In the context of an invalid appointment of a successor trustee, the Oregon appellate court in Allen Trust Co. v. Cowlitz Bank, 152 P.3d 974 (Or. Ct. App. 2007) recently grappled with the question of what it means to be a "trustee de facto" -- and what kinds of fees and attorney expenses such a trustee might demand.
In this case, Ronald and Jean Harriman established a trust in 1995 as part of their divorce proceedings. The trust, which was for their benefit, allowed the acting trustee to name successor trustees if the acting trustee was unable to serve. After the original trustee died without naming a successor, Ronald and Jean agreed to the appointment of a man named Arlie Hutchins as the trustee. After Hutchins accepted the office, he designated a person -- whom the court simply identifies as "Wilkins" -- as successor trustee, and designated one of Ronald and Jean's daughters, Valerie, as the next successor trustee if Wilkins were unable to serve.
Hutchins later resigned and in his resignation revoked Wilkins' trustee designation, intending that Ronald and Jean would name a successor.
Harboring the belief that Hutchins' resignation left her as the successor trustee, Valerie, who did not want to serve because of family reasons, sought an alternative trustee. After learning that Allen Trust Company would agree to act as trustee, Valerie accepted the position of successor trustee in order to appoint Allen Trust as her successor. After making the appointment, Valerie resigned as trustee.
Allen Trust accepted the office of trustee, believing that Valerie's appointment was valid. Jean approved the appointment of Allen Trust, but Ronald objected to it. Because of Ronald's objections, Allen Trust petitioned the trial court to confirm its appointment. The trial court denied the appointment of Allen Trust, finding that Valerie had never become a trustee. According to the court, it wasn't that Wilkins had been unable to serve as trustee, but rather that Hutchins had revoked Wilkins' appointment. As a result, the contingency that would have made Valerie the trustee never occurred. Therefore, Valerie was never the trustee and her appointment of Allen Trust as successor trustee was invalid.
During the period between Valerie's attempted appointment of Allen Trust as trustee and the trial court's ruling, Allen Trust acted as trustee and received a trustee's fee for its services. Allen Trust also used trust funds to pay its attorneys' fees in connection with its petition to confirm its appointment, on the theory that such a judicial determination would benefit the trust. After the trial court found the appointment of Allen Trust to be invalid, Ronald filed a petition to require Allen Trust to repay the trustee's fee it had received and the funds paid by the trust for Allen Trust's attorney. The trial court granted summary judgment on the petition in favor of Ronald, and Allen Trust appealed.
The parties' arguments focused on the status of Allen Trust as a trustee de facto versus a trustee de son tort. The appellate court defined a trustee de facto as one "who has at least a colorable claim to be a trustee, who acts as one, and, in some instances, who seeks the benefits of one." A trustee de son tort, on the other hand, is someone who becomes "a trustee by construction by intermeddling with, and assuming the management of, trust property without authority." Allen Trust argued that it was a trustee de facto and was entitled to a trustee's fee for the services it had performed. Ronald argued that Allen Trust was a trustee de son tort, because it undertook the duties of trustee without authorization and therefore was not entitled to a trustee's fee.
After noting the lack of Oregon case law addressing the status of a trustee de facto, the court surveyed cases from outside Oregon to shed light on this issue. One was a California Supreme Court case from 1971, Crocker-Citizens Nat'l Bank v. Younger, 481 P.2d 222 (Cal. 1971), in which the court held that a trustee de facto is entitled to a trustee's fee if under the trust terms, a duly appointed trustee in the same circumstances would be entitled to a fee. In that case, the court found that the trustee de facto had provided legitimate services to the trust and therefore, under the trust terms, she was entitled to compensation for those services. However, she was not entitled to reimbursement of attorneys' fees incurred from the litigation over her status as a trustee de facto, because the trust instrument did not provide for such payment.
Turning back to Oregon law, the appellate court noted a 1937 Oregon Supreme Court case, In re Workman's Estate, 65 P.2d 1395 (Or. 1937), which dealt with the improper appointment of an executor of an estate. In that case, the Supreme Court concluded that the actions of a person erroneously appointed as executor are valid and binding, just as if the position had been held by the proper person. Although In re Workman's Estate dealt with an executor rather than a trustee, the appellate court found that it was the "best available indication of the direction" the Oregon Supreme Court would take when deciding an issue of trustee de facto status, and that, as applied to trusts, the decision was consistent with the law outside of Oregon.
Applying the rules governing trustees de facto, the appellate court found that Allen Trust was a trustee de facto during the period of time it administered the trust. Not only did it perform the duties of a trustee, but also it assumed the position of trustee under a color of right, as it reasonably believed that it had been validly appointed as trustee. Following the decision in Crocker-Citizens Nat'l Bank, the court further found that Allen Trust was entitled to a trustee's fee in the same circumstances that a properly appointed trustee would be. The trust specifically provided for reasonable compensation to the trustee, but did not contain any provisions allowing a trustee to use trust funds for the defense of its trustee status. Thus, the court concluded that even though Allen Trust was a trustee de facto and entitled to its own fees, it was not entitled to pay attorneys' fees -- from the trust to defend its trust status.
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