Perennially Hopeless Battle On In JP Morgan FINRA Arbitration
March 27, 2018
A few years ago I had the misfortune of getting involved in an estate matter, which, among other points in contention, included a Special Needs Trust or "SNT." Reduced to simplistic basics, an SNT is a legal construct that is designed to protect a "beneficiary" (typically a disabled individual) who is receiving Supplemental Security Income and Medicaid benefits. If the SNT is properly created and implemented, the disabled individual retains their government benefits and a trustee spends SNT funds on payments for certain goods and services for the disabled individual's benefit. When all goes well, the government does not calculate the SNT funds as disqualifying assets when determining the individual's ongoing eligibility. Of course, what in life generally goes well? As a recent FINRA arbitration demonstrates, SNTs are often the impetus behind the Lawyers Full Time Employment Act and prove that Jarndyce v Jarndyce (Bleak House, Court of Chancery, Charles Dickens, Chief Justice) was not a work of fiction.
Jarndyce and Jarndyce drones on. This scarecrow of a suit has, in course of time, become so complicated that no man alive knows what it means. The parties to it understand it least, but it has been observed that no two Chancery lawyers can talk about it for five minutes without coming to a total disagreement as to all the premises. Innumerable children have been born into the cause; innumerable young people have married into it; innumerable old people have died out of it. Scores of persons have deliriously found themselves made parties in Jarndyce and Jarndyce without knowing how or why; whole families have inherited legendary hatreds with the suit. The little plaintiff or defendant who was promised a new rocking-horse when Jarndyce and Jarndyce should be settled has grown up, possessed himself of a real horse, and trotted away into the other world. Fair wards of court have faded into mothers and grandmothers; a long procession of Chancellors has come in and gone out; the legion of bills in the suit have been transformed into mere bills of mortality; there are not three Jarndyces left upon the earth perhaps since old Tom Jarndyce in despair blew his brains out at a coffee-house in Chancery Lane; but Jarndyce and Jarndyce still drags its dreary length before the court, perennially hopeless.
Cases In Point
In September and October 2016, Claimants trustees filed two separate FINRA arbitrations against both JPMorgan
Chase Bank, N.A. ( "JPMC Bank") and J. P. Morgan Securities, LLC ("JPMS") as a result of circumstances
that the trustees alleged prevented them from undertaking the necessary and
proper disbursements of funds.
In the Matter of the Arbitration Between Bernard S. Black and Samuel H. Black, as Trustees of the Irrevocable Trust for the Benefit of the Issue of Renata Black, Claimants, v. JPMorgan Chase Bank, N.A. and J.P. Morgan Securities, LLC, Respondents (FINRA Arbitration 16-02822, March 23, 2018) (the "IT Claimants" and the "IT Case")
-- CONSOLIDATED WITH --
In the Matter of the Arbitration Between Bernard S. Black and Samuel H. Black, as Trustees of the Supplemental Needs Trust for the Benefit of Joanne Black, Claimants, v. JPMorgan Chase Bank, N.A. and J.P. Morgan Securities, LLC, Respondents (FINRA Arbitration 16-03146, March 23, 2018) (the "SNT Claimants" and the "SNT Case")
http://www.finra.org/sites/default/files/aao_documents/16-02822.pdf
The IT Case
The IT Claimants asserted conversion, breach of contract, and breach of fiduciary duty. IT Claimants asserted that JPMS impermissibly froze the IT accounts and prevented the trustees from making necessary and proper disbursements of IT funds. Claimants sought in part to require Respondents to unfreeze the IT accounts and restore Bernard S. Black's authority to make disbursements from the IT accounts. The IT Claimants also sought compensatory damages, costs, and fees.
Respondent JPMS requested that the Panel not adjudicate these claims because FINRA is an inappropriate forum, and, in the alternative, that the FINRA Arbitration Panel should dismiss the claims.
The SNT Case
The SNT Claimants asserted conversion, breach of contract, and breach of fiduciary. SNT Claimants asserted that JPMS impermissibly froze the SNT accounts; removed Trustee Bernard S. Black's access to the SNT account statements for five months; and prevented a majority of trustees from acting on behalf of the trust, including making necessary and proper disbursements of the SNT funds.
Further, SNT Claimants alleged that JPMS knowingly permitted a single trustee to make withdrawals from the SNT accounts without agreement or consent from his co-trustees; permitted this trustee to make withdrawals for purposes not authorized by the trust instruments and also not authorized by an improperly obtained court order that this trustee relied upon.
SNT Claimants sought in part to require Respondents to unfreeze the SNT accounts and restore Bernard S. Black's authority to manage and make disbursements from the SNT accounts. The SNT Claimants also sought to bar Respondents from seeking or following Court Orders concerning the SNT from the Denver Probate Court or other courts that lack jurisdiction over the SNT and its assets. Finally, the SNT Claimants sought compensatory damages, costs, and fees.
Respondent JPMS requested that the Panel not adjudicate these claims because FINRA is an inappropriate forum, and, in the alternative, that the FINRA Arbitration Panel should dismiss the claims.
Consolidation
In April 2017, the FINRA Arbitration Panel consolidated the IT and SNT Cases under the IT Case number 16-02822. As further noted in the FINRA Arbitration Decision, prior to the closing of the case, the pleadings were conformed to the proof and resulted in the following understandings:
FINRA Case No. 16-02822: Claimants seek an Order requiring Respondents to unfreeze the IT to allow Claimants access to withdraw funds to pay graduate school-related costs for his issue.
FINRA Case No. 16-03146: Claimants waive any claim to damages and seek specific performance to prevent the withdrawal of funds from the SNT to pay litigation-related expenses until there is a final ruling on whether the Denver Probate Court has jurisdiction over the SNT.
Respondent JPMC Bank is not a member or associated person of FINRA and did not voluntarily submit to arbitration. Therefore, the FINRA Arbitration Panel made no determination with respect to Claimants' claims against Respondent JPMC Bank.
Respondent JPMS generally denied the allegations and asserted various affirmative defenses.
Panel Findings
The FINRA Arbitration Panel published these "FINDINGS":
1. On December 19, 1997, Renata Black set up two (2) trusts, a SNT for the benefit of her daughter Joanne Black into which two-thirds of her assets were to go, and an IT for the benefit of her son Bernard S. Black and his children into which one-third of her assets were to go. She named Bernard S. Black as Executor of her Estate. Renata Black died on May 1, 2012.
2. These Trusts are held at JPMS, pursuant to arrangements with Trustees of both Trusts.
3. Currently, Trustees of the SNT are: A.D., Bernard S. Black and Samuel H. Black; Trustees of the IT are: Bernard S. Black and Samuel H. Black.
4. Because of conflicting claims, instructions and directions to JPMS from Trustees of the SNT and Trustees of the IT, including but not limited to assets, the distribution of assets, the expenditures of assets and the ownership of assets, Respondent, pursuant to its account agreements with Trustees of the IT and the SNT, has frozen assets in both Trusts and seeks to continue this freeze pending court orders or mutual agreement of the Trustees of the SNT and the IT.
5. In the pleadings, Claimants allege Respondent has engaged in conversion, breach of fiduciary duty, and breach of contract; each of which allegations Respondent has denied, and which allegations are without merit.
6. At the hearing, the parties' motion to conform the pleadings to the proof was granted.
7. a) Claimants withdrew their request for monetary damages.
b) Claimants requested that the freeze imposed upon the SNT be lifted, except continue for litigation matters.
c) Claimants requested that the freeze imposed upon the IT be lifted, especially with regard to education expenses for the Bernard Black children beneficiaries, except continue to be imposed for litigation matters.
d) Respondent requested that the freeze on both Trusts continue until final order of Colorado courts on jurisdictional matters, final turn-over orders from Illinois courts, or until the Trustees otherwise agree in writing.
8. Each party urged the Panel to exercise its equitable powers in resolution of the dispute between the parties.
9. Litigation matters involving the Trusts, the Trustees and persons involved in the Trusts are pending in various courts, including, inter alia:
Black, et al. vs. Dain, et al., Civil Action No. 1238 (ED NY);
Black, et al. v. Wrigley, et al., Case No. 16-cv-430 (ED NY);
Litvak v. Wrigley, et al., Case No. 17-cv-101 (ND Ill.);
In the matter of Joanne Black, Case No. 12 PR 1772 (Denver);
Renata Black Estate, (Surrogate's Court) (NY); and
Goodwin, as Conservator v. Black, et al., (Circuit Court, Cook County).
10. Thus far, approximately $1,000,000.00 has been expended in the SNT for purposes of litigation, and approximately the same amount has been expended in the IT for purposes of litigation, including approximately $200,000.00 owed in loans to the IT.
11. At the current time there remains approximately $1,500,000.00 in assets in the IT and $3,200,000.00 in assets in the SNT.
12. The use of assets in both Trusts to fund litigation against or involving Trustees, administrators, family members and individuals in connection with the Trusts has dissipated assets in each Trust and unless curtailed, will continue to do so to the detriment of the beneficiaries of the Trusts.
13. The freeze imposed by JPMS in both Trusts, prevents the use of trust assets for the benefit of the respective beneficiaries, i.e., Joanne Black in the SNT and Bernard S. Black and his children in the IT.
Arbitration Panel Order
In light of the Panel's findings, the arbitrators issued the
following Order:
1. JPMS is directed and ordered to freeze and continue to freeze assets in both the IT and the SNT for use of and in connection with litigation expenses, costs or attorneys' fees in matters of any sort, including but not limited to matters involving or relating to each Trust, Trustee, administrator, conservator or family member.
2. JPMS is directed and ordered to freeze assets in the IT or the SNT for use or for purposes of paying for any monetary damages assessed against Bernard S. Black in other proceedings and for use or for purposes of repaying loans to Bernard S. Black and/or the IT or SNT.
3. JPMS specifically is authorized, directed and ordered upon request by SNT Trustee(s), except for litigation matters as referenced above, to expend SNT assets for the benefit of Joanne Black, including her personal needs, clothing, food, living arrangements, travel, and entertainment.
4. JPMS specifically is authorized, directed and ordered upon request by IT Trustee(s), except as referenced above, to expend IT assets for the benefit of Bernard S. Black's trust beneficiary children, for purposes of the beneficiary children's educational expenses.
5. Paragraphs 1, 2, 3 and 4 of this Order shall remain in effect until final order of pending litigation in the Colorado Courts, or unless and until Trustees of the IT and Trustees of the SNT in writing to JPMS mutually agree to withdrawals from the SNT or the IT, or both, which agreement(s) shall be honored by JPMS.
6. Claims against JPMS for conversion, breach of fiduciary duty and breach of contract are dismissed, and Claimants' request for attorneys' fees is denied.
Bill Singer's Comment
Truly, a stunning and superb FINRA Arbitration Decision replete with content and context. The arbitrators are to be applauded for tackling not one but two thorny trust disputes and rendering the consolidated matter intelligible. No one -- not even a cranky bastard such as me -- could ask for more.
Given that the FINRA Arbitration Decision largely speaks for itself (and does so quite eloquently), allow me to offer you just a bit more background as to how entangled the various estate and trusts issues have become. By way of only one example, consider the statement of "Facts" section in JPMorgan Chase Bank, N.A. v Irrevocable Trust for the Benefit of the Issue of Renata Black (2017 NY Slip Op 50588(U) [55 Misc 3d 1216(A)]; Supreme Court New York County, May 4, 2017) http://www.nycourts.gov/reporter/3dseries/2017/2017_50588.htm:
This interpleader action relates to certain assets and funds in the nine Issue Trust accounts that are currently maintained at Chase by the Issue Trust (complaint, ¶ 15). The Issue Trust was funded from the Estate of Renata Black, who was the mother of defendants Bernard Black and Joanne Black. Renata Black died on May 1, 2012, and her will was subsequently admitted to probate in the Surrogate's Court of the State of New York, County of Westchester (Joanne Black answer and cross-claims, ¶ 2, see exhibit B). Defendant Bernard Black was appointed executor of the will (id.).
Under the terms of the will, two thirds of the residuary estate was to pass to a Supplemental Needs Trust for the benefit of Joanne Black, and the remaining 1/3 was to pass to the Issue Trust, a trust for the benefit of Bernard Black and his children (id.). Defendants Bernard Black, Samuel Black and Anthony Dain are the trustees of the Supplemental Needs Trust. The Issue Trust designates Bernard Black and Anthony Dain as trustees. Anthony Dain subsequently resigned, and was replaced by Samuel Black.
Currently, there is extensive litigation across the country regarding these trusts between and among Bernard Black, Samuel Black, Anthony Dain and Joanne Black, including:
1. A probate proceeding entitled In re the Interest of Joanne Black, Case No. 2012PR1772 (Denver Probate Court, Denver County, Colorado) (the Colorado proceeding);2. A turnover proceeding entitled Petition for the Turnover of Property Belonging to Joanne Black by the Estate of Renata Black pursuant to SCPA 2105, File No. 2012-1209/B (Surrogate's Court, Westchester County);3. A civil action entitled Samuel H. Black, et al. v Cherie Wrigley, et al., Case No. 16-CV-0430 (ED NY);4. A civil action entitled Samuel H. Black, et al. v Anthony Dain, et al., Case No. 16-CV-1238 (ED NY)(complaint, ¶ 18).
In addition, there were two other litigations involving various of the defendants herein, including Bernard Black and Joanne Black, that have recently been dismissed:
1. A guardianship proceeding concerning Joanne Black entitled In the Matter of the Application of Bernard Black, Petitioner and Cherie Wrigley, Cross-Petitioner, for the Appointment of a Guardian of the Person and Property of Joanne Black, Index No. 80253/2014 (Sup Ct, Richmond County); and2. A civil action entitled Bernard S. Black, et al., v Joanne Black, Case No. 16-Civ-1763 (ND Ill)(id., ¶ 19).
Joanne Black has asserted in many of these litigations, and now in cross-claims in this action, that Bernard Black, while purporting to act on her behalf and in her best interests, converted approximately $3.5 million that rightfully belonged to her and used such money, at least in part, to fund the Issue Trust accounts that are the subject of the interpleader complaint. Specifically, Joanne Black alleges that Bernard Black, while purporting to act on her behalf and in her best interests, disclaimed her rights to directly receive: (1) the proceeds of approximately $3 million "Payable Upon Death" (POD) securities accounts established by her mother, decedent Renata Black, for which Joanne Black was the sole beneficiary; and (2) the proceeds of approximately $500,000 from a Vanguard Roth IRA, of which she was also the sole beneficiary (see cross-claims, ¶¶ 6-7). Joanne Black further alleges that, after Bernard Black fraudulently obtained these disclaimers from the Colorado court, he then converted the funds and transferred the proceeds into the Estate of Renata Black, and used the converted funds, in part, to fund the Issue Trust and the nine Issue Trust accounts at issue here, for the exclusive benefit of Bernard Black and his children (id.). In her cross-claims in this action, Joanne Black asserts causes of action for monies had and received, unjust enrichment and conversion against Bernard Black and the other Issue Trust defendants.
Joanne Black brought two causes of action against Bernard Black in the Denver Probate Court. The first was to void the disclaimer, and the second was for civil theft. On September 28, 2015, after four days of hearing, the court issued an order finding that Bernard Black, who is both a trustee and beneficiary of the Issue Trust, had breached his fiduciary duties to Joanne Black as her conservator, and committed civil theft by disclaiming Joanne Black's right to the $3.5 million proceeds of the securities accounts and the Roth IRA. Specifically, the court held that Bernard Black "knowingly used the POD account funds to fund the Issue Trust . . . and it is clear . . . that he intended to and still intends to permanently deprive her of those funds" (Colorado Hearing order at 11 [aff of Andrew P. Karamouzis, exhibit A]). The court surcharged Bernard Black for the full amount of the funds he converted from Joanne Black, and entered judgment against him for treble damages in the amount of $4,534,068, based on its finding that Bernard Black had committed civil theft (id. at 11). Despite finding for Joanne Black on her civil theft motion, the court did not void the disclaimer, which remains in force. Bernard Black is currently appealing this order, and has not paid the damages award.
Chase asserts that, based on the significant competing claims of the defendants to the funds in the Issue Trust accounts, it placed a hold on the Issue Trust accounts in order to maintain the status quo, and to prevent the dissipation of any assets or funds (complaint, ¶ 20). Chase further asserts that, because it is exposed to potential multiple liability regarding the assets and funds held by Chase in the Issue Trust accounts, it commenced this interpleader action, pursuant to CPLR 1006, seeking an order directing Chase to deposit the proceeds of the nine Issue Trust accounts, which total $1,246,737, into the court (id., ¶ 24).