2007-692, CHARLES H. SMITH v. LILLIAN V. DONAHUE TRUST

The respondent, the Lillian V. Donahue Trust (Trust),

orally), for the respondent. Krasner Law Office, of Farmington (Emmanuel Krasner on the brief and

for the petitioner. to press. Errors may be reported by E-mail at the following address: Sager Law, P.L.L.C., of Ossipee (Richard D. Sager on the brief and orally),

editorial errors in order that corrections may be made before the opinion goes No. 2007-692 Hampshire, One Charles Doe Drive, Concord, New Hampshire 03301, of any Carroll Readers are requested to notify the Reporter, Supreme Court of New ___________________________

THE SUPREME COURT OF NEW HAMPSHIRE

page is: http://www.courts.state.nh.us/supreme. a.m. on the morning of their release. The direct address of the court's home reporter@courts.state.nh.us. Opinions are available on the Internet by 9:00

well as formal revision before publication in the New Hampshire Reports. NOTICE: This opinion is subject to motions for rehearing under Rule 22 as vested in the Trustee”; and (8) “borrow money to be repaid from Trust assets.”

p. 2 beyond the term of the Trust, in connection with the exercise of any power “encumber, mortgage, or pledge a Trust asset for a term within or extending change the character of, or abandon a Trust asset or any interest therein”; (7) deemed necessary for her support and maintenance. the property was not yet subdivided, it would be subdivided upon request. The approximately 550 feet of lake frontage. The agreement provided that although

public or private sale”; (6) “manage, develop, improve, exchange, partition, permitted to use as much of the principal as they, in their sole discretion, from the trust property was to be paid to her, and the successor trustees were she turned twenty-five. During Lillian’s lifetime, however, all of the net income sell him a house located on five acres of the Wakefield land held in trust, with percent was to be held in trust for his daughter and distributed to her when On June 30, 1996, Donahue entered into an agreement with Smith to

See RSA 564-A:3 (1974) (amended 1996, 1998).

conveyance thereof.

Trust funds in a bank”; (5) “acquire or dispose of an asset, for cash or credit, at interest in a Trust asset”; (3) “invest and reinvest Trust assets”; (4) “deposit Trustee, disposition of the assets should be made”; (2) “acquire an undivided (1) “collect, hold, and retain Trust assets . . . until, in the judgment of the terminate as to the portion distributed to him. The remaining twenty-five The trust document gave “any successor Trustee” the power to, inter alia: any accumulated net income” was to be paid to Donahue, and the Trust would seventy-five percent of the remaining “principal, real, personal or mixed and pertinent part: See RSA 564-A:7, II-III (Supp. 1994) (amended 1995). time, the Trust was further amended to require that, upon Lillian’s death,

application of any Trust asset paid to the Trustees for a said power or are properly exercising said power or to see to the third party shall be bound to inquire whether the trustees have improvements thereon held in said Trust and no purchaser or Declaration of Trust to convey any interest in real estate and DONAHUE TRUST . . . have full and absolute power in said The undersigned Trustees as Trustees under the LILLIAN V.

trustee certificate at the Carroll County Registry of Deeds, which stated, in E. Runyon, as a successor trustee to serve with her son as co-trustee. At that In September 1993, Donahue and Runyon, as successor trustees, filed a

In June 1993, Lillian resigned as trustee and named her attorney, Elmer

Horn’s Pond in Wakefield. terminate. The property in trust included approximately 200 acres of land on court ruled that Smith was entitled to be reimbursed for his payments. p. 3 subdivide Smith’s parcel from the larger parcel. If this was impossible, the the Trust to deed the disputed property to him provided that it was possible to $100,000 purchase price, however, the court ordered him to do so, and ordered

applicable law. petition for specific performance. Because Smith had not yet paid the entire supports its findings, and then whether the court’s decision is consonant with

Id.

Impliedly finding that it was equitable to do so, the court granted Smith’s is to determine whether the evidence presented to the trial court reasonably allonge ratified the 1996 agreement and made it binding upon the Trust. well as the application of law to fact, independently for error. Id. Our inquiry Runyon, had not authorized it. The court found, however, that the 2000 Servs. v. Marino, 155 N.H. 709, 717 (2007). We review legal conclusions, as evidentiary support or are erroneous as a matter of law. N.H. Dep’t of Envtl. We will not disturb the findings of the trial court unless they lack

Donahue and Smith was invalid because Donahue’s co-trustee at the time, After a bench trial, the trial court ruled that the 1996 agreement between

place. Instead, he had placed the entire Wakefield lot for sale for $700,000. subdivided the Wakefield land as requested so that the conveyance could take $70,000, Donahue had not conveyed any property to him, nor had he alleging, among other things, that although he had already paid Donahue In August 2002, Smith brought this petition for specific performance,

and once as “Trustee.” Smith was the only other signator. property was $50,000. Donahue signed the allonge twice: once “personally,” were the only signatories. the purchase price in installments. The purchase price for the additional held in trust. Nor did it identify Donahue as trustee. Donahue and Smith Like the original agreement, the allonge provided that Smith would pay paid the final installment. The agreement did not identify the property as being trust, with 200 feet of lake frontage. sell Smith an additional approximately three acres of the Wakefield land held in trustee of the Trust. Pursuant to the allonge, Donahue, as trustee, agreed to allonge, unlike the original purchase agreement, identified Donahue as the which they termed an “allonge” to their original purchase agreement. The September 20, 2000, Donahue and Smith entered into another agreement, Runyon resigned as trustee on June 19, 2000. Three months later, on

installments, and that Donahue would hold the deed in escrow until Smith agreement also provided that Smith would pay the $50,000 purchase price in the Uniform Trustees’ Powers Act (UTPA).

the third party possessed actual knowledge that the trustee was exceeding or common law, the UTPA protected a third party dealing with a trustee unless damages for breach of trust. See Laws 1969, 312:1. Unlike the New Hampshire departed from the common law in 1969 when it adopted

Rev. 971, 977 n. p. 4 49 (2005); Restatement (Second) of Trusts, supra § 297. for Participating in a Breach of Trust: An Economic Analysis, 35 Seton Hall L. Wendel, The Evolution of the Law of Trustee’s Powers and Third Party Liability was charged with knowledge of the proper construction of the trust terms. See

transactions at the time required actual knowledge. have known that he was dealing with a trustee, had a duty to inquire into contract with a third party, the New Hampshire statute governing such Trusts, supra § 321 (1959). At common law, a third party, who knew or should and Trustees § 901, at 30 p. 4 4 (2d ed. rev. 1995); see also Restatement (Second) of

1970). Such a third party could also be liable to the trust beneficiaries for breach of trust suffices to void a contract, the Trust relies upon the Services Automobile Association, p. 4 459 S.W.2d 930, 934-35 (Tex. Ct. Civ. App. void. Restatement (Second) of Trusts, supra § 288; see Steves v. United to a person who took “with notice of the breach of trust,” the conveyance was At common law, if a trustee in breach of trust transferred trust property

(repealed 200 p. 4 4).

common law, constructive knowledge of a trustee’s breach of trust could void a deprives him of the remedy of specific performance. Restatement (Second) of Trusts is a compilation of the common law. While at knowledge of the first breach and/or his actual knowledge of the second Restatement (Second) of Trusts § 288 (1959). This reliance is misplaced. The

To support its assertion that constructive knowledge of Donahue’s

that constructive knowledge is legally insufficient. breach of trust by Donahue suffices to void the contracts at issue. We hold We first address whether Smith’s constructive knowledge of any alleged

from Smith for his own purposes. The Trust argues that Smith’s constructive trustee’s authorization or consent, and second, by using the money he received a breach of trust first, by entering into the 1996 agreement without his coand not to the benefit of the Trust. The Trust alleges that Donahue committed Donahue acted outside of the scope of his authority, without authorization, and Smith are void because Smith had actual or constructive knowledge that On appeal, the Trust first argues that the contracts between Donahue

p. 5 person is not bound to assure the proper application of trust

and properly exercised the powers he purports to exercise. A third protected in dealing with the trustee as if the trustee possessed exceeding his powers or improperly exercising them, is fully 5 and a third person, without actual knowledge that the trustee is

constructive knowledge of Donahue’s breach of trust was sufficient to void the and, therefore, governs. Thus, to the extent that the Trust argues that Smith’s RSA 564-A:7, I, was in effect during the relevant times in this appeal

them. the trustee has power to act or is properly exercising the power, the trustee [was] exceeding his powers or improperly exercising without inquiry. The third p. 5 person is not bound to inquire whether limited to the trustee and a third party with actual knowledge that trust powers and their exercise by the trustee may be assumed deprive a person of this protection. The remedy for breach [was] assisting a trustee in the conduct of a transaction, the existence of With respect to a third person dealing with a trustee or

564-A:7, I, which provided: The New Hampshire statute expressing this part of the UTPA was RSA

Id. (quotation and ellipsis omitted). minimize the risk of a breach.” Wendel, beneficiaries, thereby creating an incentive for them to take precautions to

which, if pursued, would show that limitations exist[ed] [did] not mere suspicion that limitations exist[ed] or knowledge of facts

the UTPA: who dealt with a trustee.” Id. at 987. According to the official reporter, under the UTPA acknowledged the broad protection the UTPA accorded third parties

risk of harm associated with a breach of trust to the settlor and trust “The actual knowledge standard of liability allocate[d] virtually all of the

735 (Ct. App. 1992). knowledge of a breach.” Adler v. Manor Healthcare Corp., 9 Cal. Rptr. 2d 732, “such purchasers protected bona fide status except where they [had] actual on constructive or inquiry notice of possible breaches of trust,” the UTPA gave at 987. While the common law “placed third party purchasers of trust property transaction, that the proposed transaction constitute[d] a breach of trust,” id. liability unless the third party ha[d] actual knowledge, at the time of the granted “a third party who deal[t] with a trustee complete protection from The UTPA “abolish[ed]” the “common law broad duty of inquiry,” id. at 973, and improperly exercising the trustee’s powers. See Wendel, supra at 973, 987. purposes. p. 6 told him of the purpose for the money. Specifically, Smith testified that Montana, among other things. Smith acknowledged that Donahue sometimes notations showed that Donahue asked for money to travel to New Zealand and

any, he gave to the Trust, and how much money he spent for his own Donahue allocated any of his own resources to the Trust, how much money, if benefit of Donahue’s mother, Lillian. Smith did not know, however, whether indicating the purpose for which Donahue said he needed money. These that he needed money. For some of these transactions, Mason kept notations schedules in the agreements, but were made whenever Donahue told Smith bookkeeper, Judith Mason. The payments were not made according to the

2000 allonge, he also knew that the property at issue was held in trust for the

the 1996 agreement and 2000 allonge through his then-girlfriend and According to Smith and other witnesses, he paid the money due under

Donahue’s co-trustee. fact, he did not learn until the 2000 allonge that Runyon had previously been

that the property at issue was owned by the Trust. When he entered into the Trust. Smith testified that he knew in 1996 that Donahue was a trustee and a finding that Smith knew that, by so doing, Donahue violated the terms of the Donahue used some of Smith’s money for his own purposes, it does not compel Moreover, while the evidence supports a finding that Smith knew that

this, he clarified that this was only his assumption. Smith testified that, in was a co-trustee. Although Donahue testified that he believed that Smith knew authorization, there is scant evidence that Smith even knew then that Runyon trust by entering into the 1996 agreement without his co-trustee’s contracts with Donahue. With respect to whether Smith actually knew that Donahue breached the implicit finding that Smith lacked the requisite actual knowledge to void his court’s implied finding that Smith lacked the requisite actual knowledge. Based upon our review of the record, we conclude that it supports the trial without Runyon’s authorization or by using the money for his own purposes. that Donahue breached the trust either by entering into the 1996 agreement (2004). Also, for the purposes of this discussion, we assume, without deciding, decision. See Nordic Inn Condo. Owners’ Assoc. v. Ventullo, 151 N.H. 571, 586 finding, we assume it made all subsidiary findings necessary to support its N.H. 36, 40 (1934). Although the trial court did not expressly make this (whether party has actual knowledge is question of fact); Clark v. Railroad, 87

We next examine whether there is evidentiary support for the trial court’s

was required. contracts, we disagree. Pursuant to RSA 564-A:7, I, Smith’s actual knowledge was transferred to him . . . , a court of equity will not compel the p. 7 value and had no notice of the breach of trust when the property

knowledge. contract was made and paid value before receiving such notice.” 7 contract, even though he had no notice of the trust at the time when the to a third person, the third person cannot compel specific performance of the

transferred in breach of trust takes it free of the trust if he paid Although a person to whom trust property has been

when the transfer itself would be a breach of trust: Comment (a) to this section makes clear that this provision applies only

the evidence does not mandate a finding that Smith had the necessary actual

trust makes a contract to sell, mortgage or otherwise dispose of trust property (Second) of Trusts, supra § 310, which provides: “[I]f the trustee in breach of actual knowledge, he is not entitled to specific performance under Restatement Alternatively, the Trust argues that notwithstanding Smith’s lack of

his own purposes, rather than to benefit his mother, Lillian. There is no

was insufficient under RSA 564-A:7, I. Actual knowledge was required, and breach of trust.”). As previously discussed, however, constructive knowledge personally, the transferee is chargeable with notice that the transfer is in transaction known to the transferee to be for the benefit of the transferor purposes. See Restatement (Second) of Trusts, supra § 297 cmt. m (“[I]n a he knew that Donahue was using at least some of the money for his own Smith had constructive knowledge that Donahue breached the trust because We acknowledge that the evidence may have supported a finding that

consent or by spending the money for his own purposes. knew that Donahue violated the terms of the Trust by spending the money for of trust either by entering into the 1996 agreement without his co-trustee’s compel a finding that Smith actually knew that Donahue committed a breach self-dealing. We hold, therefore, that the evidence before the trial court did not beneficiary, and/or the trust document expressly allowed trustees to engage in beneficiary during her lifetime. For all Smith knew, Donahue was also a trust is there any evidence that Smith actually knew that Lillian was the only trustee exceeded powers where third party saw copy of trust instrument). Nor 1985) (third party could not claim that it lacked “actual knowledge” that Farmers State Bank of Yuma v. Harmon, 778 F.2d 543, 546-47 (10th Cir.

This evidence, however, does not compel a finding that Smith actually

daughter’s tuition to attend a private school. Donahue told him at one time that he was using some of the money to pay his express no opinion as to whether p. 8 known to the person at the time in question, has reason to know it.” We knowledge, the Trust’s claim of “unclean hands” fails. received a notice or notification of it; or (3) from all the facts and circumstances evidence does not compel a finding that Smith had the requisite actual 8 Smith’s purported actual knowledge of Donahue’s breach of trust. As the support this argument, the Trust relies upon its previous assertions regarding

BRODERICK, C.J., and DUGGAN, GALWAY and HICKS, JJ., concurred.

performance even though he lacked the requisite actual knowledge. if he was unable to receive the benefit of his bargain by obtaining specific has knowledge of a fact if the person: (1) has actual knowledge of it; (2) has exercise.” RSA 564-A:7, I. A third party could not have been “fully protected” properly exercised the power.” Pursuant to RSA 564-B:1-104 (2007), “a person exercising the trustee’s powers is protected from liability as if the trustee was inequitable because Smith comes to court with “unclean hands.” To with a trustee, without knowledge that the trustee is exceeding or improperly Finally, the Trust argues that awarding specific performance in this case

consistent with the Uniform Trust Code.

if the trustee possessed and properly exercised the powers he purport[ed] to improperly exercising them, [was] fully protected in dealing with the trustee as lacked “actual knowledge that a trustee [was] exceeding his powers or “[a] person other than a beneficiary . . . who in good faith and for value deals 130:1; see also N.H.H.R. Jour. 377 (2004). Under RSA 564-B:10-1012 (2007), Code, see RSA ch. 564-B (2007), and repealed RSA 564-A:7, I. See Laws 2004, We acknowledge that in 2004, the legislature enacted the Uniform Trust

trustee to commit or complete the commission of a breach of trust. his words or conduct . . . . A court of equity will not compel a

with the UTPA. Under the UTPA, as previously discussed, a third party, who Restatement Second of Trusts, supra § 310 could not have coexisted

entitled to relief under this provision because it was superseded by the UTPA. 484 N.E.2d 406, 410-11 (Ill. Ct. App. 1985). We hold that the Trust is not Restatement (Second) of Trusts, supra § 310 cmt. a; see Hocking v. Hocking,

breach of trust, unless the beneficiary of the trust was estopped by trustee to transfer the property if such a transfer would be in