Legal Update: May 2025

Galiotos v. Galiotos—The Tale of a Sibling Feud

This legal update provides a summary of how the trial and appellate courts addressed a dispute amongst siblings that were co-trustees of trusts holding commercial real estate assets. The case provides valuation and litigation support professionals an opportunity to assess what has happened when an impasse of this nature results in litigation.

“If you ever start feeling like you have the goofiest, craziest, most dysfunctional family in the world, all you have to do is go to a state fair. Because five minutes at the fair, you’ll be going, ‘You know, we’re alright. We are dang near royalty.’” (Comedian Jeff Foxworthy) Or, you can go to a courthouse.

In Galiotos v. Galiotos, 2024 Va. App. LEXIS, 753 (Va. App. December 30, 2024), the court of appeals reviewed a Circuit Court judge’s ruling dealing with the double whammy of three quarreling brothers who were simultaneously co-trustees and beneficiaries of their parents’ trusts, and the complexities of effectuating the grantors’ intents.

Background

Anthony and Irene Galiotos amassed a multi-million-dollar portfolio of commercial real estate throughout Norfolk and Virginia Beach, Virginia. During their lifetimes, Anthony and Irene transferred interests in some of these properties to their three sons, Steve, Tasos, and Paul, who grew up working in their parents’ real estate empire. Nearly all those transfers were in “equal shares” despite requests from time to time from one of the brothers that they receive a greater interest.

In 1982, Anthony created two trusts. Trust A liquidated on Anthony’s death in 2006, but Trust B continued. Trust B named Irene as the primary beneficiary and on her death was to be “divided per stirpes, into equal shares, one share for each” of his sons. Valuation of trust assets was left to the trustee, initially Irene, “whose decisions as to value shall be conclusive.”

In 2008, Irene created her own trust, the Irene A. Galiotos Revocable Trust (“IAG Trust”), which like Anthony’s Trust B, called for the trust assets to be “divided into equal shares, once share for each child,” upon her death.

Irene died in 2016, and after reimbursing her estate for an estate tax liability from Trust B, the trusts continued to own substantial assets in the form of ownership interests in several real estate limited liability companies and partnerships and direct ownership of other real properties. The brothers, as joint beneficiaries of the trusts executed an “Agreement of Beneficiaries and Acceptance by Successor Co-Trustees” (the “Agreement”) that appointed the three of them as successor trustees to their mother. Under the terms of the Agreement, each brother voted one-third of the trustee votes in the LLCs and general partnership but required unanimous agreement for the trusts’ separately owned real estate (other than for affecting the day-to-day business like paying real estate taxes or collecting rents).

Steve, a Wharton-trained real estate management professional, had worked in commercial real estate investment for decades. Tasos, a real estate lawyer and investor, served as counsel to and manager of the family real estate businesses, responsible for day-to-day management of the properties. Steve and Tasos were nearly always at loggerheads in the operation of the trusts and had previously resorted to litigation with each other over the family real estate portfolio.

In April 2018, the disputes came to a head and Tasos sought to be done with his brothers. He proposed that Steve and Paul divide the portfolio into three “buckets.” He would pick first from among the buckets and Steve and Paul could choose who got the others. Steve objected to this strategy and the brothers remained at an impasse until May 2020 when Steve and Paul moved to oust Tasos from his position as manager of various family companies.

Following his ouster, Tasos sued seeking, among other things, to remove Steve and Paul as trustees, distribution of the trusts’ assets to the beneficiaries, and liquidation of the various entities that owned much of the real estate. Steve counterclaimed requesting a declaratory judgment that the properties could be distributed on a non-pro rata basis and to remove Tasos as a co-trustee.

In an apparent effort to mitigate the grievances, the trial court directed Steve and Paul to produce a non-pro rata distribution plan. If the parties were unable to arrive at a resolution, the court scheduled a trial.

Steve and Paul developed a plan (“Steve & Paul’s Plan”) that gave Tasos one of the property-owning businesses in Trust B that they valued at $1.9 million. The plan also allocated the debt owed from Trust B to the IAG Trust for advancing Irene’s estate tax obligation.

Steve and Paul would split the remaining five business interests. Because those entities involved other investors, Steve and Paul would each receive less than 50% of each entity. So, they applied discounts for lack of control and lack of marketability to each business interest. While neither a business valuation professional nor a real estate appraiser, Steve chose a fair market value (FMV) standard rather than a fair value (FV) standard and discounted the values of the business interests from 36% to 53.8%.

Regarding the IAG Trust, Steve & Paul’s Plan essentially divided the assets among Irene’s grandchildren, giving their children more real estate, but giving Tasos’s children the debt owed to the IAG Trust from Trust B, which would essentially be an offset to Tasos’s property distribution.

Tasos conditionally agreed to the property division if he could swap positions with either brother. Steve and Paul declined, and the case went to trial.

At the trial, Steve and Paul called an expert witness, a business valuation professional from the Richmond area, who agreed (a) with Steve’s use of the fair market value standard over a fair value standard and (b) that the three groups of assets were of equal value.

In support of his non-pro rata distribution strategy, Steve testified that a pro rata distribution of the assets would have adverse tax consequences and resulted in lower values for all three brothers, but he offered neither his own nor an expert analysis to support that assertion.

Tasos raised several issues in his opposition, including that the discounts to business interests allocated to Steve and Paul were excessive resulting in undervaluation of the assets they would receive under the plan. Tasos further argued that assigning the Trust B debt to him would likely force him to sell the real estate, triggering capital gains taxes that would properly have been borne by the trust if it had actually paid its obligation to the IAG Trust. Tasos offered a business valuation expert who testified that a fair-value approach, excluding discounts, was more appropriate than a fair market value, which grant Steve and Paul a windfall and result in “an egregious under-allocation of assets to Tasos.”

The trial court ruled against Steve and Paul, finding, based on Anthony and Irene’s history of gifting property interests to their sons pro rata and the language of the trusts, that trust assets needed to be distributed pro rata. To succeed in their proposal for non-pro rata distribution, Steve and Paul had the burden to persuade the court the fairness of the proposed plan, and they had fallen short. The trial court found that the asset valuation in Steve & Paul’s Plan had “little credibility,” as shown by their refusal to trade one of their allocations for Tasos’s. The trial court also found fault with Steve’s strategy to burden Tasos with all the Trust B debt when the debt belonged jointly to all three of them.

The trial judge ordered that Trust B liquidate its debt and, after that, all the trust assets be distributed pro rata to the beneficiaries.[1]

Steve and Paul appealed the trial court order.

Court Findings

The court of appeals found that “Steve and Paul’s I-cut-I-choose strategy was fraught from the start.” The court distinguished between the traditional I-cut-you-choose tactic and Steve and Paul’s I-cut-I-choose proposal in the most basic way possible: “Anyone who grew up with siblings might have practiced the time-honored I-cut-you-choose method to fairly divide something everyone wanted, like a cake or a pizza. That method, also known as divide and choose, is ‘elegantly simple: one person (the cutter) would divide the disputed matter into two pieces and then allow the other (the chooser) to choose which piece she would take for herself.’ ‘The incentives for fair partition are obvious: the cutter is incented to divide in equal pieces knowing she will be left with the piece the chooser leaves behind.’”[2]

The lack of equity in the Steve & Paul Plan was clear from Steve’s refusal to allow Tasos to choose a non-pro rata allocation coupled with his refusal to allow Tasos to choose from among the three groups of assets that Steve created. To overcome the trust language that assets be distributed in “equal shares, one for each child,” Steve needed to produce an “envy-free” allocation. “An allocation is envy-free if every player thinks he or she receives a portion that is at least tied for largest, or tied for the most valuable and, hence, does not envy any other player.”[3] The Steve & Paul Plan, however, demonstrated envy amongst everyone. Tasos was clearly envious of the asset allocation to his brothers since he sought to trade with one of them. Steve was also wrought with envy as shown by his refusal to allow Tasos to either allocate the assets of the trusts or to choose first among the allocations that Steve proposed for fear that Tasos would recognize and choose the undervalued bucket rather than the one Steve selected for him.

While the I-cut-I-choose strategy was procedurally unfair, the appellate court also agreed with the trial court’s findings that the allocations were substantively unfair. The Steve & Paul Plan substantially undervalued the interests allocated to Steve and Paul and assigned 100% of the trust debt to Tasos.

Impropriety of FMV Standard

The court agreed with the trial court that FMV was not the applicable standard of value in this case. The court paraphrased Tasos’s expert’s testimony that “fair market value is premised on a hypothetical sale by a willing buyer and a willing seller who is not under compulsion to sell. … But those assumptions are out of place in a forced sale or forced redemption. Quite simply, Tasos did not want to give up his interests in the five income producing properties that Steve and Paul wanted for themselves. Because Tasos was forced to give up his interests in those companies, the discounts resulted in what Dr. Waller described as a ‘windfall’ to Steve and Paul.”[4] The court determined that liquidation of trust assets is similar to a corporate shareholder freezeout, and as the Delaware Supreme Court held, “to fail to accord to a minority shareholder the full proportionate value of his shares imposes a penalty for lack of control, and unfairly enriches the majority shareholders who may reap a windfall from the appraisal process by cashing out a dissenting shareholder, a clearly undesirable result.”[5]

The court found that judicial dissolutions of privately held companies and limited liability companies were analogous to the liquidation of the trusts. “The purpose of a judicial buy-out is not to closely simulate a market sale, but rather, to fashion a sensible remedy to compensate for a lost investment. A judicially ordered buy-out occasioned by oppressive conduct is not voluntary in any sense of the word.”[6] Thus, just as with dissenting shareholder cases and shareholder oppression claims, application of the fair market value standard would have provided Steve and Paul with a windfall by reducing the values of the assets they received through discounts for lack of marketability and lack of control.

Allocation of Trust B Debt

Steve and Paul also appealed the lower court’s determination that the debt from Trust B to IAG Trust needed to be liquidated before the distribution of assets. In other words, saddling Tasos with the full amount of debt imposed an undue burden on Tasos and, by definition, granted a disproportionate boon to Steve and Paul. The appeals court adopted the testimony of a trust and estates lawyer who testified that he had never seen “a trustee try to impose a debt obligation involuntarily on a beneficiary like this. [The lawyer] said it was like trying to ‘give my credit card debt to [the] guy I like the least[.] I can’t do that.’ The best practice in this situation, he explained, was for the trustee to ‘clean’ up the estate debt before distributing the assets to the beneficiaries.”[7]

Conclusion

To overcome the language of a trust document that calls for pro rata distributions of trust assets, a trustee must establish that an alternate distribution method is fundamentally fair. The trustee choosing the assets to go to beneficiaries and forcing the beneficiaries to take those assets (I-cut-I-choose) fails that standard. Further, applying the fair market value standard in a forced liquidation of trust assets may result in recipients of discounted assets experiencing a windfall. Finally, the best practice in trust distributions is to liquidate trust debts at the trust level, not forcing that debt on a beneficiary.

[1] Over the next 18 months, the parties continued to litigate other issues, primarily related to recovering their respective costs of litigation and Tasos’s allegations that Steve and Paul had unilaterally taken cash out of the trusts to pay their own legal fees.

[2] 2024 Va. App. LEXIS 753 at *26, quoting Seokoh, Inc. v. Lard-PT, LLC, No. 2020-0613-JRS, 2021 Del. Ch. LEXIS 62, at *1–2 (Mar. 30, 2021).

[3] Ibid. at *28.

[4] Ibid. at *30–31.

[5] Ibid. at *31, quoting Cavalier Oil Corp. v. Harnett, 564 A.2d 1137, 1145 (Del. 1989).

[6] Ibid. at *32, quoting Sandra K. Miller, Discounts and Buyouts in Minority Investor LLC Valuation Disputes Involving Oppression or Divorce, 13 U. Pa. J. Bus. L. 607, 631 (2011).

[7] Ibid. at *34–35.

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Michael J. Molder, JD, CPA, CFE, CVA, MAFF, applies 30 years of experience as a Certified Public Accountant and litigator to help investigate and analyze cases with complex financial and economic implications. He has acted as both counsel and accounting expert in pending and threatened litigation as well as participating in internal investigations of financial misconduct. As a litigator, Mr. Molder helped co-counsel understand complex financial and accounting issues in dozens of cases. In 2006, Mr. Molder returned to public accounting applying his unique skills to forensic engagements. He has also performed valuations of business interests in a wide variety of industries.

Mr. Molder has served as a valuation expert for both plaintiffs and defendants in commercial litigation matters and owner and non-owner spouses in matrimonial dissolutions. He has participated in the valuations of businesses in a wide variety of industries, including: food service, wholesale and retail distribution, literary development and production, healthcare, manufacturing, and real estate development.

Mr. Molder has also investigated and valued damages in a wide variety of litigation contexts ranging from breach of contract claims to personal injury cases, and from employment disputes to civil fraud. He has consulted on many matters which have not involved the issuance of a report for litigation or resulted in deposition or trial testimony. Accordingly, the identity of these matters is protected by attorney client privilege.

Mr. Molder has also lectured widely on a variety of accounting and litigation related topics including business valuation, financial investigations in divorce proceedings, accountant ethics, financial statement manipulation and “earnings management.”

Mr. Molder can be contacted at (610) 208-3169 or by e-mail to Molder@lawandaccounting.com.