Fresno Lawyer – Randolf Krbechek

It’s remarkable how persons come out of the woodwork after a relative’s death, claiming that they should get a share of the decedent’s estate.  Especially when the decedent left money to someone not related by blood who helped care for the person in his or her declining years.  In this case, the wicked step-daughter.

The recent situation in Estate of Austin involved this all-too-familiar pattern.  The court set the facts as follows.  “Prior to Donald Austin’s death, Donald’s mother passed away and his brother, Wesley Austin became successor trustee of the mother’s trust.”

“In April or May 2007, Wesley and his wife, Janice, learned Donald would receive funds from the mother’s trust.  Wesley and Janice went to see Donald at the nursing home and asked what he wanted to do with the funds.”

This did not sit well with Donald.  “On their third visit in three weeks, Donald had decided he wanted Debra to have the money.  [Debra was the daughter of Donald’s ex-wife.]”

“Wesley and Janice called Debra and asked her to come to the nursing home. Wesley handed the first check to Donald, who signed it, handed it to Debra, and said, ‘Here, this is yours.’  Wesley received the second check from the life insurance company; he took it to Donald, who signed it over to Debra and told Wesley to take it to her. Wesley delivered it to Debra personally. The remaining four checks were written by Donald to Debra. The six checks were dated between April 5 and July 10, 2007, and totaled approximately $185,000.”

The testimony at trial indicated that, at the time the checks were given to Debra, Donald was 72 years old and a resident of a nursing home.  He had been placed in the nursing home because his health had declined and he was unable to care for himself after suffering a broken hip and undergoing triple bypass surgery.  The parties did not dispute that he was a “dependent adult” within the meaning of California law.

Donald’s daughter, Dawn, was outraged after his father’s death that she [Dawn] did not get the money.  So she did what any reasonable person would do.  She sued Debra.  The court would have none of it.

Dawn’s theory was that Debra was a “care custodian” under California law and therefore ineligible to take from Donald.  Specifically, “Dawn contends Debra was a ‘care custodian of a dependent adult. as that term is used in Probate Code section 21350, and is therefore a person disqualified from receiving a transfer of property from that dependent adult.”

The trial court found that Dawn did not meet her initial burden of proving Debra was a disqualified transferee under section 21350, subdivision (a). It concluded Dawn failed to prove Debra met the definition of a care custodian.  This finding was affirmed on appeal.

Explained the court, “The definition [of care custodian] is not limited to paid professional care givers; it includes a person who provides health services or social services to a dependent adult as a result of a preexisting personal friendship with the dependent adult.”

However, Debra did not fit the definition.  According to the court, “Donald made the gifts to Debra while he was residing in a nursing home.  There was no evidence Debra was providing any health or social services to him at that time. The evidence showed that Donald had been able to take care of himself, and Debra did not provide assistance to him, until he broke his hip in October 2006 and had triple bypass surgery three weeks later.”

Furthermore, “There was no evidence Debra was ever a paid live-in caregiver for Donald . . . Debra’s services were much more limited, consisting only of driving Donald to the doctor, preparing some of his meals, and unspecified helping out. ¶ Substantial evidence supports the trial court’s conclusion that Debra did not become Donald’s care custodian as a result of the limited services she performed for him while he was not in a nursing home.  Dawn failed to carry her burden of proving Debra was a disqualified transferee.”

It seems like the court reached a fair and reasonable decision.  Donald favored the person who was closer to him, and the court respected his wishes.

Estate of Austin (Sept. 15, 2010) — Cal.Rptr.3d —-, 2010 WL 3565739

California provides a one-year statute of limitations for claims against a deceased person.  If a claim exists against a person as of the time of that person’s death, an action based on such claim must be filed within one year after death or forever be barred.

Caveat – This rule assumes that the claim existed on the date of death.  If, for example, the claim is based on a promissory note which does not come due and payable until a later date, then the one-year statute of limitations is not controlling.

The court in Estate of Ziegler did not like the facts with which it was presented.  Here is the opening from the recent opinion.

“The statute of limitations serves noble public policies.  It promotes justice by preventing surprises through the revival of claims that have been allowed to slumber until evidence has been lost, memories have faded, and witnesses have disappeared.  Its operation in particular cases, however, can be sadly inequitable.”

“This is just such a case.  The equities in favor of claimant Richard H. LaQue could hardly be more compelling.  LaQue and his wife provided food, care, and companionship to their neighbor, Paul Ziegler, when Ziegler was sick and alone.”

“At first, they did so out of the goodness of their hearts.  Eventually, however, a grateful Ziegler insisted on entering into a written agreement – the validity of which is unquestioned – that in consideration of continued care, LaQue would receive Ziegler’s home upon Ziegler’s death.”

“On the other hand, the equities in favor of appellant W.C. Cox and Company (Cox) are slim to none.  Cox is a soulless corporation in the business of locating missing heirs.  It is acting as the attorney in fact for nine residents of Germany who claim to be Ziegler’s heirs.”

“After Ziegler died without a will, LaQue simply moved into Ziegler’s former home, unopposed. He did not see the need to file any claim in connection with Ziegler’s estate until about a year and three weeks after Ziegler’s death.”

“Alas for LaQue, Code of Civil Procedure section 366.3, subdivision (a) provides: ‘If a person has a claim that arises from a promise or agreement with a decedent to distribution from an estate or trust or under another instrument . . . an action to enforce the claim to distribution may be commenced within one year after the date of death, and the limitations period that would have been applicable does not apply.’”

The contract provided as follows:

“November 10, 2005

“2:15 p.m.

“I Paul Daniel Ziegler home owner of 820 E. G St in Colton, California 92324, am signing over my home and property to Richard H. LaQue Sr.”

“This written agreement between myself and Richard is for the exchange of my care and daily meals. This written note will be immediately active if and when I no longer can reside in my home due to death.”

Ruling for Mr. LaQue, “the trial court reasoned that the applicable statute of limitations would run from breach of the contract and that the contract had not been breached.”  This finding was reversed on appeal, because “LaQue’s claim here is indistinguishable from a claim on a contract to make a will.  The agreement was a promise to transfer property upon death. It could be performed only after death, by the decedent’s personal representative, by conveying property that otherwise belonged to the estate.”

Here’s where Mr. LaQue loses the case.  If there had been a will in his favor, such will would have controlled.  Instead, there was a contract providing for distribution at death, which contract was subject to the one-year statute of limitations.

Yet, there is a question is whether the document was a contract, or a will substitute.  If the written document could have been a construed as a will – a disposition of property not effective until death – then Mr. LaQue stood a chance.

But the court of appeal did not reach this issue, stating that, “Even though the agreement was worded in the present tense, it required some further action by the Administrator (representing Ziegler) to make the transfer happen.  The notion that the title was instantly transferred, although appealing, is a legal fiction; actually, the estate continued to hold the title.”  (Which suggests that the agreement might have been a will substitute.)

Estate of Ziegler (Aug. 31, 2010) — Cal.Rptr.3d —-, 2010 WL 3398883

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.”

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

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

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.”

Thus,“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

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

A recent decision involving a deed to an estate planning trust achieved the correct result, but with unnecessary effort.

The facts in Luna v. Brownell (June 15, 2010) 2010 DJDAR 8811 were simple.

• “On August 13, 2006, Al executed a quitclaim deed transferring his interest in the Property as an individual to himself as trustee of the Trust.”

• “On August 29, 2006, Al executed the declaration of trust for the Trust.  The declaration of trust stated that Al was the trustee.”

• “On September 8, 2006, the grant deeds transferring plaintiffs’ interest in the Property to Al as trustee of the Trust were recorded.”

• “Al died on September 19, 2006.”

The hitch in the analysis arises because the court implicitly considered Al’s revocable estate planning trust to be different from Al.  It is not:  the trust is not different from a Will, at least during Al’s lifetime.

The court presented its discussion as follows. “A deed does not transfer title to the grantee until it has been legally delivered.  Delivery is a question of intent.  A valid delivery of a deed depends upon whether the grantor intended that it should be presently operative.”

The court starts pushing in the wrong direction from the beginning.  This is should be treated as a wills question, not as a conveyancing question.

“In addition, acceptance by the grantee is necessary to make a delivery effective and the deed operative.  Whether the deed was accepted by the grantee so as to complete a transfer of title to him is likewise a question of fact for the trial court.”

The court continued.  “On August 8, 2006, after understanding that Al wanted his property in his own name for purposes of creating a trust, the plaintiffs did not dispute his ownership . . . The [real] question before this court therefore is whether the quitclaim deed executed by Al on August 13, 2006, transferring the Property from Al as an individual to Al as trustee of the Trust was void because the Trust did not exist on the date the deed was executed.”

Following decisions from other jurisdictions, the court held the conveyance was effective.  For example, in John Davis & Co. v. Cedar Glen # Four, Inc. (Wash. 1969) 450 P.2d 166, the court considered the validity of a quitclaim deed transferring real property to a corporation.  Held the court, “A deed to a corporation made prior to its organization, is valid between the parties.  Title passes when the corporation is legally incorporated.  This is particularly true as against one who does not hold superior title when the corporation goes into possession under the deed.”

Similarly, in Heartland v. McIntosh Racing Stable (W.Va. 2006) 632 S.E.2d 296 the court held that “A deed drawn and executed in anticipation of the creation of the grantee as a corporation, limited liability company, or other legal entity entitled to hold real property is not invalidated because the grantee entity had not been established as required by law at the time of such execution, if the entity is in fact created thereafter in compliance with the requirements of law and the executed deed is properly delivered to the entity, the grantee, after its creation.”

Both are solid analyses under corporate law.  What the recent California court should have looked at in Al’s case was the following:

(1)  Did Al want his property to be handled in a probate?

A.  He did not.  He wanted to provide for a non-probate transfer via an estate planning trust.

(2)  Did Al intend for his trust to control the disposition of his real property?

A.  Yes.

Unfortunately, current trust law invites confusion by (sometimes) treating a revocable estate planning trust as a separate entity.  Having considered authorities from other states, the California court held as follows:

“A quitclaim deed transferring property to the trustee of a trust is not void as between the grantor and grantee merely because the trust had not been created at the time the deed was executed, if (1) the deed was executed in anticipation of the creation of the trust and (2) the trust is in fact created thereafter.  Such a deed is valid between the grantor and grantee on the date the trust was formed.”

That’s a nice, concrete statement of law, and obviously the result intended by the decedent.  But the conveyancing gloss detracts from a focus on the decedent’s intention.

Luna v. Brownell (June 15, 2010) 2010 DJDAR 8811

A recent case affirms that California does not recognize a claim based on “intentional interference with an inheritance expectancy.”  However, the court’s analysis leaves the door open to future litigation arising from different fact patterns.

The lawsuit in Munn v. Briggs, 2010 DJDAR 8680 (4th Dist. June 11, 2010) was based on the following claim.  “James alleged Carlyn and Michael intentionally interfered with his inheritance expectancy.  Before the codicil, James had an expectancy to share equally with his sister Carlyn in the balance of the survivor’s trust, each having a one-half interest.”  As a result of the codicil, James took less than he expected from his parent’s estate.

James sued his sister claiming that we was deprived of his inheritance due to Carlyn’s tortious conduct.  “The probate court sustained the demurrer without leave to amend.  In so doing, the court ruled no California case has ever expressly held that the cause of action of intentional interference with an inheritance expectancy is recognized in California.”

On appeal, the court held that “Under American law, testators have a right to completely disinherit nearly anyone, and there is no right to inherit.  Of course, tortious conduct relating to wills, such as the use of undue influence, threats, or coercion to procure a particular disposition, or destruction of a will, has long been understood as a legal wrong, but only against the testator whose right of free testation is infringed upon, not the beneficiary.”

“A purported injury to an intended recipient is not cognizable (because there is no right to inherit); instead, the probate system through the will contest proceeding aims to offer all interested parties a forum in which to litigate the testator’s true intentions.”

The court recognized that “Section 774B of the Restatement (2d) Torts provides:  ‘One who by fraud, duress or other tortious means intentionally prevents another from receiving from a third person an inheritance or gift that he would otherwise have received is subject to liability to the other for loss of the inheritance or gift’.”

Let’s pause there.  The predicate act must be “fraud, duress or other tortious means.”  Such wrongful conduct is independently actionable.  We do not need to create a new tort to cover acts that are already unlawful.

The Restatement further notes liability under section 774B is “limited to cases in which the actor has interfered with the inheritance or gift by means that are independently tortious in character,” including when a third person has been induced to make or not make a “bequest or gift by fraud, duress, defamation or tortious abuse of fiduciary duty,” or when a will or document making a gift has been “forged, altered or suppressed.”

Now we are sliding into the same morass as “tortious interference with a contract,” which also requires such “independent wrongful conduct.”  Tortious inference with a contract is a murky, unclear area of the law, and should not be expanded.

Even more, we can ask, Why isn’t slander an adequate remedy?  If a person was deprived of a gift because someone lied about them, then slander would be the appropriate remedy.

The court of appeal added that “our independent research also confirms that when a party has an adequate remedy in probate, the party generally will be precluded from recovering in tort for interference with an expectancy.”

For example, “if the claimed wrongdoing relates to the execution or revocation of a will, and the claimant has standing in the probate proceeding, the court should not entertain an independent action even if the jurisdiction recognizes the tort of interference with an inheritance.”

The court of appeal noted that inheritance laws are “purely a creature of statute” (see In re Darling (1916) 173 Cal. 221, 223), and cited a New Mexico case with approval.  The court in New Mexico stated:

“We feel compelled to protect the jurisdictional space carved out by our legislature when it enacted the Probate Code and created remedies, such as a will contest, designed exclusively for probate.  We note that a will contest in probate requires a greater burden of persuasion than an independent action in tort.  A presumption of due execution normally attaches to a testamentary instrument administered in probate, but not necessarily in tort.”

“If we were to permit, much less encourage, dual litigation tracks for disgruntled heirs, we would risk destabilizing the law of probate and creating uncertainty and inconsistency in its place.  We would risk undermining the legislative intent inherent in creating the Probate Code as the preferable, if not exclusive, remedy for disputes over testamentary documents.”  Wilson v. Fritschy (N.M. App. 2002) 55 P.3d 997.

For now, California does not recognize the tort of “interference with an expectancy.”  To this author, there is no need for such a tort.  However, we would need to consider the proper factual situation, which would involve a lifetime transfer accompanied by “independent wrongful acts,” which would merit further scrutiny.

Munn v. Briggs, 2010 DJDAR 8680 (4th Dist. June 11, 2010)

A recent decision from the Florida court of appeals exalts form over substance to a achieve an unjust decision.   Here is the case in a nutshell.  Mom set up an irrevocable trust for benefit of one of sons.  The trust contained a spendthrift provision, meaning that creditors could not reach trust assets before distribution to the beneficiary.

A large judgment was entered against the beneficiary son.  After mom’s death, the second son served as named trustee, with complete discretion as to when to make distributions to the debtor brother.  In fact, the trustee son allowed all trust decisions to be made by the debtor brother.

The creditor argued that the debtor’s interest should be available to satisfy the judgment, because the debtor brother effectively exercised control over the trust property.  Notwithstanding these facts, the court held that the creditor was not able to reach the debtor brother’s interest because of the spendthrift provision.

This is a terrible decision on policy grounds, as the court expressly permitted the two brothers to manipulate a legal entity to commit fraud on the creditor.  Here are the facts in more detail.

“In April 2004, Elizabeth Miller established the James F. Miller Irrevocable Trust (the James Trust) for the benefit of her son, James.  She named her other son, Jerry, sole trustee.  The James Trust is a discretionary trust under which Jerry has absolute discretion to make distributions for James and James’s qualified spouse.”

“The James Trust contains a spendthrift provision and gives Jerry, as trustee, the complete discretion to terminate the trust by distributing the entire principal to the beneficiary for any reason.”

After forming the trust, Elizabeth transferred property to the trust.  The principal asset of the trust was “a residence located in Islamorada, Florida” with a value greater than $1 million.

In 2007, Kresser obtained a judgment against James for $1,019,095. Elizabeth died on September 10, 2007.  “When Kresser was unable to collect on his judgment from James he brought proceedings supplementary against them and impleaded Jerry, as trustee of the James Trust.  Kresser asserted that he was entitled to execute on the James Trust’s assets . . . because James exercised dominion and control over all of the trust assets and over Jerry, as trustee.”

The trial court found in favor of the creditor.  The trial court “set forth a detailed account of James’s significant control over the James Trust and over Jerry, as trustee.  The trial court found that Jerry had almost completely turned over management of the trust’s day-to-day operations to James.  James controlled all important decisions concerning the trust assets, including investment decisions. ”

“Jerry never independently investigated these decisions to determine whether they were in the best interest of the trust, and some of the decisions have turned out to be unwise.  The trial court concluded that Jerry simply rubber-stamped James’s decisions and ‘served as the legal veneer to disguise James’s exclusive dominion and control of the Trust assets.’”

It’s remarkable that a court of appeal would have interest in reviewing this decision.  Even more remarkable, the trial court was reversed on appeal.  In ruling against the creditor, the court of appeal held that “the James Trust does not give James any express control over distributions of the assets.  Jerry, as trustee, has sole discretion to distribute income or principal to James, or to terminate the trust.”

Said the court of appeal, “while we agree that the facts in this case are perhaps the most egregious example of a trustee abdicating his responsibilities to manage and distribute trust property, the law requires that the focus must be on the terms of the trust and not the actions of the trustee or beneficiary.  In this case, the trust terms granted Jerry, not James, the sole and exclusive authority to make distributions to James.  The trust did not give James any authority whatsoever to manage or distribute trust property.”

That’s the court of appeal saying form matters more than substance, and adding that, “We’ll ignore what’s really going on if you right it down properly.”

Stated the court, “In this case, James may ask Jerry for as many distributions as he because Jerry has sole discretion to make distributions, he may also choose to deny James’s requests at any time, and James would have no recourse against him unless he were abusing his discretion as trustee.”

“Until Jerry makes a distribution to James, Kresser and other creditors may not satisfy James’s debts through trust assets.  Accordingly, the trial court erred in invalidating the James Trust’s spendthrift provision and allowing Kresser to reach trust assets before they have been distributed to James.”

To rub salt in the wound, the court of appeal stated that “to conclude otherwise would ignore the realities of the relationship between a beneficiary and trustee of a discretionary trust – the beneficiary always pining for distributions which he feels are rightfully his, and the trustee striving to allow only those distributions that coincide with the settlor’s express intent, as set forth in the trust documents . . . In the case before us, it is not the role of the courts to evaluate how well the trustee is performing his duties.  We are instead limited, by statute, to evaluating the express language of the trust to determine the extent of the beneficiary’s control and the extent to which a creditor may reach trust assets.”

That is not correct.  It is the court’s duty to “evaluate how well the trustee is performing his duties” when the trustee has effectively turned over control of the assets to the judgment debtor.  The Florida court of appeal failed badly in reversing the trial court.

Miller v. Kresser, — So.3d —, 2010 WL1779899 (Fla. 4th DCA May 5, 2010)

Professors Robert Cooter and Bradley J. Freedman analyzed the economic character and legal consequences of the fiduciary relationship.  As discussed below, their strongest point is to explain that not all fiduciary duties are the same – it depends on the nature of the relationship.

As a starting point, they acknowledge that “Legal theorists and practitioners have failed to define precisely when such a relationship exists, exactly what constitutes a violation of this relationship, and the legal consequences generated by such a violation . . . In any of these paradigmatic forms, a beneficiary entrusts a fiduciary with control and management of an asset.  Ideally, for the beneficiary, this relationship would be governed by specific rules that dictate how the fiduciary should manage the asset in the beneficiary’s best interests.”

“Because asset management necessarily involves risk and uncertainty, the specific behavior of the fiduciary cannot be dictated in advance.  Moreover, constant monitoring of the fiduciary’s behavior, which would protect the beneficiary, often is prohibitively costly . . . The fiduciary relationship exposes a beneficiary/principal to two distinct types of wrongdoing: first, the fiduciary may misappropriate the principal’s asset or some of its value (an act of malfeasance); and second, the fiduciary may neglect the asset’s management (an act of nonfeasance).”

Employing a law and economics perspective, Cooter and Freedman pose the question: “How can one party be induced to do what is best for another without specifying exactly what is to be done?”

Cooter and Freedman consider how to deter wrongful conduct by the fiduciary.  As they explain, “Once a consensual relationship in which the principal relinquishes control or management of her asset to the agent is formed, the resulting separation of ownership from control or management creates opportunities for the agent to appropriate the asset or some of its value.”

This leads to the first broadly-stated category of wrongful conduct:  misappropriation, or violation of the duty of loyalty.  “Fiduciary law creates a cluster of presumptive rules of conduct compendiously described as the duty of loyalty . . . Taking advantage of these opportunities whether by theft, diversion, conversion, or trespass would violate the agent’s duty of loyalty.”

“Generally, once a fiduciary is shown to have purchased her own asset on behalf of the principal without its consent, either she is held to be disloyal and allowed no defenses, or she has the burden of proving her loyalty.”

The professors suggest that “If the parties to this agreement possessed perfect information, disloyalty could be controlled or prevented by contract.”

In the real world, that is not correct.  It does not matter how much is written into the contract – if the thief wants to commit larceny, the contract won’t stop him.

Even more, the fiduciary relationship is a “relational contract,” in which obligations morph over time.  Cooter and Freedman correctly state that, “In fiduciary relationships, however, the parties are unable to foresee the conditions under which one act produces better results than another.  Rather, chance events and unanticipated contingencies require continual recalculation to determine which course of action will be the most productive.”

This leads into the second category of wrongful conduct, “negligent mismanagement, [which is] is governed by the duty of care.”

Here lies the strongest points in the article.  Cooter and Freedman state that “Judgment especially is important when decisions involve an element of risk.  The duty of care imposes an obligation on the fiduciary to avoid unnecessary risk.”

“However, different levels of risk are appropriate in different fiduciary relationships.  For example, a trustee often is required to be prudent and conservative in managing an asset, whereas a director of a start-up company may be encouraged to take risks.”

That is a point that is ignored far too frequently.  Different relationships lead to different fiduciary obligations, which cannot be painted all with the same brush.

“The bundle of duties and rights created by fiduciary law must be adjusted continually in response to changing circumstances and fresh litigation . . . Holding trustees to higher standards than directors makes economic sense because the same legal rule that imposes a light burden on a trustee would impose onerous restrictions upon a director.”

Thus, Cooter and Freedman conclude that, “Whenever an optimal contract includes fiduciary duties, the economic character of the fiduciary relationship precludes the specification of exact duties . . . The economic character of the fiduciary relationship embodies a deterrence problem for which the duty of loyalty provides a special remedy . . . [To this end] the duty of loyalty must be understood as the law’s attempt to create an incentive structure in which the fiduciary’s self-interest directs her to act in the best interest of the beneficiary.”

Robert Cooter and Bradley J. Freedman, The Fiduciary Relationship: Its Economic Character and Legal Consequences, in 66 New York University Law Rev. 1045 (1991).