In re Rutanen v. Baylis

• Decision Date: 06 June 2000
• Docket Number: CO-TRUSTEE,No. 99-2352,99-2352
• Parties: (1st Cir. 2000) 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, V. CARL E. BAYLIS, INDIVIDUALLY AND IN HIS CAPACITY ASOF THE ANTONIA QUEVILLON TRUST, DEFENDANT, APPELLANT. Heard
• Court: U.S. Court of Appeals — First Circuit

Page 66

217 F.3d 66 (1st Cir. 2000)

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,

V.

CARL E. BAYLIS, INDIVIDUALLY AND IN HIS CAPACITY AS CO-TRUSTEE OF THE ANTONIA QUEVILLON TRUST, DEFENDANT, APPELLANT.

No. 99-2352

United States Court of Appeals For the First Circuit

Heard June 6, 2000

Decided July 6, 2000

[Copyrighted Material Omitted] David M. Nickless, with whom Nickless & Phillips was on brief for appellant.

Christopher S. Wheeler, with whom Robert A. Gelinas and Bulkley, Richardson & Gelinas, Llp, were on brief for appellees.

Before Torruella, Chief Judge, Stahl and Lipez, Circuit Judges.

Stahl, Circuit Judge.

Defendant-appellant Carl Baylis appeals the district court's decision that a seven-year-old state probate court finding should be given preclusive effect in the subsequent adversarial bankruptcy court proceeding. We vacate and remand.

I.

In October 1969, Baylis, an attorney specializing in taxation and estate planning, created a trust (the "Trust") for Antonia Quevillon. Baylis included in the agreement an exculpatory clause which provided that the Trustees would be "liable only for [their] own willful conduct or omissions in bad faith." The res of the Trust consisted of two apartment buildings in Worcester, Massachusetts, and six in Southbridge, Massachusetts. The Trust provided that Quevillon would serve as trustee and that upon her death, Estelle Ballard and Baylis would serve as co-trustees. Ballard was one of Quevillon's daughters and was, along with her siblings--plaintiffs-appellees Constance Rutanen, Robert Quevillon,¹ and Theresa Alexander (the "plaintiffs")--an income beneficiary of the Trust. Ballard had agreed with her mother to be paid fifty dollars per week for the management of the properties. Baylis was paid only for specific work he performed for the Trust.

During the life of the Trust, net income was to be distributed equally among the beneficiaries. Twenty years after Antonia Quevillon's death, the Trust was to terminate, and the Trust property was to be divided equally among the children of her son Marcel. The Trust terminated on May 20, 1991, and the Trust property was distributed to Marcel Quevillon's children.

Upon Antonia Quevillon's death in 1971, Ballard and Baylis sold one of the properties to pay estate taxes. Over the next fifteen years, the Trust paid the beneficiaries modest amounts. In 1985, the plaintiffs, concerned because of the minute amounts they were receiving from the Trust, met with Ballard and Baylis to discuss its operation. By then, both Worcester buildings had been sold, but the Trust still held the six Southbridge buildings. At this meeting, it was agreed, with no objection from Ballard, that the co-trustees would sell the remaining properties and invest the proceeds in treasury notes.

By January 1986, Ballard and Baylis had received offers for the properties. A Mr. and Mrs. John Young made an offer for two of the properties, and Ramshorn Realty Trust ("Ramshorn") offered to buy the other four. The total price offered for the six buildings totaled $1,640,000, which was $300,000 greater than the properties' appraised values. Ballard then decided not to sell any of the properties, claiming that she wanted to keep them for herself. Because Baylis believed that the real estate market had peaked, he urged the sale of the properties, but Ballard remained steadfast in her refusal to sell. In February 1986, in an attempt to complete the transactions before an increase in the federal capital gains tax became effective, Baylis first offered Ballard a chance to buy all the property, which she was unable to do because she lacked financing, and then offered her an additional management fee of either $75,000 or $133,667 if she would assent to the sale. She refused. Nevertheless, despite her refusal, Baylis presented unsigned purchase and sale agreements to the Youngs in May 1986 and to Ramshorn in June 1986. Both parties executed and returned the agreements to Baylis.

After he received the signed purchase and sale agreements, Baylis attempted to garner Ballard's signature on them. She refused, prompting Baylis to propose to her that the Trust would sell the two properties earmarked for the Youngs to her instead. In return, she was to assent to the sale of the other four properties to Ramshorn, resign as co-trustee, and agree to a trustee fee for Baylis. Ballard agreed.

In December 1986, when the Youngs became aware of this arrangement, they sued Baylis for fraud and Ballard and Baylis, in their capacities as co-trustees, for specific performance. Ballard then withdrew her agreement with Baylis and refused to sell the four properties to Ramshorn. The properties, therefore, remained unsold. Ballard and Baylis used Trust funds to finance their defense of the Young litigation. Jointly, they spent approximately $12,000 in defending themselves as co-trustees, with Baylis spending approximately $7000 to defend himself against the fraud claim. Finally, to settle its litigation the Trust paid $15,000 to the Youngs in connection with their fraud claim against Baylis.

That same December, Baylis filed with the probate court a petition for a license to sell the properties on behalf of the Trust. The probate court decided to defer acting on the petition until Ballard gave her consent to sell. She never did. Baylis thereafter failed to pursue the petition even though he believed that Ballard's reason for refusing to sell was baseless and that her refusal constituted a breach of fiduciary duty. Consequently, the property was not sold. Within a short time, property values in the area fell, and the value of the Trust was diminished.

In May 1988, the plaintiffs sued Ballard and Baylis in Massachusetts Probate Court. The plaintiffs sought an accounting and alleged breach of fiduciary duty, conversion, fraud, and negligent misrepresentation. After a bench trial, the court found that Baylis had acted negligently in failing to prevent Ballard from fulfilling her fiduciary duties. In addition, it found that the exculpatory clause in the Trust Agreement was unenforceable and that, in failing to sell the properties, Ballard and Baylis had acted in bad faith. The trial court entered judgment for $330,079.95 against Ballard and Baylis.

The Massachusetts Appeals Court affirmed the judgment of the probate court with respect to both its negligence and bad faith determinations. The Supreme Judicial Court of Massachusetts ("SJC") granted Ballard and Baylis's application for further appellate review and affirmed. In so doing, however, the court expressly refused to reach the issue of bad faith, stating that a finding of negligent breach of fiduciary duty would suffice to affirm the judgment. Baylis subsequently filed a petition for rehearing in which he requested, inter alia, that the SJC reverse the trial court's finding of bad faith. The SJC denied the petition.

Following the SJC's affirmance, Baylis filed for bankruptcy. The plaintiffs opposed the discharge of his judgment debt to them and brought an adversary action pursuant to 11 U.S.C. § 523(a). This section of the Bankruptcy Code prohibits the discharge of any debt arising from "defalcation while acting in a fiduciary capacity," id. § 523(a)(4), or from "willful and malicious injury," id. § 523(a)(6). The parties filed cross-motions for summary judgment,² agreeing to be bound by the probate court's factual findings, except for the finding that Baylis acted in bad faith. The plaintiffs argued that the bankruptcy court should accord this finding preclusive effect, but the court disagreed. The court went on to find neither willful and malicious injury nor defalcation. Therefore, the court held that Baylis's debt to the plaintiffs was dischargeable and entered judgment to Baylis in the adversary action.

The plaintiffs appealed to the district court, arguing that the bankruptcy court had erred in its determination that issue preclusion did not apply to the probate court's determination of bad faith. In a Memorandum and Order dated October 29, 1999, the district court reversed the holding of the bankruptcy court, holding that issue preclusion did apply. It further held that the finding of bad faith under Massachusetts law required concomitant findings of defalcation and willful and malicious injury under the Bankruptcy Code. Consequently, it reversed and ordered that judgment be entered in favor of the plaintiffs. This appeal followed.

II.

The sole issue before us is whether the district court was correct in ruling that the bankruptcy court should have given preclusive effect to the probate court's finding that Baylis had acted in bad faith. We review this ruling de novo. See IRS v. Cousins (In re Cousins), 209 F.3d 38, 40 (1st Cir. 2000); Prebor v. Collins (In re I Don't Trust), 143 F.3d 1, 3 (1st Cir. 1998).

The plaintiffs argue that the issue of bad faith was fully and fairly litigated in the state probate court and, as such, should have preclusive effect in the bankruptcy proceeding. In doing so, they point out that the probate court found Baylis to have acted in bad faith and that the appeals court affirmed this finding. Further, they argue that this finding of bad faith suffices to prove that Baylis committed defalcation and inflicted willful and malicious injuries on the plaintiffs. Baylis responds that because the probate court alternatively found that Baylis was negligent and had acted in bad faith and because the SJC affirmed only on the negligence ground, there was no preclusive final judgment on the issue of bad faith. Thus, we must decide whether issue preclusion applies when a trial court's judgment, which rests on alternative grounds, is affirmed by the intermediate appeals court on both grounds, but by the court of last resort on only one ground.

It is well-settled that a previously litigated...