Irrevocable Trusts: Termination pursuant to 20 Pa.C.S. § 7736 for fraud

In Re: Passarelli Family Trust, 206 A.3d 1188 (Pa. Super. 2019), allocatur granted Sept. 11, 2019, appeal docket 71 MAP 2019

The Pennsylvania Supreme Court granted allocatur in this case to consider the standard for termination of a trust pursuant to 20 Pa.C.S. § 7736 when a party seeks to rescind an irrevocable trust that was induced by fraud.

Margaret Passarelli and Joseph Passarelli  were married in 1998. In 2015, the Passarellis met with Attorney Michael Perna to set up an irrevocable trust (“Trust”). Joseph compiled a schedule of assets, which included two property companies known as Japen Holdings, LLC, and Japen Properties, LLP, to be conveyed to the Trust. Margaret was unaware that Joseph had previously met with Attorney Perna until shortly before execution of the trust documents. Margaret did not read over the trust documents, did not ask about the inventory assets, but did confirm that in the event of divorce the Trust would survive a dissolution of the couple’s marriage.

After the execution of the Trust, Margaret discovered that Joseph had used marital assets to purchase two properties (Properties) included in the Trust without her knowledge, including a property that housed Joseph’s girlfriend from an extra-marital affair. Margaret filed for divorce, petitioned the divorce court for special relief to prevent dissipation of marital assets, and filed a petition in the orphans’ court to terminate the Trust pursuant to 20 Pa.C.S.A. §§ 7736 and 7740.6. The orphans’ court, applying the two-part test for fraud set forth in In re Estate of Glover, 669 A.2d 1011 (Pa. Super. 1996),granted Margaret’s petition to terminate the Trust, because (1) Joseph had concealed the fact that he purchased the Properties with marital assets and had failed to disclose that fact at the time of the Trust’s execution and (2) Margaret would not have agreed to execute the Trust had she known about the existence of the Properties.  Joseph appealed to Superior Court.

Superior Court en banc reversed the Orphans’ Court order terminating the Trust, finding first that the Orphans’ Court’s use of the two-part test for fraud set forth in In re Estate of Glover was “problematic on multiple fronts”, explaining that:

First, as noted above, [In re Paul’s Estate, 180 A.2d 254 (Pa. 1962)]—upon which the Glover court based its holding—was a case ultimately involving undue influence, a similar yet distinct legal theory. Thus, the Paul Court did not engage in a pure fraud analysis. For this reason, the Paul court’s fact-specific distillation of the appellant’s burden in that case is not directly applicable to a case rooted squarely in fraud. As such, the subsequent adoption by the Glover court of the factors enumerated in Paul as a definitive test for fraud was, in our opinion, in error.

Second, the Glover court misstated the Paul “test,” omitting entirely Paul’s requirement that there be “fraud and misrepresentation” in the concealment of a material fact from the testator. Thus, in relying on Glover rather than the Supreme Court’s case from which it purported to glean its analytical framework, the Orphans’ Court relied on an incomplete characterization of the law. Indeed, the Glover framework entirely omits the concepts of knowledge/recklessness, justifiable reliance and injury, all of which are key elements [of] any fraud inquiry. [Citation omitted]. Accordingly, in relying on Glover, the Orphans’ Court essentially failed to engage in a fraud analysis.

Slip Op. at 10-12.

Thus, the Superior Court concluded  that termination of an irrevocable trust for fraud requires a stricter standard than used by the Orphans’ Court, as set forth in case law concerning common-law fraud, the Restatement of Trusts, and the Restatement of Property. The Superior Court found that Joseph had no duty to disclose every individual asset owned by the property companies included in the Trust and thus,, Margaret could not prove the existence of a misrepresentation, reasoning that:

Here, Margaret has failed to demonstrate that Joseph, having disclosed Japen and its aggregate valuation, also had a duty to disclose each and every asset owned by Japen. Margaret cites to nothing in the law of trusts—and our research has disclosed nothing—requiring that each and every asset composing the res of a trust be specifically identified by a settlor. While a trust is invalid unless the subject matter is definite or definitely ascertainable, trust property need not be segregated, designated, or specifically described; a valid trust is created where the identity of the res is clear and the description is sufficient. . ‘It is in the identity of the fund, not of the pieces of coin or bank notes, that controls.’.

Here, Japen and its total value were identified in Schedule “A” to the Trust. The description provided was sufficient to describe and identify the particular asset contributed to the Trust. . Indeed, it would be patently absurd to require that each and every asset of a corporate entity be identified upon the entity’s contribution to a trust in order to constitute a valid transfer. A corporation is, itself, an identifiable asset and can be sufficiently described by its corporate name.

Slip Op. at 14-15 (internal citations omitted).

The Supreme Court granted allocatur to address the following issues, as stated by the petitioner:

(1) Whether the Superior Court’s reversal of the orphans’ court’s termination of an irrevocable inter vivos trust pursuant to 20 Pa.C.S. 7736, which explicitly allows for the voidability of a trust induced by fraud, conflicts with another appellate court’s opinion?

(2) Whether the Superior Court’s reversal of the orphans’ court’s termination of an irrevocable trust pursuant to 20 Pa.C.S. 7736, and implicit overruling of Estate of Glover, is at odds with this Court’s holding in Paul’s Estate regarding the factors by which a trust may be terminated?

(3) Whether the Superior Court’s reversal of the orphans’ court’s termination of an irrevocable inter vivos trust pursuant to 20 Pa.C.S. 7736 presents an issue of first impression, especially where the Superior Court has held that a stricter standard should apply when a party seeks to rescind an irrevocable trust that was induced by fraud?

(4) Whether the Superior Court’s imposition of a stricter standard to terminate an irrevocable inter vivos trust on the basis of fraud in the inducement presents an issue of such substantial public importance as to require the prompt and definitive resolution of the Pennsylvania Supreme Court?

Allocatur grants present an excellent opportunity for your group or association to advance your legal and policy goals by filing an amicus brief. Participating as an amicus has proven to be an effective method of advising and influencing courts and often can involve far fewer resources than traditional lobbying.

If you are interested or would like more information, contact Kevin McKeon or Dennis Whitaker.