Luyties' Estate v. Scudder

• Decision Date: 09 September 1968
• Docket Number: No. 52997,No. 2,52997,2
• Citation: Luyties' Estate v. Scudder, 432 S.W.2d 210 (Mo. 1968)
• Parties: ESTATE of William H. LUYTIES, Deceased, William H. Luyties, Jr., Frederick B. Luyties, Mercantile Trust Company National Association and Frederick B. Luyties, Trustees under the Will of William H. Luyties, Deceased, and Mercantile Trust Company National Association, Executor under the Will of William H. Luyties, Deceased, Plaintiffs-Appellants, v. Cliffton R. SCUDDER, Defendant-Appellant
• Court: Missouri Supreme Court

Page 210

432 S.W.2d 210

ESTATE of William H. LUYTIES, Deceased, William H. Luyties Jr., Frederick B. Luyties, Mercantile Trust Company National Association and Frederick B. Luyties, Trustees under the Will of William H. Luyties, Deceased, and Mercantile Trust Company National Association, Executor under the Will of William H. Luyties, Deceased, Plaintiffs-Appellants, v. Cliffton R. SCUDDER, Defendant-Appellant.

No. 52997.

Supreme Court of Missouri, Division No. 2.

Sept. 9, 1968.

Motion for Rehearing and to Transfer to Court En Banc Denied

Oct. 14, 1968.

Lewis, Rice, Tucker, Allen & Chubb, by Chas. Claflin Allen, Dominic Troiani, St. Louis, for plaintiffs-appellants.

G. Carroll Stribling, Joseph Renard, Fordyce, Mayne, Hartman, Renard & Stribling, St. Louis, for defendant-appellant.

BARRETT, Commissioner.

Originally in this cause there were three separate actions or proceedings, two in probate court and one in circuit court; they were all consolidated and tried as one action. The consolidated cause has to do with the will of William H. Luyties and the administration of his estate--essentially it is a contest as to certain matters between residuary beneficiaries, natural sons, and one co-executor on the one hand against a co-executor-beneficiary stepson on the other hand. The plaintiffs or movants are William H. Luyties, Jr., and Frederick B. Luyties, sons by the first marriage of William H. Luyties, and Mercantile Trust Company National Association, co-executor. The defendant is Cliffton Scudder, Mercantile's co-executor, and as with the individual plaintiffs a beneficiary under his stepfather's will. It is not necessary to even summarize the lengthy pleadings, the general purpose of the consolidated cause was to remove Scudder as co-executor for misconduct and in a two-count action to recover for his breach of duty a total loss to the estate of $40,815.51 and, second, $27,817.25 benefit gained by Scudder in his personal federal income tax resulting from his misconduct. Upon the final trial in the circuit court the cause was submitted upon the oral testimony of one witness, a lawyer tax expert, the depositions of certain witnesses, the testimony of several witnesses adduced in the probate court proceedings and sixty-four exhibits--all relating to some phase of Mr. Luyties' estate and will and particularly to the original federal estate tax return filed by the co-executors. At the conclusion of the trial the circuit court made a detailed finding of fact and conclusions of law--material here the court found that Scudder as co-executor had breached his duty to the other beneficiaries and therefore judgment was entered against him for the sum he had gained in his personal federal income tax, $27,817.25. The court refused, however, to enter judgment for plaintiffs for additional federal estate taxes lost to them, plus interest and attorney fees, $40,815.51. Both parties have appealed and five briefs have been filed setting forth their various claims in great detail.

In the interest of some brevity of opinion it is neither necessary nor desirable to set forth all the claims of the parties or to detail all the testimonial and documentary circumstances pointed to by the parties--only so much of the record will be noted as is necessary to a determination of the essential issues. In brief these are the background circumstances of the controversy: Mr. William H. Luyties died on July 13, 1959, and Mercantile and Scudder immediately qualified as his executors. Mr. Luyties was the principal officer and moving spirit of Luyties Pharmacal Company, a manufacturer and distributor of homeopathic drugs. After the death of his second wife Mr. Luyties was the owner of 17,182 1/2 shares out of a total of 60,000 shares of the company's capital stock. As of August 1959 the drug company was of the value of about $1,600,000.00, its assets were quite liquid including a portfolio of $585,000.00 worth of blue chip stocks and bonds. Mr. Luyties' natural some, once estranged, lived in California. Mr. Scudder was taken into the drug business and when Mr. Luyties died was secretary and on the company's board of directors. Under the terms of his will Mr. Luyties' residuary estate was to be divided into three equal parts, one for his sons, the plaintiffs, one to his stepson, Scudder, and a third part in trust for the life of Mrs. Luyties' nurse and then to his sons. In addition, and this provision turned out to be the crux of the matter, Scudder was given three options, he could take, as indicated, one-third of the residue, or he could take an amount of Luyties stock, at its fair market value, or he could elect to take all of the shares of stock, 17,182 1/2 shares, owned by Mr. Luyties in lieu of one-third. Eventually he chose the latter option and that election is the key background circumstance to this litigation.

Mr. Luyties died July 13, 1959, and on July 18 letters of administration were granted and Mercantile and Scudder qualified and entered upon their duties as co-executors of the will. Almost immediately they were confronted with the duty of filing a federal estate tax return and the first important problem in that connection was choosing the most advantageous date upon which to value the estate. There were two alternatives, the date of Mr. Luyties' death or one year after the date of his death. After some deliberation the co-executors elected as most advantageous to the estate the date of death. The federal estate tax return was not due until October 30, 1960 and in the meanwhile these events transpired: As of August 31, 1959, a public accountant made a full and complete audit of Luyties Pharmacal Company for its board of directors and for the first time everyone concerned was advised of the fluid, liquid financial condition of the company with its stockholders' equity of $1,413,336.92. At the same time, if not as a consequence, stockholders and directors realized that the important corporate problem was whether, without Mr. Luyties' leadership, the company should continue in business or liquidate. Accordingly on November 12, 1959, the board of directors appointed a committee consisting of Mr. Butler and Mr. Scudder to investigate the possibilities of liquidation and in February 1960 the committee recommended liquidation. Also, in the meanwhile Mr. Scudder consulted counsel in his own personal interest and on November 3, 1959, was advised in detail of the advantages and disadvantages of his three options under the will. In that letter counsel discussed the audit of August 1959 and pointed out that the company's liquid assets were of the value of $1,059,000.00 with a per share value of $17.60 or a total value of the 17,251 1/2 shares of $302,618.00. Counsel also pointed out to Mr. Scudder under the three alternatives the tax problems confronting both the estate and him personally. In discussing the alternative eventually chosen, to take all the Luyties stock, counsel added: 'It might be noted parenthetically that as Co-Executor of the estate it is your duty, in any event, to make every effort to contend for the lowest possile valuation of the Luyties stock for tax purposes.' On December 29, 1959, Scudder made the formal election to take all the shares of Luyties stock in the estate. It shoudl be interpolated, as the court found, that in March 1961 there were substantial distributions from the estate and of course the co-executors were paid their commissions. On August 3, 1960, in preparation of the federal estate tax return due on October 13, there was a conference, including Scudder, at Mercantile for the purpose of arriving at a value to be placed upon the stock for estate tax purposes. After some discussion a valuation of $6.00 a share was agreed upon and accordingly the tax return was prepared and executed by the co-executors and an estate tax of $235,533.04 was paid. In support of their return the co-executors purported to sustain to the government their $6.00 a share valuation by quotations of stockbrokers as to bid and asked prices of Luyties stock as of July 13, 1959. The return and that valuation was accepted by the government and on February 2, 1962, the Internal Revenue Service issued its closing letter and on March 22, 1962, its letter releasing co-executors from personal liability was issued. As a matter of fact, as of July 13, 1959, the stock was liquidated at $24.71 a share, the final dividend of $4.71 being paid in 1962.

In any event by March 1961 Mr. Scudder was confronted with the problems of his own personal federal income tax and particularly with the fact that a per share valuation of $6.00 would subject him to a large capital gains tax, $77,000.00 or would substantially reduce his capital would substantially gains and consequently result in a material reduction in his personal income tax. And so before the date upon which the federal estate tax could not be reopened Mr. Scudder through his counsel contacted the Internal Revenue Service and advised it of the Lunnemann audit and of the fact of the liquidation of the Luyties stock for $24.71 a share in contrast to the co-executors' stated value of $6.00 a share. The consequence was that the government reopened the federal estate tax and proposed an additional estate tax of $118,000.00. There were numerous conferences between Internal Revenue Service, the co-executors and all interested parties and a tax suit and in the end, with government approval, all tax matters were settled by the estate paying an additional estate tax of $28,031.64 and Scudder paying additional income taxes of $49,809.68. The basis of the settlement was on an agreed valuation of.$9.00 a share plus $15,000.00, in the language of the government, 'adjustment for settlement purposes.' The trial court found that in the end and as a result of the estate tax reopening Scudder benefited $27,817.25, the difference between the income tax proposed by the government and the amount he...