In Re: Estate of Grahek, J., Appeal of: Grahek, D.
In Re: Estate of Grahek, J., Appeal of: Grahek, D. No. 554 MDA 2016
| Pa. Super. Ct. | Apr 27, 2017Background
- Decedent Joseph L. Grahek’s 1971 will created two trusts (Trust A and Trust B). The sole income beneficiary was Marion Grahek; remainder beneficiaries included David and Philip Grahek.
- The trusts’ primary asset was income-producing real property in Placentia, CA. That property was sold under threat of condemnation on August 28, 2006 for ~$8.7 million (net gain ~$8.2 million).
- Trustee (Wachovia/Wells Fargo) intended to complete a §1033 like‑kind exchange to avoid capital gains tax, set aside ~$2.1M for taxes/down payment, and invested the remainder (~$6.5M) in a diversified portfolio to generate income for the life beneficiary and growth for remaindermen.
- During the 2008 financial crisis the portfolio lost value and nonrecourse financing briefly became unavailable; David and Philip were appointed trustees pro tem and ultimately purchased replacement properties in 2009, avoiding capital gains tax.
- Remainder beneficiaries objected to the Trustee’s investment strategy (arguing funds should have been held in cash to preserve liquidity for the §1033 exchange), contested certain investment decisions and fees, and sought surcharge/relief. The Orphans’ Court held for the Trustee; the Superior Court affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Trustee breached fiduciary duty by investing sale proceeds in a diversified portfolio instead of keeping them in cash to protect a §1033 exchange | Grahek: Trustee should have preserved proceeds in cash (short horizon) to guarantee funds for a like‑kind exchange and avoid market risk | Wells Fargo: Trustee pursued a prudent overall strategy under the Prudent Investor Rule—set aside taxes, kept liquidity, sought nonrecourse financing, and balanced income vs. growth for dual beneficiaries | Held: No breach. Trustee complied with Prudent Investor Rule; contingency plan and portfolio were reasonable; losses due to unforeseeable 2008 crisis and hindsight bias rejected |
| Whether Trustee should be surcharged for market losses caused by the investment strategy | Grahek: Market losses were caused by Trustee’s imprudent exposure to market risk | Wells Fargo: Losses resulted from historic market collapse, not Trustee misconduct; objectors failed to meet burden of proof | Held: No surcharge; objectors failed to prove breach or attributable loss |
| Whether Trustee erred in not realizing capital losses in 2007 to offset gains | Grahek: Trustee should have sold securities in 2007 to lock losses and reduce tax exposure | Wells Fargo: Investment decisions are part of multi‑year balanced strategy; cannot be judged in isolation by calendar year | Held: No breach; objectors did not show that refraining from realizing losses was improper or caused unrecoverable harm |
| Whether the Trustee’s requested reserves, fees, and payment for legal opinions were improper | Grahek: Reserves and legal disbursements were unnecessary/wasteful | Wells Fargo: Reserve modest relative to trust size; legal opinions and fees were reasonable and related to complex tax/exchange issues | Held: Reserve and payments permitted; Trustee may retain requested reserve; legal fees/disbursements not disallowed |
Key Cases Cited
- In re Estate of Fuller, 87 A.3d 330 (Pa. Super. 2014) (standard of review for Orphans’ Court factual findings and legal conclusions)
- In re Dentler Family Trust, 873 A.2d 738 (Pa. Super. 2005) (burden on beneficiary to prove trustee breach; once breach shown, burden shifts to trustee to show loss would have occurred anyway)
- Estate of Stetson, 345 A.2d 679 (Pa. 1975) (allocation of risk and consequences when trustee breaches fiduciary duties)
- In re Paxson Trust I, 893 A.2d 99 (Pa. Super. 2006) (trustee liability for losses and profits resulting from breach of trust)