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Matter of Trust Under Will of Maxwell

December 24, 1997

I/M/O THE TRUST UNDER THE WILL OF CHARLES J. MAXWELL, DECEASED.


On appeal from Superior Court of New Jersey, Chancery Division, Camden County.

Approved for Publication December 27, 1997.

Before Judges Skillman, Eichen and Wertheimer. The opinion of the court was delivered by Eichen, J.A.D.

The opinion of the court was delivered by: Eichen

The opinion of the court was delivered by

EICHEN, J.A.D.

This appeal concerns the administration of the Charles J. Maxwell testamentary trust established in 1945 after the death of the testator (the trust).

The primary questions raised by the appeal are (1) whether the contingent remainderpersons under the trust had sufficient notice and adequate representation during two intermediate accountings approved by the court in 1975 and 1983 (the fourth and fifth intermediate accountings *fn1 ) to justify barring them from seeking to reopen the accountings in order to file exceptions against the trustees, and (2) whether the exceptions filed by the remainderpersons in 1996 to the fourth, fifth, and sixth and final accountings *fn2 were legally sufficient to justify allowing them to take discovery of the trustee. The remainderpersons contend that during the twenty-seven year period covered by the three accountings, the successive trustees breached their duties to properly invest and manage the trust in that they failed to diversify and impartially administer its assets for the benefit of both the life beneficiaries and the ultimate remainderpersons. As a result, they contend that they suffered a substantial loss as reflected in the serious decline in real value of the trust assets.

We hold that the notice and representation of the minor remainderpersons at the fourth intermediate accounting were inadequate; that the notice of the proceedings on the fifth accounting may have been deficient; and that the allegations in the exceptions filed to all three accountings are legally sufficient. Accordingly, we reverse and remand the matter to the Chancery Division for further proceedings consistent with this decision.

I.

Charles J. Maxwell died in 1945. He left the bulk of his estate to a trust created under his will. The trust required payment of income to certain designated life beneficiaries until their deaths, when the trust would terminate and the principal would be distributed to their descendants. *fn3 Initially, First Camden National Bank and Trust Company (First Camden) and Maxwell's son became the trustees of the trust. In the early 1950's, after the testator's wife and son died, the testator's grandchildren, Virginia Holt and Katherine Freeman, became the life beneficiaries of the trust, and First Camden became the sole trustee.

Virginia Freeman died in 1984 leaving her sons David Freeman and Donald Freeman as her only descendants. Upon their mother's death, Donald and David began receiving the income from their half of the trust assets. In 1994, Katherine Holt died leaving as her only descendants her children Lauren Holt Rupp and Gregory Holt. David Freeman, Donald Freeman, Lauren Holt Rupp and Gregory Holt are the remainderpersons under the trust (the remainderpersons) and the exceptants and counterclaimants herein.

On July 7, 1995, Midlantic Bank N.A. *fn4 (Midlantic), the present trustee under the will, filed a complaint seeking an order approving its sixth and final accounting and directing distribution of the trust assets to the remainderpersons. On August 4, 1995, the court issued an order to show cause why the relief should not be granted. A number of adjournments followed. Nine months later, on April 17, 1996, the remainderpersons filed exceptions to the third, fourth, fifth and sixth and final accountings, as well as an answer and a counterclaim against Midlantic and its predecessor trustees, First Camden and Heritage. *fn5 They sought to reopen the intermediate accountings on due process grounds, alleging that the trustees failed to provide them with adequate notice and representation in the proceedings to approve the intermediate accountings. They also asserted that the trustees had failed to properly diversify the trust assets and fairly balance the investments between assets that would "achieve[] appreciation and gain as well as income." Additionally, the remainderpersons claimed that Midlantic and its predecessor trustees had failed to make a full and complete disclosure of the true value of the trust assets, alleging that they had actively sought to conceal substantial decreases in their value. Accordingly, in their counterclaim, the remainderpersons sought to recover "an amount sufficient to fully restore the trust estate, and thus the remainderpersons, to the extent and position they would have occupied if the trust were faithfully and properly administered." The remainderpersons also sought recoupment of the commissions, legal fees and costs previously awarded to the trustees, as well as punitive damages.

The remainderpersons traced the history of the performance of the trust beginning with the first intermediate accounting in 1957 and provided graphs to demonstrate the deterioration in its value over the years. The exceptions noted the decline in the value of the trust assets even though there had never been an invasion of the principal of the trust during the entire period covered by the accountings. The remainderpersons compared, for example, the market value of the trust assets in 1968, at the beginning of the period covered by the third intermediate accounting, which was $382,420.36, with its value at the time of the sixth and final accounting in 1995, which was $402,854.81. *fn6

They fault the lack of diversity in the trust assets, pointing out that almost from its inception, over 85% of the trust was comprised of the same three common stocks, Christianna, DuPont and General Motors, noting that the National Bank Examiners in 1953 had been critical of this concentration of assets. *fn7 They also contend that during the later accounting periods the trustees over-invested in income-producing assets to their detriment. *fn8

On April 8, 1996, Midlantic filed a motion in the Chancery Division, Probate Part seeking to strike the exceptions and the answer and to dismiss the counterclaim. On June 13, 1996, the Judge granted Midlantic's motion with respect to the intermediate accountings, ruling primarily that the remainderpersons had received adequate notice of the proceedings to approve the prior accountings as reflected by the notices mailed to their addresses of record. The Judge also determined that the minor remainderpersons had been adequately represented at the fourth intermediate accounting by David Freeman as their "virtual representative." See R. 4:26-3(a). However, with respect to the sixth and final accounting, the Judge permitted the remainderpersons to file amended exceptions to more specifically set forth the bases of their claims against the trustee.

On August 27, 1996, Midlantic moved to strike the amended exceptions, and the remainderpersons filed a cross-motion for reconsideration of the court's earlier order striking their exceptions to the intermediate accountings. By order dated October 31, 1996, the Chancery Division Judge denied the remainderpersons' cross-motion for reconsideration. The Judge determined that the amended exceptions were insufficient as a matter of law and denied the remainderpersons' request for discovery. On January 2, 1997, the Judge entered an order approving the sixth and final accounting and struck the remainderperson's amended exceptions. Thereafter, on January 22, 1997, the Judge entered an order awarding commissions and counsel fees to Midlantic with respect to the sixth and final accounting, and for defending against the remainderpersons' claims. This appeal ensued.

These are the essential facts concerning the issues of notice and representation of the remainderpersons in the proceedings for approval of the fourth and fifth accountings. At the time of the testator's death in 1945, the remainderpersons were not yet born. On June 26, 1956, David Freeman was born; his brother Donald Freeman was born on August 20, 1960; Gregory Holt was born on November 3, 1959; and Lauren Holt Rupp was born on October 3, 1962. In 1957, shortly after David's birth, the record reflects that First Camden wrote to Virginia Freeman requesting information concerning the status of any children, explaining that a guardian "must be appointed to represent the minor's interest." In 1958, a letter written to Virginia Freeman's attorney reiterated the need for a guardian ad litem where "a 'possible' conflict between the income beneficiary and the ultimate remainderman [exists]." Similarly, in 1968, prior to the filing of the third intermediate accounting, First Camden again wrote to Virginia Freeman, advising that neither she nor her sister Katherine Holt, the other life beneficiary, could serve as guardian ad litem because "no one having any possible conflict of interest with the minors can serve." The trustee further rebuffed the life beneficiaries' efforts to have their mother, who lived in Florida, serve as guardian ad litem for the minor remainderpersons. Consequently, during the remainderpersons' minority, at least through the third intermediate accounting, they were represented by guardians ad litem in the proceedings brought for approval of the first, second and third intermediate accountings.

The record reflects that the trustees and the life beneficiaries were both keenly aware of the conflict necessitating the appointment of a guardian ad litem to represent the minor contingent remainderpersons in the ensuing intermediate accountings. Nonetheless, on August 22, 1975, Heritage filed a complaint seeking approval of the fourth intermediate accounting without seeking the appointment of such guardian ad litem ; instead, the trustee sought an order pursuant to R. 4:26-3(a) designating and appointing David Freeman, who had turned eighteen on June 26, 1974, to represent the three minor remainderpersons. At the time, David Freeman was a dependent residing in Georgia with his mother, Virginia Freeman, one of the life beneficiaries. The complaint described David as an adult, without indicating that he had just attained maturity.

Paragraph 5 of the complaint states as follows:

There are contingent gifts ... under Article Seventh, paragraphs (I) and (J) [of the will], to the grandchildren of [the] testator. Included in this group are persons presently alive as well as unborn persons. All such persons included in this group may now be represented under Rule 4:26-3 by David Vernon Freeman and there is no possibility of a conflict of interest insofar as the facts in this accounting proceeding are involved between him and the others in such group presently born and unborn.

An affidavit filed on September 11, 1975 states that notice of the fourth intermediate accounting and the appointment of David Freeman as "virtual representative" was mailed on September 8, 1975 to the minor remainderpersons, individually, and to the life beneficiaries, Virginia Freeman and Katherine Holt, at their family homes. At the time of the mailings, David's fourteen-year-old brother Donald lived in the same household in Georgia with David and their mother, Virginia Freeman. Their minor cousins, Lauren Holt Rupp and Gregory Holt, whom David was also representing, lived in Colorado with their mother, Katherine Holt, the other life beneficiary.

According to a certification filed by David Freeman, he contends that "[he] was never notified of the fourth interim accounting in 1975," and that he was never notified that "[he] was either nominated or appointed as the 'virtual representative' for the other remainderpersons, Lauren B. Rupp, Gregory M. Holt and Donald M. Freeman." The latter remainderpersons also disclaim any knowledge of the fourth intermediate accounting. Midlantic did not file an affidavit or certification disputing these claims.

The remainderpersons contended in the Chancery Division that the life beneficiaries purposely withheld knowledge of the existence of the trust from them. In support of their claim of lack of notice, the remainderpersons relied on certain correspondence sent by the life beneficiaries in 1982 to Heritage, prior to the fifth intermediate accounting. The record reflects that on September 1, 1982, Virginia Freeman wrote to the trustee, ...


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