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We have previously discussed how mediation can add value in the estate planning and family business contexts by helping family members quickly and quietly resolve disputes before they erupt into litigation. The fact pattern in a recent Illinois appellate court decision illustrates the point. See Mandalis v. David Wentzel, et al., 2019 WL 3227106 (Ill. App. June 12, 2019).
The opinion in Mandalis shares the saga of a sprawling family business founded by Daniel and Mary O’Brien consisting of interests in hotels, a golf course, nursing homes, fast food franchises, gas stations, and warehouses valued at $125 million (as of March 1, 2013). The majority of the business assets were controlled and operated through limited partnerships with the balance of the interests held in revocable trusts, S-corporations, or in the O’Brien’s own names.
The O’Briens had six children (four daughters and two sons) and fifteen grandchildren. In 1989, after the loss of their eldest son, the O’Briens transferred control of the family assets to their youngest child and only surviving son, Peter. Thereafter, in 1994, in a series of transactions, Peter acquired a majority interest in the S-corporations that owned the nursing home operations, and control of the limited partnerships as a general partner. He was also appointed as the controlling trustee of the revocable trusts.
It seems apparent that granting exclusive control over the family businesses to one son to the exclusion of his four sisters was bound to stir up conflict (notwithstanding the gifting of non-voting interests to the other children and grandchildren). And indeed, after the passing of one of the O’Brien’s daughters in 2004 and the transfer of her interests to two of the grandchildren, the family became embroiled for nearly a decade in protracted litigation with the children and grandchildren ultimately splintering into two factions.
All of the pending lawsuits were seemingly resolved with the execution of a term sheet on March 1, 2013, at the conclusion of a mediation. But the members of the two factions could not agree on how to effectuate the settlement embodied in the term sheet, which was apparently short on key details. To resolve their disputes over implementation, the family members participated in a second mediation, and then an arbitration that conclusively divided the assets between the two factions.
The plaintiff in Mandalis was a grandchild who had allied himself with the faction known as the “MMMD Group.” After the arbitration, the members of the MMMD Group could not agree among themselves how to divide the assets that had been allocated to them by the arbitrator. The result was more litigation, with the plaintiff suing the other members of the MMMD Group to obtain exclusive control over assets with a value equal to his pro rata share of the total assets allocated to the Group.
After the plaintiff settled his suit against the other members of the MMMD Group, he sued his former attorneys for malpractice and fraud. The plaintiff alleged that the attorneys never informed him about the March 2013 mediation, executed the March 2013 term sheet without his authorization, misrepresented the impact of the settlement on the plaintiff’s ability to secure a pro rata share of the assets allocated to the MMMD Group, and concealed certain conflicts of interests that later forced them to withdraw from representing plaintiff in connection with the division of the MMMD Group’s assets. But the plaintiff never got a chance to prove his case —the trial court dismissed his malpractice and fraud claims as time-barred and the appellate court affirmed.
There is little doubt that the decade-long litigation between the O’Brien’s children and grandchildren cost millions of dollars in legal fees. There was also an opportunity cost as well — instead of working to build the businesses, the time and attention of the family members was consumed by lawsuits. But beyond the economic cost, the most tragic long-term consequence of the litigation was likely wrecked family relationships, as evidenced by the splintering of the family into two factions.
Could all of these destructive consequences have been averted with a family mediation at the outset when the O’Briens first decided to transfer their business interests to their children and grandchildren? Since we are not aware of all of the family dynamics, we cannot say for sure. But the answer is almost certainly yes. The proof is that after a decade of litigation, the family’s disputes were conclusively resolved in less than nine months through a combined mediation and arbitration. Sadly, it is likely that no one ever advised the O’Briens that mediation was an option at the outset to help them divide the family’s business interests in an amicable manner that took the interests of all family members into account.
In that vein, it is worth comparing the O’Brien’s story with that of a different family described by mediator John Gromala in an article entitled The Use of Mediation in Estate Planning: A Preemptive Strike Against Potential Litigation. Like the O’Briens, the family patriarch and matriarch of this family, Richard and Judy, had an eight-figure estate that they wished to divide among their adult children. Gromala describes how discussions initially deteriorated into recriminations, and how timely intervention by a mediator ultimately saved the family from destructive litigation:
The family . . . had labored through two years of planning . . . The parents and each child retained and conferred with their own experts (attorneys, accountants and financial advisors). The experts corresponded among themselves and their proposals were circulated among the family. Everyone understood the concepts being presented. Each attorney spent much time with her or his client, and family members had many conferences, but the family was not communicating effectively.
By the time a mediator was retained, the family was close to open warfare. Each family member suspected the others of conniving to gain advantage. This suspicion was within and between generations and was affecting spousal relations. The proposed plans had great technical merit as regards tax minimization, but the lines of communication between and among attorneys and clients (dictated by conflict rules) did not provide a vehicle for the family members’ real interests to become known to each other and their advisors. As a result, each professional was working with pieces of a different puzzle. They were unable to put the pieces together since each had a different concept of how the final picture should look. Spouses and siblings had “non-monetary” needs that were either obfuscated or couched in “dollar” demands. Satisfying the dollar demand failed to satisfy the emotional need.
Within three months the mediator forwarded to the attorneys a memorandum of understanding signed by all family members. By communicating with everyone on an individual basis, in small groups and in the large family group, the mediator was able to develop a complete picture of the family’s needs. After conferring with his clients and their accountants the parents’ attorney prepared documents for an estate plan that satisfied the desires, interests and needs of the entire family.
Richard and Judy’s estate planning had a happy ending thanks to mediation. The O’Briens only opted for mediation after a decade of protracted litigation. When considering these two stories side-by-side, we think the lesson is plain — when estate planning or family business attorneys detect disputes brewing between family members over an estate or family business, there is a small window of opportunity for the attorneys to suggest mediation to their clients to spare them from costly and destructive litigation. There is no guarantee, of course, that mediation will resolve the disputes. But given the terrible consequences of litigation between family members, it is certainly worth a shot.