Opinion
DOCKET NO. A-2016-11T4
06-25-2014
VALERIE ALPER, individually and on behalf of the VALERIE B. ALPER TRUST, Plaintiff-Appellant/Cross-Respondent, and HEATHER ALPER, a minor, through her p/n/g VALERIE ALPER; and LUCAS ALPER, a minor, through his p/n/g VALERIE ALPER, Plaintiffs-Respondents, v. JACOB SIMON; JOSEPH WOLFSON and RENEE WOLFSON, h/w; J&M LAND COMPANY; HI-LAKES CORPORATION; 660 NEW ROAD ASSOCIATES, INC.; CONTINENTAL SEARCHERS, INC.; BETTY SIMON TRUSTEE, L.L.C.; PISCATAWAY HOLDINGS; SAM AT SOMERSET; ESDG; JMRV ASSOCIATES; SIMON SIMON SIMON & ZELL a/k/a RICHARD SIMON TRUSTEE, L.L.C.; 30 SRI ASSOCIATES, L.L.C.; 1200 BAYSHORE ASSOCIATES; HJ&J LAND COMPANY II, L.L.C.; and SIMON LEASING, L.L.C., Defendants-Respondents/Cross-Appellants.
Arthur M. Brown argued the cause for appellants/cross-respondents (Levine, Staller, Sklar, Chan, & Brown, P.A., attorneys; Mr. Brown, Glenn P. Callahan, Mary Beth Clark, David J. Azotea, on the brief). Edwin J. Jacobs, Jr., argued the cause for respondents/cross-appellants (Jacobs & Barbone, P.A., attorneys; Mr. Jacobs and YooNieh Ahn, on the brief). Guardian ad Litem for the minor respondents did not participate in this appeal.
NOT FOR PUBLICATION WITHOUT THE
APPROVAL OF THE APPELLATE DIVISION
Before Judges Parrillo, Harris and Sumners.
On appeal from the Superior Court of New Jersey, Chancery Division, Atlantic County, Docket No. C-07-08.
Arthur M. Brown argued the cause for appellants/cross-respondents (Levine, Staller, Sklar, Chan, & Brown, P.A., attorneys; Mr. Brown, Glenn P. Callahan, Mary Beth Clark, David J. Azotea, on the brief).
Edwin J. Jacobs, Jr., argued the cause for respondents/cross-appellants (Jacobs & Barbone, P.A., attorneys; Mr. Jacobs and YooNieh Ahn, on the brief).
Guardian ad Litem for the minor respondents did not participate in this appeal. PER CURIAM
Plaintiff Valerie Alper established the Valerie Alper Trust (VAT) in June 1997 with certain assets in various family businesses and for her benefit. Four months later, Valerie, her parents, and her brother, Jacob Simon, entered into an agreement that canceled the VAT and transferred her assets to the new Valerie B. Alper Trust (VBAT). The VBAT named Valerie's father, Richard Simon, and Jacob co-trustees and gave them sole and absolute discretion to make distributions of income and principal to Valerie or her issue. It named Valerie's mother, Betty Simon, as the successor trustee.
This action arises from allegations by plaintiffs Valerie, individually and on behalf of the VBAT, and her two minor children, that defendants mismanaged the VBAT and committed acts of misconduct resulting in damages. They alleged, among other things, various breaches of fiduciary duties, diversion of a business opportunity from the VBAT in connection with defendants' purchase and sale of property in Absecon for a substantial profit, and breach of contract for refusing to pay the construction costs for her house. They also alleged that the VAT was the controlling trust.
Plaintiffs' original complaint named as defendants Jacob Simon, Joseph Wolfson, Renee Wolfson, J&M Land Company (J&M Land), Hi-Lakes Corporation (Hi-Lakes), 660 New Road Associates, Inc. (660 New Road), Continental Searchers, Inc. (Continental Searchers), and Betty Simon Trustee, L.L.C. (BST). An amended complaint added new defendants, including JMRV Associates (JMRV), Simon Simon Simon and Zell, HJ&J Land Company, L.L.C. (HJ&J), and HJ&J Land Company II, L.L.C. (HJ&J II), along with other family business entities that do not figure into the appeal.
The court granted defendants' motion for partial summary judgment, finding plaintiffs' claim to set aside the VBAT was barred by laches. Following a bench trial, the court dismissed all claims except the contractual claim against Valerie's brother. It also concluded that an independent trustee should be chosen to replace Valerie's brother and mother, who had replaced her father after his death.
On appeal, plaintiff argues that the trial court erred by: (1) granting defendants' motion for partial summary judgment based on laches; (2) failing to find that her brother breached various fiduciary duties; (3) permitting the trustee to use VBAT assets to pay defendants' legal fees; and (4) allowing the payment of excessive compensation to the working partners. In their cross-appeal, defendants argue that the court erred by: (1) removing Valerie's brother and mother as co-trustees of the VBAT; (2) ruling that the trustees were not entitled to commissions; and (3) finding the VBAT was entitled to reimbursement by the corporate entities and five percent of legal fees paid on behalf of Valerie's sister and brother-in-law. For the following reasons, we affirm.
The following facts were adduced at the nineteen-day trial on plaintiffs' eleven-count complaint alleging breaches of fiduciary duty, conversion, diversion of a corporate opportunity, oppression of a minority shareholder, breach of contract, promissory estoppel and waste.
By way of background, beginning in the 1960s, Richard Simon, the family patriarch, bought and sold real estate in New Jersey, primarily acquiring properties with title deficiencies or through foreclosures on tax sale certificates. His business model was to buy property at the lowest price possible, apply for subdivision approvals, and sell off lots at a profit. To assist with the acquisitions and purchases, Richard created various business entities, which we refer to collectively as the core entities. The business model proved successful, and during Richard's lifetime the properties held by the family businesses had a value of about $40 million.
These include: J&M Land; Betty Simon Trustee, L.L.C. (BST), formed in 1970 (the 1970 trust); Richard Simon Trustee, L.L.C. (RST), a partnership formerly known as Simon Simon Simon & Zell, formed in 1984; and Continental Searchers.
Richard and Betty had four children: Jacob, Marsha, Renee and Valerie. Renee married defendant Joseph Wolfson, and Marsha married Herman Zell. Jacob is Valerie's older brother. In 1993, Valerie married Jeffrey Alper. They had two children: Heather, born in 1995, and Lucas, born in 2002. Richard created the 1970 trust to transfer equal ownership interests in the family businesses to each of his four children.
In 1974, Herman joined J&M Land, where he conducted title searches, attended tax sales, and performed land acquisitions and sales. Three years later, Jacob left college to learn the business from his father, who was having health problems. Sometime after 1985, after marrying Renee, Joseph also joined the family businesses and became involved in tax lien purchasing and the work necessary to foreclose tax liens. Jeffrey worked for the family businesses from approximately 1993 to 1997, when he and Valerie temporarily separated.
Renee, Marsha and Valerie never assumed a management role in the family businesses. As Herman explained, "it was better to keep it just the men." Moreover, Valerie suffered from a longstanding addiction to alcohol and prescription drugs, and was diagnosed with attention deficit hyperactivity disorder (ADHD). According to Jacob, Valerie had difficulty focusing, did not get along with Herman or Joseph, and would create tension in the office if offered a job there.
In the 1980s, the family shifted its focus to buying and selling tax liens for profit, and in the 1990s to undertaking subdivision and development work, along with the continued acquisition of tax liens. Richard, Herman, Jacob and Joseph continued to perform title searches, handle contract negotiations for land acquisitions and sales, and bid on tax sales. The family businesses eventually acquired hundreds of parcels of real estate in New Jersey. Most properties were owned by the core entities.
All projects were self-financed by the Simon family businesses, not commercial banks. Family members loaned money to the BST and RST (collectively known as the family banks), which used these funds to finance business operations and acquisitions, and to provide capital for family members and working partners to fund their projects. These family banks repaid the loans with a greater interest rate than commercial banks. Although the loans were made without promissory notes or mortgages, the transactions were recorded in the books and records of the family businesses.
Most significant for present purposes, Richard encouraged his children and their spouses to acquire real estate, together or separately, and to become entrepreneurs working on their own. There was never any written or oral agreement that required all siblings or working partners to participate in every business deal. Jacob explained that many properties were owned by all siblings, whereas other properties were owned by fewer than all siblings or were jointly owned with third parties. In thirty years, Jacob never heard any family member complain about being excluded from a deal. In fact, Richard and Jacob encouraged Jeffrey to undertake his own deals when he was working for the family businesses. For example, Jeffrey and Valerie acquired property in Linwood, which they sold on October 30, 1998, for $160,000. This transaction did not involve any of Valerie's siblings or the working partners.
A. Formation of the JMRV and BST
On March 29, 1994, Marsha, Rene, Valerie, and Jacob entered into an agreement with their mother to form a partnership called JMRV Associates (JMRV) "for the purpose of owning, investing and otherwise holding assets in the State of New Jersey, and engaging in any other activities related thereto." Among other things, the agreement required capital contributions from each partner along with the maintenance of books and records. JMRV designated Jacob as its manager.
JMRV did not conduct any business on its own or engage in any profit-making transactions. Instead, it served as the paymaster, meaning it acted as the management company for the family business entities and compensated the active managers.
In an operating agreement dated April 12, 1994, Betty, as trustee of the 1970 trust and JMRV, formed the BST "to hold, own, develop, improve, manage, operate and sell the [p]roperty" in the initial trust. In other words, the BST was the successor entity of the 1970 trust. Its owners were Jacob, Marsha, Renee and Valerie. The operating agreement stated that the BST's purpose was to invest in securities, to carry on the real estate business, to transact other business, and to act on its own account or for others. The operating agreement also authorized the manager of the company
to make all decisions as to the operation of the Primary Business including the following: (a) the development, sale, lease or other disposition of the Company's assets, (b) the purchase or other acquisition of other assets of all kinds and (c) the employment of persons, firms, or corporations for the operation and
management of the Company's business.
The BST operating agreement made the JMRV its manager. BST paid the JMRV a management fee, which it then used to compensate the active managers, Herman, Jacob and Joseph. Jeffrey also received payment from JMRV during the years he worked in the family businesses. Valerie's trust did not receive any distributions from JMRV because it was not an active manager. Between 2003 and 2007, the JMRV paid substantially all the management fees it received from the BST to the partners, and retained residual profits of about $58,000, which was divided equally among the three siblings and Valerie's trust.
Specifically, over a five-year period from 2003 to 2007, the three active working partners received a total of $4,523,012 in compensation. The payments were split three ways for each year except 2007, when Herman was bought out. Jacob and Joseph received equal compensation of $445,200 in 2008 and $436,800 in 2009. They also received pension and profit sharing benefits. Their pension benefits in 2008 and 2009 were $15,500 each. Jacob explained that, because a trust was not entitled to a pension payment, Valerie was paid individually by J&M Land up to the amount of money that he and Joseph placed into their pension plans.
In comparison, from 2002 to 2007 Valerie's trust received $2,244,077, or an average per year of about $374,013. During those years, Valerie individually also received $817,465 in income, or an average of $136,244 per year. The money given to Valerie individually came from the businesses, over and above the twenty-five-percent share that went into her trust. Valerie, therefore, received trust and individual income annually, whereas Jacob and Herman received approximately $335,000 per year in compensation, with Joseph getting a little less.
During the same six years, Valerie also received $982,852 from the BST on a loan payment to her individually, and $2,663,782 from a loan payment to her trust. According to the family accountant, Robert Reynolds, Valerie and her trust received a total of $6,708,099, or more than $1.1 million each year between 2002 and 2007.
B. Formation of HJ&J and the Alper Investment Group
On November 29, 1995, with Richard's blessing, Herman, Jacob and Joseph formed HJ&J to acquire projects that did not fit the family's business model, namely those that involved risk, hard work, experience, and time.
The HJ&J's operating and partnership agreements were executed on December 8, 1995. Over the next fifteen years, HJ&J undertook only "four or five deals[.]" Some projects succeeded, while others failed. For example, HJ&J purchased property in Dover Township, which the members eventually sold after resolving numerous problems relating to its location in the wetlands. HJ&J also purchased a knitting factory in Monroe Township, but over the next four or five years spent more than $1.1 million on the property while trying unsuccessfully to find a buyer or renter. Jacob explained that these were not the "cookie cutter deals" that the family businesses historically acquired. Given the limited work, salaries were not taken out of HJ&J.
Neither Valerie, who was not a working partner, nor her trust were asked to join HJ&J. According to Jacob, Valerie's bad relationships with Herman and Joseph made it impractical for her to work within HJ&J or any of the other Simon family businesses. He also did not feel obligated, as trustee, to involve the VBAT in projects that presented risks. According to Herman, Richard encouraged the formation of HJ&J and knew it did not include Valerie or her trust. Herman and Jacob testified that neither Valerie nor Jeffrey raised any objection about the formation of HJ&J, or asked for any interest in the company.
Although the operating agreement indicated that HJ&J did not include Valerie or the VBAT, the tax returns filed by family accountant Robert Reynolds included the VBAT as a member of HJ&J from 1998 to 2002. Jacob, Herman and Reynolds testified that the VBAT's inclusion was a mistake, and Reynolds stated that it was corrected on the 2003 tax return.
Meanwhile, on December 15, 1995, sixteen days after the formation of HJ&J, Valerie's husband, Jeffrey, formed the Alper Investment Group, L.L.C. (Alper Investment). The sole members were Jeffrey and Valerie. HJ&J and Alper Investment were funded by distributions from the RST of $10,000 each to Herman, Jacob and Joseph, who pooled their money, and $10,000 to Jeffrey to form his company.
C. Valerie Alper Trust (VAT)
In 1997, Valerie separated from Jeffrey and had a relationship with a man who, Richard believed, was taking advantage of his daughter, who by then had been abusing drugs and alcohol for about sixteen years. Concerned for the welfare of his daughter and granddaughter, Richard discussed with Jacob the creation of a trust to protect Valerie's interests in the family assets, which Richard then asked the family attorney to prepare.
By then, Valerie had entered three rehabilitation programs.
On June 19, 1997, Valerie, as grantor, and Richard and Jacob, as co-trustees, executed the VAT. Valerie believed her father wanted to protect her, and signed the document because she trusted him and Jacob. The VAT was an irrevocable trust, and Valerie, as grantor, had "no power to alter, amend, revoke, or terminate any trust provision or interest . . . ." Article III of the VAT required the trustees to pay income "in quarterly or more convenient installments" to Valerie. It also gave the trustees "sole and unfettered discretion" to use the principal, if needed, for her "health, maintenance, welfare and comfort" and, upon her death, to distribute the balance of the principal to her daughter Heather.
Valerie transferred to the VAT two properties in Linwood, all her interest in Alper Investment, an investment account at Paine-Webber, and her twenty-five-percent interest in certain family businesses. However, she did not transfer her beneficial interest in the 1970 trust. Only four months later, on October 24, 1997, Valerie and Betty, both individually and as co-trustees under the 1970 trust, and Richard and Jacob, individually and as co-trustees of the VAT, entered into a family settlement agreement to cancel the VAT and to transfer to Valerie, "outright and free of trust," her marital residence, another property in Linwood, her interests in Alper Investment, and her account at Paine-Webber. The parties also agreed to transfer the remaining assets to a new trust called the VBAT, along with Valerie's interest in the 1970 trust and an additional asset known as 1200 Bayshore Associates (1200 Bayshore).
D. Valerie B. Alper Trust (VBAT)
Prior to the execution of the new trust, the family attorney, Paul D'Amato, was asked to review the trust documents with Valerie, although he admittedly had no expertise in this area. Nevertheless, Valerie trusted D'Amato and did not want to seek the advice of another attorney. D'Amato confirmed that when they finally met, Valerie told him that she was "voluntarily entering into these [a]greements," that she was "not being forced in any way, shape, or form to sign" them, and that every time they met, she was "not under the influence of alcohol or drugs." He added that he had no doubt that every time he met with Valerie she was "totally competent and not under the influence of any substance whatsoever."
According to Valerie, she signed the family settlement agreement to stop the harassment from her father, mother, and Jacob, who were unhappy with her lifestyle. In his certification dated July 25, 2008, D'Amato stated that Valerie had told him "on several occasions that she was under extreme pressure from 'the family' to sign the document[,]" that they were "'on her back' and that she just wanted to get the matter done and 'put to bed.'"
On October 24, 1997, Valerie, Richard, and Jacob executed the trust agreement called the Valerie B. Alper Trust (VBAT). Under the new trust, Valerie transferred to the trustees all of her "right, title and interest" to the assets held by certain of the family entities, including J&M Land and JMRV. She also transferred all of her interest in the 1970 trust.
The VBAT was an irrevocable trust. Article III required the trustees to "hold the trust principal and undistributed income [in trust.]" It added: "NEVERTHELESS[,] [t]he Trustees may make distributions of income and principal from the Trust in such amounts and at such times as they, in their sole and absolute discretion, determine." Unlike the VAT, the new trust authorized the trustees to make distributions of income or principal to Valerie, as grantor, and to her issue. Under Article IV, when the trust ended and the principal vested in absolute ownership of any minor beneficiary, the trustees might,
if deemed appropriate, hold such interest in trust until the beneficiary attains age thirty-five (35), paying so much (including all or none) of the trust's net income and principal to the beneficiary as the Trustees deem appropriate for the beneficiary's health, education, support, and maintenance, adding to the principal any undistributed income.
Article VII of the VBAT "exclusively empowered" the trustees, in their fiduciary capacity, with extensive authority to, among other things, invest, reinvest, deposit or lend trust funds and to manage, develop, sell or otherwise dispose of trust assets.
Article VIII provided that Richard and Jacob would serve as trustees and that if either became unwilling or unable to serve, Betty would serve as successor co-trustee. If all three trustees became unwilling or unable to serve, the VBAT designated Renee as the sole successor trustee. The VBAT also specified that "[n]o Trustee shall be required to obtain the order of any court to exercise any power or discretion under this trust." It did not require the trustees to file an accounting with any public official, although it required the trustees to "maintain accurate records concerning the trust."
In his second interim report, the court-appointed guardian ad litem for Valerie's children, John Rosenberger, wrote that:
It is my sense that the VBAT, and indeed its predecessor, the VAT, were created as an ad hoc reaction to [Valerie's] mental, physical and emotional condition throughout the relative time period of 1997. Neither Richard Simon nor Jacob Simon gave any thought to the structural changes in business model operations that might be necessitated by virtue of the VBAT's 25% ownership in the family business. Intellectually, at the time of the creation of the VBAT, the trust was conceived solely to prevent [Valerie] from squandering her wealth by losing it to a third-party stranger, which wealth was otherwise created through the diligence and acumen of Richard and Betty Simon. The purpose of the trust was to make distributions to [Valerie] through control exercised by her father and, upon his death, by her brother, Jacob Simon. The purpose of the Trust was not to curtail [Valerie's] spending and in fact never was utilized for that purpose until 2010. The purpose of the trust was to protect the
family business and Valerie's wealth from claims by third-party strangers.
E. Later Developments
In 1998, Richard was diagnosed with Alzheimer's. Two years later, in 2000, Jeffrey and Valerie reconciled and they had their second child, Lucas, in 2002. Jeffrey, however, never returned to the family businesses. According to Jacob, Jeffrey preferred to work on his own and the other partners did not want him in the businesses. Jeffrey, however, sought Jacob's advice almost daily on various projects.
During the same year, Jacob purchased a mortgage on a property for Valerie for $112,500. No other siblings or working partners were involved in the deal. The mortgage paid Valerie $800 or $900 a month, until she discharged the mortgage on February 3, 2010, for $141,500.
In 2001, Jeffrey purchased a property in Pleasantville for $335,000 through Eastern Shore Development Group (ESDG), which he formed with a third-party. The BST gave Jeffrey a loan of $290,504.63, without any security or collateral, for the acquisition. He later sold the property to Bradco Realty for approximately $2,365,000, after which ESDG paid off the loan. Valerie and Jeffrey earned a profit of $525,000 or more on this deal. On Jacob's advice, he invested this money in the BST to take advantage of the family's higher interest rate. No siblings or working partners participated in this deal.
Also, in 2000 or 2001, with advice from Jacob, Jeffrey and Valerie bought property on Shore Road in Linwood, subdivided it into three lots, and then Jeffrey, in partnership with another third-party, built three houses and sold them. The project also did not involve any siblings or working partners.
F. Absecon Transaction
1. Risks
In June 2003, Dennis Duffy, a land surveyor, told Herman that the City of Absecon was auctioning off a real estate development project. The highest bidder would have the right to purchase a tract of property on Pitney Road to develop an active adult community.
The Absecon transaction, also known as the Pitney Road project, was larger and more complex than anything the family had previously undertaken. None of the working members had any experience with such a complex project. It was also the most money the family had ever spent at a public auction. Until then, the biggest single purchase was an office building in Northfield for $640,000.
This project, which included 264 units on 26.78 acres, required the assistance of experts, including architects, engineers, surveyors, environmentalists, planners, traffic specialists, and attorneys. It also required zoning variances and various permits. Herman decided the project was too risky for him and went to Jacob and Joseph for help. Joseph immediately liked the deal. Jacob, however, had reservations, and took about a week to decide. Ultimately, the trio submitted a bid on the property.
Jacob explained his concerns:
Well, it was scary because it was something new. We never did anything like this before. The only thing that we ever did was cookie cutter subdivisions where you subdivide a property into single family lots. You didn't have to try to guess or think of what type of unit, the architectural style of the unit, the square footage of the unit, the marketability of the unit. It was something totally new to
Jacob, however, did not believe the project was suitable for Valerie's trust because it was such a high risk. In this regard, Stephen Nehmad, an attorney and defendants' expert in the areas of zoning, planning, land use, and development, testified about the complexities of the Absecon project, which included the urban setting, the municipal boundary with Galloway Township, an adjacent public school, the unusual rolling topography, the acquisition of the land at a public sale, the large scale of the residential development, and the need for various zoning and planning board approvals along with State permits.
There were also contractual and capital risks, along with the risks of obtaining municipal land use approvals and various permits from the New Jersey Department of Environmental Protection (DEP), including a permit under the Coastal Area Facilities Review Act (CAFRA), which was questionable due to the unforeseen discovery that the site was a nesting area for the endangered red-headed woodpecker. Thus, Nehmad concluded that, in January and February 2005, the Absecon transaction was risky and fragile.
The CAFRA permit was ultimately issued on February 14, 2005, after the environmental consultant used empirical data to show the area was not an endangered species habitat. According to Herman, the family's expert resolved the woodpecker issue for about $25,000. He estimated that the partnership spent an additional $1 million to get the necessary approvals, plus in excess of $400,000 for all of the "soft costs."
Nehmad further explained:
The undertaking was one that was very complex, had very significant risks involved and was literally . . . a mine field in which at any time you -- of course, you had to navigate your way through a very complex scenario of contractual and regulatory and economic risks which -- some of which were knowable, some of which the client had control over, others of which the client had no control over, just had to rely upon good fortunes and good luck.
2. Financing
On July 17, 2003, the City of Absecon authorized the sale of the Pitney Road property to the BST for $2,570,000. The actual buyer, however, was HJ&J. At the end of a 120-day due diligence period, the City required the buyer to pay a non-refundable deposit in the amount of five percent of the final bid, or $128,500.
On July 17, 2003, HJ&J borrowed $155,000 from the BST to finance the $128,500 deposit. The next day, HJ&J returned the unused amount of $26,500. On July 21, 2003, Herman, Joseph and Jacob each received checks for $50,000 from the BST, and deposited the total amount of $150,000 into the HJ&J account. Valerie also received a check from the BST for $50,000 made payable to the VBAT, which Jacob reinvested into the BST giving credit to the VBAT. The same day, HJ&J reimbursed the BST for the $128,000 it had borrowed four days earlier.
On July 23, 2003, with Jacob's approval, the BST gave Jeffrey, through the VBAT, an interest-free loan of $220,000 to finance another project in Pleasantville undertaken by one of his companies called CDG of Pleasantville. CDG repaid the loan the following year. Jacob explained that Jeffrey's loans were interest free even though his projects did not benefit the family businesses, because "[t]hat's one thing my father told me when Jeff came back, that I needed to help him get back on his feet, because nobody else was going to help him." Jacob believed the deal was good for Jeffrey which, in turn, made it good for Valerie.
On July 31, 2003, the City of Absecon and HJ&J entered into an agreement of sale for $2,570,000, with an initial deposit of $128,500. The BST subsequently loaned additional money to HJ&J to fund environmental and development costs, including, as noted, $412,750.87 in "soft costs" to obtain the necessary approvals.
G. Formation of HJ&J II
HJ&J's operating agreement was amended in October 2003 to name Herman as manager and further amended on May 19, 2004, to include Marsha and Renee as members. Herman, Marsha, Jacob, Joseph, Renee, and HJ&J, thus, created the successor entity HJ&J II.
HJ&J II subsequently obtained a loan from RST in the amount of $2,451,019.32 to complete the financing of the Absecon property. On May 2, 2005, the Absecon property was transferred by deed from the City of Absecon to HJ&J II. On June 16, 2005, July 19, 2005, and August 25, 2005, HJ&J II paid interest to RST in the amounts of $12,112.25, $6,652.14, and $7,660.04, respectively.
One year later, on May 11, 2006, HJ&J II sold the Pitney Road project for $14,100,000 to Foxmoor Development. All loans borrowed from BST and RST were paid in full with interest. According to Herman, after the sale, the market changed and there was no longer a demand for active adult communities. Jacob agreed that "but for a matter of a few weeks, this could have been a total failure." He explained that Foxmoor had been unable to pay the high taxes on the completed project and that he expected the property to appear on the Absecon tax sale list.
B. The Zells' Separation from the Family Businesses
Richard died in May 2005. Shortly afterwards, the Zells asked to withdraw from the family businesses because, as Herman explained, there was "a gradual deterioration of the work ethic in the office." To facilitate the buy-out, hundreds of family-owned parcels of real estate were placed into groupings by an MAI appraiser, while Jacob and Herman established the fair market value of forty-three tracts of property that they divided. The family also determined the value of tax certificates based on their reasonable value as liens. When the family executed the separation agreement (Zell agreement) dated June 30, 2006, they agreed that the Zells' withdrawal was worth about $10 million, or one-fourth of the total value of $40 million in cash assets and real estate. The agreement transferred some properties directly to the Zells, whereas other properties stayed in the Simon family businesses, with the Zells retaining an interest. Jacob testified that he discussed the negotiations with Valerie and Jeffrey, that he did not ask her to review any drafts, and that he did not advise her of the right to obtain independent counsel. The Zell agreement caused the VBAT's interest in the family businesses to increase from 25% to 33.33%.
I. Events Leading up to the Lawsuit
In 2005, Valerie and Jeffrey told Jacob that they wanted to build a house on property that was for sale in Linwood. In May 2005, at Jacob's suggestion, his mother purchased the four-lot tract for $1 million. She sold one lot to Jeffrey's company, JJV Investment Group, L.L.C. (JJV), for $360,000. JJV built a house on the land, which it sold for about $1.1 million. Betty sold another lot to someone outside the family.
In 2006, Valerie and Jeffrey began construction of their home on the two remaining lots. Funds were transferred from the BST to Valerie's trust, and used to pay the construction costs. Specifically, between 2002 and 2007, the VBAT paid Valerie and Jeffrey a total of $3,838,596, of which $1,596,188.95 was dedicated to the construction of the house, which the VBAT owned. These funds were also used for interest payments ($125,282.38), direct disbursements to Valerie ($145,410) and Jeffrey ($6,243), and for Valerie's personal expenses ($108,150.20) that were mostly credit card bills. Jacob estimated that Valerie typically spent between $10,000 and $15,000 per month on her credit cards. Other personal expenses included home maintenance, insurance, Lucas's school, utilities, and loans back to the BST. Valerie's BST account also paid $111,915.61 for Jeffrey's investments.
In addition to money the VBAT earned from 2002 to 2007, Valerie received $817,465 from J&M Land in interest income on her personal loan to the company. Moreover, although she did not work in the family businesses, Valerie received a $1,000 monthly salary and medical benefits until 2004, after which she received four years of administrative fees.
By July or August 2007, Jacob, who became sole trustee of the VBAT after his father's death, was having difficulty understanding Valerie's bills and began to question whether the money was being used for the house construction. He asked for copies of bills, but did not always get them. Jacob also sought prior approval before authorizing payment, explaining that he would not reimburse Valerie if the project was not necessary or Jeffrey could pay for it. Communication ultimately had broken down. Although Jacob continued to pay bills that he considered appropriate such as food, gas, and medicine, he stopped paying for items that he did not believe were in Valerie's best interests, including casino and liquor charges. Jacob also exercised his discretion as trustee to decide which bills should be paid by Valerie's husband, explaining that he had told Valerie for years that her husband should pay for some of their expenses.
In October 2007, Valerie's mother conveyed the deed to the remaining two lots to Valerie for $1.00. The same month, Jacob executed, on behalf of the trust, two promissory notes from Valerie for a total of $58,000, explaining that he borrowed this money from Valerie because he could not get answers from Jeffrey about the house bills and wanted to secure the trust's money.
Jacob continued to use trust funds to pay Valerie's expenses until January 2010. Around that time, he asked his mother to take a more active role, as a co-trustee of the VBAT, to help him verify Valerie's expenses and determine whether Jeffrey should pay for any of them. However, Betty's efforts to communicate with Valerie about the bills were unsuccessful.
By March 2010, Jacob and Betty decided not to pay any future bills until Valerie underwent a drug test, due to their concern over her thirty years or more of drug and alcohol abuse. In response, Valerie gave them a nine-month-old urine test.
Jacob also stopped paying cash advances, and decided Jeffrey should pay for the family's personal umbrella insurance policy. He also refused to pay the remaining construction costs on the house. Jacob, however, continued to pay Valerie's insurance and real estate taxes of $44,000 a year. Valerie and Jeffrey paid for their cable, electric, gas, and telephone bills.
J. Pre-Trial
In the meantime, Valerie filed the instant lawsuit against defendants seeking an accounting and review of books and records, repudiation of the VBAT and enforcement of the VAT, and damages for various breaches of fiduciary duty and other alleged wrongs. A court-ordered accounting for the period January 1, 2003 to December 31, 2009, was completed. Defendants subsequently filed a motion for partial summary judgment, arguing that plaintiffs' claim to set aside the VBAT in favor of the VAT was barred under the doctrine of laches. The court ruled that the VBAT was the controlling trust document.
By then, the Simon family had disintegrated into various warring camps. Marsha liquidated her interests in the Simon family business as a result of familial business disagreement. Marsha and Renee and their husbands were in litigation with each other. Jacob and the family businesses had filed counterclaims against Valerie. Significant litigation existed between the Simon family businesses and Jeffrey. According to Jacob, everyone but his mother had sued someone else in the family, and that it had been that way since his father died.
K. Trial
At trial, Stanton Meltzer, plaintiffs' expert in forensic financial accounting and business valuation, concluded to a reasonable degree of certainty that the VBAT suffered total damages of $4,239,190 as a result of Jacob's acts as trustee.
Meltzer's calculation included damages of $1,130,753 arising from transactions involving the BST and JMRV. In this regard, JMRV's operating agreement provided for nominal management fees, and its partnership agreement stated that no partner could have priority over another partner and that all must share equally in income and expenses. Instead, the BST paid management fees to JMRV in excess of $4 million. That figure included $3,965,379 in guaranteed payments over five years, and $557,663 in retirement plan contributions over five years. In Meltzer's opinion, the money paid by the JMRV for compensation and benefits should have remained in the BST, where the VBAT, as owner, was entitled to its one-fourth share, i.e., $1,130,753. It was Meltzer's opinion that: (1) the amount paid in compensation was not nominal; (2) neither the operating nor partnership agreements provided for guaranteed payments; (3) the retirement benefits went to only three of the partners; and (4) the partnership agreement designated the siblings, not Herman or Joseph, as partners.
Meltzer also determined that the VBAT suffered damages from transactions involving HJ&J. He believed that "all of the companies were part of a common enterprise family business" and that Valerie's trust was a twenty-five-percent owner of each. HJ&J engaged in the same activities as the other family businesses, and all of its transactions were directly related to one of the core companies. Using the 2008 tax return, he testified that Valerie should have one-fourth ownership of HJ&J's assets, to which he gave a book value of $412,117, excluding the Pitney Road project. Meltzer also calculated that the VBAT sustained damages of $2,696,320, or one-fourth of the profits, as a result of its exclusion from the Pitney Road deal, explaining that the BST bid on the project, the RST funded it, and the VBAT had a twenty-five-percent interest in both.
On cross-examination, Meltzer admitted that when he wrote his report on May 27, 2010, he did not know the family businesses owned $40 million worth of real estate in 600 locations, or that sixteen days after HJ&J was founded, Jeffrey had established Alper Investment and used family financing to create this company.
Plaintiff's trust expert, Mitchell Rabil, opined that Jacob breached his fiduciary duty of loyalty to Valerie by awarding himself excessive compensation, since the underlying documents allowed only nominal management fees and prohibited any partner from having priority over the others. He also believed that Jacob's exclusion of Valerie's trust from the Absecon transaction represented a conflict of interest and a diversion of a business opportunity. He found it "especially egregious" because HJ&J II, in which Valerie's trust held no interest, acquired properties using funds from family businesses in which Valerie had an interest. Thus, Rabil concluded that Valerie's trust participated in the risks, but was excluded from the profits.
Rabil relied on the Uniform Trust Code (UTC) for the standard of conduct governing trustees. He acknowledged, however, that the UTC was not the law in New Jersey, and further, that the Prudent Investor Act, N.J.S.A. 3B:20-11.1 to - 11.12, obligated a trustee to exercise reasonable care, skill and caution in making investments, but did not require a trustee to make any particular investment. Nevertheless, Rabil concluded that Jacob should have consulted with Valerie about the Pitney Road deal, offered her the opportunity to participate, and advised her of the risks.
Rabil, however, did not know that Jeffrey had: borrowed money from the BST; owned his own real estate development companies; and participated in business deals without other family members. He also did not know that the Simon family owned 600 parcels, that it always self-financed its projects, and that Valerie and Jeffrey had used the family banks to finance their separate deals. Moreover, he did not know that the Absecon transaction was publicly bid or advertised, or that Jeffrey had embarked on a separate deal the same week.
On the other hand, Gregory Cowhey, a financial analyst and defendants' expert in forensic and tax accounting, determined that the compensation paid to the working, active partners between 2003 and 2007 — a total of $4,523,012 over this five-year period from which the partners allocated a portion to their retirement assets — was reasonable. Cowhey explained that: (1) the partners received these payments for working full-time to manage the various businesses; (2) if they had not managed the businesses the family would have to hire independent managers; and (3) the actual profit during the same period was $7 million. After determining that the core entities had a total taxable income of $24,521,927, Cowhey calculated that the management company over five years received an average of 18.4 percent of the sales per year, including all guaranteed payments to the working partners and retirement allocations.
Cowhey actually believed that the three working partners had been "undercompensated vis-à-vis reasonable market compensation strategies." He arrived at this opinion using the industry standard of a two-plus-twenty-percent compensation scheme, meaning the base fee (two percent of the fair market value of the assets under management) plus the incentive fee (twenty percent of the profits earned).
In determining the economic earnings of the Simon family businesses, Cowhey estimated that the core entities had a net income for tax purposes of about $9,335,000, and a net income for book purposes (net income before any charitable deductions) of approximately $11,890,000. By comparison, the VBAT's total net income from 2003 to 2007 was $2,333,944, and its total net income plus contributions was $2,972,305. According to Cowhey, after 2007, the family businesses suffered financial problems due to changes in the real estate market, losses of $2.4 to $2.5 million over a two-year period in connection with the projects managed by Jeffrey, and Valerie's depletion of her personal and trust loans to the BST.
Terrance A. Kline, an attorney and defendants' expert in general estate and trust matters, testified that, in his opinion, it would have been imprudent for Jacob as trustee to invest assets of the VBAT in HJ&J and HJ&J II for the purpose of developing the Pitney Road project because of the risks and potential harm to the beneficiary. He explained that the risks involved the project's complexity and the possibility of economic disaster. In forming his opinion, Kline relied on the Prudent Investor Act, not the UTC, explaining the latter was not the law. Under the Prudent Investor Act, he believed Jacob would have been liable to the beneficiary for the loss of the investment if the project had failed.
Kline was unaware of any law or trust principle that required Jacob, as trustee, to invest the trust's assets in business ventures in which he decided to engage. He saw no evidence that Jacob was self-dealing by borrowing assets from the family bank to invest in the Absecon project, based on evidence suggesting there was enough capitalization for the family bank to cover any losses. Contrary to Rabil, Kline also saw no evidence of a conflict of interest.
While acknowledging that a trustee should communicate with a beneficiary about investments, Kline did not believe Jacob had a duty to confer with Valerie about the Absecon transaction. A trustee was required to invest and manage the assets in the same manner as a prudent investor, exercising reasonable care, skill and caution. Thus, he opined that the prudence of the investment in the Absecon project must be judged at the time it was made without looking at the fact that it earned roughly $15 million.
L. Court's Decision
At the close of evidence, on June 22, 2011, the court issued its decision, dismissing with prejudice all claims against defendants except for Valerie's breach of contract claim against Jacob. As to the latter, the court ordered the VBAT to pay the remaining $314,000 of the construction costs based on its determination that Jacob, as trustee, had made an agreement with Valerie and Jeffrey to pay these costs. The court added that this amount should be paid out of the VBAT funds to Valerie personally.
With regard to its dismissal of all other claims, the court reasoned that the VBAT gave the trustee expansive powers with few limitations, and that Jacob did not violate his express powers or fiduciary duties by participating, without including the VBAT, in the Absecon transaction. It also found that: (1) the decisions regarding compensation were decided by agreement between Jacob, the VBAT, Herman and Joseph; (2) Marsha, Renee and Valerie allowed the working partners to manage and control the businesses; and (3) the amount was reasonable. It explained: "On the whole, it appears Jacob, Joseph, and Herman did a sufficient job in managing the family enterprise. Valerie has benefited greatly from the fact that her assets have been managed and controlled by her father and then her brother." The court, therefore, concluded that the trustees did not abuse their broad discretion.
Nonetheless, the court, expressing concern over Jacob's about-face approach to Valerie's distributions and the overall deteriorating family dynamics, concluded that "[t]he purpose of the VBAT has been entirely frustrated by the growing animosity between Jacob, Betty and Valerie[,]" and that "an independent trustee should be chosen to succeed both Jacob and Betty."
As to counsel fees incurred by Jacob and others in connection with this litigation, the court concluded that there was no conflict of interest and allowed same, finding that "counsel fees for Jacob, Joseph and the named business entities[] . . . [were] appropriately paid from the family business accounts."
Finally, the court noted that, prior to the commencement of trial, Valerie and the guardian ad litem had "agreed to seek reformation of the VBAT to more clearly provide for the benefit of each of [her] two children in equal fashion." It, therefore, ordered the modification of the trust to clarify the rights and interests of the minor beneficiaries.
Thereafter, plaintiffs and defendants cross-moved for reconsideration. Plaintiffs filed exceptions to the March 31, 2011 accounting; proposed modification to the VBAT; and recommended a new trustee. Defendants, on the other hand, among other things, requested payment of commissions.
On reconsideration, the court denied plaintiffs' motion to revise the trust agreement, but directed the guardian ad litem to prepare an amendment to include the children as equal beneficiaries. In so doing, the court relied on its October 2010 ruling that the VBAT was controlling. The court also denied plaintiffs' request for an additional accounting, noting that it would create another expense for the trust and that the new trustee could request from the former trustee whatever information was needed. Citing the parties' strong objections to the proposed trustees and the general distrust between them, the court appointed an independent trustee, Kyle T. Kievit, an attorney with a bachelor's degree in accounting.
The court also denied defendants' request for commissions from 2003 to 2009, totaling $459,490, reasoning that Jacob never charged commissions in the past and did not intend to charge them until the litigation. The court could not "in equity allow him to now charge back commissions simply because his beneficiary objected to his handling of the trust."
Lastly, in reconsidering the counsel fee issue, the court found that the trust should not pay legal fees relating solely to the representation of Joseph and the business entities. Accordingly, the court held that the VBAT was entitled to reimbursement of $78,544.18 in fees charged for representing the business entities, not the trust, and of five percent of all legal fees incurred representing Joseph and his wife relating to the litigation.
This appeal and cross-appeal followed. On appeal, plaintiff raises the following issues:
I. THE TRIAL COURT ERRED IN GRANTING DEFENDANTS' MOTION FOR PARTIAL SUMMARY JUDGMENT BASED ON LACHES.
A. AS A MATTER OF LAW, VALERIE ALPER'S CLAIMS AGAINST JACOB SIMON
FOR DURESS AND UNDUE INFLUENCE IN THE CREATION OF THE VBAT WERE NOT BARRED BY LACHES.
1. EXPRESS TRUSTS AND THE LAW OF LACHES.
2. THE TRIAL COURT CONSIDERED THE WRONG TIME PERIOD UNDER LACHES.
3. THE TRIAL COURT'S FINDING OF PREJUDICE WAS PLAIN ERROR.
B. THE EXISTENCE OF GENUINE ISSUE OF MATERIAL FACT PRECLUDED THE GRANTING OF SUMMARY JUDGMENT.
II. PITNEY ROAD AND DEFENDANTS' BREACH OF FIDUCIARY DUTY.
A. JACOB SIMON'S BREACH OF FIDUCIARY: SELF-DEALING AND CONFLICT OF INTEREST.
1. THE DUTY OF LOYALTY.
2. JACOB SIMON'S SELF-INTEREST AND CONFLICT OF INTEREST.
B. DEFENDANTS' BREACH OF FIDUCIARY DUTY: USURPING THE PITNEY ROAD BUSINESS OPPORTUNITY BY CUTTING OUT THE VBAT.
1. HJ&J AND HJ&JII WERE PART OF THE COMMON ENTERPRISE THAT IS THE SIMON FAMILY BUSINESS.
2. HJ&J USURPED THE PITNEY ROAD BUSINESS OPPORTUNITY AND EXCLUDED THE VBAT.
a. THE LAW AND THE FACTS ESTABLISH USURPATION OF A BUSINESS OPPORTUNITY.
b. THE TRIAL COURT IMPROPERLY RELIED UPON AN UNPUBLISHED DECISION AS PRECEDENT.
3. JACOB'S CONFLICT OF INTEREST: HE COULD NOT AGREE HJ&J WAS NOT A COMMON ENTERPRISE.
C. JACOB'S BREACH OF FIDUCIARY DUTY: GIVING LOANS TO HJ&J.
1. JACOB'S LOANS TO HJ&J.
i. JACOB'S LOANS FROM BST AND RST WERE SELF-DEALING.
ii. THE LOANS WERE NOT SECURED.
iii. THE VBAT DOES NOT AUTHORIZE THE TRUSTEE TO SELF-DEAL.
iv. THE VBAT NEED NOT SUFFER DAMAGES TO PREVAIL ON JACOB'S BREACH OF FIDUCIARY DUTY.
v. EQUITABLE CONSIDERATIONS CANNOT SUPPORT THE TRIAL COURT'S DECISION THAT JACOB DID NOT BREACH HIS DUTY BECAUSE CERTAIN FUNDS WERE USED FOR VALERIE AND HER HUSBAND'S BENEFIT.
vi. VALERIE WAS PART OF HJ&J.
D. ADDITIONAL BREACHES OF FIDUCIARY DUTY BY JACOB SIMON.III. THE TRIAL COURT ERRED IN PERMITTING THE TRUSTEE TO USE VBAT ASSETS TO PAY DEFENDANTS' LEGAL FEES.
E. THE COURT ERRED BY FAILING TO SHIFT THE BURDEN OF PROOF TO DEFENDANT.
F. VALERIE HAD CLEAN HANDS WITH REGARDS TO PITNEY ROAD.
IV. DEFENDANTS WERE PAID EXCESSIVE COMPENSATION UNDER THE OPERATING AND PARTNERSHIP AGREEMENTS TO THE DETRIMENT OF THE VBAT.
On cross-appeal, defendants raise the following issues:
I. THE TRIAL COURT ERRED IN REMOVING BETTY SIMON AND JACOB SIMON AS CO-TRUSTEES OF THE VBAT.
II. THE TRIAL COURT ERRED IN RULING THAT JACOB SIMON IS NOT ENTITLED TO COMMISSIONS FOR THE YEARS BETWEEN 2003 AND 2009, TOTALING $459,490.
III. THE TRIAL COURT ERRED IN FINDING THAT THE VBAT IS ENTITLED TO RECEIVE REIMBURSEMENT OF $78,500 BY THE CORPORATE ENTITIES.
I.
Plaintiff challenges the summary judgment dismissal of her claim to invalidate the VBAT and reinstate the VAT. In relying on the doctrine of laches, the court reasoned that Valerie did not bring this claim until her third amended complaint in March 2010, filed two years after commencement of this litigation and thirteen years from the creation of the VBAT. This, the court found, despite the fact that Valerie: (1) had knowledge of the facts giving rise to a cause of action for duress and undue influence as early as October 1997; (2) had accepted income and benefits from the VBAT since its inception; (3) allowed the trustees to rely on the validity of the October 1997 trust for more than a decade; (4) had not challenged its formation until the trustees stopped paying her expenses; and (5) never alleged fraud in the inducement. We agree.
Furthermore, Valerie did not bring this claim until the court asked for clarification as to her position.
The equitable doctrine of laches bars a party from bringing a claim when it engages in "an 'unexplainable and inexcusable delay' in exercising a right, which results in prejudice to another party." Fox v. Millman, 210 N.J. 401, 417 (2012) (quoting Cnty. of Morris v. Fauver, 153 N.J. 80, 105 (1998)). Unlike the periods prescribed in a statute of limitations, the time constraints for laches are characteristically flexible, not fixed. Lavin v. Bd. of Educ. of Hackensack, 90 N.J. 145, 151 (1982). The purpose of applying the doctrine of "laches is to discourage stale claims." Fauver, supra, 153 N.J. at 105. "The application of laches, however, requires more than 'mere' passage of time." Chance v. McCann, 405 N.J. Super. 547, 568 (App. Div. 2009).
"Laches may only be enforced when the delaying party had sufficient opportunity to assert the right in the proper forum and the prejudiced party acted in good faith believing that the right had been abandoned." Knorr v. Smeal, 178 N.J. 169, 181 (2003). The key factors we consider to determine whether to apply laches are "the length of the delay, the reasons for the delay, and the 'changing conditions of either or both parties during the delay . . . .'" Ibid. (quoting Lavin, supra, 90 N.J. at 152). "The core equitable concern in applying laches is whether a party has been harmed by the delay." Ibid.
A defendant, however, cannot benefit from the doctrine of laches when his or her own actions caused or contributed to the delay. Rolnick v. Rolnick, 262 N.J. Super. 343, 364 (App. Div. 1993). Our courts also do not regard the defense of laches with favor when there is a confidential relationship between the parties. In re Estate of Mosery, 349 N.J. Super. 515, 524 (App. Div.), certif. denied, 174 N.J. 191 (2002). Whether laches applies depends on "'the facts of the particular case and is a matter within the sound discretion of the trial court.'" Mancini v. Twp. of Teaneck, 179 N.J. 425, 436 (2004) (quoting Garrett v. General Motors Corp., 844 F.2d 559, 562 (8th Cir.), cert. denied, 488 U.S. 908, 109 S. Ct. 259, 102 L. Ed. 2d 248 (1988)).
Plaintiff contends that the lapse of time, even considering possible prejudice to defendants, did not bar her claim against Jacob until they had actual knowledge of his misdeeds, which occurred in 2007 when "the fruits of Pitney Road became evident" and when Valerie first noticed "extravagant purchases by her siblings" and questioned the family accountant. Plaintiff relies on the concurring opinion in State by Parsons v. Fidelity Union Trust Co., 25 N.J. 387, 403-04 (1957) (Heher, J., concurring), to argue that there are no time limitations for claims grounded in express trusts, even with possible prejudice to defendants.
In that factually distinguishable case, the Court held that the State could assert its claims for the escheat of assets of a dissolved company acquired by Fidelity Union, which had remained unclaimed for the necessary fourteen years under N.J.S.A. 2A:37-13. Id. at 397. It also held that there was no presumption of abandonment where the fourteen-year period had not ended. Id. at 398-99. In his concurring opinion, Justice Heher noted that "[t]he beneficiaries of an express trust are not barred by laches or by the statute of limitations from enforcing the trust merely because of lapse of time . . . ." Id. at 403 (Heher, J., concurring). Instead, he found it was "only where the trustee ha[d] repudiated the trust to the knowledge of the beneficiaries that they may become barred from enforcing the trust." Ibid.
The provision set forth in N.J.S.A. 2A:37-13 provided "that whenever the owner remains unknown for 14 years, or his whereabouts remain unknown for that period, or whenever any personal property remains unclaimed for that period, then the property shall escheat to the State." State v . N . J . Nat ' l Bank & Trust Co ., 62 N . J . 50, 52 (1972).
In contrast, Valerie seeks to bar the enforcement of the VBAT as the product of duress and undue influence more than ten years after she first raised these concerns. Contrary to plaintiff's assertion, Valerie became aware of the so-called "wrong" in October 1997 when she initially raised concerns about the exertion of duress and undue influence, but did not pursue these claims until plaintiffs filed the initial complaint in 2008. Moreover, a month after plaintiffs filed the third-amended complaint in March 2010, the court wrote a letter to counsel expressing concern that they were arguing for the first time in the case that the June 1997 trust was controlling. As argued by defendants, the record strongly suggests that plaintiffs' claims of duress and undue influence were "merely an afterthought" to their lawsuit challenging the Absecon transaction. L.V. v. R.S., 347 N.J. Super. 33, 39-40 (App. Div. 2002) (holding that "[w]hile laches does not arise from delay alone, the actions and non-actions of the plaintiff [we]re sufficient to justify the bar of laches to deny her any claim for reimbursement"). Under the circumstances, then, plaintiff's delay was unreasonable and inexcusable.
Plaintiff also relies on In re Estate of Mosery, supra, 349 N.J. Super. at 524, to argue that the defense of laches was not appropriate because the parties had a confidential relationship. In Mosery, the plaintiff's husband transferred all his major assets to his sons about eight months before his death, leaving nothing for his wife. Id. at 516. About three years later, the wife sued her sons claiming the transfer was the result of undue influence. Ibid. The trial court granted defendants summary judgment based on laches. Ibid. We reversed, holding that laches did not bar the mother's action. Id. at 526. Instead, we found that the wife's delay in bringing the lawsuit was the result of her confidential relationship with her sons, who told her that the transfer of assets was only for tax purposes. Id. at 524. More importantly, "we perceive[d] no facts clearly establishing prejudice to defendants." In re Estate of Mosery, supra, 349 N.J. Super. at 524.
Here, however, Valerie testified that Jacob had harassed her to execute the VBAT more than a decade earlier, and thus, her delay in bringing this lawsuit was not the result of a confidential relationship. Moreover, unlike In re Estate of Mosery, laches is appropriate here because of prejudice to defendants. For more than ten years, Jacob managed the VBAT and its assets with no objections from Valerie. During that time, she continued to accept, without reservations, the benefits of the trust. The Simon family businesses also paid their taxes each year on the assumption that Valerie had abandoned her rights to challenge her trust.
Richard, who was the primary witness to the events surrounding the execution of the VBAT, passed away in 2005. Valerie testified that it was her father's idea to establish a trust for her protection and that she had trusted him. Jacob confirmed that "[n]othing was done without going through [his] father first." While Richard's death by itself may not have produced sufficient prejudice to support the application of the laches bar, it is nevertheless clear that defendants acted in good faith believing that plaintiffs had abandoned their right to challenge the creation of the VBAT, and that they relied on Valerie's inaction to their detriment. Knorr, supra, 178 N.J. at 181. Moreover, as the trial court found, to call into question the validity of the October 1997 trust years later would require the trustees to amend thirteen years of tax returns to address countless other issues concerning the family businesses.
In sum, considering the length of, and reasons for, the delay, the changing positions of the parties, and the likely prejudice inuring to defendants, we discern no abuse of the trial court's discretion in barring plaintiffs' claim to void the VBAT and reinstate the VAT based on laches.
II.
Plaintiff next argues that the court erred by failing to find that Jacob breached his fiduciary duties as trustee by: (1) excluding Valerie and the VBAT from the Absecon transaction and from the HJ&J entities; (2) self-dealing and using family financing from the BST and RST to fund the Absecon transaction; (3) acting in a conflict of interest; and (4) failing to communicate with Valerie. Plaintiff also contends that Jacob, as trustee, and Jacob, Joseph, Renee and the corporate defendants, as partners and as a "common enterprise," breached their duty of loyalty to the VBAT by diverting business opportunities from the trust. We disagree.
Specifically, plaintiff argues that, to finance the Absecon transaction, Jacob borrowed money from these family banks in which Valerie had an interest, and that he earned a profit of almost $4 million while the VBAT received four percent interest on the borrowed money, or $31,000.
In concluding that the $2,451,019 in loans from BST and RST to finance Absecon were neither self-dealing nor a conflict of interest, the trial court found that Jacob had an equal interest in these trusts and their operating agreements gave him express authority to borrow for property transactions and to take distributions. Further, the amount borrowed "was far below the amount of interest Jacob individually held within" the BST and RST, and that Jacob could not participate in self-dealing when he exercised proper authority to access funds from these family banks for the very purpose they were intended to further. Second, even if the loans were self-dealing, the court found that they were secured, in the practical sense, because "Jacob had equity in the lender[,]" had assumed personal liability, and had never failed to pay back any money he had borrowed from the family banks. Third, even if the loans were not secured, the VBAT expressly authorized Jacob to use the trust assets without regard to his own or other partnership interests, and that plaintiffs failed to establish that he acted in bad faith.
Fourth, the court found that plaintiffs failed to establish that the VBAT suffered any damages as a result of Jacob's alleged self-dealing. It determined that the VBAT had no interest in the HJ&J entities, that it had no right to claim the profits from the Absecon transaction, and that it had experienced no loss because the loans were repaid with interest.
Lastly, even if the loans were self-dealing and plaintiffs established a breach, the court believed equitable considerations did not support a finding of liability. Indeed, Valerie sought relief for the very same acts in which she and Jeffrey participated without including the VBAT. The court explained: "[E]quity requires the court to consider whether these claims are truly brought in good faith when her husband has behaved in much the same manner and has personally benefited as a result." The court also applied the doctrine of unclean hands, explaining that plaintiffs' cause of action related to the same acts which Valerie and Jeffrey had done without liability.
The scope of appellate review in a non-jury case is limited. Rova Farms Resort, Inc. v. Investors Ins. Co. of Am., 65 N.J. 474, 483-84 (1974). We will "'not disturb the factual findings and legal conclusions of the trial judge unless we are convinced that they are so manifestly unsupported by or inconsistent with the competent, relevant and reasonably credible evidence as to offend the interests of justice[.]'" Id. at 484 (quoting Fagliarone v. Twp. of N. Bergen, 78 N.J. Super. 154, 155 (App. Div.), certif. denied, 40 N.J. 221 (1963)). By the same token, we do not owe any special deference to the trial court's interpretation of law. Manalapan Realty, L.P. v. Twp. Comm. of Manalapan, 140 N.J. 366, 378 (1995).
"A fiduciary relationship arises between two persons when one person is under a duty to act for or give advice for the benefit of another on matters within the scope of their relationship." F.G. v. MacDonell, 150 N.J. 550, 563 (1997). A fiduciary owes the dependent party "a duty of loyalty and a duty to exercise reasonable skill and care." Id. at 564. A fiduciary is liable for the harm that results "from a breach of the duties imposed by the existence of such a relationship." Ibid. (citing Restatement (Second) of Torts § 874(b) (1979)).
A trustee has a fiduciary relationship with the trust. In re Niles Trust, 176 N.J. 282, 297 (2003). "The most fundamental duty owed by the trustee to the beneficiaries of the trust is the duty of loyalty . . . ." In re Accounting of Ex'rs of Koretzky, 8 N.J. 506, 528 (1951); Wolosoff v. CSI Liquidating Trust, 205 N.J. Super. 349, 359 (App. Div. 1985). A trustee must "administer the trust solely in the interest of the beneficiaries." Branch v. White, 99 N.J. Super. 295, 306 (App. Div.), certif. denied, 51 N.J. 464 (1968). A trustee, therefore, must not act "contrary to the legitimate interests and expectations of the beneficiaries . . . ." Coffey v. Coffey, 286 N.J. Super. 42, 53 (App. Div. 1995), certif. denied, 144 N.J. 172 (1996).
Moreover, "[s]tandards of utmost fidelity required of a fiduciary forbid the fiduciary to occupy a position in which its interests conflict with the estate." In re Trust for the Benefit of Duke, 305 N.J. Super. 408, 438 (Ch. Div. 1995), (citing Cohen v. First Camden Nat'l Bank & Trust Co., 51 N.J. 11, 18 (1967)), aff'd, 305 N.J. Super. 407 (App. Div.), certif. denied, 151 N.J. 73 (1997). A trustee is prohibited from using trust money or property for his or her own personal benefit, Koretzky, supra, 8 N.J. at 528-29, "from making an inordinate profit from his [or her] fiduciary position[,]" Silverstein v. Last, 156 N.J. Super. 145, 151 (App. Div. 1978), and from placing self-interest above his or her obligation to the trust. Gilliam v. Edwards, 492 F. Supp. 1255, 1266 (D.N.J. 1980). "[A] trustee who violates his [or her] duty of loyalty [is] chargeable with any loss to the value of the trust estate resulting from the breach." Id. at 1267.
A trustee's duties depend "primarily upon the terms of the trust." Branch, supra, 99 N.J. Super. at 306. The terms are determined by the settlor's intention at the time of the trust's creation. See Coffey, supra, 286 N.J. Super. at 53. Thus, "the primary inquiry must be to ascertain the intent of the settlor from the language of the instrument itself." In re the Trust for the Benefit of Duke, supra, 305 N.J. Super. at 418. A court may also consider "extraneous circumstances" that surround the trust's creation to determine the settlor's true intent and purpose. Id. at 419.
Article VII of the VBAT defined the trustees' powers. It expressly authorized Jacob "[t]o participate in the operation of any business or other enterprise," and to retain, borrow, lend, sell, or dispose of trust assets as he deemed advisable. The VBAT also empowered Jacob to manage the trust's assets, including "the Trustees' personal interest in such property in any other capacity . . . ." Additionally, it allowed Jacob "[t]o borrow money for any reasonable trust purpose and upon such terms, including (but not limited to) interest rates, security, and loan duration, as the Trustee deems advisable." It further allowed Jacob to lend trust funds to any person that he deemed advisable, except "to the Grantor's estate without receiving adequate security and an adequate rate of interest."
As the trial court found, the express terms of the VBAT demonstrated Valerie's intent to give expansive powers to the trustees with few limitations. The circumstances surrounding the VBAT's creation also supported the finding that Valerie intended to give the trustees broad authority to protect her assets and preserve them for her children. In light of these provisions and their purpose, we find no violation of the express terms of the VBAT by using family financing to fund the Absecon transaction.
Nor did Jacob violate the provisions of the BST's operating agreement by loaning money to HJ&J. The primary business purpose of the BST was "to hold, own, develop, improve, manage, operate and sell" various real estate and personal property. The BST's operating agreement authorized JMRV, as manager, to make decisions regarding the operation of the business, including: "(a) the development, sale, lease or other disposition of the Company's assets, [and] (b) the purchase or other acquisition of other assets of all kinds . . . ." Under the provisions of JMRV's partnership agreement, Jacob assumed these management responsibilities.
Moreover, we find no violation of Jacob's duty of loyalty by using family financing for the Absecon transaction. The testimony established that the family patriarch encouraged his children and their spouses to acquire real estate together or separately. Both Valerie and Jeffrey borrowed money from the family banks to finance their own projects. Like the Absecon transaction, their projects did not involve other family members. Because Valerie and Jeffrey benefitted from the same business model as Jacob did with respect to the Absecon transaction, of borrowing from family banks to finance their projects, it would be unfair and unreasonable to hold Jacob liable for any breach of fiduciary duty. See Faustin v. Lewis, 85 N.J. 507, 511 (1981) ("[A] court should not grant relief to one who is a wrongdoer with respect to the subject matter in suit."). In any event, Jacob exercised reasonable judgment when he determined the Absecon transaction was too risky for Valerie based on the facts that were available to him at the time. See Commercial Trust Co. of N.J. v. Barnard, 27 N.J. 332, 343-44 (1958) (holding trustees who invested solely in governmental securities did not breach their duty to diversify investments because they exercised reasonable judgment with regard to investments).
We also find no conflict of interest with regard to the Absecon transaction. Jacob testified that he, Marsha and Renee held three-quarters of the value of the BST and RST, and were owed considerable money by these lenders. Herman confirmed that the BST held a lot of assets owned by Jacob, Marsha, Renee, and Valerie in the form of loans due, tax liens, and mortgages. Cowhey similarly testified that the HJ&J entities held interests in the BST and RST in excess of the amounts borrowed. Likewise, Kline believed there was enough capitalization in the family banks to cover any losses that might have occurred. He explained that "there's so much security in that trust [BST] that it's hard to say that the trustee would have used assets of the [VBAT] to enrich himself. It's a stretch."
According to Cowhey, the HJ&J entities borrowed $3,335,000 from the BST and RST, whereas the total collateral held by the BST was $33,745,837, or about ten times the amount borrowed. Plaintiff does not dispute that the HJ&J entities paid back the family banks whatever they borrowed, plus interest.
Plaintiff relies on Cohen, supra, 51 N.J. at 18, to argue that Jacob wore "two hats" by participating in the Pitney Road project as a member of HJ&J and by serving as trustee. In Cohen, the plaintiff, "as settlor and cestui que trust," sought to recover assets of a trust fund that were held by the defendant bank, which was co-trustee along with the plaintiff's husband, who defaulted on loans obtained from the bank with the trust assets as collateral security. Id. at 14. The Court held that the defendant's position as trustee and at the same time creditor secured by the trust assets was "a conflict of interest incompatible with its duty of undivided loyalty to its trust." Id. at 18-19. Because the trustee bank failed to show that the plaintiff had "knowledge of all relevant facts and complete awareness of the resultant divided loyalty and its possible consequences[,]" it concluded that the trustee bank was liable for breach of its fiduciary duty. Id. at 19,24. Here, however, Valerie knew that Jacob was managing the VBAT and the family businesses, and that the family's long-time business model allowed its members and their spouses to engage in their own deals. Under these circumstances, then, we perceive no reason to disturb the trial court's finding that Jacob did not breach his duty of loyalty by using family financing for the Absecon transaction.
Plaintiff next argues that the court erred by failing to find that the HJ&J entities were part of a common enterprise for the purpose of evaluating the Absecon transaction and that Jacob, Joseph, Renee and the corporate defendants breached their duty of loyalty by diverting business opportunities from the VBAT. Specifically, she claims that the VBAT should have shared equally in the profits of the Absecon transaction because: all family businesses, including the HJ&J entities, traced their roots back to the core entities; the core entities BST and RST financed the Absecon transaction; and the VBAT owned a twenty-five-percent interest in the core entities.
"A partner has a fiduciary duty to share with the partnership those business opportunities clearly related to the subject of its operations." Fortugno v. Hudson Manure Co., 51 N.J. Super. 482, 499 (App. Div. 1958). Co-partners, therefore, "must deal with each other with trust, confidence and good faith[,]" and without any secret benefits or advantages. Ibid.
In Fortugno, a case on which plaintiff relies, we held that various companies owned by a family partnership were part of a single, integrated family enterprise and, therefore, assets of the partnership. Id. at 502. We explained that all the companies were "incorporated or purchased with partnership money, their assets either came directly from the partnership or were purchased with partnership funds, and they were . . . treated as a single enterprise" in many respects and were used to further the partnership interests. Ibid.
While the Simon family businesses shared the same characteristics as the family partnership in Fortugno, the HJ&J entities did not follow the same model. Instead, the HJ&J entities tackled projects that involved more risk and a greater investment of skill, time and money. Over fifteen years, they undertook a mere four or five projects, only some of which succeeded. According to Herman and Jacob, neither Valerie nor Jeffrey raised any objection at the time of HJ&J's formation, or asked for any interest in the new company. Notably, sixteen days later, Jeffrey formed Alper Investment with himself and Valerie as the only members. Both HJ&J and Alper Investment were funded by distributions from the BST. By parity of reasoning, since Alper Investment was never considered a family business by any of the parties, the court properly concluded that the HJ&J entities were not part of single common enterprise for purposes of evaluating the fiduciary duties owed to the VBAT.
Plaintiff, nevertheless, argues that the officers and partners of HJ&J, and defendant corporations, breached their duty of loyalty to the VBAT by usurping the Absecon transaction. She asserts that: (1) the transaction was in line with the Simon family businesses; (2) the property was located in Atlantic County where a majority of family holdings existed; (3) it involved the same professionals used on other projects; (4) its cost fell within the wherewithal of the Simon family businesses; and (5) it was funded solely by assets of companies in which the VBAT owned a twenty-five percent interest. We disagree.
"The corporate opportunity concept is one aspect of the general rule that a fiduciary's loyalties may not be divided." Valle v. N. Jersey Auto. Club, 141 N.J. Super. 568, 573 (App. Div. 1976), aff'd and modified, 74 N.J. 109 (1977). To prove the diversion of a corporate opportunity, a plaintiff must show that: (1) a corporate officer or director is presented with a business opportunity; (2) "the corporation is financially able to undertake" the opportunity; (3) the opportunity, by its nature, is "in the line of the corporation's business and is of practical advantage to it[]"; (4) "the corporation has an interest or a reasonable expectancy[]" in the opportunity; and (5) "by embracing the opportunity, the self-interest of the officer or director will be brought into conflict with" the interests of the corporation. Ibid. (internal quotation marks omitted).
Even assuming the HJ&J entities were part of the family's "common enterprise," the Absecon transaction was not a diversion of a corporate opportunity. As the court found, both Jacob and Joseph deliberated before making an informed decision to participate in the Absecon transaction and to exclude Valerie and the VBAT. They decided to purchase the property through HJ&J because it was formed to tackle such risky projects. Indeed, the record established that: (1) the Absecon transaction was the family's most costly undertaking; (2) it involved the assistance of numerous experts; (3) it required zoning variances and multiple permits; and (4) no family member or business entity had previously participated in such a project. Moreover, the decision to bid on the project was made by a majority of the HJ&J shareholders. Because the Absecon transaction was not in line with the family businesses, and there was no conflict of interest, it did not meet the third and fifth prongs of the Valle test and defendants did not violate their fiduciary duties as partners to the VBAT. There was also no evidence of bad faith. Green Party v. Hartz Mountain Indus., Inc, 164 N.J. 127, 147 (2000) ("[W]hen business judgments are made in good faith based on reasonable business knowledge, the decision makers are immune from liability from actions brought by others who have an interest in the business entity.").
Lastly, plaintiff contends the court erred by failing to find that Jacob breached his duty to communicate with Valerie, to keep records, and to provide an accounting. This argument has no merit. As to the latter, the VBAT required Jacob, as trustee, to keep reasonable records, not an accounting. Jacob testified that books and records were kept of the family businesses. Moreover, at the court's direction, an accounting for the period from January 1, 2003 to December 31, 2009 was completed by an outside firm.
As to the former, the trial court found that Jacob had problems communicating with Valerie, which he attributed to her ADHD, drug and alcohol abuse, and memory lapses. Citing Jacob's testimony, the court believed that he did his best to keep Valerie informed of the family businesses and the VBAT, that he made records available for her review, and that he gave her open access to meet with the family accountant to discuss the business. The court, therefore, concluded that Jacob did not violate his duty to keep Valerie informed and that any lack of communication was the result of her problems, not the lack of reasonable efforts by Jacob. We agree.
Trustees have an obligation "to make full disclosure of all facts within their knowledge which are material for beneficiaries to know for the protection of their interests." Branch, supra, 99 N.J. Super. at 307. Thus,
"[e]ven if the trustee is not dealing with the beneficiary on the trustee's own account, he is under a duty to communicate to the beneficiary material facts affecting the interest of the beneficiary which he knows the beneficiary does not know and which the beneficiary needs to know for his protection in dealing with a third person with respect to his interest."
[St. Pius X House of Retreats v. Diocese of Camden, 88 N.J. 571, 590 (1982) (quoting Restatement (Second) of Trusts § 173, comment d (1959)).]
The VBAT agreement did not contain specific directions to the trustees regarding the notification of beneficiaries. Nonetheless, Jacob had an obligation to inform Valerie of all facts relating to the subject matter of her trust, which were essential to protect her interests. In this case, however, the Absecon transaction did not involve Valerie or her trust, and Jacob had no affirmative duty to communicate with her about the project.
Moreover, Jacob recalled meetings and discussions with Valerie about "things that were going on," and showing her balance sheets when she requested them. He denied hiding any business records from her, explaining:
Did Valerie come to me once every two months, once every three months, once every four months, when Valerie got a niche up her tail, she used to come to me, she used to complain. And I used to show her whatever I had, which was the balance sheets that our bookkeeper does at the end of every month
that shows the income, the expenses, the loans, everything, okay?
. . . .
If Valerie wasn't satisfied, Valerie was told she can go to Bob Reynolds and she can see -- if I can't answer the question, he may be able to answer the question. I never held anything back from either one of them.
Valerie herself admitted that she was a long-time abuser of alcohol and drugs, that she suffered from ADHD, and that she was never interested in learning the family business. She also had difficulty at her deposition recalling her age, and admitted that she did not recall a lot. Jacob similarly testified that it was hard to explain anything to Valerie given her limited attention span and inability to understand explanations. Thus, the evidence supports the court's finding that Jacob made reasonable efforts to keep Valerie informed, and did not violate his duty to communicate.
In sum, we find the evidence amply supports the trial court's findings that: (1) Jacob, as trustee, did not breach his fiduciary duty of loyalty to the VBAT; (2) Jacob and Joseph, as directors, and the corporate defendants did not breach their fiduciary duties owed to the VBAT by participating in the Absecon transaction; and (3) the VBAT suffered no damages because it had no interest in the HJ&J entities and the loans made to them were repaid with interest.
III.
Plaintiff next contends that the trial court erred in finding no breach of duty by Jacob, Joseph or Herman (who was not sued) to the VBAT as a result of taking excessive compensation. We disagree.
To reiterate, according to Cowhey, from 2003 to 2007, Herman, Jacob and Joseph received a total of $4.5 million in compensation plus retirement benefits, or $900,000 per year. Meltzer similarly calculated that the BST paid management fees to JMRV in the amount of $4,523,012, from which $3,965,379 in compensation and $557,663 in retirement benefits were distributed. Each working manager, therefore, received approximately $300,000 in compensation and $37,000 in pension benefits per year before Herman left.
The JMRV, therefore, retained fees totaling $58,000, which were divided equally among Herman, Jacob, Joseph and VBAT.
Cowhey explained that the working managers were paid because they ran the business and made decisions about what transactions to enter into, what properties to acquire, and what tax sales certificates to purchase as well as how to handle the businesses and assets, and whether or not to make improvements. Even plaintiffs' expert, Rabil, acknowledged that if Jacob or Joseph stopped working full-time, the family businesses would be required to hire someone else to manage the 600 properties.
Notably, from 2002 to 2007, Valerie received approximately $297,000 in salary and benefits from J&M Land, or about $50,000 a year, even though she performed no work.
The trial court agreed, reasoning:
To run numerous companies with $40 million in assets and over a five-year period earn $7 million (as Reynolds testified) requires considerable time, effort, intelligence and skill. The court finds that the compensation taken by three individuals who managed all the Simon family businesses was a reasonable amount. The court finds there is no evidence that they mismanaged the businesses. In fact the VBAT appears to have been fortunate to own one-quarter of the business enterprise that has such management at these compensation levels. Plaintiffs' expert does not really dispute the fact that the cost of outside management personnel to run the companies would have been a required cost if Herman, Jacob, and Joseph were not doing the work.
Plaintiff nevertheless cites the BST operating agreement entitling the manager to "nominal compensation as shall be agreed upon, from time to time, by the affirmative vote of a Majority Interest." Yet, as the trial court found:
The fact that one sentence in the BST agreement states its partners shall be paid nominal compensation for managing [the] BST and that JMRV's partnership agreement states that all partners are equal does not change the reality that Jacob, Herman and Joseph did not just manage JMRV or BST but rather all of the Simon family businesses.We agree and affirm on this issue substantially for the reasons stated by the trial judge.
IV.
On their cross-appeal, defendants argue that the trial court erred by removing Jacob and Betty as co-trustees of the VBAT. Alternatively, they contend that the court should have appointed Renee as successor trustee pursuant to the language of the VBAT. We disagree.
Although the trial court found no breach of fiduciary duty in the management of the VBAT, it did register the following concern:
As trustee, Jacob has appeared to have extremely juxtaposed approaches to Valerie's distributions. On one extreme, Jacob for more than ten years paid every one of Valerie's submissions without any demands on Valerie to prove their validity. On the other extreme, Jacob and Betty required documentation for every expense and imposed drug testing on Valerie resulting in basically paying none of her expenses. The first approach causes concern about preserving the estate for the benefit of Valerie's children -- the remaindermen of the VBAT[--]and Valerie's expenses were a drain on the trust assets. The latter approach does not seem to portray either what Valerie intended as grantor or the generosity, love and concern of Richard and Betty had in mind when they created the trust for her.
Moreover, the court also found that, given the family dysfunction and extant litigation, the distrust among Valerie, Betty and Jacob rendered it impossible and impractical for the VBAT to function as originally intended. Relying on Braman v. Central Hanover Bank & Trust Company, 138 N.J. Eq. 165, 191 (Ch. 1946), which dealt with the removal of a trustee who was not guilty of a breach of trust, but was not "altogether blameless," the court concluded that Jacob and Betty should be removed even though they did not breach their fiduciary duties to Valerie.
This same reasoning led to the court's rejection of Renee as the successor trustee. Given the overlapping interests of the VBAT and the family businesses and the general distrust between the parties, the court opted to choose a "truly independent trustee," one who neither party had requested, and appointed Kievit.
The decision to remove a trustee "is in the sound discretion of the court, and it will not be disturbed by an appellate tribunal in the absence of manifest abuse." In re the Trust for the Benefit of Duke, supra, 305 N.J. Super. at 438. The request to remove a trustee "should be granted only sparingly." Ibid.
In general, mere hostility or friction "is not necessarily a sufficient ground for removal." Wolosoff, supra, 205 N.J. Super. at 360. To warrant removal, "there must be evidence that the relationship is likely to materially interfere with the administration of the trust." In re the Trust for the Benefit of Duke, supra, 305 N.J. Super. at 438; see also Wolosoff, supra, 205 N.J. Super. at 360-61. A court, therefore, "should consider the nature of the trust[,]" the duties and powers of the trustee, the need for "collaboration between the parties, the origin or responsibility for the hostility and the extent to which" the trustee's discretion "might adversely affect the rights or benefits of the beneficiary seeking removal." Wolosoff, supra, 205 N.J. Super. at 363 (holding the trial court properly removed trustees who had bitter personal confrontations with the plaintiff in legal arenas and where there was no dispute that future conduct would continue on path of acrimony and distrust).
The record below supports the court's discretionary determination that it was necessary to remove Jacob and Betty as trustees to effectuate the purpose of the VBAT. Family ties among siblings and between Valerie and her mother were strained or broken. Jacob admitted at trial that many family members did not talk to each other, that every family member but his mother had sued someone else in the family, and that it had been that way since his father's death. In addition to this lawsuit, Jacob reported that he and others were in litigation with Jeffrey, and that the Zells were in litigation with the Wolfsons. He also testified that Betty's attempts to communicate with Valerie about her expenses were unsuccessful.
Thus, there was evidence of hostility between the trustees and Valerie, and no indication that their relationships would improve in the future. The existence of this hostility clearly has affected the administration of the VBAT and its purpose to protect Valerie's interests and to handle her affairs. Thus, the court did not abuse its discretion by removing Jacob and Betty as trustees, and by refusing to name Renee as successor trustee.
V.
Defendants also contend the court erred by ruling that Jacob and Betty were not entitled to commissions between 2003 and 2009 totaling $459,490. We disagree.
The amount of "commissions allowable to a fiduciary is a matter controlled by statute, subject to the court's discretionary review." In re Estate of Summerlyn, 327 N.J. Super. 269, 273 (App. Div. 2000). An appellate court will review an award of commissions under an abuse of discretion standard, unless the wrong legal standard was used. Id. at 272.
"[W]hen the trust instrument provides for commissions payable to the trustee, it is binding on the court." Bank of N.J. v. Abbott, 207 N.J. Super. 29, 37 (App. Div. 1986). In the absence of an express provision, however, the court should allow compensation in accordance with "the compensation provisions of the Probate Reform Act[,]" N.J.S.A. 3B:18-1 to -33, "which codified, in a non-business context, the common law reasonableness standard." Id. at 37-38.
N.J.S.A. 3B:18-2 provides:
On the settlement of the account of a nontestamentary trustee, as defined in N.J.S.[A.] 3B:17-9, the court shall allow him the compensation as may have been agreed upon by the instrument creating the trust; and in the absence of any express provision concerning compensation, shall allow him commissions in accordance with this chapter."Commissions in the amount of 6% may be taken without court allowance on all income received by the fiduciary." N.J.S.A. 3B:18-24. Moreover, under N.J.S.A. 3B:18-26, "[t]he failure of a fiduciary to take commissions in any year shall not constitute a waiver by the fiduciary to take in a subsequent year the commissions not taken for that year."
Defendants concede that the VBAT instrument did not provide for payment of commissions on the corpus or income. Indeed, Therese M. Connell, a principal of Capaldi Reynolds & Pelosi, the firm that completed the court-ordered accounting, certified that no trustee of the VBAT ever took commissions since its inception in October 1997. She calculated the total amount of income and corpus commissions foregone between 2003 and 2009, the "accounting" years, as $459,490.
A trustee's failure to take income commissions "is a waiver to the extent income is . . . on hand from which to pay it." In re Bessemer Trust Co., 147 N.J. Super. 331, 396 (Ch. Div. 1976), aff'd sub nom., Bessemer Trust Co. v. Boegner, 165 N.J. Super. 76 (App. Div. 1979). A waiver is generally found in cases where the trustee intended to waive the income distributions. See Id. at 396-97. Here, the trust was in effect for more than ten years during which Jacob performed his duties as trustee without charging, or intending to charge, commissions. Indeed, Connell acknowledged in her certification that the total amount of income and corpus commission was actually higher because it did not include the years between 1998 and 2002, "for which the trustees would also be entitled to commissions." Thus, we perceive no abuse of discretion in the court's finding that equity mandates that Jacob should not be allowed to receive back commissions as a consequence of the litigation.
VI.
Plaintiff contends the court erred by permitting Jacob to use trust funds to pay defendants' legal fees. Defendants, on cross-appeal, argue the court erred on reconsideration by awarding the VBAT reimbursement of $78,544.18 in legal fees paid on behalf of the corporate entities and five percent of the legal fees paid on behalf of Joseph Wolfson and his wife.
According to Reynolds, the family accountant, $227,866 of Valerie's trust money was used to pay counsel fees incurred by Jacob and others in connection with this litigation in 2008, and $202,393 in 2009. The amounts for 2010 were then unknown. Reynolds believed this money represented Valerie's proportionate share of counsel fees, "just like all the other partners" that were paid as part of the "ordinary course of business[.]"
The trial court found that Jacob could have used the trust assets to pay his counsel fees if he chose. The court concluded that under the Restatement (Third) of Trusts § 88 comment d (2007), a trustee could "incur expenses for reasonable counsel fees and other costs" in defending "litigation as appropriate to proper administration or performance of the trustee's duties." It noted that this right applied even though the trustee was unsuccessful in the action, provided "the trustee's conduct was not imprudent or otherwise in violation of a fiduciary duty." Ibid.
On reconsideration, the court agreed that the VBAT should not pay counsel fees relating solely to the representation of Joseph and the business entities. It determined that the trust was entitled to reimbursement of $78,544.18 in legal fees charged by Jacobs & Barbone for representation of the business entities, and five percent of all fees charged by Jacobs & Barbone and Ford Flower & Hasbrouck for representation of Joseph and his wife. The court explained that the five percent represented a "reasonable division of time based on the allegations and proofs at trial[,]" and that no billing was done for the corporate entities except for $78,544.18.
Appellate review of a trial court's determination of attorney fees is deferential. Packard-Bamberger & Co. v. Collier, 167 N.J. 427, 444 (2001). We will disturb the lower court's fee determination "'only on the rarest of occasions, and then only because of a clear abuse of discretion.'" Ibid. (quoting Rendine v. Pantzer, 141 N.J. 292, 317 (1995)).
There is a strong policy in New Jersey "against the shifting of counsel fees." In re Niles Trust, supra, 176 N.J. at 293. Our courts, however, recognize exceptions when "special circumstances enumerated in the Rules themselves [apply] or when such fees specifically are authorized by statute." Ibid.
N.J.S.A. 3B:14-23(l) authorizes trustees "[t]o employ and compensate attorneys for services rendered to the estate or trust or to a fiduciary in the performance of the fiduciary's duties[.]" Under Rule 4:42-9(a)(2), fiduciaries may make counsel fee payments from accounts entrusted to them, "subject to approval and allowance or to disallowance by the court upon settlement of the account." Trustees, therefore, "are entitled to the advice and help of counsel in the performance of their duties" provided they do not unnecessarily subject the trust fund to such charges. Mears v. Addonizio, 336 N.J. Super. 474, 480 (App. Div. 2001) (internal quotations marks omitted).
A court may reimburse a trustee for the expense of defending the administration of the trust. See Behrman v. Egan, 31 N.J. Super. 95, 100 (Ch. Div. 1953), aff'd and modified on other grounds, 16 N.J. 97 (1954). A trustee, however, may be deprived of counsel fees for engaging in acts of misconduct or wrongdoing. Id. at 100; see also In re Niles Trust, supra, 176 N.J. at 298-99 (assessing all reasonable counsel fees against executor or trustee whose undue influence resulted "in the development or modification of estate documents that" expanded "the fiduciary's beneficial interest in the estate"); Bankers Trust Co. v. Bacot, 6 N.J. 426, 446 (1951) (awarding counsel fees for trustee because surcharge against trustee for loss sustained on investment did "not result from actual fraud or active misconduct[]"); Restatement (Third) of Trusts, supra, § 88, comment d ("To the extent the trustee is successful in defending against charges of misconduct, the trustee is normally entitled to indemnification for reasonable attorneys' fees and other costs; to the extent the trustee is found to have committed a breach of trust, indemnification is ordinarily unavailable.").
The VBAT agreement gave exclusive authority to the trustees "[t]o prosecute or defend any action for the protection of the trust, the Trustees in the performance of the Trustees' duties, or both, and to pay, contest, or settle any claim by or against the trust or the Trustees in the performance of the Trustees' duties." Thus, Jacob had express authority to retain litigation counsel. Additionally, Jacob and the other defendants were entitled to reimbursement of counsel fees from the BST, which included the VBAT's twenty-five-percent interest, for the cost of defending the trust's administration and the trustees' removal because, contrary to plaintiff's assertion, the court found that they did not violate any fiduciary duties. There were also reasonable grounds for defending the removal action, especially given the court's finding that "Valerie has benefitted greatly from the fact that her assets have been managed and controlled by her father and then her brother."
We note that plaintiff does not challenge the reasonableness of the fee award. Instead, she argues that "hundreds of thousands of dollars were paid out by the VBAT to cover legal fees" and that this money must be repaid in full if we determine that defendants breached their fiduciary duties.
Accordingly, we find no abuse of the court's discretion by ordering the VBAT to pay its share of defendant Jacob's counsel fees in connection with the litigation involving the administration of the estate and the removal of Jacob and Betty as trustees. Nor did the court abuse its discretion in awarding the VBAT a reimbursement of $78,544.18 from the business entities, and five percent of legal fees from the Wolfsons, as those fees were reasonably found to have been incurred in legal representation of entities and individuals other than the trust and trustees, on issues non-exclusive to the trust.
The record on appeal contains the first accounting prepared by Capaldi, Reynolds & Pelosi for the VBAT, which includes the period from January 1, 2003 to December 31, 2009. The accompanying spreadsheet identifies the legal bills paid on behalf of the VBAT for this litigation from January 22, 2008 to June 30, 2010.
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Affirmed. I hereby certify that the foregoing is a true copy of the original on file in my office.
CLERK OF THE APPELLATE DIVISION