Middleton v. PNC Bank N.A.

• Decision Date: 15 March 2019
• Docket Number: NO. 2017-CA-001673-MR,2017-CA-001673-MR
• Parties: CHARLES G. MIDDLETON III, INDIVIDUALLY AND IN HIS CAPACITY AS CO-EXECUTOR OF THE ESTATE OF LAWRENCE L. MIDDLETON, SR.; AND LAWRENCE J. MIDDLETON, JR., IN HIS CAPACITY AS CO-EXECUTOR OF the ESTATE OF LAWRENCE L. MIDDLETON, SR. APPELLANTS v. PNC BANK N.A., IN ITS CAPACITY AS PREDECESSOR TRUSTEE FOR THE LAWRENCE L. JONES, SR. TRUST UNDER AGREEMENT DATED DECEMBER 28, 1933; AND COMMONWEALTH BANK & TRUST COMPANY, IN ITS CAPACITY OF SUCCESSOR TRUSTEE FOR THE LAWRENCE L. JONES, SR. TRUST UNDER AGREEMENT DATED DECEMBER 28, 1933 APPELLEES
• Court: Court of Appeals of Kentucky

CHARLES G. MIDDLETON III, INDIVIDUALLY AND IN HIS CAPACITYAS CO-EXECUTOR OF THE ESTATE OF LAWRENCE L. MIDDLETON, SR.;AND LAWRENCE J. MIDDLETON, JR., IN HIS CAPACITY ASCO-EXECUTOR OF the ESTATE OF LAWRENCE L. MIDDLETON, SR. APPELLANTS v. PNC BANK N.A., IN ITS CAPACITY AS PREDECESSOR TRUSTEEFOR THE LAWRENCE L. JONES, SR. TRUST UNDER AGREEMENT DATED DECEMBER28, 1933; AND COMMONWEALTH BANK & TRUST COMPANY, IN ITS CAPACITY OFSUCCESSOR TRUSTEE FOR THE LAWRENCE L. JONES, SR.TRUST UNDER AGREEMENT DATED DECEMBER 28, 1933 APPELLEES

NO. 2017-CA-001673-MR

Commonwealth of Kentucky Court of Appeals

MARCH 15, 2019

NOT TO BE PUBLISHED

APPEAL FROM JEFFERSON CIRCUIT COURT

HONORABLE SUSAN SCHULTZ GIBSON, JUDGE

ACTION NO. 16-CI-002566

OPINION

AFFIRMING IN PART, REVERSING IN PART, AND REMANDING

** ** ** ** **

BEFORE: DIXON, JONES AND K. THOMPSON, JUDGES.

DIXON, JUDGE: Appellants, Charles G. Middleton III and the Estate of Lawrence J. Middleton, Sr. (collectively "the Middletons"), appeal from orders of the Jefferson Circuit Court finding that they were obligated to indemnify a trust in the amount of $1,081,293.61 plus prejudgment interest, such amount representing the attorneys' fees and costs the Trust incurred in defending the Middletons' failed action against then-trustee, PNC Bank. We affirm in part, reverse in part, and remand.

On December 28, 1933, Lawrence Jones, Sr., created an inter vivos trust ("the Trust") for the benefit of his three daughters and their descendants. He established a similar trust for the benefit of his son, Lawrence Jones, Jr., and his descendants.¹ Those trusts became irrevocable in 1935 and became testamentary trusts in 1941 under Jones's will. The Middletons are descendants of Lawrence Jones, Jr., who predeceased his father.

Throughout the years, there were ongoing issues involving the administration of the Trust. In 1996, those issues were raised and addressed in an arbitration proceeding and order. The order settled a number of longstanding issues, most notably regarding the continued validity of the Trust under the Rule Against Perpetuities and whether the descendants of the Trust established for Lawrence Jones, Jr., including the Middletons, could be considered as remainder beneficiaries under the Trust. The arbitration order also required the trustee to institute a declaratory judgment action to confirm the agreement and award.

Consequently, in 2004, PNC, as trustee, instituted a declaratory judgment action in the Jefferson Circuit Court to determine, among other things, whether the descendants of Lawrence Jones, Jr., were included in the class of remainder beneficiaries under the Trust. The Middletons, as potential remainder beneficiaries, were named as parties to that action and eventually filed a counterclaim against PNC. In September 2006, the trial court ruled that Lawrence Jones, Jr.'s descendants were included in the class of remainder beneficiaries under the Trust. Both the Middletons and the descendants of Lawrence Jones Sr.'s daughter ("Daughter Descendants") appealed.

In October 2007, the Middletons brought a separate action against PNC asserting claims for breach of fiduciary duties arising from its improper delegation of investment management and failure to properly supervise investments. The Middletons also asserted that PNC's conduct while managing the Trust amounted to other violations of Kentucky law, PNC's internal policies, and the requirements of the Trust itself. The Middletons contended that PNC's actions caused losses to the Trust's investment portfolio during the period of July 2001 through October 2007.

Shortly after filing the 2007 lawsuit, the actual and potential beneficiaries of the Trust agreed to mediate and settle the 2004 declaratory judgment action. Pursuant to a 27-page "Settlement, Release and Indemnity Agreement," the Daughter Descendants paid the Middletons $3.95 million from the Trust in exchange for the Middletons giving up their rights as potential remainder beneficiaries of the Trust upon its termination. In addition, the Middletons reserved their right to maintain their individual action against PNC, and the Daughter Descendants disclaimed any interest they or the Trust might have in proceeds from that action. As further consideration, the Agreement contained the following provision:

Charles G. Middleton, III and Lawrence J. Middleton hereby covenant and agree to hold harmless and indemnify . . . [the Trust] . . . from any and all claims, causes of action, demands or suits of any kind arising directly or indirectly from any damages and/or claims asserted in Middleton v. PNC, including but not limited to, any claims for attorneys' fees and costs and any claims by other Defendants in Middleton v. PNC.

The Agreement further contained a clause stating that "the Middletons hereby acknowledge and represent that they have carefully read all of the foregoing and understand all conditions contained herein . . . .", as well as an integration clause memorializing that it was the complete statement of the parties' agreement.

Thereafter, two hearings were held for the purposes of explaining the terms of the Agreement and obtaining court approval. During one of the hearings, Charles Middleton stated,

The indemnity provisions are clear. If the Trust has to pay the trustee's fees to defend [the PNC action], my brother and I have to pay it back. We recognize that obligation, we think we are good for it, and we have no question that if that occurs, we are going to have to write that check.

On January 29, 2008, the trial court approved the Settlement Agreement and dismissed the 2004 declaratory judgment action with prejudice.

The Middletons thereafter continued their action against PNC. Shortly before the approval of the Settlement Agreement, they filed a motion to disqualify PNC's attorneys on the grounds that PNC's use of Trust funds to defend the action created a conflict of interest. Essentially, the Middletons argued that PNC could not use Trust funds to defend the action because PNC was not being sued in its capacity as trustee, but rather in its individual capacity. In denying the motion, the trial court observed,

Review of the Middletons' First Amended Complaint reveals that the claims are premised upon fiduciary duties that exist only by virtue of PNC's designation as Trustee and relate to actions taken by it as Trustee. As such, it does not appear that the Attorneys are representing PNC in its individual corporate capacity, but, instead, as Trustee.

Since KRS 386.810(3)(x) and (y) appear to provide a trustee the power to employ attorneys and to prosecute or defend actions, claims or proceedings for protection of the trust assets and of the trustee and the performance of his duties, it appears that PNC, as Trustee, has authority to employ and pay its counsel utilizing Trust funds.

Significantly, the trial court further noted,

The Court will note that, in the event that the Middletons establish PNC breached its fiduciary duty, it may be required to refund the Trust the attorneys' fees expended in its defense after the adjudication. Likewise, pursuant to the Settlement Agreement, the Middletons will be required to refund the Trust the attorneys' fees expended in PNC's defense, in the event that PNC prevails in the case at bar.

Following discovery, all parties filed motions for summary judgment. On December 5, 2012, the trial court entered an opinion and order, denying the Middletons' motion and granting PNC's motion. The trial court found that even if genuine issues of material fact existed as to whether PNC's actions amounted to a breach of its fiduciary duties, the Middletons could not prevail on their claims because they had failed to demonstrate any injury. Thus, the trial court concluded that, even if PNC had breached its duties to the Trust beneficiaries and remaindermen, the Middletons had failed to show that the Trust had suffered a loss which would entitle them to recover from PNC.

PNC thereafter moved to alter or amend the trial court's order to clarify the procedure for enforcing the Middletons' indemnity obligation. The Middletons responded that because the dismissal order did not contain any findings regarding whether PNC had breached its fiduciary duties, their indemnity obligation was not triggered. In an order entered March 7, 2013, the trial court ruled,

[T]he settlement agreement constituted an indemnification agreement binding the Middletons to reimburse the [Trust] for all attorneys' fees, expenses and costs paid on behalf of PNC in defending this lawsuit in the event that PNC prevails.

Since this Court found against the Middletons, PNC has prevailed in this action. The Court finds no merit in the Middletons' argument that PNC has not prevailed since there has been no adjudication of PNC's breach of fiduciary duty. As such, pursuant to the settlement agreement, the Middletons will have to reimburse the [Trust] for all attorneys' fees, expenses and costs paid on behalf of PNC in defending this lawsuit. That obligation will certainly follow the final disposition of any appeals.

The trial court further instructed that an application for an attorney fee award was not required and that, should the Middletons refuse to honor their indemnity obligation, the Trustee² was to file a separate action:

[T]he Trustee is to send a letter to the Middletons requesting payment of the attorneys' fees; and if the Middletons do not pay those fees in response to the letter, then the Trustee is to institute suit to recover those fees. As such, any request by [the Trustee] to reimburse the [Trust] and resulting action in the event that the Middletons do not pay would be separate and apart from the action before this Court.

The Middletons subsequently appealed to this Court. Significantly, however, they did not seek review of either the trial court's ruling that PNC, as Trustee, had the authority to employ and pay its counsel utilizing Trust funds, or that the Middletons would...