Sanford v. Sanford

• Decision Date: 11 December 2003
• Docket Number: No. 02-789.,02-789.
• Citation: 355 Ark. 274,137 S.W.3d 391
• Parties: Jon R. SANFORD v. Sherry W. SANFORD.
• Court: Arkansas Supreme Court

137 S.W.3d 391

355 Ark. 274

Jon R. SANFORD v.Sherry W. SANFORD.

No. 02-789.

Supreme Court of Arkansas.

December 11, 2003.

Appellant, pro se.

Mitchell, Blackstock, Barnes, Wagoner, Ivers, and Sneddon, by: Jack Wagoner, III and Kimberly Miller, Little Rock, for appellee.

TOM GLAZE, Justice.

AppellantJon R. Sanford and appelleeSherry W. Sanford had been married thirty-four years when they separated on October 22, 1996.During the following approximately eighteen months, Jon, an attorney, and Sherry, a housewife, spent some time arriving at a property settlement agreement.On May 5, 1998, Sherry filed for and was granted a divorce in Pulaski County, and, on the same date, she signed a property agreement, plus a separate trust agreement.The trust agreement named Sherry the settlor and Jon the trustee and co-owner of one-half interest in the parties' properties.Its expressed purpose was to vest in Jon, Sherry's individual half interest in certain real estate she and Jon owned in Pope and Johnson Counties.The trust was to insure the properties would be prudently liquidated, giving Jon the authority to manage, develop, and sell the properties as he deemed best, without interference from Sherry.Jon had prepared these two agreements, as well as the complaint for divorce and the final decree that Sherry filed when she obtained the divorce.Jon did not contest the grounds for divorce, and because all fifteen of their children were over the age of eighteen, child support was not an issue.

On January 22, 2001, Sherry filed this litigation against Jon in Pope County, alleging that Jon had breached his fiduciary duty as trustee by having failed to manage the trust assets for the mutual benefit of the parties.Sherry's action was initiated as a result of Jon having failed to pay the capital gains tax arising from the sale of the parties' apartment complex, Oakwood Apartments.Sherry claimed Jon improperly chose to pay a personal loan obligation that Sherry allegedly owed him.Besides demanding her one-half share of the gross amount from the sale of the Oakwood Apartments so she could apply the proceeds toward payment of the capital gains tax, Sherry also sought a full accounting of all trust properties and proceeds.Jon denied Sherry's claim that he had breached any fiduciary duty to Sherry by preparing all of the parties' legal documents for their divorce.He rejoined that he did not give any advice to Sherry; therefore, he had no attorney-client relationship from which a conflict could result.As for Sherry's request for an accounting, Jon submitted that he had already provided one to her.A series of hearings followed.

On May 9, 2001, the Pope County Circuit Court concluded it had jurisdiction to enforce the parties' agreements, and, if appraisals were to be needed of their various properties, the court would reserve its ruling as to who would be liable for the costs.Jon argued that Sherry should pay the costs since she was the beneficiary of the trust.

The parties had a second hearing on August 28, 2001, when they argued and presented testimony bearing on the three following issues:

(1) Whether Jon committed self dealing and a breach of fiduciary duty when he did not pay the capital gains tax on the $314,000 proceeds from the sale of the Oakwood Apartments, but instead applied those trust proceeds to pay a personal loan he claimed Sherry owed him.

(2) Whether Jon would be required to provide Sherry a full accounting of the assets and liabilities of the trust.

(3) Whether Jon would be required to continue to finance Sherry's purchase of a bed-and-breakfast business, as he was required to do under the couple's May 5, 1998, property settlement agreement.

At the August 28th hearing, both Jon and Sherry agreed that the capital gains issue was the more urgent issue to decide.Jon stated that Sherry owed him about $47,000, which he had loaned her at five percent interest to buy a business; as trustee, he reimbursed himself out of Sherry's share of the proceeds from the Oakwood Apartments.¹Sherry testified that such reimbursement left her without any of those sale proceeds to pay her part of the capital gains tax.Jon called witness Mr. Bruce Garrett, a certified public accountant, who had been preparing the tax returns for the Sherry Sanford Trust.He testified that, even though Sherry was never given any of the sale proceeds, she still owed the capital gains tax under the Internal Revenue Service rules.

As for Jon's tax liability, Mr. Garrett testified that Jon had other property to purchase that could minimize his capital gains debt.Garrett also conceded that, in addition to Jon's fifty percent of the sale proceeds, Jon got thirty-three percent from Sherry's share "each month that went by since the trust agreement was entered."He added, "When Oakwood was sold, [Jon] got a little over four percent of that, and I believe it was because the trust agreement had something dealing with administrative expenses."Garrett said that, while the trust agreement provided the trustee would not charge a fee for his services as trustee or attorney, Garrett "guessed" Jon was being compensated for being both trustee and attorney.Garrett also gave an account of how he helped Jon file three versions of the accounting of expenses to be charged against Sherry, including one-half of the debts, taxes, and insurance.

Sherry also testified at the August 28th hearing that she never hired an attorney because Jon said that she could trust him and that a lawyer would be too expensive.She stated that Jon volunteered to prepare all the documents and that he never mentioned anything about a possible conflict of interest.Sherry thought Jon was her lawyer, and she said Jon told her she would "probably get less" if she hired her own attorney.Sherry further testified that Jon never informed her that their businesses and properties should have been valued at the time of their divorce.Sherry then declared that, while Jon claimed she owed him $47,000, she disagreed, stating he had loaned her $27,000, at five percent interest, which represented his share of the proceeds from the sale of their North Little Rock home.When Sherry asked Jon to explain how the loan was $47,000, she quoted him as saying, "It is what it is."

On cross-examination, Sherry conceded that she initially felt some sense of loyalty to Jon, and she chose not to get an attorney because Jon told her they could not afford one.She admitted that, based on what she knew at the time of signing the agreement, she believed the documents were satisfactory.Sherry said that it was not until the apartments were sold, and she first learned of the sale from their children, that Sherry claimed she could no longer trust Jon.As for the tax indebtedness that was in issue, she thought, at the time of signing the documents, she was to be obligated for the taxes for 1996 and 1997, and the taxes would total only between $3,000 to $4,000.Jon never mentioned or discussed capital gains taxes with Sherry.

At the conclusion of the August 28th hearing, the court and the parties turned their attention again to which one of them would be responsible for paying a master to prepare and furnish the court with an accounting.After considerable discussion, all agreed that Jon had the capacity to do a "real accounting," and Jon said he could do so in twenty days.The trial judge made it clear that he wanted to resolve who was responsible for the capital gains tax as quickly as possible, and, while he was not, as yet, removing Jon as trustee, he held that, while the case was to be continued for another hearing, Jon would not act as the trustee.The judge asked Sherry's counsel to prepare an order summing up "what they had been talking about."²

On November 9, 2001, the third and final hearing was held.Sherry called her final witness, accountant Bert Batchelor.Batchelor testified that he prepared a cash flow summary for Oakwood Apartments, covering the time Jon managed them prior to sale.The information Batchelor used came from Jon, who set out every penny spent and received.Batchelor determined the net cash available for distribution was $25,475 and that amount went to Jon as payment on a debt Sherry owed him.Batchelor further averred that, based on a formula in the trust, Sherry should have received about 98% of the net cash in 1998 and 95% in 1999.Batchelor said that the distribution number changed each month and, basically, Jon was given compensation for managing the trust, which was contrary to the terms of the trust agreement.In addition, Batchelor pointed to the parties' property settlement agreement which provided that their real estate should be reduced to tenants in common with Jon given both possession and control over the properties and full responsibility for all debts, taxes, and insurance.Notwithstanding this language, these obligations were paid from the trust, which resulted in Sherry receiving a lot less of the sale proceeds to which she would have been entitled.Upon inquiry by the court, Batchelor agreed that, because Sherry transferred only her one-half interest into the trust, his accounting should only be for half the debts, taxes, and insurance.However, Batchelor told the judge that, in his opinion, some of the debts and taxes should not have been charged to the trust.Jon's counsel then cross-examined Batchelor, and Batchelor agreed that someone had to pay one-half of these expenses in the Oakwood account.However, Batchelor added that nothing in the accounting alerted him that Jon or Sherry ever attempted to capture the shortfall from the Oakwood Apartments.He also said that he would not be surprised to learn that Jon paid the shortfall out of his own pocket.In order for the court to determine what net cash was available for distribution for the years 1998 and 1999, Batchelor was thoroughly cross-examined as to what the terms "debts, taxes, and insurance" in...