Treachery of the Untrustworthy Trustee

J-W Operating Co. v. Olsen is another Louisiana concursus (“It’s not my money, Your Honor; let them fight over it”).

The Trust

In 2006, Fred Houston created the Fred L. Houston Trust and placed into it the Tenneco lease, which had been producing since 1974. Ms. Williams was the trustee. The trust instrument declared the trust “… irrevocable and may not be revoked at any time under any circumstances,” including “any action to modify or negate Settlor’s intended effect of protecting the properties and assets transferred to the Trust.”  This language established it as a spendthrift trust.  Houston was both the income and principal beneficiary. Upon his death, “his interest in the trust shall vest in his estate (his heirs or legatees) free of trust.”

The Treachery

All you need to know about the treachery is that the following transaction was orchestrated by Ms. Williams and she personally benefitted from it:

Noble House offered to buy the trust’s interest in the Tenneco lease. In April, Houston signed, in his personal capacity, an assignment of the royalty interest in the Tenneco lease to Noble House. The assignment made no mention of the trust. That same day Noble House promised to assign to Ms. Williams “50% of the interest purchased as soon as the new division orders are complete.” The assignment to Ms. Williams was executed on August 8. Noble House assigned its remaining interest to its president Olsen a year later. Houston died and his executor notified J-W Operating that the trust, and now the succession, claimed the Tenneco lease.

The Assignment: Really Null or Just Maybe Null?  

Was the assignment to Noble House …

An absolute nullity? A contract is absolutely null when it violates a rule of public order, as when the object of a contract is illicit or immoral. A contract that is absolutely null may not be confirmed.

A relative nullity? A contract is relatively null when it violates a rule intended for the protection of private parties, as when a party lacked capacity or did not give free consent at the time the contract was made. A contract that is only relatively null may be confirmed.

Olsen and Williams argued relative nullity that was cured by subsequent acquisition. Houston might not have had title to the lease at the time of the assignment, but ownership vested in his estate upon his death—curing the relative nullity and conveying after-acquired title.

The executor argued absolute nullity, citing the doctrine of “trust indestructibility.” The assignment violated the core concept of the trust: the beneficiary cannot alienate trust property.

The court agreed with the executor. The Noble House assignment violated a rule of public order, protecting the settlor’s intent as set forth in the trust document. Louisiana has a strong public policy “in effectuating and protecting the settlor’s intent as set forth in the trust document.” The settlor of a trust is limited to modifying the terms of the trust after its creation only to the extent that he expresses in the trust document.

It was clear that Houston intended to protect the properties transferred to the trust, including the Tenneco lease. The Noble House assignment and the assignments to Williams and Olsen were absolute nullities.

Bonus: An Insider’s Look at the Structure of the Deal

More than just a little bit of chanky-chank and a video, here is a rare glimpse of the negotiations between Ms. Williams and Mr. Olsen.

Topics:  Energy, Estate Planning, Oil & Gas, Spendthrift Trusts, Trusts

Published In: General Business Updates, Energy & Utilities Updates, Wills, Trusts, & Estate Planning Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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