Fresno Lawyer – Randolf Krbechek

Case law reflects a tension in the interpretation of fiduciary duties. One camp favors a “I know it when I see it” approach, while the more rigorous jurists seek to discern the basis for imposition of such liability.

This tension is on full display in the recent en banc decision in U.S. v. Milovanovic, ___ F.3d ___ (9th Cir. April 24 2012). The majority decision found liability under the Mail Fraud Statute, 18 U.S.C. § 1341, based on the holding in Skilling v. U.S., 130 S. Ct. 2896 (2010).

Explained the Ninth Circuit, “A close examination of the Supreme Court’s opinion in Skilling reveals that embedded in the Court’s holding – ‘that § 1346 criminalizes only the bribe-and-kickback core of the pre-McNally case law’ – is the implication that a breach of a fiduciary duty is an element of honest services fraud.”

The Ninth Circuit then reached for soft law, holding that “a fiduciary duty for the purposes of the Mail Fraud Statute is not limited to a formal ‘fiduciary’ relationship well-known in the law, but also extends to a trusting relationship in which one party acts for the benefit of another and induces the trusting party to relax the care and vigilance which it would ordinarily exercise.”

Truly, that’s about as soft and broad a definition of a fiduciary relationship as is possible.  Continued the court, “Because allegations in the indictment, which we must take as true for the purposes of this appeal, assert that the State, through outsourcing the work to private contractors, reposed a special trust in Lamb and Milovanovic to ensure the integrity of the testing of CDL applicants, and thus relied on the provision of their honest services in administering the tests and certifying the results, we hold that a jury could find that Milovanovic’s and Lamb’s conduct falls within the ambit of §§ 1341 and 1346.”

Remember, this is the same Ninth Circuit that held that, when a raisin grower is required to turn over a portion of his crop to an agency of the federal government, there is no “taking without just compensation” for Constitutional purposes.  Horne v. U.S. Dept. of Agriculture, ___ F.3d ___ (9th Cir. July 25, 2011). The Horne opinion is certainly a low point in the scholarly tenure of Judge Michael Hawkins.

Back to U.S. v. Milovanovic. The concurring opinion by Judge Richard Clifton drives home the casual nature of the majority’s analysis. Judge Clifton begins by “repeat[ing] an observation made nearly 50 years ago:

“‘Fiduciary’ is a vague term, and it has been pressed into service for a number of ends.  My view is that the term `fiduciary’ is so vague that plaintiffs have been able to claim that fiduciary obligations have been breached when in fact the particular defendant was not a fiduciary stricto sensu but simply had withheld property from the plaintiff in an unconscionable manner.”

Judge Clifton continues.  “’Fiduciary’ has not gotten any clearer in the half-century since then, and our decision here does not help.  We accede to the agreement of the parties that the Supreme Court defined a breach of fiduciary duty as an essential element required for honest services mail fraud.  But we conclude that ‘fiduciary’ here does not mean a ‘formal, or classic, fiduciary duty.’  Rather, we hold that a fiduciary duty as an element of mail fraud ‘is not limited to a formal fiduciary relationship well-known in the law.’”

Here’s where Judge Clifton shines. “But we should not muddy the meaning of ‘fiduciary’ any further by employing it here to mean something other than ‘fiduciary.’  By doing so we further devalue the term and invite that much more confusion as to what the word means in other situations.”

“In some contexts, after all, the term ‘fiduciary’ is intended to mean ‘fiduciary,’ not our variation on that concept.  We should instead simply define the essential element for honest services mail fraud as the trusting relationship described in the majority opinion and leave the word ‘fiduciary’ out of it.”

The concurrence has the better of the argument. A published opinion that establishes a soft, murky definition for the essential term “fiduciary” does no benefit to the development of the law.

U.S. v. Milovanovic, ___ F.3d ___ (9th Cir. April 24 2012).

A recent case illustrates the need for a beneficiary to exercise care when making a bid at a trustee sale.  In Biancalana v. TD Service Company (Oct. 31, 2011) 2011 DJDAR 15972, the secured debt was $219,105.  However, due to error by the beneficiary, the trustee was instructed to make an opening bid of only $21,894.  “The auctioneer was not instructed by TD to make any further because of the property over above the opening bid.”

The buyer made a successful bidder $21,896.  A day later, the beneficiary discovered the error, and instructed the trustee not to issue a trustee’s deed to the buyer.  The buyer sued to compel the trustee to issue a deed for the sales price.  The court of appeal held in favor of the buyer, rejecting the beneficiary’s argument that there had been a “procedural defect” in the sale.

The Court of Appeal explained the nonjudicial foreclosure process as follows.  “The purposes of this comprehensive scheme are threefold: (1) to provide the creditor/beneficiary with a quick, inexpensive and efficient remedy against a defaulting debtor/trustor; (2) to protect the debtor/trustor from wrongful loss of the property; and (3) to ensure that a properly conducted sale is final between the parties and conclusive as to a bona fide purchaser.”

The court rejected the argument that the sale was not “bona fide” because of the substantial difference between the fair market value for the property and the opening bid.  (The successful buyer was the only bidder at the sale.)   “Mere inadequacy of price, absent some procedural irregularity that contributed to the inadequacy of price of otherwise injured the trustor, is insufficient to set aside a nonjudicial foreclosure sale.”

The court distinguished the decision in Millennium Rock Mortgage, Inc. v. T.D. Service Co. (2009) 179 Cal.App.4th 804.  In Millennium Rock Mortgage, the auctioneer was set to sell two properties on the same street in Sacramento. “The script prepared for the 13th Avenue auction contained the proper trustee sale number and legal description of the property, but due to a clerical error, listed the address for the Arcola Avenue property, rather than the 13th Avenue property.”

The Millennium Rock Mortgage sale was reversed for the following reasons.  “”The auctioneer called out the legal description and credit bid applicable to one property, while announcing the street address of a different property.  This created a fatal ambiguity in determining which property was being auctioned.  Due to the contradictory descriptions of the property, the auctioneer’s mistake went to the heart of the sale.  Since irregularity, gross inadequacy of the price, and unfairness were all abundantly present, the sale was voidable at the option of the trustee.”

No such facts were present in Biancalana.  “The beneficiary’s servicing agent miscalculated the amount owed on the subject property … This error, which was wholly under the agent’s control and arose solely from the agent’s own negligence, falls outside the procedural requirements for foreclosure sales described in the statutory scheme.”

“In the instant case, TD was acting as the beneficiary’s agent in preparing the property for the foreclosure sale.  It submitted the incorrect credit bid to the auctioneer, and twice confirmed the incorrect bid when the auctioneer called to inquire just prior to the sale.”

“Consequently, the mistake was made by TD in the course and scope of its duty as the beneficiary’s agent, not by the auctioneer as in Millennium Rock. The auctioneer simply announced the bid submitted by TD. The error was wholly under TD’s control and arose solely from its negligence … As a result, there was no procedural irregularity in the foreclosure sale and TD’s motion for summary judgment should have been denied.”

The moral of the story – a beneficiary should always be diligent to confirm the proper amount of the opening bid at a foreclosure sale, or suffer the loss.

Biancalana v. TD Service Company (Oct. 31, 2011) 2011 DJDAR 15972

A recent case reinforces the necessity to comply with the technical requirements for prosecuting an unlawful detainer complaint in California. [Commonly known as an eviction.]  Specifically, the issue at trial was whether the three-day notice had been served properly.  The trial court held that service was defective.  This was reversed on appeal, based on the statutory presumption arising from service by a registered process server.

The take away rule is that you should always have a registered process server serve the three-day notice.  If you do not, make sure that the person who effected service of the three-day notice is present in court to testify on behalf of the landlord.

The situation in Palm Property Investments, LLC v. Yadegar (2011) 194 Cal.App.4th 1419 involved years of unpleasant litigation.  In 2002, the “penthouse apartment” was been leased out for $3,500 per month.  The rent was later increased slightly, followed by a third addendum in 2003 which reduced the rent to $32,000 per year, subject to rent being prepaid one year in advance.

The prior owners had engaged in bitter litigation with the tenant.  The landlord was not successful in its prior eviction lawsuit, and was ordered to pay $109,062 in attorney’s fees to the tenant.  The landlord took that matter up on appeal, lost, and was ordered to pay a further $70,770 in attorney’s fees to the tenant.

[No, I am not exaggerating.  These are the dollar amounts recited in the appellate decision.]

Not surprisingly, the tenant applied the judgment amount to offset future rent payments.  Thereafter, the property went into foreclosure and was sold to a third party, who then sought to enforce the lease against the tenant.  The new owner filed an unlawful detainer action, asserting that the property was held on a month-to-month tenancy, with rent payable amount of $3,500 per month.

The new owner lost at trial.  Specifically, the “the trial court sustained the [tenant’s] objection to the admission of the proof of service of the three-day notice and found that appellant failed to meet its burden to show that the notice was properly served.”

As discussed below, this decision was reversed on appeal.  The appellate court made the following observations regarding the unlawful detainer process in California.

“Unlawful detainer is a unique body of law and its procedures are entirely separate from the procedures pertaining to civil actions generally … An unlawful detainer action is a statutory proceeding and is governed solely by the provisions of the statute creating it.  As special proceedings are created and authorized by statute … the statutory procedure must be strictly followed.”

Importantly, “proper service on the lessee of a valid three-day notice to pay rent or quit is an essential prerequisite to a judgment declaring a lessor’s right to possession under section 1161, subdivision 2.  A [landlord] must allege and prove proper service of the requisite notice.  Absent evidence the requisite notice was properly served pursuant to section 1162, no judgment for possession can be obtained.”

In the case on appeal, the three-day notice had been served by a registered process server.  The appellate court cited to Evidence Code section 647, which provides that “the return of a process server registered pursuant to Chapter 16 [] of Division 8 of the Business Professions Code upon process or notice establishes a presumption, affecting the burden of producing evidence, of the facts stated in the return.”

The court then reversed the trial court for the following reasons.  “Where service is carried out by a registered process server, Evidence Code section 647 applies to eliminate the necessity of calling the process server as a witness at trial.  This conclusion is consistent with the purpose of the unlawful detainer procedure to afford a relatively simple and speedy remedy for specific landlord-tenant disputes …

“The trial court erred by failing to apply the evidentiary presumption afforded by Evidence Code section 647.  The excluded proof of service established that a registered California process server served the three-day notice …

“As explained in Evidence Code section 604, ‘the effect of a presumption affecting the burden of producing evidence is to require the trier of fact to assume the existence of the presumed fact unless and until evidence is introduced which would support a finding of its nonexistence, in which case the trier of fact shall determine the existence or nonexistence of the presumed fact from the evidence and without regard to the presumption. Thus, the [tenants] were required to come forth with evidence – beyond their answer – in order to overcome the presumption …

“The [tenants] offered no evidence to show that they were not properly served and instead relied on their answer and appellant’s asserted failure to satisfy its burden of proof.  On retrial, they will have the opportunity to present evidence to rebut the presumption afforded by Evidence Code section 647 … [The landlord] is awarded its costs on appeal.”

Always be careful with your three-day notices.  Make sure they comply with the requirements established by law, and make sure that they have been properly served on the tenant.  Otherwise, the landlord will not prevail at trial.

Palm Property Investments, LLC v. Yadegar (2011) 194 Cal.App.4th 1419

This author has often complained that the trust laws have not kept pace with modern practice as it relates to estate planning.  Estate planning trusts (a.k.a. “living trust”) are used as will substitutes.  The rules pertaining to wills are well known, and are established by case and by code.

In contrast, the statutory rules relating to estate planning trusts come from general trust law, which law was developed in response to traditional property management trusts.  Yet, the property management trust is functionally different from an estate planning trust.  Typically, a property management trust manages property for benefit of current third-party beneficiaries.  In contrast, an estate planning trust does nothing until the death of the trustor, when the trust assets are distributed according to the “trust” agreement.

The recent decision in Estate of Giraldin (Sept. 28, 2011) 2011 DJDAR 14642 fully reinforces the proposition that an estate planning trust is a will substitute, and that no duties are owed to the heirs or beneficiaries prior to the death of the trustor.  The same result applies in connection with a will – an heir cannot sue on the ground that the testator sold or gifted property owned by the testator before death, such that the property was not included in the estate after death.

Bill Giraldin was a savvy investor, with a fortune worth $6,000,000 or more before his death.  He placed his assets into his estate planning trust.  The trust was fully revocable and/or amendable by him during his lifetime.  He appointed one of his sons to act as trustee.  (Nine children qualified as future beneficiaries under the trust.  Later, four filed suit.)

Following the instruction of the father, the son invested $4,000,000 in a company called SafeTzone.  Thus, one son (Tim) was the trustee of the trust; at the instruction of his father, Tim invested a substantial amount of his father’s wealth in Tim’s company.

Needless to say, the SafeTzone investment went badly, “and by the time Bill died in May of 2005, the family trust’s stake in the company was worth relatively little.”  In response, four children sued Tim for breach of his fiduciary duties, alleging that the investments he made as trustee during his father’s lifetime were in violation of the fiduciary duties owed to them as successor beneficiaries under the trust.

Comment – The court found that Bill invested in SafeTzone of his own free will, and was not unduly influenced by Tim, the trustee.

Tim lost badly at trial, but the appeal court fully vindicated him.  Specifically, the court of appeal focused “on the question of whether respondents have standing to maintain claims for breach of fiduciary duty and to seek an accounting against [Tim] based upon his actions as trustee during the period prior to Bill’s death.”

The court’s analysis was as follows.  “In this case, the family trust was revocable by Bill during his lifetime, and thus Tim’s duties as trustee were owed solely to Bill, as settlor, and not to respondents …As explained by our Supreme Court, ‘property transferred to, or held in, a revocable inter vivos trust is deemed the property of the settlor.’”

The court continued.  “A settlor with the power to revoke a living trust effectively retains full ownership and control over any property transferred to that trust.  Any interest that beneficiaries of a revocable trust have in trust property is merely potential and can evaporate in a moment at the whim of the settlor.”

As explained by the court, “statutes recognize that when property is held in a revocable trust, the settlor and lifetime beneficiary has the equivalent of full ownership of the property.  Thus, during Bill’s lifetime, Tim’s duties as trustee were owed solely to Bill – the settlor with the power to revoke – and not to respondents. Instead, respondents occupied a position analogous to heirs named in a will.

“Revocable living trusts are merely a substitute for a will.  And just as a will ‘speaks’ only as of the date of the testator’s death, a revocable trust confers enforceable property interests to the beneficiaries only at the time it becomes irrevocable. Prior to that time, those beneficiaries have no rights to the trust property, and thus no say in how it is managed.”

The court made plain its position.  “In our view, the statute supports the conclusion beneficiaries lack standing – ever – to assert claims based upon conduct occurring during the settlor’s lifetime.”

Also, Tim owed no “duty” to stop his father from making an “unwise” investment.  “That was not a claim Bill himself could have brought. ‘Stop me before I do something I’ll regret’ is not a recognized cause of action, even against the trustee of one’s revocable trust …

“Bill remained legally entitled to do what he wanted with the trust assets – which were effectively his own property – including doing financially risky or downright stupid things. No one – including Tim – had the authority to stop him. Thus, in the absence of an adjudication of Bill’s incompetency, we cannot discern any legal basis on which Bill might have justified holding Tim liable for carrying out Bill’s own wishes with regard to the assets in the family trust – even if those wishes appeared to be objectively unreasonable.”

Such a sound and well-reasoned opinion is welcome in an area that suffers from needless confusion.

Estate of Giraldin (Sept. 28, 2011) 2011 DJDAR 14642

This writer has commented regularly that the modern estate planning trust is a legal fiction.  A convenient legal fiction, mind you, but still a legal fiction.

The estate planning trust (also known by the unfortunate term, “living trust”) is a merely a will substitute.  It takes effect – meaning, it provides a benefit to a third party – upon the death of the settlor.  That’s precisely what a will does – it transfers property at death.  The difference is, the administration of a decedent’s will is subject to the jurisdiction of the probate court, whereas many estate planning trusts operate extra-judicially.

Remember the essential legal premise of an estate planning trust – one person (sometimes a married couple) acts simultaneously as the settlor (trustor), trustee, and beneficiary.  The same person retains the full power to amend or revoke the trust, and/or to withdraw all of the assets for his or her own benefit.

Enter the merger doctrine.  The merger doctrine is conventionally considered a principle of real estate law.  It holds that temporary (or partial) interests in real property become joined – unified – when held by one person.  The legal doctrine (whether or not intended) causes the partial interest to merge into the greater fee interest.

Thus, when one person is both the tenant and the landlord at the same time, the lease “merges” into the fee ownership, and ceases to have legal significance.

Likewise, when the owner of real property is simultaneously the beneficiary of a deed of trust encumbering the property, the beneficial interest under the deed of trust merges into the fee ownership, and is no longer independently enforceable.

One more common example.  If the same person holds a fee interest in real property and also holds an easement against the property, the easement will merge into the fee ownership, and cease to function for legal purposes as an easement (at least while the ownership is unified).

Why doesn’t the same result occur with estate planning trusts?  We know that real estate trusts have their genesis in real estate law, starting in about 1250 in England.  (Other Continental legal systems do not recognize trusts.)

When one person is simultaneously the grantor, the grantee, and the beneficiary, why don’t the legal interests merge so that the trust is disregarded?  That’s an interesting question: a recent case brushes against it, but fails to consider the full impact of this analysis.

Thus, we find the following discussion in Weinberger v. Morris (2010) 188 Cal.App.4th 1016:

“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. (See Ammco Ornamental Iron, Inc. v. Wing (1994) 26 Cal.App.4th 409, 417.)

“The determination whether the duties of a trustee and the interests of a beneficiary have become united in a single person is a question of law resolved by construction of the trust instrument.”

(Interesting observation by the court of appeal.  Why isn’t the legal construction of the document an issue of law to be resolved by the court?)

Continued the court.  “In the current case, the trial court rejected Robert’s claims for the following stated reasons: ‘The Sue Weinberger Trust did not terminate upon Sue Weinberger’s death. The merger doctrine does not apply.  In interpreting Sue Weinberger’s intent, as expressed in the Sue Weinberger Trust, the Sue Weinberger Trust continued until there was a final distribution of the assets of the Sue Weinberger Trust …

“Upon Sheila Weinberger’s death the real property continued to remain in the Sue Weinberger Trust and was distributed by Lee Davis acting as trustee of the Sue Weinberger Trust to himself.  Upon Lee Davis’ distribution of the real property, the Sue Weinberger Trust terminated.”  Based thereon, the court concluded that the trust interests had not merged at an earlier time.

To me, that’s a legal conclusion: it’s not a matter for resolution strictly by factual reference to the decedent’s estate planning trust.  The reality is that conventional trust law is applied carelessly in the case of estate planning trusts, because the round peg doesn’t fit the square hole.  We advance the fiction of estate planning “trusts,” with the result that probate administration is avoided.  We need a coherent body of law controlling the treatment of estate planning trusts, because the Restatement of Trusts does not fit well.

In Weinberger, the court offered no analysis as to why the merger doctrine did not apply, as a matter of law.  The question is profound, and worthy of further thought.

Weinberger v. Morris (2010) 188 Cal.App.4th 1016

The trend in the courts has been to reduce the legal theories available to persons who suffered losses during the mortgage meltdown.  Traditional theories based on breach of contract, fraud, and promissory estoppel, remain viable causes of action.

Yet the more exotic theories seeking to impose liability have been narrowed and often eliminated.  Such is the case in Bank of America v. Superior Court (Paul Ronald) (August 25, 2011) 2011 DJDAR 12942.  In the Paul Ronald action, the plaintiff sought to hold Bank of America, as successor-in-interest to Countrywide Mortgage, liable for the general decline in property values triggered by Countrywide’s bad lending practices.  The court would have none of it.

According to the complaint, “Countrywide’s founder and CEO, Angelo Mozilo determined that Countrywide could not sustain its business ‘unless it used its size and large market share in California to systematically create false and inflated property appraisals throughout California.  Countrywide then used these false property valuations to induce Plaintiffs and other borrowers into ever-larger loans on increasingly risky terms.’

The complaint continued.  “Mozilo knew ‘these loans were unsustainable for Countrywide and the borrowers and to a certainty would result in a crash that would destroy the equity invested by Plaintiffs and other Countrywide borrowers.  Mozilo and others at Countrywide ‘hatched a plan to ‘pool’ the foregoing mortgages and sell the pools for inflated value.  Rapidly, these two intertwined schemes grew into a brazen plan to disregard underwriting standards and fraudulently inflate property values.’”

Unfortunately, those allegations describe the general problems that swept through the mortgage industry.  “This writ petition relates solely to plaintiffs’ cause of action for fraudulent concealment.”

The trial judge noted the scope of the issue presented to it.  On January 11, 2011, the matter came on for hearing.  At the outset, the trial court indicated, “the issues presented by the many plaintiffs in this case as against their current mortgage lender and/or loan servicer are part of a larger socioeconomic problem that confronts our society in California and all of the other states in this union, an issue of great concern to the U.S. Congress, state Legislature, and the bank regulators, given that in our banking system the banks are insured by the full faith and credit of the United States government for all intents and purposes, so the continued solvency of the banking industry as a whole is a matter of intense interest to the U.S. Congress as well as the central bank.”

That’s the real problem.  This is not a matter that should be dumped into a trail court.  Our entire justice system has shrugged its shoulders and refused to impose liability on anyone for the manipulations that developed into the mortgage crisis.  Shame on us.

It seems there are some 20 cases rolling around in Los Angeles and Orange Counties based on the same charging allegations.  As explained by the court of appeal, “We conclude the plaintiffs/borrowers cannot state a cause of action against Countrywide for fraudulent concealment of an alleged scheme to bilk investors by selling them pooled mortgages at inflated values, the demise of which scheme led to devastated home values across California.”

Explained the court, “we conclude that while Countrywide had a duty to refrain from committing fraud, it had no independent duty to disclose to its borrowers its alleged intent to defraud its investors by selling them mortgage pools at inflated values.”

More specifically, “Due to the generalized decline in home values which affects all homeowners (borrowers of Countrywide, borrowers who dealt with other lenders, and homeowners who owned their homes free and clear), there is no nexus between Countrywide’s alleged fraudulent concealment of its scheme to bilk investors and the diminution in value of the instant borrowers’ properties.”

Further, the court noted that the complaint embraced a general decline in property values across the state.  “Irrespective of whether a homeowner obtained a loan from Countrywide, or obtained a loan through another lender, or whether a homeowner owned his or her home free and clear, all suffered a loss of home equity due to the generalized decline in home values.  That being the case, there is no nexus between the alleged fraudulent concealment by Countrywide and the economic harm which these plaintiffs/borrowers have suffered.”

The final holding – “We merely conclude plaintiffs failed to state a cause of action against Countrywide for fraudulent concealment of its alleged scheme to bilk investors by selling collateralized mortgage pools at an inflated value, the demise of which led to a generalized decline in California residential property values.”

This writer is as upset about the mortgage debacle, and the refusal of governmental authorities to take action, as anyone else.  But the right place for action is the Department of Justice, or the Securities and Exchange Commission, not a trial court.

Most commendable is the speed at which the court issued this decision.  The lawsuit was filed in March 2009.  The trial court issued its order dismissing the claim for fraudulent concealment on January 11, 2011.  This writ proceeding was resolved by decision entered on August 25, 2011.  Justice is not always delayed.

Bank of America v. Superior Court (Paul Ronald) (August 25, 2011) 2011 DJDAR 12942

The fees in a probate case trigger a reaction that sometimes borders on panic.  Part of the reasoning behind the use of an estate planning trust (sometimes referred to as an inter vivos trust) is that the trust will save on attorney’s fees.

However, as I tell clients, it only works if the beneficiaries get along.  If not, the attorney’s fees in a trust dispute will greatly exceed the regular probate fees.  A case in point is the recent decision in Bellows v. Bellows (June 13, 2011) 2011 DJDAR 8530.  The estate was in the range of $65,000.  Under California law, the probate fees would have been around $2,600 (four percent of the estate).  Yet the trust litigation has triggered attorneys fees in excess of $20,000, which surely was not the intended result.

The case also stands for the proposition that a trustee cannot demand a release as a condition to making a distribution as required under the trust agreement.  (Again, such a release comes part and parcel with a probate, as the court approves all distributions by the executor.)

Here are the facts.  “In 2003, Beverly Bellows established the Beverly Bellows trust, naming her and Frederick as cotrustees. As restated in 2005, the trust provided that on her death, the trust assets would be divided equally between Frederick and Donald. Following Beverly’s death in 2008, Donald requested distribution of his share of the trust.”

Watch as the wheels start to slip – the two brothers did not get along. “In September 2009, when the distribution had not been made, Donald filed a petition in the probate court pursuant to section 17200 seeking an accounting and distribution of the trust assets. On November 13, the court ordered Frederick to provide an accounting of the trust assets and to distribute one-half of the assets to Donald within 10 days. The order awarded Donald attorney fees in the amount of $9,800.”

Ouch.  That fee award – long before the fees on appeal – was four times the total probate fees, had the estate been subject to probate.  But it only gets worse, as Donald also claimed that “Frederick had improperly deducted from the remaining corpus of the trust approximately $13,000 of his own attorney fees prior to dividing the trust assets in half.”

Never forget Molly Ivins’ first rule of holes – When you find yourself in one, stop digging.  These two brothers amassed more than $25,000 in collective attorney’s fees, before they ever took the matter up on appeal.

“On February 23, 2010, Donald filed a motion to compel compliance with the court’s November 2009 order.  Frederick opposed the motion and filed a cross-motion for abatement and for attorney fees and sanctions.”

Here’s the holding on appeal. “There is no dispute that under the terms of the trust as interpreted by the court in its November 2009 order, Frederick was required to distribute to Donald one-half of the trust assets. Under the plain language of [Probate Code] section 16004.5, subdivision (a), Frederick could not condition the payment on a release of liability . . .

“There was no dispute that Donald was entitled to receive from the trust at least $30,376.80, based on Frederick’s own accounting. Frederick, as trustee, was required to make this distribution to Donald without any strings attached. He was not entitled to condition the payment on the release of other claims or demands of the trust beneficiary.

Added the court, “[the statute] permits a trustee to seek a voluntary release or discharge.  A release obtained as a condition of accepting payment to which the beneficiary is entitled is in no sense voluntary . . . Frederick could not condition such an agreement on Donald releasing his right to an accounting or of other claims he might have against the trustee. Again, such an interpretation would render subdivision (a) nugatory.”

Finally, the court added that, “subdivision (b)(4) confirms the right of the trustee to withhold any distribution that is reasonably in dispute. In such a case, as subdivision (b)(5) confirms, the trustee may seek instructions from the court, the well-established method of resolving controversies that may arise between trustee and beneficiary . . . What the trustee may not do is extract from the beneficiary an agreement to accept a compromise concerning a disputed issue as a condition of receiving a distribution to which the beneficiary is unquestionably entitled. A trustee may not under any circumstances condition a required distribution on an involuntary release of liability.”

As it looks to this writer, the two brothers spent all of the money on attorney’s fees. That’s a bad result under any standard.

Bellows v. Bellows (June 13, 2011) 2011 DJDAR 8530

The Delaware Supreme Court recently decided William Penn Partnership v. Saliba, a case in which there are no winners.  In the case, one of the members breached his fiduciary obligations, but his conduct caused no damage.  Nonetheless, the court awarded attorneys’ fees as an “equitable remedy.”  In this author’s view, the award distorts the law of equitable remedies, creates uncertainty in the law, and rewards fruitless litigation.

The facts were as follows.  The parties were members of a limited liability company called Del Bay Associates, LLC.  Del Bay built the Beacon Motel in Lewes, Delaware in 1987, with 66 guest units.  Later, some of the members (the Lingos) wanted to “end their business relationship” with the other members.

The Lingos concocted a story about their need to dissolve the limited liability company and sell the motel to fulfill obligations under a section 1031 tax-deferred exchange.  Explained the court, “On June 10, 2003, the Lingos convinced Hoyt to sign the contract immediately so they could present it to the JGT board. The Lingos told Hoyt that if he did not sign the contract, JGT might back off.”

The court found that the representations were not true.  Instead, the Lingos controlled both sides of the transaction – seller and buyer.  For example, “The Lingos manipulated the sales process through misrepresentations and repeated material omissions such as (1) imposing an artificial deadline justified by ‘tax purposes;’ (2) failing to inform Saliba and Ksebe that they were matching their offer by assuming the existing mortgage; [and] (3) failing to inform Saliba and Ksebe that they had already committed to selling the property to JGT, an entity the Lingos controlled.”

So, we have a transaction in which one member abused his fiduciary duties to the other members.  More bluntly, “The Lingos here acted in their own self interest by orchestrating the sale of Del Bay’s sole asset, the Beacon Motel, on terms that were favorable to them.  By standing on both sides of the transaction – as the seller, through their interest in and status as managers of Del Bay, and the buyer, through their interest in JGT– they bear the burden of demonstrating the entire fairness of the transaction.”

Such proof of “entire fairness” was a burden the Lingos could not meet.  “The concept of entire fairness consists of two blended elements: fair dealing and fair price.  Fair dealing involves analyzing how the transaction was structured, the timing, disclosures, and approvals.  Fair price relates to the economic and financial considerations of the transaction.  We examine the transaction as a whole and both aspects of the test must be satisfied; a party does not meet the entire fairness standard simply by showing that the price fell within a reasonable range that would be considered fair.”

In fact, the price did fall with “a reasonable range.”  The buyer paid $6,625,000 for the Beacon Motel, while the trial court found that the “retained appraisal valued the property at $5,480,000.”  Thus, the price paid by the buyer was greater than the fair market value for the motel, meaning that the non-controlling members suffered no compensable injury.

The court found that this result was not satisfactory.  “Merely showing that the sale price was in the range of fairness, however, does not necessarily satisfy the entire fairness burden when fiduciaries stand on both sides of a transaction and manipulate the sales process.”

OK, but we have no basis on which to award damages.  “Saliba and Ksebe were left without a typical damage award because the Court’s appraisal of the property came in at a value lower than the sale price.”

What to do?  This court decided to award attorneys’ fees to the non-controlling members.  “The Chancellor concluded it would be unfair and inequitable for Saliba and Ksebe to shoulder the costs of litigation arising out of improper prelitigation conduct attributable to the Lingos that amounted to a violation of their fiduciary duties.”

Although there was no statutory or contractual basis for an award of attorneys’ fees, the Delaware Supreme Court held that “The Chancellor’s decision to award attorneys’ fees and costs was well within his discretion and is supported by Delaware law in order to discourage outright acts of disloyalty by fiduciaries.  Absent this award, Saliba and Ksebe would have been penalized for bringing a successful claim against the Lingos for breach of their fiduciary duty of loyalty.”

Which perhaps would have been the better result.  This litigation was surely driven by the attorneys, not by the injured parties, with substantial attorneys’ fees.  The court’s award of attorneys’ fees on equitable grounds will only foster litigation in the future, which is hardly an optimal result.

William Penn Partnership v. Saliba (Del. Supreme Court Feb. 9, 2011) 2011 Del. LEXIS 91

The courts are increasingly faced with the cases involving the interpretation and enforcement of estate planning trusts.  In Diaz v. Bukey (May 10, 2011) 2011 DJDAR 6650, the court concisely framed the dispute:

“The beneficiary of a trust petitions to remove her sister as trustee of their parents’ trust.  The trustee responds by seeking to compel arbitration of their dispute as provided by the trust documents.

“Though the sisters are beneficiaries of the trust, neither was party to any agreement that such disputes would be resolved by arbitration.

“Here we hold that the beneficiary of a trust who did not agree to arbitrate disputes arising under the trust may not be compelled to do so.”

It seems that the trust was a standardized form.  It included the following provision:

“Any dispute arising in connection with this Trust, including disputes between Trustee and any beneficiary or among Co–Trustees, shall be settled by the negotiation, mediation and arbitration provisions of that certain LawForms Integrity Agreement (Uniform Agreement Establishing Procedures for Settling Disputes ) entered into by the parties prior to, concurrently with or subsequent to the execution of this Trust.   In the event that the parties have not entered into a LawForms Integrity Agreement (Uniform Agreement Establishing Procedures for Settling Disputes ), then disputes in connection with this Trust shall be settled by arbitration in accordance with the rules of the American Arbitration Association.”

(Of course, someone needs to produce the “integrity agreement.”)

On appeal, “Bukey contends that Diaz is a third party beneficiary of the Trust and she is equitably estopped from denying her obligation to arbitrate.”  Further, “Bukey relies on a trio of cases in which appellate courts have characterized a trust as a contract between a trustor and trustee.”

Explained the court of appeal, “We do not find these cases persuasive for several reasons.  First, they are factually inapposite.  The controversy here involves a dispute between the trustee and a beneficiary over the internal affairs of the Trust.”

Also,  “In Saks v. Damon Raike & Co. (1992) 7 Cal.App.4th 419, the court rejected the argument that a trust was a third party beneficiary contract. The court said: ‘The rules governing the respective rights of action of trustees and beneficiaries of express trusts are not the same as those generally applicable to promisees and third party beneficiaries’ . . .

“The general right of a third party beneficiary to sue on a contract made expressly for his or her benefit has no application where a trust has been created in favor of that party, and the contract in question is between the trustee and an agent of the trustee.”

The court concluded that the arbitration provision was not enforceable because the trust was a relationship, not a contract (which is the correct result).  “As a matter of law, the trusts at issue here were not contracts.”

“A beneficiary of a trust receives a beneficial interest in trust property while the beneficiary of a contract gains a personal claim against the promissor. Moreover, a fiduciary relationship exists between a trustee and a trust beneficiary while no such relationship generally exists between parties to a contract.”

“The legal distinctions between a trust and a contract are at the heart of why the beneficiaries cannot be required to arbitrate their claims against the defendants. Arbitration rests on an exchange of promises.  Parties to a contract may decide to exchange promises to substitute an arbitral for a judicial forum. Their agreement to do so may end up binding (or benefitting) nonsignatories.

“In contrast, a trust does not rest on an exchange of promises.  A trust merely requires a trustor to transfer a beneficial interest in property to a trustee who, under the trust instrument, relevant statutes and common law, holds that interest for the beneficiary.”

So, we have the correct result for the correct reasons.

Diaz v. Bukey (May 10, 2011) 2011 DJDAR 6650, 2011 WL 1759798

In McMackin v. Ehrheart (April 8, 2011) 2011 DJDAR 5122, the court of appeal held that a Marvin-based palimony claim under California law could be asserted against an estate more than three years after the decedent’s death.  We remark on the extent to which the law is willing to allow a person to make a claim to real property when that claim is not evidenced by a writing, and, even when title was held 100% in the decedent’s name, as in McMackin.

Before reviewing the decision, let’s cut to the chase.  Hugh McCrackin lived with Patricia McGinness for 17 years, from 1987 until 2004.  He helped her in her declining health.  Patricia told people that she wanted Hugh to live in her house for the rest of her life.  The couple never married.

Let’s accept all of the foregoing as true.  On the other hand, Patricia did not make a will manifesting her intentions.  Nor did she undertake the simple expediency of executing a deed with a life estate in favor of Hugh.  Now, after Patricia’s death, Hugh petitions the court to enforce Patricia’s oral intentions.

These facts do not strike this writer as commanding judicial intervention.  The ability to execute a will or a deed with a life estate is known to all.  The notion that courts should be quick to enforce oral agreements in derogation of the statute of frauds is discomforting, and bears greater scrutiny.

To return to the case.  “Plaintiff Hugh J. McMackin lived with Patricia Lyn McGinness in her home from approximately 1987 until [Patricia] died intestate on October 1, 2004. [Hugh] was never on title to the home but continued to occupy it after [Patricia]’s death.

“Defendants Kimberly Frost and Kellian Ehrheart are [Patricia]’s daughters and are the heirs of [Patricia]’s estate. On February 25, 2008, more than three years after [Patricia]’s death, [her daughter] opened a probate . . .

“On November 23, 2009, Ehrheart served [Hugh] with a 60-day notice to quit. On January 13, 2010, [Hugh] filed a complaint, the gravamen of which was that [Patricia] promised him a life estate in the home upon her death in consideration for 17 years of his ‘love, affection, care and companionship.’”

That’s the stage for this action.  “On January 21, 2010, [Hugh] filed an ex parte application for a temporary restraining order and for an order to show cause why an injunction should not issue to enjoin [the daughters] from evicting him from the home.”

The injunction was entered in favor of Hugh, and was affirmed on appeal.  According to Hugh, Patricia “agreed that he could live in the home for the rest of his life after her death and that she made this promise in consideration of the love, affection, care and companionship we shared over those 17 years.”  The housekeeper “declared that on approximately twenty (20) different occasions [Patricia] told her that she wanted [Hugh] to live in the home for the rest of his life.”

This is a classic case of an promise that lies outside the statute of frauds, and would normally be unenforceable.  Even more, California Probate Code section 366.3 provides that an action to enforce a claim arising from an agreement with a decedent for distribution from an estate must be filed within one year after the decedent’s death.  This statute applies to “a promise to transfer property upon death [that] could be performed only after death, by the decedent’s personal representative, by conveying property that otherwise belonged to the estate.”

The court of appeal noted that “The limitations period provided in this section for commencement of an action shall not be tolled or extended for any reason except as provided in Sections 12, 12a, and 12b of this code, and [certain provisions] of the Probate Code [not applicable to this action].”

Hugh would appear to be out of luck.  However, the court of appeal rescued Hugh by allowing him to apply the doctrine of “equitable estoppel.”  “The court held that there is a distinction between the doctrine of equitable estoppel, on the one hand, and the tolling or extension of the statute of limitations, on the other hand.”

In other words, “there is a distinction between tolling and equitable estoppel. Tolling concerns the suspension of the statute of limitations. The doctrine of equitable estoppel applies only after the limitations period has run to preclude a party from asserting the statute of limitations as a defense to an untimely action where the party’s conduct has induced another into forbearing to file suit.”

The court of appeal ruled that “depending on the circumstances of each case, the doctrine of equitable estoppel may preclude a party from asserting section 366.3 as a defense to an untimely action where the party’s wrongdoing has induced another to forbear filing suit.”

Unfortunately, the opinion does not address whether there was any factual basis for Hugh’s assertion of equitable estoppel against the daughters.  We do not know that the daughters did after the death of their mother that stopped the statute of limitations from running.

Stated the court, “We are not asked, nor do we decide, whether this implied ruling was supported by substantial evidence because [the daughters] made it clear at oral argument on appeal that they challenge the application of equitable estoppel as a matter of law, not whether the evidence supported its application for the purposes of the issuance of a preliminary injunction.“

That’s the easy way out.  The court does not tell us what the daughters said or did that gave Hugh the right claim they were estopped (i.e., prevented by their conduct) from asserting the one-year statute of limitations as a defense.  For the time being, Hugh has deftly stepped over both the statute of frauds and the statute of limitations.

McMackin v. Ehrheart (April 8, 2011) 2011 DJDAR 5122