In Re: Passarelli Family Trust

J-A17020-17

2017 PA Super 366

IN RE: PASSARELLI FAMILY TRUST IN THE SUPERIOR COURT OF
PENNSYLVANIA

APPEAL OF: JOSEPH PASSARELLI

No. 3150 EDA 2016

Appeal from the Decree September 19, 2016
in the Court of Common Pleas of Chester County
Orphans' Court at No(s): 1516-0101

BEFORE: GANTMAN, P.J., RANSOM, J., and PLATT, J.*

OPINION BY RANSOM, J.: FILED NOVEMBER 16, 2017

Appellant, John Passarelli, appeals from the decree entered September

19, 2016, terminating an irrevocable trust on the basis of fraud. We

reverse.

We adopt the following statement of facts from the trial court’s

September 19, 2016 decision and decree, as well as the record. See Trial

Court Decree, 9/19/16, at 1-3. Appellant and Appellee, Margaret Passarelli,

were married in November 1998, and have two children. In 2015, Appellee

was diagnosed with early stage breast cancer. That same year, Appellee

agreed with Appellant to meet with an attorney, Michael Perna, to discuss

estate planning. Appellee was unaware that Appellant had previously met

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*
Retired Senior Judge assigned to the Superior Court.
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with Attorney Perna and learned of the relationship shortly prior to a

meeting to sign estate planning documents.

In May 2015, Attorney Perna, who prepared the trust document, and

Appellant, presented it to Appellee. See Passarelli Family Trust, 5/21/15, at

1 (“the Trust”). The Trust had been compiled with an inventory of assets

provided by Appellee and Appellant, including ownership of two property

companies known as Japen Holdings, LLC and Japen Properties, LLP.1 See

Notes of Testimony (N.T.), 6/23/16, at 208; see also Trust, 5/21/15,

Schedule A. Appellee did not ask about the inventory of assets, valued at

approximately $13,900,000, nor did she read the Trust documents. See

N.T. at 18, 32, 56-57, 62-63. Appellee did inquire as to the disposition of

trust assets in the event of divorce and was informed by Attorney Perna that

the Trust would survive divorce. See N.T. at 156-58, 179-180.

On May 21, 2015, Appellee executed the Trust, naming Appellant as

trustee, Appellant and Appellee as settlors, and their two minor children as

additional beneficiaries; a will; and other estate planning documents. The

Trust provided that the trustee would distribute the income to settlors and

their children within his discretion. See Trust, 5/21/15, at ¶ 2. The Trust

further provided that in the event of the death of the settlors, the Trust

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1
These businesses were acquired during the marriage with marital property,
and were titled in Appellant’s name. See N.T., 6/23/16, at 208. Both
businesses were valued at a combined $4,200,000.00. See Trust, 5/21/15,
Schedule A.

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would be held for the benefit of the children and their living issue. Id. at ¶

4.

Subsequent to executing the Trust, Appellee discovered that

Appellant, through the Japen corporations, had purchased two properties in

Florida without her knowledge and had included these properties in the

corpus of the trust. In September 2015, Appellee discovered Appellant was

having an extra-marital affair and filed for divorce. She also discovered that

Appellant’s girlfriend was living in one of the Florida properties. In October

2015, Appellee filed an emergency petition for special relief to prevent

dissipation of the marital assets. In December 2015, the court froze fifty

percent of certain accounts included in the corpus of the trust.

On January 19, 2016, Appellee filed a petition to terminate the trust

pursuant to 20 Pa.C.S. §§ 7736 and 7740.6. The court held an evidentiary

hearing and subsequently issued findings of fact and conclusions of law. The

court found that Appellant had concealed the fact that he purchased the

Florida properties with marital assets and had failed to disclose this at the

time of the Trust’s execution. As a result, the court concluded that Appellee

had met her burden of proving fraudulent conduct and dissolved the Trust.

Appellant timely appealed and filed a court-ordered Pa.R.A.P. 1925(b)

statement of errors complained of on appeal. The court issued a responsive

opinion.

On appeal, Appellant raises the following questions for our review:

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1. Whether a finding of fraud may be premised upon a failure to
identify each asset contributed to a trust?

2. Whether non[-]disclosure of the assets donated to the trust
can be construed as fraudulent misrepresentation where (a) the
complaining party had no present interest in the assets conveyed
to trust (b) the assets became part of the trust and (c) the
complaining party received a benefit from the assets conveyed
to the trust.

3. Whether non-disclosure of $470,000 of assets conveyed to a
trust is material where the total assets made part of the trust is
$13,900,000.

4. Whether a trust agreement should be terminated premised
upon fraud where the alleged victim professes to have never
read the instrument but it conferred upon the alleged victim a
tangible benefit consistent with the estate planning goals she
sought to achieve?

Appellant’s Brief at 3-4 (unnecessary capitalization, answers, and emphasis

omitted).

When reviewing a decree entered by the Orphans’ Court,

this Court must determine whether the record is free from legal
error and the court's factual findings are supported by the
evidence. Because the Orphans’ Court sits as the fact-finder, it
determines the credibility of the witnesses and, on review, we
will not reverse its credibility determinations absent an abuse of
that discretion. However, we are not constrained to give the
same deference to any resulting legal conclusions. Where the
rules of law on which the court relied are palpably wrong or
clearly inapplicable, we will reverse the court’s decree.

In re Estate of Rosser, 821 A.2d 615, 618 (Pa. Super. 2003) (internal

quotation marks and citations omitted).

Appellant first claims that the court erred in finding that the trust had

been created under the inducement of fraud. See Appellant’s Brief at 9-11.

The “fraud” suggested by the court arose from the failure to disclose marital

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assets incorporated into the Trust. Id. at 11. However, according to

Appellant, a finding of fraud may not be premised upon a failure to identify

each asset contributed to a trust. Id. at 9-11.

With regard to trusts,

[a] trust is a fiduciary relationship; one person holds a property
interest subject to an equitable obligation to hold or use that
interest for the benefit of another. The language or conduct
creating the trust must be clear and unambiguous. A statement
will be sufficient evidence of a trust if the beneficiary, the trust
property, and the purpose of the trust are set forth therein.

Generally, a trust executed without reservation of power by a
settlor to revoke or reform the trust is irrevocable.
An irrevocable trust may be rescinded by the settlor, however, if
it is demonstrated that the trust was created through fraud,
duress, undue influence, or mistake.

Rebidas v. Murasko, 677 A.2d 331, 333 (Pa. Super. 1996) (internal

citations and quotations omitted). Additionally, Black’s Law Dictionary

defines an irrevocable trust as one which “cannot be terminated by the

settlor once it is created.” TRUST, Black's Law Dictionary (10th ed. 2014).2

The Pennsylvania Probate, Estates, and Fiduciaries Code delineates the

requirements for the creation of a trust as follows:

(1) the settlor has capacity to create a trust;
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2
In contrast, the Pennsylvania Probate, Estates, and Fiduciaries Code
defines a revocable trust as a trust that is revocable “to the extent the
settlor, immediately before the time as of which the determination is made,
had the power, acting without the consent of the trustee or any person
holding an interest adverse to revocation, to prevent the transfer of the trust
property at the settlor's death by revocation or amendment of or withdrawal
of property from the trust.” See 20 Pa.C.S. § 7703.

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(2) the settlor signs a writing that indicates an intention to
create the trust and contains provisions of the trust;

(3) the trust has a definite beneficiary . . .

(4) the trustee has duties to perform; and

(5) the same person is not the sole trustee and sole beneficiary
of the trust.

20 Pa.C.S. § 7732(a). These requirements were met in the creation of the

irrevocable trust at issue, and neither party disputes these facts.

However, Appellee contended that because the creation of the trust

was induced by fraud, it was voidable. See 20 Pa.C.S. § 7736 (noting that

trusts may be rescinded if fraudulently induced). The evidence required to

“substantiate a request for rescission [of a trust agreement] must be clear,

precise, and convincing. The credibility and weight accorded to the

testimony and witnesses will not be disturbed except for clear error.”

Rebidas, 677 A.2d at 334 (internal citations and quotations omitted)

(discussing the standards for rescission of a trust based upon mistake); see

also Pa.O.C.R. 33 (noting that fraud must be pleaded with particularity).

However, unsubstantiated testimony as to an alleged mistake, for instance,

is insufficient to justify the reformation of a trust. See, e.g., In re

LaRocca’s Trust Estate, 192 A.2d 409, 414 (Pa. 1963).

Before the Orphans’ Court, Appellee argued that the trust had been

fraudulently induced, specifically because the property addresses were not

listed in the trust’s Schedule A. See Pet. to Terminate, 1/19/16, at 1-3. In

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its analysis, the trial court 1) noted that a challenge to a validity of a trust

due to fraud is similar to that of a will challenge, citing in support Estate of

Newhart, 22 Fid. Rep. 2d 383 n.4 (Pa.Com.Pl.Orph 2002), and 2) adopted

the definition of fraud espoused in In re Paul’s Estate, 180 A.2d 254 (Pa.

1962), and adopted by In re Estate of Glover, 669 A.2d 1011 (Pa. Super.

1996). See Trial Court Decision (TCD), 9/16/16, at 4. The court concluded

that Appellant had committed fraud by failing to inform Appellee of the

inclusion of the specific property addresses in the trust. Id. at 4-6. We

reject this conclusion for a number of reasons.

Initially, we note that we do not find the trial court’s reliance on

Newhart persuasive. Newhart is a trial court decision and, therefore, not

binding on this Court. See Coleman v. Wyeth Pharmaceuticals, Inc., 6

A.3d 502, 522 n.11 (Pa. Super. 2010). Further, Newhart was a case that

did not involve fraud, but undue influence in the formation of a will. See

Newhart, 22 Fid. Rep. 2d 383 n.4. Finally, the text cited for the proposition

that will and trust challenges should be treated similarly is a footnote with

no supporting authority. Id. Thus, we need not accept the trial court’s

contention that will contests and trust contests should always be treated

similarly without further examination of the appropriate law. That said, the

same general standards apply. See Rebidas, 677 A.2d at 334.

Of deeper concern is the case law relied upon to construct the lower

court’s definition of fraud, as the analysis is both simplistic and reliant upon

dicta. In Paul, the appeal questioned whether an attorney had exerted

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undue influence upon the testatrix during the formation of the will. See

Paul, 180 A.2d at 255. There was some evidence that the attorney had

provided misinformation as to the value of certain stocks in the estate. Id.

The Supreme Court of Pennsylvania concluded that the appellants had not

proven by clear and convincing evidence that undue influence was exercised.

Id. at 261-62. Thereafter, the Court found no evidence of fraud, because

there was no indication that the testatrix did not know the true value of the

stock or would not have made the bequest had she known its true value.

Id. at 262. At best, this appears to be dicta. The Court did not engage in a

true fraud analysis and focused mostly on the undue influence claim. Id.

In the other case relied upon by the trial court, the testator left

$50,000.00 to a friend, a farm to other relatives, and one million dollars to a

veterinary facility. Glover, 669 A.2d at 1016. The friend had also

misappropriated over a million dollars in funds from the testator’s bank

account and, accordingly, Glover’s relatives argued that the will was

fraudulently induced. Id. This Court affirmed in part but reversed in part.

We concluded that the relatives had failed to offer evidence that, if the

testator was aware of the misappropriation, she would not have bequeathed

the farm or money to the veterinary facility. Id. However, we also

concluded that the bequest to the friend who had stolen money was indeed

the result of fraud, as it was absurd to think that the bequest would have

been made if the testator was aware of the misappropriation. Id. at 1016-

17. Glover, then, adopted Paul’s definition of fraud wholesale. Id. at 1016

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(describing Paul as “the only published opinion within the last eighty years”

and one of the few cases regarding fraud in the inducement of a will).

Despite the Glover court’s assertion that there is little precedent

discussing fraud in the formation of wills, this assertion is inaccurate. In

other cases involving fraud in the inducement of wills, including some

decided after Paul, our Court has used the following language to define

fraud:

The essence of fraud is deceit intentionally and successfully
practiced to induce another to part with property or with some
legal right. Fraud is practiced when deception of another to his
damage is brought about by a mispresentation of fact or by
silence when good faith required expression.

See In re Thorne’s Estate, 25 A.2d 811, 816 (Pa. 1942); see also In re

McClellan’s Estate, 75 A.2d 595, 598 (Pa. 1950); In re Reichert’s

Estate, 51 A.2d 615, 617-618 (Pa. 1947); Moser v. DeSetta, 589 A.2d

679, 682 (Pa. 1991); Barker v. Rangos, 324 A.2d 498, 505 (Pa. Super.

1974). Pennsylvania Courts have used this language since the 1940s, citing

a 1934 New Jersey Chancery matter. Thorne’s Estate at 816. However,

not all cases discussing fraudulent wills, including Glover and Paul, adopt

this definition.

In common law and in Pennsylvania, the definition of fraud is well-

settled. A plaintiff must demonstrate: “(1) a representation; (2) which is

material to the transaction at hand; (3) made falsely, with knowledge of its

falsity or recklessness as to whether it is true or false; (4) with the intent of

misleading another into relying on it; (5) justifiable reliance on the

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misrepresentation; and (6) the resulting injury was proximately caused by

the reliance.” See Eigen v. Textron Lycoming Reciprocating Engine

Div., 874 A.2d 1179, 1185 (Pa. Super. 2005); DeArmitt v. N.Y. Life Ins.

Co., 73 A.3d 578, 591 (Pa. Super. 2013).

Moreover, the uniform law comment to 20 Pa.C.S. § 7736, regarding

setting aside a trust, also notes that the section is a specific application of

the Restatement (Third) of Trusts and Restatement (Second) of Trusts,

which provides that:

a trust can be set aside or reformed on the same grounds as
those which apply to a transfer of property not in trust, among
which include undue influence, duress, and fraud, and mistake.
This section addresses undue influence, duress, and fraud. For
reformation of a trust on grounds of mistake, see Section 415.
See also Restatement (Third) of Property: Wills and Other
Donative Transfers Section 8.3 (Tentative Draft No. 3, approved
2001), which closely tracks the language above. Similar to a
will, the invalidity of a trust on grounds of undue influence,
duress, or fraud may be in whole or in part.

20 Pa.C.S. § 7736.3

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3
Our courts have adopted portions of the Restatement (Second) of Trusts in
previous matters. See, e.g., Estate of Weeks, 402 A.2d 657, 658 (Pa.
1979) (adopting Restatement of Trusts on question of whether a trust may
be terminated without the consent of the settlor); In re Shoemaker, 115
A.3d 347, 355 (Pa. Super. 2015) (adopting Restatement as to the
expression of the doctrine of cy pres); In re Scheidmantel, 868 A.2d 464
(Pa. Super. 2005) (noting that Pennsylvania follows the Restatement of
Trusts regarding exercise of discretion by trustees); In re Barnes
Foundation, 683 A.2d 894 (Pa. Super. 1996) (adopting the Restatement of
Trusts regarding the doctrine of deviation with regard to a charitable trust).

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The Restatement (Third) of Property, as cited, provides some guidance

regarding the definition of fraud in the context of a donative transfer:

A donative transfer is invalid to the extent that it was procured
by undue influence, duress, or fraud . . . A donative transfer is
procured by fraud if the wrongdoer knowingly or recklessly made
a false representation to the donor about a material fact that
was intended to and did lead the donor to make a donative
transfer that the donor would not otherwise have made.

See Restatement (Third) of Property (Wills & Don. Trans.) § 8.3 (2003).

While there are similarities to the requirements of Glover and Paul,

particularly with the requirements as to the donor, the Restatement contains

additional language that imputes further strictures on the wrongdoer,

including a knowing and reckless misrepresentation about a material fact.

This language tracks with that of common law fraud, specifically the knowing

and recklessness requirement; the intent of misleading another into relying

upon it; and the resulting injury proximately caused by the reliance. See

Eigen, 874 A.2d at 1185; DeArmitt, 73 A.3d at 591.

We further note that irrevocable trusts are intended to be just that:

irrevocable. See Rebidas, 677 A.2d at 332. Such a trust is not easily

modified or rescinded, absent the varying circumstances discussed above.

They provide stability and security. Those entering into a trust do so with

the knowledge that the property they seek to protect will be taken care of

and available to the beneficiaries at the appropriate time. Indeed, Appellee

testified to the same effect: that she wished to ensure the family money

stayed within the family. See N.T. at 51-52. A will does not provide this

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same finality. A will may be amended in favor of new beneficiaries, either by

a new will or by codicil. Based on these principles and the discussion above,

we are satisfied that the standards required to set aside a trust on the basis

of fraud should be stricter than that which case law previously provided.

Thus, we conclude that the adoption of the elements of fraud as discussed in

the Restatement of Trusts and the Restatement of Property, and as

expressed in case law regarding common law fraud, is appropriate in the

instant case.

Here, the court concluded that the omission of the addresses of the

Florida properties from the Schedule A was a material fact that fraudulently

induced Appellee to execute the trust and that Appellee would have acted

differently if she had known of the properties’ inclusion in the trust. Initially,

we note that Schedule A does not identify any corporate asset of either

Japen Properties or Japen Holdings. The assets of both corporations are

included in the trust in their entirety, and are valued at $4,200,000.00. No

party asserts that these valuations are incorrect. Nevertheless, we will

determine whether, under the definition adopted above, Appellee can show

fraud in the inducement of the trust.

There is a six-factored test to establish fraud in the inducement of a

trust, and each factor must be met. See Eigen, 874 A.2d at 1185;

DeArmitt, 73 A.3d at 591. First, Appellee was required to demonstrate that

a representation was made to her. The “representation” was that the two

properties were included as assets of the Japen corporations. Next, Appellee

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was required to show the representation was material to the transaction at

hand. A misrepresentation is material if the party would not have entered

into the agreement but for the misrepresentation. See Eigen, 874 A.2d at

1186. Appellee avers she would not have executed the trust if she had

known that the properties were included. Even if the properties had been

listed on the Schedule A, it is unlikely that Appellee would have known of

their significance to the marriage at the time of the trust’s execution. Giving

her the benefit of the doubt, however, we turn to the third requirement.

There was no false statement made. The corporations were included

in the trust, listed in the Schedule A, and were accurately valued. It is

undisputed that Appellee was unaware of every asset held by the Japen

corporations. Here, this does not amount to fraud or a false statement for

several reasons. Although not specifically listed on the Schedule A, the

properties were included in the trust under the corporation’s holdings and

combined value of $4,200,000.00. Appellee has identified no duty to fully

disclose a corporation’s assets when that corporation is added to the corpus

of a trust. “Marital assets” and the duty to disclose them are defined by

statute in the Divorce Code and Rules of Civil Procedure, 23 Pa.C.S. § 3501,

3505(b); Pa.R.C.P. 1920.33(a).4 Here, at the time of the execution of the

trust, there was no divorce pending and, accordingly, no duty to disclose.

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4
Appellee’s arguments regarding undue influence and a confidential
relationship are equally misplaced. She abandoned these claims before the
(Footnote Continued Next Page)

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Perhaps most importantly, Appellee cannot show that she suffered an

injury from the “misrepresentation.” She has not parted with any property:

it is included in the Trust for which she is a settlor and her children are

beneficiaries. Her argument that she has suffered an injury because she

cannot access these funds in a divorce settlement is misplaced: during the

execution of the trust documents, Appellee specifically wished to ensure the

security of these assets in the event of a divorce.

Thus, the evidence did not establish that Appellant committed a

fraudulent misrepresentation during the execution of the trust. Due to our

resolution of this issue, we need not address Appellant’s remaining claims.

Accordingly, we conclude that the court abused its discretion and committed

an error of law in determining that the creation of the Trust was premised

upon fraud, and reverse. See Rosser, 821 A.2d at 618.

Decree reversed. Jurisdiction relinquished.

President Judge Gantman joins the opinion.

Judge Platt files a dissenting opinion.

_______________________
(Footnote Continued)

trial court and may not now raise them before this Court. See Pa.R.A.P.
302.

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Judgment Entered.

Joseph D. Seletyn, Esq.
Prothonotary

Date: 11/16/2017

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