Butt v. Bank of America, N.A.

• Decision Date: 22 February 2007
• Docket Number: No. 05-2175.,05-2175.
• Citation: 477 F.3d 1171
• Parties: Paul BUTT, Jr., Plaintiff-Appellant, v. BANK OF AMERICA, N.A., Defendant-Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

477 F.3d 1171

Paul BUTT, Jr., Plaintiff-Appellant, v. BANK OF AMERICA, N.A., Defendant-Appellee.

No. 05-2175.

United States Court of Appeals, Tenth Circuit.

February 22, 2007.

Martin E. Threet, (Joey B. Wright, with him on the brief) Martin E. Threet & Associates, Albuquerque, NM, for Plaintiff-Appellant.

Joseph W. Halpern (Bradford C. Berge and Trent A. Howell, Holland & Hart, LLP, Santa Fe, NM, with him on the briefs), Holland & Hart LLP, Denver, CO, for Defendant-Appellee.

Before HARTZ, O'BRIEN, and McCONNELL, Circuit Judges.

McCONNELL, Circuit Judge.

Plaintiff Paul Butt, Jr., contends that Defendant Bank of America, N.A., has breached its fiduciary duty to him as trustee of a trust created in 1948 to administer a New Mexico oil and gas lease. The district court dismissed Mr. Butt's complaint, finding that the Bank never assumed trusteeship and therefore had no fiduciary duty. We find that the trust did not survive the death of its original trustee, and thus agree with the district court's conclusion that the Bank does not serve, and never has served, as trustee on Mr. Butt's behalf. We reverse, however, the district court's judgment that it need not conclusively find whether the Bank acted adversely to Mr. Butt's interest in specific transactions. As to those specific transactions, which we outline below, we remand for consideration of Mr. Butt's request for an accounting and imposition of a constructive trust.

I. BACKGROUND

A. A Brief History of Oil and Gas Lease No. A-4096

On April 21, 1931, the State of New Mexico issued Oil and Gas Lease No. A-4096 (the "Lease") to C. Frederick Luthy for the purposes of exploring for, developing, and producing oil and gas in lands located in Lea County. According to the parties, New Mexico law permitted legal title for the Lease to issue only in one person's name, but per a prior agreement, each of three men held a one-third interest in it: Mr. Luthy, Paul Butt, Sr., and E.T. Buckley. Over the years, those one-third interests were devised, inherited, and sold such that Paul Butt, Jr., ("Mr. Butt") now owns his father's third, three different parties own equal portions of Mr. Luthy's original third, and two different parties own equal portions of Mr. Buckley's original third. Because of New Mexico's single lease-holder policy, however, Bank of America, N.A. — the trustee of Mr. Luthy's testamentary trust — holds actual title to the Lease, which apparently still bears Mr. Luthy's name.¹ The dispute we encounter is between Mr. Butt and the Bank over the Bank's role as title holder of the Lease following Mr. Luthy's death.

On April 19, 1948, Mr. Luthy executed a "Declaration of Trust," which identified the Lease as the corpus and named him as trustee. Under the terms of the document, Mr. Luthy was to have absolute control over the Lease and was to periodically disburse profits to the beneficiaries. The document did not identify a successor trustee or establish any means for appointing one.²

Paul Butt, Sr., passed on in 1953, whereupon Appellant Paul Butt, Jr., acquired his interest in the Lease. On December 7, 1954, Mr. Luthy, Mr. Butt, and the president of Defiance Coal signed an affidavit setting forth historical facts relating to the acquisition and management of the Lease. In the affidavit, the parties identified the Luthy-Butt-Defiance entity as a "syndicate" and agreed that they had delegated "full and complete power of disposition" regarding the Lease to Mr. Luthy. App. Vol. I, at 124-29. The law firm that represented the entity at the time treated it as a joint venture and as a partnership for tax purposes.

Mr. Luthy died on January 11, 1963. His will named Albuquerque National Bank as executor of his estate and as trustee of his testamentary trust. One of the assets included in Mr. Luthy's estate was his one-third interest in the Lease. The Bank, in its capacity as Mr. Luthy's testamentary trustee, pays annual rents due under the Lease and generally obtains reimbursement from the other interest holders.³

The evidence presented to the district court revealed a series of transactions that the parties engaged in with respect to the Lease over the years. The district court's order identified these transactions by reference to tract numbers, which correspond to the "line" numbers on the original Lease. See Dist. Ct. Mem. Dec. 6; App. Vol. I, at 115-18.⁴ For ease of reference, we adopt the same designations.

1. The Humble Oil Assignment: Tracts 12, 13, 14, 18, 19, and 20

On May 15, 1963, the Bank, Mr. Luthy's widow, Defiance Coal, and Mr. Butt sent a letter to Humble Oil & Refining Company offering to sell mineral interests in six tracts covered by the Lease. The offer letter stated that "the Estate of C. Frederick Luthy, now deceased, has the entire official title to said land but that the leasehold interest is actually owned one-third by Paul Butt Jr., one-third by Defiance Coal Company, and one-third by the Estate of C. Frederick Luthy, deceased." App. Vol. II, at 442. The letter also indicated that, in return for the assignment, the Luthy and Defiance interests would receive production payments while the Butt interest reserved an overriding royalty interest. Humble Oil accepted the offer on May 21, 1963.

On June 19, 1963, Humble Oil obtained a title opinion letter from the law firm of Hervey, Dow & Hinkle. The authoring attorney advised that "since Mr. Luthy is now deceased his power of control and sale has now ceased and it is not vested in his heirs or devisees." Id. at 449. Instead, the one-third interests were "titles in real property and not merely contract rights to profits." Id. In subsequent correspondence, the attorney further opined:

I suppose that the trust which Mr. Luthy had in mind when he made his Affidavit of December 7, 1954 ... and the unrecorded trust dated April 19, 1948 terminated when he died[, and that it] may be that upon the death of Mr. Luthy this became a dry trust and the legal title would go over to the beneficiaries under the Statutes of Uses ....

Id. at 479.

On October 8, 1963, Mr. Butt, by separate instrument, conveyed his interest in the six tracts to Humble Oil in exchange for $31,964.80.

2. The Rankin Farmout: Tract 3

A few months prior to his death, Mr. Luthy executed a farmout agreement with Mann Rankin for a single tract covered by the Lease. On November 9, 1962, Mr. Rankin's law firm sent him a letter questioning Mr. Luthy's "authority ... as trustee or agent" for Mr. Butt and Defiance and advising Mr. Rankin to either have the latter two parties ratify the farmout agreement or acknowledge the power of Mr. Luthy to act on their behalf with respect to the Lease. Id. at 351-52. As noted above, Mr. Luthy perished in January 1963, in the midst of these dealings. On October 31, 1964, Mr. Rankin executed an "Assignment of Overriding Royalty Interest," which acknowledged that he had been assigned the leasehold as to Tract 3 on October 22, 1964. In consideration of that assignment, Mr. Rankin conveyed a ten percent overriding royalty interest and specified that the conveyance was a one-third interest to each of Mr. Butt, Defiance Coal, and the Bank as executor of Mr. Luthy's estate.

3. The Turner Farmout: Tracts 6 and 7

In May 1962, Mr. Luthy offered to assign two tracts covered by the Lease to Charles R. Turner, with drilling to commence on or before June 15, 1962. After Mr. Luthy's death, the Bank, Mrs. Luthy, Mr. Butt, and Defiance Coal reaffirmed the offer — with a later drilling date — in a letter signed by each of them. Turner accepted the offer.

Two other transactions related to this farmout occurred over the next year, each with the individual written assent of the Bank, Mrs. Luthy, Mr. Butt, and Defiance Coal. In February 1963, the parties executed a letter amending the farmout per Mr. Turner's request. In July 1963, the parties executed a new offer to Mr. Turner, which he accepted.

Two years later, the parties engaged in further dealings with Mr. Turner. In September 1965, Mr. Turner wrote a letter to a trust officer at the Bank in which he reported that he had "discussed a trade with Mr. Paul Butt, on acreage owned by the Luthy Group." Id. at 387. On October 28, 1965, the Bank, in its capacity as executor and testamentary trustee of the Luthy estate, independently assigned the entire interest in Tracts 6 and 7 to Mr. Turner; in return, Mr. Turner assigned an overriding royalty to the Bank equal to 1/8 of all production. This transaction ignored the beneficial interest holders but, on May 25, 1970, they ratified it by signing a "Ratification and Amendment to Agreement" stating, in part:

Whereas, prior to [the] Assignment to Turner, the Bank owned official legal record title to [the Lease], but the equitable or beneficial title to [the Lease] was actually owned an [sic] undivided 1/3 interest each by said Bank, Defiance, and Butt, and said Mapel (formerly Cyrene Luthy) as her community property owned ½ of the 1/3 beneficial interest of the Bank, and said Defiance, Butt and Mapel did not sign or ratify said Assignment by the Bank to Turner and they now desire to correct said matter....

Now, therefore, ... Defiance, Butt and Mapel hereby adopt, ratify and confirm said Assignment dated October 28, 1965 ... and do hereby convey all of their title in said lease as to said land to Charles R. Turner....

Id. at 395. In addition, the document assigned to each of the beneficial owners a 1/16 share of the overriding royalty interests in production occurring on the tracts.

4. The Machris Assignment: Tract 1

On October 6, 1954, Fred and Cyrene Luthy assigned to M.A. Machris the interest in Tract 1 of the Lease; in return, Machris and his wife assigned to Mr. Luthy a 15% overriding royalty interest in production on the tract. On May 24, 1963, Cities Service Oil Company — a buyer from Machris of gas produced from Tract 1 — prepared a "Division Order" for signature by the Bank indicating that the Bank was...