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In re Estate of Derzon

Court of Appeals of Wisconsin, District III

January 9, 2018

In re the Estate of Rebecca R. Derzon:
v.
Alan Derzon, Sydney Johnson and Marina Johnson, Respondents. Lori Laatsch, Appellant,

         APPEAL from an order of the circuit court for Milwaukee County No. 2008PR1693 DAVID L. BOROWSKI, Judge. Affirmed.

          Before Stark, P. J., Hruz and Seidl, JJ.

          STARK, P.J.

         ¶1 Lori Laatsch appeals an order surcharging her based on actions she took as personal representative of Rebecca Derzon's estate (the Estate) and as the trustee of a related trust. The circuit court concluded Laatsch had acted in "extreme bad faith" in those roles, and it therefore ordered her to pay $1, 235, 954.20 in attorney fees that the Estate had incurred as a result of her conduct.

         ¶2 Laatsch argues the circuit court mistakenly believed predecessor judges had already concluded her actions constituted bad faith, and it therefore erroneously denied her a full evidentiary hearing on that issue. Laatsch further contends the court erred by surcharging her for actions she took both before she became personal representative and trustee and after she was removed from those roles. Finally, Laatsch argues the court improperly relied on WIS. STAT. § 701.1004 (2015-16), [1] in ordering her to pay the Estate's attorney fees.

         ¶3 We reject Laatsch's arguments. The issue before the circuit court was whether Laatsch's actions as personal representative and trustee rose to the level of bad faith for purposes of imposing a surcharge. The court's written decision shows that it did not mistakenly believe prior judges had already concluded Laatsch acted in bad faith. Instead, it properly relied on findings set forth in predecessor judges' decisions, which we affirmed, as well as other evidence the Estate presented at the evidentiary hearing. Based on those findings and evidence, the court concluded Laatsch's actions as personal representative and trustee rose to the level of "extreme bad faith." It therefore properly exercised its equitable authority in surcharging Laatsch. Laatsch has failed to establish that the court surcharged her for actions she took outside her roles as personal representative and trustee. In addition, despite a passing reference to WIS. STAT. § 701.1004 in the court's written decision, it is clear the court properly surcharged Laatsch based on its equitable authority to do so. We therefore affirm the order imposing the surcharge.

         BACKGROUND

         ¶4 This is the third appeal from circuit court proceedings involving the estate of Rebecca Derzon, who died in August 2008.[2] As such, many of the background facts set forth in this section are drawn from the factual recitations contained in our two previous opinions. See Laatsch v. Johnson, No. 2011AP377, unpublished slip op. (WI App Mar. 6, 2012) (Laatsch I); Laatsch v. Derzon, No. 2012AP2590, unpublished slip op. (WI App Dec. 16, 2014) (Laatsch IL).

         ¶5 Rebecca married David Derzon in 1978. David had two sons from a prior marriage-Mark and Alan Derzon. Rebecca had no children before marrying David, and they did not have any children together. However, over the years Rebecca developed close bonds with members of David's family, including Mark and Alan, whom she referred to as her sons. In addition, she and David jointly owned and operated Derzon Coin, a family business, during their marriage.

         ¶6 Although Rebecca had numerous siblings and half-siblings, she had close relationships with only two of them: Paul Johnson, her brother, and Laatsch, her half-sister. Rebecca was close with Johnson for her entire life. She and Laatsch lived together in the same home until Rebecca was thirteen and Laatsch was three. After that, aside from some incidental contact during the mid-1970s, Rebecca and Laatsch had no contact until 1997. Although the parties dispute whether Rebecca and Laatsch had a close relationship after reuniting in 1997, it is undisputed Laatsch was a prominent figure in Rebecca's life during the approximately eighteen-month period leading up to Rebecca's death.

         ¶7 In 1995, Rebecca and David executed wills leaving their respective estates to one another. Both wills further provided that, if the other spouse did not survive the decedent by thirty days, the residue of the decedent's estate would be divided equally between Mark and Alan. However, in 2006, unbeknownst to David, Rebecca executed a codicil stating that, if David did not survive her by thirty days, Johnson and Mark would each receive forty percent of the residue of her estate, and Alan would receive the remaining twenty percent.

         ¶8 David died on December 20, 2007, and, pursuant to the terms of his will, his entire estate passed to Rebecca. Rebecca subsequently altered the terms of her estate plan significantly. On March 10, 2008, she executed a financial power of attorney naming Laatsch as her agent. On the same date, she created the Rebecca R. Derzon Revocable Trust (the Trust) and executed a pour-over will that would transfer her assets into the Trust at the time of her death. The documents named Laatsch trustee of the Trust and personal representative of the Estate.

         ¶9 Under Rebecca's new estate plan, Laatsch would receive a seventy-five percent share of Derzon Coin upon Rebecca's death, and Diane Mehalko, a longtime Derzon Coin employee, would receive the remaining twenty-five percent. Johnson would receive distributions totaling $500, 000. The new estate plan directed the trustee to establish separate trusts upon Rebecca's death for Johnson's minor children-Sydney and Marina-and Laatsch's adult children- Robyn and Anna. It completely disinherited Mark and Alan.

         ¶10 Rebecca died in August 2008, just over five months after executing her new estate plan. In November 2008, Laatsch initiated informal probate proceedings, seeking to admit the March 10, 2008 will to probate. She represented to the circuit court that it was unnecessary to appoint a guardian ad litem for Sydney and Marina Johnson because their interests were "virtually represented" by Laatsch's daughters, Robyn and Anna.

         ¶11 However, in May 2010, Sydney and Marina filed a petition asserting they had "not received any financial benefit from or meaningful information about the Trust" since Rebecca's death. They asked the circuit court to compel Laatsch to produce certain documents related to Rebecca's estate plan; to require Laatsch to provide an inventory and accounting of the Estate and Trust; to remove Laatsch as trustee and personal representative and appoint "a suitable neutral third party" to fulfill those roles; and to order the Estate's law firm (hereinafter, the Cramer law firm), which had also drafted Rebecca's estate plan, to produce its "entire legal file" on Rebecca.

         ¶12 The circuit court, the Honorable Mel Flanagan presiding, issued an order requiring Laatsch and the Cramer law firm to produce the requested documents. The court scheduled a hearing for July 6, 2010, to address the other relief Sydney and Marina had requested. Despite the court's order and the pending hearing, on May 27, 2010, the Cramer law firm asked the Register in Probate to close the informal administration of Rebecca's estate, representing that the administration was completed. Sydney and Marina objected to the closing of the Estate and filed a demand for formal administration. They later moved to disqualify the Cramer law firm, asserting it was "ostensibly acting as the law firm on behalf of the Estate and Trust while at the same time defending" Laatsch.

         ¶13 As of the July 6, 2010 hearing, Laatsch had not turned over any of the documents the circuit court had ordered her to produce. Following several additional hearings, the court concluded the Cramer law firm had a conflict of interest requiring its removal from the case. The court also granted Sydney and Marina's motion to remove Laatsch as personal representative and trustee, explaining in its written decision:

Ms. Laatsch's powers as PR [personal representative] were suspended on June 2, 2010, when the petition for formal proceedings was filed. Nonetheless, Ms. Laatsch continued to exercise the powers as PR where she has refused to turn over to Petitioners discoverable and relevant documents, sought to sell undetermined assets of undetermined value to her daughter and other interested parties, and proposed a new firm as substitute counsel for the Estate and Trust. This has continued despite the fact that this Court entered an order on May 6, 2010, that required Ms. Laatsch to turn over complete estate and trust records to the Petitioners, and on October 14, 2010, the Court ordered the Respondent "to turn over to the Petitioners all the estate planning, estate and trust files within one week of the entry of this order." Ms. Laatsch and her counsel have ignored the duty of loyalty and the duty to make full disclosure of all relevant facts due to the ... petitioning beneficiaries, which has resulted in protracted litigation and unnecessary expense for the Petitioners and the Estate and Trust. As such, the Court finds sufficient grounds to remove Ms. Laatsch as Personal Representative and Trustee.

         ¶14 Laatsch appealed Judge Flanagan's order removing her as personal representative and trustee, removing the Cramer law firm from the case, and requiring her to produce documents regarding the Estate. We affirmed the order in all respects. See Laatsch I, No. 2011AP377, unpublished slip op. With respect to Laatsch's removal as personal representative and trustee, we reasoned the circuit court did not erroneously exercise its discretion because the record showed that Laatsch: (1) failed to comply with the court's orders; (2) "tried to mislead" the court by alleging Sydney and Marina's interests were "virtually represented"; and (3) continued to act as personal representative even after the court suspended her powers. Id., ¶\2. We characterized Laatsch's conduct as "impermissible stonewalling in an attempt to deprive [Sydney and Marina] of their rightful interests." Id., ¶22.

         ¶15 While Laatsch I was pending before this court, Alan, Mark and Johnson petitioned the circuit court to invalidate Rebecca's estate plan, alleging it was the product of undue influence by Laatsch. After a ten-day trial, the Honorable Jane Carroll issued a written decision refusing to admit the March 10, 2008 will to probate based on "irregularities" in the document-primarily, a large "Draft" watermark running diagonally across the signature page that did not appear on any other page of the will. The court also emphasized that Laatsch and the Cramer law firm had withheld key documents for an extended period of time, even after being ordered to produce them. Based on that delay, the court found that "the documents were altered or destroyed for the purpose of hiding information from [Mark and Alan], who were making inquiries for years beginning immediately after Rebecca's death." The court further found that the "length of the delay, and the number of irregularities in the documents provided, established that Lori Laatsch and her attorneys had something to hide; their motives are suspect."

         ¶16 The circuit court also concluded the March 10, 2008 will and trust were invalid due to undue influence by Laatsch. Applying the two-prong test for undue influence, [3] the court first concluded a confidential relationship existed between Rebecca and Laatsch. The court noted that: Laatsch was Rebecca's agent under the financial power of attorney; Laatsch "became a much more prominent and consistent figure in Rebecca's life after David became ill"; Laatsch and Rebecca essentially ran Derzon Coin together after David died; Laatsch had access to Rebecca's condominium; Laatsch and Rebecca opened a safe deposit box together; and Laatsch was present at Derzon Coin when the will, trust, and power of attorney were signed. The court also emphasized Rebecca's "fragile emotional state" following David's death, including her depression, erratic behavior, heavy drinking, and use of prescription sleeping pills.

         ¶17 The circuit court next concluded there were suspicious circumstances surrounding the changes to Rebecca's estate plan. In support of that conclusion, the court again cited the irregularities regarding the March 10, 2008 will and trust, as well as the subsequent efforts by Laatsch and the Cramer law firm to withhold pertinent documents from other interested parties. The court also noted the 2008 will and trust represented a "substantial departure" from Rebecca's prior estate plan, and there was "virtually no explanation" for Rebecca's decision to disinherit Mark and Alan and significantly reduce the bequest to Johnson.

         ¶18 The circuit court ultimately concluded Laatsch had failed to rebut the presumption of undue influence created by the presence of a confidential relationship and suspicious circumstances. In so doing, the court found the actions of Laatsch and the Cramer law firm "call[ed] their motives and their credibility in question." In addition to the acts discussed above, the court also noted that, after Rebecca's death, Laatsch and Diane Mehalko "recovered $137, 000 in cash from two safe deposit boxes leased by Rebecca, " which money "was omitted from the inventory filed with [the] Probate Court." The court rejected Laatsch's attempt to blame her attorneys for her actions, finding that Laatsch is "an intelligent woman" and was "at a minimum ... complicit in her attorneys' concerted efforts to withhold information."

         ¶19 Laatsch appealed the circuit court's decision invalidating the March 10, 2008 will and trust. While her appeal was pending, the Estate petitioned the circuit court to surcharge Laatsch for the attorney fees and costs it had incurred as a result of her conduct. The circuit court, Judge Carroll presiding, stayed the petition for surcharge pending the resolution of both Laatsch's appeal and the Estate's malpractice claim against the Cramer law firm. We subsequently affirmed the circuit court's decision invalidating the March 10, 2008 will and trust. See Laatsch II, No. 2012AP2590, unpublished slip op. ¶l. The Estate settled its legal malpractice claim against the Cramer law firm in April 2015.

         ¶20 Thereafter, the Estate filed an amended petition to surcharge Laatsch. The circuit court, the Honorable David Borowski presiding, held a two-day evidentiary hearing on the amended petition. On May 20, 2016, Judge Borowski issued a written decision and order surcharging Laatsch in the amount of $1, 235, 954.20.[4] The court found that Laatsch "acted in extreme bad faith many times before and after [Rebecca's] death, at the Expense of the Estate." It explained:

Laatsch did not merely mismanage the Estate funds. She intentionally and conveniently re-entered Rebecca's life as Rebecca's husband was dying, after years of having no contact with Rebecca .... She convinced Rebecca, in her declining physical and mental health, to leave 75% of Derzon Coin to her and appoint her as trustee and personal representative. Then, after Rebecca's death, she engaged in a pattern of deceit for years that needlessly prolonged the litigation she herself caused-termed "impermissible stonewalling" by the appellate court.

         The court concluded Laatsch "abused her fiduciary position, to her great personal benefit, time and time again, " and her actions "have been nothing short of despicable, easily rising to the level of bad faith, fraud, and deliberate dishonesty." The court further found that the ...


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