Bauman v. Pasquotank Cty. ABC Bd. (19-613) 4/7/2020
Trusts - Adverse Possession under Color of Title
Chris Burti Vice President and Senior Legal Counsel

In this case, the Plaintiff unsuccessfully appealed from an order of the trial court granting judgment on the pleadings in favor of the defendant Pasquotank County ABC Board (the "Board"). The Plaintiff's grandmother passed away in 1990 owning substantial real property in Pasquotank County, North Carolina. Her will devised her real property to her testamentary trust for the benefit of the Plaintiff's father with a pour over provision in favor of the Plaintiff at her father's death. The named trustee was not a family member at the time of decedent's death, and was delegated full and sole discretion to sell the corpus for the benefit of the father and to terminate the trust at any time.

The fiduciary relationship between the trustee and the father became a romantic relationship and, the two were married. The opinion states (edited for consistency):

On the day the marriage license was issued, the trustee, in her capacity as trustee, conveyed the majority of the real property in the trust to the father individually by general warranty deed. Nine days later, the trustee arranged for the father to execute a deed conveying that same property to her in her individual capacity.

The deeds did not transfer the entirety of the trust's real estate holdings because they failed to describe a .66 acre tract in Elizabeth City (the "Disputed Tract"). Thus, while the vast majority of the trust's corpus now belonged to the trustee individually, the Disputed Tract remained within the trust.

[The trustee] executed a deed purporting to transfer the Disputed Tract to the Board in exchange for $165,000 in March of 2000. The deed lists the grantor [in her individual name] "and husband, [Mr.] Fletcher[,]" and both signed the deed individually without reference to the trust. (emphasis added by the author) [The trustee] deposited the proceeds from the sale in a personal account under her name only. The Board built and operated an ABC store on the property.

The father and the Plaintiff filed suit against the trustee for undue influence, fraud, and breach of fiduciary duty in connection with her transfers of the real property out of the trust almost 20 years later, the trustee and the father died while litigation was pending, and their respective estates were substituted in as parties with the claims resolved by summary judgment in favor of the Plaintiff and her father's estate. Subsequently, the Plaintiff and the new trustee learned that the Disputed Tract had not been conveyed out of the trust and the Plaintiff filed a quiet title action against the Board.

The Board claimed adverse possession under color of title and reformation, among other claims for relief.

The analysis of the controlling law in North Carolina by the Court of Appeals on the issue of adverse possession against trust beneficiary is spot on and a sufficiently useful study on the subject to include it in its entirety. The opinion states:

Plaintiff concedes on appeal that the Board "has possessed the land in dispute under a claim of right for 17 years before her lawsuit was filed and that the . . . deed to the [Board] adequately described the property." She thus limits her argument to the "sole contention . . . that th[e] shortened period of adverse possession . . . [of] seven years under ‘color of title' cannot be applied [to] the facts presented in this record."

More specifically, Plaintiff asserts that the seven-year term for adverse possession under color of title cannot run against the beneficiaries of a trust when the trustee is responsible for creating color of title in the adverse possessor. She relies on our Supreme Court's decisions in King v. Rhew, 108 N.C. 696, 13 S.E. 174 (1891), Deans v. Gay, 132 N.C. 227, 43 S.E. 643 (1903), and Cherry v. Power Co., 142 N.C. 404, 55 S.E. 287 (1906).

King, like this case, involved the purported transfer of real property held in a testamentary trust. 108 N.C. at 697, 13 S.E. at 174. There, the beneficiary of the trust and her husband—but not the trustee—executed a deed transferring the real property to a third party, and the purported grantee took possession of the land. Id. at 698, 13 S.E. at 174. When the beneficiary died, and more than seven years after the grantee took possession, several heirs with contingent remainder interests in the trust sued to recover the real property. Id. The Supreme Court held that the seven year period for adverse possession under color of title had run against the heirs because the trustee of the trust could have brought a legal challenge as the true owner of the property against the grantee on behalf of the trust's beneficiaries. Id. at 699, 13 S.E. at 175. In other words, the Supreme Court followed the default rule that if the seven-year period for adverse possession under color of title has run against the trustee, then it has also run against the trust's beneficiaries. Id. The Supreme Court, in applying the rule, distinguished a decision from Tennessee, Parker v. Hall, 39 Tenn. 641 (1859) that reached a different result under a different set of facts:

[Parker] only decides that the [beneficiaries] are not barred where the trustee estops himself from suing by selling the property, and thus "uniting with the purchaser in a breach of the trust." The wrong, says the court, is to the [beneficiaries] and not to the trustee, and he "could not sue or represent them." It has never been insisted that the bar is effective against the [beneficiaries] except in cases where the trustee could have sued, as in this case, and failed to do so.

King, 108 N.C. at 704, 13 S.E. at 176-77.

The Supreme Court again addressed this general rule in Deans, when a testator's will established a testamentary trust for the benefit of her daughter and grandchildren and naming her daughter as trustee. 132 N.C. at 228, 43 S.E. at 644. Per the trust documents, the real property was to be held in the trust "for the benefit of [the daughter] and her children forever." Id. The daughter and her husband executed a mortgage deed encumbering the land held by the trust to a third party, who then conveyed that mortgage interest to the defendant. Id. The defendant later foreclosed on the property and ultimately purchased it. Id. 25 years later, the daughter and her children filed suit against the defendant seeking his removal. Id.

In resolving the case, the Supreme Court distinguished King and declined to apply the general rule on adverse possession found therein. Id. at 231, 43 S.E. at 645. The Supreme Court held that although a mortgage interest was validly conveyed by the trustee, that mortgage interest did not include a power of sale. Id. at 232, 43 S.E. at 645. And, seizing on the fact that the daughter had executed the mortgage deed as trustee, the Court held that the defendant's possession could not satisfy an adverse possession claim because the defendant took "possession under, and not adverse to the trustee." Id. at 231, 43 S.E. at 645. The Court continued:

There is no ouster of the trustee; she puts him in. He takes the legal title subject to the trust, the declaration of which is in his chain of title, and therefore his possession cannot become adverse to the [beneficiaries]. In this respect the case is distinguished from the case of King v. Rhew[.] Id.

The final case cited by Plaintiff, Cherry, involved a tract of real property held in trust for a woman with her husband acting as trustee. 142 N.C. at 408, 55 S.E. at 288. The wife possessed "an equitable estate for the joint life of her husband and herself and a contingent remainder in fee dependent upon her surviving him, with remainder over to her children dependent upon her predeceasing her husband." Id. at 409, 55 S.E. at 288.

The trust document provided that the wife could transfer her interest only upon the consent of the trustee, but in any event could not "dispose of a larger estate than that vested in her." Id. The husband and wife ultimately conveyed the real property in the trust to a third party in 1868, with the husband executing the deed in his capacity as trustee. Id. at 407, 55 S.E. at 288. The property was eventually conveyed to the defendant, who continued possession of the property. Id. The wife died in 1885, and the husband died in 1903. Id. Their children eventually brought suit in 1906 to recover the property from the defendant. Id.

The Supreme Court first addressed what was transferred by the deed, and held that the husband had executed the conveyance in his capacity as trustee; however, it construed the deed as only conveying the wife's interest in the property, i.e., "an equitable estate for the joint life of her husband and herself and a contingent remainder in fee dependent upon her surviving him[.]" Id. at 409, 55 S.E. at 288.

Thus, the defendant possessed the property under that equitable interest until her death and, because the trustee had agreed to the transfer of the equitable interest, there was no adverse possession during that time such that the rule utilized in King did not apply. Id. at 410, 55 S.E. at 289. Instead, the Supreme Court held that the period of adverse possession began when the wife predeceased her husband, as the wife's interest under the trust extinguished upon her death and the property should have devolved in fee simple to the children at that time. Id. In other words, because the trustee conveyed less than a fee simple interest in the property to the defendant and that conveyance was made under the terms of the trust, the defendant's possession was not adverse until the trust was extinguished and complete title passed to the children. Id.

In sum, the above cases stand for the following propositions: (1) if a trustee may sue to eject an adverse possessor, the time for adverse possession under color of title runs against the trust beneficiaries, King, 108 N.C. at 699, 13 S.E. at 175; and (2) if the trust possesses rights short of a fee simple interest in real estate and the trustee, acting in that capacity, transfers those rights to a third party, the term of adverse possession does not begin to run until the trust is extinguished and fee simple passes to the beneficiaries. Deans, 132 N.C. at 231, 43 S.E. at 645; Cherry¸ 142 N.C. at 410, 55 S.E. at 289.

The facts of this case do not lend themselves to a neat application of King, Deans, and Cherry based on the close reading discussed above. Deans and Cherry are distinctly inapposite from this case. As demonstrated by the allegations of the complaint and supporting exhibits, the trustee did not convey the Disputed Tract to the Board in her capacity as trustee. Nor did she purport to bind the trust in any way. By contrast, in Deans and Cherry, the defendants took title from trustees under the terms of the respective trusts, so that possession during the life of each trust was not adverse. Given the unique and distinguishing facts of this case, we hold that the Board took possession of the Disputed Tract adverse to, instead of under, the trust.

The Court determined that King applied because the trustee did not join in the execution of the deed to the Board and that Deans and Cherry did not apply because the Board did not take title from the trustee. However, this conclusion ignores the application N.C.G.S. Section 39-6.7(c) which provides:

A deed or other instrument by which the trustee or trustees of a trust convey or otherwise transfer any ownership or security interest in real or personal property shall be deemed sufficient:
       (1) Regardless of whether the instrument is signed by the trustee or trustees as such, or by the trustee or trustees purportedly for or on behalf of the trust;

In applying the presumption of the statute, the deed was, in fact, from the trustee and to recast the word of the opinion; the basis for tolling adverse possession against trust beneficiaries announced in Parker and echoed in King would seem to apply to this case. The Plaintiff argued, we think correctly, that "the Board had no adverse possession during the term of the trust because the trustee was estopped from suing to eject the Board under the theory of estoppel by deed. See, e.g., Crawley v. Stearns, 194 N.C. 15, 16, 138 S.E. 403, 403 (1927) ("[A]s to his grantee the maker of a deed will not be heard to contradict it, or to deny its legal effect . . . , or to say that when the deed was made he had no title. As against his grantee he is estopped to assert any right or title in derogation of this deed."). the Court declaims that the "Plaintiff offers no explanation of how the trustee's conveyance solely in her individual capacity worked to estop her from challenging the conveyance as trustee on behalf of the trust..." which ignores the application of N.C.G.S. Section 39-6.7(c). however, a foot note to the case sates: "In light of the complaint's allegations and Plaintiff's insistence on appeal that Emma's conveyance to the Board was purely an individual act that in no way bound the trust, the facts do not compel the legal conclusion that Emma was legally estopped from asserting the trust's claim to oust the Board in her capacity as trustee." This information may well have militated for the court's conclusion.

Ultimately, it is clear that unless certain limited exceptions clearly apply, adverse possession will apply to the beneficiaries of the trust if it applies to the trustee.