Daily Development for Wednesday, March 29, 2000

By: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
randolphp@umkc.edu

TRUSTS; CREDITOR'S CLAIMS: A creditor of a trustee can not reach a trust assets on the ground that the instrument transferring = such assets into trust did not name the trust beneficiary, notwithstanding = state law requiring such designation.

Legae v. Lackner, No. 98SC593 (Col. March 27, 2000)

Decedent established a revocable trust with his spouse as sole=20 beneficiary. When decedent died, his spouse, as a personal representative of the estate, deeded property in the estate to the = trust, pursuant to provisions in the will providing that the residuary of the estate "pour over" into the trust. The deed identified the trustees as = co- trustees of an identified trust, but did not identify the trust = beneficiary.

Colorado law provides as follows:

"All instruments conveying real estate, or interests therein, = in which the grantee is described as trustee, agent, conservator, executor, administrator, or attorney-in-fact, or in any other representative capacity, said instruments shall also name the beneficiary so represented and define the trust or other agreement under which the grantee is acting, or refer, by proper description to book, page, document number, or file to an instrument, order, decree, or other writing which is of public record in the county = in which the land so conveyed is located in which such matters appear; otherwise the description of a grantee in any such representative capacity in such instruments of conveyance shall be considered and held a description of the person only and shall not be notice of a trust or other representative capacity of such grantee." =A7 38-30-108=20

The trial court had found that the creditor could not reach the trust, = but the Colorado Court of Appeals reversed, holding that the literal = language of the statute made the deed into a deed of fee to the trustee in his personal capacity. On appeal to the Colorado Supreme Court, held: reversed.

The Supreme Court concluded that a "literalist" reading of the statute would be inconsistent with the intent of the legislature in drafting = it. It held that the statute did not deal with the validity of the transfer by = the trustee, but instead was a "notice" statute.

The court noted that at common law a deed to a party as trustee was sufficient to establish the trustee's capacity, and no designation of = the beneficiary was required. This created a situation in which parties dealing with the trustee could not be confident that the trustee had = fully complied with the trust requirements, thus , if the trustee transferred property to them, they would be liable to a claim against that by an undisclosed beneficiary. Parties therefore were reluctant to accept a transfer from a trustee, due to this possibility.

Many states have adopted statutes indicating that an undisclosed beneficiary cannot challenge a transfer to a third party by a trustee = on the grounds that the trustee was not in compliance with the trust = instrument.=20 The court in this case held that this was the purpose of the Colorado statute as well, even though the intent is not as explicit. =20

The court held that judgment creditors cannot show that they relied = upon the trustees ability to function as trustee in extending credit to the = trustee in his personal capacity.

Comment: This case is another example of the reluctance of many courts to recognize judgment creditors as equivalent to bona fide purchasers.=20 The cases vary in the interpretation of the precise statutory language, = but they all reflect the fact that the courts conclude that creditors do = not rely upon the record and consequently the title clearing function of notice statutes ought not to benefit them.

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1‑6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312) 988 5590 or mtabor@staff.abanet.org

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