IN RE: BERTHA C. WRIGHT CASE NO. 93-50224

UNITED STATES BANKRUPTCY COURT 

FOR THE EASTERN DISTRICT OF KENTUCKY

LEXINGTON DIVISION

IN RE:

BERTHA C. WRIGHT CASE NO. 93-50224

DEBTOR ADV. NO. 93-5050

BERTHA C. WRIGHT; WARREN WRIGHT, III;

LUCILLE WRIGHT LUNDY; COURTENAY WRIGHT

LANCASTER by James D. Lyon, Trustee;

THOMAS C. WRIGHT; JAMES C. LANCASTER;

ROBERT LUNDY; JONATHAN LUNDY; KATHERINE

LUNDY BALDWIN; THE UNBORN ISSUE OF

LUCILLE WRIGHT LUNDY; COURTENAY ANN

LANCASTER; JAIME LANCASTER,unmarried

minor by and through his next friend

Courtenay Wright Lancaster; MELISSA

LANCASTER, unmarried minor by and

through her next friend Courtenay

Wright Lancaster; THE UNBORN ISSUE OF

COURTENAY WRIGHT LANCASTER; THE UNBORN

ISSUE OF WARREN WRIGHT, III; SARAH

REBECCA WRIGHT, unmarried minor by

and through her next friend Thomas

C. Wright; ZACHARY THOMAS WRIGHT,

unmarried minor by and through his

next friend Thomas C. Wright; THE

UNBORN ISSUE OF THOMAS C. WRIGHT; THE

UNBORN ISSUE OF BERTHA C. WRIGHT;

NICHOLAS BALDWIN, unmarried minor by

and through his next friend Katherine

Lundy Baldwin; TYLER JESSICA BALDWIN,

unmarried minor by and through her next

friend Katherine Lundy Baldwin; NASH

BALDWIN, unmarried minor by and through

his next friend Katherine Lundy Baldwin;

TANNER BALDWIN; unmarried minor by and

through his next friend Katherine Lundy

Baldwin; THE UNBORN ISSUE OF KATHERINE

LUNDY BALDWIN; VICTORIA LUNDY, unmarried

minor by and through her next friend

Robert Lundy; THE UNBORN ISSUE OF ROBERT

LUNDY; THE UNBORN ISSUE OF JONATHAN LUNDY;

LUCINDA MASTERSON HALL, Trustee for the

estate of Bertha C. Wright PLAINTIFFS

v.

NATIONAL CITY BANK, KENTUCKY, Trustee

under the will of Warren Wright, Jr.;

J. T. LUNDY DEFENDANTS

MEMORANDUM OPINION

This matter is before the court on two motions of defendant National City Bank, Kentucky for partial summary judgment.

National City Bank, trustee of a trust created by the will of Warren Wright, Jr., seeks dismissal of the claims of the plaintiff beneficiaries of the remainder interest of the trust, namely the grandchildren, great-grandchildren, and unborn descendants of Warren Wright, Jr., on the grounds that these plaintiffs lack a justiciable interest in the case. The bank argues that an agreement executed in 1985 by Bertha Wright and her four adult children constitutes an irrevocable release of the power granted to Bertha Wright by the will of her deceased husband to appoint the remainder interest of the trust. The bank asserts that the agreement vested the entire remainder interest of the trust solely in the four adult children of the marriage of Bertha Wright and Warren Wright, Jr. and divested the grandchildren, great-grandchildren, and unborn heirs of any interest in the trust.

The bank also seeks dismissal of the claims of plaintiffs Bertha Wright and her four adult children, Lucille Wright Lundy, Courtenay Wright Lancaster, Warren Wright III, and Thomas C. Wright, on the grounds that dismissal with prejudice of similar claims asserted by these plaintiffs in a prior state court action between the bank and the Wrights bars under the doctrine of res judicata relitigation of their claims asserted herein.

The present action which originated as civil action 91-CI-3076 in the Fayette Circuit Court, Fifth Division, and a prior action in the same court in which Bertha Wright and her four adult children asserted like claims by counterclaim, civil action number 85-CI-3022, Third Division, were timely removed to this court after the debtor, Bertha Wright, filed a petition for relief under chapter 7 of the Bankruptcy Code on February 12, 1993. Both actions are discussed in some detail in the findings of fact.

FINDINGS OF FACT:

The plaintiffs in this action are the beneficiaries of a trust created by the Last Will and Testament of Warren Wright, Jr. The plaintiff Bertha C. Wright, the debtor in the above-entitled bankruptcy case, is the widow of Warren Wright, Jr. She is the income beneficiary of the trust. The other plaintiffs are the beneficiaries of the remainder interest of the trust. They are Lucille Wright Lundy, Courtenay Wright Lancaster, Warren Wright III, and Thomas C. Wright, the four adult children of the marriage of Bertha C. Wright and Warren Wright, Jr. ("the Wright children"); the grandchildren and great-grandchildren of Warren Wright, Jr.; and the unborn issue of Bertha C. Wright and of the Wright children. Plaintiff Lucinda Masterson Hall is the trustee for the bankruptcy estate of Bertha C. Wright. Ms. Hall was permitted to intervene as a plaintiff by order entered February 7, 1994. Plaintiff James D. Lyon is the trustee for the bankruptcy estate of Courtenay Wright Lancaster. Mr. Lyon was substituted as the real party in interest for Courtenay Wright Lancaster by order entered July 27, 1994. Another of the plaintiff Wright children, Lucille Wright Lundy, has filed a petition for relief under chapter 7 of the Bankruptcy Code in the Southern District of Florida, case no. 93-31460 (S.D. Fla.). Her trustee has not asked to be substituted as a party plaintiff in this action.

Defendant National City Bank, Kentucky (sometimes referred to herein as "the bank" or "the trustee") is the trustee of the trust created by the Last Will and Testament of Warren Wright, Jr. Defendant J. T. Lundy, the husband of plaintiff Lucille Wright Lundy, was president of Calumet Farm, Inc. from 1982 until April, 1991.

In the complaint the plaintiffs seek a judgment against the bank for damages for alleged mismanagement of the trust and breach of fiduciary duties. The complaint was precipitated by the financial demise of Calumet Farm.

Calumet Farm, renowned for its champion thoroughbred racehorses and quality breeding stock, was owned by Warren Wright, Sr., until his death in 1950. The Last Will and Testament of Warren Wright, Sr. provided for the creation of an income trust and granted to Warren Wright, Jr. the power to appoint up to but not in excess of three-fifths (3/5) of the income trust estate to his surviving widow (Bertha Wright) or to any of his surviving descendants.

The will of Warren Wright, Sr. also established a residuary trust. The will directed that Calumet Farm constitute a part of the estate of the residuary trust and further directed that while the farm was held in trust the widow of Warren Wright, Sr., Lucille Parker Wright, would have the right to reside on and to direct and control the operations of the farm. The trustee of the residuary trust was required by the terms of the will to collect the income derived from operations of Calumet Farm and to pay all expenses of the farm. The net income from the residuary trust was payable during her life to the widow of Warren Wright, Sr.

The will granted to Warren Wright, Jr. the power to appoint up to one-half (1/2) of the remainder of the residuary trust to his surviving widow (Bertha Wright) or to any of his surviving descendants, provided that if Warren Wright, Jr. predeceased his mother, Lucille Parker Wright, then the appointment would not become effective until her death. The remaining 50% of the residuary trust was distributed in accordance with the will of Warren Wright, Sr. as follows: 30% was distributed to the four grandchildren of Warren Wright, Sr. (the children of Warren Wright, Jr.), and 20% was distributed to various charities.

Warren Wright, Jr. died testate in 1978. By ARTICLE V of his Last Will and Testament he established a trust ("ARTICLE V Trust") into which he poured the assets over which he had been granted a power of appointment by the will of his father. The trust was not fully funded until after the death of his mother in 1982. His will provides that the net income derived from the ARTICLE V Trust shall be paid to Bertha Wright during her life. The will also grants to her the power to appoint by her will the remainder interest of the trust among their children and grandchildren. In the event Bertha Wright does not effectively dispose of all or any part of the trust estate by her will, all or any part of the trust which was not disposed of shall go and be distributed in equal shares, per stirpes, to the then living lawful descendants of Warren Wright, Jr.

In ARTICLE VII of his will, Warren Wright, Jr. directed that his residuary estate be divided into two parts. Part one consisted of that fractional share of all property in his residuary estate required to obtain for the estate the maximum federal estate tax marital deduction allowable to his estate less certain designated items. ARTICLE VIII of his will provided that the aforementioned part one of the residuary estate was to be held in trust ("ARTICLE VII Trust") for the benefit of his wife, Bertha Wright, who was to receive all net income therefrom. Bertha Wright was given the power to appoint by her will the remaining corpus of the ARTICLE VIII trust in her absolute discretion. In the event Bertha Wright does not effectively dispose of all or any part of this trust estate by her will, all or any part of the trust which was not disposed of shall go and be distributed per stirpes to the then living lawful descendants of Warren Wright, Jr. The will of Warren Wright, Jr. also directed that part two of his residuary estate be held in trust, but part two was entirely consumed by debts, taxes, and administrative expenses of the estate and never came into existence. As previously indicated the record is unclear as to whether any portion of part one of his residuary estate remains in the trust created by ARTICLE VIII of his will. In any event what is clear is that we are here primarily concerned with allegations concerning the conduct of the defendant bank as trustee of the ARTICLE V trust.

ARTICLE XV of the Last Will and Testament of Warren Wright, Jr. provides: "No beneficiary of any trust hereby established shall have any right to alienate, encumber, or hypothecate his or her interest in the principal or income of the trust estate in any manner, nor shall such interest of any beneficiary be subject to claims of his or her creditors or liable to attachment, execution or other process of law or in any manner subject to the control of the spouse of any beneficiary."

Second National Bank and Trust Company, Lexington, Kentucky, was appointed trustee of the trusts created by the will of Warren Wright, Jr. Second National Bank was succeeded by CommerceNational Bank and thereafter by the present defendant National City Bank, Kentucky.

After the death of Lucille Parker Wright Markey in August of 1982, the trustee under the will of Warren Wright, Sr. transferred to Second National Bank as trustee of the trusts created by the will of Warren Wright, Jr. real, personal, and intangible property having a value of approximately $50 million. These assets were added to the ARTICLE V testamentary trust created by the will of Warren Wright, Jr. Among the assets transferred to the Warren Wright, Jr. testamentary trust was a 62.5% ownership interest in Calumet Farm. Each of the Wright children received a 9.375% ownership interest in Calumet Farm from the trust estate of Warren Wright, Sr. J. T. Lundy, a farmer from Scott County, Kentucky, who was married to Bertha Wright's daughter Lucille "Cindy" Wright Lundy, assumed control of the farm at the behest of the Wrights, all of whom were unfamiliar with operations of a horse farm.

On or about September 16, 1982, Calumet Farm, Inc., a Kentucky corporation, was organized and received its charter from the Kentucky Secretary of State. On or about October 1, 1982, Second National Bank as trustee and the four Wright children conveyed to Calumet Farm, Inc. substantially all of the real estate, improvements, and personal property (other than oil and gas interests) which had been distributed to them by the trustee under the will of Warren Wright, Sr., in return for which Second National Bank as trustee received 62.5% of the common capital voting stock of Calumet Farm, Inc. and each of the Wright children received 9.375% of the stock of Calumet Farm, Inc.

On August 22, 1983, Second National Bank as trustee received from the Warren Wright, Sr. trust for addition to the Warren Wright, Jr. testamentary trust the sum of $7,187,500 in cash. On or about the same date, from the trust the trustee loaned to Calumet Farm, Inc. that sum plus an additional sum of $6,000,000 on an unsecured basis. The loans are evidenced by two promissory notes in the respective amounts of $7,187,500 and $6,000,000 payable to the trust.

The Wrights, inexperienced in managing finances of a magnitude such as they inherited and uninitiated in the affairs of Calumet, relied on the advice of J. T. Lundy and his friend, attorney Lyle Robey, whom they eventually retained as their counsel and business manager. Lundy and Robey advised the Wrights to establish Wright Enterprises, a partnership, as a vehicle for management of their business affairs and investments. Bertha Wright assigned all of her income from the Warren Wright, Jr. trust to Wright Enterprises. Robey and Lundy frequently asked the Wrights to sign various legal documents relative to Wright Enterprises and Calumet Farm. According to her testimony, Bertha Wright rarely read or understood the documents she signed but instead relied on the advise of Lundy, Robey, other counsel or the bank.

Lundy and Robey convinced the Wrights that Second National Bank was charging exorbitant fees for its services as trustee and that the bank duplicated many of the services provided by Wright Enterprises. On the advice of Lundy and Robey, Bertha Wright and the Wright children executed on September 12, 1985 an agreement which Bertha Wright believed would remove Second National Bank as trustee. She now claims she was unaware at the time that the agreement would attempt to terminate altogether the trusts created by the will of Warren Wright, Jr.

The three-page agreement, dated September 12, 1985, (hereinafter referred to as the "1985 agreement") recited:

WHEREAS, the Life Tenant and Remaindermen are the widow and children, respectively, of Warren Wright, Jr., deceased; and

WHEREAS, the Beneficiaries [the Wrights] are beneficiaries of certain Trusts created under the Last Will and Testament of Warren Wright, Jr., of which Second National Bank and Trust Company (the "Trustee") is Trustee; and

WHEREAS, the Beneficiaries desire to terminate the Trusts created under the Last Will and Testament of Warren Wright, Jr. and to notify the Trustee of such termination; and

WHEREAS, the Beneficiaries desire to accomplish the purposes of Warren Wright, Jr. in the creation of the Trusts pursuant to the terms of his Last Will and Testament; and

WHEREAS, the purposes of Warren Wright, Jr. in creating the aforesaid Trusts was to (a) provide income for the Life Tenant during her life, and (b) to preserve the remainder of his estate for the Remaindermen; and

WHEREAS, the Beneficiaries have reached certain agreements accomplishing the aforesaid purposes of Warren Wright, Jr. which they desire to reduce to writing,

NOW, THEREFORE, in consideration of the covenants herein contained, the beneficiaries agree as follows . . . .

Agreement dated September 12, 1985.

In the agreement the Wrights stated they had each executed wills designed to accomplish the purposes of the trusts. Bertha Wright declared in the agreement that she had executed a Last Will and Testament devising and bequeathing to her four children, in equal shares and per stirpes, all property devised and bequeathed to her under the will of her husband, including the property over which she had a power of appointment. Bertha Wright agreed not to change the terms and provisions of her will with respect to such property.

The Wright children declared in the agreement that each of them had executed wills devising and bequeathing to their children, in equal shares and per stirpes, all property devised and bequeathed to them by their mother. They asserted that their wills further provide that in the event any of them die without issue, such property that he or she would have inherited from Bertha Wright shall be devised and bequeathed to his or her siblings in equal shares and per stirpes. The children agreed that while their mother is living they would not change any provision of their wills respecting the property devised or bequeathed to them by their mother.

The Wrights agreed in the 1985 agreement that all income from certain sources described in the agreement would be distributed periodically to Bertha Wright for and during the term of her life and further agreed to inform the sources of income to make distributions directly to Bertha Wright. The Wrights further agreed to terminate the trusts created by the Last Will and Testament of Warren Wright, Jr. The Wrights notified Second National Bank by letter that the trusts were terminated in accordance with the agreement hereinabove described.

Also on September 12, 1985, the Wrights by counsel filed a petition in the Fayette District Court, Probate Division, requesting a release of the registration of the trusts. The petition was accompanied by a memorandum of counsel and virtually identical affidavits of Bertha Wright, Lucille Wright Lundy, Warren Wright III, Courtenay Wright Lancaster, and Thomas C. Wright. Each affiant affirmed that the Wrights had entered into the agreement hereinabove described, that the agreement accomplishes the purposes of the trusts created by the Last Will and Testament of Warren Wright, Jr., that the agreement terminates the trusts, and that the Wrights had so notified Second National Bank, trustee.

On September 26, 1985, Second National Bank commenced a civil action in the Fayette Circuit Court, Third Division, civil action number 85-CI-3222, in which the bank asked the court to declare that the trusts were not terminated and that the registration of the trusts should not be released. The bank also asked the court to determine whether the bank could lawfully terminate the trusts in accordance with the Wrights' agreement.

Simultaneously therewith the bank filed in the Fayette District Court, Probate Division, a response to the Wrights' petition and a supporting memorandum in which the bank argued, inter alia, that: (1) the filing of a civil action in the Fayette Circuit Court divested the Fayette District Court of jurisdiction to hear the Wrights' petition to release registration of the trusts; (2) the petition should be dismissed because it failed to join as indispensable parties the grandchildren of Warren Wright, Jr. who have a contingent remainder interest in the trusts; and (3) the trusts are spendthrift trusts which cannot be terminated by consent of the beneficiaries. The parties agreed to stay the proceedings in district court pending the outcome of the circuit court action.

The Fayette Circuit Court appointed Fred E. Fugazzi, Jr. guardian ad litem for the minor grandchildren, great-grandchildren, and unborn heirs of Warren Wright, Jr.

On October 25, 1985, the Wrights filed an answer to the bank's complaint and a counterclaim against the bank. In count I of their counterclaim the Wrights requested a declaration that the trusts created by the will of Warren Wright, Jr. were terminated and that the bank should turn over trust assets to the Wrights. In count II the Wrights requested a release of registration of the trusts.

In count III the Wrights alleged that hostility between the bank as trustee and the Wrights as beneficiaries of the trust made the bank incapable of discharging its duties as trustee; that the bank had charged excessive and unreasonable fees for its services; that the bank had failed to act in the best interests of the trusts and of the beneficiaries thereof, had taken actions not in the best interests of the trusts and of the beneficiaries thereof, had conflicts of interest making it incapable of discharging it duties under the trusts, had failed to carry out the purposes of the trusts, and had mismanaged, willfully and/or negligently, the trusts. The Wrights further alleged that Warren Wright, Jr. selected Second National Bank as trustee, that Second National Bank had been acquired by First National Bank of Louisville and would be merged with Bank of Commerce, Lexington, and that to allow another entity to succeed as the trustee would defeat the intention of Warren Wright, Jr. to have Second National Bank serve as trustee. The Wrights requested the removal of Second National Bank as trustee and the appointment of a successor trustee capable of discharging its duties.

In count IV of their counterclaim the Wrights alleged that the bank had intentionally, willfully, wrongfully and flagrantly failed to discharge its fiduciary duties and responsibilities to the Wrights and that the Wrights were entitled to an award of compensatory damages in the amount of $3,500,000 and an award of punitive damages in the same amount.

On January 24, 1986, the bank filed a motion for summary judgment in the Fayette Circuit Court and argued that: (1) a spendthrift trust cannot lawfully be terminated by consent of the beneficiaries; (2) the trusts cannot be terminated because all of the purposes of the trusts have not been accomplished; and (3) the trusts cannot be terminated because all of the beneficiaries, i.e., the grandchildren, great-grandchildren, and unborn descendants of Warren Wright, Jr., have not consented. The Wrights opposed the motion but conceded the trusts to be spendthrift trusts under Kentucky law.

On August 5, 1987, the Fayette Circuit Court, Third Division, entered an opinion and order finding: (1) the grandchildren, great-grandchildren, and unborn issue of Warren Wright, Jr. are parties in interest who have not agreed or consented to the termination of the trust; (2) the language of ARTICLE XV of the Last Will and Testament of Warren Wright, Jr. expressly prohibits termination of the trust or at least necessarily implies that the trust is not to be terminated; and (3) the attempted termination of the trust by agreement of Bertha Wright and her children would defeat the purpose of the trust which is to provide to Bertha Wright only the income from the trust for the duration of her life with the corpus to be distributed to the children and grandchildren of Warren Wright, Jr. upon the death of Bertha Wright. A declaratory judgment was entered September 4, 1987.

Also on September 4, 1987, the bank and Bertha Wright, Lucille Wright Lundy, Courtenay Wright Lancaster, Warren Wright III, and Thomas Cochran Wright, all represented by counsel, executed and caused to be entered by the Fayette Circuit Court an agreed order and judgment dismissing with prejudice the claims of the Wrights as set forth in their counterclaim, other than the claims disposed of by the declaratory judgment entered on the same date. The agreed order reserved for appropriate further action claims of the bank in count II of its first amended complaint relating to the establishment of oil and gas depletion accounts. Thus the agreed order resolved all claims asserted by the Wrights in their counterclaim. The only unresolved issue can be characterized as a request by the bank in count II of its first amended complaint for instructions in the administration of the trust. Otherwise the order was final with respect to all claims asserted in civil action number 85-CI-3222. The agreed order further provided that the defendants Bertha Wright, Lucille Wright Lundy, Courtenay Wright Lancaster, Warren Wright III, and Thomas Cochran Wright "waive any right of appeal which they may have as a result of the entry of the Declaratory Judgment herein on September 4, 1987." The order was signed by counsel for plaintiff and for defendants beneath the notation "to be entered; notice of service and entry waived." The guardian ad litem signed the order beneath the notation "have seen." It has been suggested that as consideration for the Wrights' agreement to dismiss their claims against the bank, the bank agreed to give J. T. Lundy more latitude in operating Calumet Farm.

On July 11, 1991, Calumet Farm, Inc. filed a petition for relief under chapter 11, title 11 United States Code, case no. 91-51414. The farm scheduled liabilities in excess of $127 million and assets in the approximate amount of $87 million. Included in the liabilities are all debts owed by Calumet to the Warren Wright, Jr. trust.

On August 15, 1991, the plaintiffs herein commenced the present action in the Fayette Circuit Court, Fifth Division, civil action number 91-CI-3076, by filing a complaint against CommerceNational Bank & Trust Company of Lexington, successor to Second National Bank and predecessor of National City Bank, as trustee of the trust created by the will of Warren Wright, Jr. This action was initiated in the interim between the commencement of the Calumet Farm, Inc. chapter 11 case and the subsequent chapter 7 bankruptcy cases filed by Bertha Wright and two of her adult children. At the time the complaint was filed the value of trust assets other than oil and gas interests held by the trust was considered by the parties to be less than $1 million. The complaint alleges that "the bankruptcy of Calumet Farm, Inc. and the wasting or encumbrance of trust assets by CommerceNational are the direct and proximate result of the negligent acts and omissions and breach of fiduciary duties of the trustee." The proceeding was removed to and is now before this court.

In count I of the complaint the plaintiffs allege the trustee should be adjudged liable to the plaintiff-beneficiaries of the trust for the trustee's gross negligence, ultra vires acts, unlawful delegation of its fiduciary duties, and breach of its fiduciary duties. The plaintiffs accuse the bank of the following: (a) failing to monitor the financial affairs of Calumet Farm, Inc. to protect the value of the trust's 62.5% interest in the stock of Calumet Farm, Inc. and the value of two promissory notes in the amounts of $7,187,500 and $6,000,000 owed by Calumet to the trust; (b) permitting or causing Calumet to overencumber its assets; (c) failing to exercise sound independent business judgment as trustee; (d) yielding control of the board of directors and executive committee of Calumet; (e) delegating to the president of Calumet Farm, Inc., J. T. Lundy, the authority to borrow on behalf of Calumet Farm, Inc. up to $10 million per transaction; (f) obligating the trust as guarantor of some of the indebtedness of Calumet; (g) extending and renewing loans of $7,187,500 and $6,000,000 on an unsecured basis while permitting horses purchased with the loan proceeds to be pledged to other creditors; (h) failing to sell the stock of Calumet Farm, Inc. when a prudent trustee would have done so; (i) otherwise breaching its fiduciary duties; and (j) loaning $500,000 to Calumet Farm, Inc. in June, 1991 with knowledge that the farm was insolvent and would file for bankruptcy. The plaintiffs further allege in count I that any alleged consent or ratification by Bertha Wright or any of the Wright children to the actions of the trustee is void and unenforceable by reason of the failure of the trustee to fully and completely disclose to the Wrights all relevant facts and circumstances surrounding the transactions and the prerogatives of the Wrights with respect to the trust.

In count II of the complaint the plaintiffs initially requested declaratory judgment that: (a) the agreed order and judgment of dismissal entered by the Third Division of the Fayette Circuit Court on September 4, 1987, be set aside for lack of consideration and as against public policy pursuant to Kentucky Rules of Civil Procedure 60.02; (b) the agreed order of September 4, 1987, if binding upon some of the adult plaintiffs, is ineffective to bar claims arising after October 25, 1985 and is void as to the remaining plaintiffs; (c) an agreement dated October 1, 1982 and executed by Bertha Wright, Courtenay Wright Lancaster, James Lancaster (husband of Courtenay Wright Lancaster), Warren Wright III, Lucille Wright Lundy, J. T. Lundy, and Thomas Cochran Wright, which purports to indemnify the bank as trustee against all loss, damage, claims, suits, or demands resulting from the trustee's retention of Calumet Farm as a trust asset, is void; and (d) the agreement, if binding upon some of the adult plaintiffs, is void as to grandchildren and unborn heirs who are remainderpersons under the trust.

In count III of the complaint the plaintiffs request that the trustee be ordered to restore to the trust estate all fees and commissions it received between 1984 and 1990. In count IV the plaintiffs request an accounting. In count V the plaintiffs request judgment removing the bank as trustee and appointing a qualified Kentucky bank or trust company as successor trustee.

The plaintiffs request an award of damages to be calculated as follows:

(1) the difference or decrease between the fair market value of the assets of the Trust estate under the Will of Warren Wright, Jr. as of August 22, 1982 and the date of Judgment herein, plus (2) any further reduction in the value of the Trust estate by reason of creditors' collection on guaranties by the Trustee of the debts of Calumet Farm, Inc. or others, plus (3) the reasonable and expected appreciation or increase in value of the principal of the Trust estate from August 22, 1983 [sic] to the date of Judgment, plus (4) all lost income or unrealized interest or income which a prudent man as Trustee of a similar estate would reasonably be expected to generate, together with (5) all fees and commissions paid to the Trustee/Defendant from 1984 through 1991, all of which sums should be restored to the Trustee estate under the Will of Warren Wright, Jr. by surcharge or indemnification, with interest at the legal rate of eight percent (8%) before Judgment and twelve percent (12%) per annum after Judgment.

Complaint at 15.

The bank filed in the Fayette Circuit Court a motion to dismiss the complaint and argued: (1) the allegations of the plaintiffs in count II(a) & (b) constitute an impermissible collateral attack on the judgment of the Fayette Circuit Court, Third Division; (2) the plaintiffs failed to name as indispensable parties J. T. Lundy and James Lancaster, parties to an indemnity agreement described hereinbelow; and (3) the plaintiffs failed to name as indispensable parties the minor descendants of Warren Wright, Jr., who hold an interest in the remainder of the trust.

On November 25, 1991, the Fayette Circuit Court dismissed count II(a) and (b) and ordered plaintiffs to amend their complaint to name as parties James Lancaster, J. T. Lundy, and the minor grandchildren of Bertha Wright. The court appointed Duane Osborne guardian ad litem for the unborn heirs of Warren Wright, Jr. and his issue. On December 23, 1991, the plaintiffs filed a first amended complaint in conformity with the order of the Fayette Circuit Court.

On January 13, 1992 CommerceNational Bank filed an answer, counterclaim and crossclaim. In count I of its counterclaim the bank alleges that on October 1, 1982, the Wrights, James Lancaster and J. T. Lundy entered into a Release and Indemnity Agreement with the bank's predecessor, Second National Bank, and agreed on behalf of themselves, their successors in interest and their respective heirs and estates to "indemnify and hold the Trustee harmless against any and all loss, damage, claims, suits, and attorneys' fees in defending claims, suits, and demands which in any wise or in any manner arise out of or result from the retention of Calumet Farm or any interest therein and the operation thereof as an asset of the said trust under the will of Warren Wright, Jr." The bank further alleges that should the plaintiffs recover any damages from the bank it is entitled to contractual indemnity from the Wrights, James Lancaster, and J. T. Lundy.

In count II of its counterclaim the bank alleges that it was unable to collect from Calumet Farm loans in the principal amount of $13,187,500 advanced to Calumet by the trust because of an agreement which subordinated the loans to indebtedness incurred by Calumet Farm in favor of First City National Bank of Houston. CommerceNational further alleges that the Wrights requested the bank to execute the subordination agreement and that the Wrights in July, 1988, executed an indemnity agreement to indemnify the bank and to hold the bank harmless against any loss, damage, claims, suit, or attorneys' fees in defending claims, suits or demands which arise out of or result from the subordination agreement.

In count III of its counterclaim the bank alleges that the acts and omissions complained of by the plaintiffs were participated in, instigated, procured and ratified by the Wrights, that the bank is entitled to indemnity from the Wrights if judgment is rendered against the bank, or that in the alternative liability for any damages should be apportioned among the bank and Bertha Wright, Warren Wright, III, Lucille Wright Lundy, Courtenay Wright Lancaster, and Thomas C. Wright.

Bertha Wright filed a petition for relief under chapter 7, title 11 United States Code on February 12, 1993. Her bankruptcy resulted from the financial collapse of Calumet Farm, Inc. and her exposure as a co-maker or guarantor of a substantial portion of the indebtedness of Calumet Farm. The debtor scheduled assets in the amount of $307,282.24 and liabilities in the amount of $69,401,526.43.

The bank removed the within action to this court on May 11, 1993. On June 10, 1993, the plaintiffs filed a motion asking the court to remand to the Fayette Circuit Court only so much of the within action as seeks to remove National City Bank as trustee under the will of Warren Wright, Jr. By order entered April 11, 1994, this court ordered that the issue of whether to remand the action be held in abeyance until such time as this court has entered final orders with respect to the remaining counts of the complaint. Thereafter the bank agreed to resign as trustee after the sale of oil and gas interests held by the trust.

On August 13, 1993, Lucinda Masterson Hall, bankruptcy trustee for the estate of Bertha Wright, filed a notice of removal of the action styled Second National Bank & Trust Co. v. Bertha C. Wright, et al., civil action number 85-CI-3222, from Fayette Circuit Court, Third Division to this court. The proceeding has been designated adversary proceeding no. 93-5102. On December 16, 1993, the Wrights filed a motion requesting this court to reconsider and modify the agreed order and judgment of dismissal entered by the Fayette Circuit Court, Third Division, on September 4, 1987. This court overruled the motion by order entered therein on January 11, 1994.

CONCLUSIONS OF LAW:

1. Does the 1985 agreement between Bertha Wright and her four adult children constitute an irrevocable release of the power of appointment conferred on Bertha Wright by the will of Warren Wright, Jr.?

Before reaching this question we must first determine whether the issue is properly before the court. The plaintiffs argue that the bank is estopped by prior judicial admissions from asserting that the grandchildren, great-grandchildren and unborn heirs of Warren Wright, Jr. should be dismissed as parties to this proceeding.

The doctrine of judicial estoppel bars a party from asserting a position which is inconsistent with a position assumed in a prior judicial proceeding. 28 Am. Jur. 2d Estoppel and Waiver 68 (1966). The bank asserted in the Fayette Circuit Court, Third Division, civil action no. 85-CI-3222, subsequently removed to this court, that the minor and unborn heirs of Warren Wright, Jr. were persons who may have an interest in the trust established by his will and whose presence before the court was necessary to a complete adjudication of the issue of whether the trust could be terminated by agreement of the beneficiaries of the trust. The plaintiffs contend the bank cannot now argue that the minor and unborn heirs should be dismissed from this proceeding because they have no interest in the trust.

The doctrine of judicial estoppel does not apply in this instance. The argument propounded by the bank in the Fayette Circuit Court, Third Division action is not inconsistent with the position it now assumes. The instrument creating the trust, the will of Warren Wright, Jr., bestowed upon the minor and unborn heirs a contingent remainder interest in the trust. The bank sought joinder of those persons as indispensable parties in an action in which the Fayette Circuit Court was asked to declare whether the trust was terminated. The question of whether the 1985 agreement between Bertha Wright and her four children operated as a release of her power of appointment and the effect of such a release on the contingent remainderpersons of the trust was not raised by the parties or addressed by the court. The issue of whether the contingent remainderpersons were divested of their interest by operation of the 1985 agreement is now before this court.

We now consider the bank's first motion for partial summary judgment.

Bertha Wright is the donee of a "non-general" or "special" power of appointment granted to her by the will of her husband with respect to the ARTICLE V trust created by his will. The power is "special" because it is exercisable only in favor of "objects" defined in the will of Warren Wright, Jr.: his children and grandchildren.

The manner in which a donee may exercise a power of appointment is confined to the mode of exercise supplied by the instrument creating the power. The power granted to Bertha Wright by the will of Warren Wright, Jr. is effective only if she exercises it in her will. It may be described as a power not presently exercisable.

In the event Bertha Wright fails to exercise in her will the power to appoint assets of the trust to her children or grandchildren, the default clause of the will of Warren Wright, Jr. is triggered. That clause provides that any part of the trust not effectively disposed of by Bertha Wright in her will shall be distributed to the then living lawful descendants of Warren Wright, Jr. The lawful descendants of Warren Wright, Jr. are ascertained be reference to the law of intestate succession as set forth in KRS 391.010 and KRS 391.030. The "then living lawful descendants" of Warren Wright, Jr. are "takers in default" of an exercise of the power of appointment. The takers in default are the four Wright children, who are also among the objects of the power. The takers in default have a vested remainder interest in the trust subject to defeasance by the exercise by Bertha Wright of her power of appointment.

The Restatement (Second) of Property notes that "[a] power of appointment that is outstanding with respect to property makes uncertain the final destination of the property subject to the power. If the power can be released by the donee of the power, the uncertainty its existence creates with regard to the ultimate takers can be removed." Restatement (Second) of Property, Donative Transfers chpt. 14 introductory note (1984). "A non-general power to appoint by will cannot be exercised in the donee's lifetime. A complete release of such power causes the interests of the takers in default of appointment to be incapable of being defeated by the exercise of the power." Restatement (Second) of Property, Donative Transfers 14.2 comment c (1984). The Restatement offers the following rationale for recognizing a release of a special power of appointment:

a. Rationale. A release of a non-general power of appointment that is presently exercisable in favor of objects that include the takers in default of an exercise accomplishes indirectly what could be accomplished directly, and hence no intention of the donor of the power is defeated by the release. If the takers in default of an exercise are objects of the power, even though the non-general power is not presently exercisable, as when the power is to appoint by the donee's will, and a release of the power does assure at an earlier date than may have been contemplated by the donor that the appointive assets will pass to the takers in default of appointment, no significant desires of the donor are defeated by allowing the release.

Restatement (Second) of Property, Donative Transfers 14.2 comment a (1984).

National City Bank, successor trustee under the will of Warren Wright, Jr., argues that the agreement executed on September 12, 1985 by Bertha Wright and her four children operated as a release by Bertha Wright of her power of appointment in favor of the four children which is irrevocable as a matter of law. If Bertha Wright released her power of appointment the remainder interest of the trust was vested equally and indefeasibly in the four Wright children, and no plaintiff other than the four children would have an interest in the remainder of the trust.

The bank relies on the recent case of In re Green (Doss v. Green, 986 F.2d 145 (6th Cir. 1993), in support of its argument. In Green, Hal Price Headley, Sr. had established testamentary and inter vivos trusts containing a combined corpus of approximately 886 acres of real property located in Fayette County, Kentucky. The property was to be held in trust for the benefit of Mr. Headley's wife for her life, then for the benefit of their three adult children during their lives, with the remainder to their issue as they may appoint by their respective wills. 986 F.2d at 146.

Mr. Headley died in 1959. Mrs. Headley and her three adult children, Price Headley, Alice Headley Bell, and Patricia Headley Green, entered into an agreement ("the 1959 agreement") which provided for a division of the property upon the death of Mrs. Headley into three defined tracts of substantially equal value. They acknowledged in the agreement that as life tenants they could not bind their issue, the remainderpersons of the trusts, to their agreement. In re Jonathan D. Green (Doss v. Green), adv. no. 88-0122, Memorandum Opinion at 4 (Bankr. E.D. Ky., Lex. Div., May 23, 1991) (hereinafter "Memorandum Opinion"). Mrs. Green received acreage designated as "tract B." 986 F.2d at 147.

Thereafter Mrs. Green questioned the fairness of the 1959 agreement and informed her siblings that she and her children would not abide by it. Mrs. Headley attempted to forestall a challenge to the agreement by executing a codicil to her will that would impose a substantial monetary penalty on anyone who breached the 1959 agreement. Litigation ensued, and Mrs. Green's siblings sought partition of the property in accordance with the 1959 agreement. Id.

In 1985 the litigation was settled by a series of agreements among the parties ("the 1985 Headley agreement"). The real property was partitioned into three tracts in accordance with the 1959 agreement. Mrs. Green agreed to exercise by her will the power of appointment in favor of her five children equally and irrevocably. Her will provided that each child would receive an undivided one-fifth interest in tract B. Mrs. Green agreed not to change her will, with the exception that if any child dies without issue she may change her will to exercise the power of appointment in favor of the other children or their issue. As consideration for her agreement to exercise the power of appointment in favor of her five children, her children agreed not to challenge any of the conditions of the Headley trust, thereby preventing invocation of the penalty provision of Mrs. Headley's will. Id.

Thereafter one of Mrs. Green's children, the debtor Jonathan Dewaal "Finn" Green, began to experience financial difficulties. On January 21, 1986, Mrs. Green executed a new will to provide that the share which would otherwise be distributed to Jonathan Green shall not be distributed to him but instead shall be held by him in trust for his children. Mrs. Green conceded that she changed her will to shield her son's share of the trust from his creditors. Jonathan Green filed a petition in bankruptcy on September 3, 1986. The bankruptcy trustee sought to set aside the transfer of Jonathan Green's interest in the trust assets to his children as a fraudulent conveyance. The trustee argued the 1985 Headley agreement conferred on the debtor an indefeasibly vested interest in tract B of the Headley trust, subject only to Mrs. Green's life estate. Id.

The bankruptcy court held that Mrs. Green, the donee of a special power of appointment under the will of Hal Price Headley, Sr., was required to exercise the power in accordance with the donor's wishes. The will of Hal Price Headley, Sr. directed Mrs. Green to exercise the power of appointment in her will, which under Kentucky law is revocable and mutable. The bankruptcy court held that the 1985 Headley agreement was void. Memorandum Opinion at 14-15. The district court affirmed.

The Sixth Circuit Court of Appeals reversed the finding of the bankruptcy and district courts. The court acknowledged that generally, for a power to be effective, a donee must exercise the power in the manner provided for by the donor of the power. Green, 986 F.2d at 148. The court held the 1985 Headley agreement constituted not an exercise of Mrs. Green's power of appointment, but a release of the power.

The Sixth Circuit opined that a power can be released by a contract between the donee and the "takers in default," the persons who could be harmed by an exercise of the power of appointment. 986 F.2d at 149. The takers in default of Mrs. Green's interest in tract B were her five children, her "issue," all of whom were parties to the agreement. Because the release benefitted the takers in default, the intent of the donor was not defeated, and the release was valid and irrevocable. 986 F.2d at 149.

In deciding the Green case the Sixth Circuit relied in part on a Kentucky statute which provides:

(1) Any power which is exercisable by deed, by will, or otherwise, whether general or special, other than a power in trust which is imperative, is releasable by written instrument signed by the donee of the power and delivered as hereinafter provided. A power which is releasable may be released with respect to the whole or any part of the property subject to such power and may also be released in such manner as to reduce or limit the persons or objects, or classes of persons or objects, in whose favor such power would otherwise be exercisable. No release of a power shall be deemed to make imperative a power which was not imperative prior to such release, unless the instrument of release expressly so provides.

(2) Such release may be delivered to any of the following:

(a) Any person specified for such purpose in the instrument creating the power;

(b) Any trustee of the property to which the power relates;

(c) Any person, other than the donee of the power, who could be adversely affected by an exercise of the power; or

(d) The recorder of deeds of the county in which the donee of the power resides or has a place of business, or in which the deed, will or other instrument creating the power is recorded.

KRS 386.095.

The mode of release recognized by statute is not necessarily the only manner in which a donee may release a special power of appointment. Restatement (Second) of Property, Donative Transfers 14.3 comment a (1984). For example, a power may be released, in whole or in part, by contracting with a person who could be adversely affected by an exercise of the power of appointment not to exercise the power. Restatement (Second) of Property, Donative Transfers 14.3(3) (1984); Green, 986 F.2d at 149.

At first blush the 1985 agreement between Bertha Wright and the Wright children would appear to satisfy the requirements of KRS 386.095 for a valid release. It is a written instrument signed by the donee of the power and delivered to her children, who as takers in default are persons who could be adversely affected by an exercise of the power. The power of appointment cannot be said to be an imperative power. The will of Warren Wright, Jr. provided for the possibility that Bertha Wright would not exercise the power. The 1985 agreement also would seem to satisfy the requirements of section 14.3(3) of the Restatement (Second) of Property, Donative Transfers. It is a contract between the donee of a power and the takers in default, persons who could be adversely affected by an exercise of the power of appointment. However, the agreement does not operate as an irrevocable release by Bertha Wright of her power of appointment.

The agreement does not evidence an intent by Bertha Wright to appoint irrevocably the assets of the trust to her four children absent termination of the trust. In the Green case, Mrs. Green manifested in the 1985 Headley agreement her intention to appoint tract B of the trust estate to her children equally. In the case at hand, (despite her present protestations that she did not so intend at the time she executed the agreement) Bertha Wright manifested in the agreement of September 12, 1985 an intention to terminate the trust created by her husband. The agreement could not be more clear and unambiguous: "WHEREAS, the Beneficiaries desire to terminate the trusts created under the Last Will and Testament of Warren Wright, Jr. . . ." In consideration of the covenant to terminate the trust, Bertha Wright agreed to execute a will appointing to her children the remainder of the trust and further agreed not to change her will. In consideration therefor the children promised to give to their mother an income for her life. The agreement was designed to empower the Wrights to obtain access to the corpus of the trust. It does not manifest an intention by Bertha Wright to appoint the remainder interest of the trust to her four children if the trust continued in existence.

One purpose of any written instrument is to evidence the intent of the person executing the instrument. In states which lack a statute governing the release of a power of appointment courts have held that any method which evidences an intent to release the power of appointment is valid. See Restatement (Second) of Property, Donative Transfers 14.3 reporter's note 5 (1984) and cases cited therein. The intent of the donee is a factor to be considered, even in light of a statute which merely requires a written instrument signed by the donee and delivered.

At common law the intent of a donee to exercise a power of appointment must be apparent and clear from express terms of the instrument by which the exercise is to be accomplished or by necessary implication. Payne v. Johnson Ex'rs, 24 S.W. 238, 240 (Ky. 1893). By analogy, the intent of the donee to release her power of appointment must be evident.

The agreement cannot be construed as evidencing the intent of Bertha Wright to release her power of appointment, to indefeasibly vest in her four children the assets of the trust and to divest her grandchildren of any interest in the trust, absent termination of the trust.

Even if the agreement were construed to manifest an intent of Bertha Wright to release her power of appointment, the agreement fails to operate as an irrevocable release for other reasons. The agreement operated as a release subject to a condition, the termination of the trust, which did not occur, or alternatively, Bertha Wright implicitly reserved in the agreement the right to revoke her release if the trust were not terminated.

The bank argues that the release was effective and irrevocable upon execution. The reporter's note to the Restatement (Second) of Property provides: "A release of a power of appointment is irrevocable unless the donee reserves the right to revoke." Restatement (Second) of Property, Donative Transfers 14.1 reporter's note 9 (1984) (emphasis added), citing Manville v. Dresselhuys, 181 Misc. 290, 43 N.Y.S.2d 658 (N.Y. Sup. Ct. 1943). It thus appears a release may be made revocable by the donee.

The bank also argues that the agreement does not express any condition which must first occur before the release is to have legal effect. However, a desire to make performance of an agreement subject to a condition may be manifested by the general nature of an agreement as well as by specific language. Restatement (Second) of Contracts 226 (1981). The question arises whether a release can be made conditional. That question is not addressed in the Restatement or by any reported decisions.

The Kentucky statute is silent with respect to whether a release can be revocable or conditional. Certainly if the donor's wishes are not defeated by permitting the donee to release a power altogether it seems unlikely that the donor's wishes would be defeated by permitting the donee to condition her release on the occurrence (or non-occurrence) of a subsequent event or to reserve the right to revoke a release. A conditional release or, to a lesser extent, a revocable release may still provide certainty to the takers in default as to the devolution of appointive assets.

The 1985 agreement can be read to have required as a condition of the release the termination of the trust and distribution of the corpus to the Wrights. In the alternative the agreement can be construed to have implied a reservation by Bertha Wright of the right to revoke the release if the trust were not terminated.

The agreement also fails as a release under the doctrine of frustration of purpose. Generally, the doctrine of frustration of purpose is applied to cases in which performance of the contract is not impossible, but "the foundation of the contract is gone." Haynes, Ky. Jur. Contracts 22-3 (1986). The rule of discharge by supervening frustration is stated as follows: "Where, after a contract is made, a party's principal purpose is substantially frustrated without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his remaining duties to render performance are discharged, unless the language or the circumstances indicate the contrary." Restatement (Second) of Contracts 265 (1986). Comment "a" explains:

First, the purpose that is frustrated must have been a principal purpose of that party in making the contract. It is not enough that he had in mind some specific object without which he would not have made the contract. The object must be so completely the basis of the contract that, as both parties understand, without it the transaction would make little sense. Second the frustration must be substantial. . . . Third, the non-occurrence of the frustrating event must have been a basic assumption on which the contract was made. . . . [T]he mere fact that the event was foreseeable does not compel the conclusion that its non-occurrence was not such a basic assumption.

Restatement (Second) of Contracts 265 comment a (1986) (emphasis added).

The bank contends that because execution of the agreement resulted in an immediate release of Bertha Wright's power of appointment, performance was not delayed, and there could not have been an intervening frustration of purpose.

The court is of the opinion that the purpose of the agreement was the termination of the trust. Failure of this essential purpose of the agreement invalidates the release contained therein.

The court finds the 1985 agreement did not operate as an irrevocable release by Bertha Wright of her power of appointment. The bank's first motion for partial summary judgment should be overruled.

2. Are the claims of Bertha Wright, Lucille Wright Lundy, Courtenay Wright Lancaster, Warren Wright, III, and Thomas C. Wright barred by the doctrine of res judicata?

The bank also seeks dismissal of the claims of Bertha Wright and the Wright children against the bank which arose prior to September 4, 1987. The bank asserts that identical claims for mismanagement and breach of fiduciary duties were dismissed with prejudice by the Wrights by agreed order entered on September 4, 1987 in the proceeding between the bank and the Wrights in the Fayette Circuit Court, Third Division.

The debtor argues the agreed order is interlocutory and cannot be given res judicata effect. The debtor cites as evidence of the interlocutory nature of the order the unresolved issue of whether the bank could establish a depletion allowance with respect to the oil and gas assets constituting part of the trust, and the absence from the agreed order of the recital required by Kentucky Rules of Civil Procedure 54.02 that "there is no just reason for delay" and that the order is final.

The court was faced with this question in adversary number 93-5102 on the motion of plaintiffs to reconsider the September 4, 1987 agreed order and judgment of dismissal. The court overruled the motion to reconsider on the grounds that the order of September 4, 1987 was a final order. See order entered January 11, 1994 in adversary no. 93-5102. The Wrights had agreed not to appeal the declaratory judgment in favor of the bank determining that the trusts had not been terminated. They could not in good faith appeal the agreed judgment dismissing their counterclaim with prejudice. It is difficult to imagine a more final order for purposes of application of the doctrine of res judicata.

The doctrine of res judicata makes a final judgment between parties conclusive on the parties in a subsequent proceeding involving the same claim or cause of action and bars all matters that were or could have been adjudicated in the prior proceeding respecting the same claim or cause of action. Cromwell v. County of Sac, 94 U.S. 351, 352, 24 L. Ed. 195 (1876).

An agreed judgment dismissing claims with prejudice is final for purposes of res judicata. 3 Moore's Federal Manual 30.04[8] at 30-71 (1993).

The plaintiffs continue to assert that they were unaware that the purpose of the Fayette Circuit Court civil action number 85-CI-3222, Third Division, was to terminate the trust, that they were not informed that claims they had against the bank were dismissed with prejudice, that their attorney acted without authority (despite the fact that they conferred on Lyle Robey as their attorney-in-fact broad authority with respect to the civil action). However, the plaintiffs' failure to maintain control of or to stay informed about the civil action does not make the September 4, 1987 agreed order of dismissal any less final.

The plaintiffs also argue the agreed order is unenforceable under principles of contract law and fails for lack of consideration and for other reasons. Plaintiffs have not cited, and the court has not found, persuasive authority to support these arguments. The court finds these arguments of plaintiffs are without merit.

The motion of the bank for partial summary judgment dismissing the claims of Bertha Wright, Lucille Wright Lundy, Courtenay Wright Lancaster, Warren Wright III, and Thomas C. Wright which arose before September 4, 1987 should be sustained.

Dated:

 

By the court -

 

 

 

Chief Judge

 

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