November 1, 2013
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 to himself the loan he made to Decedent during Decedent's lifetime. See Pew Estate, 655 A.2d 521, 534 (Pa.Super. 1994) ("In order to ascertain the actual intent of the . . . testator, the Court must place itself in his armchair and consider not only the language and scheme of the instrument but also the facts and circumstances with which he was surrounded[.]") (citation omitted).
Moreover, the Orphans' Court concluded that the value of the properties transferred to Basciano in satisfaction of his loan was actually less than the outstanding loan principal and, as such, was "a reasonable exchange." Amended Adjudication Discussion, 3/2/12, at 67-68. Accordingly, we can discern no abuse of discretion on the part of the Orphans' Court in declining to surcharge Basciano for this transaction. Flagg Estate, supra.
BOCA DEL MAR
The estate owned the Boca Del Mar property – a shopping center in Boca Raton, Florida – through RW Ventures, a partnership in which Decedent held a 100% interest. Even prior to Decedent's death, Boca Del Mar was in need of significant repairs in the estimated amount of $800, 000-$900, 000. Amended Adjudication Findings of Fact, 3/2/12, at ¶ 228. There were also problems involving tenant vacancies, environmental remediation and a tenant dispute over a roof replacement that RW Ventures could not afford to make. Id. at ¶¶ 228-29. During his life, Decedent had expressed an interest in selling the property, but never did so. Id. at ¶ 221. In fact, numerous entities had expressed an interest in purchasing the property around the time of Decedent's death; however, several of them withdrew over concerns about the environmental issues and/or RW Ventures' refusal to lower the asking price. Id. at ¶ 231. As of the end of 1995, the property was valued at $13.5 million. Id. at ¶ 226.
In an effort to generate cash flow necessary for a bank payment and a $500, 000 distribution to Rita, Basciano listed Boca Del Mar for sale and, on January 23, 1996, entered into an agreement of sale on the property with Capitol Investment Associates, Corp. and the Jaffe Group. The selling price was based upon appraisals performed by Keystone Appraisal Company, a disinterested third party. Id. at ¶ 233. Although Basciano was not initially part of the purchasing group, he ultimately agreed to provide $1.6 million in equity to satisfy the requirements of the lender, Nomura. RW Ventures, through co-executor Morris Hershman, also agreed to contribute a $1.5 million "take-back" to the transaction. Id. at ¶ 247. Together, the purchasers (including Basciano and RW Ventures) formed the Del Mar Village Limited Partnership to purchase Boca Del Mar. Id. at ¶ 253. Basciano personally acquired a 40% interest in Boca Del Mar. Id. at ¶ 254. In doing so, he accepted a 10% return rather than the 12% return offered; he applied the extra two percentage points to RW Ventures' return on its non-equity interest, increasing it from 8% to 10%. Id. at ¶ 255. At closing on December 27, 1996, RW Ventures received proceeds of approximately $13.5 million, $10.2 million of which was used to pay off the mortgage, $1.5 million of which comprised the "take back, " and $1.4 million in cash. Id. at ¶ 264.
The trial court concluded that neither the estate nor RW Ventures suffered financial damages as a result of the sale of Boca Del Mar. Id. at ¶ 268. However, Beneficiaries argue that, at the time of the sale of Boca Del Mar, Basciano was in possession of an appraisal reflecting a value of $16-17 million and that, within a week of closing, the property was actually appraised at $17 million.
Upon review, we conclude that the Orphans' Court did not abuse its discretion in declining to surcharge Basciano for the Boca Del Mar transaction. Based upon the condition of the property and the circumstances involved (including tenant-related issues and environmental remediation concerns), it was reasonable for the court to conclude that Basciano obtained the best price possible. At least one lower offer, in the amount of $12.8 million, was rejected. In addition, Michael Rubin, President and CEO of Capitol Investments, testified that Basciano "was adamant on getting the maximum price he could" for Boca Del Mar. N.T. Trial, 7/22/09, at 23. Moreover, Basciano did not originally intend to be personally involved in the transaction and did so only when it became apparent that the deal would fall through if he did not agree to become part of the buying group.
The Orphans' Court has the discretion to select which remedy it considers most appropriate to effect an equitable result. McGillick, supra. Absent an abuse of that discretion, we will not disturb the court's ruling. Here, the court chose the remedy of removal, but declined a surcharge. Under the circumstances, we can ascertain no abuse of discretion in the court's chosen remedy.
Decedent owned, through a partnership called T&W Rappaport Investments, Ltd. ("T&W"), a movie theater and parking garage complex in Hollywood Beach, Florida called the Hollywood Beach Garage & Movie Theater ("Hollywood Beach"). Carl Cordek, Decedent's accountant, repeatedly recommended that the executors sell Hollywood Beach, as it was a "problem asset." Amended Adjudication Discussion, 3/2/12, at 72. At one point, the property had faced foreclosure. Amended Adjudication Findings of Fact, 3/2/12, at ¶ 337.
On September 22, 1997, T&W entered into a purchase agreement with the Jaffe Group for the sale of Hollywood Beach for $9 million. Similar to the Boca Del Mar transaction, the buyer was unable to obtain financing and requested that T&W and Basciano participate in the purchase. As a result, T&W took back a $1.5 million Class C limited partnership interest in the purchasing group, the Hollywood Beach Garage Limited Partnership ("HBGLP"). Basciano obtained a 50% interest in the Hollywood Beach Garage and obtained partnership interests on behalf of his grandchildren and employees. Tracy, who had managed the Hollywood Beach property and was aware that the property was costing money to operate, supported the sale and believed that Basciano's involvement resulted in the best price being obtained from the buyers. N.T. Trial, 1/23/09, at 26-27.
Beneficiaries now claim that Rita knew nothing about the Hollywood Beach transaction and Wil was unaware of the specifics of the deal or the involvement of Basciano's "cronies, " although he had discussed the $9 million purchase price with Basciano. They further claim they were unrepresented by counsel in the transaction. We find these arguments unavailing.
The Orphans' Court determined that the Hollywood Beach transaction "was reasonable from an accounting perspective because the price paid . . . was commensurate with the appraised value[.]" Amended Adjudication Findings of Fact, 3/2/12, at ¶ 372. The court also found that Basciano's participation in the buying group facilitated the sale, id. at ¶ 373, which did not harm the estate. Amended Adjudication Conclusions of Law, 3/2/12, at ¶ 29. Upon review, we are unable to conclude that the Orphans' Court abused its discretion in refusing to surcharge Basciano for this transaction. Beneficiaries, who were themselves involved in the operation of some of Decedent's businesses and aware of the complexities involved in the administration of the estate, could have retained counsel to review this and other transactions. Moreover, there is no indication that Basciano or anyone on his behalf interfered with the Beneficiaries' ability to consult with counsel. That they chose not to pursue these avenues is not a basis for surcharge against the executors. See Adams v. Adams, 848 A.2d 991 (Pa.Super. 2004) (party who has reasonable opportunity to consult with counsel before entering contract cannot later invalidate it by claiming duress).
2. Based on the August 23, 2002 Adjudication and Decree . . . and the prior decisions of this Court and the Supreme Court of Pennsylvania, which considered and rejected the same arguments, did the principles of res judicata and the law-of-the-case doctrine compel the conclusion that the adjudicated self-dealing transactions were improper self-dealing and that decedent did not waive implicitly any conflict or prohibition against self-dealing?
By Adjudication and Decree dated August 23, 2002, the Honorable Dan Lawler found that the Executors had breached their fiduciary duty to the estate and removed them from office. Judge Lawler concluded that Basciano, in particular, had engaged in multiple self-dealing transactions that were not authorized by the will. The Executors, having failed to obtain a certification of finality from the Orphans' Court, filed a petition for review with this Court, which we denied. Executors filed a petition for extraordinary relief with the Pennsylvania Supreme Court. By order entered on March 5, 2003, the Supreme Court granted Executors' petition and directed this Court to determine, in relevant part, whether the Orphans' Court erred in removing them.
By memorandum decision filed on December 23, 2003, this Court affirmed the decree of the Orphans' Court removing the Bascianos from office. In finding that the Orphans' Court did not abuse its discretion in removing the Bascianos, this Court cited the lower court's finding, apparently referring to the Four Properties, Boca Del Mar and Hollywood Garage transactions, that:
under the posture of repayment of documented personal loans to the decedent and the estate, Basciano acquired various parcels of property from the estate without court approval . . . [and] under the posture of generating cash for the estate, . . . sold real property of the estate to a limited partnership of which he was the co-general partner, and negotiated a priority return on his investment of 10%[.]
Estate of Rappaport, 772 EDA 2003, at 20 (Pa.Super. 2003) (unpublished memorandum, filed December 23, 2003).
This Court also addressed the Bascianos' claim that Item SEVENTH of the will authorized them to engage in self-dealing, concluding:
[w]hile the powers granted the executors under the will are broad, we see no provisions contained therein which would give the executors blanket authorization to personally profit from the business dealings undertaken on the estate's behalf. Nor does the law allow such profit-taking, despite appellants' apparent claim to the contrary.
. . .
[W]e conclude that the court did not err in removing Basciano for acquiring estate property to his benefit and to the detriment of the estate and its beneficiaries. We reject the argument that the will allowed Basciano unrestricted authority to self-deal in this manner.
Id. at 22, 24.
Based upon the foregoing, Beneficiaries argue that the doctrines of res judicata and the law of the case compel reversal of the Orphans' Court's decision not to grant rescission or surcharge with respect to the Four Properties transaction because it was "neither unlawful self-dealing nor unreasonable." Amended Adjudication Discussion, 3/2/12, at 67-68. We disagree.
As quoted above, we previously found that the will contained no blanket authorization allowing Basciano to personally profit from transactions with the estate and rejected the argument that Basciano had unrestricted authority to self-deal. However, with respect to the Four Properties, the Orphans' Court found that: (1) before his death, Decedent specifically agreed to repay Basciano's loan in real property if cash was unavailable and (2) Basciano actually lost money in the Four Properties transaction. As such, the transaction did not involve personal profit on the part of Basciano. Moreover, to the extent that the sole purpose of the Four Properties transaction was to repay Basciano a sum he was indisputably owed by the estate, under terms agreed to by Decedent during his lifetime, the transaction cannot be considered to be self-dealing. Thus, neither res judicata nor the law of the case doctrine requires the Orphans' Court to grant a further remedy with respect to the Four Properties transaction.
We further note that the prior appeal addressed solely the issue of removal. The issues surrounding the Orphans' Court's disposition of the Beneficiaries' objections to Basciano's account, which is the matter currently before this Court, had yet to be litigated at the time this case first appeared on our docket in 2003. "Application of the doctrine of res judicata requires the concurrence of four elements: identity of the thing sued for; identify of the cause of action; identity of persons and parties to the action; and identify of the quality or capacity in the persons for or against whom the claim is made." In re Stevenson, 40 A.3d 1212, 1228 (Pa. 2012) (citation omitted). Moreover, the issue of fact or of law must have actually been litigated and determined by a valid final judgment. McNeil v. Owens-Corning Fiberglass Corp., 680 A.2d 1145, 1147 (Pa. 1996). A final order is one that ends the litigation or disposes of the entire case. Weis Mkts. v. United Food & Commercial Workers Union, Local 23, 632 A.2d 890, 896 (Pa.Super. 1993).
Here, the petition for removal – the first action – and the objections to the account – the subsequent action – were not identical and sought distinct forms of relief. Moreover, the order removing the Bascianos as executors was not a "final judgment, " in that it did not end the litigation. Accordingly, res judicata is inapplicable.
So, too, is the "law of the case" doctrine. This doctrine "sets forth various rules that embody the concept that a court involved in the later phases of a litigated matter should not reopen questions decided by another judge of that same court or by a higher court in the earlier phases of the matter." Ario v. Reliance Ins. Co., 980 A.2d 588, 597 (Pa. 2009). However, the doctrine is not absolute and may be departed from "where there has been an intervening change in the controlling law, a substantial change in the facts or evidence giving rise to the dispute in the matter, or where the prior holding was clearly erroneous and would create a manifest injustice if followed." Commonwealth v. Starr, 664 A.2d 1326, 1332 (Pa. 1995).
Here, the earlier decisions were entered before the parties engaged in the bulk of their discovery on the objections. Some of this discovery was directly pertinent to and shed additional light on issues addressed by this Court in its 2003 memorandum. For example, as noted by Basciano in his brief, the will's scrivener, Bennett Aaron, Esquire, testified on July 14, 2009, regarding Decedent's execution of the will and his insistence on naming Basciano as an executor despite his status as a creditor. This testimony is pertinent to whether or not Decedent waived the bar against self-dealing.
As our Supreme Court noted in Flagg Estate, supra:
where the power, indeed duty, to engage in self-dealing is necessarily implied in the terms of the testator's will the valid exercise of that power will not be set aside by this [C]ourt. We do not wish to impair the value of the rule against self dealing when properly applied. Testamentary provisions must be given effect notwithstanding the existence of the self-dealing rule; it is not the abstract conflict but the administration that is decisive and administration is subject to the control of the court.
Id. at 416. Thus, if credited by the Orphans' Court (as it was, see Amended Adjudication Findings of Fact, 3/2/12, at ¶¶ 71-75), Attorney Aaron's testimony establishes that Basciano was granted the implied authority, within the bounds of good faith, to engage in self-dealing transactions. This testimony was not of record when this matter was initially before this Court and constitutes a "substantial change in the facts or evidence giving rise to the dispute in the matter." Starr, supra. As such, the law of the case doctrine is inapplicable.
3. In light of the Former Executors' unparalleled self-dealing, breaches of fiduciary duty, waste, mismanagement, and conversion of Estate assets, and their obdurate, vexatious and dilatory behavior and blatant disregard for the law and the Beneficiaries' wishes, was the Estate entitled to surcharge the Former Executors for $1 million in executor's compensation paid?
"It is well established that if a deed or will creating a trust is silent as to compensation, a trustee is entitled to receive a reasonable allowance on the income passing through his hands during the term of the trust and reasonable compensation from the corpus for his care and preservation of the trust at its end." In re Reed, 357 A.2d 138, 140-41 (Pa. 1976) (citations omitted). Under Pennsylvania law, the determination of whether the compensation claimed by the fiduciary is "reasonable and just" is left to the sound discretion of the trial court. In re Estate of Sonovick, 541 A.2d 374, 376 (Pa.Super. 1988) (citations omitted). When reviewing the judgment of the Orphans' Court regarding the allowance or disallowance of a fiduciary's fees and commissions, we will not interfere with the court's decision absent an abuse of discretion or a palpable error. Id.
Here, the Orphans' Court approved a fee for Richard Basciano of $1 million. In doing so, the court found:
the Estate of Samuel Rappaport was a complicated entity, containing several businesses and employees. It was no small task to manage such an estate. Given that Mr. Basciano acted effectively for the Estate for several years, we find that the $1 million that was agreed to be paid to Mr. Basciano is reasonable.
Amended Adjudication Discussion, 3/2/12, at 75. Moreover, the court also stated that Basciano had been "instrumental in helping the [Rappaport] family come together to reach [the Family Settlement Agreement] for the overall good of the Estate and family, " Amended Adjudication Findings of Fact, 3/2/12, at ¶ 69, and that Basciano's efforts were "vital in improving the condition of the Estate" in the years immediately following Samuel's death. Id. at ¶ 162.
We are mindful that, to an extent, Basciano benefitted himself and those close to him through certain transactions involving estate assets. However, it is undeniable that Basciano's business expertise, familiarity with the Decedent's holdings, willingness to loan large sums of money, and relationship with the Rappaport family were invaluable in restoring liquidity to the estate and placing estate holdings on surer financial footing. Basciano devoted significant time and energy to the administration of the estate over a period of many years and was directly involved in all major transactions affecting estate assets. Given the value of the estate, the complex nature of the administration, and Basciano's vital efforts in stabilizing the Decedent's nearly bankrupt business empire, we cannot say that the Orphans' Court abused its discretion in approving a $1 million executor's fee.
4. Was the Estate entitled to surcharge the Former Executors for nearly $800, 000 in undocumented and unsubstantiated expenses the Former Executors charged to the Estate as "administration" expenses?
Our Supreme Court has held:
Where a fiduciary claims credit for disbursements made by him, the burden rests upon the fiduciary to justify them. Proper vouchers or equivalent proof must be produced in support of such credits. [A fiduciary's] unsupported testimony is generally insufficient.
Strickler Estate, 47 A.2d 134, 135 (Pa. 1946). See also In re Estate of Bryan, 522 A.2d 40 (Pa. 1987) (citing Strickler Estate); In re Paxson Trust I, 893 A.2d 99 (Pa.Super. 2006) (same).
Here, the Orphans' Court placed the burden of proof upon Beneficiaries to show that the expenses charged to the estate were unreasonable. See Amended Adjudication Discussion, 3/2/12, at 76 ("We find that the objectors have not met their burden in showing that Mr. Basciano's actions in this respect were unreasonable or that the Estate suffered undue loss therefrom."). This burden should properly have been allocated to Basciano to substantiate his expenses and demonstrate that they were reasonably incurred in the furtherance of estate business. Strickler, supra. Accordingly, we reverse the Orphans' Court's ruling on this issue and remand the case for further proceedings, in which the court is directed to require that Basciano produce requisite proof of his disbursements and demonstrate the reasonableness of his expenditures.
5. In connection with the adjudicated self-dealing transaction involving property in Hollywood Beach, Florida, was the Estate entitled to surcharge the Former Executors for $500, 000 that the former executor converted from proceeds due to the Estate at the closing of the self-dealing transaction, in light of the uncontroverted evidence establishing that former executor Richard Basciano and his partners were responsible for this obligation?
Prior to closing on the Hollywood Beach transaction, Basciano's purchasing partnership ("Partnership") entered into a twenty-year lease with Allright Miami ("Allright") to operate the parking garage situated on the premises. As part of that agreement, the Partnership agreed to provide Allright with either an irrevocable standby letter of credit or a fully-funded bank account, under Allright's control, in the amount of $500, 000. Of this credit, $200, 000 was to be used for necessary repairs to the garage and $300, 000 was to ensure that Allright would make a profit. Pursuant to the lease between the Partnership and Allright, this line of credit was the obligation of the landlord, the Partnership. Despite this fact, at the closing on the Hollywood Beach property, the $500, 000 obligation was deducted not from the Partnership's proceeds, but from those of T&W Rappaport. The Orphans' Court found that "the record is insufficient to find that the $500, 000 discount attributable to the parking agreement with Allright Miami was unreasonable." Amended Adjudication Discussion, 3/2/12, at 73. Beneficiaries assert that the Orphans' Court erred in failing to require Basciano to repay this sum to the estate. We agree.
We begin by noting that the Orphans' Court did not clearly address the precise issue at hand, i.e., whether the $500, 000 obligation of the Partnership was properly deducted from the sale proceeds payable to T&W Rappaport rather than those payable to the Partnership. Instead, the court simply stated that the "discount" provided to Allright was not unreasonable, based on the record before the court. We are not called upon to pass on the reasonableness of the discount and will not do so here. The sole issue is whether it was charged to the correct party at closing. We conclude that it was not.
Notably, Basciano did not address this issue in his responsive brief. However, at trial, Basciano admitted that the $500, 000 was an obligation of the Hollywood Beach Garage Limited Partnership. N.T. Trial, 1/27/09, at 37. That fact is reflected in the lease agreement between the Partnership and Allright. See Lease, 4/23/98, at ¶ 5(c). Basciano also admitted that the $500, 000 obligation was charged to T&W Rappaport, as shown on the settlement sheet. N.T. Trial, 1/27/09, at 38-39. As the $500, 000 was the legal obligation of the Partnership, we can discern no reason why the sum was charged against the estate's proceeds. As executor, Basciano was duty-bound to ensure that the estate's interests were properly protected in the sale of estate property. Instead, Basciano, by his own admission, allowed the estate to be charged with an obligation properly borne by his Partnership group. There can be no argument that this accounting sleight-of-hand resulted in a loss to the estate of $500, 000 and was directly attributable to Basciano's failure, as the seller's representative and fiduciary, to ensure that settlement proceeds were properly distributed. Accordingly, we conclude that the Orphans' Court abused its discretion in failing to surcharge Basciano in the amount of $500, 000, representing the Partnership's obligation charged to the estate at closing on the Hollywood Beach property.
6. Where invoices for legal fees and costs that the Former Executors produced showed that most of the more than $2.4 million of legal fees and costs the Estate paid on behalf of the Former Executors prior to their removal were predominantly connected to their unsuccessful defense of the removal proceedings, should the Former Executors have been compelled to repay the Estate more than the $523, 807.47 that the Former Executors allocated to removal defense in their analysis of the legal fees and costs?
Beneficiaries next assert that the Orphans' Court erred in failing to properly scrutinize the attorney time records submitted by the Bascianos in support of their claim for counsel fees. As a result, Beneficiaries claim the Orphans' Court improperly required the estate to bear the burden of fees attributable to the Bascianos' efforts to avoid removal and surcharge. Upon review, we agree with Beneficiaries and remand for further proceedings.
"It is fundamental that an attorney seeking compensation from an estate has the burden of establishing facts which show that he or she is entitled to such compensation." Sonovick, 541 A.2d at 376. However, where counsel's "services did not benefit the estate, any fees paid as a result are not properly charged to the estate." Estate of Bruner, 691 A.2d 530, 534 (Pa.Super. 1997), quoting Faust Estate, 73 A.2d 369 (Pa. 1950).
Our Supreme Court has previously stated:
It is a well entrenched rule of law in this State that the responsibility for determining the amount of counsel fees rests primarily with the auditing judge. . . . The amount of fees to be allowed to counsel, always a subject of delicacy if not difficulty, is one peculiarly within the discretion of the court of first instance. Its opportunities of judging the exact amount of labor, skill and responsibility involved, as well as its knowledge of the rate of professional compensation usual at the time and place, are necessarily greater than ours, and its judgment should not be interfered with except for plain error. . . . This court has frequently held that the allowance or disallowance of counsel fees rests generally in the judgment of the court of the first instance and its decision will not be interfered with except for palpable error.
Estate of McClatchy, 424 A.2d 1227, 1230 (Pa. 1981), quoting Thompson Estate, 232 A.2d 625, 631 (Pa. 1967) (internal citations and quotation marks omitted).
Finally, "[t]he facts and factors to be taken into consideration in determining the fee or compensation payable to an attorney include: the amount of work performed; the character of the services rendered; the difficulty of the problems involved; the importance of the litigation; . . . the degree of responsibility incurred; whether the fund involved was "created" by the attorney; the professional skill and standing of the attorney in his profession; the results he was able to obtain; the ability of the client to pay a reasonable fee for the services rendered; and, very importantly, the amount of money or the value of the property in question." LaRocca Estate, 246 A.2d 337, 339 (Pa. 1968). Where the court imposes a surcharge of improperly paid fees, such surcharge may not reflect the application of any formula; rather, it must result from consideration of the factors outlined above. Bruner, 691 A.2d at 534.
The Orphans' Court noted in its Pa.R.A.P. 1925(a) opinion that "in a joint effort to avoid presenting evidence as to amount and reasonableness of all legal fees each side incurred in Estate-related matters, the parties stipulated to the total legal fees borne by each side, for any purpose, prior to and after removal." Rule 1925(a) Opinion, 6/11/12, at 8. Based upon the stipulation of the parties, the Orphans' Court required the Bascianos to repay the estate the sum of $2, 462, 807.47 for fees improperly charged to the estate.
Once the case was remanded by this Court after the first appeal, the Orphans' Court decided to revisit its fee ruling. In doing so, the Orphans' Court:
directed the Bascianos to produce all of the relevant legal invoices in un-redacted form. These produced invoices were color coded to delineate which expenses specifically related to removal proceedings, administration of the estate, other work performed in the Orphans' Court not pertaining to removal and litigation in other matters. After receiving this legal breakdown of fees, which we accepted, we reduced the amount the Bascianos owed to the Estate to $523, 807.47, which represented the fees they expended solely in conjunction with the removal proceedings. . . .
As reflected in our initial Adjudication, our intent always was to charge to the Bascianos only . . . those legal fees they expended in defense of the removal action. On remand, when more specific information was furnished to the [c]ourt regarding legal fees the Bascianos charged to the Estate, we amended our Adjudication accordingly.
Id. (emphasis added).
Based upon our review, it appears that the Orphans' Court failed to undertake a thorough analysis and examination of the fees charged to the estate by the Bascianos. The Court made no attempt to engage in an analysis under, nor did it even mention, LaRocca Estate. In their brief, Beneficiaries point to numerous instances in which the Bascianos appear to have miscategorized certain time entries in order to render them reimbursable by the estate. For example, the Beneficiaries requested that the Bascianos resign in or about June 2000. Shortly thereafter, attorney time records from the law firm of Heckscher, Teillon, Terrill & Sager, P.C. ("Heckscher") show entries in September 2000 regarding research into self-dealing and potential remedies, conflict of interest, and waiver and consent by Beneficiaries. Despite the fact that these entries, representing $6, 398.00 in legal fees, appear to be related to potential defenses to removal, the Bascianos classify them as related to "administration of the estate." Also, a three-hour entry by Lisa M. Rhode, Esquire, on June 13, 2001, classified by the Bascianos as "work performed in the Orphans' Court matter that did not pertain to removal, " includes time spent by counsel reviewing the Benficiaries' petition for removal, preparing to respond to the petition, and researching legal grounds for removal. Similarly, on June 14, 2001, Attorney Rhode spent 5.7 hours researching "malfeasance and misfeasance of an executor that results in his removal." Nevertheless, this time, representing $1, 026 in fees, was classified by the Bascianos as Orphans' Court work not pertaining to removal.
While our review of the extensive time records submitted by the Basicianos was not exhaustive, it is readily apparent that the Orphans' Court failed to thoroughly scrutinize the documentation submitted by the Bascianos and, in the process, required the estate to bear the burden of thousands of dollars in fees that in no way benefited the estate. See Bruner, supra. Accordingly, we vacate the fee-related surcharge imposed by the Orphans' Court and remand for further proceedings. The court is directed to place the burden of proof as to reasonableness on the Bascianos; to allow Beneficiaries an opportunity to challenge the Bascianos' self-serving categorization of fees; and to apply the standards set forth in LaRocca Estate, supra, in arriving at a final fee award.
Appellee/Cross-Appellant Richard Basciano raises the following issues for our review:
1. Whether the trial court erred in excusing the Beneficiaries' acquiescence to the two transactions rescinded by the Orphans' Court based upon the unrecognized theory of "fear" where the Beneficiaries consented in writing to the SR Utility Transaction[?]
At his death, Decedent owned 100% of the stock in an entity called SR Utility Holding Company ("SR Utility"), which owns the Atlantic City Sewer Company ("AC Sewer"). AC Sewer was a profitable company which generated positive cash flow to the estate and approximately $800, 000 in annual dividends. Amended Adjudication Findings of Fact, 3/2/12, at ¶ 271.
In November 1996, Basciano reached an agreement to allow Lewis Katz and himself to acquire interests in SR Utility for their children, as well as for Tracy and Wil. However, the Rappaports objected to Katz's involvement. Wil testified that Basciano "berated" him for weeks regarding his objection to Katz's involvement in the SR Utility transaction. N.T. Trial, 1/21/09, at 10. Ultimately, however, Basciano relented on the issue and agreed to structure the transaction to involve only Wil, Tracy, Basciano's children, via an entity called "Three Keys, Ltd., " and Carl Cordek. Wil testified that there were several attorneys who had represented him in the past to whom he could have gone for advice regarding the SR Utility transaction and that he discussed the transaction with Rita and Tracy before agreeing to it. Id. at 15. Finally, the Beneficiaries signed a consent to the transaction, which included the following language:
We acknowledge that all material information about the transaction has been disclosed to us and a copy of the Stock Purchase Agreement and Assignment of Principal and Interest payments Under the Promissory Note, the Promissory Notes of Wil Wes Rappaport and Tracy Scott and Assignment of Interest in the Future Payments are attached hereto, copies of which are hereby acknowledged. We understand that the sale is being made to persons who would be considered related parties to the Estate and are nevertheless satisfied that the selling price is fair and reasonable, that the transaction is in the Estate's interest and do hereby approve and consent to this transaction.
Beneficiaries' Consent to Sale, 3/31/97.
"A beneficiary believing a trustee's action is improper has an affirmative duty to speak." In re Estate of Warden, 2 A.3d 565, 579 (Pa.Super. 2010), quoting In re Macfarlane's Estate, 177 A. 12, 15 (Pa. 1935). Moreover, where a party has had the opportunity to consult with legal counsel before entering into a contract, that same party cannot later invalidate the contract by claiming duress. Degenhardt v. Dillon Co., 669 A.2d 946, 950 (Pa.Super. 1996). "[I]n the absence of threats of actual bodily harm there can be no duress where the contracting party is free to consult with counsel." Id., quoting Carrier v. William Penn Broadcasting Co., 233 A.2d 519, 521 (Pa. 1967).
Based upon the foregoing and the record before us, we conclude that the Orphans' Court erred in rescinding the SR Utility transaction. The Rappaports, all sui juris adult individuals, were aware of Basciano's plans and consented to the sale in writing. Although they claimed not to be cognizant of all material information regarding the transaction, they had every opportunity to consult with counsel of their choosing prior to the transaction. For whatever reason, they chose not to avail themselves of separate legal representation or exercise any other due diligence. Moreover, Beneficiaries' claim that Basciano essentially "strong-armed" them into this transaction is belied by the fact that Wil was able, despite weeks of allegedly being "berated" by Basciano, to force Basciano to relent on his plan to involve Lewis Katz in the transaction. Accordingly, we vacate that portion of the Orphans' Court's adjudication rescinding the SR Utility transaction.
2. Whether the Orphans' Court erred by exercising jurisdiction over the D&S Garage which was not owned by the Estate, but rather was owned by a partnership in which the Estate was only one of three partners[?]
The Dimeling and Schreiber ("D&S") Garage is a parking garage located in the 600 block of Market Street in Philadelphia. At the time of Decedent's death, it was owned by the Dimeling & Schreiber Garage Partnership in which Decedent, William Dimeling and Richard Schreiber were the sole partners and owners. Decedent's ownership interest was 90%, while Dimeling and Schreiber owned the remaining 10% share jointly. At Decedent's death, the garage had a zero book value and consistently lost money.
In 1997, Basciano expressed to Carl Cordek his interest in acquiring the D&S Garage. The sale would be a means of making payment to Basciano on a $6.8 million loan owed to Basciano by the estate, which at the time was overdue. Basciano briefly withdrew his offer after an outside buyer sought to purchase the property, but reasserted his interest once the outside buyer backed out for reasons unrelated to Basciano. On September 22, 1997, Basciano entered into a written agreement of sale to purchase D&S Garage, executing the agreement both individually as purchaser and, in his capacity as executor, as seller. Basciano paid $6, 566, 000 for the property. Both Dimeling and Schreiber consented to the sale.
The Orphans' Court found that, as of April 25, 1997, the value of the D&S Garage was $6, 566, 000, allowing for existing vacancies and based on a 10-cap valuation. However, the court concluded that "there was no benefit to the Estate in selling the [D&S Garage], particularly given that it has a prime location in the historical district of Philadelphia." Amended Adjudication Discussion, 3/2/12, at 72. Accordingly, the court ordered that the transaction be rescinded and the property returned to the estate.
Basciano claims that the Orphans' Court improperly exercised jurisdiction over the garage because it was owned, not by the estate, but by a partnership in which the Decedent was only one of three partners. In support of his assertion, he relies upon the decision of our Supreme Court in Ellis v. Ellis, 203 A.2d 547 (Pa. 1964). In Ellis, the decedent and his three sons each owned 25% of two partnerships. After decedent's death, disagreements arose amongst the surviving partners and two of them filed bills in equity in common pleas court seeking decrees of dissolution of the partnerships. The third partner filed preliminary objections in his individual capacity and as co-executor of decedent's will, challenging the jurisdiction of common pleas to direct the sale, and asserting the need for prior permission of the Orphans' Court before the court of common pleas can permit either the purchase of estate assets by executors or a sale thereof. The common pleas court dismissed the preliminary objections and an appeal followed.
On appeal, the appellant claimed that the petitioning partners were seeking a distribution of assets of the decedent's estate and, accordingly, the matter was subject to the exclusive jurisdiction of the Orphans' Court. In rejecting the appellant's argument, the Supreme Court concluded that assets held by a partnership in which the decedent held an interest were not assets of the decedent's estate and, thus, not subject to the jurisdiction of the Orphans' Court. Rather, Orphans' Court jurisdiction attached only when, upon dissolution and winding up of the partnership, payment is made to the estate, representing the value of the decedent's share in the partnership. Accordingly, the Court held that the common pleas court, and not the Orphans' Court, had jurisdiction over the dissolution and winding up of the partnership. Upon review, we find the facts of Ellis distinguishable from the case at bar.
Here, the D&S Garage was owned by a partnership comprised of the Decedent and two non-parties, Dimeling and Schreiber. As such, Basciano argues that the Garage was not an asset of the estate and that the Orphans' Court lacked jurisdiction to order rescission of the sale to Basciano pursuant to Ellis. However, whether a specific property is partnership property or separate property of one partner is largely a question of intent. In re Estate of Rider, 409 A.2d 397, 400 (Pa. 1979). Such intent "may be manifested in acts and declarations, and be established by parol testimony." Collner v. Greig, 20 A. 938 (Pa. 1890).
Here, the Orphans' Court concluded that Decedent owned the Garage in his individual capacity. Although nominally owned by the D&S Garage Partnership, D&S Garage was entirely managed and controlled, during his lifetime, by the Decedent. Rule 1925(a) Opinion, at 14. The court found that that the various Rappaport partnerships, including D&S, were "Samuel Rappaport's properties." Id. The court further found that Basciano, like Decedent when he was alive, "treated the [D&S] Garage property as an Estate asset and signed the Deed transferring said property to Richard Basciano [in his capacity as Executor]." Id. Decedent gave Dimeling and Schreiber their interests in exchange for their work in helping them acquire the garage. Id. Carl Cordek testified as follows:
Mr. Rappaport learned that . . . what came to be known as the Dimeling and Schreiber Garage, was available for sale from a company called [Rohm and Haas] who owned the garage. Mr. Rappaport wanted to acquire it, but [Rohm and Haas] would not deal with him because of his reputation as a tough negotiator. So Mr. Rappaport approached Bill Dimeling and Rick Schreiber, who were his partners in at least one other company, and asked if they would acquire the garage basically on his behalf. Mr. Rappaport supplied all the money to acquire the garage either directly from his funds or from his banks and gave Mr. Schreiber [and] Mr. Dimeling a 10-percent ownership in the garage for their work in helping him with the acquisition.
N.T. Trial, 1/21/09, at 103. Accordingly, "[r]ecognizing the same policy underlying the legal theory of piercing the corporate veil, and exercising [its] equitable powers, " the Orphans' Court concluded that it would be improper to "permit an executor to act with the power to manage and sell estate businesses and later hide behind the business designation of said entities." Id. We concur.
"In deciding whether to pierce the corporate veil, courts are basically concerned with determining if equity requires that the shareholders' traditional insulation from personal liability be disregarded and with ascertaining if the corporate form is a sham, constituting a facade for the operations of the dominant shareholder." Fletcher-Harlee Corp. v. Szymanski, 936 A.2d 87, 96 (Pa.Super. 2007), quoting The Village at Camelback Property Owners Association, Inc. v. Carr, 538 A.2d 528 (Pa.Super. 1988). The corporate form:
will be disregarded whenever justice or public policy require[s] and where rights of innocent parties are not prejudiced nor the theory of the corporate entity rendered useless . . .. We have said that whenever one in control of a corporation uses that control, or uses the corporate assets, to further his or her own personal interests, the fiction of the separate corporate identity may properly be disregarded.
Here, the record supports the court's conclusion that the D&S Garage Partnership was, in essence, a sham and that the Garage, despite technically belonging to the "partnership, " was actually the sole property of the Decedent. The only purpose of the partnership was as a vehicle to hold the Garage, over which the Decedent exercised sole and exclusive control during his lifetime. Accordingly, the court properly disregarded the partnership entity and assumed jurisdiction over the Garage.
3. Whether the trial court erred in excusing the Beneficiaries' acquiescence to the [D&S Garage transaction] based upon the unrecognized theory of "fear" where the transaction was openly conducted, approved by the partners who owned the garage and was purchased at a patently fair price that exceeded an offer from a third party[?]
In its findings of fact, the Orphans' Court found that, as of the end of April 1997, the D&S Garage was worth $6, 566, 000. On September 22, 1997, after a potential third-party purchaser offering a lower price backed out, Basciano entered into an agreement of sale to purchase the garage for $6, 566, 000. Of the proceeds received by the estate, Basciano used the sum of $3, 033, 000 to repay part of an overdue $6.8 million loan he had made to the SRFP shortly after Decedent's death in order to timely satisfy a debt- forgiveness arrangement that Basciano had successfully negotiated with Continental Bank on behalf of the estate. In order to extend this loan to SRFP, Basciano himself obtained a personal loan from Jefferson Bank. Basciano "charged the same interest rate and applied the same payment schedule that he received from Jefferson Bank to the loan he ultimately extended to the SRFP." Amended Adjudication Findings of Fact, 3/2/12, at ¶ 138. Wil, along with Basciano and former executor Morris Hershman, signed the promissory note evidencing the loan. Id. at ¶ 139
The Orphans' Court concluded that there was "no benefit to the Estate" in selling the garage and that it was done "in bad faith and at the financial expense of the estate." Amended Adjudication Discussion, 3/2/12, at 72. However, the court's conclusions contradict its own findings of fact. Specifically, the court determined that Basciano purchased the garage for value, after a third-party offering less withdrew its offer. We have already concluded that Basciano's loans to the estate, which occurred near the time of Decedent's death at a time when "[c]ash was particularly tight, " were not improper and, in fact, were of significant assistance in placing the estate on firmer financial footing. Accordingly, the fact that Basciano may have used the proceeds to repay himself for an overdue loan does not render the transaction voidable under the circumstances. Accordingly, we reverse that portion of the decree of the Orphans' Court ordering rescission of the D&S Garage transaction.
Finally, Appellee/Cross-Appellant Lois Basciano raises the following question for our review:
Whether the Orphans' Court erred when it ordered Lois to refund her entire commission earned over five years without making any finding of gross or willful misconduct and despite the Beneficiaries['] appointment of her to serve a complimentary [sic] executor role[?]
Section 3537 of the Probate, Estates and Fiduciaries Code provides that a "court shall allow such compensation to the personal representative as shall in the circumstances be reasonable and just, and may calculate such compensation on a graduated percentage." 20 Pa.C.S.A. § 3537. That which is fair and just compensation depends upon the extent and character of the labor and the responsibilities involved; courts will normally assess the nature and quality of the fiduciary's performance before determining the appropriateness of compensation. In re Reed Estate, 341 A.2d 108, 110 (Pa. 1975). A fiduciary bears the burden of proving the reasonableness of his or her commissions. In re Estate of Salus, 617 A.2d 737, 743 (Pa.Super. 1992), quoting Sonovick, 541 A.2d at 376.
Here, the Orphans' Court concluded that the commission paid to Lois Basciano was "unreasonable and unjust." Amended Adjudication Discussion, 3/2/12, at 75. The court found that Lois knew very little about the estate or its businesses and never independently reviewed any of the transactions initiated by Richard Basciano. Essentially, the court concluded that Lois provided little more than a rubber stamp for Richard's actions. This conclusion is supported by the record.
In testimony before Judge Lawler on June 20, 2002, Lois stated that she was Basciano's administrative assistant and had never served in any fiduciary capacity. N.T. 6/20/02, at 114, 116. She testified that she never participated in setting the price for any estate assets that were to be sold. Id. at 117. She never disagreed with any decision made by Basciano and his decisions were always final. Id. at 117-18. She testified that she did not question anything Richard told her because she felt he was a very good businessman. Id. at 123.
Based upon Lois' clear abdication of responsibility as co-executor in favor of Richard, as evidenced by her own testimony at trial, we find that the Orphans' Court did not abuse its discretion in concluding that Lois was not entitled to an executor's commission in this matter.
SURCHARGE FOR FEES AND COSTS INCURRED BY BENEFICIARIES
Each party raises a claim regarding the Orphans' Court's surcharge requiring Basciano to pay $1, 645, 352.09 in fees and costs incurred by the estate in prosecuting this matter. Beneficiaries argue that the Bascianos should have been compelled to pay all fees and costs incurred by the estate during the pendency of this matter. Conversely, Basciano asserts that the court "erred in awarding any attorney fees to the Estate for the small number of sustained Objections, without a similar award to the Bascianos for their successful defense of the vast majority of the overruled objections." Brief of Appellee/Cross-Appellant Richard Basciano, at 55 (emphasis added). For the reasons that follow, we reverse the Orphans' Court surcharge of Basciano for the estate's fees and costs and decline to award fees to Basciano.
The "American Rule" regarding the award of counsel fees, consistently adhered to in this Commonwealth, provides that "there can be no recovery of attorneys' fees from an adverse party, absent an express statutory authorization, a clear agreement by the parties, or some other established exception." Herd Chiropractic Clinic, P.C. v. State Farm Mut. Auto. Ins. Co., 64 A.3d 1058, 1066 (Pa. 2013). As a result, the general rule is that each party to adversary litigation is required to pay his or her own counsel fees. In re Estate of Lychos, 470 A.2d 136, 143 (Pa.Super. 1983). However, a court "may require a party to pay another participant's counsel fees if the party's conduct during the pendency of the matter was 'dilatory, obdurate, or vexatious[.]'" Brenckle v. Arblaster, 466 A.2d 1075, 1078 (Pa.Super. 1983). In addition, a fiduciary may be entitled to fees and costs following the successful defense of surcharge proceedings:
The executors were placed in the position to be sued because of duties they had performed for the estate. That being the case, it would be unjust to require them personally to bear the reasonable costs of the defense of suits brought against them solely by reason of their positions as executors. It is well established that whenever there is an unsuccessful attempt by a beneficiary to surcharge a fiduciary the latter is entitled to an allowance out of the estate to pay for counsel fees and necessary expenditures in defending himself against the attack.
McGillick, 642 A.2d at 472 (quotation marks and citation omitted). If the record supports the court's finding, an award of counsel's fees will not be disturbed absent an abuse of discretion. Breckle, 466 A.2d at 1078.
In its Amended Adjudication, the Orphans' Court found as follows:
[W]e find that the costs and attorneys' fees incurred by the beneficiaries in connection with this surcharge action are not categorically attributable to the Bascianos. However, given the egregiousness of Mr. Basciano's actions in the later years of his term as Executor, we find that a deviation from the general rule [that each party bear his own fees] is appropriate in this case.
Amended Adjudication Discussion, 3/2/12, at 78. The Orphans' Court concluded that approximately one-fourth of the transactions Basciano made as executor were unreasonable and damaging to the estate and, accordingly, the court imposed one-fourth of the estate's legal fees on Basciano.
Upon review, we are constrained to reverse the court's award. We have already determined that the court erred by rescinding the SR Utility and D&S Garage transactions. Contrary to the court's findings, those transactions were either consented to by the Rappaports or reasonable and necessary for the payment of legitimate estate debt to Basciano. As the court's fee award was based largely upon the rescission of those two transactions, its fee award is no longer justifiable.
We sympathize with the difficulties this case presents in terms of equitable principles. The Orphans' Court correctly recognized that many of the transactions complained of were either necessary for the good of the estate or were constented to by the Beneficiaries. In addition, the Decedent himself not only created the conflict of interest but, based upon the terms of his will, anticipated that there would be transactions involving "self-dealing" on the part of Basciano. Based upon the record before us, we agree with the Orphans' Court's apparent conclusion that Basciano, on balance, benefitted the estate substantially during the early years of his administration. It was only toward the end of his administration that certain of the transactions complained of could be construed as "self-dealing" in the true sense of the word. However, a thorough review of estate transactions leads us to conclude that those instances were a small percentage of the overall estate.
Moreover, the vast majority of the Beneficiaries' objections were either withdrawn by the Beneficiaries or overruled as meritless by the court. The Orphans' Court itself concluded that Basciano's efforts on behalf of the estate were instrumental in salvaging the Decedent's crumbling business empire, which ultimately inured to the benefit of the Beneficiaries. Largely as a result of the personal animosity that developed between the Beneficiaries and the former executors, each party in this matter litigated strenuously and bears responsibility for the escalation of counsel fees over the many years this estate has been before the courts of this Commonwealth. Despite the Beneficiaries claiming ignorance regarding many of the transactions, they had access to counsel and could have sought legal advice and representation had they so chosen. In fact, after Morris Hershman resigned as co-executor, Richard himself suggested that Rita, Wil or Tracy assume the role of co-executor. Accepting such an appointment would have provided the Rappaport family the opportunity to be intimately involved with the administration of the estate and could potentially have alleviated most, if not all, of the disputes that ultimately arose in this matter. However, all three Rappaports declined the opportunity to assume such a role.
In sum, we are not persuaded that the particular circumstances of this case justify deviation from the generally accepted rule that each party is responsible for its own fees and costs. Accordingly, we reverse the Orphans' Court's award of fees to the Beneficiaries as an abuse of discretion not supported by the record.
Decree affirmed in part and reversed in part. Case remanded for proceedings in accordance with the dictates of this memorandum. Jurisdiction relinquished.