Although the California Supreme Court issued no Trusts and Estates opinions in 2023, the much-anticipated Haggerty v. Thornton case, which may resolve a conflict among the appellate districts about the permitted methods of trust amendment, was argued and submitted on Dec. 5, 2023, and is impending.
There were also a wide and interesting variety of topics addressed by the lower appellate courts. What follows is a discussion of five of them, chosen only because they piqued this author's interest. A brief summary of every 2023 case issued in this practice area can be found on the California Lawyers Association's website, under the Trusts and Estates section's "New Case Alerts" tab.
Legal malpractice -- estate planner's duty to nonclients -
Gordon v. Ervin Cohen & Jessup
(2023) 88 Cal.App.5th 543 (2nd Dist.)
This case provides a useful reminder that an attorney owes duties to non-clients only in exceptional circumstances, and that the courts will impose liability only if the client's intent to benefit that third party (in the way the third party asserts in their malpractice claim) is "clear," "certain" and "undisputed."
Claire Gordon had three sons. She hired defendant attorney to draft a trust amendment that disinherited three of her grandchildren, all of whom were the children of one of those three sons, Kenneth. A year later Claire asked the attorney to create three limited liability companies, and she then gifted equal shares in the LLCs to each of the three sons. Nothing in the operating agreements of the LLCs prohibited Kenneth from gifting his shares to his children. After Claire died, one of the sons and his children sued the attorney for failing to draft the operating agreements in a way that would have prevented Kenneth's children from receiving any shares of the LLCs from their father. The trial court granted summary judgment in favor of the attorney, and the Court of Appeal affirmed.
As framed by the Gordon court, the issue was whether a client's intent to disinherit someone in a testamentary trust by itself constituted clear, certain and undisputed intent to disinherit them in every subsequent transaction the client makes with the property contained in the trust, such that the attorney had a duty to effectuate such an intent. To ascertain whether the lawyer owed a duty to a non-client the court applies a "heightened standard," using the eight factors set forth in the seminal Lucas v. Hamm case. In concluding that the attorney owed no duty to the non-clients, the court synthesized the caselaw as providing that the "courts will recognize a duty to a nonclient plaintiff - and thereby allow that plaintiff to sue the lawyer for legal malpractice - only when the plaintiff, as a threshold matter, establishes that the client, in a clear, certain and undisputed manner, told the lawyer, "Do X" (where X benefits the plaintiff)." Here, there was uncertainty as to whether Claire intended to prevent Kenneth's children from benefiting from the LLC interests, and the mere fact that Claire intended to disinherit those children when she died did not, under a heightened standard, necessarily mean that she intended that they not obtain a benefit from their father's interest in the LLCs. Further, imposing a duty on the attorney here would have forced him to second-guess Claire's otherwise clear directive with respect to the LLCs, which is an obligation that the courts cannot impose on attorneys given the public policy considerations set forth in Lucas v. Hamm.
The result in this case should not be surprising. The case is nevertheless a useful and extensive primer on Lucas v. Hamm's eight-factor test, and the public policy considerations that inform any decision to impose a duty on an attorney to non-clients of that attorney.
Trustee's use of trust funds to defend contests -
Zahnleuter v. Mueller
(2003) 88 Cal.App.5th 1294 (3rd Dist.)
Zahnleuter is the latest in the Whittlesey v. Aiello, Terry v. Conlon and Doolittle v. Exchange Bank line of cases that discuss the propriety of a trustee's use of trust funds to defend contests of trusts and amendments, and whether doing so violates the trustee's duty of impartiality among competing beneficiaries. Whittlesey held that to the extent the trustee represents the interests of one side of the contest over the other, the trustee must look to the parties who stand to gain from the litigation for reimbursement, not the trust. Terry held that because the trustee had not participated as a neutral trustee to defend the trust and protect its assets, she must bear her own costs and fees. (Zahnleuter, 88 Cal.App.5th at 1307-1308.) Doolittle, by contrast, interpreted a trust instrument that specifically directed the trustee to defend against contests of the trust and amendments to the trust, and affirmed an order authorizing the trustee to defend such a contest using trust funds.
Settlor Richard Mueller had two daughters, Katie and Amy, during his second marriage, and daughter Julie by his first marriage. Under the original trust, Katie and Amy were to be residuary beneficiaries, with Julie to receive a modest pecuniary gift. Notably, while the original trust authorized the trustee to defend against any contest at trust expense, it explicitly prohibited the trustee from doing so as to a contest of an amendment. Under the third amendment, Richard nominated his brother Thomas as successor trustee, and changed the distributive provisions of the trust to broadly benefit Amy. Katie contested the third amendment on lack of due execution and undue influence grounds, and sought to surcharge Thomas for the trust assets he expended to defend her contest. Ultimately, although it ruled in favor of Thomas on the lack of due execution claim, the court invalidated the third amendment, and ruled that the trust, as amended by the first and second amendments only, was valid. After replacing Thomas with a professional fiduciary, the court surcharged Thomas for attorneys' fees he had expended defending the third amendment. Relying largely on Doolittle, Thomas appealed.
The Court of Appeal affirmed. In doing so the court made clear, as Doolittle itself had acknowledged, that Whittlesey and Terry are good law, and that "when a dispute arises as to the rightful beneficiary of a trust, involving no attack upon the trust itself, the trustee ordinarily must remain impartial, and may not use trust assets to defend the claim of one party against the other." The opinion distinguished Doolittle on the basis that there, the trust instrument specifically and explicitly directed the trustee to defend against a contest of the trust and of any amendments. Because Mueller's trust did not so direct the trustee, the general principles espoused in Whittlesey and Terry controlled. Thomas' actions in defending the third amendment served to represent the interests of one side (Amy) over those of the other side (Katie Zahnleuter), and he therefore could not look to the trust for reimbursement. The fact that Thomas himself did not stand to benefit from the amendment he tried to defend was of no import, because he did not remain neutral in the litigation between the beneficiaries. Finally, and for the same reason, even the fact that Thomas had prevailed in his defense of the lack of due execution claim did not justify his fee award.
Zahnleuter helpfully emphasizes that Doolittle was based on unique facts, turning on the crucial and somewhat unusual provisions ordering the trustee to use trust assets to defend against contests. It was clear that the Doolittle settlor had anticipated contests, and did everything she could to deter them. In cases involving trusts that do not contain such directives, the opinion should serve to make trustees think twice before taking sides in litigation. It is also important to note that the Zahnleuter opinion did not turn on the provision in Mueller's trust prohibiting the trustee from defending contests of an amendment, but rather on the general principles espoused in Whittlesey requiring the trustee to remain neutral. Most trusts contain neither the prohibition found in Zahnleuter nor the directive found in Doolittle, and as to such trusts Whittlesey's and Terry's rule of trustee impartiality should continue to apply.
Trusts - method of amendment - Diaz v. Zuniga (2023) 91 Cal.App.5th 916 (2nd Dist.)
The Second District's opinion in Diaz v. Zuniga is the latest in a recent spate of opinions, including the Fifth District's King v. Lynch (2012), the First District's Balistreri v. Balistreri (2022) and the Fourth District's Haggerty v. Thornton (2021), that take divergent views on whether statutory methods of trust amendment can be availed of when the instrument itself provides a particular method of trust amendment, but does not state that it is the exclusive method. Hopefully the current uncertainty will be resolved by the Supreme Court's forthcoming opinion in Haggerty.
Mateo Diaz' trust instrument provided that the trustor "may at any time during [his] lifetime amend any of the terms of this instrument by an instrument in writing signed by the trustor and delivered by certified mail to the trustee." Until his death in 2018, Diaz was the trustee. After his death in 2018 an unmailed and undelivered envelope addressed to his attorney, and containing a purported amendment to the trust, was found in Diaz' closet. It would have significantly changed the distribution of two parcels of real property in the trust. The trial court ruled that the 2007 document was not a valid amendment to the trust because Diaz did not deliver it to himself by certified mail.
King, Balistreri, Haggerty, and now Diaz, all turned on interpretation of the language of Probate Code sections 15401, governing revocation, and 15402, governing modification. Section 15401 provides that a trust may be revoked by the method prescribed by the instrument (the trust method) or alternatively, by a signed writing delivered to the trustee during the settlor's lifetime (the statutory method). The section adds that if the trust instrument explicitly makes the trust method the exclusive method of revocation, the trust may not be revoked by the statutory method. Section 15402 provides that "unless the trust instrument provides otherwise, a trust may be modified (amended) by the procedure for revocation." King and Balistreri held when the trust instrument provides a method of amendment, but is silent as to whether it is the exclusive method, that method must be used, and the statutory alternative is not available. They read the words "unless the trust instrument provides otherwise" as meaning that the trust terms control the procedure for modifying the trust. i.e. the trust method is the only option. In other words, they read 15401 and 15402 as providing for separate procedures. By contrast, the Haggerty court, following the dissent in King, construed the phrase "unless the trust instrument provides otherwise" in section 15402 as effectively meaning "unless the trust instrument distinguishes between revocation and modification." Because the instrument in Haggerty did not so provide - i.e. the instrument did not explicitly provide that the trust method was the only available method, the statutory method of revocation could be used to modify the trust. In other words, under the King dissent and the Haggerty majority, the method of modification is the same as the method of revocation.
The Diaz court elected to follow the King and Balistreri view. Because Diaz' instrument had prescribed a method of amendment (delivery by certified mail), it was the only method available, and the 2007 document was not a valid amendment.
The Haggerty case, on the one hand, and the King, Balistreri and Zuniga line of cases, on the other, although they reach diametrically opposed conclusions, are all supportable by reasonable interpretations of the statutes and legislative history. Balistreri and Haggerty have been consolidated for Supreme Court review under the impending Haggerty proceeding (S271483). The issue is a nuanced and complex one, and the Supreme Court's opinion will hopefully put to rest the uncertainty that now exists. In the meantime, planners can avoid uncertainty by specifying in their instruments whether or not the methods of revocation and modification provided for in their documents are the exclusive methods.
Trusts - time limit to contest -
Hamilton v. Green
(WL8947126) (Second Dist. December 28, 2023)
This case clarifies that a civil complaint, albeit not styled as a petition to invalidate a trust amendment, is nevertheless a contest of a trust when its practical effect is to invalidate the amendment, and needs to comply with the 120-day deadline to contest a trust.
Lena Hamilton had two children, son Erica, and daughter LaDonna. Her 1991 trust provided that if one of her children predeceased her, that child's living descendants would take the child's share. A handwritten purported 2002 amendment changed the distributive provisions to direct that if only one beneficiary is alive, all assets will go to the survivor. Eric predeceased Lena. LaDonna served Eric's children with notice under Probate Code section 16061.7, along with a copy of the trust and the amendment. More than a year later Eric's children filed a civil complaint alleging (1) interference with inheritance rights; (2) interference with prospective economic advantage; (3) interference with contract; (4) conversion; (5) quiet title; (6) breach of fiduciary duty; and (7) an accounting. The essence of each cause of action was that the amendment was a forgery, which invalidated the amendment. The trial court sustained LaDonna's demurrer based on section 16061.8's 120-day limitations period, since all of the allegations were centered on the invalidity of the trust amendment due to forgery.
In affirming, the Court of Appeal analogized to 2011's Estate of Stoker, where an attempt to probate a 2005 will that purportedly revoked a 1997 trust was deemed an action to invalidate the 1997 trust, because the trial court would have to determine the validity of the purported revocation in order to decide the probate petition. In this case, each cause of action of the complaint would require the trial court to determine the validity of the amendment, and without a finding that the amendment was invalid Eric's sons would have no interest in the trust. Therefore, the civil complaint constituted an action to contest the trust within the meaning of section 16061.8's 120-day limitations period, and was time-barred.
This case makes clear that if the practical effect of a petition or complaint is to invalidate a trust or amendment, it must be filed within 120 days of receiving a notice under section 16061.7.
Creditors claims against trusts - Spears v. Spears
(2023) WL 8742924 (1st Dist. December 19, 2023)
This case holds that, at least where no probate estate administration or trust creditor's claims proceedings are initiated, a creditor can recover from the assets of the decedent's trust by suing the trustee directly.
James Spears created a revocable trust in 2018, providing for a modest bequest to his son Brian, and naming Brian's stepmother Therese as the trustee. Brian filed a petition seeking an accounting, and removal of Therese as trustee, stating that he did not trust her to give him his bequest. Unusually, Brian's petition also requested that he be added as a creditor of the trust pursuant to Probate Code sections 19000, 19050, and 19151-19152, because of debts Therese owed him. Therese successfully demurred based on standing (she had argued she had paid him his bequest) and because the creditor's claim lacked specificity, and the court gave Brian leave to amend as to the creditor's claim. Brian's response was to file a document under the same case number entitled "creditor's claim," along with a supporting declaration which provided more specificity as to the basis of the creditor's claim. Therese objected, asserting in part that Brian needed to first file his claim against James' estate, not the trust. Because Brian had filed a "creditor's claim" and not an amended petition, as he was ordered to do, the trial court dismissed.
The Court of Appeal reversed, stating that it would exalt form over substance to dismiss Brian's claim because he used a creditor's claim form instead of an amended petition, especially since there was no confusion about the fact that Brian intended his claim as his amended pleading. But as to Therese's contention that where no optional trust creditor's claim procedure is pursued, a creditor must first file an action and obtain a judgment against the personal representative of the settlor's probate estate, the court disagreed, holding that where the optional trust creditor's claim procedure is not utilized and there is no open probate administration, the creditor may sue the trustee directly. Because under section 19400 distributees of the trust's assets are personally liable for the unsecured claims of the probate estate to the extent that those claims cannot be satisfied from the probate estate, it makes sense to allow the creditor to first sue the trustee before suing those distributees.
The case is noteworthy for a number of reasons. Firstly, practitioners have generally understood that one first had to comply with the probate creditor's claims process before filing an action against a trustee on a rejected creditor's claim, a requirement that appears to have been dispensed with here. (see, e.g., Hirsch & McGovern, Cal. Probate Code Annotated (2023), commentary to section 19001(a) ["under section (a) creditors must first exhaust the probate estate"]; section 9351 [suit may not be commenced against a personal representative without first complying with probate creditor's claim procedure]; 1 California Trust Administration [CEB 2023] at §10.82 [where no probate estate has been opened, a creditor can and should open one in order to make his claim]; Id., at §10.81, citing Dobler v. Arluk Med. Ctr. Indus. Group, Inc. (2001) 89 Cal.App.4th 530 ["the probate estate must be exhausted by expenses of administration and claims with higher priority before the trust estate is liable"].) Here, Brian filed his lawsuit first, and later amended it with a more standard creditor's claim form. And he did so directly against the trustee, in a trust proceeding. But he never attempted to open a probate at all, or to first perfect his claim against his father's probate estate.
The court's lenient attitude towards the form in which Brian made his claim might be explainable by the fact that Brian filed the petition and creditor's claim from prison. But in clearly announcing that a creditor can sue a trustee directly where no probate has been opened, and the trust creditor's claim process not utilized, the court has clarified an issue that has vexed many a practitioner. Although one or two cases had allowed, without discussion, a claim directly against a trustee, no prior case had explained the rationale for allowing such an action. The Spears court expressly disapproved of statements in Arluk, supra, that such an action was impermissible.
Perfection of claims against decedents whose assets pass by trust, without a probate administration, has always been a potential minefield for the unwary or unsophisticated creditor. The confusing statutory scheme makes it too easy for a trustee to evade such claims until C.C.P. section 366.2's truncated statute of limitations has already expired, and the creditor left without recourse. In clarifying this new rule, the court makes it more likely that trustees will opt for some kind of creditor's claim proceeding, which promotes fairness to creditors.
Finally, practitioners should note that certain language in the opinion suggests that where no probate has been opened, the creditor should allege that the probate estate is insolvent when proceeding directly against the trustee: "Brian states in his briefing here that James' estate was insolvent because James transferred all of his assets into the trust, which we treat as an offer that he can amend his pleading to allege the insolvency of James' estate." This in turn begs the question as to whether (1) the rule of Spears v. Spears only applies where there are in fact insufficient probate assets outside of the trust to satisfy a claim, and (2) whether if there are sufficient probatable assets, the creditor must still open a probate administration before suing the trustee. This opinion does not answer this question.