Present: Compton, Lacy, Hassell, Keenan, Koontz, and Kinser,
JJ.
LYNN-HALL WARD, ET AL.
v. Record No. 972622
NATIONSBANK OF VIRGINIA, N.A., ET AL.
OPINION BY JUSTICE ELIZABETH B. LACY
November 6, 1998
THE LIFE INSURANCE COMPANY OF VIRGINIA
v. Record No. 972640
LYNN-HALL WARD, ET AL.
FROM THE CIRCUIT COURT OF ALBEMARLE COUNTY
Rayner V. Snead, Judge Designate
In this case, the beneficiaries of a trust filed a bill
of complaint against the trustee alleging that the trustee
breached the trust agreement by executing a purchase option,
agreeing to a deed of trust on the trust property securing
funds lent to the lessee/purchaser for development of the
property, and subsequently conveying the trust property.
Because we conclude that the trustee had the authority to
grant the purchase option and exercised that authority in a
prudent manner, and that the deed of trust on the trust
property provided a benefit to the trust, we will affirm the
judgment of the trial court.
I. FACTS
In March 1965, J. L. Hartman and Pauline H. Hartman
created a trust for the benefit of their grandchildren, Lynn-
Hall Ward, Robert Lee Walker, Jr., Margaret M. Martin, and
1
Anne Walker Durrett (collectively "the Beneficiaries").
Virginia National Bank, NationsBank of Virginia, N.A.'s
predecessor, was named as trustee (the Trustee). The trust
property was a 29.26-acre tract of land located in Albemarle
County.
In May 1969, the Trustee leased the trust property to
Wendell W. Wood. The lease contained an option to purchase
the property for $750,000 at the expiration of the 25-year
lease term. In December 1972, Wood assigned his interest in
the lease to Rio Associates Limited Partnership (Rio).
In conjunction with the assignment, the Trustee, Wood,
and Rio executed an agreement (1972 agreement) in which the
Trustee agreed to subordinate its fee interest in the trust
property to first lien deeds of trust securing loans to Rio
for development of the property. In return, Rio and Wood
agreed to provide collateral security to insure performance of
their obligations. The 1972 agreement further provided that
when the first development loan was obtained, the lease would
be amended by changing the option to purchase clause to a
contract to purchase with the deed of conveyance naming Rio or
its successors as the grantee.
Between 1976 and 1994, Rio developed the trust property
into Albemarle Square Shopping Center. Development of the
property was financed by three loans totaling over $5 million
from The Life Insurance Company of Virginia (Life of
2
Virginia). When the first loan for $4.1 million was obtained
in June 1976, Rio exercised the purchase option in accordance
with the 1972 agreement and agreed to close on the purchase of
the trust property and pay the purchase price in December 1994
(contract of sale). Also in accordance with the 1972
agreement, the Trustee executed a subordination agreement,
subordinating its fee interest to a deed of trust securing
Life of Virginia's loan to Rio. Subsequent development loans
were similarly secured.
In 1987, the Beneficiaries told the Trust manager, David
P. Masich, that they felt the $750,000 purchase price stated
in the lease was too low. Masich subsequently informed the
Beneficiaries in October 1988 that the sale of the property at
the end of the lease was "a done deal."
In the spring of 1994, the Beneficiaries retained E.
Randall Rawlston, an attorney, to represent them. Rawlston
told the Beneficiaries that they could file a suit to enjoin
the sale of the property. One of the legal theories under
consideration as a basis for such litigation was that the
Trustee had breached its fiduciary duty when it entered into
the purchase option. After conferring with another attorney,
Rawlston told the Beneficiaries that additional work necessary
to analyze whether the trust agreement authorized the Trustee
to enter into a purchase option required a retainer of $2,000.
The Beneficiaries decided not to pursue the matter because
3
they did not want to incur the cost associated with the
additional work.
Ralston also advised the Beneficiaries that they could
defer capital gains taxes of $250,000 if the sale of the trust
property was structured as a like-kind exchange. Because the
Trustee's cooperation was necessary to accomplish this type of
exchange, the Beneficiaries decided not to institute legal
proceedings to enjoin the sale of the trust property and to
proceed with the sale as a like-kind exchange. They did
intend to pursue litigation, however, after the transaction
was complete.
The closing on the sale of the trust property was
originally scheduled for December 1994 but was delayed to
accommodate the like-kind exchange. In conjunction with the
closing, Life of Virginia agreed to loan Rio an additional
$6.9 million, part of which was to be used to pay off the
prior loans. As with the previous loans, the Trustee
subordinated its fee interest, and on December 24, 1994 the
Trustee and Rio executed a deed of trust on the property to
Life of Virginia to secure the loan (1994 Deed of Trust). On
January 5, 1995, the Trustee executed a deed conveying the
property to Rio (1995 deed or deed of conveyance).
II. PROCEEDINGS
In November 1995, the Beneficiaries filed a bill of
complaint against the Trustee, Rio, and Life of Virginia,
4
alleging that the Trustee breached its fiduciary duty and the
terms of the trust agreement by granting a purchase option in
the 1969 lease. The Beneficiaries asked the court to void the
January 1995 conveyance of the trust property from the Trustee
to Rio, to void the December 1994 Deed of Trust granted by the
Trustee and Rio to Life of Virginia, and to remove NationsBank
as Trustee of the trust.
The Trustee, Rio, and Life of Virginia responded,
denying, inter alia, any breach of fiduciary duty and
asserting that the 1969 lease and option to purchase, the 1976
contract of sale, the 1994 Deed of Trust, and the 1995 deed of
conveyance were valid. They also raised the affirmative
defenses of consent, ratification, and affirmation of the 1995
deed by the Beneficiaries and asserted that the Beneficiaries
were estopped from challenging the 1995 deed of conveyance.
The Trustee sought attorney's fees. Rio and Life of Virginia
filed a cross-bill for sanctions and attorney's fees under
Code § 8.01-271.1.
A demurrer and motions for summary judgment were filed.
Prior to trial, the trial court denied the demurrer, but
granted the Beneficiaries partial summary judgment, holding
that the grant of the purchase option in the 1969 lease was a
breach of the trust agreement because it was not expressly
authorized by the agreement and could not be inferred from or
implied by the language of the agreement. The trial court
5
also concluded that the breach was not excused under the
exception set out in § 190, comment k, of the Restatement
(Second) of Trusts, because the trust property could have been
advantageously sold to Wood in 1969 without the purchase
option. The trial court held that none of the other issues
could be decided on summary judgment and denied the remaining
motions.
Following an evidentiary hearing, the trial court entered
an order holding that the 1994 Deed of Trust and the 1995 deed
of conveyance were valid, that the Beneficiaries had ratified,
acquiesced, and consented to the 1995 deed and could not
challenge the deed as a breach of trust, and that the
Beneficiaries were estopped from challenging the 1995 deed.
The trial court declined to remove NationsBank as the Trustee,
awarded the Trustee attorney's fees, and denied Rio and Life
of Virginia's cross-bill for sanctions and attorney's fees
under Code § 8.01-271.1.
The Beneficiaries appealed, raising nine assignments of
error. The Trustee, Rio, and Life of Virginia assigned cross-
errors. Life of Virginia filed a separate appeal challenging
the denial of attorney's fees pursuant to Code § 8.01-271.1.
We granted the parties' appeals on all assignments of error
and cross-error and consolidated the two appeals for our
consideration. A number of the assignments of error and
cross-error are dispositive of other issues.
6
III. OPTION TO PURCHASE
The trial court held that the trust agreement was not
ambiguous, that it did not expressly authorize the Trustee to
grant an option to purchase the trust property, and that the
power to grant an option to purchase would not be implied
because an option to purchase "involves much more discretion
in the determination of a purchase price as in this case
before the sale actually occurs under the option." The
Trustee, Rio, and Life of Virginia assert that the trial court
erred in holding that the power to grant an option to purchase
should not be implied from the terms of the trust agreement.
Alternatively, they argue that that trial court erred in
holding that the trust agreement was unambiguous and denying
the use of parol evidence to ascertain the intent of the
grantor.
In refusing to find that the language of the trust
agreement was sufficient to include an option to purchase, the
trial court relied on § 190, comment k, of the Restatement
(Second) of Trusts. Comment k, which the trial court
described as stating "the common law rule," provides that
"[w]here by the terms of the trust a power of sale is
conferred upon the trustee, it is ordinarily not proper for
the trustee to give an option to purchase property."
Restatement (Second) of Trusts § 190 cmt. k (1959). The trial
court's reliance on this comment was misplaced in this case.
7
Section 190 of the Restatement is entitled "Power of
Sale" and the discussion in comment k addresses a trustee's
power to grant an option to purchase based solely upon the
expressly granted power to sell the trust property. See also
3 William F. Fratcher, Scott on Trusts § 190.8, at 117-18 (4th
ed. 1988). In this case, however, the trust provision
expressly granting the Trustee the power to sell the trust
property is not the only provision of the trust agreement
which is relevant in determining whether the Trustee has the
power to grant a purchase option.
In determining the scope of a trustee's powers, we seek
to effectuate the intent of the grantor as expressed in the
terms of the trust. Frazer v. Millington, 252 Va. 195, 199,
475 S.E.2d 811, 814 (1996). This process requires
consideration of the document as a whole. Id.; Dascher v.
Dascher, 209 Va. 167, 169, 163 S.E.2d 144, 146 (1968).
Although not explicitly identified in the trust agreement,
authority to take certain actions may be implied if the
intention to create such power is evident, the power may be
appropriate or necessary to carry out the purposes of the
trust power, and the power is not forbidden by the trust
agreement. Frazer, 252 Va. at 199, 475 S.E.2d at 814;
Dascher, 209 Va. at 169, 163 S.E.2d at 147; Restatement
(Second) of Trusts § 186 cmt. d.
8
As recognized by the trial court, the trust agreement
vested very broad powers in the Trustee. 1 Of particular
relevance here is not only the power granted in Article VI of
the trust agreement to sell and lease, but also the authority
granted in subsection (m) of that Article to
do all other acts and things not inconsistent
with [the trust agreement which the Trustee] may
deem necessary or desirable for the proper
management [of the trust] in the same manner and
to the same extent as an individual might or
could do with respect to his own property.
(emphasis added). Any reasonable interpretation of this
language would include the ability of the Trustee to grant an
option to purchase. Therefore, we must determine whether an
option to purchase is appropriate or necessary to carry out
the purpose of the trust.
All parties agree that the purpose of this trust was to
provide for the education of the grantors' grandchildren. The
trust agreement states that it is the grantors' "primary
concern in the creation of this trust to provide each
beneficiary with an adequate and sufficient education." To
effectuate this purpose, the trust agreement gave the Trustee
1
Article VI of the trust agreement granted the Trustee
the power to "dispose" of the trust property by "sale,
exchange, or otherwise as and when it shall deem advisable;"
to dispose of the property "upon such terms and conditions as
it, in its absolute discretion, may deem advisable, at either
public or private sale, either for cash or deferred payments
or other consideration, as it may determine;" and to "lease
any or all of the real estate . . . upon such terms and
conditions as said Trustee, in its sole judgment and
discretion, may deem advisable."
9
broad discretion to manage the trust property in a way which
would insure that sufficient assets would be available
throughout the period needed to complete the grandchildren's
education. 2 The Trustee's use of an option to purchase is in
no way inconsistent with this purpose. Considering all the
provisions of the trust agreement, we conclude that the
language of the agreement is sufficient to imply that the
Trustee was given the power to grant an option to purchase and
that there is no basis to exclude use of the purchase option
as a mechanism for achieving the purposes of the trust.
This conclusion, however, does not end our inquiry. The
authority to undertake a specific action and the proper
exercise of that authority are distinct considerations. The
decision to grant a purchase option is at the discretion of
the Trustee and, even though a trustee's discretion is
generally broadly construed, "his actions must be an exercise
of good faith and reasonable judgment to promote the trust's
purpose." NationsBank of Virginia, N.A. v. Grandy, 248 Va.
557, 561, 450 S.E.2d 140, 143 (1994). The trustee must
"exercise the same degree of discretion in the management of
the trust that a prudent man of discretion and intelligence
would exercise in his own like affairs." Parson v. Wysor, 180
Va. 84, 89, 21 S.E.2d 753, 755 (1942).
2
At the time the trust was created, one of the
beneficiaries had not yet been born and the other three were
between three and eight years of age.
10
The trial court considered whether the Trustee's action
in this case was prudent. Its analysis was made in the
context of determining whether the Trustee's action qualified
for the exception to the Restatement rule set out in § 190
comment k. The exception requires a finding that "the grant
of the option was prudent." Regardless of the purpose for the
prudence review, the analysis and the standard to be applied
remain constant and, therefore, the trial court's conclusion
in this regard is relevant to the inquiry before us.
The trial court concluded that the Trustee's action in
granting the purchase option was prudent. Based on the
evidence before it on the motions for summary judgment, the
trial court found that
there is no evidence that the lease with the option
to Mr. Wood may not have been prudent in light of
the financial analysis advanced by the [Trustee].
The lease of the property with the option to
purchase appears to have rendered greater financial
benefit to the beneficiaries than an outright sale
of the property to Wood would have rendered.
The Beneficiaries disagree with this conclusion and argue
that the actions of the Trustee in this regard were not
prudent because the option contained no escalation in the
purchase price over the course of the 25-year term, no
evidence of how the sales price was reached in 1969, and no
provision for evaluating the market value of the property at
the time of sale at the end of the lease. While the
Beneficiaries may be correct about the state of the record
11
regarding these items, on appellate review, the factual
findings regarding the Trustee's actions made by the trial
court in this case can be set aside only if there is no
evidence in the record to support them. Code § 8.01-680.
The financial analysis referred to by the trial court
was that of the Trustee's expert witness, who compared the
value of the trust following the 1995 deed of conveyance with
what the value of the trust would have been if the trust
property had been sold outright in 1969. Using a $200,000
purchase price, the highest price Wood indicated he would
have paid for the land in 1969, and taking into account the
actual disbursements to the Beneficiaries and a reasonable
return on the trust assets, the expert testified that the
value of the trust in January 1995, if sold in 1969, would
have been $85,000. In contrast, as calculated by the expert,
the actual value of the trust following the 1995 deed of
conveyance was $905,830.46. This evidence supports the trial
court's conclusion that the lease with the option to purchase
"rendered greater financial benefit to the Beneficiaries"
than had the trust property been sold outright.
Furthermore, the record reveals that in 1969 the trust
property was swampy wetland, producing no income, and that
only part of the property was zoned for business purposes.
The 1969 assessed value of the property was $281,133 which
included an adjustment to reflect the pre-1977 Albemarle
12
County policy of assessing real estate at 15% of the fair
market value. Even though Wood testified he wanted to
purchase the property in 1969, the most he was willing to pay
for it was $200,000. Finally, he testified that he would not
have leased the property without an option to purchase it.
These circumstances support the trial court's determination
that the Trustee's actions in setting a sales price of
$750,000 with an income stream in excess of $400,000 over the
25-year term of the lease were prudent.
In summary, we conclude that under the terms of the trust
agreement, the Trustee had the implied power to grant an
option to purchase, that an option to purchase was not
inconsistent with effectuating the purpose of the trust, and
that the manner in which the Trustee exercised its authority
to grant the purchase option was prudent. Because the Trustee
did not breach the trust agreement in granting the option to
purchase, the Beneficiaries' challenge to the 1995 deed based
on the 1969 purchase option as amended in 1976 must fail.
Accordingly, for the reasons stated, we will affirm the trial
court's decision that the 1995 deed of conveyance was valid.
IV. 1994 DEED OF TRUST
In light of our holding that the exercise of the purchase
option by the Trustee was valid and not a breach of the trust
agreement, we need not address the Beneficiaries' assignments
of error I, III, and that portion of II relating to the
13
validity of the 1995 deed of conveyance based on the 1976
contract of sale; assignment of error IV relating to consent,
ratification and affirmation of the 1995 deed of conveyance;
assignment of error V relating to equitable estoppel; and the
Trustee's remaining assignments of cross-error. We do,
however, address the Beneficiaries' claim that the trial court
erred in holding that the 1994 Deed of Trust on the trust
property was valid.
The Beneficiaries assert that the 1994 Deed of Trust
executed by the Trustee in favor of Life of Virginia was
invalid because the trust agreement only allowed the Trustee
to place a deed of trust on the trust property for the benefit
of the trust. The Beneficiaries contend that the loan secured
by the 1994 Deed of Trust was for improvements to the property
and those improvements did not and were not intended to
benefit the trust.
The record shows, however, that the 1994 Deed of Trust
was part of the plan worked out to develop the property and
secure financing for the development. Consequently, whether
the 1994 Deed of Trust benefited the trust must be evaluated
within the context of that plan.
In 1969, the trust property was swampy wetland with
"scrub trees" and a dilapidated, uninhabited house on it.
Wood testified he tried to purchase the property outright, but
the Trustee refused, requiring instead a lease which would
14
provide an income stream over an extended period of time.
Wood hoped to develop the property himself, even though the
Trustee refused to include a provision in the lease that it
would agree to subordinate its fee interest to secure
development financing.
After struggling for a few years with zoning and
financing, Wood was approached by the principals of Rio with
an offer to undertake the development of the trust property as
a shopping center. The shopping center development was
feasible for Rio only if the fee simple interest could be "put
up" as part of the financing. Negotiations ensued, resulting
in the assignment of the lease and option to purchase from
Wood to Rio and the execution of the 1972 agreement. As a
condition for subordinating its fee interest, the Trustee
required removal of "all risks" from the Trustee's standpoint.
Accordingly, the 1972 agreement provided a guarantee of the
rental income and purchase price by requiring Rio and Wood to
acquire a line of credit for the rent and a certificate of
deposit for the purchase price. Additionally, the Trustee was
relieved from all risk related to rezoning, sewer, road
access, environmental concerns, in short, from all risks
connected with "anything [Rio] might do with the property."
The 1994 Deed of Trust was part of the financing and
development plan initiated by the 1972 agreement. In that
agreement, the Trustee agreed to subordinate its fee interest
15
in the future in exchange for a "virtually risk-free" position
while insuring income to the trust over a period of years.
Without that agreement, the trust had only Wood's personal
obligation to pay over $13,000 a month for non-income
producing property. This change in position benefited the
trust.
Based on the facts we have just recited, we conclude that
the 1994 Deed of Trust was executed in performance of the 1972
agreement. As such, it was a contributing factor to the
overall benefit which the 1972 agreement brought to the trust.
Therefore, the trial court did not err in holding that the
1994 Deed of Trust was valid.
V. REMOVAL OF THE TRUSTEE
In their assignments of error VI and VII, the
Beneficiaries argue that the trial court erred in not removing
NationsBank as Trustee because the record "is replete" with
evidence that the Trustee acted dishonestly, negligently, and
engaged in misconduct in its management of the trust and in
its dealings with the Beneficiaries. As support for this
argument, the Beneficiaries contend that the record shows,
contrary to the trial court's finding, that the 1969 purchase
option damaged the trust and did not enhance or benefit the
trust.
The Beneficiaries assert that damage to the trust as a
result of the 1969 option was evident because, at the time of
16
the sale in 1995, the assessed value of the trust property
without the improvements was approximately $4 million.
Therefore, according to the Beneficiaries, granting the
purchase option in 1969 caused the trust to suffer a
substantial loss because the sales price was only $750,000.
The Beneficiaries thus conclude that the record cannot support
a holding that the purchase option benefited the trust.
In Part III of this opinion, we discussed the evidence
which supported the trial court's pre-trial determination that
the Trustee acted prudently when it granted the purchase
option. That evidence likewise provides an adequate basis for
the trial court's post-trial determination that the trust was
not harmed by the purchase option and that the option enhanced
the trust. 3
As additional grounds for removal, the Beneficiaries
recite here, as they did in the trial court, various actions
of the Trustee in relation to the execution of the 1969 lease
and option to purchase, 1976 contract of sale, deeds of trust,
the 1995 deed of conveyance, and information relayed to the
Beneficiaries regarding the status of the purchase option.
Removal of a trustee is within the discretion of the
trial court. The trial court must determine whether it is in
3
The evidence upon which the trial court based its pre-
trial finding was presented to the court by affidavit and
exhibits prepared by the Trustee's expert. The same evidence
was subsequently presented ore tenus during trial through the
expert's testimony.
17
the best interest of the trust for the trustee to be removed.
Clark v. Grasty, 210 Va. 33, 37, 168 S.E.2d 268, 271 (1969).
The trial court reviewed all of the Trustee's actions and
their impact on the trust, but declined the Beneficiaries'
request to remove NationsBank as trustee. Based on our
review, we cannot conclude that this decision was an abuse of
discretion.
VI. ATTORNEY'S FEES
The Beneficiaries assign error to the trial court's
determination that the Trustee was entitled to an award of
attorney's fees to be charged against the trust. The
Beneficiaries challenge both the basis for and the amount of
the award.
Citing Willson v. Whitehead, 181 Va. 960, 965, 27 S.E.2d
213, 216 (1943), the Beneficiaries assert that a trustee is
entitled to attorney's fees only if the litigation was
initiated "without his own fault." Here, the Beneficiaries
assert, the basis for the litigation was the Trustee's action
in granting the purchase option, and therefore the Trustee is
not entitled to attorney's fees. The Beneficiaries misread
Willson.
As applied by the Beneficiaries, Willson would bar an
award of attorney's fees in every case naming the trustee as a
respondent because virtually every case challenging the
administration of a trust is based on some action taken by the
18
trustee. The correct application of Willson is that a
trustee, who has the duty to defend the actions challenged as
detrimental to the trust, is entitled to attorney's fees when
he has been called on to defend himself against a charge of
dereliction of duty and there is neither substantial evidence
that the trustee wasted or mismanaged the trust nor evidence
of any conduct warranting the removal of the trustee. Id. at
967, 27 S.E.2d at 217.
In this case, the Trustee was required to defend against
claims of dereliction of duty in granting the option to
purchase the trust property. As we have held, this action
along with the other actions of the Trustee under attack in
this case did not damage the trust but, in fact, benefited the
trust.
The relevant legal principle we apply here is that where
a trustee has a good faith basis for defending a suit
challenging his actions as trustee, attorney's fees and costs
incurred in the defense of the suit should be charged against
the trust. Cooper v. Brodie, 253 Va. 38, 44, 480 S.E.2d 101,
104 (1997). In this case, the Trustee had a good faith basis
for defending this law suit and there was no evidence of
mismanagement, waste, or any other actions warranting removal
of the Trustee.
The Beneficiaries also assert that not all the fees
awarded were related to the defense of the trust, and that the
19
amount of the fees was unreasonable. The claims made by the
Beneficiaries and the relief sought related to documents and
events which involved all of the respondents; therefore, the
Trustee's attorneys were required to consult with and review
pleadings and other matters generated by Rio and Life of
Virginia. The Beneficiaries produced no evidence to support
their charge that the consultations were unnecessary or that
the amount of the fees was unreasonable. In contrast, the
Trustee introduced expert witness testimony to establish the
reasonableness of the time spent on the case and the amount of
the fees. Furthermore, the trial court reduced the Trustee's
request for attorney's fees by $34,000.
Accordingly, we will affirm the trial court's judgment
awarding attorney's fees to the Trustee.
VII. CODE § 8.01-271.1
Finally, we reject claims made by Life of Virginia and
Rio that the trial court erred in refusing to impose sanctions
against the Beneficiaries and their counsel pursuant to Code
§ 8.01-271.1. The trial court concluded that this litigation
was not frivolous. A number of issues in this case, even
though decided against the Beneficiaries, were subject to
legitimate debate. The relief requested by the Beneficiaries
included vacating the 1995 deed of conveyance and the 1994
Deed of Trust. Neither of these remedies could have been
granted without joining Rio and Life of Virginia as parties.
20
In reviewing a trial court's award of sanctions pursuant
to § 8.01-271.1, we apply an abuse of discretion standard.
Oxenham v. Johnson, 241 Va. 281, 287, 402 S.E.2d 1, 4 (1991).
Based on our review in this case, we conclude that the trial
court did not abuse its discretion in denying the imposition
of sanctions and attorney's fees.
VIII. CONCLUSION
The Beneficiaries' final assignment of error, that the
trial court erred in adopting the respondents' findings of
fact and conclusions of law, merits little attention. We have
reviewed and affirmed all the factual findings and legal
determinations of the trial court necessary for the
disposition of these appeals. There is no need to review
matters which have no bearing on the issues before us.
In summary, for the reasons stated in this opinion, we
will affirm the judgment of the trial court.
Record No. 972622--Affirmed.
Record No. 972640--Affirmed.
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