In re Scheidmantel

• Decision Date: 05 January 2005
• Citation: 868 A.2d 464
• Parties: In re: Stella SCHEIDMANTEL. Appeal of: Trustee Sky Trust, N.A., Appellant.
• Court: Pennsylvania Superior Court

868 A.2d 464

In re: Stella SCHEIDMANTEL.

Appeal of: Trustee Sky Trust, N.A., Appellant.

Superior Court of Pennsylvania.

Argued April 27, 2004.

Filed January 5, 2005.

Reargument Denied March 18, 2005.

Perry A. Napolitano, Pittsburgh, for appellant.

John J. Petrush, Beaver, for appellee.

BEFORE: HUDOCK, GANTMAN and POPOVICH, JJ.

OPINION BY HUDOCK, J.:

¶ 1 This is an appeal from an order sustaining the grant of a surcharge and confirming as absolute the final account filed in this case. We affirm in part, reverse in part and remand for further proceedings.

¶ 2 In 1998, Stella N. Scheidmantel (Grantor) executed an instrument of trust creating a revocable inter vivos trust titled the "Stella N. Scheidmantel Living Trust dated July 29, 1998" (the Trust, or the Scheidmantel Trust). See Declaration of Trust, 7/29/98, at 14 (Article Seventeenth) (defining "short name" of the Trust). The Scheidmantel Trust named as trustee Century National Bank & Trust Company (Century National). Appellant Sky Trust, N.A. (Sky Trust or Trustee) is the successor-in-interest to Century National and became substitute trustee effective as of January 1, 2000. Sky Trust is a wholly owned subsidiary of Sky Financial Group, Inc. (Sky Financial), a publicly traded corporation whose common stock is designated by the symbol "SKYF" on the NASDAQ stock market exchange. The Scheidmantel Trust named Grantor's husband, Paul E. Scheidmantel (Life Tenant), as beneficiary during his lifetime. Upon the Life Tenant's demise, the trust instrument directed Trustee to distribute the trust corpus to the Grantor's then living issue, "discharged of trust," in equal shares per stirpes. See Declaration of Trust, 7/29/98, at 1 and 5 (identifying beneficiaries to the Scheidmantel Trust). The Life Tenant died on December 9, 2000. On that date, Grantor's three children, Paul E. Scheidmantel, Jr., Paula S. Wescott, and Marleigh P. Zimmerman (the Remaindermen), all were living.

¶ 3 Originally, the trust estate consisted of property delivered by Grantor to Century National on August 13, 1998, comprising fifteen certificates of deposit issued by First Western Bancorp, Inc. (FWBI) and 13,214 shares of common stock in FWBI. The record indicates that the certificates of deposit initially were valued at $155,931.73. However, the record is unclear as to the value of the FWBI common stock on the delivery date.¹ Sky Financial acquired FWBI in August of 1999. On August 13, 1999, the 13,214 shares of FWBI stock held as part of the trust estate were exchanged for 16,002.15 shares of SKYF stock. SKYF consistently paid both cash dividends and stock dividends. On November 2, 1999, the Trustee received 1,600.2 shares of SKYF stock as a ten percent stock dividend on the trust estate's existing stock holding.

¶ 4 Grantor died on March 3, 1999. Despite the fact that Grantor's assets were delivered to the Scheidmantel Trust on August 13, 1998, no portfolio review was performed until March 10, 1999, after Grantor's death. Deposition testimony from the portfolio manager, introduced as evidence at the hearing conducted on November 21, 2002, indicates that Trustee's policy is to perform the first portfolio review within sixty days of a trust's funding, and that is "an unusual situation" for a first review to occur more than seven months after funding. N.T., 11/21/02, at 13-14. Trustee is not responsible for any default in this regard because Century National was still acting as trustee at that time. We do note, however, that when Century National performed the first portfolio review, the goal of the Scheidmantel Trust was defined as "safety and income." Id. at 14.

¶ 5 After his wife's death, Life Tenant rapidly became debilitated to the extent that he could not take care of himself and could no longer remain in his home. In August of 1999, approximately six months after Grantor's death, Life Tenant moved into a nursing home. N.T., 11/21/02, at 32. Life Tenant's health deteriorated rapidly during the last six months of his life. Id. at 33, 35. The testimony of Life Tenant's son, Paul E. Scheidmantel, Jr., was unequivocal that Trustee never consulted him concerning the Life Tenant's health or circumstances (financial or otherwise) at any time during the twelve months preceding his father's death. Id. at 33. Life Tenant's daughter, Paula Wescott, indicated that Trustee never consulted her on any matter implicated by the Scheidmantel Trust. Id. at 35-36. The third Remainderman, Marleigh P. Zimmerman, did not testify.

¶ 6 On June 26, 2000, Thomas J. Oehmler (Oehmler) commenced employment with Trustee as a portfolio manager and was assigned to handle the Scheidmantel Trust. (Oehmler has since been promoted to the position of Trustee's Western Pennsylvania Regional Manager.) Oehmler indicated that his reading of the Declaration of Trust led him to conclude that Grantor's investment goal was to "take advantage of estate [tax] planning, not necessarily to provide income." N.T., 11/21/02, at 20-21 (as corrected at 31). As discussed below, we cannot agree with Oehmler's legal conclusions regarding Grantor's goals when establishing the Trust.

¶ 7 On June 30, 2000, four days after Oehmler commenced employment with Trustee, an "annual account investment review" was performed for the Scheidmantel Trust. At that time, Oehmler changed the investment objective from "safety and income" to "balanced." Deposition, 8/16/02, at 27. Oehmler explained that the distinction between the two objectives relates to asset allocation "among equity asset classes, and cash." Id. at 35, 37. According to Oehmler, a "balanced objective" may allocate fifty to seventy percent to stock, with the remaining assets in fixed income and cash. Id. at 37. However, a "balanced income objective" may allocate forty to sixty percent of the assets in stock with the remainder held as fixed income assets and cash. Id. at 37. Originally, the Scheidmantel Trust's "horizon" (the "expected life" of the trust) was defined as three to seven years. Id. at 31-32, 38. Under Oehmler's aegis, the horizon was increased to seven to ten years. Id. at 44. Oehmler could give no reason to explain why he decided to lengthen the Scheidmantel Trust's horizon despite the fact that the Life Tenant's health was rapidly deteriorating. Id. Nor could he explain the discrepancy between his perception of the goal of the Scheidmantel Trust and the goal of "safety and income," which was defined pursuant to the first portfolio review. Id.

¶ 8 The corpus of the Scheidmantel Trust remained the same, except for additions of cash and SKYF stock, from its inception until September of 2000. At that time, without consulting the Life Tenant or the Remaindermen concerning the state of the Life Tenant's health and the extent of his projected income needs, the Trustee began diversifying the Trust's holdings. Trustee correctly indicates that the trust instrument does not require consultation with any of the beneficiaries as to the sale or retention of specific assets. However, as noted above, the Trust's investment goal and horizon also were changed without any inquiry concerning the Life Tenant's medical and financial status.

¶ 9 When he was deposed in August of 2002, Oehmler could not explain why these alterations were made to the Trust. Nevertheless, three months later, at the hearing conducted on November 21, 2002, Oehmler stated that the goal change was effectuated because ownership of the SKYF common stock represented "too high a concentration in one name" and it was prudent to allocate ownership "into a greater diversity of vehicles." N.T., 11/21/02, at 41-42. Oehmler stated that his decision to diversify was not predicated on a belief that the SKYF stock might become worthless or suffer a substantial decline in value. Id. at 25-26. Furthermore, Oehmler conceded that he had no reason to think that the SKYF stock was unsound. Id. at 30.

¶ 10 In the fall of 2000, Sky Financial publicly reported a third quarter stock dividend. Oehmler knew the dividend had been announced, but elected to sell 8,000 shares of SKYF stock before the ex-dividend date (the date on or after which the buyer of a security does not acquire the right to receive a recently declared dividend). The buyer receives the dividend if a stock is sold after declaration of the dividend but before the ex-dividend date. Black's Law Dictionary 608 (8th ed.2004). Conversely, the seller receives the dividend if a stock is sold "ex dividend," i.e., on or after the ex-dividend date. Id. A stock's price normally falls for a short time after the ex-dividend date in an amount approximating the value of the dividend. Id. at 608-09. See also N.T., 11/21/02, at 50 (testimony of Ralph Edward Duckworth, Jr. (discussing impact of ex-dividend date)).

¶ 11 Instantly, Trustee sold the SKYF stock before the ex-dividend date and the Trust lost the dividend.² Oehmler did not explain why, in this particular case, he deemed it prudent to execute the stock sale immediately rather than waiting for the stock to go ex dividend. On that date, the Trust retained only 9,692.35 shares of SKYF stock. Thus, the Trust lost 800 of the shares it would have earned upon payment of the ten percent stock dividend and received only 960.2 shares. The trial court found that Trustee's timing election for the sale of the 8,000 shares of SKYF stock resulted in direct losses to the Scheidmantel Trust totaling $45,674.94. Opinion and Order, 3/17/03, at 6. Additionally, on September 28, 2000, Oehmler proposed liquidating assets yielding over $8,000.00 in annual cash income and purchasing assets yielding only $3,000.00 in annual cash income. Opinion and Order, 3/17/03, at 6 (Factual Finding 48). Oehmler knew the asset exchange would cost the Trust approximately $5,000.00 in annual income. N.T., 11/21/02, at 17. Nevertheless, his plan was implemented. ¶ 12 Between September 29, 2000, and December 1, 2000, Trustee purchased shares in several mutual...