In 1992, B.R. McNulty formed the McNulty Ranch Trust to provide income for his daughter, Sondra, and his grandson, Scott, during Sondra’s lifetime. Thereafter, the trust corpus was to be distributed to Mr. McNulty’s grandchildren, Scott, Kevin, Lisa and Kassi, in stated percentages. The trust corpus of the trust consisted of a ranch in Park County, Colorado, and the trust specified that Scott would continue as ranch manager.
The initial trustees of the trust eventually resigned, and Sondra became the sole trustee. Sondra sold the ranch to Scott and his wife for $1,750,000. Sondra used the $300,000 down payment from Scott and his wife to buy a home in the Bahamas. In 2006, Scott sold the property in several pieces for a total price of $10,037,000, after having sold conservation easements for a total price of $856,200.
Scott’s siblings petitioned the court for Sondra’s removal as trustee, an accounting, and surcharge against Sondra and Scott. The siblings sought damages from Sondra and Scott for both breach of fiduciary duty and for aiding and abetting in breach of fiduciary duty. They also requested a declaratory judgment voiding the sale of the property and ordering Scott to forfeit his remainder interest in the trust.
The parties engaged in mediation. The first conference was unsuccessful, but the second mediation conference resulted in settlement and a signed settlement stipulation. Kevin was not physically present at the mediation conference, but Kevin’s attorney signed Kevin’s name to the stipulation.
Thereafter, Kevin informed his attorney that he had not agreed to the settlement terms, and his attorney scratched his signature out of the stipulation. The remaining parties then sought direction from the district court. Scott’s counsel proposed proceeding by way of motion of Sondra, as trustee, asking the court to approve the settlement stipulation and then allowing the other parties to file any responses as appropriate. The court agreed, Kevin’s new counsel agreed, and Sondra filed the motion. Kevin objected to the motion and the court’s authority to enforce the stipulation, and filed an affidavit stating that he had not given his counsel permission to sign the stipulation on his behalf, and asserted that because of a conflict of interest Sondra could not act on behalf of the trust.
After a hearing, the trial court held that the settlement stipulation was enforceable because: (1) the stipulation was prudent, offered in good faith, and was fair, reasonable, and in the best interests of the parties; and (2) the stipulation was an enforceable contract under Colorado law, because the actions of Kevin’s counsel were indicative of Kevin’s agreement. Kevin appealed.
On appeal, the court in a matter of first impression held that when trust beneficiaries bring suit for the benefit of a trust, a court may properly approve the settlement agreement, even over the objection of one of the beneficiaries, if the settlement is just and reasonable and that the district court did not err in approving the settlement stipulation. The court rejected Kevin’s objection to Sondra, settling claims on behalf of the trust where the siblings all had attorneys and were adequately represented, and she merely filed the motion for approval.
The court noted that in equity, trust beneficiaries may bring suit for the benefit of the trust when trustees fail to do so, which is analogous to a shareholder derivative suit on behalf of a corporation. The court explained that in a derivative action, a court may approve the settlement agreement over the objections of a shareholder even if the shareholder is a named plaintiff in the suit, and extended this reasoning to the trust context. The court noted that where Kevin, Sondra and Scott, and the trial court all agreed that the underlying petition was in the nature of a derivative action in which the siblings were acting as representatives of the trust, the district court was authorized to approve the settlement of the beneficiaries’ claims even over Kevin’s objections.
Examining whether the district court properly approved the settlement stipulation, the court again turned to shareholder derivative suits for guidance, and applied the principal articulated in In re Norwest Bank, 80 P.3d 98 (N.M. Ct. App. 2003) that in order to be approved, a mediated settlement must be fair, adequate, reasonable, and free from collusion or fraud, and satisfy a four factor test: (1) whether the proposed settlement was fair and honestly negotiated; (2) whether serious questions of law and fact existed, placing the ultimate outcome of litigation in doubt; (3) whether the value of an immediate recovery outweighed the mere possibility of future relief after protracted and extensive litigation; and (4) the judgment of the parties that the settlement is fair and reasonable. Based on Norwest, the court found that the lower court had adequately sought to determine whether the settlement was just and reasonable, and acted well within its discretion in approving the settlement.
The court dismissed Kevin’s contention that the trial court approved an alleged unilateral modification to the stipulation terms by changing certain release provisions, and did not address the court’s alternative reasoning that the settlement was binding as an enforceable contract.
