KATHY GORTNEY v. KAREN SUE ROGERS
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C ommonwealth O f K entucky
C ourt O f A ppeals
NO.
2001-CA-000803-MR
KATHY GORTNEY
v.
APPELLANT
APPEAL FROM FRANKLIN CIRCUIT COURT
HONORABLE WILLIAM L. GRAHAM, JUDGE
ACTION NO. 99-CI-00070
KAREN SUE ROGERS
APPELLEE
OPINION
REVERSING
AND
REMANDING
** ** ** ** **
BEFORE:
BUCKINGHAM, KNOPF, SCHRODER, JUDGES.
BUCKINGHAM, JUDGE:
Kathy Gortney appeals from a partial summary
judgment of the Franklin Circuit Court which determined that she
had breached her fiduciary duties as trustee by failing to
provide an accounting of trust funds and which awarded Karen Sue
Rogers a judgment for her share of the purported trust, plus
prejudgment interest and attorney fees.
On appeal, Kathy
contends that a fiduciary duty to Karen never arose because a
valid trust was never established due to the failure of the trust
settlor to properly transfer a trust corpus into the trust.
Viewing the evidence in the light most favorable to the
appellant, we conclude there was a genuine issue of material fact
concerning whether the trust actually came into existence.
Accordingly, we reverse and remand.
Robert D. Rogers is the father of Kathy Gortney, Karen
Sue Rogers, and Kenneth Smith Rogers. Robert’s first wife, the
mother of Kathy, Karen, and Kenneth, is deceased.
also deceased but has surviving children.
Kenneth is
It appears that in
approximately 1986, Robert named Kathy as his attorney-in-fact,
conferring her with general power of attorney authority.
At some
point before 1990, Robert married Mattie D. Rogers.
On July 1, 1990, Robert D. Rogers and Mattie D. Rogers
created and executed a trust agreement.
The trust agreement
stated, in part, as follows:
THIS AGREEMENT made this 1st day of July,
1990, by and between ROBERT D. ROGERS and
MATTIE D. ROGERS, of Frankfort, Franklin
County, Kentucky, hereinafter called the
GRANTORS, and KATHY R. GORTNEY, of
Frankfort, Franklin County, Kentucky,
hereinafter called the TRUSTEE,
W I T N E S S E T H:
The Grantors have this day assigned,
transferred, and conveyed to the Trustee, the
property described in Schedule A which is
attached hereto and made a part hereof. The
Grantors and the Trustee agree that the
Trustee shall hold said property and all
other property that may be added hereto as
hereinafter provided, together with all its
increments, proceeds, additions, investments
and reinvestments, in Trust, for the use and
purposes and upon the terms and conditions
hereinafter set forth.
The Trust property shall be held by the
Trustee for the benefit of Karen Sue Rogers,
Kenneth Smith Rogers, and Kathy R. Gortney.
The Trustee shall hold the principle and
income from the property designated in
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Schedule A hereof until such time as the
mortgage notes mature. Upon maturity, the
corpus of the Trust shall be divided between
the three (3) children, Karen Sue Rogers,
Kenneth Smith Rogers, and Kathy R.
Gortney. . . .
When the mortgage notes mentioned in Schedule
A hereof mature, all property held
hereinunder including both principal and
undistributed income shall be distributed by
the Trustee to her and to her brother and
sister, Kenneth Smith Robert and Karen Sue
Rogers, and thereupon this Trust shall
terminate.
The Trust created by this instrument shall be
irrevocable. Nothing contained in this
instrument shall be deemed to authorize or
permit the Grantors to borrow, any Trust
funds or to directly or indirectly deal with
or in any manner benefit from the principle
of or income from any of the Trust property.
. . .
Schedule A listed as the trust corpus: “(1) Mortgage
and note from Howell Construction, Inc.” and “(2) Mortgage and
note from Glenn and Connie Sewell.”
The Trust Agreement was
signed by Robert and Mattie Rogers as Grantors and by Kathy
Gortney as Trustee.
Following the execution of the Trust Agreement, Kathy
commenced receiving and controlling the mortgage payment checks
received on the Howell Construction and Sewell notes.
It appears
that the monthly payment on the Sewell note was $1,034.66 and
that the monthly payment on the Howell Construction note was
$3,067.00.
The checks were endorsed in various ways;1 however,
it is undisputed that Kathy received the notes proceeds.
1
Some checks were endorsed “Bob Rogers,” some were endorsed “Bob Rogers by Mattie
Rogers,” and some were endorsed “Bob Rogers by Kathy Gortney.”
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It is also undisputed that the proceeds were not
deposited into a separate trust fund or account.
Kathy contends
that she received the funds in conjunction with her attorney-infact powers and that, at Robert’s direction, the proceeds were
spent in support of Robert.
Karen contends that Kathy received
the proceeds as trustee of the July 1990 trust and that the funds
were diverted by Kathy to her own personal use.
Kathy’s power of
attorney was revoked sometime in 1996, and after that Kathy no
longer controlled the proceeds on the notes, either as trustee or
as attorney-in-fact.
In April 1996, incongruent with the existence of the
1990 trust, Robert executed a Last Will and Testament wherein he
bequeathed and devised “all of my right, title and interest in
two certain Notes and Mortgages which I hold on the Glen Sewell
property and the Howell Construction property” to Karen and
Mattie.
1998.
Kathy was disinherited under the Will.
Robert died in
On June 18, 1998, Kathy, by counsel, assuming a position
diametrically at odds with her present position, sent a letter to
the attorney for the Estate of Robert Rogers and demanded that
the future proceeds of the Sewell note2 be remitted to her on the
basis that she was entitled to the proceeds as trustee of the
1990 trust.
On January 21, 1999, Karen filed a complaint in
Franklin Circuit Court alleging (1) that Kathy had breached her
fiduciary duties as a trustee by transferring and illegally
2
The Howell Construction note had been paid in full by this
time.
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converting assets of the trust solely into her name; (2) that
Kathy had converted property of the trust to her own use; (3)
that Kathy committed fraud by falsely representing that she would
abide by the terms and conditions of the trust; and (4) that,
following Karen’s request, Kathy had failed to provide an
accounting of the trust fund.
On September 21, 1999, Karen filed a motion for partial
summary judgment upon the issue of Kathy’s failure to provide an
accounting.
Kathy responded to the motion with arguments that a
trust was never created because the intended corpus of the trust,
the mortgage notes, was never transferred to her, the intended
trustee.
On January 20, 2000, the circuit court entered an
opinion and order granting partial summary judgment on the issue
of whether a valid trust had been created.
The order determined
that the trust corpus was created by the trust agreement and that
a valid trust existed with Kathy as the trustee.
The order
further directed Kathy to provide an appropriate accounting to
the beneficiaries of the trust for all funds she received as
trustee.
On June 26, 2000, the circuit court again issued an
order directing Kathy to provide an accounting of the trust fund
receipts and disbursements.
On July 11, 2000, Kathy filed a
document captioned “Accounting.”
The document stated as follows:
Assets Received
None
Assets Distributed
None
Ending Balance
None
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On September 12, 2000, an evidentiary hearing was held
concerning the funds.
On January 22, 2001, the trial court
entered a judgment determining that Kathy had breached her
fiduciary duty to provide a proper accounting with respect to
funds she received as trustee.
On March 20, 2001, the trial
court entered a final judgment against Kathy for $98,817.18 plus
interest and attorney fees.
This appeal followed.
Kathy contends that a trust was never properly created
because the Sewell and Howell Construction notes were never
transferred to her as trustee, and, therefore, the trust was
never funded with a corpus.
This argument relates back to the
January 20, 2000, opinion and order which granted Karen partial
summary judgment on the issue of whether a trust had been
created.
We accordingly review this argument under the standards
applicable to summary judgments.
The standard of review on appeal of a summary judgment
is "whether the trial court correctly found that there were no
genuine issues as to any material fact and that the moving party
was entitled to judgment as a matter of law." Scifres v. Kraft,
Ky. App., 916 S.W.2d 779, 781 (1996).
"The record must be viewed
in a light most favorable to the party opposing the motion for
summary judgment and all doubts are to be resolved in his favor."
Steelvest, Inc. v. Scansteel Service Ctr., Inc., Ky., 807 S.W.2d
476, 480 (1991).
“A trust . . . is a fiduciary relationship with respect
to property, subjecting the person by whom the title to the
property is held to equitable duties to deal with the property
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for the benefit of another person, which arises as a result of a
manifestation of an intention to create it.”
(Second) of Trusts § 2 (1959).
Restatement
“To constitute a trust, there
must be (1) some subject matter [the res or corpus], (2) a
trustee who has the legal but not the equitable title to this
subject matter, and (3) a cestui que trust [beneficiary] who has
the equitable but not the legal title to this subject matter.”
Lossie v. Central Trust Co. of Owensboro, 219 Ky. 1, 8, 292 S.W.
338, 340 (1926).
A trust cannot be created unless there is trust
property.
Restatement (Second) of Trusts § 74 (1959).
“In order
to create a trust, legal title to the res must be transferred to
the trustee.”
Strode v. Spoden, Ky., 284 S.W.2d 663, 665 (1955).
Any property which can be voluntarily transferred by the owner
can be held in trust.
(1959).
Restatement (Second) of Trusts § 72
However, “if the owner of property makes a conveyance
inter vivos of the property to another person to be held by him
in trust for a third person and the conveyance is not effective
to transfer the property, no trust of the property is created.”
Id. at § 32.3
3
Furthermore, it has been stated that:
Transfer of title to a trustee for the
benefit of the trust of an identifiable res
is the event that brings a trust into
existence. Thus, in order to create a valid
trust, there must be an actual conveyance or
transfer of property; the trust must be
funded by an assignment of property from the
settlor to the trustee. With respect to an
inter vivos trust, a settlor must convey the
(continued...)
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The purported trust in this case was initiated by the
trust agreement dated July 1, 1990.
This agreement specifically
provided that Robert and Mattie Rogers “assigned, transferred,
and conveyed” the Howell Construction and Sewell notes to Kathy
in her capacity as the trustee of the trust.
duly executed and notarized.
The agreement was
However, for purposes of summary
judgment, we accept as true Kathy’s contentions that the notes
were neither endorsed over to her nor delivered to her.
Notwithstanding the explicit language in the trust agreement
purportedly assigning, transferring, and conveying the notes to
Kathy, because there was evidence that neither an endorsement or
negotiation of the notes nor a transfer of physical possession of
the notes occurred, we are persuaded that there was a fact issue
as to whether the trust ever came into existence.
It is undisputed that the Howell Construction note and
the Sewell note were negotiable instruments.
See KRS4 355.3-104.
In its order granting partial summary judgment, the trial court,
in concluding that a transfer of the notes to Kathy had occurred,
relied on KRS 355.3-203.
This statute provides, in relevant
part, that:
(1) An instrument is transferred when it is
delivered by a person other than its issuer
for the purpose of giving to the person
3
(...continued)
legal title to the trust res to the trustee
so that the trustee may hold the property for
the benefit of the cestui que trust.
76 Am Jur 2d Trusts 82 (1992).
4
Kentucky Revised Statutes.
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receiving delivery the right to enforce the
instrument.
(2) Transfer of an instrument, whether or not
the transfer is a negotiation, vests in the
transferee any right of the transferor to
enforce the instrument, including any right
as a holder in due course . . . .
KRS 355.3-203.
The circuit court correctly phrased this issue for
summary judgment as “this Court must determine whether the
assignment and transfer clause in the trust itself was sufficient
to transfer the notes to Ms. Gortney as trustee.”
In its January
20, 2000, order granting partial summary judgment, the court
concluded that:
[A] delivery and transfer of the notes
occurred when the Trust Agreement was
executed. The transfer to Ms. Gortney as
Trustee authorized her to enforce the
instruments, as was evidenced by the fact
that she received payments from the obligors
and endorsed their checks for deposit
herself. This Court is aware that Robert and
Mattie Rogers made no endorsement on the
notes to transfer them to Ms. Gortney or the
trust. However, an endorsement is not
required for mere enforcement of the
instrument, only for a negotiation of the
instrument. Therefore, endorsement of the
notes was not required for Ms. Gortney to be
able to enforce the right to receive payments
on the notes as Trustee.
We are persuaded that the trial court erroneously
relied upon KRS 355.3-203 in concluding that any rights in the
notes had passed to Kathy by way of the language of the Trust
Agreement.
KRS 355.1-201 defines “delivery” with respect to an
instrument as the “voluntary transfer of possession.”
For
purposes of summary judgment, we assume that no transfer of
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possession of the notes occurred; therefore, delivery of the
notes to Kathy did not occur.
Since an instrument is
“transferred” only when it is “delivered,” it follows that a
transfer did not occur, and it was error for the circuit court to
rely upon KRS 355.3-203 to conclude that any title or other
rights in the notes had occurred.
Similarly, Kathy was not a holder of the notes by
negotiation of the notes.
Negotiation likewise requires a
transfer of possession of the notes.
KRS 355.3-201.
Further, as
there was no endorsement of the notes, Kathy acquired no rights
in the notes under KRS 355.3-204, KRS 355.3-205, or KRS 355.3206.
In addition, since Kathy was not a holder of the instrument
or a nonholder in possession of the instrument, Kathy acquired no
rights to enforce the instrument under KRS 355.3-301(1) or
355.3-301(2).
KRS
Finally, neither of the exceptions for enforcement
for a person not in possession under KRS 355.3-301(2) applies.
In summary, under the facts viewed in the light most
favorably to Kathy, the notes were not negotiated to Kathy so as
to give her rights in the notes, nor were the notes transferred
to Kathy so as to give her a right to enforce the notes, nor were
the notes endorsed so as to give her rights in the notes.
Under
these circumstances, despite the trust agreement purporting to
transfer the notes to Kathy, we conclude that there was a fact
issue concerning the transfer of the notes to the trust so as to
create a trust corpus.
into existence.
Absent a trust corpus, a trust never came
Absent a trust, Kathy never became a bona fide
trustee, and no fiduciary duty arose to provide an accounting to
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Karen.
We therefore reverse the judgment of the Franklin Circuit
Court and remand for a factual determination in this regard.5
In her brief, Karen argues to the effect that Kathy
should be estopped from denying the existence of a trust because,
following Robert’s death, Kathy sent a communication to the
estate acknowledging the existence of a trust and demanding that
the proceeds from the Sewell note be sent to her in accordance
with the trust agreement and, further, because in her deposition
Kathy acknowledged that a trust had been created by the 1990
trust document.6
However, prior to the entry of summary
judgment, Kathy repudiated this position and argued that a trust
had not been created because no corpus had been created.
In our
review of a summary judgment, we must view the evidence in the
light most favorable to the nonmoving party, i.e., Kathy.
Here,
that requires us to accept her later, though inconsistent,
position. Further, in her deposition Kathy acknowledged only that
5
There is evidence indicating that the trust came into
existence. For example, the trust agreement states that the
notes were actually transferred to Kathy. Also, Kathy
acknowledges coming into possession of the notes proceeds
(although she states she did so as Robert’s power of attorney).
Furthermore, Kathy at one time acknowledged the existence of the
trust in a letter written by her attorney.
However, there is also evidence that the notes were never
transferred and that the trust never came into existence. For
example, Kathy testified that the notes were not attached to the
trust agreement and were never transferred to her. Further, no
trust account was ever set up, and Robert and Mattie Rogers
apparently reported income from the notes as income on their
personal income tax returns. Also, Robert Rogers’ rights in the
notes were the subject of a provision in his will (indicative
that the notes were not within a trust).
6
The circuit court did not address this issue in its
partial summary judgment.
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the letter accurately reflected her position at the time the
letter was written.
The issue is one of credibility that we
leave to the fact finder.
Karen also argues that under Jones v. Chipps, 296 Ky.
245, 176 S.W.2d 408 (1945), the language of the trust agreement
accomplishes the transfer of the notes.
The Jones case contains
the statement, “The transfer of the notes on the margin of the
book wherein the mortgage is recorded operated as an assignment
of the mortgage to the bank.”
Id. at 411.
Kathy contends that
“[i]f an assignment of a mortgage can be made by a handwritten
note in the margin of the document, then it follows that an
assignment was made by the clear language of the Trust
Agreement.”
However, Jones, and the cases cited therein,
occurred prior to this jurisdiction’s adoption of Article 3 of
the Uniform Commercial Code, the controlling statutes on issues
See KRS 355.3-101, et. seq.7
involving negotiable instruments.
Further, Jones did not squarely address the issue in the case at
bar; rather, Jones, and the cases it cites, are primarily
concerned with the recording of a mortgage in a deed book and the
corresponding notice to the public.
Karen also argues that “whether or not the trust was
created has no real bearing on this appeal.”
She asserts in this
regard that Kathy failed to properly account for the funds,
regardless of whether she received the money as trustee or as
Robert Rogers’ attorney-in-fact.
7
We disagree.
The civil
Article 3 was originally enacted in 1958, effective July
1, 1960. In was repealed and reenacted in 1996, effective
January 1, 1997.
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complaint in this case was filed by Karen as a beneficiary of the
trust.
existed.
If no trust existed, then no duty of a trustee to account
However, if Kathy received the funds as Rogers’
attorney-in-fact, then any duty to account would be to Rogers’
estate, not to Karen.
The last issue is whether the court erred in awarding
Karen prejudgment interest.
The issue will be moot if the fact
finder determines on remand that no trust existed.
However, if
the fact finder determines that a trust existed, then the issue
will not be moot.
Thus, we will address it.
The circuit court awarded Karen $119,611.77 “plus
interest on said amount at the rate of twelve percent (12%) per
annum from July 1, 1990 through December 31, 2000, which totals
$98,419.76 . . . plus interest on the total amount of $218,031.53
from January 1, 2001 until paid, at the rate of twelve percent
(12%) per annum. . . .”
In other words, the court directed that
interest on the principal amount begin to run as of the date of
the trust agreement.
The court relied on Taylor v. Taylor’s
Executors, 211 Ky. 309, 277 S.W. 278 (1925).
Kathy argues that prejudgment interest should only have
been awarded from the date Karen was entitled to performance
under the trust (if there was a trust).
In support of her
argument, she cites the Taylor case and the language of the trust
agreement herein which states that the trust property shall be
distributed when the notes matured.
Because she asserts that the
notes were not part of the record, she maintains that the record
does not indicate when the notes were to mature.
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Apparently, the
Howell note was discharged as paid in full on December 19, 1995,
but the Sewell note had not yet matured as late as May 10, 1999.
On the other hand, Karen argues that the court
correctly awarded prejudgment interest from the date of the trust
agreement.
She also relies on the Taylor case.
Further, she
asserts that Kathy should have invested the money and that the
money would have been earning interest had Kathy not converted it
to her own use.
The court in the Taylor case said, “An agent failing to
pay over the money to his principal when he should pay it over
and using it in his own business is always chargeable with
interest.”
211 Ky. at 314, 277 S.W. at 280.
We agree that the
court would not abuse its discretion in awarding Karen
prejudgment interest should it find the existence of a trust and
a failure to account for the money.
However, it would be
improper to award prejudgment interest from the date of the trust
agreement.
If a trust existed as of that date, there is no
indication that the trust would have any money at that time.
Rather, the money would likely come into Kathy’s hands as each
payment was made.
We hold that prejudgment interest is awardable only
from the date the notes matured and Karen became entitled to
distribution.
See Bassett v. Paine’s Adm’r, 264 Ky. 495, 95
S.W.2d 8 (1936) (“It is the settled rule that when an obligation
is expressly payable at a time certain the debtor is in default
if he fails to pay at that time, and interest runs from the time
when the money should have been paid.”
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264 Ky. at 497.).
Interest on the total principal amount could not be owed from the
date of the trust agreement since presumably none of the
principal amount had been received at that time.
Thus, we
reverse the circuit court on this issue.
For the foregoing reasons, the judgment of the Franklin
Circuit Court is reversed and remanded.
ALL CONCUR.
BRIEFS AND ORAL ARGUMENT FOR
APPELLANT:
BRIEF AND ORAL ARGUMENT FOR
APPELLEE:
Bruce A. Brightwell
Louisville, Kentucky
Paul C. Harnice
Frankfort, Kentucky
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