October 27, 2009
Previously published on October 22, 2009
In 1976, John Koons and his wife, Ethel, created a trust for their children and funded it with thousands of shares of stock in their family company, Central Investment Corporation (CIC), which owned a brewery and bottling companies. The Koonses appointed their son, Bud, as trustee. Bud also served as president and CEO of CIC. The trust was divided into two separate trusts – one for Bud's children, called Share A; and one for the children of Bud's sister, Betty Cundall, called Share B.
The next year, Betty created her own trust for the benefit of herself, her spouse, and her children, and funded it with stock in a family holding company that held only CIC stock. Betty named a predecessor to U.S. Bank as trustee. U.S. Bank served as trustee until 1996, and was also the commercial banker for CIC.
In 1983, Bud offered to buy all of the family's shares in CIC, including the shares held in Share B and the Cundall trust, at $155 per share, which the family refused. Around the same time, CIC purchased its own stock from another shareholder for $328 per share. Eventually, Bud purchased the CIC shares from Share B and the Cundall trust for $210 per share. The Cundall family members, as beneficiaries of Share B and the Cundall trust, signed releases at the time of the sale releasing Bud and U.S. Bank from any and all liability in connection with the sale.
Bud died in 2005. One of Betty's children, Michael, alleged that after Bud's death, he discovered for the first time that CIC was sold for $400 million, and as a result of Trust B having sold its CIC stock for a low price, Trust B was worth only $800,000 while Trust A (which was for the benefit of Bud's family) was worth more than $30 million.
Michael was appointed as successor trustee of Trust B in November 2005, and four months later sued Bud's estate, U.S. Bank, other trustees of related trusts, and more than 20 members of Bud's family and the Cundall family. Michael's claims were based on the allegations that: (1) Bud breached his fiduciary duties as trustee by acquiring CIC shares through intimidation, coercion, and misrepresentation about the value of the shares; and (2) U.S. Bank breached its fiduciary duties by enabling the sale and knowingly concealing the value of the CIC shares.
All of the defendants moved to dismiss the claims. U.S. Bank moved to dismiss based on the statute of limitations and the releases, and other defendants moved to dismiss on lack of jurisdiction and failure to tender back the consideration received in the sale before filing suits. The trial court granted the motions to dismiss.
On appeal, the First District Court of Appeals affirmed the dismissal of U.S. Bank on statute of limitations grounds, but rejected the application of the tender offer rule in a fiduciary context.
The First District also found the releases "highly suspect" and concluded that in order for the releases to be valid, the trustees had to meet the burden of showing that the trustees acted "with the utmost good faith, and exercised the most scrupulous honesty toward the beneficiaries, placed the beneficiaries' interests before their own, did not use the advantage of their trustee positions to gain any benefit at the beneficiaries' expense, and did not place themselves in a position in which their interests might have conflicted with their fiduciary obligations." The First District found that the claims against Bud and the other trustees were not barred by the statute of limitations.
On appeal, the Ohio Supreme Court found that all of the claims were barred by the statute of limitations because: (1) the rule that the statute of limitations does not run until the trustee repudiates the trust only applies where the trustee's action is "surreptitious or obscured and remains so until the trustee's death or removal"; and (2) where the beneficiary knows about the breach of duty, or by the exercise of reasonable skill could have learned of it, the statute of limitations begins to run at the time of the breach.
The court found that the beneficiaries knew or should have known about the alleged fraud and wrongdoing at the time of the sale of the CIC stock in 1984, and therefore the statute of limitations began to run at that time. Consequently, the court held that all of the claims were time barred.
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