434 P.3d 502
Or. Ct. App.2018Background
- David F. King’s 1995 will created the DFK testamentary trust (Nevada choice-of-law clause) giving income to his wife Sandra for life and remainder to his three children; Sandra later served as sole trustee and income beneficiary.
- The children sued Sandra alleging breaches: large insider loans from trust principal (to Sandra, her son Cameron, and an LLC she had interest in), mischaracterization of certain distributions as income, and failure to account ~ $900,000; trial court found breaches and surcharged Sandra ~$913,247, removed her, and appointed Winona National Bank (WNB) successor trustee.
- Sandra appealed the limited judgment (challenging application of Nevada law and findings of breach); concurrently WNB sought instructions about applying trust income (owed to Sandra) to satisfy the money judgment against her and pay attorney fees.
- Trial court held Nevada law governed and that Sandra breached (affirmed here). It later held Nevada’s spendthrift statute, NRS 166.120, prevented applying Sandra’s income interest to satisfy the judgment; the children appealed that instruction ruling.
- Court of Appeals: affirmed limited judgment (Nevada law governs; insider loans violated NRS 163.030 and could not be overridden by trust terms). Reversed the instruction order: NRS 166.120 does not bar surcharge of a breaching trustee-beneficiary’s interest to compensate the trust; remanded for equitable allocation by probate court.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Choice of law for trust administration: which state's law governs whether insider loans were breaches? | Children: Section 6.10 designates Nevada law to govern all questions of trust administration; Nevada prohibits trustee insider loans. | Sandra: Section 6.2 (incorporating Minnesota trustee powers) and fact that trustee and assets are in Oregon mean Nevada should not control; choice-of-law is only a gap-filler. | Nevada law governs administration per will’s unambiguous 6.10; NRS 163.030 prohibits insider loans and controls despite broad trustee powers. |
| Whether trustee’s insider loans (to herself, son, LLC) were breaches despite express trust loan powers | Children: Loans violate Nevada statute and are per se breaches; settlor cannot override NRS 163.030. | Sandra: Trust expressly authorized loans to beneficiaries (including herself/associates); therefore loans were permitted. | Loans were statutory breaches under Nevada law; trust terms cannot negate NRS 163.030. |
| Whether NRS 166.120 (spendthrift statute) prevents applying beneficiary-trustee’s income interest to satisfy judgment for breach of trust | Children: Spendthrift protection does not bar surcharge of a breaching trustee-beneficiary’s interest; court may apply equitable surcharge. | Sandra: NRS 166.120 broadly shields beneficiary interests from assignment, seizure, or court-directed diversion; trustee cannot apply income to satisfy the judgment. | NRS 166.120 does not prohibit surcharge of the breaching trustee-beneficiary’s interest to compensate the trust; trial court’s restriction reversed and remanded for equitable allocation. |
| Scope of probate court’s equitable powers to remedy breaches by trustee-beneficiary | Children: Probate court has full equitable powers (NRS 153.031) and common-law rule allows charging a trustee-beneficiary’s interest. | Sandra: Spendthrift protections and statutory language limit court’s power to redirect income. | Probate court retains equitable power to surcharge the breaching trustee-beneficiary’s interest; Nevada courts would follow Restatement rule permitting such surcharge. |
Key Cases Cited
- Montoya v. Ahearn, 426 P.3d 599 (Nev. 2018) (approves surcharging breaching trustee-beneficiary's trust interest as remedy)
- Diotallevi v. Sierra Dev. Co., 591 P.2d 270 (Nev. 1979) (probate court has full equitable powers to redress breaches of trust)
- Brock v. Premier Trust, Inc., 390 P.3d 646 (Nev. 2017) (use of Restatement of Trusts to interpret Nevada trust statutes)
- Chatard v. Oveross, 101 Cal.Rptr.3d 883 (Cal. Ct. App. 2009) (spendthrift clause did not bar surcharge of a trustee-beneficiary’s interest for breach of trust)