Opinion ID: 1314221
Heading Depth: 1
Heading Rank: 2

Heading: duty of the trustee to pay valid trust debts.

Text: The Beneficiaries do not argue that the mortgages as to Tract C, the property specifically identified in the loan agreement, are invalid. They do assert that because Tracts A and B were not mortgaged, their transfer is not fraudulent as to the Banks. [22] This argument cannot be sustained under our statutory trust law. Section 2 of the Trust Agreement [23] provides that as to the management, sale, or conveyance of Trust assets, the provisions of the Oklahoma Trust Act (Trust Act), 60 O.S. 1991 §§ 175.1-175.53, apply unless limited or modified by the Trust terms. The power to sell trust property includes the authority to mortgage the trust assets. [24] Pursuant to 60 O.S. 1991 § 174, [25] the liability for trust debts extends to the entire trust estate. It provides: Liability to third persons for any act, omission, or obligation of a trustee or trustees of an express trust when acting in such capacity, shall extend to the whole of the trust estate held by such trustee or trustees, or to so much thereof as may be necessary to discharge such liability, but no personal liability shall attach to the trustee or the beneficiaries of such trust for any such act, omission or liability. Additionally, § 175.18 [26] provides that the trust estate is liable for contracts executed by the trustee in his/her representative capacity. The Trust Act, as incorporated in the Trust Agreement, mandates payment of valid Trust debts. Even if the Trust terms did not incorporate the Trust Act, a duty to pay the Trust debts could be inferred from other trust provisions. Here, the Trustor signed the notes and mortgages individually and in her capacity as Trustee. The express terms of the Trust provide that the Trustee has full power and authority to pay all necessary and proper expenses of the trust estate. [27] He is also authorized to pay the Trustor's personal debts on her death. [28] The Trustor signed the mortgages as an individual. Whether the debts are construed as a liability of the Trust or as a personal debt of the Trustor, the terms of the Trust Agreement anticipated that they would be satisfied from trust assets. The terminating event of the Trust, the death of the Trustor, [29] did not divest the Trustee of all his powers. Paragraph 16 of the Trust Agreement provides that the powers and duties of the Trustee will continue until final distribution. [30] After termination, a trustee's powers continue for a reasonable time during which the trustee may perform such acts as are necessary to winding up the trust. [31] If a trustee properly incurs a liability in the administration of the trust, trust property can be applied in discharging the liability after termination. [32] Because a trustee has a duty to pay valid trust debts before distributing trust property, the pretrial death of the Trustor did not moot the Banks' action for fraudulent transfer pursuant to the Fraudulent Transfer Act, 24 O.S. 1991 § 117. [33] To hold otherwise would encourage beneficiaries to pressure trustees to make premature distribution of trust assets when failure to do so would cause their interests to be diminished. It would also discourage mortgagees from making loans to Trusts because of fears the assets might be dissipated before debts were settled. The purpose of the Fraudulent Transfer Act is to allow a creditor the opportunity to invalidate a transfer of assets made by a debtor if the transfer has the effect of placing the assets out of the reach of present and future creditors. [34] Although our research has not disclosed any cases dealing with the precise fact situation presented here, a number of cases hold that a transfer of property into a trust or in the creation of a trust to evade creditors is subject to the Fraudulent Transfer Act. [35] In addition, Oklahoma Nat'l Bank v. Cobb, 52 Okla. 654, 153 P. 134, 136 (1915), although promulgated before the enactment of the Fraudulent Transfer Act, is instructive. Cobb involved a transfer of property held under a parol trust to the trust beneficiary. The creditors of the trustee claimed the transfer was fraudulent and attempted to reach the property in satisfaction of the trustee's personal debts. This Court held that because no allegations or evidence of insolvency were presented, the creditors could not reach the transferred property. We indicated in Cobb that if insolvency had been shown, the property could have been reached to satisfy the trustee's debts. Unlike the creditors in Cobb, the Banks here are not attempting to reach the trust property for satisfaction of the Trustee's debt. Rather, they seek to extinguish a debt of the trust estate. Additionally, here the insolvency issue is settled  the parties have stipulated that the Trust is insolvent. [36]