Blain v. Russell

Filed 4/23/07 Blain v. Russell CA5

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FIFTH APPELLATE DISTRICT

APPEAL from a judgment of the Superior Court of Kern County. Louis L. Vega, Commissioner.

Klein, DeNatale, Goldner, Cooper, Rosenlieb & Kimball, Steven J. Lee and Catherine E. Bennett for Defendant and Appellant.

Law Office of Timothy L. Kleier and Timothy L. Kleier for Plaintiff and Respondent.

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Appellant, Michael D. Russell, in his capacity as trustee of the Joseph Alexander Blain Trust (Trust), was granted broad management discretion through an amendment to the Trust. Shortly after his appointment as trustee, appellant lost substantially all of the Trusts cash by investing it in an oil lease in the late 1980s.

Approximately 15 years later, respondent Jerold Blain, one of the Trust beneficiaries, petitioned to remove appellant as trustee, to obtain an accounting, and to surcharge appellant. Following a court trial, judgment was entered in respondents favor. In making its ruling, the court determined that the Trust amendment was invalid.

Appellant contends the trial court made numerous evidentiary and procedural errors. According to appellant, respondent presented improper material to the court, including posttrial exhibits. Appellant further argues that the issue of the validity of the Trust amendment was not properly before the court and that the evidence does not support the finding that this amendment was invalid. Additionally, appellant contends that damages were incorrectly calculated.

As discussed below, the trial courts liability findings are supported by the record and the alleged procedural errors are harmless. However, the courts improper consideration of posttrial exhibits requires reversal of the damage award.

BACKGROUND

In early 1986, Joseph Alexander Blain was dying of cancer. At Blains request, appellant, an attorney, prepared a will and the Trust. Blain signed the Trust documents on March 11, 1986. The Trust named Blain as trustee but did not name a successor trustee.

Thereafter, appellant prepared an amendment to the Trust. This amendment named appellant as the successor trustee and waived [a]ll statutory limitations and restrictions concerning the investment of trust funds that are now in force and that may hereafter be enacted. The trustees liability was limited to the trustees own gross negligence or wilful [sic] default. This Trust amendment was executed on April 15, 1986.

Blain died on April 21, 1986. The last three weeks or so of Blains life, he was under 24-hour care, heavily medicated, and barely able to communicate. Blain was survived by his widow, Geraldine Cady, respondent, his four-year-old son, and three other children from a previous marriage.

Upon Blains death, appellant became the successor trustee. As of May 1986, the Trust contained approximately $115,000 in cash and real property worth $60,000.

In September 1986, appellant formed RCON, Inc. RCON was created to purchase an oil lease. The Trust was the source of the money for the purchase and operation of this oil lease. However, the venture was unsuccessful. RCON filed bankruptcy and lost the lease in 1989. By that time, the Trust had little or no cash remaining.

In 1987, one of Blains sons, Joseph Alexander Blain, Jr., repeatedly requested Trust information from appellant. However, he never received a response. Joseph, Jr., then hired an attorney, Curtis Darling, to pursue the matter. Although appellant represented to Darling that he intended to prepare a full report, complete financial report, and tax returns for the Trust in 1989, such information was never provided.

In August 2001, respondent filed a petition for removal of trustee, an accounting, and attorney fees and costs. The petition alleged that appellant had breached his fiduciary duties by refusing to account to the beneficiaries, refusing to distribute the Trust income, conducting the affairs of the Trust for his own benefit, and engaging in transactions involving a conflict of interest.

Appellant resigned as trustee and Geraldine Cady was appointed successor trustee. Thereafter, an accounting was prepared.

Trial was held in March and May 2003, and closing briefs were filed. In respondents first closing trial brief he moved for leave to amend according to proof for fraud and breach of fiduciary duty. Punitive damages were also sought. This brief included exhibits that had not been admitted at trial.

The court ruled in respondents favor. In doing so, the court summarized the issue before it as essentially whether [appellant] breached his fiduciary duties owed to the beneficiaries of the [Trust] when he invested the Trusts assets, ostensibly through powers granted in an amendment thereto, in a failed oil production venture in the state of Oklahoma. Regarding this amendment, the court determined that Blain was not able to comprehend the amendments substantive change and that appellant wielded influence over Blain. Thus, the court found the amendment invalid. Accordingly, despite the vast powers appellant provided himself in the Trust amendment, the trial court analyzed appellants conduct as trustee under the prudent investor standard. The court also granted the motion for leave to amend and for punitive damages. The court awarded respondent $164,404.36 in principal plus interest, attorney fees and costs. As punishment for appellants malfeasance, the court did not credit appellant for any money he has or claims to have reimbursed to the Trust.

Appellant filed a motion for new trial. Appellants stated grounds included an objection to the courts consideration of respondents posttrial exhibits, objections to the added claim for punitive damages, and a claim that the proceedings violated the statute of limitations and/or laches. The court granted a new trial on the ground that the punitive damages award was improper. Finding this issue meritorious, the court did not consider the remaining issues.

Respondent countered with a motion for reconsideration. Respondent proposed that the court either reopen the case on the issue of appellants financial worth or reevaluate its ruling as one in equity, i.e., categorize the award as a surcharge and a denial of appellants set off claim rather than punitive damages. Alternatively, respondent offered to withdraw his prayer for punitive damages.

To avoid a new trial, respondent waived his right to recover punitive damages. The trial court vacated its order granting the new trial motion and entered a revised judgment. This judgment awarded respondent compensatory damages in the same principal amount as before, i.e., $164,404.36, plus $318,703.04 in prejudgment interest, plus postjudgment interest at the rate of 10 percent. This judgment stated that it included credits for two contributions appellant made to the Trust, $10,000 for a Janus Fund and $25,000 for an interest in a Los Angeles property. Appellant had asserted at trial that he made certain payments on behalf of and contributions to the Trust from his personal assets. The two above credits recognized by the trial court were applied first to accrued interest.

DISCUSSION

1. The trial court did not err in finding the Trust amendment invalid.

A. The validity of the amendment was before the court.

In the petition, respondent alleged that Blain executed both the Trust and the amendment to the Trust. In seeking an order removing appellant as trustee and surcharging him, the petition alleged that appellant had breached his fiduciary duties by refusing to account to the beneficiaries, refusing to distribute the Trust income, conducting the affairs of the Trust for his own benefit, and engaging in transactions involving a conflict of interest. During trial, the parties agreed that the area of dispute was the oil lease.

Appellant contends the judgment went beyond the scope of the verified petition and beyond the agreed scope of the trial. His relevant complaint is that the trial court should not have ruled on the validity of the Trust amendment. According to appellant, this issue was not before the court.

In support of his position, appellant notes the petition admitted that Blain executed the Trust amendment. Therefore, appellant argues, the trial court erred when it permitted respondents attorney to elicit testimony from Cady that it was not Blains signature on the amendment. However, since the court found that Blain had in fact executed the Trust amendment, this line of questioning was harmless.

Appellant also asserts that evidence regarding any potential grounds for invalidating the amendment was beyond the agreed scope of the trial. The record, however, belies appellants interpretation.

In response to an objection to valuation evidence on relevance grounds, the court explained the limits on the trial as follows:

[THE COURT] The issue is whether or not this oil lease was a legitimate business investment and whether or not his efforts to reimburse, refund a certain portion of this Trust through that real estate property --

[APPELLANTS COUNSEL]: Well, it looks to me, your Honor, that we have gone beyond that.

Now we have a question as to whether or not the amendment was ever done and now I have got to go and find the notary to come in and testify to that.

THE COURT: Well, thats fine but its all related to what authority, if any; that was the only reason I let [respondents counsel] get into it, was the nexus of the amendment to the alleged actions taken by Mr. Russell under the authority, if that was apparently granted under that amendment.

Thats the only reason I let them get into it, so as to the validity of the amendment, you certainly can cross examine her on that.

As evidenced by this exchange, the validity of the amendment was put into issue at trial.

Further, both parties solicited testimony regarding whether Blain was mentally competent when he executed the amendment. Cady, Joseph Blain, Jr. and appellant were examined and cross-examined on this subject. If the amendments validity had not been at issue, this evidence would not have been relevant.

Finally, appellant presented argument on this very issue in his closing trial brief. In asserting that he did not violate any duty or law by investing the trust money in the oil lease, appellant stated that a full consideration of this issue requires examination of four sub issues, the first being Was the amendment valid? Appellant then argued that An examination of the credible evidence shows that Mr. Blain was competent when he signed the amendment, knew full well what he was doing, and did it. Appellant noted that the validity of the amendment did not become an issue until the middle of trial, but did not object to that issue as being beyond the scope of the trial either in his closing brief or in his subsequent motion for a new trial.

Thus, contrary to appellants position on appeal, the trial courts conclusion that the trust amendment was invalid did not go beyond the agreed scope of the trial.

B. The trial courts invalidity finding is supported by the record.

Regarding the validity of the Trust amendment, the trial court found:

As to his capacity to understand the document he was signing, the court finds it very odd that [appellant] did not provide for a successor in the original Trust, knowing that Blain was terminally ill with colon cancer. Moreover, rather than merely providing for a successor trustee in the Trust amendment, [appellant] provided himself vast powers to pretty much do with it as he pleased with apparent impunity. Such a radical departure from the careful provisions for his family , less than a month from the date he executed the original Trust, does no[t] seem rational, especially when Blain was in the final stage of cancer, barely able to communicate, under 24-hour care and apparently under the influence of medications he was taking at that time, according to his family members who testified. The evidence leads to the inescapable conclusion by this court that although he signed the Trust amendment, he was not able to comprehend the substantive amendment to the Trust. It is also very apparent that [appellant] wielded influence over Blain at the time the subject amendment was presented to him. The amendment to the Trust, therefore, is invalid.

Appellant contends the evidence does not support the trial courts finding that the Trust amendment was invalid. Appellant argues there is no evidence to support the courts conclusions that Blain did not understand the amendment and that appellant wielded undue influence over him. To support his argument, appellant relies on his own testimony that he went over each page of the amendment with Blain and had Blain initial each page. Appellant also notes that respondent did not present any medical expert on the issue of Blains ability to understand the Trust amendment during the relevant time period.

In reviewing the sufficiency of the evidence, the appellate court must resolve all conflicts in favor of the respondent and give the respondent the benefit of every reasonable inference. Further, the evidence must be substantial, i.e., reasonable, credible and of solid value. (Kuhn v. Department of General Services (1994) 22 Cal.App.4th 1627, 1632-1633.)

Substantial evidence may consist of inferences. However, such inferences must be a product of logic and reason and must rest on the evidence [citation] . (Kuhn v. Department of General Services, supra, 22 Cal.App.4th at p. 1633.) Further, when confronted with conflicting inferences, this court cannot substitute its own deductions for those of the trial court. (Wilmot v. Commission on Professional Competence (1998) 64 Cal.App.4th 1130, 1139.)

Here, Cady testified that during the last month of Blains life, he was in [a] very fragile condition. Blain was under heavy medication, was not able to eat, and was asleep [p]robably 98 percent of the time. Blains son, Joseph, Jr., testified that Blain was [c]lose to being incoherent during those last 30 days. In light of Blains physical condition and the sharp dichotomy between the conservative Trust provisions and the liberal trustee powers granted in the amendment, it was reasonable for the trial court to infer that Blain did not understand the substantive provisions of the amendment when he signed it. Also, based on appellants giving himself vast powers as trustee, it can be reasonably inferred that appellant wielded influence over Blain when the amendment was presented for execution. Accordingly, substantial evidence supports the trial courts conclusion that the amendment was invalid.

Since the trial courts finding that the Trust amendment was invalid will be upheld, appellants argument that the trial court erred in not applying the amendments investment standard is moot.

2. Respondents submission of settlement negotiation evidence was harmless.

Evidence Code section 1152, subdivision (a), prohibits admitting evidence of an offer of money, or any other thing, made in compromise, as well as statements made in the negotiation, for the purpose of proving a persons liability for loss. (Hasler v. Howard (2004) 120 Cal.App.4th 1023, 1026.)

Here, respondent submitted a memorandum as an opening brief that contained settlement negotiation references and a quote from a settlement proposal written by appellant. Respondent also made statements in court regarding appellants promise to pay the money back. Such evidence was inadmissible under Evidence Code section 1152, subdivision (a).

However, with one exception, the trial court refused to consider the settlement negotiation evidence. The court stated:

I am not going to entertain any testimony whatsoever regarding any settlement negotiations, any -- except if there are any admissions of wrongdoing, of course I am going to be interested in hearing those things but accusations as to those matters I am not going to entertain .

It would have been error for the court to consider any admissions of wrongdoing. However, no such admissions were made. In fact, the settlement proposal written by appellant stated Parties agree that no admission of liability is being made. Accordingly, the trial courts error was harmless.

3. Because the remedy imposed is authorized under the Probate Code, appellant was not prejudiced by the amendment adding a fraud claim.

On respondents motion, the trial court amended the petition to conform to proof to add causes of action based in fraud and breach of fiduciary duty. The court found, by clear and convincing evidence, that appellant intentionally misrepresented and concealed material facts concerning the Trusts affairs from the beneficiaries with the specific intent to thereby deprive the beneficiaries of the assets and benefits of the Trust, all of which were fraudulently converted to appellants own benefit and use. The court concluded appellants conduct with respect to the Trust and its beneficiaries was intentional and despicable, and carried out with a willful and conscious disregard of the Petitioners and other beneficiaries rights.

Noting that Probate Code section 16421 restricts the remedies of a beneficiary against a trustee to equity, appellant contends that no legal action, here fraud, should lie against him. However, a trustee may be found liable for a fraudulent breach of trust. (Estate of Gump (1991) 1 Cal.App.4th 582, 603.) Further, the remedy imposed here, compelling the trustee to redress a breach of trust by payment of money, is specifically authorized under Probate Code section 16420, subdivision (a)(3). Moreover, a court may also resort to any other appropriate remedy provided by statute or the common law. (Prob. Code,  16420, subd. (b).)

Appellant further argues this amendment was prejudicial because it denied him a right to a jury trial. Appellant is correct that a suit to recover damages for fraud is an action at law that entitles the parties to a jury trial. (Raedeke v. Gibraltar Sav. & Loan Assn. (1974) 10 Cal.3d 665, 671.) Accordingly, the trial court should not have granted respondents request to amend his equitable action to conform to proof and add a legal cause of action for fraud posttrial.

Nevertheless, since the remedy imposed here was not dependent on the finding of fraud, this error does not require reversal. As noted above, redress by payment of money is appropriate to remedy what the court found to be a breach of trust, i.e., misuse of trust funds and the failure to account. Since respondent waived his claim for punitive damages and damages limited to fraud were not awarded, appellant suffered no prejudice from the amendment to add a claim for fraud.

4. The trial court erred in relying on posttrial exhibits.

In his closing trial briefs, respondent submitted three exhibits to the court that had not been admitted into evidence at trial. These exhibits, designated 39 through 41, were a bookkeepers summaries of the Trusts checking account purportedly based on trial evidence. This bookkeeper did not testify and was not present at trial. The trial court relied on exhibit 41 in making its damage award.

Appellant contends the court erred in accepting and using these exhibits. According to appellant, they were inadmissible because no foundation was laid for their admission, they are hearsay, and they do not conform to the evidence presented at trial. Appellant further argues that the court acted in excess of its jurisdiction by receiving evidence outside of trial.

Respondent described these exhibits as a simple spreadsheet that starts with the amount of cash claimed by Mr. Russell to belong [to] the Trust at the Decedents date [of death], and then fairly credits each payment not in dispute (all non-attorney fee[s] and non-Oil Lease related payments) made by Mr. Russell (regardless of the source of the payment) against the Trust principal. However, exhibit 41 does not credit appellants payments against the Trust principal. Rather, they are credited against accrued interest. Moreover, exhibit 41 begins accruing interest on the principal as of Blains date of death. Accordingly, despite the credits, the principal balance never changes. Due to the posttrial admission of these exhibits, appellant was unable to either cross-examine the preparer regarding this methodology or present his own counterexhibits.

Appellant also asserts that certain credits testified to at trial are not included in this exhibit. Again, appellant was precluded from either cross-examining the preparer regarding the alleged omissions or providing his own exhibits.

A trial judge, sitting as the trier of fact, takes on the role of the jury and is subject to the same rules. (Guadalupe A. v. Superior Court (1991) 234 Cal.App.3d 100, 108.) Accordingly, the judge cannot receive information from sources outside the evidence in the case. (Id. at pp. 108-109.)

Here, the posttrial exhibits constituted information outside the evidence. In preparing the exhibits, the bookkeeper manipulated the evidence in a manner that is in dispute. Further, some information was allegedly omitted. Thus, the trial court erred in relying on exhibit 41 to calculate damages. Consequently, the damages issue must be retried.

In light of this conclusion, it is unnecessary to discuss whether the damages as calculated were inaccurate. Similarly, we need not determine whether the trial court erred in reconsidering its order granting a new trial. Appellant is receiving a new trial on damages. Further, the remaining liability issues that appellant raised in his new trial motion have also been raised and ruled on in this appeal.

5. The petition is not barred by the statute of limitations.

Probate Code section 16460, subdivision (a)(2) provides:

If an interim or final account in writing or other written report does not adequately disclose the existence of a claim against the trustee for breach of trust or if a beneficiary does not receive any written account or report, the claim is barred as to that beneficiary unless a proceeding to assert the claim is commenced within three years after the beneficiary discovered, or reasonably should have discovered, the subject of the claim.

In assessing the time of accrual of a cause of action against a trustee under this section, the relevant inquiry is when the plaintiff suspected or should have suspected that his injury was caused by wrongdoing, such that someone had done something wrong to him. (Jolly v. Eli Lilly & Co. (1988) 44 Cal.3d 1103, 1110; Noggle v. Bank of America (1999) 70 Cal.App.4th 853, 860.) In other words, who knew what and when was it known. (Noggle v. Bank of America, supra, 70 Cal.App.4th at p. 860.)

As noted above, Joseph Blain, Jr., attempted to obtain Trust information from appellant but was unsuccessful. Joseph, Jr., then hired an attorney, Curtis Darling, to assist him. In response to Darlings inquiries, appellant wrote two letters. In the letter dated January 31, 1989, appellant stated that the distribution of the Blain Estate that was to be distributed to your clients has been made and was made quite some time ago. The only matter remaining is the lot split. Thereafter, on March 23, 1989, appellant wrote I intend to have a full report and complete financial report and tax returns for the past two years to you before the end of April. However, appellant never provided this information.

Based on these facts, appellant contends the petition, filed in 2001, is barred by the statute of limitations. Appellant argues that by 1989 respondent, through his half brother, was aware of the fact that no accounting was provided and thus his claim for breach of trust was discovered or should have been discovered at that time.

Appellants argument assumes that the alleged breach of trust was based solely on appellants failure to provide an accounting. However, this is not the case. Appellants mishandling of trust assets was the subject of the claim. Although an accounting might have put respondent on notice of wrongdoing, the absence of an accounting did not. Nothing in the record suggests that respondent had any knowledge of appellants investment in the oil lease and resulting loss of Trust assets. In fact, appellant concealed the loss by making payments out of his own pocket on behalf of the Trust and placing personal assets into the Trust. Accordingly, respondents claim did not accrue in 1989 as alleged by appellant.

DISPOSITION

The judgment is reversed insofar as damages are concerned. In all other respects, the judgment is affirmed. The parties shall bear their own costs on appeal.

_________________________

Levy, J.

WE CONCUR:

_______________________________

Harris, Acting P.J.

_______________________________

Gomes, J.

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