Opinion ID: 2278218
Heading Depth: 1
Heading Rank: 1

Heading: The Trustee's Appeal

Text: The Trustee raises three issues on appeal. First, the Trustee argues that the Districts lacked standing to assert a cause of action against the Trustee because the trust agreement is not a contract, and the Districts, which are not direct beneficiaries of the trust, cannot pursue a claim against the Trustee. Second, the Trustee argues that the chancery court erred in finding that there was a breach of contract because the Pledge and Mortgage agreements were not contracts but trusts, the chancery court disregarded gross negligence as the standard of care, and the Trustee's conduct was not a breach of contract. Finally, the Trustee argues that the chancellor erred in determining the existence and amount of damages in that the Districts failed to prove any recoverable damages, the damage calculation was in error, and the trial court erred in the amount of attorney's fees awarded to the Districts.
The Trustee argues that the Districts did not have standing to assert a cause of action against it in a counterclaim because the Pledge and Mortgage agreements were trust agreements between the Trustee and the bondholders, thus permitting only the bondholders to bring a cause of action against the Trustee should there be a breach of the trust. The Districts respond in three parts: first, they argue that even if the Pledge and Mortgage agreements are treated only as trusts, the Districts have standing as beneficiaries; second, they argue that Arkansas law allows a settlor to maintain an action against a Trustee; and third, they argue that the Pledge and Mortgage agreements have features of both trusts and contracts to allow claims for breaches of fiduciary and contractual duties. Generally, Arkansas law on standing states that a person or party who has a pecuniary interest in the outcome of the action has standing to assert a claim on his or its behalf. See, e.g., In re $3,166,199, 337 Ark. 74, 987 S.W.2d 663 (1999); McCoy v. Moore, 338 Ark. 740, 1 S.W.3d 11 (1999); Stilley v. James, 345 Ark. 362, 48 S.W.3d 521 (2001). In these cases, this court noted that the appellants had standing to pursue an action where they would be pecuniarily affected by the outcome of the case. Under this general rule, the Districts have standing to pursue a counterclaim against the Trustee based on the fact that a decrease in the amount of funds in the bond accounts adversely and directly affects the Districts' pecuniary interests. This is even more prevalent here where the Districts' counterclaim was based on the fact that their asserted damages were due to the Trustee's pursuit of causes of action outside of the authority granted it under the trust indenture, such as revision or rescission of the trust indenture documents. The deeper issue here, however, and what the Trustee is apparently trying to argue in this point, is whether the agreement reached among the Districts, the Trustee, and the bondholders is a trust in the donative sense of the word or actually a contractual trust indenture requiring performance of different duties by these parties to that agreement. The Trustee is correct in its assertion that under general trust law, a party has no standing to raise an issue regarding property in which it has no interest. See McCollum v. McCollum, 328 Ark. 607, 946 S.W.2d 181 (1997). Furthermore, once a settlor, the person creating the trust, releases his interest to the property to the trust, he loses any standing to challenge the administration of that property unless such power is reserved in him as a beneficiary or trustee, or unless the person has an interest in the subject matter of the trust. Restatement (Second) of Trusts § 200(d) (1959). In McCollum , this court determined that beneficiaries under a family trust had no standing to contest the sale of property by the trustee of a marital trust, where the marital trust permitted the trustee, who was also the beneficiary in that trust, to dispose of the property as she wished. The court determined that the beneficiaries in the family trust never gained an interest in the property because the family trust was a residual trust which only went into effect if the marital trust did not dispose of the property. The Restatement 2d of Trusts § 200(b), however, notes that if a settlor makes a contract with the trustee, he can maintain an action against the trustee on that contract. Here, however, the Pledge and Mortgage agreements, while termed by the parties as a trust, are actually more akin to indenture agreements in the form of corporate or trust indentures, or to a deed of trust. Black's Law Dictionary defines an indenture as 1. A formal written instrument made by two or more parties with different interests ...; 2. A deed or elaborate contract signed by two or more parties. Black's Law Dictionary 773 (7th ed.1999). Types of indentures can include a corporate indenture, defined as a document containing the terms and conditions governing the issuance of debt securities, such as bonds or debentures, or a trust indenture, defined as a document containing the terms and conditions governing a trustee's conduct and the trust beneficiaries' rights. Id. A deed of trust is a deed conveying title to real property to a trustee as security until the grantor repays a loan. This type of deed resembles a mortgage. Id. Furthermore, the statutes authorizing the creation of municipal property owners' districts indicate that such districts may issue bonds to fund improvements, and may provide for the execution and delivery of a trust indenture or like instrument by the board securing the bonds and for the execution and delivery of other writings pertaining thereto. Ark.Code Ann. § 14-94-123(b)(2). The importance in understanding the terminology here is that while the parties call this a trust, it is not a trust in the classic donative sense of the word, and this court has determined on several occasions that an indenture trust is actually a contractual relationship among several parties. In Stilley v. Makris, 343 Ark. 673, 38 S.W.3d 889 (2001), for example, this court determined that a proposed initiative was invalid where the initiative, which proposed to require Jefferson County to sell its county hospital, impaired the contractual relations between the hospital and the county as contained in lease agreements and in a trust indenture contract. This trust indenture contract involved the County's issuance of revenue bonds, secured by a mortgage lien on the hospital property and the rental payments made under a lease, and the court indicated that this was a contract between the County and the bank, which would be impaired if the proposed initiative was approved. Selling the property under the proposed initiative would make it impossible for the County, the bank, and the bondholders who relied on the lease revenues and hospital income to pay satisfy the bonds. In City of Barling v. Fort Chaffee Redevelopment Authority, 347 Ark. 105, 60 S.W.3d 443 (2001), this court determined that public trusts formed under Ark.Code Ann. §§ 28-72-201202 (1987) involve a trust indenture, and that trust agreement becomes a binding contract between the state, the designated beneficiary, and the trustee of the trust. While that contractual right is provided by statute, the fact that the terms of the indenture trust are similar to that here is persuasive authority that such a trust indenture is, in reality, more akin to a contract. Such is the case here in that obligations continue among the different parties regardless of who has the ability to control the holding and disbursement of income. Here, the Districts are under the duty to make bond payments in a timely manner, and must sell District-owned lots to help meet that requirement. The Trustee is under the duty to hold, protect, and appropriate the income, release deeds to property owners upon payment of the Lot Release Price, and retire the bonds upon payment by the Districts. The bondholders are required to finance the bonds and refund the bonds only at required times over the course of the agreement. Failure by any one of these entities to perform its duties under the trust indenture contract could result in a breach of the agreement actionable by any party harmed by that breach. Therefore, a breach of a contractual duty by the Trustee that harms the Districts is actionable in contract by the Districts as parties to the mortgage-style trust indenture.
First, the Trustee argues that the Pledge and Mortgage agreements were not contracts that could be breached, and cites the granting clause of the Pledge and Mortgage noting that the Districts pledge, mortgage, assign, transfer and set over the income and rights to income to retire the bonds. The Trustee argues that this is evidence of the creation of a trust rather than a contract under the Restatement (Second) of Trusts. However, as discussed in the previous section, the Pledge and Mortgage agreements between the Trustee and the Districts evidence certain obligations on the part of each entity to the other in the performance of the trust indenture agreement. This agreement between the Trustee and the Districts is in the nature of a contract, and is actionable under contractual causes of action. Furthermore, the Trustee may by contract undertake other duties than those which he undertakes as trustee, and if that is done the trustee will be liable in an action at law for failure to perform such duties. Restatement (Second) of Trusts § 197(b). The Trustee's agreement to release the lots upon the payment of the Lot Release Price is an evident duty on the Trustee, and one which the Trustee admittedly failed to perform. Second, the Trustee argues that the chancery court erroneously disregarded the gross negligence standard of care required under the trust indenture contract in ruling that the gross negligence standard did not apply to this case. Paragraph 19 of the Pledge and Mortgage agreements states in part: 19. Trustee Standard of Care: By its acceptance of the offices of Trustee and paying agent hereunder, the Trustee agrees to discharge its duties as a reasonably prudent Trustee. The Trustee shall be responsible only for gross negligence in the execution of its trust.... The trial court found that the gross-negligence standard of care only applies in tort cases, and because this is not a tort claim by the beneficiary bondholders, but rather a breach-of-contract claim by the Districts, the gross-negligence standard of care does not apply. The trial court was correct. Clearly, by the terms of the trust indenture agreement, the Trustee agreed to be bound to a gross negligence standard of care in its execution of the trust and in its duties as a trustee. The Trustee's actions in refusing to release the lots, however, was an action taken in violation of its contractual duties to the Districts and not within the confines of the trust agreement with the bondholders. Therefore, the Trustee was liable for a contractual breach, which carries no consideration of a duty of care. As its third point here, the Trustee argues that its conduct was not a breach of contract because the Trustee was duty bound to solve the problems of the trust to protect the bondholders. The Trustee argues that it was fully empowered to ask for guidance from the trial court regarding the declaration of rights under the documents, and that payment of its attorney's fees for this action cannot in hindsight justify an award of damages after an unsuccessful litigation on the Trustee's part. As the chancery court noted below, and as is apparent on appeal, the Trustee continues to miss the point that the breach of contract did not occur when it filed suit or pursued a declaratory judgment action, but rather the breach occurred when the Trustee refused to release the lots to purchasers who had paid the Lot Release Price under the guise that the Pledge and Mortgage documents had to be revised or rescinded. It was this refusal to release these lots that spurred the litigation in this action. Under a contractual theory, the Trustee's actions were unwarranted. Contractually, the Trustee entered into an agreement with the Districts under Paragraph 9 of the Pledge and Mortgage agreement that once the Lot Release Price has been paid, the Trustee would release the deed to the lot owner, who would then be excused from paying any additional Special Taxes or Assessment of Benefits. Here, however, the Trustee does not deny that it did not release the lot pursuant to the provisions in Paragraph 9rather, it argues that it had the right to do this. However, the contractual language of the Pledge and Mortgage agreement provides the Trustee no discretion in the release of these lots. Instead, Paragraph 9 indicates that the Trustee shall release the lots upon payment of the Lot Release Price. As noted above, breach of the Pledge and Mortgage agreements, as mortgage-type contracts, becomes actionable. Therefore, failure to release the lots pursuant to Paragraph 9 resulted in a breach of contract. Under the terms of the Pledge and Mortgage agreements, the Trustee was empowered under Paragraph 5 to proceed by mandamus or other proper remedy, in the name of the bondholders, to compel the Districts' performance of the terms of the agreement. Furthermore, Paragraph 16 lays out the Trustee's obligations if the Districts default. Under Paragraph 16, the Trustee and its counsel may be paid a reasonable amount to litigate and solve a default situation. However, both Paragraph 5 and Paragraph 16 anticipate that action by the Trustee will only be taken if the Districts fail to meet their obligations or if they default. In this case, however, the Districts did not fail to meet their obligations, nor did they default in their payments of the bonds. While the Trustee certainly retained the power to ask the chancery court for a declaratory judgment regarding its obligations under the Pledge and Mortgage agreements, it did not have authority to ask for reformation or rescission of the agreements. Because the Trustee stepped outside its permitted boundaries under the terms of the trust, the Districts, as parties to a contract, were compelled to bring this counterclaim against the Trustee to recover the funds expended for fees which were improperly paid from the bond funds to pursue litigation that was largely unwarranted.
In its third point on appeal, the Trustee argues that the trial court erred in determining the existence and amount of damages, and in awarding attorney's fees to the Districts.
First, the Trustee argues that the Districts failed to prove any recoverable damages. The Trustee argues that if the prosecution of the litigation was considered a breach, the districts certainly suffered no out-of-pocket loss. The districts did not pay the attorney's fees. The fees were paid out of the respective bond funds. The Trustee further asserts that the trial court indicated that the breach occurred when the Trustee refused to release the lots and based the fee award from that date forward, but then also concluded that no damages resulted from that breach. As such, the damages awarded do not bear any relationship to any damages proved. Damages recoverable from breach of contract are those damages that would place the injured party in the same position as if the contract had not been breached. Dawson v. Temps Plus, Inc., 337 Ark. 247, 987 S.W.2d 722 (1999); Carroll v. Jones, 237 Ark. 361, 373 S.W.2d 132 (1963). Here, the question is whether the Trustee's breach of contract in its failure to release lots upon payment of the Lot Release Price resulted in any damages. Certainly, this failure at that time did not, in and of itself, cause damage to the amount of money in the bond funds. However, the trial court found that it was this act that triggered the resulting litigation that drained the bond funds the Trustee claimed to be protecting. The Trustee attempts to argue that the court's finding that this alone was the breach on which damages were based; however, in reading the court's order, it is apparent that the court found that upon that initial breach, all actions by the Trustee thereafter seemed to be one continuing breach for the reason that the entire litigation was not warranted. For example, the court also found that the Trustee breached the contract when it requested a reformation of the Lot Release Price through litigation rather than following the requirements in the Pledge and Mortgage agreements requiring approval by two-thirds of the bondholders. The Trustee, in fact, did not even attempt to get that approval. The court also found that the breach related to the Trustee's reliance on the Bracewell 1 schedule indicating that default was imminent, rather than on the other information, including the Bracewell 2 schedule, indicating that at least three of the four Districts would retire the bonds. Therefore, while the initial breach of contract related to the Trustee's failure to release the lots, the trial court also indicated that the Trustee continued breaching the contract with the Districts by pursuing actions that, under the trust indenture contract, it did not have authority to pursue. Certainly, while the Trustee retains authority to ask for guidance under or a declaratory judgment about the terms of the agreements, the Trustee's actions in this case extended beyond those powers, resulting in unnecessary litigation that drained the bond funds, resulting in damage to the Districts. Ultimately, the trial court found that the only damages proved by the Districts were those relating to the payment of litigation expenses, namely attorney's fees, for pursuing an action contrary to the contract and trust language. In other words, to place the Districts in the same position as before the initial breach, payment of all litigation expenses after April 1, 1998, when the Trustee refused to release the lots, constituted the required damages. The trial court did not err in this decision.
Second, the Trustee argues that if the trial court is affirmed on the award of damages, the court wrongly calculated the damages because it relied on a law firm exhibit showing when invoices were paid to Friday, Eldredge & Clark Law Firm rather than when the work was done. As such, the award of fees after April 1, 1998, could take into account fees paid for work done before April 1, 1998. The Districts respond that the trial court based its decision, in part, on the Trustee's own exhibit, and that the Trustee's own witness testified to the accuracy of those charges, but that the final order offers no specific document on which the trial court relied. Notably, the Districts are correct that the trial court did not base its conclusion on any particular document as no such document is indicated in the final order. Two documents, DX 49, a report completed by Paes detailing the payout of attorney's fees during this case, and PX 305, a summary detailing the amount of $315,528.97 for fees paid to Friday, Eldredge & Clark Law Firm for activities from April 1, 1998, to February 25, 1999, offer evidence on which the trial court apparently relied. It appears that the trial court took these and other documents into account when it reached its final award total of $381,436.96 for the amount paid to the Trustee's attorneys in the litigation. In order to return the Districts to the position in which they would have been had the contract not been breached, the trial court was correct in assessing damages for the attorney's fees paid from the bond funds during the pendency of the litigation by the Trustee and the time during which the Districts pursued the Trustee for repayment of those funds into the bond accounts. These fees were based in large part on the Trustee's own records and exhibits. As such, we can not find that the trial court erred in assessing these damages.
Finally, the Trustee argues that the trial court erred in awarding fees to the Districts. The Trustee argues that the fee reports submitted by the Districts included unrelated expenses, and, therefore, those fees should have been reduced by approximately $35,000. The Districts respond that the trial court made an initial adjustment downward of attorney's fees authorized by statute, but thereafter the Trustee failed to show that the award of fees was an abuse of discretion. Therefore, the fees should stand. A trial court is not required to award attorney's fees and, because of the trial judge's intimate acquaintance with the trial proceedings and the quality of service rendered by the prevailing party's counsel, we usually recognize the superior perspective of the trial judge in determining whether to award attorney's fees. Marcum v. Wengert, 344 Ark. 153, 40 S.W.3d 230 (2001); Jones v. Abraham, 341 Ark. 66, 15 S.W.3d 310 (2000); Chrisco v. Sun Industries Inc., 304 Ark. 227, 800 S.W.2d 717 (1990). The decision to award attorney's fees and the amount to award are discretionary determinations that will be reversed only if the appellant can demonstrate that the trial court abused its discretion. Nelson v. River Valley Bank & Trust, 334 Ark. 172, 971 S.W.2d 777 (1998); Burns v. Burns, 312 Ark. 61, 847 S.W.2d 23 (1993). A grant of attorney's fees is an issue within the sound discretion of the trial court and will not be disturbed on appeal absent an abuse of discretion. Id. The decision of whether to award attorneys' fees in a contract case is governed by Ark.Code Ann. § 16-22-308, which provides in pertinent part: In any civil action to recover on ... breach of contract, unless otherwise provided by law or the contract which is the subject matter of the action, the prevailing party may be allowed a reasonable attorney fee to be assessed by the court and collected as costs. In awarding fees under Ark.Code Ann. § 16-22-308, the trial court has broad discretion on whether to award fees, and his decision will not be reversed absent an abuse of discretion. The operative word in this statute is may. The word may is usually employed as implying permissive or discretional, rather than mandatory, action or conduct and is construed in a permissive sense unless necessary to give effect to an intent to which it is used. Jones, supra; Chrisco, supra . Here, the trial court entered a subsequent order on September 1, 2000, granting fees to the four Districts in the amount of $128,726.25 to be divided out among the Districts according to the attorney's allocation of percentages of contribution to the lawsuit. According to the order, the trial court reviewed the submission of fees by Attorney Lawrence with some care, adjusting the fees downward and correcting a typographical error in order to reach the correct amount of fees. The Districts were clearly the prevailing parties as they succeeded in proving a breach-of-contract claim resulting in reimbursement to the bond funds of the damages from the breach, i.e. the attorney's fees expended in unwarranted litigation. While the Trustee argues that the fee schedules submitted by the Districts' attorneys listed unnecessary expenses, the Trustee fails to specifically state why certain expenses are not warranted, other than to indicate that these expenses are Non-litigation expenses. However, a review of the listed expenses indicates that these expenses are for the time period included within the award of damages and involve various matters involved in this litigation. As such, we cannot say that the trial court abused its discretion in awarding these fees.