Little v. Ward ( 1995 )

Present: All the Justices
GEORGE B. LITTLE, TRUSTEE
OPINION BY
v. Record No. 941475 CHIEF JUSTICE HARRY L. CARRICO
June 9, 1995
WILLIAM S. WARD, JR., ET AL.
FROM THE CIRCUIT COURT OF THE CITY OF RICHMOND
Melvin R. Hughes, Jr., Judge
This appeal is from an order removing George B. Little
(Little) and Robert L. Freed (Freed) as trustees of a trust
because hostility developed between them. Finding that the trial
court erred in removing George B. Little, we will reverse.
Anne L. Ward (Mrs. Ward) executed the trust agreement on
December 30, 1976, and funded the trust with shares of stock she
owned in The Little Oil Company, Incorporated, of Richmond (Little
Oil). In creating the trust, Mrs. Ward had three purposes in
mind, (1) to remove the stock from her gross estate in order to
achieve substantial savings in estate taxes, (2) to provide
security for her husband, William S. Ward, Sr., one of the trust's
beneficiaries whose affliction with alcoholism caused serious
financial problems, and (3) to provide for her children, William
S. Ward, Jr., and Beverly Lewis Ward, the trust's other
beneficiaries.
Article Seven of the trust agreement is central to the issues
involved in the case. It provides as follows:
This trust is irrevocable and the Grantor does
hereby expressly relinquish all right, whether acting
individually or in conjunction with others, to alter,
amend, revoke, or terminate this Agreement, but the
Grantor expressly reserves the right to add additional
property acceptable to the Trustee of any nature
whatsoever to the principal of this trust.
In the trust agreement, Mrs. Ward named Little, a Richmond
attorney, as trustee. However, in the introductory clause of the
agreement, Little's name was followed by a blank space for the
naming of a co-trustee. Blank spaces were provided for the co-
trustee's name in two other places in the body of the document,
and there was an extra signature line and a third notarial
certificate included at the end. Little explained on the witness
stand that he provided the blank spaces when he prepared the
document because Mrs. Ward consistently named two persons in other
documents he had prepared for her.
Little testified further that although he and Mrs. Ward
discussed the naming of a co-trustee on a number of occasions
after she executed the agreement and he delayed executing it for
three months to give her time to name a co-trustee, she finally
told him he should act as sole trustee, and he signed the
agreement on March 24, 1977. Mrs. Ward testified, however, that
she "didn't trust [Little] to be sole trustee" and that when she
left his office after she executed the trust agreement, she
understood she had "the ability to fill in that blank."
Ten years later, in February 1987, Mrs. Ward telephoned
Freed, a Richmond attorney who then represented both Mrs. Ward and
Little Oil, of which she was president. Mrs. Ward told Freed the
company was preparing to pay its annual dividend, and she
instructed him to "figure out some way" to avoid sending Little
the dividends on the stock in the trust, amounting to some $9,000.
Freed "got the trust agreement out and focused on the blank
in the document." He also did some research and found no cases
either supporting Mrs. Ward's position or prohibiting her from
appointing a co-trustee. Deciding that Mrs. Ward "had retained
the right to complete the blank," Freed "advised [Mrs. Ward] of
the risk of [filling in the blank,] agreed that [he] would serve
as a co-trustee of the trust, . . . agreed that [he] would accept
the funds from Little Oil Company," and secured Mrs. Ward's
agreement to indemnify him. 1 However, neither Freed nor Mrs. Ward
informed Little of Freed's purported appointment as co-trustee.
For more than three years, Freed periodically received checks
from Little Oil, representing payments of dividends on the stock
held in the trust. Freed deposited the checks in an account he
opened as "Escrow Agent" in a local bank but neither notified
Little of the existence of the account nor reported the sums
received to the Internal Revenue Service or Virginia tax
authorities.
Finally, on March 23, 1990, realizing he was in "a dilemma
because [he] had not reported [the dividends and knew Little could
not have reported them] on any trust income tax return," Freed
sent bank "summaries" to the certified public accountant Little
used to prepare tax returns for the trust. Little immediately
wrote Freed and demanded that he turn the funds over to Little.
Freed refused the demand.
Meanwhile, on December 23, 1986, Mrs. Ward and the three
beneficiaries of the trust, with Freed as their counsel, filed a
1
Mrs. Ward never filled in any of the blank spaces in the
trust agreement. Apparently, Freed was content with her oral
appointment of him as co-trustee.
petition against Little, as trustee, alleging that, due to recent
changes in federal and state tax laws, the shareholders of Little
Oil had resolved that the company "should elect [Subchapter] S
Corporation status pursuant to the provisions of the Internal
Revenue Code on or before December 31, 1986." The petition
alleged further that Little had refused to terminate the trust, to
distribute the shares of the corporation to the beneficiaries, or
to resign as trustee and appoint a successor trustee so the
corporation could elect Subchapter S status before December 31,
1986.
The petition prayed that the court order Little to distribute
to the beneficiaries the shares he held in trust, order that the
trust be terminated, or order Little to resign as trustee and
appoint Freed as successor trustee. Little filed a response
denying that his refusal was without good cause. He also offered
to resign as trustee in favor of "any corporate fiduciary in the
City of Richmond," provided his successor concurred with his
position that the trust should not be terminated because there
were contingent beneficiaries who could not be ascertained until
2
the occurrence of future events.
The Subchapter S issue became moot for reasons unrelated to
the questions involved in the present case. However, the petition
2
On appeal, Little stresses the point that because there were
contingent beneficiaries who could not be ascertained until the
occurrence of future events, it was his duty to resist the efforts
to terminate the trust. His opponents deny there is any substance
to the point. In view of the disposition we make of the case
infra, we need not decide the point.
filed by Mrs. Ward and the beneficiaries was not dismissed, and
negotiations continued for several years concerning a successor to
Little as trustee. Then, on July 26, 1990, after Little learned
of the "Escrow Agent" account into which Freed had been depositing
dividends accruing on the stock held in the trust, Little filed a
cross-bill against Freed and his law firm seeking judgment "in an
amount equal to the total dividends diverted . . . together with
appropriate interest and an additional sum equal to the total of
all penalties and interest payable to the United States Government
3
and the Commonwealth of Virginia." A consent order allowed the
filing of the cross-bill.
Freed and his law firm filed an answer to the cross-bill on
April 23, 1991. From this answer, Little learned for the first
time of Freed's purported appointment as co-trustee. By order
entered August 23, 1993, the case was continued, and Freed and his
law firm were permitted to withdraw as counsel for the
beneficiaries of the trust. 4
With leave of court, the beneficiaries, with new counsel,
filed an amended petition on October 12, 1993. This petition
sought the removal of both Little and Freed as trustees "due to
3
At time of trial, the funds in Freed's "Escrow Agent" account
amounted to "about $29,000."
4
About this time, an incident occurred which caused friction
between Little on the one hand and Mrs. Ward and the beneficiaries
on the other. In a letter dated May 18, 1993, Mrs. Ward and the
beneficiaries requested that Little pay hospital bills totalling
some $14,000 that had been incurred for the hospitalization of
William S. Ward, Sr. Little refused the request, taking the
position that Mrs. Ward was responsible for the bills of her
spouse.
irreconcilable disagreements and conflict between the co-
trustees."
After a hearing, in an order entered May 26, 1994, the trial
court found that "because of the existence of the hostility and
friction" between Little and the settlor and beneficiaries and
between Little and Freed, "the best interests of the trust would
be served by the removal of . . . Little and . . . Freed as
trustees." The order removed Little and Freed, appointed The
Tredegar Trust Company as the sole trustee, and dismissed Little's
cross-bill. We awarded Little this appeal.
William S. Ward, Sr., one of the trust's beneficiaries, died
in December, 1993. Freed, his law firm, and the surviving
beneficiaries, William S. Ward, Jr., and Beverly Lewis Ward, have
filed a joint brief and will be referred to hereinafter,
collectively, as Ward. 5
The initial question to be decided is whether Freed was
validly appointed as co-trustee. In resolving this question, the
crucial consideration is whether Mrs. Ward validly reserved the
power to name a co-trustee.
On this point, the trial court noted in a letter opinion that
"[t]he settlor, by terms of the trust instrument, may reserve to
herself the power to modify or alter the trust with reference to
the details of administration of the trust." In its order of May
5
Anne L. Ward is not a party to this appeal, but she signed a
statement at the end of the appellees' brief in opposition to the
granting of an appeal that she agreed with the argument of
appellees' counsel.
26, 1994, the court stated that "the terms of the trust . . .
permitted . . . Anne L. Ward, to preserve the power to appoint a
second trustee to the trust instrument" and that Mrs. Ward
"accomplished [this] by . . . appointing Robert L. Freed as co-
trustee." 6
However, the court did not specify any term of the trust
agreement that reserved the power to name a co-trustee and,
indeed, the instrument contains no such term. Apparently, the
court considered that Mrs. Ward's stated intent to name a co-
trustee, coupled with the presence of blank spaces in the trust
agreement, constituted a reservation of the power to name a co-
trustee.
If this was the basis of the trial court's finding of a
reservation of power, then the finding was in error for it is in
contravention of Article Seven of the trust agreement.
Restatement (Second) of Trusts § 331 (1959). Article Seven
provides that the trust is irrevocable and prohibits any
alteration or amendment of the agreement save to add additional
property acceptable to the trustee.
Commenting on Article Seven, the trial court said in its
letter opinion that the purpose of the Article was to prohibit "a
change of purpose or object of the trust" and not to prevent the
addition of a co-trustee as Mrs. Ward intended, which "did not
6
On brief, Ward adopts the trial court's rationale in arguing
that Mrs. Ward reserved the power to name a co-trustee.
change the substantive provisions of the trust" but "merely
relate[d] to its administration." 7 There is nothing in the
language of Article Seven, however, that permits so restrictive an
application of its terms. Rather, the language is all
encompassing, prohibitive of any alteration or amendment of the
agreement, substantive or administrative.
When Little signed the trust agreement after it had been
executed by Mrs. Ward and she had funded it with the Little Oil
stock, the agreement became complete, its terms became fixed as
they were then spelled out, and the trust became operative. One
of the terms becoming fixed as then spelled out was that the trust
would be administered by only one trustee, namely, Little, despite
the fact that blank spaces remained in the trust agreement; once
the trust became operative, the blank spaces became surplusage
8
and, thereafter, should have been ignored.
Another of the terms becoming fixed as then spelled out was
the prohibition against any alteration or amendment of the trust
agreement. With the terms thus fixed, any filling in of blanks to
name a co-trustee clearly would have been an alteration or
7
Ward adopts the trial court's rationale in arguing that Mrs.
Ward's appointment of a co-trustee did not violate Article Seven.
8
Ward makes the additional argument that the presence of
blanks in the trust agreement "where one would expect a named
trustee" rendered the instrument ambiguous and, hence, the trial
court properly determined that Mrs. Ward intended that the trust
be administered jointly by two trustees. We will agree that Mrs.
Ward had the described intent, but the fact she had such an intent
is beside the point. The question is whether Mrs. Ward acted
pursuant to a power reserved in the trust agreement to carry out
her intent. And, as indicated in the text, infra, she did not act
pursuant to any such power.
amendment of the trust instrument in violation of Article Seven.
See Restatement (Second) of Trusts § 331 cmt. b (1959).
In our opinion, Mrs. Ward did not validly reserve the power
to appoint a co-trustee and, hence, Freed was not validly
appointed. 9 It follows that, while friction between co-trustees
may be a valid ground for removal, May v. May, 167 U.S. 310, 320-
21 (1897), Freed never became a co-trustee, and, consequently, any
hostility or friction that developed between him and Little could
not constitute good cause for the removal of Little.
Nor could the friction that existed between Little and Mrs.
Ward and the beneficiaries serve as good cause for removing
Little. In the first place, the sole basis alleged in the
beneficiaries' amended petition for removal of Little was the
"irreconcilable disagreements and conflict between the co-
trustees"; therefore, friction between Little and Mrs. Ward and
the beneficiaries was not available to the trial court as a ground
for removing Little. Ted Lansing Supply Co. v. Royal Aluminum &
Constr. Corp., 221 Va. 1139, 1141, 277 S.E.2d 228, 229 (1981) (no
court can base its judgment upon facts not alleged or upon a right
not pleaded). Furthermore, in Virginia, "[f]riction between the
trustee and the beneficiary is not in itself sufficient ground for
removal [of the trustee]." Willson v. Kable, 177 Va. 668, 676, 15
9
Little has been concerned throughout this case that if Mrs.
Ward is held to have reserved the power to name a co-trustee,
there is danger that the assets of the trust would be included in
her gross estate with an accompanying increase in estate taxes in
excess of $300,000. Ward says there is no basis for Little's
concern. Because we hold that the trial court erred in finding a
reservation of power, this issue is moot.
S.E.2d 56, 59 (1941).
Accordingly, we will affirm the judgment of the trial court
to the extent that it removed Freed as trustee but reverse it to
the extent that it removed Little as trustee and named a new
trustee in his place. We will dismiss with prejudice the amended
petition insofar as it sought removal of Little as trustee and
enter final judgment in favor of Little. We will reverse the
dismissal of Little's cross-bill, reinstate the cross-bill, and
remand the case for further proceedings consistent with the views
expressed in this opinion.
Affirmed in part,
reversed in part,
and remanded.