Benson v. Rosenthal
Filing
161
ORDER AND REASONS denying 54 , 55 Motions for Judgment on the Pleadings. Signed by Judge Jane Triche Milazzo. (ecm)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF LOUISIANA
THOMAS BENSON
CIVIL ACTION
VERSUS
NO: 15-782
ROBERT ROSENTHAL ET AL.
SECTION: “H”(2)
ORDER AND REASONS
Before the Court are Defendants’ Motions for Judgment on the Pleadings
(Docs. 54, 55). For the following reasons, the Motions are denied.
BACKGROUND
This is an action for declaratory judgment. Plaintiff Thomas Benson,
appearing as grantor of several trusts, asks this Court to declare that his
attempt to exchange certain assets held by those trusts for other assets of
equivalent value was effective. Over the course of several years, Plaintiff
established various trusts for the benefit of his daughter, Renee Benson, and
two grandchildren, Rita Benson LeBlanc and Ryan LeBlanc. Plaintiff created
three trusts in 2009 (the “2009 Trusts”), three trusts in 2012 (the “2012
Trusts”), a Grantor Retained Annuity Trust in 2012 (“2012 GRAT Trust”), and
1
a Grantor Retained Annuity Trust in 2014 (“2014 GRAT Trust”). 1
Notwithstanding the dispute at issue, these trusts hold ownership interests in
various entities that in turn own valuable property, including the New Orleans
Saints and Pelicans franchises, the New Orleans Fox television affiliate,
automobile dealerships, and the Benson Tower and Champions Square
development. 2 Plaintiff asked Defendant Robert Rosenthal to serve as trustee
of these trusts. In 2015, Rosenthal resigned as trustee of the 2012 trusts and
appointed Defendant Mary Rowe in his place.
The aforementioned trust documents provide Plaintiff with the power to
reacquire or exchange property of the trust with property of equivalent value
without the approval of the trustee. In January of 2015, Plaintiff exercised
this power and sent correspondence to Defendant Rosenthal, stating his
intention to exchange the trust assets for promissory notes of equivalent value.
This correspondence was sent to Rosenthal on January 12, 2015 but intended
to make the exchange effective as of January 1, 2015. With the January 12
correspondence, Plaintiff included a preliminary schedule of values of the trust
assets, a Notice of Exchange of trust assets, and blank promissory notes
containing a valuation adjustment clause that would operate to adjust the
notes automatically to a later-determined appraised value. The transfer also
The trusts are the Renee Benson 2009 Irrevocable Trust, the Rita Benson LeBlanc
2009 Irrevocable Trust, the Ryan LeBlanc 2009 Irrevocable Trust, the Renee Benson 2012
Irrevocable Trust, the Rita Benson LeBlanc 2012 Irrevocable Trust, the Ryan LeBlanc 2012
Irrevocable Trust, the Tom Benson 2012 Grantor Retained Annuity Trust, and the Tom
Benson 2012 Grantor Retained Annuity Trust.
2 The parties dispute the effectiveness of the exchange attempted by Plaintiff and
whether the trusts at issue still own the assets affected by the exchange.
1
2
included certain real estate and the forgiveness of nearly $100 million of
indebtedness owed to Plaintiff by some of the trusts.
Rosenthal refused to execute the documents required to complete the
exchange, stating that such an exchange requires a simultaneous transfer of
property.
He also stated that an unsecured promissory note is “not an
appropriate trust investment” and that he must “make his own independent
verification that the assets to be exchanged are of equivalent value [with the
trust assets]” before the exchange could occur. 3
On January 24, 2015, Plaintiff supplemented his exchange request with
additional documents, including certifications of the values of each trust signed
by Plaintiff, collateral assignments granting the trusts security interests, and
seven promissory notes for values based on the most recent valuations
available.
These promissory notes also contained valuation adjustment
clauses. Plaintiff’s supplements failed to assuage Rosenthal’s concerns, and he
again rejected the exchange, stating that there had “not yet been an exchange
of assets of equivalent value.” 4
On August 24, 2015, after filing this suit, Plaintiff again supplemented
the Notice of Exchange in accordance with the valuation adjustment clauses
included in the promissory notes. Plaintiff had retained Empire Valuation
Consultants (“Empire”) to conduct a valuation of the assets that he sought to
remove from the trusts as of December 31, 2014. Empire’s services had been
used in the valuation of assets of the trusts on prior occasions and had been
relied upon by Rosenthal. Based on Empire’s updated valuation of the trust
3
4
Doc. 1-47.
Doc. 1-48.
3
assets, Plaintiff delivered to Defendants thirteen new promissory notes of
specific values and collateral assignments securing each of those notes.
Defendants again rejected Plaintiff’s exchange. 5 Plaintiff seeks a judgment
from this Court declaring that the exchange was effective.
Defendant Rowe’s motion asks this Court to dismiss Plaintiff’s action on
several grounds.
Defendant Rosenthal has adopted these arguments by
reference in his own motion and expounded upon them. Defendants move this
Court for a judgment holding either that (1) Plaintiff’s attempted substitution
was, in fact, a request for a loan, which the trustee had the discretion to deny,
or that (2) Plaintiff’s purported substitution did not occur on January 1, 2015
and occurred, at the earliest, on August 24, 2015, if Plaintiff can prove that he
exchanged property of equivalent value.
LEGAL STANDARD
Rule 12(c) provides that a party may move for judgment on the
pleadings, after pleadings are closed but early enough not to delay trial. 6 The
standard for determining a Rule 12(c) motion is the same as a Rule 12(b)(6)
motion to dismiss. 7 To survive a Rule 12(b)(6) motion to dismiss, a plaintiff
must plead enough facts “to state a claim to relief that is plausible on its face.” 8
A claim is “plausible on its face” when the pleaded facts allow the court to “draw
the reasonable inference that the defendant is liable for the misconduct
Docs. 48-4, 48-5.
Fed. R. Civ. Pro. 12(c) (2014).
7 Guidry v. Am. Pub. Life Ins. Co., 512 F.3d 177, 180 (5th Cir. 2007).
8 Ashcroft v. Iqbal, 556 U.S. 662 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S.
544, 547 (2007)).
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alleged.” 9 A court must accept the complaint’s factual allegations as true and
must “draw all reasonable inferences in the plaintiff’s favor.” 10 The court need
not, however, accept as true legal conclusions couched as factual allegations. 11
To be legally sufficient, a complaint must establish more than a “sheer
possibility” that the plaintiff’s claims are true. 12 The complaint must contain
enough factual allegations to raise a reasonable expectation that discovery will
reveal evidence of each element of the plaintiff’s claim. 13 If it is apparent from
the face of the complaint that an insurmountable bar to relief exists and the
plaintiff is not entitled to relief, the court must dismiss the claim. 14 The court’s
review is limited to the complaint and any documents attached to the motion
to dismiss that are central to the claim and referenced by the complaint. 15
LAW AND ANALYSIS
Defendants ask this Court to make one of two findings: (1) that the
exchange attempted by Plaintiff was a loan, which the trustee properly refused
or (2) that Plaintiff’s purported substitution was ineffective. This Court will
address each argument in turn.
A. Attempted Exchange as Loan
The trusts at issue are “intentionally defective grantor trusts.” This
term refers to a trust intentionally formed to avoid estate tax on the trust’s
Id.
Lormand v. U.S. Unwired, Inc., 565 F.3d 228, 232 (5th Cir. 2009).
11 Iqbal, 556 U.S. at 678.
12 Id.
13 Lormand, 565 F.3d at 255–57.
14 Jones v. Bock, 549 U.S. 199, 215 (2007).
15 Collins v. Morgan Stanley Dean Witter, 224 F.3d 496, 498 (5th Cir. 2000).
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assets. 16 This is accomplished by including clauses that either give the grantor
the power to reacquire trust assets by substituting assets of equivalent value
or allow the grantor to borrow trust assets without adequate interest or
security. 17 By retaining this power, the grantor is treated as the owner of those
assets for tax purposes pursuant to 26 U.S.C. § 675. In doing so, the grantor
becomes subject to income, gift, and capital gain taxes on those assets, but the
assets are not treated as part of his estate. 18
Three trust provisions are at play in this dispute. First, each trust states
that neither the trustee nor the grantor may exchange or dispose of any part
of the principal of the trusts for “less than an adequate consideration in money
or money’s worth.” 19 Next, the trusts state that the trustee has the right “to
loan to the Grantor up to 100% of trust assets” but that such a loan shall be
made “upon the terms and conditions as are deemed appropriate by the
Trustee” (“Loan Provision”). 20 The trusts then grant the grantor the power to
substitute trust assets for other assets of equal value without the approval or
consent of the Trustee (“Substitution Provision”). 21
Defendants argue that Benson’s proposed exchange was in fact a loan
pursuant to the Loan Provision, rather than a substitution pursuant to the
See Petter v. C.I.R., 98 T.C.M. (CCH) 534 (T.C. 2009), aff’d sub nom. Estate of
Petter v. C.I.R., 653 F.3d 1012 (9th Cir. 2011)
17 See 26 U.S.C. § 675.
18 Petter, 98 T.C.M. (CCH) 534; Mark S. Poker, Sales to Intentionally Defective
Grantor Trusts Here Is How Defects Can Be Positives, 25 NO. 1 PRAC. TAX LAW. 15 (2010).
19 Doc. 1-3 at p. 4; Doc. 1-4 at p. 4; Doc. 1-5 at p. 4; Doc. 1-6 at p. 5; Doc. 1-7 at p. 5;
Doc 1-8 at p. 5; Doc. 1-9 at p. 3; Doc. 1-10 at p. 3.
20 Doc. 1-3 at p. 17; Doc. 1-4 at p. 17; Doc. 1-5 at p.17; Doc. 1-6 at p. 18; Doc. 1-7 at p.
18; Doc. 1-8 at p. 19. The 2012 and 2014 GRAT Trusts do not include a loan provision.
21 See Doc. 1-3 at p. 16–17; Doc. 1-4 at p. 16–17; Doc. 1-5 at p. 16–17; Doc. 1-6 at p.
18; Doc. 1-7 at p. 18; Doc. 1-8 at p. 19; Doc. 1-9 at p. 9; Doc. 1-10 at p. 10.
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Substitution Provision. Defendants argue that Plaintiff’s attempted exchange
was a loan because he sought an extension of credit from the trusts. In support,
Defendants cite to both non-binding case law and IRS Revenue Rulings. This
Court finds, however, that the Defendant’s reliance on these authorities is
misplaced.
First, Defendants cite to In re Condiotti, an unpublished case from the
Colorado Court of Appeals, in which the grantor of an intentionally defective
grantor trust attempted to substitute the full value of the trust’s assets for a
promissory note. 22 First, the court held that the trustee had the power to
determine whether the proposed transaction was a substitution or a request
for a loan. It also held that the record before it supported the probate court’s
factual finding that the transaction was an attempt to exercise the loan
power. 23 The court made this finding based on the language of the trust and
the grantor’s intent at the time that it was created. 24 Relying on Colorado
precedent, the court considered the following questions in determining
whether the transaction was a loan: “1. Do the parties ‘stand in the relationship
of debtor and creditor?’ 2. Was a promissory note executed? 3. Was interest
‘agreed to or paid?’ 4. Did the parties agree that the recipient would repay the
money received?” 25
The Colorado court answered these questions in the
affirmative. In making its holdings, the court relied on two sources also cited
herein by Defendant. In Rothstein v. U.S., the Second Circuit held that the
In re The Mark Vance Condiotti Irrevocable GST Trust, No. 14CA0969 (Col. App.
July 9, 2015) (citing Love v. Olson, 645 P.2d 861 (Colo. App. 1982).
23 Id.
24 Id.
25 Id.
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exchange of an unsecured promissory note used by the grantor to purchase
trust assets was a loan. 26 The Condiotti court also relied on the Revenue
Ruling 85-13, in which the IRS held that a grantor’s “receipt of the entire
corpus of an irrevocable trust in exchange for an unsecured promissory note
given to the trustee, the grantor’s spouse, constituted an indirect borrowing of
the trust corpus.” 27
Defendants contend that each of these opinions support a finding that
Plaintiff’s exchange was actually a loan. This Court, however, finds these cases
distinguishable. The promissory notes offered by the grantors in Condiotti,
Rothstein, and Revenue Ruling 85-13 were unsecured. Here, Plaintiff has
tendered fully-secured promissory notes based on qualified appraisals bearing
adequate interest rates. In addition, Plaintiff has offered tangible property
and other assets to form equivalent value in the attempted substitution. This
Court finds these distinctions significant. Accordingly, these cases provide this
Court with little assistance because they are both distinguishable and nonbinding.
Having considered Defendants’ arguments and the sources cited in
support, this Court remains unpersuaded that Plaintiff’s attempted exchange
was a loan. Moreover, Plaintiff has pointed to several factors that weigh
toward a finding that it was a substitution. First, Plaintiff points to the
language of the trusts, which solely require that a substitution be for property
of equivalent value. There is no provision in the trusts prohibiting the use of
26
27
Rothstein v. United States, 735 F.2d 704, 707 (2d Cir. 1984).
Rev. Rul. 85-13, 1985 WL 286711.
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a promissory note, which certainly has value, in a substitution. Indeed, under
Texas law a promissory note may be a trust asset. 28
Second, the real estate and loan forgiveness that Plaintiff offered as part
of the substitution are further proof that a loan was not intended.
This
additional property weighs in favor of a finding that a substitution was made.
If Plaintiff was merely requesting a loan, this additional property would be
superfluous.
Accordingly, this Court is not persuaded by either the cited authority or
the facts before it to hold that Plaintiff’s attempted substitution of assets was
a loan. A determination that a transaction is a loan is a finding of fact, and
this Court holds that such a finding would be premature at this stage. 29
Defendants’ Motions for Judgment on the Pleadings on this issue are denied.
B. Attempted Exchange as Substitution
Next, Defendants argue that if Plaintiff’s exchange was a substitution,
it was ineffective. Specifically, they allege that Plaintiff’s exchange could not
have occurred retroactively to January 1, 2015, because the language of the
trusts requires that a contemporaneous exchange of property of equivalent
value be made in order to effect a substitution. In addition to the Substitution
Provision, Defendants point to the provision of the trusts that states that
neither the grantor nor the trustee may “purchase, exchange or otherwise deal
with or dispose of all or any part of the principal or income of the Trust for less
Carter v. DeJarnatt, 523 S.W.2d 88, 91 (Tex. Civ. App. 1975) (“A promissory note
constitutes ‘personal property’ in the sense that it may be owned as a trust asset.”).
29 See Beausejour Corp., N.V. v. Offshore Dev. Co., 802 F.2d 1319, 1320 (11th Cir.
1986).
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than an adequate consideration in money or money’s worth.” 30 Defendants
allege that the trustee has the obligation to delay a purported substitution to
ensure that the grantor is offering property of equivalent value. Defendants
argue that, at the earliest, the substitution may have occurred on August 24,
2015, but only if Plaintiff can show that equivalent value was tendered on that
date.
Plaintiff responds that Defendants’ reading of the trusts requiring a
contemporaneous exchange of assets of equivalent value is both incorrect and
impractical. Plaintiff argues that because of the nature of the trust assets,
valuation of those assets will necessarily take time and be based on some date
in the past. Therefore, Plaintiff was justified in choosing January 1, 2015 as
the date upon which to effectuate the substitution, which he has an absolute
right to undertake. Plaintiff also notes that the value adjustment feature of
his promissory notes allowed for the substituted property to be adjusted
automatically to ensure that equivalent value was being given.
At its core, this is an issue of trust interpretation. Courts interpret trust
instruments as they do contracts. 31 By their express terms, the trusts at issue
are governed by Texas law. 32 “Generally, Texas courts endeavor to enforce
trusts according to the settlor’s intent, which [is] divine[d] from the four
corners of unambiguous trusts.” 33 “To the extent the trust instrument is silent,
See Doc. 1-8 at p. 5.
Goldin v. Bartholow, 166 F.3d 710, 715 (5th Cir. 1999).
32 See Docs. 1-3–1-10.
33 Rachal v. Reitz, 403 S.W.3d 840, 844 (Tex. 2013).
30
31
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the provisions of the Trust Code govern.” 34 Extrinsic evidence may be
introduced only when the trust is ambiguous. 35
The Substitution Provisions in the trusts at issue here differ slightly.
The Substitution Provisions in the 2009 Trusts read as follows:
Notwithstanding any other provision of this agreement to the
contrary, the Grantor hereby reserves the right and authority,
exercisable in a nonfiduciary capacity and without the approval
or consent of any person in a fiduciary capacity, to reacquire or
exchange any property of the Trust created hereunder by
substituting other property of an equivalent value; however, if
this power of substitution is exercised, the Grantor shall certify
in writing that the substituted property is of equivalent value
to the property for which it is substituted and the Trustee has
a fiduciary obligation independently to verify that the
properties acquired and the properties substituted by the
Grantor are in fact of equal value. Any dispute regarding the
value of the substituted property may be resolved in an
appropriate court. This power is intended to create grantor
trust status under section 675(4) of the Code. 36
The Substitution Provisions in the 2012 Trusts, although less specific, express
an identical power, stating:
Notwithstanding any other provision of this agreement to the
contrary, the Grantor hereby reserves the right and authority,
exercisable in a nonfiduciary capacity and without the approval or
consent of any person in a fiduciary capacity, to reacquire or
exchange any property of the Trust created hereunder by
substituting other property of an equivalent value. This power is
Myrick v. Moody Nat. Bank, 336 S.W.3d 795, 802 (Tex. App. 2011).
In re Ray Ellison Grandchildren Trust, 261 S.W.3d 111, 117 (Tex. App. 2008).
36 Docs. 1-3, 1-4, 1-5.
34
35
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intended to create grantor trust status under section 675(4) of the
Code. 37
Both the 2012 GRAT Trust and the 2014 GRAT Trust contain Substitution
Provisions substantially similar to those in the 2012 trusts. 38
Having considered the plain language of these provisions, the Court
finds that the grantor’s intent is unambiguous. The trusts grant him the
unilateral power to substitute assets, and while the trustee must ensure
equivalent value, he does not have the power to prevent such an exchange.
The Substitution Provision of the 2009 Trusts clearly grants the grantor
the power to effect a substitution without approval. To do so, however, he must
first “certify in writing that the substituted property is of equivalent value to
the property for which it is substituted.” The provision then states that “the
Trustee has a fiduciary obligation independently to verify that the properties
acquired and the properties substituted by the Grantor are in fact of equal
value. Any dispute regarding the value of the substituted property may be
resolved in an appropriate court.” 39 Clearly, the grantor has the unilateral
power to effect the substitution, provided that he certify that it is of equivalent
value. The trustee must then verify that the substituted assets are indeed of
equivalent value. The trusts do not say, however, that he may delay the
substitution while such a verification is made. To be sure, the provision speaks
of the substitution in the past tense, stating that the trustee must value the
“substituted” and “acquired” property. The provision says that a disagreement
Docs. 1-6, 1-7, 1-8.
Docs. 1-9, 1-10.
39 Docs. 1-3, 1-4, 1-5.
37
38
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regarding valuation should be brought to the courts for resolution.
Under
Defendants’ reading, which would allow the Trustee to block a substitution
until he was satisfied that it was of equivalent value, the phrase “without the
approval or consent of any person” would be rendered meaningless.
The
Trustee would be able to block the exchange indefinitely while valuation was
disputed, as was attempted in this case. “[T]he court should construe the
instrument to give effect to all its provisions so that no provision is rendered
meaningless.” 40
In addition to rendering parts of the Substitution Provision meaningless,
Defendants’ reading of the trusts leads to absurd results. Defendants would
have this Court read the trusts to require that before a substitution can occur
the grantor must offer substituted assets based on an up-to-the-minute
valuation to which the trustee agrees. Such a requirement would all but
prevent Plaintiff from making such an exchange. The trust assets at issue here
are units of closely-held LLCs owning sports franchises and other real estate
that are not readily valued. Valuation of these assets necessarily takes time,
making an up-to-the-minute valuation nearly impossible. In addition, the
trustee’s verification of equivalent value likewise takes time.
Plaintiff is
practically incapable of obtaining a valuation of the assets as of the exact day
on which he tenders promissory notes of equivalent value, just as the trustee
would be incapable of verifying the equivalence of value before the valuation
was deemed inaccurate by the passage of time. Defendants have offered no
solution as to how Plaintiff should provide an up-to-the-minute valuation of
40
Myrick, 336 S.W.3d at 802.
13
the trust assets in order to effect the contemporaneous exchange of equivalent
value that they say is required. As a practical matter, valuation of the trust
assets must necessarily be based on some date in the past. This Court does
not read the Substitution Provisions of these trusts as requiring a
contemporaneous exchange. The trusts merely require that when a grantor
unilaterally effects a substitution, he is bound to offer equivalent value in
exchange.
Although the Substitution Provisions of the 2012 Trusts and the 2012
and 2014 GRAT Trusts differ from that discussed above, this Court holds that
an identical reading is warranted. These provisions also unequivocally grant
Plaintiff the unilateral power to substitute assets without the approval of any
person. While the exchange must be of equivalent value, these Substitution
Provisions likewise do not allow the Trustee to block the exchange pending a
determination of equivalent value. Such a reading would render the “without
consent or approval of any person” clause meaningless. The grantor’s intent
in these Substitution Provisions, just as those in the 2009 Trusts, was to have
the unilateral power to effect a substitution. If the trustee disagrees with the
value of the substituted property, such can be disputed without delaying the
exchange, which the grantor clearly has the right to make.
Applying this interpretation to the facts at hand, this Court holds that
if the attempted exchange was a substitution, it was effective on January 24,
2015. It is on that date that Plaintiff provided the trustee with a certification
of value of the substituted property, as required by the 2009 Trusts, and
promissory notes purporting to be of equivalent value, as required by all trusts.
Each of these promissory notes also included a valuation adjustment clause,
14
stating that “[i]f there is a final determination that the value of this Note is
not equal to the Net Value, [Plaintiff] shall reform this Note to reflect the Net
Value as finally determined.” 41 As Plaintiff points out, “[t]his feature allows
trustees time to confirm equivalence of values, and to ensure equivalent value
is given by automatically adjusting the face value of the promissory notes as
necessary.” 42
Plaintiff complied with all of the requirements of the
Substitution Provisions of the trusts to effect a substitution on January 24,
2015. Defendants must now comply with their obligations under the trusts in
confirming the equivalence of value as of that date.
CONCLUSION
For the foregoing reasons, Defendants’ Motions for Judgment on the
Pleadings are denied.
16th
New Orleans, Louisiana this ____ day of May, 2016.
____________________________________
JANE TRICHE MILAZZO
UNITED STATES DISTRICT JUDGE
41
42
See Doc. 56-5 at ¶ 6.
Doc. 56 at p. 21.
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