Al J. Schneider Company v. Mary S. Moseley ( 2021 )

RENDERED: AUGUST 27, 2021, 10:00 A.M.
NOT TO BE PUBLISHED
Commonwealth of Kentucky
Court of Appeals
NO. 2019-CA-1700-MR
AL J. SCHNEIDER COMPANY,
DAVID OETKEN, TODD OETKEN, AND
NANCY O’HEARN APPELLANTS
APPEAL FROM JEFFERSON CIRCUIT COURT
v. HONORABLE BRIAN C. EDWARDS, JUDGE
ACTION NO. 16-CI-001164
MARY S. MOSELEY; DAWN M. HITRON;
MICHAEL B. MOUNTJOY; R. JOSEPH MITTELL;
CHRISTE COE; RANDY COE; SHANE MOSELEY;
SAM MOSELEY, IN HIS INDIVIDUAL CAPACITY OR
HIS CAPACITY AS TRUSTEE OF THE MARY S. MOSELEY
IRREVOCABLE TRUST; PNC BANK N.A.; KEVIN FORD,
GUARDIAN AD LITEM APPOINTED TO REPRESENT
THE INTERESTS OF THE UNBORN/UNKNOWN/MINOR
BENEFICIARIES OF THE ALTON JOHN SCHNEIDER
RESTATED REVOCABLE TRUST; JEFFREY A. BUTLER;
AMANDA LOUISE BUTLER; ALLIE WELLINGHURST;
DANIAL L. OETKEN; GERRI L. FIHE; KEVIN A. OETKEN;
KERRI TERESA SULLIVAN; CHRISTOPHER OETKEN
CATT; ALTON J. SCHNEIDER, III; ANTHONY G. BUTLER;
CANDICE SCHNEIDER POLIO; OLIVIA SCHNEIDER
LANNING; REBECCA RICHARDSON; MICHAEL A.
SCHNEIDER; WALTER SLATER COE; KELLY COE
DOLLINGER; CONNIE SCHILFFARTH; JACQUELYN
BAINBRIDGE; ADDIE BAINBRIDGE; AUSTIN BAINBRIDGE;
AMY ELIZABETH BISIG; NORA KATE BISIG; ANNIE BISIG;
CONNOR R. KILLOUGH; ELI OETKEN; FINN OETKEN;
JUDE OETKEN; KATHERYN E. CURRAN; JACKSON F.
CURRAN; CALVIN CURRAN; MARY ANN OETKEN;
ERIN E. FIHE; JOHN C. FIHE; TIMOTHY TODD OETKEN,
JR.; TIMOTHY TODD OETKEN, SR.; HEATHER
HAYDON; GRACE I. HAYDON; ELEANOR M. HAYDON;
ANNA E. HITRON; ALICE M. JOHNSON; HAGAN
EDWARD O’HEARN; THOMAS O’HEARN, II; ANTHONY
KAYO POLIO; KENNEDY RIYANN POLIO; KRUZE
POLIO; MAGGIE M. HITRON; NICOLE MOSELEY
JAEGER; FELIX JAEGER; CORA JAEGER; JOSEPH
SCHILFFARTH; ASHLEY SCHILFFARTH; ALTON JOHN
SCHNEIDER, IV; KELSEY SCHNEIDER; NICHOLAS
SCHNEIDER; HAZEL SCHNEIDER; LILA NOELLE
SCHNEIDER; SLOANE MOSELEY; MILA CAR MOSELEY;
PHILLIP MICHAEL SULLIVAN; SEAN PATRICK SULLIVAN,
SALLY E. WELLINGHURST; KAREN WELLINGHURST;
KRISTEN JOY OETKEN; DANIEL JOSEPH OETKEN;
LANDON ANTHONY BELL; DANIEL L. OETKEN; ERIK
D. OETKEN; JORDYN L. OETKEN; COURTNEY OETKEN;
NATHAN OETKEN; ALEXIS K. BUTLER; AND JOHN
ANDREW HITRON, IN HIS INDIVIDUAL CAPACITY
OR HIS CAPACITY AS TRUSTEE OF THE DAWN M.
HITRON IRREVOCABLE TRUST APPELLEES
AND NO. 2020-CA-0748-MR
MARY S. MOSLEY;1 AND DAWN M. HITRON CROSS-APPELLANTS
1
The body of the notice of cross-appeal identifies Mary S. Moseley’s last name as “Mosely.”
This appears to be a typographical error from our review of the record below.
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CROSS-APPEAL FROM JEFFERSON CIRCUIT COURT
v. HONORABLE BRIAN C. EDWARDS, JUDGE
ACTION NO. 16-CI-001164
AL J. SCHNEIDER COMPANY; DAVID OETKEN;
TODD OETKEN; NANCY O’HEARN;
MICHAEL B. MOUNTJOY; R. JOSEPH MITTELL;
CHRISTE COE; RANDY COE; SHANE MOSELEY;
SAM MOSELEY, IN HIS INDIVIDUAL CAPACITY OR
HIS CAPACITY AS TRUSTEE OF THE MARY S. MOSELEY
IRREVOCABLE TRUST; PNC BANK N.A.; KEVIN FORD,
GUARDIAN AD LITEM APPOINTED TO REPRESENT
THE INTERESTS OF THE UNBORN/UNKNOWN/MINOR
BENEFICIARIES OF THE ALTON JOHN SCHNEIDER
RESTATED REVOCABLE TRUST; JEFFREY A. BUTLER;
AMANDA LOUISE BUTLER; ALLIE WELLINGHURST;
DANIAL L. OETKEN; GERRI L. FIHE; KEVIN A. OETKEN;
KERRI TERESA SULLIVAN; CHRISTOPHER OETKEN
CATT; ALTON J. SCHNEIDER, III; ANTHONY G. BUTLER;
CANDICE SCHNEIDER POLIO; OLIVIA SCHNEIDER
LANNING; REBECCA RICHARDSON; MICHAEL A.
SCHNEIDER; WALTER SLATER COE; KELLY COE
DOLLINGER; CONNIE SCHILFFARTH; JACQUELYN
BAINBRIDGE; ADDIE BAINBRIDGE; AUSTIN BAINBRIDGE;
AMY ELIZABETH BISIG; NORA KATE BISIG; ANNIE BISIG;
CONNOR R. KILLOUGH; ELI OETKEN; FINN OETKEN;
JUDE OETKEN; KATHERYN E. CURRAN; JACKSON F.
CURRAN; CALVIN CURRAN; MARY ANN OETKEN;
ERIN E. FIHE; JOHN C. FIHE; TIMOTHY TODD OETKEN,
JR.; TIMOTHY TODD OETKEN, SR.; HEATHER
HAYDON; GRACE I. HAYDON; ELEANOR M. HAYDON;
ANNA E. HITRON; ALICE M. JOHNSON; HAGAN
EDWARD O’HEARN; THOMAS O’HEARN, II; ANTHONY
KAYO POLIO; KENNEDY RIYANN POLIO; KRUZE
POLIO; MAGGIE M. HITRON; NICOLE MOSELEY
JAEGER; FELIX JAEGER; CORA JAEGER; JOSEPH
SCHILFFARTH; ASHLEY SCHILFFARTH; ALTON JOHN
SCHNEIDER, IV; KELSEY SCHNEIDER; NICHOLAS
SCHNEIDER; HAZEL SCHNEIDER; LILA NOELLE
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SCHNEIDER; SLOANE MOSELEY; MILA CAR MOSELEY;
PHILLIP MICHAEL SULLIVAN; SEAN PATRICK SULLIVAN,
SALLY E. WELLINGHURST; KAREN WELLINGHURST;
KRISTEN JOY OETKEN; DANIEL JOSEPH OETKEN;
LANDON ANTHONY BELL; DANIEL L. OETKEN; ERIK
D. OETKEN; JORDYN L. OETKEN; COURTNEY OETKEN;
NATHAN OETKEN; ALEXIS K. BUTLER; AND JOHN
ANDREW HITRON, IN HIS INDIVIDUAL CAPACITY
OR HIS CAPACITY AS TRUSTEE OF THE DAWN M.
HITRON IRREVOCABLE TRUST CROSS-APPELLEES
OPINION
AFFIRMING IN PART, REVERSING IN PART,
AND REMANDING
** ** ** ** **
BEFORE: KRAMER, McNEILL, AND L. THOMPSON, JUDGES.
THOMPSON, L., JUDGE: The Al J. Schneider Company (hereinafter referred to
as “the Company”), David Oetken, Todd Oetken, and Nancy O’Hearn appeal from
orders of the Jefferson Circuit Court which granted Mary S. Moseley and Dawn M.
Hitron’s motions for a judgment on the pleadings. Mary S. Moseley and Dawn M.
Hitron cross-appeal an order of the circuit court which certified the orders granting
a judgment on the pleadings as final and appealable. We affirm the trial court’s
order being appealed by Ms. Moseley and Ms. Hitron, but reverse and remand the
orders granting a judgment on the pleadings.
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FACTS AND PROCEDURAL HISTORY
Alton John Schneider, founder and sole owner of the Company,
created the Alton John Schneider Trust. When Mr. Schneider passed away in
2001, all of the shares of the Company went into the trust. All of the stock was to
remain in the trust until June 1, 2016, when the shares would be distributed to Mr.
Schneider’s four living daughters, Ms. Moseley, Ms. Hitron, Christe Coe, and
Nancy O’Hearn. Also receiving shares would be the offspring of two deceased
children. This included David and Todd Oetken. Various grandchildren and great-
grandchildren also were named beneficiaries in the trust. In total, there were 21
beneficiaries named in the trust. Mr. Schneider named five trustees to administer
the trust: Ms. Moseley, Ms. Hitron, Ms. Coe, Michael Mountjoy,2 and Joseph
Mittel.3 The terms of the trust specifically allowed his daughters to hold positions
as trustees, beneficiaries of the trust, and board members of the Company.
In 2005, the trustees adopted a shareholder agreement which restricted
the transfer of the Company’s stock. In early 2012, the trustees decided to amend
the 2005 shareholder agreement to create two classes of stock: Class A voting
stock and Class B non-voting stock. The new agreement would also amend other
sections of the 2005 shareholder agreement. One such amendment was a put
2
Mr. Schneider’s accountant.
3
A former general manager of the Galt House Hotel.
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provision. This would force the Company to buy back a shareholder’s shares
whenever requested by said shareholder. In essence, it was a way for a shareholder
to exit the Company. Around this same time, certain beneficiaries of the trust
formed a Governance Working Committee to advise the trustees of shareholder
concerns and debate the terms of the new shareholder agreement. Some of the
trust beneficiaries did not want the put provision to be included in the new
shareholder agreement.
In August of 2012, the trust’s trustees voted to approve the new 2012
shareholder agreement, which included the put provision. The Board of Directors
of the Company later also adopted the new shareholder agreement. After the
adoption of the new agreement, the new Class B stock was distributed to the
shareholders.
In 2016, certain beneficiaries petitioned the court to remove Appellees
as trustees. That is what began this underlying case. Appellees then petitioned the
court to declare that the trust is valid and that they were proper trustees. Later,
new claims were brought regarding a dispute amongst the beneficiaries as to
whether to liquidate corporate assets, and some shareholders filed a shareholder
derivative suit. Some of these issues are still part of ongoing litigation.
Relevant to our purposes is a counter petition for declaration of rights
filed by the Company. On September 5, 2017, the Company filed a petition for
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declaratory judgment regarding the interpretation and enforcement of the 2012
shareholder agreement and the put provision. The Company alleged that Appellees
had a conflict of interest because they were trustees, beneficiaries of the trust, and
members of the Company board. The Company further alleged that the put
provision included in the 2012 shareholder agreement was not in the best interest
of the Company or the trust’s beneficiaries. The Company argued that the 2012
shareholder agreement should be voided due to Appellees’ conflict of interest,
Appellees’ breach of fiduciary duties, and the allegation that the put provision is
not in the best interests of the Company or the trust beneficiaries.
On August 9, 2018, the Company filed a motion to amend its petition
and an amended petition. The amended petition expanded on the alleged facts
surrounding the 2012 shareholder agreement. It also alleged Appellees engaged in
fraud, misrepresentation, and bad faith. On September 7, 2019, Messrs. Oetken
and Ms. O’Hearn filed an intervening petition for declaratory judgment. They
were also seeking declaratory judgment that the new shareholder agreement was
void. They incorporated into their petition the facts and allegations set forth in the
Company’s amended petition. In essence, they alleged Appellees had conflicts of
interest, acted in bad faith, and engaged in fraud and misrepresentation.4
4
In its order granting Appellees’ motion for judgment on the pleadings, the trial court also
denied the Company’s motion to amend its petition. The court held that because it was ruling in
favor of Appellees and the amended complaint only expanded on the facts alleged in the original
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Appellees filed a counterclaim seeking enforcement of the 2012
shareholder agreement. Section 3 of the 2012 agreement requires the Company to
perform a valuation every year. Appellees claimed that the Company did not
perform the 2017 evaluation. Appellees alleged this was done to thwart their
attempt to use the valuation amount when exercising the put provision.
Appellees later filed motions seeking judgment on the pleadings
against Appellants. Appellees argued that Mr. Schneider recognized and permitted
the conflicts of interest when he created the trust because it specifically allows
Appellees to be trustees, beneficiaries, and Company board members. Appellees
also claimed that the 2012 shareholder agreement was valid because the other three
trustees approved of it and the trustees were able to act by simple majority
pursuant to the terms of the trust.
On November 19, 2018, the trial court entered an order granting
Appellees’ motion for judgment on the pleadings as against the Company. The
court cited to In re Flagg’s Estate, 365 Pa. 82, 73 A.2d 411 (1950), in holding that
Mr. Schneider intended that conflicts of interest might arise due to Appellees being
trustees, beneficiaries, and Company board members pursuant to the terms of the
petition, it was moot. Even though the trial court denied the Company’s motion to amend the
petition, we will still consider it in our analysis. The court addressed some of the allegations
found in the amended petition in the order granting Appellees’ motion for judgment on the
pleadings. Furthermore, the Oetken and O’Hearn petition for declaration of rights incorporated
all of the Company’s amended petition in their petition.
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trust. The court believed that Mr. Schneider, as the testator, had the power to allow
these conflicts to exist during the administration of the trust.
On September 4, 2019, the trial court entered an order granting
Appellees’ motion for a judgment on the pleadings as against Messrs. Oetken and
Ms. O’Hearn. The trial court reiterated its previous holding from its order granting
a judgment on the pleadings as against the Company. It also held “that a trustee
may occupy conflicting positions in handling the trust where the trust instrument
contemplates, creates, or sanctions the conflict of interest.” In re Estate of Halas,
209 Ill. App. 3d 333, 344, 568 N.E.2d 170, 178 (1991) (citations omitted). Like its
previous order, the court held that Mr. Schneider intended that the trust be run by
trustees with dual roles and potential conflicts of interest. The court also held that
there was no evidence that the 2012 shareholder agreement was enacted in bad
faith.
The court also addressed Kentucky Revised Statute (KRS) 386.820.
Specifically, the court addressed the version of the statute in effect in 2012 when
the new shareholder agreement was created. The 2012 version of KRS 386.820(2)
stated in relevant part: “If the duty of the trustee and his individual interest or his
interest as trustee of another trust, conflict in the exercise of a trust power, the
power may be exercised only by court authorization . . . upon petition of the
trustee.” The court held that this statute did not apply because the new shareholder
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agreement was accepted by all five trustees, including three who had no conflict of
interest, namely Ms. Coe, Mr. Mountjoy, and Mr. Mittel. The court concluded that
any possible conflict was cured by approval of the majority of disinterested
trustees; therefore, court approval was unnecessary.
On September 19, 2019, Appellees attempted to exercise the put
provision of the 2012 agreement. They discovered that the Company had in fact
had a valuation done in 2018. They sought to use the valuation and requested a
buyout of their shares. The Company refused to honor the demand. On September
25, 2019, Appellees filed a motion for leave to amend their counterclaim. They
sought to add a claim for breach of the 2012 agreement because the Company
refused to allow them to exercise the put provision.
On September 26, 2019, Messrs. Oetken and Ms. O’Hearn filed a
motion requesting that the trial court designate the two orders granting judgment
on the pleadings as being final and appealable. Appellees objected to this request.
They argued that the issue of damages for breach of the valuation provision had yet
to be determined and allowing the appeal of the two judgment on the pleadings
orders would result in piecemeal litigation. On November 1, 2019, the court
entered an order granting the motion to make the orders final and appealable.
That same day Appellees filed a motion asking the court to reconsider
its order making the two other orders final and appealable. They argued that the
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motion to amend their counterclaim was still pending and that damages for the
breach of the valuation and put provision sections of the 2012 agreement had yet to
be determined.
On November 13, 2019, Appellants filed a joint notice of appeal in
which they appealed the two orders granting judgment on the pleadings.
On May 29, 2020, the trial court entered an order denying Appellees’
motion to reconsider the order making the judgment on the pleading orders final
and appealable. The court held that at the time it made the two orders final and
appealable, there were no outstanding issues regarding the put provision, only
issues regarding the valuation. The court held that while Appellees had moved to
amend their counterclaim to include put provision claims, that motion had not been
granted or fully briefed. The court held that Appellees failed to meet their burden
for reconsideration. That same day, the court entered another order holding
Appellees’ motion to amend their counterclaim in abeyance pending the outcome
of Appellants’ appeal.
Appellees then filed a notice of cross-appeal in which they appealed
the court’s order making the judgment on the pleadings orders final and
appealable.
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ANALYSIS
We will first address Appellees’ cross-appeal. They are appealing
from the trial court’s order designating the November 19, 2018, and September 4,
2019, orders against Appellants as final and appealable pursuant to Kentucky
Rules of Civil Procedure (CR) 54.02. CR 54.02(1) states in relevant part:
When more than one claim for relief is presented in an
action, whether as a claim, counterclaim, cross-claim, or
third-party claim, or when multiple parties are involved,
the court may grant a final judgment upon one or more
but less than all of the claims or parties only upon a
determination that there is no just reason for delay. The
judgment shall recite such determination and shall recite
that the judgment is final. In the absence of such recital,
any order or other form of decision, however designated,
which adjudicates less than all the claims or the rights
and liabilities of less than all the parties shall not
terminate the action as to any of the claims or parties, and
the order or other form of decision is interlocutory and
subject to revision at any time before the entry of
judgment adjudicating all the claims and the rights and
liabilities of all the parties.
Appellees argue that there are still closely related issues to be
determined and that the trial court erred in ruling the two judgment on the
pleadings orders were final and appealable. Appellees claim the two orders did not
fully adjudicate their counterclaims, specifically the damages for failing to do a
valuation and for failing to redeem their shares pursuant to the terms of the put
provision. They argue the court should make a ruling on these issues before the
judgment on the pleadings orders can be deemed final and appealable.
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In any case presenting multiple claims or multiple
parties, CR 54.02 . . . vests the trial court–as the tribunal
most familiar with the case–with discretion to “release
for appeal final decisions upon one or more, but less than
all, claims in multiple claims actions.” In such a case,
the trial court functions as a “dispatcher.” If the trial
court grants a final judgment upon one or more but less
than all of the claims or parties, that decision remains
interlocutory unless the trial court makes a separate
determination that “there is no just reason for delay.”
And the trial court’s judgment shall recite such
determination and shall recite that the judgment is final.
A reviewing court, in turn, examines the trial
court’s certification on two levels. First, an appellate
court must determine that the trial court rendered a final
adjudication upon one or more claims in litigation. A
final adjudication is a judgment that conclusively
determines the rights of the parties in regard to that
particular phase of the proceeding. Second, once an
appellate court determines that the trial court rendered a
final adjudication upon one or more claims in litigation,
an appellate court then examines the trial court’s
certification for abuse of discretion in releasing for
appeal a final decision upon one or more, but less than all
the claims.
Watson v. Best Financial Services, Inc., 245 S.W.3d 722, 726 (Ky. 2008)
(footnotes and citations omitted).
In the exercise of that discretion the trial judge
must balance this Court’s historic policy against
piecemeal appeals[] and the practical needs of the
particular case before him. The entering of certification
under CR 54.02 is no more automatic than is an
extension of time to file a record on appeal under CR
73.08. The trial judge should always determine in
entering a certification under CR 54.02 that the order
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being certified is sufficiently important and severable to
entitle a party to an immediate appellate review.
Jackson v. Metcalf, 404 S.W.2d 793, 794-95 (Ky. 1966) (citations omitted). “The
test for abuse of discretion is whether the trial judge’s decision was arbitrary,
unreasonable, unfair, or unsupported by sound legal principles.” Commonwealth v.
English, 993 S.W.2d 941, 945 (Ky. 1999).
We believe the trial court reasonably exercised its discretion in
designating the two judgment on the pleadings orders as final and appealable.
These two orders ended the declaratory judgment actions brought by Appellants
and conclusively determined that the 2012 shareholder agreement was not
procured through unreasonable conflicts of interest, fraud, or bad faith. It was also
reasonable to allow Appellants to immediately appeal these orders because
Appellants could no longer participate in the continuing litigation before the trial
court unless an appellate court reversed and remanded. In addition, since the two
orders being appealed ended the causes of action at the pleadings stage, it would be
a waste of time and resources for the case to fully conclude and then potentially
later get reversed and remanded by an appellate court. Finally, even though
Appellees may have counterclaims against the Company, there are no further
claims against Messrs. Oetken and Ms. O’Hearn related to their declaratory action.
Allowing Messrs. Oetken and Ms. O’Hearn to appeal because their claims have
been fully adjudicated, but not allowing the Company to appeal over the same
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issue, would be illogical. We believe it is reasonable to determine if the 2012
shareholder agreement and put provision are valid before moving on to issues of
damages for failing to adhere to the terms of said agreement.
We also believe that case law supports this conclusion. In Preferred
Risk Mutual Insurance Company v. Kentucky Farm Bureau Mutual Insurance
Company, 872 S.W.2d 469 (Ky. 1994), Preferred Risk Mutual Insurance Company
sought a declaration of rights regarding a policy issued by Kentucky Farm Bureau
Mutual Insurance Company and sought to recover damages from Kentucky Farm
Bureau. The trial court granted a declaratory judgment in favor of Preferred Risk
and allowed Kentucky Farm Bureau to immediately appeal. The Kentucky
Supreme Court held this was proper even though issues of damages were still
outstanding. Id. at 470. See also Curtiss-Wright Corp. v. General Elec. Co., 446
U.S. 1, 9, 100 S. Ct. 1460, 1465, 64 L. Ed. 2d 1 (1980) (where the United States
Supreme Court held that the existence of a counterclaim does not render the federal
version of CR 54.02 certification inappropriate).
Based on the foregoing, we conclude that the trial court did not abuse
its discretion in ordering the two judgment on the pleadings orders as final and
appealable.
We now move on to Appellants’ appeal. They argue that the trial
court erred in granting Appellees’ motions for judgment on the pleadings.
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Appellants claim that they made sufficient allegations to survive such a motion.
We agree.
A judgment on the pleadings is a question of law and is reviewed de
novo. Russell v. Johnson & Johnson, Inc., 610 S.W.3d 233, 238-39 (Ky. 2020).
[A] judgment on the pleadings can be granted only if, on
the admitted material facts, the movant is clearly entitled
to a judgment. Relief must be denied if there is a
material issue of fact. Such motion is to be determined
solely on the pleadings and is equivalent to a demurrer on
the pleadings. When a party moves for judgment on the
pleadings, he admits for the purposes of his motion not
only the truth of all of his adversary’s well-pleaded
allegations of fact and fair inferences therefrom, but also
the untruth of all of his own allegations which have been
denied by his adversary. The question thus presented is
one of law and requires an examination of the pleadings.
Archer v. Citizens Fidelity Bank & Trust Co., 365 S.W.2d 727, 729 (Ky. 1962)
(citations omitted). Not only does the moving party admit the truth of the non-
moving party’s allegations, but he also admits the truth of the non-moving party’s
defenses. Sheffer v. Chromalloy Min. and Mineral Division of Chromalloy
American Corp., 578 S.W.2d 594, 595 (Ky. App. 1979). Also, only the denial of
material facts will be effective in defeating a motion for judgment on the
pleadings, denial of legal conclusions will not. Archer, supra.
Importantly, a motion for judgment on the pleadings
should never be granted unless “it appears beyond doubt
that the nonmoving party cannot prove any set of facts
that would entitle him/her to relief.” Furthermore, as our
predecessor Court stated, if “the pleadings raise any issue
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of material fact,” then a judgment on the pleadings
“should be denied.”
Russell, 610 S.W.3d at 240 (citations omitted).
As stated previously, the trial court, relying on In re Flagg’s Estate,
supra, and In re Estate of Halas, supra, held that because Mr. Schneider’s trust
allowed Appellees to hold conflicting positions, their conflicts of interest could not
void the 2012 shareholder agreement or put provision. The trial court also held
that KRS 386.820, which requires court approval of a trustee’s exercise of power
when there is a conflict of interest, did not apply because the trust was allowed to
act based on a majority vote. The court concluded that because there was no
allegation of bad faith or conflict of interest on the part of the other three trustees,
their ratification of the 2012 agreement negated the need for Appellees to seek
court approval via KRS 386.820. Finally, the trial court held that Appellants made
no allegations of bad faith.
We agree with the trial court that if the settlor of a trust allows trustees
to hold conflicting positions, such as is the case here, then alleged conflicts of
interest would not void actions of the trustees. “The intention of the testator is the
polestar guiding the court in the construction of a will. An action to interpret a will
or trust document or an action for breach of a trustee’s fiduciary duties is
consistent with the [well-established] rule that the deceased’s intent be
effectuated.” Commonwealth Bank & Tr. Co. v. Young, 361 S.W.3d 344, 353 (Ky.
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App. 2012) (internal quotation marks and citation omitted). We also agree with the
trial court that this permissive action would not apply to acts of bad faith. “[T]he
court will not restrict the trustee in the exercise of his discretion unless it appears
that he is guilty of bad faith or is acting in an arbitrary manner.” Combs v. Carey’s
Tr., 287 S.W.2d 443, 445 (Ky. 1955) (citation omitted). Finally, we further agree
with the trial court that if a trust allows trustees to act by simple majority, and a
majority of disinterested trustees vote one way, then the trustees who have the
conflict of interest do not need court approval pursuant to KRS 386.820. We
believe the majority vote of three disinterested trustees, or trustees who have not
been alleged to have done wrong, would also allow the trust to act even though
other trustees violated their trustee duties.5
Where we disagree with the trial court is its findings that Appellants
made no allegations of bad faith and that Appellants made no allegations that the
other three trustees were all disinterested. We will first address the bad faith issue.
We believe Appellants raised sufficient allegations of bad faith, contrary to the
finding of the trial court. Appellants alleged that Appellees and Mr. Mountjoy
fraudulently misrepresented the fact that the new Class B stock could only be
issued after the new 2012 shareholder agreement was completed. Appellants
5
Such duties include administering the trust in good faith, KRS 386B.8-010; a duty of full
disclosure, KRS 386B.8-130; a duty to act with care, KRS 386B.8-040; and a duty of loyalty
KRS 386B.8-020.
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claimed in their pleadings that the trust beneficiaries could have received the new
Class B stock before the new agreement. These new shares were to go directly to
the trust beneficiaries and not into the trust. Appellants alleged that had the
beneficiaries received the Class B stock, they could have used the collective voting
power of their shares to prevent the new shareholder agreement from being entered
into. Supporting this allegation are the following facts contained in the pleadings:
(1) a probate court ordered that the Class B shares be distributed to the
beneficiaries by July 8, 2012; (2) the shares were not distributed until early
September 2012, shortly after the new shareholder agreement was ratified by the
trust; and (3) Mr. Mountjoy was responsible for valuing the Class B shares.
Essentially, Appellants alleged that Appellees and Mr. Mountjoy purposefully
delayed the issuance of the Class B stock until after the new 2012 shareholder
agreement was completed.
These allegations must be taken as true for the purposes of a motion
for a judgment on the pleadings.
“The law does not permit a person in a fiduciary capacity
to handle the beneficiary’s property so as to further his
own ends.” Rather, a fiduciary “owes the duty of utmost
fidelity and loyalty to the beneficiary and if it appears
that the trustee is guilty of such self-dealing the courts
will not hesitate to declare such a transaction void.”
Osborn v. Griffin, 50 F.Supp.3d 772, 794 (E.D. Ky. 2014), aff’d, 865 F.3d 417 (6th
Cir. 2017) (citations omitted). We conclude that a fraudulent misrepresentation
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like this could constitute bad faith and would negate the actions of Appellees and
Mr. Mountjoy in the ratification of the new shareholder agreement. The trial court
erred in finding no allegations of bad faith.
As to whether the other three trustees were disinterested, innocent,
and did not breach fiduciary duties, there are some allegations that Mr. Mountjoy
might have acted in bad faith, as we have previously discussed. Additionally,
Appellants’ pleadings alleged that Mr. Mountjoy breached his fiduciary duties
because the put provision would greatly hamper the ability of the Company to
expand and could force a sale of the business. Further, Appellants alleged that the
beneficiaries made it known to the trustees that they did not approve of the
inclusion of the put provision. If this is true, then Mr. Mountjoy would have
breached his fiduciary duties to the beneficiaries of the trust by ignoring their
wishes. Additionally, if the B Stock could have been distributed to the
beneficiaries before the entry of the new shareholder agreement, and Mr. Mountjoy
knew of such, then he had a duty to inform the beneficiaries. Finally, if Mr.
Mountjoy knew the put provision would harm the interests of the beneficiaries, as
alleged in Appellants’ pleadings, then he would have violated his fiduciary duties.6
We believe Appellant made sufficient allegations that Mr. Mountjoy either acted in
6
Appellants do not say that Mr. Mountjoy specifically did these things, but stated that the
“trustees” violated said fiduciary duties. Mr. Mountjoy is a trustee; therefore, he is included in
the allegations against the group.
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bad faith or disregarded his duties as trustee. If so, then it is possible a majority of
trustees were not disinterested, acting in good faith, or acting pursuant to their
fiduciary duties.
Finally, we believe there is insufficient evidence at this time to
support the trial court’s conclusion that Mr. Schneider’s intent was to allow the
trust to waive all conflicts of interest and fiduciary duties as to Appellees. The
trust does allow Appellees to be trustees, beneficiaries, and board members of the
Company, which suggests some leeway as to conflicts of interest; however, we
believe there needs to be further proceedings to determine if this allows Appellees
to act solely in their self interest and ignore the wishes of the other beneficiaries.
“Generally, a trustee owes the duty of ‘uberrima fides, or utmost fidelity’ to the
beneficiaries of a trust. According to Black’s Law Dictionary 299 (6th ed.1990), a
conflict of interest exists in ‘[a] situation in which regard for one duty tends to lead
to disregard of another.’” Wiggins v. PNC Bank, Kentucky, Inc., 988 S.W.2d 498,
501 (Ky. App. 1998) (citation omitted).
Furthermore, if the trust does waive some fiduciary duties, KRS
386B.10-080 would prevent such self-dealing to some extent. KRS 386B.10-080
states in relevant part:
(1) A term of a trust relieving a trustee of liability for
breach of trust is unenforceable to the extent that it:
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(a) Relieves the trustee of liability for breach
of trust committed in bad faith or with
reckless indifference to the purposes of the
trust or the interests of the beneficiaries[.]
If the trust does waive Appellees’ fiduciary duties, then there are sufficient
allegations at this point to suggest they acted in bad faith or with reckless
indifference to the interests of the other beneficiaries.
CONCLUSION
Based on the foregoing, we affirm the trial court’s order which made
the judgment on the pleadings orders final and appealable. We reverse and
remand, however, the two orders granting the judgment on the pleadings. We hold
that the trial court erred in concluding there were insufficient allegations of bad
faith on the part of Appellees and no allegations of bad faith or breach of duties on
the part of Mr. Mountjoy.
ALL CONCUR.
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BRIEFS FOR APPELLANTS/CROSS- BRIEFS FOR APPELLEES/CROSS-
APPELLEES AL J. SCHNEIDER APPELLANTS MARY S. MOSELEY
COMPANY, DAVID OETKEN, AND DAWN M. HITRON:
TODD OETKEN, AND NANCY
O’HEARN: R. Gregg Hovious
Dennis D. Murrell
Donald L. Cox Jennifer M. Barbour
Matthew P. Cox Louisville, Kentucky
Louisville, Kentucky
David S. Kaplan
Andrea N. Aikin
Louisville, Kentucky
Norbert J. Arrington
Liam H. Michener
Louisville, Kentucky
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