May 18, 2017

Spendthrift Clause - Carmack v. Reynolds

A common provision to include in a trust for a careless beneficiary is a spendthrift provision. This provision provides protection to a beneficiary's inheritance by limiting the ability of a creditor to attach their claim to a beneficiary's interest in the trust. Still, a spendthrift clause does not absolutely insulate a beneficiary's inheritance from creditors. 

Certain types of creditors can attach to the beneficiary's interest regardless of a spendthrift provision, e.g. child support creditors. For general creditors, recovery is typically not as easy. 

A recent California Supreme Court case addressed the issue of how far a bankruptcy trustee can reach into a beneficiary's interest in a trust.

Carmack v. Reynolds (2017) _____ Cal.4th _____

The pertinent facts are as follows:

"The trust provides that at Freddie's death, Reynolds is entitled to $250,000 from the trust if he survives Freddie by 30 days. In addition, Reynolds is entitled to receive $100,000 a year for 10 years and then one-third of the remainder. All payments are expected to be made from principal; the trust's assets are in undeveloped real estate that do not produce income. Those assets are estimated to be worth several million dollars, although their exact value will not be known until the trust assets are liquidated.

The day after his father died, Reynolds filed for voluntary bankruptcy under chapter 7 of the United States Bankruptcy Code. The trustees of the Reynolds Family Trust sought a declaratory judgment on the extent of the bankruptcy trustee's interest in the trust. The bankruptcy court held that under the California Probate Code, the bankruptcy trustee standing as a hypothetical lien creditor could reach 25 percent of Reynolds's interest in the trust. The bankruptcy appellate panel affirmed. The bankruptcy trustee appealed to the Ninth Circuit, which asked us to clarify if Probate Code section 15306.5 caps a bankruptcy estate's access to a spendthrift trust at 25 percent of the beneficiary's interest where the trust pays entirely from principal. We granted the Ninth Circuit's request."

The court found that "that a bankruptcy trustee, standing as a hypothetical judgment creditor, can reach a beneficiary's interest in a trust that pays entirely out of principal in two ways. It may reach up to the full amount of any distributions of principal that are currently due and payable to the beneficiary, unless the trust instrument specifies that those distributions are for the beneficiary's support or education and the beneficiary needs those distributions for either purpose. Separately, the bankruptcy trustee can reach up to 25 percent of any anticipated payments made to, or for the benefit of, the beneficiary, reduced to the extent necessary by the support needs of the beneficiary and any dependents."

May 10, 2017

Equitable Estoppel

When a litigant desires to seek legal action, timeliness is key. A party is generally obligated to seek redress within a certain period of time. This is known as the statute of limitations.

For example, Code of Civil Procedure § 366.3(a) provides that "[i]f 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, whether the promise or agreement was made orally or in writing, 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." Therefore, the aggrieved party has 1 year to commence an action following the decedent's death. If filed after 1 year, the claim is considered time-barred because the statute of limitations has run. 

However, there is an exception to this rule. The doctrine of equitable estoppel "comes into play only after the limitations period has run to preclude a party from asserting the statute of limitations as a defense to an untimely action where the party's conduct has induced another into forbearing to file suit." (McMackin v. Ehrheart (2011) 194 Cal.App.4th 128, 140. This doctrine consists of four elements: "(1) the party to be estopped must be apprised of the facts; (2) he must intend that his conduct shall be acted upon, or must so act that the party asserting the estoppel had a right to believe it was so intended; (3) the other party must be ignorant of the true state of facts; and (4) he must rely upon the conduct to his injury." City of Long Beach v. Mansell (1970) 3 Cal.3d 462, 489.

For purposes of illustration, assume that Danny orally promised Billy that he would bequeath his home to him in a will. Danny thereafter had a change of heart and bequeathed the property to his neighbor Fred and named Fred the executor. Danny then died on May 10, 2010. Fred intentionally stalled in lodging the will until 1 year had elapsed. He eventually lodge the will on June 2, 2011.

Fred was aware of Code of Civil Procedure § 366.3(a) so he thought by delaying probate until after the statute of limitations had run, he would not have to worry about Billy's claim. When Billy periodically asked Fred about the matter, Fred told him that he was still searching for the will. Billy believed Fred as they were acquaintances. 

These facts could potentially give rise to an equitable estoppel claim if Billy pursues an action against Fred, as executor of Danny's estate.

First, Fred knew the pertinent facts regarding Danny's will, i.e. he received the property not Billy. Second, Fred knew that Billy would believe him about the will's erroneous disappearance because of their relationship. Third, Billy was not able to procure a copy of Danny's will so as to be made aware of the situation. Fourth, by believing Fred's false statements about the will, Billy suffered an injury as any claim he could make would be time-barred since more than 1 year elapsed after Danny's passing.  

April 21, 2017

Trust Accounting

A beneficiary is generally free to contest a trustee's accounting without fear of consequence. However, there is an exception to this rule.

Probate Code § 17211(a) provides that "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."

An example of a contest done without reasonable cause and in bad faith was recently illustrated in an unpublished case. The case originated in Orange County Superior Court, Case #  30-2011-00494819.

A source of scrutiny for the contestant was proof of the actual cashed checks. Of note, Morgan was the trustee and Winslow was the beneficiary.

"Morgan also explained that in attempting to obtain cancelled checks for trust expenses and distributions to beneficiaries, her inquiries with the bank showed the process would be "time consuming and tedious," so she instead provided Winslow with copies of invoices, check registers showing the payments, and bank statements showing the checks cleared. She noted that Winslow did not subpoena copies of the checks. Winslow did not claim or provide any evidence that trust beneficiaries did not receive or deposit distributions Morgan made to them. 

"Winslow returned to Morgan's use of a paid assistant in cleaning the trust property, noting, "I haven't seen a company check that she actually paid money to her." When the trial court asked, "Why would you need to see the check," Winslow responded, "Because, for some reason, she doesn't want to provide copies of the checks and I believe a copy of the checks [showing who they] were made out to [would] tell me, `Yes, that person was paid.'" The court observed, "How does it help you if she was paid. . . . [D]oesn't [it] help you if she wasn't paid. That means there's more money in the trust." (Italics added.) Winslow responded, "Well, I just want it." She added as a jumbled explanation, "I know if the accounting is correct and the items are legitimate — so if I sum them up, I could get the money that I need." At that point, the court asked rhetorically, "Or are you nitpicking everything in depth?"

"Following the conclusion of the parties' testimony and closing arguments, the trial court granted Morgan's petition to approve her accountings. Finding Winslow's accounting contest was unreasonable and in bad faith, the court awarded Morgan on the trust's behalf $60,059.33 in attorney fees and costs under section 17211. Winslow moved for a new trial, which the trial court denied in July 2014, further sanctioning Winslow $1,750 under section 17211. Winslow now appeals."

The trial court's decision was upheld on appeal in an unpublished appellate opinion.

April 3, 2017

Attorney fees in Probate

Los Angeles County Superior Court
Compensation for a personal representative and attorney in a probate is derived from a statutory scheme that provides for ordinary compensation, and in certain instances, extraordinary compensation. Ordinary compensation is based off of a percentage of the assets. As can be surmised, ordinary compensation is regularly granted. Still, the attorney must correctly value the estate in order to claim the appropriate fee. Otherwise the probate judge will not approve the requested fee.

A recent unpublished appellate opinion discussed this issue.

Estate of Shea-Robert Sheahan, Los Angeles County Superior Court, Case # BP145773

"A probate referee was appointed to appraise the assets of the estate, which, in December 2013, were estimated to have an approximate value of $800,000. According to Bock, the estate's sole asset was a membership interest in a limited liability company."

"The probate referee valued the LLC at $2,505,000, concluding that the LLC's only asset was a five-acre lot of undeveloped real property in Clark County, Nevada."

"In February 2014, Bock petitioned the probate court for authority to act as the manager of the LLC and execute an agreement for sale of the Nevada real property for $1,775,000. In March 2014, the court entered an order authorizing Bock to (i) act as manager of the LLC, (ii) sell the real property for $1,775,000, and (iii) pay a commission to the real estate broker who procured the sale."

"Following the sale, Bock proceeded to close the probate and, in the process, moved for compensation for herself and her attorney. Bock asserted the value of the estate was $4,169,768, consisting of (i) the membership interest in the LLC, valued at $2,505,000 and (ii) $1,664,768 in cash, $1,659,023 of which was received in connection with the sale of the Nevada real property. Applying sections 10800 and 10810, the $4,169,768 valuation resulted in ordinary services compensation requests of $54,698 for each of Bock and her attorney."

"After further proceedings, the probate court denied Bock's initial request for ordinary compensation. Bock then prepared a supplemental petition in accordance with the court's calculation of the estate's value. This calculation relied on the $2,505,000 appraised value of the LLC and recognized a loss on sale of the LLC's property of $845,976. Along with nominal receipts, the calculated estate value totaled $1,664,769. This estate value resulted in ordinary compensation awards of $29,648 to each of Bock and her attorney."  

March 22, 2017

Unpublished Appellate Opinions

A hallmark of our legal system is the establishment of precedent, or case holding, from appellate courts that bind future cases. That is, the prior case can be cited in a subsequent case to argue for a similar outcome, provided the facts are analogous. For example, probably the most well-known probate case of recent years is Estate of Heggstad (1993) 16 CA4th 943, 950. This decision was rendered by the First District of the California Court of Appeal and stemmed from a case in San Mateo County Superior Court. Heggstad established the holding that a formal transfer of real estate into a trust, i.e. through a deed, was not required for the trust to control the real estate if it was identified on the trust's schedule of assets. This holding has probably been cited thousands of times in probate courts throughout California involving unfunded trusts. 

Still, many appellate opinions rendered by the California Court of Appeal are not published. In effect, these cases are non-binding on subsequent cases. For instance, if Heggstad was an unpublished opinion, it would be improper to cite it.

The beginning of the unpublished appellate opinion will state something like the following "California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.115." Hence the determination of whether an appellate opinion can serve as precedent or not is quite clear.

The logical inference is that an attorney should not cite to an unpublished opinion to support a legal argument. 

A recent appellate opinion, unpublished ironically, discussed how an attorney cited to an unpublished opinion initially in a demand letter and then in a petition to compel a trust accounting. The respondent naturally objected to the petition's reliance on an unpublished opinion, inter alia, and sought sanctions against the petitioner for violating the California Rules of Court. Conversely, petitioner's attorney declared that he was unaware of the rule governing citation to an unpublished opinion and regretted any confusion or inconvenience over it. Still, the trial court awarded the respondent "$4,000 in sanctions under California Rules of Court, rules 2.30 and 8.1115, for Rudolph's reliance on and citation to the unpublished decision."

Koppl v. Zimmerman, San Francisco County Superior Court, Case  PTR15298735

March 9, 2017

Settlement Agreements

When given the opportunity to be certain in a litigated matter, it is typically prudent to opt for such a route. This can eliminate future uncertainty. In a recent unpublished appellate opinion, the parties unfortunately decided against such a route and further litigation ensued.

Lough v. Lough, Orange County Superior Court Case #

The central issue stemmed from the interpretation of a settlement agreement.

"In May 2008, on the eve of the trial of the underlying action, Vinetta, Rodger, and Richard reached a settlement (the settlement agreement) after discussions in the chambers of Judge Di Loreto, the trial judge assigned to the case. The terms of the settlement agreement were put on the record in court with all parties present."

"Judge Di Loreto emphasized that the settlement agreement that was being put on the record was a binding agreement, stating that "basically what we're doing today is, in fact, a settlement, we're going to put it on the record. Even though nobody signed anything, it's just as good. [¶] [The court reporter] is taking down everything that I say, so it's going to be part of a settlement that's going to be enforceable. Do you understand?" Vinetta responded, "Yes." Judge Di Loreto asked Vinetta, "Do you understand everything Ms. Lough?" Vinetta responded, "I should." Judge Di Loreto said, "Well, not you should, do you understand it?" Vinetta responded, "I do." Judge Di Loreto then asked, "Do you agree to it?" Vinetta responded, "Yeah."

"The court ordered that copies of the transcript of the hearing be provided to counsel for both sides "so they can draft the stipulation, even though at this point in time we have it on the record so it's binding, even though it's not reduced to writing but it should be reduced to writing." Vinetta's counsel told the court that he would reduce the settlement agreement to writing within two weeks. The court responded, "So if I continue this matter until, say, May 16th, you'll be able to come in here with something to have formally in writing so I won't have to look to the court reporter every time?" Vinetta's counsel replied, "That would certainly be my client's desire, Your Honor. I will do everything to make that happen." In a declaration prepared in September 2013 in support of a motion by Rodger for summary adjudication in the present case, Vinetta's former counsel stated: "Ultimately, it was agreed between me and counsel for Richard that as between Vinetta, on the one hand, and Richard and Rodger, on the other hand, the May 5, 2008, transcript would stand on its own and we would not draft a separate settlement agreement. However, we did agree that a judgment would be entered to effectuate the terms of the settlement with respect to the four properties that Vinetta was going to retain and to confirm that Vinetta held title to those properties free and clear of any claims or interests of Richard (or Rodger)." (emphasis added).  

Following Vinetta's death, Richard filed suit against Rodger to enforce the settlement agreement.