Court Opinion

ID: 3078001
Source: CourtListenerOpinion
Date Created: 2015-10-16 01:31:00.091214+00
Date Added: 2024-06-11T08:13:19.634821
License: Public Domain

In The
                             Court of Appeals
                    Seventh District of Texas at Amarillo

                                   No. 07-11-00441-CV

               CONNOR DRUMMOND RICE AND SCOTT D. RICE AS
          CO-TRUSTEES FOR THE 2001 SCOTT D. RICE TRUST, APPELLANTS

                                            V.

                         MATTHEW E. MALOUF, APPELLEE

                          On Appeal from the 320th District Court
                                    Potter County, Texas
                 Trial Court No. 98,389-D, Honorable Paul Davis, Presiding

                                      July 8, 2013

                            MEMORANDUM OPINION
                  Before QUINN, C.J., and CAMPBELL and BOYD, S.J.1

      This appeal involves a suit brought against the recipient of funds wrongfully paid,

seeking to impose a constructive trust on the funds and recover them. Among other

defenses, the recipient asserted he received the funds in good faith, for value and

without knowledge of any impropriety. The jury agreed. The trial court rendered a take-

      1
       John T. Boyd, Chief Justice (Ret.), Seventh Court of Appeals, sitting by
assignment.
nothing judgment in favor of the recipient, but denied the recipient’s request for

attorney’s fees. Both sides appeal. We will affirm the judgment.

                                        Background

       The parties are familiar with the facts, and in this memorandum opinion we relate

only those pertinent to the appellate issues we address. Appellant Scott D. Rice and

Steve Sterquell, an Amarillo CPA and long-time advisor to the Rice family, served as

co-trustees of the 2001 Scott D. Rice Trust. Sterquell died in April 2009.2

       Sterquell also had business dealings with appellee Matthew E. Malouf, a Dallas

real estate developer. Sterquell acted as accountant for both Malouf and Rice. In

October 2005, Sterquell, acting alone and without the knowledge of his co-trustee Rice,

caused $1.6 million to be transferred by wire from a Rice Trust bank account to Malouf’s

personal account. That transfer is the subject of this litigation.

       Malouf conducted business through various entities.           He “own[ed]” Malouf

Interests, Inc.,3 which served as “a one percent general partner” of Minerva Partners,

Ltd., Java Partners, L.P., and TM Development Partners, Ltd. Evidence also showed

Malouf, during the time pertinent to this case, was the sole limited partner of these

entities.

       2
         After Sterquell’s death, appellant Conner Drummond Rice joined his brother
Scott as a co-trustee.
       3
        Documents in evidence state Malouf also served as president and sole director
of Malouf Interests, Inc.

                                              2
      The Rice Trust had no business with Malouf, and no one disputes the jury’s

finding that the $1.6 million transfer was a breach of trust by Sterquell.     Evidence

showed, however, that a company controlled by Sterquell, AHF Development, Ltd.,

served Malouf as a “qualified intermediary” for tax-deferred like-kind exchanges of

property under § 1031 of the Internal Revenue Code.4            The evidence contains

documents reflecting AHF Development’s participation as qualified intermediary in sales

of properties by Minerva Partners, Java Partners and TM Development Partners. As

one example of such documents, the record contains documents dated in January 2005

in connection with the sale of a property in Indiana by Minerva Partners to an individual

buyer. The documents include an assignment to which Minerva Partners, as

“exchanger,” AHF Development, as “qualified intermediary,” and the buyer are parties,

providing for the closing of the sale of the property as an exchange under § 1031.

Sterquell signed the assignment on behalf of AHF Development, his signature line

bearing the title “exchange coordinator.”

      A similar assignment appears in the evidence, dated in February 2005, with

respect to the sale of a property in Denton County, Texas by TM Development Partners.

AHF Development is a party to the assignment, and is identified as qualified

intermediary.    As with the Minerva Partners assignment the previous month, this

document provides that the proceeds of the sale will be paid to AHF Development in its

role as qualified intermediary. Sterquell also signed this document on behalf of AHF

Development, again in the capacity of “exchange coordinator.”

      4
          See generally 26 U.S.C. § 1031; 26 CFR 1.1031(k)-1.

                                            3
      As a third example, a title company’s settlement statement appears in the

evidence, with regard to the June 2005 closing of the sale of another property in

Indiana. The seller’s statement reflects the sale is from AHF Development, Ltd., as

qualified intermediary for Java Partners. The statement provides for payment of the net

sales proceeds as “1031 proceeds” payable to AHF Development.

      Malouf testified that the years 2004 through 2006 were busy years for his real

estate business, and his entities deposited the net proceeds of several property sales,

totaling some $15.8 million, with AHF Development as qualified intermediary. However,

on none of the occasions in which sales proceeds were deposited with AHF

Development did Malouf identify a replacement property to complete the like-kind

exchange, within the time limit required by § 1031.5 In such instances, the seller (or

“exchanger,” in § 1031 parlance) is entitled to the net sales proceeds being held by the

qualified intermediary.6 Malouf testified that all the funds his entities deposited with

AHF Development pursuant to § 1031 were returned.

      In April 2005, Sterquell established a single-signatory bank account at Herring

National Bank in Amarillo in the name of the Rice Trust. In subsequent months, checks

and wire transfers from this account went to various payees, including Scott Rice.

      5
         See Terry v. SunTrust Banks, Inc., No. 11-1704 & 11-1707, 2012 U.S. App.
Lexis 13632, at *4-5 (4th Cir. July 2, 2012); Frontier Pepper's Ferry, LLC v.
LandAmerica 1031 Exchange Servs. (In re Landamerica Fin. Group, Inc.), No. 08-
35994-KRH, 2009 Bankr. Lexis 4133, at *9-10 (Bankr. E.D. Va. May 7, 2009) (both
describing operation of § 1031).
      6
         See Frontier Pepper's Ferry, 2009 Bankr. Lexis 4133, at *9-10 (“In the event
that the Replacement Property is not identified or closed within the specified time
periods, then the qualified intermediary pays an amount equal to the net sales proceeds
to the exchanger”).

                                           4
       In August 2005, Malouf was presented with a business opportunity making it

necessary that he borrow a substantial amount of money. He testified at least one bank

he approached suggested that he “improve his balance sheet” by reducing his other

indebtedness. He sent an August 15 e-mail to Sterquell, entitled “1031 funds.” In the

email, Malouf expressed his need “to get the 1031 funds.” He explained, “I have to pay

down my debts on time to get the loan, and I can’t let [his new client] down on the

timing.”

       When the funds were not forthcoming, Malouf sent a September 13 e-mail to

Sterquell giving him wiring instructions for the transfer of $1.6 million to a Minerva

Partners bank account on September 16. Malouf determined the amount of his request

by consulting an “informal worksheet” he maintained, reflecting § 1031 funds AHF

Development held.     According to Malouf’s testimony, based on his worksheet he

believed he had more than $1.6 million “on deposit” with AHF Development when he

sought his “entities’ money back.” Another record shows that as of October 10, 2005,

the balance of § 1031 funds remitted to AHF Development for the Malouf limited

partnerships stood at $1,762,672.24.

       Sterquell did not, however, transfer the $1.6 million as directed by the September

13 instructions. There is evidence that, because of Sterquell’s misuse of funds in AHF

Development’s account, it lacked the funds to comply with Malouf’s request. In fact, an

AHF Development “account detail” ledger in evidence shows available funds of only

$517.12 at the time of Malouf’s September 13 e-mail.

                                            5
        Meanwhile the Rice Trust sold land in New Mexico. Sales proceeds totaling over

$2.9 million were deposited to the trust’s Herring National Bank account on October 7,

2005. On the next business day, October 11, 2005, Sterquell transferred by wire $1.6

million from the trust’s account to Malouf’s personal account.

        Rice and Malouf each had extensive business dealings with Sterquell, but not

with each other. Only after the death of Sterquell on April 1, 2009, did Rice and Malouf

meet. It was during this period that Rice concluded Sterquell had improperly diverted

$1.6 million from the trust to Malouf.

        Contending Malouf was unjustly enriched by the $1.6 million transfer, the

trustees of the Rice Trust brought suit.         Rice lives in New Mexico, and the trust

instrument governing the Rice Trust contains language adopting New Mexico law.

Malouf asserted an affirmative defense to the trustees’ claim based on a provision of the

New Mexico Trust Code,7 contending he received the $1.6 million in good faith, for

value and without knowledge of Sterquell’s misconduct. In the trial of the case, the jury

charge contained questions seeking findings on each of those three elements. The jury

made findings favorable to Malouf. Based on those findings, the trial court rendered a

take-nothing judgment in favor of Malouf. But it denied Malouf’s request for attorney’s

fees.       The Rice trustees appeal through two issues and by cross-appeal Malouf

challenges the denial of his request for attorney’s fees.

        7
         N.M. Stat. Ann. § 46A-10-1012(A) (LexisNexis 2012) (“A person other than a
beneficiary who in good faith . . . and for value deals with a trustee, without knowledge
that the trustee is exceeding or improperly exercising the trustee’s powers is protected
from liability as if the trustee properly exercised the power”). The applicability of the
New Mexico trust code provision to the claims between these parties is not disputed on
appeal.

                                             6
                                        Analysis

Rice’s Appeal

      In their first issue, the Rice trustees argue the evidence was legally or factually

insufficient to support the jury’s finding that Malouf dealt with Sterquell for value. The

specific inquiry, to which the jury gave an affirmative answer, was, “On the occasion in

question, did Malouf deal with Sterquell for value?” The term “value” was not defined

but the jury was instructed that “the occasion in question” referred to “the October 11,

2005 transaction when Steve Sterquell, as co-trustee of the [Trust], caused $1,600,000

to be wire transferred from the [Trust] bank account to [Malouf’s] personal bank

account.”

      The trustees do not challenge on appeal the jury’s findings that Malouf dealt with

Sterquell in good faith and without knowledge of Sterquell’s misconduct.8

      Applicable Legal Standards

      In examining the legal sufficiency of the evidence supporting a jury finding, we

consider the evidence in the light most favorable to the challenged finding and indulge

every reasonable inference supporting it. City of Keller v. Wilson, 168 S.W.3d 802, 822

(Tex. 2005).    We credit favorable evidence if a reasonable fact finder could and

disregard contrary evidence unless a reasonable fact finder could not. Id. at 827. The

      8
         The charge posed to the jury the question, “On the occasion in question, did
Malouf deal with Sterquell without knowledge that Sterquell was exceeding or
improperly exercising his powers as Co-Trustee of the [Rice] Trust?” It instructed the
jury that “A person has knowledge of a fact if the person (1) has actual knowledge; (2)
has received a notice or notification of it; or (3) from all the facts and circumstances
known to the person at the time in question, has reason to know it.”

                                            7
evidence is legally sufficient if it enables a reasonable and fair-minded person to reach

the verdict under review. Id.

       In reviewing the factual sufficiency of the evidence, we first examine all the

evidence, Lofton v. Texas Brine Corp., 720 S.W.2d 804, 805 (Tex. 1986) (per curiam),

and, having considered and weighed all the evidence, set aside the verdict only if the

evidence is so weak or the finding is so against the great weight and preponderance of

the evidence that it is clearly wrong and unjust. Cain v. Bain, 709 S.W.2d 175, 176

(Tex. 1986); Garza v. Alviar, 395 S.W.2d 821, 823 (Tex. 1965). Because the trier of fact

is the sole judge of the credibility of the witnesses and the weight to be given their

testimony, Rego Co. v. Brannon, 682 S.W.2d 677, 680 (Tex.App.--Houston [1st Dist.]

1984, writ ref’d n.r.e.), we may not substitute our opinion for the trier of fact merely

because we might have reached a different conclusion. Herbert v. Herbert, 754 S.W.2d
141, 144 (Tex. 1988).

       Application

       For explication of the “for value” requirement, the parties turn to the Restatement

(Second) of Trusts. In pertinent part, § 284 of the Restatement states, “If the trustee in

breach of trust transfers trust property to . . . a person who takes for value and without

knowledge of the breach of trust . . . the latter holds the interest so transferred . . . free

of the trust, and is under no liability to the beneficiary.” It refers to such a transferee as

a “bona fide purchaser.”9 Restatement (Second) of Trusts, § 284 (1959). Generally, a

       9
         See, e.g., Endico Potatoes, Inc. v. CIT Group/Factoring, Inc., 67 F.3d 1063
(2nd Cir. 1995) (applying § 284). Similarly, the Rice trustees refer to cases applying the
comparable requirement that a holder in due course of a negotiable instrument takes

                                              8
transfer by a trustee in breach of trust in consideration of the extinguishment of a pre-

existing debt or other obligation is not a transfer for value. Restatement (Second) of

Trusts, § 304(1) (1959). There are exceptions to the general rule. One provides that a

transfer by the trustee in consideration of extinguishment of a pre-existing debt or other

obligation is for value if the trust property transferred is money. Restatement (Second)

of Trusts, § 304(2)(a) (1959). Thus, an illustration of the rule provides: “A is trustee of

$1000. In breach of trust he pays the money to B in payment of a personal debt of

$1000 owed by A to B. B is a purchaser for value.”

       The trustees contend the evidence of Sterquell’s transfer does not fit the pattern

described by § 304(2)(a).      They argue the transfer of the $1.6 million to Malouf’s

personal account cannot have been for value because the § 1031 funds belonged to the

limited partnerships, not Malouf personally. We cannot agree the contention renders

the evidence of a transfer for value insufficient.

       As noted, the jury heard evidence that AHF Development held, at the time of the

October 11 transfer, some $1.7 million in funds belonging to Malouf’s limited

partnerships. The jury heard testimony that Malouf, directly or through his sole-

shareholder corporation Malouf Interests, Inc., owned one-hundred percent of Minerva

Partners, Java Partners, and TM Development. There is no dispute that Malouf was

authorized, on behalf of the limited partnerships, to direct payment of the funds held by

AHF Development, and we perceive no dispute that Malouf further was authorized to

receive the funds on their behalf.

the instrument for value. See, e.g., Godat v. Mercantile Bank, 884 S.W.2d 1 (Mo. App.
E.D. banc 1994).

                                              9
      We also think it is clear the evidence showed Sterquell’s October 11 transfer was

made in response to Malouf’s repeated requests for payment of $1.6 million from the §

1031 funds. Indeed, the evidence would seem to lead to no other rational conclusion.

In these circumstances, we find Sterquell’s act of wiring the funds to Malouf’s personal

account, rather than to the Minerva Partners account as instructed, is a fact of no

consequence bearing on the issue of value.

      Nor can we agree the jury was required to find important the other evidence the

trustees emphasize. They point to evidence that AHF Development held no § 1031

funds for Minerva Partners at the time of the transfer; among Malouf’s limited

partnerships, only Java Partners and TM Development actually had § 1031 sales

proceeds on deposit with the qualified intermediary on October 11. Nevertheless, on

receiving the $1.6 million, Malouf applied some $653,000 of the funds to a bank loan

owed by Minerva Partners.     And he applied another $700,000 to reduce the principal

balance of a note obligation of another limited partnership entity, Margaux Water

Towers, LP. He made a personal investment of some $74,000 in another business

venture, and used the remaining funds otherwise for his personal benefit.

      A like-kind exchange of properties under § 1031 serves merely to defer

recognition of any gain or loss on the sale of the initial property and thus defer any

federal tax due.10 And, except for the one percent general partner’s interest, any federal

      10
          See Maloney v. Commissioner, Nos. 41612-84, 1716-85, 93 T.C. 89, 1989
U.S. Tax Ct. Lexis 105, at *14 (T.C. July 25, 1989) (“The purpose of section 1031 [26
U.S.C.] (and its predecessors) is to defer recognition of gain or loss on transactions in
which, although in theory the taxpayer may have realized a gain or loss, the taxpayer's
economic situation is in substance the same after, as it was before, the transaction.

                                           10
tax liability of the limited partnerships resulting from gains on sales of property would

find its way to Malouf’s individual return.11 With those realities in mind, we cannot agree

the uses to which Malouf put the funds after their receipt bear significantly on the

question whether the October 11 transfer was in satisfaction of the obligation to return

the deposited § 1031 funds.12

       The trustees further argue no evidence shows Malouf or any of the limited

partnerships received credit for the $1.6 million against the funds held by AHF

Development. Keeping in mind that Sterquell’s transfer of Rice Trust funds to Malouf

was in breach of his duties as trustee, the jury likely did not find it surprising that his

AHF Development records contain no entry reflecting the transfer. Beyond that, so far

as the evidence shows, Sterquell neither segregated the funds held as qualified

intermediary from other funds nor kept a record of the identities of the Malouf entities for

which particular amounts were received or distributed.13        The evidence shows that

Malouf, like Scott Rice, trusted Sterquell implicitly.

Stated otherwise, if the taxpayer's money continues to be invested in the same kind of
property, gain or loss should not be recognized”).
       11
          “Under the Internal Revenue Code, partnerships are not taxpayers or taxable
entities. When a partnership receives income, the partners record their share of that
income on their individual returns and are taxed on it, whether or not that income is
actually distributed to them. Partners also deduct partnership losses on their individual
returns.” Goulding v. United States, 957 F.2d 1420, 1427 (7th Cir. 1992).
       12
          For purposes of determining whether the requirements of a like-kind deferred
exchange under § 1031 have been met, a receipt of funds by an agent of the exchanger
(not including a qualified intermediary) is treated as receipt by the exchanger. See 26
CFR 1.1031(k)-1(f)(2).
       13
          The AHF Development “account detail” ledger in evidence contains entries
identifying apparent transactions involving Malouf’s entities with wording such as “Wire

                                              11
       Despite the informality of Sterquell’s record-keeping, and whether viewed in the

light most favorable to the verdict or from the entire record, we find the evidence

permitted reasonable and fair-minded jurors to believe the $1.6 million wired by

Sterquell to Malouf’s personal bank account was in partial extinguishment of the pre-

existing obligation due the Malouf entities from AHF Development. Hence, the evidence

was legally and factually sufficient to support the jury’s finding that Malouf dealt with

Sterquell for value. We overrule the trustees’ first issue.

       By their second issue, the trustees contend the trial court reversibly erred by

submitting a question apportioning the fault of Sterquell, Scott Rice, and Malouf.

Because of our disposition of their first issue, it is unnecessary to consider the second

issue. Tex. R. App. P. 47.1.

Malouf’s Cross-Appeal

       Through one issue on cross-appeal, Malouf asserts the trial court abused its

discretion by denying him an award of attorney’s fees and costs. The applicable law,

section 46A-10-1004 of the New Mexico Trust Code, provides:

       In a judicial proceeding involving the administration of a trust, the court, as
       justice and equity may require, may award costs and expenses, including
       reasonable attorney fees, to any party, to be paid by another party or from
       the trust that is the subject of the controversy.
N.M. Stat. Ann. § 46A-10-1004 (LexisNexis 2012). The statutory specification that a

trial court may award attorney’s fees and costs indicates the decision is left to the

court’s discretion. State v. Pacheco, 2008-NMCA-851, ¶ 25, 143 N.M. 851, 182 P.3d

in from Matt Malouf,” “Wire to Matt Malouf (Western Title),” and “Wire in from Chicago
Title (Matt).”

                                             12
834. And absent an abuse of discretion, an appellate court will not alter a trial court’s

award of attorney’s fees. Lenz v. Chalamidas, 113 N.M. 17, 18, 821 P.2d 355, 356

(1991) (citing Montgomery v. Karavas, 45 N.M. 287, 114 P.2d 776 (1941)). “A trial court

abuses its discretion when a ruling is clearly against the logic and effect of the facts and

circumstances, or when the ruling is contrary to the reasonable, probable, and actual

deductions that may be drawn from the facts and circumstances.” Id. (citing State v.

Soto, 2007-NMCA-77, ¶ 10, 142 N.M. 32, 162 P.3d 187 (internal quotation marks and

citations omitted). “Many considerations enter into the matter of fixing attorney fees, not

the least important of which are: the ability, standing, skill and experience of the

attorney; the nature and character of the controversy; the amount involved, the

importance of the litigation and the benefits derived therefrom.” In re Brown’s Estate, 48
N.M. 580, 586, 154 P.2d 247, 251(N.M. 1944) (quoting Elsea v. Broome Furniture

Company, Inc., 47 N.M. 356, 143 P.2d 572, 584 (1943)).

       Citing our decision in Lyco Acquisition 1984 Ltd. Partnership v. First National

Bank, 860 S.W.2d 117 (Tex.App.--Amarillo 1993, writ denied), Malouf concludes that

because his proof of attorney’s fees was unopposed the trial court “clearly abused its

discretion by denying the fee application.”      Lyco sued a bank for conversion and

violation of the Texas Trust Code.      Id. at 120.    The bank requested an award of

attorney’s fees under § 114.064 of the Trust Code. Before the trial court ruled on the

bank’s motion for summary judgment, Lyco non-suited by amended pleading its cause

of action arising under the Trust Code. Id. at 120-21. The trial court granted summary

judgment for the bank but denied its request for attorney’s fees. In addressing the

bank’s complaint of this decision, we found its request for attorney’s fees under §

                                            13
114.064 was a claim for affirmative relief and therefore not preempted by the non-suit of

the Trust Code claim. We then examined the attorney’s affidavit in light of the factors

stated in Edwin M. Jones Oil Co. v. Pend Oreille Oil & Gas Co., 794 S.W.2d 442, 450-

51 (Tex.App.--Corpus Christi 1990, writ denied).14 He described the work necessary to

defend the bank because the transactions in question occurred “many years ago.” In

reaching his opinion of a reasonable and necessary attorney’s fee, he considered “the

untimeliness of Plaintiff’s action.” We found the bank had demonstrated the trial court’s

failure to award some amount of attorney’s fees was not equitable or just. Id. at 122.

      The facts of Lyco differ notably from the present matter. In Lyco we found as a

matter of law that Lyco’s live cause of action was barred by limitations.        And the

untimeliness of the complaint necessitated significant work by the bank’s attorney.

Here, the jury found that Malouf was unjustly enriched by Sterquell’s wrongful

disposition of trust property. But it also found that Malouf dealt with Sterquell in good

faith, for value, and without knowledge of any impropriety by Sterquell. Because the

issue of attorney’s fees was determined in a post-trial proceeding, the court resolved all

disputed facts necessary to its determination. In that capacity, it was the sole judge of

the weight and credibility of the evidence. Findings of fact and conclusions of law were

not prepared.   It was the trial court’s task to determine whether justice and equity

required an award of attorney’s fees and costs to Malouf. Based on the record before

      14
          Citing A. H. Belo Corp. v. Southern Methodist University, 734 S.W.2d 720, 724
(Tex.App.--Dallas 1987, writ denied) the court stated, “Factors to be considered in
determining the reasonableness of the attorneys (sic) fees include: time and labor
involved, nature and complexities of the case, the value of the interest involved, the
extent of the responsibilities assumed by the attorney, and the benefits resulting to the
client from the attorney's services”).

                                           14
us, we are unable to say its decision was an abuse of discretion. Malouf’s sole issue on

cross-appeal is overruled.

                                      Conclusion

        Having overruled the only issue of Rice necessary for disposition of its appeal

and having overruled Malouf’s sole issue on cross-appeal, we affirm the judgment of the

trial court.

                                                James T. Campbell
                                                    Justice

                                           15