Date: 06-25-2002

Case Style: Verbon Smith and Hazel Smith v. The Baptist Foundation of Oklahoma, et al.

Case Number: 2002 OK 57

Judge: Kauger

Court: Supreme Court of Oklahoma

Plaintiff's Attorney: Patrick O'Hara, Jr. and Blake C. Parrott, Oklahoma City, Oklahoma, for Plaintiffs/Petitioners Verbon Smith and Hazel Smith

Defendant's Attorney: Jack S. Dawson and James A. Scimeca, Oklahoma City, Oklahoma, for Defendant/Respondent, The Baptist Foundation of Oklahoma

Stephen D. Beam, Weatherford, Oklahoma, for Defendant/Respondent, The Baptist General Convention of the State of Oklahoma.

Description: 1 The issues presented are: 1) whether all the plaintiffs/petitioners', Verbon and Hazel Smith (collectively, Smiths), claims predating January 1, 1995, against the defendants/respondents, Baptist Foundation of Oklahoma (Foundation/trustee) and Baptist General Convention of the State of Oklahoma (Convention), are time barred; and 2) if timely filed, whether lost insurance premiums may be recovered as consequential damages. Although we determine that claims relating to investment strategies predating January 1, 1995, are barred by the settlor's acquiescence in the trustee's actions, the existence of material questions of fact in relation to the settlor's notice on the issue of the trustee's handling of losses associated with the sale of mineral interests precludes the entrance of summary judgment on the claim. Further, the record presented will not support an award for lost insurance premiums as consequential damages.1

FACTS

2 The Foundation is an agency of the Convention. It receives, invests and manages endowment gifts distributing the income from those gifts to Baptist causes and other designated beneficiaries.2 In 1984, the Foundation contacted Verbon Smith (Verbon) about creating a charitable trust. Verbon conveyed real estate valued at $494,154.00 and mineral interests sold for $94,132.00 to the Foundation, forming the Verbon Smith Charitable Remainder Unitrust (trust) on June 19, 1984. The trust provided that Verbon receive up to eight percent of the trust's income during his lifetime. At Verbon's death, his wife, Hazel Smith (Hazel), was entitled to five percent of the income.3 Upon both the Smiths' deaths, the remainder was to be distributed to the Convention.

3 Verbon became incompetent in 1994 after suffering a stroke. Hazel filed suit on his behalf in February of 1997, seeking to have the trust declared void ab initio. In addition, Hazel asserted claims for breach of fiduciary duty, negligence, removal of the trustee and an accounting. Hazel sought no damages on her own behalf — seeking to recover only in Verbon's name. Sometime subsequent to the suit's filing, Hazel became incompetent and her granddaughter, Cheryl Kerr, was appointed as guardian ad litem. Finding that the Foundation lacked the authority to serve as a trustee when the trust was established, the trial court sustained summary judgment in favor of Verbon and ordered the trustee to return approximately $500,000.00 to the Smiths as the trust corpus. The Court of Civil Appeals reversed and remanded in Smith v. Baptist Foundation of Oklahoma (Smith I), 2000 OK CIV APP 119, 17 P.3d 466, holding that: 1) the action "arose", for venue purposes, in the county in which Verbon entered into the trust agreement; and 2) a nonprofit corporation did not lack statutory authority in 1984, when the trust was created, to serve as trustee for an inter vivos charitable trust. The Court of Civil Appeals did not address Verbon's other theories of recovery.

4 The trustee and the Convention filed motions for summary judgment on April 2, 2001, alleging that Verbon's claims were barred statutorily and by the equitable doctrine of laches. The trial court heard the matter on April 26, 2001. On November 5, 2001, it entered an order sustaining the motion as to all damages occurring before January 1, 1995. Essentially, the trial court determined that until that date, Verbon had acquiesced in the trustee's management of the trust estate. Further, the trial court found that no grounds were established for the recovery of premiums paid on certain life insurance policies purchased in conjunction with the establishment of the trust. Recognizing that barring these claims affected a substantial portion of the suit, the trial court certified the cause for immediate interlocutory appeal pursuant to 12 O.S. 2001 §952(b)(3).4

5 On January 14, 2002, we granted certiorari and ordered the preparation of the record and submission of briefs. The briefing cycle was completed with the filing of Verbon's reply brief on March 13, 2002.5 Although the notice of completion was filed on January 29, 2002, the record was not received from the trial court until March 29, 2002.

I.

6 VERBON'S KNOWLEDGE THAT POOLED INVESTMENTS WERE BEING UTILIZED BY THE TRUSTEE COUPLED WITH INFORMATION PROVIDED INDICATING THE RETURNS ON THE INVESTMENTS PRECLUDES VERBON FROM PURSUING CLAIMS DURING THE PERIOD IN WHICH VERBON, THROUGH SILENCE, ACQUIESCED IN THE INVESTMENT PROCEDURES UTILIZED.

a. Defenses to allegations of fraud or breach of trust – statute of limitations, laches and acquiescence.

7 Relying on general statements in early case law,6 Verbon's guardian asserts that Verbon's claims — arising from a fiduciary relationship — can never be affected by the expiration of a limitations period because the trust has not been terminated and there has been no repudiation.7 Similar arguments were considered and rejected in Mud Trans, Inc. v. Foster-Dickenson & Co., Inc., 1993 OK 94, 856 P.2d 282, which makes it clear that the statute of limitations begins to run on a trust beneficiary's claim when it learns it has suffered damage that might be the trustee's fault.8

8 At the time this cause was filed, actions grounded in allegations of fraud or breach of trust were governed by the two-year statute of limitations found in 12 O.S. Supp. 1996 §95(3).9 The discovery rule allows the limitation period in certain tort cases to be tolled until the fraud is discovered or until the date the defrauded party, by the exercise of ordinary diligence, might have recognized the deception.10 Even where the defendant has the responsibility of a trustee towards the plaintiff, the statute starts to run when the beneficiary learns it has suffered damage that might be the trustee's fault.11 The question of when fraud is discovered or should have been unearthed with the exercise of ordinary diligence is one of fact dependent on the surrounding circumstances, the relationship of the parties, and all other elements peculiar to the cause.12

9 Laches is an equitable defense to stale claims.13 There is no arbitrary rule for when a claim becomes stale or what delay is excusable.14 Application of the doctrine is discretionary depending on the facts and circumstances of each case as justice requires.15 As an affirmative defense, the party claiming the doctrine's benefit has the burden of proof.16 The party invoking the laches defense must show unreasonable delay coupled with knowledge of the relevant facts resulting in prejudice.17 Delay is deemed excusable if it is induced or contributed to by the adverse party.18 Furthermore, laches is not a defense to one lacking notice of a right to proceed or a cause of action19 — the elements of laches are simply not met when there is an absence of knowledge and affirmative acts to mislead.20

10 Acquiescence involves a quiet submission or compliance with acts from which assent can reasonably be inferred.21 A person may, through long acquiescence in a practice or recognition of a right, be precluded from denying the legality of the actions taken.22 Equity will not deprive a party of a remedy unless it appears the party had knowledge — one cannot acquiesce in performance of an act of which the party is ignorant.23 Nevertheless, a beneficiary of a trust estate may be estopped from asserting a claim as against a trustee if the beneficiary accedes to the trustee's actions for an extended period of time.24 Under appropriate circumstances, acquiescence will support the equitable plea of laches.25

b. Application of the defenses to facts surrounding the utilization of pooled investments.

11 Verbon's guardian contends that throughout the management of the trust, the trustee breached its fiduciary duties and negligently mismanaged the trust by engaging in self-dealing transactions, charging and collecting excessive fees, ignoring and/or neglecting the Smiths' individualized circumstances when making investment decisions and engaging in an impermissible conflict of interest between the Smiths and the Convention. Specifically, Verbon's guardian asserts that, only when suit was filed, did the Foundation provide her with information that would have alerted Verbon to the trustee's actions forming the basis of his claims. Verbon's guardian argues that material issues of fact exist as to whether Verbon had information sufficient to put him on notice that the trust monies had been invested in generic pooled investment funds26 and that the Foundation's losses on the sale of mineral interests had been charged back to the estate.

12 The trustee insists that claims regarding its investment strategies, i.e. the utilization of pooled investments, are barred by the settlor's long acquiescence in the investment procedures. We agree with this proposition. Nevertheless, we are convinced that a material fact issue exists concerning when Verbon was presented with documents which may have advised him that losses associated with the trustee's sale of mineral interests were charged back to the trust.27

13 The trust was established in 1984. The record demonstrates that as early as October 27th, 1987, Verbon was receiving quarterly activity reports from the trustee clearly denominating income as arising from pooled investments.28 It does not appear that Verbon inquired into the nature of these investments before he became incompetent due to a stroke in 1994. Although Hazel questioned the dropping income, the record does not denominate the date of the inquiry.29 The earliest that it can be established from the summary judgment record that inquiries or complaints were made about investment returns from the trust is July of 1994.30 Therefore, for a period of at least ten years — during which Verbon was competent except for a few months at the end of the time frame, no complaints were voiced about the trust's income production. For at least seven years, Verbon was receiving statements on the trust account indicating that income was being generated from the utilization of investment pools.

14 Verbon's cause of action against the trustee accrued when he had sufficient information to realize that the investment strategies utilized were not meeting his expectations.31 Parties refraining from the pursuit of inquiries plainly suggested by the facts may not benefit from a rule tolling the applicable statute of limitations.32 Therefore, we determine that Verbon's knowledge that pooled investments were being utilized by the trustee coupled with information provided indicating the returns on the investments precludes Verbon from pursuing claims during the period in which he, through silence, acquiesced in the investment procedures utilized. Any claim for damages relating to the utilization of pooled assets resulting in reduced trust income predating January 1, 1995, is barred.33

II.

15 MATERIAL ISSUES OF FACT EXIST CONCERNING WHEN VERBON WAS PROVIDED WITH A TAX RETURN WHICH MAY HAVE ALERTED HIM THAT THE TRUSTEE WAS CHARGING THE ESTATE WITH LOSSES ASSOCIATED WITH THE SALE OF MINERAL INTERESTS AND WHETHER, WHEN PROVIDED, THE RETURN WOULD HAVE ADVISED HIM OF THE NATURE OF THE TRANSACTION RESULTING IN THE LOSS, PRECLUDING SUMMARY JUDGMENT ON THESE ISSUES.

16 Title 60 O.S. 2001 §175.11 has been a part of Oklahoma's statutory law on uses and trusts since 1941.34 It provides in clear and mandatory language that no trustee shall buy trust property for itself or an affiliate.35 Further, the trust instrument itself prohibits self-dealing transactions.36 Nevertheless, the trustee's motion for summary judgment makes it clear that it engaged in a statutorily prohibited act of self-dealing in order to provide some immediate income to Verbon through the purchase of his mineral interests at $200.00 per acre for a total of $94,132.00.37 When it later sold some of the same mineral interests for $100.00 per acre, the trustee does not deny that it charged back a loss of $23, 391.47 — not to the Foundation as owner of the properties, but to the trust estate.

17 The trustee argues that any claims associated with the sale of the mineral interests are barred by the statute of limitations or by the equitable doctrine of laches. It bases its argument on the fact that a 1984 tax return revealed the transaction to Verbon. Verbon's guardian asserts that there is no evidence in the record supporting the Foundation's contention that the 1984 tax return was actually provided to Verbon when it was filed and that, even if it were, it would not have advised him of the self-dealing transaction or that losses associated with the mineral interests were being charged back to the trust estate. We agree.

18 Where a trustee mishandles the subject matter of a trust or where the actions taken by the trustee are self-concealing, a cause of action will not accrue until the trustee-instituted actions are discovered or until they could have been unearthed by the exercise of due diligence.38 The Foundation cannot rely on the statute of limitations defense absent a showing that Verbon knew of the breach of trust — self-dealing and charging back of losses — when it occurred39 or was given sufficient information that he should have discovered the injury.40 Laches is no defense to a beneficiary who is justifiably ignorant of the trustees' default or where the default has been concealed.41 The question of when a beneficiary discovers or with reasonable diligence could have discovered a breach of trust is a question of fact to be determined from the parties' relationship, the nature of the acts involved, and all other circumstances.42

19 Just as the record supports the entrance of summary judgment in favor of the trustee on the issue of the manner in which investments were handled, it militates against it on Verbon's claim for losses associated with the sale of mineral interests. The record reveals that the Foundation advised Verbon on October 18, 1984, and on November 9, 1984, that the mineral interests had been transferred from the trust to "general endowment" with the trust receiving $94,132.00, or $200.00 per acre, for the sale. Nevertheless, the record is devoid of any item specifically indicating that the trust — which Verbon legitimately could have presumed no longer even held title to the mineral estate — was being charged back a loss suffered by the Foundation when the minerals were sold to a private individual.

20 The only evidence the trustee proffers to support notice to Verbon that such a charge against the trust was being taken is a 1985 tax return which indicates that the trust suffered a capital loss of $23,391.47 on the sale of "land." Although the trustee implies that Verbon was forwarded a copy of the tax return, there is nothing in the record to indicate that the return was provided to him contemporaneously with its filing43 — there is no copy of correspondence indicating that the document was attached for mailing to Verbon and there is no other memorial of such a mailing. The only record evidence of when tax returns were received comes from the testimony of the guardian ad litem indicating that although the Foundation failed to produce some items of third-party verification and trust information from investment personnel she had requested, the tax returns were provided sometime after April of 1995 when she became involved in the cause.44 Clearly, there is a question of fact concerning when Verbon may have had notice of facts sufficient to advise him that he had been harmed by the trustee's business transactions. Furthermore, nothing on the tax return indicates that the loss is associated with the sale of a mineral estate or that the loss is actually the Foundation's loss being charged back to the trust estate.

21 We are unconvinced that the bare information appearing on the 1984 tax return would have alerted Verbon that the Foundation was charging back a loss on the sale of minerals when he had previously been informed that the minerals were sold for $94,132.00. Because material issues of fact exist concerning when Verbon was provided with a tax return which may have alerted him that the trustee was charging the estate with losses associated with the sale of mineral interests and whether, when provided, the return would have advised him of the nature of the transaction resulting in the loss, we hold that summary judgment on these issues was inappropriate.

III.

22 WHERE THE ONLY EVIDENCE THAT THE PURCHASE OF LIFE INSURANCE POLICIES WAS CONTEMPLATED FROM THE REVENUES OF THE TRUST IS A QUOTATION FROM A DEPOSITION NOT INCLUDED IN THE RECORD, LOST INSURANCE PREMIUMS MAY NOT BE RECOVERED AS CONSEQUENTIAL DAMAGES.

23 Verbon's guardian asserts that Verbon should be able to recover consequential damages in the nature of premiums paid for insurance on his life intended to guarantee his children an inheritance. Her theory is that the policies were cancelled or sold because the trust did not generate enough income to pay the premiums as a result of the trustee's breach of its fiduciary duty. The trustee contends that there is no basis in law or in fact for the award of insurance premiums as consequential damages.

24 Verbon's guardian's memorandum of law filed on April 26, 2001, contains quotations from the deposition of Judson Cook (Cook), the individual who first approached Verbon about the possibility of executing a trust benefitting the Convention. Those excepts contain testimony indicating that Verbon clearly expressed his concern that trust income should be sufficient to pay insurance premiums purchased to ensure his children an inheritance. Further, the quotation includes a statement by Cook that everyone expected the trust income to be adequate to pay the insurance premiums and to provide Verbon with income during his lifetime.45 Except for these quotations, the record is devoid of material to support the assertion that the insurance policies were purchased in conjunction with the execution of the trust document.

25 We are not free to take notice of any item not properly before the trial court.46 Evidentiary materials in the summary judgment process must be placed into the record in compliance with Rule 13, Rules for the District Court, 12 O.S. 2001, Ch. 2, App. Rule 13 requires a party opposing a motion for summary judgment to file any evidence relied upon as an attachment to the pleading in opposition.47 All deposition material to be reviewed on appeal must be shown by the record to have been tendered for the trial court's consideration.48

26 There are portions of Cook's deposition testimony attached to the trustee's motion for summary judgment and brief in support. In the attached material, Cook clearly testifies that Verbon's first intent was to care for his children.49 Additional pages of the deposition are attached to Verbon's guardian's response. However, the pages cited to in the memorandum of law indicating that Verbon communicated to the trustee that returns on investments should be sufficient to both pay insurance premiums on his life and provide for his income are missing from the record. They are not attached to the surreply brief and they are not located elsewhere in the record tendered.

27 The appellant bears the burden of presenting the appellate court with a record to support issues raised.50 Legal error may not be presumed from a silent record.51 Under the facts presented, where the only evidence that the purchase of life insurance policies was contemplated from the revenues of the trust is a quotation from a deposition not included in the record, we hold that lost insurance premiums may not be recovered as consequential damages.

* * *

Click the case caption above for the full text of the Court's opinion.

Outcome: ¶28 A trustee is a fiduciary of the highest order in whom the hope and confidence of the settlor are placed with the expectation that the trustee will exercise the obligations of the office for the exclusive benefit of those holding beneficial interests.52 Without exception, a trustee owes its beneficiaries the most abundant good faith, absolute and perfect candor, openness and honesty.53 The trustee of a charitable trust has all the same responsibilities and duties of the trustee of a private trust. These trustees are inescapably burdened with the positive responsibility of exercising prudence in trust administration and may be subject to an even higher measure of sagacity in pursuance of the integrity required by the trust relationship.54 Certainly, where a settlor places property in trust with the same entity to which religious allegiance is pledged, the settlor should have every confidence that trust matters will be handled forthrightly.

¶29 In Oklahoma, charitable trusts are subject to superintendence by the appropriate district court.55 Courts are reluctant to apply the doctrine of laches to express trusts.56 The trend across the nation in both legislation and judicial decision continues to favor increased openness and disclosure in situations like this one where the trust is irrevocable — beneficiaries are entitled not only to accounting information but also to relevant information concerning the bases upon which the trustee's discretionary judgments have been or will be made.57 The question of laches in the enforcement of a trust should not be disposed of by summary judgment where there is a genuine issue of material fact.58 Nevertheless, we determine that a settlor who is advised of the nature of investments utilized and the return on those investments may not acquiesce in procedures throughout the years and preserve a cause of action.

¶30 The Court notes that the trustee apparently engaged in self-dealing transactions prohibited both by the trust agreement and by statute.59 Although these actions tend to demonstrate that the trustee here has not met the high standards imposed upon charitable trustees generally, we express no opinion on whether Verbon may ultimately recover on claims associated with the handling of the sale of the mineral interests and determine that the record is insufficient to avoid summary judgment on the issue of the recovery of lost premiums as consequential damages.

Plaintiff's Experts: Unavailable

Defendant's Experts: Unavailable

Comments: None