Opinion
NO. 2011-CA-001250-MR
02-22-2013
MARTHA RENDALL; PHYLLIS HUFF AND HARMON HAYS APPELLANTS v. ELSIE BLACK; CLIFFORD R. BARKER; RONALD BARKER; CLAYTON ALLEN; NORMAN D. BARKER; J.T. BARKER; DAVID N. BARKER; NANCY B. HUTTO; NAOMI B. WOODWARD; AND ENTERPRISE MINING COMPANY, LLC. APPELLEES
BRIEFS FOR APPELLANTS: John P. Cornett Lexington, Kentucky BRIEF FOR APPELLEES: Frank C. Medaris, Jr. Hazard, Kentucky
NOT TO BE PUBLISHED
APPEAL FROM KNOTT CIRCUIT COURT
HONORABLE KIM C. CHILDERS, JUDGE
ACTION NO. 10-CI-00283
OPINION
REVERSING AND REMANDING
BEFORE: ACREE, CHIEF JUDGE; CLAYTON AND DIXON, JUDGES. ACREE, CHIEF JUDGE: The appellants contend the Knott Circuit Court committed reversible error by declaring a 1994 deed void ab initio based upon the language of a trust agreement, and in ruling a decedent and beneficiary of the trust had failed to properly execute her special power of appointment. Because we find the deed was valid, we reverse without the need to address the latter issue.
I. Facts and procedure
J.D. Hays and his wife, Martha, acquired a tract of land in Knott County, Kentucky, in 1942 (the Knott property). When J.D. died intestate in the 1960s, Martha received one-half of his fifty percent interest in the Knott property, with the remaining one-half of J.D.'s half interest descending equally among the couple's children. The Knott property was apparently productive, as it was the subject of a number of leases, including mineral, oil and gas, and timber leases.
In 1986, Martha placed certain of her property in trust, including her seventy-five percent interest in the Knott property. The purpose of the trust was to provide for Martha and to manage her assets. It was also designed as an estate planning tool, for upon Martha's death, the trustees would create separate, individual trusts for the benefit of each of her surviving children.
Martha died in 1991 and the separate, individual trusts were created. Martha's trust agreement granted the trustees even broader authority to administer the survivor trusts than it granted relative to the original trust.
With regard to the distribution of the trust's net income, Martha "intended to grant a liberal degree of fiduciary discretion to the Trustees to make income and corpus available to the beneficiaries for reasonable purposes, it not being intended to grant any beneficiary a power to withdraw or appoint assets." (Martha Hays Irrevocable Trust Agreement, Art. II.B.(2)(a)).
More importantly, Martha specifically granted the trustees all but total authority to alienate the Knott property that comprised the bulk of the trust corpus.
There was an exception, inapplicable here, that the trustees could not "sell, encumber nor transfer any of the surface real property contained in the trust during [Martha's] lifetime other than to provide for the care and welfare of Martha Hays, and then only after first having exhausted all other available trust resources." (Trust Agreement, Art. VI.A.).
With regard to both real and personal property, . . . the trustees may . . . sell, . . . transfer and convey in such manner and on such terms without limit as to time as they may deem advisable and generally to deal with the property of the trust created by this Agreement to the same extent and with the same powers that any individual would have in respect to his own property . . . .(Trust Agreement, Art. VI. A.; see also Art. VI. C.). Two other provisions were designed to protect purchasers of trust property from claims that the trustee lacked authority to sell it.
[N]o purchaser . . . shall be held liable to see to the propriety of the transaction nor to the application of the proceeds[.](Id.; Trust Agreement, Art. VII. E.).
. . . .
No purchaser or other person dealing with any Trustee or Trustees purported to act under any power or authority granted [by the Trust Agreement] need be concerned to inquire into the existence of facts upon which the purported power or authority depends or into the question whether the purported power or authority still exists.
The survivor trusts were to continue until the death of the respective primary beneficiaries, i.e., Martha's surviving children. The trust further stated that, upon the death of each of Martha's children, "his or her separate trust shall end and the remaining balance thereof . . . shall be distributed in fee simple, per stirpes and free of trust to the then living issue of" that deceased child. However, there was an exception carved out for one of Martha's children - Kathlyn Riddle.
For reasons not relevant to our analysis, the trust document called for Kathlyn's interest in her survivor trust, upon her death, to be "distributed in fee simple, per stirpes, and free of trust to [Martha's, not Kathlyn's,] then[-]living issue[.]" That is, the corpus of Kathlyn's survivor trust would not pass entirely to her only child, Daniel, as would have been the case if the trust provision that applied to Kathlyn's siblings also applied to her. Instead, her survivor trust assets would be divided equally among Daniel and Martha's other issue.
"Issue" is not limited to children, but also includes the children of one's children, and so forth. See Combs v. First Sec. Nat. Bank & Trust Co., 431 S.W.2d 719, 720 (Ky. 1968)("Combs left as issue four grandchildren . . . .").
However, Martha did grant Kathlyn a special power of appointment which, if exercised, would allow her to distribute her survivor trust assets "to or for the benefit of such one or more of [Martha's] issue [including Daniel only] . . . as she [Kathlyn] may desire . . . ." Kathlyn could only exercise this power by specific reference in her will and, just as with her siblings' survivor trusts, the distribution would not take place until her death. Properly exercised then, the special power of appointment allowed Kathlyn to direct distribution of the entirety of her survivor trust assets to her only son, Dan.
As it turns out, when Kathlyn executed her will in April of 1992, she did not exercise her power of appointment, nor did she mention her status as a trust beneficiary or the property held in trust for her. Kathlyn died soon thereafter.
On January 26, 1994, after Kathlyn died, Johnny Cornett, successor trustee of the Martha Hays Trust, executed a deed as grantor conveying the Knott property Martha previously owned and conveyed to her trust after J.D.'s death, to Martha's surviving children and to Kathlyn's estate as grantees. The conveyance was "for and in consideration of the sum of One Dollar ($1.00)[.]"
Once the deed was executed and Kathlyn's estate was administered and closed, Kathlyn's only son, Daniel, believed he owned a 13.839% interest in the Knott property. Of that total, he had inherited the 3.125% that Kathlyn had inherited directly from her father by intestacy. However, he also believed he inherited 10.714% of the Knott property from his mother's estate which had acquired it from the trust pursuant to the 1994 deed. Whatever property Daniel inherited, it came to him by means of residuary clause of Kathlyn's will. Daniel's interest was eventually acquired by Harmon Hays, Martha Rendall, and Phyllis Huff, the appellants. The appellants brought this action to quiet title to the respective interests they believed they had acquired.
This represents one-seventh of Martha's 75% interest, which the deed conveyed in equal shares to Martha's six surviving children and the Estate of Kathlyn Riddle.
The parties' briefs have not provided us a history of the transfers of property which occurred between Daniel's purported acquisition following the 1994 deed and acquisition by the eventual appellants, and our review of the record has not revealed that history. The chain of title has not been disputed, however.
The appellees protested. They viewed the 1994 deed as a distribution of the trust assets to the beneficiaries upon the terms of the trust agreement. They argued before the circuit court that the deed the trustee executed should have distributed Kathlyn's survivor trust assets in equal shares to all of Martha's then living issue rather than to her estate. Specifically, they argued: (1) the trust did not permit the trustees to distribute the corpus of the trust to the estate of a former beneficiary, now deceased; and (2) the residuary clause of Kathlyn's will did not comport with the requirements of the special power of appointment granted her in the trust instrument, and so the interest she had in the trust should have been split among her siblings, and could not have been inherited by Daniel.
The defendants were the six living grantees of the 1994 deed or their heirs. Enterprise Mining Company, LLC, a lessee of the subject property, was also named a defendant and is a party to this appeal.
The circuit court agreed with the appellees and entered judgment in their favor. This appeal followed.
It is undisputed that Daniel inherited the 3.125% interest in the property which Kathlyn inherited from her father, and so our discussion does not concern the 3.125% interest which Daniel inherited from his mother, which she inherited directly from her father.
II. Standard of review
Because we believe the dispute can be resolved solely by analysis of the deed's validity, we need not address whether Kathlyn properly executed her power of appointment.
The standards which govern our review of a circuit court's interpretation of a deed have previously been stated as follows.
[T]he interpretation of a deed is a matter of law and, for that reason ... our review of this case is de novo. In interpreting a deed, we look to the intentions of the parties, gathered from the four corners of the instrument, giving common meaning and understanding to the words used. We will not substitute what grantor may have intended to say for what was said in the deed itself. The rule is also well settled that the deed will be construed most strongly against the grantor and in favor of the grantee if it admits of two constructions.Smith v. Vest, 265 S.W.3d 246, 249 (Ky. App. 2007) (citations and quotation marks omitted).
III. Discussion
"The deed in question is a valid deed if it contains the fundamental elements necessary to a valid and enforceable deed, which are: (1) a grantor and grantee; (2) delivery and acceptance; (3) a divesting of title by grantor and a vesting of title in the grantee." Id. at 250 (citing Haynes v. Barker, 239 S.W.2d 996, 997 (Ky. 1951)). Based on these elements, the deed before us is a valid deed.
We first consider who the grantor is. The deed plainly identifies the grantor as trustee Johnny Cornett. The appellees do not deny that Cornett was the successor trustee, nor do they challenge the principle that, as a requisite to creating the trust, title to the subject property was vested in the trustee. Strode v. Spoden, 284 S.W.2d 663, 665 (Ky. 1955)("In order to create a trust, legal title to the res must be transferred to the trustee."). The grantor was the trustee of Martha's trust.
One of Martha's children, Elsie Black, was also identified as a grantor, in two capacities - as a co-trustee and as the executrix of Martha's estate. However, by the terms of the trust, Elsie's service as trustee ended upon Martha's death making her inclusion in that capacity superfluous. Her inclusion as a grantor in the capacity as executrix was also superfluous because the real property passed to Martha's heirs through an inter vivos trust; the property was never a part of her estate. These superfluities, however, do not affect the validity of the deed.
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There is even less difficulty discerning the identity of the grantees, plainly listed on the deed as Elsie Black, Madeline H. Hall, Wanda H. Barker, Clella H. Barker, Nedra H. Judy, Harmon N. Hays, and the Estate of Kathlyn H. Riddle. There has been no allegation that any of these grantees were nonexistent at the time of the conveyance.
Delivery and acceptance, the second element, is met by proof that the deed was recorded. Smith¸265 S.W.2d at 251. Attached to the deed is a signed, witnessed document verifying that the Knott County Clerk recorded the deed on February 3, 1994. Delivery and acceptance is indisputably present here.
The third and final element, the divesting of title by the grantor and vesting of the same title in the grantee, is achieved by delivery of the deed. Id. And so, proof that the deed was recorded is also proof of this third element of a valid deed. The fact that only nominal consideration was reflected in the deed is of no consequence despite the appellees' protestations. Id.
This would end the analysis and entitle appellants to enforce this valid deed, except for the appellees' arguments for affirming the judgment, beginning with the argument that the trustee lacked authority to sell the property. Generally, "[e]ven where the trustee lacks such authority, his or her conveyance of trust property operates to vest legal title in the grantee . . . ." 76 Am. Jur. 2d Trusts § 500 (2012). There are exceptions to this general rule. However, we need not consider those exceptions because we find that the trustee, in fact, did have the authority to sell this property to these grantees.
Appellees' specific argument is that the trustee could not distribute trust property to Kathlyn's estate, and so the portion of the deed which purported to do so must be void. We here note that there is more than a technical distinction between the trustee's authority to distribute trust income, particularly to non-beneficiaries, and his authority to alienate property. In fact, we agree that the trustee was not authorized to distribute any of this trust's income to the estate of a deceased former beneficiary, and we agree that the estate of a decedent could not be a beneficiary of this trust. However, it cannot be questioned that the trustee did have the power and authority to sell or otherwise dispose of the property which constituted trust corpus.
A trustee's power derives either from the trust instrument or from statute. Kentucky Revised Statutes (KRS) 386.805; see also 4A Ky.Prac. Methods of Practice §26:32, Fiduciary duties (2011). Although this trust instrument prohibited the sale of the subject real property during Martha's lifetime (unless it became necessary to provide for Martha's care and welfare), no such prohibition applied after Martha's death. As indicated above, the trustee's authority included the power to "sell . . . any trust assets, at public or private sale, with or without security, in such manner, at such time or times, for such purposes, for such prices and upon such terms, credits[,] and conditions as it [trustee] may deem advisable[.]" (Trust Agreement, Art. VI. C.). It is clear that this trust authorized its trustee to convey the property to these, or any, grantees.
The appellees next contend that even if we conclude the trustee was authorized to execute the deed with respect to Kathlyn's estate, we should apply the rule articulated in Mobile Companies, Inc. v. American States Ins. Co. - the trust pursuit rule. 823 S.W.2d 934 (Ky. App. 1991). That rule provides that "equity . . . will follow property wrongfully converted by a fiduciary and compel restitution to the beneficiary regardless of its present form." Id. at 936.
The trust pursuit rule does not apply here because there has been no allegation the trustee converted trust property. Indeed, there is no evidence in the record to support such a claim. "[C]onversion is the wrongful exercise of dominion and control over property of another[.]" State Auto. Mut. Ins. Co. v. Chrysler Credit Corp., 792 S.W.2d 626, 627 (Ky. App. 1990) (citing Illinois Central R. Co. v. Fontaine, 217 Ky. 211, 289 S.W. 263 (1926)). Here, the trustee simply and lawfully exercised the authority granted him by the trust document to sell property entrusted to his care. Furthermore, "[t]he general rule is that an action for conversion lies only with respect to personal property, and that real estate is not subject to conversion." 18 AmJur.2d Conversion § 19 (1985). If a claim of conversion had been asserted, it could not succeed because the property in question is real property; in turn, because the trust pursuit rule applies only to property that has been converted, the rule does not apply here.
Finally, the appellees argue that this deed was merely an artifice or vehicle used by the trustee to terminate the survivor trusts and distribute their separate corpuses. We find that argument unpersuasive for the following reasons.
We are prohibited from looking beyond the four corners of a valid deed to ascertain why the transaction occurred, unless the deed itself is ambiguous on its face. Smith v. Vest, 265 S.W.3d at 249. It follows that we cannot look to extrinsic evidence, such as a trust document, to read an ambiguity into an otherwise unambiguous deed. This deed is unambiguous.
On its face, this deed evinces a simple sale of property, albeit for nominal consideration rather than fair market value, and albeit to certain of Martha's issue and to Kathlyn's estate rather than to an unrelated third party. Nothing in this deed indicates it was intended to distribute assets as part of a plan to terminate trusts. If so, what happened to the consideration paid for the property? The fact is that such consideration, as modest as it was, became part of the corpuses of the several trusts to be administered by the trustee along with any other trust assets that remained. If the assets of the survivor trusts (including the consideration paid for this property) have been distributed and the trusts terminated, such distributions and terminations must have occurred subsequent to the exchange of the real property for cash.
Furthermore, Martha's trust agreement says: "Upon the death of a primary beneficiary [i.e., Martha's children, excepting Kathlyn,] his or her separate trust shall end and the remaining balance . . . be distributed" to that child's issue. Martha clearly intended each individual survivor trust to exist until after the death of her child for whom it was created, and also to distribute the trust corpus after that child's death directly to her grandchildren who were the issue of such deceased child, not to her child prior to death. (Trust Agreement, Art. II. B. (3)(d)). The appellees who are Martha's children, obviously, were still alive when the deed was executed. Their interpretation, therefore, is contrary to the trust agreement. We find no support in these circumstances for appellees' argument that the deed was a vehicle to terminate the trusts and distribute the assets to them.
IV. Conclusion
The circuit court erroneously found the portion of the 1994 deed which conveyed an interest in real property to the estate of Kathlyn Riddle was void. The deed in question meets all the requirements of a valid deed and is unambiguous. We find no reason for failing to enforce it. Therefore, we reverse the Knott Circuit Court's June 13, 2011 Judgment and remand for further proceedings consistent with this opinion, with instructions that the circuit court enter an order declaring that the deed is valid, thereby vesting in the appellants, cumulatively, ownership of 10.714% of the property described in the deed. Furthermore, the circuit court shall enter an appropriate order, consistent with this opinion, distributing to the parties the royalties paid into the circuit court by Enterprise Mining Company, LLC.
ALL CONCUR. BRIEFS FOR APPELLANTS: John P. Cornett
Lexington, Kentucky
BRIEF FOR APPELLEES: Frank C. Medaris, Jr.
Hazard, Kentucky