Fall 2004 Newsletter
Two Trusts; One Big Problem
By Peter A. Dingman, Esquire and Elizabeth G. Engle, Esquire
Introduction
The matter that became Austin v. City of Alexandria, et al., seemed straightforward when it came to us, a nice referral from a friend who specializes in trusts and estates, a dispute that would be quickly cleared up by a simple Declaratory Judgment suit. An individual conveyed his property into trust. Several years later, without revoking that trust or withdrawing the property, acting only in his individual capacity, he deeded the same property to another trust.
After three years of litigation and more than $100,000.00 in legal fees (for all parties), after a loss in the trial court, and then a successful trip to Richmond, we are talking about lessons to be remembered.
The case of the two James Duncan trusts demonstrates both the necessity of meticulous drafting and the danger of assuming that "obvious" legal principles will be obvious to everyone.
As to the drafting point, often, when time is short, the client is demanding quick turnaround on work, and there is a stack of files on the desk, it is simple enough to prepare a document for the client that seems perfectly serviceable but that contains a few provisions that approach boilerplate (not that you would ever give a client a document that was anything less that perfectly-tailored to suit his or her needs.) Let's just say that modern word processing makes it efficient to start from a base document, quickly modified to suit the correct case.
Nine times out of ten, this document performs perfectly. On the tenth time, all Hell breaks loose.
The case of the two Duncan trusts shows why, despite that time crunch and the client's screaming about additional costs such as title searches, one needs to take one's time on the documents, and spend the money to do the title search. Otherwise, the client, through confusion, inadvertence, or forgetfulness (in our case, there were assertions of malicious intent, as well), might end up giving his or her property to someone unintended and/or sparking a costly legal battle.
Another interesting aspect of the case of the Duncan trusts is that it involves venerable principles of law that seemed to us to require no explanation, but that were not so clearly persuasive to the trial judge or to half the parties in litigation. Our case involved four such chestnuts: (i) a person who does not own property cannot transfer it (this one was so obvious, we were hard-pressed to find a case cite); (ii) for a settlor or beneficiary to withdraw property from a trust, he or she must follow the methods set forth in the trust instrument and trust deed; (iii) one cannot look beyond the four corners of a clear instrument to find the parties' intent; (iv) a court cannot speculate on the intent of a dead man without corroborative evidence. Simple and obvious principles of law, right? Wrong: these principles were what we argued at the Circuit Court level, where we lost. Unwilling to accept that answer, we asked for and were granted an opportunity to argue at the Virginia Supreme Court level, and got what we believe to be the appropriate result.
But, similar to the point above, where, in a hurry, you might think boilerplate will be fine and nothing will ever occur that will make trouble for your client, you cannot take for granted those obvious principles of law. You might end up in a bloody battle over whether a non-owner can transfer property. We did, and we were greatly aided by both the clarity of the language in "our" trust instrument (the one we advocated, drafted by another firm) and the care taken in conveying the Duncan Property into the trust. Our opponents were forced to argue for judicial reinterpretation of a subsequent deed and trust declaration.
The themes that tie together all the interesting elements of the dueling Duncan trusts case are that a) every word matters and b) process and procedure count. In England several centuries ago, a transaction could be thrown out because a seller or buyer did not use the "magic words" or complete the ritual (literal ritual: often involving picking up a clod of dirt and handing it to another person or walking the boundaries of a property) required to transfer that property. As the Duncan trusts case shows us, some of that Common Law remains part of our law today.
A Tale of Two Trusts
James M. Duncan, III, ("Duncan") was the owner, in his individual name, of two parcels of real property located in the City of Alexandria, 200 North Henry Street and 1115 North Cameron Street, Alexandria, Virginia 22314 (together, the "Duncan Property"). The Duncan Property consists of two lots. On one lot sits a warehouse (known commonly as the Hopkins Furniture Warehouse), and on the other is built an automobile service facility (All Tune and Lube).
On September 7, 1993, Duncan executed a Declaration of Trust creating and establishing the James M. Duncan, ill, Living Trust (the "Living Trust") naming himself as Trustee of that Living Trust. The Living Trust, in general terms, provided that, upon the death of Duncan, a lifetime income would go to William Y. Austin ("Austin"). The Living Trust then provided that, upon Austin's death, the remaining assets of the Living Trust were to pass to the James M. Duncan, Jr., Library Foundation, a foundation not yet formed, to endow projects at the James M. Duncan, Jr., Library, located in the City of Alexandria.
The Living Trust also specifically provided, in Article 3.1, that Duncan as the settlor of the trust, could withdraw property from the Living Trust as follows: "By signed instruments delivered to the Trustee during my lifetime, I may: (1) withdraw property from this trust in any amount and at any time upon giving reasonable notice in writing to the Trustee...".
To fund the Living Trust, Duncan executed, also on September 7, 1993, a Deed in Trust (the "First Trust Deed") conveying the Duncan Property from himself, as an individual, to himself, as Trustee of the Living Trust Duncan signed the First Trust Deed on two signature lines, one designated for "James M. Duncan, ill, Grantor", and one designated for "James M. Duncan, III, Trustee, Grantee".
The First Trust Deed specifically provided, on page two, that
Any revocation of the [Living] Trust Agreement by the Grantor [James M. Duncan, III] shall not be effective as to the property herein conveyed [the Duncan Property] unless he execute a deed, duly recorded, evidencing such revocation and reversion of title. The First Trust Deed was recorded among the Land Records for the City of Alexandria on June 15, 1994.
On August 3, 1999, Duncan, acting solely in his individual capacity, made and executed a Deed of Contribution (the "Unitrust Deed") conveying the Duncan Property from himself individually to himself as Trustee of the J. M. Duncan ill Charitable Remainder Unitrust. Duncan signed the Unitrust Deed on one signature line, designated for "James M. Duncan, ill". No reference was made in this document either to the Living Trust or to the Trustee of the Living Trust. Further, the Unitrust Deed noted at its head that it was "PREPARED WITHOUT BENEFIT OF A TITLE REPORT". The Unitrust Deed was then recorded among the Land Records of the City of Alexandria. Deposition testimony from the lawyer who drafted the Unitrust Deed (but not the trust to which it referred) was unsurprising. James Duncan, ill had been unwilling, despite advice of counsel, to pay to have a title search done, and, for whatever reason, did not mention to his lawyer the Living Trust.
On August 4, 1999, again, acting solely in his individual capacity and without reference to the Living Trust or its Trustee, Duncan executed a trust agreement titled "The J. M. Duncan ill Charitable Remainder Unitrust (the "Unitrust"), naming himself as Trustee of the Unitrust. A lawyer in the District of Columbia drafted the Unitrust. We do not know what, if anything, Duncan told that lawyer regarding the Living Trust.
The Unitrust provided, in general terms, that, upon the death of Duncan, the assets of that Unitrust were to be distributed to the James M. Duncan, Jr., Library, St. Paul of the Desert Episcopal Church of Palm Springs, California; and to a charitable foundation in California.
On October 20, 1999, Duncan, as Trustee of the Unitrust, executed a contract to sell the Duncan Property (the "Purchase Contract") to Nationwide CH LLC ("Nationwide").
On March 2, 2000, Duncan departed this life, and on July 19, 2000, Mr. Austin became successor Trustee.
Litigation, in the form of a Bill of Complaint for Declaratory Judgment by Trustee Austin in the Alexandria Circuit Court, arose when a title search revealed the problem of Duncan's having transferred the Duncan Property, as an individual, into a trust and then, again as an individual and not as Trustee, into a second trust.
The case required that numerous defendants be joined because of the structure of Alexandria libraries, but the final, and key, parties were Austin as Trustee versus the City of Alexandria and the contract purchaser from the Unitrust, Nationwide. Austin sought a declaration that he held the Duncan Property as Trustee of the Living Trust and that the Purchase Contract was therefore a nullity.
The litigation became more complicated when cross-bills were filed by the defendants, but after numerous motions and decrees, the case ended with a stipulation of facts (the parties stipulated to relevant documents and facts: the location of the property at issue, the execution of the deeds and trust instruments at issue, and the authenticity of those documents), and on cross-motions for summary judgment.
The motions were argued on August 24, 2001, and on August 31, 2001, the Trial Court issued a letter opinion setting out its rulings on the Motions for Summary Judgment. The Final Decree, entered on October 31, 2001, i) incorporated by reference the letter opinion; ii) denied the Motion for Summary Judgment filed by Austin; iii) granted the Cross Motions for Summary Judgment filed by the City of ...- Alexandria and Nationwide; iv) declared that the execution of the Unitrust Agreement and the Deed of Contribution by James M. Duncan, ill, individually, acted to transfer to the Unitrust the property titled in· the name of the Trustee of the Living Trust; v) declared that the purchase contract between Nationwide and the Unitrust is valid and enforceable; vi) appointed a trustee for the Unitrust; vii) declared that the Unitrust Agreement and the Deed of Confirmation are the controlling documents regarding ownership of the property; and viii) ordered the Unitrust trustee to proceed with the Purchase Contract.
Austin filed a Petition for Appeal, which the Supreme Court granted, and the case was argued on November 1, 2002. On January10, 2003, the Virginia Supreme Court reversed the Decree of the Trial Court, ordered final judgment on that reversal, and remanded the case for entry of a decree consistent with that holding.1 The Supreme Court agreed with Austin's argument that the procedures set forth in the Living Trust for withdrawal of property controlled, and that the supposed intent of Duncan could not be considered. The Supreme Court also held that, having conveyed the Duncan Property to himself as trustee, James Duncan, acting as an individual, could not effectively convey title to anyone.2
Austin was now free to dispose of the Duncan Property as he saw fit, and, we feel, the land records make sense.
The Moral of the Story
What does this convoluted set of facts and (much abbreviated) recitation of legal procedure teach anyone? What the Virginia Supreme Court's ruling affirmed, in an important way, was that the provisions of a trust matter when it comes to withdrawn property. Yes, cases exist, and they were cited at length, that stand for the principle that property can be withdrawn if all beneficiaries agree, that style should not triumph over substance; but those cases did not have facts such are ours. Here, a method was clearly and unequivocally set out in the Living Trust document, and in the Living Trust Deed, as to how the Duncan Property could be withdrawn: Duncan had to give notice in writing to the trustee of his desire to withdraw property; and Duncan, as trustee, needed to execute a deed reverting title to Duncan, as an individual.
Before the Trial Court, the City of Alexandria and Nationwide relied heavily on the case of Bottimore v. First-Merchants Bank, 170 Va. 221, 196 S.E. 593 (1938). We argued that the applicable case, whose facts were quite close to those here, was Cohn v. Central National Bank of Richmond, 191 Va. 12, 60 S.E.2d 30, (1950). The other parties asserted that Bottimore contradicted Cohn or governed this case over Cohn. Bottimore, however, was certainly good law, but the facts of that case were different from those in Duncan's case in two key aspects: 1) all beneficiaries of a trust in Bottimore moved to have that trust revoked and 2) the trust instrument in Bottimore did not specify a method by which the trust could be revoked; so, the court in Bottimore held, the trust could be revoked by all beneficiaries before the court. In Cohn, however, like Duncan's case, a specific method was delineated in the trust instrument, and that specific method could not therefore be disregarded as a mere formality, the court said. In Duncan's case, like Cohn, the trustor clearly and definitively specified a method for withdrawal of property or revocation of the trust, and so it had to be used.
Perhaps seeking to minimize the differences between Bottimore and Duncan's case, the City and Nationwide also argued that, because Duncan was both the Trustee and the beneficiary, he could "unite" his roles into one person and act that way, and that, therefore, the second deed, the Unitrust Deed, acted as the "written notice" necessary according to the Living Trust to withdraw property. This theory is, perhaps, facially appealing: why not let one person act as one person? He gave notice to himself in writing with that deed, right? Well, no, because, legally, from the moment James Duncan executed and recorded the First Trust Deed, he was not one person. Property transfer must be done properly, by the person who owns that property, and Duncan as an individual did not own that property: Duncan as Trustee of the Living Trust did. Insisting on the proper process of real property transfer is not a triumph of style over substance. The Trustee held title. Requiring the Trustee to transfer title back to the individual before that individual could execute a deed transferring the property again was the essence of substance. And, would not the "unity" argument ultimately destroy the very essence of trust law, rendering meaningless the conveyance into a trust?
Another case we cited, Air Power, Inc. v. Thompson, 244 Va. 534, 422 S.E.2d 768 (1992), supported the Cohn holding, but from a different perspective. Air Power addressed the issue of what type of property interest was held by a beneficiary of a land trust under Virginia Code Section 55-17.1 (which is what was created when James Duncan, III, executed the First Trust Deed moving his property into the Living Trust, as noted in the First Trust Deed, which references that Code Section).
Virginia Code Section 55-17.1 provides, inter alia, that "in any case under this section, where there is a recorded deed of conveyance to a trustee, the interest of the beneficiaries there under shall be deemed to be personal property..." Applying this Section, and the Air Power court held that because the land trust beneficiary's interest is a personal property right, not an interest in real estate, the beneficiary was not a necessary party to an action to enforce a mechanic's lien, reversing the trial court's decision.
The Code Section and the Air Power case make clear that, after the conveyance to a trustee an individual beneficiary no longer holds record title to the property and cannot encumber or transfer that property. Judgment liens of the individual's creditors do not automatically attach to legal title.
Duncan's execution of the Unitrust Deed in his individual capacity was therefore ineffectual. Once Duncan moved his real property interest into a trust, he individually retained no title interest in that Duncan Property, and the Trustee alone thenceforth, retained the legal right to transfer, sell, or encumber the Duncan Property. Duncan, simply put, did not own the Duncan Property, and therefore could not withdraw it from the First Trust without a deed executed by himself as Trustee. Duncan never took this required step.
Seeking to avoid the strictures and procedures set forth above, the City and Nationwide asked the trial court to look beyond the documents to Duncan's intent. Well, no, he did not comply with procedure, but why don't we simply look at what he" meant to do and carry out·his wishes? Clearly, it was argued, he wanted the Duncan Property in the Unitrust. He might have. But, once you opened the door to speculation, there were a plethora of possibilities that could have been inferred from the stipulated facts in the case: i) he might, as advocated by Nationwide and the City Parties, have intended to revoke the Living Trust (and did so by means different than specified in that Living Trust, means that were defective as a matter of law); ii) he might have forgotten the Living Trust existed, perhaps being non compos mentis; or iii) he might have had some unknown and unknowable reason to create these documents. Nationwide in fact offered, as a fourth area of speculation, the assertion that Duncan acted not to transfer title, but instead to facilitate a fraud on Nationwide.3
How can a court, years after the transfer and after the transferor's death, justifiably or accurately speculate as to his intent? Logically, a court cannot and should not. In this instance, the law followed the logic.4
And how can a court speculate at all when the documents are clear? Our situation seemed a classic one for application of the parol evidence rule: we had a crystal clear document, devoid of ambiguity (and, before you say that these facts give rise to ambiguity, remember that circumstances outside the clear document cannot be used to create ambiguity that then can be addressed via the parol evidence rule); and therefore, looking beyond that document's words to speculate regarding intent would render any deed in the future meaningless.5
And that last argument was one of the most powerful we had: what worth would the land records have if people could, years later, poke holes in deeds, twisting the recorded documents through ex post facto exploration of grantor's motivations and intent? Every angry disinherited heir would come forward with a story about Uncle Henry and how, before the gout carried him off to his own reward, he had promised to give Grayacre to his beloved niece. Title insurance would be impossible to get because how could anyone insure that Uncle Henry really deeded that property to his trust? His niece now swears he meant to give it to her.
Is that assertion too broad? Were we making up doomsday scenarios to prove our point? Here there was a subsequent document, so what danger was there in speculation? Well, in some other case there might be a document, as well: it might be a letter, a diary entry, a note, any of which could be advanced as proof of intent and as satisfying the requirement of a written notice of intent to withdraw property from a trust. Are trial courts to be asked (allowed) to speculate as to whether the subsequent intent was present? Must land title companies and examiners review every document executed, in whatever form and capacity, and then analyze whether each document evidences a subsequent intent to withdraw property? We suggested that chaos would result from a doctrine of law permitting inferences trumping the clear words of the first recorded deed to be drawn from other documents. The Supreme Court apparently agreed with us.
The words matter. In a deed, through specific words, dirt, grass, trees, and the buildings built on and among them can be transferred. But for the ancient system of transfer of dirt via paper to work, those deeds, after the fact, must remain inviolable. (Of course, we are painting with a broad brush here, and yes, correction deeds are possible, but not in a situation with the Duncan facts). In fact, our argument against the effectiveness of the Unitrust Deed and against introduction of parol evidence to ratify an ineffective transfer is proven by the fact that the entire fiasco could have been avoided had the Unitrust Deed been prepared with the benefit of a title report, and, if to transfer to the Unitrust had indeed been his intent, James Duncan, as trustee, had conveyed the Duncan Property out of the Living Trust first.
But no search was done, the second, ineffective, deed was executed, and years of litigation were required to clean up title to the Duncan Property. For some reason, clients often balk at expenses such as $150 or $200 for full title, when the result might be $l00,000 in legal fees. Be strong. Convince your client to spend the money up front. As much fun as a case like this could be for the lawyers (and it was for us), your clients might think that spending the minimal amount up front to avoid cases like this is a lot more fun for them.6
1 William Y. Austin, Trustee of the James M. Duncan, III, Living Trust v. City of Alexandria, et al., 265 Va. 89, 574 S.E.2d 289 (2003) (Opinion available at http://www.courts.state.va.us/opin.htm)
2 The opinion reads: "the legal and equitable title of the property remained with Duncan as trustee of the Living Trust until his death. Accordingly, we further hold that the 1999 deed purporting to convey the property to the Unitrust was ineffective because Duncan did not make the conveyance as trustee of the Living Trust and he had no legal title in the property to convey in his individual capacity." Opinion, page 12.
3 Nationwide pled claims for constructive and actual fraud at the trial level.
4 See, Irby v. Roberts, 256 Va. 324, 504 S.E.2d 841 (1998); Langman v. Alumni Association of the University of Virginia, 247 Va. 491, 442 S.E.2d 669 (1994); Shirley v. Shirley, 259 Va. 513, 525 S.E.2d 274 (2000); Fitzgerald v. Fitzgerald, 194 Va. 925, 76 S.E.2d 204 (1953).
5 Id.
6 A postscript: the Duncan Property has been sold to the original contract purchaser and is scheduled to be condos within a few years.
Copyright © 2003. The Fee Simple and Peter A. Dingman and Elizabeth G. Engle. All rights reserved. Reprinted with pennission. This material is taken from volume 23, number 2 of The Fee Simple, pp. 137 (May 2003). The Fee Simple is published by the Real Property Section of the Virginia State Bar and is available for purchase from the Virginia State Bar, Eighth & Main Building, 707 East Main St., Suite 1500, Richmond, VA 23219-(804) 775-0500, Intemet http://www.vsb.org
.PETER A. DINGMAN is a principal in the Alexandria lawfirm ofDingman Labowitz, P. C. where he primarily focuses on transactional real estate law. As he. also has extensive courtroom experience, when the needarises, he litigates in real-estate related cases. Mr. Dingman represents developers, land owners, banks and other fiduciaries in a variety of real estate transactions. In lean economic times, he conducts foreclosures and also represents property owners in preventing foreclosures and loan workouts. Dingman received his B.A. from Alfred University in 1971 and his J.D. from George Washington University Law Center in 1974. He is admitted to practice law in Virginia, Maryland, and District ofColumbia, is a member ofthe Alexandria and American Bar Associations, the Virginia State Bar and the Virginia Bar Association, and is a membe.r of the Virginia State Bar Disciplinary Board. Mr. Dingman is a Co-Author of "Boundary Law in Virginia," National Business Institute, 1998; "Commercial Real Estate Transactions in Virginia," National Business Institute, 1996; "Virginia Foreclosure and Repossession," National Business Institute, Inc., 1996; "Current Issues in Commercial Real Estate Leases in Virginia, "National Business Institute, 1994; and "Advanced Real Estate Law in Virginia," National Business Institute. Mr. Dingman frequently lectures at continuing legal education seminars on real-estate-related topics. He is a member ofthe Virginia State Bar Disciplinary Board.
ELIZABETH (LILY) G. ENGLE is a principal in the Alexandria lawfirm ofChamowitz, Chamowitz &Engle, P.C., and was formerly an associate with Dingman Labowitz, P. C. She represents individuals andentities in real estate transactional work, such as preparation of contracts and litigation related to those documents. Ms. Englefurthe rfrequently both creates entity structuresfor small businesses and continues the representation after creation by providing business-related documents and advising those businesses on an ongoing basis. Ms. Engle also has broad litigation experience in both trial and appellate courts, including partition suits and other real estate litigation, and, like Mr. Dingman, conducts and preventsforeclosures. Ms. Engle received her B.A. from Swarthmore College in 1993 and her J.D. from the University of Virginia School of Law in 1996. She is admitted to practice law in Virginia, Maryland, and District ofColumbia and is a member ofthe Alexandria and American Bar Associations. She is a Co-Author of "Boundary Law in Virginia, "National Business Institute, 1998, and has presented seminars on partition suits and on how to conduct and avoidforeclosures.