A Montgomery County judge accused Phillies co-owner John S. Middleton and his lawyers of concealing key information in a case involving a long-running dispute with his sisters over the family fortune.
In a ruling issued March 16, Judge Lois E. Murphy of Montgomery County Orphan’s Court cited problems with Middleton's court filings in dismissing a request from the Phillies co-owner to affirm an agreement he reached in 2003 with his sisters.
The dispute involving the family's successful cigar company pits the billionaire against his younger sisters, Anna Nupson and Lucia Hughes, and has been grinding on for two years.
Recently Middleton wanted the judge to affirm a 2003 settlement dividing the family's cigar and Phillies assets. But his legal team did not disclose that an earlier agreement with different terms had been reached in 2001, the judge wrote.
Middleton's "concealment" prevented her from determining the validity of the earlier agreement and led her to be skeptical of his lawyers' filings. "This court cannot at this juncture rely upon them to determine any disputed facts," she wrote.
Murphy said that Middleton could refile the court action, which his attorneys said they would do.
Nupson, Middleton's younger sister, says that her brother cheated her when he bought her, Hughes, and their mother out of the cigar company in 2003 for about $200 million. He then sold the firm for $2.9 billion in 2007, notching a huge gain.
Middleton has said that Nupson is motivated by greed and that he took a big financial risk turning around the cigar company, which was threatened by lawsuits and new regulations that could have sunk it.
Responding to the judge on Tuesday, Middleton's attorneys said they had too much respect for the court to "conceal" or "intentionally omit facts." They said they did not believe that the earlier 2001 agreement had to be put into the court record in the context of what they were seeking.
Both sisters knew of the altered document and received tens of millions of dollars in inheritance because of the changes, his lawyers said. They said the sisters could have brought the older agreement to the judge's attention, and that Nupson's attorney "feigned ignorance" of it when it came up in court in November.
The judge's actions pose risks for both sides. Middleton's sisters could be forced to pay back inheritance, Middleton's lawyers say. Middleton himself faces new scrutiny over the family's financial dealings and potential tax liabilities.
The family dispute
Murphy's decision is part of a sprawling and complex litigation over the Middleton fortune that has run up well over $1 million in legal fees and involves, on Middleton's side, some of Philadelphia's biggest law firms: Blank Rome, Schnader Harrison, and Cozen O'Connor. Middleton is also represented by trust attorney James Mannion, of Mannion Prior LLP in King of Prussia.
Attorneys say the dispute could take years to reach a trial — with the potential for tens of millions of dollars in legal fees — and if it does, Middleton, Nupson, and Hughes could be called to testify in court.
Spilling out of the court record has been revelations about family money feuds, details on Middleton sibling rivalries, and the disclosure that matriarch Frances Middleton considered disinheriting Nupson in the late 1990s.
John Middleton, who owns 48 percent of the Phillies, declined to be interviewed for this story. In November, Major League Baseball's owners approved Middleton as control person of the Phillies, making him accountable for the team's operation and compliance with league rules.
The Phillies opens their season Monday against the Reds in Cincinnati.
"John Middleton is providing critically important leadership for the Phillies, and his sister's lawsuit has nothing to do with us or John's role as managing partner," the Phillies said in a statement Wednesday. "For everyone's sake, we hope this controversy ends soon."
Nupson, who lives on a 40-acre ranch in New Mexico, is represented by attorneys there. In response to Murphy's March 16 order, Nupson's attorney Joel Young said that Middleton had misled the court, leading to costly delays.
"This court cannot at this juncture rely upon [documents submitted by Middleton] to determine any disputed facts."
— Judge Lois E. Murphy of Montgomery County Orphan’s Court
“This was accomplished,” Young wrote in a March 20 filing, “by carefully crafting every aspect of their lawsuit, from pleadings, briefs, discovery requests to oral arguments, so as to build-in plausible deniability concerning which trust they were really referencing at any given moment.”
Nupson wants to overturn the old family agreements because she says a family lawyer induced her to agree to deals favorable to her brother. She wants to be awarded a share of the Phillies and some of the proceeds of the family cigar company.
Eleanor Myers, the interim associate dean for students at Temple University Beasley School of Law, who read Murphy's opinion, said that the judge "seems to be exasperated that the underlying facts about the existence" of two trusts "were not brought to her attention clearly and in a timely way by the parties."
Michael Hussey, the associate dean for academic affairs at the Widener University Commonwealth Law School who also read the order, said that Murphy "now wants to be walked through everything" to understand the underlying facts in the case.
The roots of Murphy's frustration and the family feuding can be found in a bulging Montgomery County Orphan's Court docket.
Origins of the dispute
A year after the death in 1998 of patriarch Herbert Middleton, his wife, Frances, met with her only son, John, and a family lawyer to talk about the estate, according to a document filed in December.
Frances Middleton told her son that it had been the couple's intent to leave him the cigar company, John Middleton Inc., which his great-great-grandfather had founded in 1857 as a tobacco shop. In the 1950s and 1960s, it became a successful cigar manufacturing company that had built up more than $200 million in revenues by the early 2000s. One of its innovations was rolling pipe tobacco into tipped cigars.
Hughes, who lives in North Carolina, was to inherit non-cigar-company assets.
Frances Middleton, meanwhile, was considering disinheriting Nupson because of her struggles with alcohol, court records show, and a new boyfriend who had not signed a pre-nuptial agreement. In an October 2015 interview with the Inquirer, Nupson said she was now sober.
Based on this plan, family attorneys drew up a two-year "irrevocable" trust for Frances Middleton with her son as the beneficiary for all of her 258,029 shares in the family holding company, Bradford Holdings Inc. It was dated February 2001.
But by 2002, Hughes, the older sister, realized how lucrative the plan would be for her brother because of the cigar company's value. She objected.
With Hughes voicing displeasure, Frances Middleton rethought the plan. She and her children reached a master agreement in early 2003, dividing the Bradford shares equally among her son and daughters.
This agreement included a revised trust that was back-dated to the original 2001 date. This was the document that John Middleton's lawyers submitted to Murphy's court in April 2015, with no mention of the first one.
"The Hughes family hopes to see the family differences ironed out without the continuing and unnecessary involvement of the court."
— Timothy Hoeffner, an attorney with DLA Piper who represents the Hughes family
Murphy expressed frustration about learning of the original document 18 months into the litigation.
She also signaled there could be potential tax implications. Because of the "irrevocable nature of the gift made by Frances," any transfer of assets in the original trust after Feb. 1, 2003 "could be considered a gift by John, rather than a gift by Frances, and may result in additional federal gift tax liability," Murphy wrote.
In its filing on Tuesday, Middleton's attorneys said that Nupson and Hughes would be liable for gift taxes if their brother has to pay them, based on the 2003 master agreement.
Murphy said the court could not turn a "blind eye" to the trust changes.
While Nupson and Middleton seem to be digging in for a bruising fight, Hughes isn't anxious for one.
"The Hughes family hopes to see the family differences ironed out without the continuing and unnecessary involvement of the court,” said Timothy Hoeffner, an attorney with DLA Piper who represents the Hughes family.
Meanwhile, more filings are coming. In last week's response to Murphy, Middleton's attorneys said that a new court action would "fully frame the issues."