Van Gundy v. Van Gundy

• Decision Date: 08 November 2012
• Docket Number: No. 11CA0750.,11CA0750.
• Citation: 292 P.3d 1201
• Parties: Eldon K. VAN GUNDY, Plaintiff–Appellee, v. Quinton VAN GUNDY, Defendant–Appellant.
• Court: Colorado Court of Appeals

292 P.3d 1201

Eldon K. VAN GUNDY, Plaintiff–Appellee,

v.Quinton VAN GUNDY, Defendant–Appellant.

No. 11CA0750.

Colorado Court of Appeals, Div. IV.

Nov. 8, 2012.

Joseph Coleman & Associates, LLC, Joseph Coleman, Grand Junction, Colorado, for Plaintiff–Appellee.

Aldrich Law Firm, LLC, Frederick G. Aldrich, Grand Junction, Colorado, for Defendant–Appellant.

Opinion by Judge J. JONES.

¶ 1 Defendant, Quinton Van Gundy (trustee), appeals a portion of the judgment entered after a bench trial in favor of plaintiff, Eldon Van Gundy (beneficiary), on beneficiary's breach of contract claim, as well as the court's award of attorney fees to beneficiary. We affirm in part, reverse in part, and remand the case with directions.

I. Background

¶ 2 In 2004, beneficiary created an irrevocable trust to be managed by trustee, his son, funding it with real estate and shares of stock in a family business.

¶ 3 As relevant here, the trust agreement provided generally that (1) trust property would be “held, managed, administered, and distributed by Trustee as provided in this Agreement”; (2) trustee could expend trust funds for beneficiary's health, maintenance, support, and comfort in whatever amounts trustee, in his sole discretion, deemed advisable; and (3) trust assets would not be subject to beneficiary's creditors' claims and beneficiary could not “encumber, hypothecate, or alienate” trust assets (a so-called “spendthrift” provision).

¶ 4 Section 8 of the trust agreement enumerated trustee's powers and discretion, which trustee was to exercise “in a fiduciary capacity.” Subsection (d) of section 8 is at the heart of the parties' dispute. It stated that trustee would have the power and discretion

[t]o invest and reinvest in common stocks, preferred stocks, investment trusts, bonds, securities and other property, real or personal, foreign or domestic, including any undivided interest in any one or more common trust funds maintained by any corporate trustee, whether or not such investments be of the character permissible for investments by fiduciaries under any applicable law, and without regard to the effect any such investment or reinvestment may have upon the diversity of the investments.

(Emphasis added.)

¶ 5 Trustee sold the initial assets of the trust in early 2006, for a total of over $1.3 million. That year, trustee deposited nearly $1.05 million of trust funds into a brokerage account.¹ By November 2006, trustee had invested 100% of the trust's brokerage account funds in common stocks and mutual funds. Among the investments were 5,000 shares of stock in Crystallex International Corporation (a Venezuelan gold mining company) purchased for $26,508, and some stock in other companies purchased on margin.²

¶ 6 In early 2007, trustee met with beneficiary and beneficiary's other son. Trustee identified trust objectives, including that trustee would diversify the trust holdings so that only 30% of trust assets would be invested in stocks. Notwithstanding this stated objective, trustee continued to maintain 100% of trust assets in stocks and mutual funds until March 2009, when he received a notarized letter from beneficiary asking him to liquidate all trust assets. Though the value of the trust's holdings had dropped precipitously from late 2008 to early 2009, trustee complied with beneficiary's request and sold the bulk of the trust's brokerage account holdings that month.³ As a result, the trust realized a long-term loss of over $340,000. The remaining value of the trust's brokerage account was just over $100,000.⁴

¶ 7 Later that year, beneficiary filed a complaint against trustee, asserting claims for breach of fiduciary duty, breach of contract, breach of duty to provide a complete accounting, and to quiet title. He further alleged that trustee had fraudulently induced him to create the trust, and sought termination of the trust and retitling of trust assets in his name.

¶ 8 Before trial, the district court dismissed the claims of fraudulent inducement and breach of fiduciary duty (the latter having been deemed duplicative of the breach of contract claim).

¶ 9 Following a bench trial, the district court found that trustee had breached his contractual duty to beneficiary by purchasing stocks on margin, which, “under the circumstances,” violated the prudent investor rule codified in subsection 15–1.1–102(a), C.R.S. 2012. The court acknowledged that current Colorado law does not classify margin investments as per se imprudent, and that the trust agreement granted trustee the power to invest in property “whether or not such investments be of the character permissible for investments by fiduciaries under any applicable law.” Nonetheless, it ruled that trustee's duty to act prudently was not eliminated by the terms of the trust, and further found that trustee's investments on margin were imprudent given the trust's purpose and beneficiary's age and financial situation. In addition, the court held that, under section 15–1.1–103, C.R.S.2012, trustee was required to diversify trust investments, but had failed sufficiently to do so. The court calculated damages of $376,959.24 due to trustee's investment on margin and failure to diversify.

¶ 10 The district court also found that trustee's $26,508 investment in Crystallex had been imprudent, awarding damages for the entire loss resulting from that investment. In total, the court awarded beneficiary $402,959.24 in damages, plus attorney fees, on his breach of contract claim. It further ordered a complete accounting by trustee and awarded damages for any trust funds unaccounted for or improperly disbursed. Trustee subsequently provided an accounting and corrections, and the court then awarded beneficiary $2,624 in additional relief for funds improperly disbursed, and subtracted $3,140 for the remaining value of the Crystallex investment, entering a final damages award of $399,819.24.⁵

¶ 11 Trustee appeals, contending that the district court erred in applying the prudent investor rule and consequently ruling that he had breached the trust agreement by purchasing stock on margin and failing sufficiently to diversify.

II. Discussion

A. Standard of Review

¶ 12 We review a court's factual findings following a trial to the court only for clear error. M.D.C./Wood, Inc. v. Mortimer, 866 P.2d 1380, 1383–84 (Colo.1994); Page v. Clark, 197 Colo. 306, 313, 592 P.2d 792, 796 (1979). A court's factual findings are clearly erroneous only if there is no support for them in the record. M.D.C./Wood, 866 P.2d at 1384.

¶ 13 Trustee's contentions on appeal raise issues of statutory interpretation and interpretation of the trust agreement. We review a district court's resolutions of such issues de novo. Associated Governments of Northwest Colo. v. Colo. Pub. Utils. Comm'n, 2012 CO 28, ¶ 11, 275 P.3d 646 (statutory interpretation); Denver Foundation v. Wells Fargo Bank, 163 P.3d 1116, 1122 (Colo.2007) (interpretation of trust agreement); Casey v. Colorado Higher Educ. Ins. Benefits Alliance Trust, 2012 COA 134, ¶ 20, –––P.3d –––– (interpretation of trust agreement); see also Loveland Essential Group, LLC v. Grommon Farms, Inc., 251 P.3d 1109, 1114 (Colo.App.2010) (reviewing de novo the district court's application of governing legal standards).

B. Applicable Law

¶ 14 In 1995, the General Assembly enacted the Uniform Prudent Investor Act (UPIA), drawing upon the revised standards for prudent trust investment set forth in the Restatement (Third) of Trusts: Prudent Investor Rule (1992). Title 15, article 1.1 official cmt. prefatory note, C.R.S. 2012; see Micale v. Bank One N.A., 382 F.Supp.2d 1207, 1219 (D.Colo.2005) (“The UPIA essentially compl[e]ments and codifies the common law.”).

¶ 15 Section 15–1.1–101, C.R.S.2012, of the UPIA provides:

(a) Except as otherwise provided in subsection (b) of this section, a trustee who invests and manages trust assets owes a duty to the beneficiaries of the trust to comply with the prudent investor rule set forth in this article.

(b) The prudent investor rule, a default rule, may be expanded, restricted, eliminated, or otherwise altered by the provisions of a trust. A trustee is not liable to a beneficiary to the extent that the trustee acted in reasonable reliance on the provisions of the trust.

(Emphasis added.)

¶ 16 Subsequent sections of the UPIA set forth, as relevant here, a prudent trustee's obligations and the considerations affecting a prudent trustee's investment decisions. See§§ 15–1.1–102 to –109, C.R.S.2012; see§ 15–1.1–101 official cmt., C.R.S. 2012 (“Sections [15–1.1–102 to –109] of this Act identify the main factors that bear on prudent investor behavior.”).

¶ 17 Section 15–1.1–102 is “the heart of the [UPIA]”—it sets forth the standard of care for prudent investment. § 15–1.1–102 official cmt., C.R.S. 2012. Subsection (a) thereof provides that a trustee must consider the purposes of the trust and select investments with reasonable care, skill, and caution. See alsoRestatement (Third) of Trusts § 90 (2007). Subsection (c) includes a nonexclusive list of factors that a prudent trustee should consider in selecting investments, including needs for liquidity and regularity of income. Subsection (e) abrogates “[a]ll categoric restrictions on types of investments,” and allows any investments appropriate for achieving the risk/return objectives for the trust. Title 15, article 1.1 official cmt. prefatory note.

¶ 18 Other subsections provide that a prudent trustee must diversify trust investments; must act solely for the beneficiaries' benefit; and must invest and manage trust assets impartially, taking into account any differing interests of the beneficiaries. §§ 15–1.1–103, –105, –106, C.R.S.2012; see alsoRestatement (Third) of Trusts § 90(b), (c).

¶ 19 Whatever the scope of the prudent investor rule, the UPIA, as noted, expressly provides that it is a default rule that can be altered or eliminated by the terms of the trust instrument. § 15–1.1–101(b); ...