ESTATE OF SAMUEL RAPPAPORT, DECEASED APPEAL OF: ESTATE OF SAMUEL RAPPAPORT, DECEASED (THE ESTATE) (RITA RAPPAPORT, TRACY RAPPAPORT SCOTT, AND WIL WES RAPPAPORT) AND THE ADMINISTRATORS D.B. N.C. T.A. OF THE ESTATE OF SAMUEL RAPPAPORT, DECEASED (MELLON BANK, N.A., TRACY RAPPAPORT SCOTT, AND WIL WES RAPPAPORT) Appellant IN RE: ESTATE OF SAMUEL RAPPAPORT, DECEASED APPEAL OF: LOIS BASCIANO IN RE: ESTATE OF SAMUEL RAPPAPORT, DECEASED APPEAL OF: RICHARD BASCIANO
Appeal from the Decree March 2, 2012 In the Court of Common Pleas of Bucks County Orphans' Court at No(s): 94-000547.
BEFORE: LAZARUS, J., OTT, J., and STRASSBURGER, J.[*]
Before the Court are cross-appeals filed in the estate of Samuel Rappaport, deceased ("Decedent"). Appellants/Cross-Appellees Rita Rappaport ("Rita"), Wil Rappaport ("Wil"), and Tracy Rappaport Scott ("Tracy") are beneficiaries of the estate (collectively, "Beneficiaries"). Appellant Mellon Bank, N.A., along with Wil and Tracy, is an administrator, d.b.n.c.t.a., of the estate. Appellees/Cross-Appellants Richard Basciano ("Basciano") and Lois Basciano ("Lois") are former executors of the will of the Decedent (collectively, "Executors"). The issues raised in this appeal concern the adjudications issued by the Court of Common Pleas of Bucks County, Orphans' Court Division with regard to objections filed to the First and Second Accounts of the former Executors. After careful review, we affirm in part, reverse in part and remand for further proceedings.
Samuel Rappaport died on September 6, 1994, leaving a will dated September 3, 1994. He was survived by his estranged wife, Rita, and his children, Wil and Tracy. Decedent was also estranged from Tracy at the time of his death. Despite their estrangement, Decedent left his entire residuary estate, in trust, for Rita, with net income to be paid to her at least quarterly for the duration of her life. Upon Rita's death, the net income was to be paid in the same fashion to Wil; upon Wil's death, the principal was to be paid to Wil's spouse and descendants as he may specifically appoint in his will. Tracy received only a contingent interest in any portion of the estate that Wil might disclaim. Ultimately, Wil disclaimed a one-half share of his interest in the estate in Tracy's favor. A Family Settlement Agreement was executed on May 25, 1995 reflecting that arrangement.
In his will, Decedent appointed Morris P. Hershman, Richard Basciano and Charles Podhaizer as executors and trustees and required that there be at least two executors acting at all times. Hershman was Decedent's personal attorney and Podhaizer was a close personal friend. Basciano was a business associate of Decedent as well as a longtime family friend, trusted by Rita, Wil and Tracy. Basciano was a father figure to Decedent's son, Wil, and a godfather to one of Tracy's children. Basciano was also a significant creditor of Decedent's estate. Despite full knowledge of this fact and of the conflict of interest it created, Decedent specifically instructed his attorney to include Basciano as an executor in the will, against the advice of counsel.
Shortly after Decedent died, Podhaizer renounced his right to serve as executor. The will was admitted to probate on September 13, 1994. Basciano and Hershman qualified and proceeded to serve as co-executors until Hershman's own resignation as co-executor on September 18, 1996. As a result of Hershman's resignation, and contrary to the provisions of the will, Basciano acted as sole executor from the date of Hershman's resignation until February 24, 1997, when he appointed his personal administrative assistant, and now wife, Lois Palmer, as co-executor. The Rappaport family supported Lois' appointment. Lois had no prior experience as a fiduciary. Basciano also hired his personal attorney, Norman Oshtry, Esquire, as counsel to the estate.
At the time of his death, Decedent's net worth was approximately $57.5 million. Amended Adjudication Findings of Fact, 3/2/12, at ¶ 1. As of January 1, 1994, audited financial statements reflect that his businesses carried total debt of nearly $108.5 million. Id. at ¶ 111. Decedent used a trade name, SR Management Company, to employ the individuals who managed his various interests. Id. at ¶ 36. After Decedent's death, his executors continued to operate his businesses under the name RRR Management Company, Inc. ("RRR"). Id. at ¶¶ 38-39. Decedent's assets included investments in securities and interests in various businesses, companies, partnerships and joint ventures. Id. at ¶ 109. A large portion of the underlying partnership and joint venture assets was comprised of real estate holdings in Pennsylvania, Delaware and Florida. However, around the time of his death, Decedent's business holdings were "experiencing serious financial problems, " id. at ¶ 65, and he had difficulty making payments on obligations as they came due as a result of liquidity problems. Id. at ¶ 113.
In an effort to alleviate some of his financial problems, Decedent had attempted to secure debt forgiveness from two banks, Fidelity and Continental. Id. at ¶ 117. In order to convince Fidelity to finalize a debt forgiveness agreement, Basciano agreed to pledge $3 million in Israel bonds as collateral on Decedent's behalf. Id. at ¶ 118. During the same time-frame, Basciano loaned the sum of $3 million to Decedent for the payment of delinquent real estate taxes, as evidenced by a promissory note dated July 29, 1994. Id. at ¶¶ 174-75. Basciano told Decedent that he would need the loan repaid by the end of 1994 for tax reasons. Id. at ¶ 176. Decedent agreed, telling Basciano he would repay him in real property if sufficient cash was unavailable. Id. at ¶ 177. During his life, Decedent used a "ten-cap" valuation to value properties for sale and agreed to use such valuation when and if he repaid Basciano's loan in property. Id. at ¶¶ 177-79.
Decedent was unable to reach a debt forgiveness agreement with Continental prior to his death. However, as executor, Basciano successfully negotiated a deal pursuant to which Continental would accept approximately $14 million as payment in full of a $20 million debt. Id. at ¶ 127. The estate was required to make that payment by February 1995, approximately six months after Decedent's death. Id. at ¶ 128. In order to raise the funds to meet that deadline, Basciano personally loaned the estate an additional sum of $6.8 million, which he secured with properties owned by the Samuel Rappaport Family Partnership ("SRFP"). Id. at ¶¶ 132, 135. During his life, Decedent had been the general partner of SRFP and held a 90% interest in the partnership. Id. at ¶ 53. Wil and Tracy were limited partners, each holding a 5% interest. Id. Basciano set an interest rate of 9.75% and signed the $6.8 million mortgage and security agreement on his own behalf and on behalf of SRFP, as Decedent's executor. Id. at ¶¶ 136-37. Basciano subsequently loaned the estate and RRR an additional $639, 000, which was consolidated in a promissory note dated March 1, 1997. Id. at ¶ 141. The promissory note was executed by Basciano and Lois on behalf of the estate. Id. Basciano neither sought nor received court approval for these loan transactions with the estate. Id. at ¶ 143.
Between the date of Decedent's death and the end of July 1995, the estate's debt decreased by a total of $47 million; the trial court found that Basciano's negotiations for debt forgiveness were "vital in improving the [financial] condition of the estate." Id. at ¶¶ 160-62.
Over the duration of Basciano's administration of the estate, he engaged in numerous transactions involving property owned by various estate-related entities. Beneficiaries, who once supported Basciano's efforts, raised objections to nearly all of these transactions, alleging self-dealing on Basciano's part and asserting claims for rescission and surcharge. The
Orphans' Court sustained some of those objections, but concluded that the majority were without merit. On appeal, the parties have raised various claims relating to the Orphans' Court's ruling on these objections, which we address below.
We begin by noting that our standard of review of a decree of the Orphans' Court is deferential. Estate of Harrison, 745 A.2d 676, 678 (Pa.Super. 2000).
When reviewing a decree entered by the Orphans' Court, this Court must determine whether the record is free from legal error and the court's factual findings are supported by the evidence. Because the Orphans' Court sits as the fact-finder, it determines the credibility of the witnesses and, on review, we will not reverse its credibility determinations absent an abuse of that discretion. However, we are not constrained to give the same deference to any resulting legal conclusions. Where the rules of law on which the court relied are palpably wrong or clearly inapplicable, we will reverse the court's decree.
Estate of Pendergrass, 26 A.3d 1151, 1153 (Pa.Super. 2011) (internal citations and quotation marks omitted).
An abuse of discretion is not merely an error of judgment, but if in reaching a conclusion the law is overridden or misapplied, or the judgment exercised is manifestly unreasonable, or the result of partiality, prejudice, bias or ill-will, as shown by the evidence of record, discretion is abused. A conclusion or judgment constitutes an abuse of discretion if it is so lacking in support as to be clearly erroneous. . . . If the lack of evidentiary support is apparent, reviewing tribunals have the power to draw their own inferences and make their own deductions from facts and conclusions of law. Nevertheless, we will not lightly find reversible error and will reverse an [O]rphans' [C]ourt decree only if the [O]rphans' [C]ourt applied an incorrect rule of law or reached its decision on the basis of factual conclusions unsupported by the record.
In re Estate of Warden, 2 A.3d 565, 571 (Pa.Super. 2010), quoting In re Scheidmantel, 868 A.2d 464, 479 (Pa.Super. 2005).
We first address the claims of the Appellants/Cross-Appellees, Beneficiaries, who raise numerous issues for our review.
1. Where the Former Executors engaged in multiple, improper acts of self-dealing involving millions of dollars in Estate assets, was the Estate entitled to a remedy and surcharge with respect to all of the self-dealing transactions, notwithstanding any asserted defenses of adequacy of consideration, purported good faith, lack of immediate pecuniary harm, or purported "benefit" to the Estate?
Beneficiaries first assert that the Orphans' Court erred by failing to surcharge the former executors with regard to three alleged "self-dealing" transactions executed during their tenure. Although the court granted relief as to the SR Utility and D&S Parking Garage transactions, it declined to impose a surcharge or other remedy with respect to the Four Properties, Boca Del Mar and Hollywood Beach transactions. The court found that, because Basciano paid fair market value ("FMV") for these properties, the estate suffered no harm and, therefore, surcharge was unnecessary. Appellants argue that: (1) the court's conclusion that Basciano paid FMV for the properties is open to question and (2) even if he did pay FMV, Pennsylvania law guarantees a remedy for self-dealing by a fiduciary, regardless of whether an actual loss was sustained.
Our Supreme Court has stated that "surcharge is the penalty for failure to exercise common prudence, common skill and common caution in the performance of the fiduciary's duty and is imposed to compensate beneficiaries for loss caused by the fiduciary's want of due care." In re Estate of Dobson, 417 A.2d 138, 142 (Pa. 1980) (citation omitted). A fiduciary may not be subject to surcharge for a breach of duty unless the breach caused a loss to the estate. See Estate of Pew, 655 A.2d 521, 543 (Pa.Super. 1994), citing In re Mendenhall, 398 A.2d 951, 954 n.3 (Pa. 1979). However, where the issue is one of self-dealing on the part of a fiduciary, loss need not be established in order for a surcharge to be imposed. Our Supreme Court has stated:
The test of forbidden self-dealing is whether the fiduciary had a personal interest in the subject transaction of such a substantial nature that it might have affected his judgment in material connection[.] . . . It will be noted that the extent of the fiduciary's disqualifying interest need not be such as 'did affect his judgment' but merely as 'might affect his judgment[.]
. . .
Where there is self-dealing on the part of a fiduciary, it is immaterial to the question of his liability in the premises whether he acted without fraudulent intent or whether the price received for his sale of trust property was fair and adequate[.] . . . It matters not that there was no fraud meditated and no injury done; the rule forbidding self-dealing is not intended to be remedial of actual wrong, but preventive of the possibility of it.
Noonan Estate, 63 A.2d 80, 83-84 (Pa. 1949) (emphasis in original) (internal citations and punctuation omitted).
Notwithstanding the foregoing, however:
[a] surcharge is one of a variety of remedies which the Orphans' Court may impose for mismanagement of a trust fund. Other possibilities include removal or injunction. The Orphans' Court is endowed with all chancery powers. This includes the power to select which remedy it considers most appropriate to effect an equitable result. . . . [A]bsent an abuse of discretion, we will not second guess the [Orphans' Court's] choice of which remedy is appropriate in a given factual situation.
In re Francis Edward McGillick Found., 594 A.2d 322, 331 (Pa.Super. 1991) (internal citations omitted), rev'd on other grounds, In re Francis Edward McGillick Found., 642 A.2d 467 (Pa. 1994) (McGillick II).
Finally, the following principles guide an Orphans' Court's review of the account of an estate administration: (1) the estate will be viewed as a whole and, where the value of the estate has increased, a surcharge generally will not lie; (2) where the estate has increased in value over the course of an administration, the court will generally not review individual transactions which may have incurred a loss; (3) the remedy for self-dealing is either rescission or surcharge to compensate the estate for its loss or to punish the fiduciary for his wrongdoing; and (4) self-dealing may be authorized by the instrument pursuant to which the disputed transactions occur, such as when a testator knowingly creates a conflict of interest in a will.
Here, the Bascianos were removed as executors in August 2002 based on the Orphans' Court's finding of self-dealing, breach of fiduciary duty, waste and mismanagement. See Adjudication Conclusions of Law, 8/23/02, at ¶¶ 3-5. However, upon audit of their account, the trial court declined to further punish the former executors by imposing surcharges with respect to those transactions which did not result in a loss to the estate and/or in which the court concluded that the beneficiaries acquiesced. The Orphans' Court possesses discretion in crafting a remedy for self-dealing on the part of a fiduciary, and, for the reasons that follow, we can discern no abuse of discretion in the court's determinations here.
THE FOUR PROPERTIES
The Four Properties were obtained by Basciano from the estate specifically in satisfaction of the $3 million loan he had made to Decedent shortly before his death. At the time of the loan, Rappaport was aware that Basciano required repayment by the end of the year in order to avoid adverse tax consequences. Amended Adjudication Findings of Fact, 3/2/12, at ¶ 176. Rappaport also agreed to repay the loan in property in the event his cash flow was insufficient. Id. at ¶¶ 177-79. Wil signed the settlement statements on the Four Properties and none of the Beneficiaries objected to the transactions. Moreover, Morris Hershman, then still acting as co- executor, approved the transaction. Id. at ¶¶ 192-94. Finally, the trial court found as a matter of fact, and Appellants do not dispute, that the total value of the Four Properties as of the date they were transferred to Basciano in full satisfaction of his $3 million loan to Decedent was $2, 935, 000. Id. at ¶ 199. Thus, Basciano actually suffered a loss of $65, 000 as a result of this "self-dealing" transaction.
In declining to impose a surcharge, the Orphans' Court noted:
Basciano, a creditor of Samuel Rappaport, who was knowingly appointed Executor by the decedent, should not be treated differently from other creditors given that Mr. Rappaport was aware of the conflict and knew that Mr. Basciano needed to be repaid for the loan. Therefore, as Mr. Basciano was placed in a conflicting position as Executor and creditor, he had implied authorization to repay the loan to himself. . . . Thus we find that surcharge is not appropriate.
Amended Adjudication Discussion, 3/2/12, at 68.
The Orphans' Court's conclusion is supported by the decision of our Supreme Court in Flagg Estate, 73 A.2d 411 (Pa. 1950). There, a testator left half of his estate, which consisted of stock in his family-run business, in trust for his daughter. He appointed as trustees his son and a bank, both of which were also directors of the family corporation. Several years later, the corporation's board voted to redeem a number of shares, some of which were held in daughter's trust. Daughter sought to restrain her trustees from surrendering her shares and, as a result, the trustees filed an account seeking a resolution of the issue.
Before the Orphans' Court, daughter argued that her trustees' dual roles created a conflict of interest and that, in voting to redeem the stock in their capacity as directors of the corporation, they had engaged in prohibited self-dealing in their capacity as trustees. The Orphans' Court agreed. However, our Supreme Court reversed and, in doing so, stated as follows:
The appellants agree that there may be conflict of interest between them as trustees of the daughter's trust and as directors of the corporation. Both interests were created by the testator to be enjoyed as limited by his will. The mere existence of the conflict cannot be allowed to destroy the trust because the testator had the power to specify the terms on which he bequeathed his property. For the same reason that the possible operation of the conflict cannot be allowed to destroy the trust, it cannot be allowed to cut down the effect of the absolute bequests, because, again, the testator had the power to make the bequests. The testator, having the power to do so, created the conflict which became a fact or condition in the administration and devolution of his property to be observed by his executors and trustees. This administration is subject to the scrutiny of the courts, who restrain or otherwise pass on charges of breach of trust.
Flagg Estate, 73 A.2d at 414 (emphasis added). Likewise, here, Decedent himself created the conflict by naming Basciano as an executor, over the protestations of the attorney who drafted the will.
Nonetheless, Beneficiaries argue that the Orphans' Court violated res judicata and the law-of-the-case doctrine by concluding that Basciano's conduct with respect to the Four Properties "was neither unlawful self-dealing nor unreasonable." Amended Adjudication Conclusions of Law, 3/2/12, at ¶ 68. We disagree. Beneficiaries are correct that the court concluded, in its August 23, 2002 adjudication, that "[t]he Will of Samuel Rappaport did not authorize the Executors to engage in self-dealing without obtaining [c]ourt approval" and that this Court affirmed that adjudication. However, our Supreme Court has also held that a settlor or testator may authorize his fiduciary "to do what in the absence of such a provision in the trust instrument would be a violation of his duty of loyalty." Burke Appeal, 108 A.2d 58, 63 (Pa. 1954). Here, Decedent's will granted his fiduciaries the power to "buy real and personal property from my Executor, and to lend money to my estate upon such terms and conditions as my Trustee deems advisable, even if the Executor is also a Trustee." Will of Samuel Rappaport, 9/3/94, at Item Seventh, (k). The loan in question was made while the testator was still living and the Orphans' Court found that, prior to his death, "Rappaport took steps to repay Mr. Basciano in real estate, proposing several properties to be sold in payment of the loan. After [Rappaport's] death, the process that was already set into motion simply continued." Amended Adjudiction Discussion, 3/2/12, at 67. As Decedent appointed Basciano as an executor despite the fact that some of Basciano's business interests were closely intertwined with his own, it is clear that Decedent intended that Basciano have the power, as fiduciary, to repay ...