Opinion
NOT TO BE PUBLISHED
Appeal from an order of the Superior Court of San Diego County, No. PN28646, Richard G. Cline, Judge.
HALLER, J.
Rowena Schooler (Rowena) died in October 2004, and left six adult children. Her daughter Jane Schooler (Jane) was the executor of her estate and trustee of her trust. Four years after Rowena's death, three of Jane's brothers (Brothers) petitioned the probate court under the safe harbor statute for a determination whether their proposed objections to Jane's final estate account constituted a contest under the no contest clauses in Rowena's will and trust. (Prob. Code, § 21320.) The Brothers challenged Jane's estate accounting and sought to surcharge Jane for breaching her fiduciary duties by failing to properly handle an estate asset and using estate assets for her own benefit.
All further statutory references are to the Probate Code.
The court granted the petition in part and denied it in part. The court ruled the Brothers could seek to remove Jane as executor and challenge the contents of her final account without violating the no contest clauses. But the court found that certain actions would violate the no contest clauses, including the Brothers' attempt to surcharge Jane (impose personal liability) for claimed breaches of fiduciary duty and the Brothers' claim for attorney fees and costs. The Brothers appeal.
We determine the court erred in ruling that the Brothers' breach of fiduciary duty claims seeking to surcharge Jane would constitute a "contest." Even if these claims constitute a contest within the meaning of the no contest clauses, the clauses are unenforceable. The Legislature has declared that a "pleading challenging the exercise of a fiduciary power" does "not violate a no contest clause as a matter of public policy," and this rule applies "notwithstanding anything to the contrary in any instrument...." (§ 21305, subd. (b)(6), italics added.) The Brothers' petition seeking to surcharge Jane challenges the exercise of her fiduciary powers, and thus does not constitute a contest under California law.
We reject the Brothers' additional contention that the court erred in finding that their claims for attorney fees would constitute a contest.
FACTUAL AND PROCEDURAL SUMMARY
Background
In December 1989, Rowena and her husband, Eugene, executed a revocable trust (Family Trust), and were the cotrustees of the trust. At the time, they owned a duplex (with an additional studio unit) in Del Mar near the beach (the Beach House), and they transferred the Beach House into the Family Trust.
Six years later, in August 1996, Eugene died. Under the Family Trust provisions, the trust was divided into two subtrusts. The Beach House was allocated to one of the trusts (the Survivor's Trust). The Schoolers' real estate investment corporation, which owns valuable investment properties, was allocated to the other trust (the Marital Trust or "B" Trust).
Rowena Trust
Three years later, in November 1999, Rowena created a new and different revocable trust (the Rowena Trust), and transferred the Beach House into that trust. At the time, Rowena was living in one of the units of the Beach House, and her son Andrew was living in another unit and managed the property.
Rowena was the trustee of the Rowena Trust, and Jane was the successor trustee. The Rowena Trust provided that: "Upon my death, the [successor] Trustee shall allocate the entire trust estate, including... the property transferred to the trust estate by reason of my death, as follows:" (1) tangible personal property "shall be distributed by the Trustee outright in substantially equal shares to [each of my five children]"; and (2) "[t]he balance of the trust estate shall be allocated as follows: [20 percent to each of my five children]." (Italics added.) The Rowena Trust further provided that: "Where this Trust Agreement states that the Trustee 'shall' perform an act, the Trustee is required to perform that act. Where this Trust Agreement states that the Trustee 'may' do an act or Trustee is 'authorized' to act, the Trustee is expressly permitted or authorized to do the act described, and his or her decision to do or not do the act shall be made in the Trustee's sole and absolute discretion in the exercise of his or her fiduciary powers and duties." (Italics added.)
Rowena expressly disinherited one of her six children.
Paragraph 14.2 of the Rowena Trust gives the Trustee extremely broad discretion to perform his or her discretionary duties, including that a Trustee need not satisfy "the standard of judgment and care exercised by a reasonable, prudent person," and instead, may use "his or her own personal, subjective best judgment." The Trustee's powers include to "collect, hold, and retain trust property... until, in the judgment of the Trustee, disposition or distribution of the property should be made." The Trust provides that the Trustee shall not be personally liable for his or her good faith efforts in administering the trust estate, and that the Trustee shall be entitled to indemnification and reimbursement from the trust estate for damages imposed arising from the Trustee's good faith efforts.
Paragraph 14.2 states: "The discretionary powers granted to the Trustee under this Trust Agreement shall be absolute. This means that the Trustee can act arbitrarily, so long as he or she does not act in bad faith, and that no requirement of reasonableness shall apply to the exercise of his or her absolute discretion. This does not mean that the Trustee may do as he or she pleases, but rather that I want the Trustee to use his or her own personal, subjective best judgment. For this purpose, I waive the requirement that the Trustee's conduct at all times must satisfy the standard of judgment and care exercised by a reasonable, prudent person. In particular, the decision of the Trustee as to the distributions to be made to beneficiaries under the distribution standards provided in this Trust Agreement shall be conclusive on all persons."
Paragraph 16.3 of the Rowena Trust states: "The Trustee may collect, hold, and retain trust property received from [Rowena] or any other person until, in the judgment of the Trustee, disposition or distribution of the property should be made. The property may be retained even though it includes property in which a Trustee is personally interested. Notwithstanding [statutes relating to a trustee's duties regarding investment decisions], the Trustee shall have no duty to dispose of any part of the trust property... that would not be a proper investment for the Trustee to make. The Trustee may, without liability, continue to hold that property. The Trustee may hold trust property in bearer form so that title may pass by delivery, or in the name of any one Trustee or a nominee without indication of any fiduciary capacity by the nominee."
But the Rowena Trust also establishes some limits on a Trustee's discretion. For example, the Rowena Trust provides: "Notwithstanding any other provisions of this Trust Agreement, a Trustee (other than me) who is also a beneficiary of the trust shall not have, and shall not participate in the exercise of, the power to invade trust principal for his or her own benefit, except as necessary to provide for his or her [specified needs]." The Rowena Trust also provides that distributions may be postponed for "compelling reasons," and gives an illustrative list of these reasons. The Rowena Trust additionally provides that the Trustee is authorized to permit "me [Rowena] to occupy rent-free any residence held in trust and to use the furnishings in the residence," but does not explicitly extend this permission to successor trustees. Under the Rowena Trust provisions, a Trustee "shall be personally liable for his or her breach of trust by acts or omissions, committed intentionally, with gross negligence, in bad faith, or with reckless indifference to the interests of the beneficiaries, and as to any profit that the Trustee derives from any breach of trust."
Paragraph 14.4 of the Rowena Trust states: "Notwithstanding any other provisions of this Trust Agreement, a Trustee (other than me) who is also a beneficiary of the trust shall not have, and shall not participate in the exercise of, the power to invade trust principal for his or her own benefit, except as necessary to provide for his or her health, education, maintenance, and support in his or her accustomed manner of living."
Paragraph 15.10 of the Rowena Trust provides that "Notwithstanding other provisions of this Trust Agreement, the Trustee shall have the power to postpone the distribution of any fractional portion or part of the principal of any trust estate or of an entire trust estate of any trust created under this Trust Agreement for any person other than me if the Trustee determines that there is a compelling reason to postpone the distribution. Compelling reasons shall include, but are not limited to, a serious disability, drug addiction or dependency, a pending divorce, a potential financial difficulty, pending or threatened litigation, a serious tax disadvantage, or similar substantial cause affecting the beneficiary who otherwise would be entitled to the distribution. In that event, the distribution from or termination of any trust may be postponed, and any postponement may be continued from time to time, up to and including the entire lifetime of the beneficiary. During the postponement, the retained portion of part of the trust estate shall be administered under the same terms as applied immediately prior to the postponement." (Italics added.)
Rowena's Will
On the same date that she established the Rowena Trust, Rowena executed her Will. The Will provides that upon her death, all of Rowena's property would pass to the Rowena Trust. Rowena appointed Jane as the personal representative (executor), and gave the executor broad discretionary powers to administer the estate "in his or her sole and absolute discretion." In this regard, Rowena's Will states the executor's decisions "made in good faith to take or not to take actions authorized by this Will or by law shall be binding and conclusive on all interested persons." The Will also specifically provides the executor with the right to "collect, hold, and retain" estate property until in the executor's "judgment, the disposition or distribution of the property should be made," and states that the executor "may, without liability, continue to hold that property." The Will further provides that "I ratify, confirm and republish [the Rowena] Trust Agreement to be included in my Will for the disposition of my estate, and give the residue of my estate to the Trustee of the Trust, to be held in trust according to its terms."
Article 6 of the Will states: "[My] Personal Representative... shall have all of the powers and authority granted to him or her by law... and under the provisions of this Will... to be exercised in his or her sole and absolute discretion, subject only to his or her giving such notices and obtaining such court confirmation or approval as is required by law. All my Personal Representative's decisions made in good faith to take or not to take actions authorized by this Will or by law shall be binding and conclusive on all interested persons."
Will and Trust: No Contest Clauses and Contest Expenses
The Rowena Trust and Will contain essentially identical no contest clauses, which broadly express Rowena's intent that she "want[ed] the greatest deterrence against interference with my estate plan that the law allows," and identified numerous actions that would constitute contests. These documents also contain identical provisions authorizing the executor/trustee to defend all actions described in the no contest clause and provide that all expenses incurred in the defense "shall be paid, as the Trustee determines, from either my probate estate or the trust estate as expenses of administration." These provisions state that if a contestant becomes entitled to receive any property, then all expenses of the contest "shall be charged against and paid from" that "property... whether or not the Trustee or my Personal Representative was successful in the defense of the Contestant's actions."
The no contest clause in Rowena's Will states: "I want the greatest deterrence against interference with my estate plan that the law allows. If any heir, issue, relative, legatee, devisee, beneficiary, or other interested person; or any person who is provided for under this Will or the Trust Agreement, any beneficiary designation, or any Will substitute; or any person who would be entitled to any of my property under the laws of succession or otherwise, alone or in conjunction with any other person or persons, directly or indirectly (1) institutes any legal proceeding that attacks or contests this Will or the Trust Agreement, or attacks or seeks to impair or invalidate any of their provisions; (2) asserts in any manner any claim against my estate or property other than as provided in this Will or the Trust Agreement; (3) attacks or contests or seeks to change any beneficiary designation under an insurance policy, employee benefit plan, deferred compensation plan, retirement plan, or other Will substitute of mine; (4) seeks to change my testamentary plan (such as by challenging the appointment of fiduciaries designated by me or in the manner described by me); (5) objects to any construction or interpretation of this Will or the Trust Agreement, or any provision of them, that is adopted or proposed by the Trustee or my Personal Representative, (6) frivolously seeks or requests the removal of any person serving as a Trustee or a Personal Representative, or (7) conspires with or voluntarily assists any person or persons attempting to do any of these things, I direct that that person (the "Contestant") and all persons conspiring with or assisting him or her shall take none of my property and nothing from my estate. All these persons are expressly disinherited. Any and all gifts or property that otherwise would have gone to these persons shall be forfeited and shall pass as if these persons had predeceased me without leaving living issue. The foregoing provisions shall apply to any persons who claim that I entered into an oral agreement providing for the disposition or transfer of property to those persons or others in any way inconsistent with the provisions of this Will or the Trust Agreement. [¶] The foregoing provisions shall not be violated by (1) the disclaimer of any right or interest in my property; (2) the submission of creditors' claims, supported by consideration, by any person to my Personal Representative or the Trustee that are believed in good faith to be owed by me to that person; or (3) the commencement of any proceeding for declaratory relief to determine whether any action by any person constitutes a contest under these provisions...." The Rowena Trust's no contest clause is essentially identical except for the placement of certain words referring to the Will and Trust.
Events Occurring After Rowena's Death
Five years after executing her Will and the Rowena Trust, Rowena transferred the Beach House from the Rowena Trust to her individual ownership as part of her effort to refinance the property. Shortly after, Rowena died without retransferring the property back into her trust. Thus, at the time of her death in October 2004, the Beach House remained in Rowena's name and was not an asset of the Rowena Trust.
Soon after Rowena's death, Jane moved into the unit of the Beach House where Rowena had been living, and Andrew moved out. Jane continued living in the Beach House during the next three years while the estate was in probate.
In June 2007, Jane filed a first and final account and report, seeking to close the estate and for final distribution of assets under the Will. Jane requested that the court distribute Rowena's residuary assets, including the Beach House, to the Rowena Trust.
The next month, one of Rowena's sons and beneficiaries (Andrew) filed a petition for declaratory relief under section 21320, known as the safe harbor statute, seeking an order determining whether his proposed objection to Jane's final account and his request to remove Jane as executor and surcharge her for claimed breaches of fiduciary duty would violate the terms of the no contest clauses in the Will and Rowena Trust. Jane filed an opposition to Andrew's petition, but for reasons not entirely clear on the record, the petition was never ruled upon and was ultimately withdrawn.
Seven months later, Andrew, joined by his two brothers, John and Lewis, (Brothers) filed a new section 21320 safe harbor petition, requesting the court to determine whether their proposed objections to Jane's final account and their claims seeking to surcharge Jane would constitute a contest within the meaning of the no contest clauses of the Rowena Trust and Will. Because the nature of the Brothers' proposed objections is important to the issues raised on appeal, we set forth those claims in some detail.
First, the Brothers challenged the estate accounting. They alleged that "approximately $59,299.64 of administrative expenditures of the estate... are not supported and there is approximately $10,070.95 of expenditures that are questionable estate expenses or there is inadequate support for the expenses." The Brothers claimed that Jane failed to provide sufficient documentation to support various accounting figures, and specifically identified each of these documentation problems. The Brothers also identified nine separate problems with Jane's final account, including inconsistencies between the accounting pertaining to the Rowena Trust and the Marital Trust, and claims that the accounting showed Jane used estate funds for her own living expenses. The Brothers stated the deficiencies were communicated to Jane's counsel, but Jane had not provided any information to explain the deficiencies.
Second, the Brothers sought to surcharge Jane for claimed breaches of her fiduciary duty. In this respect the petition stated the following: "Objectors seek to surcharge the Executor as follows: [¶] A. Failure to close the estate timely in order to use the [Beach House] for her own use and benefit to the exclusion of the remaining heirs; [¶] B. Failure to pursue a Heggstad petition in order to personally benefit from the conflict of interest; [¶] C. Using assets of the Estate for her own use and to pay her own personal expenses; [¶] D. Failing to pay a reasonable rental value for the [Beach House] which the Executor has used as her own personal residence to the exclusion of the remaining heirs; [¶] E. For Breach of Fiduciary Duty arising from the forgoing...."
A Heggstad petition is a procedural device to obtain a determination that property held in a decedent's name is actually trust property. (See Estate of Heggstad (1993) 16 Cal.App.4th 943, 947-950.)
The Brothers' proposed petition sought several categories of relief, including: (1) an order "requiring [Jane] to provide documentary and other information necessary to adequately determine the accuracy of the accounting and whether [Jane] has breached her fiduciary duties to the Heirs"; (2) a determination that Jane is "liable in an amount according to proof together with interest... and that the liability be charged against [Jane's] compensation, or beneficial interest, or that it be recovered from [Jane] personally"; and (3) an order that the Brothers "recover costs and attorney's fees from" Jane.
In support of their position that their objections did not constitute a contest, the Brothers relied on section 21305, subdivision (b) to argue that the "filing of a pleading challenging the exercise of a fiduciary power, for removal of a fiduciary, or challenging an accounting or report of a fiduciary, does not violate a no-contest clause as a matter of public policy." The Brothers alternatively argued that their petition did not come within the no contest clauses because their objections did "not seek to invalidate any [portion of the] Will or Trust," and the no contest clauses do not "forbid[ ] any heir from contesting [actions]... that are motivated by the fiduciaries self-interest, self-dealing, and other non-business judgment type breaches of a fiduciary's duty to the heirs or beneficiaries."
In response, Jane argued that the Brothers' proposed objections were essentially an attempt by the Brothers "to force Jane to move from and sell" the Beach House. Jane argued that this challenge was without merit because the prior 1989 Family Trust: (1) contained provisions directing the trustee not to sell the residence because of its special significance to the Schoolers; and (2) expresses Rowena's "emphatic intent that the property remain in the family to provide a residence for Jane, Katherine... and/or Andrew...." (Italics in original.) Jane also argued that numerous provisions of the Rowena Trust and Will give her absolute discretion " 'to retain and hold' " property owned by Rowena at her death. (Italics omitted.) Jane additionally argued that a request for attorney fees was a contest because it was inconsistent with the terms of the Rowena Trust and Will, which provide that a person asserting a contest must pay for attorney fees even if the contestant is successful.
Jane also submitted her declaration, in which she stated that "My mother told me that her and my father's intent was that I would live in the upper flat, my sister Katherine would live in the lower flat, and my brother Andrew would continue to live in the back bedroom/bathroom above the garages. To my knowledge, my mother's intent never changed." She also stated that "I currently live in the upper flat of the Family Beach House, in the space where my mother once lived. I have paid 100% of the property taxes for the entire property since June 2006. I have also paid $2,000 a month rent since June 2006, which is more than the upper flat's fair share of the maximum rent to be paid, as provided by the Family Trust. I did not pay rent for the period of time during which I was supervising and overseeing the extensive repairs necessary to correct the deterioration and damage that occurred under Andrew's management were being made. The process of making necessary repairs continued after I began paying rent."
In their reply brief, the Brothers disputed Jane's factual assertions regarding Rowena's intent and the amount of rent she has paid, but said these factual issues were irrelevant for purposes of the safe harbor petition and deciding the no contest issue. The Brothers also disagreed that Jane has " 'absolute' discretion to effectuate Rowena's Estate Plan," and argued that the 1989 Family Trust was not relevant in determining Rowena's intent with respect to the provisions of the separate Rowena Trust and Will, drafted 10 years later.
The Brothers, for example, noted that the claimed $2,000 per month rental payment was never identified on the estate accounting, and $2,000 was substantially below the market rental rate for a beach house in Del Mar.
After considering these papers, the court granted the Brothers' safe harbor petition in part and denied the petition in part. Relying on section 21305, subdivision (b), which identifies proceedings that do not violate a no contest clause as a matter of public policy, the court stated that the Brothers "may move for the removal of [Jane] without running afoul of the no-contest clause at issue. They may likewise challenge the contents of the accounting and seek additional information regarding those contents without running afoul of the no-contest clause."
But the court found the Brothers' remaining allegations would constitute a "contest" and would not be entitled to "safe harbor" because "the proposed 'objection' to the accounting is far more than what it claims to be. It goes beyond merely objecting to the accounting, seeking to surcharge Respondent, impose personal liability upon her for attorneys' fees and costs, and question her decision to retain trust property in a declining real estate market...." The court found these challenges would constitute "indirect contests" because they " 'attack[ ] or seek[ ] to impair or invalidate' " provisions of the Will pertaining to the Trustee's discretion, the imposition of attorney fees and costs on a contestant, and the Trustee's indemnification rights. In reaching this conclusion, the court did not address the applicability of section 21305, subdivision (b) to these challenges. The Brothers appeal from this portion of the court's ruling.
During oral argument, the Brothers' counsel indicated that he interpreted the court order as determining only that the Brothers' request for their claimed remedies (surcharge and attorney fees) would constitute a contest. We agree with Jane's counsel that this interpretation is too narrow. Read in its entirety, the court's order reflects its conclusion that the Brothers' proposed breach of fiduciary duty claims would constitute a contest.
DISCUSSION
I. Safe Harbor Proceedings
" ' " '[S]ection 21320 provides... a "safe harbor" for beneficiaries who seek an advance judicial determination of whether a proposed legal challenge would be a contest [under a particular no contest clause].'... If a court determines that a... proposed action would constitute a contest, the beneficiary will then be able to make an informed decision whether to pursue the contest and forfeit his or her rights under a will or to forgo that contest and accede to the [trust's] provisions." ' " (Giammarrusco v. Simon (2009) 171 Cal.App.4th 1586, 1600.) The sole question in a safe harbor proceeding is whether the proposed action would be a contest. (§ 21320.) A ruling on whether the beneficiary's proposed action would be a contest may not involve a determination on the merits of the action itself; otherwise, the summary procedure could be used to allow the very form of challenge and protracted litigation the testator sought to prevent. (Giammarrusco, supra, at p. 1600.) Thus, the fact that the court may believe the proposed pleading is frivolous is not a basis for finding that the petition would be a contest. (See Estate of Hoffman (2002) 97 Cal.App.4th 1436, 1447.)
In reviewing the probate court's ruling on an application under section 21320, we apply a de novo standard of review, when, as here, the ruling did not turn on the credibility of extrinsic evidence. (Johnson v. Greenelsh (2009) 47 Cal.4th 598, 604; Betts v. City National Bank (2007) 156 Cal.App.4th 222, 231.)
II. Enforcement of No Contest Clauses
A no contest clause " 'essentially acts as a disinheritance device, i.e., if a beneficiary contests or seeks to impair or invalidate the trust instrument or its provisions, the beneficiary will be disinherited and thus may not take the gift or devise provided under the instrument.' [Citation.] 'The purpose of no contest clauses "is to discourage will contests by imposing a penalty of forfeiture against beneficiaries who challenge the will." ' " (Betts v. City National Bank, supra, 156 Cal.App.4th at p. 231.) Traditionally, the primary factor determining whether a particular proposed proceeding constitutes a "contest" is the intent of the drafter of the instrument. (Id. at p. 232.) Under this rule, the intention of the trustor as expressed in the trust instrument controls the legal effect of the dispositions made in the instrument. (Crook v. Contreras (2002) 95 Cal.App.4th 1194, 1206.)
This long-standing rule of interpretation, however, has been qualified by the Legislature. Effective 2001, the Legislature enacted statutes providing that, as a matter of law, certain proceedings do not violate an instrument's no contest clause, regardless of the testator's intent. (§ 21305, subds. (a) & (b).) Section 21305, subdivision (b) provides that "notwithstanding anything to the contrary in any instrument, the following proceedings do not violate a no contest clause as a matter of public policy:.... [¶] (6) A pleading challenging the exercise of a fiduciary power. [¶] (7) A pleading regarding the appointment of a fiduciary or the removal of a fiduciary. [¶] (8) A pleading regarding an accounting or report of a fiduciary." (§ 21305, subd. (b), italics added.) These subsections are generally applicable to instruments of decedents dying after January 1, 2001 and to documents that became irrevocable after January 1, 2001. (See § 21305, subd. (d).) It is undisputed that these subsections govern in this case because Rowena died in 2004, and her trust and will became irrevocable at that time.
Section 21305, subdivision (b)(6) does not apply to a "direct" contest, which is a pleading alleging the invalidity of the instrument based on claims such as fraud or lack of capacity. (§ 21305, subd. (e).) There is no claim here that the Brothers' challenge was a direct contest.
With respect to the actions specified in section 21305, subdivision (b), an action "can never constitute a contest no matter what the no contest clause says."(Bradley v. Gilbert (2009) 172 Cal.App.4th 1058, 1069 (Bradley).) After reviewing the legislative history underlying the code section, the Bradley court explained that " 'section 21305 was enacted to protect certain actions, including challenges to fiduciary misconduct, from the scope of no contest clauses in response to a consensus that no contest clauses had been applied overbroadly and inconsistently by the courts. [Citations.]' " (Id. at pp. 1070-1071; see also Estate of Rossi (2006) 138 Cal.App.4th 1325, 1330-1331.) "[I]t was the intent of the Legislature to restrict the reach of no contest clauses which the Legislature opined the courts were guilty of making overly broad applications. For that reason subdivision (b)(6) was added to section 21305 to make it clear that 'A pleading challenging the exercise of a fiduciary power' was excluded." (Bradley, supra, at p. 1070, italics added.)
Another court similarly observed that by enacting section 21305, "the Legislature has determined that in furtherance of the public policy of eliminating errant fiduciaries, a beneficiary who believes a fiduciary is engaged in misconduct should be able to bring the alleged misconduct to the court's attention without fear of being disinherited." (Estate of Hoffman, supra, 97 Cal.App.4th at p. 1444.) "To place barriers to a court's review of alleged fiduciary misconduct would... be contrary to well-established policy to ensure that estates are properly administered." (Bradley, supra, 172 Cal.App.4th at p. 1071; see also Estate of Bullock (1968) 264 Cal.App.2d 197, 201.)
In 2008, the Legislature enacted a major revision of the statutory scheme governing no contest clauses, which even more substantially limits the circumstances under which a no contest clause may be enforced. Effective January 1, 2010, the new scheme limits the enforceability of no contest clauses to only three types of claims: (1) direct contests brought without probable cause; (2) challenges to the transferor's ownership of property at the time of the transfer if expressly included in the no contest clause; and (3) creditor's claims and actions based on them, if expressly included in the no contest clause. (Stats. 2008, ch. 174, § 2, p. 483; see Johnson v. Greenelsh, supra, 47 Cal.4th at p. 601, fn. 2.)This new law does not apply to the order before us. (See § 3, subd. (e).)
Under the foregoing principles, if a party files a pleading challenging the exercise of a fiduciary power under an instrument that falls within the statutory effective date, the pleading cannot trigger a no contest clause penalty, even if the testator would have intended the clause to cover the claim. Thus, in determining whether a proposed pleading constitutes a contest with respect to a testamentary instrument subject to the current version of section 21305, a court engages in a two-step analysis: (1) does the claim constitute a "contest" within the meaning of the no contest clause at issue; and, if so, (2) is the no contest clause enforceable against the claim under section 21305.
As explained below, in this case we need not analyze the first step with respect to the Brothers' breach of fiduciary claims, because even assuming the claims would constitute a contest within the meaning of the no contest clauses in the Rowena Trust and Will, the clauses would not be enforceable as to those claims. The Brothers' claims that Jane breached her fiduciary duties and their request to surcharge her for these breaches "challeng[ed] the exercise of a fiduciary power" under section 21305, subdivision (b)(6).
III. Breach of Fiduciary Duty Claims
The Brothers' proposed objections allege that Jane breached her fiduciary duties as an executor in handling estate property. Specifically, the Brothers alleged that Jane breached her fiduciary duty by: (1) failing to "close the estate timely in order to use the [Beach House] for her own use and benefit to the exclusion of the remaining heirs"; (2) failing "to pursue a Heggstad petition"; (3) using estate "assets... for her own use and to pay her own personal expenses"; and (4) failing "to pay a reasonable rental value for the [Beach House] which the Executor has used as her own personal residence to the exclusion of the remaining heirs...." In these claims, the Brothers sought to hold Jane personally responsible for her acts that allegedly constituted a violation of her duty of loyalty and her duty to avoid conflicts of interest and to protect the estate property.
Each of these claims challenge Jane's exercise of her fiduciary powers as the executor of Rowena's estate, and could potentially support a surcharge claim. " 'Objections to accountings commonly raise surcharge claims against their representative for purported acts of misconduct, neglect, waste, mismanagement or other breach of fiduciary duty. These grounds fall under the general category of "all matters relating to an account" which may be contested "for cause shown" (Prob. C. § 11001).' " (Estate of Fain (1999) 75 Cal.App.4th 973, 991, italics omitted.)
Jane does not specifically dispute that the Brothers' claims implicate the exercise of her fiduciary powers as those powers are delineated in the statutes. Under the relevant statutes, the fiduciary duty of a trustee includes the duty of loyalty, the duty to deal impartially with the beneficiaries, the duty to avoid conflicts of interest, the duty to control and preserve trust property, and the duty to report and account. (See §§ 16002, 16003, 16006, 16060; Harnedy v. Whitty (2003) 110 Cal.App.4th 1333, 1340.)
Jane instead argues the Brothers' claims do not allege a breach of her fiduciary powers because Rowena lowered the standards to which a trustee must abide and the Brothers' allegations do not show that Jane breached these standards. However, this argument essentially asks the court to determine the merits of the Brothers' petition, i.e., to conclude that there is a contest because the Brothers cannot prevail on their breach of fiduciary claims. This is not a proper analysis in a safe harbor proceeding or in any other proceeding to determine whether a claim constitutes a contest. (See Perrin v. Lee (2008) 164 Cal.App.4th 1239, 1244.)
In support of her contention, Jane relies on Hearst v. Ganzi (2006) 145 Cal.App.4th 1195. In Hearst, the income beneficiaries of a trust brought a safe harbor petition seeking a determination whether a proposed claim alleging the trustees breached their fiduciary duties by favoring the remainder beneficiaries over the income beneficiaries would constitute a contest within the meaning of the trust's no contest clause. (Id. at p. 1200.) The reviewing court found that the claims would be a contest. (Id. at p. 1214.) The Hearst court reasoned that the no contest clause excluded from the "contest" definition only those claims asserting a trustee's "gross neglect or fraudulent misconduct," and that the income beneficiaries' claims did not allege this level of misconduct. (Id. at p. 1200.) The court noted that the trust instrument specifically "authorizes" the trustees to make decisions that would benefit the remainder beneficiaries at the expense of the income beneficiaries. (Id. at p. 1211.) The court recognized that generally the fiduciary duty of a trustee includes the duty of loyalty and the duty to deal impartially with the beneficiaries, but held that these obligations could be modified by language in the trust. (Id. at pp. 1208, 1211.) In concluding that the income beneficiaries' claim constituted a contest, the court emphasized that the trust instrument "expressly" modified the statutory fiduciary duties and that its determination on the merits of the breach of fiduciary claim could be made " 'as a matter of law without reference to any factual matters.' " (Id. at p. 1214.)
Jane cites Hearst for the proposition that a breach of fiduciary duty claim as a matter of law constitutes a "contest" if the testator lowered the fiduciary standards to which the executor/trustee must comply, and the claimants do not allege a breach of those lowered standards. We do not read the Hearst decision so broadly.
First, Hearst did not arise under section 21305 because the trust in that case was created and became irrevocable in 1951 and thus predated the effective date of section 21305, subdivision (b). (See Hearst v. Ganzi, supra, 145 Cal.App.4th at p. 1201.) Thus, unlike here, the Hearst court's focus was solely on the decedent's intent as expressed in the no contest clause, rather than on implementing this state's public policy as expressed in section 21305.
Second, in Hearst, the critical factor was that the decedent's intent to alter the statutory duty of impartiality—that the trustee could favor one class of beneficiaries over the other—was clear and express in the trust document, and the court could "make this 'determination... as a matter of law without reference to any factual matters.'..." (Hearst v. Ganzi, supra, 145 Cal.App.4th at p. 1214.) This case is different because there is nothing in the Rowena Trust or Will expressly authorizing the conduct about which the Brothers seek to raise objections. For example, in their objections, the Brothers seek to surcharge Jane because she breached her fiduciary duty by allegedly using estate assets for her own personal benefit and to pay her own personal expenses. This claim arises from Jane's exercise of her duties to administer the estate with loyalty and without conflicts of interest. Jane does not point to anything in the Rowena Trust or Will that expressly allows her to use the estate assets for her own benefit (to the exclusion of the other beneficiaries) without any limitation. Instead, she claims only that this breach of fiduciary claim is too "vague" to analyze.
The Brothers additionally seek to challenge Jane's use of the Beach House for her own personal benefit to the exclusion of the other beneficiaries, and her failure to pay the estate a reasonable rental rate for her use during the probate period. These claims similarly arise from the exercise of Jane's fiduciary duties to treat the beneficiaries equally, protect estate assets, and avoid conflicts of interest. In arguing that Rowena eliminated these duties with respect to the Beach House, Jane relies on provisions in the 1989 Family Trust to argue that Rowena intended to permit Jane to live in the residence to the exclusion of her siblings and that the maximum rent to be paid would be $2,000. However, the terms of the 1989 Family Trust were never incorporated into Rowena's Trust (established 10 years later), and it is not clear from Rowena's Trust that she intended to incorporate those provisions into her later executed testamentary documents.
Jane argues that "it is well within reason to interpret the estate planning documents to provide Jane was entitled to hold the Beach House and occupy it (along with Katherine and Andrew) for a time within her good faith subjective judgment." Although she may prevail on this argument when the court reaches the merits of the Brothers' objections, there is nothing in the estate documents providing as a matter of law Jane is entitled to hold the property for an indefinite period and live there, to the exclusion of some or all of her siblings. Although Jane may be entitled to rely on the 1989 Family Trust as evidence of Rowena's intent if an ambiguity exists in the operative documents, we cannot say as a matter of law that Rowena's will or trust provides that Jane may remain in the Beach House indefinitely to the exclusion of her siblings, and without paying a reasonable rental value to the estate.
Jane also relies on provisions of the Rowena Trust and Will granting the executor/trustee extraordinarily broad discretion in exercising her powers. We agree these provisions grant very broad authority to Jane in deciding how to fulfill her duties. But they do not expressly eliminate the statutory fiduciary duties of loyalty and to avoid conflicts of interest. In particular, there are other provisions in the Rowena Trust and Will that appear to create some limitations on these broad powers. For example, Paragraph 14.4 of the Rowena Trust, titled "Limitation on Discretion of a Beneficiary Serving as Trustee," provides that "Notwithstanding any other provisions of this Trust Agreement,a Trustee (other than me) who is also a beneficiary of the trust shall not have, and shall not participate in the exercise of, the power to invade trust principal for his or her own benefit, except as necessary to provide for his or her health, education, maintenance, and support in his or her accustomed manner of living." (Italics added.) Paragraph 15.11 of the Rowena Trust states "The Trustee is authorized to permit me [Rowena] to occupy rent-free any residence held in the trust and to use the furnishings in the residence," without expressly extending this right to a successor trustee. (Italics added.) Moreover, the Rowena Trust contains a provision stating that upon Rowena's death the Trustee "shall" distribute the Trust assets (including those transferred from probate) in equal shares to her five children.
Jane also relies on the no contest provisions in the Rowena Trust and Will, but as we have noted we have assumed for purposes of this appeal that the proposed objections would constitute a contest within the meaning of those provisions, and the issue before us is whether California law permits the enforcement of these provisions with respect to a challenge to a trustee's/executor's exercise of fiduciary duties. Although Rowena may have sought to provide more flexibility and even "liability-free" discretion by including the no contest clause in her will and trust, the California Legislature has decided that these provisions are not enforceable under the circumstances here.
Because the Brothers' proposed objections raised claims challenging Jane's exercise of her fiduciary duties—claims that by statute do not run afoul of a no contest clause as a matter of public policy and claims that did not challenge conduct specifically authorized by the will or trust instruments—the trial court erred in ruling that these claims would constitute a contest. In reaching our conclusion, we express no opinion as to the merits of the Brothers' proposed objections, including the scope of Jane's rights and obligations with respect to the Beach House. We simply hold that in light of section 21305, subdivision (b), the claims seeking to surcharge Jane for alleged breaches of fiduciary duties would not amount to a contest in violation of the no contest clause in Rowena's Trust and Will.
IV. Remaining Claims
In addition to the breach of fiduciary duty claims, the court stated that Jane's claims for attorney fees and costs would constitute a contest. We agree that the Will and Trust specifically provide that attorney fees should be paid by the estate, and that a "contestant" is responsible for fees and costs even if the contest is successful. We further agree that the Brothers' attorney fees claim seeks to "invalidate" this provision within the meaning of the no contest clauses of the Will and Trust. Moreover, there is nothing in section 21305 specifically stating that no contest clauses are unenforceable against claims for attorney fees. The Brothers' contention that a petition seeking a particular remedy cannot constitute a contest based on the nature of the remedy is without merit.
Thus, we affirm the order to the extent it holds that the Brothers' claim for attorney fees and costs would constitute a contest under the Rowena Trust and Will.
DISPOSITION
Order reversed. The court is directed to vacate its September 25, 2008 Order on the petition of John, Louis and Andrew Schooler (Brothers) for declaratory relief under section 21320, and issue a new order providing that Jane Schooler would not be entitled to enforce the no contest clause against the Brothers if they file and litigate their proposed Objections to Executor's First and Final Account and Request for Surcharge of Executor and Other Remedies, except with respect to the Brothers' claims for Jane Schooler to be held personally responsible for attorney fees and costs in the litigation.
The parties to bear their own costs on appeal.
WE CONCUR: BENKE, Acting P. J., MCDONALD, J.