Fresno Lawyer – Randolf Krbechek

Professor Thomas Schoenbaum from George Washington University has written a paper discussing the worldwide financial crisis.  His paper entitled “Saving the Global Financial System: International Financial Reforms and United States Financial Reform, Will They Do the Job?”, identifies 12 factors as triggering the financial crisis.

The first six are as follows (the second six are discussed in part 2).

1. The diminished authority of the United States Securities Exchange Commission.  This constituted a regulatory failure.  States Prof. Schoenbaum,  “beginning in the 1980’s, the once-feared SEC became largely toothless due to rule-revisions, exceptions, and leaders that discouraged fraud investigations and enforcement actions.”

Such failure continued for two decades, but not without warning.  “One of the most egregious of SEC failure occurred on April 28, 2004, when the SEC voted to exempt investment companies from the SCC’s net capital rule . . . During this meeting, Harvey Goldschmid, one of the Commissioners, remarked, ‘If anything goes wrong, its going to be awfully big mess.’”

2. Failure to Regulate the Derivatives Market.  Another regulatory failure.  The derivative market is enormous, yet it operated for years without effective oversight.   Again, there were warnings.  The Commodities Futures Modernization Act of 2000 specify exempted derivatives and swaps from supervisory oversight by the Commodity Futures Trading Commission, “despite warning from its chairman that unregulated derivatives “could threaten our regulated markets or, indeed, our economy without any Federal agency knowing about it.”

3. Lax Regulation of Financial Institutions.  Here, the author cites the Federal Reserve and the Comptroller of the Currency as failing to exercise proper oversight of the U.S. banking industry.  Thus, “the persons in charge of bank regulations were totally obvious to the dangers of the extensive use of derivatives such as MBS’s.  Accordingly, the use of MBS’s allowed financial institutions to profit from transactions that involved unreasonably low capital requirements.”

This point could be stated in slightly different terms.  The players in the financial markets, especially in derivatives, were permitted to gamble with other people’s money.  The oversight in the banking industry was absent in the derivatives market.  Such easy access to such excessive leveraging encouraged Wall Street to take unreasonable and dangerous – desperately dangerous – risks.

4. Financial Institutions That Took on Too Much Leverage.  The authors cites this factor as a private sector abuse,  stating “a key cause of the Crisis was the fact that key financial institutions, especially the investment banks, took on far too much leverage, risking vast qualifies of borrowed capital so that they were unable to withstand a down turn in asset prices.”

What kind of leveraging was going on?   “After the SCC exempted investment banks from the ‘net capital’ rule in April 2004, leverage increased dramatically to levels in excess of 40 to 1.”  This meant the investment banks could make a $40 bet with only $1 in actual assets.  Is this a recipe for disaster?  You bet it is.

5. Mismanagement by Bond and Securities Ratings Agencies.  As explained by Prof. Schoenbaum, “hearings in the Congress and the European Union have established a sloppy and misleading ratings practices that causes most of the now ‘toxic’ derivatives to be given triple A ratings.  Only after the Crisis began did the ratings agencies downgrade these securities.  The credit ratings agencies were among the enablers of the Crisis.“

See, the vast tradings in the investment banking world were really a shadow financial system, running parallel to the banking industry.  The banks were heavily regulated and were backed by the FDIC.  The investment banking world had no such official guarantees, so they invested the insurance provided by companies such as AIG.  At present, “AIG has benefitted for governmental largesse amounting to a total of $182.5 billion.  None of this funding has been repaid.”

That means that the U.S. taxpayers bailed out the bets that were made by Goldman Sachs and other investment banks to the tune of $182 billion that has never been repaid.  It’s one thing to take risks with your own money; it’s entirely different when the government steps in to save private industry in the amount of $182 billion.  Oversight and accountability must be established, otherwise the taxpayers just gave away $182 billion to the bankers.

6. Low Saving Rates and High Borrowing by American Consumers.  This is a social factor.  Explains the author, “as of 2007, the U.S. savings rate touched zero, which means that as a group Americans were spending every penny of income.  Moreover, many Americans were deeply in debt, now only for home mortgages but on credit cards and other consumer loans.  The American economy was overheated and riding for a fall.”

Part 2 follows next week.

Uniform Commercial Code Law Journal, Vol. 43, No.1 (October 2010) page 479.

In the recent decision in Citizens Business Bank v. Carrano (Nov. 05, 2010), the court sensibly applied the rules for construing a will to the interpretation of an estate planning trust.  This is an appropriate result, considering that the trust was intended to serve as a substitute for will.  However, the law authorizing such a result is not as clear as it should be, at least under the statute.

The facts make for an entertaining read.  According to the court, “Charles and Serena Papaz created the Papaz Family Trust on August 2, 1966.  Charles and Serena ha[d] one child, Christopher.  Christopher fathered three children out of wedlock.”

The lawsuit concerned one of the grandchildren, Jonathan.  The matter of Jonathan’s conception was unusual, to say the least.  The court found that, “Christopher (the son) met Jonathan’s mother, Kathy Carrano, when he was shot in the leg in 1984.”

“Kathy was Christopher’s physical therapist while he was in the hospital and she continued to care for him during his recovery at his parents’ home.  One night, Christopher gave Kathy a drug and had sex with her without her knowledge.  Jonathan was conceived that night.”

Only in California, you might say.  But wait, the story gets better.  “Kathy was married to another man at the time. Jonathan was born in August 1985.  Kathy and her husband raised Jonathan as their child.  A few years after he was born, Kathy learned that Jonathan was Christopher’s son and not her husband’s.  Jonathan was never formally adopted by Kathy’s husband.”

“Christopher, however, appeared to be aware that Jonathan was his son from the beginning.  He bragged to his friend, Vahe Tatoian, when Kathy was pregnant that, “I know this is my kid.’”

Christopher led a troubled life.  “In December 2006, Christopher became paralyzed from his neck down and could no longer speak.  In January 2007, Kathy told both Jonathan and Charles [the grandfather] that Christopher was Jonathan’s biological father.  Jonathan introduced himself to Charles, saying, ‘I am Jonathan, your grandson, Christopher’s son.’  Charles ‘reached over and grabbed [Jonathan’s] hand and said, ‘I know.’”

After Christopher’s death, an issue arose as to who was entitled to inherit under the trust.  The trust provided for distributions to Christopher’s “then-living issue.”  The matter wound up in court when “Citizens Business Bank, as trustee to the Papaz Family Trust, filed a petition for an order ascertaining beneficiaries and determining entitlement to distribution.”

Held the court, “The ultimate question in this case is whether the Papaz Family Trust’s definition of ‘issue’ includes Jonathan.  Jonathan argues that the term ‘issue’ in the trust instrument is unambiguous.  We agree.”

First, the court applied basic contract law, stating that “whether an ambiguity exists in a writing is an issue of law subject to independent review on appeal.”  Then the court reached out and connected trust law with the law of wills, as follows:

“Our Supreme Court’s opinion in Estate of Russell (1968) 69 Cal.2d 200, 205-206, lays the foundation for our interpretation of a trust instrument: ‘The paramount rule in the construction of wills, to which all other rules must yield, is that a will is to be construed according to the intention of the testator as expressed therein, and this intention must be given effect as far as possible.’”

Now, I agree with this analysis, specifically, that estate planning trusts should be construed by rules similar to those applicable to the law of wills.  The Carrano court makes an explicit link between the two bodies of law, a link that is not always followed, either in case law or in statute.

The court continued.  “The rule is well established that where the meaning of the will, on its face, taking the words in the ordinary sense, is entirely clear, and where no latent ambiguity is made to appear by extrinsic evidence, there can be no evidence of extrinsic circumstances to show that the testatrix intended or desired to do something not expressed in the will.”

The court found that the word “issue” had a statutory definition which included all three of Christopher’s children, regardless of the unusual circumstances by which Jonathan was conceived.  Stated the court, “typically, latent ambiguities arise where two persons or things answer the description of a bequest, or where there is a mistaken description and one or more persons match a portion of the bequest . .  However, extrinsic evidence is not admissible to change a testator’s intent.”

Having found no ambiguity in the word “issue,” the court ruled in favor of Jonathan, concluding that, “Just as in Estate of Russell, we are not at liberty to rewrite the Papaz Family Trust to attach restrictions to the term ‘issue’ that Serena and Charles did not expressly include.”

The court reached the right decision for the right reasons, but I am not positive that the line connecting law of wills to the law of trusts is quite as straight as the court would have us believe.

Citizens Business Bank v. Carrano (Nov. 05, 2010) — Cal.Rptr.3d —-, 2010 WL 4371042

The recent decision in Lickter v. Lickter (Oct. 27, 2010) — Cal.Rptr.3d —-, 2010 WL 4231300 highlights of three important points.  First, a trust beneficiary does not have standing to pursue a claim on behalf of the trust after the beneficiary has received his or her distribution pursuant to the trust.  This may seem like a common-sense answer, but it took a published appellate decision to affirm the point.

Second, draftspersons should be careful in how they handle pour over provisions in wills.  It is common to couple an estate planning trust with a pour over will.  By such standard estate planning documentation, the pour over will transfers any assets into the trust that were not already titled in the name of the trust at the time of the trustor’s death.

Yet, this can lead to an awkward circumstance if the asset consists of a claim for personal injury to the trustor, such as wrongful death or elder abuse.  Depending on how the pour over will was drafted, such claim may pass to the trust, to be prosecuted in the name of the trustee for benefit of the trust and its beneficiaries.  Draftspersons may wish to consider modifying their pour over wills to provide that such claims for personal injury are the property of one or more named persons, rather than property of the trust.

Third, this case emphasizes the importance of making pecuniary bequests to persons whom the trustor wants to preclude from attacking the trust.  If the trustor makes a gift of $0.00 a potential beneficiary, then the beneficiary has no reason not to attack the trust.  If the beneficiary loses, he still gets nothing; if he wins, then he gets something under the trust.

In this case, the beneficiaries who wanted to launch a challenge received specific bequests, which requests were distributed to them by the trustee.  By such distribution, the trustee prevented an attack on the trust.

Here’s how the court addressed the matter.  “The underlying facts are largely irrelevant. For our purposes, it is sufficient to say that Lois died in August 2007 at the age of 91, leaving property in a trust, of which Robert became the trustee. The terms of the trust provided that upon Lois’s death, $10,000 each would be distributed to plaintiffs and the entire residue of the trust would then be distributed to Robert.  If Robert predeceased Lois, the residue was to be distributed to Maggie and Kate.  If Maggie and Kate also predeceased Lois, the residue was to be distributed to their children or, if none, to Lois’s living children by right of representation.”

“Plaintiffs Joshua and Jezra Lickter sued their father (Robert Lickter), their half-sisters (Maggie and Kate Lickter), and their half-sisters’ mother (Mary McClain) for elder abuse and other related causes of action that had belonged to their grandmother (Robert’s mother), Lois Lickter, when she died.  Plaintiffs claimed they had standing to commence and maintain the action under Welfare and Institutions Code section 15657.3(d).”

Explained the court, “The primary issue in this case is who is entitled to commence and/or maintain an elder abuse action after the elder who was allegedly abused has died . . . As we will explain, just because plaintiffs were beneficiaries of Lois’s trust did not make them ‘interested persons’ for purposes of pursuing this elder abuse action under subdivision (d) of Welfare and Institutions Code section 15657.3 . . . Plaintiffs were former beneficiaries of Lois’s trust, as they already had been paid the amounts they were owed under the trust. Thus, plaintiffs had no such interest in this elder abuse action.”

Bravo for a pithy and direct analysis.  “Because Robert was Lois’s only surviving child, and because neither Maggie nor Kate had children, the residue of Lois’s trust would be distributed to plaintiffs under the terms of the trust if Robert, Maggie, and Kate all were deemed to have died before Lois.”

Here is the heart of the issue.  “It has long been clear under California probate law that a person who can claim the title of ‘heir’ is not necessarily an ‘interested person’ for purposes of instituting or participating in a particular proceeding in a probate case.  The question, rather, is whether the person – whether an heir, devisee, beneficiary, or other person – has an interest of some sort that may be impaired, defeated, or benefited by the proceeding at issue.”

Now shines the beauty of the specific bequests to the beneficiaries who wanted to institute the action.  “Here, when the trial court granted summary judgment, plaintiffs had no right in or claim to Lois’s trust estate by virtue of their status as former beneficiaries of Lois’s trust because all of the interest they had in Lois’s trust had been satisfied when they were each paid the $10,000 Lois left each of them.”

“Thus, they were no longer beneficiaries of the trust, let alone beneficiaries with ‘a property right in or claim against the trust estate which could be affected by the’ elder abuse action. For this reason, the trial court did not err in concluding that they did not have standing as ‘interested persons’ under subdivision (d)(1)(C) of Welfare and Institutions Code section 15657.3 in their role as beneficiaries of Lois’s trust.”

To drive the point home, the court further held that, “In other words, contrary to plaintiffs’ assertions, it is not true that Robert’s payment of the $10,000 each plaintiff was owed from the trust terminated their standing to pursue this action as beneficiaries of Lois’s trust. The fact is that plaintiffs’ status as beneficiaries of Lois’s trust never gave them standing to pursue this action because the beneficial interest they had in the trust estate was not one that could have been ‘affected by’ this action.”

Hat’s off to a clear, concise, and absolutely accurate decision.

Lickter v. Lickter (Oct. 27, 2010) — Cal.Rptr.3d —-, 2010 WL 4231300

Some estate plans make use of a “five-or-five” provision to help reduce the estate tax.  In the recent decision in Estate of Cairns (Sept. 15, 2010) 188 Cal.App.4th 937, the court had to interpret such a five-or-five provision many years after the death of the testator.

As the court explained, “Margaret Cairns executed a will in 1975, and died in 1977.”  The will established a testamentary trust.  The court continued.  “The five-or-five provision of the will [ ] specified: ‘The Trustee shall also pay to my son during his lifetime, from the principal of the trust, such amounts as he may from time to time request in writing, not exceeding in any calendar year, non-cumulatively, the greater of the following amounts: Five Thousand Dollars ($5,000.00) or Five Per Cent (5%) of the value of the principal of the trust, determined as of the end of the calendar year.’”

The trust was administered for many years after the death of Mrs. Cairns.  Eventually, demands were made for trust distribution in periods after the right to receive the funds arose. The court held that such requests were not time-barred.  Explained the court,

“As we read the provision, the beneficiary may make multiple demands from ‘time to time’ for distribution of Trust assets for a calendar year as long as the total amount demanded is no greater than $5,000 or 5 percent of the value of the principal of the trust.  The directive that the request must be non-cumulative refers to the total amount of the permissible distributions in a calendar year, not the date by which the demand must be exercised.  Finally, the total maximum distribution available to the beneficiary in any given calendar year is not ascertained or determined until the ‘end of the calendar year.’”

The court continued.  “Thus, if the 5 percent distribution is elected, the beneficiary will not even know the amount of the permissible demand until after the calendar year has concluded and an accounting is completed. The beneficiary may often not have adequate information to make a prudent decision as to which five-or-five election – five percent or $5,000 – is appropriate during the calendar year.”

The trustee disputed such interpretation under applicable tax law. The court swept aside these objections, stating “We reject Kenneth’s contention that the trial court’s interpretation of the instrument also is not in accord with applicable provisions of federal tax law.  We deal in the present case with an issue of interpretation of a trust document, which implicates state rather than federal tax law.  Further, Kenneth’s suggestion that under these tax rules, the beneficiary’s right to the disbursement lapses if the power is not exercised, is in keeping with our determination of the meaning of the five-or-five provision.”

This analysis seems incomplete. True, the court was obligated to review the written trust agreement. The court also was obligated to consider the circumstances under which the trust agreement was drafted. The circumstances included the tax rules applicable at the time that the will was drafted. The interpretation should have taken these circumstances into consideration.

The court made the following findings. “We therefore interpret the five-or-five provision to mean: during his lifetime [the beneficiary] is not required to make a single demand for distribution of principal during each calendar year in which the maximum total amount of the distribution is calculated.”

OK, that makes sense.

“He may make multiple written demands for distribution of principal from time to time within a single year, as long as the total amount requested for any single calendar year does not exceed the annual 5 percent or $5,000 maximum.”

Agreed. That’s what the document states.

“The proscription against non-cumulative requests prohibits him from making demands for less than the maximum amount for one calendar year, then seeking to add the amount not requested for that year to the distribution the next year.”

Agreed again. The distributions were to be noncumulative.

“The total maximum distribution amount available to him, whether it is 5 percent or $5,000, is calculated as of the end of each calendar year.”

Again, that’s the document states.

“And, he must make his demands for distribution before the end of the next calendar year after the determination of the value of the principal of the Trust to avoid the ban against non-cumulative distributions ‘in any calendar year.’”

This prevents the beneficiary from requesting distributions many years after the fact.  In conclusion, “We have found that the Trust does not require [the beneficiary] to exercise his right to a principal distribution in a given calendar year to receive the distribution related to that same year. Thus, he was not required to make his demands for the year 2007 in the year 2007. The ban on cumulative distributions required him to demand principal distributions not in excess of the five-or-five maximum for the year 2007 by no later than the end of 2008.”

In the end, a sensible interpretation.

Estate of Cairns (Sept. 15, 2010) 188 Cal.App.4th 937

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Duties of Agent

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

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

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

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

Reliance by the Buyers

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

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

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

Duty of Confidentiality

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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