In re Harry Inge Baker and Jeanne C. Baker Trust Dated August 9, 1988
Marla B. Smith, individually, and as Personal Representative of the Estate of Jeanne C. Baker, et al., Respondents. Janet Baker Evans as Successor Trustee of the Harry Inge Baker and Jeanne C. Baker Trust Dated August 9, 1988, Appellant,
Dakota County District Court File Nos. 19HA-CV-10-1531, 19HA-CV-08-4109.
Thomas E. McEllistrem, Sarah J. McEllistrem, Collins, Buckley, Sauntry & Haugh, P.L.L.P., St. Paul, Minnesota (for appellant).
J. Kevin McVay, Richfield, Minnesota (for respondents).
Considered and decided by Smith, Presiding Judge; Peterson, Judge; and Chutich, Judge.
Appellant Janet Baker Evans, as Successor Trustee of the Harry Inge Baker and Jeanne C. Baker Trust dated August 9, 1988, challenges the district court's decision following a court trial arising from a dispute over the administration of a trust established by her late father and stepmother. Evans argues that the district court erred by: (1) determining that missing records precluded recovery of more than $250, 000 of her claim; (2) applying the doctrine of laches against her as an alternative basis to deny that portion of her claim; (3) awarding attorney fees to respondents; and (4) applying a low lost-investment interest rate to the allowed portion of her claim.
We affirm the district court's ruling on the applicable lost-investment interest rate. But because the district court erroneously concluded that Evans could not recover undisputedly missing trust assets, abused its discretion in applying the doctrine of laches, and inappropriately awarded attorney fees to respondents, we reverse and remand to the district court for entry of an amended judgment and reconsideration of Evans's attorney-fee award.
Harry Baker and Jeanne Baker ("Baker") were married in 1987 and entered into a Declaration of Trust on August 9, 1988. The trust was funded with about $1.2 million of Harry Baker's assets. Harry Baker's remaining children, and the trust beneficiaries, are Evans and her sister, Linda Pickett.
Harry Baker died in 1990. The trust declaration provided for the creation of three distinct trusts upon his death. The first was the "Survivor's Trust, " which was to be funded by Baker's separate assets and her share of the couple's community property. Both principal and income from the Survivor's Trust could be used to pay for Baker's "health, maintenance and reasonable comfort, and best interests." Baker did not keep any of her money in this trust after Harry Baker's death, and the couple had no community property, so the Survivor's Trust was unfunded.
The second trust created after Harry Baker's death was the "Decedent's Trust, " consisting of about half of the trust assets, from which the trustee was authorized to pay income to Baker, Evans, and Pickett in equal shares during Baker's lifetime. The third trust, the "Marital Election Trust, " contained the balance of the trust assets and authorized the trustee to pay income from those assets to Baker during her lifetime. Upon Baker's death, the principal from both the Decedent's and Marital Election Trusts would be distributed to Evans and Pickett in equal shares. By its terms, the trust is governed by Arizona law. Because all of the assets from the original trust went into the Decedent's and Marital Election Trusts and both of those trusts prohibit distribution of principal, and because a determination of which particular assets were held in each trust is not relevant to the case, we will refer to the original trust, and the resulting Decedent's and Marital Election Trusts, collectively as "the trust."
Baker served as trustee from Harry Baker's death in 1990 until early 2005. During that time, she deposited the income from the trust assets into one bank account and distributed the income quarterly to herself, Evans, and Pickett in the proportions specified in the trust. The trust document named Evans as successor trustee of the Decedent's and Marital Election Trusts, and provided that Evans would serve as trustee if Baker resigned, died, or was unable to manage her affairs. Besides occasional cards and emails, Evans had little contact with Baker after Harry Baker died.
Baker delivered the quarterly income checks and a K-1 tax form each year to Evans and Pickett, but they never requested or received an annual reconciliation of the assets in the trust. After receiving her income check, K-1 form, and Baker's work papers in September 2004, Evans became concerned that assets were missing from the trust. She spoke to Baker, who told Evans that she simply forgot to list about $270, 000 worth of assets on the work papers. Evans was satisfied with Baker's response and did not investigate further.
At some point before May 2005, Baker began to develop dementia. In May 2005, Baker's daughter, respondent Marla Smith, became Baker's agent for trust matters by virtue of a clause in the trust document that allowed a settlor to delegate or relinquish her powers under the trust to another person. Baker also executed a Minnesota Power of Attorney form designating Smith as her attorney-in-fact. From the time Smith became Baker's agent until Baker died in 2009, Smith spent principal from the trust for Baker's care.
Evans did not learn of Smith's delegation as Baker's agent until late 2007 when Evans and Pickett noticed that their quarterly income checks had become smaller and that Smith had been sending the checks instead of Baker. Evans spoke to Smith in late 2007 and learned of the delegation and of Baker's dementia, though Smith did not inform her of its severity. Evans asked Smith about the smaller distributions, and Smith told her that they were due to fluctuations in the market. Smith told Evans that she had not read the trust document and later admitted that she did not even have a copy of it.
It soon became apparent to Evans that Smith believed she could spend not only income but also principal from the trust for Baker's care. Evans told Smith that she believed Smith and her attorney were reading the trust document incorrectly, and requested that she become successor trustee. Smith told Evans that she intended to continue paying for Baker's care with principal, as she had apparently been told by Baker, Baker's attorney, and her own attorney, Sandra Sather, that withdrawing principal from the trust was proper. During this time, Smith also told Evans that nothing had changed with Harry Baker's trust money, a statement she knew to be false because she had been spending principal. Smith admitted to spending $203, 200 of principal from the trust from the time she began acting as Baker's agent in 2005 until Evans took over as successor trustee in 2008.
In September 2008, Smith filed a petition with the district court requesting that the court construe the trust, ratify and confirm all of her previous distributions of principal and income, and appoint a successor trustee. Evans objected to Smith's petition because she believed that trust assets were missing. With Smith's agreement, Evans became successor trustee in October 2008.
Jeanne Baker died in 2009. In February 2010, after unsuccessfully attempting to receive an accurate accounting of trust assets from Smith for more than a year, Evans brought suit against Smith individually and as personal representative of Baker's estate. Evans sought a surcharge against Baker's estate to recover the wrongfully spent or transferred trust principal, and she later added the Jeanne C. Baker Revocable Living Trust as a defendant. The district court consolidated the two actions filed by Smith and Evans and held a court trial in May 2012.
Attorney Sandra Sather began representing Smith and the trust in January 2008 and advised Smith, as Baker's agent, that it was permissible to spend principal from the Marital Election and Decedent's trusts. Once the district court proceedings began, Sather represented Smith, individually and as personal representative of Baker's estate, and the Jeanne C. Baker Revocable Living Trust, while Evans, as successor trustee, engaged separate counsel for the trust. Sather never sought or received consent from Evans to represent respondents after she no longer represented the trust, and she continued to represent respondents up until trial, withdrawing only when she was called as a witness.
Evans testified both in a personal capacity and based on her professional expertise as a forensic accountant. During her investigation into the missing assets, she attempted to get trust records from various financial institutions, but records created before 2006 were unavailable. In addition, because checkbooks or bank records were missing, Evans was unable to specifically trace assets missing from the trust. Evans also reviewed Baker's work papers, concluding from the documents that cash was taken out of the trust and not returned or reinvested.
Many trust-related documents from Baker's time as trustee were missing. Smith gave three different explanations for the missing records: (1) Baker threw away records due to her confusion from dementia; (2) Baker discarded old paperwork when she moved out of her home into an assisted-living facility; and (3) a flood at Baker's assisted-living facility destroyed records. The district court found that the documents were not discarded in bad faith and that Smith and Baker "substantially fulfilled their duty to maintain records of the Trust."
As the district court found, "[e]ven with Evans'[s] best efforts to obtain records, she did not have all of the records from the beginning of the Trust, particularly the missing bank account records, that would tell her where the missing cash went." Based on her forensic examination of the available documents, Evans concluded as follows: (1)$253, 053.74 in assets went missing from the trust between 1994 and April 19, 2004; (2)$203, 200 went missing from the trust between May 2006 and August 2008, which Smith admitted spending for Baker's care; and (3) the lost-investment interest rate on the missing principal through the date of trial should be calculated at 6%.
Other experts also testified at trial. Accountant Larry Greely reviewed the same documents as Evans and calculated a tentative figure for assets that might be missing from the trust. Greely was unable to render an ultimate opinion about the missing assets, however, because he determined that the records were insufficient to find with any reasonable professional certainty that any specific amounts were missing from the trust or to trace any missing assets.
Lynda Mohs, the accountant who had prepared Baker's tax returns since 1997, also testified and admitted that assets were missing from the trust. Mohs had limited information about the trust and "made a number of guesses or assumptions about missing assets, " but admitted that the ...