In re Trust B Under Agreement of Richard H. Wells Dated September 28, 1956

282 A.3d 1149

IN RE: TRUST B UNDER AGREEMENT OF RICHARD H. WELLS DATED SEPTEMBER 28, 1956

Appeal of: V.M.I. Foundation, Inc.

No. 1269 WDA 2021

Superior Court of Pennsylvania.

Argued August 3, 2022.

Filed: September 7, 2022

Charles J. Avalli, Pittsburgh, for appellant.

George H. Roberts, Virginia Beach, for appellant.

Anthony T. Kovalchick, Pittsburgh, for Commonwealth, parens patriae, participating party.

Claudia M. Tesoro, Office of the Attorney General, Philadelphia, for Commonwealth, participating party.

Kristen M. Del Sole, Pittsburgh, for PNC Bank, participating party.

BEFORE: STABILE, J., MURRAY, J., and McLAUGHLIN, J.

OPINION BY MURRAY, J.:

In this case of first impression, V.M.I. Foundation, Inc. (Appellant), appeals from the order which denied Appellant's motion for summary judgment; granted summary judgment in favor of Appellees, PNC Bank, N.A. (PNC) and the Commonwealth of Pennsylvania; and denied Appellant's petition to show cause why the Trust of Richard H. Wells (Trust) should not be terminated.¹ After careful consideration, we affirm.

FACTS

Appellant is the sole beneficiary of the Trust, and a charitable organization pursuant to Section 501(c)(3) of the United States Internal Revenue Code. See 26 U.S.C.A. § 501(c)(3). Appellant "holds and oversees Virginia Military Institute's (hereinafter referred to as "VMI") endowment assets." Petition to Show Cause, 5/6/19, at 6. VMI is a public university in Lexington, Virginia. PNC is the Trustee.²

The orphans’ court described the evolution of the Trust as follows:

Richard H. Wells ("Wells") for much of his life was a resident of Oil City, Venango County, Pennsylvania. Wells was a 1924 graduate of Virginia Military Institute ("VMI"). In 1952, Wells became president of and was appointed to the Board of Directors of the Oil City Trust Company. Wells aggressively led his bank to expand and acquired additional banks and in 1954, the Oil City Trust Company changed its name to First Seneca Bank and Trust Company following the purchase of two other local banks. Mr. Wells continued the expansion of the bank by merger with two other banks and was continually reelected as president of the bank until his retirement on December 31, 1963. It was stated in his obituary that during the 12 years for which he served as president, the bank "quintupled in size." See (Brief of Trustee, p.3). In 1956, Wells created the Richard H. Wells Revocable Trust Agreement dated September 28, 1956. The agreement established First Seneca Bank and Trust Company of Oil City, Pennsylvania as the Trustee. Mr. Wells died on March 30, 1968, whereupon the trust agreement became irrevocable. During his lifetime, Wells amended the trust agreement four times, in 1960, in 1961, in 1963, and in 1965. Originally the trust agreement provided that Wells’ wife or his children would receive the net income of the trust for life, with the power to invade principal in the trustee's discretion for the benefit of his wife or children. Upon the death of his wife, the trust would be divided into new trusts for each of his children and then upon their death it would be distributed under the terms of their wills or to their issue free of the trust. If there was no issue then the assets of the trust would be distributed to various individuals with the residue, if any, to VMI to be added to its general endowment fund and identified as a memorial to Richard H. Wells and the class of 1924. The amendment in 1960 changed the terms of the agreement so that VMI was to receive "favorable consideration" in the allocation of trust income, instead of a gift of the residue to VMI to be added to its general endowment fund. In 1961 and in 1963, the gift to VMI continued to be "favorable consideration" for the distribution of the trust income of a contingent charitable remainder. Then in 1965, Wells amended the trust for the final time . In this amendment he removed all references to his son and provided that upon his wife's death, two other individuals would receive lump sum payments instead of money in trust, and then the remaining principal would form a perpetual charitable trust. VMI as the sole remainder beneficiary was to receive the income at least annually , which would be credited to the class of 1924.

Orphans’ Court Opinion and Order, 10/5/21, at 1-2 (emphasis added).

Mr. Wells died on March 30, 1968. His wife died on August 14, 2004. Mr. Wells’ fourth and final amendment to the Trust, in Paragraph B.5., states that upon Mrs. Wells’ death,

the Trustee shall add any accumulated and undistributed income in the trust to the principal thereof, and shall hold the thus augmented principal in trust, in perpetuity, and the Trustee shall pay and distribute the net income of the Trust, in perpetuity, at least annually, to [Appellant], Virginia Military Institute, of Lexington, Virginia, which distributions shall by [Appellant], Virginia Military Institute, be credited to the Class of 1924, and which distributions shall be unrestricted, to be applied for such purposes as the governing board of [Appellant] may from time to time determine.

Amendment to Revocable Trust Agreement, 7/7/65, at 4.

Presently, Appellant asserts "the approximate annual income is $67,000 per year (a 3.35% return), and with fees of approximately $18,500 per year, the Trustee's fees represent approximately twenty-eight percent (28%) of the income of the Trust in 2017, which is out of proportion to the intended benefits of the Trust to its beneficiary." Petition to Show Cause, 5/6/19, at 7, ¶ 38.

PROCEDURAL HISTORY

On May 6, 2019, Appellant filed a petition to show cause why the trust should not be terminated, or, alternatively, why PNC should not be removed and BNY Mellon be appointed as successor trustee.³ Appellant sought termination of the Trust pursuant to the Charitable Trust Termination Statute, 20 Pa.C.S.A. § 7740.3(e) (Judicial termination of charitable trusts).⁴

Appellant averred,

19. Currently, the Trust has assets of approximately $2,000,000 and generates income of approximately $67,000 per year (a 3.35% return) while incurring fees of approximately $18,500 per year and other expenses of $750 for tax return preparation (or approximately 0.96% of the trust corpus), which excludes any fees which the Trustee or its holding company may have realized from the mutual or commingled investments funds sponsored by PNC Bank and not rebated back to the Trust.

20. The Trustee's fees represent approximately twenty-eight percent (28%) of the income of the Trust in 2017, leaving [Appellant] approximately $47,750.

Petition to Show Cause, 5/6/19, at 4.

Appellant argued "the Trust should be terminated, as the administrative expenses and other burdens are unreasonably out of proportion to the charitable benefits and [Appellant] will properly use and administer the assets in accordance with [Mr. Wells’] intentions." Id. at 5. Appellant averred:

33. [Appellant] also incurs additional management and audit expense in accounting for the Trust in the preparation of its audited financial statements, which likewise reduces its net aid to VMI.

34. Terminating the Trust will also eliminate the costs of the tax and reporting expense incurred by the Trust and realize the economies of scale in the investment of its assets.

35. [Appellant] is a charitable institution under Section 501(c)(3) of the Internal Revenue Code and is subject to the oversight of the Attorney General of Virginia under Va. Code § 2.2-507.1.

36. Pursuant to Virginia [state law], [Appellant] manages its endowments in a manner similar to 15 Pa.C.S.A. § 5548(c) ["Investment of trust funds",] and 20 Pa.C.S.A. § 8113 ["Charitable trusts"].

37. Given the clear intent of [Mr. Wells] to benefit VMI in perpetuity, even small annual savings in these fees and expenses can become substantial over time and can be more properly used for the benefit of VMI.

38. As set forth above, the approximate annual income is $67,000 per year (a 3.35% return) and with fees of approximately $18,500 per year, the Trustee's fees represent approximately twenty-eight percent (28%) of the income of the Trust in 2017, which is out of proportion to the intended benefits of the Trust to [Appellant].

39. [Appellant] has been in existence since 1936 and VMI since 1839. There is no reason to believe that they will not continue to provide educational benefits for the foreseeable future.

40. Additionally, [Appellant] has a long track record of managing sizeable assets with professional managers and Virginia's oversight of charitable institutions further assures satisfaction of [Mr. Wells’] intent.

Petition to Show Cause, 5/6/19, at 7-8.

PNC filed an answer in opposition, averring that PNC "serves in a fiduciary capacity and is bound by the terms of the Trust." Answer to Petition to Show Cause, 6/14/19, at 4. PNC argued "termination of the Trust would violate not only [Mr. Wells’] intent, but also the explicit terms of the Trust[.]" On August 23, 2019, the Commonwealth of Pennsylvania, through the Office of the Attorney General and acting as parens patriae , intervened.⁵

Following discovery, Appellant filed a motion for summary judgment. Appellant requested the orphans’ court enter summary judgment in its favor and against PNC, and order PNC "to transfer the assets of the Wells Trust to [Appellant] to be held in perpetuity as a permanently endowed fund (the "Wells Fund") with the annual distributions therefrom in accordance with Mr. Wells’ specific instructions[.]" Motion for Summary Judgment, 1/12/21, at 1. Appellant claimed there were "no issues of material fact." Id. at 2.

Both PNC and the Commonwealth filed responses in opposition. In addition, PNC filed a counter motion for summary judgment, seeking summary judgment in favor of PNC, dismissal of Appellant's petition for rule to show cause, and reimbursement from the Trust for fees and costs (including attorneys’ fees). See generally , Counter Motion for Summary Judgment, 1/29/21. Likewise, the Commonwealth sought summary...