No Contest Clause Not Violated

Judge Gerald Johnston today heard the long-running case, In re Rosalie Givens Trust, Case number A228299, and ruled that the filing of a petition for instructions did not violate a trust's no contest clause as a matter of public policy.

Although the petition filed did have the effect of challenging the exercise of the trustee’s fiduciary power to sell property, California law holds that a pleading challenging the exercise of a fiduciary power is excepted as a contest to a trust as a matter of public policy, provided the Trust became irrevocable on or after January 1, 2001.  See Probate Code Section 21305(b)(6) and 21305(d).   

Anti-Slapp Motions in Probate Actions

The Fourth Circuit Court of Appeal, Division 3, has upheld rulings by Judge Gerald Johnston denying anti-slapp motions in a trust case seeking to remove a trustee.

In unpublished decisions of Hasso v. Hasso (Case No. G039911) and Hasso v. Hasso (Case No. G040342), the Court of Appeal held that the filing of a petition to remove a trustee did not justify dismissal of an action against a trustee under California's anti-SLAPP statutes. (SLAPP stands for Strategic Lawsuit Against Public Participation.) the second case held that a person named in the complaint as a successor trustee similarly cannot seek dismissal under the anti-SLAPP statutes when the complaint does not seek any relief against the named successor trustee.

The complaint alleged that the trustee was treating the income beneficiary unfairly and trying to benefit the remainder beneficiaries. The complaint enumerated several allegations of fiduciary misconduct and requested that the trustee be removed. Defending against the complaint, the trustee filed a motion to dismiss under the anti-SLAPP statutes and pointed to a petition for instructions that the trustee had filed, which had been unsuccessfully appealed by the trustee.

The parties conceded that the filing of a petition for instructions is protected activity. However, the court of appeals still affirmed the trial court's decision to deny the motion, because the complaint was not based solely on the facts surrounding the earlier petition for instructions and appeal of that earlier decision.

"When a cause of action is based both on protected and unprotected activity, no single allegation may take disproportional weight. When analyzing a “mixed” cause of action, it is “the principal thrust or gravamen of the plaintiff’s cause of action that determines whether the anti-SLAPP statute applies [citation], and when the allegations referring to arguably protected activity are only incidental to a cause of action based essentially on nonprotected activity, collateral allusions to protected activity should not subject the cause of action to the anti-SLAPP statute.”

The court found that the complaint was not based solely on the protected activity, but upon the failure to distribute moneys in the trustee's possession before the trustee filed the petition for instructions.

Comment: The court's reasoning seems stretched. It would appear that the court is making a distinction whether the trustee files a petition for instructions asking for clarification on income or principal treatment of money before or after money is received. Does this suggest that the trustee should file a petition for instructions before receipt of the money?

I also note that the anti-SLAPP statutes are rarely invoked in probate court actions, but the trend has shown increasing use of the special motions to strike.

One Continuance Rule in Effect

The Probate Judges are now announcing a one continuance rule. Petitioners will be allowed one continuance to clear examiner notes by the continued hearing date. The announcements also state that requests for further continuances will be denied and matters will go off calendar.

For cases that were heard today (January 14, 2009), continuance dates are 2-1/2 months out - April 1, 2009.

The announcements also state that papers filed less than five days before a hearing will not be reviewed. (This has been the rule for years, but until now, not strictly enforced.)

Attorney Needs More than a Simple Lesson in Ethics

How egregious can a breach of ethics be before the State Bar takes disciplinary action?

In a civil action, Attorney Eddie Jamison of Los Angeles was found guilty of committing financial elder abuse and yet he still holds a license to practice law.

Click Here for State Bar Record showing no public record of any disciplinary actions.

In Wood v. Jamison (2008) 167 Cal.App.4th 156, the Second Circuit Court of Appeals affirmed a Los Angeles Superior Court decision finding Attorney Jamison liable for malpractice and elder abuse.

Click Here for the court opinion.

Here are the facts as described by the Court of Appeals:

"Shortly after her son's death and her husband's move to the Alzheimer's facility, Merle Peterson (Peterson), then 78 years old, met Patrick McComb. McComb told Peterson he was her nephew. In fact, he was not related to her. Over the next few weeks, McComb convinced Peterson to transfer approximately $174,000 to him in a series of transactions. McComb also convinced Peterson, in her capacity as trustee of the Peterson trust, to obtain a $250,000 loan secured by her primary residence. McComb told Peterson that the money would be invested in a night club joint venture.

Jamison was representing McComb in the joint venture. He also performed legal services for Peterson. The services included meeting with Peterson and McComb in his office to discuss financing of the night club; locating the lender for Peterson's loan; advising Peterson about various lenders; selecting the lender; gathering documents necessary to close the loan; completing the loan application; transmitting documents under cover of his letterhead; communicating with the lender and title company; reviewing loan documents; and attending the loan escrow closing with Peterson."

Jamison not only represented Mrs. Peterson without a written disclosure and waiver of the conflict of interests or referring Mrs. Peterson to another attorney, a violation of Rules of Professional Conduct Rule 3-310, he had an undisclosed financial interest in the transaction. Jamison received a finder's fee from the lender for placing the loan, and he ended up receiving a portion of the loan proceeds from McComb in repayment of loans from an earlier transaction.

Shortly after the loan was funded, Mrs. Peterson found herself unable to pay the 18% interest and the loan went into default without a single payment. After Mrs. Peterson's death, her nephew sued McComb, Jamison, and others. The trial court found Jamison committed malpractice, breached his fiduciary duty to Mrs. Peterson, and violated California Welfare & Institutions Code Section 15601(a) by committing acts of financial elder abuse.

The Second District Court of Appeal affirmed. Jamison argued that the finding of malpractice was not supported by substantial evidence. The Court's reply: Nonsense. "The evidence of malpractice and breach of fiduciary duty is overwhelming. Jamison failed to advise Peterson of a conflict of interest; failed to advise Peterson the investment was not appropriate for her, or at least to refer her to an independent investment advisor; and obtained an undisclosed profit from the transaction."

"Jamison argues there is no evidence that he knowingly assisted McComb in taking the $250,000 loan proceeds. But Jamison knew what the loan proceeds would be used for. Any attorney would know it was an inappropriate use of Peterson's funds."

Now that you read this, does this not anger you that this attorney is still in practice? Here's his website:

Buy-Sell Agreements in California

California Continuing Education of the Bar (CEB) hosted numerous seminars throughout the state as part of its Winter Fair 2009. Similar seminars are scheduled state-wide for the next three weekends..

Click here for a complete schedule of seminars.

Joanne Rocks and I presented a 3 hour seminar in Irvine on Buy-Sell Agreements for California Businesses. Here we are, just about to start.


California Holographic Will Rules Relaxed

The California legislature has recently changed the definitions and requirements of the Probate Code for a valid will.

AB 2248 (Chapter 53, Statutes of 2008) amends California Probate Code Section 6110 in two respects.

First, for a formal witnessed will, there is now a requirement in the statute that specifies that the witnesses have to sign the will while the testator is still alive. This will prevent the defective will from being "witnessed" after the person has died, closing an obvious temptation for fraud to cure defective wills.

The second change is long overdue. Now, a will that fails to meet the requirements for a formal will can be admitted to probate if there is clear and convincing evidence that the testator intended at the time the document was signed to make a will. For years, courts have been forced to deny probate to wills which had been prepared on the computer and signed without witnesses. The new statute should also allow admission of wills which are notarized instead of being witnessed.

I will expect that there will still be plenty of hardship cases where there is no competent testimony about the testator's intent. The probate courts will be forced to continue to deny admission of those wills to probate merely because nobody saw the will being executed.

The legislation was proposed by Assemblyman Todd Spitzer.

CEB Estate Planning & Administration Seminar

I attended the California CEB Estate Planning & Administration: 24th Annual Recent Developments Seminar in Irvine, California today. The speakers were Lynn Kambe, Craig Alexander, and John Minnott.

The first half of the seminar focussed on federal tax developments, including a brief review of every tax case and private letter ruling listed in the 165 page course materials.

The second half of the seminar dealt with state law developments and recent legislation.

I made notes to write additional materials on these topics, which I found of particular importance to my practice:

1. FDIC insurance limits for trusts have changed. It has been widely publicized that the old $100,000 insurance limit on individual accounts has been temporarily bumped to $250,000 until Dec. 31, 2009. Not as widely known is the change to trust rules which allows $100,000 per beneficiary, up to 5 beneficiaries, and then doubles the limits for married settlors.

(During the second half of 2008, I had more calls from clients asking questions about FDIC insurance than in the previous 27 years of practice.)

2. No contest legislation in California will take effect in 2010, but we have to draft trusts and estate plans in the current year for both current rules and future rules. How are practitioners handling this task?

3. California legislation now establishes procedures for "Physician Orders for Life Sustaining Treatment."

4. Orange County probate court now apparently has a one continuance rule.

California CEB This Weekend

California Continuing Education of the Bar (CEB) will be playing host this weekend to numerous seminars.

Winter Fair 2009 will be held at several California locations on Friday, January 9 and Saturday, January 10.

Click here for a complete schedule of seminars.

In the estate planning area, these are the course offerings:

Estate Planning & Administration: 24th Annual Recent Developments
Practical Problems in Probate

I will be teaching a seminar on Buy-Sell Agreements for California Businesses.

Wall Street Journal Article Looks at Psychology of Investing that Leads to Madoff-type Losses

Human beings are fascinating creatures. Knowledge and judgment can so easily be tossed aside when it comes time to selecting investments. This great Wall Street Journal article analyzes the psychology of mob investing that leads people to trust their hard-earned money to people like Madoff. - Why We Keep Falling for Financial Scams

The author of this article, Stephen Greenspan, notes that he too should have known better. "I lost a good chunk of my retirement savings to Mr. Madoff, so I know of what I write on the most personal level."

"The basic mechanism explaining the success of Ponzi schemes is the tendency of humans to model their actions -- especially when dealing with matters they don't fully understand -- on the behavior of other humans. ... Simply stated, the fact that so many people seem to be making big profits on the investment, and telling others about their good fortune, makes the investment seem safe and too good to pass up."

Scholar Questions Why California Probate Law Subjects Bequests to Caregivers to Scrutiny

Boalt Hall's Professor David Horton has completed an article that reviews California statutes that invalidates bequests to caregivers.

Click here for a link to the article.

Here is the

Californians will inherit hundreds of billions of dollars in the next two decades. Yet Probate Code section 21350(a)(6) - the state's unique "care custodian" provision - casts a long shadow over this unprecedented transfer of wealth. Section 21350 creates a virtually unrebuttable presumption of invalidity for testamentary gifts to certain individuals. The statute first applied only to devises to attorneys and other fiduciaries. The Legislature then added subdivision (a)(6), which included bequests from seniors to their caregivers. However, by broadly defining this new class of suspect beneficiaries as non-relatives who provide "health or social services," it seemed to imperil many legacies from seniors to friends. After the California Supreme Court's decision in Bernard v. Foley - in which the majority, concurring, and dissenting opinions expressed qualms about the care custodian provision - the Legislature asked the Law Revision Commission to reconsider the statute. In turn, the Commission tentatively proposed limiting subdivision (a)(6) to paid caregivers. This Essay explains why the Commission's recommendations would improve the statute, but ultimately do not go far enough. In particular, it challenges the normative claims that gifts to caregivers warrant scrutiny and that a bright-line rule is preferable to the flexible common law doctrine of undue influence.

Scholar Suggests that Probate Courts Apply Contract Law Unconscionability Principles to Trust Litigation

Boalt Hall's Professor David Horton has submitted an article to Notre Dame Law Review that suggests that principles of unconscionability may be appropriately applied to help decide cases involving trusts.

Click here for a link to the article.

Here is the

This Article claims that trust law should recognize the unconscionability defense. It begins by noting the symmetry between trust and contract defenses and the broad consensus among courts and scholars that trusts are contracts. It sketches the leading rationales for why courts enforce promises between private actors: the theories that free exchange allows parties to maximize welfare and exercise free will. It then argues that neither concept justifies upholding a contractual term if informational defects prevent one party from observing that it sharply deviates from her ex ante desires. It asserts that the unconscionability doctrine strikes down contractual terms that suffer from precisely that defect.

The Article then explains how the unconscionability doctrine could serve the same purpose in trust law. It discusses why the policies underlying freedom of testation depart from those behind freedom of contract and provide less support for a laissez-faire regime. It then challenges the unarticulated but intuitive notion that controls in the trust-creation process are sufficient to align an instrument's text with a settlor's intent. It reveals that corporate fiduciaries, trust mills, and a revitalized do-it-yourself movement have spawned "procedurally suspect" trusts: those created without attorney involvement and laden with complex terms. It then examines three common but controversial "substantively suspect" terms - exculpatory, no contest, and arbitration clauses - and shows how a trust-specific unconscionability doctrine would improve outcomes in cases

Parent That Abandons Child Held to Be Intestate Heir

A recent decision from the Second Circuit Court of Appeals serves as a reminder that people who die intestate (without having created a valid will) have no control over who will inherit their estates. That decision is left to the intestate succession statutes adopted by the legislature.

The case of Estate of Lesley Lauren Shellenbarger (2008) WL 5392189 reaffirms the general principles of intestate succession, no matter how extreme the circumstances. The decedent in this case was fathered by a man that abandoned his pregnant wife in 1962, prior to the birth of the decedent. Two years later, the decedent's parents divorced. Although the father was ordered to pay support to the mother, the father never had any contact with the decedent.

The decedent died without any spouse, domestic partner, or offspring. His mother was appointed as administrator and filed a Petition for Instructions to Determine Entitlement to Estate, in which she tried to preclude the father from inheriting half of the estate on equitable grounds. The trial court framed the issue bluntly: "Can a bad guy luck into an inheritance, and is there an equitable way to avoid it?" The trial court answered its question, "no." The Court of Appeals affirmed.

California Probate Code Section 6400 states, "Any part of the estate of a decedent not effectively disposed of by will passes to the decedent's heirs as described in this part."

Section 6402, subdivision (b) specifically lists parents, including natural parents. Good parents and bad parents inherit equally.

The only issue which might have served to disinherit the father was if the child was born out of wedlock. In the case of children born out of wedlock, the natural parent does not inherit through the child unless the parent acknowledged the child and contributed to the child's support or care. The Supreme Court's decision in Estateof Griswold (2001) 25 Cal. 4th 904, 924 summarized the rule by stating that a parent who does no more than acknowledge a child in court and pay court-ordered child support may not reflect a particularly worthy candidate for inheritance from the child, but the legislature has established this rule and it is up to the legislature to change the rule.
The courts will not change the rule under the pretense of interpretation.

In Shellenbarger, the Court of Appeal pointed out that the father's lack of contact might have justified bringing a petition to terminate parental rights under Family Code Section 7822, but that had not been attempted.

The Court of Appeal correctly noted that a decision to examine the quality of the relationship between a parent and child would necessarily require a vague and subjective rule, no doubt leading to more litigation between squabbling siblings.

Court of Appeal Reverses Judge Carter

In a recent decision, Hon. Marjorie Laird Carter was reversed by the Fourth Circuit Court of Appeal, Division 3 in a trust litigation case describing a trust settlor’s right to revoke a trust after it has become irrevocable due to the death of the other settlor-spouse. Aguilar v. Aguilar (2008) 168 Cal. App. 4th 35 (Case No. G040230, Superior Court No. A229139).

The Aguilars established a joint living trust and funded the trust with their community property residence. The trust, while amendable and revocable while both settlors were alive, expressly became irrevocable upon the death of one spouse. This was done to protect the inheritance rights of the settlors’ children and to prevent the surviving spouse from changing the ultimate remainder beneficiaries. Upon the second death, the trust was to be divided among the settlors’ children. (Nor surprisingly, the settlors’ children were from different marriages.)

After husband's death, the surviving spouse attempted a defacto amendment of the trust to the extent of her one-half community property interest in the residence. The surviving spouse executed a deed to herself to a one-half interest in the residence, and in her will, left the one-half interest to her only child and excluding the husband's children.

One of the remainder beneficiaries of the trust objected to the dilution of his eventual share and filed a petition to undo the withdrawal of trust property, to find the trust to be irrevocable, and cancel the deed. Judge Marjorie Laird Carter denied the petition and the remainder beneficiary appealed.

In a published opinion, Justice Eileen C. Moore, writing for a unanimous court, looked to the Settlors' intent, expressed in the terms of the trust document, to determine whether the surviving spouse had the right to revoke the trust as to her one-half community property interest in order to deed the property to herself.

“‘[T]he primary rule in construction of trusts is that the court must, if possible, ascertain and effectuate the intention of the trustor or settlor.’ [Citation.] ‘The intention of the transferor as expressed in the [trust] instrument controls the legal effect of the dispositions made in the instrument.’ [Citations.] ‘The nature and extent of the rights retained by the trustor are to [be] measured by the four corners of the instrument.’ [Citation.]” (Crook v. Contreras (2002) 95 Cal.App.4th 1194, 1206.)"

Having made the joint trust irrevocable, the surviving settlor was not at liberty to change that planned distribution after her husband’s death. (Heaps v. Heaps (2004) 124 Cal.App.4th 286, 291-292 [attempts to transfer assets from irrevocable trust to different trusts constituted conversion]; Walton v. Bank of California (1963) 218 Cal.App.2d 527 [trustor may not rescind irrevocable trust].) Any change at that point, would have required the consent of the other beneficiaries of the joint trust. (Prob. Code, § 15403, subd. (a); Laycock v. Hammer, supra, 141 Cal.App.4th at p. 30.)

The case was argued by Julius Aarons, for appellant, and Robert J. McDonnell for Respondent.

Investing in Madoff's Pool

Consistent returns outperforming the market. Here's how Wiley Miller's Non Sequitur explains it:


Trustees May Face Liability for Madoff Losses

The collapse of the Madoff investment portfolio, capping a 2008 that produced double digit declines in nearly every market index, has brought forth numerous reports of charities and investment funds going out of existence. Well-intentioned donors, who established charitable endowments, are belatedly raising questions about the investment decisions of the trustees managing these funds. While it may take years for the criminal prosecution to unwind and explain the Madoff investment fiasco, and to determine if there will be any recovery for those who had invested with Madoff, the effects of the losses will be felt immediately and result in substantial program cutbacks for affected charities.

The question arises, what are the responsibilities of trustees to prevent such losses, and can they be held personally responsible for any of the losses suffered by the charities and trusts they are responsible for managing?

Clearly, it is not uncommon for investors to occasionally experience ups as well as down in the investment world. Investment inevitably involves some risk, and the risk is why such investments generally yield greater rates of return than so-called “safe” investments. The expectation of profit necessarily implies some possibility of loss. (It would appear that the Madoff investors were blinded by the unbelievable results obtained by Mr. Madoff, and concluded that they could not lose with his magic investment formula.)

But what if the investor is a trustee? Can trustees be expected to be immune from investment losses? Trustees are not super-human, and should never be held to be guarantors of profit. However, should trustees be completely immune from personal responsibility for investment losses? If a trustee selects losing investments, is there ever a time when the trustee can be held accountable for not preventing such losses? The uncertainty which we call investment risk, results in higher returns. When should trustees be held accountable for investment losses and what standards should be used to evaluate the performance of trustees?

These questions have arisen before. It is reported that not a single trustee was found liable for loses following the 1929 stock market crash.

The “prudent investor rule” generally guides these decisions. California adopted the Uniform Prudent Investor Act in 1995. These statutes can be found in Probate Code Sections 16003, 16045-1054. These rules follow the general principles set forth in the Restatement (Third) of Trusts, published in 1992.

The basic rule for California trustees is set forth in Probate Code Section 16047(a), which states:
“”A Trustee shall invest and manage trust assets as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust. In satisfying this standard, the trustee shall exercise reasonable care, skill, and caution.”

The trustee has a duty to select risk and return objectives reasonably suited to the particular trust; a duty to diversify investments; a duty to evaluate investments in the context of the portfolio as a whole; a duty to avoid unreasonable or inappropriate costs; and a duty to consider tax consequences.

It is the author’s belief that any trustee which placed 100% of the trust’s investments with Madoff’s investment portfolio would have violated the duty to diversify investments, and could be found liable.

It will also be interesting to read reports on how these trustees performed their duty to evaluate the Madoff investments, considering the reports on how he was unable to explain his performance record which consistently outperformed most market indexes.