As a title examiner,[1] you see many things that make you go, “Hmm.” Some of them you do not like, but you have the protection of certain presumptions, the Marketable Record Title Act or the Simplification of Land Titles Act to rely on. Other times, you must make a judgment call about whether something that feels "icky" rises to a level of litigious uncertainty that prevents the grantee's title from being marketable.[2]

One of those judgment calls is when you see a conveyance from a trustee to themselves, individually – particularly when the trustee is not the settlor of the trust, or the trust is irrevocable. Often, a successor trustee is also the sole beneficiary of that property, so a deed from the trustee to themselves is not only warranted, it is required. But when reviewing the record, a title examiner 1) likely hasn't reviewed the terms of the trust and 2) cannot tell from the face of the document that it is for the purpose of distributing the trust asset to the sole beneficiary.[3] Further, without specific language in the conveyancing document, a title attorney has no way to distinguish a deed made for distribution purposes versus a sale of trust assets.[4]

OKLAHOMA TITLE EXAMINATION STANDARDS

When determining whether to make objection to an instrument, the Oklahoma Title Examination Standards (OTES) are, or should be, a title examiner's first stop.[5] OTES §15.1 states:

The trustee of an express trust has the power to grant, deed, convey, lease, grant easements upon, otherwise encumber and execute assignments or releases with respect to the real property or interest therein which is subject to the trust. A trustee's act is binding upon the trust and all beneficiaries thereof, in favor of all purchasers or encumbrancers without actual knowledge of restrictions or limitations upon the trustee's powers by the terms of the trust, and without constructive knowledge imposed by the trust instrument containing restrictions and limitations having been recorded in the county where the real estate is located.

This standard is based on the language of 60 O.S. §§171 et seq., 175.7 and 175.45. These statutes, in summary, provide that when dealing with an express trust, any conveyance by the trustee is binding upon the trust in favor of purchasers without notice of any restrictions or limitations established upon the trust by the trustee. Further, 60 O.S. §175.24(2) states a trustee has the power to grant options and sell real or personal property at public auction or private sale.

All of this would lead one to believe OTES §15.1 is spot on, and without anything to the contrary in the record, a title examiner should presume the trustee's conveyance is valid. However, the standard does not address or refer to 60 O.S. §175.11, which states:

No trustee shall directly or indirectly buy or sell any property for the trust from or to itself or an affiliate; or from or to a director, officer, or employee of such trustee or of an affiliate; or from or to himself, a relative, employer, partner, or other business associate; provided a national banking association or a state bank and trust company performing trust functions, where acting as executor, administrator, guardian, or trustee, may sell stock of itself to one or more of its officers, stockholders, or directors upon a court of competent jurisdiction finding that such sale will be for the best interest of the trust estate and making an order for such sale. [emphasis added]

Further, the OTES are built upon the Model Title Standards developed in 1960 by the University of Michigan Law School in Ann Arbor. Model Title Standard 11.2 recites:

Since a conveyance by a fiduciary to himself, either directly or indirectly, cannot be set aside after the five-year period of limitation on such a proceeding has expired, no objection should be made to a title on this ground after the expiration of five years from the date of record of such instrument.[6]

One can presume from this language that within the five-year period, a title examiner either can or should make such an objection. In Oklahoma, the "five-year period" presumably would be 10 years under the Simplification of Land Title Act (SLTA), which protects a purchaser for value, without notice, from one claiming under a conveyance by a trustee where the trust agreement is not of record.[7]

As a title examiner, within the 10-year period between the recording of the conveyance and the application of the SLTA, should one rely on OTES §15.1 and pass the title without objection, or does the prohibition in 60 O.S. §175.1 prevent the application of OTES §15.1? Further, does said prohibition prevent the application of the SLTA even after 10 years have passed?

COBB V. NEWMAN

This author found no Oklahoma case law interpreting the intersection between these seemingly competing statutes. One case that may yield some insight is Cobb v. Newman,[8] wherein the court discussed cestui que trusts in relation to stockholders of a corporation. J.O. Kuyrkendall owned several tracts of land that included minerals interests. Some tracts were owned by himself individually and some by D.O.K. Land and Cattle Co., of which he owned 879 of 1,200 shares. His will gave specific tracts to specific children and distributed specific numbers of shares of the corporation to specific children. The will stated a child could sell their tract before discovery of minerals (or discovery and production, depending on how you read it), but after the minerals were discovered (or discovered and produced), the "oil, gas or valuable mineral shall be the property of all my said children above named and they shall participate, share and share alike, in such gas, oil or valuable mineral and in all profits and royalty arising therefrom.”[9]

In 1932, all the shareholders agreed to convey the lands owned by the corporation to the individual children based on the distributions in the will, so each child was the owner of one or more divided tracts. The shareholders further agreed that any royalties received would be used to pay off certain corporate debt if there were not sufficient corporate funds to do so. In 1934, one child leased her minerals and received a bonus, but she did not turn the bonus money over to the corporation to apply toward the agreed debt. In 1936, the same child requested that the other children join her in a lease of the minerals. At least some of the other children refused to join the lease unless they received a share of the bonus. The lessor child did not agree to share the royalties, and the suit was filed to void the conveyances from the corporation to the children and to determine rights to the bonus and royalty money from both the 1934 and 1936 leases.[10]

The court declined to void the conveyances based on the trial court's finding that all the children were stockholders and, as such, gave full assent to the conveyances.[11] However, the court extensively discussed the general prohibition on self-dealing by quoting at least three prior decisions:

It makes no difference what the consideration of deeds made in the execution of such an agreement was, even though it was adequate and full, and no actual injury was done to the stockholders. The principle will still be strictly adhered to that, against the dissent of any stockholder of a corporation or cestui que trust protesting and asserting his right in the matter, the rule which prohibits the trustee from dealing with his trust in such a manner as to appropriate it with and mingle it with his own estate, will be set aside and no inquiry on the subject [of the adequacy of consideration] will be permitted.[12]

So jealous is the law of dealings of this character by persons holding confidential relations to each other, that the cestui que trust may avoid the transaction, even though the sale was without fraud, the property sold for its full value, and no actual injury to his interests be proven. It does not follow however, that the sale is absolutely void in the sense that the purchaser takes no title, which he can convey to a third person – a bona fide purchaser without notice; nor that the cestui que trust may not, upon notice of all the facts, ratify and affirm the sale by his acquiescence or silent approval.[13]

The character of vendor and that of purchaser cannot be held by the same person. They impose different obligations. Their union in the same person would at once raise a conflict between interest and duty, and, constituted as humanity is, in the majority of cases duty would be overborne in the struggle. …[14]

The court summarized such holdings in headnote No. 3, stating:

A person cannot legally purchase on his own account that which his duty or trust requires him to sell on account of another, nor purchase on account of another that which he sells on his own account. He is not allowed to unite the two opposite positions of buyer and seller. In such situation the law will avoid the transaction at the instance of the cestui que trust even though the sale was without fraud, the property was sold for its full value and no actual injury to his interests is proven. Such sale, however, is not void but voidable only and where the cestui que trust consents to or acquiesces in such transaction the sale is valid and binding upon him.

OTHER STATES HAVE MORE DIRECTLY ADDRESSED THE ISSUE

Ark. Code Ann. §28-73-802(b)(2) contains language similar to 60 O.S. §175.11 and further requires that a transfer "… involving the investment or management of trust property entered into by the trustee for the trustee's own personal account or which is otherwise affected by a conflict between the trustee's fiduciary and personal interests is voidable by a beneficiary affected by the transaction unless: … (2) the transaction was approved by a court." This prohibition was reinforced in Matter of GNB III Trust,[15] wherein the court held that a co-trustee’s transactions involving the purchase of trust property – a house – required court approval, not just majority agreement by co-trustees, under statute providing that a transaction by a trustee for a trustee’s own account or that is affected by conflict is voidable unless approved by a court.

Standards for Examination of Real Estate Titles in Arkansas (2021 edition) (ATES) Standard §4.1 states that in the absence of actual or constructive notice to the contrary, it may be presumed by the examiner that a recorded document has been delivered, is not a forgery, the grantor was not a minor, the grantor had the capacity to execute the instrument and the grantor was acting voluntarily in exchange for consideration. Note that this standard does not include the presumption that a trustee had the authority to convey. In fact, ATES §4.7(1)(c) states, "Proof of the authority of the trustee of an express trust to convey land owned by the trust should be furnished." Such proof can be included in a recorded certification of trust.[16]

North Carolina has similarly held that when reviewing self-interested transactions by a trustee, certain precautions must be taken "not because there is fraud, but because the trustee, because of his fiduciary relationship, is skating on the thin and slippery ice of presumed fraud, which he must rebut by proof that no fraud was committed and no undue influence exerted."[17] Further, "Transfers of trust property resulting in a breach of the duty of loyalty are voidable by the trust beneficiaries affected, regardless of whether the transaction was supported by fair consideration."[18] Delaware also prohibits self-dealing.[19] Indiana requires court approval where a trustee self-deals.[20] [21]

CONCLUSION

The questions remain. Is a violation of 60 O.S. §175.11 void or simply voidable? Would an Oklahoma court begin with the presumption that the conveyance is void, placing the burden on the trustee to defend the conveyance? Would an examiner then be bound by 60 O.S. §175.11 to require evidence of the trustee's authority to self-deal? Or would an Oklahoma court presume such conveyance is valid unless the challenger proved breach of the fiduciary duty? If so, may a title examiner rely on the presumption afforded by OTES §15.1 and the corresponding statutes and pass title without objection? Does any of this analysis change under the SLTA after the conveyance has been of record for 10 years? Until a clarifying statute or decision is reached and published, each title examiner should determine their own comfort level with passing title.

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ABOUT THE AUTHOR

Rhonda J. McLean is an attorney at Munson & McMillin PC in Edmond. She practices in the areas of real property title and curative (both surface and oil and gas), probates and estate planning. She currently serves as secretary of the Title Examination Standards Committee and chairperson-elect of the Real Property Section of the OBA. She has previously served as editor of the Title Examination Standards Handbook and as president of the Oklahoma City Real Property Lawyers Association.

 

[1] This article is written strictly from a title examination standpoint and whether a title examiner should pass title or make a requirement for review of the trust document or other curative measures. This article does not address remedies beneficiaries may have against a trustee beyond avoidance of the conveyance.

[2] A marketable title is one free from apparent defects, grave doubts and litigious uncertainty and consists of both legal and equitable title fairly deducible of record. Oklahoma Title Examination Standard §1.1.

[3] On occasion, a trust agreement will be filed of record. However, that is the exception rather than the rule. And even when filed of record, the examining attorney cannot know with any certainty whether the trust agreement has been amended since recording.

[4] When bringing up this point in various groups, the answer is often, "Look at the documentary stamps." This isn't conclusive for a few reasons: 1) the author is aware of instances when a clerk recording the document told the individual that if it had the same names for the grantor and grantee, documentary stamps weren't required; 2) documentary stamps are not conclusive evidence of the total consideration paid for the property; 3) documentary stamps do not, in and of themselves, indicate that fair market value was received for the property; and 4) exchange for fair market value may not validate the conveyance. As a practical matter, if this examiner prepares a deed for distribution purposes, they will include a recital stating the deed is made pursuant to the distribution terms of the trust.

[5] The Oklahoma Title Examination Standards Handbook can be found as an appendix to Title 16 at www.oscn.net, www.eppersonlaw.com, or you may obtain a hard copy from the OBA.

[6] An electronic copy of the Model Title Standards can be found at www.eppersonlaw.com.

[7] Oklahoma Title Examination Standard §29.2(D)(4).

[8] 1949 OK 37, 205 P.2d 858, 201 Okla. 318.

[9] Id., at ¶3-8.

[10] Id., at ¶9-13.

[11] Id., at ¶25.

[12] Id., at ¶22, quoting Barnes et al v. Lynch et al, 9 Okla. 156, 59 P. 995, at ¶6.

[13] Id., at ¶23, quoting Hoyt v. Latham, 143 U.S. 553, 12 S.Ct. 568.

[14] Id., at ¶24, quoting Marsh v. Whitmore, 21 Wall. 178, 88 U.S. 178, 22 L.Ed. 482.

[15] Court of Appeals of Arkansas, Division III, 2019 Ark. App. 171, 574 S.W.3d 159 (March 13, 2019).

[16] Arkansas Standard §4.7(1)(c) refers to Arkansas Standard §4.16 "Certificates of Trust." Standard §4.16(4) includes powers of the trustee as one of the recitations to be included in a certificate of trust.

[17] Howe v. Links Club Condominium Asso., Inc., 263 N.C.App. 130 (2018). The North Carolina Uniform Trust Code also illustrates that a trustee's sale of trust property is "rebuttably presumed to be affected by a conflict of interest if the trustee enters into the transaction with[,]" inter alia, an "officer, director, member, manager, or partner of the trustee, or an entity that controls, is controlled by, or is under common control with the trustee;" or "[a]ny other person or entity in which the trustee, or a person that owns a significant interest in the trust, has an interest or relationship that might affect the trustee's best judgment." N.C. Gen. Stat. §36C-8-802(c)(3)&(4) (2017).

[18] THZ Holdings, LLC v. McCrea, 231 N.C.App 482 (2013) discussing N.C.G.S.A. §36C-8-802(b):

Subject to the rights of persons dealing with or assisting the trustee as provided in G.S. 36C-10-1012, a sale, encumbrance, or other transaction involving the investment or management of trust property entered into by the trustee for the trustee's own personal account, or that is otherwise affected by a conflict between the trustee's fiduciary and personal interests, is voidable by a beneficiary affected by the transaction, without regard to whether the transaction is fair to the beneficiary, unless:

(1) The terms of the trust authorized the transaction;

(2) The court approved the transaction;

(3) The beneficiary did not commence a judicial proceeding within the time allowed by G.S. 36C-10-1005;

(4) The beneficiary consented to the trustee's conduct, ratified the transaction, or released the trustee in compliance with G.S. 36C-10-1009; or

(5) The transaction involves a contract entered into, or claim acquired by, the trustee before the person became or contemplated becoming trustee.

[19] Stegemeier v. Magness, Supreme Court of Delaware, 728 A.2d 557 (1999) holding that a person acting in a fiduciary capacity cannot also act for themselves and cannot be a purchaser from the estate for which they are trustee, however fair the terms of the sale or however honest the circumstances.

[20] Huff v. Huff, Court of Appeals of Indiana, 892 N.E. 2d 1241 (2008) referencing IC 1985, 30-4-3-5.

[21] This author has been unable to locate a copy of North Carolina, Indiana or Delaware title standards if such standards exist.