Peterson v. McMahon

• Decision Date: 18 October 2004
• Docket Number: No. 03SC685.,03SC685.
• Citation: 99 P.3d 594
• Parties: Petitioner: Ronald A. PETERSON v. Respondent: Jane F. McMAHON, In her capacity as Successor Trustee of the Edward Sklar Supplemental Care Trust.
• Court: Colorado Supreme Court

99 P.3d 594

Petitioner: Ronald A. PETERSON v. Respondent: Jane F. McMAHON, In her capacity as Successor Trustee of the Edward Sklar Supplemental Care Trust.

No. 03SC685.

Supreme Court of Colorado, En Banc.

October 18, 2004.

Ronald A. Peterson, Pro Se, Rothgerber, Johnson & Lyons, Edward A. Gleason, Colorado Springs, for Respondents.

MULLARKEY, Chief Justice.

I. Introduction

Ronald A. Peterson, an attorney, challenges the judgment of the court of appeals awarding exemplary damages against him under section 13-21-102(1)(a), C.R.S. (2004), for willful and wanton conduct while acting as trustee of a supplemental care trust. Respondent, Jane F. McMahon, in her capacity as successor trustee of the trust sued Peterson for breach of fiduciary duty and negligence based on improper loans made from the trust corpus and failure to file required annual accountings with the court. The probate court ruled in favor of McMahon and awarded compensatory and exemplary damages. In an unpublished opinion, the court of appeals upheld the district court in relevant part. Peterson appeals the award of exemplary damages alleging that the action was in equity and thus exemplary damages are not available. McMahon v. Peterson, No.02CA0984, 2003 WL 21715614 (Colo.App. July 24, 2003) (not selected for official publication).

We hold that a suit brought by a successor trustee against a former trustee to recover trust funds misappropriated by the former trustee can be maintained at law. Although actions by beneficiaries against existing trustees are generally considered equitable, they are not exclusively so. When a trustee is under a duty to pay money immediately and unconditionally, the action to recover that money is legal. A former trustee is under an immediate and unconditional duty to pay money misappropriated from the trust to the successor trustee appointed after his or her removal.

Exemplary damages may only be awarded by statute in Colorado, and the relevant statute provides that exemplary damages are only available in actions maintained at law. Because the action here was brought by a successor trustee against a former trustee, it is an action maintained at law. Therefore, exemplary damages may be awarded and we uphold the court of appeals' judgment affirming the probate court's order awarding exemplary damages against the defendant.

II. Facts and Prior Proceedings

The Edward Sklar Supplemental Care Trust was created in 1991 to manage the assets of Edward Sklar, who had been adjudged to be an incapacitated person following a head injury. The trust was funded by a settlement obtained by Patric LeHouillier, an attorney, for personal injury and medical malpractice claims arising out of the events leading to the injury. Peterson, a fellow attorney and close friend of LeHouillier, was appointed trustee.

During his tenure as trustee, Peterson made numerous loans from the trust corpus to LeHouillier on terms very favorable to his friend.¹ Despite the fact that LeHouillier had recently filed for bankruptcy, some of the loans were unsecured and all had interest rates much lower than what should have been charged according to the risk LeHouillier presented. The LeHouillier loan notes were not collected in accordance with their terms. Some of the notes went without any payment for approximately five years. No default interest was charged on the unpaid notes.

Peterson also made loans to LeHouillier's clients. One of the loans went bad, but Peterson repaid the money from his own funds with interest. Sklar died in 1995. Under the terms of the trust, the trust assets were to be distributed to Sklar's heirs upon his death. Peterson not only failed to make the required distributions, but also continued to make loans totaling approximately $40,000 to LeHouillier after Sklar's death. Throughout the entire time he acted as trustee, Peterson failed to file any of the annual accountings required by the terms of the trust agreement with the probate court.

Three years after Sklar's death, a magistrate for the El Paso County District Court contacted Peterson to inquire about the loans and lack of accountings as part of a review of trusts under the court's jurisdiction. Subsequently, Peterson withdrew as trustee and the court appointed McMahon as successor trustee. In her capacity as trustee, McMahon sued Peterson for breach of fiduciary duty and negligence.² After a bench trial, the probate court held Peterson liable for gross negligence in managing the trust based on his failure to file accountings, failure to act in the beneficiary's interest by making improper loans to friends and failure to invest trust assets prudently. Compensatory damages of $316,631.53 were awarded based on what the trust would have earned had Peterson not violated his duties as trustee. The probate court further found that Peterson's actions were "willful and wanton, done heedlessly and recklessly, without regard to the consequences, or of the rights and safety of others" and concluded that an award of $100,000 in exemplary damages was warranted. Although noting that exemplary damages are not available in equity actions, the court determined that this case had been tried in tort and thus exemplary damages could be awarded.

Peterson appealed the award of exemplary damages, alleging that our decision in Kaitz v. Dist. Court, 650 P.2d 553 (Colo.1982), precluded an award of exemplary damages in an action against a former trustee because such actions are equitable. The court of appeals upheld the exemplary damage award, observing that the Kaitz court held that an action by a beneficiary against a trustee was generally, but not always, an equitable action. Peterson, slip op. at 8 (citing Kaitz, 650 P.2d at 555). A later supreme court decision, the court of appeals noted, stated that Kaitz did not "foreclose the real possibility that fiduciary duty claims could be tried at law" and thus the probate court did not err in awarding damages. Peterson, slip op. at 8 (citing Paine, Webber, Jackson & Curtis, Inc. v. Adams, 718 P.2d 508, 514, n. 5 (Colo.1986)).

Peterson then appealed the exemplary damage award to this court, contending the court of appeals misapplied Kaitz in upholding the award of exemplary damages. We granted certiorari to review the award.³

III. Analysis

A.

Exemplary damages may only be awarded pursuant to statute in Colorado. Corbetta v. Albertson's, Inc., 975 P.2d 718, 721 (Colo.1999); Ark Valley Alfalfa Mills, Inc. v. Day, 128 Colo. 436, 440, 263 P.2d 815, 817 (1953). The statute authorizing exemplary damages provides a jury may make an award of exemplary damages for "a wrong done to the person or to personal or real property" when the injury is accompanied by fraud, malice, or willful and wanton conduct. § 13-21-102(1)(a), C.R.S. (2004). Despite use of the word "jury," this statute has been interpreted to allow exemplary damages to be awarded in cases tried to the court as well. Sky Fun 1 v. Schuttloffel, 27 P.3d 361, 370 (Colo.2001).

Regardless of who serves as factfinder, our interpretation of this statute has also firmly established that exemplary damages are only recoverable in actions at law and not in actions at equity. See Kaitz, 650 P.2d at 556; Miller v. Kaiser, 164 Colo. 206, 215, 433 P.2d 772, 776-77 (1967); Littlejohn v. Grand Int'l Brotherhood of Locomotive Eng'rs, 92 Colo. 275, 20 P.2d 311 (1933). Thus, in order for the exemplary damage award in the present case to stand, the action against Peterson must be fairly characterized as maintained at law.

Two methods are frequently employed to determine whether an action is legal or equitable. See 1 Dan B. Dobbs, Dobbs Law of Remedies: Damages-Equity-Restitution § 2.6(3) (2d ed.1993). First, courts examine the nature of the remedy sought. Id.; Cont'l Title Co. v. Dist. Ct., 645 P.2d 1310, 1316-18 (Colo.1982). Actions seeking monetary damages are considered legal while actions seeking to invoke the coercive power of the court, such as those seeking injunctions or specific performance, are deemed equitable. Dobbs, supra, § 2.6(3). See Cont'l Title,645 P.2d at 1316-18. Second, courts look to the historical nature of the right that a plaintiff is seeking to enforce. See Kaitz, 650 P.2d at 555; Dobbs, supra, § 2.6(3). A claim is equitable when the plaintiff is seeking to enforce a right originally created in or decided by equity courts. See Kaitz, 650 P.2d at 555; Dobbs, supra, § 2.6(3).

McMahon, the plaintiff in the present case, seeks exclusively money damages, and thus the nature of the remedy is legal. Although we have generally preferred using the remedial method in deciding whether a claim is legal or equitable, the overwhelmingly equitable history of trusts makes trust litigation a special case. See Cont'l Title, 645 P.2d at 1316 (In deciding whether a case is legal or equitable for purposes of a jury trial "the determinative issue is the characterization of the nature of the relief sought."); Dobbs, supra, § 2.3(2) (tracing the development of the concept of trusts and trust law in English courts of equity). Because equity courts developed the concept of a trust and equitable principles such as the requirements of "good conscience" are used to enforce trusts and the fiduciary duties underlying trusts, litigation relating to trusts has been treated as equitable even when solely monetary relief is sought. See Kaitz, 650 P.2d at 555 (action against trustee held equitable even though money damages sought as relief); Dobbs, supra, § 2.6(3)("Trust and fiduciary cases are historically and substantively equitable, but remedially speaking they might be legal.").

We recognized the historically equitable nature of trust actions in Kaitz, when we held that actions by a beneficiary against a trustee in an existing trust were "generally, but not always" equitable. 650 P.2d at 555. Contrary to Peterson's contention and the basis of his appeal, we did not hold that actions against a trustee were...