Archive for October, 2010

Araiza v. Younkin – Disposition of Bank Account Under Trust Law is Fundamentally Different from Result Under Law of Wills

Sunday, October 24th, 2010

The recent decision in Araiza v. Younkin (Sept. 30, 2010) 188 Cal.App.4th involved the disposition of a bank account following the death of the parent.  Under the law of wills, the beneficiary named on the account would have taken the funds, regardless of contrary language in the will.

Ah, but the mysterious law of estate planning trusts.  Instead of providing a decision that is consistent with probate law, the court broke rank and gave a contrary decision based on its interpretation of the trust agreement.

Folks, this is dumb.  The artificial dichotomy between the law of wills and the law of trusts, at least when the trust is simply a will substitute, must change.  We need conformity in the law, so the rules and outcomes are in conformity.

Here is the decision.  “In 2001, Mrs. Howery opened a checking account and a savings account at the Bank of America. Although she named [Lori Younkin] as the beneficiary of the savings account, Howery was the only person authorized to withdraw funds from it.”

To my analysis, this is a contract-based question.  Lori Younkin is the named beneficiary on the bank account, and should take the funds at death.

“In August 2005, Mrs. Howery established the Lucia Howery Living Trust . . . The Schedule listed ‘Savings accounts’ as among the categories of personal property delivered to the trust.”

Mrs. Howery died on April 29, 2009. The Trust Agreement provided that Mrs. Howery gave the Bank of America account to Gabriella Reeves.

On appeal, Lori Younkin contended that “she was the sole owner of the savings account because Mrs. Howery named her as the beneficiary and never changed that designation in a manner authorized by Probate Code section 5303.”

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That is a great argument under the law of wills.  But this court was determined to muddy the waters, by creating an artificial distinction involving estate planning trusts.

Explained the court, “The type of savings account Howery established is referred to in the Probate Code as a ‘Totten trust’ account. The term Totten trust describes a bank account opened by a depositor in his or her own name as trustee for another person where the depositor reserves the power to withdraw the funds during his or her lifetime. If the depositor has not revoked the trust then, upon his or her death, any balance left in the account is payable to the beneficiary.”

Bingo.  End of analysis.  “Subdivision (b) lists the methods by which the terms of a multiple-party account may be modified. It provides: ‘Once established, the terms of a multiple-party account can be changed only by any of the following methods: [¶] (1) Closing the account and reopening it under different terms. [¶] (2) Presenting to the financial institution a modification agreement that is signed by all parties with a present right of withdrawal.’”

Not so fast.  “This narrow reading of the statue, however, fails to harmonize it with section 5302. Section 5302, subdivision (c)(2) provides that sums remaining on deposit in a Totten trust after the death of the sole trustee belong to the person named as beneficiary, ‘unless there is clear and convincing evidence of a different intent.’”

“Here, although the signature card for the savings account named appellant as the beneficiary, there is clear and convincing evidence that Mrs. Howery had a ‘different intent’ at the time of her death. She established a living trust that expressly stated her intention to give the savings account to Gabriella Reeves. The trial court properly relied on the living trust to find that Mrs. Howery intended to change the beneficiary of the her Totten trust from appellant to Gabriella Reeves. Because the change was made by a living trust rather than by a will, it is not invalidated by section 5302, subdivision (e).”

According to this court, a change in beneficiary designation for a Totten trust cannot be made by Will, but it’s ok to make such a change by way of an estate planning trust.  There is no substantive difference in result between a will and an estate planning trust.  Both serve the same purpose.  The procedural  difference is that a Will involves probate, while an estate planning trust is handled in private, without court supervision.  The court provided a careless analysis.

Araiza v. Younkin (Sept. 30, 2010) 188 Cal.App.4th 1120, 2010 Daily Journal D.A.R. 15,225

Holmes v. Summer – Fiduciary Duties of Real Estate Broker

Sunday, October 17th, 2010

In the recent decision in Holmes v. Summer (Oct. 6, 2010) 188 Cal.App.4th 1510, the court discussed the fiduciary obligations owed by a real estate broker in a sales transaction.  The facts were not difficult.

The broker represented the seller.  According to the opinion, “the buyers and the seller agreed to the purchase and sale of a residential real property for the price of $749,000 . . . The counter offer did not disclose that the property was subject to three deeds of trust totaling $1,141,000 . . .  Unbeknownst to the buyers, the property was subject to a first deed of trust in the amount of $695,000, a second deed of trust in the amount of $196,000 and a third deed of trust in the amount of $250,000, for a total debt of $1,141,000.”

Thus, the amount offered was $392,000 less than the debt encumbering the property.  When the sale did not close for the price in the listing agreement, the buyer’s sued the listing agent.

Stop here.  How could the buyers have any expectancy damages?  The debt was $1.1 million, while the offer was $750,000.  The buyers expected to pay $750,000, while the debt was $1.1 million.  The buyers did not lose the benefit of their bargain, as they did not offer enough to purchase the property.

Instead, the buyers could claim only reliance damages, being amounts they reasonably expended in reliance on the contract.  “According to the buyers, after they signed the deal with the seller, they sold their existing home in order to enable them to complete the purchase of the seller’s property.  Only then did they learn that the seller could not convey clear title because the property was overencumbered.”

However, didn’t the buyers receive a preliminary title report listing the encumbrances?  If so, how could the buyers claim reasonable reliance, when they had full disclosure of the encumbrances, albeit from a third party?  From the opinion, it seems that the court feels that the broker is on the hook, regardless of future information learned by the buyer.

According to the opinion, “The case before us presents the interesting question of whether the real estate brokers representing a seller of residential real property are under an obligation to the buyers of that property to disclose that it is overencumbered and cannot in fact be sold to them at the agreed upon purchase price unless either the lenders agree to short sales or the seller deposits a whopping $392,000 in cash into escrow to cover the shortfall.”

OK, that’s one way to frame the issue, although the court will proceed to explain that brokers are required to police the real estate market.  “Under the facts of this case, the brokers were obligated to disclose to the buyers that there was a substantial risk that the seller could not transfer title free and clear of monetary liens and encumbrances.”

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Duties of Agent

As explained by the court, “It is now settled in California that where the seller knows of facts materially affecting the value or desirability of the property which are known or accessible only to him and also knows that such facts are not known to, or within the reach of the diligent attention and observation of the buyer, the seller is under a duty to disclose them to the buyer. When the seller’s real estate agent or broker is also aware of such facts, he [or she] is under the same duty of disclosure.”

The court continued.  “Despite the absence of privity of contract, a real estate agent is clearly under a duty to exercise reasonable care to protect those persons whom the agent is attempting to induce into entering a real estate transaction for the purpose of earning a commission.”

The allegation here is that the brokers had a duty to disclose the liens before the buyers signed the agreement.  Only then could the buyers weigh the risks of entering into an agreement, and preparing their finances and related affairs to facilitate completion of the purchase, considering there was a significant possibility the transaction would fall through.  Disclosing the liens only after the buyers had entered into the escrow failed to protect them in this context.

“Here, the buyers say that they sold their existing home in order to purchase the seller’s property and were damaged when the seller failed to convey title . . . To impose a duty on the brokers here to disclose information alerting the buyers that the sale was at high risk of failure would be to further the purpose of protecting buyers from harm and providing them with sufficient information to enable them to wisely choose whether to enter into the transaction.”

Reliance by the Buyers

“The buyers expected, based on the standard form documents they signed, as representative of industry standards, that they would receive a preliminary title report after their offer was accepted and escrow was opened.  They were given no reason to believe that they needed to pay for a title search before even making an offer on the property.”

“Just because a purchaser has constructive notice of a matter of record, this does not eliminate all of the duties of disclosure on the part of a seller or its agents.  In the matter before us, assuming a title search would have revealed the existence of deeds of trust against the property, this does not mean that constructive notice of those recorded deeds of trust would necessarily preclude an action based on the alleged breach of a duty to disclose.”

“The rule we articulate in this case is simply that when a real estate agent or broker is aware that the amount of existing monetary liens and encumbrances exceeds the sales price of a residential property, so as to require either the cooperation of the lender in a short sale or the ability of the seller to put a substantial amount of cash into the escrow in order to obtain the release of the monetary liens and encumbrances affecting title, the agent or broker has a duty to disclose this state of affairs to the buyer, so that the buyer can inquire further and evaluate whether to risk entering into a transaction with a substantial risk of failure.”

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Duty of Confidentiality

“Turning now to moral blame, we observe that California cases recognize a fundamental duty on the part of a realtor to deal honestly and fairly with all parties in the sale transaction.  Surely a sense of rudimentary fairness would dictate that buyers in a case such as this should be informed before they open escrow and position themselves to consummate the same that there is a substantial risk that title cannot be conveyed to them . . . Both the policy of preventing future harm and considerations of moral blame compel the imposition of a duty on the part of a realtor never to allow a desire to consummate a deal or collect a commission to take precedence over his fundamental obligation of honesty, fairness and full disclosure toward all parties.”

“At a minimum, the brokers did not act fairly towards these residential buyers when signing them up for a real estate purchase the brokers had reason to know was a highly risky proposition. Since the brokers had a duty to act fairly towards the buyers, and fairness under the circumstances dictated disclosing that either lender approval or a substantial seller payment was required to close escrow, the portion of Civil Code section 2079.16 upon which the brokers rely did not exempt them from the duty to disclose.”

“To recapitulate, in balancing the factors [ ], we conclude that the brokers in the matter before us had a duty to disclose to the buyers the existence of the deeds of trust of record, of which the brokers allegedly were aware . . . so the buyer can make an informed choice whether or not to enter into a transaction that has a considerable risk of failure.”

By so holding, we do not convert the seller’s fiduciary into the buyer’s fiduciary. The seller’s agent under a listing agreement owes the seller a fiduciary duty of utmost care, integrity, honesty, and loyalty.”  Although the seller’s agent does not generally owe a fiduciary duty to the buyer, he or she nonetheless owes the buyer the affirmative duties of care, honesty, good faith, fair dealing and disclosure, as reflected in Civil Code section 2079.16, as well as such other nonfiduciary duties as are otherwise imposed by law.

Holmes v. Summer (Oct. 6, 2010)  188 Cal.App.4th 1510

Weinberger v. Morris – Distribution is Not What Was Expected From Trust Agreement

Sunday, October 10th, 2010

Here’s a recent case in which the result cannot be what the decedent intended.  As a starting point, let’s discuss the law of wills.

When a distribution is made by will (or by intestate succession), the gift is effected at the time of death.  Absent a disclaimer, the recipient and his or her heirs are entitled to the property.  If the recipient dies before the transfer is completed from the estate, his heirs take the property when the transfer is subsequently finished.

Most of us would have expected the same result with an estate planning trust.  If a gift to a child made by a trust takes effect at the death of the parent, we would expect that the gift became “permanent” if the child survived the parent, even if the final distribution was delayed.

Alas, things are never as settled or certain with a trust agreement.  In Weinberger v. Morris (Sept. 24, 2010) 2010 WL 3720812, 2010 Daily Journal D.A.R. 15,073, the child survived the parent, but died before final distribution from the trust.  The court held that the property passed to a different family member (not the child’s heirs) based on a slanted reading of the trust agreement.  Here is the court’s analysis.

“During her lifetime, Mrs. Weinberger had two children, Sheila and Robert . . . On October 12, 1996, Mrs. Weinberger executed a declaration of trust [ ].  On the same date, Mrs. Weinberger executed a quitclaim deed transferring her Atoll Avenue property to the Trust.”

Stop here.  This meant that Mrs. Weinberger wanted the Atoll Avenue property to be distributed in accordance with the trust agreement.  What did the trust say?

The Trust provided that after Mrs. Weinberger’s death . . . all trust assets, save the personal effects which Mrs. Weinberger requested distributed in separate written instructions, were to go to Sheila.”

“Article 5.2 of the Trust instrument provided that, if Sheila died prior to receiving final distribution, the undistributed principal and income was to go to Davis.  Article 5.2 further provided that, if all of the named beneficiaries died prior to final distribution of the Trust estate, its remainder was to go to the heirs of the trustees.”

Most of us would conclude that daughter Sheila received the property if she survived her mother, which she did.  “Mrs. Weinberger died in May 1997.  On December 22, 1997, Sheila recorded an Affidavit Death of Trustee/Trustor.”

Sheila almost certainly believed the Affidavit of Death was sufficient to complete the distribution.  Here is the critical fact that caused the distribution to bypass Sheila.  “After recording the affidavit of Mrs. Weinberger’s death as trustee/trustor of the Trust, Sheila never executed, delivered or recorded – in her role as successor trustee of the Trust – any documents to transfer the Atoll Avenue property out of the Trust and to herself as the beneficiary of 100 percent of the Trust estate.

So what, you ask?  Why do Sheila’s heirs lose out on the inheritance?  “Sheila died in September 2002 . . .  In November 2005, Davis recorded an Affidavit – Death of Trustee disclosing that Sheila had died.  At the same time, Davis, as Successor Trustee, executed a quitclaim deed transferring the Atoll Avenue property out of the Trust, and to himself. Davis recorded the quitclaim deed in December 2005.”


“Robert contend[ed that] Davis never acquired any right, title or interest in the assets held by the Trust.  More specifically, Robert argue[d] that the assets owned by the Trust irrevocably vested in Sheila on the death of Sue Weinberger.  Robert contend[ed] that he [was] entitled – as Sheila’s sole heir – to the assets which were once held by the Trust [because the] Trust did not exist after the death of Sue Weinberger and certainly not after Sheila Weinberger’s recording of her Affidavit Death of Trustor/Trustee on December 22, 1997.”

On appeal, the court rejected this argument.  Explained the court, “Robert’s argument implicates the ‘merger doctrine,’ which may be summarized as follows:  When the sole trustee of a trust and the sole beneficiary of the trust become one-and-the-same person, the duties of the person, in his or her role as trustee, and the interests of the person, in his or her role as beneficiary, ‘merge,’ meaning that the trust terminates as a matter of law, and the trust’s assets irrevocably vest in the beneficiary.”

Wow.  That’s an old theory from real property law, and not the best analogy.  The better analogy comes the law of wills.  To no avail for Robert, as the court held that, “The language employed by Mrs. Weinberger in her trust instrument provided that, upon her death, the trustee would pay certain expenses and distribute her personal effects in accord with her written directions, and distribute the remainder to Sheila.  If Mrs. Weinberger’s trust instrument ended there, then Robert’s argument might prevail, but it did not. Mrs. Weinberger’s trust instrument further provided in Article 5.2.A: ‘If Sheila should die prior to receiving final distribution, the undistributed principal and income of such beneficiary’s share shall be held, administered and distributed for the benefit of Lee Davis.’”

We see no language in Mrs. Weinberger’s trust instrument indicating that it imposed upon a trustee an affirmative duty to make a prompt distribution of the Trust’s assets to Sheila upon Mrs. Weinberger’s death.  At the same time, the Trust included express language governing the contingency of Sheila’s death prior to a distribution of trust assets to her.”

“The primary cases cited by Robert [ ] involved a will, meaning any interpretation of the instrument had to be rendered in light of the public policy favoring the ‘prompt’ distribution of an estate.  Depending upon its terms, a trust may serve significantly different purposes than a will.”

Correct.  Now, to hold against Robert, the court has to state that this was a property management trust, not an asset distribution (aka estate planning) trust.  Which it cannot do, but it could bend the language to serve its own purposes.  “Taylor involved an instrument which included no language regarding the time limits for distribution of estate assets . . .  The language found in Mrs. Weinberger’s trust instrument gives no such indication that she intended a prompt distribution of her trust’s assets.”

Oh, the mischief that comes from these non-probate distributions.  Time to change your trust agreements.

Weinberger v. Morris (Sept. 24, 2010) 2010 WL 3720812, 2010 Daily Journal D.A.R. 15,073

Safe Deposit Boxes Are Not as Safe as They Seem

Sunday, October 3rd, 2010

Conventional wisdom is that a safe deposit box is a safe place to store valuable belongings.  And that’s true, as long as the owner keeps track of the contents of the safe deposit box.

Yet, I have handled a case in which a bank denied, in writing, the existence of a safe deposit box in the decedent’s name.  A few months later, when presented with the key to the safe deposit box, the bank “found” the box and we recovered thousands of dollars in U.S. government bonds.

The plaintiff in Gabriel v. Wells Fargo Bank (Aug. 30, 2010) 2010 DJDAR 14579 did not fare as well.  In Gabriel v. Wells Fargo Bank, the decedent held a safe deposit box.  The widow learned of the safe deposit box 16 years after her husband’s death.  In the box was a non-negotiable certificate of deposit in the face amount of $976,691.60, payable to the widow.

But because the widow could not prove a negative (specifically, because she could not prove that Wells Fargo Bank had not already paid out on the certificate of deposit), she lost at the trial court and on appeal.

That’s a bitter pill, and a strange decision.  Here are the facts and the holding.
“On June 22, 1988, Hideo purchased a certificate of deposit from Wells Fargo in the amount of $976,691.60, payable to his wife Kuniko.  Interest from the certificate was to be placed in a savings account held in Kuniko’s name.  Hideo apparently placed a receipt from the bank for the certificate of deposit account in a safe deposit box at the bank which was also in Kuniko’s name.”

Sounds like great facts.  “Hideo died in November 1991 . . . In April 2002, Wells Fargo opened the safe deposit box because the rental fee had not been paid and the box was presumed abandoned.  It found the certificate of deposit and in June 2006 sent it to the California Controller’s Office as unclaimed property.”

Still going strong.  “In August 2007, Kuniko received a letter from the controller’s office informing her that it was holding the contents of a safe deposit box from Wells Fargo. The controller sent her the contents of the box, which included the receipt for the certificate of deposit. This was the first time that she learned of the existence of the certificate of deposit or of the savings account . . . Kuniko sued Wells Fargo, claiming that it failed to pay her the money in the accounts.”

What more do you need?  A lot, according to the court.  “The court granted summary judgment in favor of the bank, finding that despite the absence of definitive records, Wells Fargo had presented sufficient evidence of its normal business practices to establish that no funds remained in either account.”

Are you wondering what went wrong?  You should be.   Here’s how Wells Fargo got away scot-free.  “Wells Fargo has no records indicating that any funds from the CD account or the savings account were ever transferred to the State Controller’s Office as unclaimed property.  If any unclaimed funds remained in either of these accounts, those funds would have been escheated to the State Controller’s Office and Wells Fargo would have records of that fact.”

OK, so the bank did not pay out the funds to the state as unclaimed property.  What happened to the million dollars, which was payable to the widow?  “Wells Fargo [determined] that neither account was open, and that no records existed which would show when those accounts had been closed or how much money had been in the account when they were open.”

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Watch the train wreck unfold before your eyes.   “Wells Fargo’s evidence establishes that the absence of specific Wells Fargo records infers that the certificate of deposit was withdrawn.   Since there is no evidence that plaintiff Yamamoto’s late husband did not withdraw the funds, and no evidence that the terms of the certificate of deposit account did not permit him to withdraw the funds, plaintiff Yamamoto is unable to meet her burden of producing evidence on an essential element of her claim.”

Really?  The widow loses?  Said the court, “At trial Kuniko would have the burden of proving nonpayment.”  Well. The widow said she never received the money.  Isn’t that enough?

No way, said the court.  “Wells Fargo submitted the declaration of the operations manager of the bank’s unclaimed property department who is responsible for monitoring dormant accounts and reporting escheated property to the State Controller’s Office.  Her declaration states that ‘it is Wells Fargo’s policy and practice to maintain account records for seven years after the account has been closed.’”

No tickee, no laundry.  Or, because the bank has no records, the widow loses.  “Wells Fargo’s evidence that no money remained in the accounts shifted to Kuniko the burden of presenting evidence sufficient to create a triable issue as to nonpayment, and her possession of the receipt and her testimony were insufficient to do so.  The trial court therefore properly granted summary judgment in favor of Wells Fargo.”

The moral of this story – make sure that your family knows how to find your valuable possessions.  Also, bankers have a powerful lobby, and the laws favor them to an unreasonable degree.

Gabriel v. Wells Fargo Bank (Aug. 30, 2010) 2010 DJDAR 14579