Opinion
IP 99-1237-C T/G (District Court Cause Number) IP 97-05118-V-V-11 (Bankruptcy Court Cause Number) IP 98-014 (Adversary Proceeding Number)
September 19, 2000
MEMORANDUM ENTRY DISCUSSING APPEAL FROM BANKRUPTCY COURT
Appellant, Wayne E. Seufert, appeals from an adverse judgment in the Bankruptcy Court granting summary judgment to the Appellees, Edgar Mulzer, Lee Ray Olinger, Thomas Messmer and Spencer Industries, Inc. (collectively "Appellees"), on Courts 1 and 3 of Seufert's Amended Complaint filed in Adversary Proceeding No. IP 98-014.
I. Facts
The following facts as set forth by the Bankruptcy Court are not disputed:
As of November 22, 1996, Seufert owned 600,000 common shares ("Seufert's Shares") of Spencer Industries, Inc. ("Spencer") which amounted to 48.53% of the outstanding shares of Spencer. At the same time, Seufert owed Mulzer and Olinger an approximate total of $1.8 million secured by a first lien on Seufert's Shares. Spencer owed Mulzer and Olinger $1.4 million, payable on demand. Shortly after November 26, 1996, Spencer paid the demand obligations to Mulzer and Olinger, half in cash and half by issuing 107,030 shares of Spencer stock.
There seems to be some question over whether 107,030 or 113,877 additional shares were issued. However, for the purpose of this appeal it makes no difference whether 107,030 or 113,877 additional shares were issued.
Some time before November 22, 1996, Seufert, as Grantor, executed two trust agreements ("Trust Agreements") creating two trusts for the benefit of his minor grandchildren. The first Trust Agreement was dated December 24, 1987, and the second Trust Agreement was dated July 25, 1990. Each trust was funded with 12,500 shares of Spencer stock. These 25,000 shares totaled approximately 2.02% of the outstanding Spencer shares as of November 22, 1996. Each trust had as its trustee Sheila S. Vercruysse, Suefert's daughter ("Trustee"). Both Trust Agreements were prepared by Seufert's counsel on Seufert's behalf.
The Trust Agreements at paragraph 5 provide:
No person, other than the Trustee, shall have or exercise the power to vote or direct the voting of any corporate shares or other securities of this trust, to control the investment of this trust either by directing investments or reinvestments or by vetoing proposed investments or reinvestments, or to reacquire or exchange any property of this trust by substituting other property of an equivalent value.
The Trust Agreements at paragraph 9 provide:
This trust is irrevocable and the Grantor shall have no right whatsoever to alter, amend, revoke, or terminate this trust, in whole or in part. By this trust agreement the Grantor intends to and does hereby relinquish absolutely all possession or enjoyment of, or the right to the income from, the trust property, and all right to designate the persons who shall possess or enjoy the trust property, or the income therefrom;. . . .
Seufert presents two issues on appeal. First, Seufert argues that the Bankruptcy Court erred when it found that parol evidence was inadmissible to establish the existence of an oral agreement between Seufert and the Trustee, the content of which contradicts the express terms of the Trust Agreements. Second, Seufert argues that the Bankruptcy Court erred when it concluded that Seufert did not control a majority interest in Spencer at the time of the issuance of the additional shares. Seufert argues that he controlled a majority interest in Spencer as of November 22, 1996, because he had control over the 25,000 trust shares which, when combined with his 600,000 shares, constitute a majority interest in Spencer.
An adverse determination on the first issue would be fatal to Seufert's second issue, and, as the Bankruptcy Court and both parties acknowledged, fatal to Counts 1 and 3 of Seufert's Amended Complaint. In Count 1 Seufert alleges that a fraudulent transfer occurred when his "effective majority interest" in Spencer was transferred to Milzer and Olinger by the issuance of the additional shares. In Count 3 Seufert alleges that the Appellees breached their fiduciary duties in causing the issuance of the additional shares.
Without the consideration of parol evidence, Seufert cannot prove that he controlled a majority interest in Spencer at the time the additional shares were issued.
II. Analysis
Review of the Bankruptcy Court's grant of summary judgment is de novo. See In re Lefkas General Partners, 112 F.3d 896, 899-00 (7th Cir. 1997) (recognizing that a district court reviews a bankruptcy court's grant of summary judgment de novo) (citations omitted).
The standard for granting summary judgment in an adversary proceeding in bankruptcy is the same standard as that set forth under Federal Rule of Civil Procedure 56. See Fed.R.Bankr.P. 7056. Thus, a grant of summary judgment is appropriate if, in viewing the evidence in light most favorable to the non-moving party, there exists no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. See Fed.R.Civ.P. 56; Wade v. Hopper, 993 F.2d 1246, 1251 (7th Cir. 1993) ("We will affirm summary judgment if there is no genuine issue of material fact and the movant is entitled to judgment as a matter of law.") (citation omitted).
The ultimate issue in this appeal is whether parol evidence may be considered to establish the existence and particulars of an oral agreement between Seufert and the Trustee. Seufert argues that because he made a unilateral mistake of law it is proper to consider the parol evidence. Seufert claims that the oral agreement, if considered by the court, would be sufficient to render the Trust Agreements reformable or rescindable.
Under the parol evidence rule, "[i]f a declaration of a trust is in writing, oral evidence to show that the terms of the trust were different from those appearing in the writing will clearly be inadmissible[.]" Colbo v. Buyer, 134 N.E.2d 45, 49 (Ind. 1956) (holding that settlor was not "laboring under a mistake of fact, or was defrauded, or incompetent" when he created a trust which failed to contain an express provision granting to him the power to revoke the trust) (quotation omitted). However, extrinsic evidence may be admissible to contradict or vary the terms of an unambiguous, written trust if "fraud, duress, mistake or other ground for reformation or rescission" exists. Id. ("`Under the parol evidence rule, if the manifestation of intention of the settlor is integrated in a writing, that is, if a written instrument is adopted by him as the complete expression of his intention, extrinsic evidence, in the absence of fraud, duress, mistake or other ground for reformation or rescission, is not admissible to contradict or vary it.'") (quoting 1 Scott, Trusts, § 38, pp. 226, 227); see also Hauck v. Second Nat'l Bank of Richmond, 286 N.E.2d 852, 861 (Ind.Ct.App. 1972) ("In Indiana [the parol evidence rule] has been stated to be that in the absence of fraud, mistake, ambiguity, illegality, duress or undue influence, extrinsic evidence is not admissible to add to, vary or explain the terms of a written instrument if the terms of the instrument are susceptible of a clear and unambiguous construction."). But, "`[i]t is only where there is an equitable ground for reformation or rescission, such as fraud, duress, undue influence or mistake, that such evidence is admissible.'" Colbo, 134 N.E.2d at 49 (quoting 1 Scott, Trusts, § 38, pp. 226, 227). Therefore, there must be an equitable ground for reformation or rescission for the terms of the oral agreement to be considered.
Neither party disputes the applicability of Indiana law.
Seufert argues that his unilateral mistake of law as to the legal effect of the terms of the Trust Agreements is a sufficient equitable ground on which to allow reformation or rescission.
Seufert's argument fails for at least two reasons. First, under Indiana law a unilateral mistake as to the legal effect of the terms of a trust gives no right for reformation of the trust. Second, the Bankruptcy Court concluded, and this court agrees, that Seufert did not make a "mistake."
Under Indiana law, there is no equitable ground for reformation or rescission in this case. A long line of Indiana cases, starting with Heavenridge v. Mondy, 49 Ind. 434, 1875 WL 5738, at *4 (Ind. 1875), have held, "A mistake as to the legal effect of words inserted designedly in a written instrument gives no right to a reformation of such instrument." See also Gierhart v. Consolidated Rail Corp.-Conrail, 656 N.E.2d 285, 287 (Ind.Ct.App. 1995) ("[A] long line of Indiana authority has held that reformation may only be had for mistake of fact. It is not available for a mistake of law.") (citations omitted); Indiana Dept. of State Revenue, Inheritance Tax Div. v. Estate of Nichols, 659 N.E.2d 694, 700 n. 5 (Ind. T.C. 1995) (holding that extrinsic evidence was inadmissible to add to, vary or explain the terms of an unambiguous, written trust when the settlor's intent was clear from the trust instrument itself). In Heavenridge, 1875 WL 5738, at *2, the court considered whether an express trust should be reformed. The trustee argued that reformation was appropriate because the parties were mistaken as to the legal effect of the express terms of the trust. See id. In determining that the trust should not be reformed, the court held, "It is settled law, that to entitle a party to the reformation of a written instrument, it must be clearly and satisfactorily shown that there was a mistake of fact, and not of law. It must be shown that words were inserted that were intended to be left out, or that words were omitted which were intended to be inserted." Id. at *3.
Seufert has cited no case in which parol evidence that directly contradicts the express terms of a trust is considered on the ground of unilateral mistake of law. Seufert cites section 333.4 of Scott on Trusts for the proposition:
[W]here the settlor receives no consideration for the creation of a trust, as is usually the case, a unilateral mistake is ordinarily a sufficient ground for rescission, as it is in the case of an outright gift. It is immaterial that the beneficiaries of the trust did not induce the mistake or know of it or share in it. It is immaterial whether the mistake was a mistake of fact or a mistake of law.
IV Austin Wakeman Scott William Franklin Fratcher, Scott on Trusts § 333.4, at 402-03 (4th ed. 1989). From a reading of the remainder of section 333.4, it appears that this treatise does not use the phrase "mistake of law" in the manner in which Seufert suggests. Rather, the treatise uses the phrase to refer to situations in which one party relies on the law as currently interpreted by a court, and subsequent to the creation of the trust instrument, it becomes clear that the party's interpretation was inaccurate. See id. (citing, e.g., Stone v Stone, 29 N.W.2d 271 (Mich. 1947) (permitting a husband and wife to rescind a gift made for the sole purpose of minimizing taxes after the United States Supreme Court rendered a decision in a similar case that the donor was subject to the whole of the income tax, on the ground that it was induced by a mistake of law)). Indeed, it appears that if section 333.4 were to be interpreted in the manner that Seufert proposes, section 333.4 would be in conflict with section 164.1. See IIA Scott Fratcher, Scott on Trusts § 164.1, at 257-58 (4th ed. 1987) (see relevant test of section infra). To the extent that this treatise may suggest that a trust is reformable due to a unilateral misunderstanding of the legal effect of express terms of a written trust, Indiana law is clearly inapposite.
Seufert cites Richards v. Reeves, 49 N.E. 348 (Ind. 1898), for the proposition that a unilateral mistake is a sufficient ground for reformation of a voluntary trust. However, in Richards, the mistake was one of fact rather than of law. In that case, the settlor proved that words reserving to her the right to revoke the trust were intended to be inserted but were omitted by mistake. See id. at 349 ("It is enough in this case that the facts admitted to be true by the demurrer to the answer show that [the conveyor of the deed] . . . intended to retain the right to revoke the gift, and that it was only by her own ignorance and mistake, and that of the scrivener, that a clause to show the retaining of such right of revocation was not inserted in the deed."). Thus, the mistake in Richards was one of fact. There is no suggestion that the trust at issue in Richards contained a directly contrary provision stating that the trust was irrevocable. Because there is no suggestion nor evidence that Seufert made a mistake of fact, Richards does not advance Seufert's position.
In Gierhart, 656 N.E.2d at 287, the court extended the holding in Heavenridge, to include the reformation of a release. In that case, petitioners requested the court to reform a release which provided that petitioners would "release and forever discharge" "all claims . . . of every kind whatsoever" against the defendant in exchange for a cash payment. Id. at 286. The petitioners filed a motion to reform the release asserting that it was intended only to cover certain expenses and was not intended to prevent them from taking additional action against the defendant. See id. The court held, "There has been no showing that words were inserted which were agreed to be left out, or that words were omitted which were agreed to be inserted. The mistake on the part of [the petitioners], to the extent that there was one, was a mistake of law as to the effect of the agreement, and reformation was not available to correct a mistake of law." Id. at 287; see also George Gleason Bogert George Taylor Bogert, The Law of Trusts and Trustees § 51 (2d ed. rev. 1983) ("If the failure to insert a term or the inclusion of a wrong term was caused by mistake in the drafting of the instrument, equity will reform the instrument to show the provisions actually agreed upon. But if there is no mistake, oral evidence will not be admitted for the purpose of proving that the powers and duties of the trustee were intended to be different from those expressed in the trust instrument.").
The Gierhart court's extension of Heavenridge was appropriate under Indiana law, as is the application of Gierhart to the present case. Section 30-4-3-25 of the Indiana Code provides: "Upon petition by an interested party, the court may rescind or reform a trust according to the same general rules applying to recission or reformation of nontrust transfers of property." Ind. Code Ann. § 30-4-3-25 (Michie 2000). The Indiana Supreme Court has held that Indiana courts are not at liberty to rewrite voluntary trusts any more than they are at liberty to rewrite contracts. See Colbo, 134 N.E.2d at 49 ("Nor is this court at liberty to rewrite the trust agreement any more than it is at liberty to rewrite contracts."); see also Ewing v. Jones, 29 N.E.1057, 1059 (Ind.) (holding that an author of a trust created without consideration "cannot revoke it, unless fraud or mistake is shown"); Kessler v. Williams, 198 N.E.2d 22, 24 (Ind.Ct.App. 1964) ("We are not unmindful . . . that a voluntary gift by deed will be set aside when it appears that the donor did not intend to make it irrevocable, or there was fraud or mistake in its execution."). Therefore, although Gierhart did not concern a voluntary transfer of property in trust, the principle of law for which it stands is applicable to the present case.
A voluntary trust is a trust "made in favor of a volunteer, that is, a person who gives nothing in exchange for the trust, but receives it as a pure gift; and in this use the term is distinguished from `trusts for value,' the latter being such as are in favor of purchasers, mortgagees, etc." Black's Law Dictionary 1514 (6th ed. 1990).
Seufert argues that the facts of Colbo are distinguishable from the facts of this case and those distinctions explain the holding in Colbo. Most importantly, Seufert argues that Colbo did not concern a voluntary trust, but rather a trust for value. Seufert bases his argument on the following Colbo language: "The fact that there was no consideration moving from the beneficiary to the settlor, with the exception of the trustee, who was also a beneficiary, did not invalidate the trust." Colbo, 134 N.E.2d at 48-9. Colbo did, however, involve a voluntary trust, see Colbo v Buyer, 125 N.E.2d 724, 727 (Ind.Ct.App. 1955) (repeatedly referring to the trust at issue as a "voluntary trust agreement"), rev'd on other grounds, 134 N.E.2d 45 (Ind. 1956), and any consideration flowing from the trustee to the settlor did not change the result. The Colbo court held:
Where a trust is created and the manifestation of intention of the settlor with respect to the trust is integrated in writing, that is, is adopted by the settlor as the complete expression of his intention, and there is no provision in the trust instrument as to the power of the settlor to rovoke [sic] the trust, the trust is not revocable by the settlor, although he received no consideration for creating the trust. Nor is this court at liberty to rewrite the trust agreement any more than it is at liberty to rewrite contracts.
Id. at 49 (emphasis added) (quotations and citations omitted).
Furthermore, the trust treatises are in accord with Indiana law on this point. Bogert on Trusts provides:
Reformation of Trust Instrument
If, due to a mistake in the drafting of a trust instrument, it does not contain the terms of the trust as intended by the settlor and trustee, the settlor or other interested party may maintain a suit in equity to have the instrument reformed so that it will contain the terms which were actually agreed upon. However reformation will not be granted where the mistake was as to the legal effect of the wording of the instrument.
Bogert Bogert, The Law of Trusts and Trustees § 991 (2d ed. rev. 1983). Scott on Trusts provides:
The terms of the trust.
[S]tatements by the settlor as to his intention are ordinarily not admissible, whether the trust is created by will or by an instrument inter vivos. Such evidence is inadmissible not only where it contradicts or is inconsistent with express provisions of the trust instrument, but also where it changes the legal effect of the instrument, that is, where if given effect it would lead to results that would not be reached in the absence of such evidence.
IIA Scott Fratcher, Scott on Trusts § 164.1, at 257-58 (4th ed. 1987).
Even if a mistake of law were recognized by Indiana courts as an equitable ground on which to allow reformation or rescission, Seufert did not make such a mistake. As the Bankruptcy Court opined, "Seufert's actions both contemporaneous and subsequent to the execution of the Trust Agreements indicate that even he understood the contents of the Trust Agreements." (Findings of Fact and Conclusions of Law entered July 30, 1999, at 15). There is no evidence that words were inserted that were intended to be left out or words omitted which were intended to be inserted. The Trust Agreements were prepared by Seufert's counsel. There is no evidence from Seufert's counsel that Seufert intended or believed the Trust Agreements to reflect the content of the oral agreement between Seufert and the Trustee. There is no evidence that Seufert communicated the content or sense of that agreement to his counsel to be included in the Trust Agreements. There is no evidence that Seufert's counsel failed to follow Seufert's direction in preparing the Trust Agreements or that a drafting error occurred. The Trust Agreements were explicit and detailed, and a reading of the Trust Agreements makes clear Seufert's intentions.
Seufert relies on Andrews v. Andrews, 12 Ind. 348 (Ind. 1859), for the proposition that a unilateral mistake is a sufficient ground for reformation of a voluntary conveyance of a piece of property. In Andrews, the court held simply that, "It is a general proposition of law, that a deed drawn by mistake, for a different interest than that intended to be conveyed, may be corrected, if the mistake be clearly proved." (citation omitted). In so doing, the court reversed the lower court's dismissal on demurrer of the settlor's complaint. There is no way to discern from the case whether the alleged mistake was a mistake of fact or of law. At most, Andrews stands for the proposition that a unilateral mistake is a sufficient ground for reformation of a voluntary conveyance of property if the mistake can be clearly proved. In this case, the Bankruptcy Court found that Seufert failed to prove that a mistake occurred. This court agrees with the Bankruptcy Court's finding.
Because, under Indiana law, there exists no equitable ground on which to allow reformation or rescission, parol evidence is not admissible. Therefore, this court will not consider the oral agreement between Seufert and the Trustee. As a result, Counts 1 and 3 of Seufert's Amended Complaint fail as a matter of law. Summary judgment in favor of the Appellees is thus proper as to those counts.
Rescission of the Trust Agreement is improper for another reason. Recission of a trust is only proper when a settlor "was induced to create the trust by fraud, duress, undue influence or mistake[.]" Colbo, 134 N.E.2d at 529 (quoting 2 Restatement, Trusts § 330, clause b, p. 985; citing 4 Bogert Trusts and Trustees, §§ 992, 993); see also Restatement (Second) of Trusts: Termination and Modification § 333 cmt. e (1959) (stating that a gratuitous trust may be rescinded when "the settlor was induced by [material] mistake to create the trust, although neither the trustee nor the beneficiary shared in the mistake or knew of it"). No evidence exists that Seufert was at all induced by fraud, duress, undue influence or mistake to create the Trust Agreements. Therefore, rescission of the Trust Agreements is an improper remedy.
For the foregoing reasons, the judgment of the Bankruptcy Court will be AFFIRMED in a separate judgment.
ALL OF WHICH IS ENTERED this 19th day of September 2000.