Chapter 10—Duty of Loyalty
The trustee must administer the trust solely in the interest of the beneficiaries. This is similar to the exclusive benefit rule under ERISA that requires retirement funds to be managed for the exclusive benefit of the retirees. The two main indicators of disloyalty occur when the trustee engages in self-dealing or ignores a conflict of interest. Self-dealing occurs when the trustee buys or benefits from the sell or purchase of trust property directly or indirectly. If the trustee engages in self-dealing, good faith and fairness to the beneficiaries are not enough to save the trustee from liability. In case of self-dealing, the court makes no further inquiry. Therefore, the trustee’s good faith and the reasonableness of the transaction are irrelevant. The beneficiaries have several remedies when the trustee engages in self-dealing. First, the beneficiaries can hold the trustee accountable for any profit he made on the transaction. In the alternative, if the trustee purchased the property from the trust, the beneficiary can sue to compel the trustee to restore the property to the trust. In the event the trustee has sold his own property to the trust, the beneficiary can sue to make the trustee return the purchase price and take back his property. The trustee is not without defenses when it comes to self-dealing. In order to avoid liability, the trustee must prove that the settlor authorized the self-dealing or that the beneficiaries consented to the transaction after he made full disclosure. Nonetheless, the transaction must be fair and reasonable.
A conflict of interest occurs when the trustee facilitates the sell or purchase of trust property to a person or entity to which the trustee also owes a fiduciary duty. For example, if an attorney who is acting as trustee sells trust property to one of his clients, a conflict of interest arises. The court will evaluate the transaction to see if was fair and reasonable to the trust. In that case, the trust pursuit rule provides a remedy for the beneficiary. Under that rule, if the trustee wrongfully disposes of trust property and acquires other property, the beneficiary is entitled to enforce a constructive trust on the newly acquired property so acquired. Hence, the new property becomes a part of the trust assets. In the event that the trust property ends up in the hands of a third party, there are two possible results. If the third party is not a bona fide purchaser (BFP))(one who pays value and takes without notice of the breach of trust), he does not hold the trust property free of the trust. If the person is a BFP-he holds the trust property free of the trust and is under no liability to the beneficiary.
1. Karlowba established a support trust for the benefit of her son Kahn. The corpus of the trust was a collection of antique cars valued at $200,000 and other property. After Karlowba died, Cory assumed his roll as trustee. The trust needed cash in order to pay monthly income to Kahn. Thus, Cory decided to purchase the antique car collection from the trust. In order to avoid the appearance that he was taking advantage of the trust, Cory purchased the car collection for $350,000. Later, the car collection appreciated to a value of $800,000. Kahn sued Cory to recover the profits from the appreciation of the car collection. What result?
2. Alberto established a trust for his daughter Isabella. The corpus of the trust was an apartment complex valued at two million dollars. Lionel was appointed as trustee over the Isabella trust. Lionel was also trustee over a second trust that had been created by Bradford for the benefit of his son, Carlton. For tax reasons, the Carlton trust needed to make an investment. Lionel purchased the apartment complex from the Isabella trust for the Carlton trust. Lionel used two million dollars from the Carlton trust to purchase the apartment complex. Later, the apartment complex was worth three million dollars. Isabella sued Lionel to recover the profits from the appreciation of the apartment complex. What result?
3. Please label the following situations as self-dealing or conflict of interest.
a). Elaine’s brother Chris purchased property from a trust over which she is trustee.
b) Joseph gives property from a trust over which he is trustee to his mistress, Arlene.
c) Galvin sells land owned by his medical practice to a trust over which he is trustee.
d). Melvin, a psychologist, sells property from a trust over which he is trustee to one of his patients.
e) Zach sells property from a trust over which he is trustee to City College. Zach is on the board of trustees of City College.
Boyce Family Trust, 128 S.W.3d 630
WILLIAM H. CRANDALL, Jr., Judge.
Defendant, Robert B. Snyder, appeals from the judgment, entered in a court-tried case, in favor of plaintiffs, the John R. Boyce Family Trust, John R. Boyce, Mary Ann Boyce, Daniel P. Boyce, M. Elizabeth Boyce, Emily Ann Boyce, and Stephen Pallen Boyce, in their action for removal of the trustee and for damages for the trustee’s breach of fiduciary duty. We affirm in part and reverse in part.
In a court-tried case, the judgment of the trial court will be affirmed unless there is no substantial evidence to support the judgment, it is against the weight of the evidence, or it erroneously declares or applies the law. Murphy v. Carron, 536 S.W.2d 30, 32 (Mo. Banc. 1976. We accept all evidence and inferences favorable to the judgment, and disregard all contrary evidence and inferences. Central Dist. Alarm, Inc. v. Hal-Yuc. Inc., 886 S.W.2d 210, 211 (Mo. App. E.D. 1994. The trial court is in the best position to judge the credibility of the witnesses. VanBooven v. Small, 938 S.W.2d 324, 327 (Mo.App. W.D. 1997).
The evidence established that the John R. Boyce Family Trust (hereinafter “family trust”) was created by the Henrietta Boyce Revocable Living Trust upon the death of Henrietta Boyce in February 1994. The beneficiaries of the trust were John R. Boyce, Henrietta’s son; Mary Ann Boyce, Boyce’s wife; and their four children, Daniel P. Boyce, M. Elizabeth Boyce, Emily Ann Boyce, and Stephen Pallen Boyce. Henrietta named Anthony Ribaudo as trustee of the family trust; and in the event Ribaudo resigned, designated defendant, Snyder, as successor trustee.
For years, plaintiff, Boyce, and defendant, Snyder, were close personal friends and business associates; and Boyce, an attorney, represented Snyder in legal matters. Snyder began working in the family grocery store as a teenager. In 1962, at the age of 22, he acquired his first ownership interest in a grocery store. He later formed Arnold Discount Foods, Inc. (hereinafter “ADF”), a corporation that owned and operated several small grocery stores. He converted the stores to Save–a–Lot stores, which were part of a chain of discount grocery stores. He also bought grocery stores which had failed or were failing. In 1983, he acquired a store in Eureka, Missouri, forming a second corporation, Eureka Discount Foods, Inc. (hereinafter “EDF”), to own and operate the store as a Save–a–Lot store (hereinafter “Eureka store”). After 1983, Snyder opened additional Save–a–Lot stores and placed them in ADF corporation.
Snyder was also an owner and director of First Exchange Bank (hereinafter “the bank”), which failed and was taken over by the FDIC. At Snyder’s urging, Boyce had placed several loans with the bank. After the bank’s failure, the FDIC called Boyce’s loans. When Boyce was unable to obtain financing elsewhere, the FDIC obtained a judgment against him.
In the fall of 1994, Boyce met with Snyder several times to discuss Boyce’s financial problems. During the meetings, Boyce learned that Snyder was interested in selling the Eureka store. Snyder’s reasons for selling the Eureka store, as stated by him, were that he wanted to lessen his workload, to reduce the number of stores he owned, and to work with his son under only one corporation, ADF.
Boyce expressed an interest in purchasing the Eureka store not only as an investment opportunity for the family trust but also as a way of providing a job for his son, Daniel. Boyce expressed concern to Snyder, however, that neither he nor Daniel had any experience in the grocery business. Snyder assured Boyce that Daniel could be trained to operate the store. Snyder and Boyce were both aware that a Wal–Mart super center was planning to open in Eureka.
Snyder provided Boyce with the past financial records for the Eureka store and introduced him to Save–a–Lot executives. The Save–a–Lot representatives told Boyce that the stores were so easy to run that a “chimpanzee could run one.” On the basis of their experience, they predicted that the opening of the Wal–Mart super center would cause an initial drop in sales of ten to 15 percent, but that the Eureka store would recover the loss within six months. Snyder concurred in that opinion.
Boyce determined that the family trust should purchase the Eureka store and agreed with Snyder on a purchase price of $403,000.00. The sale was structured as a sale of the common stock of EDF, so that Snyder could offset the capital gain from the sale of the store against the capital loss he incurred when the bank failed. No date was set for closing. Boyce agreed to close when Snyder felt that Daniel was sufficiently trained to operate the Eureka store successfully.
In January 1995, Daniel began working at one of Snyder’s stores located in Fenton, Missouri. Snyder told his general manager to train Daniel to take over the Eureka store. The Fenton store manager started Daniel at an entry level position and after two months moved him into a management trainee program when he became aware that he was training Daniel to take over the management of the Eureka store. In May 1995, Daniel continued his training at the Eureka store under Bob Heaton, the manager of the Eureka store who had been interested in purchasing the Eureka store but had decided against it. Snyder’s general manager continued to monitor Daniel’s training several times per week and told Daniel to contact her whenever necessary. Daniel was also free to contact the manager of the Fenton store for guidance. Heaton and Daniel, however, did not get along. Heaton eventually left employment at the Eureka store at Daniel’s request. Daniel was left to manage the Eureka store on his own, with occasional help from Snyder and his two managers. Snyder’s own store managers had years of experience in the grocery business before they were promoted to store manager.
The Wal–Mart super center was scheduled to open in the mid-summer of 1995. Snyder was anxious to close on the sale of the Eureka store. In May 1995, Snyder told Boyce that Daniel was ready to manage the Eureka store. Boyce relied on Snyder’s representation in deciding to proceed with the closing. When the purchase of the Eureka store was proposed to the trustee of the family trust, Anthony Ribaudo, he resigned as trustee because he did not have any experience in the grocery business. As the designated successor trustee, Snyder agreed to serve as trustee.
On May 30, 1995, Snyder signed documents accepting the trustee position. On May 31, 1995, the closing on the sale of the Eureka store took place. Boyce drafted the terms of the purchase agreement, which provided as follows: $265.00 to purchase one share of EDF from Snyder and $265,000.00 to redeem the remaining shares from Snyder, with the result that the family trust owned the only share of EDF corporation; $13,000.00 to Snyder for ADF corporation to provided consulting to EDF corporation, payable in monthly installments; $125,000.00 to Snyder for a non-compete agreement to prohibit him from owning or operating a grocery store within 10 miles of the Eureka store for a period of five years, payable in monthly installments. The family trust guaranteed EDF’s loan of $175,000.00 from Rockwood Bank and loaned EDF an additional $75,000.00. Snyder signed the documents for the sale and financing on his own behalf and as successor trustee of the family trust.
For the first fiscal year the Eureka store was in business, after the opening of the Wal–Mart super center, the figures reflected an average decline in sales of 17 percent per week. In addition, shortly after closing, the Eureka store’s refrigeration equipment needed extensive repairs and in some cases replacement. In the fall of 1995, Snyder acquired an interest in real property within a ten-mile radius of the Eureka store, with the intent of opening another grocery store with his son. Snyder and his son formed a new limited liability company to operate the new store and opened the store in May 1998. Rockwood Bank renewed EDF’s loan in August 1997, August 2000, and August 2001. At the time of trial, the family trust remained liable on its guaranty of the EDF loan; and the family trust’s loan to EDF remained unpaid and had increased to $160,676.27.
In 2000, plaintiffs brought the present action against Snyder. Their petition against Snyder was in six counts: Count I for his removal as trustee; Count II for breach of his fiduciary duty; Count III for his ultra vires acts; Count IV for avoidance of the ultra vires acts; Count V for fraudulent misrepresentation; and Count VI for imposition of a constructive trust. In their action, they sought money damages, a rescission of the sale of the Eureka store, and the imposition of a constructive trust on the proceeds of the sale of the Eureka store for the benefit of the family trust. Plaintiffs also brought one count for negligent misrepresentation (Count VII) against Moran Foods, Inc. d/b/a Save–a–Lot, Ltd.; but dismissed that count without prejudice before trial. Snyder counterclaimed, seeking indemnification from the family trust for his attorney’s fees and a declaratory judgment that he was entitled to indemnification. During the pendency of this action, Snyder resigned as trustee and the court appointed Daniel as interim trustee.
After a bench trial, the court entered judgment in favor of plaintiffs and against Snyder on Count I for the removal of Snyder as trustee. On Count II for breach of fiduciary duty, the court awarded total damages of $285,000.00: $185,000.00 for the family trust’s purchase of the Eureka store; and $100,000.00 for the monies loaned by the family trust, which the trial court determined was a total loss. On Count VI, the court imposed a constructive trust in the amount of $285,000.00 on the proceeds of the sale of the Eureka store. The court dismissed as moot plaintiffs’ claims in Counts III, IV, and V and entered judgment in favor of plaintiffs on Snyder’s counterclaims. Snyder appeals from that judgment.
In his first point, Snyder contends that the trial court erred in entering judgment in favor of plaintiffs because his challenged conduct did not amount to misrepresentations, but were merely expressions of opinion or predictions. In addition, he argues that the conduct occurred prior to his assuming the role of trustee and that he became trustee only after the deal was fully negotiated and set for closing.
A trustee is a fiduciary of the highest order and is required to exercise a high standard of conduct and loyalty in administration of the trust. Ramsey v. Boatmen’s First Nat’l Bank of K.C., N.A., 914 S.W.2d 384, 387 (Mo. App. W.D. 1996). Although the trustee has many duties emanating from the fiduciary relationship, the most fundamental is the duty of loyalty. Id. As part of this duty, the trustee is to administer the trust solely in the interest of the beneficiary. Id. This duty precludes self-dealing, which under most circumstances is a breach of the fiduciary duty. Id.
Here, Snyder’s argument that he merely expressed opinions and predictions in lieu of misrepresentations is without merit. He was very familiar with the grocery business, having worked in the business for well over 40 years in varying capacities. During that time, he had negotiated for and purchased several failed or failing grocery stores. There was evidence that Snyder had no personal experience regarding the impact a Wal–Mart super center would have on the sales of the Eureka store, although he admitted at trial that he was concerned about the competition from a Wal–Mart super center. Yet, he assured Boyce that the decline in store sales would be minimal and would be recovered six months after the opening of the Wal–Mart super center. He also was anxious to close on the Eureka store and pushed for closing, presumably because he was worried about the increased competition from the Wal–Mart super center. At trial, he was unable to explain his eagerness to close the sale of the Eureka store. He withheld information from Boyce about the true value of the store, especially as it faced competition from a Wal–Mart super center. Knowledge of the value of the Eureka store was particularly within his province, in light of his experience in purchasing grocery stores experiencing financial difficulty. Snyder was under a duty to inform the beneficiaries of all facts known by him so that they could make an informed decision about whether to proceed with the purchase of the Eureka store.
In addition, Snyder represented to Boyce that Daniel was ready to assume management of the Eureka store. He did this, despite the fact that Daniel did not have any prior grocery store experience and had been in a management-trainee program for less than six months. Further, his own store managers had many years of experience in the grocery business before he promoted them to managerial positions.
Finally, Snyder misrepresented his reasons for selling the Eureka store, as evidenced by his subsequent conduct. His stated motives for selling were his desire to lessen his workload, to reduce the number of stores he owned, and to work with his son under one corporation. Yet, after selling the Eureka store, he opened an additional store in violation of the non-compete agreement and even formed a new business entity to operate that store.
The trial court was not obligated to believe Snyder’s proffered reasons for selling the Eureka store. Nor was the court required to believe Snyder about what facts were known to him at the time of closing. In a court-tried case, the court is free to disbelieve the testimony of a witness. See Ford Motor Credit Co. v, Freihaut, 871 S.W.2d 129, 131 (Mo. App. E.D. 1994).
Boyce testified that, had Snyder apprised him of Daniel’s lack of readiness to manage the Eureka store successfully and of Snyder’s true reasons for wanting to sell the Eureka store, Boyce would not have recommended that the family trust purchase the store.
Snyder’s argument that the transaction was for all practical purposes completed prior to his assuming the position of trustee draws a distinction without a difference. Snyder was acting in his capacity as trustee at the time of closing the sale of the Eureka store. At that time, he had the duty not only to disclose any information relevant to the sale but also to avoid engaging in a financial transaction beneficial to his interests and detrimental to the interests of the family trust. The trial court did not err in finding that Snyder breached his fiduciary duty to the family trust. Snyder’s first point is denied.
In his second point, Snyder asserts that the trial court erred in entering judgment in favor of plaintiffs because they not only consented to the transaction prior to closing but also ratified the transaction after the fact by operating the Eureka store for five years before filing the present action.
When a competent beneficiary who has full knowledge of the facts and of his legal rights consents to a transaction, he cannot thereafter seek redress against the trustee even though the transaction would otherwise be a breach of trust. Ramsey, 914 S.W.2d at 387. The consent of the beneficiary, however, does not preclude him from holding the trustee liable for a breach of trust, (1) if when he gave his consent, the beneficiary did not know of his rights and of the material facts which the trustee knew or should have known and which the trustee did not reasonably believe that the beneficiary knew or (2) if the consent of the beneficiary was induced by improper conduct of the trustee. Id. (citing Section 216 Restatement (Second) of Trusts). When a transaction involves a trustee, it must be fair and open, and consent must be informed with all parties holding equal knowledge of material facts and rights and otherwise free of influence. Ramsey, 914 S.W.2d at 388.
Here, as discussed above, Boyce did not have full knowledge of all of the material facts and did not have knowledge equal to Snyder’s. Boyce had never been involved in the grocery business, unlike Snyder who had been in the business for over 40 years. Boyce relied on Snyder’s estimate of the impact of the Wal–Mart super center on the Eureka store’s sales. Boyce relied on Snyder’s representations that Daniel was ready to assume management of the Eureka store. Snyder was aware that his knowledge regarding the sale of the Eureka store was superior to Boyce’s, yet he induced Boyce to proceed with the sale by representing that Daniel was ready to manage the store. Under these circumstances, Snyder breached his fiduciary duty to the trust.
Further, Snyder’s argument that the plaintiffs’ continuing to operate the Eureka store was tantamount to a ratification of the sale after the fact is specious. Plaintiffs, once they purchased the Eureka store, had no choice but to continue to operate it to protect their investment as much as possible. That conduct did not amount to ratification of the sale. Snyder’s second point is denied.
In his third point, Snyder contends that the trial court erred in imposing a constructive trust on the proceeds of the sale of the Eureka store. He first argues that there was no underlying breach of fiduciary duty to warrant the imposition of a constructive trust. His second argument is that there was no evidence that there were identifiable proceeds remaining on which to impose a constructive trust. We only discuss Snyder’s second claim, because it is dispositive of this point on appeal.
A constructive trust is a device employed by a court of equity to provide a remedy in cases of actual or constructive fraud or unjust enrichment. U.S. Fidelity and Guaranty Co. v. Hiles, 670 S.W.2d 134, 137 (Mo. App. 1984). It may be imposed where, as the result of the violation of confidence or faith reposed in another, or fraudulent act or conduct of such other, the plaintiff has been deprived wrongfully of, or has lost, some title, right, equity, interest, expectancy, or benefit, in the property which, otherwise and but for such fraudulent or wrongful act or conduct, he would have had. Id. The plaintiff may seek to impose the constructive trust on the specific property after it has left the wrongdoer’s hands, until it reaches the hands of a bona fide purchaser. Id. The plaintiff may also seek to impose the constructive trust on, or to trace his property into, the proceeds of the property which are in the hands of the wrongdoer. Id. In this latter event, the plaintiff may recover any profit or increase in value that has accrued. Id. The plaintiff is limited, however, to a proportionate interest in the proceeds, if other separate property is commingled with wrongfully taken property to produce the price paid for the proceeds. Id. The plaintiff must prove his claim, both the fact of wrongful taking and any tracing, by clear, cogent and convincing evidence. Id.
Snyder posits that the essence of a constructive trust is the identification of specific property or fund as the res upon which the trust may be attached. See Blue Cross Health Services, Inc. v, Sauer, 800 S.W.2d 72, 76 (Mo.App. 1990). Plaintiffs did not allege and did not establish that any such identifiable property or fund existed to which the proceeds from the sale of the Eureka store could be traced.
The appropriate action to enforce a constructive trust is an action for money had and received. Campbell v. Webb, 363 Mo. 1192, 258 S.W.2d 595, 602 (1953). Notwithstanding the fact that plaintiffs prayed for the equitable remedy of a constructive trust and for an accounting for all the proceeds of the sale, in the absence of any allegation of the existence of specific property or fund constituting the res upon which the trust might be imposed, their petition failed to invoke equity jurisdiction. See Blue Cross, 800 S.W.2d at 76. Nothing in the record shows that plaintiffs are entitled to more than a money judgment. The trial court erred in imposing a constructive trust on the proceeds of the sale.
Under the circumstances of this case, however, it does not follow that Snyder is entitled to a new trial because of this error. See id. The case was fully tried with ample opportunity for all parties to present evidence on all issues framed by the pleading. There was sufficient evidence that plaintiffs are entitled to have Snyder removed as trustee and to be awarded an amount which represented the money wrongfully taken by Snyder as a result of his breach of his fiduciary duty to the family trust. The second part of Snyder’s third point is granted.
In his fourth point, Snyder asserts that the trial court erred in entering judgment for plaintiffs for money damages, because plaintiffs lacked standing to assert those claims, which could only be brought by the successor trustee.
The beneficiaries have standing to bring the equitable actions for removal of the trustee, disqualification of the successor trust, and for an accounting. Deutsch v. Wolff, 994 S.W.2d 561, 566 (Mo. Banc. 1999 (citing Restatement (Second) of Trusts, section 177, 197-199). The trustee, however, should bring the claims for money damages. Deutsch, 994 S.W.2d 566. In Deutsch, Missouri Supreme Court recognized that several factors justified an exception to the general rule. Id. In the instant action, there are factors similar, although not identical, to those in Deutsch that mitigate against the application of the rule requiring the successor trustee to bring the present action. See Id. First, Snyder was actively involved in administering the family trust during the pendency of this action. Although he resigned as successor trustee, he did so 13 months after the action began. In addition, the court required the interim trustee, who was appointed to serve during the litigation, to submit monthly income and expense reports to Snyder and any withdrawals had to be submitted to Snyder five days in advance of the proposed withdrawal. Second, Snyder denied that his conduct justified removal. Plaintiffs were required to prove their right to removal by establishing that Snyder had breached his fiduciary duty to the family trust and that the trust had been damaged. Thus, the fact issues on the legal and equitable claims were identical. Third, Snyder did not make any claim before the trial court that the proper party to assert the claim was the successor trustee, but instead undertook a defense of the legal claims on their merits, including raising affirmative defenses and pleading counterclaims. Fourth, in addition to all the beneficiaries, the family trust itself was a party-plaintiff. Fifth, the pleading alleged a breach of Snyder’s fiduciary duty to the trust. Sixth, the money judgment was entered in favor of all plaintiffs, which included the family trust itself. To allow actions at law to be prosecuted with the equitable actions is also consistent with the doctrine that once equity acquires jurisdiction, it will retain it so as to afford complete justice between the parties. Id. at 567. Thus, under the facts of this case, the beneficiaries had standing to bring this action. Snyder’s fourth point is denied.
In his fifth point, Snyder challenges the award of damages of $285,000.00, because the award was not supported by the evidence.
The trial court’s findings relating to actual damages are entitled to great weight on appeal and will not be disturbed unless the damages awarded are clearly wrong, could not have been reasonably determined, or were excessive. Williams v. Williams, 99 S.W.3d 552, 557 (Mo.App. W.D. 2003). If an award of damages is within the range of the evidence, an award of a particular amount may be considered responsive even though it does not correspond precisely with the amount claimed. Id.
Here, Boyce testified that the actual value of the Eureka store at the time of sale was about $150,000.00. The measure of damages for misrepresentation is the difference between the actual value of the thing sold and the value as represented. Smith v. Tracy, 372 S.W.2d 925, 938 (Mo. 1963). The difference between the purchase price of $403,000.00 and actual value was $253,000.00. The court’s award of $185,000.00 for this element of damages was within the range of the evidence.
Plaintiffs also claimed damages for the money the family trust loaned in conjunction with the Eureka store. The evidence was that at closing the family trust loaned $75,000.00 of the purchase price and throughout the years of operation the family trust loaned additional monies, with the result that the amount loaned increased to $160, 767.27. The court’s award of $100,000.00 for this element of damages was within the range of the evidence. The trial court did not err in awarding damages. Snyder’s fifth point is denied.
That part of the judgment imposing a constructive trust on the proceeds of the sale of the Eureka store is reversed. In all other respects, the judgment of the trial court is affirmed.
Edwards v. Edwards, 842 P.2d 299
WALTERS, Chief Judge.
This is a family dispute involving two agreements to develop real property located in the vicinity of the Cascade Reservoir. Franklin Edwards (Frank), a real estate developer, brought this action against his children and the estate of his deceased mother, seeking a declaratory ruling on the enforceability of a 1964 joint venture agreement and a 1977 contract to develop property held in trust. Following a trial, the district court decreed the joint venture dissolved as a result of Frank’s wrongful conduct, and further held the subsequent contract voidable as a consequence of Frank’s breach of his duty as trustee. We affirm.
Facts and Procedural Background
Charles and Ora Edwards had one child, Frank. In 1937, Charles and Ora bought 1,350 acres of land near Donnelly, in Valley County. The federal government purchased the land in 1940 as part of the development of the Cascade Dam and Reservoir. After the dam was completed, the government deeded part of the land back to Charles and Ora, which they thereafter held as community property. The area soon began developing into a location for summer homes, enhancing the economic potential of the Edwards’ property. In 1964, Charles, Ora, and Frank entered into an agreement (the 1964 Agreement) to develop a portion of the land known as the Edwards Ranch Subdivisions I and II. Under the terms of the agreement, Charles and Ora agreed to make these two tracts available for promotion and sale, and Frank agreed to make the improvements necessary to develop the property, to promote and sell individual lots, and to oversee the performance of sales contracts. Specifically, the agreement recited that Frank promised to proceed with plans to develop the … property for purposes of its sale, to construct the necessary roads, ditches and other improvements necessary for the development of the area, and to promote and sell the lots in the two subdivisions. He further agrees to be responsible for the sale of the lots.
The parties also agreed that Frank would receive one-half the net profit from each lot sold, and that the parties would share expenses equally. The agreement further provided that it was to remain in effect until all the lots were sold, and that its terms would be binding on the parties’ administrators, executors, and heirs.
Between 1964 and 1974, Frank sold all of the lots in the Edwards Ranch Subdivision I, and all but eleven of the lots in Edwards Ranch Subdivision II. Frank purchased a waterfront lot in Subdivision II for himself where he built his home. The eleven unsold lots lie immediately adjacent to his home, shielding it from some of the other development in the area.
In March, 1974, Charles Edwards died. With a few exceptions not germane to this case, Charles left his entire estate, which included his one-half interest in his and Ora’s real property, in trust for the benefit of Ora and his four then-living grandchildren—Frank’s four older children: William, Roger, Dawn, and Alexandra, and named Frank as its trustee. Pursuant to the terms of the testamentary trust (the Trust), Ora received a life interest in the trust income, and upon her death the trust corpus was to be divided among the four grandchildren. The document authorized the trustee to invade the trust corpus as necessary to provide for Ora’s support, maintenance and health. Charles’ will additionally contained the following request:
Although I am not directing the Trustee not to sell this property [the land adjacent to the reservoir], I urge that he retain it as long as possible for the reason that it will continue to appreciate in value.
With the single exception of an offer in 1989—which precipitated this litigation and is discussed below—Frank made no attempt to sell any of the remaining lots in Subdivision II after 1974. During 1976 and 1977, Frank and Ora discussed developing and selling other property to fund the Trust, notwithstanding the fact that there remained unsold lots in the Edwards Ranch Subdivision II. In April, 1977, Frank and Ora entered into a written contract (the 1977 Agreement) to develop and sell lots from a twenty-five acre tract within the original Edwards property, known as the Margot Subdivision. Ora and the Trust each owned an undivided one-half interest in this property. Under the terms of the 1977 Agreement, Frank would receive fifty percent of the net profit from each sale, the Trust twenty-five percent, and Ora twenty-five percent. Frank executed the agreement in his individual capacity, and also as trustee on behalf of the beneficiaries.
Ora died in July, 1988, terminating the trust. The trust corpus, which included a one-half interest in the eleven unsold lots in the Edwards Ranch Subdivision II and a one-half interest in the unsold lots remaining in the Margot Subdivision, was distributed directly to the four named grandchildren. In her will, Ora named William, the eldest grandchild, the personal representative of her estate. Over Frank’s objection, the will was admitted to probate.
Shortly after Ora’s death, Frank learned that, in 1986, Ora had executed and recorded a document unilaterally renouncing the 1964 Agreement and declaring it to be of no further effect. In November, 1989, while the will contest was pending, Rufus and Rona Gillette offered to buy two of the remaining lots in the Edwards Subdivision II, plus a small additional parcel outside of the subdivision, for $100,000. Frank was willing to make the sale, but when he asked William to proceed with the transaction on behalf of Ora’s estate, William refused. The family dispute has also prevented the completion of other proposed sales in the Margot Subdivision.
In February, 1990, Frank filed this action against his children and Ora’s estate, seeking a declaration that the 1964 and 1977 agreements were valid and binding upon all of them, and that Ora’s unilateral renunciation of the earlier agreement was without effect. The three eldest children, William, Roger and Dawn, filed an answer and counterclaim. They admitted that the 1977 Agreement was still valid and enforceable. They alleged, however, that the 1986 renunciation was a valid exercise of Ora’s rights, and asked the court to declare the 1964 agreement no longer in effect. Alexandra Edwards filed a separate answer alleging that Frank executed the 1977 Agreement in violation of his duties as trustee, rendering the agreement voidable, at least as to her interest.
Without ruling on the validity or effect of Ora’s unilateral renunciation of the 1964 Agreement, the court concluded that the joint venture had been dissolved, prior to the time of the renunciation in 1986, because Frank had willfully and persistently breached his duty to promote and sell the remaining lots under the Agreement. In ruling on the enforceability of the 1977 Agreement, the court concluded that, notwithstanding Frank’s good faith or the fairness of the agreement’s terms, Frank’s dual role as trustee and developer created an impermissible conflict of interest, and absent Alexandra’s consent or authorization by a court, the agreement was voidable as to her interest.
On appeal, Frank asserts that the district court erred by finding that his conduct constituted a willful breach of his duties under the 1964 Agreement, and therefore the decree of dissolution must be reversed. He also avers that the court erroneously held he had breached his fiduciary duty to Alexandra, and that its declaration that the 1977 Agreement was voidable as to her interest must also be overturned. We will address these issues in turn.
Standard of Review
The role of this Court in reviewing findings of fact is limited. We do not weigh the evidence, nor do we substitute our view of the facts for that of the fact finder. Alumet v. Bear Lawk Grazing Co., 119 Idaho 946, 949, 812 P.2d 253, 256 (1991). Findings made by the trier of fact will not be disturbed on appeal unless clearly erroneous. I.R.C.P. 52(a). Findings are not clearly erroneous if they are supported by substantial, even though conflicting, evidence in the record. Sun Valley Shamrock v. Travelers Learning, 118 Idaho 116, 118, 794 P.2d 1389, 1391 (1990). Evidence is “substantial” if a reasonable trier of fact would accept and rely upon it in determining whether a disputed point of fact has been proved. Weaver v. Millard, 120 Idaho 692, 698, 819 P.2d 110, 116 (Ct.App. 1991). However, we freely review any statements of law and the trial court’s application of the law to the facts properly found. Carr v. Carr, 116 Idaho 747, 750, 779 P.2d 422, 425 (Ct.App. 1989).
Dissolution of the Joint Venture
A joint venture is a relationship analogous to, but not identical with, a partnership. Brummet v. Ediger, 106 Idaho 724, 727, 682 P.2d 1271, 1274 (1984); Stearns v. Williams, 72 Idaho 276, 284-85, 240 P.2d 833, 839 (1952). Accordingly, the law relating to the dissolution and termination of partnerships generally applies to joint ventures. See 46 AM JUR.2d Joint Ventures § 30, at 51 (1969The Uniform Partnership Act, as adopted in Idaho), enumerates the legal causes of dissolution. See I.C. § 53-331. Section 53-331(6) provides for dissolution by decree of a court. The grounds upon which a party is entitled to a judicial decree of dissolution are set forth in I. C. § 53-332. Specifically, the court will decree a dissolution whenever a partner willfully or persistently commits a breach of the partnership agreement, or otherwise so conducts himself in matters relating to the partnership business that it is not reasonably practicable to carry on the business in partnership with him. I. C. § 53-332(1)(a).
Frank does not contest the applicability of the Uniform Partnership Act to the issues presented. Rather, his appeal challenges the district court’s finding that he “willfully and persistently breached his duties under the 1964 agreement to the extent it became totally impracticable to carry on the purpose of the joint adventure—to develop and sell the remaining lots in Edwards Subdivision II.” Frank maintains that the court’s ultimate finding of a willful and persistent breach is premised on two underlying erroneous findings:
(1) that during the fifteen-year period between 1974 and 1989, Frank did nothing to promote or sell the eleven remaining lots under the 1964 Agreement; and (2) that Frank intended to use the lots for his own benefit. He claims that the first finding is clearly erroneous in light of evidence that he staked lots, graded a road, and orally listed the lots with realtors in the area. However, it does not appear from the record that these efforts to improve and promote the lots took place after 1974. Furthermore, the record indicates that Frank failed to establish any road to some of the lots as required by the original plat. The record also indicates that two realtors with whom Frank had listed other Edwards properties did not know that the lots adjacent to Frank’s home were for sale. According to Frank’s own testimony, the eleven remaining lots were not advertised after 1974. Frank also argues that septic tank restrictions imposed in 1970 and 1972 impeded the further sale of lots in the Edwards Ranch Subdivision II. Notwithstanding the imposition of the sewage covenants, however, Frank was able to purchase for himself a lot in that subdivision, and to sell another lot in 1974, and to attempt to sell the two lots to the Gillettes in 1989.
Frank argues that his inactivity was justified because it furthered the parties’ profit motive and his father’s will that he “retain the property as long as possible for the reason that it will continue to appreciate in value.” Admittedly, the property had increased in value. However, the trial judge considered Frank’s explanation and the evidence supporting it, but ultimately rejected it, being persuaded that “the most reasonable and rational explanation for Frank’s lack of effort on behalf of the joint adventure is that he intended to use the lots for his own benefit, to provide a buffer zone between his own house and other residences.” This finding is supported by evidence of Frank’s active development of other Edwards property around the reservoir, most notably, the lots in the Margot Subdivision. As Frank acknowledges, the provision in his father’s will applied to all of the Edwards property near the reservoir, including lots in the Margot Subdivision. Furthermore, the evidence indicates that Frank proposed the development of the Margot Subdivision in 1977 after telling his mother there were no more lots left to sell, even though the eleven lots next to his own home remained unsold. The district court also heard testimony from Frank’s former wife, who had lived with him at Edwards Ranch Subdivision II from the time their house was built in 1972 until 1988. According to her, Frank was not inclined to develop the surrounding lots and he told her he wanted to preserve his privacy from neighbors.
We conclude that the record contains ample evidence, even if conflicting, to support the district court’s finding that Frank’s fifteen years’ inaction under the 1964 Agreement constituted a willful and persistent breach of his duties. Accordingly, the district court’s declaration that the joint venture was dissolved as a result of Frank’s conduct is affirmed.
As a final note on the subject, we mention that the effective date of a dissolution is the date of the first effective act of dissolution; subsequent acts or causes of dissolution are irrelevant. See 59A AMJUR2D Partnership § 814, at 638 (1987). Thus, although a dissolution by judicial decree generally dates from the date of the court decree, the date of dissolution may be deemed to have occurred earlier, where, as here, the partnership is dissolved on the basis of findings that relate back to a prior date. 59A AMJUR2D Partnership § 881-883, at 670-71. In view of the court’s finding that Frank’s willful and persistent breach predated Ora’s 1986 renunciation, the renunciation was a superfluous act, and a ruling on its validity or effect was unnecessary.
The 1977 Agreement
Next, we turn to the declaration that the 1977 Agreement was voidable as to Alexandra. Frank seeks to overturn this decision, arguing that the court erroneously held that his execution of the agreement violated his fiduciary duty of loyalty. As noted above, Frank contracted to develop the Margot Subdivision—property owned jointly by Ora Edwards and the Trust. Under the terms of the agreement he was to receive fifty percent of the net profit from all sales. Frank entered into the agreement on his own behalf and also as trustee on behalf of the Trust’s beneficiaries. Alexandra Edwards, a beneficiary of the Trust and still a minor in 1977, never consented to the agreement at the time of its making, nor has she ratified it subsequently. These facts are not disputed.
Although Frank acknowledges that his dual role as trustee and developer generally would create a conflict of interest, he argues that under the circumstances, the fact that he placed himself in a position of potentially conflicting loyalties did not constitute a breach of his fiduciary duty to the beneficiaries. We disagree.
The Uniform Trustees’ Powers Act, I. C. § 68-104 through 68-113 describes the powers that may be exercised by a trustee. The Act specifically recognizes the trustee’s powers to invest the trust assets and to develop, improve and convey them. See I. C. § 68-106(c). However, these powers are expressly made subject to the trustee’s duty to act with due regard to his or her obligation as a fiduciary. I. C. § 68-106(b). Although the obligations of a fiduciary are not enumerated in the statute, they are well established in the law. Often deemed its first duty, the trustee owes a duty of loyalty
The trustee owes a duty to the beneficiary to administer the trust in the interest of the beneficiaries alone, and to exclude from consideration his own advantages and the welfare of third persons. This duty is called the duty of loyalty. If the trustee engages in a disloyal transaction, the beneficiary may secure the aid of equity in avoiding the act of the trustee or obtaining other appropriate relief, regardless of the good faith of the trustee or the effect of the trustee’s conduct on the beneficiary or benefit to the trustee.
In enforcing the duty of loyalty the court is primarily interested in improving trust administration by deterring trustees from getting into positions of conflict of interests, and only secondarily in preventing loss to particular beneficiaries or unjust enrichment of the trustee.
G.G. Bogert & G.T. BOGERT, Law of Trusts § 95 (5th ed. 1973) (emphasis added); see also Restatement (Second) of Trusts §§ 170, 206 (1959); A. Scott, Abridgment of the Law of Trusts § 170, 1960). “Fidelity in the agent is what is aimed at, and as a means of securing it the law will not permit the agent to place himself in a situation in which he may be tempted by his own private interest to disregard that of his principal.” Jensen v. Sidney Stevens Implement Co., 36 Idaho 348, 353, 210 P. 1003, 1005 (1922). Furthermore, the Uniform Trustees’ Powers Act specifically provides that if the fiduciary duty of the trustee and his individual interest conflict in the exercise of a trust power, the power may be exercised only by court authorization. I. C. § 68-108(b).
By contracting to develop and sell the trust property at a profit to himself, Frank clearly was not acting for the sole benefit of the trust beneficiaries, but for his own interest as well, therefore creating a conflict of interest. Pursuant to the provisions of the Trustees’ Powers Act, I. C. § 68-108(b). Frank was prohibited from entering into the contract without court authorization. Although Frank admits he never obtained judicial authorization, he suggests that the conflict of interest created here ought to be exempted from his duty of loyalty, arguing that his actions were in accord with the presumptive intent of his father, the trust settlor, to develop and sell the properties in order to fund the trust corpus. To support his position, Frank relies on two cases, In re Kellogg’s Trust, 35 Misc.2d 541, 230 N.Y.S.2d 836 (1962) and In re Steele’s Estate, 377 Pa. 250, 103 A.2d 409 (1954). These cases lend little support, however, because they present situations in which the trustee’s conflict of interest was either passive or was the direct creation of the trust settlor. Here, by contrast, Frank himself created the conflict by contracting to develop the trust property at a profit to himself. Although the trust scheme arguably countenanced the development of the trust properties, their development by way of a specific arrangement involving self-dealing was neither inherent in the trust scheme nor authorized by the trust instrument. Thus, even if otherwise applicable in this jurisdiction, the reasoning of the cases cited by Frank is inapposite to the factual situation here.
As correctly concluded by the district court, Frank executed the 1977 Agreement in violation of his duties as trustee. Because Alexandra had neither consented to the agreement at the time nor ratified it since, she was entitled to equitable relief. The judgment declaring the 1977 Agreement voidable as to her interest is, therefore, affirmed.
The judgment of the district court declaring the 1964 joint venture dissolved and the 1977 agreement voidable as to Alexandra is affirmed.
Class Discussion Tool
Donald and his wife, Minnie, were in poor health and unable to look after their own affairs. In 1970, Donald, then age 82, executed a power of attorney naming his sons, Roy and David, as his agent. A few months later, Minnie, age 79, executed her power of attorney naming her sons, Roy and David, as her agent. In 1970, Donald and Minnie owned real and personal property of a value estimated to be between $375,000 and $500,000.
During the following three years, Roy sold his parents’ vacation home for $150,000. He used the money he received from the sale of the home to buy a lake cabin for him and his wife. Further, Roy misappropriated great sums of money from his parents to pay debts and living expenses for himself and his family. Roy sold his parents’ art collection to Mystic Art Gallery. Stanley, the gallery’s owner thought that the art collection belonged to Roy. Roy also bought a house and gave it to his best friend, Fred, who was having financial problems. Fred did not know that the house had been purchased with Roy’s parents’ money. David signed off on all of Roy’s actions because he thought they have been approved by his parents.
Donald and Minnie executed a will leaving all of their property in trust for their grandchildren. National Bank was the trustee. After Donald and Minnie died, National Bank discovered the misappropriations made by Roy. The trustee filed an action against Roy and David to recover the trust assets. Please analyze all of the relevant legal issues.