Opinion
F077613
11-19-2019
OSCAR RUDNICK, as Trustee, etc., Plaintiff and Respondent, v. ROBERT RUDNICK, Defendant and Appellant.
Gilmore Magness Janisse and David M. Gilmore for Defendant and Appellant. Thompson Coburn, Richard G. Reinis and John L. Viola; Lynch & Lynch and Craig Lynch for Plaintiff and Respondent.
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.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. S-1500-PB-57626)
OPINION
APPEAL from an order of the Superior Court of Kern County. Robert S. Tafoya, Judge. Gilmore Magness Janisse and David M. Gilmore for Defendant and Appellant. Thompson Coburn, Richard G. Reinis and John L. Viola; Lynch & Lynch and Craig Lynch for Plaintiff and Respondent.
-ooOoo-
In this dispute about the wrapping up of a long-standing family trust, the trial court granted a petition by respondent Oscar Rudnick (Oscar or the trustee) as the trustee of the Rudnick Estates Trust for final distribution and termination of the trust. The only trust beneficiary who had raised objections to the petition was appellant Robert Rudnick (Robert). Most of his objections were withdrawn on the eve of hearing, but only after causing considerable expense and delay. In ruling on the petition, the trial court not only granted the trustee's petition but found Robert's objections were asserted in bad faith. Robert appeals from the trial court's order, including the finding of bad faith, but he has failed to establish any reversible error. Accordingly, the order of the trial court is hereby affirmed.
For convenience, we generally refer to the parties by their first names. No disrespect is intended.
FACTS AND PROCEDURAL HISTORY
The 1937 Trust
In 1937, Oscar and Libbie Rudnick entered into an irrevocable trust agreement creating separate trusts for the benefit of each of their 11 children. The separate trusts each owned an undivided interest in various real property and businesses. Oscar Rudnick, after whom the current trustee was named, managed all 11 trusts as an integrated enterprise. We refer to this original trust arrangement as the 1937 trust.
Oscar and Libbie Rudnick were Robert's parents and the present trustee's (i.e., Oscar's) grandparents.
In the early 1960's, many of the beneficiaries of the 1937 trust were entitled to a distribution of some or all of their trust assets. However, immediate distribution of assets was not feasible because of the nature of the assets and the beneficiaries undivided interests in those assets. As the trial court put it, "[s]ince each beneficiary possessed an equal one eleventh interest in each asset it was nearly impossible to dispose of assets unless all eleven beneficiaries agreed to the terms of sale or distribution." At that time, a dispute arose between the successor cotrustees and several beneficiaries regarding how to proceed. In 1964, in settlement of the dispute, all the beneficiaries of the 1937 trust reached an agreement to create a new unified trust that would own, manage and liquidate the assets of the 1937 trust. Pursuant to that 1964 agreement entitled "Trust Termination and Distribution Agreement," the assets of the 1937 trust would be transferred into the new trust, to be known as the Rudnick Estates Trust, and the 1937 trust would be terminated.
Rudnick Estates Trust
In carrying out this objective, the beneficiaries executed the new trust agreement on January 24, 1965, thereby establishing the Rudnick Estates Trust (hereafter, the trust). As declared by the terms of the trust, its purpose was "to accomplish an orderly liquidation of all of the assets in the Trust Estate, and to provide for distribution of the proceeds therefrom to the beneficiaries hereof as quickly as reasonable prudence will permit." The trust also set forth a definite termination date. Unless it was terminated earlier by majority vote of beneficiaries or by distribution of all trust assets, the trust would terminate on December 31, 1974.
In seeking to facilitate an orderly liquidation of assets and distribution of proceeds, the trust provided greater flexibility by allowing a sale or other disposition of trust assets to be approved by a majority of beneficiaries. In that regard, article "Seventh" of the trust stated the following: "Beneficiaries representing a majority of the corpus interests hereunder shall have the power to approve or disapprove any sale, exchange, or lease of any [t]rust asset. Ten (10) days notice of any such contemplated sale, exchange or lease shall be given by the Trustee to every beneficiary. Any beneficiary who does not give written notice to the Trustee that he objects to the proposed transaction within ten (10) days of the date the original notice was mailed, will be conclusively deemed to have approved said transaction. The Trustee shall not have power to enter into any such transaction unless and until such majority have expressly approved and/or by inaction have been deemed to have given their approval." In like manner, other significant actions such as amendment or termination of the trust and removal or appointment of a trustee could be accomplished by a majority of the beneficiaries. However, there were at least two exceptions to the majority-rule provisions. In order to extend the term of the trust (i.e., beyond December 31, 1974) or to change the beneficiaries' interest in the trust, unanimous consent was required.
The current trustee, Oscar, was elected by a majority of the beneficiaries more than 20 years ago to serve as trustee of the trust.
Our 1999 Opinion
Although the trust contemplated liquidation of the assets and termination of the trust by December 31, 1974, due to various complications outlined in our 1999 opinion (Rudnick v. Rudnick (May 25, 1999, F027453) [nonpub. opn.]), that did not occur. As we observed in that 1999 case, all the beneficiaries by their conduct had unanimously agreed to extend the trust beyond 1974; however, they disagreed about the length of the extension and the terms of the extension. When a petition to terminate the trust was denied by the trial court in 1996, Robert appealed. Our opinion affirmed the holding of the trial court that the trust would continue to exist for a reasonable time until either all the assets were sold or a majority of the beneficiaries elected to terminate the trust. In so holding, we rejected Robert's contention that after December 31, 1974, any continuation of the existence of the trust required unanimity and, thus, if he as an individual beneficiary withdrew his consent the trust would automatically terminate. In rejecting that interpretation of the trust as unreasonable, we explained as follows: "The entire structure of the trust agreement discloses a commitment by each of the original settlors to give up his or her right, as an individual, to veto a sale or other disposition as part of the liquidation of the trust corpus. Thus, any such sale or disposition can be made upon majority approval of the beneficiaries. This provision would be totally meaningless if an individual beneficiary could instantaneously terminate the trust merely by withdrawal of his or her consent to its continuation; to avoid termination of the trust, any sale of corpus would need unanimous consent instead of majority approval."
Our 2009 Opinion
Our next opinion relating to the trust was issued 10 years later in Rudnick v. Rudnick (2009) 179 Cal.App.4th 1328. As summarized at pages 1330-1333 of that opinion, in 2008 the sale of one of the trust's major assets, the 68,000-acre Onyx Ranch, was approved by a majority of the beneficiaries. The sale was challenged in the trial court by Robert and two other beneficiaries, and after a trial, the trial court ruled in favor of the majority and ordered the sale of the ranch. The trial court also concluded that the objections to the sale by Robert and other objectors were not made in good faith, but had sought through meritless arguments to delay and disrupt the sale, thereby forcing the trustee to incur significant legal expenses. The trial court in that case awarded $226,000 in attorney fees and costs to the trustee and ordered such fees charged against the objectors' (including Robert's) future trust distributions. In so ruling, the trial court noted that it appeared "[the objectors] were either unwilling or incapable of understanding that they did not own the [trust] assets to the exclusion of the other beneficiaries. [The objectors] were partial owners who agreed many years ago that, in liquidating the [trust] assets, the majority of the beneficiaries would determine the conditions of such liquidation." (Rudnick v. Rudnick, supra, 179 Cal.App.4th 1328, 1333.) On appeal, we affirmed the trial court's order, including the court's finding of bad faith and the use of its discretionary equitable power to charge attorney fees incurred against the objectors' share of the trust estate. (Id. at pp. 1335-1336.)
The 2010 Settlement Agreement
A series of other challenges by Robert and another beneficiary resulted in additional attorney fee orders being entered against them and appeals and writs concerning said orders. While those matters were pending, and further attorney fee petitions were filed in the trial court by Oscar as trustee, the parties met and reached a global settlement. According to the trustee, the purpose of entering into the settlement was "to stop wasteful, vexatious, frivolous and bad faith litigation instituted by Philip Rudnick and Robert Rudnick," and through a compromise to "buy peace and to ultimately terminate this Trust without more unnecessary litigation."
The parties' settlement was memorialized in the 2010 settlement agreement (hereafter, the 2010 Settlement Agreement), executed on June 15, 2010. Section 3 of the 2010 Settlement Agreement established, for Oscar's protection as trustee, a litigation reserve of $1 million "for the purpose of defending him as Trustee of the [trust] from claims made after the Execution Date [of the 2010 Settlement Agreement]." Section 4 provided Oscar "may proceed to act for and on behalf of the [trust] as Trustee and to fulfill its purpose of liquidation of its assets as soon hereafter as is practicable, and, as soon as practicable, shall take reasonable steps to sell three remaining parcels of land owned by the [trust]," assuming that any such sales are approved by a majority of the beneficiaries. Further, Robert Rudnick and the other objectors agreed "that Oscar is entitled to engage in the conduct identified herein" of liquidating assets, and they further agreed they would not "object to any such conduct by Oscar." The 2010 Settlement Agreement also required, as a condition of enforceability, that Robert and Philip Rudnick enter a stipulation to have a pre-filing order entered against them under Code of Civil Procedure section 391.7 that they "will not directly or indirectly ... file any litigation against Oscar Rudnick without first obtaining leave of the presiding judge of the court of the county wherein litigation is proposed to be filed and posting security for the benefit of the defendants as provided in ... Code of Civil Procedure [section] 391.3."
In its order dated August 6, 2010, the trial court approved the 2010 Settlement Agreement. In approving the settlement terms, the trial court included additional conditions in its order. For example, in confirming that the trustee "shall attempt to sell the three remaining parcels of land that constitute the real property assets of the [trust] and all other [trust] assets as soon as practicable," the trial court's order added that the sale of the remaining assets shall be "in no event later than one year from the Effective Date of the Settlement Agreement." (Italics added.) That one-year period would conclude on June 15, 2011. At which time, as stated in the trial court's August 6, 2010 order, "[t]he Trust will be terminated."
Postsettlement Actions by Trustee
Following the 2010 Settlement Agreement, Oscar sought to dispose of the remaining trust assets by valuing the properties and offering them for sale. He attempted to sell real property parcels located in Barstow and Ridgecrest, but no acceptable offers were received. During this process, Oscar discovered that the trust had interests in oil, gas and other subsurface rights that may have value, some of which were never properly transferred from the 1937 trust. Oscar brought such mineral interests to the attention of the beneficiaries and was unanimously instructed to pursue these opportunities. In seeking to fulfill this charge, it was learned that a successor trustee of the 1937 trust would have to be appointed to cause the mineral rights to be transferred to the present trust. A ballot was sent to the beneficiaries explaining the situation and seeking their consent to have him appointed as successor trustee of the 1937 trust for this limited purpose. However, Robert and others refused to consent to the proposed plan. Oscar was forced to file a petition so that he could be appointed as successor trustee of the 1937 trust. Robert objected to Oscar's petition.
On March 21, 2012, the trial court issued its order granting Oscar's request and appointing him to act as successor trustee of the 1937 trust to cause the discovered mineral interests to be transferred to the present trust. By its 2012 order, the trial court implicitly, but necessarily, superseded its prior order that the present trust—the Rudnick Estates Trust—be liquidated and terminated by June 15, 2011. That is, the trust would obviously have to continue so that Oscar could resolve the matters relating to the mineral interests. As the trial court observed in the ruling at issue in the instant appeal, "Oscar's compliance with [the 2012] order necessarily required him to continue the affairs of the [trust] well beyond the June 15, 2011 deadline because these mineral rights had to be liquidated in a reasonable and prudent manner. Robert Rudnick was well aware of this situation."
Oscar's efforts regarding the mineral interests apparently bore fruit. During the ensuing years, Oscar made further distributions to the beneficiaries, at their request, totaling $539,993.80. Robert cashed his distribution checks without objection.
Another unexpected development occurred during this same period. At the time of the 2010 Settlement Agreement, a gold mine in Keyesville, California, appeared to have little more than land value. Oscar discussed the matter with the beneficiaries and determined the mine should be appraised. A consulting mine geologist was hired. In 2013, after the mine geologist informed Oscar that the gold mine could possibly be worth $4.1 million, Oscar informed the beneficiaries of this new information.
According to Oscar's declaration in support of his proposed final distribution, the new information concerning the gold mine was significant and would prudently require a new approach in liquidating the trust. "This [the gold mine's potential value] required a complete tactical shift as to disposing of this particular asset. To sell it for land value with that potential gold mine value would be irresponsible. I could not dispose of the asset to meet a deadline if that meant sacrificing significant value that belongs to the beneficiaries. No beneficiary disagreed with this. Indeed, those with whom I discussed this were adamant that I seek to exploit the full value of this asset, especially in a market when gold had appreciated. This asset cannot be developed, in my view, within the structure of a Trust. It requires investment by its owners in order to maximize it. The [trust] is not a vehicle for raising money. It is not a business, and development of a gold mine is a business. Terminating the [t]rust could thus be accomplished not by a sale of this asset, but rather by a distribution of it to a business entity owned by the beneficiaries. That tactical shift caused a substantial delay in termination, as a new entity had to be researched, the [e]xisting Mammoth Mountain Mining Company [the corporation having title to the mine, the shares of which were owned by the trust] had to be thoroughly investigated, and a mechanism had to be conceived by our lawyers that would comply with [the trust], Probate Law and Corporate Law." After further investigation, it did not appear wise to use the Mammoth Mountain Mining Company as the vehicle for this purpose, since its records were antiquated and potentially incomplete. After considering the available options, and in consultation with legal counsel, Oscar requested a new entity be formed, Rudnick Keyesville, LLC, to own and operate the gold mine, with the intent that proportional membership interests in Rudnick Keyesville, LLC, would be distributed to the beneficiaries. Under this proposal, the stock in the Mammoth Mountain Mining Company and other remaining trust assets would be transferred to Rudnick Keyesville, LLC.
Once the attorneys were able to draft the necessary legal documents relating to the Rudnick Keyesville, LLC, which process was delayed for several months due to health issues suffered by the attorney in charge of this process, Oscar was prepared to file his petition for final distribution and termination of trust.
The Petition for Final Distribution and Termination of Trust
On March 15, 2016, Oscar filed the "Final Account and Petition for Final Distribution and Termination of Trust" (hereafter, the petition). All beneficiaries were timely served with the petition. No timely written objections were ever received.
In the petition, in describing the proposed final distribution, Oscar preliminarily explained that (i) his good faith efforts to sell the remaining assets at a reasonable price were unsuccessful, and (ii) the prospect of distributing the remaining assets in kind to the multiple beneficiaries as tenants in common would be problematic since "such diverse and unrelated business assets ... would be unwieldy and unnecessarily complicate the ultimate disposition of such assets, potentially permanently impairing alienation thereof" on the part of the beneficiaries. Further, Oscar noted that until such business assets could eventually be sold, "they would need to continue to be managed and holding them as joint tenants or tenants in common among the [trust] beneficiaries would not provide adequate centralized management" to be workable.
In addition to the gold mine and any other mining or mineral rights, it appears the remaining assets in the trust included, among other things, two sizable parcels of desert land (apparently the Barstow and Ridgecrest properties), some cemetery plots and a remaining cash reserve.
As discussed above, as a pragmatic solution Oscar proposed in the petition to transfer the remaining assets in the trust to a newly-formed limited liability company (or LLC) and then to distribute membership interests in said LLC to the trust's beneficiaries in connection with the termination of the trust. Each beneficiary's membership interest in the LLC would be in a percentage identical to the beneficiary's corpus interest in the trust. The name of the LLC would be Rudnick Keyesville, LLC, and a copy of underlying legal documents to accomplish the proposed disposition were provided. Oscar explained this proposed disposition was reasonable and advantageous because business assets such as the gold mine would, by nature, require active management. He asserted that "distribution in such form will permit the Members of the limited liability company greater flexibility in management of the Remaining Trust Assets than would exist if distribution were made to the beneficiaries as tenants in common or joint tenants, and that the business of disposing or developing such assets is better governed by the provisions of the Corporations Code than the Probate Code."
Robert's Written Objections
In June 2016, Robert appeared at a hearing on the petition and sought to present oral objections. The trial court ordered him to submit his objections in writing on or before July 15, 2016. On August 30, 2016, Robert filed written objections to the petition contending that Oscar violated the 2010 Settlement Agreement and the court order approving the same by (i) depleting the cash litigation reserve and (ii) failing to terminate the trust by June 15, 2011. The written objections were not only untimely but were not in proper form because they were unverified. Robert offered to file amended objections with a verification. However, Robert had also failed to comply with the pre-filing order by first obtaining consent of the presiding judge and posting any security required. In an interim order, the trial court held that before it would decide on Robert's request to file amended verified objections, Robert "shall first apply for permission from the presiding judge of the Kern County Superior Court to file an objection in the present action and post a security bond." The trial court indicated that if Robert were granted permission to file his objections and if he posts any security required, the court would then grant Robert's request for leave to file the amended verified objections.
On January 11, 2017, the presiding judge of the superior court ruled that before he may proceed with his written objections, Robert "shall furnish security in the amount of $100,000.00 for the benefit of Oscar Rudnick, Trustee of the Rudnick Estates Trust, within 30 days of the date of this order." Robert complied by posting security (i.e., $100,000) with the superior court on February 9, 2017.
Oscar's request for judicial notice of the presiding judge's order is granted.
On July 26, 2017, Robert filed his amended written objections with verification, reiterating the same objections as before. Specifically, he objected that (i) Oscar failed to honor the litigation reserve provision contained in the 2010 Settlement Agreement and the August 6, 2010 court order approving the settlement, and (ii) Oscar breached his duty to terminate the trust by the June 15, 2011 deadline, as required by the August 6, 2010 court order. In alleging a failure to meet the termination deadline, Robert did not object to transferring property into the LLC as such, but asserted "[t]he proposed transfer of the remaining 3 parcels to the Rudnick Keyesville, LLC could have been done on June 15, 2011," which would have saved money. The trial court set an evidentiary hearing on such issues for September 8, 2017, but on that date Robert's counsel informed the court he was not ready to proceed because he had failed to conduct discovery. In its minute order following the September 8, 2017 hearing, the trial court set the matter for trial on December 11, 2017.
The trial court also granted Oscar's motion to strike a new petition filed by Robert against Oscar alleging breach of fiduciary duty. The trial court's rationale for striking the petition was that it was wholly duplicative to the matters set forth in Robert's amended objections.
Timing Issue Resolved
Oscar filed a declaration on September 30, 2016, responding to the contention that he should have terminated the trust by June 15, 2011 pursuant to the trial court's August 6, 2010 order (sometimes referred to as the timing issue). In his declaration, Oscar reiterates the unexpected developments that occurred after the trial court's August 6, 2010 order. Those developments included the discovery of extensive mineral interests, which the beneficiaries unanimously instructed him to pursue, and the need to be appointed as a successor trustee of the 1937 trust for the sole purpose of clearing title to some of the mineral interests by having them properly transferred into the present trust. In 2012, over Robert's objection, the trial court granted Oscar's petition to be appointed successor trustee of the 1937 trust for that purpose. As we have already noted herein, the trial court's 2012 order superseded its prior order that the trust be liquidated and terminated by June 15, 2011 because the trust would obviously have to continue so that Oscar could resolve the matters relating to the mineral interests. As the trial court subsequently found: "Oscar's compliance with [the 2012] order necessarily required him to continue the affairs of the [trust] well beyond the June 15, 2011 deadline because these mineral rights had to be liquidated in a reasonable and prudent manner. Robert Rudnick was well aware of this situation."
In response to Robert's objection based on the timing issue, one of the beneficiaries of the trust (i.e., RET Falk Holdings LLC, as successor to beneficiary Elynor Rudnick) filed a motion for judgment on the pleadings. The motion for judgment on the pleadings specifically challenged the legal viability of raising the timing issue as a matter of law. In essence, the motion asserted that the 2012 order superseded the deadline indicated in the prior court order, and since Robert did not appeal or otherwise challenge the 2012 order, he was barred from arguing otherwise. Oscar, as trustee, joined in the motion.
The same beneficiary (RET Falk Holdings LLC) sought leave to file a brief in the present appeal to further address the timing issue. Since we do not believe additional briefing on that issue is necessary, we deny the request.
Additionally, David Falk, on behalf of RET Falk Holdings LLC as a trust beneficiary having a 20 percent interest in the trust corpus, filed a declaration fully supporting Oscar's proposal for final distribution, and opposing Robert's objections. Falk's declaration states: "On behalf of RET Falk Holdings LLC, I oppose having the desert properties and mineral rights distributed by the [trust] directly to the beneficiaries, and am in favor of Oscar's [p]lan to place those properties in a limited liability company with the Mammoth Mountain Mining stock and any mining claims. Oscar's plan will allow for sources of funds from mineral leases, sales of properties and capital calls, to pay property taxes on the desert properties and the real property where the gold mine is located, to maintain the mining claims, and to pay other expenses. [¶] ... Oscar's plan will also allow the properties and gold mine company to be held and managed as a whole rather than many undivided parts controlled by 12 different people. Having the interests held individually is problematic, given the track record of the Rudnicks of having many disagreements related to the [trust], the varying levels of involvement of the beneficiaries, and the fundamentally different objectives ... related to the [trust] assets. I also think that it would be almost impossible to sell undivided fractional interests to third parties."
Prior to the hearing of the motion for judgment on the pleadings, Robert filed a notice of non-opposition to the motion. On December 1, 2017, the trial court issued its order granting the motion for judgment on the pleadings, resolving the timing issue. As the trial court explained in its ruling from which the present appeal was taken, "Robert never appealed the March [ ] 2012 Order and was therefore precluded from raising any objection to a delay in terminating the [trust] following this court proceeding. [¶] On December 1, 2017, the date set for the hearing on the Motion for Judgment on the Pleadings[,] Robert withdrew his objection and the motion was granted. In essence, Robert conceded the motion had merit and [he] had no plausible justification to oppose it!"
Robert Withdraws His Principal Written Objections
On December 1, 2017, at the hearing on the motion for judgment on the pleadings, Oscar's counsel announced to the trial court that a stipulation had been reached wherein Robert, through his counsel, agreed to withdraw objections premised on alleged violation of the 2010 Settlement Agreement and the court's August 6, 2010 order approving the 2010 Settlement Agreement. Robert's withdrawal of objections included both the timing issue concerning termination of the trust, as well as any claim for damages relating to the trustee's purported failure to establish and maintain a $1 million litigation reserve. The stipulation also stated Robert reserved the right to present to the court evidence that reasonable cause existed for filing his objections in good faith, for purposes of opposing any motion for attorney fees sought against him. Further, the stipulation stated Robert has put the trustee on notice that Robert would seek to persuade the trial court not to approve the trustee's petition because "commingling of all remaining [trust] assets into the [Rudnick Keyesville, LLC] is not consistent with the purpose of the [trust] and is not in the best interests of the beneficiaries ...." Finally, the stipulation provided that any further litigation going forward would be accomplished by declaration and not by an evidentiary hearing involving live testimony.
The trial court elected to keep the December 11, 2017 hearing date on calendar to establish a briefing schedule. Based on the above stipulation, it was understood the only two issues to be decided were (i) whether, in light of Robert's stipulated arguments against the transfer of trust assets to an LLC, the court should approve Oscar's proposal for final distribution, and (ii) whether Robert lacked good faith in making his principal objections. Both issues would be resolved by declaration and further briefing.
Robert attempted to introduce other issues in a supplemental brief filed January 19, 2018, but then withdrew them and claimed their inclusion was an inadvertent mistake, as explained in his "surrebuttal" brief filed on February 23, 2018. In deciding whether to approve the petition, the trial court rejected any effort by Robert to argue new issues beyond the commingling issue that was reserved in the stipulation.
The Trial Court Grants Oscar's Petition
On March 9, 2018, the trial court granted Oscar's petition in its entirety. In so holding, the trial court rejected Robert's argument that distributing and commingling the remaining trust assets into the Rudnick Keyesville, LLC was not in the best interest of the beneficiaries and/or was inconsistent with trust purposes. Robert's position was rejected by the court for several reasons, most of which centered on the fact that a majority of the beneficiaries approved of the proposed disposition of trust assets by virtue of their failure to object. On this point, the trial court agreed with Oscar's argument that, in light of two appellate court decisions embracing the majority-rule provision as controlling in the disposition or liquidation of the trust assets, Robert was barred by the law of the case from seeking to go against that principle. Further, the trial court indicated this outcome was also consistent with the purpose of the trust because, when the trust was created by the beneficiaries in 1965, "[t]hey all agreed that in any dispute involving the liquidation of [trust] assets the majority vote would control. The majority of the beneficiaries are in agreement with Oscar's Final Account and his proposal to distribute the assets in the manner proposed. Whether Robert believes his proposal is a better approach is of no consequence." Additionally, the trial court noted the reasonableness of the outcome proposed by Oscar, as contrasted to Robert's alternative suggestion to distribute the remaining assets in kind as tenants in common, since Robert's alternative would make the property "unsaleable"—a problem whose avoidance "[was] the precise reason the [trust] was created over fifty-three years ago!!"
The bulk of the trial court's order addressed the issue of Robert's bad faith in raising his written objections to the petition—in particular, the objections that Oscar failed to terminate the trust by June 15, 2011 and spent or misused the litigation cash reserve. The trial court was very familiar with the entire history of the case, and of Robert's litigious tendencies that have resulted in extensive delays and expenses to the trust. The trial court's ruling extensively documented that history.
The trial court then evaluated Robert's written objections to the petition. In light of the fact Robert suddenly withdrew his written objections 10 days prior to trial, the trial court made an assessment of whether this occurred because Robert had discovered the relevant facts for the first time, or, whether he had known the relevant information all along. Relying on Oscar's declaration filed in September 2016, which described the activities Oscar engaged in as trustee during the applicable time frame, the trial court found that Robert was "fully aware" of the trustee's actions and the reasons for them "as they were occurring and long before he filed his verified Amended Objection." This would have included the circumstances of why the trust did not terminate earlier (including pursuit of mineral interests that benefited the beneficiaries), and of the trustee's need to incur legal expenses to address Robert's many objections, as well as the trustee's decisions to make distributions to beneficiaries or pay for other matters that were reasonably necessary to carry out the trust, but which required the expenditure of cash reserves. Because Robert was found to be fully aware of such facts all along, as they were occurring, the trial court concluded the objections were made in bad faith: "The fact Robert withdrew his objections and waived any right to rebut Oscar's Petition ten (10) days before trial causes this Court to conclude Robert was not acting in good faith."
Robert timely filed a notice of appeal from the trial court's March 2018 order granting the petition.
Attorney Fees Awarded to Oscar
After Robert filed the present appeal, Oscar moved for an award of his attorney fees and costs against Robert relating to Oscar's defense of the petition. On January 7, 2019, the trial court issued its minute order granting the attorney fee motion based in part on the fact that Robert "was without reasonable cause and acted in bad faith in objecting to the trustee's Petition ...." We note that on April 9, 2019, Robert filed a separate appeal from the order granting attorney fees (case No. F079105). That appeal has not been briefed, and the two appeals remain separate. Robert's present appeal (case No. F077613) is directed solely against the trial court's March 2018 order granting the petition, including the finding of bad faith therein, but not the subsequent attorney fee order.
An additional or alternative basis for granting the fee award was that, in the 2010 Settlement Agreement, the parties agreed that in any action to enforce terms of the 2010 Settlement Agreement, the prevailing party would recover attorney fees.
DISCUSSION
I. Standard of Review
In the present appeal, Robert challenges the trial court's order granting the petition. The appeal may be broken down into two main issues: First, did the trial court err when it approved the final distribution of the remaining trust assets into an LLC; and second, did the trial court err in finding Robert made his objections to the petition in bad faith.
In our consideration of the above issues, where we are called upon to consider a purely legal question such as the interpretation of trust language, we review that discrete question under the de novo standard. (Ike v. Doolittle (1998) 61 Cal.App.4th 51, 73.) However, in other respects, to the extent the order granting the petition was based upon factual matters presented in connection with the petition, we will affirm if the order was supported by substantial evidence. (Estate of Kampen (2011) 201 Cal.App.4th 971, 991-992; see Crocker National Bank v. City and County of San Francisco (1989) 49 Cal.3d 881, 888.) As to the trial court's separate finding of bad faith, that issue is likewise governed by the substantial evidence standard. (Powell v. Tagami (2018) 26 Cal.App.5th 219, 234, 236-237 [although an award of attorney fees or the fashioning of an equitable remedy in a trust or probate matter will not be disturbed on appeal in the absence of a manifest abuse of discretion, the trial court's finding of bad faith itself is reviewed under the deferential substantial evidence standard].) Under the substantial evidence standard, findings of fact are liberally construed to support the judgment or order, and we consider the evidence and reasonable inferences in the light most favorable to the prevailing party. (Id. at p. 231.)
Moreover, "[a] judgment or order of a lower court is presumed to be correct on appeal, and all intendments and presumptions are indulged in favor of its correctness." (In re Marriage of Arceneaux (1990) 51 Cal.3d 1130, 1133.) Because a trial court's order is presumed to be correct, error must be affirmatively shown. (Denham v. Superior Court (1970) 2 Cal.3d 557, 564.) Thus, an appellant must affirmatively demonstrate prejudicial error based on adequate legal argument and citation to the record. (Yield Dynamics, Inc. v. TEA Systems Corp. (2007) 154 Cal.App.4th 547, 556-557.)
II. Trial Court Properly Approved the Final Distribution of Trust Assets
Robert contends the trial court erred in granting Oscar's petition because the proposed final disposition of the remaining trust assets was to have them transferred into an LLC with the trust beneficiaries each receiving a proportionate membership interest in the LLC. According to Robert, that disposition was contrary to the purposes of the trust and, consequently, beyond Oscar's authority. Robert also argues the disposition was not in the best interests of the beneficiaries. On the entire record before us, we find Robert's arguments unpersuasive.
A. The Final Distribution Was Consistent with Trust Purposes
In support of his argument that the proposed distribution set forth in the petition was contrary to trust purposes, Robert stresses that the trust's express purpose was to liquidate the assets of the trust and distribute the proceeds to the beneficiaries as quickly as possible. However, Robert's position, while partly correct, represents an incomplete picture of the trust's purposes. The actual wording of the trust required the trustee to accomplish "an orderly liquidation of all of the assets in the Trust Estate, and to provide for distribution of the proceeds therefrom to the beneficiaries hereof as quickly as reasonable prudence will permit." (Italics added.) Thus, the trustee was to apply reasonable prudence to the entire process, not merely liquidate assets on any terms. Moreover, one of the foundational purposes of the trust was to remove the difficulty inherent under the former 1937 trust arrangement of needing unanimous agreement of all the beneficiaries. Thus, the trust provides that disposition of trust assets (i.e., sales, exchanges or leases) may be made by the trustee when a majority of the beneficiaries approve thereof, and a beneficiary's failure to timely object after notice was given would constitute his or her approval. This majority-rule provision was crucial to the trial court's ruling. In approving the petition, the trial court essentially concluded that because a majority of the beneficiaries approved the final disposition of the assets (by failure to object), the disposition was in keeping with trust purposes.
Here, we conclude the trial court correctly applied the trust's majority-rule provision to the petition's disposition of the remaining assets. The majority-rule provision is broadly worded, applying by its terms to "any sale, exchange, or lease of any [t]rust asset." The fact that this was the final disposition and not an isolated sale should not alter or undo its clear applicability. Moreover, our decision in 1999 (Rudnick v. Rudnick, supra, F027453) declared a broad interpretation of the trust's majority-rule provision, stating as follows: "The entire structure of the trust agreement discloses a commitment by each of the original settlors to give up his or her right, as an individual, to veto a sale or other disposition as part of the liquidation of the trust corpus. Thus, any such sale or disposition can be made upon majority approval of the beneficiaries." We find it is unnecessary to decide whether the trial court correctly held that our 1999 decision operated to create a "rule of the case" that would necessarily preclude Robert's present legal objections. (See, e.g., Diocese of San Joaquin v. Gunner (2016) 246 Cal.App.4th 254, 268 [describing nature of rule of the case doctrine].) For purposes of resolving the question before us, it is sufficient to observe that the trial court's decision to apply the trust's majority-rule provision was in accordance with the reasonable terms and provisions of the trust, and that Robert has failed to demonstrate otherwise.
Robert next argues that formation of an LLC and placement of remaining assets (among other things a gold mine, subsurface mineral rights, and two parcels of real estate) into that LLC were not explicitly authorized by the trust, and therefore were beyond the powers of the trustee. This argument also fails because the trustee's proposal was well within the scope of the broad powers set forth in article Seventeenth of the trust. Article Seventeenth of the trust vests the trustee with an impressive range of discretion, encompassing the power to continue, hold, retain, manage and/or operate any property or business held by the trust "whether or not of the character permitted by law for the investment of trust funds"; the power to "manage, control, sell, convey, exchange, partition, divide, subdivide, improve, ... to lease for terms within or extending beyond the duration of this Trust for any purpose, including exploration for and removal of gas, oil, and other minerals"; the power to "become a partner, either general or limited" in a business; and with respect to securities, to have all the rights, powers and privileges of an owner, to participate in voting trusts, pooling agreements, reorganizations, consolidations, mergers or liquidations, to exercise or sell stock subscription rights, to accept and retain as an investment any securities or other property received through the exercise of any of the foregoing powers, regardless of any limitation elsewhere in the [trust] instrument. Moreover, article Seventeenth provides the trustee is not limited by the enumeration of powers: "The enumeration of certain powers of the Trustee shall not limit his general powers, the Trustee, subject always to the discharge of his fiduciary obligations, being vested with and having all the rights, powers and privileges which an absolute owner of the same property would have."
Additionally, we note Probate Code section 16222, subdivision (a), states that where (as here) a continuation of a business or other enterprise is authorized by the trust, "the trustee ... may effect incorporation, dissolution, or other change in the form of the organization of the business or enterprise."
The specific proposal set forth in the petition for disposition of the remaining assets was as follows: "Petitioner proposes to transfer the Remaining Trust Assets to a newly formed limited liability company wherein, initially, Trustee shall be the sole member, thus reducing the assets of the trust to Trustee's membership interest in the newly formed LLC. Trustee shall then distribute membership interests to the [trust's] beneficiaries in connection with the termination of the Trust. Those membership interests shall be owned in percentages identical to the beneficiaries' corpus interests in the [trust].... That final distribution will liquidate all the assets of the [trust] and thereupon such trust shall terminate by the order of this Court."
We agree with Oscar that the proposed disposition was within the broad scope of his powers as trustee under the terms of the trust. We conclude, based on our entire discussion above, that the proposed disposition of remaining assets in the petition was in keeping with the overall terms of the trust and was not inconsistent with its purposes, and that Robert's appeal has failed to demonstrate otherwise.
B. Substantial Evidence Supported Petition's Proposed Disposition
The trial court's decision was also supported by substantial evidence. In approving the petition, the trial court found that a majority of the beneficiaries approved of or agreed with "Oscar's Final Account and his proposal to distribute the assets in the manner proposed." That finding was supported by the record because substantial evidence (including Oscar's verified petition) showed all the beneficiaries were timely served with the petition. Since Robert was the only beneficiary to file a written objection to the petition, and under the plain terms of the trust a failure to give written notice of objection constitutes approval of a proposed disposition of trust assets, the trial court's factual conclusion that a majority of beneficiaries approved of the petition was sufficiently supported by the record.
Additionally, we agree with Oscar that Robert's failure to raise this issue in the trial court (i.e., of whether there was sufficient corroborating evidence to confirm the petition's service on each beneficiary) resulted in a forfeiture of that issue on appeal. (Feduniak v. California Coastal Com. (2007) 148 Cal.App.4th 1346, 1381 [failure to raise issue in trial court generally results in waiver or forfeiture of issue on appeal]; Richmond v. Dart Industries, Inc. (1987) 196 Cal.App.3d 869, 874 [appellant not permitted to adopt new theory on appeal].)
Furthermore, substantial evidence also supported the reasonableness of the final disposition proposed in the petition, which appeared to be an additional ground for the trial court's order granting the petition. As the trial court explicitly found, Robert's alternative suggestion that the remaining assets be distributed to the beneficiaries in kind as tenants in common, "would make the property unsaleable." That conclusion was supported in the record by, among other things, the declaration of David Falk, which stated as follows: "Oscar's plan will ... allow the properties and gold mine company to be held and managed as a whole rather than many undivided parts controlled by 12 different people. Having the interests held individually is problematic, given the track record of the Rudnicks of having many disagreements related to the [trust], the varying levels of involvement of the beneficiaries, and the fundamentally different objectives ... related to the [trust] assets. I also think that it would be almost impossible to sell undivided fractional interests to third parties." As the Falk declaration indicated, the entire track record and/or litigation history of the Rudnicks was itself clear evidence of how unworkable a return to undivided interests requiring unanimity would be. The trial court, being well acquainted with the Rudnicks' litigation history, aptly observed that the prevention of that difficulty was "the precise reason the [trust] was created over fifty-three years ago!!"
Additional evidence supporting the trial court's order to approve the proposed final disposition was Oscar's September 2016 declaration, which explained in detail that once the gold mine's potential value of $4.1 million was discovered, he could not in good faith simply sell it for land value alone because that would be irresponsible. Oscar stated, "I could not dispose of the asset to meet a deadline if that meant sacrificing significant value that belongs to the beneficiaries. No beneficiary disagreed with this." He determined, after consultation with attorneys, that to adequately develop the gold mine to maximize its value for sale would require a business structure. "Terminating the [t]rust could thus be accomplished not by a sale of this asset, but rather by a distribution of it to a business entity owned by the beneficiaries." After legal counsel investigated whether accomplishing this objective could be achieved through the stock ownership in Mammoth Mountain Mining Co., Inc., that option was rejected due to some uncertainties in the outstanding ownership. Ultimately, the plan to form a new LLC appeared to be the most practical solution. We believe Oscar's rationale for the proposed final disposition of trust assets, as set forth in his declaration and the petition itself, provided a sound factual explanation to the trial court that reflected an exercise by Oscar, as trustee, of his discretion to create a plan that reasonably and objectively appeared to be in the beneficiaries' best interests. Thus, contrary to Robert's contention, there was substantial evidence in the record indicating the proposed plan was in the interests of the beneficiaries.
For the reasons expressed above, we conclude the trial court's approval of the petition's proposal for final distribution of the trust assets was adequately supported by substantial evidence.
C. Robert's Further Arguments Unavailing
Robert's remaining arguments are, in substance, expressions of his disagreement with the overall wisdom of the proposed transfer of the trust assets to the LLC. Among other things, Robert contends the transfer of assets to the LLC will result in the assets being subject to the "business judgment rule" instead of being subject to fiduciary duties, that he will have less access to records, that his membership interest in the LLC will not give him all the same rights he would have had if he received an interest as a tenant in common (such as seeking immediate partition), and that the LLC may potentially have a long duration. But disagreeing with a result or challenging its wisdom is not grounds for reversal. The order of the trial court was to approve the plan for final disposition of the assets as set forth in the petition, and that order is presumed correct. We have already observed herein that the proposed use of the LLC business structure as part of the final disposition of the remaining assets was not inconsistent with the purposes of the trust or the interests of the beneficiaries. In the absence of affirmatively demonstrating either a legal error or the lack of substantial evidence—and Robert has done neither—the trial court's decision to grant the petition must be upheld. Accordingly, we conclude these further arguments by Robert are unavailing and we reject them.
Finally, Robert claims a conflict of interest with respect to the operating agreement for the proposed new LLC wherein Oscar would act as the initial manager. However, Robert did not raise this issue as a ground of objection to the petition in the trial court. Since no conflict of interest argument was asserted in the proceedings below, we agree with Oscar that the issue has been forfeited on appeal. (Feduniak v. California Coastal Com., supra, 148 Cal.App.4th at p. 1381 [failure to raise issue in trial court generally results in waiver or forfeiture of the issue on appeal]; Kaufman & Broad Communities, Inc. v. Performance Plastering, Inc. (2006) 136 Cal.App.4th 212, 226 [same].) Additionally, Robert failed to provide any citation to the record in connection with this argument, which provides an additional reason for its rejection. (Duarte v. Chino Community Hospital (1999) 72 Cal.App.4th 849, 856.)
In conclusion, Robert's challenge of the trial court's order granting the petition, which challenge was based on his various arguments against the final disposition of the remaining trust assets, has not demonstrated grounds for reversal. No legal or prejudicial error has been shown, and consequently the trial court's order will be affirmed.
III. The Trial Court Properly Found Bad Faith
Robert contends the trial court erred in concluding that his written objections to the petition were made in bad faith. Ordinarily, such issue would be raised in connection with an appeal from an order granting attorney fees under Probate Code section 17211. Although the sole order at issue in this appeal—i.e., the order granting the petition—did not address or award attorney fees, it did make a foundational determination that Robert's objections were in bad faith. Therefore, we believe it is appropriate to consider that finding as part of the present appeal. We review the finding of bad faith under the deferential substantial evidence standard. (Powell v. Tagami, supra, 26 Cal.App.5th at p. 234.) As explained below, we hold the trial court's determination of bad faith was adequately supported by substantial evidence.
The order generally used the terminology that the objections were not in good faith, which was another way of saying they were in bad faith.
Probate Code section 17211, subdivision (a), provides in relevant part: "If a beneficiary contests the trustee's account and the court determines that the contest was without reasonable cause and in bad faith, the court may award against the contestant the compensation and costs of the trustee and other expenses and costs of litigation, including attorney's fees, incurred to defend the account." Thus, the statute requires both lack of reasonable cause and bad faith. The two elements are distinct. "Reasonable cause is evaluated under an objective standard of whether any reasonable person would have tenably filed and maintained the objection." (Powell v. Tagami, supra, 26 Cal.App.5th at p. 234.) On the other hand, "[b]ad faith involves a subjective determination of the contesting party's state of mind—specifically whether he or she acted with an improper purpose." (Ibid.) Bad faith may be, and often is, inferred from the circumstances: " 'Good faith, or its absence, involves a factual inquiry into the plaintiff's subjective state of mind [citations]: Did he or she believe the action was valid? What was his or her intent or purpose in pursuing it? A subjective state of mind will rarely be susceptible of direct proof; usually the trial court will be required to infer it from circumstantial evidence.' [Citation.]" (Gemini Aluminum Corp. v. Cal. Custom Shapes (2002) 95 Cal.App.4th 1249, 1263, italics omitted.) In short, an action or tactic may be found to be in bad faith if, under the circumstances, the trial court may reasonably infer that it was pursued for an improper purpose, such as to cause unnecessary delay or to harass the opposing side. (Id. at p. 1263.)
Here, in concluding the objections were made in bad faith, the trial court focused on the fact that Robert, after having opposed the petition "at every turn" "for nearly two years" through his steadfast objections that Oscar breached the 2010 Settlement Agreement and the order approving same by (i) not terminating the trust by the June 15, 2011 deadline, and (ii) failing to comply with the litigation reserve provision, Robert suddenly reversed his position and withdrew these principal objections only a few days before the hearing on the merits. In light of Robert's abrupt abandonment of his main objections on the eve of trial, the trial court made a factual assessment of whether this occurred because Robert had learned or discovered the relevant facts for the first time, or, conversely, whether he had known the relevant information all along.
Relying on Oscar's declaration filed in September 2016, which described the activities Oscar engaged in as trustee during the relevant period, the trial court found that Robert was "fully aware" of the trustee's actions and the reasons for them "as they were occurring and long before he filed his verified Amended Objection." This would have included the circumstances indicating why the trust did not terminate earlier (including the court-approved pursuit of mineral interests), and the trustee's need to incur legal expenses to address Robert's many objections. It also would have included the trustee's decisions to make distributions to beneficiaries or pay for other matters that were reasonably necessary to carry out the trust, but which required the expenditure of cash reserves. Because Robert was found to be fully aware of such facts all along, as they were occurring, the trial court concluded the objections were made in bad faith: "The fact Robert withdrew his objections and waived any right to rebut Oscar's Petition ten (10) days before trial causes this Court to conclude Robert was not acting in good faith."
We discern no error. Based on the timing of Robert's withdrawal of his principal objections without any adequate explanation, and the detailed history of the relevant events undertaken by the trustee that would have been fully known by Robert all along (as set forth in Oscar's supporting declaration), we conclude there was substantial evidence in the record to support the trial court's finding that Robert's objections were interposed in bad faith. If, as the trial court properly found, Robert had always known the facts which warranted the withdrawal of his objections, it may reasonably be inferred that he interjected and maintained those objections for improper purposes, such as to vex, delay or obstruct the proceedings. For these reasons, the trial court's finding of bad faith is affirmed.
Although the order appealed from in this case contained a finding of bad faith, the trial court did not overtly rule on the separate issue of whether Robert's objections were presented without reasonable cause. Instead, it appears the issue of lack of reasonable cause was decided subsequently by the trial court in connection with its eventual ruling on Oscar's motion for attorney fees. Since that order is not part of the present appeal, we do not address it here.
DISPOSITION
The order of the trial court is affirmed, with costs on appeal awarded to Oscar.
/s/_________
LEVY, Acting P.J. WE CONCUR: /s/_________
POOCHIGIAN, J. /s/_________
SNAUFFER, J.