In re the Estate of Foiles, deceased.
Larry B. Foiles, Appellee Gregory Kevin Foiles, Appellant,
Boulder County District Court No. 05PR381. Honorable Andrew R. Macdonald, Judge.
Berenbaum Weinshienk, PC, Ellen Elizabeth Stewart, Gary M. Kramer, Denver, Colorado, for Appellant.
Fairfield & Woods, P.C., Lee Katherine Goldstein, Denver, Colorado, for Appellee.
Opinion by JUDGE TERRY. Dailey and Roy[*], JJ., concur.
[¶1] In this probate action concerning the Clyde Foiles Trust and the Ruth Foiles Trust (the trusts), appellant, Gregory Kevin Foiles, who is a beneficiary of the trusts, appeals the judgment entered in favor of trustee and co-beneficiary Larry B. Foiles. We reverse the judgment and remand for further findings of fact and conclusions of law.
[¶2] This case presents an issue of first impression in Colorado. We hold that, in the absence of a trust provision that would allow ratification by a co-trustee of otherwise invalid actions of a trustee, only the consent of all the beneficiaries, with full capacity to give such consent and full knowledge of the relevant facts, could ratify an action of a trustee that is in violation of the express terms of a trust.
[¶3] Ruth and Clyde Foiles (the Settlors) were the parents of Larry Foiles and the grandparents of Gregory Foiles. Settlor Ruth Foiles created the Ruth Foiles Trust, over which she retained sole decisionmaking authority while she remained a trustee. Settlor Clyde Foiles created the Clyde Foiles Trust. After his death, the trustees of the Clyde Foiles Trust were Ruth Foiles, Larry Foiles, and the Farmers State Bank of Fort Morgan (the Bank).
[¶4] The corpus of each trust consisted of the Settlor's one-half interest in property held jointly with the Settlor's spouse, as well as certain property held separately by the Settlor.
[¶5] Larry Foiles, together with Larry's two children and his nephew Gregory Foiles, are all beneficiaries of the trusts. Despite the inherent conflict of interest in naming Larry Foiles simultaneously as a co-beneficiary and co-trustee of the trusts, the Settlors specifically intended that he serve as co-trustee. See § 15-1.1-105, C.R.S. 2013 ( " A trustee shall invest and manage the trust assets solely in the interest of the beneficiaries." ); § 15-1.1-106, C.R.S. 2013 ( " If a trust has two or more beneficiaries, the trustee shall act impartially in investing and managing the trust assets, taking into account any differing interests of the beneficiaries." ).
[¶6] As more fully explained below, the Clyde Foiles Trust prohibited Larry Foiles from exercising powers as trustee that were directly or indirectly for his own benefit, and required that any such actions be taken solely by the Bank.
[¶7] At trial, Gregory Foiles contested two transactions undertaken at least in part by
Larry Foiles, acting as trustee of the Clyde Foiles Trust. In 1996, an exchange of real property (1996 Section 1031 Exchange) was made pursuant to 26 U.S.C. § 1031 (2012). In that exchange, the trusts transferred farm property out of the trusts and replaced it with an apartment property in Denver, Colorado (the Emerson property).
[¶8] In 2001, a second Section 1031 exchange was made (2001 Section 1031 Exchange). Larry Foiles had a contract to purchase in his own name a property known as the Hudson Farm property. Through a series of transfers, the Hudson Farm property became property of the trusts, and the Emerson property became the sole property of Larry Foiles.
[¶9] Ruth Foiles approved these transactions as trustee of the Ruth Foiles Trust, and the validity of the transactions under her trust is not at issue in this appeal. She died before trial of this matter.
[¶10] However, Gregory Foiles alleged that the transactions were a breach of Larry Foiles's fiduciary duty under the Clyde Foiles Trust. Under the terms of both trusts, when the trusts terminated, Larry Foiles was to receive all farm property held in the trusts, while the co-beneficiaries (including Gregory Foiles) were to receive all non-farm property.
[¶11] As relevant here, Gregory claimed that (1) the 2001 Section 1031 Exchange worked to his detriment, because he and the beneficiaries other than Larry should have been able to inherit the Emerson property (a non-farm property) at trust termination, but could not do so because it had been removed from the trust corpus and conveyed to Larry as part of the exchange; and (2) the transactions ultimately benefited Larry, who stood to inherit the Hudson Farm property at trust termination, and who received conveyance of the Emerson property as part of the 2001 Section 1031 Exchange.
[¶12] After a bench trial, the trial court found that Larry Foiles had not breached his fiduciary duty with respect to either of the Section 1031 Exchanges. The court ordered termination of both trusts, and directed the distribution of the trust assets.
[¶13] On appeal, Gregory Foiles does not contest the trial court's ruling that the 1996 Section 1031 Exchange was not a breach of Larry Foiles's fiduciary duty. He does contest its ruling that the 2001 Section 1031 Exchange was not a breach of fiduciary duty. He also asserts other errors, which we address at the end of this opinion.
II. Summary of Our Holding
[¶14] The trial court's ruling that the 2001 Section 1031 Exchange was not a breach of Larry Foiles's fiduciary duty relied primarily on two findings: (1) the Bank, as co-trustee of the Clyde Foiles Trust, ratified that transaction; and (2) the Emerson property was to be considered farm property because it was brought into the trust corpus by exchanging it for farm property.
[¶15] The court erred in ruling that the Bank's ratification of the 2001 Section 1031 Exchange precluded Gregory Foiles's breach of fiduciary duty claim. Moreover, the trial court failed to recognize that Gregory Foiles had established a prima facie case of breach of fiduciary duty as to the Clyde Foiles Trust. See In re Estate of Heyn, 47 P.3d 724, 726 (Colo. App. 2002) ( a plaintiff need only demonstrate a fiduciary relationship and a transfer to or use of trust property by a fiduciary to raise a rebuttable presumption and establish a prima facie case of breach of fiduciary duty).
[¶16] Because Gregory Foiles met his burden of establishing a prima facie case, Larry Foiles was required to go forward with evidence that the transaction was fair and reasonable. Id. Arguably, the trial court's finding that the Emerson property was to be treated as farm property was relevant to a defense that the transaction was fair and reasonable. However, because the trial court began with the incorrect premise that the Bank's ratification of the 2001 Section 1031 Exchange precluded a breach of fiduciary duty claim, it must make new factual findings and legal conclusions, starting from the premise that Gregory Foiles established a prima facie case of breach of fiduciary duty as to the Clyde Foiles Trust in connection with that transaction.
[¶17] Because the other issues raised on appeal depend on the trial court's decision on remand, we defer ruling on those issues until after the case has been ...