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Enormous Judgment Entered in Kentucky Estate Dispute

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When fiduciaries of trusts and estates are also in control of family businesses, courts take breaches of fiduciary duty seriously.  When misconduct is intentional and concealed, traditional ideas about statutes of limitations and prohibitions on pre-judgment interest are set aside in favor of the victims of misconduct.

The US Court of Appeals for the Sixth Circuit recently affirmed an enormous award of $584 million in favor one set of children of the decedent against another set of children, for breach of fiduciary duty, in Osborn v. Griffin, 865 F.3d 417 (6th Cir. 2017).  The award includes over $250 million in prejudgment interest.

In Osborn, the Plaintiffs were four sisters who alleged that two of six brothers, the Defendants, cheated them out of stock and real property relating to the family’s business, Griffin Industries.  The Court explained the intention of the patriarch, John Griffin, and his wife:

In sum, from the late 1960s to the early 1980s, both John’s and Rosellen’s respective estate plans expressed a clear and consistent desire to bequeath their property equally to their eleven living children. There was only one deviation from this intention. In the early 1980s, John recognized that because Griffin Industries was a Subchapter S corporation, “the four working children were receiving more income from Griffin Industries tha[n] the seven nonworking children.” (Id. ¶ 13.) John wanted to “adjust this result” by making additional stock gifts to the non-working children to restore equality amongst his heirs. (Id.) John’s intention was that if Rosellen predeceased him, “the non-working children would end up with more shares than the working children” to account for the fact that the working children received direct income from Griffin Industries.

The Decedent’s and his wife Rosellen’s estate plan carried out this intention.  The Defendants , however, used their positions as executors of their mother’s estate, as fiduciaries for their disabled father, and as officers of the family business, to engage in a series of stock transactions to greatly increase their share of the family business, to the detriment of the Plaintiffs.

Defendants misled the Plaintiffs about a number of things – which was likely fatal to the various defenses mounted by the Defendants (which could have been successful in the absence of affirmative misrepresentations).  As explained by the Court:

After planning these maneuvers, Dennis called a pair of family meetings in November 1985 to discuss his mother’s estate. At the meetings, Dennis lied to his siblings by claiming that Griffin Industries was on the verge of bankruptcy (it was actually profitable), and that their parents’ estate plans called for the six sons to own all of the parents’ Griffin Industries stock. Dennis did not show any of his sisters his mother’s estate or trust documents, and when one of the sisters (Linda) tried to ask about her mother’s will, Dennis told her “to shut up and sit down.” (Id. ¶ 40.) Reflecting the patriarchal nature of the family, Plaintiffs trusted and “relied on Dennis and Griffy to handle their parents’ estate matters.” (Id. ¶ 45.)

On two subsequent occasions, Linda visited Dennis and asked to view Rosellen’s estate documents. Each time, Dennis became angry and abusive, and refused to show her the relevant documents.

After the Defendants structured the ownership of the family business to their liking, they sold the family business for $840 million.  The trial court awarded the Plaintiff’s $330 million in lost profits.  The trial court also awarded the Plaintiffs $250 million in prejudgment interest.

The Sixth Circuit included many issues in its opinion, but we focus on three:  (i) the “probate exception” to federal jurisdiction, (ii) statute of limitations, and (iii) prejudgement interest.

What is the Probate Exception to Federal Jurisdiction?

The probate exception to federal jurisdiction prevents a federal trial court from hearing a dispute over which it would otherwise have jurisdiction, if the subject matter of the dispute concerns a probate matter.  An extensive analysis of federal jurisdiction over inheritance matters can be found here.

In explaining why the probate exception did not bar the current dispute from federal court, the Sixth Circuit explained:

 Defendants argue that the district court should have invoked the probate exception and declined to hear this case because: (i) Plaintiffs sought money damages equal to the value of the property probated pursuant to John’s will, violating Wisecarver; and (ii) the 1986 Griffin Industries stock sales were ratified in John’s will, and therefore Plaintiffs’ claims challenging those sales necessarily sought to invalidate the will.

We disagree, for several reasons. First, we note that John’s Griffin Industries stock was not part of any res distributed by a probate court. The October 20, 1995 Inventory and Appraisement Form prepared by Dennis and Griffy for John’s probate proceedings shows that John’s estate did not hold any Griffin Industries stock at the time of his death. As we have recounted, John did not possess this stock in 1995 because Dennis and Griffy transferred it out of his estate in the mid-1980s.

We thus agree with the district court that, with respect to John’s Griffin Industries stock, Plaintiffs sought and obtained “compensation for the value of property allegedly wrongfully transferred out of their father’s estate by [D]efendants in breach of their fiduciary duties.” (R. 612, PageID #28041 (emphasis added, footnote omitted).) We have expressly held that such relief does not implicate the probate exception. See Wisecarver, 489 F.3d at 751 (holding that “the removal of [contested] assets from [the decedent’s] estate during his lifetime removes them from the limited scope of the probate exception”). The reasoning for this rule is simple: property that a party removes from a decedent’s estate prior to his death is not part of the res that is distributed by the probate court. Thus, ordering a defendant to disgorge the profits acquired from such property does not require either setting aside the decedent’s will, or redistributing assets that were parceled out by the probate court.

Can Statutes of Limitations be Excused Based on Wrongful Conduct and Concealment?

The Sixth Circuit rejected all arguments that the lawsuit was late – even though the alleged wrongful conduct occurred decades before the filing of the lawsuit.

This case closely parallels Security Trust. As in Security Trust, Plaintiffs and Defendants were in a close family relationship that would have made it difficult for Plaintiffs to question their brothers’ integrity or demand a detailed accounting of the brothers’ business activities. The parties’ family dynamics were such that Plaintiffs trusted their brothers implicitly, and generally deferred to their business judgment. Moreover, Defendants reacted aggressively and disparagingly whenever Plaintiffs tried to inquire into Defendants’ management of the family business and their parents’ assets. Under these circumstances, Kentucky law excuses Plaintiffs’ failure to discover Defendants’ wrongful conduct.  Security Trust, 210 S.W.2d at 338 (“Where a confidential relationship exists between the parties, failure to discover the facts constituting fraud may be excused.” (citation omitted)).

Martom separately argues that equitable tolling cannot apply to Plaintiffs’ claims against it, because it was never in a fiduciary relationship with Plaintiffs. We reject this argument. The district court found that Martom was created by Griffy and Dennis to wrongfully circumvent Kentucky’s law against self-dealing. Kentucky law places persons and entities that aid or abet a tort in the same position as the primary tortfeasor.  See  Steelvest, Inc. v. Scansteel Serv. Ctr., 807 S.W.2d 476, 486 (Ky. 1991); cf. Miles Farm Supply, LLC v. Helena Chem. Co., 595 F.3d 663, 666 (6th Cir. 2010) (explaining that Kentucky follows § 876 of the Second Restatement of Torts, which imposes aiding and abetting liability on parties that knowingly assist in a tortfeasor’s breach of fiduciary duties).  Because Martom participated in Griffy and Dennis’ wrongdoing, equitable principles prevent it from invoking the statute of limitations.  Emberton, 299 S.W.3d at 573 (noting that Kentucky’s equitable tolling statute does not permit an “inequitable resort to a plea of limitations” (quoting Adams, 249 S.W.2d at 793)).

The Sixth Circuit also rejected an “equitable” statute of limitations defenses, known as laches.

In the proceedings below, the district court invoked the unclean hands doctrine and disallowed Defendants’ laches defense because it found that Defendants repeatedly and flagrantly violated their fiduciary duties with respect to the administration of their parents’ estate plans, and continued these violations even after they were sued by Betsy for their wrongful conduct.  The district court thus concluded that Defendants’ “decades-long refusal to fulfill their fiduciary duty to deal fairly and openly with their sisters, and to see that the sisters received the property left to them by their parents” should prevent “them from asserting any defense that sounds in equity.

When Can Pre-Judgment Interest be Awarded?

In affirming the $580 million prejudgment interest award, the Sixth Circuit pointed out the difference between a “liquidated” claim v. an “unliquidated” claim.

Under Kentucky law, if the claim is liquidated, interest follows as a matter of right, but if it is unliquidated, the allowance of interest is in the discretion of the trial court.” Hale v. Life Ins. Co., 795 F.2d 22, 24 (6th Cir. 1986).  The Kentucky Supreme Court has recently explained that:

A damages claim is liquidated if it is “of such a nature that the amount is capable of ascertainment by mere computation, can be established with reasonable certainty, can be ascertained in accordance with fixed rules of evidence and known standards of value, or can be determined by reference to well-established market values.” [3D Enters. Contracting Corp. v. Louisville & Jefferson Cty. Metro. Sewer Dist., 174 S.W.3d 440, 450 (Ky. 2005)] (citation omitted). Examples include “a bill or note past due, an amount due on an open account, or an unpaid fixed contract price.” [Nucor Corp. v. General Elec. Co., 812 S.W.2d 136, 141 (Ky. 1991)].In contrast, an unliquidated damages claim is one which has “not been determined or calculated, . . . not yet reduced to a certainty in respect to amount.” Id. (citations omitted). An unliquidated claim is unspecified and undetermined prior to a breach. In determining whether a claim is liquidated or unliquidated, “one must look at the nature of the underlying claim, not the final award.” 3D Enterprises, 174 S.W.3d at 450.

Plaintiffs’ disgorgement claims are far afield from “a bill or note past due, an amount due on an open account, or an unpaid fixed contract price”—the examples the Kentucky Supreme Court has given of liquidated damages. See Nucor Corp., 812 S.W.2d at 141. Indeed, Plaintiffs were only able to establish entitlement to their claims by providing expert testimony at trial, a strong indication that the claims were not for liquidated sums. Ford Contracting, 429 S.W.3d at 414. We therefore hold that Plaintiffs’ claims were unliquidated.

The Sixth Circuit then quoted from the trial court opinion, to drive home the consequences of the bad conduct of the Defendants.

Before this Court is an extraordinary case, spanning decades, in which defendants repeatedly and flagrantly violated the fiduciary duties they owed to their sisters, who reposed great trust in their brothers.

There can be no question that prejudgment interest results in a large — very large — recovery. But, as plaintiffs point out, this is a function of the passage of many years since the breaches in question, during which time defendants misled their sisters about the propriety of their actions. But for an errant mailing in 2010, plaintiffs perhaps would never have discovered the wrongs done to them by their brothers. It would [be] inequitable not to compensate plaintiffs for the loss of use of millions of dollars for much of their adult lives.

 

Osborn v. Griffin Sixth Circuit Opinion

Appellant Brief

Appellee Brief

 

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