Denver Foundation v. Wells Fargo Bank, N.A.

• Decision Date: 02 July 2007
• Docket Number: No. 05SC849.,05SC849.
• Citation: 163 P.3d 1116
• Parties: The DENVER FOUNDATION, Petitioner. v. WELLS FARGO BANK, N.A., Respondent.
• Court: Colorado Supreme Court

163 P.3d 1116

The DENVER FOUNDATION, Petitioner. v. WELLS FARGO BANK, N.A., Respondent.

No. 05SC849.

Supreme Court of Colorado, En Banc.

July 2, 2007.

Rehearing Denied August 13, 2007.^*

Sherman & Howard L.L.C., Christopher Lane, Bridget K. Sullivan, Denver, Colorado, Attorneys for Petitioner.

Baker & Hostetler LLP, Marc D. Flink, Casie D. Collignon, Denver, Colorado, Attorneys for Respondent.

Davis Graham & Stubbs LLP, Ted R. Sikora II, Victoria V. Johnson, Denver, Colorado, Attorneys for Amici Curiae Colorado Bankers Association; JPMorgan Chase Bank, N.A.; Valley Bank and Trust; Home State Bank; and First National Bank.

Chief Justice MULLARKEY delivered the Opinion of the Court.

Charles Sterne and Dorothy Elder Sterne created a charitable trust bequeathing, upon their deaths, a portion of their estate for the uses and purposes of The Denver Foundation, a philanthropic community trust, to be held in trust by the United Bank of Denver. After the Sternes passed away, The Denver Foundation requested Wells Fargo Bank, successor trustee to the United Bank of Denver, to transfer the Sternes' trust principal to The Denver Foundation's nonprofit corporation to hold for management and investment. Wells Fargo refused, claiming the Sternes' trust document prohibited such a transfer. The Denver probate court granted summary judgment in favor of The Denver Foundation, but in Denver Foundation v. Wells Fargo Bank, N.A., 140 P.3d 78 (Colo.App.2005), the court of appeals reversed that judgment. We now reverse the court of appeals' decision, holding that the Sternes' trust instrument does not forbid the transfer of the trust principal to The Denver Foundation's nonprofit corporation and, indeed, that the Sternes' intent in establishing the trust would be best effectuated by such a transfer.

I. Facts and Procedural History

In 1925, Denver community leaders created The Denver Foundation (also "the Foundation"), which was designed to serve the charitable, educational, and benevolent needs of the greater Denver area in perpetuity. The Denver Foundation was envisioned as an organization that would "afford an opportunity alike to persons of wealth and persons of moderate means to make their several gifts to different trustees of their own selection" while meeting "the changing needs for such gifts with flexibility in the power of distribution." To govern the organization, the creators of The Denver Foundation ratified a Declaration of Trust ("1925 Declaration") establishing the Foundation and describing its charitable purposes.

As envisioned in 1925, trust settlors were to make their gifts to trustee banks, which would hold the principal in trust and then disburse the yearly income on the principal to The Denver Foundation. In turn, The Denver Foundation would distribute a portion of that income to various community "beneficiaries" identified and selected by an impartial and changing committee knowledgeable about the charitable needs of the time. The Foundation would then reinvest the remainder in the Foundation's endowment, which is comprised of several component funds subject to separate accounting and community recognition.

From its inception as a community trust,¹ The Denver Foundation has enjoyed expansive powers not generally accorded to traditional beneficiaries. For instance, The Denver Foundation's 1925 Declaration ensured it was free to modify restrictions in trust gifts that had ceased to serve the best interests of the Foundation's charitable beneficiaries.² That Declaration also granted the Foundation the power to direct transfers of income and principal³ and to conclusively construe, if in good faith, any provision contained in the Declaration.⁴

Drawn to the Foundation's mission and unique structure for charitable giving, Charles Sterne, a long-time Denver philanthropist, created a trust in 1976 for the uses and purposes of The Denver Foundation, naming United Bank of Denver (predecessor to Wells Fargo Bank, N.A.) as trustee. In 1978, Dorothy Elder Sterne, his wife, created a similar trust (the two trusts are henceforth referred to as "the Sterne-Elder Trust" or "the Trust"). The Sterne-Elder Trust provided that upon the Sternes' deaths, the principal of the Trust should be held by the United Bank of Denver, and The Denver Foundation would receive and then distribute the income from the principal to various charities. The Sternes intended their gift as a permanent endowment. Section 2(c)(3)(d) of the Sterne-Elder Trust agreement provided that "[n]either The Denver Foundation nor its Distribution Committee is authorized to direct disbursement of principal, or invade the principal, of such Trust." The Sterne-Elder Trust incorporated by reference the Foundation's Declaration of Trust, along with any future amendments to the Declaration.⁵

The Denver Foundation made a significant change to its structure in 1983. Until 1983, the Foundation could not directly hold and manage endowment funds; settlors were required to make gifts to trustee banks, which would hold the funds for the uses and purposes of the Foundation. In 1983, however, the Foundation established a nonprofit corporation capable of carrying out the same functions that had theretofore been performed by trustee banks — holding and investing trust principal as the Foundation's permanent endowment. Once the Foundation's nonprofit corporation was organized, the corporation assumed the role of the common governing body of the Foundation, and each trust held by the corporation for the uses and purposes of the Foundation was to be treated by the Internal Revenue Service as a "component part" of the Foundation. Since 1983, most settlors have chosen to make their gifts directly to the corporation, streamlining the charitable giving process by eliminating the middle-man trustee banks, although settlors are still free to give a gift to be held in trust by a participating trustee bank.

In 1997, The Denver Foundation adopted an Amended and Restated Declaration of Trust ("1997 Declaration"), the operative document governing the Foundation and its activities at present. The 1997 Declaration continues to allow for alternative plans, administered either by the corporation or by trustees of settlors' own selection.⁶ All gifts, however, are governed by the 1997 Declaration, which contains many of the same types of provisions as those in the 1925 Declaration. For instance, the 1997 Declaration provides, in Article 2-3, a broad power to modify designations and restrictions on the "use or distribution of funds." Article 3-1.1, titled "Transfer of Funds to Corporation," mandates that "[e]ach Trustee Bank shall, within ten days after the last day of each calendar quarter, pay and disburse to the Corporation such portion of the net income and principal of each trust held by it hereunder as the Board of Trustees shall direct." Article 7-8.3 reiterates The Denver Foundation's power to conclusively construe the Foundation's Declaration,⁷ and Article 7-8.5 allows the Foundation to "[a]mend any of the terms or provisions of this Declaration . . . provided, however, that no change shall be made to this Declaration of Trust that modifies, enlarges, or restricts the powers, duties or liabilities of any Trustee Bank."

Around the same time The Denver Foundation adopted the 1997 Declaration, it also reviewed the management of its endowment funds, including those component parts of its endowment held and managed by trustee banks. Based on that review, the Foundation determined that it could better serve the charitable needs of its community beneficiaries if it centralized management of its endowment in its nonprofit corporation.⁸ Accordingly, the Foundation requested its trustee banks transfer the principal of component trusts to the Foundation to be held by the corporation as part of its endowment.

As part of this movement toward centralization, when Dorothy Elder Sterne passed away in 2003 the Foundation requested Wells Fargo Bank, N.A. ("Wells Fargo") transfer the Sterne-Elder Trust principal to the Foundation to be held by the Foundation's nonprofit corporation. Wells Fargo refused, however,⁹ and the Foundation instituted this litigation in the Denver probate court to compel Wells Fargo to transfer the principal.

On motion for summary judgment, the Denver probate court determined that the 1976 Trust Agreement, read in conjunction with the 1997 Declaration, granted the Foundation the power to direct Wells Fargo to transfer the Sterne-Elder Trust principal to the Foundation's nonprofit corporation. First, the probate court held that the Sternes clearly intended to incorporate future amendments of the Declaration into their 1976 Trust Agreement. In so doing, the court read the invasion of principal provision in the 1976 Trust Agreement as merely preventing the Foundation from distributing the principal to outside, end-user charities. It also noted the various versions of the Foundation's Declaration and, by extension, the 1976 Trust Agreement provided that the parties agreed the Foundation could amend provisions of its Declaration in any respect consistent with the original purposes of the Foundation. Second, the probate court held that the Foundation's Declaration, as conclusively construed in good faith by the Foundation, empowers the Foundation to compel the transfer of principal to its nonprofit corporation. Finally, the Probate Court struck as irrelevant any evidence relating to comparative rates of return on investments as between Wells Fargo and The Denver Foundation. It did, however, allow evidence of other transfers of trust principal to The Denver Foundation approved by Wells Fargo.

The court of appeals reversed the probate court's decision, ruling that the Foundation could not lawfully direct Wells Fargo to transfer the Trust principal to the Foundation. Denver Found., 140 P.3d at 86. The Sternes' intent, it said, was to create a perpetual trust managed by a bank t...