Articles – Page 9 – Law Offices of Randolf Krbechek

Starr vs Starr – Court Upholds Finding of Undue Influence in Real Estate Matter (Part 2)

This is the second part of an analysis of Starr v Starr (Sept. 30, 2010) 189 Cal.App.4th 277. The court held that a house acquired during marriage in the name of the husband only was actually community property, even though the wife signed a quitclaim deed in favor of the husband.

Explained the court, “Evidence Code section 662 creates a presumption that title is actually held as described in a deed . . .The law, from considerations of public policy, presumes such transactions to have been induced by undue influence. When that presumption arose, it trumped the competing presumption created by Evidence Code section 662.”

The court then shifted to an analysis of undue influence, explaining that California law recognizes three forms of undue influence.

1. Undue influence is a contract defense based on the notion of coercive persuasion. Its hallmark is high pressure that works on mental, moral, or emotional weakness, and it is sometimes referred to as over persuasion.

2. Undue influence is statutorily defined as taking unfair advantage of another’s weakness of mind, or taking a grossly oppressive or unfair advantage of another’s necessity or distress.

3. There is another type of conduct that amounts to undue influence: the use of confidence or authority to obtain an unfair advantage. This is triggered by one party’s breach of a confidential relationship.

In reviewing prior case law, the court explained as follows. “Brison I and II are significant for three reasons.”

“First, they announced the overarching principle that constructive fraud due to breach of a confidential relationship amounts to undue influence, terminology that was adopted by other courts.”

That is a clean, efficient statement of the law.

“Second, they differentiated such constructive fraud from the other forms of undue influence based on acts of coercion or over persuasion.”

Also helpful.

“Third, they established a paradigm fact pattern of constructive fraud arising from one spouse’s conveyance of property to the other spouse based on an unfulfilled promise by the other spouse to reconvey. This fact pattern has been applied by our courts many times in cases involving spouses and other persons in confidential relationships.”

Similarly, “In action to quiet title and void deed from father and one son to other son based on breach of fiduciary duties, judgment affirmed; undue influence is a species of constructive fraud and depends on the facts and circumstances of each case.”

The court distinguished another similar holding. “It is easy to see why Ron relies on Mathews. The factual setting seems virtually identical to this case, with the added bonus of Martha’s testimony that she signed the quitclaim deed freely and voluntarily.”

“There is a critical – and we believe fatal – distinction, however. In Mathews, the wife said she merely assumed she would be added onto the title after escrow closed, while Martha testified that Ron told her he would do so. The importance of this distinction is tied up in both section 721 and its statutory predecessor, and the sometimes confusing use of the term undue influence’ by decisions interpreting those provisions.”

Stated the court, “As we have seen, the failure to add Martha onto the title is constructive fraud under section 721, and constructive fraud is presumed to be undue influence, which means the transaction was not free and voluntary. When the trial court found Martha did not act freely and voluntarily, it necessarily found that she quitclaimed her interest in the house as the result of undue influence.”

Now comes the interesting part of the decision. The court outlines a defense to a claim of breach of confidential relationship, aka constructive fraud, aka undue influence. This is a point well worth considering.

To overcome a claim of breach of confidential relationship, “the husband had to show that the deed was freely and voluntarily made, and with a full knowledge of all the facts, and with a complete understanding of the effect of the transfer.”

Stated otherwise, “an interspousal transaction that benefits one of the spouses creates a presumption of undue influence, requiring the husband who obtained his wife’s quitclaim deed to the family home to show that the deed was freely and voluntarily made.”

That’s a quite profound statement, as it sets up a defense to a claim of undue influence or breach of confidential relationship.

Starr v Starr (Sept. 30, 2010) 189 Cal.App.4th 277

Starr v. Starr – Sterling Analysis of Effect of Confidential Relationship (Part 1)

In Starr v Starr (Sept. 30, 2010) 189 Cal.App.4th 277, the court was confronted with division of assets at the time of divorce. In an excellently-reasoned opinion by a divorce attorney, the court found in favor of the wife, and held that she was entitled to a 50% interest in the family residence, even though title was held in the husband’s name.

Interestingly, the court also may have interposed a defense to a claim of undue influence (which defense did not help the husband).

The court reviewed the law thoroughly, and its analysis is worthy of a two–part review.

Here is the issue before the court. “Ron Starr appeals from the judgment entered after the family law court found that the house he bought in his name only while married to former wife Martha Starr was community property and ordered him to convey the property to them both as tenants in common.”

The holding, in a nutshell. “The evidence shows that Martha quitclaimed her interest in the house based on Ron’s promise to put her on title after the purchase was completed, but that Ron failed to do so. As a result, the evidence supports a finding that the house was community property based on Ron’s violation of his fiduciary duties to Martha.”

Ron’s claim was based on record title. “Ron testified that the house was bought in his name only because the $50,000 down payment came from his separate property funds, and he and Martha intended all along that the house would be his separate property. In accord with that plan, Martha quitclaimed her interest in the house before escrow closed. Property taxes and mortgage payments came from community property earnings, Ron testified.”

Not so fast, said the court. Husbands and wives owe fiduciary duties to each other. “Under Family Code section 721, Ron had the burden of proving that the quitclaim transaction satisfied his fiduciary duties to Martha. She testified that because of her poor credit history, the lender recommended she agree to the quitclaim so she and Ron could qualify for a better interest rate.”

Martha testified that, “The loan broker told Martha and Ron they could add Martha back onto the title by way of a quitclaim deed within 45 days of the close of escrow. Martha had a discussion with Ron about adding her onto the title, and he said he would do that. Martha said she and Ron jointly offered to buy the house, and that the deed to Ron was mailed to them both after it had been recorded.”

The critical fact, at least as it relates to the fiduciary relationship. “Although Ron never added Martha onto the title, she never worried about it because ‘He’s my husband. I just don’t . . . mistrust him. You know, it was our house.’ She signed the quitclaim deed freely and voluntarily.”

The trial court stretched to rule in favor of Martha. finding that “Ron did not meet his burden of proof that Martha’s quitclaim deed was signed freely and voluntarily. The reason Martha did not sign the quitclaim deed freely and voluntarily was because the intent of the lender controlled title to the house when the lender suggested that Martha’s name be left off of the mortgage for the purposes of financing, and Martha agreed to execute the quitclaim deed based on the lender’s suggestion.”

Well, that doesn’t sound like the husband overreached in his dealings with Martha. Rather, Martha took action (i.e., signed the quitclaim deed in favor of Ron) based on information she received from the lender. The court of appeal dismantled that argument.

Explained the court of appeal, “Although spouses may enter transactions with each other, such transactions are subject to the general rules governing fiduciary relationships which control the actions of persons occupying confidential relations with each other.”

Thus, transactions between spouses arise in the context of a confidential relationship. “This confidential relationship imposes a duty of the highest good faith and fair dealing on each spouse, and neither shall take any unfair advantage of the other. This confidential relationship is a fiduciary relationship subject to the same rights and duties of unmarried business partners, including the right of access to records and information concerning their transactions.”

“Because of this, our courts have long held that when an interspousal transaction advantages one spouse, public policy considerations create a presumption that the transaction was the result of undue influence. A spouse who gained an advantage from a transaction with the other spouse can overcome that presumption by a preponderance of the evidence.”

See part 2 for the conclusion of this case.

Starr v Starr (Sept. 30, 2010) 189 Cal.App.4th 277

Vuki vs. Superior Court – No Private Right to Enforce Three-Month Negotiation Period in Civil Code Section 2923.52

The California legislature has been tinkering with the foreclosure rules since the mortgage crisis started in 2007. One of the laws enacted was Civil Code section 2923.52. This section says that a lender must add three months to the normal 90-day waiting period for recoding a notice of sale (i.e., double the waiting time for a notice of sale) “if all of the following conditions exist:

“(1) The loan was recorded during the period of January 1, 2003, to January 1, 2008, and is secured by residential real property; (2) The loan at issue is the first mortgage or deed of trust; and (3) The borrower occupied the property as the borrower’s principal residence at the time the loan became delinquent.”

In the recent case of Vuki v. Superior Court (October 29, 2010) 189 Cal.App.4th 791, the borrowers alleged that the foreclosure sale of their house was invalid because the lender failed to provide them with the additional three-month “renegotiation” period. The court swept aside the argument, finding that a violation of the statute was a matter for the regulators to enforce, not an aggrieved borrower.

Here are the all-to-common facts. “Lucy and Manatu Vuki lost their Buena Park home to foreclosure. The sale took place October 7, 2009, with their erstwhile lender, HSBC Bank USA (HSBC), as the buyer at the foreclosure sale . . . On April 6, 2010, the Vukis filed this state court action against HSBC for, among other things, statutory violation of Civil Code sections 2923.52 and 2923.53.”

The court was essentially compelled to rule against the borrowers because “of the operation of section 2923.54. Subdivision (b) of that statute is clear that: ‘Failure to comply with Section 2923.52 or 2923.53 shall not invalidate any sale that would otherwise be valid under Section 2924f.’”

That’s a shame, because we have a legislative mandate to protect borrowers from over-reaching, but no effective manner of recourse. Still, the borrowers should have been able to maintain an action for wrongful foreclosure, even if they could not invalidate the sale.

As the court held, “This argument fails since any claim which the Vukis might have to invalidate the foreclosure sale based on sections 2923.52 and 2923.53 necessarily entails a private right of action which the statutes do not give them.”

Explained the court, “Civil Code section 2923.52 imposes a 90-day delay in the normal foreclosure process . . . After the enactment of section 2923.52, at least for certain loans, another 90 days must be included ‘in order to allow the parties to pursue a loan modification to prevent foreclosure.’”

The court explained that “the requirements are a matter of a general program, evaluated by regulatory commissioners . . . Everything in the exemption process, in short, is funneled through the relevant commissioner, [to wit] (1) The Commissioner of Corporations for licensed residential mortgage lenders and servicers and licensed finance lenders and brokers; (2) The Commissioner of Financial Institutions for commercial and industrial banks and savings associations and credit unions; and (3) The Real Estate Commissioner for licensed real estate brokers servicing mortgage loans.”

In the court’s analysis, the statute could not be enforced by the debtor. “Section 2923.54 first imposes a requirement that a notice of sale give information about whether the servicer has, or has not, obtained an exemption from the 90-day delay provisions of section 2923.52.”

“But then section 2923.54 makes clear that whatever else is the case as regards actual compliance or noncompliance with sections 2923.52 and 2923.53, it will not invalidate any otherwise valid foreclosure sale”

The court conclusively ruled against the debtors, stating that “The argument fails because, as shown above, any noncompliance with sections 2923.52 and 2923.53 is entirely a regulatory matter, and cannot be remedied in a private action. The statutory scheme contains no express or implied exceptions for any lender who buys property knowing that it may not have complied with sections 2923.52 and 2923.53.”

I’m not keen on all the legislative tinkering with the foreclosure process. It’s just sticking a finger in the dam – it doesn’t address the underlying problems, including the apparent wilful failure of lenders to renegotiate loans in good faith.

Yet, if there’s going to be a statutory right to an additional three-month “negotiation” period, then there has to be a private enforcement mechanism, or the law serves no useful purpose. Which point was driven home by this court.

Vuki v. Superior Court (October 29, 2010) 189 Cal.App.4th 791

Thomas Schoenbaum on the Causes of Global Financial Crisis – Part 2

Professor Thomas Schoenbaum from George Washington University has written a paper discussing the worldwide financial crisis. His paper entitled “Saving the Global Financial System: International Financial Reforms and United States Financial Reform, Will They Do the Job?”, identifies 12 factors as triggering the financial crisis.

The second six are as follows (the first six are discussed in part 1).

7. Irresponsible Behavior and Fraud by Wall Street Professionals. Investment abdicated their traditional roles as financiers for the business world, and instead decided to make money using new models, which profited from their good names.

“In creating and profiting from new types of derivatives securities, such as CDO’s and CDS’s, Wall Street professionals were taking full advantage of a permissive and inadequately policed system that encouraged sharp practices and provided large rewards for excessive greed. Of course, fraudulent activity also played a part: for example, Goldman Sachs, perhaps the most respected name on Wall Street, has accepted a civil fine of $550 million (about two weeks worth of profits) to settle a fraud case brought by the SEC accusing the firm of selling derivative investments to customers that were secretly designed to fail.”

8. Confused and Inconsistent Accounting Standards. A 2000 statue was supposed to establish the Public Company Accounting Oversight Board, whose job is to regulate the accounting industry.

Says Prof. Schoenbaum, “Regretfully, this Board has been very slow to act, prevented from getting off the mark by alleged conflicts of interest and litigation begun with the intent to destroy it all together . . . For whatever reason, the Board has not done its job and accounting miscues and inconsistences contributed to the Global Financial Crisis. For example Lehman Brothers was able to use accounting rules to remove tens of billions of dollars from its balance sheet according to an examiner’s report.”

We’ve been hearing about this for years. The investment banks were permitted to restate income and to circumvent the accounting rules with a wink and a nod from the government. You can’t have a level playing field unless the rules are uniformly enforced.

9. The U.S. Federal Reserve’s Botched Monetary Policy. “After the bursting of the high-tech bubble in 2001, the Greenspan-led Federal Reserve lowered interest rates to levels not seen in a generation. These low rates persisted too long [, ] contributing to the asset bubble that sparked the Crisis. Then, too late, the Fed rapidly raised rates. Making up for lost time to kill the asset bubble. Both polices were badly mistaken.”

In the early 200s, the Fed wanted to propel a recovery from the dot-com bust. Low interest rates encouraged the growth in mortgage-backed securities; lack of oversight allowed the mortgage-backed securities to flourish in an atmosphere free from realistic oversight. The economy overheated, and the conductor failed to apply the brakes before the train crashed.

10. U.S. Government Housing Policy. “The U.S. government is far too involved in private housing market. In a misguided effort to make every citizen a property owner, the U.S. government has skewed the housing and mortgage markets as well as the prices for homes in the United States. There is simply too much government interference in housing.”

The author cites the Community Reinvestment Act as a contributor to bad lending decisions, stating “this is not the appropriate role for government, which should enforce anti-discrimination laws but should not pressure banks to make loans to certain groups of people.”

11. Repeal of the Glass-Steagall Act. “The Glass-Steagall Act, which was enacted during the Great Depression, functioned to insulate banks from the risks inherit investment banking. This law was repealed [in 1999], which permitted consolidation of commercial banking, investment banking, and insurance companies . . . The repeal of Glass-Steagall was a reason why the Crisis infected the whole U.S. financial system, not just investment banks.”

Many warned against the repeal of Glass-Steagall, but the warnings were ignored. Hey, if we haven’t had a banking crisis in 70 years, we must have eradicated the problem, right? Wrong. Glass-Steagall served an admirable purpose, and must be reinstated.

12. Global Current Account Imbalances. A final global factor is that, “during the period leading up to the Crisis the U.S. experienced record trade in current account deficits. In 2006 the U.S. current account deficits was $811 billion; in 2007 it was $738 billion. In 2008 the deficit declined slightly to $706 billion, and because of recession a further decline was recorded in 2009 to $409 billion”

Such deficits cannot be sustained. “During the boom years before the Crisis, record U.S. trade deficits were equal to approximately 2/3rds of the trade surpluses of the rest of the world. While trade and current account deficits are not inherently bad, when they become chronic and balloon out of proportion they are a sign of structural problems that should be corrected.”

“In the case of the U.S. the current account deficits represents inadequate savings and over-consumption. In the case of China, the growing and chronic surpluses represent lack of adequate domestic demand and too much saving . . . This imbalance cannot continue without threatening the stability of the international monetary system.”

Uniform Commercial Code Law Journal, Vol. 43, No.1 (October 2010) page 479.

MS8QXUM93AJW

Thomas Schoenbaum on the Causes of Global Financial Crisis – Part 1

The first six are as follows (the second six are discussed in part 2).

1. The diminished authority of the United States Securities Exchange Commission. This constituted a regulatory failure. States Prof. Schoenbaum, “beginning in the 1980’s, the once-feared SEC became largely toothless due to rule-revisions, exceptions, and leaders that discouraged fraud investigations and enforcement actions.”

Such failure continued for two decades, but not without warning. “One of the most egregious of SEC failure occurred on April 28, 2004, when the SEC voted to exempt investment companies from the SCC’s net capital rule . . . During this meeting, Harvey Goldschmid, one of the Commissioners, remarked, ‘If anything goes wrong, its going to be awfully big mess.’”

2. Failure to Regulate the Derivatives Market. Another regulatory failure. The derivative market is enormous, yet it operated for years without effective oversight. Again, there were warnings. The Commodities Futures Modernization Act of 2000 specify exempted derivatives and swaps from supervisory oversight by the Commodity Futures Trading Commission, “despite warning from its chairman that unregulated derivatives “could threaten our regulated markets or, indeed, our economy without any Federal agency knowing about it.”

3. Lax Regulation of Financial Institutions. Here, the author cites the Federal Reserve and the Comptroller of the Currency as failing to exercise proper oversight of the U.S. banking industry. Thus, “the persons in charge of bank regulations were totally obvious to the dangers of the extensive use of derivatives such as MBS’s. Accordingly, the use of MBS’s allowed financial institutions to profit from transactions that involved unreasonably low capital requirements.”

This point could be stated in slightly different terms. The players in the financial markets, especially in derivatives, were permitted to gamble with other people’s money. The oversight in the banking industry was absent in the derivatives market. Such easy access to such excessive leveraging encouraged Wall Street to take unreasonable and dangerous – desperately dangerous – risks.

4. Financial Institutions That Took on Too Much Leverage. The authors cites this factor as a private sector abuse, stating “a key cause of the Crisis was the fact that key financial institutions, especially the investment banks, took on far too much leverage, risking vast qualifies of borrowed capital so that they were unable to withstand a down turn in asset prices.”

What kind of leveraging was going on? “After the SCC exempted investment banks from the ‘net capital’ rule in April 2004, leverage increased dramatically to levels in excess of 40 to 1.” This meant the investment banks could make a $40 bet with only $1 in actual assets. Is this a recipe for disaster? You bet it is.

5. Mismanagement by Bond and Securities Ratings Agencies. As explained by Prof. Schoenbaum, “hearings in the Congress and the European Union have established a sloppy and misleading ratings practices that causes most of the now ‘toxic’ derivatives to be given triple A ratings. Only after the Crisis began did the ratings agencies downgrade these securities. The credit ratings agencies were among the enablers of the Crisis.“

See, the vast tradings in the investment banking world were really a shadow financial system, running parallel to the banking industry. The banks were heavily regulated and were backed by the FDIC. The investment banking world had no such official guarantees, so they invested the insurance provided by companies such as AIG. At present, “AIG has benefitted for governmental largesse amounting to a total of $182.5 billion. None of this funding has been repaid.”

That means that the U.S. taxpayers bailed out the bets that were made by Goldman Sachs and other investment banks to the tune of $182 billion that has never been repaid. It’s one thing to take risks with your own money; it’s entirely different when the government steps in to save private industry in the amount of $182 billion. Oversight and accountability must be established, otherwise the taxpayers just gave away $182 billion to the bankers.

6. Low Saving Rates and High Borrowing by American Consumers. This is a social factor. Explains the author, “as of 2007, the U.S. savings rate touched zero, which means that as a group Americans were spending every penny of income. Moreover, many Americans were deeply in debt, now only for home mortgages but on credit cards and other consumer loans. The American economy was overheated and riding for a fall.”

Part 2 follows next week.

Uniform Commercial Code Law Journal, Vol. 43, No.1 (October 2010) page 479.

Citizens Business Bank v. Carrano – A Strange Conception

In the recent decision in Citizens Business Bank v. Carrano (Nov. 05, 2010), the court sensibly applied the rules for construing a will to the interpretation of an estate planning trust. This is an appropriate result, considering that the trust was intended to serve as a substitute for will. However, the law authorizing such a result is not as clear as it should be, at least under the statute.

The facts make for an entertaining read. According to the court, “Charles and Serena Papaz created the Papaz Family Trust on August 2, 1966. Charles and Serena ha[d] one child, Christopher. Christopher fathered three children out of wedlock.”

The lawsuit concerned one of the grandchildren, Jonathan. The matter of Jonathan’s conception was unusual, to say the least. The court found that, “Christopher (the son) met Jonathan’s mother, Kathy Carrano, when he was shot in the leg in 1984.”

“Kathy was Christopher’s physical therapist while he was in the hospital and she continued to care for him during his recovery at his parents’ home. One night, Christopher gave Kathy a drug and had sex with her without her knowledge. Jonathan was conceived that night.”

Only in California, you might say. But wait, the story gets better. “Kathy was married to another man at the time. Jonathan was born in August 1985. Kathy and her husband raised Jonathan as their child. A few years after he was born, Kathy learned that Jonathan was Christopher’s son and not her husband’s. Jonathan was never formally adopted by Kathy’s husband.”

“Christopher, however, appeared to be aware that Jonathan was his son from the beginning. He bragged to his friend, Vahe Tatoian, when Kathy was pregnant that, “I know this is my kid.’”

Christopher led a troubled life. “In December 2006, Christopher became paralyzed from his neck down and could no longer speak. In January 2007, Kathy told both Jonathan and Charles [the grandfather] that Christopher was Jonathan’s biological father. Jonathan introduced himself to Charles, saying, ‘I am Jonathan, your grandson, Christopher’s son.’ Charles ‘reached over and grabbed [Jonathan’s] hand and said, ‘I know.’”

After Christopher’s death, an issue arose as to who was entitled to inherit under the trust. The trust provided for distributions to Christopher’s “then-living issue.” The matter wound up in court when “Citizens Business Bank, as trustee to the Papaz Family Trust, filed a petition for an order ascertaining beneficiaries and determining entitlement to distribution.”

Held the court, “The ultimate question in this case is whether the Papaz Family Trust’s definition of ‘issue’ includes Jonathan. Jonathan argues that the term ‘issue’ in the trust instrument is unambiguous. We agree.”

First, the court applied basic contract law, stating that “whether an ambiguity exists in a writing is an issue of law subject to independent review on appeal.” Then the court reached out and connected trust law with the law of wills, as follows:

“Our Supreme Court’s opinion in Estate of Russell (1968) 69 Cal.2d 200, 205-206, lays the foundation for our interpretation of a trust instrument: ‘The paramount rule in the construction of wills, to which all other rules must yield, is that a will is to be construed according to the intention of the testator as expressed therein, and this intention must be given effect as far as possible.’”

Now, I agree with this analysis, specifically, that estate planning trusts should be construed by rules similar to those applicable to the law of wills. The Carrano court makes an explicit link between the two bodies of law, a link that is not always followed, either in case law or in statute.

The court continued. “The rule is well established that where the meaning of the will, on its face, taking the words in the ordinary sense, is entirely clear, and where no latent ambiguity is made to appear by extrinsic evidence, there can be no evidence of extrinsic circumstances to show that the testatrix intended or desired to do something not expressed in the will.”

The court found that the word “issue” had a statutory definition which included all three of Christopher’s children, regardless of the unusual circumstances by which Jonathan was conceived. Stated the court, “typically, latent ambiguities arise where two persons or things answer the description of a bequest, or where there is a mistaken description and one or more persons match a portion of the bequest . . However, extrinsic evidence is not admissible to change a testator’s intent.”

Having found no ambiguity in the word “issue,” the court ruled in favor of Jonathan, concluding that, “Just as in Estate of Russell, we are not at liberty to rewrite the Papaz Family Trust to attach restrictions to the term ‘issue’ that Serena and Charles did not expressly include.”

The court reached the right decision for the right reasons, but I am not positive that the line connecting law of wills to the law of trusts is quite as straight as the court would have us believe.

Citizens Business Bank v. Carrano (Nov. 05, 2010) — Cal.Rptr.3d —-, 2010 WL 4371042

Lickter v. Lickter – No Standing to Sue for Elder Abuse After Distribution Made to Trust Beneficiary

The recent decision in Lickter v. Lickter (Oct. 27, 2010) — Cal.Rptr.3d —-, 2010 WL 4231300 highlights of three important points. First, a trust beneficiary does not have standing to pursue a claim on behalf of the trust after the beneficiary has received his or her distribution pursuant to the trust. This may seem like a common-sense answer, but it took a published appellate decision to affirm the point.

Second, draftspersons should be careful in how they handle pour over provisions in wills. It is common to couple an estate planning trust with a pour over will. By such standard estate planning documentation, the pour over will transfers any assets into the trust that were not already titled in the name of the trust at the time of the trustor’s death.

Yet, this can lead to an awkward circumstance if the asset consists of a claim for personal injury to the trustor, however, Costa Ivone can give you legal advice. Depending on how the pour over will was drafted, such claim may pass to the trust, to be prosecuted in the name of the trustee for benefit of the trust and its beneficiaries. Draftspersons may wish to consider modifying their pour over wills to provide that such claims for personal injury are the property of one or more named persons, rather than property of the trust, check

Third, this case emphasizes the importance of making pecuniary bequests to persons whom the trustor wants to preclude from attacking the trust. If the trustor makes a gift of $0.00 a potential beneficiary, then the beneficiary has no reason not to attack the trust. If the beneficiary loses, he still gets nothing; if he wins, then he gets something under the trust.

In this case, the beneficiaries who wanted to launch a challenge received specific bequests, which requests were distributed to them by the trustee. By such distribution, the trustee prevented an attack on the trust.

Here’s how the court addressed the matter. “The underlying facts are largely irrelevant. For our purposes, it is sufficient to say that Lois died in August 2007 at the age of 91, leaving property in a trust, of which Robert became the trustee. The terms of the trust provided that upon Lois’s death, $10,000 each would be distributed to plaintiffs and the entire residue of the trust would then be distributed to Robert. If Robert predeceased Lois, the residue was to be distributed to Maggie and Kate. If Maggie and Kate also predeceased Lois, the residue was to be distributed to their children or, if none, to Lois’s living children by right of representation.”

“Plaintiffs Joshua and Jezra Lickter sued their father (Robert Lickter), their half-sisters (Maggie and Kate Lickter), and their half-sisters’ mother (Mary McClain) for elder abuse and other related causes of action that had belonged to their grandmother (Robert’s mother), Lois Lickter, when she died. Plaintiffs claimed they had standing to commence and maintain the action under Welfare and Institutions Code section 15657.3(d).”

Explained the court, “The primary issue in this case is who is entitled to commence and/or maintain an elder abuse action after the elder who was allegedly abused has died . . . As we will explain, just because plaintiffs were beneficiaries of Lois’s trust did not make them ‘interested persons’ for purposes of pursuing this elder abuse action under subdivision (d) of Welfare and Institutions Code section 15657.3 . . . Plaintiffs were former beneficiaries of Lois’s trust, as they already had been paid the amounts they were owed under the trust. Thus, plaintiffs had no such interest in this elder abuse action.”

Bravo for a pithy and direct analysis. “Because Robert was Lois’s only surviving child, and because neither Maggie nor Kate had children, the residue of Lois’s trust would be distributed to plaintiffs under the terms of the trust if Robert, Maggie, and Kate all were deemed to have died before Lois.”

Here is the heart of the issue noted by the Best Overland Park Family Lawyer. “It has long been clear under California probate law that a person who can claim the title of ‘heir’ is not necessarily an ‘interested person’ for purposes of instituting or participating in a particular proceeding in a probate case. The question, rather, is whether the person – whether an heir, devisee, beneficiary, or other person – has an interest of some sort that may be impaired, defeated, or benefited by the proceeding at issue.”

Now shines the beauty of the specific bequests to the beneficiaries who wanted to institute the action. “Here, when the trial court granted summary judgment, plaintiffs had no right in or claim to Lois’s trust estate by virtue of their status as former beneficiaries of Lois’s trust because all of the interest they had in Lois’s trust had been satisfied when they were each paid the $10,000 Lois left each of them.”

“Thus, they were no longer beneficiaries of the trust, let alone beneficiaries with ‘a property right in or claim against the trust estate which could be affected by the’ elder abuse action. For this reason, the trial court did not err in concluding that they did not have standing as ‘interested persons’ under subdivision (d)(1)(C) of Welfare and Institutions Code section 15657.3 in their role as beneficiaries of Lois’s trust.”

To drive the point home, the court further held that, “In other words, contrary to plaintiffs’ assertions, it is not true that Robert’s payment of the $10,000 each plaintiff was owed from the trust terminated their standing to pursue this action as beneficiaries of Lois’s trust. The fact is that plaintiffs’ status as beneficiaries of Lois’s trust never gave them standing to pursue this action because the beneficial interest they had in the trust estate was not one that could have been ‘affected by’ this action.”

Hat’s off to a clear, concise, and absolutely accurate decision.

Lickter v. Lickter (Oct. 27, 2010) — Cal.Rptr.3d —-, 2010 WL 4231300

Estate of Cairns – Judicial Interpretation of Five-Plus-Five Power

Some estate plans make use of a “five-or-five” provision to help reduce the estate tax. In the recent decision in Estate of Cairns (Sept. 15, 2010) 188 Cal.App.4th 937, the court had to interpret such a five-or-five provision many years after the death of the testator.

As the court explained, “Margaret Cairns executed a will in 1975, and died in 1977.” The will established a testamentary trust. The court continued. “The five-or-five provision of the will [ ] specified: ‘The Trustee shall also pay to my son during his lifetime, from the principal of the trust, such amounts as he may from time to time request in writing, not exceeding in any calendar year, non-cumulatively, the greater of the following amounts: Five Thousand Dollars ($5,000.00) or Five Per Cent (5%) of the value of the principal of the trust, determined as of the end of the calendar year.’”

The trust was administered for many years after the death of Mrs. Cairns. Eventually, demands were made for trust distribution in periods after the right to receive the funds arose. The court held that such requests were not time-barred. Explained the court,

“As we read the provision, the beneficiary may make multiple demands from ‘time to time’ for distribution of Trust assets for a calendar year as long as the total amount demanded is no greater than $5,000 or 5 percent of the value of the principal of the trust. The directive that the request must be non-cumulative refers to the total amount of the permissible distributions in a calendar year, not the date by which the demand must be exercised. Finally, the total maximum distribution available to the beneficiary in any given calendar year is not ascertained or determined until the ‘end of the calendar year.’”

The court continued. “Thus, if the 5 percent distribution is elected, the beneficiary will not even know the amount of the permissible demand until after the calendar year has concluded and an accounting is completed. The beneficiary may often not have adequate information to make a prudent decision as to which five-or-five election – five percent or $5,000 – is appropriate during the calendar year.”

The trustee disputed such interpretation under applicable tax law. The court swept aside these objections, stating “We reject Kenneth’s contention that the trial court’s interpretation of the instrument also is not in accord with applicable provisions of federal tax law. We deal in the present case with an issue of interpretation of a trust document, which implicates state rather than federal tax law. Further, Kenneth’s suggestion that under these tax rules, the beneficiary’s right to the disbursement lapses if the power is not exercised, is in keeping with our determination of the meaning of the five-or-five provision.”

This analysis seems incomplete. True, the court was obligated to review the written trust agreement. The court also was obligated to consider the circumstances under which the trust agreement was drafted. The circumstances included the tax rules applicable at the time that the will was drafted. The interpretation should have taken these circumstances into consideration.

The court made the following findings. “We therefore interpret the five-or-five provision to mean: during his lifetime [the beneficiary] is not required to make a single demand for distribution of principal during each calendar year in which the maximum total amount of the distribution is calculated.”

OK, that makes sense.

“He may make multiple written demands for distribution of principal from time to time within a single year, as long as the total amount requested for any single calendar year does not exceed the annual 5 percent or $5,000 maximum.”

Agreed. That’s what the document states.

“The proscription against non-cumulative requests prohibits him from making demands for less than the maximum amount for one calendar year, then seeking to add the amount not requested for that year to the distribution the next year.”

Agreed again. The distributions were to be noncumulative.

“The total maximum distribution amount available to him, whether it is 5 percent or $5,000, is calculated as of the end of each calendar year.”

Again, that’s the document states.

“And, he must make his demands for distribution before the end of the next calendar year after the determination of the value of the principal of the Trust to avoid the ban against non-cumulative distributions ‘in any calendar year.’”

This prevents the beneficiary from requesting distributions many years after the fact. In conclusion, “We have found that the Trust does not require [the beneficiary] to exercise his right to a principal distribution in a given calendar year to receive the distribution related to that same year. Thus, he was not required to make his demands for the year 2007 in the year 2007. The ban on cumulative distributions required him to demand principal distributions not in excess of the five-or-five maximum for the year 2007 by no later than the end of 2008.”

In the end, a sensible interpretation.

Estate of Cairns (Sept. 15, 2010) 188 Cal.App.4th 937

Araiza v. Younkin – Disposition of Bank Account Under Trust Law is Fundamentally Different from Result Under Law of Wills

The recent decision in Araiza v. Younkin (Sept. 30, 2010) 188 Cal.App.4th involved the disposition of a bank account following the death of the parent. Under the law of wills, the beneficiary named on the account would have taken the funds, regardless of contrary language in the will.

Ah, but the mysterious law of estate planning trusts. Instead of providing a decision that is consistent with probate law, the court broke rank and gave a contrary decision based on its interpretation of the trust agreement.

Folks, this is dumb. The artificial dichotomy between the law of wills and the law of trusts, at least when the trust is simply a will substitute, must change. We need conformity in the law, so the rules and outcomes are in conformity.

Here is the decision. “In 2001, Mrs. Howery opened a checking account and a savings account at the Bank of America. Although she named [Lori Younkin] as the beneficiary of the savings account, Howery was the only person authorized to withdraw funds from it.”

To my analysis, this is a contract-based question. Lori Younkin is the named beneficiary on the bank account, and should take the funds at death.

“In August 2005, Mrs. Howery established the Lucia Howery Living Trust . . . The Schedule listed ‘Savings accounts’ as among the categories of personal property delivered to the trust.”

Mrs. Howery died on April 29, 2009. The Trust Agreement provided that Mrs. Howery gave the Bank of America account to Gabriella Reeves.

On appeal, Lori Younkin contended that “she was the sole owner of the savings account because Mrs. Howery named her as the beneficiary and never changed that designation in a manner authorized by Probate Code section 5303.”

That is a great argument under the law of wills. But this court was determined to muddy the waters, by creating an artificial distinction involving estate planning trusts.

Explained the court, “The type of savings account Howery established is referred to in the Probate Code as a ‘Totten trust’ account. The term Totten trust describes a bank account opened by a depositor in his or her own name as trustee for another person where the depositor reserves the power to withdraw the funds during his or her lifetime. If the depositor has not revoked the trust then, upon his or her death, any balance left in the account is payable to the beneficiary.”

Bingo. End of analysis. “Subdivision (b) lists the methods by which the terms of a multiple-party account may be modified. It provides: ‘Once established, the terms of a multiple-party account can be changed only by any of the following methods: [¶] (1) Closing the account and reopening it under different terms. [¶] (2) Presenting to the financial institution a modification agreement that is signed by all parties with a present right of withdrawal.’”

Not so fast. “This narrow reading of the statue, however, fails to harmonize it with section 5302. Section 5302, subdivision (c)(2) provides that sums remaining on deposit in a Totten trust after the death of the sole trustee belong to the person named as beneficiary, ‘unless there is clear and convincing evidence of a different intent.’”

“Here, although the signature card for the savings account named appellant as the beneficiary, there is clear and convincing evidence that Mrs. Howery had a ‘different intent’ at the time of her death. She established a living trust that expressly stated her intention to give the savings account to Gabriella Reeves. The trial court properly relied on the living trust to find that Mrs. Howery intended to change the beneficiary of the her Totten trust from appellant to Gabriella Reeves. Because the change was made by a living trust rather than by a will, it is not invalidated by section 5302, subdivision (e).”

According to this court, a change in beneficiary designation for a Totten trust cannot be made by Will, but it’s ok to make such a change by way of an estate planning trust. There is no substantive difference in result between a will and an estate planning trust. Both serve the same purpose. The procedural difference is that a Will involves probate, while an estate planning trust is handled in private, without court supervision. The court provided a careless analysis.

Araiza v. Younkin (Sept. 30, 2010) 188 Cal.App.4th 1120, 2010 Daily Journal D.A.R. 15,225

Holmes v. Summer – Fiduciary Duties of Real Estate Broker

In the recent decision in Holmes v. Summer (Oct. 6, 2010) 188 Cal.App.4th 1510, the court discussed the fiduciary obligations owed by a real estate broker in a sales transaction. The facts were not difficult.

The broker represented the seller. According to the opinion, “the buyers and the seller agreed to the purchase and sale of a residential real property for the price of $749,000 . . . The counter offer did not disclose that the property was subject to three deeds of trust totaling $1,141,000 . . . Unbeknownst to the buyers, the property was subject to a first deed of trust in the amount of $695,000, a second deed of trust in the amount of $196,000 and a third deed of trust in the amount of $250,000, for a total debt of $1,141,000.”

Thus, the amount offered was $392,000 less than the debt encumbering the property. When the sale did not close for the price in the listing agreement, the buyer’s sued the listing agent.

Stop here. How could the buyers have any expectancy damages? The debt was $1.1 million, while the offer was $750,000. The buyers expected to pay $750,000, while the debt was $1.1 million. The buyers did not lose the benefit of their bargain, as they did not offer enough to purchase the property.

Instead, the buyers could claim only reliance damages, being amounts they reasonably expended in reliance on the contract. “According to the buyers, after they signed the deal with the seller, they sold their existing home in order to enable them to complete the purchase of the seller’s property. Only then did they learn that the seller could not convey clear title because the property was overencumbered.”

However, didn’t the buyers receive a preliminary title report listing the encumbrances? If so, how could the buyers claim reasonable reliance, when they had full disclosure of the encumbrances, albeit from a third party? From the opinion, it seems that the court feels that the broker is on the hook, regardless of future information learned by the buyer.

According to the opinion, “The case before us presents the interesting question of whether the real estate brokers representing a seller of residential real property are under an obligation to the buyers of that property to disclose that it is overencumbered and cannot in fact be sold to them at the agreed upon purchase price unless either the lenders agree to short sales or the seller deposits a whopping $392,000 in cash into escrow to cover the shortfall.”

OK, that’s one way to frame the issue, although the court will proceed to explain that brokers are required to police the real estate market. “Under the facts of this case, the brokers were obligated to disclose to the buyers that there was a substantial risk that the seller could not transfer title free and clear of monetary liens and encumbrances.”

Duties of Agent

As explained by the court, “It is now settled in California that where the seller knows of facts materially affecting the value or desirability of the property which are known or accessible only to him and also knows that such facts are not known to, or within the reach of the diligent attention and observation of the buyer, the seller is under a duty to disclose them to the buyer. When the seller’s real estate agent or broker is also aware of such facts, he [or she] is under the same duty of disclosure.”

The court continued. “Despite the absence of privity of contract, a real estate agent is clearly under a duty to exercise reasonable care to protect those persons whom the agent is attempting to induce into entering a real estate transaction for the purpose of earning a commission.”

“The allegation here is that the brokers had a duty to disclose the liens before the buyers signed the agreement. Only then could the buyers weigh the risks of entering into an agreement, and preparing their finances and related affairs to facilitate completion of the purchase, considering there was a significant possibility the transaction would fall through. Disclosing the liens only after the buyers had entered into the escrow failed to protect them in this context.”

“Here, the buyers say that they sold their existing home in order to purchase the seller’s property and were damaged when the seller failed to convey title . . . To impose a duty on the brokers here to disclose information alerting the buyers that the sale was at high risk of failure would be to further the purpose of protecting buyers from harm and providing them with sufficient information to enable them to wisely choose whether to enter into the transaction.”

Reliance by the Buyers

“The buyers expected, based on the standard form documents they signed, as representative of industry standards, that they would receive a preliminary title report after their offer was accepted and escrow was opened. They were given no reason to believe that they needed to pay for a title search before even making an offer on the property.”

“Just because a purchaser has constructive notice of a matter of record, this does not eliminate all of the duties of disclosure on the part of a seller or its agents. In the matter before us, assuming a title search would have revealed the existence of deeds of trust against the property, this does not mean that constructive notice of those recorded deeds of trust would necessarily preclude an action based on the alleged breach of a duty to disclose.”

“The rule we articulate in this case is simply that when a real estate agent or broker is aware that the amount of existing monetary liens and encumbrances exceeds the sales price of a residential property, so as to require either the cooperation of the lender in a short sale or the ability of the seller to put a substantial amount of cash into the escrow in order to obtain the release of the monetary liens and encumbrances affecting title, the agent or broker has a duty to disclose this state of affairs to the buyer, so that the buyer can inquire further and evaluate whether to risk entering into a transaction with a substantial risk of failure.”

Duty of Confidentiality

“Turning now to moral blame, we observe that California cases recognize a fundamental duty on the part of a realtor to deal honestly and fairly with all parties in the sale transaction. Surely a sense of rudimentary fairness would dictate that buyers in a case such as this should be informed before they open escrow and position themselves to consummate the same that there is a substantial risk that title cannot be conveyed to them . . . Both the policy of preventing future harm and considerations of moral blame compel the imposition of a duty on the part of a realtor never to allow a desire to consummate a deal or collect a commission to take precedence over his fundamental obligation of honesty, fairness and full disclosure toward all parties.”

“At a minimum, the brokers did not act fairly towards these residential buyers when signing them up for a real estate purchase the brokers had reason to know was a highly risky proposition. Since the brokers had a duty to act fairly towards the buyers, and fairness under the circumstances dictated disclosing that either lender approval or a substantial seller payment was required to close escrow, the portion of Civil Code section 2079.16 upon which the brokers rely did not exempt them from the duty to disclose.”

“To recapitulate, in balancing the factors [ ], we conclude that the brokers in the matter before us had a duty to disclose to the buyers the existence of the deeds of trust of record, of which the brokers allegedly were aware . . . so the buyer can make an informed choice whether or not to enter into a transaction that has a considerable risk of failure.”

“By so holding, we do not convert the seller’s fiduciary into the buyer’s fiduciary. The seller’s agent under a listing agreement owes the seller a fiduciary duty of utmost care, integrity, honesty, and loyalty.” Although the seller’s agent does not generally owe a fiduciary duty to the buyer, he or she nonetheless owes the buyer the affirmative duties of care, honesty, good faith, fair dealing and disclosure, as reflected in Civil Code section 2079.16, as well as such other nonfiduciary duties as are otherwise imposed by law.

Holmes v. Summer (Oct. 6, 2010) 188 Cal.App.4th 1510.