Failure to probate will results in lost mineral rights

The 12th District Court of Appeals in Tyler Texas affirmed a lower court’s decision denying the appellant’s application for probating a will 13 years after the testator’s death. It should be a wakeup call for anyone whose family members may have owned land at one time or another in areas of the country that may now be sources of rich deposits of oil, gas, or other minerals. Since I recently became the financial caregiver for my parents who do own mineral interests in Louisiana and Texas, this case certainly hits close to home.

In the Estate of Everett H. Rothrock, Deceased, Jerry E. Rothrock appealed the trial court’s order denying his application to probate his father’s will as a muniment of title.  In one issue, Jerry contends the trial court erred in determining that he was in default for failing to probate  his father’s will within the statutory period. 

Section 73(a) of the Texas Probate Code states as follows:

(a) No will shall be admitted to probate after the lapse of four years from the death of the testator unless it be shown by proof that the party applying for such probate was not in default in failing to present the same for probate within the four years aforesaid; and in no case shall letters testamentary be issued where a will is admitted
to probate after the lapse of four years from the death of the testator.

In 1986, Everett H. Rothrock, Jerry’s father, signed a will appointing Jerry as the independent executor of the will and naming him as the sole beneficiary of the estate. Everett died on June 5, 1994.  In September 2008, Jerry was notified by an oil and gas landman that Everett owned mineral interests in Cherokee County, Texas.  On October 6, 2008, Jerry filed an application to probate Everett’s will as a muniment of title.

At a hearing on the application, Jerry testified that, in gathering Everett’s assets between 1985 and 1986, he investigated whether Everett owned any land. According to Jerry, Everett told him that he had sold all of the real property he had received from his parents and that he did not have any real property left.

The Court of Appeals upheld the lower court’s decision stating, “Because Jerry did not probate Everett’s will within four years after his death, relied upon a family agreement, and failed to show reasonable diligence, the evidence is factually sufficient to support the  trial court’s finding  that Jerry was in default.  The trial court did not err in denying Jerry’s application to probate Everett’s will as a muniment of title.”

Adding insult to injury is the fact that according to court documents, Jerry was also a “very successful lawyer in Washington, D.C. and that about half of his practice dealt with oil and gas law.”

MS Supreme Court Determines Conditional Bequest as Precatory

In Estate of Brill, No. 2009–CT–01968–SCT (Miss. Dec. 15, 2011), the Mississippi Supreme Court reversed in an opinion thoroughly analyzing the Mississippi precedents and holding that the language was precatory and thus the will gave the sister fee simple ownership of the residuary estate.

Bobbye Brill died testate on April 1, 2004.  She was survived by her mother, Annie Nichols, and her brother and sister, Frank Nichols and Shirlee Phillips, respectively.  Brill’s holographic will states:

I, Bobbye Brill, leave my home and contents to my sister, Shirlee Phillips.  My Thunderbird  car  I  leave  to my  brother,  Frank Nichols. The  remainder  of my estate   I  leave  to my  sister, Shirlee Phillips, with  the  understanding  she  will  take care of my mother, Annie Nichols.  Please be sure this is carried out.

Brill’s brother Frank Nichols, claimed that the language created an testamentary trust for the benefit of Annie Nichols, and did not confer a fee-simple remainder interest in Brill’s entire estate to Shirlee Phillips.

Both the Chancery Court and the Court of Appeals ruled against Nichols, claiming that the language created a “conditional bequest” to Phillips and that she had fulfilled the condition by caring for Annie Nichols.

In rendering its option, The Mississippi Supreme Court ruled that

After reviewing the entire will, we find that the sentence creates neither a testamentary trust nor a ‘conditional bequest’. We find that the language ‘with the understanding that she will take care of my mother’ was a precatory expression of Brill’s wish or desire and was not imperative. Brill’s will conveyed her residuary estate to Phillips in fee simple. Accordingly, we find that the Court of Appeals and chancery court correctly awarded the residuary estate to Phillips, but that both courts erred in finding that the will created a conditional bequest.

State v. Smith and State v. Snelling (Indiana)

The Indiana state securities regulators pursued an action alleging that Jerry Smith and Jasen Snelling bilked investors out of more than $4.5 million in a nearly decade-long Ponzi scheme where Mr. Smith and Mr. Snelling told investors they were talented day traders and promised up to 20% returns. Mr. Smith and Mr. Snelling, through various companies, encouraged investors to roll over their traditional IRA accounts into self-directed IRAs at a trust company. Mr. Smith and Mr. Snelling would immediately take the funds from those accounts and use them for personal living expenses, but investors continued to receive statements from the trust company, as well as bills for custodial fees, even after their money was taken out of the ac-counts. Mr. Smith and Mr. Snelling are charged with more than fifty counts of violations of the Indiana Uniform Securities Act.

To read more on this case, click here.

SEC v. Durmaz, et al

The SEC filed charges alleging that a company and its partners perpetrated a Ponzi scheme in which at least $20 million was raised from more than 120 investors. In particular, the SEC alleged that the defendants promised safe, guaranteed returns in purported investments in foreign bonds and raised money by convincing investors to invest in self-directed IRAs and steering them to custodians who offered the self-directed IRAs. $20 million of the funds invested in the fraudulent scheme came from self-directed IRAs.

The SEC alleges that USA Retirement Management Services (“USARMS”) and managing partners Francois E. Durmaz and Robert C. Pribilski mass-mailed promotional materials to prospective investors and invited them to estate planning seminars held at country clubs and banquet halls. They gained retirees’ confidence in follow-up meetings and portrayed themselves as educated and experienced in foreign investments specifically tailored to the needs of seniors. Durmaz and Pribilski then pitched what they represented as safe, guaranteed investments in “Turkish Eurobonds” through the purchase of USARMS promissory notes that would earn annual returns between 8 and 11 percent.

The SEC alleges that USARMS raised at least $20 million from more than 120 investors, but did not actually invest the money in Turkish Eurobonds as promised. Instead, returns were paid to earlier investors with funds received from new investors in Ponzi-like fashion. Durmaz and Pribilski further misused investor funds to finance their other businesses and purchase such things as luxury automobiles, homes, vacations, and web-based pornography. They also wired investor money into bank accounts belonging to individuals living in Turkey who are named as relief defendants in the SEC’s case.

To read the full complaint, click here.

SEC v. Robert Stinson, Jr., et al.

The SEC filed charges alleging that an individual perpetrated an offering fraud and Ponzi scheme in which at least $16 million was raised from more than 140 investors. In particular, the SEC alleged that the defendant promised “safe and risk free” returns in purported investments in real estate and commercial mortgage loans. The defendant raised money by targeting, among others, investors in self-directed IRAs. Approximately $9.2 million of the funds invested in the fraudulent scheme came from self-directed IRAs.

According to the SEC’s complaint, from at least 2006 through the present, Robert Stinson, primarily through Life’s Good, Inc. and Keystone State Capital Corporation, two companies he controlled, sold purported “units” in four Life’s Good private real estate hedge funds. (“Life’s Good Funds”). Stinson falsely claimed that the Life’s Good Funds generated annual returns of 10 to 16 percent by originating more than $30 million in commercial mortgage loans, and other investment income gained on the sale of foreclosure and investment properties. In reality, the SEC’s complaint alleges that Stinson has been stealing investor funds for his personal use, transferring money to family members and others, and using new investor proceeds to make payments to existing investors in the nature of a Ponzi scheme.

To read the full complaint, click here.

SEC v. United American Ventures, LLC, et al

The SEC filed charges alleging that two companies and four individuals misrepresented and concealed numerous material facts in connection with the offer and sale of $10 million in bonds to approximately 100 individual investors in various states. In particular, the SEC alleged that the defendants promised guaranteed returns in purported investments in medical technologies and raised money by convincing investors to invest through self-directed IRAs and steering them to custodians who offered the self-directed IRAs. Approximately $3.5 million of the funds invested in the bonds came from self-directed IRAs.

The SEC’s complaint alleges that the defendants misrepresented and concealed numerous material facts in communications with investors. They assured investors, for example, that UAV had a strong track record of profiting from medical-related investments and that investors would earn a guaranteed 25 percent annual return on UAV’s bonds. In reality, UAV had no such record or experience, and never earned a return from any investment. Instead, UAV used nearly all of the money it raised from investors for purposes other than investments in medical ventures, such as paying exorbitant salaries and benefits,  paying referral fees, and making Ponzi-type interest payments to investors. Further, the defendants misrepresented their venture capital experience and educational background, and failed to inform investors that one of the principals was previously barred by a California court from being involved in any securities offering.

To read the full complaint, click here.

SEC Issues Fraud Alert for Self Directed IRAs

Self Directed IRA’s (SDIRA) can be a great way for individuals to invest IRA assets outside of traditional financial assets. With some limitations on permitted investments such as collectables, and Non-U.S. minted coins, investors can direct IRA investments into such assets as investment real estate, limited liability companies that hold allowable assets, limited partnerships, mortgage notes, and even interests in closely held corporations as long as certain self-dealing rules that apply to ERISA Plans and IRA’s are followed.

Generation Skipping Tax hits skip beneficiaries of charitable trust: Trustee fails to inform.

In Hobbs Jr. v. Legg Mason Investment Counsel and Trust Company (N.D. Miss. January 25, 2011), Plaintiffs were allowed to bring a claim based upon failure to inform beneficiaries of generation-skipping tax consequences but lose summary judgment action with respect to alleged damages emotional distress and having to sell securities at a loss to pay taxes all based on trustee’s failure to inform beneficiaries of GST consequences of distributions from trust.

Upon the death of Edward H. Johnson in 1994, a QTIP marital trust was established for the benefit of his wife, Bernice. Lawrence Glover and First American Trust Company were appointed as co-trustees. The trustees allocated the assets of the marital trust into two separate trusts to take advantage of Edward Johnson’s remaining GST exemption. One contained $949,626 of assets exempt from GST tax liability. The other contained $18,420,895 of nonexempt assets.

Corporate trustee did not breach fiduciary duty for failing to diversify.

Karo v. Wachovia Bank, N.A., 2010 U.S. Dist. LEXIS 46929 (May 12, 2010) A Virginia federal district court grants summary judgment in favor of Wachovia Bank as co-trustee on claims of breach of fiduciary duty arising out of loss in value of bank stock comprising 65 percent of the trust portfolio.

In 1966, Rosalie Karo created a trust for the benefit of her husband Toney, her son Drew, and her grandson W.A.K. (a minor), with Toney and Central National Bank as co-trustees. The trust was originally funded primarily with Central National Bank stock. Through a series of mergers, Wachovia Bank became co-trustee and the trust assets included Wachovia stock that constituted 65 percent of the trust portfolio.

Illinois case rules in favor of corporate trustee

Bank of America v. Carpenter, 2010 Ill. App. LEXIS 440 (May 24, 2010) The Illinois Court of Appeals reversed a trial court’s modification of trust terms to shorten the duration of a trust and affirms summary judgment in favor of Bank of America as trustee on claims of breach of fiduciary duty for failing to seek construction of trust terms.

Hartley Harper died in 1932, and under his will established a trust to provide income first to his wife for her lifetime, then to his brother Frederick for his lifetime, and then in equal shares to Frederick’s children and their descendants per stirpes. The trust provided for the termination of the trust upon the death of all of Frederick’s descendants, and the distribution of the trust assets upon termination in equal shares to Hartley’s step-daughter, step-grandson, and sister-in-law, or their descendants per stirpes. The trust also included a perpetuities savings clause that provided for the termination of the trust 21 years after the death of the last survivor of “all the beneficiaries named or described who are living at the date of [Hartley’s] death”.