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In re Black

Court of Appeals of Colorado, Sixth Division

January 25, 2018

In the Interest of Joanne Black, Protected Person, Appellee and Cross-Appellant,
Bernard Black, in his Capacity as Trustee for the Supplemental Needs Trust for the Benefit of Joanne Black, Appellant and Cross-Appellee.

         City and County of Denver Probate Court No. 12PR1772 Honorable Elizabeth D. Leith, Judge

          Holland Hart LLP, Christina Gomez, Matthew S. Skotak, Morgan M. Wiener, Denver, Colorado, for Appellee

          Davis Graham Stubbs LLP, Shannon Wells Stevenson, Paul D. Swanson, Denver, Colorado, for Appellant


          HARRIS, JUDGE.

         ¶ 1 Bernard Black is the former conservator for his sister, Joanne Black. The probate court found that Mr. Black breached his fiduciary duty by converting Joanne's[1] assets for his own benefit. Based on its findings, the court surcharged Mr. Black in the amount of the converted funds and then trebled those damages under the civil theft statute.

         ¶ 2 Mr. Black's primary argument on appeal is that he could not have breached his fiduciary duty because the conflicted transaction that resulted in the conversion of his sister's assets was disclosed to, and approved by, the probate court. But we are not persuaded that Mr. Black complied with his obligations under section 15-14-423, C.R.S. 2017, the statute that he contends provides him safe harbor.

         ¶ 3 Nor are we persuaded that the court erred in finding Mr. Black liable for civil theft or that the evidentiary hearing was so unfair as to require reversal.

         ¶ 4 Accordingly, we affirm the probate court's order.

         I. Background

         A. Factual Background

         ¶ 5 The Black siblings' mother died in New York in 2012. Mr. Black believed that his children would inherit one-third of mother's entire estate. But his belief was mistaken.

         ¶ 6 Joanne suffers from chronic schizophrenia and cannot manage her own financial affairs. To account for Joanne's condition, mother created a special needs trust (the SNT) and, in her will, devised two-thirds of her estate to the SNT. The remaining one-third of the estate was devised to a trust for the benefit of Mr. Black and his children (the Issue Trust).

         ¶ 7 The bulk of mother's estate consisted of multiple accounts, including a Roth individual retirement account (Roth IRA), with a total value of approximately $3 million. Mr. Black expected that, upon mother's death, the $3 million would become part of the estate and be distributed to the SNT and the Issue Trust. But shortly before her death, mother designated the accounts as payable-on-death (POD) directly to Joanne. (More precisely, mother left 95% of the value of the accounts to Joanne and 1% to each of Mr. Black's five children from his first marriage. The Roth IRA was left entirely to Joanne.) That left only the residual estate to be divided two-thirds to Joanne and one-third to Mr. Black and his children.

         ¶ 8 The discovery that he and his children had mostly been cut out of $3 million of mother's estate did not sit well with Mr. Black. Nor did it sit well with Mr. Black's second wife, with whom he had two children. Mr. Black's wife, along with his older children, threatened to mount a legal challenge to the validity of mother's POD designation.

         ¶ 9 As Mr. Black saw it, the situation presented only two options: his family could litigate the POD designation, or he could figure out another way to get what he considered to be his fair share of the money. But either way, as Mr. Black candidly admitted at the later evidentiary hearing, his goal was to "get the POD assets back into the estate."

         ¶ 10 Mr. Black, a tenured law professor who has written on the subject of corporate directors' fiduciary duties, decided that the best course of action was to seek appointment as Joanne's conservator. Then, acting on Joanne's behalf, he could "disclaim"[2] the money in the POD accounts, and the money would revert to the estate and be distributed two-thirds to the SNT and one-third to the Issue Trust. In this way, Mr. Black later explained, he could unilaterally correct the "mistake" made in mother's designation of the POD accounts without enduring intra-family litigation.

         B. Procedural Background

         ¶ 11 Joanne had been a longtime resident of New York. But at the time of mother's death, Joanne was in Denver, homeless and in a deteriorated state. Thus, Mr. Black initiated the conservatorship action in the probate court in Denver. In his petition, he told the court that Joanne's approximately $3 million in assets were at risk of being "wasted or dissipated" because mother had "inadvertently" designated the accounts as POD to Joanne, rather than routing the funds through the SNT. In support of his petition, Mr. Black emphasized that the "assets need to be secured."

         ¶ 12 After a hearing on the petition in December 2012, during which Mr. Black first proposed the disclaimer as a method for securing the assets, the probate court appointed Mr. Black as Joanne's conservator. The order of appointment authorized the conservator to disclaim Joanne's interests in the POD accounts and further provided that "[Joanne's] assets will be placed into a Supplemental Needs Trust for [Joanne's] benefit."

         ¶ 13 Mr. Black promptly executed the disclaimer. Pursuant to his plan, the POD assets (with the exception of the Roth IRA) were then redistributed two-thirds to the SNT and one-third to the Issue Trust. As for the $300, 000 Roth IRA, Mr. Black simply moved those funds into new accounts in the name of his children.

         ¶ 14 Questions about the propriety of the disclaimer were first raised two years later. By that time, Joanne had returned to New York and parallel guardianship proceedings had been initiated in that state. During the course of those proceedings, and in response to Joanne's inquiries, Mr. Black admitted that he had diverted approximately $1 million of the POD assets to the Issue Trust.

         ¶ 15 Joanne's court-appointed counsel filed a motion to void the disclaimer. Counsel argued that Mr. Black's diversion of one-third of the POD assets was "antithetical to the terms and intent of [mother]. All of this money was meant for [Joanne's] care and benefit." Counsel alleged that, in failing to "preserve and maintain [Joanne's] assets for her sole benefit, " Mr. Black had breached his fiduciary duty as Joanne's conservator.

         ¶ 16 At a subsequent status conference, the court approved a request for an independent accounting of Joanne's assets and scheduled an evidentiary hearing to resolve the issue of whether Mr. Black had properly disclosed his intent to redirect one-third of Joanne's POD assets to Mr. Black's children and whether the disclaimer gave Mr. Black the authority to do so. The court advised the parties that it would consider whether "disgorgement or unwinding of fiduciary actions" was appropriate.

         ¶ 17 Shortly before the first day of the evidentiary hearing, Joanne's guardian ad litem (GAL) filed a motion alleging that Mr. Black's conduct amounted to civil theft and requesting that the court award treble damages.

         ¶ 18 The evidentiary hearing occurred over the course of four days, from June to September 2015. Following the hearing, the court issued a written "hearing order" finding that Mr. Black had breached his fiduciary duty to Joanne. Specifically, the court concluded that Mr. Black had failed to adequately disclose his intent to use the disclaimer to divest his sister of one-third of the POD assets and, therefore, he did not have the court's authorization to redirect the assets. Mr. Black's actions in redirecting the funds were "deceptive and undertaken in bad faith, " the court determined, and his conduct satisfied the elements of civil theft. Accordingly, the court "surcharged" - or, ordered reimbursement by - Mr. Black in the amount of $1.5 million, the value of the improperly diverted assets, including the Roth IRA. Then, under the civil theft statute, it trebled the damages.

         II. Jurisdictional Issues

         ¶ 19 We begin by addressing Mr. Black's jurisdictional challenges to the court's hearing order. First, he contends that the probate court lacked jurisdiction to enter the hearing order because any challenge to the disclaimer had to be brought under C.R.C.P. 60, the procedural mechanism for attacking a final judgment. And second, he says that he did not receive sufficient notice that the evidentiary hearing was a "surcharge proceeding."

         ¶ 20 When resolution of a jurisdictional issue involves a factual dispute, we apply a clearly erroneous standard of review. Tulips Investments, LLC v. State ex rel. Suthers, 2015 CO 1, ¶ 11. But when there are no disputed facts, the determination of a court's subject matter jurisdiction presents a question of law we review de novo. Id.

         A. The Motion to Void the Disclaimer

         ¶ 21 Mr. Black argues that only a Rule 60(b) motion - not a motion to void the disclaimer - could undo the court's order authorizing the disclaimer.

         ¶ 22 True, a final judgment may be vacated only as provided for in C.R.C.P. 60. In re Marriage of Scheuerman, 42 Colo.App. 206, 208, 591 P.2d 1044, 1046 (1979). But the motion to void the disclaimer did not seek relief from a final order. Instead, the motion alleged that Mr. Black had breached his fiduciary duties to Joanne while acting as conservator, and it sought to unwind a transaction based on this breach. Levine v. Katz, 167 P.3d 141, 144 (Colo.App. 2006) ("[I]t is the facts alleged and the relief requested that decide the substance of a claim, which in turn is determinative of the existence of subject matter jurisdiction.") (citation omitted).

         ¶ 23 Thus, the probate court's jurisdiction to conduct a hearing regarding a possible breach of Mr. Black's fiduciary duties and to enter the hearing order (which, we note, did not unwind the transaction) was based not on Rule 60 but on the court's authority to monitor fiduciaries over whom it has obtained jurisdiction. See § 15-10-501, C.R.S. 2017. Pursuant to section 15-10-503, C.R.S. 2017, the probate court has authority, either by petition or on its own motion, to address alleged misconduct of a fiduciary. Accordingly, the court had jurisdiction to adjudicate the allegations and issues raised by the motion to void the disclaimer.

         B. Notice of Surcharge Proceeding

         ¶ 24 Mr. Black further contends that the court lacked subject matter jurisdiction because he did not receive sufficient notice of the surcharge proceeding.

         ¶ 25 Section 15-10-504, C.R.S. 2017, sets forth remedies, including imposition of a surcharge, against a fiduciary who has breached his fiduciary duties:

(2) Surcharge. (a) If a court, after a hearing, determines that a breach of fiduciary duty has occurred or an exercise of power by a fiduciary has been improper, the court may surcharge the fiduciary for any damage or loss to the estate, beneficiaries, or interested persons. Such damages may include compensatory damages, interest, and attorney fees and costs.

See also § 15-10-503(2)(g) (listing remedies available for fiduciary's breach of his duties, including "[a] surcharge or sanction of the fiduciary pursuant to section 15-10-504"). Under section 15-10-401, C.R.S. 2017, the fiduciary must receive notice by mail of the time and place of the surcharge proceeding fourteen days before the hearing.

         ¶ 26 We are not convinced that the notice was statutorily deficient. The court bifurcated the proceedings into a liability phase and a damages phase. On August 6, after the conclusion of the liability phase, the court issued a minute order, explaining that the next hearing, set for September 8, would address the issues of surcharge and civil theft. Thus, Mr. Black had more than fourteen days' notice of the damages portion of the hearing.

         ¶ 27 But even if we assume that notice of the hearing did not strictly comply with section 15-10-401, we disagree that any defect divested the court of jurisdiction. Mr. Black had actual notice of the proceedings, and the possible consequences, more than fourteen days before the evidentiary hearing. "[I]n the absence of explicit statutory language requiring it, a statute requiring the providing of notice by a specified means need not be strictly applied." Feldewerth v. Joint Sch. Dist. 28-J, 3 P.3d 467, 471 (Colo.App. 1999). Nothing in section 15-10-401 indicates that the form of notice is a jurisdictional requirement; thus, "actual notice may be substituted for it." Id.

         ¶ 28 The GAL filed her motion to void the disclaimer on February 9, 2015, approximately four months before the first day of the evidentiary hearing. The motion alleged that Mr. Black had breached his fiduciary duties by converting more than $1 million of Joanne's assets for his own benefit. The GAL sought an order voiding the disclaimer and the return of the converted assets to the court registry.

         ¶ 29 The court held a status conference on April 2, 2015. In response to a suggestion that the disclaimer could not be unwound, the court reminded Mr. Black that "disgorgement" was a possible remedy: "And does Mr. Black understand that under this process he can be required to disgorge money?"

         ¶ 30 Following the status conference, the court issued a status conference order, explaining that Mr. Black was "the subject of allegations of misconduct" and suspending him as conservator pending an evidentiary hearing to resolve the allegations. The court's order advised the parties that the evidentiary hearing would address "whether the allegations of breach of fiduciary duty are supported by the evidence and whether any disgorgement or unwinding of fiduciary actions, including the creation of trusts, is appropriate."

         ¶ 31 We conclude that the notice of the allegations of breach of fiduciary duty, and warnings that "disgorgement" was a possible remedy, gave Mr. Black actual notice that he might be ordered to reimburse Joanne for any funds improperly diverted out of the conservatorship estate.

         ¶ 32 In any case, by the time of the hearing, the parties and the court specifically used the term "surcharge" instead of "disgorgement" to describe the possible remedy for a breach of fiduciary duty. In her prehearing brief, Joanne's counsel asked the court to "surcharge the fiduciary" under section 15-10-504(2)(a).[3]Mr. Black did not object to proceeding with the evidentiary hearing. Then, on the second day of the hearing, the court noted that "this is a surcharge action." Again, Mr. Black did not object on the ground that he was unaware of the nature of the proceedings. In fact, on the third day of the hearing, Mr. Black's counsel objected to certain cross-examination as irrelevant because "it has nothing to do with the issue[s], " one of which he defined as "whether or not a surcharge ought to be imposed." Later during the hearing, Mr. Black's counsel suggested to the court that a surcharge "would be the only remedy available" for any breach of fiduciary duty.

         ¶ 33 Indeed, Mr. Black does not dispute that he had actual notice of the surcharge proceedings. His argument is that any failure to strictly comply with the statutory notice requirement constituted a due process violation that deprived the court of jurisdiction to impose sanctions. But we must reject that argument in light of Mr. Black's actual notice, coupled with his failure to object to a purported lack of notice and his participation in the surcharge proceedings. See Feldewerth, 3 P.3d at 471; see also City of Philadelphia v. Urban Mkt. Dev., Inc., 48 A.3d 520, 522 (Pa. Commw. Ct. 2012) (no due process claim based on lack of notice where party had actual notice and participated in hearing).

         III. Breach of Fiduciary Duty

         ¶ 34 We turn now to Mr. Black's primary argument on appeal: that he could not have breached his fiduciary duty to Joanne because his conversion of one-third of her POD assets was disclosed to, and approved by, the probate court, in accordance with section 15-14-423.

         ¶ 35 We review de novo the legal questions concerning the fiduciary duty's nature and scope, but whether a fiduciary duty has been breached is a factual question we review for clear error. Mintz v. Accident & Injury Med. Specialists, PC, 284 P.3d 62, 68 (Colo.App. 2010), aff'd, 2012 CO 50. We review questions of statutory interpretation de novo. Taylor v. Taylor, 2016 COA 100, ¶ 26.

         A. A Fiduciary Has a Duty of Loyalty That Generally Precludes Conflicted Transactions

         ¶ 36 A conservator is a fiduciary and must "observe the standards of care applicable to a trustee." § 15-14-418(1), C.R.S. 2017. Thus, as Joanne's conservator, Mr. Black owed her a "duty of undivided loyalty." Estate of Keenan v. Colo. State Bank & Tr., 252 P.3d 539, 543 (Colo.App. 2011) (citation omitted). Indeed, the "duty of loyalty is, for trustees, particularly strict even by comparison to the standards of other fiduciary relationships." Restatement (Third) of Trusts § 78 cmt. a (Am. Law Inst. 2007) (hereinafter Restatement).

         ¶ 37 Consistent with the duty of loyalty, a conservator must manage the protected person's assets for her sole benefit, without regard to the interests of others. Jones v. Estate of Lambourn, 159 Colo. 246, 250, 411 P.2d 11, 13 (1966); see also § 15-1.1-105, C.R.S. 2017 ("A trustee shall invest and manage the trust assets solely in the interests of the beneficiaries."); Hilliard v. McCrory, 110 Colo. 369, 371, 134 P.2d 1057, 1058 (1943) ("[I]t is the duty of a conservator to conserve . . . the property and safeguard the interest of its owner . . . .").

         ¶ 38 To that end, the duty of loyalty strictly prohibits a conservator from entering into transactions involving the protected person's property if the transaction is for the conservator's personal benefit or otherwise involves or creates a conflict between the fiduciary duties and personal interests of the conservator. See Restatement § 78; see also In re Estate of Heyn, 47 P.3d 724, 726 (Colo.App. 2002) (trustee's use of trust property creates presumption that trustee has breached his fiduciary duties).

         B. A Fiduciary May Engage in a Conflicted Transaction if He Gives Notice of the Conflict and Shows That the Transaction is Nonetheless Reasonable and Fair

         ¶ 39 Still, a conservator may obtain approval to engage in a conflicted transaction if he (1) complies with section 15-14-423's notice requirement and (2) establishes that the conflicted transaction is nonetheless reasonable and fair to the protected person.

         1. The Notice Requirement Under Section 15-14-423

         ¶ 40 Section 15-14-423 provides that "[a]ny transaction involving the conservatorship estate that is affected by a substantial conflict between the conservator's fiduciary and personal interests is voidable unless the transaction is expressly authorized by the court after notice to interested persons." The provision explains that a "transaction affected by a substantial conflict between personal and fiduciary interests includes any sale, encumbrance, or other transaction involving the conservatorship estate entered into by the conservator . . . ." Id.

         ¶ 41 Mr. Black acknowledges that the act of disclaiming Joanne's assets created a conflict between his fiduciary duties to Joanne and his own personal interests. But he insists that he did not breach his fiduciary duties by engaging in the conflicted transaction because he satisfied the ...

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