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Hodges v. Johnson

Supreme Court of New Hampshire

December 12, 2017

DAVID A. HODGES, JR. & a.
v.
ALAN JOHNSON & a.

          Argued: March 30, 2017

         7th Circuit Court-Dover Probate Division

          Bernstein Shur, P.A., of Manchester (Roy W. Tilsley, Jr. and Edward J. Sackman on the brief, and Mr. Tilsley orally), for the plaintiffs.

          Upton & Hatfield, LLP, of Portsmouth (Russell F. Hilliard on the joint brief and orally), for defendants Alan Johnson and William Saturley.

          Wadleigh, Starr & Peters, PLLC, of Manchester (Jeffrey H. Karlin on the joint brief), for defendant Joseph McDonald.

          Glenn A. Perlow and Todd D. Mayo, of Hampton, for the New Hampshire Trust Council, as amicus curiae.

          DALIANIS, C.J.

         The defendants, Alan Johnson, Joseph McDonald, and William Saturley, appeal an order of the 7th Circuit Court-Dover Probate Division (Cassavechia, J.), which, following a bench trial, set aside "decantings" from two 2004 irrevocable trusts of which the plaintiffs, David A. Hodges, Jr. (David Jr.), Barry R. Sanborn, and Patricia Sanborn Hodges, had been beneficiaries, and which removed defendants Johnson and Saturley as co-trustees of those trusts. "Decanting is the term generally used to describe the distribution of trust property to another trust pursuant to the trustee's discretionary authority to make distributions to, or for the benefit of, one or more beneficiaries." William R. Culp, Jr. & Briani Bennett Mellen, Trust Decanting: An Overview and Introduction to Creative Planning Opportunities, 45 Real Prop. Tr. & Est. L.J. 1, 2 (Spring 2010); see RSA 564-B:4-418(a) (Supp. 2016) (explaining that "[t]he power to decant is the power to appoint some or all of the trust property of a trust . . . to another trust"). The decantings at issue eliminated the future beneficial interests of the plaintiffs. The trial court ruled that the decantings are void ab initio because McDonald, as the decanting trustee, and Johnson and Saturley, to the extent they assisted as co-trustees in facilitating the decantings, failed to "give any consideration to the [plaintiffs'] beneficial interests." The trial court also determined that it "best serves the interests of all beneficiaries to order removal of . . . Saturley and Johnson as co-trustees." We affirm.

         I. Pertinent Facts

         The trial court found, or the record reflects, the following facts. The settlor of the 2004 trusts was David A. Hodges, Sr. (hereinafter referred to as either David Sr. or the settlor). David Jr. is one of the settlor's three biological children. The settlor's other biological children are Nancy Hodges-Friese and Janice Hodges. Barry and Patricia are the settlor's two step-children. The settlor died in August 2015.

         In 1969, David Sr. founded Hodges Development Company (HDC), now a relatively large and reportedly successful real estate holding and development company. According to the defendants, HDC is "the parent entity of the Hodges enterprises."

         McDonald was David Sr.'s attorney. Saturley, who is also an attorney, has represented both David Sr. and HDC. Johnson has worked for HDC since 1984 and is now its President. He holds minority shares in two HDC entities, Hodges Pembroke, LLC and Hodges Portsmouth, LLC, and is a beneficiary of a revocable trust established by David Sr. Under the terms of that revocable trust, Johnson is to receive $500, 000 for his past service to HDC and an additional $500, 000 over time for his continued service to HDC.

         Some of David Sr.'s children and step-children have worked for HDC and/or its subsidiaries. Barry worked for HDC for approximately 36 years, rising to the position of Senior Vice President, before his employment was terminated in October 2012. When Barry's employment was terminated, he was working for HDC part-time, although he was paid a full-time salary. His underemployment was a source of friction between him and David Sr.

         David Jr. also worked for the family business. In April 2012, however, he was informed that he would not be appointed President of HDC, but that Johnson would assume that position instead. The trial court found that "[t]his resulted in a confrontation" between David Sr. and David Jr., "the ferocity of which is disputed." David Jr. informed Barry of this development, and Barry confronted David Sr. about it. The trial court found that, although "the measure of discord is disputed, what is clear is that David, Sr. moved out of the family home, Barry had a heart attack, and a divorce action between [David Sr. and his then-wife, Joanne M. Hodges, ] . . . ensued." When David Jr. returned to HDC headquarters, he discovered that armed guards had been hired allegedly to protect David Sr. and Johnson from Barry. David Jr. was fired from HDC in August 2012

         Patricia testified that she has never held any corporate office or position at HDC. She also testified that, as of May 2015, she had not spoken with David Sr. in three or four years.

         A. The 2004 Trusts in General

         In 2004, the settlor created two irrevocable trusts, the "David A. Hodges, Sr. Irrevocable GST Exempt Trust" (the 2004 GST Exempt Trust) and the "David A. Hodges, Sr. Irrevocable GST Non-Exempt Trust" (the 2004 GST Non-Exempt Trust). (Capitalization omitted.) The 2004 trusts were products of decanting, but that decanting is not in dispute. The 2004 GST Exempt Trust contains assets that are exempt from the federal generation-skipping transfer tax; the 2004 GST Non-Exempt Trust contains assets that are not exempt from the federal generation-skipping transfer tax. When the two trusts were first created, Johnson was the sole trustee. Saturley was later appointed to be Johnson's co-trustee.

         The beneficiaries of both trusts are Joanne and the settlor's five children and step-children and their "descendants, " as defined by the trust instruments. The primary assets held in the trusts consist of all of the non-voting stock of HDC. The non-voting stock represents more than 98% of all HDC stock. The voting stock was held by David Sr. The 2004 trusts were created when market conditions made the transfer of non-voting stock of the family's closely-held business attractive to the settlor. The paramount purpose of the 2004 trusts was to provide for the continuation of HDC after the settlor's death by eliminating the need to liquidate HDC assets in order to pay estate taxes.

         It was represented to the trial court that, in addition to the non-voting stock of HDC and cash dividends paid on those shares, the 2004 trusts currently hold stock in Hodges limited liability companies (Hodges Portsmouth, LLC and Hodges Pembroke, LLC) and the income generated by those limited liability companies.

         Both trusts are irrevocable and both trust instruments contain a provision in which the settlor specifically acknowledged that he had "no right or power, whether alone or in conjunction with others, in whatever capacity, to alter, amend, modify or revoke" the trust instrument "or to designate the persons who shall possess or enjoy the trust property or its income."

         Each trust instrument provides that, during the settlor's lifetime, the trust beneficiaries (Joanne, the plaintiffs, and the settlor's other children) had a right to withdraw from the trust whenever property was contributed to it. That right was exercisable within 60 days following a contribution.

         Each trust instrument also provides for discretionary distributions, during the settlor's lifetime, to the beneficiaries and to "distributee trusts, " which are subject to the beneficiaries' rights of withdrawal. The provision in each trust document regarding such discretionary distributions allows the trustee(s) to "distribute all or any portion of the net income and principal of the trust to any one or more of the group consisting of [Joanne], [the settlor's] descendants, and distributee trusts, in such amounts and at such times as the Trustee, in the Trustee's discretion, may determine." The trust documents define a distributee trust as "any trust being administered" under the trust instruments "for the benefit of any one or more, but not necessarily all, of the group consisting of [Joanne] and [the settlor's] descendants, or any trust established by [the settlor] under another trust instrument for the benefit of any one or more, but not necessarily all, of the members of such group."

         The trust instruments specify that, upon the death of the settlor and of Joanne, provided that all five children are then living, the trust corpus is to be divided into five separate trusts for each of the settlor's children and step-children and their respective descendants. With respect to the separate trusts for the settlor's children and step-children, each trust instrument allows the trustee(s) to "distribute all or any portion of the net income and principal of the trust to any one or more of the group consisting of the child and his or her descendants in such amounts and at such times as the Trustee, in the Trustee's discretion, may determine."

         The trust instruments set forth a list of considerations that the trustee(s) "should consider" when "deciding whether to make distributions of the net income or principal of any trust, " although each trust instrument also states that the enumerated considerations are "not intended to limit or direct the exercise of [the trustees'] discretion in any way." One such consideration states: "Whenever there is more than one beneficiary of a trust, distributions of income and principal may be made by the Trustee without obligation to equalize such distributions among the beneficiaries." Another states that Joanne "during her life should be deemed the primary beneficiary of the trust and her welfare, enjoyment, and comfort should be regarded as paramount to the conservation of the trust for the benefit of concurrent or remainder beneficiaries."

         Each trust instrument also provides that "[t]o the extent that the Trustee is not required to make distributions of the net income of a trust, the Trustee is authorized, in the Trustee's discretion, . . . to accumulate income without allocation and at any time thereafter to add such income so accumulated to the principal of the trust."

         Both trust instruments also contain a "No Contest Provision" whereby "[i]f any beneficiary . . ., directly or indirectly, institutes, conducts or in any manner whatsoever takes part in or aids in any proceedings to impair, invalidate, oppose, or set aside [the] trust, . . . then any and all provisions made for the benefit of such beneficiary . . . shall thereupon be revoked."

         B. Provisions in the 2004 Trusts Related to the Settlor's Closely-Held Business Interests

         Each trust document contains provisions related to the settlor's closely-held business interests. The trust instruments define those business interests to include the stock of HDC, the stock of its three wholly-owned subsidiaries (Hodges Properties, Inc., Hodges Construction Corporation, and Hodges Realty, Inc.), and an interest in Hodges Family Farm, LLC. The trust instruments establish a "Committee of Business Advisors, " who, by majority vote, have the exclusive authority, upon the settlor's death or incapacity or upon such earlier date as he may designate, to make all business decisions for his closely-held business interests (as defined by the trust documents). According to the trust documents, the initial members of the committee were Johnson, Barry, David Jr., Nancy, and a fifth member to be appointed by David Sr. The trust instruments empowered the settlor, while living and competent, to amend the provisions related to "the appointment, resignation, removal, and number" of the members of the Committee of Business Advisors, as well as "their powers, duties and liability."

         During his lifetime, the settlor revised the membership of the Committee of Business Advisors on several occasions. As revised by the settlor in 2012, the members of that committee are: Johnson, McDonald, Saturley, Nancy, and Diane Benoit. Janice was nominated as a "Special Equity Voting Member" solely to exercise voting powers pertaining to "any voting equity interest" in a business ...


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