Miller v. Bank of Am., N.A.

• Decision Date: 15 June 2015
• Docket Number: 34,554.
• Parties: George Robert MILLER, Barbara Jean Miller, and Charles Richard Miller, Plaintiffs–Petitioners, v. BANK OF AMERICA, N.A., as Trustee of the Qualified Terminable Interest Marital Trust and Family Trust created under the Last Will and Testament of Rudolph C. Miller, Jr., Deceased, Defendant–Respondent.
• Court: New Mexico Supreme Court

352 P.3d 1162

2015 NMSC 022

George Robert MILLER, Barbara Jean Miller, and Charles Richard Miller, Plaintiffs–Petitioners

v.BANK OF AMERICA, N.A., as Trustee of the Qualified Terminable Interest Marital Trust and Family Trust created under the Last Will and Testament of Rudolph C. Miller, Jr., Deceased, Defendant–Respondent.

34,554.

Supreme Court of New Mexico.

June 15, 2015.

Tucker Law Firm, P.C., Steven Lee Tucker, Catron, Catron, Pottow & Glassman, P.A., Michael T. Pottow, Santa Fe, NM, for Petitioners.

Keleher & McLeod, P.A., Thomas C. Bird, Phil Krehbiel, Cassandra R. Malone, Albuquerque, NM, for Respondent.

The Cullen Law Firm, P.C., Christopher Cullen, Santa Fe, NM, Benjamin N. Cardozo School of Law, Melanie B. Leslie, New York, NY, for Amicus Curiae Trust Law Professors.

OPINION

DANIELS, Justice.

{1} The New Mexico Uniform Trust Code provides that when a trustee breaches its duty of care and causes a loss to the trust, that lost value must be returned to the trust as restoration damages. It also provides that when a trustee breaches its duty of loyalty by self-dealing, any profit from such self-dealing must be disgorged so that the trustee cannot profit from its wrongdoing. Restoration and disgorgement are not mutually exclusive, and recovery need not be limited to the amount of a beneficiary's loss if more is required to ensure that both remedial goals are met. Because it is unclear whether the principles of disgorgement and restoration have both been satisfied in this case, we remand to the district court to determine whether the profit wrongfully earned by the trustee was included in the restoration award to the beneficiary.

I. BACKGROUND

{2} In 2007, the remainder beneficiaries (Beneficiaries) of two testamentary trusts sued the defendant Bank of America (the Bank) for its actions as trustee from 1991 through 2003. Beneficiaries alleged that the Bank had invested trust assets in an unproductive commercial building in direct violation of express trust provisions and had thereby caused the loss of trust value in breach of its duty of care. Beneficiaries also alleged that, as part of this investment, the Bank arranged loans to the trust from its own affiliates that were secured by mortgages on the building and collected loan fees and mortgage interest from the trust in breach of its duty of loyalty.

{3} At trial, Beneficiaries called Henry South to testify as an expert in accounting. South testified that the value of the trust, if the Bank had properly maintained the principal since 1991 and if that amount was adjusted for inflation to 2003 dollars, would have been approximately $894,000. Instead, the value of the trust principal by the reasonable presumed date of distribution was effectively zero. South was unable to reconcile the records to determine where the lost principal had gone, but he testified that “the only place it could have gone was back in the building” and that it was not used to pay “trustee fees or property management fees or something like that” because “[a]ll those were paid out of the rental income and the interest and dividends that were collected.” He did not testify specifically about whether money from the trust principal had been used to pay the mortgage interest and loan fees to the Bank. The Bank did not call a witness to testify concerning the calculation of damages or present other evidence concerning these calculations.

{4} The district court found the Bank liable for multiple breaches of different duties under the New Mexico Uniform Trust Code and the specific trust agreement but awarded Beneficiaries one lump sum of net damages. The court concluded that the Bank had engaged in improper self-dealing by making loans to the trust and had profited from the transactions by retaining interest and loan fees, and it ordered the disgorgement of this profit in the amount of $540,000. The court also ordered restoration of the lost trust value. It found that $894,000 was necessary to fully compensate the trust, which included an adjustment for inflation that was required to keep Beneficiaries whole. In its letter decision, the district court awarded both of these amounts and asked Beneficiaries' counsel to prepare the judgment.

{5} The Bank objected to Beneficiaries' proposed form of judgment, arguing for the first time that the award would provide “impermissible double recovery to Plaintiffs, by awarding Plaintiffs damages ... to restore the trust and loan interest that the Trustee received.” The Bank asserted that Beneficiaries' recovery must be limited to the amount of their loss and that New Mexico Uniform Trust Code provisions on damages for breach of trust, NMSA 1978, § 46A–10–1002 (2007), did not permit an award of both restoration and disgorgement, but the Bank did not discuss the actual method of calculation for the restoration award or argue that the interest had been included in those calculations. The district court accepted and signed the Bank's revised form of judgment that altered several findings and conclusions and changed the amount of the damages awarded to $171,000. The resulting district court judgment was a mix of inconsistent findings and conclusions. The final damages award deducted the amount of income the Bank had disbursed to Beneficiaries during the time period at issue from the restoration amount, unadjusted for inflation, and did not include the disgorgement award. But the final judgment did not change the conclusion that ordered disgorgement or the finding that adjustment for inflation was required to keep Beneficiaries whole. The findings stated that the award “by definition includes $540,000 in loan interest paid to the Trustee” but did not explain or support this statement.

{6} The Court of Appeals reversed the district court's decisions not to adjust for inflation and to offset income distributions against the damages award, and it awarded Beneficiaries $894,000 to restore the value of the Miller Trusts. Miller v. Bank of America, N.A., 2014–NMCA–053, ¶ 47, 326 P.3d 20. The Court of Appeals held that restoration and disgorgement were alternative remedies, and it did not award an additional $540,000 on a disgorgement theory as requested by Beneficiaries because it “would amount to a double recovery and improperly impose a penalty on the Bank.” Id. ¶¶ 44–45. Both parties petitioned this Court for certiorari, and we granted Beneficiaries' petition.

{7} Beneficiaries assert that disgorgement of profit is not an alternate remedy but is separately required under the New Mexico Uniform Trust Code because the Code does not limit an award to the amount of a beneficiary's loss. While we agree that both restoration and disgorgement are required and reverse the Court of Appeals conclusion on that issue, we remand to the district court for the determination of damages because it is unclear whether the mortgage interest and loan fees paid to the Bank were included in the calculation of the restoration award in this case.

II. STANDARD OF REVIEW

{8} “Disgorgement is an equitable remedy whereby a [defendant] is forced to give up the benefits obtained as a result of [the defendant's] wrongdoing.” Peters Corp. v. N.M. Banquest Investors Corp., 2008–NMSC–039, ¶ 32, 144 N.M. 434, 188 P.3d 1185. As an application of equity, “[t]he decision whether to order a defendant to disgorge profits and the amount of profits to be disgorged rests within the sound discretion of the trial court.” Id. ¶ 32. “ ‘An abuse of discretion will be found when the trial court's decision is clearly untenable or contrary to logic and reason.’ ” State ex rel. King v. B & B Inv. Grp., Inc.,

2014–NMSC–024, ¶ 28, 329 P.3d 658. “ ‘Such discretion ... is a legal discretion to be exercised in conformity with the law.’ ” Id. (citation omitted). We review de novo “a discretionary decision that is premised on misapprehension of the law.” New Mexico Right to Choose/NARAL v. Johnson, 1999–NMSC–005, ¶ 15, 126 N.M. 788, 975 P.2d 841.

III. DISCUSSION

{9} In 2003, New Mexico adopted the 2000 National Conference of Commissioners on Uniform State Laws (UL) Uniform Trust Code. New Mexico Uniform Trust Code, NMSA 1978, §§ 46A–1–101 to –11–1105 (2003, as amended through 2011). The UL Uniform Trust Code largely codifies the common law of trusts. Unif. Trust Code Prefatory Note, 7C U.L.A. 364, 364 (2006). Beneficiaries argue that the history and purposes of this common law, as codified in Sections 46A–8–802 and 46A–10–1003(A) of the New Mexico Uniform Trust Code, require that disgorgement be ordered in every instance of trustee self-dealing. Where New Mexico trust law requires disgorgement, its denial is an abuse of the district court's discretion. See B & B Inv. Grp., Inc., 2014–NMSC–024, ¶ 28, 329 P.3d 658.

A. The New Mexico Uniform Trust Code Requires a Trustee to Disgorge All Personal Profit Because It Codifies the Strict Common Law Prohibition Against Self–Dealing

{10} The common law of trusts strictly prohibited self-dealing by a trustee and would not allow a trustee to retain profit gained through such transactions.

It is a well-settled rule that a trustee can make no profit out of his trust. The rule in such cases springs from his duty to protect the interests of the estate, and not to permit his personal interest to in any wise conflict with his duty in that respect. The intention is to provide against any possible selfish interest exercising an influence which can interfere with the faithful discharge of the duty which is owing in a fiduciary capacity.... It makes no difference that the estate was not a loser in the transaction, or that the commission was no more than the services were reasonably worth.

Magruder v. Drury, 235 U.S. 106, 119–20, 35 S.Ct. 77, 59 L.Ed. 151 (1914). This no-further-inquiry rule allowed a beneficiary to void a trustee's self-dealing transactions, whether or not the beneficiary suffered any loss. See Iriart v. Johnson, 1965–NMSC–147, ¶ 6, 75 N.M. 745, 411 P.2d 226 (“Courts do not inquire whether a...