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In re Testamentary Trust Created Under Will of King

Court of Appeals of Oregon

December 5, 2018

In the Matter of the Testamentary Trust Created Under the Will of David F. King, Deceased (aka The David F. King Trust Dtd 3/6/95).
v.
Sandra L. KING, individually and as trustee of the Testamentary Trust Created Under the Will of David F. King, Deceased and Alexandra King, individually and as trustee of the FBN Management Trust, Respondents-Appellants, David KING, Jr.;Kristin King-Fournier; and Kathryn King, Petitioners-Respondents, and James D. CAMERON, individually; et al., Respondents below. In the Matter of the Testamentary Trust Created Under the Will of David F. King, Deceased (aka The David F. King Trust Dtd 3/6/95). David KING, Jr.; Kristin King-Fournier; and Kathryn King, Petitioners-Appellants,
v.
Sandra L. KING; E. L. King, III and Sarah King, individually and as Trustees of the Testamentary Trust created under the will of David F. King, Deceased; Alexandra King, individually and as Trustee of the FBN Management Trust; James D. Cameron and Jamie Sandhurst, as Trustees of the 78th Place Trust; and James D. Cameron, individually and as Trustee of the Hamilton House Trust, Respondents-Respondents, and WINONA NATIONAL BANK, as Trustee of the Testamentary Trust created under the will of David F. King, Deceased, Trustee below.

         [295 Or.App. 177] A157640 and A159957 argued and submitted individually October 5, 2017.

          Jackson County Circuit Court 112694E3 Timothy C. Gerking, Judge.

          In A157640, James R. Dole argued the cause for appellants. Also on the briefs was Watkinson Laird Rubenstein, P. C .

          In A157640, H. M. Zamudio argued the cause for respondents. Also on the briefs were Darrell R. Jarvis and Huycke O'Connor Jarvis, LLP.

          In A159957, H. M. Zamudio argued the cause for appellants. Also on the briefs were Darrel R. Jarvis and Huycke O'Connor Jarvis, LLP.

          In A159957, James R. Doyle argued the cause for respondents Alexandra King and Sandra L. King. Also on the brief was Watkinson Laird Rubenstein, P.C.

          In A159957, no appearance for respondents E. L. King III and Sarah King. In A159957, no appearance for respondents James D. Cameron and Jamie Sandhurst.

          Before Ortega, Presiding Judge, and Garrett, Judge, and Powers, Judge.

[295 Or.App. 178] Case Summary:

         These two appeals arise from a dispute over the administration of a testamentary trust created under the will of David F. King.

         Held:

         In the first appeal, because the trust unambiguously designates Nevada law as the law [295 Or.App. 178] governing the administration of the trust, the trial court did not err in applying Nevada law to determine the questions of trust administration with which it was presented. In the second appeal, contrary to the trial court's reasoning, Nevada Revised Statute 166.120 does not prohibit the successor trustee from applying the interest of the former trustee and income beneficiary to compensate the trust for losses that the trial court previously found were caused by the former trustee and income beneficiary's breaches of trust.

         In A157640, affirmed. In A159957, reversed and remanded.

         [295 Or.App. 179] GARRETT, J.

         These two appeals, which we have consolidated for purposes of this opinion, arise from a dispute over the administration of a testamentary trust (the DFK trust) created under the will of David F. King. In the first appeal, we conclude that the trial court did not err in determining that Nevada law applied and that, under that law, the trustee breached the trust. Accordingly, we affirm the limited judgment. In the second appeal, we conclude that the trial court erred in construing Nevada law to prohibit a successor trustee from applying a trustee-beneficiary's interest in a trust to compensate the trust for losses caused by that trustee-beneficiary's own breaches of trust. Accordingly, we reverse the order on the petition for instructions and remand for further proceedings.

         We begin with factual background and history of the proceedings; the relevant facts are undisputed. In 1995, David F. King executed a will providing for a trust to be established after his death. After he died in 2004, the DFK trust was created by operation of that will. The original trustees were David F King's brother, E. L. King III; David F King's sister-in-law, Sarah King; and David F King's wife, Sandra King. By 2011, Sandra King was acting as the sole trustee; E. L. King III had resigned and Sarah King was no longer involved in the administration of the trust.

         In 2011, David F King's three adult children, David King, Jr., Kristin King-Fournier, and Kathryn King (the children), who are the remainder beneficiaries of the trust, petitioned the court for relief against Sandra, their stepmother, who, in addition to acting as the sole trustee, is the income beneficiary of the trust for her lifetime. The children alleged that under Nevada trust law, Sandra breached the trust by making loans to her son James Cameron and to another entity in which Sandra had an interest. The children alleged that those breaches had caused and would cause substantial losses to the trust. They also alleged that Sandra had improperly treated as income certain distributions to the DFK trust from a limited liability corporation that held mineral interests and certain undistributed earnings of a Subchapter S corporation owned in part by the trust, and that Sandra had failed to account for approximately [295 Or.App. 180] $900, 000 of trust assets. The petition sought relief including removal of Sandra as trustee, an accounting, a surcharge of approximately $2.8 million on Sandra's interest to compensate for the damages caused by her breaches, a withholding of Sandra's trust income until that liability was satisfied, the imposition of constructive trusts on two properties owned by other trusts of which Cameron was the trustee, injunctive and declaratory relief, and attorney fees.

         After a four-day trial, the trial court issued a detailed letter opinion. The court held that Nevada law governed the administration of the trust and that, under Nevada law, Sandra had committed breaches of trust and had improperly treated most of the disputed distributions and undistributed earnings as income. In addition to its issue-by-issue analysis, the court provided a general summary of its findings, explaining that Sandra

"by and large treated the assets of the trust as her own without regard to whether those assets were to be treated as income or principal, she entered into a number of poorly secured or totally unsecured large insider transactions that constituted per se breaches of trust under Nevada law, she failed to properly and timely account and she generally ignored or was completely oblivious to the rights of petitioners and the fiduciary duties she owed them as contingent remainder beneficiaries of the DFK trust."

         In a limited judgment, the court removed Sandra as trustee and appointed Winona National Bank (WNB) as trustee, surcharged Sandra $913, 247, imposed constructive trusts on the two properties, and awarded the children their attorney fees, the amount of which remained to be determined.[1] [295 Or.App. 181] Sandra appealed the limited judgment, and that is the first appeal before us.[2]

         While the first appeal was pending, the parties' dispute continued. After accepting the appointment as trustee, WNB petitioned for instructions on how to distribute funds in light of the court's previous money awards: one against Sandra and in favor of the trust for $913, 247 to compensate the trust for losses caused by Sandra's breaches of trust, and one against Sandra and the trust in favor of the children for the children's attorney fees. As to the first item, WNB sought "direction regarding whether to apply income generated by the trust and owing to Sandra King [(as the income beneficiary)] to the judgment against Sandra King and how much she should be given for support." As to the second item, the children's attorney fees, WNB noted that Sandra and the trust were jointly and severally liable for the fees and suggested methods for distributing the income to pay the fee award.

         In response to WNB's petition, the children requested that the court order WNB to pay the fee award and the money judgment in full from trust income before distributing further income to Sandra. For her part, Sandra asserted that a Nevada statute protecting interests in spendthrift trusts, Nevada Revised Statute (NRS) 166.120, prohibited the trustee from applying any part of the trust income to satisfy the judgment.

         The trial court agreed with Sandra and entered an order instructing the trustee that "NRS 166.120 restrains and prohibits the Trustee * * * from applying income of the [DFK trust] toward the Money Judgment entered against Sandra King herein." The children appeal that order, and that is the second appeal before us.

         We consider the two appeals in turn. As noted above, in the first appeal, Sandra appeals the limited judgment, raising eight assignments of error that challenge the trial court's reasoning in numerous respects. In her first [295 Or.App. 182] assignment of error, she argues that the trial court erred in holding that she breached her fiduciary duty by making the disputed loans, given that the terms of the trust allowed the trustee to make loans to anyone, including "any beneficiary" of the trust. We conclude, as the trial court did, that the will's choice-of-law provision selects Nevada law to govern all questions regarding the administration of the DFK trust, and that, under Nevada law, the disputed loans were breaches of trust. Because Nevada law absolutely prohibits a settlor from allowing insider ...


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