January 30, 2018

Beneficiary's Suit

If a trust has suffered an injury, the correct party to bring suit is the trustee. However, there is an exception to this rule.

"[W]here a trustee cannot or will not enforce a valid cause of action that the trustee ought to bring against a third person, a trust beneficiary may seek judicial compulsion against the trustee. In order to prevent loss of or prejudice to a claim, the beneficiary may bring an action in equity joining the third person and the trustee." Saks v. Damon Raike & amp; Co. (1992) 7 Cal.App.4th 419, 427-428. 

The following illustration is how the above rule can happen in real life.

Father, as settlor and trustee, creates a trust and funds it with his home. Later in life, father encumbers the property with a reverse mortgage. Father then passes away in October 2014 and an acquaintance becomes the successor trustee. The beneficiary of the trust after father is son.

Following father's death, the lender informs the successor trustee that they intend to initiate foreclosure proceedings unless the loan can be paid off or the property sold. In turn, the successor trustee hires a real estate agent to market the property.

The lender records a notice of foreclosure sale in June 2015 with a sale date scheduled for July 2015. The property is ultimately sold at the July 2015 foreclosure sale. However, the lender does not property notice the successor trustee or their real estate agent of the foreclosure sale. In October 2015, the successor trustee informs the lender that they have accepted an offer to purchase the property.

Son and the successor trustee ultimately sue the lender for various causes of action, principally stemming from the lack of notice of the foreclosure sale. Son's complaint is dismissed by the trial court because he sued in his capacity as a beneficiary. On appeal, the California Court of Appeal gives him another chance with his lawsuit:

"Although plaintiff did not expressly assert a claim against Mack as trustee of the Menefield trust in the operative complaint, he does argue on appeal that he can allege Mack "failed or refused to hire a lawyer to maintain the action to recover the trust property, even after the court held that a wrongful foreclosure cause of action had been stated." This offer is sufficient to allow plaintiff the opportunity to join Mack in the wrongful foreclosure lawsuit against MTC. If plaintiff amends the complaint accordingly, he would appear to have standing to sue for wrongful foreclosure."

The above excerpt is from the unpublished case, Menefield v. MTC Financial Inc., Los Angeles County Superior Court case # BC610391.