Upon review, I found a critical place where I said "defendant" when I should have said "Plaintiff." Sorry.

Daily Development for Tuesday, June 17, 2003
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

TRUSTS; LIVING TRUSTS; PARTIES: Oregon case demonstrates
that care must be taken in resolving litigation dealing with property
transferred to living trusts.

Secor Investments, LLC v. Anderegg, 2003 Westlaw 2136447 (6/12/03)

This case is not significant as precedent, but it tells a tale that lawyers
dealing with property held in living trusts should read and absorb.
Defendants owned property in their individual names and entered into an
option agreement to sell the property to plaintiffs.  A few years later,
defendants transferred the ownership of the property into living trusts
with themselves as trustees and sole beneficiaries.  Thereafter,
defendants entered into a new option agreement with the trusts, altering
slightly the terms of the original agreement.  The second agreement
indicated that it superceded all prior agreements "between the parties."

Thereafter, plaintiffs executed elements of the option agreement and
acquired some of the property.  When they tried to resell it, their
purchaser indicated that portions of the property had been contaminated
with lead.  Defendants had used the property for sixteen years as a skeet
shooting range, and this apparently was the source of the lead

Plaintiffs sued defendants' living trusts in federal court, alleging myriad
theories of liability related to the presence of the lead on the property.
Ultimately, this lawsuit was settled by a payment of $75,000 and
dismissed with prejudice upon the execution of a settlement agreement
containing a covenant by plaintiff not to sue.

The covenant contained language critical to the present litigation:

     "It is hereby stipulated and agreed by the Covenantors that they
     release and forever discharge the Covenantees from any and all
     claims, causes of action, obligations, demands and/or damages, . .
     . in any way related to orarising out of the [lawsuit] and (2) in any
     way related to or arising out of the presence of lead in the soils of
     the property described in Exhibit B. . . "
     "This Covenant is executed on behalf of and for the beenfit of the
     Covenanting Parties and their respective officers, directors
     employees, agents, assigns, attorneys and all persons acting for or
     on behalf of the parties to this Covenant . . . It is expressly
     understood and agreed . . .that [this Covenant shall not] operate to
     extinguish or compromise any of the Covenantors' claims against
     persons or entities other than the Covenantees, including any
     agents, assigns, attorneys, or other persons acting by or on behalf
     of persons not specifically named as parties to this Covenant."

Shortly after this settlement, plaintiff initiated a lawsuit against
defendants as individuals and their real estate broker, again filing myriad
claims based upon the lead in the land.  When defendants raised the
settlement covenant as a defense, the plaintiffs argued that the federal
action had been against solely in their capacity as co-trustees of the living
trust, while in the instant action they were suing them individually.  They
claimed that the transaction by which they acquired the property had
been pursuant to both options, including the earlier option executed by
defendants as individuals.  Although the second option said that it
superceded all prior agreements entered into by the "parties," plaintiffs
pointed out that the "parties" to the second option were in fact different,
since defendants had acted solely as trustees of their living trust in that
option, and therefore the first option agreement had never in fact been

Plaintiffs further argued that since the brokers had represented the
defendants as individuals in connection with the first option, they were
"agents of parties not specifically named" in the settlement covenant, and
thus liable for suit also.

The trial court bought plaintiffs' argument that the settlement covenant
did not release the defendants as individuals, and dismissed summary
judgments motions based upon that theory, although it did also dismiss a
number of plaintiff's claims due to the statute of limitations.

At this point, defendants' counsel, which had represented them in the
drafting of the covenant, felt compelled to resign due to conflict of
interest, as counsel perceived that it might well be held liable for
malpractice if defendants in the end were held liable.  This necessitated a
new law firm entering the case and gearing up to represent defendants.

New counsel managed to get the trial court to rule that the new contract
in fact superceded the old contract.  So no claims could be based upon
the old contract.  That led to a holding by the trial court letting the
brokers off the hook to the extent they represented the defendants in their
capacity as trustees under the second option agreement, since the
covenant included releases of parties acting in that capacity.

Plaintiff responded by adding counts for tortious negligence, not based
upon the contracts at all, including claims for punitive damages.  In
response to a statute of limitations claim, plaintiffss noted that the
presence of the lead made the offense a "continuing tort" under Oregon
law, and thus the statute still was not running.  The trial court agreed, and
once again the case proceeded.

Ultimately, and at the eleventh hour, the new law firm introduced the
defense of "claim preclusion," formerly known as res judicata.
Although the defendants as individuals were not necessarily benefitted
by the settlement covenant, counsel argued, they nevertheless were
protected from being sued twice based upon the same factual allegations
that were involved in the federal case for legal claims that could have
been joined the earlier action.

Here, the trial court concluded that the defendants had hit upon the
correct formula, and granted summary judgment, which the appeals court
affirmed in the instant case.  The court noted that the principles of the
defense of "claim preclusion" protect not only the parties to a given
lawsuit but all other parties "in privity" with those parties.  It concluded
that defendants and their brokers fit within the definitions earlier adopted
as "parties in privity."

     "[T]here exist three general categories of parties that may be in
     privity with parties to earlier litigation: "(1) those who control an
     action though not a party to it; (2) those whose interests are
     represented by a party to the action; and (2) successors in interest
     to those having derivative claims."

The court noted that the defendant individuals fit within the second part
of the above definition.  Because the whole function of the trust was to
benefit them, their interests were parallel to the trust, and the defense of
the trust in the federal action also protected the interest of defendants as

What about the brokers (being sued for negligence)?  They had to rely on
the covenant, since they weren't parties to the original action.  The
appeals court, implicitly overruling the trial court on its determinations
as to the effect of the covenant on the defendants as well, ruled that the
whole purpose of the covenant clearly was to absolve those acting as
agents for the defendants and their trust from further claims, even though
it expressly stated that only the signatories to the covenant were released,
and the language preserving claims against agents of other parties than
the signatories to the covenant, although arguably it applied here, could
not reasonably be construed to reach the brokers, even though at one
point they acted as brokers for the defendants as individuals and
defendants did not execute the covenant in that capacity.

In the end, then, everyone got off and in fact the plaintiffss were slugged
with $250,000 in attorney's fees because there was no "objectively
reasonable basis" for the instant lawsuit.  Because the court
acknowledged that the defendants' first lawyers should have come up
with the claim preclusion argument earlier, it did not allow all of their

Comment 1:   OK, OK, it's much ado about nothing.  The good guys won
and the bad guys paid in the end.  So what's the object lesson?

The parties were fortunate in that they (or their first firm's malpractice
carrier) had the resources to litigate this issue to the appeals court.
That's not always going to be an available option.  Further, a great deal of travail
was suffered by all before the appeals court made things right.

Clearly, had the law firm drafting the settlement covenant really focused
upon the issue, they certainly would have had their clients obtain releases
both in their capacity as individuals and as trustees.  The case suggests
that the plaintiff in this case in fact was "sandbagging" and anticipated
suing the trustees as individuals, but in any event if the defendants'
lawyers had asked for individual releases, they'd have smoked out this

Comment 2:   So there's the real lesson - a party owning as trustee of a
living trust always is potentially going to be viewed, for better or worse,
as acting as an individual with respect to that property; or, as in this case,
the party may have conducted affairs with respect to the property as an
individual in the past.   Lawyers dealing on the same or opposite sides of
such individuals must always keep this potential dual identity in mind.
It's an easy thing to overlook.

Readers are encouraged to respond to or criticize this posting.

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