Franklin Credit Mgmt. Corp.. v. Hanney

• Decision Date: 30 June 2011
• Docket Number: No. 20100228–CA.,20100228–CA.
• Citation: 2011 UT App 213,685 Utah Adv. Rep. 17,262 P.3d 406
• Parties: FRANKLIN CREDIT MANAGEMENT CORPORATION, Plaintiff, Appellant, and Cross-appellee,v.Blaine J. HANNEY and The Hanney Family Trust, Defendants, Appellees, and Cross-appellants.
• Court: Utah Court of Appeals

262 P.3d 406

685 Utah Adv. Rep. 17

2011 UT App 213

FRANKLIN CREDIT MANAGEMENT CORPORATION, Plaintiff, Appellant, and Cross-appellee,

v.Blaine J. HANNEY and The Hanney Family Trust, Defendants, Appellees, and Cross-appellants.

No. 20100228–CA.

Court of Appeals of Utah.

June 30, 2011.

Laura S. Scott and Matthew D. Cook, Salt Lake City, for Appellant.Brad C. Smith, Ogden, for Appellees.Before Judges McHUGH, ORME, and VOROS.

OPINION

VOROS, Judge:

¶ 1 Using a forged power of attorney, Shirley Hanney mortgaged the family home without her husband Blaine J. Hanney's knowledge. When she defaulted on the payments, Franklin Credit Management Corp., standing in the shoes of the lender, Bank One, brought suit. The trial court ruled that the trust deed on the home was void. Franklin Credit appeals. We affirm in part and reverse in part.

BACKGROUND

¶ 2 Blaine and Shirley Hanney married in 1971. A few years later, Blaine's parents divided a portion of their property among their children. In particular, they conveyed an undeveloped lot (the Property) to Blaine. Blaine and Shirley built their family home on the Property. In 1995, Blaine and Shirley executed a Revocable Trust Agreement of the Hanney Family Trust (the Trust). Blaine then conveyed the Property to himself and Shirley as trustees of the Trust. Blaine also executed a general power of attorney naming Shirley as his attorney-in-fact.

¶ 3 In 1993, Blaine, his mother, and his siblings formed Hanney Development for the purpose of developing the remainder of his parents' property into a residential subdivision. The general partners of Hanney Development were Blaine, his mother, and his sister. Shirley was not a general or limited partner of Hanney Development. But because Blaine was frequently out of town, Shirley acted on Blaine's behalf and exercised full control of Hanney Development's finances. She kept the partnership's books, had signature authority on the partnership's accounts, dealt with the partnership's accountant in preparing tax returns and financial reports, signed Blaine's name as general partner on partnership documents, and opened mail sent to Blaine.

¶ 4 In 1994, Blaine and Shirley formed a construction company, Hanney & Hanney Construction, which Shirley also managed. Over the course of several years, Hanney & Hanney became overextended. To cover Hanney & Hanney's bills, Shirley began seeking money from various sources. According to Shirley's testimony at trial, she took approximately $600,000 from Hanney Development. She also used Blaine's general power of attorney to apply for loans and lines of credit from various banks. Blaine was unaware of these loans, although he and Shirley deducted the interest from the loans on their federal and state tax returns.

¶ 5 By mid–2000, Shirley needed money to cover her defalcation. She later explained, “Hanney Development needed to have money put in, because I knew that they [made] their distributions every December, or shortly thereafter, and if there wasn't that money in there that I would definitely be found out.” Around August 2000, a mortgage broker contacted Shirley and offered to help her obtain a mortgage on the Property that would allow her to pay off her other debts. The mortgage broker arranged a mortgage through Bank One, Franklin Credit's predecessor-in-interest. Shirley had no direct contact with Bank One.

¶ 6 With the help of the mortgage broker, Shirley began executing a series of documents that would allow her to obtain the loan. Shirley was told that the title company would not close the loan based on the general power of attorney, but required a special power of attorney. She was given a special power of attorney form for Blaine to sign along with other loan documents. On August 18, Shirley forged Blaine's name on the special power of attorney form and had it falsely notarized. On August 22, she executed a Warranty Deed (the Warranty Deed) conveying the Property from Blaine and Shirley as Trustees of the Trust to Blaine and Shirley individually as joint tenants. Shirley signed both her name and Blaine's name on the Warranty Deed. On August 24, she executed the Trust Deed (the Trust Deed) using the special power of attorney. She signed Blaine's name on the Trust Deed “by Shirley Ann Hanney as attorney in fact.” The parties agree that Bank One did not rely on the general power of attorney in connection with this transaction.

¶ 7 The loan closed on August 24. Also on August 24, using the special power of attorney, Shirley executed a quit claim deed transferring title from Blaine and Shirley individually back to Blaine and Shirley as trustees of the Trust. All of the loan documents were recorded in the Davis County Recorder's Office on August 29. Shirley used the loan proceeds to pay the obligations of Hanney & Hanney Construction. Blaine had no knowledge of any of these transactions.

¶ 8 In 2003, Blaine discovered Shirley's actions. Blaine and Shirley filed for bankruptcy and, later, divorce. Because Shirley defaulted on the loan, Franklin Credit brought suit. Franklin Credit sought, as relevant to this appeal, a judgment foreclosing the Trust Deed. The trial court rejected Franklin Credit's claims and ruled that the Trust Deed was void. Franklin Credit appeals.

ISSUE AND STANDARDS OF REVIEW

¶ 9 Franklin Credit raises several issues on appeal, but all resolve into a single question: whether the Trust Deed is a valid lien against the Property. The resolution of this issue involves both questions of law, which we review for correctness, and questions of fact, which we review for clear error. See Tooele Assocs. Ltd. P'ship v. Tooele City Corp., 2011 UT 04, ¶ 16, 247 P.3d 371; Utah R. Civ. P. 52 (“Findings of fact ... shall not be set aside unless clearly erroneous.”).

ANALYSIS

¶ 10 Franklin Credit's complaint sought, as relevant here, a judgment foreclosing the Trust Deed on Shirley's undivided one-half interest in the Property, a judgment declaring that the Trust Deed was a valid lien on Blaine's undivided one-half interest in the Property, and a judgment foreclosing the Trust Deed as a lien on Blaine's undivided one-half interest in the Property. The trial court determined that the Trust Deed encumbered neither Blaine's interest in the Property nor Shirley's interest in the Property.

¶ 11 On appeal, Franklin Credit contends, under a variety of theories, that Shirley successfully transferred the Property from the Trust to herself and Blaine individually. It further contends, again under a variety of theories, that Shirley was authorized to encumber Blaine's interest in the Property. Finally, it contends that Shirley was at the very least able to encumber her own one-half interest in the Property. Blaine responds that Shirley lacked authority to transfer the Property out of the Trust or to encumber any portion of it. In addition, Blaine contends that, due to a failure of proof at trial, Franklin Credit did not establish a necessary element of its case.

¶ 12 We first consider the validity of the Warranty Deed conveying the Property from Blaine and Shirley as trustees to Blaine and Shirley individually as joint tenants—that is, conveying the Property out of the Trust. We then consider the validity of the Trust Deed as executed by Shirley on her own behalf and as executed by Shirley as Blaine's attorney-in-fact.

I. Bank One Was Entitled To Rely on the Warranty Deed Conveying the Property Out of the Trust

¶ 13 Franklin Credit first contends that, under the terms of the Trust, Shirley was authorized as Trustee to convey the Property from the Trust to herself and Blaine individually.¹ Blaine responds that, under the terms of the Trust, Shirley “had no authority to act unilaterally,” but only “in conjunction with Blaine.” However, we need not reach the question of actual authority because Utah trust law protects the interests of entities doing business with a trustee so long as the entity lacks actual knowledge that the trustee is exceeding her powers:

With respect to a third person dealing with a trustee or assisting a trustee in the conduct of a transaction, the existence of trust power and their proper exercise by the trustee may be assumed without inquiry. The third person is not bound to inquire whether the trustee has power to act or is properly exercising the power; and a third person, without actual knowledge that the trustee is exceeding his powers or improperly exercising them, is fully protected in dealing with the trustee as if the trustee possessed and properly exercised the powers he purports to exercise. A third person is not bound to assure the proper application of trust assets paid or delivered to the trustee.Utah Code Ann. § 75–7–406 (1993) (emphasis added) (current version at Utah Code Ann. § 75–7–1012 (Supp.2010)).

¶ 14 Utah Code section 75–7–406, originally enacted in 1975, was part of the Uniform Trustee Powers Act (UTPA).² Despite this section's having been in effect for so many years, there is a dearth of Utah case law interpreting it.³ In fact, nationwide, there is very little case law concerning this provision of the UTPA. See, e.g., Wetherill v. Bank IV Kansas, N.A., 1997 WL 94255, at *3, 1997 U.S. Dist. LEXIS 2355 at *10 (D.Kan.1997) (“Despite having been enacted nearly thirty years ago, there is a paucity of case law interpreting [the corresponding Kansas statute].”).

¶ 15 “Under our rules of statutory construction, we look first to the statute's plain language to determine its meaning.” Sindt v. Retirement Bd., 2007 UT 16, ¶ 8, 157 P.3d 797 (internal quotation marks omitted). Although the contours of this statute have not been tested, its plain language is clear: anyone dealing with a trustee is “fully protected” if it is later discovered that the trustee exceeded her authority, so long as the third person does not have actual knowledge that the trustee is exceeding that authority. The sparse commentary on this issue seems to support this straightforward...