Opinion
G045013
11-07-2012
KARI GRUNDER, Plaintiff and Respondent, v. DOUGLAS L. MAHAFFEY, Defendant and Appellant.
Mahaffey & Associates, Douglas L. Mahaffey and John R. Marshall for Defendant and Appellant. Regan & Associates, James J. Regan and Gene A. Wilker for Plaintiff and Respondent.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.
(Super. Ct. No. A230423)
OPINION
Appeal from a judgment of the Superior Court of Orange County, Mary Fingal Schulte, Judge. Affirmed.
Mahaffey & Associates, Douglas L. Mahaffey and John R. Marshall for Defendant and Appellant.
Regan & Associates, James J. Regan and Gene A. Wilker for Plaintiff and Respondent.
I. INTRODUCTION
Kari Grunder was only five years old when, in April 1992, her father established an irrevocable trust in her favor. The trust consisted of $356,967 from a personal injury settlement obtained by her father after he was badly burned in an explosion at a Mobil refinery. Her father's personal injury attorney, Douglas L. Mahaffey, was appointed trustee of the trust. A little less than four years later, in March 1996, Mahaffey, as trustee, lent himself about $210,000 from the trust - or about 80 percent of the trust's value at the time - giving in return his unsecured personal IOU providing for an 8 percent interest rate and no required payments of either interest or principal for 10 years. We may take judicial notice that 8 percent was below the prevailing prime rate of 8.25 percent in 1996, though Mahaffey did have his law firm guarantee the note. Mahaffey did not obtain anyone's permission for the loan to himself prior to making it, though Mahaffey presented evidence - evidence which was impliedly rejected by the trial judge - that he might have obtained the father's "ratification" for the transaction in 1998. Neither Kari, nor her mother with whom she lived, were ever informed of the loan from Mahaffey as trustee to himself as an individual, and neither learned of the loan until it was revealed in documents obtained from Kari's attorney in 2006. In fact, the trust's own CPA did not learn of the loan until 2005. Kari filed this action in the probate court in 2007.
The trial judge went easy on Mahaffey. Trustees who were also attorneys and who made loans to themselves from trust funds have been disciplined by the State Bar for loans more favorable to the trust than the one Mahaffey made to himself here. (See In re Hultman (State Bar Rev. Dept., No. 91-O-07738, Apr. 28, 1995) [nonpub. opn.] [attorney who made one secured loan of $25,000 and another unsecured loan of $5,000 to himself at rate above prime given stayed three-year suspension, placed on probation for three years, and actually suspended for six months] (Hultman).)The trial judge believed Mahaffey's explanation that his motivation in making the 1996 loan to himself was a desire to protect the trust corpus from invasion by Kari's father or mother and, by guaranteeing an 8 percent return out of his own pocket, maintain the value of the trust corpus so it would be available to Kari when she became an adult. So the trial judge expressly found that Mahaffey was "not a thief." She did not award punitive damages.
It is strong poison for attorneys who double as trustees to make loans to themselves. Hultman is a perfect example. The terms of the loan in Hultman were actually more favorable to the trust than the terms here - in Hultman, the attorney-trustee paid two points above prime and the larger of the two loans was secured - but even so the attorney did not escape discipline. Indeed, the parallels between this case and Hultman are remarkable. The attorney in Hultman also had the "goal" of trying to increase the value of the trust for the beneficiaries by "trying to obtain higher interest rates for the beneficiaries." [1995 WL 257829 at p. 1; see also id. at p. 2.] Like Hultman, the attorney here did not disclose the terms of the loan to any beneficiary at the time the loan was made, or advise the beneficiaries of a right to independent counsel. [1995 WL 257829 at p. 4.] And the attorney in Hultman, like the attorney here, gave himself favorable repayment terms. In Hultman there was no due date for the loan , while here the loan required no debt service whatsoever until the entire loan came due in 2006, and when 2006 came, Mahaffey unilaterally extended the loan to himself for another five years.
Nevertheless, the trial judge made an order that Mahaffey personally, as an individual, was to pay the entire loan back to the trust almost immediately, plus 8 percent interest - an amount equal, in February 2011, to about $400,000, with interest accruing at about $110 a day. She also removed Mahaffey as trustee.
Mahaffey now appeals from the order requiring him to pay back the loan he made to himself. His main argument centers on the language of the 1992 trust. He asserts the terms of the trust actually allowed him to self-deal. As we show in detail below, they didn't.
His other arguments are variations on the theme of delay: the passage of time, combined with the lassitude of Kari's parents in discovering, then enforcing, Kari's rights vis-à-vis the trust. Mahaffey claims Kari's father ratified Mahaffey's loan to himself in 1998, when Kari's father signed certain documents Mahaffey put in front of him which purported to approve everything Mahaffey had already done with the trust. Mahaffey also contends Kari is prevented from seeking relief because the three-year statute of limitations set forth in Probate Code section 16460 had expired by the time she brought this action in 2007. Mahaffey further asserts Kari is estopped from seeking relief because Mahaffey made interest payments on the loan beginning around 2002. And Mahaffey claims Kari (who was 10 years old at the time of the self-dealing loan) and her parents simply waited too long to bring this action.
All statutory references are to the Probate Code unless otherwise indicated.
None of these defenses are availing. There is nothing Kari's father could have done to ratify Mahaffey's self-dealing. A trustor in 1998 cannot alter the terms of an irrevocable trust established in 1992. Plus, Mahaffey himself acknowledged Kari's father had a conflict of interest in relation to Kari's trust money. Mahaffey also acknowledged Kari's mother likewise had a conflict of interest in relation to Kari's trust money. There is also substantial evidence no one - including the trust's own CPA hired by Mahaffey - was informed of the loan until 2005 at the earliest, which would have put this 2007 action well within the applicable three-year statute of limitations. We therefore affirm the judgment.
II. FACTS
A. The Standard of Review
The judgment here comes to us after a nonjury trial, followed by a statement of decision. The statement of decision complicates the standard of review, and hence our recitation of the facts, just a little. Our recitation of the facts is limited by what the trial court expressly found, when supported by substantial evidence. (See SFPP v. Burlington Northern & Santa Fe Ry. Co. (2004) 121 Cal.App.4th 452, 462 ["The substantial evidence standard applies to both express and implied findings of fact made by the superior court in its statement of decision rendered after a nonjury trial."].) So, for example, while Kari's attorney argued that the 1996 promissory note evidencing the loan from the trust to Mahaffey was a post hoc fabrication made in 2001, the trial court's implied finding is that the 1996 note was indeed drawn up in 1996, as the document shows on its face. Likewise, while Kari's attorney asserted the 1996 note was a case of "blatant theft," the trial court's express finding was Mahaffey did not intend to steal the money. And both those findings are supported by substantial evidence - the implied first finding by Mahaffey's own testimony as to when he drew up the note, the express second finding by Mahaffey's own testimony about his subjective intent in loaning himself money from the trust.
On the other hand, the trial court's statement of decision was most assuredly not a "vindication" of Mahaffey's self-dealing. The trial court expressly found his loan to himself "breached at least one of his duties as trustee," namely taking assets out of the trust in return for an unsecured promissory note. (Italics added.) The only exoneration of Mahaffey to be found in the statement of decision was as to his subjective state of mind. While the trial court found Mahaffey did not act "with his own self-interest in mind," the trial court also expressly found he made "a poor judgment call."
Accordingly, our statement of facts is written in light of both (1) the trial court's favorable findings as to the actual date of the 1996 note and Mahaffey's subjective state of mind and (2) its unfavorable findings that he did indeed self-deal with trust funds. Moreover, generally speaking, where state of mind is not involved, we must give Kari, as the prevailing party, the benefit of all conflicts and reasonable inferences that may be drawn from substantial evidence in her favor. (See Estate of Carter (2003) 111 Cal.App.4th 1139, 1154 ["all reasonable inferences from substantial evidence are also drawn in favor of the judgment"]; Kahn v. Department of Motor Vehicles (1993) 16 Cal.App.4th 159, 168-169 ["Factual matters and conflicts in the evidence are viewed in the light most favorable to the prevailing party."].) B. The Formation of the Trust
Kari's father is Tem Mullenax, who was badly injured in a refinery explosion (apparently the 1987 explosion in Torrance), receiving burns over 90 percent of his body. Mahaffey represented Mullenax, who received a $3.5 million personal injury settlement as a result of his injuries. The money was put into a trust for Mullenax's benefit, with Mahaffey as trustee.
Mullenax would later sue Mahaffey for legal malpractice for Mahaffey's alleged negligence in the administration of Mullenax's own trust. One of his allegations was that Mahaffey lost Mullenax's money engaging in margin trading. This court held the suit was barred by the one-year statute of limitations for attorney malpractice. (Mullenax v. Mahaffey (Mar. 11, 2009, G039850) [nonpub. opn.].)
From Mullenax's $3.5 million he established another trust, this one for his daughter Kari. The initial trust funding consisted of $356,967. Mullenax understood the purpose of the trust was to preserve money for Kari. Mullenax testified "that's not my money to be messed with," and it "wasn't supposed to be touched." Mahaffey testified that Mullenax's attitude in setting up the trust was to protect his daughter from himself. Mahaffey did not write the trust - someone named Jacqueline Jensen did - but, as with the case of Mullenax's own trust, Mahaffey was named the trustee.
The record does not tell us anything about Jacqueline Jensen.
The trust document was signed in April 1992. Almost exactly to the day a year later, Mullenax entered into a marital separation agreement with his wife and Kari's mother, Robin Grunder. The separation agreement provided for the trust fund previously established on Kari's behalf to pay to Kari's mother $2,000 a month "so long as" the $2,000 a month payments did not "reduce the principal of said trust." On the other hand, "[t]o the extent that the trust payments" were "insufficient," Mullenax himself was to pay the "difference." Mahaffey himself acted as Mullenax's "attorney in fact" in negotiating the marital separation agreement.
We examine the exact terms of the trust instrument in detail below when we discuss Mahaffey's argument the trust terms allowed him to self-deal.
The evidence was uncontroverted that in the two-and-one-half years following the establishment of the trust for Kari, Mullenax went through about 50 percent of his own trust. Even so, the record is susceptible of the inference the money used to pay the $2,000 a month child support payments due Kari's mother from Mullenax did not come from Mullenax's own trust, but Kari's. Kari's trust began with $356,000. Mahaffey admitted that after he borrowed out $210,000 in March 2006, there was only $50,000 left, i.e., in effect there was $260,000 at the time of the loan. Three years of $24,000 support payments from an initial $356,000 would have left, even if the trust had not made any income at all, about $284,000, not $260,000. Of course, the difference may be explained by Mahaffey's making unsuccessful margin investments with Kari's trust money. Mahaffey admitted to incurring margin interest with trust fund money.
Margin accounts have a way of getting people into trouble. (E.g., People v. Talbot (1934) 220 Cal. 3 [affirming conviction where, among other things, defendant used corporate money to protect margin account].) That said, as we shall see, the trust did expressly allow for margin investments consistent with prudence.
In any event, by the spring of 1996, Mahaffey was clearly worried about the depletion of Kari's trust. He was concerned that if Kari's trust made the $2,000 a month child support payments to Kari's mother, the trust principal would be depleted by the time Kari turned 19 years old. And he was further concerned about both Kari's parents taking advantage of their daughter.
The most dramatic statement of his fear concerned Mullenax. At a deposition in this case Mahaffey expressed his concern that Mullenax would "strong-arm that ex-wife, strong-arm that daughter and get that money which he [Mullenax] put in" for Kari.
And so, in 1996, Mahaffey unilaterally "made the elective decision" (his phrase) to borrow money from the trust and have his law corporation guarantee the loan. Mahaffey prepared a one-page promissory note between himself as an individual and himself as trustee of Kari's trust, borrowing $210,000 from the trust. The $210,000 borrowed was, given a trust value of $260,000 at the time, a little more than 80 percent of the trust's value. The note was dated March 5, 1996, and provided for an 8 percent interest rate. This was a full quarter point below the then-prevailing prime rate of 8.25 percent. (See Jackson, The Snipe Hunt Redux (Apr. 2006) 5 Am. Bankr. Inst.Com.Newsletters, Business Reorganization Com. 161, fn. 10 [giving tables of prime rate by each month from 1996 through 2005]; see also ww.fedprimerate.com/wall_street _journal_prime_rate_history.htm (as of October 22, 2012) [giving prime rate table showing rate of 8.25 percent beginning January 31, 1996 and continuing on through March 27, 1997].) No payments at all - not even interest-only payments - were due on the note for 10 years, at which point everything was to come due. However, in 2006, when the note was due, Mahaffey made another unilateral decision - this time to extend the note for another five years, until 2011. His reason, as he testified, was because he was afraid the "rate of return would be sucked up" by unspecified "litigation" then instituted by Kari's counsel.
After oral argument, Mahaffey and his law corporation sent this court notice that his law corporation has been the subject of an involuntary Chapter 7 bankruptcy. Nothing in the notice indicated that Mahaffey himself, as distinct from his law corporation, is in bankruptcy. The law is clear that the automatic stay provisions of the federal bankruptcy law (see 11 U.S.C. § 362) only apply to the debtor in bankruptcy, not other parties. (See Eisenberg et al., Cal. Practice Guide: Civil Appeals and Writs (The Rutter Group 2007) ¶ 7:68.6, p. 7-24 ["The bankruptcy automatic stay applies only to the bankrupt debtor defendant. Thus, bankruptcy of one of two or more codefendants will not stay appellate proceedings as to the others. [Citations.]" (Italics in original.))
In the case before us, Mahaffey's law corporation is not a party to this appeal - the notice of appeal was filed only on behalf of Douglas L. Mahaffey and the judgment applies only to him personally. Indeed, the law corporation is in no way aggrieved by the judgment. Our decision today is solely concerned with Douglas L. Mahaffey the individual, who, as far as we know, is now not in bankruptcy. If the "notice" was an attempt by Mahaffey to mislead this court into thinking this case has been stayed, it didn't work.
Kari is represented in this case by the same law firm who represented Mullenax in his unsuccessful malpractice litigation, Mullenax v. Mahaffey, referenced above. The "litigation" about which Mahaffey spoke could have referred to Mullenax's own malpractice suit against Mahaffey, another proceeding brought by Mullenax against Mahaffey for mismanagement of Mullenax's own trust, this "litigation" destined to be filed in 2007, or some combination of the three.
The evidence is uncontroverted that in 1996 Mahaffey did not ask anybody's permission to borrow $210,000 of the $260,000 then remaining in Kari's trust. However, about two years later, Mullenax signed two documents on the same day (April 29, 1998) prepared for him by Mahaffey in which Mullenax appeared to ratify everything which Mahaffey had done with Mullenax's money.
One of the documents was a "Confirmation of Power of Attorney" in which Mullenax agreed to put "no limitations" on Mahaffey to "enter into all investment decisions on my behalf." The basic thrust of the power of attorney was basically Mullenax saying he didn't want to be bothered with any information about his accounts. (To quote from the document: "Until I advise in writing otherwise, I do not want to be concerned with or involved in any communications or issues regarding my account so long as Mr. Mahaffey is acting as my Attorney-in-Fact and Trustee.") The other document was a "Cross-Account Management Agreement" in which Mullenax gave Mahaffey power "to manage all investment accounts" and then followed a list of "accounts," none of which included the trust set up for Kari.
Kari's trust, in fact, was not mentioned in either document. And there is no reference in either document to any loan from Kari's trust to Mahaffey himself made previously.
Sometime around 2001, Mahaffey began making payments on the 1996 loan of $210,000. However, there is no evidence Mahaffey disclosed that any of these payments were specifically denominated payments on the loan, as distinct from payments for child support which Mullenax owed Robin Grunder anyway.
About 2002 Mullenax appears to have become disenchanted with Mahaffey's management of Mullenax's own trust, as alluded to in a June 2002 letter from Mahaffey to Mullenax, the gravamen of which was the umbrage Mahaffey had taken concerning unspecified allegations of mismanagement of Mullenax's own assets. ("It is hard for me," wrote Mahaffey, "to hear that someone is again accusing me of mismanaging your assets.")
The disenchantment eventually led to Mullenax seeking an accounting of his own assets in 2005. Mahaffey was ordered to provide an accounting, and that accounting uncovered Mahaffey's 1996 loan from Kari's trust to himself.
Kari, as beneficiary and represented by the same attorney retained by Mullenax to prosecute Mullenax's own claims, filed the petition in this case in April 2007. She named Mahaffey, the trustee, as defendant; she did not name the trust itself, nor did she have to. (See Portico Management Group, LLC v. Harrison (2011) 202 Cal.App.4th 464, 476 ["A judgment against a trust, rather than against its trustees, is not enforceable."].) Kari's petition sought three different kinds of relief: First, an order removing Mahaffey as trustee; second, an order compelling an accounting; and, third, an order of "redress of trust."
Indeed, even if the trust had been an indispensible party (which it wasn't), omission of trust itself from the litigation would not affect the validity of the judgment before us. (See Golden Rain Foundation v. Franz (2008) 163 Cal.App.4th 1141, 1155.)
Apropos footnote 8 above, we also note that Kari did not name Mahaffey's law corporation as a defendant.
Sometime after July 2007 - that is, after Kari's litigation was filed in April - Mahaffey provided a formal written accounting for Kari's trust. The accounting is entitled, "Kari Grunder Trust [¶] Douglas L. Mahaffey, Trustee [¶] Summary of Account [¶] For Period July 8, 1992 Through July 31, 2007." This 2007 accounting disclosed the 1996 loan and listed it as an asset of the trust.
This case was tried in the late summer of 2010, and was not a pleasant experience for anyone involved. The final statement of decision noted the "anger and venom" and the open hostility between counsel. Nonetheless, while Kari's counsel had argued the 1996 note was a fabrication and the loan a "blatant theft" the statement of decision explicitly found Mahaffey was "not a thief." The statement of decision further found Mahaffey "while acting as trustee, was acting in good faith, and with good intentions." The trial court found no "malice or any ill intent that would support an award of punitive damages," and "insufficient evidence" Mahaffey had "looted the trust, and that he acted with his own self-interest in mind."
Said the statement of decision: "The anger and venom won't be as stark in the black and white record as it was to the Court in listening to the testimony of Mr. Mahaffey, the questions of both counsel, and the arguments of counsel. As with the Tem Mullenax matter, quite frankly, it was not pleasant to try this case, either for the court, or for her staff."
The statement of decision was extraordinarily evenhanded in this regard. We have made a detailed examination of the "black and white record" and the only anger or venom found in the black and white transcript is all to be found on Mahaffey's side. (Perhaps Kari's attorney displayed some by his tone of voice - no anger and venom comes across in terms of the bare text, other than, perhaps, his oral argument in which he accused Mahaffey of stealing and then fabricating the promissory note.) For example, while Mahaffey testified he was willing to resign as trustee, he further stated he was "not willing to resign" until Kari's counsel was "out of [her] life." Likewise, Mahaffey testified he was willing to perform an accounting, but not "to" Kari's attorney. And, at one point during trial, Mahaffey accused Kari's counsel of coaching an expert - an accusation which the trial judge immediately rejected. ("I'm looking at everybody, and there's no coaching going on"). Mahaffey also referred to Kari's counsel as "an attorney who's - who's taken 70 or 80 thousand" of Kari's money.
Mahaffey was probably saved by Mullenax himself, who was one of Kari's witnesses at trial. The judge asked Mullenax the question, "Do you think he stole the money," and Mullenax answered, "No, I didn't."
Even so, the judge concluded Mahaffey had violated "at least" of one his duties as trustee, namely the duty not to self-deal: "But, however well intentioned, in administering this trust for the daughter of a (formerly) good friend (who even in testifying at trial seemed to bear no ill will toward his former lawyer and friend), he breached at least one of his duties as trustee. He transferred $210,000 worth of securities from the trust to his Merrill Lynch account, and gave an unsecured promissory note in exchange for the transfer, in 1996."
Accordingly, the court entered judgment requiring Mahaffey to repay to the trust $395,469.45 as of November 23, 2010, with interest thereafter to be paid at $109.95 per day. Mahaffey was also removed as trustee. He timely appealed.
III. DISCUSSION
A. Appealability
Counterintuitively, Mahaffey argues the judgment from which he has appealed "was premature." His theory is that he is entitled to be compensated by Kari's trust for all expenses and costs incurred in defending the allegations of self-dealing, and also for the $200 an hour (or more) which the trust provides as his compensation as trustee, but the trial court did not reach the issue of his expenses, costs, or compensation. Mahaffey's point seems to be that the judgment from which he has appealed is not an appealable final judgment under the one final judgment rule. (See Kinoshita v. Horio (1986) 186 Cal.App.3d 959, 961 [judgment directing dissolution of partnership and sale of its assets was interlocutory and therefore not appealable].) Of course, if we were to accept his argument, the result would be a dismissal of Mahaffey's own appeal, leaving intact the "premature" judgment requiring him to pay to the trust about $400,000. It would not be to reverse that judgment.
The compensation section of the trust instrument (section 8.05) provides that if the hourly rate of the attorney "should be increased" from $200 an hour (apparently Mahaffey's hourly rate in 1992), the trustee "shall be entitled to such increase."
But we do not accept his argument. The supposed incompleteness of the judgment centers on claims by Mahaffey against the trust (and also perhaps against Kari's present counsel) for Mahaffey himself having been put to the expense of defending his own self-dealing. As noted by the trial court in her statement of decision, "In his testimony and written papers, Mr. Mahaffey repeatedly threatened to seek attorney fees and surcharges" against Kari's attorney. We further note the record indicates Mahaffey continually made references - "threats" would be the more accurate word - to collecting from the trust his attorney fees incurred to defend against the allegations of self-dealing brought against him.
For example, Mahaffey testified that "but for this litigation and but for the depletion of the trust attorney's fees, there would have been an automatic payment to [Kari]" when she turned 25. The testimony can only be squared with an intention to take money from the trust, as distinct from Kari's counsel.
Of course, as should be obvious, self-dealing trustees are not entitled to be reimbursed by the trust for fees used to unsuccessfully defend against charges of self-dealing. (Whittlesey v. Aiello (2002) 104 Cal.App.4th 1221, 1231.)
And there is certainly no viable issue of appealability as to the judgment before us. The Probate Code provides for its own separate set of rules of appealability which operate independently of the rules which normally govern civil appeals. (See Code Civ. Proc., § 904.1, subd. (a)(10) [providing for the appealability of "an order" made otherwise "appealable by the provisions of the Probate Code"].) Sections 1300 through 1304 of the Probate Code list the specific orders made by probate courts which are appealable. Section 1304, subdivision (a) makes appealable any final orders "under Chapter 3 (commencing with Section 17200) . . . ." Among the orders included under section 17200 are section 17200, subdivision (b)(12) compelling redress of trust, and section 17200, subdivision (b)(10), removing a trustee. Here, the judgment includes orders for both redress of trust and removing a trustee. While orders compelling a trust to submit an accounting are not appealable (see § 1304, subd. (a)(1)), Mahaffey does not attack any order he submit an accounting. He attacks the order of redress, which is expressly appealable under section 1304, subdivision (a). B. Basics of Trust Law
The facts of this case show certain basics of trust law and administration should be rehearsed before we directly address Mahaffey's arguments. Those basics are laid out in Division 9 of the Probate Code, beginning with section 15000.
To create a trust there must be a trustor, sometimes called a "settlor," who transfers property to "another person as trustee." (§ 15200, subd. (b).) Obviously there must also be an intention to create a trust, some trust property which is transferred to the trustee, and a beneficiary. (§§ 15201, 15202 & 15205.) Thus, when Mullenax transferred $356,000 to Mahaffey as trustee for the benefit of Mullenax's daughter Kari, that was a trust. (§ 15200, subd. (b).)
It was also an irrevocable trust. An irrevocable trust is just what it sounds like - the trustor (or settlor) can't take the property back. Thus if a settlor establishes an irrevocable trust, the beneficiary acquires a "vested and present beneficial interest in the trust property" which cannot be divested. (See Empire Properties v. County of Los Angeles (1996) 44 Cal.App.4th 781, 787.) By the same token, the trustor's (or settlor's) conduct after he or she has established an irrevocable trust will not alter the nature of the trust. (Laycock v. Hammer (2006) 141 Cal.App.4th 25, 31 (Laycock) ["In sum, contrary to Hammer's argument, a settlor's conduct after an irrevocable trust has been established will not alter the nature of such a trust."].)
The Probate Code lays out a whole series of duties on trustees beginning in section 16000. Trustees are, after all, the keepers of other's people's property. The basic rule is found in section 16000 itself: Trustees have a duty to "administer the trust according to the trust instrument and, except to the extent the trust instrument provides otherwise, according to this division." The "division" referred to then proceeds to fasten a whole series of duties on trustees, including: a duty of loyalty (§ 16002), a duty to deal impartially with beneficiaries (§ 16003), a duty to avoid conflicts of interest (§ 16004), a duty not to require the beneficiary to relieve the trustee of liability (§ 16004.5), a duty not to become the trustee of another trust adverse to the interests of the beneficiary of the first trust (§ 16005), a duty to preserve trust property (§ 16006), a duty to keep the trust property separate from nontrust property (§ 16009), and a duty to enforce claims which are part of the trust property (§ 16010). Beyond those duties, a trustee is subject to the "prudent investor" rule, which requires making investments with regard to the trust portfolio as a whole and the overall strategy of the trust in light of relevant circumstances, including such factors as general economic conditions, needs for liquidity, regularity of income, and preservation of the trust's capital. (§ 16047.)
The old rule was the "prudent man" rule, codified at former section 2261 of the Civil Code. The prudent man rule was changed to the "prudent investor" rule for more reasons than just to have a gender-neutral name. Under the prudent man rule, a number of investments were absolutely prohibited, such as (as happened in this case) purchasing of securities on margin. Besides certain absolute prohibitions (e.g., margin speculation), the prudent man rule came with a strong presumption against making investments in things like precious metals, collectibles, currency hedging and junk bonds. (See Levy, The Prudent Investor Rule: Theories and Evidence (Spring 1994) 1 Geo. Mason U. L. Rev. 1, 3.) By contrast, the modern "prudent investor" rule looks to the trust portfolio as a whole, and does not consider any given investment in isolation. (See § 16047, subd. (b).)
Some readers will have noticed that section 16000 contains language indicating the trust instrument itself may relieve trustees of some or all of the basic statutory duties otherwise imposed on trustees in sections 16002 et seq. - the "except to the extent the trust instrument provides otherwise" clause. The case law dealing with claims by trustees asserting they were relieved of statutory duties otherwise imposed on them by statute demonstrates this common sense rule: In order for a trust instrument to be construed as relieving a trustee of normal duties of fiduciary loyalty otherwise imposed by statute, the language in the trust instrument relieving the trustee must be "clear and unequivocal." (See Estate of Thompson (1958) 50 Cal.2d 613, 615.)
The few cases which have allowed a relaxation of normal statutory duties imposed by the Probate Code illustrate the point clear and unequivocal language is needed.
We begin with Thompson, albeit it involved an executor as distinct from a trustee. In Thompson, a decedent made an attorney the sole executor of her estate. The will expressly gave the attorney the right to "'act[] as his own attorney'" and to collect fees both as an executor and as his own attorney. (Thompson, supra, 50 Cal.2d at p. 614.) Accordingly, it was error for the trial court to deny the attorney's claim for attorney fees (otherwise perfectly proper) while allowing his claim for executor fees. The court made the point the will left no doubt about his right to seek both sorts of fees: "[I]n the present case Mrs. Thompson's intention was expressed in clear and unequivocal language and leaves no doubt but that she wished the petitioner to receive the compensation for legal services if he should choose to perform them." (Id. at p. 615.)
Then there is Copley v. Copley (1981) 126 Cal.App.3d 248. Copley is perhaps the strongest case of which we are aware to allow trustees some relief from statutory duties otherwise imposed on them. But if there is one lesson to take from Copley, it is that the need for relaxation of the statutory duty must, given the trustor's evident intent, be unavoidable.
In Copley, a publishing tycoon had a trust during his lifetime which, upon his death, split into two trusts - a "marital" trust and a "nonmarital" trust, with each trust having exactly 48.877 percent of the stock shares in his publishing empire. (Copley, supra, 126 Cal.App.3d at p. 260.) And the stock shares in the empire were all the property those trusts contained. There was no other property in them, so in order to pay any expenses, some sort of liquidation of stock was required. The trustees of the original lifetime trust - including the tycoon's widow - remained the trustees of both the marital and nonmarital trusts after the split. (Id. at p. 256.) But there was a big difference in the way each trust was to be administered. According to the original trust instrument, the nonmarital trust had to bear all the freight of the death duties and expenses of trust administration, and, of course, its only asset was the stock in the publishing empire. (Id. at p. 279.) Paying death duties required some sort of disposition of the stock, so the trustees arranged for a stock redemption agreement for the nonmarital trust. The "[i]neluctabl[e]" and "inevitable" result of the stock redemption agreement, however, was that the widow (the beneficiary of the marital trust) "consolidated" her control of her late husband's business. (Ibid.)
The trial court concluded the trustees had violated their statutory duty of avoiding a conflict of interest. But the appellate court, noting the inevitability of the arrangements made by the trustor, reversed, and excused the stock redemption that had favored the widow over other beneficiaries. The trustees had no other choice given the way the trusts were set up. By requiring only one of the trusts, but not the other, to pay death duties and administration expenses, the tycoon made control of his empire by his widow inevitable. Accordingly, the Copley court held the trustees did not breach their duty of loyalty to the beneficiaries of the nonmarital trust. Tellingly, in Copley (in contrast to the case before us), there was no "violation of the prohibition against self-dealing in the sense of profiting or obtaining an advantage." (Copley, supra, 126 Cal.App.3d at p. 279.)
A contrast to Copley may be found in Estate of Martin (1999) 72 Cal.App.4th 1438 (Martin). There, much as in Copley, an executor arranged for a stock redemption in a family refrigeration corporation (in which she owned stock, and was an officer and director) to pay estate taxes, the net effect of which was, similar to Copley, to enhance the executor's personal control over the family corporation. (See id. at pp. 1440, 1444.) Later, one of the beneficiaries of the decedent's estate sought to void the stock redemption, and the appellate court held the trial court erred in not granting the request. A series of probate code statutes impose duties on executors similar to those imposed on trustees (see § 9880 et seq.), including limiting the ability of executors to purchase property from the estate or be interested in a purchase. In Martin (as in Copley), the person in the fiduciary role arranging for the stock redemption had a personal stake in that redemption. In both cases the effect of the redemption was to increase the fiduciary's control over a family corporation. And in Martin the executor invoked Copley as a reason to be relieved of those statutory duties. But in Martin the outcome was different because the relevant language did not require the redemption. In fact, the language made any sale of estate property "'subject to such confirmation as may be required by law,'" i.e., the will did not relieve the executor of duties otherwise imposed by law. (Martin, supra, 72 Cal.App.4th at p. 1445.) There was not the inevitability of Copley.
However, there is one more dimension to the general issue of when a trust instrument might be held to relieve a trustee of statutorily-imposed duties, including duties to avoid conflicts of interest and self-dealing, otherwise imposed by the Probate Code. One of the advantages to having a trust where the trustee is also an attorney is that the trustee-attorney, by the ethics of his or her profession, is held to a higher standard than ordinary trustees. Even if the trust instrument does unequivocally allow for self-dealing, the attorney-trustee must still observe certain rules, including giving the beneficiary the meaningful opportunity to have independent counsel look at the transaction before the transaction takes place. As stated by the Supreme Court in Schneider v. State Bar (1987) 43 Cal.3d 784, 796: "Petitioner relies on Copley . . . . There, the Court of Appeal held, as a general rule, that the duty of loyalty imposed on a trustee [citation] and the statutory prohibitions against self-dealing by a trustee [citations] must give way to directions contained in the governing trust instrument. Rule 5-101, however, imposes quite independent requirements on attorneys who transact business with clients. The mere fact that such a transaction arises in the context of a trust agreement does not exempt an attorney from the rule. The terms of the trusts authorizing self-dealing on the part of petitioner clearly come within the rule and do not supersede it." (Italics added.)
Rule 5-101 (now rule 3-300) to which the Supreme Court alluded in Schneider requires an attorney to first advise the client of the client's right to seek independent counsel before entering into any transaction with a client. (See Passante v. McWilliam (1997) 53 Cal.App.4th 1240 [upholding ruling precluding attorney from having significant share in billion-dollar corporation because attorney did not first advise corporate clients of need for independent counsel to evaluate effect of loan arranged by attorney on corporation's capital structure].) The ethical rule also requires the client be given a reasonable opportunity to find that independent counsel, that the transaction be fair and reasonable, and all terms fully disclosed.
Old rule 5-101 is now rule 3-300. It provides: "A member shall not enter into a business transaction with a client; or knowingly acquire an ownership, possessory, security, or other pecuniary interest adverse to a client, unless each of the following requirements has been satisfied: [¶] (A) The transaction or acquisition and its terms are fair and reasonable to the client and are fully disclosed and transmitted in writing to the client in a manner which should reasonably have been understood by the client; and [¶] (B) The client is advised in writing that the client may seek the advice of an independent lawyer of the client's choice and is given a reasonable opportunity to seek that advice; and [¶] (C) The client thereafter consents in writing to the terms of the transaction or the terms of the acquisition."
Along the same lines, when an attorney assumes a fiduciary relationship toward a nonclient (e.g., a beneficiary of a trust in which the attorney is the trustee), the attorney is subject to the rules of professional conduct as if the nonclient were a client. (Guzzetta v. State Bar (1987) 43 Cal.3d 962, 979 ["As a fiduciary his obligation to account for the funds extended to both parties claiming an interest in them. Having assumed the responsibility to hold and disburse the funds as directed by the court or stipulated by both parties, petitioner owed an obligation to Camila as a 'client' . . . ."].) C. The Trust Argument
With these principles in mind, we now turn to Mahaffey's argument the trust allowed him to self-deal. Obviously the language of the instrument is paramount. (See Brown v. Labow (2007) 157 Cal.App.4th 795, 812 [the "'intention of the transferor as expressed in the instrument controls the legal effect of the dispositions made in the instrument'"].) Our examination is thus guided by classic principles of textual exegesis. We seek to ascertain the intent of the trustor. (See Estate of Lindner (1978) 85 Cal.App.3d 219, 226 ["'It is the intention of the trustor, not the trustor's lawyer, which is the focus of the court's inquiry.'"].) We derive intent from the whole of the instrument, not just its isolated parts. (See Scharlin v. Superior Court (1992) 9 Cal.App.4th 162, 168.) And we may examine extrinsic evidence to explain any ambiguities, even latent ones. (See Estate of Russell (1968) 69 Cal.2d 200, 206.)
To quote from the reply brief: "It may have been illegal self-dealing for a Trustee to borrow money from a different Trust, but this Trust and this Trustor [Mullenax] expressly allowed this kind of self-dealing investment."
The "Kari Grunder Irrevocable Trust" consists of nine articles, covering the major subjects of trust property, including identification of the beneficiary, distribution of income, powers of the trustee, miscellaneous provisions, and provisions for a successor trustee. A number of the articles are, in turn, subdivided into sections.
The purposes of the trust are to be found in article IV. Income received is to be distributed to the beneficiary for "expenses such as . . . summer camp, clothing, lessons, travel, entertainment or any other need or comfort item," or, alternatively, partly or entirely accumulated, depending on the trustee's "sole and absolute discretion." However, beginning at age 25 and continuing afterwards in five year increments, the beneficiary receives the right, regardless of the trustee's discretion, to various percentages of income. (So, at age 25 the beneficiary has the right to 15 percent of trust income, at age 30, the right to 25 percent of trust income, increasing to 100 percent of trust income at age 45.)
Sections 16080 through 16082 put certain statutory restrictions on a trustee's discretion even when the trust instrument gives a trustee "sole" or "absolute" discretion. These statutes, however, are not directly implicated by our analysis.
Interestingly enough, it appears there is no provision in the trust requiring distribution of the principal to the beneficiary during her lifetime. Article IV also provides the trustee may pay to the beneficiary as much as the trustee, in his "sole discretion," deems necessary for the beneficiary's support and care, including "college and post-graduate study." Anything remaining in the trust at the time of Kari's death goes to her estate or as she directs prior to her death.
Article VII enumerates the powers of the trustee, and contains no less than 25 separately subheaded sections, most of which spell out separate enumerated powers, such as: power to hold any property the trust receives, power to sell, exchange and repair property, power to lease trust property out (including the mineral rights), to invest in limited partnerships, to insure trust property, to employ consultants, or physically segregate or divide trust property.
Mahaffey relies on two sections of the instrument to justify his self-dealing. The first of these is section 7.17, entitled "Loans by Trustee." Mahaffey argues this section "expressly allows for Trustee 'self-dealing.'" Section 7.17 allows the trustee to loan his own money to the trust (and in that sense does allow for that kind of self-dealing), or to make loans from the trust to the estate of the trustor, i.e., loans to Mullenax, to pay for Mullenax's liabilities, taxes and expenses. But there is no language in section 7.17 allowing the trustee to loan money from the trust to himself. The entire text of section 7.17 is quoted in the margin. There is also no section, corresponding to section 7.17, with a subheading entitled anything like "Loans to Trustee."
Here is the text: "The trustee may loan or advance its own funds for any Trust purpose to this Trust upon the security of the entire Trust Estate, said loans to bear interest at the then current rate from the date of advancement until repaid; but the Trustee shall in no event be required to make any such loan or advancement to this Trust. The Trustee may, at its discretion, make loans with or without security out of the Trust Estate to, or purchase assets from, the estate of the Trustor in order to assist such estate in the payment of liabilities, taxes and expenses; such loansor [sic] purchases shall be without liability to the Trustee for loss resulting to the Trust estate therefrom."
The second section Mahaffey points to is section 7.10, which covers the general investment powers of the trustee. Again, we quote the entirety of the provision in the margin, so readers can see there is no express or unequivocal power given the trustee to loan money to himself as an "investment." To be sure, section 7.10 allows the trustee to "invest and reinvest" trust property in "every kind of property" and "every kind of investment," but that power is qualified by the words "which men of prudence, discretion and intelligence acquire for their own account." (The section also allows for margin investments and the acquisition of residential property which the Trustor [Mullenax] might occupy in his lifetime.)
Here is the text:
"To invest and reinvest the Trust Estate in every kind of property, real, personal, or mixed, and every kind of investment, specifically including, but not by way of limitation, corporate obligations of every kind, stocks, preferred or common, shares of investment trusts, investment companies and mutual funds, and mortgage participations, which men of prudence, discretion and intelligence acquire for their own account, and any common trust fund administered by the Trustee.
"To buy, sell and trade in securities of any nature, (including 'short sales' on margin,) and for such purpose may maintain and operate margin accounts with brokers, and may pledge all securities held or purchased by them, with such brokers as security for loans and advances made to the Trustee.
"To hold securities or other property in the Trustee's name, as Trustee under this Trust, or in the Trustee's own name, or in the name of the nominee, or unregistered in such condition that ownership will pass.
"The Trustee is empowered to acquire, hold, maintain and improve, as an asset of the Trust Estate, residential property which the Trustor may occupy during her [sic] lifetime without obligation for rent or reimbursement for its use."
Mahaffey presented no extrinsic evidence at trial that in 1992 Mullenax specifically intended to allow Mahaffey to make loans to himself. The only evidence as to Mullenax's own intent has been quoted already: He wanted to protect the trust money from himself, and thus it wasn't his money "to be messed with."
We conclude the trust did not expressly or unequivocally allow Mahaffey, as trustee, to make a loan to himself, period - even for a putatively good purpose. In section 7.17, the trust instrument expressly allows for loans from the trustee, or to the trustor, but there is no express language allowing loans to the trustee. Under the basic rule of expressio unius, loans to the trustee were impliedly excluded by section 7.17 alone.
Moreover, the broad powers of "investment" given the trustee under section 7.10 were qualified by the requirement any investments be of the sort "which men of prudence, discretion and intelligence acquire for their own account." Men and women of prudence certainly do not make unsecured loans of money at subprime rates. And even if Mahaffey's law firm guaranteed the loan, Mahaffey presented no evidence his law firm was something in which "men of prudence, discretion and intelligence" would invest.
In Hultman, an attorney borrowed $25,000 from the trust, gave security, and borrowed at two percent above the then-current prime rate of eight percent. (See Hultman, supra .)
And beyond that, as we indicated above, one of the advantages of having an attorney as a trustee is the attorney is required to clear any self-dealing prior to engaging in it. Thus even if the trust instrument had allowed Mahaffey to loan money to himself (a conclusion we reject), since Mahaffey was an attorney-trustee, the transaction still had to be fair and reasonable - which meant, at the very least, Mahaffey should have paid a higher interest rate than he did. Further, there is no evidence that Mahaffey attempted to give Kari's mother, Mullenax, or Kari herself the opportunity to obtain counsel to evaluate the transaction.
At trial, Mahaffey was filled with self-congratulation for having obtained an 8 percent return on trust assets. "[T]his was great business judgment, excellent business judgment," he proclaimed. But he ignored the problem that, as a prospective borrower, he, in his personal capacity, was getting a real deal by the 8 percent loan. To have been "fair and reasonable," the "promissory note investment" as he called it should have been at some rate higher than the then-existing prime rate of 8.25 percent, and it should have included some additional premium for the fact it was unsecured. (See Hultman, supra ["The advantages of loaning oneself money as opposed to obtaining a loan from another source are obvious."].)
Finally, we examine what might be described as Mahaffey's underlying commercial reason for the loan to himself. Far from showing an "inevitable" need for the loan, it only brings into sharp relief the conflict of interest into which Mahaffey had placed himself. That conflict was between Mullenax's obligation to pay child support from his own funds and Kari's entitlement to have her own trust managed prudently.
Mahaffey's position is that Kari's trust was being depleted too fast because of the $2,000 child support payments contemplated by the marital separation agreement, so nothing would be left by the time she attained the age of majority. He was also afraid her father and mother would exercise undue influence over Kari, and would somehow grab her money for themselves. And so he protected the money by getting it out of harm's way by loaning it to himself at a rate of interest better than the trust could obtain from ordinary investments. He believed that in 2006, when the loan would come due, he'd be good for it, and the trust would have had at least $210,000 of its assets protected at an excellent rate of return.
Closer scrutiny of the relevant documents and extrinsic evidence belies this scenario. The marital separation agreement was made a year after the trust agreement, and there is no way the marital separation agreement could have required the trust to pay $2,000 a month on Kari's behalf. There was no provision in the trust instrument that Mullenax would be allowed to raid Kari's trust to make his child support payments for him. To the contrary, any money paid from Kari's trust was in the "sole" discretion of the trustee. At the most, Mahaffey had the discretion to pay over to Kari's mother as child support whatever income the trust generated, which would have left Mullenax's own trust (even assuming Mullenax himself was incapable of working) to pay the rest.
Thus, far from inevitably requiring a self-interested loan (cf. Copley), Kari's trust did not require income payments of $2,000 a month. Any action by Mahaffey to generate $2,000 a month in income from it was necessarily dictated by Mahaffey's self-imposed need to protect Mullenax from having to pay child support money from Mullenax's own trust.
And Mahaffey's solution to this evident conflict of interest, whatever his own state of mind, objectively favored Mullenax over Kari. The money came out of Kari's trust, not Mullenax's. Otherwise, Mahaffey simply could have sent the Mullenax trust the bill for the difference between what Kari's trust generated and what Mullenax was personally obligated to pay. For example, a conservative 5 percent (easily obtainable in the early 1990's) on $350,000 would have generated $17,500 a year, which would have left Mullenax himself to make up a paltry $6,500 a year. Mullenax could easily have paid that from his own trust, which at the time still amounted to more than a million dollars. Kari's trust corpus could have remained steady with conservative investments, Mahaffey could have paid her whatever income they generated, Mullenax would have made up the difference, and the corpus would have been wholly intact by the time Kari attained her majority.
In sum, neither the language of the instrument setting up Kari's trust, extrinsic evidence concerning the trustor's intent, nor the circumstances surrounding Kari's trust allowed Mahaffey to loan himself money from Kari's trust. D. The Ratification Argument
Mahaffey argues Mullenax ratified the loan by virtue of Mullenax's signing the 1998 power of attorney and cross-account management agreements. Statutorily, Mahaffey predicates his ratification on section 16465. That statute deals with a beneficiary's option to reject or affirm transactions in breach of trust. By entering into the 1998 documents, says Mahaffey, Mullenax essentially accepted the loan and its benefits.
Mahaffey forgets, though, that by 1998 Mullenax had no power to ratify any self-dealing on Mahaffey's part. It was an irrevocable trust. Much of Mahaffey's argument is predicated on the assumption that Mullenax, as original trustor, just had to have the power to alter or change the trust terms. But Mahaffey points to nothing in the trust instrument which gave Mullenax any power to permit the trustee to self-deal, and the extrinsic evidence about Mullenax's own intent (no longer his own money to "mess with") flatly contradicts any theory Mullenax could have ratified Mahaffey's self-dealing. And, as shown by Laycock, the trial court was of course correct in concluding Mullenax had no power to alter in 1998 the nature of an irrevocable trust set up in 1992.
Mahaffey, as trustee, might have gone to court to seek instructions if he concluded that some overpowering business need required the trust to loan him money. (See § 17200, subds. (b)(6) & (8) [trustee may petition court concerning internal affairs of trust, including instructing trustee or granting powers to trustee].) His attitude on this point at trial, however, was, in psychological parlance, one of "denial." Mahaffey testified he had no "responsibility" to go to court about the self-dealing.
We need merely add several additional points which further undercut any "ratification" argument: (1) Nothing in the text of the trust agreement gave Mullenax the power to ratify any self-dealing on the part of the trustee. (2) Neither of the two 1998 documents explicitly mentioned the 1996 loan. (3) Mullenax testified he was not informed of any promissory note. (4) Mullenax testified he never agreed Mahaffey could take $210,000 from Kari's trust. And (5), Mullenax testified he could not remember any conversations with Mahaffey about any loan. In fact, Mullenax testified that when he looked at Merrill Lynch statements received from Mahaffey, he "didn't know what they were saying." Accordingly, as between Mullenax's testimony and any contrary testimony from Mahaffey, the standard of review requires us to credit Mullenax's version of events - which is that Mahaffey did not specifically inform Mullenax about the 1996 loan in 1998. E. The Statute of Limitations Argument
There is a three-year statute of limitations for claims against trustees for breach of trust set out in section 16460. (See generally Noggle v. Bank of America (1999) 70 Cal.App.4th 853 (Noggle).) Before we apply the statute, we review its somewhat complex structure.
1. Basics of Section 16460
Basically, section 16460 works by triggering the three-year statute of limitations from two alternative points: either (a) from the reception by the beneficiary of accountings which "adequately" disclose the existence of a claim for breach of trust or (b) if there are no adequate accountings (or any accountings at all), from the time a beneficiary "should have discovered" the existence of a claim for breach of trust. (See Noggle, supra, 70 Cal.App.4th at pp. 858-859.)
Subdivision (a) of section 16460 sets forth the basic trigger of the statute:
"(a) Unless a claim is previously barred by adjudication, consent, limitation, or otherwise: "(1) If a beneficiary has received an interim or final account in writing, or other written report, that adequately discloses the existence of a claim against the trustee for breach of trust, the claim is barred as to that beneficiary unless a proceeding to assert the claim is commenced within three years after receipt of the account or report. An account or report adequately discloses existence of a claim if it provides sufficient information so that the beneficiary knows of the claim or reasonably should have inquired into the existence of the claim.
"(2) If an interim or final account in writing or other written report does not adequately disclose the existence of a claim against the trustee for breach of trust or if a beneficiary does not receive any written account or report, the claim is barred as to that beneficiary unless a proceeding to assert the claim is commenced within three years after the beneficiary discovered, or reasonably should have discovered, the subject of the claim."
Subdivision (c) adds the proviso accountings need not conform to certain formal Probate Code requirements: "(c) A written account or report under this section may, but need not, satisfy the requirements of Section 16061 or 16063 or any other provision."
Noggle illustrates how section 16460 works in the context of regular accountings by a bank trust department, i.e., when beneficiaries do receive regular accountings (which is not the case here, of course). There, certain trusts had two different kinds of beneficiaries: "income" beneficiaries, who received the income generated by the investments made by the trust, and "remaindermen," who got the leftovers after a certain time. In Noggle, the "remaindermen" sued a bank on the theory the bank favored the "income" beneficiaries" over them in the bank's choice of investments (a classic choice of short term versus long term). (See Noggle, supra, 70 Cal.App.4th at p. 856.) The remaindermen's suit presented the question of the possible applicability of the three-year statute of limitations found in section 16460. The question turned on the information the bank had disclosed. The court noted there was no dispute over "what the remaindermen knew or when they knew it," only the effect of the information given them by the bank. (Id. at p. 860.)
As to two of the remaindermen, the Noggle court pointed to a letter sent them by the bank which flat out told them there had been no growth in the principal because the investments had been structured to "'maximize the current income.'" (Id. at p. 861, italics omitted.) The court held the bank could not have made it "any plainer" that it was showing favoritism to the income beneficiaries, and so held the statute of limitations was triggered. (Ibid.)
As to a group of other remaindermen, they had received annual accounting giving enough information to allow them to calculate the value of the assets in the trusts, and those accountings were "received over a sufficient number of years" to permit year-by-year comparison. That is, the remaindermen easily could have figured out if the bank was favoring income over long-term growth as an investment strategy. So all breaches revealed by those accountings triggered the running of the three-year statute.
Quick v. Pearson (2010) 186 Cal.App.4th 371, by contrast, shows considerable periods of time can elapse without triggering the running of the statute of limitations when a beneficiary is not actually aware of a claim and receives no accountings. The case was like something out of one of those mystery stories where a long-lost illegitimate child, now grown, shows up to haunt a rich family.
In Quick, a wealthy owner of commercial real estate set up a trust in which his grandchildren were the remaindermen, with his two children as the trustees. It turned out there was a grandchild who did not discover his true heritage as one of the owner's grandchildren until 1989, when the grandchild was 34 years old. It was only then he learned one of the two trustees was his natural father. But the grandchild, eager to build a good relationship with his newly-discovered natural father, never inquired about any financial matters. During that period the other trustee (the grandchild's aunt) told the other grandchildren not to tell the grandchild about the trust. As a result, the grandchild did not learn about the existence of the trust until 2007, when he was advised by a brother about a large distribution the brother had received from the trust. (Id. at pp. 373-375.) The grandchild sued. The appellate court held that despite the 18-year period from the discovery of the grandchild's natural father to his discovery of the trust, the statute of limitations had not run. Even knowing who his real father was did not put the grandchild on notice of the existence of the trust. The grandchild was still not aware of facts that "would have put a reasonable person on notice of the existence of the trust" earlier than the 2007 revelation from the brother. And there were no accountings furnished him to put him on notice of the claim either. (Id. at pp. 379-380.)
Section 16460 is even more complicated when it comes to minors. Subdivision (b)(3) addresses the question of what happens when the beneficiary is a minor. In that case, the statute deems the minor to have "received an account" if an account has been received by her guardian, or, if he or she has no guardian, by the minor's parent (singular) as long as the parent does not have a conflict of interest.
Here is the exact language: (b) For the purpose of subdivision (a), a beneficiary is deemed to have received an account or report, as follows: [¶] . . . . (3) In the case of a minor, if it is received by the minor's guardian or, if the minor does not have a guardian, if it is received by the minor's parent so long as the parent does not have a conflict of interest." (Italics added.)
Thus basically, the statute dates the beginning of the three years from the time the minor beneficiary's parent - assuming he or she has no conflict of interest -receives an accounting which reveals some claim for breach of trust by the trustee. Otherwise it doesn't run at all until the minor beneficiary reaches adulthood and receives such an accounting (assuming the newly-turned adult is "capable" of understanding an accounting), or, if there's no accounting (or an accounting adequate to disclose the claim), doesn't run until the newly-turned-adult beneficiary actually discovers or "should have discovered," the claim.
Here is the exact language:
"(a) Unless a claim is previously barred by adjudication, consent, limitation, or otherwise: "(1) If a beneficiary has received an interim or final account in writing, or other written report, that adequately discloses the existence of a claim against the trustee for breach of trust, the claim is barred as to that beneficiary unless a proceeding to assert the claim is commenced within three years after receipt of the account or report. An account or report adequately discloses existence of a claim if it provides sufficient information so that the beneficiary knows of the claim or reasonably should have inquired into the existence of the claim.
"(2) If an interim or final account in writing or other written report does not adequately disclose the existence of a claim against the trustee for breach of trust or if a beneficiary does not receive any written account or report, the claim is barred as to that beneficiary unless a proceeding to assert the claim is commenced within three years after the beneficiary discovered, or reasonably should have discovered, the subject of the claim."
Conspicuously missing from subdivision (b) is any provision which somehow automatically triggers the statute of limitations when the minor becomes an adult if there is no accounting received prior to that time and the minor's parents have received no accounting, or, even if they have, the minor's parents have a conflict of interest.
Subdivisions (b)(1) and (b)(2) address the issue of what happens when the beneficiary minor reaches adulthood. They make the result depend on the person's mental competency. Subdivision (b)(1) deems the minor to have "received an account" if an account has been received by the minor as an adult and he or she is "capable of understanding" it. Subdivision (b)(2) deems the minor-now-turned-adult to have received a report if one is received by his or her legal guardian or legal representative in the case where the person is not capable of understanding the accounting.
Here is the exact language: "(b) For the purpose of subdivision (a), a beneficiary is deemed to have received an account or report, as follows: [¶] (1) In the case of an adult who is reasonably capable of understanding the account or report, if it is received by the adult personally."
Here is the exact language: "For the purpose of subdivision (a), a beneficiary is deemed to have received an account or report, as follows: [¶] . . . . (2) In the case of an adult who is not reasonably capable of understanding the account or report, if it is received by the person's legal representative, including a guardian ad litem or other person appointed for this purpose."
2. Application of Section 16460
This action was brought in 2007. Kari was born in December 1986, so she was not yet 21 at the time this action was filed. And, she was not even 10 years old at the time of the 1996 loan. The evidence was uncontroverted that neither Kari nor her mother actually learned of the 1996 loan by trustee Mahaffey to himself until 2006. So the question arises: Given the mechanics of section 16460 just reviewed, what possible argument could there be that the three-year statute of limitations had run?
There was some discrepancy in the evidence as to whether she was born in 1985 or 1986. Mahaffey does not contest a 1986 date on appeal.
None really. Mahaffey's main line of defense relies on the 1998 documents he prepared and Kari's father Mullenax signed when Kari was 12. That defense crumbles in light of the fact the 1998 documents did not explicitly disclose the existence of a claim by Kari, Kari's mother, or even Mullenax himself, based on the self-dealt 1996 loan. Moreover, it bears repeating there was substantial evidence in the form of Mullenax's own testimony that Mahaffey did not specifically disclose the existence of the loan to him. The 1998 documents were both general and self-serving from Mahaffey's point of view. In essence they had Mullenax simply agreeing to the proposition, "Whatever Mahaffey has done as trustee, I trust him so much I approve of it, so don't bother me further with any details."
And we do not exaggerate. Recall that Mullenax testified that when he looked at Merrill Lynch statements received from Mahaffey, he "didn't know what they were saying." Further recall that Mahaffey acknowledged Mullenax had a drug problem. If the 1998 documents show anything, they show Mahaffey could put practically anything in front of Mullenax and he would sign it.
So Kari's father Mullenax received no accountings, and no notice. The lack of notice was corroborated by the substantial evidence that even Mahaffey's own CPA doing the accounting for the trust did not learn of the 1996 note until 2005. Beyond that, as Mahaffey himself acknowledged (and the facts of the two trusts and the marital separation agreement illustrate perfectly), Mullenax had a conflict of interest with regard to Kari. Thus, as the trial court correctly found, under section 16460, subdivision (b)(3), nothing Mullenax did, even if he did receive notice, could affect Kari.
The same pattern holds true for Kari's mother, Robin Grunder. She also had a conflict of interest, also recognized by Mahaffey, who testified Robin Grunder wanted Kari's money to spend on property for herself. At least twice Mahaffey testified he feared both parents wanted to raid Kari's trust. Moreover, the evidence is uncontroverted Mahaffey never sent Robin Grunder an accounting of her daughter's trust. Rather, Robin Grunder testified that when she asked Mahaffey what the trust was invested in, he replied in "low risk" assets, and when she then asked what kind of low risk assets, Mahaffey told her it was none of her business. So Kari's mother certainly received nothing that would have triggered the statute of limitations either.
And, finally, the evidence was uncontroverted that the earliest Kari herself learned of Mahaffey's loan to himself was in 2006, when they learned of the document from their present attorney.
The 2007 filing was timely. F. "Accepting" the Interest Payments
Mahaffey points to his post-July 2007 accounting, which lists a series of "Loan payments from Doug Mahaffey, Trustee" to the trust, beginning March 8, 2001. We note the accounting shows the payments to be mostly in irregular amounts until spring 2003, finally settling into a series of regular $2,000 a month payments beginning September 2, 2003, and continuing monthly thereafter until July 2, 2007. The total of these payments, according to the 2007 accounting, was $158,497. Mahaffey argues that by "accepting" these payments Kari is necessarily estopped from asserting any breach of trust.
For example, he paid $302 on June 22, 2001, and $1,883 on December 6, 2001.
Mahaffey, however, points to no evidence either Kari or her mother Robin Grunder ever really "accepted" these payments. At most, the record is susceptible of the inference Robin simply continued to receive "child support" payments of $2,000 a month most or all of which came from money which Mahaffey ascribed to interest payments on the 1996 loan. Nothing in the record shows Mahaffey ever sent Kari or Robin a letter notifying them to the effect of: "In 1996 I loaned myself $210,000 from the trust at 8 percent interest, and this check for $2000 represents interest I owe the trust on that loan."
By contrast, the evidence presented at trial was that Kari's mother Robin Grunder didn't understand the source of the monthly payments which, as far as the marital settlement agreement was concerned, might have come 100 percent from Mullenax himself. Moreover, since Robin Grunder testified she didn't learn of the loan until 2006, the reasonable inference is that she didn't "accept" any payments as interest, and any payments she did accept she only accepted as child support owed her anyway. Because Mahaffey did not inform Robin Grunder of the true nature of the "interest payments," he cannot now claim any inconsistency in their "acceptance."
At trial Mahaffey did not present any claim for offset for these payments, and we do not deal with that issue. G. Laches
For example, the record is not clear whether the $395,469.45 figure in the judgment already gives Mahaffey credit for some or all of the interest payments which Mahaffey made beginning in 2001, or not. What is clear is that at trial Mahaffey presented no affirmative defense for any offsets, and in this appeal he makes no attempt to demonstrate the trial court erred in not offsetting payments he made.
Laches is an unreasonable delay in asserting a claim combined with prejudice to the party against whom the claim is asserted. (Quick, supra, 186 Cal.App.4th at p. 379.) Obviously laches does not apply here, where the 1996 loan was effectively concealed until the mid-2000's. Mahaffey's own CPA did not know of the loan until 2005. Mahaffey never presented an accounting to Kari or her mother until 2007. And he never expressly disclosed the existence of the 1996 loan to Kari, her mother, or even (given the opacity of the 1998 documents signed by Mullenax) Kari's father. Any claim of laches in bringing this 2007 litigation is risible. H. The Remedy
Mahaffey's final argument relies on section 16440, subdivision (a), which lists three kinds of liability for "breach of trust" - loss in value, profit made, and profit that would have accrued but for the breach. Mahaffey now claims the judgment, by construing an order requiring repayment of principal and interest on the 1996 loan as "damages," effectively goes beyond section 16440 and in any event represents a remedy never sought in Kari's pleadings.
Here is the exact language:
"(a) If the trustee commits a breach of trust, the trustee is chargeable with any of the following that is appropriate under the circumstances:
"(1) Any loss or depreciation in value of the trust estate resulting from the breach of trust, with interest.
"(2) Any profit made by the trustee through the breach of trust, with interest. "(3) Any profit that would have accrued to the trust estate if the loss of profit is the result of the breach of trust.
"(b) If the trustee has acted reasonably and in good faith under the circumstances as known to the trustee, the court, in its discretion, may excuse the trustee in whole or in part from liability under subdivision (a) if it would be equitable to do so."
There is no question Kari's pleadings sought relief against the trustee for breach of trust under section 17200, subdivision (b)(12), and that statute is very broad - much broader than section 16440. Section 17200, subdivision (b)(12) allows the trial court to make an order "Compelling redress of a breach of the trust by any available remedy." And there is no question the trial court's remedy was made pursuant to section 17200, subdivision (b)(12).
The simple answer to Mahaffey's argument is found in section 16442, which expressly declares section 16440 to be nonexclusive: "The provisions in this article for liability of a trustee for breach of trust do not prevent resort to any other remedy available under the statutory or common law."
IV. DISPOSITION
The judgment, which requires the Mahaffey as an individual and now the ex-trustee of the Kari Grunder trust, to pay back to the trust the entire amount of the 1996 self-dealing loan plus interest, is affirmed. As to costs, plainly Kari was the prevailing party at trial. She established Mahaffey breached the trust, made a self-dealing loan to himself, and obtained a remedy of making him pay back what he owned under his own self-dealt loan. Just because she didn't receive punitive damages does not mean she did not prevail. (See Western Decor & Furnishings Industries, Inc. v. Bank of America (1979) 91 Cal.App.3d 293, 297 [even though party "did not receive the damages it sought" it was still prevailing party].) She now has a court order requiring Mahaffey to pay real money immediately to her trust, as distinct from an unsecured IOU. And she has clearly prevailed in this appeal, which unqualifiedly affirms her win at trial. She is entitled to receive her costs on appeal from Mahaffey.
BEDSWORTH, J. WE CONCUR: RYLAARSDAM, ACTING P. J. IKOLA, J.