Nevin v. Union Trust Co.

• Decision Date: 12 March 1999
• Citation: 726 A.2d 694,1999 ME 47
• Parties: Crocker NEVIN et al. v. UNION TRUST COMPANY and Hale & Hamlin et al.
• Court: Maine Supreme Court

726 A.2d 694

1999 ME 47

Crocker NEVIN¹ et al. v. UNION TRUST COMPANY and Hale & Hamlin et al.

Supreme Judicial Court of Maine.

Argued December 1, 1998.

Decided March 12, 1999.

Julian L. Sweet (orally), Paul F. Macri, Berman & Simmons, P.A., Lewiston, attorneys for plaintiffs.

James R. Wholly (orally), George Z. Singal, Gross, Minsky, Mogul & Singal, P.A., Bangor, for Union Trust Company.

Kevin J. Beal (orally), Preti, Flaherty, Beliveau, Pachios & Haley, LLC, Portland, for Hale & Hamlin.

Before WATHEN, C.J., and CLIFFORD, RUDMAN, DANA, SAUFLEY, ALEXANDER, and CALKINS, JJ.

ALEXANDER, J.

[¶ 1] This matter is before the Court on report by the Superior Court (Hancock County, Mead, J.) pursuant to M.R.Civ.P. 72(c) to consider whether plaintiffs' claims of negligence, breach of contract and breach of fiduciary duty are time barred.

[¶ 2] In its rulings on the defendants' motions for a summary judgment, the court determined that:

1. The individual beneficiaries of the estate lacked standing to assert claims against the estate planning law firm; and

2. Claims against all defendants were largely barred by the statutes of limitation, 14 M.R.S.A. §§ 752, 753-A (1980 & Supp. 1998), as accruing more than six years prior to February 1, 1995.

[¶ 3] Because there were some issues regarding events occurring after February 1, 1989, the summary judgment did not finally resolve all claims. Accordingly the parties, by agreement, reported the issues to this Court, pursuant to M.R.Civ.P 72(c). As part of the report, the parties stipulated that a ruling by this Court that the plaintiffs' claims arising from acts occurring or alleged to have occurred before February 1, 1989, are barred by the applicable statutes of limitation "will completely and finally dispose of plaintiffs' claims and of any claims of the beneficiaries of the Estate of Jennie Learned, whether occurring or alleged to have occurred before or after February 1, 1989. . . ." With this stipulation, plaintiffs abandoned claims for any events occurring after February 1, 1989, and assured that consideration of the report on the merits was appropriate.²

[¶ 4] Because we determine that plaintiffs' claims against Union Trust Company (Union Trust) are not time barred, we vacate the summary judgment order regarding Union Trust. We affirm the judgment regarding the law firm and the individual attorneys.

[¶ 5] We review the grant of a summary judgment for errors of law, viewing all the properly presented evidentiary materials in a light most favorable to the party against whom the summary judgment was entered. Denman v. Peoples Heritage Bank, Inc., 1998 ME 12, ¶ 3, 704 A.2d 411, 413. "We undertake an independent review of the record to determine if there is a genuine issue of material fact and if the moving party was entitled to a judgment as a matter of law." Searles v. Trustees of St. Joseph's College, 1997 ME 128, ¶ 4, 695 A.2d 1206, 1208.

Case History

[¶ 6] The facts as developed for purposes of the summary judgment may be summarized as follows:

[¶ 7] At some time in 1976, Jennie Fassett Learned contracted with Union Trust to provide her with custodial account services. After 1985, the principal assets subject to Union Trust management were two valuable properties in Blue Hill. In 1985, William Clark, a Union Trust officer, recommended that Learned form a corporation to hold her Blue Hill real estate. The recommended purpose for forming the corporation was to reduce potential estate taxes by transferring real estate to the corporation and then making annual gifts of stock to Learned's four children.

[¶ 8] In furtherance of that proposal, Clark introduced Learned to Atherton Fuller, an attorney with the law firm of Hale & Hamlin. After Learned met Fuller, she retained him and his firm to prepare a will, draft a durable power of attorney and form a corporation named the Nevin Corporation (Corporation).

[¶ 9] The Corporation was organized with Learned, the sole shareholder, receiving two thousand shares of stock in exchange for her Blue Hill real estate. The durable power of attorney assigned to another Union Trust officer, Robert Boit, all authority to manage Learned's business, corporate and financial affairs—including the preparation and filing of tax returns. The will that Fuller drafted included a provision devising all Learned's stock in the Corporation remaining upon her death to her children. The articles of incorporation of Nevin Corporation provided that transfers of stock could only be made between Learned and her children.

[¶ 10] Fuller was designated as clerk of the Corporation and undertook certain ongoing duties in managing the Corporation's legal affairs, including preparing stock certificates and arranging the annual transfers of stock of the Corporation in amounts worth $10,000 to each of Learned's children. In furtherance of this responsibility, gifts of stock intended to have a total value of $40,000 a year were made to the children in each of the years 1985 through 1988. Fuller also performed other duties, including, in 1987, contacting the Town of Blue Hill regarding taxation of the real estate of the Corporation.

[¶ 11] In 1988, another Hale & Hamlin lawyer, Jeffrey Jones, replaced Fuller as clerk of the Corporation and assumed Fuller's duties regarding oversight of the Corporation's legal affairs. Jones recommended to Learned, and Learned agreed to create an irrevocable trust transferring the Nevin Corporation stock that Learned still owned to Union Trust as the trustee. In December 1988, Jones prepared the instruments creating this irrevocable trust. The trust instruments prepared by Jones violated the Corporation's articles of incorporation by transferring shares in the Corporation to an entity other than Learned or her children.

[¶ 12] There were no $10,000 gifts of shares of stock to each of the children in 1989. This was because Jones and Union Trust apparently concluded that before gifts of stock could be made, the real estate would need to be appraised to assure that the value of the gifts was in the individual amounts of $10,000 intended by Learned. The gifts resumed in 1990.³

[¶ 13] Learned died on September 16, 1992. Her estate, consisting primarily of the two Blue Hill properties, had a value in excess of $3,000,000.

[¶ 14] In 1994, the Internal Revenue Service (IRS) disallowed the benefits to the estate that were expected to result from the transfer of the real estate to the Corporation and the succeeding transfer of the shares to the trust because corporate formalities had not been observed and the transactions were regarded as a sham. As a result, the IRS assessed additional taxes, interest and penalties of more than $400,000 against the Learned Estate. The exact nature of the plaintiffs' liability and damages claims are not entirely clear in the record and must be addressed on remand.

[¶ 15] The corporate formalities that the IRS determined had not been properly observed included: (i) complying with the articles of incorporation; (ii) obtaining a corporate tax identification number; (iii) filing corporate tax returns; (iv) collecting rent from Learned and her children as they occupied the property; (v) having leases for use of the property; and, (vi) having a bank account to collect lease proceeds and pay corporate expenses to maintain the property. Arguably, these are formalities that reasonably competent attorneys and trust departments should have recognized and observed.

[¶ 16] Despite the importance of observing corporate formalities in order to get the planned IRS tax benefits, it is undisputed that none of the defendants ever informed Learned of the necessity of following these corporate formalities. Also, none of the defendants followed these legally required corporate formalities during the term of their representation of Learned and their management of the affairs of the Corporation and the trust between creation of the Corporation in 1985 and the trust in 1988 and Learned's death in 1992. It is also undisputed that Jones drafted documents which explicitly violated the corporate charter by failing to respect the restrictions on transfers indicated in the corporate bylaws and arranging for transfer of the corporate stock to the trust.

[¶ 17] On November 16, 1994, after the IRS action, Jones sent a letter to the personal representative and beneficiaries of the estate advising that they may have a cause of action against Hale & Hamlin for malpractice arising from either the failure to render proper advice about or manage the Corporation in a way which complied with IRS requirements.

[¶ 18] In early 1995, as the possibility of a negligence and legal malpractice action loomed, all the parties to this action entered into an agreement to toll the applicable statutes of limitation "for a period of six months, from February 1, 1995 until August 1, 1995."

[¶ 19] On November 15, 1995, the personal representative and the beneficiaries filed this action against Union Trust, Hale & Hamlin, Fuller and Jones alleging, as to each, negligence, breach of contract and breach of fiduciary duty. The essence of the claim is that the defendants in their management of the Corporation and the trust, failed to observe and respect the corporate formalities required by law to qualify for favorable tax treatment, or to advise Learned to take those actions.

[¶ 20] After the action was joined and some discovery was taken, all defendants moved for a summary judgment. The court granted a partial summary judgment to all defendants.

[¶ 21] Regarding Union Trust, the court granted a summary judgment, determining that the statute of limitations, 14 M.R.S.A. § 752,⁴ barred any claim against Union Trust arising out of actions occurring before February 1, 1989.

[¶ 22] Regarding the attorneys, the court concluded that the beneficiaries of the estate lacked standing to maintain an action against the estate planning lawyers of the deceased....