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Issue  101  Article  179
Published:  12/1/2003

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Parol Trust Case Derails Evidentiary Doctrine
Chris Burti, Vice President and Legal Counsel

Joines v. Anderson, filed November 18, 2003 by the North Carolina Court of Appeals (COA02-1479), has the potential for a much broader impact on real property transactions than would appear at first blush. North Carolina has never adopted the seventh section of the English Statute of Frauds (Stat. 29, Car. II, c. 3, s. 7), which limits the creation of parol trusts. As a rule of evidence, parol evidence is admissible in appropriate cases in order to establish the existence of a trust. Thompson v. Davis, 223 N.C. 792, 794, 28 S.E. 2d 556, is the most frequently cited case supporting this doctrine. Summarized, the rule is that parol evidence is properly admitted to establish a trust where A conveys to B for the benefit of C by a deed that makes no reference to the existence of the trust. The rule is otherwise when grantors allege a trust for the benefit of themselves. Gaylord v. Gaylord, 150 N.C. 222, 63 S.E. 1028 (1909), controls in such cases. The Gaylord rule is stated as follows:

"[E]xcept in cases of fraud, mistake or undue influence, a parol trust, to arise by reason of the contract or agreement of the parties thereto, will not be set up or engrafted in favor of the grantor upon a written deed conveying to the grantee the absolute title, and giving clear indication on the face of the instrument that such a title was intended to pass."

The need for such a rule should be obvious if we are to have any certainty in real property transactions. It has been repeatedly observed (we think correctly) that the free and certain alienability of land in the United States is the foundation of our economic system and the source of our economic success.

That said, Joines takes the evidentiary rule a step further and implies that such a parol trust can never exist without the introduction of evidence of fraud, mistake or undue influence. It is important to note that the cases cited for this ‘rule’ only address the limitation of introducing evidence to prove the existence of such a trust. The facts as presented in the opinion by the Court of Appeals are set out below with slight editing to conserve space.

"John Barry Joines ("plaintiff") appeals from an order of the trial court granting summary judgment to the North Carolina Department of Revenue ("defendant"). The evidence presented at the hearing on summary judgment tended to show the following. Plaintiff transferred real property in fee simple to his uncle, Jerry Dean Anderson ("Jerry"), without reservation rights. There is no question that the conveyance was intended to protect the property from possible equitable distribution proceedings commenced by plaintiff's now former wife."

"At the time of the conveyance, Jerry was married to Janney Elizabeth Anderson ("Janney") (collectively "the Andersons") [author’s note: the Andersons apparently did not participate in the appeal]. Plaintiff's transfer of the property to Jerry effectively conveyed the property to Jerry and Janney Anderson as tenants by the entirety under North Carolina law. Plaintiff does not argue that title improperly transferred as tenants by the entirety. After plaintiff resolved his equitable distribution claim, Jerry attempted to reconvey the property to plaintiff. Janney, fearful of the gift tax consequences associated with the transaction, refused to sign the deed."

"Plaintiff filed a civil action requesting that the district court order Janney to execute the deed and declare that she assumed no liability in reconveying the property. The Andersons filed a counterclaim seeking $704.00 to compensate them for the expenses incident to the transfer of the property. On 17 May 2001, a hearing was conducted on plaintiff's motion for judgment on the pleadings. The motion was granted in favor of plaintiff. The trial court concluded as a matter of law that gift tax would not attach to either conveyance. The trial court ordered the property reconveyed to plaintiff and directed that plaintiff pay any expenses the Andersons incurred in connection with the property."

"The Anderson's attorney subsequently contacted defendant to verify that gift tax would not attach to either conveyance. Defendant informed the Andersons that both the initial transfer to them and the subsequent reconveyance to plaintiff were gifts and would be accordingly taxed. Plaintiff filed a motion entitled Motion to Set Aside Judgment of the trial court and to make The North Carolina Department of Revenue a Party Defendant. A consent order setting aside the 17 May 2001 judgment was entered by the trial court on 13 February 2002."

"When this matter came before the trial court for the second time, defendant moved for summary judgment, arguing that the transfer was a gift and taxable as such. Plaintiff filed a motion to re-instate the previous judgment. The trial court granted defendant's motion for summary judgment and denied plaintiff's motion to re-instate the previous judgment. Plaintiff appeals."

This Court essentially states that a deed speaks for itself and "any evidence which contradicts the written agreement is prohibited under the parol evidence doctrine, unless the written agreement was created through fraud, undue influence, or mutual mistake" citing Financial Services v. Capitol Funds, 288 N.C. 122, 217 S.E.2d 551 (1975); Lewis v. Boling, 42 N.C. App. 597, 257 S.E.2d 486 (1979); Day v. Powers, Sec. of Revenue, 86 N.C. App. 85, 356 S.E.2d 399 (1987). The court notes that the plaintiff "failed to allege fraud, undue influence, or mutual mistake in his complaint. Plaintiff in fact asserted that the conveyance was not fraudulent, but voluntary. Thus, parol evidence could not be introduced to contradict the written deed." The Court noted the similarity between the facts of Day and this case and found it to be controlling precedent in concluding that the trial court correctly granted summary judgment for defendant Department of Revenue. We think that the error of this decision is revealed in the following quote from the Joines Court. "Plaintiff conveyed the property by deed in fee simple to protect said property from his former wife. Furthermore, plaintiff seeks to introduce evidence that the deed in fee simple was in fact a trust, but fails to allege an exception to the parol evidence rule."

There is a further exception to the parol evidence rule unstated in the cases relied upon by the Court of Appeals. Judicial Admissions are exceptions to the parole evidence rule because they obviate any necessity of introducing any evidence of the facts admitted.

An admission in a pleading is a judicial admission and it conclusively establishes the facts admitted for the purpose of the case and therefore, eliminates the necessity of proof by the adverse party, Norburn v. Mackie, 262 N.C. 16, (1964). A verdict may be directed for the party with the burden of proof when the credibility of the movant's evidence is manifest as a matter of law. North Carolina National Bank v. Burnette, 297 N.C. 524, 256 S.E. 2d 388 (1979). This includes judicial admissions, see, W. Virginia Pulp & Paper Company V. Richmond Cedar Works, 239 N.C. 627, (1954).

Clearly, an admitted trust, as between the parties is enforceable. The implication of the Joines and Day decisions is that they are not. The issue in these cases should have been whether a party may invoke an evidentiary rule for a purpose for which it was not developed and for whom it was not intended to protect. We think not. The purpose of the parol evidence rule in the fee simple deed involving an alleged grantor trust context is to protect the grantee and those holding an interest in the land through the grantee. Under the Joines facts, the Department of Revenue holds no interest in the land unless no trust exists in fact. Trust conveyances are exempt "where the power to revest in the donor title to such property is vested in the donor. . . ." as noted in the opinion. If no tax is due, the State has no lien and no property interest. The State is not an intended beneficiary of the evidentiary rule.

Invocation of the rule under these facts tends to hinder justice rather than further it. It is clear that the Court of Appeals had concerns about aiding the plaintiff in an improper scheme concerning his domestic controversy. It should be noted that what the plaintiff did was not improper per se, was not improper if appropriate disclosure was made and the facts set out in the opinion do not reveal any actual impropriety. Had the Court of Appeals addressed the evidentiary issues, it is clear that the admissions of the parties to the conveyance would not be binding on the Department of Revenue. But, after the plaintiff makes a prima facie case of the existence of the trust through the judicial admission, the burden shifts to the State to introduce evidence that the admissions were not true.

It appears that the Court of Appeals has taken an evidentiary rule and, in effect, created a property doctrine that holds that no trust can ever exist when A conveys to B without indicating in some fashion that a trust was intended or without proving fraud, mistake or undue influence. We think that this is not the rule in North Carolina. If one applies the holding in this case to a common set of facts, we believe that one can see that it will have unintended consequences.

We will construct a hypothetical situation to illustrate the problem this case poses. Our hypothetical contains no improper purposes, is not unlikely in general practice and is only one of countless situations affected by the ruling. A, a divorced woman, acquired several contiguous tracts of land in her married name. She desires to combine them into one tract and to hold title in her maiden name, which she has resumed. Under North Carolina law, a deed to oneself is void. In order to accomplish her purpose, it is an accepted practice to convey the property to a "strawman" and for the strawman to reconvey the property to her in her legal name as a combined tract. It is also common for this to be done with deeds that do not contain any recitations of purpose. This is, perhaps, not the best practice, but there is a credible argument that you may not do indirectly what you can not do directly. Our hypothesis creates an express trust between the parties. To further develop our facts, the ‘trustee’, who owns no other property properly reconveys the land. Unfortunately, our ‘trustee’ is the defendant in a pending lawsuit which results in a large judgment. The creditor then seeks to recover the land for the purpose of execution of the judgment under Uniform Fraudulent Transfer Act. Applying the rule in Joines, the case is a slam-dunk for the creditor. The transfer, on its face is a per se fraudulent transfer under the Act and the parties are now excluded from the protection otherwise offered by the existence of the trust. To make the situation worse, the North Carolina Department of Revenue can impose gift taxes both ways! We do not believe that the Court of Appeals intended this result and hope that this case will be reconsidered or be the subject of a discretionary review by the North Carolina Supreme Court.

Until such time as this situation is corrected, practitioners should be extremely careful in utilizing strawman conveyances and title examiners should report any suspected transactions to their title insurer for review and an underwriting determination


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