Lane Title & Trust Co. v. Brannan

• Decision Date: 18 April 1968
• Docket Number: No. 8546,8546
• Citation: 440 P.2d 105,103 Ariz. 272
• Parties: LANE TITLE AND TRUST COMPANY, Appellant, v. John BRANNAN and Jewel Brannan, his wife, and Clayton E. Blakeway, Individually and dba the Wilshire Construction Company, Appellees.
• Court: Arizona Supreme Court

Page 105

440 P.2d 105

103 Ariz. 272

LANE TITLE AND TRUST COMPANY, Appellant, v. John BRANNAN and Jewel Brannan, his wife, and Clayton E. Blakeway, Individually and dba the Wilshire Construction Company, Appellees.

No. 8546.

Supreme Court of Arizona, In Division.

April 18, 1968.

Rehearing Denied May 14, 1968.

Jennings, Strouss, Salmon & Trask, by A. J. Pfister, Phoenix, for appellant.

Kenneth S. Scoville and Leroy W. Hofmann, Phoenix, for appellees Brannan.

Neal T. Roberts, Phoenix, for appellee Blakeway.

BERNSTEIN, Justice.

This is an appeal by Lane Title and Trust Company (hereafter referred to as Lane) from judgments entered after jury verdicts were returned against them for breach of trust. The jury awarded a verdict of $73,800 to appellees, John and Jewel Brannan (hereafter referred to as Brannan), and $16,500 to appellee, Clayton E. Blakeway (hereafter referred to as Blakeway).

Early in 1959 Brannan agreed to sell a parcel of land in Phoenix to Blakeway for subdivision development. Pursuant to this agreement Brannan conveyed the land in trust to Lawyers Title and Trust Company. The trust instrument designated Brannan, the seller, as first beneficiary, and Blakeway, the purchaser, as second beneficiary. The total purchase price was $82,000 with a down payment of $8,200, and the balance of $73,800 to be paid in installments of $15,000 plus interest each year. Essentially the trust instrument provided that as long as Blakeway made the yearly installment payments to the trustee he would be entitled to periodic partial releases of the subdivided lots. ¹ Thereafter Blakeway began negotiations to sell his beneficial interest in the trust to Res Com Builders Corporation (hereafter referred to as Res Com) at a substantial profit. Etsel Denney, one of Res Com's officers, contacted Brannan and asked him if he would be willing to transfer the Brannan-Blakeway trust to Lane, with whom Res Com 'did business'. Brannan agreed so long as the terms of the trust remained the same. Before Lane could be substituted as trustee, however, it was necessary for Brannan to pay off some of the debts he had incurred in his transaction with Blakeway. Consequently, Brannan borrowed $12,000 from Lane, the trustee, for this purpose and signed a promissory note. A new trust instrument was then prepared by Lane which was designated as Trust No. 398. The provisions of this trust were substantially the same as the original Brannan-Blakeway trust, with Brannan as first beneficiary and Blakeway as second beneficiary. The only change of any consequence was the substitution of Lane as trustee.

Subsequently, Blakeway completed the sale of his interest in Trust No. 398 to Res Com by conveying his interest to Lane, as trustee, under a second trust numbered 411, with Blakeway as first beneficiary and Res Com as second beneficiary. The total purchase price of this interest was to be $100,599.14 with a cash down payment of $8,432.57 and the balance payable to Blakeway in the same manner as Blakeway's payments to Brannan under Trust No. 398. The money used by Res Com for the down payment on this property had been borrowed from Lane.

On January, 1, 1960, Brannan did not receive the first annual installment due from Blakeway under Trust No. 398. Brannan's $12,000 note to Lane was also due about the same time. When Brannan contacted the president of Lane, its chief executive officer, to find out why he had not received his money the president told him that he knew the payment was overdue, and that 'I will make a deal with you * * * we want you to extend.' He proposed that Brannan extend the $15,000 payment due from Blakeway for six months and in return Lane would extend Brannan's note for the same period. In addition, Lane would give Brannan the $3,000 difference. Brannan agreed. This transaction was consummated by Lane with the knowledge that Res Com was indebted to Lane in excess of $130,000.00 and that Res Com was unable to meet its current obligations as they came due. Moreover, it was apparent that Blakeway's payment to Brannan was dependent on Res Com's financial ability to pay its installment to Blakeway. Neither the president nor any other of Lane's agents informed Brannan that Res Com was in financial straits and that they owed a great deal of money to Lane.

The extension agreement prepared by Lane was not sent to Blakeway but rather to Res Com, and indeed Blakeway never received notice of this extension. In March of 1960, Lane informed Blakeway that Res Com had made the payment which was due on January 1, 1960. In fact, however, this payment was never made.

During this same extension period Lane received approximately $45,000.00 as payments on personal debts owed to them by Res Com. When the extension period lapsed on July 1, 1960, Brannan still did not receive the installment payment due him. Again he contacted Lane's president who informed him that payment had not been made. Brannan directed Lane to notify Blakeway of the demand for payment to him but this was not done until a formal written demand was sent to Lane by Brannan almost four months later. Lane then notified Blakeway of the demand for payment. In addition, Lane sent a copy of the demand to Res Com. The day after Res Com received this notice it filed a voluntary petition in bankruptcy, and was adjudicated bankrupt on November 11, 1960. All the property was then taken over by the bankruptcy court.

The principal issue raised on this appeal is whether the duties and liabilities of Lane, as a subdivision trustee, are the same as that of a common law trustee. Lane contends that its fiduciary duty is not as strict as that of a common law trustee because a subdivision trust is more in the nature of a deed in trust, or mortgage, rather than a common law trust. This is a case of first impression in this jurisdiction, and therefore in order to analyze this proposition it is necessary to examine the nature and purposes of a subdivision trust.

In Arizona a substantial part of the real estate transactions during recent years have been the sale of large tracts of land, used either for ranching, agriculture, or merely undeveloped desert acreage held for speculation. With a shortage of the required capital to make these land acquisitions buyers who engage in subdivision development, in many instances, can only do so if they can pay for the land with the proceeds received on the sale of subdivided lots. To fill this need the subdivision trust was created.

'In some sections of the country the trust has been employed by the developers of suburban or subdivision property for the purpose of effecting the purchase and distribution of the land. The parties desiring to divide and improve the land makes (sic) (make) a contract for its purchase under which they agree that title to it shall be transferred to a trustee (usually a corporate fiduciary) in trust for the seller of the land to the extent of his unpaid purchase money and in trust for the subdivider and his nominees as to the remaining interests. Some cash is paid to the seller, and, instead of taking a mortgage for the balance of the price, he obtains equitable interests in the land under the trust and the duty of the trustee to apply the avails of sales of lots toward canceling the remaining debt from the purchaser to him. The acreage purchasers are the managers and developers of the plot, put in improvements, advertise, and procure purchasers for the lots. On performance by the buyers of the conditions precedent set forth in the trust instrument, the trustee is under a duty to convey the several lots to the purchasers thereof.

'The plan takes the place of a mortgage by the acreage buyer to his seller and also avoids the necessity of placing deeds to the lot purchasers in escrow or otherwise guaranteeing to them that they will get title to their lots, free and clear, when they perform their contracts.'

Bogert, Trusts and Trustees § 250 (2d ed. 1964) (Footnotes omitted.) ² We should note, however, that the trust instruments before us provide that 'the interest of the Beneficiaries in this Trust is personal property. * * *'

The first question which must be answered is whether such an arrangement is, indeed, a trust. The essential elements of a trust are: (a) a competent settlor and a trustee; (b) a clear and unequivocal intent to create a trust; (c) an ascertainable trust res; and (d) sufficiently identifiable beneficiaries. Doss v. Kalas, 94 Ariz. 247, 383 P.2d 169. In the case before us all of these elements are present. The settlor of Trust No. 398 was Brannan, and Blakeway was the settlor of Trust No. 411; Lane was designated as trustee; the trust instruments explicity stated that the property was 'declared to be held in Trust by the Trustee', clearly indicating an intention to create a trust; the trust res was the parcel of land consisting of 14 1/2 acres in Phoenix; and the beneficiaries under both Trust No. 398 and No. 411 were clearly identified. As we see it, the very language of the instrument used by Lane necessarily leads to the conclusion that there was an intention to create a trust.

More important, however, is the question of whether these instruments create 'passive trusts' which become executed by the Statute of Uses. In order that an 'active trust' be created the trustee must have some duties. In the instruments before us the trustee was charged in part with the following duties:

'* * * the Trustee holds and will hold title to said property in Trust for the purposes of consummating a sale thereof from First Beneficiaries to Second Beneficiaries and for the purpose of deeding, selling, conveying, receiving payment for and otherwise handling the property upon such terms and conditions and for such prices as the Trustee may be instructed in writing so to do. * * *'

Merely because the trustee was not granted broad discretionary powers does not make this any less an 'active trust'. See, e.g., Breen v. Breen,...