A Strong Offense
A Stronger Defense
Whether a particular court has jurisdiction to hear a trust dispute can become increasingly more complicated as trustees, beneficiaries, and assets move to different states. So, when a lawsuit is filed, a threshold question should be whether the lawsuit was filed in a court with jurisdiction over the parties and the property.
The Nevada Supreme Court’s decision in In re Aboud Inter Vivos Trust highlighted some of these jurisdictional issues when the Court considered whether a district court could impose a constructive trust over assets transferred from a trust to a limited partnership and then from the limited partnership to a corporation.
Betty Jo and Michael Aboud created an inter vivos trust the assets of which included various real property and a restaurant. When Michael died, the assets were divided and distributed into a survivor’s trust and an irrevocable residual trust. The beneficiaries of the residual trust were the couple’s four adult children.
Betty Jo and the children later created the Aboud Family Partners Limited Partnership to own, develop, lease, manage, and sell real property. Betty Jo and one of her sons-in-law, as cotrustees of the survivor’s trust and the residual trust, transferred all of the trusts’ assets to the partnership, including the restaurant. The residual trust and survivor’s trust each received a share in the partnership in exchange for the transfer. All of the trust beneficiaries consented to the transaction.
Several years later, Betty Jo, as general partner and as successor trustee of the survivor’s trust, transferred all of the partnership’s assets, with the exception of the restaurant, to a third party corporation owned by her son in exchange for two promissory notes and the son’s renunciation of his interest in the residual trust. This transfer occurred without the knowledge or consent of the remaining residual trust beneficiaries. That same year, Betty Jo, again acting as general partner, also transferred the restaurant to the same third party corporation, but for no monetary consideration.
The next year, Betty Jo resigned as trustee of the residual trust and the girlfriend of the son who owned the third party corporation became sole successor trustee. Shortly thereafter, one of Betty Jo’s daughters filed a petition in district court requesting that the court assume jurisdiction of the residual trust and require the successor trustee to perform a trust accounting. An accounting was prepared, and the new trustee noted that certain transactions occurred before she became trustee. Additional allegations were made, and, among other things, the district court ended up imposing a constructive trust on the assets of the third party corporation on the grounds that Betty Jo had breached her fiduciary duties as both general partner of the partnership and as trustee of the residual trust by transferring the restaurant to the third party corporation for no monetary consideration and by transferring the remaining partnership assets to the corporation for nominal consideration, without the knowledge or consent of the residual trust’s beneficiaries.
The Nevada Supreme Court, however, determined that the district court lacked authority to impose a constructive trust on the corporation’s assets. The court began by discussing in rem and in personam jurisdiction. In rem jurisdiction permits a court to enter judgment against specific property; in contrast, in personam jurisdiction permits a court to enter judgment against a person.
NRS 164.010(1) confers in rem jurisdiction on the district court over trust property in all trust administration actions. Furthermore, NRS 164.015(6) provides that a district court’s order in a trust administration action is “binding in rem upon the trust estate and upon the interests of all beneficiaries.” The district court’s in rem jurisdiction under these statutes did not extend to the assets the corporation acquired from the partnership.
In Nevada, when a trustee improperly transfers trust assets to a third party, those assets are held pursuant to the trust if the third party purchaser had notice of the trust and the breach of duty by the trustee. However, when a trustee transfers trust assets with authority or with the consent of all beneficiaries, the transfer “operates to pass the legal and equitable title to the purchaser.” Here, the trust beneficiaries consented to the trusts’ transfer of assets to the partnership. Thus, the property that Betty Jo, acting as general partner, transferred to the third party corporation was the property of the partnership and not the trusts.