Opinion ID: 168824
Heading Depth: 2
Heading Rank: 1

Heading: Is the Bank a Trustee Under New Mexico Law?

Text: 38 When exercising diversity jurisdiction, we apply state law with the objective of obtaining the result that would be reached in state court. Perlmutter v. U.S. Gypsum Co., 4 F.3d 864, 869 (10th Cir. 1993). The district court correctly turned its attention to New Mexico's Uniform Trust Code, N.M. Stat. Ann. §§ 46A-1-101 through 46A-11-1104, which went into effect during the pendency of this action. 2003 N.M. Laws, ch. 122, § 1-101. The UTC applies to all trusts created before, on or after its effective date, N.M. Stat. Ann. § 46A-11-1104(A)(1), and to judicial proceedings concerning trusts commenced before its effective date, unless the court finds that application of a particular provision of the [UTC] would ... prejudice the rights of the parties, in which case the particular provision of the [UTC] does not apply and the superseded law applies, id. § 46A-11-1104(A)(3). Except to the extent the UTC or other New Mexico statutes modify it, [t]he common law of trusts and principles of equity supplement the [UTC]. Id. § 46A-1-106. 39 We assume, as did the district court, that the 1948 Declaration of Trust created a valid trust with Mr. Luthy as the trustee and Paul Butt, Sr., as one of the beneficiaries. When Mr. Butt the elder passed on, Mr. Butt the younger inherited his beneficial interest. If we were also to assume, as the did the district court, that the trust did not fail upon Mr. Luthy's death, then upon that instance a vacancy in the trusteeship occur[red]. Id. 46A-7-704(A)(5) (A vacancy in a trusteeship occurs if: ... a trustee dies.). The UTC provides that [a] vacancy in a trusteeship must be filled if the trust has no remaining trustee, id. 46A-7-704(B), in the following order of priority: (1) by a person designated in the terms of the trust to act as successor trustee; (2) by a person appointed by unanimous agreement of the qualified beneficiaries; or (3) by a person appointed by the court, id. at 46A-7-704(C)(1)-(3). The district court found that none of these methods of appointment occurred at any time following Mr. Luthy's death and therefore held that the Bank never assumed trusteeship and had no fiduciary duty to Mr. Butt. 40 Carrying forward the assumption that the trust survived Mr. Luthy's death, nothing in the record conflicts with the district court's ultimate factual finding: at no time were any of the proper means of appointing a successor trustee under the UTC pursued by any party to this relationship. Mr. Butt is surely correct, however, that if under New Mexico law in 1948 (when the trust was created) or 1963 (when Mr. Luthy died) the Bank would have automatically acceded to trusteeship, then the district court's legal conclusion was erroneous. The UTC, after all, explicitly states that where its application would prejudice the parties, superceded law applies. Id. § 46A-11-1104(A)(3). And if prior law would have rendered the Bank a fiduciary of Mr. Butt, then the UTC's nullification of that status would certainly be prejudicial to the trust beneficiaries. But Mr. Butt fails to direct to us to any law, extant at the time of the formation of the trust or Mr. Luthy's death, that supports his assertions. Instead, he reproduces a hodgepodge of provisions from New Mexico's 1953 code, none of which shed even the faintest light on the questions in this case. 10 Nor has our independent review of New Mexico law uncovered any statutory or case law that is contrary to the provisions of the UTC. Indeed, it appears that the UTC, rather than contracting the methods by which a successor trustee may be appointed, expanded the options available under prior law. Compare Restatement (Second) of Trusts § 108 (1959) (providing for appointment of a new trustee by a proper court or by the person, if any, who by the terms of the trust is authorized to appoint a trustee), 11 with N.M. Stat. Ann. § 46A-7-704(C) (providing for appointment of a new trustee to a vacant trusteeship by the court, by a person designated in the terms of the trust to act as successor trustee, or by a person appointed by unanimous agreement of the qualified beneficiaries). Consequently, we find no merit to Mr. Butt's argument that trust law from years gone by renders his fiduciary duty claim any more sound that it appears under the UTC. 41 But even accepting that the Bank never acceded to trusteeship, the district court's analytical stopping point is a curious one. If the trust marched on into the future but no trustee administered it, what then was the status of the trust these past forty-four years? The UTC provides no answer to this question, nor, it appears, does New Mexico case law. A generally accepted common law principle, which supplements the UTC, see N.M. Stat. Ann. § 46A-1-106, instructs that [u]pon the death of a sole trustee who has devised or bequeathed the trust property, the title to the trust property passes subject to the trust to the devisee or legatee, unless it is otherwise provided by the terms of the trust. Restatement (Second) of Trusts § 105; see also George Gleason Bogert et al., Bogert's Trusts and Trustees § 529 (rev.2d ed.2005) (collecting cases). But the devisee is not permitted to administer the trust unless by the terms of the trust he is so authorized, and if he is not so authorized, a new trustee will be appointed. Restatement (Second) of Trusts § 105 cmt. a. Perhaps the Bank, as testamentary trustee of the Luthy estate, obtained title to the trust property but not authority to administer the trust. This is a puzzle, like a car without a driver. We believe the simpler and more straightforward way to analyze this case is to conclude that the trust terminated at Mr. Luthy's death. 42
43 Although, as a general rule, trusts do not fail upon the death of a trustee, [a] settlor may manifest an intention ... that the trust continue only for as long as a particular person serves as trustee. In [this] case[ ], the rule that a court will appoint a substitute or successor trustee does not apply. Restatement (Third) of Trusts § 31 cmt. b (2003); see also In re Doe's Will, 232 Wis. 34, 285 N.W. 764, 766 (1939) (If upon such construction of the instrument it appears that a power lodged with the trustees in connection with the trust is a special confidence reposed in this particular trustee or set of trustees, or is to be exercised only upon his or their personal judgment or discretion, such power can only be exercised by the designated trustee and will not pass to a substituted trustee. (internal quotation marks and citation omitted)); Bogert et al., supra, § 529 (The death of a sole or surviving trustee does not terminate the trust, unless the settlor has manifested an intention that the trust shall be personal to the particular trustee .... (emphasis added)). 12 44 After trial, the district court issued a detailed set of factual findings, none of which are challenged on appeal. Based on these findings, we conclude that when Mr. Luthy declared the trust, the powers of trusteeship were meant to be personal to him. In the trust instrument itself, Mr. Luthy stated that the three original parties to the Lease operation agreed that I was to have complete control and final decision in all matters pertaining to the handling of said lease. App. Vol. I, at 119. No provision was made for successor trustees and the emphasis throughout the instrument is on Mr. Luthy's personal and complete control over the handling of the Lease. See Dist. Ct. Mem. Dec. 4; Rogers, 120 N.E. at 828 (finding that language in a will makes the judgment and discretion of [the named trustee] absolutely essential to the creation of the trust, and noting that [t]his is self-evident when it is noted that [the testatrix] makes no provision whatsoever for any failure by death or otherwise of the trustee to act); Schloss, 10 A.2d at 345 (finding that a settlor created a trust to secure for himself the counsel and guidance of his brother as trustee and finding nothing in [the trust] instrument which even tends to indicate that, in the event of [the trustee's] death or disability, any other person was to succeed him as trustee). Mr. Luthy was not charged with mere ministerial matters as trustee, but rather with exercising his particular business judgment in initiating, negotiating, and finalizing a wide array of complex oil and gas transactions under the Lease. See French v. N. Trust Co., 197 Ill. 30, 64 N.E. 105, 108 (1902) (As a general rule, where a power is discretionary, and of a kind that indicates personal confidence in the one selected to exercise it, a court of equity will not assume to exercise the discretion, and the power will not pass to a successor appointed by the court .... If the power is ministerial ... although there may be some measure of discretion involved, the court will compel the performance of the power, or execute it in the place of the trustee.). 45 We recognize that the mere fact that a power is conferred upon the trustee by name is not sufficient in itself to indicate that the power does not devolve upon successor trustees. In re City Bank Farmers Trust Co., 64 N.Y.S.2d 523, 525 (1946) (citing In re Walker, 292 N.Y. 19, 53 N.E.2d 378). [W]hether the testator intended a discretionary trust power to be ex officio or to be a purely personal power limited to the original trustees is to be ascertained by construing the language of the will as a whole in the light of all the surrounding circumstances. In re Warner's Will, 61 N.W.2d at 843; see also Welch, 38 S.E.2d at 201 (Whether the powers are personal in character is to be ascertained from a consideration of the will as a whole, and from the nature and objects of the trust created thereby, in the light of surrounding circumstances.); In re Houghton's Estate, 105 A.2d at 260 (Practically, the question reduces itself to determining whether such powers are in point of fact personal or ex officio, and this, at least in the absence of statute, depends upon the intention of the ... settlor, to be gathered from the terms of the instrument creating the trust and from the surrounding circumstances.). Here, the surrounding circumstances and subsequent history of dealings among the parties with an interest in the Lease confirms our reading of the trust instrument as conveying powers personal to Mr. Luthy. 13 46 First, in an affidavit signed in 1954, six years after the Declaration of Trust, each of the interest holders in the Lease agreed that: 47 the remaining state oil and gas leases acquired by the syndicate before mentioned are still and always have been held in the name of Fred Luthy, with full and complete power of disposition of the same, and the beneficial owners entitled to profits from said state leases are presently Fredy Luthy, Defiance Coal Company, and Paul Butt Jr., and that all of the holders of the beneficial interests in said oil and gas leases and properties have always conceded and now concede that Fred Luthy has the full and complete power of disposition of said leases and interests thereunder, and that no purchaser or person dealing with Fred Luthy is required to look to the holders of the beneficial interests or the disposition of the proceeds therefrom. 48 App. Vol. I, at 126; see also Dist. Ct. Mem. Dec. 5. As in the trust instrument, the emphasis in the affidavit is on Fred Luthy's personal control over the Lease and no provision is made for the continuance of the trust after his demise. As the trial testimony demonstrates, Mr. Luthy and the original parties to the Lease enjoyed a close business relationship, and the facts suggest that Mr. Luthy's associates placed particular faith in his abilities. 49 Second, following Mr. Luthy's death, the parties' relationship to each other and to the trust changed dramatically. The Bank — Mr. Luthy's successor in interest — did not assert, and was not recognized as having, the unilateral authority over business dealings regarding the Lease that was exercised by Mr. Luthy. Instead, with regard to multiple transactions, each interest holder in the Lease was asked to give specific approval. For example, just four months after Mr. Luthy's death, each interest holder jointly signed a letter offering the Humble Oil & Refining Company mineral interests in Tract 6. If the Bank were meant to continue as trustee with full authority to deal with the Lease, there would have been no reason to obtain the signatures of all the interest holders. Moreover, there would have been no reason to explain in the offer letter that the leasehold interest is actually owned one-third by Paul Butt Jr., one-third by Defiance Coal Company, and one-third by the Estate of Fred Luthy, deceased. Dist. Ct. Mem. Dec. 7; App. Vol. II, at 442. Indeed, in the opinion of Humble Oil's attorney, who enjoyed a vantage point much closer than the one we find ourselves in today, upon Mr. Luthy's death his power of control and sale ... ceased and [was] not vested in his heirs or devisees. Dist. Ct. Mem. Dec. 7; App. Vol. II, at 449. Additionally, some nine months after Mr. Luthy's death, Mr. Butt independently, and by separate instrument, conveyed his interest in six tracts to Humble Oil. Dist. Ct. Mem. Dec. 8. If the Trust was still extant at that point, such an action on Mr. Butt's part would have been unnecessary and improper. 50 Equally convincing is the shift in practices that occurred after Mr. Luthy's death with respect to the Rankin and Turner Farmouts. Before his death, Mr. Luthy was independently dealing, on behalf of all parties, with Mann Rankin about the assignment of a single tract under the Lease. Id. The dealings with Mr. Rankin continued after Mr. Luthy's death, but the Bank did not step into Mr. Luthy's shoes. Instead, Mr. Rankin explicitly stated that he was assigning an overriding royalty interest to each of the interest holders in the Lease. Id. at 9. If the Bank served as trustee for each of these interest holders, in the same capacity as Mr. Luthy served before his death, there would have been no reason to make this specification. The royalty interest would have just been assigned to the Bank and, in its capacity as trustee, it would have distributed the royalties to the beneficiaries as they accrued. 51 Similarly, before his death, Mr. Luthy offered to assign two tracts to Charles R. Turner. Id. After Mr. Luthy's death, the dealings with Mr. Turner continued but, again, the Bank did not step into Mr. Luthy's role as the sole entity making offers on behalf of the Lease. Instead, each interest holder reaffirmed the offer in a joint letter. Id. Moreover, Mr. Butt independently discussed transactions with Mr. Turner, id. at 10-11, a scenario that would not have occurred while Mr. Luthy was alive and serving as sole trustee for the Lease. Most significantly, when the Bank did act independently in assigning the entire interest in a tract to Mr. Turner (thereby ignoring the other interest holders), it felt compelled to have all the interest holders ratify the transaction. Id. If the Bank enjoyed the powers and rights that Mr. Luthy had enjoyed as trustee during his lifetime, such a ratification would have been unnecessary and inconsistent with the terms of the trust, and the role of a trustee. 52 The dealings surrounding the Shell Oil Assignment also confirm that the parties understood the trust to be at an end after Mr. Luthy's death. Notably, the Bank refused to take individual action on a requested transfer order because, as the Bank explained, the oil company had erroneously assumed that the Bank owned the entire interest. Instead, the Bank cautioned that it was merely an equal partner. Id. at 13; see also App. Vol. II, at 506. 53 In sum, throughout the post-Luthy period — throughout all of these dealings — Mr. Butt never objected to being treated in his individual capacity as an owner of the Lease. Indeed, in May 1972 he requested that Shell deal with him individually rather than through the Bank, Dist. Ct. Mem. Dec. 14, the very entity he now contends was serving as his trustee at the time. If Mr. Butt believes the trust survived Mr. Luthy's death, it is a realization that he has come to rather late in the game. 54 We recognize that, aside from the Humble Oil Assignment, the record does show that the Bank may have assigned more than its own one-third interest in two transactions, the Machris Assignment and the Pauley Petroleum Assignment. While these transactions may be evidence of mistake or overreaching on the part of the Bank — a matter we deal with below — they do not prove that the Bank was serving as trustee for the Lease. The existence of a few ultra vires transactions by the Bank after Mr. Luthy's death does not cut against our reading of the trust instrument as conveying powers personal to Mr. Luthy that ceased upon his death. 55 We also recognize that, at trial, Mr. Butt testified that, for each of the post-Luthy transactions to which he gave his individual approval, [e]verything went through the bank.... The bank would hammer out all the details, would negotiate the terms, and I would simply go along with it.... [T]he bank would initiate all the paperwork, do all the ... negotiations and then just give it to me to sign. App. Vol. III, at 670. This does not prove that the Bank served as a trustee. It proves only that Butt understood that his interests and those of the Bank's beneficiaries were aligned and that he chose to defer to the Bank's professional expertise. An individual who exercises his property rights by signing legal instruments cannot impose fiduciary duties on another by trusting it and choosing to go along with its actions. 56