companies called Japen Holdings, LLC, and Japen Properties, LLP (collectively "Japen"), which were valued collectively at approximately $4.2 million. Although acquired during the marriage, Japen was owned 100% by Husband. Unbeknownst to Wife, among Japen's assets were two residential properties in Florida (the "Florida Properties"). When presented with the Trust inventory of assets ("Schedule A"), Wife did not question its contents, which included Japen, but not a listing of its specific holdings, e.g., the Florida Properties.

Approximately four months after the creation of the Trust, in September 2015, Wife discovered that Husband had been having an affair and that his paramour was living in one of the Florida Properties. Wife promptly filed for divorce on September 29, 2015. The following month, she filed an emergency petition for special relief to prevent dissipation of the marital assets, including assets in the Trust. Wife argued that Husband's motive in creating the Trust was to gain control over the marital assets and avoid equitable distribution. Emergency Petition for Special Relief, 10/22/2015. Following a hearing, the family court judge accepted Wife's argument by freezing certain accounts included in the Trust and directing Husband to collect rent from his paramour. N.T., 11/17/2015, at 99; Order, 12/4/2015.

On January 19, 2016, Wife filed in the orphans' court a "Petition for Citation to Terminate Irrevocable Trust" pursuant to Chapter 77 of the Probate Estates and Fiduciaries Code, known as the Uniform Trust Act, 20 Pa.C.S. §§ 7701-7799.3 (the "Act"). Specifically, Section 7736 of the Act provides that "[a] trust or an amendment to a trust is voidable2 to the extent its creation was induced by fraud, duress or undue influence." 20 Pa.C.S. § 7736.3 Wife originally challenged the Trust on the grounds of fraud, duress, and undue influence. Petition for Citation to Terminate Irrevocable Trust, 1/19/2016, ¶¶ 28-30. Her fraud claim was specifically based on Husband's failure "to disclose all of the marital assets." Trial Memo in Support of Petition to Terminate Irrevocable Trust, 5/2/2016, at 2. On June 23, 2016, the orphans' court conducted an evidentiary hearing at which Wife, Attorney Perna, and Husband testified. At the hearing, Wife abandoned the duress and undue influence claims and proceeded before the orphans' court exclusively on the ground of fraudulent inducement, namely, that Husband induced Wife to create the Trust by not disclosing the Florida Properties. N.T., 6/23/2016, at 143-45.

The parties and the orphans' court agreed that a challenge to the validity of a trust on grounds of fraud was similar to a will challenge based on fraud. Thus, the orphans' court turned for guidance to In re Estate of Glover, 669 A.2d 1011 (Pa. Super. 1996), a will contest based on both undue influence and fraud. Faced with "scant little case law" regarding fraud in the inducement of a will, Glover was derived from this Court's decision in In re Paul's Estate, 180 A.2d 254 (Pa. 1962), a will challenge involving a claim of undue influence through fraud and misrepresentation. Glover and Paul's Estate are discussed more fully later in this opinion. In short, the Glover court extracted from Paul's Estate a two-part test to establish fraud in the context of a will contest: "[B]efore a contestant can establish that the execution of a will was fraudulently induced, the contestant must prove that: (1) the testatrix had no knowledge of the concealed or misstated fact, and (2) the testatrix would not have made the same bequest had she known the truth." Glover, 669 A.2d at 1016.

Applying the two-part Glover test to the Trust challenge in this case, the orphans' court determined that Wife proved fraudulent inducement by clear and convincing evidence. In doing so, the orphans' court noted:

Although much has been made during this matter about the parties' marital relationship, the state thereof, and the parties' divorce action, the court need not delve into such matters in order to properly dispose of the Petition [to Terminate Irrevocable Trust] before it. The focus of this court's inquiry is what [Wife] knew, or did not know, at the time the Trust was executed and whether [Wife] would have acted differently had she known of any undisclosed or misstated information.

Orphans' Court Opinion, 9/19/2016, at 5. The orphans' court credited Wife's testimony that she had no knowledge of Husband's purchase of the Florida Properties with marital assets4 and that she trusted her husband, but had she been informed that he purchased the Florida Properties, she would not have executed the Trust. It also found that Husband purposely suppressed the existence of the Florida Properties. Based on its findings, the orphans' court "terminated" the Trust pursuant to Section 7736 of the Act, returning all assets titled in the Trust "to the title which was in place prior to the execution of the Trust[.]" Decree, 9/19/2016.

Husband appealed to the Superior Court, which reversed with one judge dissenting. In re Passarelli Family Trust, 3150 EDA 2016 (Pa. Super. Nov. 16, 2017). Wife filed an application for re-argument en banc, which the Superior Court granted. Husband again contested the orphans' court's ruling on grounds that he had no legal duty to disclose each and every asset contributed to a trust and that Wife failed to demonstrate all of the elements of fraud in the inducement. In an opinion authored by the Honorable Judge Anne Lazarus, a unanimous en banc panel of the Superior Court agreed with Husband and reversed. In re Passarelli Family Trust, 206 A.3d 1188 (Pa. Super. 2019) (en banc). In reversing, the Superior Court rejected the orphans' court's reliance on Glover, finding Glover's fraud test problematic due to its misinterpretation of Paul's Estate. Id. at 1194.

Instead of the Glover test, the Superior Court relied for its disposition on the elements of a common-law fraud claim, which, unlike the Glover test, include inter alia "knowing or reckless misrepresentation, intention to mislead another into reliance, and resulting injury caused by reliance." Passarelli Family Trust, 206 A.3d at 1195-96. The Superior Court elaborated that a party seeking to demonstrate fraud in the inducement must establish:

(1) a representation; (2) which is material to the transaction at hand; (3) made falsely, with knowledge of its falsity or recklessness as to whether it is true or...

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