Creditors Attacking the Trust 20 Years after Lagae v. Lackner, 0720 COBJ, Vol. 49, No. 7 Pg. 42

• Author: BY JAMES R. WALKER
• Position: Vol. 49, 7 [Page 42]

49 Colo.Law. 42

Creditors Attacking the Trust 20 Years after Lagae v. Lackner

Vol. 49, No. 7 [Page 42]

Colorado Lawyer

July, 2020

TRUST AND ESTATE LAW

BY JAMES R. WALKER

Colorado statutes regarding real estate titles held by trusts and trustees have evolved since the original curative statute was enacted in 1921. This article discusses this evolution with a focus on the impact of Lagae v. Lackner.

Twenty years ago, in the spring of 2000, the Colorado Supreme Court released its decision in Lagae v. Lackner.^[1] The decision rejected a creditor's attack on a valuable Colorado ranch.

Lagae resolved the immediate creditor challenge, but it has also served as a catalyst for legislative reforms both in Colorado and on the national stage. This article reviews the historic Lagae decision and the subsequent legislative responses.

J.Y. Lagae's Legacy

At the time of his death, J.Y. Lagae's principal asset was a large Douglas County cattle ranch located between Interstate 25 and Castle Pines. The Lagae ranch was held in J.Y. Lagae's individual name.

J.Y.'s estate documents consisted of a revocable trust and a pour-over will.^[2] He had established the revocable trust in 1987, and his wife Ina May Lagae was its sole beneficiary during her lifetime. The pour-over provision directed the residuary of his estate to be transferred to the revocable trust. Ina May was named as personal representative of JY.s estate. J.Y.'s sons-in-law were named as co-trustees of his revocable trust.

In fulfillment of J.Y.'s residuary bequest, Ina May prepared and recorded a personal representative's deed transferring the ranch to the trust. But rather than transferring title into the name of the trust, Ina May's December 31, 1993 deed named the trustees as grantees.^[3] Her deed did not list any of the trust's beneficiaries. Lacking the beneficiary designations, Ina May's deed was "non-compliant" with the applicable 1921 Colorado statute. Seizing on this technical fault, one of the trustee's personal creditors asserted that the deed's noncompliance vested full tide (both legal and equitable) in the trustees and, thus, the trustee's creditors could seize the ranch.

In a 1998 ruling, the Colorado Court of Appeals upheld the creditor's theory.^[4] An appeal to the Colorado Supreme Court followed.

The Context for Lagae

Lagae involved an innovative statutory reform. Back in the 1920s, several states, including Colorado, enacted real estate reform laws so that abstractors could determine the condition of title from an examination of the records alone.^[5] Almost all of these state law reforms included a fix of the serious problems associated with "as trustee" deeds.^[6]

"As Trustee" Descriptions

During the 1800s and the early 1900s, it was not uncommon for a grantee to take tide "as trustee" for another. Adding the words "as trustee" was easy, and many old cases noted the practice.

Perhaps the leading "as trustee" case was decided in Massachusetts, where the Court held that "the insertion of the word 'trustee'... does indicate and give notice of a trust" and thus, " [n]o one is at liberty to disregard such notice and to abstain from inquiry for the reason that a trust is frequently simulated or pretended when it really does not exist."^[7]

Before Lagae, Colorado Supreme Court cases also recognized and described the practice: "[T]he word 'trustee,'... indicates the intention of the parties that the grantee was to take the title, not in his individual capacity, but in trust for another, though the name of his cestui que trust is not disclosed by the deed."^[8]

Although effective, "as trustee" descriptions were problematic. Under common law, a trustee had no power virtue office,^[9] and as Professor Fratcher noted, "his only powers are those of the instrument creating the trustee."^[10] Thus, without the support of a trust agreement expressly listing sale power (or a judicial confirmation that such power existed), an "as trustee" property was not marketable.^[11]

Purchasers and Notice

Under common law, the concept of notice was critical. A purchaser who bought "as trustee" property was charged with notice of the existence of a trust, and a trust beneficiary could recover the property if the trustee had no power to sell it. Professor Scott and other commentators believed that buying from an "as trustee" grantee without verifying the grantee's sale powers was prima facie wrongful, because the purchaser should have made inquiry and was chargeable with notice of everything that a reasonable inquiry "would appear."^[12]

At common law, if the purchaser did not have notice of a breach of trust and paid value for the trust property, the buyer qualified as a bona fide purchaser for value and could acquire both legal and equitable title. A court's equitable powers would protect a purchaser against beneficiary claims.^[13] A third-party purchaser who had "actual or imputed notice" that the party was dealing with a trustee was obligated to make diligent inquiry into the trustee's powers. Such a buyer was charged with whatever knowledge the buyer could have gained by such inquiry.^[14]

With this deemed notice, a buyer could not be certain whether "full" title had been acquired. Understandably, purchasers and lenders...