IN RE WILLIAM M REID TRUST
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STATE OF MICHIGAN
COURT OF APPEALS
__________________________________________
In the Matter of WILLIAM M. REID TRUST.
FERN REID AND RANDY REID,
UNPUBLISHED
February 23, 1999
Petitioners-Appellants,
v
Nos. 202537; 204552
Macomb Probate Court
LC No. 89-111457 TI
LEONARD PALIS,
Respondent-Appellee.
Before: Whitbeck, P.J., and Cavanagh and Griffin, JJ.
PER CURIAM.
Petitioners appeal the probate court’s orders denying their request to surcharge respondent
Leonard Palis as trustee of the William M. Reid Trust (the “Trust”) and awarding Palis fiduciary fees, in
addition to authorizing the payment of attorney fees from trust proceeds for legal services rendered on
behalf of the Trust. We affirm.
I. Basic Facts And Procedural History
Following William M. Reid’s death in 1989, Palis became the successor trustee of the Trust.
Perhaps not coincidentally, Palis had been Reid’s accountant for forty years. Prior to his death, Reid
became involved with a company named Applied Industries (“Applied”). Originally, Reid loaned
Applied money for operating capital. When Applied ran into financial difficulties, Reid asked Palis to
review the situation and, in 1982, both Reid and Palis began investing their money in Applied.
At the time of Reid’s death, the Trust possessed a promissory note from Applied in the amount
of $555,000 and 66,389 shares of stock in Applied. Palis personally possessed a promissory note of
approximately $500,000 at the time of Reid’s death, because he and Reid had been making matching
contributions. Whenever Applied needed additional money, Palis and Reid invested more of their
personal finances into the company and, in fact, Palis invested most of his trustee payments back into
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the company. Palis held a position on Applied’s board as an officer in the company, serving as the vice
president and treasurer.
Palis testified that in 1982 he and Reid effectuated a UCC filing to secure repayment of their
promissory notes. However, Palis was not aware that the UCC filing was only effective for five years
and the UCC filing expired in May 1987. Reid never instructed Palis to renew the UCC financing
statement prior to Reid’s death in 1989. In fact, Palis also failed to renew his own financing statement.
Believing that both notes were secured by the UCC filing, Palis did not seek to perfect Reid’s
promissory note as a secured claim for the benefit of the Trust.
Between 1986 and 1988, Applied realized a net loss each year. In an effort to reduce costs,
Applied decided to move its operations to a smaller location with cheaper rent. The new location was a
building owned by Palis and his partner, Charlie Baer. Reid knew that Palis was a part owner of the
new building, and he was in favor of the move. Baer’s and Palis’s mortgage payment on the new
building was $3,000, the same amount charged to Applied as monthly rent. Palis testified that the rent
charged for the new building was well below fair market value.
Applied owned some of its own equipment and leased the rest. When Applied needed a
“Fidell” machine to make operations more productive and profitable, it was unable to obtain the
necessary financing. However, Palis was able to finance the machine, through his company WRP
Investment, and he then leased it to Applied. As with the rent for the new building, Palis testified that he
made no profit on the lease. Applied entered into the lease agreement with Palis prior to Reid’s death,
and Reid was aware of the lease arrangement.
In addition, Applied hired Palis’s accounting firm to keep its books. Palis’s firm charged
Applied $2,000 a month for accounting services. According to Palis, the accounting fees were
reasonable and necessary. Palis testified that he believed that he probably billed for only half of the
hours that he actually worked on behalf of Applied.
After Reid’s death, Palis hired a probate specialist to assist with the preparation of the tax return
relating to the assets contained in the Trust. The tax return reflected that 66,389 shares of Applied’s
stock were held by the Trust. The return also revealed that Applied was insolvent. The return
estimated the value of the stock in Applied to be fifty cents a share. Further, the return revealed that the
chances for repayment on the promissory note from Applied were only about 50%, based on the poor
financial condition of Applied. However, Palis testified that he believed that he could still help Applied
become profitable and, in 1990, Applied made a profit of $39,000. During the same year, Applied
completed nineteen prototype, two-and-a-half ton trucks in an effort to be awarded with a contract to
build a truck for a joint venture between General Motors and BMW. However, approximately a year
and a half later, Palis was informed that the contract was awarded to another company and after 1990
Applied never made a profit.
Prior to Reid’s death in 1989, Palis had a 20% ownership interest in Applied. After two
conversions in 1989 and 1990, in which Palis converted part of his promissory note into capital stock,
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Palis had a 56.7% ownership interest in Applied and by the time of the board’s annual meeting for fiscal
1993, Palis owned 56.7%, Baer owned 7.88%, and the Trust owned 10.46% of the stock of Applied.
At the annual meeting, the board granted security interests in their machinery for past and future
rent and for the accounting services to Baer, Palis and “Palis & Company”; however, the security
agreement was never filed or acted upon. The board decided to order the liquidation of Applied and to
file either a Chapter 11 or Chapter 7 bankruptcy petition; however, Palis did not advise petitioners of
this action. A new board of directors was elected which consisted only of Palis and Baer.
Subsequently, Palis wrote a letter, dated December 30, 1993, to the board demanding payment
of the promissory notes issued to himself and the Trust. Further, an eviction notice was sent to the
board for unpaid rent. A special meeting of the board was held on February 1, 1994, and the board
decided to liquidate the corporation and transfer all assets to the secured creditors, the Trust and Palis,
because of their demand for payment of the promissory notes.
In July 1994, Applied’s assets were sold and converted into cash. Palis had an auctioneer
appraise Applied’s machinery and equipment. Another company, Ultimate Hydroforming, knew
Applied was about to shut down and offered to match the auctioneer’s estimate in exchange for the
equipment and machinery, and Applied ultimately sold its equipment and machinery directly to Ultimate
Hydroforming for $155,000. Through this direct sale, Applied avoided the commission fees associated
with conducting an auction. With the proceeds from the sale of the machinery and equipment, Palis paid
Applied’s personal property taxes and rent, and split the remainder between himself and the Trust. On
November 9, 1994, an involuntary petition for bankruptcy was filed by Applied’s judgment creditor.
In November of 1994, petitioners filed a complaint in Macomb County Probate Court seeking
to preserve the assets of the Trust and requesting that the probate court surcharge Palis for his
“maladministration” of the Trust. In response, Palis requested that the estate pay for attorney fees
incurred on its behalf and pay him for his fiduciary fees and professional accounting fees. Following a
hearing, the probate court issued a written opinion on December 16, 1996, stating:
The hearing on the accounts provided no evidence of any damages incurred by the Reid
enterprises. On the contrary, the uncontested testimony indicated valid reasons for the
activity of the trustee. The collection on the note may force problems or bankruptcy
and jeopardize the efforts to obtain the government contract. The accounting work and
rental of machinery and building were at or below market value. It is further noted that
these transactions were reviewed by the bankruptcy court without any detrimental
consequences. [Appendix E, p 3.]
According to the probate court, Palis helped Applied avoid bankruptcy and reduced the amount of
estate taxes. The probate court found that by placing Applied in a bankruptcy proceeding, Palis would
have subjected Applied and the Trust to the claims of perfected creditors. The probate court
determined that Palis did not act any less than a prudent person while he made decisions as trustee.
Furthermore, the probate court determined that Palis did not exhibit bad faith or gross negligence.
While the probate court stated that a fiduciary who works in a dual capacity walks in harm’s way, it
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noted that the law does not specifically prohibit working in a dual capacity, absent a showing that the
estate suffered damages. The probate court denied petitioners’ claim to surcharge Palis.
Thereafter, Palis filed a petition to recover professional fees for himself and his lawyer in the
amount of $51,420 and $11,100, respectively. Petitioners objected to the petition, claiming that Palis
sought reimbursement for attorney fees and costs for work which did not benefit the Trust by increasing
or preserving its assets. Further, petitioners objected because the probate court’s opinion did not
address payment of attorney fees. Similarly, petitioners objected to an award of fiduciary fees to Palis
because the probate court’s opinion did not allow for an annual accounting and did not address the sum
of fiduciary fees or the objections to those fees.
The probate court issued a supplemental opinion in June of 1997. According to the probate
court, the petitioners’ objection to fees was closely identified with their objection to the account and to
their petition for surcharge. The probate court determined that Palis and his attorney substantially
complied with MCR 8.303 by submission of an itemized statement of services rendered. The probate
court stated:
The time and service of the trustee were well documented and as indicated, scrutinized
on a consistent basis. Although there were disputes as to management decisions and
the timeliness of certain activities, the court made no findings that the trustee failed to
meet his obligations in a timely manner. The beneficiaries, as indicated, had disputed the
trustee’s fidelity and loyalty which allegations were adjudicated and the resulting
Opinion of December 16, 1996 issued.
***
As to the attorney fees, this u
nique proceeding presented a number of issues
requiring a high degree of skill in advising the fiduciary. Counsel for the fiduciary, as
well as all counsel representing the beneficiaries, were timely and well prepared in
dealing with the issues presented to the court. . . . The attorney is charging the estate at
the agreed upon rate of One Hundred and 00/100 ($100) per hour, which is well within
the hourly rate charged for work for similar legal services within the community. . . .
As to the attorney’s work benefiting the estate, or benefiting the trustee
individually -- that issue had been resolved in favor of the trustee and his attorney per
the Opinion dated December 16, 1996. The ongoing business enterprise, the trust
activity, the dealing with the trust beneficiaries required an ongoing and consistent
representation by the attorney, which although the proceeding became lengthy, disputed
matters were brought before the court in a timely fashion.
After reviewing the statement for services rendered and the submission offered
to refute it, the court concludes that 10% of the fiduciary fee is not warranted having
accepted the objector’s argument that some of the fiduciary’s efforts did not require a
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professional fiduciary but the tasks could be performed by an assistant or layman such
as in the area of paying ordinary bills or expenses.
The probate court issued an order consistent with its supplemental opinion, awarding attorney fees and
fiduciary fees to Palis.
II. Standard Of Review
A. Self-Dealing And Conflicts Of Interest
This Court reviews a probate court’s findings of fact to determine whether they are clearly
erroneous. In re Green Charitable Trust, 172 Mich App 298, 311; 431 NW2d 492 (1988).
“Findings are clearly erroneous when this Court is left with the definite and firm conviction that a mistake
has been made.” Id. Because petitioners requested that the probate court surcharge Palis as trustee of
the Trust based on his alleged breach of his fiduciary duties to the Trust, this issue is preserved for
appellate review.
B. Fiduciary Fees
“The weight to be given any factor and the determination of reasonable compensation is within
the probate court’s discretion.” Comerica Bank v City of Adrian, 179 Mich App 712, 724; 446
NW2d 553 (1989). Because petitioners objected to Palis’s request for fiduciary and attorney’s fees,
the issue is preserved for appellate review.
III. Self-Dealing And Conflicts Of Interest
Petitioners argue that the probate court erred in denying their claim to surcharge Palis in light of
Palis’s self-dealing and his conflicts of interest. We disagree.
Generally, the duties imposed on the trustee are determined by consideration of the trust, the
relevant probate statutes and the relevant case law. Green Trust, supra at 312. The question whether
a trustee has breached his fiduciary duties, subjecting him to liability, is determined based on the facts of
the given case. Id. The trustee is expected to act as “a prudent man dealing with the property of
another, and if the trustee has special skills or is named trustee on the basis of representations of special
skills or expertise, he is under a duty to use those skills.” Id. at 312-313, quoting MCL 700.813; MSA
27.5813. This duty includes acting with care, diligence, integrity, fidelity and sound business judgment.
Id. at 313. Courts have also imposed on trustees the fiduciary duties of honesty, loyalty, restraint from
self-interest and good faith. Id.
Here , Palis was named as successor trustee under § 13 of the Second Amendment to the Trust
Agreement. Section 5(c) of the Trust Agreement provided that the trustee would have the power “to
retain the property in the trust fund and any property added to the trust fund, without liability for any
decrease in value, and without being restricted in said retention to property authorized by the laws of the
State of Michigan or of any other jurisdiction for trust investments.” Granting trustees discretionary or
broad powers does not mean that the trustee’s powers are limitless. Id. at 313. The trustee’s actions
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will be reviewed for an abuse of discretion. Id. The trustee must exercise his discretion honestly and in
good faith. Id. Bad faith has been defined as “arbitrary, reckless, indifferent, or intentional disregard of
the interests of the person owed a duty.” Id. at 315 (citation omitted). Bad faith is not a specific act,
but defines the character or quality of a party’s actions. Id. Whether bad faith exists depends on the
facts of an individual case. Id.
Petitioners argue that Palis acted in bad faith and breached his fiduciary duties to the Trust
because his personal interests were directly in conflict with the Trust’s interests. Petitioners assert that
Palis was too involved with Applied Industries, which owed the Trust money through a promissory note,
to act in the best interest of the Trust.
Admittedly, Palis owned the building which Applied rented, leased machinery to Applied and
provided accounting services to Applied for a fee. However, the record indicates that Palis made no
profit on these transactions. In fact, Applied’s rental fee for the building and equipment were at or
below fair market value. Palis did not charge Applied for all his accounting services. Further, Reid,
prior to his death, was aware of and consented to Palis’s rental agreements. The record indicates that
Applied benefited from renting a building partially owned by Palis. Indeed, Palis and his partner
allowed Applied to remain in their building for over a year without paying rent. The record reflects Palis
was not treated more favorably than any other potential creditor. In fact, Applied used its relationship
with Palis to obtain favorable deals. Standing alone, the fact that Palis worked in a dual capacity does
not subject him to liability. See Mintener v Michigan National Bank, 117 Mich App 633, 641; 324
NW2d 110 (1982).
Petitioners also assert that Palis’s ownership interest in Applied and his position on its board
motivated him to place his personal interests above the interests of the Trust. According to petitioners,
Palis never attempted to realize any value on the Trust’s $555,000 promissory note issued by Applied
because of his personal financial stake in Applied. Further, petitioners argue that Palis’s belief that
Applied was going to receive a lucrative contract from GM and BMW was merely an excuse to cover
his own self-interest.
Prior to his death, Reid never requested interest payments on his promissory note from Applied.
Had Palis demanded interest payments on the note, or repayment of the note itself, Applied would have
gone bankrupt. If Applied had gone bankrupt, petitioners would not have been secured creditors
because Reid failed to renew his secured interest in the promissory note. In addition, Palis was unaware
that his promissory note and the Trust’s promissory note were no longer secured debts. Moreover,
Palis believed that there was a good chance that Applied would become profitable. Because there was
a reasonable chance that Applied could have recovered from its economic downturn, Palis attempted to
maintain Applied’s operations. For the small amount of money that the Trust would have realized from
the closing of Applied, compared to the potential value of the Trust’s assets if Applied would have been
awarded the GM/BMW contract, we believe that Palis made a reasonable business decision to continue
operations.
However, petitioners assert that the Trust was damaged in two ways. First, petitioners contend
that they were entitled to monetary damages for the difference between the valuation of the Trust’s
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Applied assets on the 706 estate tax form and the amount of money eventually received by the Trust
after the liquidation of Applied. Second, petitioners argued that the Trust is entitled to recover damages
for paying federal estate taxes on worthless assets related to Applied.
The record reflects that Palis retained the help of an expert in the area of probate matters to
assist him in filing the 706 tax form. The estimate regarding the value of the assets was based on
numerous factors, including the fact that Applied had realized a profit in 1990 and the possibility of
winning the GM/BMW contract. Palis’s actions were not arbitrary or reckless. Because Palis took the
proper steps to obtain a reasonable estimate of the worth of the Trust’s assets at the time of Reid’s
death, we do not believe that petitioners were entitled to surcharge Palis for the Trust’s losses.1
Petitioners argue that the record is undeniably clear that Palis acted in bad faith with regard to
Applied’s assets. However, petitioners offer nothing more than mere allegations. Because there is no
evidence on the record that Palis’s decisions were grossly negligent or made in bad faith, we believe that
the probate court did not err in denying petitioners’ surcharge claim.
IV. Fiduciary Fees
Petitioners contend that the probate court erred in awarding Palis fiduciary fees when his
claimed services did not benefit the Trust or its beneficiaries. We disagree. “[A] trustee is entitled to
just and reasonable compensation for services rendered.” Comerica Bank, supra at 723. The
Revised Probate Code provides:
A fiduciary shall be allowed the amount of his or her reasonable expenses incurred in
the administration of the estate and shall also have such compensation for his or her
services, both ordinary and extraordinary as the court in which the fiduciary’s accounts
are settled deems to be just and reasonable. . . . [MCL 700.541; MSA 27.5541.]
Unless the trustee’s fees are provided for in a written instrument, the trustee must file a written
description of services performed or a statement otherwise indicating the basis of a claim for
compensation. Comerica Bank, supra at 723-724; MCL 700.541; MSA 27.5541; see also MCR
5.722. Therefore, the court determines the reasonable value of the services provided by the trustee.
Comerica Bank, supra at 724. While time spent is an indicator of value, it may be a poor indicator in
some circumstances. Id. When determining which factors are to be given weight, the probate court
must consider the circumstances of the case. Id. The claimant bears the burden of proof that the
services rendered were necessary and that the charges were reasonable. Id.
Here, the probate court determined that Palis was entitled to compensation for his services
rendered to the Trust. Palis testified that his fees were in accordance with the Trust Agreement. Palis
submitted detailed billings and asked the probate court to adopt his accounting. Furthermore, Palis
testified that his accounting of services rendered to the Trust was true and accurate. Petitioners failed to
present any evidence to the contrary. In fact, petitioners’ objection to the award of fiduciary fees did
not relate to the rate per hour or the details provided by Palis. Instead, petitioners objected to the
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award of fiduciary fees because Palis’s services were not incurred in pursuit of the best interests of the
Trust.
Because we do not believe that the evidence on the record reflects any wrong-doing on the part
of Palis, as trustee of the Trust, petitioners’ objections to Palis’s request for fees was properly denied
by the probate court. It is clear that the probate court examined the record, reviewed Palis’s itemized
request for fiduciary fees and considered petitioners’ objections when it decided to award Palis his
requested fiduciary fees minus 10%. Therefore, the probate court did not abuse its discretion in
awarding Palis fiduciary fees.
Affirmed.
/s/ William C. Whitbeck
/s/ Mark J. Cavanagh
/s/ Richard Allen Griffin
1
Even if we were to believe that Palis’s business decisions were unsound, the Trust Agreement
effectively limited his liability. Section 12(o) of the Trust Agreement provides:
No Trustee acting hereunder shall be held liable to any trust or beneficiary thereunder in
respect of any loss, cost, damage or expense sustained through any error of judgment
or in any other manner except as a result of such Trustee’s bad faith or gross
negligence.
A trustee’s potential liability may be limited by the terms of the trust instrument. In re Green Trust,
supra at 313-314. Generally, an exculpatory clause does not reduce or enlarge the standard of care
required of the trustee in administering the trust, but acts to relieve the trustee of personal liability under
the stated circumstances. Id. at 314. Exculpatory clauses generally do not mean that the trustee is not
accountable to anyone for the trustee’s actions. Id.
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