Cloud v. U.S. Nat. Bank of Oregon

• Court: Oregon Supreme Court
• Writing for the Court: HOWELL
• Citation: Cloud v. U.S. Nat. Bank of Oregon, 570 P.2d 350, 280 Or. 83 (Or. 1977)
• Decision Date: 12 October 1977
• Parties: , 6 A.L.R.4th 1185 George CLOUD, Personal Representative of the Estate of Mary Cloud, Deceased, Appellant, v. UNITED STATES NATIONAL BANK OF OREGON, Respondent, Delores Cloud Spino, Willard Cloud, Sylvia Cloud Martinez, Sylola Cloud Leslie, Elaine Cloud by and through her guardian ad litem, Theresa Henry, Sharon Ann Cloud McConville, and Mike Larson Cloud, Defendants-Appellants, Esther Wilkinson, Defendant.

Page 350

570 P.2d 350

280 Or. 83, 6 A.L.R.4th 1185

George CLOUD, Personal Representative of the Estate of Mary Cloud, Deceased, Appellant, v. UNITED STATES NATIONAL BANK OF OREGON, Respondent Delores Cloud Spino, Willard Cloud, Sylvia Cloud Martinez Sylola Cloud Leslie, Elaine Cloud by and through her guardian ad litem, Theresa Henry, Sharon Ann Cloud McConville, and Mike Larson Cloud, Defendants-Appellants Esther Wilkinson, Defendant.

Supreme Court of Oregon, Department 1.

Argued and Submitted June 8, 1977.

Decided Oct. 12, 1977.

[280 Or. 84-B] Gile R. Downes of Jensen, DeFrancq, Holmes & Schulte, Portland, argued the cause for appellant. With him on the briefs were Lewis & Foster, The Dalles. Also on the briefs were Heisler & Van Valkenburgh, The Dalles, for defendants-appellants Delores Cloud Spino, Willard Cloud, Sylvia Cloud Martinez, Sylola Cloud Leslie, Elaine Cloud by and through her guardian ad litem, Theresa Henry, Sharon Ann Cloud McConville and Mike Larson Cloud.

Karen Creason of Davies, Biggs, Strayer, Stoel & Boley, Portland, argued the cause and filed a brief for respondent.

[280 Or. 84-C] Before DENECKE, C. J., and HOLMAN, HOWELL and TOMPKINS, JJ.

HOWELL, Justice.

This is a suit in equity by the beneficiaries of a trust against the trustee, the United States National Bank of Oregon. All the individual parties are American Indians. The plaintiff, George Cloud, ¹ alleged that the trustee breached its fiduciary duty to the beneficiaries by disbursing certain funds in violation of its trust duties and asked for an accounting, for reimbursement of the funds paid out, and for removal of the trustee. All of plaintiff's claims stem from the contention that the funds were disbursed after the trustor had become incompetent or, alternatively, that the instructions to disburse were the product of undue influence. The trial court found for the defendant and dismissed the suit. We review de novo.

Martha Sconawah, the trustor, was an old Yakima Indian woman who had lived in The Dalles area since before the turn of the century. She was fluent in the Wasco and Yakima languages but could not read, write or speak English. She customarily "signed" all documents with her thumbprint. In the last years of her life, Martha began to show signs of her advanced age. There is controversy as to the extent of her deterioration, but it is undisputed that toward the end she had difficulty walking without assistance, she lost considerable weight, and her eyesight was failing. She died on September 28, 1971, of a cerebral vascular accident due to advanced arteriosclerosis. Her age was unknown but was estimated at between 80 and 120 years.

Martha created a revocable trust with the defendant's trust department on December 29, 1959. ² The corpus of the trust consisted of $58,000. Under the terms of the trust Martha could order withdrawal of all or any part of the trust corpus at any time. After the death of Martha, Mary Cloud was to receive the income from the trust estate for her life, and upon her death the children of Mary were the beneficiaries. ³ From the time of the creation of the trust in 1959 until Martha's death in 1971, five withdrawals were made. The validity of the first three is not challenged here. The last two withdrawals occurred in 1971.

On April 26, 1971, the first of the two disputed transfers was executed. Esther Wilkinson, Martha's granddaughter, solicited funds from Martha and wrote the letter of withdrawal, which Martha executed with her thumbprint, as was her custom. The bank received the letter on May 18, 1971, and paid the $5,000 requested on June 10, 1971. On September 27, 1971, the day before Martha's death, Esther personally presented the second disputed instrument to the bank trust officers. The document then received Martha's thumbprint with the trust officers acting as witnesses. The instrument provided for the release of $23,000 to Esther from the trust fund which was paid in installments of $1,000 on October 1, 1971, $12,000 on October 28, 1971, and $10,000 on May 31, 1972. ⁴

Before we examine the validity of each of these transactions, it is important to frame the issue. The duty of a trustee to its beneficiaries is a heavy one, see e. g., Leahey et al. v. Commission for Blind, 253 Or. 527, 456 P.2d 77 (1969), but the possibility that the settlor of a revocable trust could attempt to withdraw funds from the trust after having become incompetent or subject to undue influence puts that trustee in a difficult position. If the instrument is valid and the trustee refuses to allow the withdrawal, the trustee is in breach of contract with the settlor. If, on the other hand, the instrument is invalid, the trustee runs a serious risk of breaching its duty to the beneficiaries of the trust if the funds are released. ⁵

[3-6] The plaintiff contends that a finding of incompetence or undue influence in either of these transactions is equivalent to finding that the trustee has breached its fiduciary obligation to the beneficiaries of the trust. ⁶ We cannot agree.

Although it is not directly on point, the Restatement of Trusts (Second) § 226A, speaks to an analogous problem, and we think the underlying policy is applicable here:

"Liability for Payments or Conveyances Made under an Invalid Trust

"If the trustee pays or conveys the trust property or any part thereof to the person who by the terms of the trust is entitled to it, and the trust is later held to be invalid in whole or in part, the trustee is liable to the person entitled to the property, if, but only if, when he made such payment or conveyance he knew that the trust was invalid or had or should have had reasonable doubt as to its validity." Restatement of Trusts, supra at 526.

Thus, under § 226A the trustee's liability turns on his actual or constructive knowledge. Accord, Wodell v. John Hancock Mut. Life Ins. Co., 320 Mass. 1, 67 N.E.2d 469 (1946); Application of Spitzmuller, 279 App.Div. 233, 109 N.Y.S.2d 1 (1951); Hughes et al. v. First Nat. Bank in Oakland, 47 Cal.App.2d 547, 118 P.2d 309 (1941); Jamison v. Culligan, 151 Mo. 410, 52 S.W. 224 (1899). Scott, in his Treatise on Trusts, agrees that the trustee should be liable for payments made under an invalid instrument only if the trustee has notice of the invalidity. Scott on Trusts 1803, § 226.1 (3d ed. 1967). ⁷

We see no reason to distinguish between payments made under a facially valid trust agreement and payments made under a facially valid withdrawal by a settlor under the trust agreement.

There are sound policy reasons for adopting the position of § 226A. An absolute liability standard would force the trustee to either (1) become the guarantor of the validity of all its actions, inevitably raising the cost to the settlor; (2) refrain from offering its services as trustee, thereby depriving the public of such services; or (3) apply to the already crowded courts for directions every time a withdrawal is requested. None of these effects are desirable and all can be avoided without injustice to the settlor or the beneficiaries by adopting the approach of the Restatement, § 226A. Schuyler, Payments Under Void Trusts, 65 Harv.L.Rev. 597 (1951). Therefore, a conclusion that the settlor was incompetent or subject to undue influence cannot end the inquiry; it must merely mean that the trustee has lost the absolute protection of being able to claim that it was following the valid instructions of the settlor. We believe that a finding of invalidity raises the question of whether or not the trustee has acted with "such care and skill (to preserve the trust property) as a man of ordinary prudence would * * * in dealing with his own property", Elliott v. Mosgrove et al., 162 Or. 507, 538, 91 P.2d 852, 863 (1939), and that to show a breach of that duty of care the person attacking the transaction must show that the trustee had knowledge of the invalidity of the withdrawal instrument or of facts from which there was reason to doubt its validity. Stated in another way, the trustee is entitled to rely on the presumption that the instrument is valid until he has reason to believe otherwise. Moreover, the presumption is that one is competent, and the burden of proof is on the party urging incompetence.

[7-9] Turning to the facts of this case, the trial court found that Martha was competent and did not act subject to undue influence on April 26, 1971, when the first disputed transaction occurred. ⁸ The plaintiff assigns this as error. We need not consider this question, however, because, even assuming incompetence or undue influence, the trustee did not know nor did it have any reason to believe that the instrument in question was invalid. The bank received the document by mail, as it had the prior withdrawals by Martha. The instrument was signed with a thumbprint as were the prior withdrawals and the trust instrument itself. It was witnessed by two witnesses, as were the other withdrawals, and the trust officers attempted to compare the thumbprint on the withdrawal with that on the trust instrument. Since the facts do not indicate that the bank knew or should have known of any incompetence or undue influence, we cannot say that the bank breached its fiduciary duty of care to the beneficiaries.

The date of the second disputed transaction, September 27, 1971, is a different matter. The plaintiff contends that Martha was incompetent when she executed the instrument releasing funds to Esther, and we agree. The test for determining mental competence was stated by this court in Kruse v. Coos Head Timber Co., 248 Or. 294, 306, 432 P.2d 1009, 1015 (1967):

"To have the mental capacity to contract it is necessary that a person have the ability to comprehend the nature of the transaction in which he is engaged and to understand its quality and consequences."

Plaintiff produced evidence that Martha was confused, unable to care for or feed herself, and occasionally "spoke" to old...