Opinion ID: 2278218
Heading Depth: 2
Heading Rank: 1

Heading: Standing of the Districts to Assert a Cause of Action

Text: 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.