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Filippi v. Filippi

Superior Court of Rhode Island

December 14, 2017

BLAKE FILIPPI and PAUL FILIPPI, Individually and as Trustees of the Marion C. Filippi Trust - 2007, Defendants.

         Washington County Superior Court

          For Plaintiff: Robert K. Taylor, Esq. Jeffrey H. Gladstone, Esq.

          Stephen J. Brouillard, Esq. Theresa L. Sousa, Esq.


          STERN, J.

         Marion Filippi (Marion) and Steven Filippi (Steven) (collectively, Plaintiffs, Counterclaim Defendants, or Marion and Steven) move for partial summary judgment, requesting judgment as a matter of law on their Amended Complaint on Count I: Breach of Contract with respect to the 2007 Purchase and Sale Agreement (2007 P&S Agreement); Count II: Breach of Contract with respect to the LLC Operating Agreements; and Count IV: Declaratory Judgment. The Plaintiffs also seek partial summary judgment on Blake Filippi (Blake) and Paul Filippi's (Paul) (collectively, Defendants, Counterclaimants, or Blake and Paul) counterclaims, which assert counts for breach of contract and request declaratory relief. The Counterclaimants have filed a cross motion for partial summary judgment, maintaining that they are entitled to judgment as a matter of law on the following counterclaims: (a) Count II - Breach of Fiduciary Duty Against Steven; (b) Count VII - Declaratory Relief Against Marion and Steven; and (c) Count VIII - Breach of Contract - Estate Planning Agreement Against Marion.[1] Blake and Paul object to both of Plaintiffs' summary judgment motions, and Marion and Steven object to Blake and Paul's cross motion for partial summary judgment. Jurisdiction is pursuant to Super. R. Civ. P. 56(c) and G.L. 1956 § 9-30-1.

         I Facts and Travel

         In 1973, Paul A. Filippi (Paul Sr.) and Marion married. Filippi v. Filippi, 818 A.2d 608, 612 (R.I. 2003). Paul Sr., known as a successful businessman and restauranteur, owned substantial real estate and a number of businesses in the Town of New Shoreham, more commonly known as Block Island. See id. Together, Paul Sr. and Marion had three children: Paul, in 1975; Steven, in 1979; and Blake, in 1980. Id.

         In 1989, Paul Sr. and Marion entered into a Contract to Make and Maintain Wills and Trusts (1989 Wills Contract). See Corrected Mem. of Law in Supp. of Defs.' Objs. to Pls.' Mot. for Partial Summ. J. and Counterclaimants' Cross Mot. for Summ. J. (hereinafter, Defs.' Mot.), Ex. 1. The 1989 Wills Contract (1) required that Paul Sr. and Marion execute wills and trusts; (2) barred Paul Sr. and Marion from "execut[ing] any other trust or estate planning document which [would] have the effect of defeating the intent of their estate plans"; and (3) prohibited Paul Sr. and Marion from "alter[ing] or revok[ing] any of the provisions of their respective wills or trust without first procuring the written and acknowledged consent of the other." Id. Additionally, Paul Sr. executed a trust agreement in 1989. Defs.' Mot., Ex. 2. The 1989 Wills Contract was amended in 1992 to reflect the 1989 trust agreement. See id.

         Paul Sr. passed away in 1992. At that time, he owned 100% of the stock in Shoreham, Inc., d/b/a Ballard's Inn and Restaurant (Shoreham), the entity which owns all of the physical assets of Ballard's Inn and Restaurant and operates the business. Filippi, 818 A.2d at 612. Paul Sr.'s stock in Shoreham became part of his estate upon his passing, in accordance with his estate plan. See Defs.' Mot., Ex. 5. Paul Sr.'s estate, however, was not closed until early 2006, three years after extensive litigation between the Filippi Family and Paul Sr.'s three older children from a former marriage. See Defs.' Mot., Ex. 6; see also Filippi, 818 A.2d 608; Filippi v. Citizens Trust Co., 2001 WL 99860 (R.I. Super. Feb. 1, 2001).

         When Paul Sr.'s estate was closed, the Shoreham shares, among other things, were deposited into Paul Sr.'s marital trust (Marital Trust). See Defs.' Mot., Ex. 6. According to Paul Sr.'s extensive estate plan, the income emanating from the Shoreham shares in the Marital Trust was to be used for Marion and for the support of her minor children, while a residuary trust (Residuary Trust) was to be established to provide for the Boys. See Defs.' Mot., Ex. 1 at D1342-1345. As set forth in the 1989 Wills Contract, the assets in the Marital Trust were to be transferred to the Residuary Trust for the benefit of Steven, Blake, and Paul upon Marion's death. Id. at D1373-84, 1342-45. However, the Filippi Family and Citizens Bank RI (Citizens Bank)-the corporate trustee of the Marital Trust-agreed to a distribution of the assets in the Marital Trust to Marion individually, on the condition that each member of the Filippi Family execute Citizens Bank's requested releases. See Defs.' Mot., Ex. 9.[2]

         One year earlier, on July 9, 2004, Marion transferred her real property located at 42 Water Street, New Shoreham, Rhode Island-the land and building utilized by Ballard's Inn-to a newly-formed LLC, Ballard's Inn Realty, LLC (R.I.). See Mem. in Supp. of Pls.' Mot. for Partial Summ. J. on Defs.' Countercls. (hereinafter, Pls.' Second Mot.). Approximately one year after the aforementioned agreement with Citizens Bank, in August 2006, Marion transferred additional real property she owned, located at 74 Water Street, New Shoreham, Rhode Island- the land and the building constituting the Overlook Hotel-to a newly-formed entity, Overlook Realty, LLC (R.I.). Id. Both properties originated from Paul Sr.'s estate and were transferred to Marion individually at the time of his death. See Filippi v. Citizens Trust Co., 2001 WL 99860, at *6, *8 (R.I. Super. Feb. 1, 2001) ("Marion wanted to have control of the family real estate and not to be subject to a trust, as it had been under prior plans. Paul [Sr.] wanted to be assured that it would remain for the children of his marriage with Marion. . . . [T]he mutual contracts were devised to satisfy Paul [Sr.] and not Marion. It was Paul [Sr.] who wanted to be assured that, if he left the family real estate to Marion, it would remain in the family, meaning, of course, the younger children. . . . [T]he contract resolved [Paul Sr.'s] concern about leaving the real estate to Marion outright."). At the time that Marion transferred the properties to the two LLCs, Marion was the sole member of Ballard's Inn Realty, LLC (R.I.) and Overlook Realty, LLC (R.I.). Id.

         Afterwards, on September 28, 2006, the Filippi Family entered into an agreement entitled "Filippi Family Estate Planning Agreement" (Family EPA). Defs.' Mot., Ex. 10. The Family EPA provided:

"WHEREAS, Paul [Sr.] was the late husband of Marion and the late father of Paul, Steven and Blake; and
"WHEREAS, Citizens Bank . . ., Executor under the will of Paul Filippi and Trustee of the [Marital Trust] . . ., has proposed closing the probate estate of Paul [Sr.] and terminating the Marital Trust by transferring all assets remaining in its possession as Executor and Trustee, including stock in the Rhode Island corporation, Shoreham, Inc., to Marion, but [Citizens] Bank is unwilling to do so unless Paul, Steven and Blake release the Bank for such action; and
"WHEREAS, Paul, Steven and Blake are unwilling to execute releases unless Marion agrees to take certain actions in connection with her own estate plan; and
"WHEREAS, Marion is willing to take such actions,
"NOW, THEREFORE, Marion, Paul, Steven and Blake, agree as follows:
"(1) Paul, Steven and Blake will forthwith execute the releases in favor of Citizens Bank that have previously been provided to them.
"(2) Marion agrees that she will complete revisions to her current estate plan within nine (9) months of the date of this Agreement (including wills and trusts and any related instruments).
"(3) Marion agrees that in the event she does not complete the contemplated revisions to her current estate plan within nine (9) months of the date of this Agreement or said revisions are not acceptable to any two (2) of Paul, Steven and Blake, she will transfer seventy-five percent (75%) of her interest in Shoreham, Inc., in equal shares to Paul, Steven and Blake." Defs.' Mot., Ex. 10.

         The Family EPA bore the signature of each member of the Filippi Family. Id. In addition, the Filippi Family purportedly entered into what Blake and Paul characterize as "the Shoreham Agreement, " which, in part, [3] provided:

"This agreement is hereby entered into by Marion . . ., Paul . . ., Steven . . . and Blake . . . . Wherefore all the undersigned parties agree to the following:
"1) Each party has an economic interest in Shoreham . . .
"2) Each party is entitled to 25% of the profits of Shoreham . . ., to be determined by a majority of the aforementioned parties and paid on or by October 1 (Combined profits from Ballard's and the Overlook Hotel).
"3) Shoreham . . . will pay Marion . . . $200, 000 in rental for the Ballard's Inn and Overlook properties
"4) The sole managerial responsibilities will rest with Steven . . . who will receive compensation from Shoreham . . . under the following terms
"Base Salary: $100, 000.00
"Incentive: If revenues of both Ballard's and the Overlook reach $2.75 Million [Steven] will be paid $150, 000.00 total, including base salary[.] If revenues reach $3 Million, [Steven] will be paid $200, 000.00 total including base salary[.]
"Steven . . . will be responsible for all aspects of the operations of Ballard's, including but not limited to, bank accounts, receivables, cash deposits and all personnel decisions. In turn, [Steven] will provide all information on all aspects of the operations including financials, of Ballard's to any of the aforementioned parties to this agreement[.]" Defs.' Mot., Ex. 11.[4]

         In accordance with the Family EPA, Steven, Blake, and Paul executed the releases mentioned therein. See Defs.' Mot., Ex. 12.[5] Marion also retained Attorney William Kirchick (Attorney Kirchick) to quarterback her estate planning. See Defs.' Mot., Ex. 4 (hereinafter, Marion Dep.) at 53:5-12; Pls.' Second Mot., Ex. I. Blake, a third-year law student at the time, participated in Marion's estate planning with Attorney Kirchick at Marion's request. See Marion Dep. at 52:16-62:1; Pls.' Second Mot., Ex. J (email from Marion to Attorney Kirchick) ("Just to re-iterate [sic], please copy to Blake what you send to me. At this point it isn't necessary to send to Paul and Steven as we are in the working document stage and Blake is the one with the legal background.").

         Subsequently, in December 2007, Marion executed an irrevocable trust agreement, entitled "The Marion C. Filippi Irrevocable Trust - 2007" (2007 Trust), as well as other estate planning documents prepared by Attorney Kirchick. See Defs.' Mot., Ex. 18; Defs.' Ans. ¶ 6. Attorney Kirchick crafted the 2007 Trust to be an intentionally defective grantor trust.[6] See Defs.' Mot., Ex. 15 at 2. In pertinent part, Article Third of the 2007 Trust provides that all property that is held in the 2007 Trust is to be divided into three separate sub-trusts: (1) the Share Trust f/b/o Paul C. Filippi (Paul Share Trust); (2) the Share Trust f/b/o Steven C. Filippi (Steven Share Trust); and (3) the Share Trust f/b/o Blake A. Filippi (Blake Share Trust) (collectively, Share Trusts). See Defs.' Mot., Ex. 18. Marion was listed as the grantor of the 2007 Trust, and Steven, Blake, and Paul named as trustees of the 2007 Trust and as co-trustees of each of the Share Trusts. See Defs.' Mot., Exs. 22-23. Article Seventh of the 2007 Trust permits the Share Trusts to make discretionary decisions upon approval of the majority of trustees-i.e., two of the three Boys. Defs.' Mot., Ex. 18. Among other things, however, Article Tenth of the 2007 Trust limits the authority of trustees to make distributions of "principal" to an "interested person." Id.

         Attorney Kirchick's estate planning procedure also required the creation of Overlook Realty, LLC (Overlook LLC) and Ballard's Inn Realty, LLC (Ballard's LLC) (collectively, the LLCs) under the state laws of Delaware. See Defs.' Mot., Ex. 15 at 2; Defs.' Mot., Exs. 19-20. The LLCs were created with a three percent voting membership interest (Voting Interest) and a ninety-seven percent non-voting membership interest (Non-Voting Interest). See Defs.' Mot., Exs. 19-20. On December 21, 2007, the Filippi Family executed the Operating Agreement for Overlook LLC (Overlook Operating Agreement) and the Operating Agreement for Ballard's LLC (Ballard's Operating Agreement) (collectively, Operating Agreements). See id. The Operating Agreements, among other things, appointed Marion, Steven, Blake, and Paul as managers of the LLCs. Defs.' Mot., Ex. 19 at 19-20; Defs.' Mot., Ex. 20 at 19-20.

         In further accordance with Attorney Kirchick's estate planning advice, Marion gifted each Share Trust a one percent Voting Interest and a two-thirds percent Non-Voting Interest in each of the LLCs. See Defs.' Mot., Exs. 22-23. In addition, Marion sold each Share Trust a fifteen percent Non-Voting Interest in the LLCs in exchange for the Share Trusts each paying Marion $587, 700 (2007 Sale). See Defs.' Mot., Exs. 24-27. Therefore, each Share Trust held: (1) a one percent Voting Interest in Overlook LLC and Ballard's LLC; and (2) a fifteen and two-thirds percent Non-Voting Interest in Overlook LLC and Ballard's LLC; Marion owned the remaining fifty percent of the Non-Voting Interest in the LLCs for tax-related reasons.[7] See Defs.' Mot., Exs. 17, 29-30; see also supra n.6. It appears from the record that around the time the 2007 Trust was created, Marion intended to sell or otherwise transfer the remaining fifty percent Non-Voting Interest that she held to the Share Trusts after certain valuations were completed and the three-year IRS lookback period had expired. See Defs.' Mot., Exs. 29-30.

         In connection with the 2007 Sale, the Boys, acting in their capacity as co-trustees of each Share Trust, executed promissory notes in the amount of the purchase price to Marion (2007 Notes). See Defs.' Mot., Ex. 27. In addition, Marion and the Boys, acting as trustees of the Share Trusts, also executed the 2007 P&S Agreement to memorialize the 2007 Sale. See Defs.' Motion, Ex. 24. Among other things, the 2007 P&S Agreement provided as follows:

         "5. Preconditions to Future Sale or Distribution by the


"(a) Notice. Each of the Purchasers [the Share Trusts] hereby agrees that, so long as the Seller [Marion] is living, no Purchaser shall sell, pledge, distribute to its beneficiaries, or otherwise transfer or encumber all or any portion of the Interests received by such Purchaser without first providing at least thirty (30) days advance notice to the Seller."
"(b) Payment of Note. Each Purchaser further agrees that such Purchaser shall not sell, pledge, distribute or otherwise transfer all or any portion of the Interests received by such Purchaser, or any other interest of such Purchaser in [Overlook LLC] or [Ballard's LLC], until such Purchaser has paid such Purchaser's Note in full." Id.

         "Interests, " as defined by the 2007 P&S Agreement, included "a 15% Non-Voting Membership Interest in [Ballard's LLC], and a 15% Non-Voting Membership Interest in [Overlook LLC]."


         Thereafter, in 2008, Steven, Blake, and Paul, in their capacity as trustees of the Share Trusts, again issued promissory notes to Marion (2008 Notes) in connection with the 2007 Sale. See Pls.' Mem. in Supp. of Mot. for Partial Summ. J. (hereinafter, Pls.' First Mot.), Ex. I. Steven and Marion characterize the 2008 Notes as "replacement notes" meant only to operate as a renegotiation of the 2007 Notes in order to reflect more favorable interest rates. See Pls.' First Mot. at 5-6. The same holds true for promissory notes executed in 2009 by Steven, Blake, and Paul on behalf of the Share Trusts (2009 Notes); Steven and Marion maintain that the 2009 Notes were renegotiations of the original bargain underlying the 2007 Sale to reflect more favorable interest rates. See id.; infra n.8. Blake and Paul contend that the 2008 Notes were meant to operate as payment in full of the 2007 Notes; a new bargain resulted in the 2008 Notes. See Defs.' Mot. at 56. Blake and Paul maintain the same position with regard to the 2009 Notes. See id. at 56-57.[8]

         During the years 2008 through 2016, the 2007 Trust operated as follows: payments from the LLCs were distributed evenly to Marion and the 2007 Trust, and the 2007 Trust would issue checks to Marion from the 2007 Trust representing payments of principal and interest. See Defs.' Mot., Exs. 33-35. Steven and Marion contend that these distributions of principal were to pay off the balance on the promissory notes owed to Marion; they claim that the LLCs obtained money from Shoreham, deposited the income into the 2007 Trust, and the cash flowed to Marion. See Marion Dep. at 110, 124.

         Blake and Paul contend that from 2007 to 2013, the three Boys received payments in the amount of twenty-five percent of Shoreham's profits, purportedly in accordance with the Shoreham Agreement. See Marion Dep. at 70:16-71:3. Meanwhile, Steven and Marion contend that the Boys did not receive twenty-five percent of Shoreham's profits; Yolanda Samson, who has been employed by Shoreham since 2002 as its accountant, stated in an affidavit that "[i]n 2008, [the Boys] each received 7.86%; in 2009, 6.48%; in 2010, 17.53%; in 2011, 9.71%; in 2012, 7.70%; and in 2013, 8.33%." Pls.' Obj. to Defs.' Cross-Mot. for Summ. J., Ex. EE at ¶¶ 2-3.

         On October 30, 2014, Marion, acting as CEO of Shoreham, and Steven, acting as manager of Ballard's Inn, executed an agreement entitled "Operating Agreement Outline 10/17/2014, " which provided in part:

"Compensation/Profit Sharing
"1. [Marion] is personally guaranteed by [Steven] $300, 000 per year and a 2% cost of living increase in 2016 and each year after. [Steven's] compensation is a [$599, 000] base salary with a 2% cost of living increase in 2016 . . . .
"2. Marion will receive 50%, Paul 16%, Blake 16% and Steve 16% of profits. As per the ownership of [Ballard's LLC].
"3. Paul and Blake will receive no less than $75, 000.
"4. Both Marion and Steven must approve in writing the distributions to Paul and Blake." Defs.' Mot., ...

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