• Hale v. Moore, 2005 CA 001895 (Kentucky Court of Appeals, January 4, 2008)
  • April 3, 2008
  • Law Firm: McGuireWoods LLP - Richmond Office
  • Claudia Sanders, widow of the late Colonel Sanders of Kentucky Fried Chicken fame, died in 1996 a resident of Shelby County, Kentucky, leaving a will, codicil, and revocable trust. The lawyer that drafted Mrs. Sanders’ estate planning documents, Maria Fernandez, was named as executrix under the will and was appointed by the court to serve in that capacity without objection. Wachovia Bank was the trustee under Mrs. Sanders’ revocable trust agreement.

    The will provided for the payment of Mrs. Sanders’ debts, costs, and taxes, a modest specific bequest to a church, and for the remaining assets to be distributed to the revocable trust. The trust which was governed under its terms by Pennsylvania law, provided a “pour back” to the estate for the payment of debts, costs, and taxes, and for the distribution of the trust assets in twelve shares to various relatives, with the share set aside for Mrs. Sanders’ deceased daughter to be distributed to two colleges.

    Mrs. Sanders’ assets included commercial and residential real property managed by a North Carolina corporation that she created. Upon Mrs. Sanders’ death, Fernandez claimed to also have taken over as CEO of the corporation until its dissolution in 2003. Fernandez and her law firm, in the course of administering Mrs. Sanders’ estate, also administered the estates of Mrs. Sanders’ sister and son and charged the expenses to Mrs. Sanders’ estate without authorization in Mrs. Sanders’ will. There were no engagement letters for any of the work done by Fernandez or her firm.

    In 1999, Wachovia Bank as trustee under Mrs. Sanders’ trust agreement was prepared to distribute the trust assets, but the estate was not yet settled. Wachovia obtained an agreement of all beneficiaries to distribute the trust assets to Fernandez for distribution to the beneficiaries, to apply Pennsylvania law to the apportionment of estate taxes, and to discharge Wachovia from any further obligations as trustee.

    On the federal and state estate tax returns for Mrs. Sanders’ estate, Fernandez listed her executor’s fee as $175,000. Fernandez billed only $7,227 of this to the probate estate. The remainder of the fee was billed to the trust ($50,000) and the corporation (over $110,000) for unspecified work, and Fernandez admitted doing only nominal work for these entities.

    In 2000, some of the beneficiaries began expressing concerns about Fernandez’s actions, and the fifth accounting was settled by the district court over the concerns of some beneficiaries. In 2004, five of the beneficiaries expressed concerns about Fernandez’s fees, and filed exceptions to the sixth accounting with the district court objecting to the fees, objecting to the amount of the distributions to the two colleges (which were not reduced for a portion of estate taxes - unlike the shares for the individual beneficiaries which were reduced for taxes), and seeking an accounting.

    Late in 2004, the district court held a hearing on the objections. Following the hearing and before a decision by the district court, the beneficiaries filed a new action in the circuit court against Fernandez. Fernandez moved to dismiss on jurisdictional grounds, which the court ultimately granted and the beneficiaries appealed.

    In January of 2005, the district court approved Fernandez’s sixth accounting, approving the fees paid to Fernandez as reasonable and approving the distributions to the charities on the basis that Pennsylvania law controlled the apportionment of taxes rather than Kentucky law. Pennsylvania law governed the trust, and did not apportion tax to the charities while Kentucky law governed the probate estate, and did apportion tax to the charities. The beneficiaries filed a motion to vacate the district court’s decision on jurisdictional grounds. The district court rejected the beneficiaries’ motion and approved the seventh and final accounting filed by Fernandez. The beneficiaries filed an appeal of the district court’s decision with the circuit court.

    In January of 2006, the circuit court reversed the district court and ruled that the apportionment of taxes was governed by Kentucky law, that the releases signed by the beneficiaries were void because of the failure of Fernandez to provide the beneficiaries with material facts about the releases and tax apportionment, and the taxes should have been paid “off the top” with a corresponding reduction in the shares for the colleges. The circuit court also reversed the district court’s approval of the fees paid to Fernandez finding that Fernandez had charged an excessive fee, and remanded the case to the district court for further proceedings. Fernandez appealed.

    The jurisdictional appeal and the appeal of the circuit court’s decision against Fernandez were consolidated. On appeal the Kentucky Court of Appeals approved the circuit court’s jurisdiction and voided any action of the district court after the filing of the complaint with the circuit court.

    The Court of Appeals affirmed the circuit court’s application of Kentucky law to the apportionment of taxes on the basis of Kentucky being Mrs. Sanders’ domicile and the Court’s conclusion that nothing in the will evidenced intent by Mrs. Sanders to give the colleges special treatment. The Court of Appeals disregarded the release signed by the beneficiaries that provided for the application of Pennsylvania law, on the basis that the taxes were paid well before the release was signed, the beneficiaries were not fully apprised of the consequences of signing the releases by either Fernandez or Wachovia, and therefore the releases were suspect.
    The Court of Appeals also affirmed the circuit court’s finding that Fernandez had charged an excessive fee on the basis that Fernandez (1) based the fee on the value of the gross taxable estate rather than probate estate, contrary to the Kentucky statute, (2) took a fee far in excess of the fee allowed by statute without being able to explain why, (3) only performed ordinary and minimal tasks, (4) failed to provide an itemized bill for services, (5) outsourced most of the substantive work, (6) failed to disclose the fees paid out of the trust and the corporation to the district court, and failed to provide actual services to those entities, (7) served as both attorney and executor without permission in the will contrary to Kentucky law, and (8) improperly settled other estates and charged the costs to Mrs. Sanders’ estate.