Hemphill v. Shore

289 P.3d 1173

Daniel L. HEMPHILL, Appellant,

v.Jay F. SHORE, Trustee of the Shore Family Trust, Appellee.

No. 102,938.

Supreme Court of Kansas.

Dec. 7, 2012.

Aaron L. Kite, of Rebein Bangerter PA, of Dodge City, argued the cause and was on the briefs for appellant.

Jeffery L. Carmichael, of Morris, Laing, Evans, Brock & Kennedy, Chartered, of Wichita, argued the cause, and Shannon M. Braun, of the same firm, was with him on the brief for appellee.

The opinion of the court was delivered by BEIER, J.:

Plaintiff Daniel L. Hemphill appeals the district court's statute of limitations dismissal of his lawsuit against his uncle, defendant Jay F. Shore, as trustee of the Shore Family Trust. The Court of Appeals affirmed in Hemphill v. Shore, 44 Kan.App.2d 595, 239 P.3d 885 (2010), and we accepted this appeal on Hemphill's petition for review.

We hold that three of four of Hemphill's causes of action are time barred, but his claim based on constructive fraud survives. The controlling trust instrument established a confidential relationship between plaintiff as beneficiary and defendant as trustee, and it limited defendant's discretion to pay out income and distribute proceeds from the sale of principal to provide only for defendant's health, education, support, or maintenance. Plaintiff has alleged that defendant did both for merely personal purposes and that plaintiff was unaware of the trust and defendant's actions until within 2 years before filing suit. We thus affirm in part and reverse in part the rulings of the district court judge and the Court of Appeals panel and remand to the district court for further proceedings.

Factual and Procedural Background

In 1984, grantors Lee Shore and Linna S. Shore created the Shore Family Trust. The principal of the irrevocable trust consisted of farmland in Stanton County. The trust instrument designated as “principal beneficiaries” the grantors' children, defendant Jay and plaintiff's mother, Susan; their spouses; and “any children subsequently born to Jay and Susan.” Jay and Susan were named trustees; on the death of one, the other was designated to continue as sole trustee.

Other potentially pertinent provisions of the trust instrument read:

“ARTICLE IV

“DISPOSITIVE PROVISIONS

“The Trustee shall hold the trust property for the primary benefit of the principal beneficiaries....

....

“B. General Dispositive Provisions ....

“1. Lifetime Disposition of The Shore Family Trust. During the lifetimes of Jay F. Shore and Susan L. Shore, the Trustee, in said Trustee's sole discretion, shall pay the income of The Shore Family Trust to Jay F. Shore and Susan L. Shore and/or their issue, in such amounts as the Trustee may deem necessary to provide for said income beneficiaries' health, education, support or maintenance....

“In the event the income of The Shore Family Trust is insufficient, in the Trustee's sole discretion, to provide for the health, education, support or maintenance of Jay F. Shore and Susan L. Shore, the Trustee may invade the principal of The Shore Family Trust to the extent said Trustee deems necessary to provide for the benefit of Jay F. Shore and Susan L. Shore.

“2. Termination. If not earlier terminated by distribution of all assets under the foregoing provisions, The Shore Family Trust shall terminate upon the death of the survivor of Jay F. Shore or Susan L. Shore. On termination, the Trustee shall distribute one-half (1/2) of the then remaining assets of The Shore Family Trust, including any undistributed income therefrom or any part thereof to the children of Jay F. Shore in equal shares, per stirpes; and one-half (1/2) of the then remaining assets of The Shore Family Trust, including any undistributed income therefrom or any part thereof to the children of Susan L. Shore, in equal shares, per stirpes....

....

“ARTICLE VII

“TRUST ADMINISTRATION

....

“G. Accounting by Trustee. The Trustee may render an accounting at any time to the beneficiaries of the trusts created herein, and the written approval of a beneficiary shall be final, binding and conclusive upon any person then or thereafter interested in the trust for that beneficiary.

....

“I. Discretionary Termination. Notwithstanding any other provision of this instrument, if the Trustee, in said Trustee's sole and absolute discretion, determines that the expense of continuing a trust created hereunder has become greater than the trust assets and the existing situation warrant, the Trustee may terminate such trust and distribute the trust property, including any undistributed income, to the persons then entitled to income, with one (1) share distributed to each beneficiary surviving, and the share of any predeceased named beneficiary shall be distributed to their issue, per stirpes.

....

“K. Reports. The Trustee shall render periodic reports at least annually, to each beneficiary then eligible to receive the current income of the trust. Each report shall show all receipts, disbursements and distributions during the period covered, and the assets then held in the trust. The Trustee's records shall be open at all reasonable times to the inspection of the beneficiaries of any Trust and to their accredited representatives.

....

“M. Trustee Guidelines. Without in any way limiting the discretion herein given to the Trustee, Grantor suggests that the primary purpose of The Shore Family Trust is to provide for the specified needs of Jay F. Shore and Susan L. Shore in equal shares; and provided their needs are satisfied to provide for the specified needs of the children of Jay F. Shore and Susan L. Shore; and provided their needs are satisfied, to provide for the specified needs of the issue of the children of Jay F. Shore and Susan L. Shore.”

Susan died on January 20, 1992, leaving plaintiff Hemphill as her only child. According to plaintiff's response to the defense motion to dismiss in this case, plaintiff, who was age 7 or younger when his mother died, was unaware of the trust or its provisions until his grandmother's estate was probated in 2008. Neither he nor his natural guardian had ever received a report on the existence of the trust or the status of its assets.

Plaintiff filed this lawsuit on April 8, 2009, attaching a copy of the trust instrument to his petition.

In Plaintiff's second amended petition, which the district judge permitted to be filed at the same time he ruled on the motion to dismiss, plaintiff alleged that defendant sold the farmland that formed the principal of the trust and “distributed all or a substantial portion of the proceeds to himself, which proceeds were, upon information and belief, used by Defendant for his own personal purposes”; that “Defendant's actions were self-dealing and a violation of the Declaration of Trust, the intent of the Trust,” his obligations under the Kansas Uniform Trust Code and applicable prior law, and “his various duties as a trustee of the Trust, including the duty of loyalty and duty of good faith and fair dealing”; that the “principal and income of the trust were ... knowingly converted by Defendant to his own personal use in violation of the express and implied terms of the trust and the intent of the trust settl[o]rs”; and that defendant

“was a fiduciary with respect to Plaintiff, and violated his fiduciary duty and duty of loyalty by converting the principal and income of the Trust to his own personal use immediately after the death of Plaintiff's mother. He also violated his duty as a fiduciary with respect to Plaintiff, breaching the duty of loyalty, duty of good faith and fair dealing, and other duties placed upon him by virtue of his fiduciary relationship with Plaintiff.”

These and other allegations were set up to support plaintiff's four causes of action: breach of trust, breach of fiduciary duty, conversion, and constructive fraud. Plaintiff sought imposition of a constructive trust “on the property of the Trust for the benefit of the beneficiaries” and “such other and further relief in Plaintiff's favor as the Court deems just and equitable.”

Defendant moved to dismiss the action, arguing that the applicable statutes of limitations and repose barred all of plaintiff's claims.

The district judge ruled in defendant's favor, holding that the trust was a “discretionary trust granting broad discretionary powers to the trustee to distribute ... income and to invade princip[al].” His journal entry of dismissal continued:

“IT IS FURTHER BY THE COURT FOUND that based upon the Trust Agreement, that in the Trustee's sole discretion the Trustee had the right to invade princip [al] to the extent said Trustee deemed it necessary to provide for the benefit of Jay F. Shore and Susan L. Shore. The Trust document is full of discretionary language giving the Trustees the ability to invade princip[al] when they deem necessary in their sole discretion.

“... The plaintiff has requested the inclusion of a claim for constructive trust and alleges generally that the actions of the Trustee were betrayal of trust but does not allege any specific acts of fraudulent conduct o[r] misuse or theft of any trust assets.

“THE COURT FURTHER FOUND that based on Stark v. Mercantile Bank NA, 29 Kan.App.2[d] 717, 725, 33 P.3d 609 (2000), that not every nondisclosure by a trustee is necessarily fraudulent and the Court must evaluate the allegations of fraud set forth in the Petition. When evaluating the pleadings in the Amended Petition submitted by the Plaintiff relating to the allegations of constructive fraud, the allegations are that Mr. Shore failed to act appropriately. The Shore Family Trust was a discretionary trust granting Defendant full and sole discretion with regard to his actions and conduct.

“IT IS FURTHER BY THE COURT FOUND that based on the facts as ple[d], both in the First Amended Petition and the Second Amended Petition, the statute of limitations is not tolled and Plaintiff's claims are barred by the statutes of limitations.”

Plaintiff appealed unsuccessfully to the Court of Appeals.

The panel gave...