Smith v. Norman

• Docket Number: 2022-CA-0473-DG
• Decision Date: 03 November 2023
• Parties: MARTIN L. SMITH APPELLANT v. JOHN NORMAN, SUCCESSOR TRUSTEE OF THE MARTIN L. SMITH REVOCABLE TRUST AGREEMENT; E&E MANUFACTURING COMPANY, INC.; AND WALLACE SMITH APPELLEES
• Court: Court of Appeals of Kentucky

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MARTIN L. SMITH APPELLANT
v.
JOHN NORMAN, SUCCESSOR TRUSTEE OF THE MARTIN L. SMITH REVOCABLE TRUST AGREEMENT; E&E MANUFACTURING COMPANY, INC.; AND WALLACE SMITH APPELLEES

No. 2022-CA-0473-DG

Court of Appeals of Kentucky

November 3, 2023

NOT TO BE PUBLISHED

ON DISCRETIONARY REVIEW FROM FAYETTE CIRCUIT COURT HONORABLE KIMBERLY N. BUNNELL ACTION NO. 21-XX-00029

BRIEFS FOR APPELLANT: Bruce B. Paul William G. Carroll Louisville, Kentucky

BRIEF FOR APPELLEE JOHN NORMAN, SUCCESSOR TRUSTEE: Joseph Whitney Wallingford Lexington, Kentucky

BRIEF FOR APPELLEES WALLACE SMITH AND E&E MANUFACTURING CO., INC.: Daniel E. Hitchcock Lexington, Kentucky

BEFORE: CETRULO, JONES, AND TAYLOR, JUDGES.

OPINION

CETRULO, JUDGE

This Court granted discretionary review of a ruling of the Fayette Circuit Court ("circuit court"), which upheld rulings of the Fayette District Court, Probate Division ("district court"), in the matter of Martin L. Smith Revocable Trust Agreement.

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I. FACTUAL AND PROCEDURAL HISTORY

In 2017, Appellant Martin L. Smith ("Martin") created the Martin L. Smith Revocable Trust (the "Trust") and, as the Settlor, he made himself the Trustee and Sole Beneficiary. The Trust contained his 48.2% interest in Appellee E&E Manufacturing, Inc. ("E&E"), a family business he jointly owned with his brother, Appellee Wallace Smith ("Wallace"). Additionally, the Trust contained his 50% interest in 200 Industrial Drive, Inc., a limited liability company. According to the Trust, Martin established it to "provide management of assets during Settlor's lifetime and to act as the means of distributing Settlor's assets after Settlor has died." Martin created the Trust in Michigan, and the Trust stated that its validity, construction, and administration are governed by Michigan law.

Pertinent to the Settlor, the Trust stated that "[d]uring Settlor's lifetime, the [Trust] may be revoked partially or completely or amended in any respect. This power may be exercised by Settlor at any time and without the consent of Trustee or anyone else, but the revocation or amendment must be in writing." (Emphasis added.) The Trust acknowledged the possibility of the Settlor's incapacitation but did not expressly prohibit the Settlor from making written amendments if he were to become incapacitated. However, the Trust did provide that upon Settlor's incapacity, Settlor's spouse "has the right to remove

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and replace a professional trustee with another professional trustee, with or without cause."

Pertinent to the Trustee, the Trust stated that "[a] fiduciary or a beneficiary shall be deemed incapacitated if a court having jurisdiction determines that due to physical or mental conditions, the person is unable to exercise about or attend to property or financial matters." The Trust detailed that "[t]he determination that an individual trustee is incapacitated, as defined by this [Trust], constitutes the resignation of that person as a trustee." If it became necessary to appoint a successor trustee and there was no designated successor trustee willing and able to serve as Trustee, "Settlor's spouse may . . . appoint a successor professional trustee within 30 days of the vacancy. If the appointment is not made within 30 days of the vacancy, a court having jurisdiction may appoint a successor professional trustee."

Three years later, in the summer of 2020, Martin suffered a stroke and filed a petition with a Michigan Probate Court to assign his wife, Elise Smith ("Elise") as his conservator and guardian. The Michigan Probate Court presumably held a hearing^[1] and concluded that Martin was "totally without the capacity to care for himself" due to "physical illness or disability." As such, the

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Michigan Probate Court granted Martin's petition for appointment, naming Elise as Martin's guardian and conservator in July 2020.^[2]

In January 2021, counsel for the Trust filed a motion to appoint a successor trustee in the district court. The motion alleged that Martin was now a resident of Lexington, explained Martin's recent stroke and Elise's appointment as guardian and conservator in Michigan, and asserted that, according to the Trust, Martin's incapacity meant he could no longer serve as Trustee of the Trust. The Trust had provided that in such a situation, Comerica Bank would serve as the successor trustee; however, the bank had declined to do so. Therefore, since the successor was "unable or unwilling to serve," Elise could have appointed a successor professional trustee within 30 days. The motion stated that Elise had failed to do so; therefore, "the [district court] now has the authority to appoint a successor professional trustee [according to the Trust]." The district court sustained the motion, appointing John E. Norman as the successor trustee of the Trust ("Successor Trustee").

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Then, only two months later, on or about May 29, 2021, Successor Trustee reached an agreement to sell the Trust assets to E&E ("Settlement Agreement").^[3] The Settlement Agreement, although drafted, specified that the sale was subject to more definitive written agreements and the approval of the district court. This quickly negotiated sale by the "Successor Trustee" was for a sum of approximately $18 million.^[4] At that point, the record indicated that Martin and/or Elise were not pleased with the Successor Trustee's actions; they believed the Trust value was far greater than the sale price.

On July 6, 2021, Martin executed The First Amendment to the Martin L. Smith Revocable Trust (the "Amendment"), which allowed Elise to remove and replace the court appointed successor trustee with either a professional trustee or a non-professional trustee. Further, Martin added a provision: "My wife, Elise G. Smith, shall serve as Trustee of my trust." Martin then provided a copy of the Amendment to the Successor Trustee.

Two days later, on July 8, 2021, Successor Trustee Norman filed a motion in the district court to set aside this amendment and moved the court to

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approve the asset sale he had negotiated. The Successor Trustee served that motion on Martin, Elise in her guardian capacity, and Martin's attorney. The motion referenced the matter as stemming from that which Martin (through counsel) had initially filed with the district court in the Trust's motion to appoint the Successor Trustee.^[5] The motion detailed Martin's incapacity and claimed he lacked the authority to execute the Amendment.

A couple of days later, Martin's new attorney entered a notice of appearance in the district court and filed a response to Successor Trustee's motion to set aside the Amendment and a motion to disapprove the asset sale. The response asserted that the trust value was in excess of $34 million and that Martin and Elise opposed the proposed sale and Settlement Agreement reached by the Successor Trustee. Martin acknowledged that a Michigan court had adjudicated him as incapacitated and that the guardianship and conservatorship orders were being transferred to the district court. However, the motion stated that Martin had the capacity to make the Amendment at the time he made the Amendment, and that his incapacity had been temporary. It further noted that Martin had executed the Amendment as a "temporary stopgap to prevent the settlement of [the underlying federal action]." Martin claimed that he planned to terminate the guardianship and conservatorship once the underlying federal action was resolved. In the motion,

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Martin's counsel emphasized that he found Martin "to be incredibly sharp and of sound mind, with the ability to recall names, dates, and numbers with ease" and that Martin had "fully recovered from the effects of his stroke."

At a status update when Martin's attorney and Successor Trustee were present, Successor Trustee asked the district court to set aside the Amendment; however, the district court declined to do so, noting that an evidentiary hearing would be necessary. The parties all agreed with this and estimated the hearing would likely take three to four hours, as each would have multiple witnesses, some of which would come from out of state. The district court scheduled the hearing for the end of August 2021.

A couple of days before the hearing, brother Wallace and E&E filed a motion to intervene in the action, claiming each had an interest in the asset sale, which would likely fall through if the district court allowed the Amendment. At the hearing, Martin's attorney objected to Wallace and E&E's participation on the first issue to be addressed: whether Martin had the capacity to amend his Trust. Nevertheless, the district court permitted the intervention. Martin then filed a witness list for the August 2021 hearing, which included himself, Elise, and an expert who would testify regarding the proposed asset sale and trust values. In mid-August 2021, Wallace and E&E filed a response to Successor Trustee's motion to set aside and approve the asset sale, agreeing with Successor Trustee that

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Martin did not have the capacity to amend the Trust and asserting that the asset sale was in the best interest of his brother's Trust.

At the August 2021 hearing, Martin and Elise were present with counsel, along with their expert as to the Trust value. Additionally, Successor Trustee was present with his counsel and counsel for Wallace and E&E. The arguments focused on Martin's capacity to amend his Trust, and the district court concluded that "once someone is determined wholly disabled, they have to come to court to overturn that . . . and they didn't do that." Martin argued, however, that testamentary capacity for trusts is treated the same as that for wills, and with wills, there is no requirement that those with testamentary incapacity cannot sign wills. The district court judge acknowledged that argument, but stated, "I think this is different" and noted that Martin "didn't go about it the...