April 17th. The Kansas Supreme Court has issued its opinion in Estate of Draper v. Bank of America (No. 96,060), a probate case. In a unanimous decision, written by Justice Luckert the Court ruled against First Christian Church of Olathe, two private individuals, Olathe Medical Center and the American Cancer Society retaining the proceeds from two trusts created by the late Ethel Draper. The property conveyed in these trusts more properly belonged in Draper’s estate for the benefit of her stepson’s due to a 1967 antenuptial agreement. Notes: While named in the litigation the American Cancer Society and Olathe Medical Center had settled with the Estate out of court. Bank of America’s naming in the lawsuit stems from its position as trustee of one of the trusts at issue. The other trust involved is overseen by UMB Bank.
In 1967 Clark Draper married Ethel Catlin. They signed an antenuptial agreement which stated that while each brought separate assets to the marriage and would retain control over those assets independently, if Clark predeceased Ethel his assets would pass to her, and she would leave at least one quarter of her estate to each of Clark’s sons by a previous marriage. Clark died in 1977. In 1977 and 1982 Ethel created two irrevocable trusts from which she benefited during her lifetime, but which upon her death would transfer the benefits to those listed above. Ethel Draper died in 2002, leaving her entire estate of $10,000 to the three sons of Clark Draper, while the two trusts contained combined assets totalling around $1 million. Clark’s son Gerald, acting as executor of Ethel’s estate sued the two trusts, arguing that their creation was a breach of Ethel’s fiduciary obligation under the 1967 antenuptial agreement.
The Johnson County District Court issued a Summary Judgement in favor of the Estate. This was reversed by the Court of Appeals. In this decision the Kansas Supreme Court reverses the Court of Appeals, reinstating the District Court’s Summary Judgement.
The essence of the decision comes down to the determination that Ethel held the property under a Constructive Trust while she was alive, that was created by the 1967 antenuptial agreement. The transfer of the property into the two irrevocable trusts was therefore a constructive fraud (essentially a legal fiction, unbeknownst to the beneficiaries). To reach this conclusion the Court finds that Ethel had a Confidential Relationship with her husband (something which does not arise automatically just from marriage) because of the agreement – under Kansas law a Confidential Relationship arises when two spouses agree to write their wills in a manner co-ordinated between the two of them. The second part of the constructive fraud finding is that Ethel had a duty under the 1967 agreement, since she owed Clark a duty to carry out her part of the bargain in good faith, which she breached by divesting her estate of most of her assets through the two trusts.
The Court also cleared a path through a number of statutory rules regarding timing. It found for example that the statute which bars out of time claims against an Estate did not apply in this instance because the lawsuit was initiated as part of the process of marshaling the assets of the Estate (in spite of the fact that the Executor doing the marshaling was also a beneficiary), where that particular rule did not apply. A claim that the suit was barred under the statute of limitations regarding fraud (on the argument that the fraud took place in 1982) was rejected on the grounds that the terms of the antenuptial agreement were not actually breached until Ethel’s death in 2002.