April 15 2014
DA 13-0576
IN THE SUPREME COURT OF THE STATE OF MONTANA
2014 MT 100N
RICHARD KAVON, ARTHUR KAVON and MICHAEL KAVON,
Petitioners and Appellants,
v.
HOWARD KAVON and FREDERICK KAVON, Trustees,
Respondents and Appellees.
APPEAL FROM: District Court of the Fifteenth Judicial District, In and For the County of Sheridan, Cause No. DV-46-2011-51 Honorable David Cybulski, Presiding Judge
COUNSEL OF RECORD:
For Appellants:
Laura Christoffersen, Christoffersen & Knierim, P.C., Culbertson, Montana
For Appellees:
Loren J. O’Toole II, Brad W. Fjeldheim, O’Toole Law Firm, Plentywood, Montana
Submitted on Briefs: March 26, 2014 Decided: April 15, 2014
Filed:
__________________________________________ Clerk Justice Laurie McKinnon delivered the Opinion of the Court.
¶1 Pursuant to Section I, Paragraph 3(d), Montana Supreme Court Internal Operating
Rules, this case is decided by memorandum opinion and shall not be cited and does not
serve as precedent. Its case title, cause number, and disposition shall be included in this
Court’s list of noncitable cases published in the Pacific Reporter and Montana Reports.
¶2 Richard Kavon, Arthur Kavon, and Michael Kavon appeal from an order of the
Fifteenth Judicial District Court, Sheridan County, denying their Petition for Removal of
Trustees. We affirm.
¶3 This dispute arises from the estate plan of Paul Kavon, father of Richard, Arthur,
and Michael, as well as Howard Kavon. Paul was a farmer in Sheridan County and was
the principal shareholder in KCR Ranch, Inc., a family farm corporation. Paul placed his
KCR Ranch stock into the Paul M. Kavon Trust. KCR Ranch has 3,000 shares of
outstanding corporate stock: Richard owns 300 shares, Arthur owns 250 shares, and the
Paul M. Kavon Trust owns the remaining 2,450 shares. KCR Ranch owns several
thousand acres of crop land, farm buildings, and two houses located on the farm property.
KCR Ranch’s mineral interests were placed in the Kavon Mineral Trust (Mineral Trust).
¶4 The Paul M. Kavon Trust was an estate planning tool for Paul. It created the KCR
Ranch Trust (Ranch Trust) effective upon Paul’s death. All of the stock that Paul owned
at the time of his death—i.e., 2,450 shares, or approximately 82 percent of KCR Ranch’s
corporate stock—was transferred into the Ranch Trust. The corporate stock is the only
property owned by the Ranch Trust.
2 ¶5 The beneficiaries of the Paul M. Kavon Trust and the Ranch Trust are Paul’s four
sons. The beneficiaries are to share equally in the corporation considering first any
individually owned shares. Paragraph 10(a) of the Paul M. Kavon Trust outlines the
process for distribution:
The Trustees shall first determine and allocate Beneficial Interests to each beneficiary on the books of the Trustee. The initial allocation shall be made by first determining the shares of stock owned outside of the trust by each son, including the transferees of each son, and then allocating as many shares in the trust as may be necessary so that for each son and his successors in interest, the total of the shares owned outside the trust plus the shares allocated in the trust shall be identical for all of my sons and their successors. All additional shares shall be allocated equally to my four sons.
¶6 The terms of the trust documents state that Howard and Paul’s nephew, Frederick
Kavon (Fred), are appointed as cotrustees. Additionally, the corporate stock is to remain
in the Ranch Trust until the Ranch Trust terminates 21 years after Paul’s death. The trust
documents further state that “none of my other sons [i.e., Richard, Arthur, and Michael],
or their descendants, or their spouses, shall ever serve as trustee or co-trustee.”
¶7 The Mineral Trust was also created on Paul’s death and contains only the mineral
interests of the farm property. The Mineral Trust has similar terms as the Paul M. Kavon
Trust in that there is a prohibition on disposing of the trust property and both Howard and
Fred are cotrustees, to the exclusion of Richard, Arthur, and Michael. The Mineral Trust
also provides that the trustees may, in their discretion, withhold up to 30 percent of the
net income to provide operating capital or to produce overall income tax savings.
¶8 Richard, Arthur, and Michael alleged in the District Court that Howard and Fred,
as cotrustees, breached their fiduciary obligations to the trust beneficiaries and should be
3 removed. They specifically asserted that Howard took a position adverse to the
beneficiaries by simultaneously serving as trustee and as president, director, and sole
employee of KCR Ranch. They maintained that this resulted in a conflict of interest,
self-dealing, and a lack of sufficient corporate or internal controls to protect the
beneficiaries’ interests. Richard, Arthur, and Michael also asserted that Howard’s fees
for administering the trusts were excessive, that he did not maintain adequate accounting
records, that he failed to secure a favorable mineral lease for the properties, and that he
allowed a house tenant to pay below market rent and to become delinquent by $2,075.
They further alleged that Fred breached his fiduciary duty by failing to take reasonable
steps to address the actions of his cotrustee, Howard.
¶9 A bench trial was held in May 2013. The parties presented testimony,
documentary evidence, arguments, and post-trial briefing. On August 7, 2013, the
District Court entered an order denying the Petition for Removal of Trustees, finding
there had been no breach of the trustees’ duties, that the trust property had been managed
properly, and that there was not good cause for removal.
¶10 On appeal, Richard, Arthur, and Michael argue that the District Court abused its
discretion in failing to remove Howard and Fred as trustees and in failing to consider the
conflicts of Howard’s several positions. They also maintain that the trustees did not
provide adequate accountings. Howard and Fred respond that they followed Paul’s
instructions and did not exceed their authority as set forth in the trust documents.
Howard and Fred maintain that Richard, Arthur, and Michael have failed to produce
sufficient evidence to meet the standard for removal.
4 ¶11 A district court’s denial of a request to remove a trustee is reviewed for abuse of
discretion. In re Baird, 2009 MT 81, ¶ 11, 349 Mont. 501, 204 P.3d 703. A trial court
abuses its discretion when it acts arbitrarily without employment of conscientious
judgment or exceeds the bounds of reason, resulting in substantial injustice. In re Estate
of Hannum, 2012 MT 171, ¶ 18, 366 Mont. 1, 285 P.3d 463. The abuse-of-discretion
standard is deferential to the trial court. State v. McOmber, 2007 MT 340, ¶ 10, 340
Mont. 262, 173 P.3d 690.
¶12 The District Court found that Paul’s selection of the trustees provided “a common
sense conservative direction for the trusts[’] long term benefit and stability.” The court
further observed that “Fred has kept the entities[’] business interests operating
conservatively for the long term benefit of the beneficiaries. As an example, instead of
chasing short term oil dollars for a tenant for the spare house on the farm property, Fred
looked for a long term tenant who would maintain and improve the property.” The court
observed that Howard is a certified public accountant who “has carefully maintained
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April 15 2014
DA 13-0576
IN THE SUPREME COURT OF THE STATE OF MONTANA
2014 MT 100N
RICHARD KAVON, ARTHUR KAVON and MICHAEL KAVON,
Petitioners and Appellants,
v.
HOWARD KAVON and FREDERICK KAVON, Trustees,
Respondents and Appellees.
APPEAL FROM: District Court of the Fifteenth Judicial District, In and For the County of Sheridan, Cause No. DV-46-2011-51 Honorable David Cybulski, Presiding Judge
COUNSEL OF RECORD:
For Appellants:
Laura Christoffersen, Christoffersen & Knierim, P.C., Culbertson, Montana
For Appellees:
Loren J. O’Toole II, Brad W. Fjeldheim, O’Toole Law Firm, Plentywood, Montana
Submitted on Briefs: March 26, 2014 Decided: April 15, 2014
Filed:
__________________________________________ Clerk Justice Laurie McKinnon delivered the Opinion of the Court.
¶1 Pursuant to Section I, Paragraph 3(d), Montana Supreme Court Internal Operating
Rules, this case is decided by memorandum opinion and shall not be cited and does not
serve as precedent. Its case title, cause number, and disposition shall be included in this
Court’s list of noncitable cases published in the Pacific Reporter and Montana Reports.
¶2 Richard Kavon, Arthur Kavon, and Michael Kavon appeal from an order of the
Fifteenth Judicial District Court, Sheridan County, denying their Petition for Removal of
Trustees. We affirm.
¶3 This dispute arises from the estate plan of Paul Kavon, father of Richard, Arthur,
and Michael, as well as Howard Kavon. Paul was a farmer in Sheridan County and was
the principal shareholder in KCR Ranch, Inc., a family farm corporation. Paul placed his
KCR Ranch stock into the Paul M. Kavon Trust. KCR Ranch has 3,000 shares of
outstanding corporate stock: Richard owns 300 shares, Arthur owns 250 shares, and the
Paul M. Kavon Trust owns the remaining 2,450 shares. KCR Ranch owns several
thousand acres of crop land, farm buildings, and two houses located on the farm property.
KCR Ranch’s mineral interests were placed in the Kavon Mineral Trust (Mineral Trust).
¶4 The Paul M. Kavon Trust was an estate planning tool for Paul. It created the KCR
Ranch Trust (Ranch Trust) effective upon Paul’s death. All of the stock that Paul owned
at the time of his death—i.e., 2,450 shares, or approximately 82 percent of KCR Ranch’s
corporate stock—was transferred into the Ranch Trust. The corporate stock is the only
property owned by the Ranch Trust.
2 ¶5 The beneficiaries of the Paul M. Kavon Trust and the Ranch Trust are Paul’s four
sons. The beneficiaries are to share equally in the corporation considering first any
individually owned shares. Paragraph 10(a) of the Paul M. Kavon Trust outlines the
process for distribution:
The Trustees shall first determine and allocate Beneficial Interests to each beneficiary on the books of the Trustee. The initial allocation shall be made by first determining the shares of stock owned outside of the trust by each son, including the transferees of each son, and then allocating as many shares in the trust as may be necessary so that for each son and his successors in interest, the total of the shares owned outside the trust plus the shares allocated in the trust shall be identical for all of my sons and their successors. All additional shares shall be allocated equally to my four sons.
¶6 The terms of the trust documents state that Howard and Paul’s nephew, Frederick
Kavon (Fred), are appointed as cotrustees. Additionally, the corporate stock is to remain
in the Ranch Trust until the Ranch Trust terminates 21 years after Paul’s death. The trust
documents further state that “none of my other sons [i.e., Richard, Arthur, and Michael],
or their descendants, or their spouses, shall ever serve as trustee or co-trustee.”
¶7 The Mineral Trust was also created on Paul’s death and contains only the mineral
interests of the farm property. The Mineral Trust has similar terms as the Paul M. Kavon
Trust in that there is a prohibition on disposing of the trust property and both Howard and
Fred are cotrustees, to the exclusion of Richard, Arthur, and Michael. The Mineral Trust
also provides that the trustees may, in their discretion, withhold up to 30 percent of the
net income to provide operating capital or to produce overall income tax savings.
¶8 Richard, Arthur, and Michael alleged in the District Court that Howard and Fred,
as cotrustees, breached their fiduciary obligations to the trust beneficiaries and should be
3 removed. They specifically asserted that Howard took a position adverse to the
beneficiaries by simultaneously serving as trustee and as president, director, and sole
employee of KCR Ranch. They maintained that this resulted in a conflict of interest,
self-dealing, and a lack of sufficient corporate or internal controls to protect the
beneficiaries’ interests. Richard, Arthur, and Michael also asserted that Howard’s fees
for administering the trusts were excessive, that he did not maintain adequate accounting
records, that he failed to secure a favorable mineral lease for the properties, and that he
allowed a house tenant to pay below market rent and to become delinquent by $2,075.
They further alleged that Fred breached his fiduciary duty by failing to take reasonable
steps to address the actions of his cotrustee, Howard.
¶9 A bench trial was held in May 2013. The parties presented testimony,
documentary evidence, arguments, and post-trial briefing. On August 7, 2013, the
District Court entered an order denying the Petition for Removal of Trustees, finding
there had been no breach of the trustees’ duties, that the trust property had been managed
properly, and that there was not good cause for removal.
¶10 On appeal, Richard, Arthur, and Michael argue that the District Court abused its
discretion in failing to remove Howard and Fred as trustees and in failing to consider the
conflicts of Howard’s several positions. They also maintain that the trustees did not
provide adequate accountings. Howard and Fred respond that they followed Paul’s
instructions and did not exceed their authority as set forth in the trust documents.
Howard and Fred maintain that Richard, Arthur, and Michael have failed to produce
sufficient evidence to meet the standard for removal.
4 ¶11 A district court’s denial of a request to remove a trustee is reviewed for abuse of
discretion. In re Baird, 2009 MT 81, ¶ 11, 349 Mont. 501, 204 P.3d 703. A trial court
abuses its discretion when it acts arbitrarily without employment of conscientious
judgment or exceeds the bounds of reason, resulting in substantial injustice. In re Estate
of Hannum, 2012 MT 171, ¶ 18, 366 Mont. 1, 285 P.3d 463. The abuse-of-discretion
standard is deferential to the trial court. State v. McOmber, 2007 MT 340, ¶ 10, 340
Mont. 262, 173 P.3d 690.
¶12 The District Court found that Paul’s selection of the trustees provided “a common
sense conservative direction for the trusts[’] long term benefit and stability.” The court
further observed that “Fred has kept the entities[’] business interests operating
conservatively for the long term benefit of the beneficiaries. As an example, instead of
chasing short term oil dollars for a tenant for the spare house on the farm property, Fred
looked for a long term tenant who would maintain and improve the property.” The court
observed that Howard is a certified public accountant who “has carefully maintained
records on all aspects of the businesses.” Based on Howard’s professional skills and their
value to the corporation, the court concluded that the negotiated salary and benefits
package was reasonable. The court also concluded that the accountings provided by
Howard were complicated due to the varied stock ownership of the trust and other
shareholders of KCR Ranch, and that “the unusual provisions of the trusts regarding
equal distributions” had been correctly interpreted and accurately implemented.
¶13 “[I]t is a basic principle of trust law that a trust is to be managed to carry out the
testator’s intent. Therefore, the threshold inquiry in any trust case is to examine the terms
5 of the trust document.” Collins v. Norwest Inv. Mgt. & Trust, 2002 MT 277, ¶ 35, 312
Mont. 366, 59 P.3d 1080 (citations omitted). A trustee may be removed in accordance
with the trust instrument, by the court on its own motion, or on petition of a cotrustee or
beneficiary. Section 72-33-618(1), MCA (2011). The grounds for removal of a trustee
by the court include the following:
(a) if the trustee has committed a breach of the trust; (b) if the trustee is insolvent or otherwise unfit to administer the trust; (c) if hostility or lack of cooperation among cotrustees impairs the administration of the trust; (d) if the trustee fails or declines to act; or (e) for other good cause.
Section 72-33-618(2), MCA (2011).
¶14 We conclude, based on a review of the record, that cotrustees Howard and Fred
followed Paul’s instructions and did not exceed their authority as provided in the trust
documents. We further conclude that Richard, Arthur, and Michael have not produced
sufficient evidence establishing grounds for removal of the trustees. Section 72-33-618,
MCA (2011). For the District Court’s order to be reversed, the beneficiaries must show
that the District Court acted arbitrarily without employment of conscientious judgment or
exceeded the bounds of reason, resulting in substantial injustice. The evidence does not
support such a conclusion. Rather, the evidence demonstrates that at the heart of this
matter is a family farm passed down to children who do not agree with decisions made by
a parent as to the management, control, and distribution of farm assets. The record
demonstrates that the trust property was productive, with respect to both a mineral lease
negotiated by the trustees and the farm lease, and that accountings were accurately
6 compiled. Moreover, Richard, Arthur, and Michael’s allegation that Howard and Fred
have an affirmative obligation, under § 72-38-802(7), MCA (2013), to elect or appoint
directors or other managers who would manage the corporation in the best interests of the
beneficiaries is contrary to the terms of the trust documents themselves which specifically
authorize the arrangement that has been effectuated by the cotrustees.
¶15 We have determined to decide this case pursuant to Section I, Paragraph 3(d) of
our Internal Operating Rules, which provides for noncitable memorandum opinions. The
issues in this case are ones of judicial discretion. The District Court did not abuse its
discretion in denying the Petition for Removal of Trustees.
¶16 Affirmed.
/S/ LAURIE McKINNON
We Concur:
/S/ MIKE McGRATH /S/ BETH BAKER /S/ PATRICIA COTTER /S/ MICHAEL E WHEAT