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CREATIVE SETTLEMENTS IN FIDUCIARY LITIGATION

Part A - Introduction


What I will say is this:
  • The most creative fiduciary settlements always respect and often leverage the clients’ most important relationships.
  • Increasingly, clients are seeking out those advisors and fiduciaries that support rather than threaten their most important relationships.
  • In my opinion, therefore, the future of fiduciary practice belongs to those advisors and fiduciaries who earn that client perception.

Whereas our clients are involved in variety of important relationships, I will focus my comments on “families.” For discussion purposes I assume that “family” (however constituted or defined) is the client’s most valued relationship.

I define a business family very broadly—as two or more relatives who own valuable property together. They need not own an operating company. Related estate or trust beneficiaries or fiduciaries are very much a business family under my definition. The parallel dynamics, problems, and creative settlement opportunities between a family business and family trust can be striking.

As a vehicle, I chose a family company held in trust because that’s where I live and work. I chose the JacMar family because I know them so well, having invented the JacMars as a composite of a number of real families. I choose to talk about the most creative (and destructive) settlement tool I have encountered to date: the family relationship.

I. The JacMar Family—Then and Now


My book, The Survival Guide for Business Families1 follows the JacMars, a first generation entrepreneurial family as they struggle with the founder’s retirement and consequent leadership change. Today we follow the JacMars through three phases of their family history.

The JacMar Family Tree Jack (63) Margaret (60) Frank (38) (Frances) Jay (40) (Judy) Karen (29) (Kenneth) Jack III (8) Ernest (16) Frank, Jr. (18) Hope (14) Faith (12)
A. Phase One: Estate and Business Planning

As we meet them in the Survival Guide, the founder, Jack JacMar, and his wife, Margaret, each own 41% of the stock in JacMar Corporation, an LLC. Each of their three adult children owns 5% outright from cumulative annual exclusion gifts over the years.

Al 3% Jay 5% Karen 5% Frank 5% Margaret 41% Jack 41% The oldest son, Jay and his brother Frank work for JacMar Corporation. Their talented younger sister Karen is an engineer employed by a public company far away. JacMar Corporation’s unrelated general manager, Al, owns 3% of the stock, issued years ago as bonus when the company was strapped for cash.

Jack and Margaret’s mirror image wills leave all company stock to a series of qualified marital deduction trusts naming the surviving spouse and the Earnest Trust Company as co-trustees. The surviving spouse, as trustee, will have the sole right to vote the company stock in trust.
B. Phase Two: Four Years Later - Family Conflict

Fast forward four years. Jack JacMar has died. Frank JacMar died tragically shortly after his father. Al, the general manager, has been running the company since Jack’s death four years ago. The board of directors consists of Margaret, her two surviving children, Jay and Karen, and a trust officer from Earnest Trust Company.

Margaret wants to retire Al and name Jay as CEO. Karen doubts her brother’s qualifications and actively opposes his election. Margaret has the votes. She owns 41% outright and votes an additional 41% as trustee of the marital trust without the concurrence of Earnest Trust Company. Margaret has told the ET board member of her intention to replace Al with Jay but has not told her children. The ET director fears a family storm may be brewing. Karen has told the ET director that if Jay is elected CEO, she’s tendering her stock under the buy-sell agreement but won’t accept any discount for minority or lack of marketability.
C. Phase Three: Litigation

Now fast forward twenty five years. JacMar Corporation has grown ten times and does business on six continents. Jay has announced his own retirement at age 63. Jay’s long since reconciled sister Karen operates as his unofficial alter ego in the company. A multinational has offered to buy JacMar Corporation for $300 million cash.

In the midst of the buyer’s due diligence, company counsel receives a courtesy copy of a petition (not yet filed) by Frank JacMar’s widow Frances and their children against Earnest Trust Company and Jay JacMar (Jay having succeeded his Margaret as co-trustee) for failing to correct certain acts of collusion, misrepresentation and wrongdoing by Jay and Karen and by other members of the JacMar board and senior management.

II. Apologia


I am a trust and estates lawyer on an extended sixteen-year sabbatical to explore the soft issues involved in the transfer of family wealth. Psychology teaches that the most important parts of our lives are lived not as individuals, but in relationships. Relationships are composed of everything that passes between two human beings and their experience of those passages: words, gestures, body language, touching, smells, grunts, and a great deal of mystery. We live most of our lives in those passageways.2

Good relationships call us to greatness. Good relationships are win-win. In good relationships—personal or professional, intimate or organizational, family or business—one plus one has the opportunity to become greater than two. It’s not surprising, then, that for most families, their relationships are far more important than their rights! It is not their individuality but their connectedness that matters most!

Somehow I had acquired the old-fashioned hard side focus on individuals. Relationships were peripheral. Twenty-five years of the law’s rugged individualism encouraged this. After all, the law assumes that all human relationships will ultimately fail, whereupon every individual will need a lawyer to protect him or her from every other individual, even from family.

In an increasingly relationship-conscious world, I think the future of estate and business planning, of fiduciary success, and even of fiduciary litigation will largely belong to those of us who learn to leverage our clients’ most important relationships into creative settlements. Most clients will avoid those professionals known for ripping and tearing, and gravitate to those who least threaten their connectedness.

You need to know more about leveraging client relationships into creative settlements. It’s a tall order. It doesn’t always work. But we must try. The most creative fiduciary settlement is that which sustains the client’s most important relationships. Or at least does the least damage.

III. Some Relationship “Givens”

A. Secrecy

Too much business and estate and business planning takes place in secret.

Without their knowledge or input Jack and Margaret
  • guessed at what their children want, or ought to want;
  • guessed at what their children need or ought to need;
  • guessed at the effect of their estate plan on their children’s most important relationships.

Their children were taken for granted and ultimately by surprise. The elder JacMars’ decisions were unduly influenced by tax advisors, with little attention paid to human consequences.
B. Parasites vs. Plunderers

Karen JacMar will regard her brother Jay as a plunderer of her legacy. He will view Karen as a parasite on the company. Insider vs. outsider. Parasite vs. plunderer.

Karen will consider her JacMar shares as a poor investment too concentrated, too little return, and subject to too much control by her brother who divulges too little information.

Jay will view Karen as a detached investor, uninterested in the growth of the business, unappreciative of his hard work, too interested in distributions, too vocal with advice and criticism, too willing to inject family concerns into business decisions.

Under the JacMar buy-sell agreement there is no market for Karen’s shares except for her brother, who doesn’t care to buy, at least not at her price—what her shares would bring if the entire company were sold. Forget discounts for minority or lack of marketability.

The third generation JacMar grandchildren will develop a sense of entitlement to distributions from the family company with little concern for company welfare. Some will become dependent upon those distributions to maintain the lifestyle that befits a member of the “JacMar lucky sperm club”—without working for it, some without working at all. Built into the JacMar family wealth system is a Welfare State second to none, notwithstanding that fact that Jack JacMar was a life long Republican.

The parasite-plunderer syndrome also surfaces in estates and trusts—or for that matter in any circumstance where one has control over the property of another, related or not, with the de facto power to prefer himself or others, and especially if he or she is compensated. Jay and Karen won’t see their mother as a plunderer, but that’s precisely how they will perceive the Earnest Trust Company.

Parenthetically, I’m greatly concerned that family limited partnerships being created with no attention to their parasite-plunderer potential. The limited partners don’t realize they are a nascent business family, and aren’t prepared for the relational stresses their partnership will ultimately create.

Whether as shareholders of active operating companies or as partners in family limited partnerships or as fiduciaries and beneficiaries of trusts or estate, insiders and outsiders—parasites and plunderers—are joined at the wallet.
C. Joined at the Wallet

The JacMars are joined at the wallet but separated by self-interest. Joined at the wallet stresses family relationships. It is said that the wealthy are different. Different also are families who are joined at the wallet. In business families, money and relationships get confused. Money talk and family talk get confused, blurred, run together. When Karen says, “It’s not the money” Jay hears, “It’s not the money…altogether. She’s criticizing me.” When Jay insists, “It’s not personal”, Karen hears “It’s not…altogether…personal. There’s the money, you know.”

Business families need to make a clear distinction between family talk and money talk—between family talk and business talk. Strong families do. Troubled families wallow in the blur.
D. Family Systems

“Systems” thinking views families not as clusters of individuals, but rather as a very complex system of relationships. A quick and dirty image of family systems:

Imagine a nest of several porcupines snuggling down for the night. If you are a porcupine in nest of other porcupines, three things can happen, and two of them are bad. You can be warmed by other porcupines, or chilled if they aren't close enough. Get too close and you get pricked.

A family system is like a nest of porcupines constantly adjusting to each other. When two porcupines fight, one dies, another brings a new mate to the nest or leaves, a new one is born—all these occasions call for porcupines to readjust their distances from other porcupines to maintain maximum warmth with minimum pricking.

A family is a system of relatives constantly adjusting to each other as their circumstances change. Although Thomas Wolfe wrote You Can’t Go Home Again, we never really leave home. Our family of origin is always with us, even if they are dead, or we don't speak, or rarely see each other.3 So, continuing the analogy, what is a business family but a nest of porcupines out in the woods foraging together!

Family systems are crucial dynamics in family limited partnerships, family businesses, and family estates and trusts. Like it or not whatever your role in the fiduciary scenario, however temporary, you are like a new and strange porcupine plopped into that nest. All other porcupines will change their relationship to all other porcupines in response to what you say and do.

Though most estate plans profoundly affect the family system, planning in secret omits the family members who are most members of the family system are most directly affected. Planning in secret necessarily proceeds in ignorance of the knowledge that could be accessed only through Family Dialogue.

Part B. Creative Settlements that Leverage Relationships


Let’s replay the three episodes in the JacMar family history. In the interest of creative settlements, how might their relationships have been addressed and leveraged?

IV. Phase One: Creative Avoidance


Protect the family relationship by not creating plunderer-parasite in the first place.4
A. Intergenerational Planning through Family Dialogue

For business families like the JacMars transmitting ownership in active operating companies, Family Dialogue is indispensable. The JacMar plan asks Jay and Frank to invest their working lives in the company, and asks Karen to suffer her inheritance to be managed by her brothers indefinitely.

Suppose that late in the planning process Margaret turns to you saying:

“I think we understand about the taxes and how our wealth will be managed. Will you spend some time discussing how your plan will affect our lives day-to-day, and the lives of our children and grandchildren?”

“We would like to include our children in these discussions?”

“Let’s meet with them before we’ve decided on a final plan?”

Dialogue accesses knowledge that is inaccessible to individuals inquiring alone. Family Dialogue—between givers and receivers—parents and children—accesses family knowledge that is inaccessible to parents who plan in secret. Margaret has unwittingly stumbled upon intergenerational estate planning.

The genius of parenting is to understand and respond appropriately to the individual differences in our children. It’s impossible to treat them exactly equally.

Perception of fair treatment may be more important to Jay, Frank and Karen than mathematical equality. Fair treatment is personal, connected, and affection-based. It’s not what Jack or Margaret considers fair—in secret—it’s what each child perceives as fair.

And if the child gets a fair hearing in his estate planning process, the more likely he or she is to perceive the ultimate plan as fair. Offering a creative role to beneficiaries in the planning process is creative settlement of disputes that may never arise because the potential plaintiffs were present at the creation. They were not taken for granted or by surprise. The plan is theirs. We support that which we create.
Recommendation:
  • In the planning stage, leverage the family relationship by encouraging Family Dialogue about your proposed estate plan.
  • Be prepared to guide the discussion, if asked.
  • Step in diplomatically if the participants detour, argue, or wallow.
  • Give the family space. The training wheels are off. It’s OK if they wobble and fall a bit. As a family unaccustomed to discussing wealth, they need to discover their common balance and rhythm.
  • Honor the knowledge they access.
  • Adjust your planning accordingly.
  • Your plan has become their plan.
B. Family Organization
1. Outside Boards—Leveling the Playing Field

Most business family clients don’t take our advice to avoid parasite-plunderer. They give equal shares of voting common stock to active and inactive children alike. So what then? We can help them manage the inevitable conflict.

An active outside board of directors can play a vital role. Outside directors must represent all shareholders. Their job is to exercise their best judgment for the benefit of the company and shareholders as a whole.

Outside directors help create a corporate culture of accountability. Their impartiality should regulate the flow of perquisites and dividends. Both in image and substance, an outside board creates a level playing field between insiders and outsiders. If the board keeps the lid on parasite-plunderer conflict, that alone may be reason enough to justify their directors’ fees. But don’t count on outside directors to manage family conflicts. If they become embroiled, they will probably leave the board.

If an estate or trust is the vehicle, why wouldn’t the same dynamics work? What about an advisory board to the fiduciary? Advisory board members could include some beneficiaries, representatives of the fiduciary, and some sage outsiders, who are counterparts of outside directors in family companies. Some fiduciaries might go so far as to transfer appropriate trust assets to an LLC and elect such an outside board to oversee them. For that matter, why not an advisory board to partnerships of non-relatives?
2. Family Councils—Formalizing Family Dialogue

First generation businesses families might slip by without organizing themselves. But a good family organization is a must for second and third generations if the business is to survive.

By force of habit, Jack JacMar carried his dominant persona into family settings. When he tried to command, he got resistance. Family Dialogue may reveal that Jack’s priorities and view of reality aren’t necessarily shared inside the family. That’s knowledge otherwise inaccessible to him.

A family council formalizes continuing Family Dialogue. Business discussions at traditional board meetings or shareholder meetings are difficult, unpleasant, inconclusive, and overwhelmingly boring. But families can learn how to talk business talk with each other in family councils.5

If the responsibilities of corporate officers and directors overlap or contradict fiduciary duties, rocky family relationships can stir the mix into an incendiary stew.6 One or more family members may be trustees, executors, company officers, corporate directors, and heatedly in conflict with other family members, who may act as some, all, or none of the above.

It’s not unusual for the time and amount of trust distributions to be subject first to the discretion of a family board of directors to declare dividends, then further subject to the discretion of another set of family trustees to make distributions to beneficiaries.

A business family, whether trust beneficiaries or family shareholders, needs to keep in touch with itself and needs a vehicle for continuing Family Dialogue. The family council may become the primary vehicle for nurturing the family relationship. Annual shareholder meetings can become family reunions. Bring the children.7
C. Family Offices

JacMar employees perform all sorts of personal services for members of the JacMar family. They wash and repair Jack’s and Margaret’s personal cars. A JacMar employee keeps their grass mowed, their trees trimmed, their flowers watered and mulched. Jack’s secretary keeps his personal checkbook. The company accountant prepares the first draft of family tax returns. On their frequent trips out of town, a company employee even walks their dog.

“Walking the dog” has become a catch phrase for a full-service family office. Not only does the family office manage family wealth, it stands ready to do whatever family members can’t do, don’t want to do, or might otherwise neglect—even walking the dog. Sometimes an office serves several families. Corporate trustees furnish a variety of family office services.

My clients’ experience with family offices is mixed. No doubt their services are convenient and affordable, but there’s a “bubble wrap” effect that insulates and isolates family members from the real world. Managers of family offices tend to empire build—to bring the entire world in-house—and to speak on behalf of family members to the outside world. Some estate planning colleagues complain bitterly about lack of access to family members. They charge that non-relatives are managing the family instead of the family managing itself—or in my terms, family offices supplant Family Dialogue. I encourage my colleagues to look in the mirror: are they doing the same by stifling intergenerational estate planning?

In contrast, I greatly admire a unique service offered by a small CPA firm to recent widows of my generation, like Margaret, who feel overwhelmed by their new and strange financial responsibilities. In the year or so after the Jack’s death, a firm accountant teaches and coaches Margaret to assume as much financial responsibility as she reasonably can. The firm handles the rest. Perhaps a similar service is offered by family offices to family members who are unsophisticated in finance. I hope so.
D. “Layering” an LLC

Suppose the corporate trustee of a long term trust creates an LLC with appropriate trust assets. The trustee populates the LLC board with family members (some of whom are financially sophisticated or show management potential), at least three strong outside directors and for oversight, one or two experienced trust officers. As a condition of maintaining the LLC, the trustee insists on an active family council.

The LLC board operates under the business judgment rule. The trustee is left to worry about the LLC as a prudent investment. All adult trust beneficiaries are invited to quarterly LLC board meetings. The annual meeting of the trustee shareholder is held concurrently with a meeting of the family council in a resort setting, all wrapped in a fun family reunion.

This layered LLC incorporates most of my other suggestions for creative preventive settlements. The common thread among them all is healthy and regular communications within the family.8 Without exception, every family that hires my firm tells us their communications are faulty. Dialogue accesses knowledge that is inaccessible to an individual inquiring alone.

Let’s revisit the above organizational suggestions as we consider creative conflict settlements and creative litigation settlements.

V. Phase Two: Creative Conflict Settlements


Jack JacMar has died. Frank JacMar died tragically shortly after his father. Al, the general manager, has been running the company since Jack’s death four years ago. The board of directors consists of Margaret, her two surviving children, Jay and Karen, and a trust officer from Earnest Trust Company.

Margaret wants to retire Al and name Jay as CEO. Karen doubts her brother’s qualifications and actively opposes his election. Margaret has the votes. She owns 41% outright and votes an additional 41% as trustee of the marital trust without the concurrence of Earnest Trust Company. Margaret has told the ET board member of her intention to replace Al with Jay but has not told her children. The ET director fears a family storm may be brewing. Karen has told the ET director that if Jay is elected CEO, she’s tendering her stock under the buy-sell agreement but won’t accept any discount for minority or lack of marketability.

ET now knows two secrets that, if disclosed, could provoke damaging disagreement about the business competence of a third family member—an oh-so common posture in the succession context. Nervous about conflicts of interest, ET’s lawyers suggest that Karen and Jay each get separate counsel. ET’s outside accountants absent themselves in the name of “independence.” ET asks your suggestions for a way out.

Discussions about the business competence or qualifications of a family member can be quite productive for one family, while hazardous and harmful for another—resurrecting old hurts, jealousies, rivalries, and other discontents that shouldn’t be relevant to business decision-making.

Imagine a traffic light could signal the present capacity of a given business family to manage sensitive issues.

The "Green Light" Zone. In the "green light" zone business families can manage sensitive issues largely on their own. However, even "green light" families can become distracted or procrastinate, may need prompting or encouragement, may encounter one or more difficult family members, or share apprehension." Green light" is not necessarily a "forever" status. Time, circumstances, births, deaths, marriages, even genetics can interfere. "Green light" families are part of the quiet good news that bores the business press. This quiet good news is vastly underreported.

The "Red Light" Zone. Families in the "red light" zone cannot possibly make a successful transition without significant professional help. Their family relationship is a large business liability. They have not found ways to communicate productively. Unless they make some fundamental changes, "red light" families are likely candidates for litigation that threatens their fortunes, their businesses, and their relationships for generations. Some "red light" families cleverly manipulate their public image to conceal their distress. "Red Light" is not necessarily terminal. Some "red light" families can and do rise above their conflict. Since noisy bad news sells, the business press gives excessive coverage to "red light" families, especially if they sue each other.

The "Yellow Light" Zone. Business families in the "yellow light" zone tolerate substandard business practices and unsatisfactory family relationships for the sake of "holding things together". Their "soft side" is sometimes an asset, sometimes a liability. Business transition may offer them a needed opportunity convert "soft side" liabilities into assets. They possess some "soft side" insights and skills, but aren’t using them effectively. Some "yellow light" families can make "good enough" business transitions, although the process may perpetuate the substandard business practices and less than desirable family relationships. Some will require professional "soft side" help to make a successful transitions. “Yellow light” status is usually temporary. It gets better or it gets or worse. The business press mistakenly lumps "yellow light" families with "red light" families—where they don’t belong.

Our experience suggests that among business families generally:
  • 40% are "green light"
  • 20% are "red light" and
  • 40% are "yellow light"

Most business families consider themselves to be “yellow light.” Those who tell the world they are green are probably red. The Wall Street Journal reads as though all business families are red.9

On the issue of Jay’s succession, they are “yellow.” A frank discussion could be productive, but might prove harmful. It’s wise to introduce an expert porcupine into the JacMar family nest. So often, creative conflict settlement involves picking the right porcupine.
  • They might choose a certified legal mediator, but what would he or she know about family dynamics or about selecting a qualified CEO?
  • They might consult a therapist who would focus on family dynamics, but what anti-business bias might he or she be carrying?
  • They might hire a family business consultant who could guide family discussions, but can the family adequately evaluate Jay’s qualifications as opposed to other candidates?
  • They might hire a professional search firm that would include Jay in the pool of candidates for CEO, but how to present this to the family?

ET might approach Jay with the idea of the search firm. If Jay likes it, he can suggest a search to Margaret and Karen. Karen will jump at the idea, and Margaret will probably go along even if she considers the search unnecessary. If he doesn’t like the idea, Jay will probably gripe about the cost of the search. That may be his only concern. If it’s not the money, he may be worried about the results. If Jay balks, Karen might approach Margaret with the idea, noting that searches are widespread in Karen’s business environment. The search firm selected should be experienced with business families and sensitive to the particular nuances.

The search may confirm that Jay is an acceptable candidate, or that suggest that JacMar Corporation would be better lead by an outsider. Even if the family hires accordingly, the conflict settlement is not complete.
  • Has Margaret done estate planning in secret? Who inherits her JacMar shares (41%)? Have Jay or Karen been consulted? Have the three discussed Margaret’s plans together with her advisors?
  • Does JacMar Corporation have an active board with outside directors?
  • Is there a functioning family council?
  • Have the trustees considered a “layered LLC” to hold the 41% that Jack placed in the marital trusts?

Look beyond resolution of the particular conflict. Use the occasion to install more comprehensive, creative preventive settlements. But if everything else fails, there’s litigation.

VI. Creative Litigation Settlements10


Now fast forward twenty five years. JacMar Corporation has grown ten times and does business on six continents. Jay has announced his own retirement at age 63. Jay’s long since reconciled sister Karen operates as his unofficial alter ego in the company.

A multinational has offered to buy JacMar Corporation for $300 million cash. In the midst of the buyer’s due diligence, company counsel receives a courtesy copy of a petition for surcharge not yet filed by Frank JacMar’s widow, Frances, and her adult children against Earnest Trust Company and Jay JacMar (Jay having succeeded his Margaret as co-trustee) for failing to correct certain acts of collusion, misrepresentation and wrongdoing by Jay and Karen and by other members of the JacMar board and senior management.

The past sixteen years has provided me with a graphic refresher course on the awful destructive power of family litigation, even the threat of family litigation. Like divorce, family litigation is the brooding omnipresence that hovers over every potentially contentious business family.11 Families don’t want to litigate and don’t like litigators. They want to learn to cooperate, to collaborate, and to co-exist.12 But if it happens…
A. Destroying the Family Relationship?

Fiduciary remedies, like most civil remedies, involve nothing more than moving money around. Litigation between persons with intense (or once intense) personal relationships can accomplish nothing more than moving money around.

Does litigation demand that the JacMar family relationship be transmogrified into nothing more than a money amount—forcing family members to declare that it is the money after all? Must joined at the wallet squeeze out the rest of the relationship? Does litigation declare the family relationship between the plaintiffs and the defendants to be legally dead? Not necessarily.

If Frank’s widow, Frances and her children object to the way JacMar Corporation has been managed, do they thereby exit the family? Could Jay ever convince Frank’s widow that nothing “personal” was intended by sitting silently while his lawyers asked her harsh questions during her deposition?
B. Karen’s Draft—Gains and Losses

During a meeting with company counsel following receipt of the petition, Karen turns to Jay and says:
Remember how years ago I thought you weren’t qualified to be CEO? I talked to a lawyer about what I could do to stop you.

He sent me home to write down what I might gain and what I might lose by going to court. Then the search firm told us you were a qualified candidate so I dropped my objections.

Last night I reread what I wrote twenty-five years ago, and then I wrote this:

Gains and Losses

Jack and Margaret JacMar have left us with abundant opportunities and lifestyles we have not earned.

We are the beneficiaries:
  • of Jack’s energy, ambition, and hard work,
  • of Margaret’s love, nurture, and vigor,
  • of Jay’s vision, intellect, and quiet leadership,
  • of Frank’s warmth, wit, and charm,
  • of Frances’ courage, strength, and compassion, and her sons’ dedication to our Company, and
  • of Karen’s versatility, loyalty and team play.

JacMar Corporation is an important part of our family heritage. The Company has provided us with careers, prominence, and personal wealth.

Yet we differ on important issues involving Company management. We hope our differences will be settled through negotiation or mediation. If not, they will be resolved by court decision.

Our differences are straining our relationships with each other and we anticipate further stress. We urgently desire to avoid unnecessary injury to our connectedness.

Our remedies are limited to money damages. None of us subverts the importance of family to money demands. None of us will use litigation as an arena to expose rivalries, envies, injustices, hurts, slights or neglects.

We wish to minimize publicity, sensationalism, and erroneous reporting. None of us will communicate with the media about our differences or the litigation, and will instruct our lawyers to refrain from any public comment about our case. We will seek to have all records of this matter sealed from public inspection.

A continuing healthy family relationship is our highest priority. We want to remain a strong family after this matter is concluded, regardless of its outcome.

We are particularly concerned that our differences may adversely affect relationships between our children and grandchildren. We will do all we can to confine our disputes to our own generation.

We urge our respective attorneys to be respectful and courteous to all family members at all stages of this matter. We ask them not to expose or exploit past disputes or differences between us that are not directly related to management of the Company. We ask all judges, magistrates and mediators to cooperate in our objective to protect our family relationship.

Why not draw a Chinese wall around the family relationship? Ask your clients to do the work and draw the preliminary boundaries. Offer Karen’s draft to opposing counsel requesting that Frances and her children accept the draft or suggest modifications. Even if rejected, Jay and Karen can choose to comply unilaterally without weakening their case? Truces begin with someone withholding the last shot. Who knows? As the litigation progresses, Frances and her children may change their minds. A “Karen draft” could be introduced as a creative litigation settlement tool at any stage of litigation, even after final judgment.
C. Mini-Trial Knockoffs

Business families contemplating litigation have no idea what the experience will be like13. Most who have been through it—win or lose—admit it was horrible. Karen’s lawyer sent her home to write down the potential gains and losses—a wise suggestion but relatively painless and inexpensive.

Potential litigants might benefit from an early whiff of tear gas by experiencing some mini-trial knockoffs. For example, Frances’ lawyers might stage her mock deposition with some rough questioning, or treat her family to a mock opening argument that makes tough accusations against Jay and Karen. Afterwards, Frances’ family might be given homework—to review Karen’s draft and then write down their own version of the potential gains and losses from continuing with litigation.

VII: Savaging or Salvaging?


All of us have seen litigious families who seem far beyond the point of reconciliation—some so savage that the steeliest soap opera fan couldn’t bear to watch them interact. Trying to leverage their relationship into a creative settlement might generate a homicide—yours! But even they have children or grandchildren who might be spared the kinds of feuds that are perpetuated by hostile family litigation. The combatants may be hopeless, but why dump their noxious bile on their children’s children?

There are alienated families who are pushed into savagery by the ordeal of litigation—“yellow light” families “red lighted” for generations. Most who consent to litigation don’t know what they’re getting into. A pathetic example is the famous Oursler v. Armstrong case.14

Fiduciary litigation is the law’s only encounter with family system except for divorce, adoption, custody and occasionally elder law. Too much fiduciary litigation is an anvil for the expression of cumulative rage.

Most of us learned early on not to suggest reconciliation in divorce litigation. They just want out. The relationship was over before they contacted you. But families can’t divorce. The day after the judgment becomes final, they are still family. I think we can help them salvage that day and the days that follow with creative settlements that leverage their most important relationships.

NOTES:


1 Le Van, The Survival Guide for Business Families (NY Routledge Press 1998)



2 Our “hard” side world is a creature of the Enlightenment that began in the 17th Century and ended after WWII. Scientific advances, particularly in mathematics and physics, characterized the Enlightenment giving rise to discoveries and inventions that created the Industrial Revolution and led to our current technological revolution. This hard side world was a clock. Successful enterprises were machines, conceived by engineers and monitored by accountants, for the ends of maximum industrial productivity at minimum cost. Individual workers were a collection of individuals, parts of the machine, fungible and interchangeable. The hallmark of the hard side is quantification and metrics. As war came to be measured in “body counts”, so also success in law or accounting in time sheets. Much of the law as we know it developed in the Enlightenment, incorporating hard side assumptions, protecting hard side interests.

“Soft side” thinking is largely post-WWII. The soft side world is not mechanical, but organic. Biology has eclipsed mathematics and physics. The soft side world is not a clock, but a rain forest. Enterprises are no longer machines, but ecosystems whose fitness to survive is determined by their relationships to other organizational ecosystems in the rain forest world. Enterprises are no longer collections of individuals, but systems. While retaining the benefits of the hard side, the soft side enterprise is no longer industrial; it is knowledge-based. The most valuable corporate assets are no longer capital assets, inventory, work in progress and finished goods, but intellectual capital—knowledge carefully collected from and then redistributed among employees, who themselves have become the company’s most valuable assets. Systems thinking abounds. Soft side emphasis is not so much on individual achievement, but one’s contribution to the system, and one’s role in the creation and utilization of valuable shared knowledge. Individualism has given way to important relationships; independence to interdependence; self-absorption and self-reliance to networking and connectedness. Ironically, that supreme quantifier—the computer—is making its supreme impact as biology eclipses mathematics. Indeed, the computer’s ultimate contribution may not be quantification but connectedness and communication offered through the Internet.

The jerky transition from a clock world to a rain forest world is far from complete and far from seamless. Those of us who grew to intellectual maturity in the clock world are nostalgic for it. We miss its certainty, its order, its predictability, its familiarity. By comparison, the rain forest world, with its unfamiliar array soft issues, seems capricious, messy, chaotic at times. Yet I predict that this tectonic shift from clock to rain forest will induce many of us to reshape our professional corrals to include some selected soft issues that we once considered free range.



3 You and I tend to view other families through the lens of our own family of origin. We see in other families what we experienced in our own.

These are some of the contours of my family lens.

I’m male, I’m Southern, of Huguenot descent, and carry a Medicare Card. Psychological testing confirms that my attention is focused primarily outside myself, on people and events. I dwell much more on possibilities than the here and now. I need to feel right about my decisions. Rather than wait and see, I make decisions quickly. I’m an only child. Though I have three children and several grandchildren, and though I recognize sibling rivalries, I have never lived sibling rivalries. As a dear friend once said, “Gerry, You have missed one of life’s great experiences: living in the same household for years with someone who absolutely hates you!”

Unless we are careful, clients in Family Dialogue will assign us a role in their family system. Unless we are careful, we’ll assume their family is like our own and behave accordingly. Even gifted therapists must struggle to avoid being sucked into powerful family systems……into playing the role of the client’s wise father or despised older sister.

I despair to hear hard side advisors talk in dismissive terms of “touchy-feely” as though a the family’s emotional agenda were nothing more than a nuisance in the otherwise linear and rational path to great planning. I spend too much time and energy with my ultra-talented hard side colleagues trying to focus their attention on relationship issues in their client families that impede the formation of a plan, or threaten its ultimate success in action. The next time you start to say “touchy-feely” stop and try to articulate as clearly as you can what’s going on inside you that prompts you to say “touchy-feely.” “I don’t want to start an argument” or “I don’t want to lose a client over this.”



4 Some “hard side” suggestions for avoiding the creation of conflict in family companies:

Should the insiders buy the company from the founder or from his estate? It can make lots of tax sense. Assure that potential parasites are advised of price and terms in advance. Ideally, insiders—plunderers—should own all the stock. Encourage plunderers to buy parasites’ shares. Keep the topic of buyouts alive, the discussions in play. Consider a “tagalong” clause in family buyouts, entitling selling shareholders to a part of the proceeds if the buyers resell the purchased shares during the next several years. Give or bequeath to outsiders something other than shares in the family company. If the company is the principal asset and other assets are small, your clients can create additional wealth is by investing in one of several breeds of life insurance. Non-voting shares for inactive parasites may not be the answer. Depriving them of a vote in company affairs just rubs salt in the wound. Shareholders who can’t vote are at the mercy of those who can. But they still have a voice. A muzzled dog cannot bite, only growl. Faced with continuing family conflict, too many advisors counsel the family to sell the business in order to stop the battles. Too often, our advice to sell is premature and contrary to the family’s best interests. Too often the family continues to fight over investment of the sales proceeds. Most advisors know how to handle the sale of a business. Most don’t know how to mediate family conflicts. It’s quite natural to recommend what we know how to do.



5 A threshold question is the definition of “family.” Shall the family council include spouses? Children above a certain age? Fiancées? Significant others? Shall in-laws and children have voting privileges? What are the responsibilities of the family council? What matters are appropriate agenda items, and which issues are out of bounds? For example, what input should the family council give on family employment issues? What is the purpose of the family council? For most families, the purpose is tied to the family business or to shared family wealth.



6 Here’s the JacMar’s recipe:

Into an eight digit pan, place two parts public securities, and eleven parts minority interest in mid-tech family business. Season with widow as co-executor and co-trustee, add two sons who run the company, a dollop of dazzlingly successful daughter employed elsewhere, and a pinch of daughter-in-law insurance agent turned investment advisor. Stir carefully lest the mixture detonate. Place in trust for widow’s lifetime at low heat and hope for the best. Baste periodically with cryptic trust accountings, an uncertain stock market, and serial trust officers, some of whom smell faintly of Clearasil.



7 Some thoughts about Family Council organization:
  • There should be a written charter.
  • The family may want to consider adopting a Code of Conduct.
  • How votes are counted can produce fascinating discussions and tense moments, e.g. per capita or per stirpes.
  • The Charter can require that no legal action can be commenced against trustees, or officers or directors of the family company without prior Family Council review.
  • List other matters that need to be considered first by Family Council to prevent “end runs” by family members via Trustees, Management, etc.
  • Provide for the use of trust or company assets, e.g. planes, recreational facilities, club memberships, the family name e.g. Libby Owens Ford
  • Watch especially for hidden or unequal perks and other perceptions of favoritism.
  • Carefully and systematically disclose all compensation and perks received by family members from the trust or company. Encourage recipients to disclose voluntarily, rather being coerced to reveal compensation and perks.
  • Discretionary dividends and trust distributions are always delicate. Should there be Family Council input to persons exercising discretion?
  • Consider stirpital disparities. Some younger generation members come into their money before others.
  • Conversations about how other relatives spend their inherited money are seldom productive.
  • Consider a rule that no advisors for individual beneficiaries may attend meetings unless invited by Family Council.
  • Sometimes, company activities carry unintended but clear intimations of family support. The family may or may not want to be identified with:
  • Company philanthropy
  • Company activism
  • Company paternalism—benefits, work rules, retention and discharge, downsizing
  • Company compliance, e.g. environmental, ADA, sexual harassment,
  • The family council can take a role in preserving family heritage. Few families lose their curiosity or concerns about their history, roots, identity, genetics, etc. No matter how remote their control over ownership of the trust or company, they continue to ask:
  • “Who am I?”
  • “Who are we?”
  • “How much of us is preserved in company archives, mementos, photos, minutes, etc?”
  • Public image and reputation are always important to business families. “It isn’t the money…altogether.”
  • Sensitize trustees and company management to family sensitivities, e.g. name, image
  • Sensitize the family to trustee and company stresses, loyalties, frustrations, regulations, and particularly public company disclosures.
  • Agenda suggestions for Family Councils:
  • spend time on family news
  • invite input from all family, company management, and trustees
  • emphasize learning and understanding.
  • make allowance for different levels of business sophistication, business judgment, interest in the Company, and attention spans.
  • Trustee representation: how much do representatives of corporate trustees really contribute?
  • Family representation: be careful about “lines”, classes of stock, generations, custom and tradition.
  • Management representation: who besides the CEO really needs to be a director?
  • Appoint at least three active independent outside directors, who are neither family, employees, or otherwise beholden to Family, Management, or Trustees.
  • Family co-trustees or trust advisors
  • For all of the trusts? For those only in co-trustee’s bloodline?
  • For trusts for one’s own benefit as learning experience?


8 Communications are critically important. By all means, keep direct communications flowing between plunderers and parasites in both directions.

Advisors. Encourage family members to keep their lawyers, accountants, and other advisors abreast of family discussions. But caution family members to weigh carefully the consequences of asking advisors to speak on their behalf to other family members. Smart business families communicate directly with each other, not through third persons. Once families start communicating through advisors, the risks of family war escalate dramatically.

Financials. Circulate pertinent financial information on a regular basis. Create brief financial summaries that are more readily understood by less sophisticated family members. Include narrative explanations for the number challenged. Estate and trust accountings may seem particularly difficult for them to grasp. Educate and remind family members about the importance of confidentiality about sensitive financial matters, e.g. leaving the annual report on the on the coffee table.

Compensation. Voluntarily disclose all insider compensation and perks to outside shareholders. Include reimbursed expenses. Highlight managing partner and family fiduciary fees, expenses, and reimbursements. Keep clear distinctions between sweat equity and blood equity. Be prepared to defend the reasonableness of insider salaries and perks not only against the IRS audits but also in response to outsider inquiries. Disallowance of unreasonable compensation deductions and recharacterization as a dividend to the family employee can create havoc with outside shareholders. A rational compensation plan applicable to family and non-family employees should be considered.

Meetings. Make annual shareholder meetings, partnership meetings, and meetings of beneficiaries informative as well as cordial. Keep outsiders abreast of what is happening in the company or partnership—the neat stuff. Encourage regular family meetings to discuss business.

Secrets. Withholding sensitive information from outsiders, limited partners, or beneficiaries sends a signal that you don’t trust them. Tell them as much as you safely can. If you can’t, tell them why they can’t know.

Perks. If hunting camps, aircraft, condos and the like are available, make sure that all have fair access. Don’t try to buy peace with your parasites simply by giving perks such as cars, club memberships, and extravagant fringe benefits. Most times it just doesn't work. Perks?for?peace just gives them something else to argue about.

Audits. Even an all-family board can create an audit committee to receive your reports. A parasite-outside family director should probably chair that audit committee.

Boards. Keep pushing for an outside board. Make it a point to introduce parasites and plunderers alike to persons who would be excellent outside directors. Send them articles and book recommendations about forming outside boards. Give a firm seminar on outside boards.

If the all-family board faces a critical business decision, invite two or three highly sophisticated business persons to sit in on board meetings asking them to behave as though they were directors. Use the crisis situation to demonstrate the value of an outside board.

Keep pushing for a Family Council, even if there is no operating company. Encourage the family to have an “informal business meeting” during family reunions or holidays. Invite attractive non-family employees to make reports. Again, about the “neat stuff.” Keep the meetings lively, interesting, and fun.

If all else fails, volunteer to act as intermediary between parasites and plunderers. At the minimum, get their questions answered, their complaints heard. But don’t deliver the answer yourself. Messengers who bring bad news get shot. Insist on direct communication between the asker and the answerer. Use your conference phone to connect the asker and the answerer and listen in to the conversation. Prompt each side as necessary for clarity and completeness of questions and answers.



9 In his book, Psychotherapy and Growth: A Family Systems Perspective, Brunner/Mazel; July 1977, Psychologist W. Robert Beavers describes five levels of family systems according to their ability to function. Beavers begins with the most dysfunctional family and moves up the scale from worse to better.

Level 5: Severely Disturbed—Chaos and Incoherence. Level Five families live in chaos. There is no leadership. There is no one in authority. No one can enforce the rules or make needed changes. No one can ensure that better things will happen. Nothing is predictable. There is no certainty that what one says or does will lead to a good outcome. If rules exist, they are in a state of perpetual flux. Murky uncertainty prevails, creating feelings of terrible apprehension and danger. They are out of control. They lack fundamental coherence. Level 5 families are haunted by past unmourned, unresolved sorrows and miseries. Loss is intolerable. Even expectable losses—such as children leaving home or parents aging—are denied as though biological time isn’t ticking. Losses are too painful to be managed. The family tends to do what it’s done before without seeming to notice that it hasn’t been working. The same dreary no-win consequences happen over and over again—like some unspoken collusion to ignore the real sources of their suffering. The family can’t focus on their concerns or even think about them coherently. Their conversations shift topics suddenly, evasively. They fail to recall facts of monumental emotional importance, (“Didn’t I tell you about my abortion”) or else respond with stony silence as though the speaker’s words had dropped into a well. If there is a basic theme in these severely disrupted Level 5 families it is that life makes no sense.

Level 4: The Polarized Family—Borderline. Instead of no rules, the Level 4 family has nothing but inflexible black-and-white rules designed not only to control behavior but thoughts and feelings as well. They live in a polarized world of “either/or”, all or nothing, in or out, entirely right or entirely wrong. There are no grays. You live in a perfect family or a monstrous family. There is no room for negotiating individual differences. The chaos of a Level 5 family is supplanted by a dictatorship. Utter disorder has been replaced by over-control. Though disagreeable, a dictator is preferable to the anarchy of Level 5. In the face of total disorganization, loss of personal freedom seems a small sacrifice. The tyrant is the truth for everyone. He or she dictates not only how others should behave, but also how others should think and feel. His or her rules impose both external order and internal order. The tyrant battles an underlying panic of being out of control, for if the tyrant is out of control chaos threatens. The tyrant runs the family system by intimidation and control. Control is the paramount issue with which Level 4 families grapple. Other family members comply in part because they fear the dictator, and in part because they fear the chaos that rebellion might bring. They have achieved a kind of coherence. Unlike Level 5 families, they do have a structure, even if they live under a cloud of mutual surveillance. Even if family members do not consciously rebel, they can’t remain in their oversimplified roles forever.

Level 3: The Rule-Bound Family—Midrange. Level 3 families have dealt with and resolved both coherence and control. They have structure and no tyrant. Their system works because of an elaborate structure of internal rules: the invisible referee. Their rules provide security, stability, and predictability. Level 3 families use the tremendous power and influence inherent in close relationships to keep people in line. Their motto might be: “If you loved me you would always do all the particular things that you well know will meet with my approval.” Coercion comes not from the tyrant, but because manifold rules about being a good person has taken deep root. The rules of honorable living dominate every aspect of existence. Violating these rules not only risks disapproval from others, but also disapproval of oneself. Obedience to the “internal referee” can seriously interfere with one’s real thoughts, true wishes, and actual preferences. In the rule-bound family system, one does what is expected, or else feels culpable and blameworthy. One can be genuinely confused as to whether they think or act in certain ways because they want to or because it is expected of them. The rules feel vitally necessary because the rule-bound family is pervaded by the belief that human beings are basically uncaring and untrustworthy. The rules rule because no one would ever do the right or loving thing of his or her own accord. Spontaneity is suspect. Authenticity is discouraged. “This is who I am” gives way to “a good person would think, feel, be ….” The invisible “they say…” or “everyone knows…” comments on everyone’s behavior although a Level 3 family may not know who “they” are. The rules seriously interfere with genuine closeness. It’s hard to share who you really are with another person, sometimes even with oneself. When it comes to intimacy, no stand-in for the real self will do. True intimacy begins by coming to grips with who we really are and what we really think and feel and sharing this (warts and all) with another person. We must be willing to be vulnerable. A real relationship is a safe place to go with one’s not-so-pretty thoughts and ambivalent feelings with the expectation we will be heeded, attended and supported. In the rule-bound system who one should be is more important than who one is. The internal referee blows the whistle when we violate the “shoulds” and “oughts”.

Level 2: The Adequate Family and Level 1: The Optimal Family

These families are more similar than different. Healthier families are comfortable with loving feelings as well as feelings of annoyance and frustration. Family members take responsibility for their own mixed, confused, or ambivalent thoughts and emotions. They are capable of flexible responses to life’s events. They focus on goals and tasks with considerable clarity.

There is conflict, but very little is unresolvable. They may struggle with strong differences, disagreements and an occasional battle, but they are nevertheless under girded by a sense of trust in their underlying connection. Because their fundamental relationships feel secure, they assume they can work things out so that their important relational web won’t be threatened.

As one climbs the Beavers ladder, families become more competent with power, control, and intimacy. At the bottom, Level 5, no one is in control. Anything goes. No one has effective power. The dictator seizes power in the borderline, Level 4 family. Fierce power struggles inevitably erupt, always involving someone’s desperate attempt to establish his or her own separateness. These eruptions may be explosive or more covert as, for example in anorexia nervosa. Because of the either/or environment there is no room for the gray areas of negotiation and compromise. It’s win-lose. Either you rule or you are helpless. Since the struggle for control can have no conclusion, the unresolvable conflict rages on. At Level 3, the rule-bound family, power is exercised through manipulation, intimidation, and guilt. Everyone feels emotionally constricted, guilt-laden, discomfited. Persons in a rule-bound system can confuse an unacceptable thought with actually having done something terrible. Sometimes they project forbidden thoughts or feelings upon others. It’s almost like they have built a prison with walls of rules, and leaped inside and locked the door behind them. At Level 2, “adequate” families have some resemblance to the rule-bound families below them. Occasionally they use emotionally coercive tactics like intimidation and guilt. Occasionally, they intimate that certain thoughts and feelings are out of bounds. Those occasions are not the norm, but when they do occur, they limit closeness, trust and good feelings. Level 2 families are more like Level 1 families in their performance. Both meet the needs of their members very well. Parents work well as a team. Family rules are not edicts but rules made by fallible human beings that are subject to question and perhaps change.

Healthy, competent family systems are flexible, though Level 2 families are less so. Their wheels don’t always move around easily at Level 2. Some pain and individual loneliness are present. They can’t muster the almost constant sense of closeness and delight that is evident in the Level 1 optimal families. The most competent family systems are egalitarian. Equal overt power is shared by the parents that is both mutually attentive and respectful of their different viewpoints. Negative conditions such as anger, frustration, sadness, discouragement, even despair are taken as part of the human package rather than as unwelcome, dangerous or potentially destructive forces. All feelings are taken to be the “facts” of someone’s existence at a particular moment. Those feelings don’t have to align with the family’s agenda or self-image. Bad feelings aren’t merely permissible, they are expected, welcomed, even embraced as aspects of a loving family’s humanity. This readiness to experience the hard parts of life makes it possible for family members to own and take responsibility for their feelings and to feel naturally entitled to do so. In Level 1 and Level 2 families, individual differences aren’t threatening. Differences are enriching. Being oneself isn’t bad or a betrayal of the group. Space—personal autonomy—is given to each member to grow without sacrificing membership in the greater family system. One can get very close without being swallowed up in others’ needs, or their communal myth. Intimacy feels safe.



10 Newspapers are replete with noisy bad news about a few high profile business families who go public with their bitter internal conflicts. Unfortunately, the quiet good news, about legions of business families who learn to manage their differences, goes largely unreported. Bad news sells; good news bores. The noisy bad news takes on a life of its own as the stories of family dysfunction are told and retold in professional circles with relish and embellishment by the worldly and sophisticated. The noisy bad news includes advisors’ unsettling experiences with business family clients. Advisors may have been ambushed, bushwhacked, broadsided by highly emotional issues imbedded in family dynamics, issues the advisor doesn’t understand, cannot control, and views as professionally threatening.



11 Ex-spouses attest that divorce doesn’t necessarily extinguish the relationship.


12 Officially, the accounting profession is loyal to the enterprise, rather than to

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