Conservatorship of Jamerson

Filed 10/25/06 Conservatorship of Jamerson CA1/3

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

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IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FIRST APPELLATE DISTRICT

DIVISION THREE

In the consolidated appeal that is the subject of the pending motion to dismiss, U.S. Bank National Association (the bank) appeals from four orders issued by the probate court authorizing James Lane and Leonard Kimara Woolfolk (jointly, conservators), as coconservators of the estate of Elizabeth G. Jamerson, to use the proceeds from the sale of property in San Francisco to purchase property in Tulsa, Oklahoma, as part of a tax-deferred exchange. The bank contends it held an equitable lien against the San Francisco property and that the probate court erred in authorizing use of the sale proceeds to purchase the replacement property without first determining its right to assert a constructive trust over those funds. The conservators assert in their brief and in a separate motion upon which we now rule that the consolidated appeal is moot. We agree and, thus, shall dismiss the appeal.

Factual and Procedural History

In 2004, Lane and Woolfolk were appointed as coconservators of the estate of their grandmother Elizabeth G. Jamerson. At the time, the fairly large estate was in serious financial distress. The conservators determined that the first step in balancing the income and expenses of the estate would be to reduce the estate’s monthly mortgage payments by selling three buildings in San Francisco. The conservators determined that an Internal Revenue Code section 1031 exchange (1031 exchange) would be necessary to avoid paying taxes on more than $2 million in capital gains to be realized from the sales. On January 18, 2005, the conservators filed a report with the court analyzing the 1031 exchange. The report explained that the court had previously authorized the sale of three properties identified as 1674 Golden Gate Avenue, 3200 Harrison Street, and 2148 Pine Street, and that if the sale proceeds were reinvested in “like kind” property the payment of taxes imposed on some or all of the capital gains could be deferred. The report emphasized that the timing of the transactions was crucial because in order to qualify for the favorable tax treatment the exchange must be “simultaneous or nearly so.” The property at 2148 Pine was reported to be worth $1.3 million and encumbered by $1.28 million in debt. Other property was expected to net $930,000 in the sale and the conservators anticipated using these proceeds as the down payment for the exchange property.

On September 29, 2005, the conservators filed a petition to approve purchase of the exchange property. The petition explained that the sale of the three estate properties netted $1,655,935 in cash and debt relief of approximately $3.2 million.[1] The sale proceeds were being held in an account with Investment Properties Exchange Services, Inc. (IPX) pending completion of the exchange, which would defer taxation on $1.2 million of the sale proceeds. A replacement property had been identified in Tulsa, Oklahoma. The conservators indicated they had used $100,000 of the sale proceeds as a down payment on the Oklahoma property and requested authorization to use up to $1,250,000 of the funds being held by IPX to complete the purchase. The matter was set for hearing on October 5.

On October 4, First City Funding doing business as Credit Co. (First City) filed a written objection to the petition on behalf of its successors and assigns. It alleged it was an “equitable lien holder of a mortgage on the property located at 2148 Pine Street” and sought to assert a constructive trust on proceeds from the sale of that property. First City explained that in May 2003 it had loaned the prior conservator of the estate approximately $1 million secured by a deed of trust on property identified as 2148 Pine Street. Due to an error in the property description attached to the deed of trust, the lien was mistakenly recorded against the adjacent property identified as 2140 Pine Street, which was also owned by the estate and mortgaged concurrently for an additional $1 million. Because of the recording error, the mortgage held by First City was not paid when the property was sold. On October 5, IPX also filed a petition for an order interpleading the disputed funds. The hearing on the interpleader petition was set for November 16.

At the October 5 hearing, the conservators acknowledged the deed of trust but questioned the validity of the loan. The conservators explained that First City made five separate loans to the estate for a total of $5 million without first obtaining court approval. In their opinion, First City had been negligent because the properties were over-appraised and over-encumbered. They argued that due to the time constraints of the 1031 exchange, there was insufficient time before the purchase was completed to determine whether First City had an enforceable equitable lien. The conservators represented that if it was later determined that First City is entitled to recover on the loan, “the estate has assets to satisfy any judgment that they might be awarded.” The trial court signed the order authorizing the purchase of the Oklahoma property over First City’s objections and request for an evidentiary hearing, and further directed the parties to discuss alternative means for securing First City’s interests pending resolution of the disputed lien. The bank, as successor in interest to First City, filed a timely notice of appeal.

On November 14, conservators filed an ex parte application seeking an order setting aside the automatic stay pending appeal of the October 5 order. (Prob. Code, § 1310, subd. (b).)[2] At a hearing the following day, over the bank’s objection the court lifted the stay, finding that “[t]he overall losses to the estate as a result of not being able to proceed with the purchase of [Oklahoma property] presents exceptional circumstances resulting in immediate and substantial loss to the property of the estate.” The court also authorized the conservators to use the funds held in the IPX account for the purchase.

On November 16, the hearing was held on IPX’s interpleader petition. The court initially denied the petition as moot in light of its previous ruling, but later changed its decision and authorized the conservators to use $1.1 million of the funds held by IPX for the purchase and ordered the balance of the funds to be held by IPX until further ruling by the court.

On November 29, the conservators filed another petition seeking authority to use an additional $275,000 from the IPX account to complete the Oklahoma purchase. Conservators alleged the additional funds were necessary to cover costs incurred due to a delay in closing caused by the litigation with the bank. The court granted the petition over the bank’s objection. Thereafter, on December 23, 2005, the court entered a written order denying IPX’s interpleader petition. The bank filed timely notices of appeal from each of the three additional orders. The appeals were consolidated for all purposes.

Discussion

The conservators contend the appeal is moot. “A case is moot when the decision of the reviewing court ‘can have no practical impact or provide the parties effectual relief. [Citation.]’ [Citation.] ‘When no effective relief can be granted, an appeal is moot and will be dismissed.’ “ (MHC Operating Limited Partnership v. City of San Jose (2003) 106 Cal.App.4th 204, 214.) Here, the bank has appealed from four orders that collectively authorized the conservators to purchase the Oklahoma property with the funds being held in the IPX account. The sole issue on appeal is whether the court erred in authorizing the conservators to use the disputed funds without first holding an evidentiary hearing on the validity of the bank’s equitable lien and its right to assert a constructive trust over the disputed funds. The conservators, however, have now exercised the authority that was conferred by the disputed orders.[3] The purchase has been completed and the proceeds from the sale of 2148 Pine Street exhausted. Because under the Probate Code the conservators’ acts are deemed to be valid regardless of the correctness of the court’s ruling authorizing the action, this court cannot undo the completed transaction and order the funds restored to the IPX account. (See Prob. Code, §§ 1310, subd. (b), 2557, subd. (f).) Accordingly, if this court were to conclude that the probate court erred in failing to conduct an evidentiary hearing, such a determination would have no practical impact or provide the bank with any effectual relief. Whether or not the probate court correctly authorized use of the sale proceeds as it did, in order to establish a constructive trust the bank must establish the validity of its equitable lien in an evidentiary hearing before the probate court. If the bank establishes that it did hold an enforceable lien, the sale proceeds can be traced to the Oklahoma property and the bank may impose a constructive trust on that property. (Gladstone v. Hillel (1988) 203 Cal.App.3d 977, 989.)

The bank implicitly recognizes that the purchase is final and the disputed funds cannot be restored. It argues that the appeal is not moot because “if the proceeds of the sale of 2148 Pine Street were subject to a constructive trust in respondents’ favor, that trust could follow the proceeds into the Oklahoma property.” But whether the bank is entitled to assert a constructive trust over the disputed funds is not now before this court. The probate court did not purport to resolve that dispute. The court determined only that completion of the tax-deferred exchange was necessary to avoid a significant tax burden on the estate and it attempted to ensure that until the dispute was resolved the bank’s interests would be protected by a lien against other property. Although the court’s attempt to mediate a solution and find alternate security apparently was unsuccessful, the court nonetheless authorized use of the sale proceeds to complete the purchase of the Oklahoma property without delay. The probate court did not decide the validity of the bank’s equitable lien claim, and it must do so before this court can review that issue.

Contrary to the bank’s assertion, the conservators have not argued that the probate court’s orders now on appeal determined the invalidity of the bank’s equitable lien claim. The conservators demurred to a complaint for breach of contract filed against the estate by the bank in a separate action on the ground that “[t]here is another action pending between the same parties and on the same cause of action.” The conservators’ statement in that action that the probate court authorized them to use the disputed funds over the objection of the bank does not imply that the probate court rejected the bank’s constructive trust claim.

The bank suggests the appeal is not moot because the probate court’s orders “cast a cloud” over its pending breach of contract claim “because they do not indicate with any clarity whether the court intended to override the bank’s security interest, the underlying obligation, both or neither.” The record is clear, however, that the court did not reach the issue of whether the bank’s security interest was enforceable. There is no adverse ruling which might impact the bank’s ability to litigate its right to a constructive trust in the proceeds of the sale of 2148 Pine Street and in the Oklahoma property purchased with those proceeds. The bank also contends we should not dismiss this appeal because the finding in the November 30 order that the conservators incurred $275,000 in additional closing costs “[a]s a result of litigation” might give rise to a claim for damages by the conservators against the bank. This possibility is too speculative to rescue the present appeal from mootness.

Disposition

The appeal is dismissed as moot. The conservators’ request for sanctions is denied. The conservators shall recover their costs on appeal.

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Pollak, J.

We concur:

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McGuiness, P. J.

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Siggins, J.

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[1] As discussed below, the net cash recovery from the sales was greater than anticipated in part because $1 million in debt that the conservators had initially determined was subject to an encumbrance on 2148 Pine Street was not satisfied from the proceeds of the sale.

[2] All statutory references are to the Probate Code unless otherwise noted. Section 1310, subdivision (b), provides: “Notwithstanding that an appeal is taken from the judgment or order, for the purpose of preventing injury or loss to a person or property, the trial court may direct the exercise of the powers of the fiduciary, or may appoint a temporary guardian or conservator of the person or estate, or both, or special administrator, to exercise the powers, from time to time, as if no appeal were pending. All acts of the fiduciary pursuant to the directions of the court made under this subdivision are valid, irrespective of the result of the appeal. An appeal of the directions made by the court under this subdivision shall not stay these directions.”

[3] The bank asserts in its reply brief that “the record contains no evidence that respondents ‘used the IPX funds to purchase the Oklahoma property’ on December 9, 2005.” The declaration of James Lane, attached to the conservators’ motion to dismiss, however, confirms the purchase date and that the IPX funds were exhausted through the transaction.