Nay v. Hudson

Filed 9/27/06 Nay v. Hudson CA1/1

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

California Rules of Court, rule 977(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 977(b). This opinion has not been certified for publication or ordered published for purposes of rule 977.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FIRST APPELLATE DISTRICT

DIVISION ONE

I. INTRODUCTION

Appellant is one of two beneficiaries of the inter vivos trust of his deceased mother. Following the filing of the trustee’s first account, appellant objected to several items in the account, including the size of the trustee’s fees and the payment of certain attorney fees. The probate court found merit in some of appellant’s arguments and required a partial reimbursement of fees by both the trustee and her attorneys. The probate court also surcharged the trustee for costs associated with the late payment of estate taxes.

Appellant now contends that the probate court should have required even greater reimbursements. Finding no abuse of discretion in the probate court’s order, we affirm.

II. BACKGROUND

Mary Nay (trustor) created an inter vivos trust in 1996. The trust instrument directed that her two sons, Frank and John Nay,[1] were to receive equal shares of the trust assets upon her death. After the trustor’s death in August 2001, respondent Mary Hudson (trustee), the trustor’s niece, became the successor trustee, charged with winding up the trust and distributing its assets. After three years, the trustee filed her first account. Frank objected to various matters reported in the accounting, including the size of the trustee’s and attorney fees. While the probate court accepted certain of Frank’s arguments, it rejected others. Frank renews the rejected arguments here.

A. The Audiotape

In a letter dated November 16, 2002, John referred counsel for the trustee to an audiotape that purported to record an August 1999 conversation between John and the trustor. We have no transcript of the audiotape, but the trustee’s counsel characterized its contents as follows: “The audiotape reviews some aspects of [the trustor’s] life and family, and also her testamentary desires. On the issue of her estate, [the trustor] states that she ‘would like to even things up a bit,’ referring to a larger distribution to John than to Frank in recognition of lifetime gifts [to Frank].” The trustor may have described a specific, alternative distribution of trust assets, particularly the trust’s real property.

John’s letter to trustee’s counsel did not expressly demand that the trust assets be divided according to the terms of the audiotape. The letter raised a number of questions about the handling of the trust and the distribution of assets and merely characterized the tape as “expressing [the trustor’s] desires relative to her estate.”

Following receipt of the audiotape, counsel for the trustee conducted research to determine the legal significance of the audiotape and concluded that the tape did not override the contrary provisions of the trust instrument. Counsel prepared a draft petition for instructions to that effect. The draft petition was provided to John and Frank, and John thereafter executed a written waiver releasing any claim relating to the audiotape. The petition for instructions was never filed.

There is some dispute about the fees charged for this work, which are not wholly clear from counsel’s legal bills. Frank contends that the cost was “approximately $23,000,” while the trustee contends that the cost was “at most approximately $19,000.” In response to Frank’s objections to the trustee’s accounting, the probate court required the trustee’s counsel to reimburse the trust for $9,000 of the sum billed for this work. Discussing her ruling during a hearing, the probate commissioner stated, “I believe that considerable amount of attorney time was warranted on [the] audiotape. . . . However, I did not see it as needing . . . to go as far as [a] petition for instructions to the Court. . . . . . . [S]o I did not take all of that off but that was [a] portion of it.”[2]

B. The Petition for Instructions

On November 7, 2003, the Internal Revenue Service (IRS) notified the trustee that it was going to conduct an audit of the trust’s estate tax return and requested documents relating to the administration of trust assets. Five weeks later, the trust’s accountant sent a letter to Frank requesting information about potential gifts made by the trustor to Frank, an item of interest to the IRS. These possible gifts took the form of funds received in connection with real property owned by the trustor in the State of Washington. The accountant requested that Frank respond within four weeks. It was not until approximately eight weeks after the accountant’s letter, on February 13, 2004, that Frank supplied the documents. On March 5, the accountant wrote a letter to the IRS arguing that the funds received by Frank did not constitute gifts.

The trustee filed a petition for instructions on March 12, 2004. The petition explained that the trustor had owned three rental properties in the State of Washington that were managed by Frank prior to her death. After the trustor’s death, the properties were transferred to the trust. Frank, who had been collecting and retaining the rents from these properties since 1998, had not surrendered to the trustee any of the rents he received from the Washington properties, although the trust paid for many of the expenses associated with the properties, including mortgage, insurance, and property taxes. Further, the petition alleged, Frank “had, until recently, refused to provide Trustee” with financial records relating to the properties.[3] The petition sought instructions in connection with a variety of issues related to the characterization and treatment of income and expenses associated with the Washington properties.

Although one purpose of the petition, to compel Frank to cooperate with the trustee by providing documents relating to the Washington properties, was long since moot by the time the petition was submitted, the trustee claims to have had a continuing concern that the rental receipts would be characterized during the audit as a taxable gift to Frank, resulting in further tax due. Ultimately, the petition was taken off calendar pending a determination by the IRS on the gift tax issue. It has never been heard.

The probate court did not order any reimbursement relating to this petition.

C. The Bay View Bank Account

The Bay View Bank account was the subject of a prior nonpublished opinion of this court. (Nay v. Hudson (Jan. 9, 2006, A108903).) The following summary is based on the detailed discussion in that decision.

The trustor held four accounts at Bay View Bank upon her death. The trustee included only one of these when compiling assets of the trust. Two of the accounts were unavailable to the trust because they had been divided equally and paid to John and Frank soon after the trustor’s death. The trustee did not include the fourth account in the trust because, the trustee claimed, it was a joint account in the names of trustor and John that was paid out by the bank directly to John following the trustor’s death. The only purported proof that the account was joint, however, was a bank statement listing the account in the name of “Mary E. Nay ITF.” There is no reference to John.

There was some reason for confusion about the trustor’s original intent to include this account in the trust. There existed three different versions of the schedule purporting to list the assets of the trust, all handwritten. None of the exhibits were dated or initialed by the trustor, although each made some, if ambiguous, reference to the Bay View Bank accounts. Nonetheless, a typed and notarized amendment to the trust, dated three days before the trustor’s death, stated unequivocally that “Trustor’s savings accounts at Bay View Federal Bank shall be distributed in equal shares unto John R. Nay and Frank D. Nay, share and share alike.”

In September 2004, Frank filed a “Petition for Order Determining that Bank Accounts are Trust Assets,” in which he sought an order directing that all four Bay View Bank accounts be included as assets of the trust. John did not oppose the petition, but the trustee filed a “response” in partial opposition. The response pointed out that one of the accounts had, in fact, been included in the trust and that Frank had already received a one-half distribution of two others. With respect to the fourth account, the trustee implied that the apparently conclusive amendment might have been gained through undue influence, but she did not provide any evidence of such influence beyond the fact that the trustor was living with Frank at the time the amendment was executed. We reversed the trial court’s denial of Frank’s petition as to the fourth account, concluding that “[t]he amendment . . . , together with the consistent intent expressed in the various [schedules], both unchallenged by any competent evidence to the contrary . . . , constitute clear and convincing evidence that [the trustor] intended . . . the Bay View Bank accounts to be assets of the trust and divided equally between her sons.” (Nay v. Hudson, supra, A108903.)

Frank contended that the trustee was not entitled to payment from the trust of attorney fees incurred in the preparation of the response to his petition. The probate court apparently rejected this contention, for there is no mention of it in the commissioner’s order.

D. Trustee’s Fees

Although Probate Code section 16062 requires a trustee to account annually to the beneficiaries, the trustee did not file her initial accounting until September 10, 2004, more than three years after the trustor’s death. The accounting revealed that the trustee had paid herself some $40,000 a year in fees, substantially more than the annual 1 percent of the value of the estate that is deemed ordinary compensation under the court’s local rules. (Super. Ct. City & County of S.F., Uniform Local Rules, rule 14.98.)

In response to Frank’s challenge, the trustee broke her fees into one portion justified under the local rule and a second portion characterized as extraordinary fees. The probate court ordered the trustee to reimburse the trust $54,396, the amount she sought as extraordinary fees, thereby reducing the trustee’s fees to the annual 1 percent of assets prescribed by the local rules. As the commissioner noted, “[t]he trustee had no basis for paying herself the amount that she did.” In addition, the court directed the trustee to reimburse the trust for $14,879 incurred by the trust as penalties and interest for the late filing of the trustor’s estate tax returns, noting that “[t]he tax penalties should not have arisen.”

III. DISCUSSION

Probate Code section 15684 governs the payment of expenses incurred by a trustee from the assets of the trust: “A trustee is entitled to the repayment out of the trust property for the following: (a) Expenditures that were properly incurred in the administration of the trust. (b) To the extent that they benefited the trust, expenditures that were not properly incurred in the administration of the trust.” “ ‘[A]mong the ordinary powers and duties of a trustee of a private trust are those of doing all acts necessary and expedient to collect, conserve and protect the property of the trust, to maintain and defend the integrity of the trust for the benefit of the beneficiaries and to employ such assistants as may be necessary for said purposes.’ “ (Terry v. Conlan (2005) 131 Cal.App.4th 1445, 1461, quoting Evans v. Superior Court (1939) 14 Cal.2d 563, 574.) A trustee is entitled to retain and compensate attorneys “to advise or assist the trustee in the performance of administrative duties.” (Prob. Code, § 16247; see Wells Fargo Bank v. Superior Court (2000) 22 Cal.4th 201, 213.) In addition, a trustee is entitled to “reasonable compensation for services rendered.” (Estate of Gump (1991) 1 Cal.App.4th 582, 597.)

Determination of the proper amount of trustee’s fees and expenses is left to the sound discretion of the probate court, and that court’s decision will not be reversed in the absence of an abuse of discretion. (E.g., Terry v. Conlan, supra, 131 Cal.App.4th at p. 1461 [payment of attorney fees from trust]; Finkbeiner v. Gavid (2006) 136 Cal.App.4th 1417, 1422 [trustee’s fees].) “[I]t is generally accepted that the appropriate test of abuse of discretion is whether or not the trial court exceeded the bounds of reason, all of the circumstances before it being considered.” (In re Marriage of Connelly (1979) 23 Cal.3d 590, 598; Estate of Gilkison (1998) 65 Cal.App.4th 1443, 1448.) Given this standard of review, “[a]n attorney who prosecutes an appeal from an order addressed to the trial court’s sound discretion is confronted with more than a daunting task.” (Estate of Gilkison, at p. 1448.)

A. The Audiotape

Frank contends that the trial court should have required a complete reimbursement of attorney fees incurred in connection with the analysis of the legal implications of the audiotape because the potential effect of the audiotape was to favor one beneficiary over another. As Frank summarizes his argument, “if the audiotape had any worth at all, it was only to John.” Frank contends that it was up to John, the party to be benefited, to raise the issue of the audiotape.

Under Probate Code section 15684, the trustee is entitled to reimbursement from the trust for expenses “properly incurred in the administration of the trust.” Among the fundamental duties of a trustee charged with winding up a trust is to determine the manner in which trust assets are to be distributed, consistent with the trustor’s intent and the law governing trust interpretation. Presented with an audiotape that purported to express a trustor intent that was inconsistent with the language of the trust, it was entirely proper for the trustee to authorize counsel to investigate the legal implications, if any, of the tape. This was true even in the absence of any insistence by John that the trustee comply with the intent expressed in the tape, since the trustee has a duty to ensure that the trust assets are properly distributed that does not depend upon the urgings of beneficiaries. There was no abuse of discretion in the probate court’s approval of reimbursement for fees incurred for that investigation.[4]

Frank’s argument that it was improper for the trustee to investigate a tape whose implications favored one beneficiary over another establishes an unworkable standard for measuring a trustee’s conduct. Every trust has limited assets; assets distributed to one beneficiary cannot be given to any other. Accordingly, every decision made about the distribution of trust assets risks favoring one potential beneficiary over another. In contending that it is improper for the trustee to investigate issues that would benefit one beneficiary over another, Frank’s proposed standard would remove the trustee entirely from the interpretation of dispositionary language in a trust instrument, leaving the potential beneficiaries to battle among themselves over the proper allocation of assets.

Frank cites only Whittlesey v. Aiello (2002) 104 Cal.App.4th 1221 (Whittlesey) in support of his position. In Whittlesey, the court affirmed a trial court’s denial of payment from the trust of attorney fees incurred by the trustee in connection with a contest to the trust. The trustee had taken the side of one group of potential beneficiaries in litigation regarding the validity of an amendment to the trust. (Id. at p. 1225.) As the court explained, a trustee may properly incur fees in connection with litigation that is for the benefit of the trust--for example, the defense of litigation having the potential to deplete trust assets. (Id. at p. 1227.) The essence of a trust contest, in contrast, is a dispute over which persons will control and benefit from the trust. (Id. at p. 1228.) It presents no risk or benefit to the trust assets, which will not be affected by the outcome. The trustee should ordinarily take a neutral position, rather than expend assets of the trust (in the form of attorney fees) in an effort to affect the outcome of such litigation. (Id. at p. 1231.)

There are two obvious distinctions between this situation and Whittlesey. First, Whittlesey concerned attorney fees expended in a trust contest, a matter considerably different from the questions presented by the audiotape. Perhaps more important, Whittlesey involved fees incurred in litigation. Determining, in the first instance, the manner in which trust assets are to be distributed is a core function of a trustee. The trustee is entitled to incur attorney fees in making that initial determination, to the extent necessary to resolve legal issues. The trustee’s joinder in litigation is an entirely different matter, subject to different considerations.

B. The Petition for Instructions

Frank contends that the trial court abused its discretion in approving payment of the attorney fees incurred in connection with the preparation of the petition for instructions regarding income from the Washington properties. In support of his argument, Frank examines each of the requests for instruction in the petition, contending that there was no evidence to support many of them.

In light of the standard governing our review, we find Frank’s point-by-point scrutiny of the petition irrelevant. The question before us is whether “the trial court exceeded the bounds of reason, all of the circumstances before it being considered.” (In re Marriage of Connelly, supra, 23 Cal.3d at p. 598.) There is no dispute that Frank received income from his mother’s Washington properties prior to her death that might have been characterized as a gift. While the accountant submitted a letter to the IRS disputing the characterization of those receipts as gifts, there was no guarantee that the IRS would accept this position. The trustee’s caution over this issue therefore appears justified. Because at least some of the concerns motivating the petition were within the realm of reason, we cannot characterize the probate court’s decision to allow reimbursement of fees in connection with the petition to have been an abuse of discretion.

C. The Bay View Bank Account

Frank contends that the trustee should have been denied reimbursement for expenses incurred in connection with the preparation of a response to his request for an order requiring inclusion of the Bay View Bank accounts in the trust, arguing that the trustee’s decision with respect to one of the accounts favored one beneficiary over the other.

As noted above, the trustee is entitled to reimbursement of expenses properly incurred in the administration of the trust. In addition to making an initial determination regarding distribution of trust assets, another fundamental duty of the trustee is to determine what assets are properly included in the trust. The trustee made such a determination with respect to each of the four Bay View Bank accounts. When Frank sought an order requiring inclusion of those accounts in the trust, the trustee acted properly in submitting a response explaining her actions to the probate court.

In contesting the trustee’s decision to file a response, Frank mischaracterizes the nature of his petition by ignoring its broad scope. Frank challenged the trustee’s treatment of all four of the accounts, not merely the single account that became an issue on appeal. There is no dispute that the trustee properly handled three of the four accounts and that the trustee’s decisions with respect to these three accounts favored neither beneficiary unduly. Even under Frank’s legal theory, the trustee was justified in preparing a response explaining her reasoning with respect to each of these, which were wrongfully challenged by Frank in his petition. The fact that one beneficiary was disproportionately benefited by the fourth of her determinations does not make submission of the entire response improper. Accordingly, we find no abuse of discretion in the probate court’s decision not to require reimbursement of funds expended in preparation of the response.

D. Trustee’s Fees

Frank contends that the probate court should have surcharged the trustee for an even greater proportion of her trustee fees. As discussed above, the trustee was ultimately allowed a fee equal to the annual 1 percent of assets specified by the local rules. Frank argues, in effect, that this was an improper guideline because the value of trust assets at the end of each year was artificially inflated as a result of the trustee’s unwarranted delay in paying estate taxes and distributing assets. Because more assets were on hand at the end of each year than would have been the case had the trustee acted prudently, Frank argues, she received a larger fee than was justified.

In response, the trustee argues that Frank waived this argument by not presenting it to the commissioner. Examining Frank’s submissions below, we find that he did raise this issue in general terms with the probate court, contending in an objection to the accounting that “[t]he trustee has increased her fees by wrongfully delaying her discretionary acts and the administration of this Trust.” The only specific example of delay provided by Frank, however, was the trustee’s delay in paying estate taxes. We therefore consider only this specific example and find the additional examples of purported delay, which are asserted for the first time on appeal, to have been waived.[5] (E.g., Ehrlich v. City of Culver City (1996) 12 Cal.4th 854, 865, fn. 4.)

With respect to the argument raised below, the probate court surcharged the trustee for costs associated with the late payment of estate taxes. We find no abuse of discretion in the court’s apparent decision not to penalize the trustee further by reducing her trustee’s fees on this ground as well.

IV. DISPOSITION

The probate court’s order is affirmed.

_________________________

Margulies, J.

We concur:

_________________________

Marchiano, P.J.

_________________________

Swager, J.

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[1] We refer to Frank Nay and John Nay by their first names as they share the same last name.

[2] The commissioner initially intended to require a refund of $19,000 in connection with this petition, but she was persuaded by counsel during the hearing that the work had some value and reduced the refund to $9,000.

[3] The trustee asserted to the probate court that Frank did not provide the documents until “[i]mmediately before” the filing of the petition in March, an assertion that appears to be inaccurate. The accountant testified that he received the documents on February 13, a full month before filing of the petition. The trustee repeats this inaccurate assertion in this court, without responding to Frank’s citation of the accountant’s testimony, which is in the appellate record.

[4] While it could be argued that trustee’s counsel went too far in preparing a petition for instructions before John had made a formal demand for distribution consistent with the tape, that argument was rendered moot by the commissioner’s requirement that counsel reimburse the trust for some or all of the fees incurred in preparing the petition.

[5] Frank’s reply brief wholly ignored the issue of waiver. Our independent review of the appellate record turned up the single example noted in the text. If Frank did indeed raise below the other arguments for delay contained in his opening brief, he has forfeited the assertion of those arguments by not directing our attention to them in response to the trustee’s waiver argument.