Schumacher v. Schumacher, 303 S.W.3d 170 (Mo. App. W.D. 2010)

Factual Background:

In 1976, Grantor created an irrevocable trust and designated his wife and one of his children as the trustees (“Trustees”).  Income was to be paid to Grantor’s four children during his lifetime and for five years thereafter; the trust was to terminate five years after Grantor’s death and the principal distributed to Grantor’s descendants.  In 1984, Trustees creation a Corporation, and the irrevocable trust was its sole shareholder.  In 1986, Grantor and his wife created a second trust, a revocable trust, and named themselves as trustees.  Upon Grantor’s death in 1998, the revocable trust split into three sub-trusts, and the wife is the trustee of all three sub-trusts.  At Grantor’s death, the irrevocable trust held three assets:  cash or cash equivalents, land, and stock in the Corporation.

In 2001, Trustees formed a Family Limited Partnership and an LLC.  Shortly after forming these entities, the Trustees conveyed all assets of the irrevocable trust into the Partnership and LLC in exchange for a small interest in the entities.  Beneficiaries learned of the conveyance after it occurred.  The wife also conveyed all of the assets in two of the three sub-trusts and a portion of the third trust into the Partnership in exchange for substantial partnership interests.  Additionally, the Corporation transferred an office building it owned to the Partnership and money to the LLC.  The wife, as trustee of the three sub-trusts and president of the Corporation, held a 59.57 percent controlling interest in the LLC.

Prior to May 2003, Trustees exchanged the irrevocable trust’s interests in the Partnership and LLC for additional shares of the Corporation.  As a result of all these conversions, most of the meaningful assets in the trusts were transferred to the Partnership controlled by Grantor’s wife.  When the irrevocable trust terminated in May 2003, shares of the Corporation were the only asset held by the irrevocable trust.  These shares were distributed to Grantor’s four children.  In November 2005, Beneficiaries filed their petition for declaratory judgment, alleging that the Trustees had no power under the terms of the irrevocable trust to convert trust assets into Partnership assets, that Trustees’ fiduciary obligations continued after formation of the Partnership, and that distribution of the Corporation stock to Beneficiaries was an improper distribution of the trust corpus and did not discharge Trustees of their fiduciary obligations.  They also alleged that wife had no power under the terms of the sub-trusts to convert assets of the trusts into Partnership assets and that her fiduciary obligations continued after formation of the Partnership.

Beneficiaries took the position that there were no disputed facts relevant to their action for declaratory judgment, so they waived trial and asked the court to decide the case solely upon the legal issues.  Beneficiaries then filed a trial brief setting forth a statement of undisputed facts, and the Trustees filed a response.  The court stated that, as a basis for deciding the legal issues, it would consider only those factual assertions in Beneficiaries’ trial brief which were uncontested by Trustees’ response and the affirmative defenses argued in Trustees’ brief that were based upon uncontested fact.

Jackson County Circuit Court, J. Forsyth, Held:

The circuit court entered judgment in favor of the Beneficiaries on their petition for declaratory judgment.  The court described the primary legal issue as whether Trustees acted outside their authority in converting trust assets into assets of the Partnership.  The court found that the overall effect of Trustees’ actions was to delay Beneficiaries’ enjoyment of the irrevocable trust, and that Trustees had violated their duties to Beneficiaries to adhere to the purpose of the trust, be loyal, and prudently administer the trust.  The court held that the transfers of trust assets to the LLC and Partnership were voidable transfers and should be set aside.  The court found that Trustees had failed to allege uncontradicted facts to support the elements of the defenses asserted.  Trustees subsequently filed a motion to vacate parts of the judgment and an alternative motion for a new trial, which the court denied.  The Trustees appealed.

Court of Appeals, J. Howard, Held:

Reversed in part, affirmed in part.  Trustees’ first point on appeal is that the trial court erred in entering a declaratory judgment finding the Trustees breached fiduciary duties because such a finding exceeded the scope of the pleadings and the issue was not tried by consent.  Trustees argue that the issue of violation of fiduciary duty was not before the court because the Beneficiaries only claimed that Trustees had no power under the terms of the trust to convert assets.  However, arguments from both parties before the trial court show that Trustees contemplated that issues Beneficiaries presented could involve the application of Missouri law, in addition to an interpretation of the terms of the trust.  Therefore, the trial court did not err in addressing the issue of violation of fiduciary duties.

Trustees’ second point is that the trial court erred in entering the judgment because it failed to hear evidence and consider facts that would have supported Trustees’ investment decisions.  Trustees argue that the trial court should not have disregarded their affirmative defenses simply because they were based on disputed facts.  In the context of a summary judgment motion, the claimant must establish that there is no genuine dispute as to the material facts upon which the claimant would have the burden of persuasion at trial.  However, when the defendant has raised affirmative defenses, the claimant must also establish that the affirmative defenses fail as a matter of law.  Though there may have been no disputed facts relevant for Beneficiaries to make their case, it is clear that there were disputed facts relevant to Trustees’ affirmative defenses.  Therefore, the trial court erred in granting judgment in Beneficiaries’ favor without hearing evidence to determine the factual issues related to the affirmative defenses.