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In re Living Trust Agreement of Morningstar

Court of Appeals of Indiana

November 15, 2019

In the Matter of the Living Trust Agreement of Virgil C. Morningstar and Agnes M. Morningstar,
Nina Fortunka and STAR Financial Bank, Appellees. Teresa J. Morningstar, Appellant,

          Appeal from the Allen Superior Court, Probate Division The Honorable Stanley A. Levine, Judge Trial Court Cause No. 02D03-1604-TR-8

          ATTORNEY FOR APPELLANT Max A. Myers Myers Law Office Fort Wayne, Indiana

          ATTORNEYS FOR APPELLEE NINA FORTUNKA John O. Feighner Troy C. Kiefer Haller & Colvin, P.C. Fort Wayne, Indiana

          ATTORNEY FOR APPELLEE STAR FINANCIAL BANK Matthew J. Elliott Beckman Lawson, LLP Fort Wayne, Indiana

          BROWN, JUDGE.

         [¶1] Teresa J. Morningstar ("Morningstar") appeals the trial court's November 21, 2018 order finding that she breached various duties as trustee of the Living Trust Agreement of Virgil C. Morningstar and Agnes M. Morningstar (the "Trust"). The trial court entered judgment in favor of the trust beneficiaries and awarded attorney fees in favor of beneficiary Nina Fortunka. The restated issue is whether the court erred in finding that Morningstar breached her duties as trustee. We affirm.

         Facts and Procedural History

         [¶2] In January 2012, Agnes died, predeceasing Virgil. Prior to her death, Attorney Max Myers prepared the Trust, which established Agnes and Virgil as trustors and Agnes, Virgil, and Morningstar as trustees.[1] Morningstar, a beneficiary of the Trust, signed the trust instrument as an attorney-in-fact on behalf of Agnes and Virgil as both Trustor and Trustee and as herself as Trustee. The Trust provides in part that, in the investment, administration and distribution of the trusts created under it, the trustee shall be given "those powers set forth in the Indiana Trust Code as amended from time to time hereafter" and, in Article X, titled "Compensation of Trustee," that the trustee shall receive reasonable compensation for ordinary services and "shall also receive reasonable compensation for unusual and extraordinary services rendered in serving the personal needs of the Trustor [sic] and in settling Trustor's [sic] financial affairs and in making distribution of the assets." Appellant's Appendix Volume II at 37, 41. Article X further provided that "[s]uch compensation shall be adequate to cover the work involved, as well as responsibilities assumed, in effecting financial disposition of the trust." Id. At some point, Agnes and/or Virgil transferred title to certain real estate to the Trust.

         [¶3] Virgil died in August 2015 and, in administering the Trust, Morningstar completed an accounting for the period covering August 13, 2015, through May 31, 2016, and submitted it to the trial court on July 19, 2016. The accounting lists as an Asset an item titled "Rental Real Estate" valued at $226, 000.00, and as Income to the "CHASE BANK Account" a "Sale of rental real estate" transaction on "1/15/16" valued at $210, 342.63 and bearing an asterisk notation which states "reduction in amount reflects costs of sale." Appellant's Appendix Volume II at 45, 47. The accounting also contains an affidavit in lieu of receipts, checks, and vouchers that lists a disbursement on "1/20/16" of $6, 780.00 for "Teri Morningstar - RE finders fee" by means of "ck 4516," as well as monthly or bimonthly disbursements of $845.50 for "Teri Morningstar - payroll" from "8/17/15" until "3/1/16."[2] Id. at 49-52.

[¶4] On September 9, 2016, Fortunka as one of twenty-one beneficiaries of the Trust filed her Objections to Trustee's Court Ordered Accounting, which asserted that the Trustee breached her fiduciary duties, committed self-dealing, and carelessly and negligently handled trust assets. It stated that among the undervalued assets were fourteen rental properties, which were sold in a single sale without appraisals performed either at the time of Virgil's death or at the time of the sale, and that the sale was heavily discounted. It further contended that Morningstar continued to receive a salary and mileage as property manager after the sale, and it objected to several disbursements as unclear and invalid expenditures of the Trust, including those "described as finder's fees, payroll, mileage and misc. paid to Trustee." Id. at 57.

         [¶5] On July 17, 2018, and September 4, 2018, the court held hearings. Tom Mack testified as to his credentials as an independent real estate appraiser, and the court found him to be qualified as an expert in the field of appraisals without objection. He indicated that he completed exterior appraisals for 2822 Mauldin Drive, 2724 Schaper Drive, 2315 Saint Mary's Avenue, and 2221 Vance Avenue, explained his methodology, and provided an assessed retrospective value for each of the properties effective January 15, 2016.[3] During cross-examination, he provided an opinion that he had "known parties to inaccurately fill out sales disclosures" through his work as an assessor back in 2000, where he would "see sales disclosures that did not reflect the sales price." Transcript Volume II at 46.[4]

         [¶6] The court admitted various Objector's Exhibits, including copies of correspondence regarding the administration of the Trust and the sale of the properties. A letter by Attorney Myers, addressed to the heirs of Virgil, dated August 26, 2015, and admitted as Objector's Exhibit 5, announced that Virgil had died on August 13th and stated:

Upon the death of Agnes [] all of the business real estate which she owned was placed into a living trust for which Virgil and [Morningstar] were the Trustees. Those properties have been managed, improved and a sale off at [sic] fair value has been underway. However, there remains [sic] approximately one dozen houses unsold in addition to eight (8) that are under Contracts which will pay off at various dates over the next three (3) years. I will be asking for input from you in the future regarding suggestions for distribution of the Contract payments and/or the remaining real estate.
I will happily discuss the strategy and results involved in the business real estate since Agnes died, however, I can state up front that the plan was to have it all sold at a good price before Virgil died.
* * * * *
By virtue of the Estate holding a good deal of real estate, it will be necessary for us to come to a consensus of how that is to be handled before a complete distribution from the Estate can be made.
I will secure a complete status on all of the real estate and submit it to the heirs for comment on how they would prefer it be handled. Look for that in another ten (10) days or so.

         Exhibits Volume I at 101-102. A letter by Attorney Myers, similarly addressed, dated September 15, 2015, and admitted as Objector's Exhibit 6, stated that it appeared that the one asset which would pass through the estate was Virgil's brokerage account valued at $826, 215.08. The letter also stated:

As previously mentioned, there exists [sic] in the trust approximately one dozen houses unsold in addition to eight (8) that are under Contracts which will pay off at various dates over the next three (3) years. The market is such in Fort Wayne that the only realistic expectation is that the houses must be sold to an investor who will keep them as rentals. The mortgage companies will not lend on a property worth what these are worth and further, the buyer intending to live in one will not have the down payment required to entice a lender.
* * * * *
I have already been asked by more than one heir what I think the shares are expected to be. I refuse to commit to an exact number because the selling price of the real estate is so elusive that I can only speculate.
If these dozen houses average in value around $12, 000.00* and the balance on the contracts adds another $25, 000.00, we can expect the real estate to add another $160, 000.00 to the distributive amount for a total approaching $990, 000.00. This amount is subject both to the marketability of the real estate and any fluctuation in the value of the brokerage account.
* * * * *
* They are mostly 1, 000 sq. ft. rental properties in the bad parts of Fort Wayne.

Id. at 103-104. Fortunka responded affirmatively when asked whether the September 15, 2015 letter was the first time she had received the information that the only realistic expectation was to sell the properties to an investor.

         [¶7] A letter by Attorney Myers, addressed to the Trust beneficiaries, dated October 30, 2015, and admitted as Objector's Exhibit 7, indicated that he had held a meeting to address questions by Kyle Foreman and others.[5] It further stated:

Let me start by saying that I was truly dumbstruck by the amount of false information that is circulating among some of you. Some of the rumors which Kyle related as having been suggested by some of you are not just a little wrong; they are nowhere close to any conceivable possibility of misunderstanding. They are outright fabrications with no basis in fact whatsoever.
I do not intend to waste my time and your money (for attorney fee bills) chasing these wild stories to ground. If any of you have a specific question, ask it of me. If it is a relevant inquiry, you will receive a prompt and complete answer. If I am asked a question that has no role in moving the estate/trust to closure and distribution, I will not waste trust assets looking into it.
** * * *
In about 45 days from the date of this letter, the Estate can be closed and the funds transferred to the Trust. The Trust was originally constructed to run Agnes' real estate business so it has only a modest amount of liquidity - with the bulk of the assets being real estate[.]
** * * *
[] The remaining assets in the Trust will be the real estate which appears on a list enclosed herewith.[6] Note that the top items are under contract, some of which will last almost three (3) more years. There is little that can be done with these except let them pay out and periodically distribute the accumulated payments to you beneficiaries.
The second set is the rental houses which can be sold at any time for a reasonable fair value, if a buyer can be located. Kyle was visibly shocked when I informed him that several of these houses were valued in the $8, 000.00 to $12, 000.00 range. I proved it to him by showing him sales documents for properties in these neighborhoods which have sold in the last three months for this price range.
THIS JUST IN: [Morningstar] has just informed me that an individual has indicated a willingness to purchase all of these houses and will give us a written offer with his price early next week.
Once received, I will share it with you on the following basis: A) If you have a valid objection to the price or terms, that objection must be sent to me in writing, within 10 days, detailing the objection with documented or statistical support; or B) that you submit a valid written offer to purchase the lot of the properties (either by you or someone else as buyer) for a greater price and terms as good as the offer given to [Morningstar].
If the offer we receive next week is of reasonable value and we have not received any qualifying response (as set forth in the preceding paragraph) then said offer will be accepted.
* * * * *
Please take this letter as my request to each of you to propose a solid alternative to the options which I have outlined above. Some that come to my ...

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