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Wellin v. Farace

United States District Court, D. South Carolina

August 13, 2018

Wendy C. H. Wellin, on behalf of the Estate of Keith S. Wellin, as its duly Appointed Special Administrator, Plaintiff,
v.
Thomas M. Farace, Esq., individually and as agent for Nixon Peabody, LLP and Nixon Peabody Financial Advisors, LLC; Nixon Peabody, LLP; and Nixon Peabody Financial Advisors, LLC, Defendants.

          SPECIAL MASTER'S REPORT AND RECOMMENDATION RE: PLAINTIFF'S MOTION FOR PROTECTIVE ORDER FOR WENDY C. H. WELLIN, ECF NO. 96

          WILLIAM L. HOWARD, JUDGE.

         In this legal malpractice case, plaintiff moves for a protective order to limit the time for defendants to ask questions of Wendy C. H. Wellin in the taking of her deposition. Plaintiff requests that the court limit the deposition to a total of two hours instead of seven hours as contemplated by Rule 30(d)(1), Fed.R.Civ.P. The motion is made pursuant to Rule 26(b)(2)(C)(i), and Rule 30(d)(3)(B), Fed. R. Civ. P., as well as Local Civ. Rule 30.04 (D.S.C.). The motion was filed on May 31, 2018, and was heard by the undersigned on July 23, 2018, sitting as Special Master, pursuant to the May 30, 2017 Order of the United States District Court for the District of South Carolina, Charleston Division, Hon. David C. Norton presiding.

         HISTORY OF THE CASE

         This legal malpractice action arises out of and concerns the alleged actions of the Defendants in the management of the estate plan for Plaintiffs decedent, Keith S. Wellin, spanning a twelve year period, from 2001 through 2013. Plaintiff alleges Defendant Thomas M. Farace ("Farace"), individually and as a partner in and agent for Defendant Nixon Peabody, LLP and its subsidiary, Nixon Peabody Financial Advisors, LLC, began representing Keith Wellin with respect to his estate planning, both individually and as Trustee of the Keith S. Wellin Revocable Living Trust dated December 11, 2001 ("Revocable Trust"), which Trust was drafted by Defendants on Keith Wellin's behalf Between 2003 and 2009, Keith Wellin's Will and Revocable Trust provided that a majority of his estate would pass to his three children, Peter J. Wellin, Cynthia W. Plum, and Marjorie W. King, at his death.

         Plaintiff alleges that Keith Wellin and his three children formed Friendship Partners, LP ("Friendship Partners") in 2003 upon the advice and direction of Defendants, and Keith Wellin funded it with Berkshire Hathaway Class A stock ("BRKa") having a value at that time of approximately $75, 000, 000. At the time it was formed, Keith Wellin was a limited partner, owning 98.9% of the partnership units. According to the allegations, the general partner was Friendship Management, LLC, which owned the remaining 1.1% interest, and was controlled by Keith Wellin's three Children. In 2007, Keith Wellin assigned his partnership interest in Friendship Partners to the Keith S. Wellin Revocable Trust, though the Plaintiff maintains Friendship Partners was never admitted as a Substitute Limited Partner as required by the Partnership Agreement.

         Plaintiff alleges Keith modified his estate plan in 2009, again based upon the advice and help of Thomas Farace as his estate planning attorney, by creating the Wellin Family 2009 Irrevocable Trust, which is at the center of ongoing litigation between the Plaintiff in this case, as well as Wendy C. H. Wellin, individually, and the purported Trust Protector and Trustee of the 2009 Irrevocable Trust, against the Wellin Children and at least one Wellin Grandchild. The genesis of that ongoing litigation, involving multiple lawsuits ("the underlying litigation"), is as follows.

         In the 2009 Revocable Trust, the situs of which was designated as South Dakota, Keith named his three children, Peter S. Wellin, Cynthia W. Plum, and Marjorie W. King, as the only named beneficiaries, and designated them as the only individual trustees. Keith named the South Dakota Trust Company, LLC as the sole corporate Trustee, and Thomas Farace was designated as the Trust Protector. The Trust provided that the three Wellin children could not be removed as trustees by the Trust Protector, and also designated them as members of the Trust's distribution committee. To fund the Trust, Keith sold his 98.9% interest in Friendship Partners, LP to the Trust in return for a promissory note having a face value of Forty Nine Million, Eight Hundred Thousand Dollars ($49, 800, 000.00).[1] The Trust was drawn to be an "intentionally defective grantor trust," as a result of which any income generated by the Trust would be taxable to Keith, as the grantor, rather than to the Trust. Furthermore, in the event the trust assets were sold prior to Keith's death by the Children, Keith, and not the Trust, would be responsible for the tax burden.

         THE "UNDERLYING LITIGATION"

          Keith Wellin filed suit against his children on July 3rd, 2013 (Civil Action No. 2:13-cv-01831-DCN)("ffe//w i"), seeking, inter alia, a return of all assets in the 2009 Wellin Family Irrevocable Trust and Friendship Partners, LP, and asserting that the Defendant Wellin Children had defrauded him into entering into the 2009 transactions.[2] Keith subsequently executed various documents, including those which purported to remove Thomas Farace as the designated Trust Protector, modified various aspects of the Trust in an attempt to regain the assets, change control over the Trust, and change the status of the Trust in order to shift the tax burdens associated with sale of trust assets from himself to the Trust.

         Keith also executed new estate planning documents excluding his three children as beneficiaries, and leaving the bulk of his estate to his wife, Wendy C.H. Wellin, and her children. In that litigation, the defendant Wellin Children assert the changes made regarding the Trust by Keith and Lester Schwartz on November 20, 2013 were ineffective, invalid, and/or incomplete. They further allege Keith's changes to his estate plan, excluding the Children, are a result of undue influence by Wendy Wellin and his declining mental state.

         After suit was filed by Keith Wellin on or about December 1, 2013, the Wellin Children took the steps they claim were necessary to protect the trust assets by selling the Berkshire Hathaway stock, then valued at approximately One Hundred Fifty Million Dollars ($150, 000, 000.), and distributing approximately $32 million to each of their individual investment accounts, leaving approximately $52 million in the Trust to satisfy the Note to Keith. They maintain that this was necessary to protect the trust and its assets, and that none of this money has been spent by them since the transfer, other than for the expenses of the litigation.

         Following this action by the Defendant Wellin Children, on December 27, 2013, Lester Schwartz, as the newly designated Trust Protector, brought suit against each of them seeking return of the distributed assets, as well as other damages caused by the sale of the BRKa stock. That suit is currently pending as well in the United States District Court for the District of South Carolina as Civil Action No. 2:13-cv-3595-DCN.

         Keith Wellin died during the litigation in November, 2014, and his widow, Wendy C.H. Wellin, was substituted in Wellin I as Plaintiff in her capacity as Special Administrator of the Estate of Keith S. Wellin and as Trustee of the Keith S. Wellin Florida Revocable Living Trust u/a/d December 11, 2001.[3] In addition to the above described claims, both Wendy C.H. Wellin and the Wellin Children have asserted claims against each other.

         THE LEGAL MALPRACTICE LITIGATION

         In this legal malpractice litigation, Plaintiff alleges the Defendants breached the proper standard of care as an attorney, breached their fiduciary duties to the Plaintiffs decedent, breached their contract with Plaintiffs decedent, and aided and abetted the breach of fiduciary duties by Keith Wellin's son, Peter J. Wellin, and daughter, Cynthia W. Plum. Specifically, Plaintiff alleges the Defendants breached the standard of care required of an attorney, breached their fiduciary duties and breached their contract by:

(a) Designing and implementing an estate planning structure (the formation and funding of Friendship Partners, Friendship Management, and the 2003 KSW Family Trust dated December 5, 2003) that failed to adequately protect the interests of (Keith) Wellin, and failing to inform or advise (Keith) Wellin as to the inherent risks and consequences of participating in that transaction;
(b) Designing and implementing an estate planning structure (the formation of the 2009 Irrevocable Trust and the sale of interests in Friendship Partners to the 2009 Irrevocable Trust for the Promissory Note) that failed to adequately protect the interests of (Keith) Wellin, and failing to inform or advise (Keith) Wellin as to the inherent risks and consequences of participating in that transaction;
(c) Structuring an irrevocable trust instrument, specifically the 2009 Irrevocable Trust, which had been interpreted by the Wellin Children as depriving (Keith) Wellin of the ability to turn off grantor status to, among other things, avoid certain catastrophic financial consequences, namely incurring a tax burden that could render (Keith) Wellin illiquid and/or insolvent;
(d) Structuring an irrevocable trust instrument, specifically the 2009 Irrevocable Trust, in such a manner as to fail to accomplish (Keith) Wellin's estate planning goals and ...

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