Opinion
B317624
05-26-2023
LAUREN ADAMSON et al., Petitioners and Respondents, v. LESLIE LONDON et al., Appellants.
Hueston Hennigan and Robert N. Klieger for Appellants. Bienert Katzman Littrell Williams, Nancy J. Sandoval and Michael R. Williams for Petitioners and Respondents.
NOT TO BE PUBLISHED
APPEAL from an order of the Superior Court of California. Los Angeles County Super. Ct. No. 20STPB00467 Gus T. May, Judge. Affirmed; remanded for further proceedings.
Hueston Hennigan and Robert N. Klieger for Appellants.
Bienert Katzman Littrell Williams, Nancy J. Sandoval and Michael R. Williams for Petitioners and Respondents.
ZUKIN, J. [*]
This appeal presents the issue of whether beneficiaries of a trust can overcome the tax return privilege to ensure a trustee is fulfilling the trustee's duties of disclosure under the Probate Code. The probate court relied on Schnabel v. Superior Court (1993) 5 Cal.4th 704 (Schnabel) to order production of an estate tax return. The court found the close relationship of the parties and the policy of transparency in probate proceedings embodied in Probate Code sections 16060 and 16061 weighed in favor of production. We affirm, and remand for the probate court to conduct an in-camera hearing to determine the scope of disclosure to ensure the protection of privileged materials not related to the dispute at issue here.
All statutory references herein are to the Probate Code unless otherwise noted.
FACTUAL BACKGROUND AND PROCEDURAL HISTORY
Appellants Leslie London, Gregory London and Kristen London are the co-trustees (Co-Trustees) of a family trust of which respondents Lauren Adamson and Megan Adamson (the Adamsons) are the beneficiaries. The Adamsons sought production of numerous documents from the Co-Trustees relating to the assets and liabilities of this trust, including the estate tax return of their grandmother Sharon Adamson Gee.
1. Background
On December 28, 1985, Merritt H. Adamson (Merritt) and his spouse, Sharon Adamson Gee (Sharon) established the Adamson Trust (Trust). The Trust provided at paragraph 5.1 upon the death of the first spouse, the Trust would be divided into two subtrusts-the Bypass Trust and the Residuary Trust. Merritt and Sharon had two children, Grant Adamson (Grant) and Leslie London (Leslie).
Where necessary to avoid confusion, we refer to the parties by their first names.
Merritt and Sharon had two other children: Samuel, who predeceased them without issue, and Rindge, whom they expressly disinherited. Rindge died in 2019.
Merritt died on March 2, 1986. Pursuant to the Trust, Merritt's separate property partnership interests were distributed to the Bypass Trust and the Residuary Trust. During her lifetime, Sharon was the income beneficiary of both subtrusts. Sharon died on September 28, 2018. Leslie is the executor of Sharon's estate.
Upon Sharon's death, pursuant to paragraphs 4.2.2, 5.2 and 5.4 of the Trust, the assets of the Bypass Trust and the Residuary Trust were to pass to Merritt and Sharon's two children, Leslie and Grant. After Sharon's death, Leslie and Grant were to hold equal 50 percent shares of the Bypass Trust, and in the absence of the exercise of Sharon's powers of appointment over the Residuary Trust, Leslie and Grant would hold equal 50 percent shares of the Residuary Trust upon Sharon's death.
However, Grant predeceased Sharon, dying in an accident on August 6, 2013. Pursuant to the terms of the Trust, upon his death, Grant's share passed to his two children, Lauren and Megan Adamson.
Sharon did not exercise the powers of appointment in her Last Will and Testament. Therefore, after her death, the Adamsons each hold a 25 percent interest in each of the Bypass and Residuary Trusts. Leslie holds the other 50 percent interest of both subtrusts.
There is a dispute pending in a separate proceeding whether the Adamsons are beneficiaries of the Residuary Trust due to an error in the drafting of Sharon's will. Leslie claims to be the sole beneficiary of the Residuary Trust.
Leslie and her two children, Kristen London and Gregory London are the Co-Trustees of the Bypass Trust and Residuary Trust.
2. Bypass Trust Assets
The principal assets of the Bypass Trust are 99 percent interests in five limited partnerships (the Sequit Partnerships), each of which holds a parcel of unimproved real property located in Malibu, California. Leslie is the general partner of the five limited partnerships.
In 2005, the Bypass Trust transferred its interests in these lots to the newly-created Sequit Partnerships.
The Sequit lots are adjacent to each other and fully permitted for development with existing plans for homes. In 2000, a portion of Lot 3 was subdivided along the boundary of Los Angeles and Malibu to create Lot 6. In addition to the real property, the Bypass Trust also had $9,477 in cash and $8,901 in accounts receivable. There have been no distributions from the Bypass Trust since 2013; no assets have been sold; and there have been no appraisals of existing assets.
Three of the lots border Laudamus Farms, an entity which is owned by Serra Canyon Company Ltd. and managed by Leslie. The Bypass Trust has no interest in Laudamus Farms.
The central conflict between the parties involves the Adamsons' discovery that the Bypass Trust wrote promissory notes totaling $1,040,400 to the Residuary Trust. The five Sequit partnerships-Canary Island Palm, LP, Eucalyptus Ranch, LP, Hacienda Robles, LP, Pepper Creek, LP, and Rancho Tecolote, LP-wrote promissory notes to the Residuary Trust (of which Leslie claims to be the sole beneficiary) totaling $1,969,850.
These notes were made to finance Grant's development plans for the five lots. From 1993 through 2005, overseen by Grant, the Bypass Trust spent approximately $850,000 on planning and development costs for the five lots in anticipation of building single-family residences on them. Because the lots were vacant and did not generate revenue, the Bypass Trust borrowed funds from the Residuary Trust. These loans were memorialized by the promissory notes written between January 2003 and September 2010 and signed by Grant, Leslie, and Sharon as co-trustees of the Bypass Trust.
The promissory notes were due and payable on demand. Because most of them were over ten years old, Lauren and Megan contended they were barred by section 3118 of the Commercial Code. The Co-Trustees contended the maturity dates were extended so all principal and interest would be payable when the Bypass Trust had the financial ability to pay, such as on the sale of the Sequit Lots. Also, the Co-Trustees claimed these notes must be paid in full before the Bypass Trust assets could be distributed.
This provision states "[i]f no demand for payment is made to the maker [of the promissory note payable on demand], an action to enforce the note is barred if neither principal nor interest on the note has been paid for continuous period of 10 years." (Comm. Code, § 3118, subd. (b).)
3. Request for and Production of Documents.
Commencing in March 2019, and continuing through October 2019, pursuant to sections 16060 and 16061, the Adamsons sought information from the Co-Trustees regarding the Bypass Trust's administration, its assets and liabilities, as well as accounting. The Adamsons contended, without this information, they could not properly assess their interests in the Bypass Trust or evaluate whether it was being administered properly.
The Co-Trustees produced numerous documents during the periods April, August and December 2019 and through September 2020. These documents included schedules of assets and liabilities, copies of promissory notes, a schedule of interest payments on promissory notes, grant deeds and quitclaim deeds relating to the limited partnerships' property holdings, building plans, site plans, title reports, title insurance, and appraisals.
The Adamsons contended the "trial balances" received from the CoTrustees for the Sequit Partnerships showed $2,567,045 owed to the Residuary Trust, yet the total due under the promissory notes (from both the Bypass Trust and the Sequit partnerships) was $1,969,850. The Adamsons contended they had not been provided any information concerning this $597,195 discrepancy. The Co-Trustees contended the sums reflected in the promissory notes were for amounts paid to third parties (consultants, engineers, architects, and attorneys) for expenses incurred in the planned development of the Sequit lots.
In May 2020, during settlement negotiations in a related proceeding between the parties, the Co-Trustees produced a portion (Schedule F) of Sharon's Form 706 estate tax return (Form 706) relating to the Sequit Partnership debts. The Co-Trustees expressly limited use of the tax return to the settlement negotiations. The Adamsons sought production of the entire return, which they asserted could be used to show discrepancies between the Form 706 and the documents the Co-Trustees produced regarding the promissory notes. The Adamsons stated they would agree to sign a nondisclosure agreement.
In October 2020, the Adamsons revealed their research had disclosed Lot 6, which was developed with a small cottage on Palm Canyon Lane in Malibu (Cottage Property). Apparently, Gregory London had been living on the property for several years at below-market rent. The Adamsons sought confirmation whether the lot was owned by the Bypass Trust.
4. Petition to Compel Production of Information, for Accounting, and Redress for Breach of Trust
On January 16, 2020, Lauren and Megan filed this petition pursuant to sections 16061 and 17200. They sought from the Co-Trustees (1) production of documents and information relating to the Bypass Trust's administration, assets, and liabilities; (2) an accounting of the Bypass Trust; and (3) attorney fees and costs incurred. The initial hearing on the petition was set for March 27, 2020. The hearing was later continued to October 2, 2020.
The Adamsons asserted, in their second supplement to the petition, they had not received information relating to any payments on the promissory notes or the status of the Cottage Property. Although the CoTrustees claimed the notes were payments to third parties, they had not produced any documentation supporting this claim, and although the CoTrustees produced documents relating to the receipt of income for leases of one or more of the Sequit lots for avocado farming, the Co-Trustees had not produced the leases.
The Adamsons argued the promissory notes were unenforceable pursuant to Commercial Code section 3118 because they were more than ten years old. They claimed Leslie had a conflict of interest in her simultaneous roles as Co-Trustee and as a 50 percent beneficiary of both the Bypass Trust and the Residuary trust. Lastly, the Adamsons asserted the Co-Trustees had still failed to provide an accounting as requested under sections 16062 and 16063.
By stipulation, the parties continued the hearing to November 16, 2020 to allow the Adamsons to review the documents and for the parties to confer regarding open issues.
In November 2020, the Co-Trustees responded to the petition, asserting they had produced all the documents requested: a total of 638 promissory notes with a schedule of interest payments; documents supporting third-party payments relating to the planned development as well as documents relating to the Cottage Property and leases; and 2006 appraisals of the properties. Finally, they asserted the Adamsons had not explained their entitlement to the Form 706.
On November 16, 2020, the parties appeared on the petition. The court requested supplemental briefing and continued the matter to February 1, 2021.
The Adamson's third supplement to the petition, filed January 15, 2021, asserted access to full information concerning the Bypass Trust's debt to the Residuary Trust was necessary because the Co-Trustee's conflict of interest prevented them from properly protecting the interests of the Bypass Trust. Leslie served as trustee of both trusts and claimed 100 percent interest in the Residuary Trust. The notes themselves were not arms-length transactions, and the notes were, on their face, barred by the statute of limitations. The Adamsons therefore requested (1) all writings (cancelled checks, contracts, invoices, etc.) reflecting goods or services provided to the Bypass Trust by third parties; (2) any documents reflecting a demand for payment or purported modification of the notes; and (3) evidence supporting the notes, such as bank statements, and receipts regarding payments made by the Bypass Trust or the Sequit Parentships to the Residuary Trust.
The Adamsons also sought the Form 706, although at this time they narrowed their request to Schedule F relating to partnership and other interests. Lastly, the Adamsons sought information on the avocado farm and an accounting.
The Co-Trustees' response to the third supplement asserted the CoTrustees had provided all requested documents. They had provided ledgers showing payments to third parties; documents related to Lot 6, including rental receipts; and documents relating to avocado farming on the properties. They continued to assert the Adamsons were not entitled to an accounting because section 16062 only applied to trusts created after July 1, 1987.
On February 1, 2021, the probate court ordered the Co-Trustees to provide an informal accounting to Lauren and Megan by March 3, 2021.
At the May 14, 2021 status conference, the Adamsons reported they had received an informal accounting. The Adamsons renewed their request for Schedule F of the Form 706, and the Co-Trustees asserted privilege. The probate court ordered supplemental briefing on the issue and set a hearing for July 20, 2021.
In their supplemental briefing, the Adamsons asserted they were entitled to Sharon's Form 706 because it was necessary for them to enforce their rights and prevent a potential breach of trust by Leslie.
In response, the Co-Trustees asserted the Adamsons were not entitled to the tax returns because (1) they were privileged, and (2) Leslie, as executor of Sharon's estate, was not a party to the current petition.
5. Probate Court Ruling
At the continued October 25, 2021 hearing, the probate court ordered the disclosure of the Form 706. The court found the taxpayer privilege had not been waived, but "the public policy of transparency in trust administration is greater than a confidentiality of tax returns, given the limited number of people to whom it is supposed to be disclosed.... This matter lines up squarely with the Schnabel case." The court ordered the return produced within 30 days and to be disclosed only to petitioners and their attorney. The court set a status conference for January 14, 2022. This timely appeal followed.
DISCUSSION
The Co-Trustees argue the court erred in ordering the disclosure of the Form 706 because Leslie, as the executor of Sharon's estate, is not a party to the Bypass Trust; furthermore, the return is privileged and not subject to a public policy exception to the privilege. The Adamsons counter the CoTrustees waived the privilege, and the probate court properly exercised its discretion in ordering disclosure of the Form 706. We conclude, based on the facts before us, the probate court properly found an exception to the privilege, but remand for an in camera proceeding to determine whether the entire return, or solely Schedule F, is to be produced.
The Probate Court Did Not Abuse its Discretion in Ordering the Disclosure of Sharon's Form 706
1. The Public Policy Exception to the Production of Tax Returns Applies to Probate Code Sections 16060 and 16061
In California, income tax returns are privileged from disclosure. (Webb v. Standard Oil Co. (1957) 49 Cal.2d 509, 512-513.) "Revenue and Taxation Code section 19282, which prohibits disclosure of tax returns, implicitly creates a privilege against the disclosure of income tax returns." (Fortunato v. Superior Court (2003) 114 Cal.App.4th 475, 479 (Fortunato).) "The purpose of the privilege is to encourage voluntary filing of tax returns and truthful reporting of income, and thus to facilitate tax collection." (Weingarten v. Superior Court (2002) 102 Cal.App.4th 268, 274.) However, the privilege "is not absolute" and "will not be upheld when (1) the circumstances indicate an intentional waiver of the privilege; (2) the gravamen of the lawsuit is inconsistent with the privilege; or (3) a public policy greater than that of the confidentiality of tax returns is involved." (Ibid.)
In Schnabel, supra, 5 Cal.4th 704, a dissolution proceeding, one spouse sought the tax returns of a close corporation in which the spouses held 30 percent of the corporation's stock. Recognizing the privilege protected such returns, Schnabel relied on the public policy exception to order their limited disclosure. (Id. at pp. 721-722.) Observing that the public policy exception is narrowly construed, Schnabel followed Miller v. Superior Court (1977) 71 Cal.App.3d 145, which applied the public policy exception to child support proceedings. (Schnabel, at p. 722.) Schnabel found Miller "'had a legislative enactment directing its path to a conclusion that in child support cases, public policy favored disclosure of income tax records.'" (Ibid.)
As a result, in the case before it, Schnabel found "[a] similar legislative mandate," namely, the public policy in favor of fair child and spousal support awards and a fair division of community assets embodied in the Family Code. (Schnabel, supra, at p. 722.) Schnabel relied on the specific facts of the case, concluding the marital community and the corporation were closely related and the marital community owned 30 percent of the stock. "These facts, combined with the legislatively declared public policy in favor of full disclosure in a marital dissolution proceeding, warrant an exception to the privilege in this case limited to those tax returns that are reasonably related to the purpose for which they are sought." (Id. at p. 722.)
The Schnabel test applies on a case-by-case basis once a legislative policy basis for an exception to the tax return privilege is found. Here, we find the legislative authority for a public policy exception to the tax return privilege in a trustee's fiduciary duties. A trustee has a duty to administer the trust, diligently and in good faith, in accordance with the terms of the trust and applicable law. (§ 16000; O'Neal v. Stanislaus County Employees' Retirement Assn. (2017) 8 Cal.App.5th 1184, 1209.) A trustee owes a duty of loyalty and must administer the trust solely in the interest of the beneficiaries. (§ 16002.) The information provided to a beneficiary pursuant to section 16060 must be the information reasonably necessary to enable the beneficiary to enforce the beneficiary's rights under the trust or prevent or redress a breach of trust. (Salter v. Lerner (2009) 176 Cal.App.4th 1184, 1187.) In addition, a trustee has both a duty to keep the beneficiaries of a trust reasonably informed of trust assets and its administration, and a duty to respond to reasonable requests of a beneficiary relating to trust administration relevant to the beneficiary's interests. (§ 16061.)
We follow Schnabel's lead. A trustee's duties under the Probate Code are akin to the duties articulated in Schnabel that spouses owe each other. Schnabel relied on each spouse's fiduciary duty to the other in managing community property, which "'duty includes the obligation to make full disclosure to the other spouse of all material facts and information regarding the existence, characterization, and valuation of all assets in which the community has or may have an interest . . ., and to provide equal access to all information, records, and books that pertain to the value and character of those assets and debts, upon request.'" (Schnabel, supra, 5 Cal.4th at p. 715, citing to former Civ. Code, § 5125, subd. (e) [now Fam. Code, § 2100, et seq.].) Indeed, dissolution proceedings and the corollary proceedings governing wills, trusts and probate often deal with family matters, involve fiduciary duties and the potential for conflicts of interest.
In spite of these salient public policies, the Co-Trustees argue the probate court erred in finding the public policy exception could be based on sections 16060 and 16061 because neither section reflects any legislatively declared policy. (See, e.g., Wells Fargo Bank v. Superior Court (2000) 22 Cal.4th 201 (Wells Fargo); Fortunato, supra, 114 Cal.App.4th 475.) Aside from this bare assertion, the Co-Trustees do not support their contentions with developed argument. Both cases are distinguishable.
In Wells Fargo, 22 Cal.4th 201, the court considered whether the attorney-client privilege of Evidence Code section 954 must yield in order for a trustee to perform its statutory and common law duties of disclosure. (Id. at p. 206.) Wells Fargo concluded the statutory attorney-client privilege, as a legislative creation, left the court without power to find implied exceptions. (Ibid.) "[T]he relevant [Probate Code] statutes cannot fairly be read to require disclosure of privileged communications.... If the Legislature had intended to restrict a privilege of this importance, it would likely have declared that intention unmistakably, rather than leaving it to courts to find the restriction by inference and guesswork in the interstices of the Probate Code." (Id. at p. 207.)
Here, Wells Fargo does not guide our analysis because there is no statutorily created privilege for tax returns as there is for the attorney-client communications at issue in that case. Indeed, as discussed above, any privilege for tax returns is implied by the Revenue and Taxation Code. Thus, the limitations of Wells Fargo do not restrain the probate court's ability to find an exception in the disclosure requirements placed on a fiduciary by the Probate Code.
The Co-Trustees' reliance on Fortunato, supra, 114 Cal.App.4th 475, is similarly misplaced because Fortunato did not rely on sections 16060 or 16061 in evaluating access to tax returns in a probate proceeding. Instead, Fortunato analyzed disclosure based upon two grounds-the general fiduciary duties of joint tenants to each other and the discovery provisions of the Probate Code (sections 8870, et seq.). (Fortunato, supra, 114 Cal.App.4th at p. 482.) Here, in contrast, the case concerns a trustee's fundamental duty to provide information to a beneficiary.
2. On the Facts of this Case, the Policy of Transparent Administration of Trusts Requires Disclosure of Form 706
Here, Leslie is involved in every aspect of the family trusts, both as trustee and beneficiary. Sharon, whose estate tax return is sought, was also a co-trustee of the Bypass Trust during her lifetime. The administration of the Residuary and Bypass Trusts has lacked transparency and raise the concern that not all transactions between the two trusts were at arm's-length and free of potential conflicts of interest. Grant, with Leslie and Sharon's acquiescence (they signed the promissory notes), used the cash in the Residuary Trust to finance the potential development of the Bypass Trust's Sequit lots. There is some evidence of Leslie's self-dealing in her son Gregory London's favorable tenancy on Bypass Trust property. Further, Leslie claims 100 percent interest in the Residuary Trust, giving her potential motivation to minimize its liabilities and maximize its assets at the expense of the Bypass Trust.
Given this cross-pollination of the family assets across the trusts and the porous boundaries the co-trustees have maintained, disclosure of at least some relevant portions of Sharon's estate tax return is appropriate. Only an examination of the Form 706 will reveal how much is relevant to the Adamson's beneficiary interests.
Nonetheless, in an attempt to avoid disclosure of the tax return, the CoTrustees claim the information they supplied, including the promissory notes, was sufficient to identify the Bypass Trust's debt. (See, e.g., Strawn v. Morris, Polich &Purdy (2019) 30 Cal.App.5th 1087, 1099.) Further, the CoTrustees contend the Form 706 reveals privileged information unrelated to the Bypass Trust's debt. (See, e.g., Schnabel, supra, 5 Cal.App.4th at p. 714 [limiting disclosure of tax return to those portions relevant to dispute].)
The Co-Trustees' two arguments are related; however, without an examination of the Form 706, their merit cannot be evaluated. Leslie and the other Co-Trustees hold all the cards with respect to knowledge of the Bypass Trust assets and liabilities and its management. We agree portions of the Form 706 aside from Schedule F may be irrelevant to the valuation of the Sequit lots and the promissory notes. Thus, on remand, the probate court is to undertake an in camera review to evaluate the extent of disclosure of the tax return.
Finally, to the extent the Co-Trustees assert the probate court lacked the authority to order Leslie to produce the Form 706 because Sharon's estate is the holder of the privilege and Sharon's status as trustee of the Bypass Trust does not provide an avenue to compel production of the tax return, we disagree. First, Leslie has not appeared in this action in her capacity as executor and has no standing to raise this argument. Even if she had appeared, given the many hats she wears and the conflict of interest inherent in her claim of a 100 percent interest in the Residuary Trust, the probate court did not err in ordering disclosure.
As we conclude the probate court properly balanced the public policy of transparency in the Probate Code with the tax return privilege, we need not consider the Adamsons' waiver arguments. The matter is remanded to the probate court to determine whether the entire Form 706, or only Schedule F, is to be produced.
DISPOSITION
The order of the superior court requiring disclosure of the Form 706 is affirmed. The matter is remanded for proceedings consistent with this opinion. Costs are awarded to respondents.
We concur: COLLINS, Acting P. J., MORI, J.
[*] Judge of the Los Angeles County Superior Court, assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.