Sherertz v. Brownstein, Rask, Sweeney, Kerr, Grim, Desylvia & Hay, LLP

314 Or.App. 331

498 P.3d 850

Kimberly J. Jacobsen SHERERTZ, as guardian ad litem for William Cole Sherertz; Kimberly J. Jacobsen Sherertz as the Personal Representative of the Estate of William W. Sherertz; and Kimberly J. Jacobsen Sherertz, as Trustee of the William W. Sherertz Testamentary Trusts, Plaintiffs-Appellants,

v.BROWNSTEIN, RASK, SWEENEY, KERR, GRIM, DESYLVIA & HAY, LLP, dba Brownstein Rask, Defendant-Respondent.

A170762

Court of Appeals of Oregon.

Argued and submitted December 18, 2020.

September 9, 2021

Zachariah H. Allen argued the cause for appellants. Also on the briefs were Bonnie Richardson and Richardson Wright LLP.

Peter R. Mersereau, Portland, argued the cause for respondent. Also on the brief were Blake H. Fry and Mersereau Shannon LLP.

Before Armstrong, Presiding Judge, and Tookey, Judge, and Aoyagi, Judge.

AOYAGI, J.

In this legal malpractice action related to estate planning, plaintiffs appeal a judgment dismissing their negligence claims against defendant law firm. Plaintiffs are Kimberly Sherertz in three capacities: as personal representative of the estate of William W. Sherertz (Estate), as guardian ad litem for William Cole Sherertz (Cole), and as trustee of the William W. Sherertz Testamentary Trusts (Trust).¹ At the close of plaintiffs’ case, the trial court granted a directed verdict for defendant. Plaintiffs challenge that ruling on appeal. We affirm.²

I. FACTS

In reviewing a directed verdict, we view the evidence and all reasonable inferences therefrom in the light most favorable to the nonmoving party—in this case, plaintiffs—and determine whether any reasonable factfinder could find in their favor. Yoshida's Inc. v. Dunn Carney Allen Higgins & Tongue , 272 Or. App. 436, 443, 356 P.3d 121 (2015), rev. den. , 358 Or. 794, 370 P.3d 502 (2016). "A directed verdict is appropriate only if the moving party is entitled to judgment as a matter of law." Id. We state the facts accordingly.

William (Bill) Sherertz was the founder, CEO, president, and chairman of the board of Barrett Business Services (BBSI), a publicly traded staffing company. He married Kimberly Sherertz in 1997. Bill had four children—two daughters from a prior marriage, a daughter of Kimberly's whom Bill adopted, and a son Cole born in 2000.

Bill's largest asset was BBSI stock, which gave him a controlling interest in BBSI. The wealth advisers at Bill's bank advised him that, upon his death, his estate would generate a large estate tax bill, which would necessitate selling stock to pay taxes unless Bill took action to provide liquidity to the estate. Bill did not like the idea of selling stock and hoped that his family would want to keep the stock.

Bill retained defendant law firm to prepare his estate plan, working primarily with Kirk Hay. At first, Bill planned to leave his BBSI stock to his children in equal shares. In 1999, defendant drafted a will under which Bill's three daughters would each receive a third of the stock. Cole was then born, and, in 2001, defendant prepared a new will under which Bill's four children would each receive a quarter of the stock. As for the estate's anticipated liquidity problem, in 2001, defendant set up an irrevocable life insurance trust (ILIT) that was the named beneficiary of a $10 million life insurance policy on Bill's life. BBSI agreed to pay the insurance premium under a "split dollar life insurance arrangement."³ Bill's four children were named equal beneficiaries of the ILIT.

Plaintiffs’ expert witness testified as to how an ILIT works to provide liquidity to an estate with substantial stock assets. Life insurance proceeds are exempt from estate taxes as long as they are not held or controlled by the decedent's estate. The settlor therefore establishes an ILIT, funded with sums sufficient to pay the life insurance premiums, and names the ILIT the beneficiary of the insurance policy. At the settlor's death, the life insurance proceeds—in this case, $10 million—flow into the ILIT to be administered for the benefit of the ILIT beneficiaries. At that point, the ILIT may provide liquidity to the estate by lending money to the estate (secured by the stock as collateral) or by buying stock from the estate. The ILIT trustee is a fiduciary, however, and must act in the ILIT's beneficiaries’ best interests. If the beneficial interests under the will and the ILIT are sufficiently aligned, the trustee's obvious choice is to use the ILIT funds to provide liquidity to the estate. The ILIT provides money to the estate, the estate provides stock to the ILIT, and the two sides are eventually merged, pursuant to language in both instruments. See ORS 130.230. However, if the beneficial interests are not aligned, the duties to differing beneficiaries will prevent such an arrangement.

Consistent with the foregoing explanation of how an ILIT provides liquidity to an estate, the settling documents that Hay prepared for Bill in 2001 gave the ILIT trustee discretion to use principal to buy BBSI stock from Bill's estate or to loan money to Bill's estate. They also permitted the ILIT trustee to engage in nominally imprudent transactions that would otherwise have to be avoided, such as investing heavily in a single volatile and thinly traded stock like BBSI stock.

Bill executed the 2001 ILIT documents, but he did not sign the 2001 will. And, in 2003, Bill changed his mind about leaving his BBSI stock to all four children and instead decided to leave it to Cole. Accordingly, defendant prepared a new will for Bill in 2003-04, which provided for all the BBSI stock to go into a testamentary trust upon Bill's death. Each of Bill's three daughters would receive annual $100,000 distributions from the trust (with cost-of-living increases and a cash-out option), but, upon the earlier of reaching age 25 or receiving an MBA degree, Cole would become the trustee, at which point he could liquidate the trust, cash out his sisters, and keep what remained.

On November 25, 2003, Hay sent a letter to Bill outlining changes and options for Bill's estate plan related to the new will that Hay was drafting. Among other things, Hay advised Bill that it was "unlikely" that his three daughters’ shares of the ILIT funds could be used for estate taxes if Cole was the sole beneficiary of the stock:

"The planning becomes critical because the [BBSI] shares passing to your children will be subject to tax and a significant amount of the shares will have to be redeemed or sold in order to raise capital to pay the tax.

"The insurance proceeds in the Irrevocable Life Insurance Trust [(ILIT)] can be utilized to pay taxes, but if a child is not a beneficiary of the [BBSI] shares, then it is unlikely that use of the funds for taxes would be appropriate for that insurance trust beneficiary."

Hay concluded by asking Bill to call him to discuss "some of these variances to the will," so that they could finalize the will. There is no evidence of any further communications between Bill and Hay.

On May 12, 2004, the BBSI board of directors held a meeting. Due to a change in federal law, the split-dollar arrangement by which BBSI had previously agreed to pay Bill's life insurance premiums was no longer permitted. BBSI's CFO reminded the directors that the purpose of that arrangement had been to provide Bill's estate with sufficient liquidity to pay estate taxes, "thereby avoiding the necessity of his estate being forced to sell a significant number of shares of BBSI to generate sufficient cash to pay estate taxes." The board approved a new arrangement, whereby BBSI would pay an annual cash bonus to Bill that he would use to pay the life insurance premiums.⁴

On September 22, 2004, Bill signed the new will, which remained in effect for the remainder of his life.

In 2005, Hay wrote an internal memorandum to a colleague at defendant law firm, asking him to look at Bill's ILIT. Hay asked the colleague to explore options to channel the life insurance proceeds to the payment of estate taxes, rather than an equal distribution to the four ILIT beneficiaries:

"Frank, please take a look at the terms of the Irrevocable Life Insurance Trust ("ILIT") and the terms and provisions of Bill Sherertz's Will and give me your recommendation on how we can channel the policy proceeds to the payment of taxes rather than an equal distribution of the proceeds to each of the four (4) children. Please note that under the Will, Cole receives by far, the largest share of the Barrett stock. The goal of the ILIT was wealth replacement to eliminate the necessity of selling Barrett's stock.

"You and I have discussed this issue before and I believe we have two (2) alternatives: (i) terminate the ILIT and reapply for new insurance or (ii) transfer the insurance to a new trust.

"I believe concerns relating to those two (2) alternatives are (i) that Bill may be uninsurable and (ii) the transfer for value issues that could arise in the event of a sale of the policies to the second trust.

"Please explore the alternatives and give me your thoughts."

There is no evidence of any further discussions between Hay and the colleague.

In 2011, Bill died, leaving behind a substantial estate. His wife Kimberly, as personal representative of the Estate, looked to the ILIT for funds to pay the estate taxes. However, the ILIT trustee would not buy stock from the Estate or loan money to the Estate using the stock as collateral, because he owed fiduciary duties to all four ILIT beneficiaries (the four children) and only one of the ILIT beneficiaries, Cole, would come to own the BBSI stock. The ILIT trustee testified that, with the four beneficiaries, it was not prudent to invest the entirety of the ILIT's funds in a single company's stock. The ILIT trustee agreed that, hypothetically, if Cole was the sole beneficiary of the ILIT, then he (the trustee) would have agreed to buy $10 million of BBSI stock from the Estate or loan the Estate $10 million secured by BBSI stock.

Ultimately, Kimberly decided to sell all of...