54 A.3d 714 | Md. | 2012
Lead Opinion
Petitioners, Barbara Hastings, R. Cort Kirkwood, and Ann K. Robinson are beneficiaries of a testamentary trust who have sued the trustee, Respondent PNC Bank, NA (PNC). Petitioners allege that PNC improperly demanded that each beneficiary execute a broad release agreement prior to distribution and misapplied the provisions of the Maryland Code,
I.
In 1995, Marion W. Bevard executed a Last Will and Testament that directed the disposition of his estate by, in part, providing for the establishment of a trust. The will appointed Mercantile Safe Deposit and Trust Company (Mercantile) to serve as trustee and mandated that the trust be divided into four equal shares. The will granted one of those shares to Marion’s sister, Rebecca “Reba” Bevard, for the duration of her life (the Trust). Following Marion’s death in February 2002, his estate was probated in the Orphans’ Court for Baltimore County. Pursuant to the terms of the will, the personal representative of the estate established the Trust and funded it with a $450,450.98 contribution. Under the terms of the Trust, Reba was to receive income from the Trust as well as discretionary distributions of the Trust principal, for life. Upon her death, the remainder of the Trust was to be distributed to Robert B. Kirkwood and, if he died before Reba, the remainder was to be distributed in equal shares to his descendants. The Trust, therefore, had two components: the life estate created for the benefit of Reba, see § 7-201(c)(2)(i), and the remainder interest, which qualifies as a “subsequent interest” for tax purposes, created for the benefit of Robert B. Kirkwood or his descendants, see § 7-201(e)(l).
With the inheritance tax paid, PNC began the task of distributing the Trust’s assets to the beneficiaries. To that end, PNC sent to each Petitioner and Robert Kirkwood a letter that included, among other things, an accounting of the entire Trust and a “Waiver, Receipt, Release and Indemnification Agreement” (Release Agreement). The letter directed that, if the beneficiaries approved of the accounting, they should sign the attached Release Agreement and return it to PNC. The letter further explained that, “[ujpon receipt of the executed Releases from all of the [beneficiaries], we will be in a position to have the cash disbursed.”
[Ejach of the undersigned hereby: ... Releases, indemnifies and holds PNC, in its corporate capacity and as Trustee, harmless from and against any and all losses, claims, demands, surcharges, causes of action, costs and expenses (including legal fees), which may arise from its administration of the Trust, including, but not limited to, the overall investment strategy of the Trustee, all decisions made and actions taken or not taken with regard to the administration of the Trust, and PNC’s distribution of the assets to the Beneficiaries as set forth on the attached schedule.
By letter dated January 2, 2008, John M. Robinson, an attorney and the husband of one of the Petitioners, Ann K. Robinson, objected on behalf of all four beneficiaries to PNC’s plan for distribution of the Trust assets. The objection touched off a flurry of correspondence between Mr. Robinson and PNC during the subsequent four months. Mr. Robinson voiced two major objections on behalf of the beneficiaries: (1) the release and indemnity clause was far too favorable to PNC and the beneficiaries could not be required to execute it before receiving their distributions; and (2) PNC misinterpreted
In response, PNC defended its calculation of the inheritance tax and explained that execution of the Release Agreement, including execution of the release and indemnity clause, was not a required step towards obtaining a distribution. PNC advised that, instead of utilizing a private agreement, under Maryland law it could petition a court for a final accounting and termination of the Trust to obtain the protection it had sought in the release and indemnity clause. The agreement and clause were offered to the beneficiaries as a matter of industry practice, “since the majority of beneficiaries prefer to terminate their trust via private agreement instead of petitioning a court.” Nonetheless, PNC released a partial distribution of $33,319.97 to each of the beneficiaries, seemingly in response to their objections, while predicating final distributions upon the execution of the appropriate Receipt and Release Agreement or court approval of a final accounting.
Petitioners, contemporaneous with the partial distribution and therefore without knowledge of it, filed a three-count complaint for declaratory judgment in the Circuit Court for Baltimore County.
In Counts II and III Petitioners addressed their challenge to PNC’s calculation of the distribution commission and inheritance tax. Petitioners alleged that PNC wrongly based its calculation on the $261,306.72 fair market value of the Trust, because that amount included the income earned on the $218,130.00 remaining principal that had been contributed by Marion’s estate. Instead, according to Petitioners, PNC should have computed the tax solely on the amount of principal because § 7 — 203(j) provides that “[t]he inheritance tax does not apply to the receipt of property that is income, including gains and losses, accrued on probate assets after the date of death of the decedent.” PNC’s alleged failure to use the correct value resulted in a $4,313.71 overpayment in inheritance taxes and a $69.59 overpayment in the distribution commission. Count II prayed for relief declaring “that PNC must use $218,130.00 as the basis for calculating inheritance tax in this case”; Count III prayed for similar relief in the calculation of PNC’s commission. Both counts prayed for monetary damages from loss of income, prejudgment interest, and attorneys’ fees.
PNC timely filed an answer and a counterclaim. In the answer PNC raised a number of defenses to liability and in the counterclaim petitioned the Circuit Court to assume jurisdiction over the Trust pursuant to Rule 10-501.
After a period of discovery, the parties filed cross-motions for summary judgment. PNC filed a motion requesting sum
PNC did not move for summary judgment on Count I because it believed that its counterclaim, asking the Circuit Court to assume jurisdiction over the Trust, “moot[ed]” that issue. PNC agreed with Petitioners that a trustee could not demand the execution of a private release and indemnity clause. PNC argued, though, that it did not demand that the Petitioners sign the Release Agreement or accede to the release and indemnity clause; it requested that the Petitioners do so in order that the Trust could be terminated expeditiously while obtaining the same protection the Trust would have received from a court’s accounting. Therefore, according to PNC, the lawfulness of a demand for a release and indemnity clause became moot when PNC withdrew its request and moved, by counterclaim, to terminate the Trust by filing a petition with the Circuit Court.
Petitioners responsively moved for summary judgment on all three counts. On Count I they argued that, by demanding execution of the release and indemnity clause, PNC required the Petitioners to release and indemnify PNC against all losses and expenses that arose from the administration of the
After a hearing, the Circuit Court issued an order assuming jurisdiction of the Trust. By the same order, the court also granted PNC’s motions on Counts II and III and entered judgment on those counts in PNC’s favor, agreeing with PNC’s interpretation of §§ 7 — 203(j) and 7 — 210(c). The court denied Petitioners’ motion on all counts and specified in its order, in relation to Count I, that Petitioners “were not required to sign any [Release Agreement].” The court, however, did not enter judgment in favor of either party on Count I, reasoning that there remained a question of whether Petitioners lost income because of PNC’s request.
PNC subsequently filed with the court an inventory and final accounting of the assets in the Trust. PNC also filed a Petition for Attorney’s Fees and a Petition for Court Approval of Final Account and Termination of Trust and for Discharge of PNC Bank, N.A. as Trustee.
Because no judgment had been entered on Count I, Petitioners renewed their Motion for Summary Judgment as to Count I. After a second hearing, the Circuit Court granted in part PNC’s Petition for Attorney’s Fees, awarding PNC $20,000 in fees, and issued an order terminating the Trust, directing distribution of the Trust assets, and discharging PNC from further responsibility following the distribution. Finally, the court denied Petitioners’ renewed motion for summary judgment, specifically finding that PNC requested, rather than “required,” that the release and indemnity clause be executed. Because the court could not “find ... any
Petitioners noted an appeal to the Court of Special Appeals. That court affirmed the judgment of the Circuit Court in an unreported opinion. Petitioners sought, and we granted, a writ of certiorari, Hastings v. PNC Bank, NA, 424 Md. 291, 35 A.3d 488 (2012), to answer the following questions:
1. Whether a Maryland trustee can lawfully demand or request an indemnity from its beneficiaries that is broader than the protection that the trustee could have obtained through a court order or a release like that permitted for a personal representative?
2. Whether Section 7-203(j) of the Tax-General Article should have been applied to the trust assets in this case being distributed to remaindermen so as to exempt the income and gains they received from any inheritance tax?
II.
In this appeal, the Circuit Court entered summary judgment in favor of PNC on Counts I and II
Petitioners’ challenge to the Court’s judgment in PNC’s favor on Counts I and II are grounded in purely legal arguments, to which we accord a non-deferential standard of review.
Legal Validity of the Release Agreement
Petitioners’ first challenge relates to the Release Agreement that PNC sought to have Petitioners and their brother execute. They focus on the following clause in the Agreement, which we restate for clarity and ease of reference:
6. Releases, indemnifies and holds PNC, in its corporate capacity and as Trustee, harmless from and against all losses, claims, demands, surcharges, causes of action, costs and expenses (including any and all legal fees), which may arise from its administration of the Trust, including, but not limited to, the overall investment strategy of Trustee, all decisions made and actions taken or not taken with regard to the administration of the Trust, and PNC’s distribution of the assets to the Beneficiaries as set forth on the attached schedule.
(Emphasis added by Petitioners.)
Petitioners argue that PNC demanded unanimous execution of the release and indemnity clause “as a condition precedent to any distribution,” and such a demand “violates the Maryland law of trusts by turning it on its head.” They cite several provisions of the Estates and Trust Article but make no argument that any of those provisions, either expressly or by implication, prohibits the action PNC took. The heart of Petitioners’ argument, instead, is that the release and indemnity clause is over-broad. In Petitioners’ words, the release and indemnity clause would force them to release and indemnify PNC “against all losses and expenses that arise from
Generally, to determine whether a trustee wields lawful authority to take certain actions in connection with trust matters we look to three different sources: (1) the instrument that creates the trust; (2) applicable statutes; and (3) the common law. See ET, § 15-102(b)(2); see also Restatement (Third) of Trusts § 85 (2007)
Preliminarily, nothing in the testator’s will precluded the trustee from exercising whatever authority the trustee was already allowed by law. The law of Maryland, moreover, permits a trustee to request a release, and Petitioners do not argue the contrary. As for Petitioners’ assertions of breach of fiduciary duty and overbreadth, both fall short.
A trustee owes to the beneficiaries of a trust duties of administration, prudence and loyalty. The trustee’s duty of loyalty — as the duty is known in this state — is well-established in the common law. Bd. of Trustees v. Mayor of Baltimore, 317 Md. 72, 109, 562 A.2d 720, 738 (1989). Broadly put, the duty prohibits a trustee from using the property of a beneficiary for the trustee’s own purposes. Gianakos v. Magiros, 238 Md. 178, 185-86, 208 A.2d 718, 722 (1965). A trustee is otherwise prohibited from “placing himself in any position where his self-interest will or may conflict with his duties as trustee,” and “using the advantage of his position to gain any benefit for himself at the expense of the beneficiary.” Hughes v. McDaniel, 202 Md. 626, 632, 98 A.2d 1, 4 (1953). A trustee also must refrain from using the advantages of the fiduciary relationship for the benefit of a non-beneficiary third party. Bd. of Trustees, 317 Md. at 109, 562 A.2d at 738.
Of course, it is equally well-established that the restrictions associated with the duty of loyalty are not absolute. See, e.g., Goldman v. Rubin, 292 Md. 693, 705-06, 441 A.2d 713, 720 (1982); Turk v. Grossman, 176 Md. 644, 666, 6 A.2d 639, 650 (1939). A trustee may engage in an otherwise-prohibited course of action if authorized “by statute, by the instrument creating the trust, or by the court having jurisdic
It almost goes without saying that, if the law countenances consent to what would otherwise be a breach of the duty of loyalty, the law also must countenance requests for consent. If not, then a trustee would be unable to solicit consent without first breaching the duty. Put simply, one must be able to ask for permission in order to obtain it. It is easy to see, then, that PNC could not have breached its duty of loyalty in this ease merely by asking Petitioners and their brother to execute a reasonable release and indemnity clause.
The terms of the release and indemnity clause, moreover, are not so broad and one-sided as to place impermissibly PNC’s interests before those of Petitioners. The clause, as we
Maryland Rule 10-501 authorizes a fiduciary or any “interested person”
Moreover, a trustee is generally entitled to indemnity for expenses incurred reasonably and properly in the course of administering a trust. Restatement, supra § 38(2). Maryland law provides explicitly for this right to indemnification, mandating that “a trustee ... [i]s entitled to reimbursement from trust property for reasonable expenses incurred in the performance of fiduciary services.” ET § 14-405(m)(l). Satisfaction of the trustee’s right to indemnification can be accomplished by lien; that is, the trustee gains a security interest in the trust’s assets upon incurring reasonable and proper expenses on the trust’s behalf. 4 Scott, supra § 22.1.1 at 1627. This security interest takes priority over the interest of the beneficiaries, so “[t]he beneficiaries are not entitled to distribution of the trust property until the trustee has been indemnified.” Id. at 1629. Finally, the amount of indemnification to which a trustee is entitled can be “enlarged or diminished by agreement between the trustee and the beneficiaries.” Restatement, supra § 38 cmt. (f).
All this is to say that, before PNC presented the Release Agreement to Petitioners and their brother, PNC was legally entitled to some measure of protection and indemnity. With or without the consent of Petitioners, PNC was free under Rule 10-501 to begin judicial proceedings to audit and terminate the Trust. Those proceedings eventually would have resulted in a court order that would have barred, as res judicata, all matters disputed and open to dispute in settling the Trust account. Moreover, PNC was entitled to indemnifi
Against this backdrop, the terms of PNC’s release and indemnity clause are not a radical departure from the common law protection and statutory right to which PNC already was entitled. To be sure, the release and indemnity clause sought protection for PNC in its role as trustee and “in its corporate capacity.”
We therefore hold that the Circuit Court correctly denied Petitioners’ motion for summary judgment as to Count I. PNC’s request for execution of the release and indemnity clause was only that — a request for consent to take a certain course of action. Moreover, PNC’s request, though expanding upon an interest already possessed, was not in its terms so one-sided as to place impermissibly its own interests ahead of those of Petitioners. PNC’s action, not prohibited by statute, was likewise lawful under the common law. The Circuit Court properly entered judgment in PNC’s favor on Count I of the complaint.
Application of the Inheritance Tax Rate to the Trust
We turn next to Petitioners’ challenge to the Circuit Court’s grant of summary judgment in favor of PNC on Count II of the complaint, which assailed the method used by PNC to calculate the amount of inheritance tax due the Register of Wills prior to distribution. On this issue the parties are
The parties part company, though, on the value of the assets upon which the tax rate should be calculated. Petitioners argue that the tax should be assessed on the $218,130.00 that constitutes the remainder of the original contribution from Marion’s estate, while PNC asserts that $261,306.72, which includes income accrued on that contribution, is the correct figure. Understanding how each party arrives at its respective figure necessitates a brief explanation of the application of inheritance taxes in Maryland.
Section 7-202 of the Tax-General Article imposes a ten percent inheritance tax “on the privilege of receiving property that passes from a decedent and has a taxable situs in the State.” See § 7-204(b) (“The inheritance tax rate is 10% of the clear value of the property that passes from a decedent.”). The tax applies broadly to property passing by devise, including property held in trust. See § 7-201(d)(l)(i). A devisee need not hold a vested, absolute interest in the devised property for the inheritance tax to apply; by law, the inheritance tax is applicable to a range of future and non-absolute interests. See §§ 7-208, 7-209. Pertinent to this case, the inheritance tax applies to property in which a devisee holds only a “subsequent interest,” which is defined as “a vested or contingent remainder, executory or reversionary interest, or other future interest that is created by a decedent and will or may vest in possession after the death of the decedent.” § 7 — 201(e)(1). Because operation of Marion’s will granted the beneficiaries a remainder interest that vested only upon the deaths of Reba Bevard and Robert Kirkwood, Petitioners and their brother each held only a subsequent interest in the assets of the Trust.
Taxation of a subsequent interest proceeds differently than taxation of a present possessory interest because a subsequent interest does not vest into possession when it is created. Under Maryland law, a subsequent interest can be
In terms of the present case, prepayment could have occurred at some reasonable time after Marion’s death in 2002, when Marion’s estate was administered and the Trust was established. Deferred payment could only happen after Reba’s death in 2007, when Reba’s life estate terminated and the beneficiaries’ remainder interest vested in their possession. The personal representative of Marion’s estate opted not to prepay the tax upon creation of the Trust. Petitioners, moreover, filed no application to prepay. They, therefore, necessarily chose to defer payment. This choice is important for a number of reasons, chief among them is that the value used for the calculation of the inheritance tax differs depending on whether a devisee prepays or defers payment.
Pursuant to § 7-210, the general rule for calculating inheritance tax on a subsequent interest is as follows: after a personal representative elects when to pay, the inheritance tax payment is made in the amount of ten percent of the value of the subsequent interest at the time of the payment. This is because Maryland law provides that for inheritance tax purposes, a subsequent interest is valued at the time of the payment, § 7-210(a)(l) & (c)(l)(i), and the tax amount is based on that timely value, § 7-210(a)(2) & (c)(l)(iii). In practice, this means that, if a personal representative prepays, the personal representative pays a ten percent tax on the value of the interest at the time of the devisor’s death. More important, if a personal representative defers payment, the remainderman pays a ten percent tax on the value of the interest
Petitioners argue that PNC miscalculated the amount of inheritance tax due on the assets of the Trust. Specifically, they argue that, in addition to § 7-210, § 7-203(j) applies to the taxation of subsequent interests. That provision states: “The inheritance tax does not apply to the receipt of property that is income, including gains and losses, accrued on probate assets after the death of the decedent.” Petitioners thus argue that, when a devisee chooses to defer payment, the devisee pays inheritance tax on the value of the interest at the time it vests less any income gained or lost during the running of the prior estate. In other words, according to Petitioners, the value of a vested subsequent interest is derived only from the property that was devised from the devisor to the devisee and not from any income that may have accrued during the intervening estate. Consequently, they assert, PNC should have calculated the inheritance tax on the $218,130.00 value of the beneficiaries’ interest that constituted property devised from the estate, instead of using the $261,306.72 figure that included the principal plus accrued income.
In support of their reading of the Tax-General Article, applying § 7-203(j) to the taxation of subsequent interests, Petitioners cite a number of secondary sources and testimonial letters from the legislative history. Their reading, however, relies primarily on two assertions: first, that the assets of the Trust are “probate assets” within the meaning of § 7-203(j); and second, that § 7 — 203(j) can be read in harmony with § 7-210 so as not to render superfluous or nugatory any provision in the statute.
PNC disagrees with Petitioners’ reading of the Tax-General Article, as does Amicus Curiae State of Maryland.
PNC provides the better interpretation of the pertinent provisions. The primary goal of statutory interpre
The first defect in Petitioners’ interpretation is the definition Petitioners assign to “probate assets,” as that term is used in § 7-203(j). We agree with the State, amicus in this appeal, that income earned by a trust during the life tenancy of a beneficiary is not income “accrued on probate assets.” As the State points out, neither the Tax-General Article nor the Estates and Trusts Article explicitly defines “probate assets,” but ET § 1-301 provides insight into the term’s meaning. That section, in outlining the type of property subject to the provisions of the Estates and Trusts Article, provides that “[a]ll property of a decedent shall be subject to the estates of decedents law, and upon the person’s death shall pass directly to the personal representative, who shall hold the legal title for administration and distribution.” ET § l-301(a). We can surmise then, that whether an asset is a “probate asset” is linked inexorably to whether legal title to that asset is held by a personal representative for administration and distribution.
We agree with PNC and the State that the personal representative of the estate did not hold legal title to the assets of the Trust after Reba’s life estate was established.
The assets also could not qualify as “probate assets” because such a reading of § 7-203(j) would conflict with the mandates of § 7-210. As our colleagues on the Court of Special Appeals illustrated, Petitioners’ reading of § 7-210 forces an interpretation that does not comport with the statute. Specifically, § 7 — 203(j) can only be made to harmonize with § 7-210 if the latter, parallel to § 7-203(j), excepts income from the calculation of inheritance tax on subsequent interests. In order to read § 7-210 as doing that, one would need to accept that § 7-210(a)(2) governs the determination of inheritance tax when the personal representative defers payment. There is no conceivable support for such a contention.
Subsections (a) and (c) of § 7-210 are distinct subsections. Subsection (a) governs the valuation and calculation of inheritance tax for personal representatives who elect to prepay, while subsection (c) does the same for those who defer payment. Subsection(c)(l)(i) begins by directing that “the whole property shall be valued when the subsequent interest vests in possession.” Subsection (c)(l)(ii) then adds that “the value of the subsequent interest shall be valued when it vests in possession in the manner stated in subsection (a).” The last six words of that subsection — “in the manner stated in subsection (a)” — direct the reader to the provision in subsection (a)(1) that prescribes how a subsequent interest is valued (“subtracting the value of all preceding and concurrent interests from the value of the whole property”). Contrary to Petitioners’ argument, those six words do not direct the reader to subsection (a)(2), which describes how the inheritance tax is calculated.
Only § 7 — 210(c)(l)(iii) was intended by the General Assembly to govern the determination of the amount of inheritance tax owed on a subsequent interest when a personal representative chooses to defer payment. Under Petitioners’ interpretation, § 7-210 cannot be harmonized with § 7-203(j). Section 7-203(j) excepts income from the inheritance tax, and we have repeatedly interpreted the language of § 7 — 210(c)(l)(iii) as including income in the inheritance tax calculation. See Mercantile-Safe Deposit & Trust Co. v. State, 264 Md. 455, 464, 287 A.2d 502, 507 (1972) (noting that when payment is postponed under Article 81 § 161, which is now § 7-210(c), the remainderman “pays a tax on the value of the interest at the time it comes into possession”); Shaughnessy, 198 Md. at 626, 85 A.2d at 41 (stating that the statutory inheritance tax scheme provides that “the taker pays on the basis of what he gets, whether more or less than the value at the date of the testator’s death”); Lilly, 156 Md. at 105, 143 A. at 665 (noting that the inheritance tax is a tax “on the transmission of the estate, and is a premium for the enjoyment of the benefit thereby secured,” therefore the tax must be valued on “the
PNC correctly included the income that accrued on the assets of the Trust in its valuation of the Trust for inheritance tax purposes. The Circuit Court properly entered judgment in PNC’s favor on Count II.
III.
In conclusion, PNC’s request for execution of the Release Agreement did not contravene Maryland common law. The request was simply that — a request — and it did not ask for a reorientation of the parties’ interests. It only asked to redefine the scope of protection and indemnity to which PNC was already entitled, in return for a less costly and more efficient distribution of trust funds. Moreover, PNC was correct in its calculation of the inheritance tax owed on the assets of the Trust. Section 7 — 203(j), excepting income on “probate assets” from the inheritance tax equation, is not applicable to the tax scenario presented here. The Circuit Court therefore was legally correct in granting summary judgment in favor of PNC.
JUDGMENT OF THE COURT OF SPECIAL APPEALS AFFIRMED. COSTS TO BE PAID BY PETITIONERS.
BELL, C.J., GREENE and ADKINS, JJ., Dissent.
. All statutory references hereafter are to the Tax-General Article (198 8, 2010 Repl.Vol.), unless otherwise specifically noted.
. Section 7-204 provides, in pertinent part:
(b) Collateral tax rate. — The inheritance tax rate is 10% of the clear value of the property that passes from a decedent.
. The Maryland Tax Code provides two different methods of paying the inheritance tax. Pursuant to § 7-219, the tax may be prepaid. Section 7-219 provides:
(a) Application. — Within a reasonable time after the valuation of a less than absolute interest in property that passes from a decedent, an application to prepay the inheritance tax for a subsequent interest in the same property may be filed with the register of the county where the inventory was filed under § 7-225 of this subtitle.
(b) Applicant. — (1) An application under subsection (a) of this section may be filed by or for a person or class of persons, whether or not then in being, in whom may vest a subsequent interest in the property valued.
(2) An application under subsection (a) of this section may not be made by or for a person who, under the instrument that created the property interests, has no interest other than the possibility of becoming an appointee by the exercise of a power of appointment.
(3) A person who only has the interest described in paragraph (2) of this subsection is entitled to receive the benefits of prepayment under § 7-210(b) of this subtitle.
Section § 7-210 provides:
(a) If application to prepay tax is filed. — (1) If an application to prepay inheritance tax for a subsequent interest in property is filed under § 7-219 of this subtitle, the value of the subsequent interest is*15 determined by subtracting the value of all preceding and concurrent interests from the value of the whole property.
(2) The total inheritance tax on all interests in the property valued shall equal the inheritance tax that would have been due if an absolute interest in the property passed from the decedent.
(b) If interest vests in nonapplicant. — (1) If a subsequent interest in property ultimately vests in possession in a person other than the person by or for whom an application to prepay the inheritance tax was filed under § 7-219 of this subtitle and if the inheritance tax determined under the prepayment application was paid:
(1) the subsequent interest shall be revalued when it vests in possession; and
(ii) the inheritance tax due on the subsequent interest shall be redetermined based on the value of the interest when it vests in possession and on the relationship of the original decedent to the person in whom the interest ultimately vests in possession.
(2) A deduction from the inheritance tax calculated under paragraph (l)(ii) of this subsection for prepaid inheritance tax on the interest shall be allowed.
(c) If no application to prepay tax is filed or no tax paid. — (1) If an application to prepay the inheritance tax for a subsequent interest is not filed in accordance with § 7-219 of this subtitle or if the inheritance tax determined for the subsequent interest under a prepayment application is not paid when due under § 7-217(d) of this subtitle:
(1) the whole property shall be valued when the subsequent interest vests in possession;
(ii) the value of the subsequent interest shall be valued when it vests in possession in the manner stated in subsection (a) of this section; and
(iii) the inheritance tax due on the subsequent interest shall be determined based on the value of the interest when it vests in possession and on the relationship of the original decedent to the person in whom the interest ultimately vests in possession.
(2) A deduction for inheritance tax previously paid on any interest in the property may not be allowed.
(d) When applicants pay different rates. — (1) If the inheritance tax applies to 1 or more of the persons by or for whom an application to prepay the inheritance tax is filed under § 7-219 of this subtitle and the exemption under § 7-203(b) of this subtitle applies to others, the inheritance tax applies to the subsequent interest.
(2)(i) On application of a party in interest, the inheritance tax due may be apportioned among the persons by or for whom the application to prepay the inheritance tax is filed.
(ii) After the apportionment, each of those persons is responsible only for the amount of the inheritance tax apportioned to that person.
. ET § 14-103 provides, in pertinent part:
(e) Final distribution. — Upon the final distribution of any trust estate, or portion of it, an allowance is payable commensurate with the labor and responsibility involved in making the distribution, including the making of any division, the ascertainment of the parties entitled, the ascertainment and payment of taxes, and any necessary transfer of assets. The allowance is subject to revision or determination by any circuit court having jurisdiction. In the absence of special circumstances the allowance shall be equal to one half of one percent upon the fair value of the corpus distributed.
. As mentioned, Petitioners’ brother, Robert Garth Kirkwood, a resident of Florida, did not join the suit. PNC moved to dismiss the complaint, citing Maryland Rule 2-211 and arguing that his joinder was "necessary and indispensable for relief on the merits and as requested by the plaintiffs.” After a hearing, the Circuit Court denied the motion, reasoning that the court could not join Robert as a plaintiff, defendant, or involuntary plaintiff, pursuant to Rule 2-211(a)(2), because it could not exercise personal jurisdiction over him. That decision has not been appealed.
. Rule 10-501 provides, in pertinent part:
(a) Who may file, fiduciary or other interested person may file a petition requesting a court to assume jurisdiction over a fiduciary estate other than a guardianship of the property of a minor or disabled person.
. Petitioners have not pursued in this Court their appeal of the Circuit Court's judgment in PNC’s favor on Count III. Petitioners only mention in their brief that "[b]oth parties have always agreed that the result in Count III follows the result in Count II.” Because Petitioners make no "stand alone” challenge to Count III, we have no cause to, and thus do not, address the Circuit Court's entry of judgment in favor of PNC on Count III, nor do we comment on the parties’ agreement that "the result in Count III follows the result in Count II.”
. All references hereafter to the Restatement are to the Restatement (Third) of Trusts, unless otherwise noted.
. Marion Bevard’s Last Will and Testament provides in Section 5.2.D.(3):
The receipt and release of the person or institution to whom any distribution is made pursuant to the terms of Sections 5.2.D.(1) or 5.2.D.(2) shall be a sufficient and complete discharge of the fiduciaries making such distribution with respect to such distribution.
Section 5.2.D.(3), however, is applicable, by its own terms, only to distributions made to minors, disabled beneficiaries, and for education or medical care. It is not applicable to distributions like the one at issue in the present appeal and therefore not applicable to resolution of this case.
In regards to applicable statutes, we have interpreted ET § 9-111 to "allow[] a personal representative to obtain a release from legatees even when acting pursuant to the distribution order of an orphans' court, and such a court may order those legatees to sign the release when the personal representative so requests.” Allen v. Ritter, 424 Md.
. The dissent accuses PNC of not providing the beneficiaries with "full and complete information” explaining their rights sufficient to overcome this prohibition against self-interested dealings. We do not dispute that a trustee has the duty to provide beneficiaries with "full information and complete understanding of all the facts.” McDaniel v. Hughes, 206 Md. 206, 220, 111 A.2d 204, 210 (1955). But that is not the question before this Court, and the parties did not brief or argue that issue on appeal. Instead, we are asked to decide whether a Maryland trustee lawfully can request the type of indemnity PNC sought here, not whether PNC's release agreement provided sufficient information to the beneficiaries. We note, however, that trustees seeking similar indemnification agreements in the future should adhere to the principle of "full information” in order to allow beneficiaries to make informed decisions.
. Maryland Rule 10-103(f)(2) defines "interested person” as, among other things, "a current income beneficiary of the fiduciary estate.”
. We note that such language would not extend protection to other services provided to the Trust by PNC. For example, although the trust department of a financial institution could obtain a release of liability and indemnification agreement for the activities of its trust department in administering the trust, it could not seek a release of liability of its securities brokerage for brokerage services provided to the trust, if the trustee happened to employ the institution’s own brokerage division to execute trades on behalf of the trust. Otherwise, the financial institution would effectively use its position as trustee to obtain a release for its securities division, which would appear at odds with the duty of loyalty.
. For reference, we offer again the pertinent text of § 7-210:
(a) If application to prepay tax is filed. — (1) If an application to prepay inheritance tax for a subsequent interest in property is filed under § 7-219 of this subtitle, the value of the subsequent interest is determined by subtracting the value of all preceding and concurrent interests from the value of the whole property.
(2) The total inheritance tax on all interests in the property valued shall equal the inheritance tax that would have been due if an absolute interest in the property passed from the decedent.
* * *
(c) If no application to prepay tax is filed or no tax paid. — (1) If an application to prepay the inheritance tax for a subsequent interest is not filed in accordance with § 7-219 of this subtitle or if the inheritance tax determined for the subsequent interest under a prepayment application is not paid when due under § 7-217(d) of this subtitle:
(1) the whole property shall be valued when the subsequent interest vests in possession;
(ii) the value of the subsequent interest shall be valued when it vests in possession in the manner stated in subsection (a) of this section; and
(iii) the inheritance tax due on the subsequent interest shall be determined based on the value of the interest when it vests in possession and on the relationship of the original decedent to the person in whom the interest ultimately vests in possession.
(2) A deduction for inheritance tax previously paid on any interest in the property may not be allowed.
Article V, Section 6 of the Maryland Constitution provides, "It shall be the duty of the Clerk of the Court of Appeals and the Clerks of any intermediate courts of appeal, respectively, whenever a case shall be brought into said Courts, in which the State is a party or has interest, immediately to notify the Attorney General thereof.” Following oral argument in this case, this Court, realizing that the State of Maryland generally has an interest in the payment and collection of taxes and in the proper interpretation and application of the Maryland Tax Code, invited the State of Maryland to submit a Memorandum of Amicus Curiae. The State did so on behalf of the Comptroller of the Treasury and the Registers of Wills.
Dissenting Opinion
Dissenting.
Just last term, this Court reiterated that “in no state are trustees, whether individuals or corporations, held to a stricter account than in Maryland.” D’Aoust v. Diamond, 424 Md. 549, 605, 36 A.3d 941 (2012) (citation and quotation marks omitted). The Majority’s opinion in this case is a sharp
Alternatively, the Majority holds that, even if the release and indemnification agreement breached the trustee’s duty of loyalty, a beneficiary may always consent to a breach of trust. In so holding, the Majority ignored the issue of whether the trustee provided the beneficiaries with full and complete information, which is required in any dealings between trustees and beneficiaries, and concluded all too swiftly that the beneficiaries in this case were in a position to give a “valid, informed” consent.
I do not share the Majority’s view and respectfully dissent. In this case, the trust beneficiaries (“Beneficiaries”) sought a declaratory judgment on the issue of whether “PNC’s policy of requiring [a broad release and indemnification prior to the distribution of trust funds] violates Maryland law.”
I. PNC’s Practice of Seeking Release and Indemnification
No one disputes that it is PNC’s common practice to seek release and indemnification agreements such as the one at
II. The Impermissible Breadth of the Agreement
No one denies that the Agreement would give PNC broader protection from liability than a court order. The Circuit
“Material ” Differences the Majority Noticed
The Majority acknowledges two aspects in which the Agreement went too far. First, the Agreement “sought protection for PNC in its role as trustee and ‘in its corporate capacity.’ ” Maj. Op. at 29, 54 A.3d at 728. The Majority admits that this clause would allow PNC to “effectively use its position as trustee to obtain a release for its securities division, which would appear at odds with the duty of loyalty.”
The dichotomy between the Majority’s perception of the “material” differences and its holding is striking. The Majority minimizes the differences by later characterizing them as “differences ... of degree rather than kind,” id. at 29, 54 A.3d
The Indemnification Clause
Supplementing the two “material” differences noted by the Majority, I add a third, arguably the most significant one: the indemnification of PNC from “any and all liabilities, relating in any way to its administration of the Trust.” Unlike a court order approving trust funds distribution, which would have discharged PNC from liability to the Beneficiaries, but not third parties; and unlike the limited common-law indemnity right, this broad indemnification clause shifts all liability for the trustee’s actions to the beneficiaries, even if the liability arose out of the trustee’s own negligence. This shift is significant because a trustee’s negligence is a risk it assumes in undertaking the often-lucrative
The Majority, however, fails to see this third material difference by focusing exclusively on the release clause and whitewashing the indemnification clause, reading it in such a way that it only pertains to expenses, surcharges, and costs, but not to claims, liabilities, and causes of action by third parties.
The Majority, however, dilutes the indemnification clause into something it considers palatable by redacting the terms “any claims,” “demands,” and “causes of action” and limiting it to “surcharges,” “costs,” and “expenses.”
Under common law, upon full disclosure by the trustee, a beneficiary generally may agree to release a trustee from
Barred claims are, for example, a claim for loss by the beneficiary caused by breach of duty of loyalty, breach of duty of impartiality, breach of trust by selling trust property, breach of trust by improperly investing funds, and breach of trust by failing to make proper investment. Restatement (Second) of Trusts § 183, §§ 206 through 212. So long as the trustee makes no “misrepresentation or concealment in presenting [the] account or in obtaining the approval of the court,” the court’s approval of the final accounting renders these beneficiaries’ claims against the trustee res judicata. Restatement (Second) of Trusts § 220 cmt. a. A release or res judicata, however, does not go as far as the Agreement.
These third-party claims may be significant, too. The Restatement (Second) of Trusts gives examples:
[ ] A is a trustee of a tailoring business. He negligently allows the floor of the premises to fall into disrepair. A customer falls through the floor and breaks an arm. Although A is liable to B, he is not entitled to indemnity out of the trust estates.
[ ] A is trustee of an apartment house. By statute owners of apartment houses are required to maintain escapes. A fails to provide such a fire escape. The house burned and as a result of the lack of a fire escape B is in the fire. Although A is liable to B, he is not entitled to indemnity out of the trust estate.
[ ] A is trustee of a grocery business. He employs B to deliver groceries. A knows that B is not a competent driver. In delivering groceries by automobile B negligently runs over C. Although A is liable to C, he is not entitled to indemnity out of the trust estate.
Restatement (Second) of Trusts § 247 cmt. d.
As these examples illustrate, under common law, a trustee’s right to indemnification is limited. Indemnity for liability upon a contract with third parties or for liability in tort to third persons is only available to a trustee if the liability “was
Not so for PNC under the Agreement. The Agreement sought to expand PNC’s protection — at the Beneficiaries’ expense — to include “any and all losses, claims, demands [and] causes of action.” In this regard, the Agreement is impermissibly broad. I see no justification for shifting liability for potential misdeeds of the trustee over to the beneficiaries.
III. Lack of Full and Complete Disclosure
The Majority brushes off the Trustee’s over-reaching, preferring instead to focus on the doctrine that “a trustee may engage in self-interested course of action so long as the beneficiaries provide valid, informed consent.” Maj. Op. at 26, 54 A.3d at 726 (citations omitted). In supporting its conclusion that a valid and informed consent would have negated a breach of the duty of loyalty, the Majority quotes comment c(3) to Section 78 of the Restatement (Third) of Trusts, which, inter alia, states: “A particular transaction that would otherwise violate a trustee’s duty of loyalty may be authorized by consent properly obtained from or on behalf of all of the trust beneficiaries.” Maj. Op. at 26, 54 A.3d at 726. To the Majority, PNC’s efforts to get the Beneficiaries to sign the Agreement are “at bottom, [an] arm’s length request to exchange increased protection and indemnity for a quicker and less costly distribution of trust funds.” Id. at 29, 54 A.3d at 728. The Majority comforts itself with the idea that the Beneficiaries “retained the choice to accede to that request,
The Majority’s analysis of consent, however, misses an important point: a beneficiary cannot properly consent to a breach of fiduciary duty without having full and complete information relating to the breach.
This is particularly true when the trustee has superior knowledge of the transaction at issue, such as when the trustee is an attorney for the beneficiaries and is “experienced in the law.” Id. In those instances, “[transactions for the personal advantage of a trustee ... are even more improper than similar dealings between laymen,” and “[t]o sustain such a tranaction [sic] the trustee must show that there was a full and complete disclosure on his part of all the facts essential to an intelligent understanding by the beneficiaries of the subject matter and the consequences of the transaction.” Id. at 221, 111 A.2d at 211.
PNC did not provide the Beneficiaries with full information explaining their rights or the consequences of their signing of the Agreement.
Furthermore, PNC’s demanding tone demonstrates that PNC failed to give the Beneficiaries “full and complete information” or explain that they were free to reject the Agreement’s sweeping provisions and go to court. In at least two communications with the Beneficiaries, PNC stated that— unless the Beneficiaries executed the Agreement — it would not be “in a position” to distribute the trust funds. For instance, in the closing line of the letter accompanying the Agreement, PNC stated: “Upon receipt of the executed Releases from all of the distributees, we will be in a position to have the cash disbursed.” (Emphasis in original.) Even the Circuit Court, which ultimately held that there was no “demand,”
Unlike the Majority, I do not find comfort in the Beneficiaries’ purported ability to reject a disadvantageous proposal.
For these reasons, I dissent.
Chief Judge BELL and Judge GREENE have authorized me to say that they join this dissenting opinion.
. In addition to the declaratory judgment on this issue, in their Complaint filed on April 28, 2008, the trust beneficiaries ("Beneficiaries”) sought loss of income, prejudgment interest, and attorney fees, all resulting from PNC's insistence that the Beneficiaries release and indemnify PNC prior to the trust distribution. The Complaint’s other two counts were for declaratory relief in relation to the inheritance tax and PNC’s final distribution fee. I concur in the Majority’s holdings with respect to these other counts.
. The Waiver, Receipt, Release and Indemnification (“Agreement”) began by stating:
the parties in interest have requested that PNC distribute the Trust assets to the beneficiaries ... without the filing, audit and adjudication ... with a court of competent jurisdiction ..., and PNC has agreed to do so, provided that the parties in interest waive the filing with and auditing of an account of PNC’s administration of the Trust with the Court and release and indemnify PNC from any and all claims and liabilities relating in any way to its administration of the Trust.
. Elaborating further, PNC maintained that the release and indemnification agreement in lieu of seeking approval of an accounting by a court "is based more on practice than the procedure of asking the Distributees if they want to incur additional expenses to Petition the Court, legal fees, etc. Accordingly, there is no formal ‘request.’ ”
. According to PNC, “Trustees, both institutional and individual, request such Agreements on a daily basis.”
. The Circuit Court went on to say that although "it must have been frustrating ... it was not improper."
. Without further elaboration, the Majority chose to read this broad clause narrowly by noting in a footnote that "such [corporate capacity] language would not extend protection to other services provided to the trust by PNC.” Maj. Op. at 29 n. 12, 54 A.3d at 728 n. 12. I would, instead, declare this provision illegal and unenforceable.
. Section 14-103 of the Trusts and Estates Article sets forth the percentages for income commissions, corpus commissions, sales commissions, and final distribution allowances. Md.Code Ann., Est. & Trusts (1974, 2002 Repl.Vol.), § 14-103. The percentages of income commissions vary, depending on the nature and the size of the trust’s income. For instance, the commissions "upon all income from real estate, ground rents, and mortgages collected in a year” are six percent. Id. at (b)(1).
. The gravity of such a mis-reading is magnified when the risk is not disclosed to the Beneficiaries, as I discuss below.
. The Majority’s reading of the term "indemnifies” only in conjunction with the terms "surcharges,” "costs,” and "expenses” does not comport with the parties' understanding of the clause. PNC did not limit the indemnification clause to expenses as the Majority did. Indeed, in the preamble to the Agreement, PNC expressly stated that by way of the Agreement, the beneficiaries would "release and indemnify PNC from any and all claims.” The Beneficiaries also read the term "indemnifies” to pertain not only to expenses but to the other terms contained within paragraph 6 of the Agreement, including "any and all losses, claims, demands [and] causes of action.” To illustrate, in his letter to the motions court, one of the beneficiaries complained:
I do not own a law dictionary; but, in my dictionary of the English language, the word "indemnify,” is defined as: "compensate (someone) in respect of harm or loss; secure (someone) against legal responsibility for their actions.” ... So, in order for me to receive my inheritance, my 25% of the Trust, I have to agree to indemnify the bank from any claims, losses, liabilities, legal fees etc. related to this Trust. This is an intolerable situation.... I [will not] sign a document, which promotes deflection of personal responsibility from the bank onto me.
. The parties appreciated this difference too. At the last summary judgment motion hearing, the Beneficiaries’ counsel emphasized this difference, arguing that, although PNC continuously referred to the Agreement as a “Release Agreement,” “[i]t wasn't [just] a release. It was a waiver and indemnification in which PNC Bank asked the beneficiary to indemnify and hold harmless PNC from its entire administration of the trust estate.” At oral argument before this Court, PNC likewise acknowledged that “[T]he release is probably better than a court order” because it contains an indemnity clause. Oral Argument at 10:34, Hastings v. PNC Bank, NA (No. 109, Sept. Term 2011), available at http://www.courts.state.md.us/coappeals/webcastarchive. html#apri!2012.
. As this Court has explained on more than one occasion, res judicata bars "the same parties from litigating a second lawsuit on the same claim, or any other claim arising from the same transaction or series of transactions and that could have been — but was not — raised in the first suit.” ’ Anne Arundel County Bd. of Educ. v. Norville, 390 Md. 93, 106, 887 A.2d 1029, 1036 (2005) (quoting Black’s Law Dictionary 1336-37 (8th ed.2004)(emphasis added)).
. Similarly, the current Draft of the Restatement (Third) of Trusts discusses the "now-prevalent practice” of authorizing third parties to file suits against the trustee in its representative capacity, "whether or not the trustee is personally liable, with the trustee protected from personal liability to the extent the trustee acted properly.” Restatement (Third) of Trusts, (Tentative Draft No. 6, March 14, 2011), § 106, Reporter’s Notes. Under the Draft, a trustee acts "properly” if it has not "committed a breach of trust” or “is [not] personally at fault” for the liability. Id. at § 106.
. Furthermore, in obtaining the consent, the "trustee must not violate other fiduciary duties, such as the duty of prudence or impartiality----” Restatement (Third) of Trusts § 78 cmt. g.
. As discussed earlier, the Agreement not only failed to contain full information, but it also contained a misrepresentation. The Agreement stated that the Beneficiaries — rather than PNC — was the party initiating distribution of trust funds without court approval. Although this may seem like a minor misrepresentation, because there are four beneficiaries in this case (each receiving the Agreement), this statement has a great potential to mislead. After all, each of the four beneficiaries may
. As a PNC lawyer has written, it may be "time consuming and difficult to get beneficiaries to understand” the process of trust termination. Robert Owings, Esq., C.F.P., PNC Bank, Closing Up Shop: Wrapping Up the Trust, in Being the Trustee: Understanding Role and Responsibilities 173 (MSBA 2012). But, as a trustee, PNC owes trustee beneficiaries the duty to provide full and complete information.
. PNC seemingly was impatient with explanations. Although the Beneficiaries insisted upon explanation of PNC’s tax and fees calculations, those requests seem to have irritated PNC. In one letter to the Beneficiaries, PNC wrote: “The trust document that you request is in your possession.... Your other questions about fees and taxes are adequately addressed in [prior] correspondence to you. Nevertheless, I will attempt to dissect this for you.’’
. The Beneficiaries did not appeal this finding.
. The court went on to say that “although that certainly is the import of PNC's correspondence as well as Mr. Lyons [sic] correspondence on behalf of PNC Bank, PNC Bank didn’t in fact do that. They did release some of the money. Unfortunately that happened just as the Plaintiffs [sic] law suit was in the mail to the Court to be filed.”