New California trust case holds that a trustee is not liable for personal damages suffered by the beneficiary, and is not liable to the beneficiary if the beneficiary failed to diligently protect her interests

Overview

Williamson v. Brooks holds that a trustee is not liable for personal damages suffered by the beneficiary, and a trustee is not liable to the beneficiary if the beneficiary failed to diligently protect her interests. Williamson v. Brooks, California Court of Appeal, Second Appellate District (2d Civil No. B265745, decided January 31, 2017)

Summary of Facts

In 2008, Dad established an irrevocable Trust which contained five separate Subtrusts benefiting five of his adult children, including Beverly. Dad selected his accountant (Brooks) and his attorney (Clemens) to serve as the initial Co-Trustees. The Subtrust allowed Beverly to withdraw certain portions of the principal at 40, 50 and 60 years of age.

After the Trust was created, Dad and the two Co-Trustees discussed the need to inform Dad’s children about the Trust. Dad said that he wanted to tell them himself and he wanted “to caution [the children] that it was not for purchases [for which] it wasn’t intended.” Dad informed Beverly about her Subtrust on at least two occasions. The first was in a March 22, 2009, email in which Dad responded to an inquiry from Beverly regarding whether accountant Brooks should file Beverly’s 2008 taxes. Dad advised: “[Brooks and Clemens] set up Trusts that do not require you to change any of your tax stuff. File with anyone you like and the Trust Income has no effect on your taxes since each Trust is a separate entity and is taxed on its own. I pay the tax on the Trust. I need to sit with you sometime this year to explain it all.” The second occasion occurred in late spring of 2009 on the beach at Hollister Ranch in Santa Barbara. William again informed Beverly of her Subtrust and told her she would be taken care of in the event of his death.

Subsequently, after Dad later fired Beverly from her employment at Dad’s company Beverly was unable to make the total monthly payments on her home loan. Beverly’s sister offered to help with either the payments in the form of a loan, or by quitclaiming the sister’s partial interest in the property to Beverly so that Beverly could do whatever she wanted with the property, or by having Beverly quitclaiming her interest in the property to her sister, and the sister renting the house back to Beverly. Beverly decided to quitclaim her interest to her sister, and instead moved into Dad’s guest room at Dad’s property at Hollister Ranch – living at Hollister Ranch was a dream come true for Beverly.

In 2012, Beverly contacted accountant and Co-Trustee Brooks for the first time to discuss the Subtrust. Brooks promptly responded, providing the information and documents requested. When Beverly made a request to withdraw assets from the Subtrust in September 2012, “Brooks worked with her to begin making monthly distributions.”

Subsequently Co-Trustees Brooks and Clemens resigned as the Co-Trustees, but for reasons that are not relevant to this case. Successor Trustee Egan filed a first amended petition against Brooks and Clemens for damages suffered as a result of Beverly’s loss of her home property. Egan claimed that Brooks and Clemens breached their fiduciary duties to Beverly by failing to sufficiently inform her of the Subtrust (thus arguably denying Beverly of knowledge of the possibility that payments from the Subtrust might be used to make payments on the mortgage on Beverly’s home, thus preventing Beverly’s loss of that property). Before trial, Joanne Williamson was substituted in as petitioner in her capacity as the second successor Trustee.

The Trial Court ruled in favor of Co-Trustee’s Brooks and Clemens against successor Trustee Williamson. The Court of Appeal affirmed.

Summary of the Court’s Decision

  1. Trustee Not Liable for Personal Damages to the Beneficiary.

Trustees accused of breaches of fiduciary duty may only be held liable for losses to the trust itself, not for personal damages to beneficiaries. “There must be a causal connection supporting any monetary award that the trustee is ordered to pay. [Citation.] Thus, the trustee is only liable for loss or depreciation resulting from the breach of trust, for profits that the trustee made through the breach of trust, or for any profits that would have accrued to the trust but for the breach of trust. Prob. C § 16440 (a).” (2 Cal. Trust and Probate Litigation (Cont.Ed.Bar 2016) § 21.65, p. 21-38, italics added.) See also Estate of Kampen (2011) 201 Cal.App.4th 971, 991-993 (holding that lost opportunity damages are not available as a remedy against a personal representative who had failed to timely distribute estate assets).

  1. No Breach of Fiduciary Duty – Beverly’s Lack of Due Diligence Prevented Her from Learning of the Details of the Subtrust Earlier.

Expert witness attorney Moes, testified that Clemens and Brooks breached their fiduciary duties to keep Beverly reasonably and sufficiently informed of the Subtrust and its provisions. The trial court found, however, that Beverly was informed of her trust shortly after it was created. The Court of Appeal further held:

Williamson maintains that William was required to tell Beverly every detail of her subtrust. We disagree. Beverly was entitled to be informed about her subtrust so that she could take action to gain more information. As stated in Williamson’s opening brief, “The most basic action required of a trustee under the duty to inform is to promptly inform the beneficiary of the existence of the trust and their status as beneficiaries, so that the beneficiary may exercise their rights to secure information about the trust.” The cotrustees fulfilled this duty by ensuring that William informed Beverly of the subtrust, and when Beverly eventually asked Brooks for information regarding the subtrust, he promptly provided it. The trial court found that it was Beverly’s “lack of due diligence” that prevented her from learning the details earlier. The court stated: “I think [Beverly] had real opportunities to inquire about her trust and what income or assets it had. No one appeared to have been hiding the facts from her. She appears to be a very bright and articulate person and the fact that she did not investigate or explore her options [is] inexplicable; that militates against her position.”

Williamson cites no California authority suggesting that a trustee may be held liable for breach of trust or fiduciary duties under the factual scenario presented here. The trial court found that Beverly was made aware of the subtrust shortly after it was created. She understood that Brooks and Clemens were the cotrustees and she had ample opportunity to obtain more information about the subtrust while she was negotiating with Connie and William over the fate of the Via Rosa Property. That she failed to do so does not make Clemens and Brooks liable for breach of fiduciary duty.

*****

Royse Law Firm – Litigation Update – New California Trustee Liability Case – Employment – Trade Secrets, Etc.

Click on the following link to Legal Updates in Litigation: Royse Legal Updates in Litigation, Liability, Governance & Risk Management (March 10, 2017)

New California case expands shifting trust/trustee attorneys’ fees and costs to a beneficiary’s share of the trust

New California trust dispute decision expands shifting trust/trustee attorneys’ fees and costs to a beneficiary’s share of the trust – Pizarro v. Reynoso, California Court of Appeal, Third Appellate District, Case No. C077594, (March 28, 2017)

Summary. The decision in Pizarro v. Reynoso expands the shifting of trust/trustee attorneys’ fees and costs to a beneficiary’s trust share, and in relevant part reminds us that all trust and estate litigation cases vary and are determined in significant part by the facts and circumstances of that case, the relevant case law, and the discretion of the trial court judge. In Pizarro v. Reynoso, on appeal the Court of Appeal held as follows:

  1. The terms and intent of the trustor prevail in substance – refusing to elevate form over substance the court upheld a sale of the trust real property to a specific beneficiary which the trust authorized in the trustee’s discretion if the beneficiary could afford to purchase the house. The trustee in fact in part assisted the beneficiary in that purchase so that the beneficiary could purchase the property – never the less the court upheld the sale based on substance over form and the intent and terms of the trust.
  2. Under the court’s equitable powers, the attorneys’ fees and costs incurred by the trust/trustee are chargeable against the trust share of a beneficiary who brings an unfounded proceeding against the trust, but those attorneys’ fees and costs cannot be awarded against the beneficiaries other personal non-trust assets, citing Rudnick v. Rudnick (2009) 179 Cal. App. 4th 1328, 1332-1333, 1335, and Estate of Ivey (1994) 22 Cal. App. 4th 873, 877-878, 882-886.
  3. Important – in an expansion of #2 above and charging fees and costs to a beneficiary’s trust share, under those same equitable powers, the court also can award the trust/trustee attorneys’ fees and costs against the trust share of a beneficiary who has not filed or brought a proceed, but who takes an unfounded position and litigates in bad faith causing the trust to incur fees and costs (the beneficiary changed her position to being against the trustee, and in the trial court’s opinion then offered false testimony by declaration, deposition and at trial – offering false evidence in litigation is a bad faith litigation tactic).
  4. The court’s decision also cites or makes reference to California Probate Code §17211(a) and §15642(d), which state as follows (and I have also provided below §17211(b):

17211(a)

(a) If a beneficiary contests the trustee’s account and the court determines that the contest was without reasonable cause and in bad faith, the court may award against the contestant the compensation and costs of the trustee and other expenses and costs of litigation, including attorney’s fees, incurred to defend the account. The amount awarded shall be a charge against any interest of the beneficiary in the trust. The contestant shall be personally liable for any amount that remains unsatisfied.

(b) If a beneficiary contests the trustee’s account and the court determines that the trustee’s opposition to the contest was without reasonable cause and in bad faith, the court may award the contestant the costs of the contestant and other expenses and costs of litigation, including attorney’s fees, incurred to contest the account. The amount awarded shall be a charge against the compensation or other interest of the trustee in the trust. The trustee shall be personally liable and on the bond, if any, for any amount that remains unsatisfied.

15642(d)

(d) If the court finds that the petition for removal of the trustee was filed in bad faith and that removal would be contrary to the settlor’s intent, the court may order that the person or persons seeking the removal of the trustee bear all or any part of the costs of the proceeding, including reasonable attorney’s fees.

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Updated (02172017) California Trustee And Beneficiary Responsibilities And Rights – Please Use It, And Tell Others

Below I have provided a link to my updated (02172017) paper California Trustee and Beneficiary Responsibilities and Rights. Please use it, and pass it along and tell other people who would be interested.

Best to you, David Tate, Esq., Royse Law Firm, Northern and Southern California, 149 Commonwealth Drive, Ste. 1001, Menlo Park, CA 94025, (650) 813-9700, Extension 233, http://www.rroyselaw.com. My practice includes civil and probate court litigation (business, real estate, trusts and estates, employment, IP, D&O, serious personal injury, elder abuse, etc., and representing fiduciaries and beneficiaries, and audit committees and D&O.

Here is the link to the updated California Trustee and Beneficiary Responsibilities and Rights (02172017) a-summary-of-california-trustee-and-beneficiary-responsibilities-and-rights-dave-tate-esq-02172017

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Completed (mostly) a will contest and trust real property percentage trial on Friday – read more

I have been away from the blog for a while, preparing for a very contentious and time-consuming trial.

This past week I was in trial on a will contest action, and also on related but separate real property ownership and trust beneficiary percentage ownership claims. The witnesses and experts included my client who was the named beneficiary, the contestant(s), documents in which the decedent expressed her wishes including a police report and APS records in addition to other documents, forensic document examiners, forensic psychiatrists, and third party witnesses including a very spry 102 year old woman who was a friend of the decedent (the decedent executed the will at age 103, and passed away approximately 9 months later at age 104). Issues also involve the validity of a power of attorney that the decedent executed in June 2015 (she died one month later in July 2015), mental capacity, undue influence, elder abuse, trust and power of attorney accountings, costs and attorneys’ fees, and other issues.

As you may be aware, issues of mental capacity and undue influence are not the same for wills, powers of attorney, and trusts, variously including California Probate Code §§810, etc., and 6100.5, etc., and California Welfare and Institutions Code §15610.70, and various other statutes and case law.

The will contest was denied, and my client will receive what the decedent wished and intended.

So . . . I will be back on this blog and other networking, and also on my other blog http://auditcommitteeupdate.com.

Best to you, and thank you for following my blogs and posts. Dave Tate, San Francisco Bay Area and California.

 

California Trustees – What Would Keep Me Up At Night – November 2016

Trustee responsibilities are extensive and they arise from different sources including the wording of the trust itself, statutes and case law. Of course you have to cover all areas of your trustee responsibility, but here is my list of primary issues that would keep me up at night as a trustee. This list is not in any particular order.

First, do you understand what the trust says and requires?

Second, have you marshalled and safeguarded the assets that are in or that are supposed to be in the trust? Are they in the trust and under your control?

Third, do you really understand your legal responsibilities including the wording and requirements in the trust, what the probate code and case law require of you? As a trustee you are a fiduciary. You have one of the highest standards of care, responsibility, liability and unbiased fairness and good faith required by law.

Fourth, are the trust assets being invested, managed and recorded properly and prudently? You need to evaluate and manage the returns and the risks, in accord with the wording of the trust and your statutory and case law fiduciary duties. So, for example, the stock market goes up and down. If the market goes down, is your approach to the portfolio management designed to help you avoid liability for losses, not just because the market went down, but also because you have implemented a portfolio approach and might allow you to net losses against gains? And are your investments prudently diversified, also taking into consideration possible risks? You will find additional posts on this blog about investment responsibilities.

Next, do you have and use the proper fiduciary demeanor and decision making approach required of a trustee?

Sixth, is the trust cash flow prudently managed? You might, for example, through no fault of your own have a trust with declining asset values or liquidity issues.

Next, do you know what to do if you have beneficiaries who are disagreeing with your decisions, or who are threatening litigation, or who have initiated litigation?

Eighth do you know what information you must or possibly should provide to the beneficiaries, including, for example, possible accountings and other information? Even if an accounting isn’t required, I do recommend that you prepare an accounting, or some form of an accounting. And, of course, you do have to keep complete records. Even if an accounting is not required, courts very often will order that accountings be prepared anyway. And, court and probate code compliant accountings include specific and detailed requirements.

Ninth, do you understand that you have personal liability exposure for the actions that you take or don’t take as the trustee? You are required to be prudent with risk management. Also consider possible fiduciary insurance coverage although in most situations it isn’t required.

Tenth, do you know what additional planning opportunities, if any, exist or might exist? Similarly, are you aware of new or changing tax, probate code, planning, and investment statutes and rules? And have you calendared important planning and compliance dates?

And last on this list, do you consult with necessary and appropriate professionals to advise you on your fiduciary duties, trust administration management, compliance, taxes, investments, insurance, asset protection and preservation, communicating with beneficiaries, and other important or possibly important issues?

That’s it for now. Thanks for reading.

FINRA proposed financial exploitation rule change for elders and vulnerable adults

FINRA has sent to the SEC a proposed rule change to help protect seniors and vulnerable adults from financial exploitation: “FINRA is proposing amendments that would require firms to make reasonable efforts to obtain the name of and contact information for a trusted contact person for a customer’s account. In addition, FINRA is proposing a new rule that would permit firms to place a temporary hold on a disbursement of funds or securities when there is reasonable belief of financial exploitation, and to notify the trusted contact of the temporary hold. The rule change is not effective until approved by the SEC.”

“A small number of states have enacted statutes that permit financial institutions, including broker-dealers, to place temporary holds on “disbursements” or “transactions” if financial exploitation of covered persons is suspected. In addition, the North American Securities Administrators Association (“NASAA”) created a model state act to protect vulnerable adults from financial exploitation (“NASAA model”). Due to the small number of state statutes currently in effect and the lack of a federal standard in this area, FINRA believes that the proposed rule change would aid in the creation of a uniform national standard for the benefit of members and their customers.”

The proposed rule change is quite lengthy. Of course, and assuming that the rule change is approved by the SEC, the real test is how the different FINRA members apply the rule in everyday occurrences, the policies and procedures that they put in place, and the training that they provide to their employees. You will note that FINRA acknowledges that the definitions are broad, which is typical in this area of law – see, for example, the California elder abuse statutes in the California Welfare & Institutions Code and the statutes pertaining to mental capacity and undue influence in the California Probate Code – but those are detailed discussions for other materials – I have given presentations for attorneys, fiduciaries and other professionals on these topics including elder abuse and elder protection, probate court procedures, and fiduciary standards of care.

Below are a couple of the pertinent rule change provisions.

“FINRA believes that “specified adults” may be particularly susceptible to financial exploitation. Proposed Rule 2165 would define “specified adult” as: (A) a natural person age 65 and older; or (B) a natural person age 18 and older who the member reasonably believes has a mental or physical impairment that renders the individual unable to protect his or her own interests. Supplementary Material to proposed Rule 2165 would provide that a member’s reasonable belief that a natural person age 18 and older has a mental or physical impairment that renders the individual unable to protect his or her own interests may be based on the facts and circumstances observed in the member’s business relationship with the person. The proposed rule change would define the term “account” to mean any account of a member for which a specified adult has the authority to transact business.”

“Because financial abuse may take many forms, FINRA has proposed a broad definition of “financial exploitation.” Specifically, financial exploitation would mean: (A) the wrongful or unauthorized taking, withholding, appropriation, or use of a specified adult’s funds or securities; or (B) any act or omission by a person, including through the use of a power of attorney, guardianship, or any other authority, regarding a specified adult, to: (i) obtain control, through deception, intimidation or undue influence, over the specified adult’s money, assets or property; or (ii) convert the specified adult’s money, assets or property.”

In addition to (1) initially attempting to obtain from the client information about a trusted person who the member can contact in possible situations of exploitation, and (2) attempting to contact that trusted person when appropriate, “The proposed rule change would permit a member to place a temporary hold on a disbursement of funds or securities from the account of a specified adult if the member reasonably believes that financial exploitation of the specified adult has occurred, is occurring, has been attempted or will be attempted. A temporary hold pursuant to proposed Rule 2165 may be placed on a particular suspicious disbursement(s) but not on other, non-suspicious disbursements. The proposed rule change would not apply to transactions in securities.” I note that although the proposed rule change would not apply to “transactions in securities,” it would nevertheless apply to a distribution of the post-sale proceeds from an account.

You should also note that the rule change does not require the member to obtain trusted person contact information from the client (it only requires the member to try to obtain that information), nor does the rule change require the member to contact the trusted member in possible situations of exploitation, nor does the rule change require the member to put a temporary hold on the account or transactions in possible situations of exploitation.

I am sure that the proposed rule change goes only as far as it does because members obviously do not want to be liable for alleged failure to act. But FINRA members in California also should already be up-to-speed on the mandated reporter of suspected financial elder abuse provisions at California Welfare and Institutions Code section 15630.1, which in part provide – “(a) As used in this section, “mandated reporter of suspected financial abuse of an elder or dependent adult” means all officers and employees of financial institutions. (b) As used in this section, the term “financial institution” means any of the following: (1) A depository institution, as defined in Section 3(c) of the Federal Deposit Insurance Act (12 U.S.C. Sec. 1813(c)). (2) An institution-affiliated party, as defined in Section 3(u) of the Federal Deposit Insurance Act (12 U.S.C. Sec. 1813(u)). (3) A federal credit union or state credit union, as defined in Section 101 of the Federal Credit Union Act (12 U.S.C. Sec. 1752), including, but not limited to, an institution-affiliated party of a credit union, as defined in Section 206(r) of the Federal Credit Union Act (12 U.S.C. Sec. 1786(r)).”

Additionally, there are separate California mandated reporter of suspected elder abuse requirements at California Welfare and Institutions Code section 15630 which provide that “(a) Any person who has assumed full or intermittent
responsibility for the care or custody of an elder or dependent adult, whether or not he or she receives compensation, including administrators, supervisors, and any licensed staff of a public or private facility that provides care or services for elder or dependent adults, or any elder or dependent adult care custodian, health practitioner, clergy member, or employee of a county adult protective services agency or a local law enforcement agency, is a mandated reporter.”

Some of the proposed rule change provides for pretty interesting reading. See, for example, footnote 14 which provides a possible example: “A customer’s request to change his or her trusted contact person may be a possible red flag of financial exploitation. For example, a senior customer instructing his registered representative to change his trusted contact person from an immediate family member to a previously unknown third party may be a red flag of financial exploitation.”

And of course I will be providing further analysis and updates on this topic. The proposed FINRA rule change has been a long time coming.

Dave Tate, Esq., San Francisco and California