Opinion ID: 2517704
Heading Depth: 1
Heading Rank: 2

Heading: Interpretation of the Sterne-Elder Trust

Text: We are called upon, in this instance, to interpret the Sternes' 1976 Trust Agreement, which incorporates by reference The Denver Foundation's 1925 Declaration and any amendments thereto. Neither party has asserted the Sterne-Elder Trust is ambiguous and, absent ambiguity, interpretation of a trust is a question of law that we review de novo. In re Ferguson Trusts, 929 P.2d 33, 35 (Colo.App.1996). Our objective in construing this trust, as with any other contract or will, is to determine the intent of the settlors. In re Ferguson Trusts, 929 P.2d at 35; Meier v. Denver U.S. Nat'l Bank, 164 Colo. 25, 29, 431 P.2d 1019, 1021 (1967) (The cardinal rule in the construction of a Will is that the Court shall determine the actual intent of the testator from the instrument in its entirety and, having ascertained that intent, shall carry it out, provided that the testator's intent conforms to law and public policy.). Thus, paramount to our concerns is the Sternes' fundamental purposes in executing the 1976 Trust Agreement. To ascertain this intent, we read and interpret all the various documents at issue, as a whole, to give effect to the Sternes' wishes in establishing the Trust. § 15-11-510, C.R.S. (2006) (A writing in existence when a will is executed may be incorporated by reference if the language of the will manifests this intent and describes the writing sufficiently to permit its identification.); U.S. Nat'l Bank v. Brunton, 112 Colo. 442, 448, 150 P.2d 297, 299 (1944); In re Estate of Daigle, 642 P.2d 527, 528 (Colo. App.1982) (finding settlor's intent is discerned from entire instrument); 11 Richard A. Lord, Williston on Contracts § 30.25 (4th ed.1999) (explaining that a document incorporated into a contract should be construed as a single instrument). Likewise, we construe the Trust instruments in their entirety to harmonize and give effect to all the provisions, rendering none meaningless or superfluous. U.S. Fid. & Guar. Co. v. Budget Rent-A-Car Sys., Inc., 842 P.2d 208, 213 (Colo.1992); Pepcol Mfg. Co. v. Denver Union Corp., 687 P.2d 1310, 1313 (Colo.1984); U.S. Nat'l Bank, 112 Colo. at 448, 150 P.2d at 299. Finally, we also consider relevant circumstances in effect at the time the 1976 Trust Agreement was executed to understand and find meaning in the instrument. Powder Horn Constructors, Inc. v. City of Florence, 754 P.2d 356, 368 (Colo.1988); Bd. of County Comm'rs v. City & County of Denver, 40 P.3d 25, 29 (Colo.App.2001). The Sterne-Elder Trust is created and governed by the terms of two documents: the 1976 Trust Agreement and The Denver Foundation's Declaration of Trust, which is expressly incorporated into the Trust Agreement. The 1976 Trust Agreement categorically forbids The Denver Foundation to direct disbursement of principal, or invade the principal of the Trust. The Denver Foundation contends that this language, read in the context of the 1997 Declaration, does not preclude transfer of the Trust corpus from Wells Fargo to The Denver Foundation's nonprofit corporation. In support, it relies primarily on the language contained in Article 3-1.1 of the 1997 Declaration, entitled Transfer of Funds to Corporation, which provides: Each Trustee Bank shall, within ten days after the last day of each calendar quarter, pay and disburse to the Corporation such portion of the net income and principal of each trust held by it hereunder as the Board of Trustees shall direct. The Denver Foundation maintains that Article 3-1.1, by its title, authorizes transfers of both principal and income to the corporation without regard to restrictions or conditions placed upon those funds. In contrast, Article 3-1.2, which governs distributions of funds, is explicitly made subject to restrictions contained in trust instruments. Reasoning Article 3-1.2 should inform construction of Article 3-1.1, The Denver Foundation concludes that under the 1997 Amended Declaration (as well as pursuant to the earlier 1925 incarnation), its power to direct transfers of funds to the Foundation is not subject to trust restrictions, but its power to distribute money out to end-user charities is clearly subject to the Sternes' prohibition against the invasion of the trust corpus. The Foundation also urges that Article 3-1.1 does not override the Sternes' intent on invasion of principal; rather, it says, when read together and considered on equal footing with the other terms in the 1976 Trust Agreement, Article 3-1.1 embodies the Sternes' wishes of a permanent endowment available to generate income for future generations of beneficiaries. We agree with The Denver Foundation's interpretation of the 1997 Declaration as permitting the transfer of the Sterne-Elder Trust corpus to its nonprofit corporation for two reasons. First, The Denver Foundation is entitled to conclusively construe, if in good faith, any provision of its Declaration, and we cannot conclude that its interpretation of Article 3-1.1 is either arbitrary or capricious. Second, we conclude that The Denver Foundation's interpretation, which allows for the transfer of the Trust corpus to the Foundation's nonprofit corporation, corresponds with the Sternes' intent and essential purposes in executing their 1976 Trust Agreement.
The Denver Foundation possesses, under both the 1925 and the 1997 Declarations, the power to conclusively construe in good faith any term or provision of its Declaration. We analyze such discretionary powers according to an abuse of discretion standard, and we will only interfere when discretion has been exercised arbitrarily or capriciously. [12] Matter of Brooks' Estate, 42 Colo.App. 333, 335, 596 P.2d 1220, 1221 (1979); see also Cent. States, Se. & Sw. Areas Pension Fund v. Cent. Transp., Inc., 472 U.S. 559, 568, 105 S.Ct. 2833, 86 L.Ed.2d 447 (1985) (according significant weight to trustees' interpretation when their construction was to have binding effect under the trust agreement). An arbitrary and capricious benchmark restrains the exercise of our independent review and interpretation save for instances of abuse of discretion, bad faith, dishonesty, or arbitrary action. Thus, an interpretation or construction that we ourselves would not have arrived at under de novo review will not necessarily fail. Restatement (Second) of Trusts § 187 cmt. e (The mere fact that if the discretion had been conferred upon the court, the court would have exercised the power differently, is not a sufficient reason for interfering with the exercise of the power. . . .); George T. Bogert, Trusts § 89 (6th ed. 1987) ([E]ven if the court would have taken different action or believes that a reasonable man would have come to a contrary conclusion discretionary decisions will generally not be upset); 33 Charles Alan Wright & Charles H. Koch, Jr., Federal Practice and Procedure: Judicial Review § 8334 (2006) (The arbitrariness standard requires only that the court reach the negative conclusion that the . . . decision is not implausible under the circumstances; it need not confirm the decision in any real sense.). Instead, only in the most egregious of circumstances, in which an interpretation is extraordinarily imprudent, extremely unreasonable, or substantially out of step with the settlor's intent, will we interfere to impose our own reading of the document. Bogert on Trusts § 560 (rev.2d ed.1980) (suggesting courts upset the use of discretionary powers only to remedy improper actions such as acting for the benefit of the [holder of the discretionary power] himself or some third person, or for the purpose of harming the beneficiary or out of ill will or prejudice against him, or an action contrary to the purposes of the trust); Restatement (Second) of Trusts § 187 cmt. e (determining courts will not intervene unless the discretionary power is wielded dishonestly, or with an improper even though not a dishonest motive, or effects a patently unreasonable judgment). In this case, while we may not have independently construed Article 3-1.1 in the same manner as has The Denver Foundation, we cannot conclude that The Denver Foundation has arbitrarily or capriciously arrived at its interpretation of that language. It is not outside the bounds of reason that Article 3-1.1, by its title, sanctions The Denver Foundation to direct the transfer of trust corpus to the Foundation's nonprofit corporation for administration and investment but not for disbursement to outside end-user charities. So construed, the Foundation's exercise of power under Article 3-1.1 would not conflict with the 1976 Trust Agreement provision barring inva[sion] of principal. Rather, it would simply reflect the drafters' intent that the Sterne-Elder Trust exist as a permanent endowment fund, the principal of which would never be distributed to end-user charities but instead would exist in perpetuity to benefit the Denver community. [13] We are also reluctant to meddle with The Denver Foundation's right to construe in good faith the terms of its Declaration because the Sternes, by incorporating into their 1976 Trust Agreement the 1925 Declaration and any later amendments thereto, knowingly and intelligently conferred upon The Denver Foundation that precise power. We have not seen any evidence that would suggest The Denver Foundation seeks to construe its Declaration dishonestly or for improper motives, nor, it should be said, has Wells Fargo alleged any such intention. Indeed, we have no reason to question the good faith of The Denver Foundation. Ultimately, however, we endorse this interpretation of the 1976 Trust agreement because we conclude that transfer of the Sterne-Elder Trust principal to The Denver Foundation furthers the Sternes' overarching intent and essential purpose in creating their Trust.
The Sternes' intent in establishing a trust that becomes a part of The Denver Foundation [14] must be read in light of the entire trust instrument  the 1976 Trust Agreement, the 1925 Declaration, and the subsequent 1997 Declaration  as well as the circumstances surrounding the 1976 Trust Agreement's execution. Through that lens, we find the probate court's reading of the Sternes' intent, which broadly holds that the Trust is a permanent gift for the benefit of the Foundation, is, in our opinion, a sounder interpretation of the Sternes' fundamental goal in establishing the Trust than the court of appeals' narrow reading that the Sternes intended to create a perpetual charitable trust managed by a bank as trustee. At the outset, it bears repeating that the Sternes chose to bequeath a portion of their estate to The Denver Foundation, a community trust, which is not a traditional trust beneficiary but rather one that exists to develop, hold, and administer endowment gifts  not for itself but for other community charities. As a result, the Sternes granted The Denver Foundation unique powers affording it the flexibility to adapt to changing circumstances in the realm of charitable giving in perpetuity. As discussed above, the Sternes agreed to grant The Denver Foundation broad powers of amendment, modification, distribution, and construction, which evince their general wish that The Denver Foundation exercise substantial discretion in the administration of their gift. That the Sternes chose to entrust to The Denver Foundation crucial responsibilities and a wide array of discretionary powers not generally accorded to traditional trust beneficiaries reflects the fact that the usual tripartite trust relationship was of significantly less import to them than the existence of a perpetual trust administered by the Foundation. Accordingly, we cannot read the Sternes' essential purpose in creating the Trust to hinge on the traditional triangulated trust form. Instead, that tripartite form was merely the mechanism by which to achieve their essential purpose in giving the gift. This conclusion is borne out by the fact that the Sternes could not have designated The Denver Foundation as a trustee at the time of the execution of the Trust Agreement. In 1976, The Denver Foundation did not have a corporate entity capable of holding and administering assets; thus, at that time, a transfer of principal from the Sterne-Elder Trust to The Denver Foundation would have to have been distributed to end-user charities and the permanent endowment would have been lost, in contravention of the Sternes' wishes. Now, given structural changes permitting The Denver Foundation to hold and manage endowments, it is capable of administering the Trust principal as trustee of this permanent endowment without violating the Sternes' most essential purpose  that the Trust become part of the Denver Foundation. In light of this overriding purpose and the circumstances existing in 1976 that prevented the Sternes from appointing The Denver Foundation to act as trustee, and given The Denver Foundation's power to conclusively construe its own Declaration in good faith, we conclude that the 1976 Trust Agreement does not restrict The Denver Foundation from directing the transfer of principal to its nonprofit corporation to be held as part of the permanent endowment of The Denver Foundation community trust. [15]