San Pasqual Fiduciary Trust Co. v. Holt
Filed 11/8/13 San Pasqual Fiduciary Trust Co. v. Holt CA4/3
NOT TO BE PUBLISHED IN OFFICIAL REPORTS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opinion has not been certified for publication or ordered published for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
FOURTH APPELLATE
DISTRICT
DIVISION THREE
SAN PASQUAL FIDUCIARY TRUST COMPANY, as Trustee, etc.,
Plaintiff and
Respondent,
v.
CLUNIES A. HOLT et al.,
Defendants and
Appellants;
DAVID M. DENHOLM,
Defendant and
Respondent.
G047029
(Super. Ct.
No. A239915)
O P I N I O
N
Appeal from an order of
the Superior Court
of
County, Mary Fingal Schulte, Judge. Affirmed.
Law Offices of William
B. Hanley and William B. Hanley for Defendants and Appellants.
Poindexter & Doutré
and Jeffrey A. Kent for Plaintiff and Respondent.
Hinojosa & Wallet,
Jeffrey Forer and Shannon H. Burns for Defendant and Respondent.
* * *
This court has before it
several appeals arising from a long drawn out dispute between the beneficiaries
of a family trust formed in 1973. This
appeal concerns a challenge to the probate court’s order granting the interim
trustee’s petition for instructions about what conditions, if any, should be
placed on the required distribution of one-half of the trust’s principal to beneficiary
David M. Denholm (Denholm), in light of the over $5 million
if he loses his appeal challenging that judgment. We affirm the probate court’s order holding (1)
Denholm had a vested interest in 50 percent of the trust assets, which will
include the civil judgment entered in Clunies
A. Holt, et al. v. David M. Denholm, et al. (Super. Ct. No. 06CC12290)
(hereafter the Civil Action), and (2) the distribution of those assets must be
made whenever the remittitur issues in the pending appeal of the Civil Action.
I
Background Facts
We incorporate by
reference the summary of facts contained in our concurrently filed opinion
(San Pasqual I). This unfortunate family saga centers on the interpretation
of the David Scott Denholm and Clunies Manson Denholm Trust dated April 2, 1973 (the Trust). The two trustors died long ago: David Scott Denholm died in 1984, and Clunies
Madison Denholm died in 2005. As
explained in detail in our opinion San
Pasqual I, the Trust’s beneficiaries have been embroiled in contentious
litigation for many years.
There are two sides to
this ongoing battle. On one side is the Trustors’
son, Denholm, who served as the trustee until his resignation in December 2007. He is also one of the Trust’s beneficiaries. The Trust states Denholm was a 50 percent
income beneficiary until the fifth anniversary of his mother’s death, which was
October 7, 2010. After that date, Denholm was entitled to
receive a distribution of one-half of the Trust’s estate. The interim trustee postponed this
distribution due to the judgment entered against Denholm in the Civil Action
and in favor of the Trust.
On the other side of the
dispute is the trustors’ daughter, Clunies A. Holt, who has a vested right to
income generated by one-half of the Trust’s assets for her lifetime. Her three children, Clunies E. Holt, James
Holt., Jr., and Cameron Holt Schmidt, are entitled to distribution of the
remaining one-half of the Trust’s estate upon their mother’s death. Holt and her children will sometimes be
collectively referred to in this opinion as the “Holt Beneficiaries.â€
The Civil Action
following facts are taken from the trial court’s statement of decision in the
Civil Action. Clunies A. Holt and her
daughter Clunies E. Holt (hereafter the Holts) sued Denholm on behalf of the
Trust for: (1) breach of fiduciary duty
(first and tenth causes of action); (2) constructive fraud (second cause of
action); (3) aiding and abetting breach of fiduciary duty (third cause of action);
(4) fraud by concealment (fifth cause of action); (5) elder abuse (sixth cause
of action); and (6) conversion (seventh cause of action).
The Holts also sued six
limited liability companies for aiding and abetting a breach of fiduciary duty
(third cause of action). Calico HGC I,
LLC, and Calico Properties, LLC, were sued for aiding and abetting breach of
fiduciary duty (fourth cause of action) and for fraud by concealment (eighth
cause of action). Calico Properties was
also sued for fraud by concealment (fifth cause of action). The Holts sued 15 other companies for fraud
by concealment (ninth cause of action).
After the Holts
presented their case-in-chief at trial, all the defendants (except Denholm)
requested dismissal. The court granted
the motion as to Nicole Biel (formally appearing as Nicole Denholm), Timothy
Harris, Denholm Harris & Company, Waterpoint Development Companies, LLC,
and HGC Irvine, LLC. The court reserved
ruling on the motions made by the other defendants. Two months later, at the end of trial, the
court found in favor of all the remaining defendants, leaving only Denholm in
the action.
The court found in favor
of Denholm and against the Holts on the third, fourth, fifth, and sixth causes
of action. It dismissed the tenth cause
of action. It found in favor of Holts, “on
behalf of the Denholm Trust†and against Denholm on the first, second, and
seventh causes of action (breach of fiduciary duty, constructive fraud, and
conversion respectively).
In the statement of decision
prepared in the Civil Action, the trial court discussed the terms of the Trust,
providing for equal distribution of net income to Denholm and Holt for a period
of five years, ending on October 7,
2010. The court noted the Trust
provided Denholm with a one-half interest in the principal “outright free of
trust,†while Holt’s one-half interest remained in the Trust for her
lifetime. The court determined Holt was
entitled to the net income from her one-half interest, but she had “no power of
invasion of the Trust property in a manner antagonistic to the intent of the
[s]ettlors to generally provide income to the beneficiaries for their support
and care for life.â€
The court determined
Denholm, as trustee, had absolute discretion to manage the Trust’s assets, but
could not use or deal with Trust’s property for his own profit, or for any
other purpose unconnected with the Trust in any manner without consent of the
other beneficiaries. (Citing Prob. Code,
§ 16004, subd. (a), formerly Civ. Code, § 2229; Coberly v. Superior Court (1965) 231 Cal.App.2d 685, 688.)
The court determined
Denholm was “liable to the Trust because he engaged in self-dealing without [Clunies
A. Holt’s] consent . . . . Specifically,
Denholm borrowed money from the Trust at interest rates and repayment terms he
set without [Clunies A. Holt’s] consent . . . .
Further, he personally took an interest in and personally benefitted
from investments of Trust assets without the consent of his co-beneficiary.†The court determined the Trust vested Denholm
with absolute discretion in the use of Trust’s assets, but he was not free to
neglect his fiduciary duty to the Trust through self-dealing without the
consent of the beneficiaries. The court
noted, “Certainly, Denholm did not have the discretion to bet all of the [Trust’s]
assets ‘on red’ as testified to by several witnesses. Nor does the Trust authorize the [t]rustee to
neglect [the T]rust or abdicate its judgment.â€
The court concluded
Denholm breached his fiduciary duty when he borrowed money from the Trust for
his own benefit and without Clunies A. Holt’s consent. It stated, “Since an inherent conflict arises
when the [t]rustee acts as both debtor and creditor, such a loan constitutes a
breach of the undivided loyalty which the [t]rustee owes to the [T]rust . . . .†The court stated there was no evidence Holt
consented to Denholm borrowing money from the Trust or consented to his self-dealing.
As to the constructive
fraud action, the court based its decision on evidence Denholm “breached his
fiduciary duty of loyalty by borrowing money from the Trust and engaging in
self-dealing transactions. Denholm
obtained monies from the Trust for his own personal use and benefit and used
[the] Trust for his own personal use and benefit. [¶]
The legal basis for the [c]ourt’s decision is that Denholm as [t]rustee
of the Trust, was a fiduciary.
[Citation.] Constructive fraud is
a species of fraud applicable to a fiduciary.
[Citation.] A breach of fiduciary
duty constitutes constructive fraud.â€
As to the seventh cause
of action for conversion, the court based its decision on the fact Denholm, as
trustee, was “directed by the terms of the Trust to engage in specific actionsâ€
and it does not permit any self-dealing.
The court determined “Denholm used the Trust’s assets for his personal
use and benefit, contrary to the purpose and terms of the Trust, and converted the
Trust’s money to and for his own benefit.
Denholm commingled the Trust money in his personal bank accounts for
extended periods of time in order to sustain his business investments and
expenses and to maintain his personal income and lifestyle. The proceeds of the loans by the Trust to
Denholm and the financial benefit derived from the loan proceeds are products
of the Trust.†The court noted
conversion is a “‘strict liability tort.’â€
It explained, “‘The foundation of the act rests neither in the knowledge
nor the intent of the defendant.
Instead, the tort consists in the breach of an absolute duty; the act of
conversion itself is tortious. Therefore,
questions of the defendant’s good faith, lack of knowledge, and motive are
ordinarily immaterial. [Citations.]’â€
Finally, the court
concluded Denholm did not act reasonably or in good faith when he engaged in
self-dealing, and consequently, the court would not relieve Denholm from
liability under section 16440, subdivision (b).
It awarded the Trust damages as follows:
(1) $213,971 for underpaid interest resulting from loans to Denholm; (2)
$25,824 damages from loans to third party entities; (3) over $1.4 million for disgorgement
of profit and income belonging to the Trust from Denholm’s investments in which
he had an interest; (4) damages for the use of Trust assets in connection with
Denholm’s investments that did not make a profit ($1,406,743); and
(5)
over $1.7 million in damages from Denholm’s investments in which he held an
interest.
The court in the Civil
Action also explained in its statement of decision why it rejected the other
causes of action against Denholm and the other defendants. It reasoned the evidence presented did not
establish any factual basis to support those claims. The court explained those causes of action
were all based on allegations Denholm, the various entities, partners, and
Denholm’s ex-spouse, “engaged in a ‘fraudulent scheme and plan to use [the
Trust] and its assets for their own personal use, gain and profit and to the
detriment of the Trust and its beneficiaries.’ [The Holts] claim these defendants entered
into this ‘scheme’ for the ‘purpose of looting [the Trust is] unsupported by
the evidence.†Specifically, the court
found no evidence the defendants acted with the intent to induce reliance or
with the intent to deceive or defraud.
The court determined the
Holts’ action for elder abuse (regarding Denholm’s mother) was also unsupported
by the evidence. It concluded Denholm’s
mother did not suffer any financial harm or loss due to her son’s conduct. The court also denied the request for punitive
damages against Denholm, stating, “Denholm did not commit any of the alleged
acts with actual fraud, malice or oppression.
The court finds that the commission of actual fraud requires the intent
to deceive. [Citation.] In the instant case, the court finds
[Denholm] did not harbor the intent to deceive during the commission of any of
the acts alleged in this action.†And
finally the court deferred to the probate court on the issue of whether
Denholm, as trustee, was entitled to have attorney fees paid from the Trust
(the tenth cause of action).
The final judgment in
the Civil Action, filed May 6, 2011, “awards compensatory damages only in favor
of [the Holts], on behalf of the [T]rust, and against [Denholm], individually,
in the sum of $5,416,315,77 . . . and costs of suit . . . [to be determined at
a future date].†On July 12, 2011, the
judgment was amended nunc pro tunc to account for prejudment interest
($5,751,682,17).
title="">[2]
Accounting
Holts objected to Denholm’s accounting, filed for the period of time he served
as trustee. They filed a petition to
expand the time period of the accounting and objected to a portion of the
credits Denholm took as trustee, seeking to surcharge him over $2 million. These accounting matters have not yet been
tried in the probate court.
D. The Petitions For Instructions
The Trust provided
Denholm was to receive a distribution of his one-half interest in the Trust on
October 7, 2010. Before that
distribution, San Pasqual filed a petition for instructions concerning distribution
of the Trust’s principal in view of the then pending Civil Action as well as
the outstanding challenges to Denholm’s accounting.
This initial petition, filed
September 13, 2010, asked the court if there should be preconditions “imposed
on principal distribution to [Denholm] in view of the ongoing litigation
between [him and the Holts].†San
Pasqual informed the court that the Civil Action judgment was expected in a few
weeks, and if Denholm was found to be liable to the Holts or the Trust, his one-half
of “the Trust estate would be subject to significant, if not complete, offset.â€
San Pasqual asked if Denholm’s
distribution should be conditioned upon the following requirements: (1) expiration of all appeal periods relating
to the Civil Action and accounting disputes; (2) payment to the Trust or
liquidation of the amounts Denholm may owe the Trust, so that an offset for
such liabilities can be taken against the principal amounts distributed to him;
and (3) payment to the Trust of any fees and costs Denholm may owe arising from
the accounting dispute or the Civil Action.
San Pasqual requested instructions about which Trust assets should be
used to make the distribution to Denholm because much of the Trust’s value was
tied up in leased real property.
On December 1, 2010, San
Pasqual filed a supplemental petition (hereafter first supplemental petition),
advising the court a minute order had been issued in the Civil Action awarding
the Trust over $5 million in damages.
San Pasqual provided a list of the Trust’s current assets, having a net
equity of over $2.5 million. San Pasqual
noted the Holts did not agree with San Pasqual’s position the Civil Action
judgment was for the benefit of the Trust and all its beneficiaries. San Pasqual stated the amount of the judgment
award should be added as an asset of the Trust, increasing the net assets of
the Trust to $8,272,568. San Pasqual
proposed distributing Denholm his one-half interest in the principal as a credit
against the $5 million he owed the Trust.
San Pasqual noted there
was also a federal tax lien in the amount of $317,945.37 against Denholm’s
property interests. San Pasqual did not
believe the Trust’s spendthrift clause would prevent the IRS from foreclosing
its lien on Denholm’s interest in the Trust.
San Pasqual requested instructions about whether it must satisfy the
lien before making any distribution to Denholm.
And finally, San Pasqual
asked for instruction about making income payments to Denholm because his
rights as an income beneficiary terminated on
October
7, 2010. San Pasqual recognized Denholm
would be entitled to interest on his one-half vested interest in the undistributed
trust principal.
The Holts filed
objections to both petitions. On October
3, 2011, the court held a trial and considered the testimony of witnesses,
reviewed exhibits, and heard oral argument.
The court took the matter under submission and filed a lengthy statement
of decision.
In the statement of
decision, the probate court stated San Pasqual’s petition for instructions
about how to distribute Denholm’s one-half interest in the Trust appeared to be
a simple request. It stated the petition,
however, was complicated by the following facts: (1) it was filed before the judgment in the
Civil Action, and that judgment is being appealed; and (2) there are still
actions pending in the probate department regarding Denholm’s accounting and $2
million in surcharges against Denholm.
The court summarized the
Holts’ objections to the petition as follows:
“The Holts argue . . . that ‘there is no plausible scenario’ under which
[Denholm] is entitled to anything.†The
probate court concluded it could not “make that finding†and prepared a lengthy
statement of decision addressing over 16 arguments raised by the Holts, as well
as, a few concerns raised by Denholm.
The probate court ultimately concluded (1) 50 percent of the Trust’s
assets as of October 7, 2010, vested with Denholm, and (2) those assets should
be distributed to Denholm when the remittitur is filed in the appeal concerning
the Civil Action. Because the Holts do
not challenge all the findings made in the 13-page statement of decision, we
have limited our discussion of the statement of decision to the specific issues
raised by the Holts on appeal.
II
Civil Action Judgment Is Only in Favor of the Trust
The Holts’ first
contention on appeal is “Denholm is not entitled to half of the judgment in the
Civil Action.†Their argument is based
on the premise Denholm’s interest in the Trust was “fixed†as of October 7,
2010, and cannot include the judgment.
They also maintain Denholm cannot, as a matter of law, benefit from his
own wrong. “Denholm would be unjustly
enriched by virtue of misconduct if he were entitled to
one-half
of the Civil Action: ‘No one can take
advantage of his own wrong’ [citation], must trump any right Denholm had to
receive one-half of the Trust on October 7, 2010.â€
The probate court rejected
this argument for several reasons. First,
the probate court noted the civil court did not order Denholm to pay the civil judgment
while that matter was pending on appeal.
Moreover, the Trust clearly provided the trustee must distribute Denholm’s
share. The court concluded, “Nowhere in
the Trust, case law, or statute is it required that [Denholm] pay his ‘damages’
to the Trust prior to receiving his distribution therefrom.†The Holts fail to provide us with any authority
to the contrary. We found no authority
holding Denholm must pay compensatory damages to the Trust before receiving his
vested share of the Trust.
The probate court also
recognized the Holts were not framing the issue correctly: “The issue of allocation of the civil
judgment (which clearly belongs to the Trust) is a matter that concerns the
internal affairs of the Trust, was clearly at issue in this trial, and the [c]ourt
has determined it accordingly.†The
probate court clarified that “contrary
to what the Holts argue, the Civil Action did not determine any allocation of
the civil judgment. . . . True, the judgment
was against [Denholm] only, but it was not allocated to favor only the Holts
either. The civil court ruled that
judgment was found in favor of the ‘plaintiffs [Holts] on behalf of the [T]rust
. . . .’ It was a credit to the [T]rust not to the Holts.†On appeal, the Holts do not explain why this reasoning
was incorrect. We find no reason to
disturb the probate court’s determination the civil judgment became an asset of
the Trust, payable to its beneficiaries.
The probate court accurately
explained Denholm’s entitlement, as the Trust’s beneficiary, to the Trust’s
assets was not before the civil court and was not decided in the Civil Action. The only issue concerning Denholm’s
entitlement as one of the Trust’s beneficiaries was related to the financial
elder abuse cause of action and the court found in his favor on that
claim. Consequently, the civil court “never
considered the issue of a forfeiture of [Denholm’s] share of the Trust under
the Probate Code. The allocation of
Trust assets (which includes the civil judgment), is a matter that concerns the
internal affairs of the Trust, is clearly at issue in this trial, and the court
has disposed of it accordingly.â€
We conclude the
probate court’s assessment of the limited issue before it was correct. Nothing in the Civil Action’s judgment
indicated Denholm forfeited his interests as a beneficiary. The entire judgment was allocated in favor of
the Trust, not the Holts individually, nor Denholm individually. The only issue left for the probate court to
decide was how the Trust assets should be allocated.
Consequently, we find the
Holts have mischaracterized the issue on appeal as relating to whether Denholm should
be awarded one-half of the $5 million judgment in the Civil Action. The probate court had nothing to do with the
determination or award of that judgment.
It simply determined that under the terms of the Trust, Denholm was
entitled to one-half of the Trust’s estate.
This is the only ruling we are reviewing in this appeal. And for this reason, we deem irrelevant the Holts’
discussion and analysis of case law regarding allocation of civil judgments, unclean
hands, and civil actions against trustees.
B.
The Civil Judgment Is Considered a Trust Asset
The parties are in
agreement that the $5 million judgment is an asset of the Trust. This conclusion is amply supported by the
record. As recited in the statement of
decision in the Civil Action, the judgment was in favor of the Trust, not the
Holts individually. The trustee must
seek collection of the judgment as it is now one of the Trust’s assets.
On appeal, the Holts
maintain that because the Civil Action judgment was entered
vested on October 7, 2010, it was not an asset of the Trust at that time, and therefore,
Denholm is not entitled to any of it. We
note this argument is an interesting departure from one raised in
terminated on October 7, 2010, and because the trustee delayed distribution, Denholm
lost the right to collect his inheritance.
In this appeal, the Holts argue that when the Trust terminated in 2007, Denholm’s
financial interest was “fixed†as of that date.
In any event, both contentions are wrong. Denholm’s interest vested in one-half of the
entire Trust estate as it existed on October 7, 2010, not a particular dollar
value. One of the Trust’s assets as of
October 7, 2010, was the right to recover the $5 million Denholm had
misappropriated. That the judgment on
the claim was not entered until after October 7, 2010, is of no legal
consequence. The judgment was simply the
fruition of the right to recover the loss.
Citing to
Cal.App.4th 1619
(
interests would not be determinable on the date of the delivery of the Trust’s
assets (or include the Civil Action judgment), but rather should be determined
from the date the Trust instrument terminated as to him. The Holts have misconstrued the case. We conclude the Salvation Army case supports the probate court’s conclusion that
because Denholm’s interest in one-half of the Trust vested, his share will be
valued on the date of distribution. The
amount of his share was not “fixed†on October 7, 2010.
In the
created two testamentary trusts, Trust A and Trust B, for the benefit of her
husband for his life. (
p. 1621.) Upon husband’s death, the
assets in Trust B were to be paid to five specified charities (including the
Salvation Army) in amounts that totaled $240,000. (Ibid.)
The will provided the residue, if any,
was to be paid to the trustor’s nephew’s children, or to their issue (who
included defendant). The trustor died in
1971 and was survived by her husband. When he died four years later, Trust B had
assets valuing over $178,000, and included an interest in a parcel of land that
was the subject of several lawsuits. (
administration of Trust B pending resolution of the lawsuits. (Ibid.)
After 18 years passed,
the trustee advised the court the lawsuits had been concluded and Trust B’s
assets had increased in value to nearly $900,000.
(
p. 1622.) The trustee petitioned the
court for instructions indicating the $900,000 should be paid to the five
charities proportionately. Defendant
opposed the petition, claiming the charities were entitled only to $240,000,
plus interest from 1974. The trial court
agreed with defendant, and the charities appealed. The appellate court decided the charities had
acquired a vested interest in all of Trust B’s assets, reversing the trial
court’s ruling the charities had acquired a vested interest in no more than
$240,000. (Id. at pp. 1622-1625.)
The court in
subdivision (a), provides a trust terminates when the terms of the trust expire. The court explained, however, that “[s]ection
15410, subdivision (c), provides, in relevant part, that upon termination of a
trust which terminates under its own terms, the trust property shall be
distributed ‘as provided in the trust instrument or in a manner directed by the
court that conforms as nearly as possible to the intention of the settlor as
expressed in the trust instrument.’
[Citation.] [¶] ‘When the objects of a trust have been fully
performed the title of the trustee ceases and the legal as well as the
equitable title vests in the beneficial owner unless the intention of the
creator clearly appears that the legal title should continue in the trustee.’ [Citations.]
Moreover, ‘[i]n the absence of any indication to the contrary a testator
contemplates prompt distribution.’
[Citation.] [¶] In this case Trust B’s purpose was to provide
[the trustor’s husband] with income during his lifetime, and [the trustor’s]
clear and stated intent was that the Trust B assets were to be distributed upon
[the trustor’s husband’s] death. The
parties do not dispute the probate court’s finding that Trust B terminated upon
[the trustor’s husband’s] death on November 11, 1974. [¶] We
conclude, as a matter of law, that upon [husband’s] death, the trust terminated
after having been fully performed, and the beneficiaries’ rights vested. At the time of termination the Trust B assets
had a value of approximately $178,000 and were insufficient to fully satisfy
the $240,000 in specific pecuniary charitable bequests. Consequently, the specific charitable
beneficiaries each received a vested beneficial share of the Trust B assets
proportionate to their specific bequests.
[The charities] are correct that because at the time the trust
terminated and the beneficial interests vested there was no residue, the
residuary beneficiaries’ interests were extinguished. That actual physical distribution of the
Trust B assets was postponed 20 years does not affect the earlier vesting of
title upon the trust’s termination.
[Citation.] Consequently, the
court erred in determining that [the charities] were entitled only to $240,000
plus interest thereon and that [defendant] and the other residuary
beneficiaries were entitled to all remaining
Trust
B assets.†(Salvation Army, supra, 36 Cal.App.4th at pp. 1624-1625.)
In other words, the court
held the charities had a vested interest (in proportionate shares) to the
entire trust’s principal, valued now at $900,000. Their interest was not fixed at $178,000 when
the trust terminated. During the 20-year
delay in distribution, the trust estate could have decreased or increased in
value. Each charity was simply entitled
to its share of the trust, valued at the time of long awaited distribution.
For the reasons already
set forth in San Pasqual I, we
reiterate that when the Trust terminated on October 7, 2010, Denholm gained a beneficial
interest in one-half of the Trust’s principal.
In that opinion, we held the postponement of his distribution did not
change the nature of this vested interest.
Contrary to the Holts’ contention, the Salvation Army case does not support the theory the dollar amount of
Denholm’s share of the Trust became fixed.
Just as the charities in Salvation
Army could collect the substantial sum of money that accumulated when
distribution was delayed for 20 years, Denholm can collect money the Trust
recovered while his distribution of the Trust was delayed. As stated above, the judgment did not
represent a new asset, but rather the recovery of money wrongfully taken from
the Trust.
As aptly stated in the
probate court’s statement of decision: “The
[c]ourt has previously ruled [and this court has affirmed on appeal] that
[Denholm] remains a beneficiary of the Trust until his share is completely
distributed to him or otherwise disposed.
[Denholm’s] interest in the Trust is present, unconditional and vested .
. . . The civil judgment arose from a
civil complaint that was filed against [Denholm] while he was a beneficiary of
the Trust (as he continues to be). Even
though the civil judgment was entered after expiration of the [five-year]
vesting period, [Denholm] is still entitled to his portion of the civil
judgment as it has changed from a chose in action to an obligation by [Denholm]
to the Trust.â€
Forfeiture
Alternatively,
the Holts suggest Denholm forfeited his right to a distribution under the terms
of the Trust because a civil judgment was entered against him. They have no authority to support this
contention. Nor do they have any
authority to support the notion they are entitled to Denholm’s vested one-half
share of the Trust. As aptly stated by
the probate court, “The Holts believe that the civil judgment against [Denholm]
is a de facto forfeiture of his
interest in the Trust. This is not
true. The civil judgment, against
[Denholm] individually, is for the benefit of the Trust. The Holts, as beneficiaries of one-half of
the Trust brought the civil action on behalf of the Trust and the judgment was
for the benefit of the Trust. Thus, the
civil judgment became another asset of the Trust, along with the Trust’s
interests in the Sawtelle property, [etc.,] . . . .†Moreover, the court noted, “Nothing in the
Trust expressly allows for withholding [his] share.†We agree there are no grounds to find Denholm
forfeited his interest in the Trust.
The probate court
provided a detailed explanation about why it rejected the Holts’ claim Denholm
forfeited his inheritance and their assertion Denholm cannot be allowed to profit
from his own misconduct, bad faith, fraud, and deceit. Primarily, the court based its decision on
the conclusion the Holts had misstated the basis for the judgment in the Civil
Action. The probate court reasoned Denholm
was found liable in tort, but “clearly exonerated of any fraud or deceit . . .
. No punitive damages were awarded. $5.3 million, roughly, is the sum of
compensatory damages, which were awarded to the Trust. . . . The [c]ivil
[c]ourt found no intent to deceive or defraud. . . . Constructive fraud was
based on the finding of breach of fiduciary duty. The same is true for the finding of
conversion, which the [c]ivil [c]ourt notes is a strict liability tort, not
requiring knowledge or intent. . . . [The
Civil Action trial judge] found [Denholm] was not relieved of liability under .
. . section 16440, [subdivision (b),] because he did not meet his burden of
proof to show he acted reasonably and in good faith. This is
not the same as a finding of bad faith . . . . This is not the same as saying [Denholm] forfeits
his share. (Fns. omitted.)†We have carefully read the lengthy statement
of decision issued in the Civil Action and reach the same conclusion. Contrary to the Holts’ arguments, Denholm was
exonerated of elder abuse, fraud, deceit, and bad faith.
We therefore also agree
with the probate court’s conclusion that because Denholm was not found liable
for elder abuse, the forfeiture statute (§ 259) was inapplicable.
to hold Denholm forfeited his inheritance.
To the contrary, as
aptly noted by the probate court, the case Estate
of Frank Dito (2011) 198 Cal.App.4th 791 (Dito), held a section 259 finding would not necessarily eliminate a
beneficiary’s entire inheritance. In the
Dito case, the testator’s grandson
petitioned for a hearing about whether the testator’s widow was exempted from
receiving a share of the estate as an omitted spouse because of allegations she
committed financial elder abuse. The
court held the financial elder abuse allegations had no bearing on the
determination of whether the widow is an omitted spouse under sections 21610
and 21611. Section 259, “does not
necessarily disinherit an abuser entirely but rather restricts the abuser’s
right to benefit from his or her abusive conduct. [Citations.]â€
(Dito, supra, 198 Cal.App.4th
at p. 803, fn. omitted.) The statute
“restricts the value of the estate to which the abuser’s percentage share is
applied and prevents that person from benefiting from his or her own wrongful
conduct.†(Id. at p. 804.) The abusers
are considered “to have predeceased the decedent only to the extent the person
would have been entitled through a will, trust, or laws of intestacy to receive
a distribution of the damages and costs the person is found to be liable to pay
to the estate as a result of the abuse.â€
(Id. at pp. 803-804, fn. omitted.)
The Dito court concluded the section 259 claim “does not affect or
threaten the prior determination that [the widow] is a surviving omitted spouse
under
section
21610. [The widow] retains that status
and is entitled to her share of the estate as specified in section 21610,
although she is not allowed to share in any damages and costs she could be
liable to pay to the estate as a result of the alleged elder abuse. It is conceivable that any damages and costs [the
widow] might be liable to pay to the estate would exceed her share of the
estate, resulting in a situation in which she pays more to the estate in
damages and costs than she receives as an omitted spouse under
section
21610. However, the mere fact that
application of section 259 might
reduce or even effectively eliminate [the widow’s] inheritance does not mean
that it concerns the same primary right as a claim she is an omitted spouse
with an entitlement to a share of the estate.â€
(Dito, supra, 198 Cal.App.4th
at p. 804.)
In the case before us,
there is no evidence of elder abuse, bad faith, fraud, or deceit. The civil judgment awarded only compensatory
damages. As explained in the
his share of the Trust would not be exempt if the civil judgment exceeded his
share of the Trust. And of course, it is
too early to determine the amount of Denholm’s share, if any, of the Trust.
In its statement of
decision, the probate court calculated (and the Holts do not dispute) the civil
damages likely do not exceed one-half of the Trust’s estate. If Denholm’s expected inheritance exceeds the
$5.3 million judgment, there is no basis to hold the Holts are entitled to the entire
civil judgment plus the windfall of the rest of Denholm’s share of the Trust.
We
find it very telling the Holts do not attempt to refute the probate court’s
interpretation of the limited nature of the civil judgment against Denholm, or
the established case law regarding when forfeiture is appropriate. The Holts’ failure to support their
contention with meaningful legal analysis waives the issue on appeal. (See Badie
v. Bank of America (1998) 67 Cal.App.4th 779, 784-785.)
D. As Held in San Pasqual I—Denholm
is a Trust Beneficiary
In their objections to
the petition, the Holts again argued Denholm was no longer a beneficiary. The probate court chastised the Holts for
persisting with this argument despite the probate court’s prior ruling
rejecting it. The probate court
reiterated Denholm remains a beneficiary until his share is completely
distributed to him or otherwise disposed of.
It reasoned, Denholm’s interest is “present, unconditional and vested .
. . [and] necessarily includes the civil judgment, the Sawtelle property, and
the other [assets of the Trust]. The
Sawtelle property has a value that is greater than the debt. The other assets of the Trust, including case
and notes, all exceed ‘zero.’ Thus, the
value of [Denholm’s] interest in the Trust is greater than ‘zero.’â€
We affirmed the probate
court’s prior ruling in San Pasqual I,
and we incorporate by reference our discussion and holding Denholm’s interest
in the Trust was not forfeited or otherwise extinguished by the Trustee’s delay
in distributing Denholm’s vested interest in one-half of the Trust’s
principal. We caution the Holts that to
raise this issue again would be deemed a frivolous act subject to
sanctions.
Surcharge
Holts maintain that if this court determines Denholm is entitled to one-half of
the judgment, his interest should be surcharged by that amount. We need not decide this issue because it was
not properly raised or decided by the probate court. In other words, we found no court order
denying a request for surcharge for us to review.
The record shows that in
response to Denholm’s request that the Trust property be sold to help pay his debt,
the probate court noted San Pasqual had a duty under section 16006 “to preserve
[T]rust property and under section 16010 to enforce claims that are part of the
[T]rust property. Such claims include the
civil judgment, and any surcharges against [Denholm] in connection with the
pending accounting.
[San
Pasqual] asserts the trustee’s right to claim an offset, which is an equitable
principle. [Citations.] There
has been no surcharge to date.â€
Consequently, the Holts’
assertions regarding the right to a surcharge are premature. The civil judgment is not final and a hearing
challenging Denholm’s accounting has not yet taken place. The trustee’s petition and the court’s
statement of decision both reflect the understanding the amount of Denholm’s
inheritance will depend on how much money he owes the Trust. The probate court properly recognized it had “insufficient
evidence to set a dollar amount.â€
We note the Holts do not
dispute the probate court’s determination regarding the timing of Denholm’s
distribution. The court determined
Denholm’s share of the “assets shall be made upon filing of the remittitur in
the appeal of the Civil Action.†We
anticipate San Pasqual will file a petition when the remittitur has issued,
seeking instructions on the amount to be distributed. Issues regarding offsets and surcharges can
properly be addressed at that time.
Benefitting From One’s Own Wrong
The Holts repeatedly
complain the probate court’s ruling permits Denholm to benefit from his own
wrongdoing. We disagree. Due to Denholm’s breach of fiduciary duty, he
is obligated to pay the Trust $5.3 million in compensatory damages. Denholm’s distribution will take into account
what he owes the Trust, and for this reason he will not benefit from his
wrongdoing.
For example, if we
assume for the sake of argument the value of the Trust without the Civil Action
judgment is $9 million, the total value of the Trust will increase to
approximately $14 million with the judgment added. Pursuant to the express Trust terms, Denholm
and the Holt Beneficiaries have an interest in one-half of the Trust estate ($7
million each). We fail to see how
Denholm benefits from his wrongdoing if he pays the judgment before receiving
his distribution of the estate, or if his distribution is offset by what he
owes the Trust. In either scenario, the
judgment will force Denholm to remedy his wrongdoing. On the other hand, we find it would be highly
inequitable to distribute to the Holt Beneficiaries half of the current value
of the estate $4.5 million in addition to the entire $5 million judgment
(giving them $9.5 million), or as they suggest, the entire estate ($9 million)
plus the judgment for a total of $14 million.
The latter calculations would mean Denholm would receive no inheritance,
forfeiting millions (in addition to the civil judgment) to the Holt Beneficiaries
for no apparent reason. This windfall
puts the Holts in a better position than if they had never sued Denholm. If this had been a case involving elder abuse
the outcome may have been different, and the court could have held Denholm
forfeited some portion of his inheritance.
But Denholm prevailed on the elder abuse claim, and we find no legal
basis to hold Denholm’s vested interest in the Trust was entirely forfeited due
to mistakes he made while acting as trustee.
III
The order is affirmed. Respondents shall recover their costs on this
appeal.
___________________________
O’LEARY,
P. J.
WE CONCUR:
___________________________
BEDSWORTH, J.
___________________________
ARONSON, J.
name="_ftn1" title="">[1] All
further statutory references are to the Probate Code, unless otherwise
indicated.
Action judgment is currently pending before this court, in addition to related
appeals concerning postjudgment attorney fee awards. We granted San Pasqual’s motion to consider
the appeals arising from the court’s instructions immediately and separately
from the Civil Action rulings.
