Sandy is a bright young woman who
dropped out of college after a couple of years.
Being a nature girl, she gets a job working on an organic farm
and
selling the produce at a local farmers's market.
Sandy is a smoker, which leads to
her being constantly nagged to quit by her nature-loving friends. One day she has an inspiration: why not grow
and sell organic tobacco? She had
received a modest inheritance from an uncle and uses it to implement
her
plan. After several years of hard work,
the
business (Ecosmokes, Inc.) becomes a great success.
Many people view organic cigarettes as a
safer alterative to ordinary tobacco.
Fast forward about 30 years. Sandy
has since acquired a partner, Tom
(purely in a business sense). Each of
them owns half the stock of Ecosmokes.
Sandy now decides to retire, leaving Tom to manage the business
(she
remains owner of half the stock and receives half the net income, after
payment
of expenses and Tom salary).
Shortly after retiring, Sandy goes
to a lawyer to have an estate plan drawn up.
The lawyer drafts a will that disposes of her personal
possessions. The lawyer also sets up an
irrevocable living
trust consisting of her half of the stock of Ecosmokes.
It contains a provision that the beneficiary may
not anticipate, assign, or encumber her interest in the trust, nor is
it
subject to any creditor's claim or legal process before being received
by the
beneficiary. Tom is appointed the trustee, and as trustee he is given
the power
to retain the Ecosmokes stock. The trust
provides that at the end of each year, the trustee must pay the net
income of
the trust to Sandy. Finally, it is governed by California law, where
Sandy
resides.
Sandy lives several years after
creating the trust and receives the income that she was entitled to
(approximately $50,000 each year).
Unfortunately, she becomes addicted to gambling.
She manages to wipe out all her assets,
forcing her to live off of social security payments and trust
distributions. She borrows money from a
friend, Fred, hoping in desperation to win back her losses, but instead
she loses
all the money she borrowed.
Now
assume now that Sandy's debt to
Fred is somehow paid, Sandy lives for
several more years, but at some point she becomes incompetent and her
nephew is
appointed to be her conservator (giving him legal power to act on her
behalf). Meanwhile, some recently
conducted scientific research suggests that organic tobacco has the
same health
risks as other tobacco. Other research
suggests that the benefits of organic tobacco over ordinary tobacco are
less
than Ecosmokes claimed, but that it was at least somewhat healthier. Whatever the case, the controversy causes the
company's profit (and thus, Sandy's income) to gradually drop to less
than half
what it was before. The value of the
company--the only trust asset--also drops to about half of what it was
when the
trust was created.
Question 2.
The nephew sues Tom on Sandy's behalf, arguing that Tom breached
his fiduciary duties by not providing Sandy with enough income. Is he likely to win, and why?
[about 60% of total essay points]
Sandy
dies. The trust provides that after
Sandy's
death, the remaining assets of the trust are to be distributed outright
to Sandy's
heirs (a few nephews and nieces). The
heirs now sue Tom for breach, arguing that Tom should have sold all of
the Ecosmokes
stock in 2000, after the adverse studies were published and the stock
began a
long decline. The court agrees. In 2000 the stock owned by the trust had a
fair market value of $200,000. At the
time of judgment in 2010 the fair market value is $100,000. The
legal rate of interest during these 10 years was 5% per year. The average trust produced 10% income a year
from its investments during this time.
3.
How
much should the court award in damages?
This jurisdiction uses simple interest (no compounding). [about
20%]