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Vander Boegh v. Bank of Oklahoma, N.A.

Court of Appeals of Kentucky

April 5, 2019



          BRIEFS FOR APPELLANTS: Mick G. Harrison Bloomington, Indiana Mark S. Medlin La Center, Kentucky

          ORAL ARGUMENT FOR APPELLANTS: Mick G. Harrison Bloomington, Indiana

          BRIEFS FOR APPELLEE: Anthony J. Phelps Lexington, Kentucky Shannon A. Singleton Lexington, Kentucky John W. Bilby Louisville, Kentucky

          ORAL ARGUMENT FOR APPELLEE: John W. Bilby Louisville, Kentucky



          THOMPSON, K., JUDGE

         Gary S. Vander Boegh, Mark A. Vander Boegh, Brian Vander Boegh, Karen Sloan, Lori Vander Boegh and Glenn F. Jones (collectively "the Vander Boeghs") appeal from the McCracken Circuit Court's July 2016 findings of fact, conclusions of law and final order and judgment dismissing their counterclaims and its January 2017 findings of fact, conclusions of law and order awarding costs and attorney fees. In 2016-CA-001307-MR, the Vander Boeghs argue the court erred by dismissing their counterclaims against the Bank of Oklahoma, N.A. ("the Bank") regarding its performance as trustee of two trusts in which the Vander Boeghs are minority beneficiaries. In 2017-CA-000294-MR, the Vander Boeghs argue the trial court erred by ordering them to pay approximately $2.7 million dollars in attorney fees and costs/expenses to the Bank. Though they have not been formally consolidated, we will resolve both related appeals in this combined opinion.[1] Having heard oral argument, and after having carefully considered the record and applicable law, we affirm the dismissal of the counterclaims but vacate and remand the attorney fee award.

         This is not the first appeal regarding the administration of these trusts. In 2013, we affirmed the trial court's decision giving the Bank direction on how to proceed in the face of conflicting demands from beneficiaries. Vander Boegh v. Bank of Oklahoma, N.A., 394 S.W.3d 917 (Ky.App. 2013) (Vander Boegh I).[2] In Vander Boegh I, we set forth the relevant underlying facts and procedural history as follows:

This appeal involves the Three Rivers limestone quarry, located in Livingston County, Kentucky. The Three Rivers is the sole asset of two separate trusts (i.e., the "Charles R. Jones, Sr., inter Vivos Trust dated May 1, 1973," and the "Eula Kathleen Jones Testamentary Trust U/W/D October 24, 1967"), and it is subject to a ninety-nine-year lease agreement with Martin Marietta Materials, Inc. [LaFarge North America, Inc. subsequently acquired Martin Marietta's rights.] The total royalties paid (and later escrowed) by Martin Marietta between January 1995 and December 31, 2010, have totaled over $17, 000, 000. Sometime between January and March of 2010, the trusts received a report from an auditor they had hired to monitor Martin Marietta's performance of its lease obligations and quarrying activities at Three Rivers. The report indicated that between 1995 and 2010 Martin Marietta had incorrectly used a forty-five-ton downward adjustment to calculate several of the royalty payments it owed the trusts, resulting in an alleged shortfall estimated at $104, 000.
The Vander Boeghs are beneficiaries holding collective minority interests (approximately 3/16ths) in both of the above-referenced trusts. After they were informed of the results of the audit, they demanded that the trustee of the trusts, [the Bank], refuse all future royalty payments from Martin Marietta and issue Martin Marietta a notice of default pursuant to the terms of the lease, which could potentially give the trusts the right to terminate the lease if Martin Marietta did not provide a timely cure. The Vander Boeghs further believed that Martin Marietta had committed other breaches of the lease which also required [the Bank] to send Martin Marietta a notice of default. Specifically, they suspected that Martin Marietta had underpaid royalties besides those identified in the audit and that Martin Marietta had committed a violation of its Three Rivers mining permit which, they asserted, amounted to a breach of the lease. They asserted that if [the Bank] failed to give Martin Marietta a notice of default under these circumstances, it could result in a waiver of these alleged breaches and, thus, could amount to a breach of the fiduciary duties that [the Bank] owed to the beneficiaries pursuant to the terms of the trusts.
[The Bank] did not send Martin Marietta any notice of default, but it began refusing royalty payments from Martin Marietta in April, [sic] 2010. Martin Marietta continued to make payments, but placed those payments in escrow. A few months later, other beneficiaries collectively holding the majority interests (approximately 13/16ths) in the respective trusts (the Armstrongs) requested that [the Bank] resume accepting royalty payments and continue refraining from issuing a notice of default to Martin Marietta. Because the Vander Boeghs' demands conflicted with those of the Armstrongs, [the Bank] filed the instant action in McCracken Circuit Court pursuant to Kentucky Revised Statutes (KRS) 386.675 for instruction regarding how to fulfill its fiduciary obligations to the beneficiaries pursuant to the terms of the trust instruments under the circumstances presented.

Vander Boegh I, 394 S.W.3d at 922-23 (footnote omitted).

         The Vander Boeghs filed counterclaims against the Bank alleging it breached its fiduciary and/or contractual duties to the Vander Boeghs and/or had negligently performed its duties as trustee. Some of the counterclaims alleged the Bank failed to comply with obligations it agreed to undertake in a letter of understanding executed prior to becoming trustee ("the Letter"), such as instituting an audit procedure of the quarry's operations. With the agreement of the parties, the trial court bifurcated the action and stayed the counterclaims until resolution of the Bank's declaratory judgment action.

         As we related in Vander Boegh I, after a 2011 bench trial on the Bank's declaratory judgment action the trial court:

entered a judgment declaring that under the terms of the trust instruments taken as a whole [the Bank] retained the power to exercise its discretion to not only refrain from issuing notices of default relating to the Martin Marietta lease, but to also resolve any monetary or non-monetary default without seeking to terminate the lease . . . .
Applying its construction of the trust documents and the "prudent investor" standard against the evidence presented at trial, the circuit court found that under the circumstances it was reasonable and in the best interests of all the beneficiaries, and thus consistent with [the Bank's] fiduciary duties as trustee, for [the Bank] to keep the Martin Marietta lease in force in spite of Martin Marietta's alleged $104, 000 royalty shortfall. To this effect, the circuit court noted that if the Martin Marietta lease were terminated, there was no certainty of finding another lessee capable of operating the Three Rivers Quarry at the current rate of production or willing to pay a higher royalty rate, and that the Vander Boeghs had produced no evidence to the contrary. It noted that many beneficiaries depended upon the limestone royalties and would suffer financial hardship during the uncertain but likely lengthy period of time necessary to terminate the lease and find another lessee operator, when no royalties would be paid. It noted that the lease contained a "perimeter lands" provision that was unique to the quarrying industry and would almost certainly not be included in a lease with any other prospective lessee.[3] It noted that Martin Marietta had never conceded to committing any breach of the lease, the evidence to that effect was at best speculative, and, according to the available evidence and expert reports, there was a possibility that Martin Marietta had actually overpaid royalties to the trusts. Moreover, the circuit court noted that the royalty rates under the lease would be subject to renegotiation in 2013, that [the Bank] intended to seek an increase of the royalty rate at that time, and that [the Bank] had successfully increased the incentive royalty rate applicable to production over three million tons from 10 cents per ton to almost 42 cents per ton in 2007.
Furthermore, the circuit court instructed [the Bank] to resume accepting and distributing royalty payments in spite of the Vander Boeghs' demand for additional investigation regarding Martin Marietta's alleged mining permit violations and the total amount of Martin Marietta's alleged royalty shortage. In this vein, the circuit court noted that it had extended discovery to permit the Vander Boeghs an opportunity to substantiate that Martin Marietta had committed permit violations, or that $104, 000 was not a reasonable estimate of Martin Marietta's alleged shortage, and that the Vander Boeghs had nevertheless failed to present evidence at trial sufficiently indicating that $104, 000 was not a reasonable estimate of the total royalty shortfall due to Martin Marietta's forty-five-ton adjustment, or that any other royalty shortfalls had occurred or could be accurately determined, or that Martin Marietta had engaged in any act amounting to a mining permit violation. Therefore, the circuit court concluded that to continue suspension of the royalty payments until such time as all [the Vander Boeghs'] questions involving Martin Marietta are fully investigated to their satisfaction is onerous and unsupported by credible evidence.
Consequently, the circuit court held that if [the Bank] pursued the course of action that it had originally proposed, [the Bank] would act consistently with its fiduciary duties as trustee despite the Vander Boeghs' contentions that doing so could be regarded as a waiver of what they believed were Martin Marietta's defaults. To that end, the circuit court's judgment provided:
1. Plaintiff, [the Bank], as Trustee, is instructed to receive, deposit, and distribute, in accordance with the terms of the Jones Family Trusts, all royalty payments from Martin Marietta from and after April, [sic] 2010 until and unless a contrary order of a court of competent jurisdiction directs otherwise.
2. Plaintiff, [the Bank], as Trustee, is instructed to: (1) request that Martin Marietta pay $104, 000.00 to the Jones family Trusts for the forty-five (45) ton adjustments made during the fifteen-year period between 1995 and 2010; (2) request that Martin Marietta pay royalties to the Jones Family Trusts, making no adjustments, in the future; (3) request that Martin Marietta maintain barge records for eighteen to twenty-four months; but (4) not attempt to terminate the Lease.
3. Plaintiff, [the Bank], as Trustee, is instructed to use all remedies available in law and contained in the Lease, except termination of the lease, to resolve the forty-five (45) ton adjustment issue with Martin Marietta. [The Bank] is further instructed to compromise, settle, or abandon the claim if the costs of pursing [sic] the claim are greater than the likely return.

Id. at 926-29 (footnotes and quotation marks omitted). We affirmed, stressing that "the Vander Boeghs point to no evidence substantiating that the total damages relating to Martin Marietta's alleged royalty shortfall exceeded $104, 000." Id. at 931.

         The trial court then began proceedings on the Vander Boeghs' counterclaims, granting summary judgment to the Bank on some and scheduling a bench trial on the remainder. In July 2015, the Bank filed a motion for a pretrial conference, arguing among other things that the Vander Boeghs had alleged during discovery over fifty additional acts or omissions by the Bank without amending its pleadings to reflect what the Bank termed "additional counterclaims." The Vander Boeghs denied the additional alleged acts and omissions were new counterclaims, instead arguing they were only additional supporting facts and "[n]o new cause of action has been asserted."

         The trial court ultimately permitted the Vander Boeghs to file an amended set of counterclaims, which they did in October 2015. Though the amended counterclaims did not contain such a demand, the Vander Boeghs contemporaneously filed a separate document demanding a jury trial. The Bank moved to strike the jury demand, arguing the Vander Boeghs had agreed to a bench trial. The Bank asserted the amended counterclaims did not entitle the Vander Boeghs to a jury trial because they "are the same causes of action set forth in their original Counterclaim . . . ." And the Vander Boeghs then argued the amended counterclaims "are separate and distinct from the matters raised in the original Counterclaim . . . ." [4] After holding a hearing, the trial court granted the motion to strike the jury demand because the Vander Boeghs had waived their right to a jury trial and the "issues plead in the amended counterclaim fall within the same general area of dispute" as the original counterclaim. See, e.g., 7 The late Kurt A. Phillips, Jr., David V. Kramer and David W. Burleigh, Ky. Prac. R. Civ. Proc. Ann. Rule 38.02 (2018) ("New issues sufficient to revive the right to a jury trial are not raised if the amended pleadings concern the same general area of dispute as were raised in the original pleadings.")

         The court held a lengthy bench trial on the counterclaims in May 2016, and about two months later issued detailed findings of fact and conclusions of law. The court concluded the breach of contract and negligence claims failed because, other than inapplicable exceptions, beneficiaries of a trust may only bring equitable claims against a trustee. The court also found the Vander Boeghs "failed to prove any basis upon which they are entitled to monetary damages or injunctive relief for breach of fiduciary duty." The Vander Boeghs then filed appeal 2016-CA-001307-MR.

         Meanwhile, the Bank sought to recover its expenses, costs and attorney fees from the Vander Boeghs. The Bank's motion was based upon KRS 386B.10-040, which became effective in July 2014, after the counterclaim proceedings began. That statute, part of the Uniform Trust Code, provides:

In a judicial proceeding involving the administration of a trust, the court, as justice and equity may require, may award costs and expenses, including reasonable attorney's fees, to any party, to be paid by another party or from the trust that is the subject of the controversy.

         The Bank attached voluminous, significantly redacted invoices to its motion. By way of illustrative example, an invoice requesting $165 for one hour of work performed on July 11, 2013, substantively only says: "Researched [redacted]." The Vander Boeghs vehemently opposed the Bank's motion, contending it would be improper to award fees based upon a statute which did not become effective until the case was in progress and the redactions made it difficult to determine if the fees, costs and expenses were reasonably incurred. The court ordered the Bank to file a privilege log, which it did. However, the log failed to provide clarity. For example, the log provides only as follows for the aforementioned July 11, 2013, entry: "Derek McMahan (SKO law clerk) performed Legal Research[:] Attorney-client privilege (KRE [Kentucky Rules of Evidence] 503); [The nature of the research is protected by the] attorney work product doctrine[.]"

         In January 2017, the trial court granted the Bank's motion for costs, expenses and fees, concluding without explanation that the privilege log "adequately document[ed] the time spent and fees charged for each task." The court concluded applying KRS 386B.10-040 was proper but deducted five percent from the lodestar figure because the Bank unnecessarily had three attorneys at trial and a deposition. The court ordered the Vander Boeghs to pay $2, 206, 644 in attorney fees and an additional $407, 915 in costs and expenses.[5] After the trial court denied their motion to alter, amend or vacate, the Vander Boeghs filed appeal 2017-CA-000294.

         The Vander Boeghs' first argument is that the trial court erred by striking their jury demand. The parties disagree about whether the Vander Boeghs' claims are equitable or legal, but we need not resolve that issue because we agree with the trial ...

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