Trustee’s Recovery of Damages for Conversion by Predecessor Trustee

Take-Away: Today the Michigan Court of Appeals released an interesting case where the decedent’s Will and Trust were found to be forgeries by the named trustees. The probate court was asked to enter a damage award against the perpetrators for treble damages as authorized by Michigan’s conversion statute, but the probate court denied that request. That denial was sustained by the appeals court. While maybe the result was correct, the Court creates somw confusion in which statute applies when assets are converted from a Trust.

Case: In re Geraldine M. Benjamin Trust, No. 34562 (Mich App, April 30, 2020.)

Facts: The facts reported in the court decision are distilled in an attempt to keep this short. Geraldine had three children, several grandchildren, and a couple of great-grandchildren. Geraldine had a 2011 Will and Trust. Under both Will and Trust she named two close friends as both personal representatives and co-trustees. In 2012 there was an amendment to the Trust. Geraldine expressly told her attorney that she did not want any of her children, or anyone else interested in her estate, to act in any fiduciary capacity. Which is why it was strange that after Geraldine’s death, two of her children allegedly discovered a Codicil to the 2011 Will and Trust amendment ‘under Geraldine’s mattress’ in which two of her children were named as fiduciaries, and who were to receive more of her estate than under the 2011 estate planning instruments. The ‘mattress documents’ were purportedly witnessed by the children’s cousins, and signed shortly after her visit to the attorney for the 2012 trust amendment. The originally named co-trustees filed suit claiming the ‘mattress documents’ were forgeries. The petitioners sought an award of treble damages for conversion by the two children.

Probate Court: The probate court found the ‘mattress documents’ to be forgeries which were an attempt to defraud other beneficiaries and gain control of Geraldine’s estate.et The judge found it highly suspicious that Geraldine would return home from the lawyer’s office just having amended her trust, to sign yet another Will and contradictory Trust amendment. A lot of creative arguments were raised by the children, but the probate judge found them to be specious, and lacking credibility. The probate judge awarded $371,955 against the respondent-children, which the judge felt was the amount required to restore Geraldine’s Trust to make it whole, leaving the original terms of the 2011 Trust, in place. This award effectively precluded one of the respondents, Geraldine’s daughter LuAnn, from receiving her share as a beneficiary under the original 2011 Trust. However, the probate judge denied the petitioner’s request for treble damages.

Claims: The respondents challenged the probate judge’s finding that they had forged Geraldine’s Codicil and Trust Amendment. They also claimed that the probate court lacked the authority to ‘disinherit’ LuAnn as a remedy for her actions.

Court of Appeals: The Court sustained the probate judge’s finding of forgery. It is a bit more confusing trying to follow the Court’s legal reasoning for the damage award.

Breach of Trust Statute: With regard to the damage award, the Court turned to MCL 700.7901(1) which deals with the available remedies against a trustee for breach of trust, even though the only reason LuAnn was the trustee was by virtue of her forgery of her mother’s Trust amendment, which the Court found to be invalid by virtue of the forgery. One of those potential remedies is to compel the trustee to redress a breach of trust by paying money, restoring property, or by other means. As to the amount of the remedy for a breach of trust, the Court cited the formula to be the larger of (a) the amount required to restore the value of the trust property and trust distributions to what they would have been had the breach not occurred; or (b) the profit the trustee made by reason of the breach. [MCL 700.7902.]In short, the remedy is the larger to either make the trust estate whole, or to take from trustee the ‘profit’ they made from the breach. This provision does not sound like the trustee is to be penalized.
Recovery of Trust Assets: The Court then turned to MCL 700.7813(4), which was covered in yesterday’s missive, the Michigan Trust Code section that provides that a person who embezzles or wrongfully converts trust property is “liable in an action brought by the current trustee for double the value of any property embezzled, converted, or wrongfully withheld.” Under this section, there is clearly a mandatory penalty of double the value of the assets converted.
Damage Calculation: In calculating the amount of damages that was deemed to be appropriate, the Court noted:
Each of the grandchildren and great-grandchildren were to have received, in trust, until age 21, $40,000 under the original 2011 Trust. LuAnn, as trustee, distributed outright $40,000 to one of them, and $10,000 to two others, contrary to the imposition of the continuing trust terms. Thus LuAnn (and her brother, the other respondent) were ordered to repay $60,000 improperly distributed to the three minor beneficiaries.
LuAnn received $$226,985 under the forged trust’s terms. Under the original 2011 trust, she was entitled to receive $185,369. “Adding the $60,000 for the grandchildren and great-grandchildren, the $41,616 from LuAnn [$226,985 less $185,369= $41,616] and the $84,970 [an aggregate of amounts paid to ‘helpers’, $33,000 that a child of LuAnn should not have received, $2,341 another beneficiary should not have received, $19,722 that David, the other respondent, had received in ‘fees’, and $23,906 that was transferred to a checking account ‘that should not have been distributed’] created a total of $186,586 ”that respondents were required to return. The probate court decided that LuAnn had forfeited this amount through her actions. This brings the total judgment to $371,955 which is the amount that the probate court awarded.” Forfeiture of an inheritance is not, however, a remedy under MCL 700.7813(4).
LuAnn argued that the probate judge lacked the authority to withhold the $186,586 that she would have been entitled to receive under the original trust’s terms. “The probate court found that respondents carried out a scheme to defraud the beneficiaries through forgery and to obtain significant financial benefit. If the probate court had merely ordered that the trust be made whole without any further judgment against LuAnn, this would mean that she would have still received her share under the first July 2012 trust] amendment and April 2011 Will. In other words, having lost out on her scheme for more financial gain, she would still have obtained the original benefit as if she had never attempted the scheme in the first place….this clearly provides no disincentive against respondents, and others, attempting such a scheme in the future.” Thus, the Court found that the probate judge did not abuse its discretion in his decision to cause LuAnn to forfeit her inheritance under her mother’s Trust.
The Court did, however, reject the petitioner’s request to award the trust treble damages authorized under MCL 600.2919a in cases of embezzlement or conversion. That statute provides that “A person damaged as a result of either both of the following may recover 3 times the amount of actual damages sustained, plus costs and reasonable attorneys fees.” The Court merely observed that the statute is permissive with its use of the word “may”, and even though the probate judge found that there was a conversion, it was not required to apply the treble damage statute.

Observations:

Did LuAnn Breach the Trust as Trustee? Interestingly, in a footnote, the Court responded to argument by LuAnn that other statutes that govern trustees, which role her forgery presumably gave her, were applicable to limit the probate court’s remedies. In response, the Court observed: “LuAnn was not a trustee. The probate court found that she created an invalid trust and forged the decedent’s signature. Kathleen Jansen was the trustee named by the valid trust, not LuAnn.” This seems a bit inconsistent since the Court previously relied on the ‘breach of trust’ by a trustee statutes [MCL 700.7901 and MCL 700.7902] to set forth how the damages should be calculated for a breach of trust by a trustee, yet in the later footnote the Court says that LuAnn was never the trustee. Why cite the breach of trust statutes with its various remedies if LuAnn was never a trustee?
Were Conversion Damages Discretionary: Similarly, the Court cites in its opinion MCL 700.7813(4) with regard to an embezzlement or conversion from a trust, providing, in part: “If a person embezzles or wrongfully converts trust property…the person is liable in an action brought by the current trustee.. for double the value of any property embezzled, converted, or wrongfully withheld from the current trustee.” If the assets wrongfully distributed by LuAnn and her brother from Geraldine’s trust were wrongfully converted, then MCL 700.7813(4) should apply, exposing LuAnn (and her brother) for double damages of the value of the converted property. While the Court is correct that MCL 600.2919a that authorizes treble damages for conversion is discretionary with the trial judge, there appears to be no judicial discretion when applying MCL 700.7813(4).

Conclusion: While I do not quarrel with the Court’s ultimate decision to punish LuAnn for her forgery of her mother’s Will and Trust Amendment, I struggle with the Court’s efforts to apply Trust Code sections to support its result. The breach of trust remedies talk in terms of making the trust whole, not punishing the perpetrator by forfeiting her inheritance. If LuAnn was never the trustee, then why even mention the breach of trust remedies. Similarly, while the separate treble damages conversion statute is obviously within the trial court’s discretion, that is not the case with regard to the Trust Code’s double the value of the wrongfully converted trust property, which expressly states that the person who is found to have converted trust assets “is liable for double the value of any property converted.” It is almost as if the appellate judges’ clerks stumbled across seldom read Trust Code provisions towards its end, and struggled to work some of them into the decision when they did not apply, and then chose to overlook the mandatory trust property conversion statute that compels a double damage award. Needless confusion, but as noted maybe the right result.