Archive for August, 2010

What is Testamentary Capacity?

Sunday, August 29th, 2010

Whether a person has sufficient mental capacity to make a will can be a difficult question.  Historically the law has set a low bar for capacity to make a will.

The recent decision in In re Estate of Manuel focused on a fight over attorney’s fees.  The dispute under the discovery laws involves a thorny question – When can attorney’s fees be recovered if a request for admission is denied, but the fact is then proven at trial?

Only a portion of the decision is published in the official reports.  However, in the unpublished portion of the opinion, the court offered a solid discussion of testamentary capacity, based on this issue:

“Brown denied that decedent possessed testamentary capacity at the time she executed the July 24, 2003 will.  We therefore must consider whether Brown possessed a reasonable basis, supported by the evidence, to believe decedent lacked testamentary capacity.”

The statute states that an “individual does not have sufficient mental capacity to be able to (A) understand the nature of the testamentary act, (B) understand and recollect the nature and situation of the individual’s property, or (C) remember and understand the individual’s relations to living descendants, spouse, and parents, and those whose interests are affected by the will.”   Probate Code section 6100.5(a)(1).

The court applied the rule of law to the facts of the case.  “Testamentary capacity must be determined at the time of execution of the will.  Incompetency on a given day may, however, be established by proof of incompetency at prior and subsequent times.”

Geisha in Japan

Now comes a more difficult point.  “Where testamentary incompetence is caused by senile dementia at one point in time, there is a strong inference, if not a legal presumption, that the incompetence continues at other times, because the mental disorder is a continuous one which becomes progressively worse.”

Yet, “dementia” is a not a one-size-fits-all diagnosis – the labels is applied to a number of different symptoms.  The court continued.  “However, it has been held over and over in this state that old age, feebleness, forgetfulness, filthy personal habits, personal eccentricities, failure to recognize old friends or relatives, physical disability, absent mindedness and mental confusion do not furnish grounds for holding that a testator lacked testamentary capacity.”

For the estate planner, the question whether a person has sufficient mental capacity to make a will can be very difficult to answer.  “In this case, Brown possessed substantial evidence that decedent lacked testamentary capacity.”  But that was not the end of the matter.

“Indeed, while the trial court’s determination that decedent possessed testamentary capacity is supported by substantial evidence, had the trial court reached the opposite conclusion, it would have survived a substantial evidence challenge on appeal.”

“Brown relied on the following evidence at trial:  (a) decedent’s stroke in 1999; (b) the two Mini-Mental State Examinations in 1999, which showed substantial mental impairment; (c) an expert opinion that it is unlikely decedent’s condition would have improved after two similar evaluations in 1999; (d) the 1999 diagnosis of probable Alzheimer’s disease; (e) the testimony of relatives regarding decedent’s lack of improvement; (f) the expert opinion of Dr. Neshkes; (g) Wilson’s verified complaint in the Campbell action; and (h) decedent’s deposition testimony six months after the will was executed, in which she demonstrated a lack of testamentary capacity, by her failure to remember and understand her relations to Wilson and the Campbells.”

So who was correct?  It’s a factual matter for determination by the trial court.  “This constitutes more than sufficient evidence for Brown to have denied the request to admit that decedent possessed testamentary capacity.   The trial court’s implicit conclusion to the contrary was an abuse of discretion.  Therefore, Wilson should not have been awarded any attorney fees with respect to the issue of testamentary capacity.”

Alas, this useful analysis was deleted from the final published opinion.

In re Estate of Manuel (August 10, 2010) — Cal.Rptr.3d —-, 2010 WL 3133553

A Fiduciary Duty for All Investment Professionals?

Sunday, August 22nd, 2010

Wading hip deep into the debate over the standard of conduct applicable to investment advisors, author Kristina A. Fausti brings helpful insight in A Fiduciary Duty for All?

Ms. Fausti is the Director of Legal and Regulatory Affairs for Fiduciary360, and is knowledgeable about the investment world.

What she demonstrates is that the investment world is not equally knowledgeable about fiduciary standards, even at the highest levels of the Securities and Exchange Commission, which shows bone-headed ignorance regarding fiduciary obligations.

Ms. Fausti shows her expertise when she notes that “Broker-dealers [ ] often have competing interests with their customers that they neither must avoid nor disclose in most cases.  For example, as Professor Mercer Bullard noted, an investment adviser would be required under the fiduciary standard to disclose any differential compensation it receives as the result of recommending different products to its client because of the conflict of interest such differential compensation creates.  Broker-dealers, however, generally have no such obligation to disclose differential compensation to their clients.”

Now that is what the fiduciary standard really means – full, complete, and candid disclosure.  And that scares the heck out of Wall Street.

Ms. Fausti notes that “the Obama Administration’s plan called for legislators and regulators to ‘harmonize’ the investment adviser and broker-dealer regulatory regimes.”  The investment community has thrived in the confusion of a post Glass-Steagall era. “The Administration’s recommendations were based on the widespread recognition that retail investors are often confused about the differences between investment advisers and broker-dealers.”

That statement is as right as rain.  “The RAND Report issued by the SEC in January 2008 [ ] concluded that investors did not understand key distinctions between investment advisers and broker-dealers, including their duties, the titles they use, and the services they offer.  Also contributing to investor confusion is the ambiguity and inconsistency in titles used across the financial services industry.”

What, then, is the delay in establishing such harmony?  The desire of the financial services industry to maintain confusion.  “In practice many financial professionals use varying titles to describe themselves including: financial advisor, financial consultant, advisor, financial planner, and stockbroker.”


Author Fausti sees the ball clearly.  “In its most basic form, to act as a ‘fiduciary’ is to serve under an already defined standard based on a relationship of trust that carries with it duties of loyalty, due care, and utmost good faith.”

Yes, but don’t forget that those are aspects of the fiduciary obligation, in other words, the duties and consequences that flow from a finding that the parties occupy a fiduciary relationship.

Sadly, SEC Commissioner Luis A. Aguilar lacks similar clarity of thought, having “passionately emphasized” that “there is only one fiduciary standard and it means that a fiduciary has an affirmative obligation to put a client’s interests above his or her own.”

Wrong, wrong, wrong.  That is simply sloppy thinking.  By an SEC Commissioner.

In contrast, these guys get it right.  Says the author, “A group of advisory and investor advocates, dubbed the Committee for the Fiduciary Standard, recently articulated a set of five core fiduciary principles: (1) put client’s interest first, (2) act with prudence, (3) do not mislead clients, (4) avoid conflicts of interest, and (5) fully disclose and fairly manage unavoidable conflicts.”

OK, now we are back on track.  “What these principles illustrate is a basic relationship based on trust that demands that loyalty and due care always remain at the foundation of the fiduciary standard.”

SEC Commissioner Elisse B. Walter “has noted that what is required under the fiduciary duty depends on the scope of the engagement as well as the sophistication of the investor.”

Wrong again.  If someone is in a fiduciary relationship, then the expertise or knowledge of the beneficiary matters not one whit.  The beneficiary gets to put complete trust in his or her fiduciary, and never has to defend his own interests because he is a “big boy” (the so-called “big boy” defense).

It’s simply gobbly-gook for the investment community to claim differing duties “where a financial professional is a ‘dual hatter,’ [which] is meant to refer to a professional who is registered both as a broker-dealer and an investment adviser representative and who, therefore, switches professional hats for different services and products.”

According to Wall Street, “the professional would be a fiduciary and subject to Adviser Act and the fiduciary duty when providing investment advice, but subject to Exchange Act and FINRA rules when executing recommended transactions; thus, switching back and forth between acting as a fiduciary.”

That is just impossible.  A mainstay of the fiduciary standard is the duty of care.  The fiduciary looks out for his or her beneficiary, not the other way around.  Wall Street’s proposal (which proposal is not backed by Ms. Fausti, may I add) is voodoo.

One standard for all financial advisers.  One set of obligations, anchored in duties of care and disclosure.  That’s not so hard.  But it scares the hell out of Wall Street.

Kristina A. Fausti, A Fiduciary Duty for All?, in 12 Duquesne Bus. Law Rev. 183 (Summer 2010)

Court Permits 35 Year Delay in Filing Claim for Breach of Trust

Sunday, August 15th, 2010

Here’s an awkward fact pattern  Grandfather establishes a testamentary trust, which trust was confirmed in 1971 court order.  The trust provides for distributions to the “grandchildren.”  A decade later, an individual (Mr. Quick) learns that he is a grandchild, and strikes up a friendship with his father, who is also a trustee of the trustee.

Another 20 years pass and Mr. Quick learns of the trust.  His father having passed away, he sues the successor trustee, claiming he was deprived of the benefits of the trust.  Despite the extremely long passage of time, the court allowed the case to go forward in the recent decision in In re Blowitz (June 14, 2010) 186 Cal.App.4th 371.

In its opinion, the court found that “Samuel D. Blowitz died testate in 1971. Pursuant to the terms of a testamentary trust, he left the remainder of the trust estate in equal shares to his grandchildren.”

The will was submitted to probate, and “An Order Settling First and Final Account and Report of Executor filed January 2, 1974, recounts that the trust provides: ‘Each grandchild living at the time of decedent’s death shall hold undivided equal interests in the trust estate.  When a grandchild attains age twenty-five (25), the Co-trustees shall distribute to such grandchild the entire principal of such grandchild’s interest in the trust.’”

That sentence triggered the litigation.  The Order did not name the grandchildren, but merely referred to “each grandchild living at the time of the decedent’s death.”

Now comes the fact that should have triggered a duty of inquiry.  “In 1989, Quick learned J. Michael Blowitz was his natural father. Mr. Quick thereafter met J. Michael Blowitz, attended a Clippers game with him and built a close relationship over the next few years.”

Quick’s father was a trustee of the trust.  If Quick wanted to sue someone, it should have been his father.  He did not do so, instead waiting years before suing the successor trustee.  In his complaint, “Quick alleged Pearson [the successor trustee] knew Quick was Samuel D. Blowitz’s grandchild and therefore a member of the class of remaindermen identified in the trust.”

The lawsuit further alleged that “Pearson willfully and unlawfully refused to give Quick notice he was a beneficiary of the trust and willfully failed to distribute Quick’s share of the trust remainder to Quick.”


By way of defense, Pearson contended Quick “played the proverbial Ostrich, stuck his head in the sand and refused to investigate.  Pearson repeatedly notes Quick  had an obvious source of information available to him, namely, his natural father with whom he had a good relationship and who was a co-trustee of the trust . . . Pearson asserts Quick had a duty to inquire and investigate when he became aware of facts which would put a reasonable person on notice.”

The court rejected this argument, holding that “Nothing in the second amended petition suggests Quick became aware of facts that would have put a reasonable person on notice of the existence of the trust earlier than 2007 when Quick was advised of the trust’s existence by Mickey J. Blowitz.”

The court concluded that “The second amended petition asserts Quick was unaware of the existence of the trust. It further alleges Pearson knew, at all relevant times, that Quick was a grandson of the testator and that Pearson failed to notify Quick of his interest in the trust and instructed the other trust beneficiaries not to inform Quick of the existence of the trust.  Accepting the allegations of the second amended petition as true, as we must on review of an order sustaining a demurrer, we conclude Quick adequately has stated a cause of action for breach of trust by a trustee.”

This seems like a wrong decision, morally if not legally.  More than 35 years elapsed before Mr. Quick filed his lawsuit.  His dispute was with his real father, not the successor trustee.  Under these facts, the court should not have permitted the litigation to proceed.

In re Blowitz (June 14, 2010) 186 Cal.App.4th 371

Stiff Penalty for Looting Assets From Decedent’s Estate

Friday, August 6th, 2010

A recent case emphasizes that the probate court has broad powers to prevent the looting of a decedent’s estate, and can award penalty damages, as well.

In Estate of Kraus (April 27, 2010) 184 Cal.App.4th 103, the decedent’s brother used an invalid power of attorney to clean out her bank accounts in the hours before his sister’s death.  As stated in the decision, “On October 22, 2006, David’s sister, Janice Helene Kraus, was dying of cancer.  Janice was unmarried, did not have any children and she was in hospice care.”

Bad fact coming up.  “On October 22, 2006, David had Janice execute a durable power of attorney in his favor.  At the time, Janice was semi-comatose.  At trial, David “could [not] remember speaking with Janice’s physicians as to whether she had the capacity to sign the power of attorney.”

More bad facts for David.  “On October 22, 2006, Janice was semi-conscious and undergoing hospice care when an ‘X’ was placed on the signature line of the power of attorney.  Joe Damco, her boyfriend, held Janice’s hand when the ‘X’ was placed on the signature line of the power of attorney . . . At the time of her death, Janice’s doctors assumed the cancer had spread to her brain.”

“On the morning of October 23, 2006, David closed several of Janice’s bank accounts and appropriated the funds [totaling  $197,402] for himself.  The money in those accounts belonged to the trust.  Janice died on October 24, 2006 at 7:50 a.m.”

According to his trial testimony, “David prepared the power of attorney to reclaim money in Janice’s accounts he thought belonged to Irene.  Also, David wanted to secure jewelry that Janice wanted placed in her coffin.”

The trial court “found the power of attorney drafted by David on October 22, 2006, was void and David wrongfully and in bad faith converted property belonging to the trust.  According to the court, “The funds secured under the power of attorney were placed in accounts in the name of David and his wife.  No funds taken by David on October 23, 2006, under the power of attorney were ever placed in Irene’s accounts.”  The probate court made no final determination as to the beneficiaries’ right to the funds.

The decision was affirmed in its entirety on appeal.  Explained the court, “the probate court is a court of general jurisdiction (Probate Code § 800) with broad equitable powers.  The probate court has jurisdiction to determine whether property is part of the decedent’s estate or living trust.”

“The probate court has general subject matter jurisdiction over the decedent’s property and as such, it is empowered to resolve competing claims over the title to and distribution of the decedent’s property.  The probate court may apply general equitable principles in fashioning remedies and granting relief . . . The ultimate aim and purpose of administrative proceedings, including any special proceeding or contest to determine heirship, is to ascertain the persons entitled to share in the estate of the decedent and to decree distribution accordingly.”

Deep jungle on Ko Phi Phi DonThus,“Probate Code section 850 et seq. provides a mechanism for court determination of rights in property claimed to belong to a decedent or another person. The statutory scheme’s ‘evident purpose’ is to carry out the decedent’s intent and to prevent looting of estates.”

Further, “Probate Code section 859 provides for recovery of twice the value of property taken in bad faith.  The section 859 penalty is imposed when an interested party establishes both that the property in question is recoverable under section 850 and that there was a bad faith taking of the property.”

On appeal, “David conceded that the power of attorney was invalid . . . David argued the probate court should have denied the petition because the beneficiaries did not prove they had any right to the funds.”

The court summarily rejected this argument.  “Section 850, by its clear and plain terms, does not require the probate court to find that the property in question belongs to the interested petitioning party.  Here, the trust beneficiaries sought an order requiring David to relinquish misappropriated property.  That it is unclear who is entitled to the property does not deny the beneficiaries of their interest in its rightful disposition – even if, ultimately, it does not go to the trust.”

“Under the language and purpose of the statutory scheme, and given the probate court’s broad powers, it was not required to allow the wrongdoer to retain the property misappropriated in bad faith until someone else proved a ‘better’ right to it.  Under the plain terms of the statutory scheme, the probate court was not required to determine who was entitled to the funds before it could take them away from a person who was not entitled to them.”

“What was clear, as the probate court found, was that David was not entitled to take the money out of Janice’s bank accounts and put it in his own name.  Given these circumstances, the probate court could reasonably, in the exercise of its statutory and equitable powers, place the funds, together with the statutory penalty imposed on David, in Janice’s estate for a future determination of their proper disposition.”

The court also affirmed the statutory penalty in the amount of $394,804.  “Here, the probate court found David in bad faith wrongfully took money that was recoverable under section 850.  At the time it was misappropriated, the money belonged to Janice.  Now that Janice is deceased, the money belongs to her estate, her trust, or, potentially, some party claiming against her estate.  But it is in David’s possession.  Because the probate court found David in bad faith wrongfully took Janice’s money, he could properly be found liable for twice the value of that property.”

Finally, the court held that David had the burden to prove his financial inability to pay the penalty.  “The ability to pay argument was not raised in the probate court.  Even if the issue were properly raised, we would conclude David’s financial condition under these circumstances was not a relevant consideration.  The Courts of Appeal have held evidence of a defendant’s financial status is not essential to the imposition of statutory penalties, and financial inability to pay is a matter to be raised in mitigation.  The trust beneficiaries had no obligation to present evidence of David’s financial condition or his ability to pay the mandatory statutory penalty.”

Estate of Kraus (April 27, 2010) 184 Cal.App.4th 103

Transfer of Property Deemed Invalid Years After Deed Was Recorded

Monday, August 2nd, 2010

In the recent decision in Estate of Hastie, the court invalidated a transfer of real property made several years before Mr. Hastie’s death.  In a matter of first impression under Probate Code section 21350, the court held that the gift to a caretaker was could be challenged years after the deed was recorded.  This, surely, was not the result that Mr. Hastie wanted, as the property instead passed to relatives who had no dealings with Mr. Hastie in the years before his death.

According to the decision, “For decades there was a close relationship between [Mr. Hastie] and defendant Bingham Liverman.  Liverman had a real estate background including some probate matters.  A fiduciary relationship developed when Hastie granted Liverman power of attorney in October 1999 and existed continuously at all times relevant to this action, up to and including the date of Hastie’s death.”

Here’s the first bad fact for Mr. Liverman.  The court finds that he was tainted because of his undefined “real estate background.”

The dispute concerned the real property located at 3712 Anza Way, San Leandro.  The trial court found that “in 2001, Liverman suggested that Hastie transfer an interest in the Anza Property to Liverman’s granddaughter by executing a joint tenancy grant deed in her favor.  Hastie executed the deed on June 13, 2001.  It was recorded on March 29, 2002.”

Here’s the second bad fact.  The property was deeded to Mr. Liverman’s granddaughter.

The court continued.  “In 2006, Liverman suggested that Hastie, while in the hospital a few weeks prior to his death, transfer his remaining interest in the Anza Property to Liverman’s grandson.  Liverman drafted a quit claim deed from Hastie in favor of Timothy.  Hastie executed the deed in June 2006.  Appellant did not pay anything to Hastie in exchange for the interest in the Anza Property.”

That’s the third bad fact.  A conveyance made while in the hospital, again to a grandchild.  Mr. Liverman should have left well enough alone and stood on the deed recorded in 2002.


At trial, Mr. Liverman’s sole defense was his assertion that the administrator’s action was barred by the statute of limitations.  Explained the court, Probate Code section 21350 lists “seven categories of persons who cannot validly be recipients of such donative transfers, including, inter alia, any person who has a fiduciary relationship with the transferor who transcribes the instrument or causes it to be transcribed; a care custodian of a dependent adult who is the transferor; and a relative of such fiduciary/transcriber or care custodian.”

This statute opened the door for the relatives to challenge the deed.  “Once it is determined that a person is prohibited under section 21350 from receiving a transfer, section 21351 creates a rebuttable presumption that the transfer was the product of fraud, duress, menace, or undue influence. . . In order to rebut the presumption, the transferee must present clear and convincing evidence, which does not include his or her own testimony, that the transfer was not the product of fraud, duress, menace, or undue influence.”

That’s double handicap for the recipient, who must meet this heightened standard based on the testimony of other persons, only.

Now the court turned to the heart of the matter. “An action to establish the invalidity of any transfer described in Section 21350 can only be commenced within the periods prescribed in this section as follows:

“(a) In case of a transfer by will, at any time after letters are first issued to a general representative and before an order for final distribution is made.

“(b) In case of any transfer other than by will, within the later of three years after the transfer becomes irrevocable or three years from the date the person bringing the action discovers, or reasonably should have discovered, the facts material to the transfer.”

Stated the court, “We are called upon to interpret section 21356 to determine whether the administrator’s action was timely filed.  The parties have not cited, nor have we found, any cases considering this statute.

In the court’s analysis, “The three-year period starts to run either from the date the transfer becomes irrevocable or from the date ‘the person bringing the action’ learns, or should have learned, of the material facts.  Importantly, the section provides that the three-year period runs from the later of these two dates.”

According to the court, “Since the transfer became irrevocable while Hastie was still alive, the later date is three years from when the person bringing the action (the administrator) became apprised of the facts.”

In opposition, “Appellant emphasizes the fact that Steven never had any relationship with Hastie, his family or friends, and asserts that he is the respondent in this matter only because the McCartys hired his brother, George, to represent their interests.”

That strikes me as a solid argument.  The court allowed strangers to interfere with the transfer, when Mr. Hastie was looking out for the persons who cared for him for years.

Even more, the court ignored the rule that the recording of a deed creates constructive notice to the whole world of the transfer.  This long-standing principle was not considered by the court.

Thus, the court concluded that “it is abundantly clear that ‘the person bringing the action’ pursuant to section 21356, subdivision (b), can be the administrator of the estate following the death of the transferor and that this person might well be a stranger to the decedent.  The McCartys, as children of Hastie’s predeceased spouse, were entitled to be appointed administrator and were also free to nominate another person, whether known to Hastie or not, to serve in that capacity.”

This is a difficult decision to reconcile, as strangers to the decedent were permitted to overturn a conveyance that had been made years before decedent’s death.

Estate of Hastie (First Appellate District) July 22, 2010