The Est. of Covalesky, S. v. Covalesky, R. & P. ( 2015 )

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NON-PRECEDENTIAL DECISION – SEE SUPERIOR COURT I.O.P. 65.37
ANNE B. COVALESKY A/K/A ANNE B. : IN THE SUPERIOR COURT OF
KAVALIAUSKAS, INDIVIDUALLY AND : PENNSYLVANIA
AS EXECUTRIX OF THE ESTATE OF :
SYLVESTER COVALESKY A/K/A :
SYLVESTER E. KAVALIAUSKAS AND :
BERNARD COVALESKY, :
:
Appellee :
:
v. :
:
RUTH COVALESKY AND PHILLIP :
COVALESKY, :
:
:
Appellants : No. 340 MDA 2014
Appeal from the Order entered January 14, 2014,
Court of Common Pleas, Lackawanna County,
Civil Division at No. 60069 of 2003
BEFORE: BOWES, DONOHUE and ALLEN, JJ.
MEMORANDUM BY DONOHUE, J.: FILED JUNE 10, 2015
Appellants, Ruth Covalesky (“Ruth”) and Phillip Covalesky (“Phillip”)
(collectively “Appellants”), appeal from the order entered on January 14,
2014 by the Court of Common Pleas of Lackawanna County. For the reasons
that follow, we affirm.
We summarize the relevant facts and procedural history underlying
this appeal as follows. Sylvester Covalesky (“Sylvester”) and his brother
Joseph Covalesky (“Joseph”) were the joint owners of approximately
$450,000 worth of U.S. Savings Bonds (“bonds”). When Joseph died on
March 7, 2001, Sylvester became the sole owners of the bonds. Prior to
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Joseph’s death, Sylvester and Joseph’s sister, Anne Covalesky (“Anne”),
gave the bonds to Ruth, who was Sylvester’s, Anne’s, and Joseph’s sister-in-
law,1 for safekeeping. At that time, Joseph was in the hospital, Anne was
having surgery and would likewise be in the hospital, and Sylvester’s health
was deteriorating following his diagnosis with Parkinson’s disease. The
bonds remained in Ruth’s possession after Joseph’s death.
At some point in 2001, Sylvester executed a durable power of attorney
appointing Anne as his attorney-in-fact and Ruth as Anne’s secondary
successor. Ruth was to serve as Sylvester’s attorney-in-fact only if Anne
was no longer competent to serve in that capacity. On August 7, 2003, after
Ruth had taken Sylvester to the hospital, Ruth cashed Sylvester’s bonds and
deposited the money in a joint account in her and Sylvester’s name, despite
Anne being competent to serve as Sylvester’s attorney-in-fact at that time.
On August 21, 2003, Sylvester executed a will bequeathing his entire
estate to Anne, and in the event she pre-deceased him, to his nephew,
Bernard Covalesky, Jr. (“Bernard”), Anne’s son. In that will, Sylvester also
named Anne the executor of his estate.
In late August 2003, Attorney Douglas P. Thomas (“Attorney
Thomas”), Anne’s lawyer, learned from PNC Bank that Ruth had liquidated
Sylvester’s bonds and deposited the proceeds in Ruth and Sylvester’s joint
1
Ruth was the wife of Victor Covalesky (“Victor”). Victor predeceased
Sylvester, Anne, and Joseph.
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bank account. Anne was able to recover all of the roughly $450,000 worth
of liquidated bond money and placed it into a bank account in her name.
Anne testified that she spent all of the bond money, though it is unknown
exactly how she spent it. N.T., 6/19/12, at 97.
Because Ruth liquidated the bonds in 2003, Sylvester incurred
approximately $320,480 worth of taxable income from the redeemed bonds,
resulting in an $89,691 tax liability on his 2003 tax return. See N.T.,
6/20/12, at 254; Plaintiff’s Exhibit 6. Both parties agreed that the tax
liability that resulted from Ruth’s liquidation of the bonds was $89,691. See
N.T., 6/20/12, at 254-55.
Sylvester and Anne filed a complaint against Ruth and Phillip, Ruth’s
son, on October 15, 2003. Sylvester subsequently died on October 30,
2003. On January 7, 2005, Anne amended the complaint to add herself as
the executor of Sylvester’s estate and to add Bernard as a party to the suit.
In the complaint, Anne and Bernard sought, inter alia, damages for the tax
liability Sylvester incurred resulting from Ruth liquidating his bonds. On
June 19 and 20, 2012, the trial court held a nonjury trial on the case.
Following trial, but prior to the trial court’s decision, Anne died on December
28, 2012. On September 6, 2013, the trial court issued a nonjury decision
pursuant to Rule 1038 of the Pennsylvania Rules of Civil Procedure finding,
inter alia, that Ruth illegally and improperly liquidated Sylvester’s bonds
because Ruth had no power to act as Sylvester’s power of attorney so long
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as Anne was competent to do so. Nonjury Decision, 9/6/13, at 22-24. The
trial court further found that because of Ruth’s conversion of the bonds,
Sylvester incurred an $89,691 tax liability, which the court ordered
Appellants to return to Sylvester’s estate. Id. at 24, 26.
On September 12, 2013, Appellants timely filed post-trial motions
pursuant to Rule 227.1 of the Pennsylvania Rules of Civil Procedure. In their
post-trial motions, Appellants argued that the trial court erred in determining
the amount of damages that they owed Sylvester’s estate stemming from
the liquidation of his bonds and the resulting tax liability. See Defendant’s
Motion for Post-Trial Relief, 9/12/13, ¶¶ 36-50; N.T., 12/10/13, at 5. On
January 10, 2014, the trial court denied Appellants’ post-trial motions. On
February 6, 2014, Appellants filed a timely notice of appeal.
On appeal, Appellants raise the following four issues for our review and
determination:
1. Whether the trial court committed an error of law
and/or abuse of discretion by disregarding all of the
expert’s testimony regarding tax liability related to
the income from the bonds, including, but not limited
to that based upon the trial court’s hypothetical
question, when the expert’s testimony was the only
testimony or evidence presented regarding income
taxes associated with liquidating bonds.
2. Whether the trial court committed an error of law
and/or abuse of discretion by requiring Appellant[s]
to return the entire $89,691.00 in tax loss for the
income from the bonds to the Appellee[s] when
[Anne] actually received and spent all bond income.
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3. Whether the trial court committed an error of law
and/or an abuse of discretion when it applied the
increased risk of harm standard in an equity action
where negligence was not claimed or established.
4. Whether the trial court committed an error of law
and/or an abuse of discretion when it applied the
unclean hands doctrine to the Appellants in this case
and basing its decision requiring Appellant to
reimburse the entire $89,691.00 tax loss, at least in
part, on the misapplied doctrine.
Appellants’ Brief at 4.2
We begin by acknowledging our standard of review for a nonjury
proceeding:
Our review in a non-jury case is limited to whether
the findings of the trial court are supported by
competent evidence and whether the trial court
committed error in the application of law. We must
grant the court’s findings of fact the same weight
and effect as the verdict of a jury and, accordingly,
may disturb the non-jury verdict only if the court’s
findings are unsupported by competent evidence or
the court committed legal error that affected the
outcome of the trial. It is not the role of an
appellate court to pass on the credibility of
witnesses; hence we will not substitute our judgment
for that of the fact[-]finder. Thus, the test we apply
is not whether we would have reached the same
result on the evidence presented, but rather, after
due consideration of the evidence which the trial
court found credible, whether the trial court could
have reasonably reached its conclusion.
2
We reordered the issues Appellants raise on appeal for ease of review.
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Agostinelli v. Edwards, 98 A.3d 695, 704 (Pa. Super. 2014) (quoting
Lynn v. Pleasant Valley Country Club, 54 A.3d 915, 919 (Pa. Super.
2012)).
For their first issue on appeal, Appellants argue that the trial court
erred by disregarding the expert testimony of Paul Murphy (“Murphy”), a
certified public accountant, regarding the tax liability associated with the
liquidation of U.S. Savings Bonds. Id. at 11-18. Murphy testified that if
Ruth had not cashed the bonds in August 2003 and they had remained in
Sylvester’s estate when he died two months later in October 2003, there
would have been two tax options. N.T., 6/20/12, at 240-41. The first
option would have been for Sylvester’s estate to report the income upon
redeeming the bonds and to pay the resulting tax. Id. The second option,
and the one most people choose, would have been to pass the bonds along
to Anne, the beneficiary of Sylvester’s estate, have her cash the bonds, and
then she would have to report the income on her individual tax return and
pay the tax. Id. at 241. Murphy stated that the second option creates the
lesser tax burden because when the estate redeems the bonds and pays tax
on them, that income is taxed in the highest tax bracket when the estate
has $9,350.00 or more in income for the year. Id. at 241-42, 251. When
the beneficiary redeems the bonds and pays the resulting tax liability, the
income is taxed in the beneficiary’s tax bracket, and an individual does not
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fall within the highest tax bracket until that person’s income reaches
$311,950 for the year. Id.
Murphy further testified, through a hypothetical question asked by the
trial court, that if the bonds had not all been cashed in one year, the tax
consequences would have been different. See id. at 248-49. The
hypothetical questioning was as follows:
Q. Assume for purposes of discussion, I am going to
give you a hypothetical, you have so many variables,
to be honest with you, I am going to be the fact
finder in this case and your testimony is not helping
me.
A. Okay.
Q. So I am going to try to ask you a [hypothetical]
and it may help.
A. Sure.
Q. Let’s assume, for purposes of my [hypothetical],
that these bonds were not liquidated in August of the
year of Sylvester’s death 2003 when he died in
October of 2003.
So let’s assume that he dies in October and these
bonds are as they originally were; could you have
cashed half in 2003 and half in 2004 because the
estate could be open for the calendar years, kept
yourself below the [$311,000] [sic] made the pass
through more tax advantageous to the recipients?
A. That’s correct.
Id. at 248-49.
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Based on the hypothetical question posed by the trial court, Murphy
stated that the tax loss, assuming Anne fell in the same tax bracket as
Sylvester, would have been less than the $89,691 Sylvester actually paid if
Anne, as Sylvester’s beneficiary, had been able to cash the bonds over a
two-year period following Sylvester’s death. See id. at 249-60. Murphy
estimated the tax liability in that scenario to be $78,562, which was an
$11,135 difference between what Sylvester actually paid as a result of Ruth
improperly redeeming the bonds in August 2003 ($89,691) and what would
have been paid if the bonds if Anne had been able to cash them over a two-
year period following Sylvester’s death. See id. at 259-60.
Because Sylvester died only two months after Ruth improperly
redeemed his bonds, Appellants argue that they should only have to pay the
difference between the $89,691 Sylvester actually owed and the amount
Anne would have paid in taxes, assuming she would have redeemed the
bonds over a two-year period following Sylvester’s death. See Appellants’
Brief at 11-18. Because Anne’s income from 2003 is unknown, and as a
result, so is her tax bracket, Appellants ask us to vacate the portion of the
trial court’s order requiring Appellants to return all of the $89,691 and
remand the matter to the trial court to determine the actual income tax
Anne would have incurred if she had redeemed the bonds over the course of
a two-year period following Sylvester’s death. See id. at 13-14.
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The trial court found not credible the conclusion reached by Murphy as
to how Sylvester’s bonds would have been taxed if they had been redeemed
following his death. Final Decision and Order on All Motions for Post-Trial
Relief, 1/14/14, at 10-11. The trial court explained:
[The] expert testimony by CPA Murphy is factually
inadequate because his testimonial assumptions are
unsupported by the evidence presented and found to
be credible. Mr. Murphy speculated that either the
estate or the beneficiary in receipt of the bonds
would ultimately have had to pay taxes. He
speculated that the flow through method directly to
the beneficiary would be most economical but we are
without guidance as to what that ultimate beneficiary
tax bracket actually was. There is simply no
evidence of record of the recipient’s tax bracket nor
is there evidence of whether that receipt did take
place over one year or two.
Id. We agree.
“It is beyond argument that the fact-finder is free to accept or reject
the credibility of both expert and lay witnesses, and to believe all, part or
none of the evidence.” Brown v. Trinidad, 111 A.3d 765, 771-72
(Pa. Super. 2015). Regarding expert testimony, our Supreme Court has
held:
An expert cannot base his opinion upon facts which
are not warranted by the record. No matter how
skilled or experienced the witness may be, he will
not be permitted to guess or to state a judgment
based on mere conjecture. … To endow opinion
evidence with probative value it must be based on
facts proven or assumed, sufficient to enable the
expert to form an intelligent opinion. The opinion
must be an intelligent and reasonable conclusion,
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based on a given state of facts, and be such as
reason and experience have shown to be a probable
resulting consequence of the facts proved. The basis
of the conclusion cannot be deduced or inferred from
the conclusion itself. In other words, the opinion of
the expert does not constitute proof of the existence
of the facts necessary to support the opinion.
Collins v. Hand, 246 A.2d 398, 404 (Pa. 1968) (quotations and citations
omitted). Thus,
expert testimony is incompetent if it lacks an
adequate basis in fact. See Viener v. Jacobs, 834
A.2d 546, 558 (Pa. Super. 2003). “While an expert’s
opinion need not be based on absolute certainty, an
opinion based on mere possibilities is not competent
evidence. This means that expert testimony cannot
be based solely upon conjecture or surmise.” Id.Rather, “[an expert’s] assumptions must be based
upon such facts as the [factfinder] would be
warranted in finding from the evidence.” Id.Helpin v. Trustees of Univ. of Pennsylvania, 969 A.2d 601, 617 (Pa.
Super. 2009), aff’d, 10 A.3d 267 (Pa. 2010).
The trial court committed no abuse of discretion in determining that
the conclusion Murphy reached through responding to the trial court’s
hypothetical was speculative and unsupported by the record. Murphy’s
conclusion was reliant on the assumption that Anne, once she received
Sylvester’s bonds as his beneficiary, would have redeemed Sylvester’s bonds
in two equal amounts in 2003 and 2004.3 Murphy’s conclusion did not
3
Appellants make a bald assertion that Sylvester’s bonds were non-
transferable and that his estate would have had to redeem the bonds to pass
the money to Anne. See Appellants’ Brief at 7. This argument is waived as
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account for any of the other different scenarios in which Anne may have
ultimately chosen to redeem the bonds. During his testimony, Murphy
acknowledged that rather than immediately redeeming the bonds, Anne
could have chosen to redeem the bonds incrementally. See N.T., 6/20/12,
at 246. For example, Murphy conceded that Anne could have liquidated
$50,000 in 2003, $50,000 in 2004, and $50,000 in 2005, etc., or in any
other increments over the course of the rest of her life. See id. at 246-48.
Additionally, Murphy admitted that the tax consequences of incrementally
redeeming the bonds would have been entirely different from the $78,562
figure he adduced in response to the trial court’s hypothetical and that he
could not determine what those amounts would be without more
information. Id. at 246-47.
Moreover, there is no evidence of Anne’s income for 2003 and 2004
and thus, there is no evidence as to what her tax bracket was for 2003 and
2004. Id. at 249. Based on our review of the record, Murphy based his
conclusion on the assumption that Anne, like Sylvester, had little to no
income in 2003. See id. Consequently, there is no record support for the
$78,562 figure Murphy came up with in response to the trial court’s
hypothetical.
Appellants did to raise the argument before the trial court. See Pa.R.A.P.
302(a) (“Issues not raised in the lower court are waived and cannot be
raised for the first time on appeal.”)
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Murphy’s testimony with regard to what was, in his opinion, the most
tax efficient way to immediately redeem Sylvester’s bonds was speculative
and did not account for the many ways in which Sylvester or Anne could
have redeemed the bonds had Ruth not improperly done so. Thus, we can
find no error in the trial court’s decision not to rely on Murphy’s conclusion
on this issue. Therefore, Appellants are not entitled to relief for their first
issue.
For their second issue on appeal, Appellants argue that the trial court
erred in ordering Appellants to reimburse Sylvester’s estate for the total tax
liability Sylvester incurred resulting from Ruth’s improper liquidation of
Sylvester’s bonds when Anne was able to recover all of the approximately
$450,000 that Ruth liquidated. Appellants’ Brief at 13. Appellants assert
that requiring them to pay all of the income tax when Anne recovered all of
the money was “manifestly unreasonably and has no basis in the law.” Id.
Appellants complain that the trial court’s decision gave Anne a windfall
because she did not have to pay any tax on the redeemed bond money. Id.
The trial court found that Ruth had converted Sylvester’s bonds and
consequently, ordered Appellants to reimburse the $89,691 tax loss that
Sylvester incurred due to Ruth converted the bonds. See Nonjury Decision,
9/6/13, at 23-24. Regarding the tort of conversion, this Court has stated
the following: “The classic definition of conversion under Pennsylvania law is
‘the deprivation of another’s right of property in, or use or possession of, a
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chattel, or other interference therewith, without the owner’s consent and
without lawful justification.’” HRANEC Sheet Metal, Inc. v. Metalico
Pittsburgh, Inc., 107 A.3d 114, 119 (Pa. Super. 2014) (quoting
McKeeman v. Corestates Bank, N.A., 751 A.2d 655, 659 n.3 (Pa. Super.
2000)). Appellants’ do not contest the trial court’s determination that Ruth
converted Sylvester’s bond’s and therefore, we find no error with the trial
court’s decision to order Appellants to pay the damages Sylvester incurred
from the conversion, i.e., the $89,691 tax liability.
Additionally, Appellants’ argument that the trial court’s decision
allowed Anne to take the bond money tax-free is unavailing. There is no
support in the record for Appellants’ argument that Anne received the
approximately $450,000 worth of Sylvester’s redeemed bond money tax-
free. Anne did admit to recovering the liquidated bond money and putting it
in an account in her name around October 2003. See N.T., 6/19/12, at 97;
Defendant’s Exhibit 17. The record indicates, however, that Anne wrote a
check for $80,000 towards paying the $89,691 tax liability stemming from
Ruth’s liquidation of Sylvester’s bond funds. Plaintiff’s Exhibit 7. 4 Therefore,
Appellants’ argument that Anne received Sylvester’s redeemed bond money
tax-free is not supported by the record.
4
Sylvester’s estate filed an extension for his 2003 tax return and along with
the filing was a check, written by Anne, for $80,000, which was the amount
estimated at that time for Sylvester’s 2003 tax liability. See Plaintiff’s
Exhibit 7. The record does not contain any evidence of how the remaining
$9,691 worth of tax liability was paid.
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Based on our conclusion that the trial court did not err in ordering Ruth
to reimburse Sylvester’s $89,691 tax liability because Ruth caused the tax
liability by converting Sylvester’s bonds, we do not need to address
Appellants third and fourth issues on appeal, which argue that the trial court
erred in applying the increased risk of harm standard and doctrine of
unclean hands to support ordering Appellants to pay the tax liability. As the
trial court did not err by requiring Appellants to pay the $89,691 tax liability
incurred when Ruth improperly redeemed Sylvester’s bonds, we have no
basis on which to afford Appellants any relief.
Order affirmed.
Judgment Entered.
Joseph D. Seletyn, Esq.
Prothonotary
Date: 6/10/2015
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