IN RE: KEET'S ESTATE.*

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District Court of Appeal, Second District, Division 1, California.

IN RE: KEET'S ESTATE.* FARMERS & MERCHANTS NAT. BANK OF LOS ANGELES v. REED et al.

Civ. 12169-S

Decided: June 21, 1939

Chenoweth & Whitehead, Morton L. Barker, and Lawler, Felix & Hall, all of Los Angeles, for appellant. Howard & Littlefield, of Hollywood, for respondents.

Appellant, as trustee under the last will and testament of Walter S. Keet, deceased, prosecutes this appeal from a judgment and order sustaining objections to and disallowing certain portions of its eighth account current and report of the administration of said trust estate. Written objections to said account were filed by respondent widow, who is the life beneficiary of a certain trust created by said will.

The facts which form the basis of the appeal may be summarized as follows:

Walter S. Keet died testate August 13, 1926, and his last will was admitted to probate on September 13, 1926. The decree of distribution therein was made and entered on November 14, 1927, carrying out the terms of the said last will, and after providing for the distribution of certain bequests, sets up first a general trust composed of “all the rest, residue and remainder of said estate”. The decree next creates a separate trust in favor of Mrs. Emma Hubbard for her lifetime in certain securities, with power in the trustee to convert the same, and upon her death such securities to “become a part of the general trust fund”. The decree of distribution then proceeds to carve out and set apart from said general trust fund a separate trust estate as to all common stock owned by decedent in the United Steel & Wire Company of Battle Creek, Michigan, in the following language:

“Said trustee shall set apart as a separate and special fund all common stock belonging to decedent in the United Steel & Wire Company of Battle Creek, Michigan, and shall pay to said Georgia S. Keet, widow, the net income derived therefrom during her natural lifetime—and shall pay to said widow all dividends accruing upon said stock from the date of death of the decedent herein; and upon the death of said widow, this separate and special trust fund shall become a part of the general trust fund of said estate.”

On March 7, 1928, appellant bank, which was named an alternative trustee in the will, was appointed trustee in the place and stead of Leslie E. Clawson, resigned trustee. Appellant since the date of its appointment as such trustee has handled the various trusts in separate accounts, designating the general or residuary trust as C–788; the trust in favor of Mrs. Hubbard as C–788–B, and the special trust for the benefit of the widow as C–788–A. It is mainly with reference to this last-named trust that this appeal is concerned.

When it accepted the trust, appellant received from the resigned trustee 3240 shares of the common stock of the United Steel & Wire Company which constituted the entire corpus of said special trust C–788–A. These shares were then appraised at $24,300 and that value was set up on the books of the trustee during the year 1928. In 1928, subsequent to the appointment of appellant as trustee, the steel company issued two shares of stock for each share of common stock then outstanding, and appellant thereafter held 6480 shares of said stock as trustee of the special trust estate C–788–A. The said steel company of which decedent Walter S. Keet was one of the founders, is a Michigan corporation engaged in the manufacture of various light steel and wire products, including refrigerator racks, household appliances, steel shelves, bird cages and bathroom fixtures, steel hoops and wires for steel brackets for miscellaneous use, parts for trailers, etc. It appears from the record that said company, through increased volume of business, earned in the year 1935 an increase in profits over the previous year in the sum of $50,000, and in May, 1937, again issued two shares of common stock for each share thereof then outstanding.

From March 7, 1928, until May 5, 1936, appellant administered said trust C–788–A and paid out the income therefrom to the respondent widow. On the latter date, however, appellant petitioned the probate court pursuant to section 1120 of the Probate Code “for instructions, for authority to sell stock and for authority to invest proceeds from sale of stock”, alleging that “your petitioner * holds as part of the assets of said estate 6,480 shares of common stock of United Steel & Wire Company carried at $24,300; that after careful investigation made by your petitioner, your petitioner has concluded that it is for the best interests of said estate and in order to bring about a more extensive diversification in the assets held by your petitioner, to sell approximately one-half or 3,240 shares of said common stock” at the current market price on the date of sale of not less than $7.50 per share. Pursuant to said petition, the court duly made its order on May 22, 1936, authorizing the sale of 3,240 shares of said stock and the investment of the proceeds therefrom in municipal bonds. In accordance with said order, appellant on June 1, 1936, sold 1000 shares of said stock at $9.75 per share; on August 13, 1936, 1000 shares at $14 per share, and on August 22, 1936, another 1000 shares at $143/838 per share, and with the proceeds of such sales, purchased municipal bonds of the par value of $32,000, paying therefor the sum of $37,968.90, or a premium of $5,968.90. The eighth account current of appellant shows that approximately 20 per cent of the coupon interest received by trustee on said bonds was allocated to the principal for amortization of said premium.

On April 6, 1937, appellant trustee filed its eighth account current covering the period from March 8, 1936, to March 8, 1937. Said account was a report and accounting of the entire trust estate, both general and special, to-wit: Trusts C–788, C–788–A and C–788–B. With respect to C–788–A, appellant recited, among other things, the sale of 3000 shares of the common stock of United Steel & Wire Company and the purchase of municipal bonds with the proceeds from such sale; prayed for an allowance of $85 as attorneys' fees, $50 in connection with an opinion rendered by its attorneys on the propriety of the sale of said stock, and $35 for preparation of the eighth account current; and also prayed for trustee's fees in the sum of $636.30 for services rendered in administering said trust C–788–A for the period covered by the said account.

On April 27, 1937, respondent filed her objections to said account, alleging a loss of $3,050 in income by reason of said sale of stock, and upon the issues joined by appellant's answer thereto, the court rendered its order and decree in favor of respondent widow.

At the commencement of the trial it was stipulated that respondent Salvation Army should be deemed to have joined in the objections filed by respondent widow.

During the trial it was stipulated, among other things, that if the 3000 shares of steel company stock had not been sold, appellant would have received an additional $2,450 as dividends on said stock during the period covered by the eighth account current. It was further stipulated that the net yield on the bonds purchased with the proceeds of the sale of stock during the accounting period was approximately $424, and that the difference between the income received and that which would have been received had the 3000 shares of stock not been sold was $2,034.

On November 16, 1937, the court made its findings of fact wherein it found, among others, that appellant sold the 3000 shares of stock without authority to do so; that appellant had no power to reinvest in the bonds purchased by it from the proceeds of the sale of said stock; and that appellant was chargeable, as of the date of filing of the eighth account current, with 6480 shares (12,960 shares of the new issue as per the split of May, 1937) of common stock of United Steel & Wire Company, at a market value of $129,600.

The court then made its conclusions of law, the same being in part as follows:

“I. That the object of the testator, as shown by the provisions of the said decree of distribution * was to set aside a fund for his said wife, Georgia S. Keet, that should be kept intact and unsold, the net proceeds of which should be paid to his wife; that it was the will and intention of the testator that the common stock belonging to him in the United Steel & Wire Company, as shown from the trust provisions in the decree of distribution, should not be sold by the trustee for the sake of diversifying the stock, or at all, and that it should be at all times during the life of Georgia S. Keet held as a separate and special trust fund. That under the provisions of said decree of distribution, dated the 14th day of November, 1927, the trustee had no power to sell or otherwise dispose of the said common stock in the United Steel & Wire Company of Battle Creek, Michigan, * comprising the principal of said trust designated as Trust No. C–788–A.

“II. That the decree of distribution in the above entitled estate dated November 14, 1927, has become final and is the sole decree of distribution in said estate and ever since the rendition thereof has been and still is in full force and effect; that said decree of distribution is res judicata as to the terms and provisions of said trust (known and designated as Trust C–788–A at the Farmers & Merchants National Bank of Los Angeles), and is res judicata as to the powers and duties of said trustee. *

“IV. That the petition * filed by the trustee did not ask for a construction by the court as to whether under the decree of distribution of November 14, 1927, the trustee had the power to sell any portion of the corpus of Trust C–788–A, to-wit: any portion of the said 6480 shares of stock * and that the said court by its order of May 22nd, 1936 * did not determine, or attempt to determine the powers of the trustee. That said order of May 22, 1936, is not res judicata as to the powers of the trustee under Trust C–788–A.

“V. That the above entitled court sitting in probate had no jurisdiction to vary or change the terms and conditions of the decree of distribution of November 14, 1927, and the order of the above entitled court of May 22, 1936 * wherein it is in conflict with the terms of the decree of distribution of November 14, 1927, is void and of no force and effect. *”

Thereafter, the probate court made its order and decree disallowing the eighth account current in so far as it related to the sale of said 3000 shares of stock and the purchase of municipal bonds with the proceeds of said sale, and adjudged and decreed that appellant was chargeable with the principal of Trust C–788–A as of March 8, 1937, of 6480 shares (12,960 shares—new issue) of common stock of United Steel & Wire Company at a market price as of March 8, 1937, of $129,600; adjudged and decreed that there was a balance of income due and payable to respondent by appellant trustee for the period of March 8, 1936, to March 8, 1937, in the sum of $2,004.32; adjudged and decreed that appellant file a correct and accurate report for the period in question showing a full, true and correct account in accordance with the findings of fact and conclusions of law, and the order and decree of said court. Said decree and order allowed appellant's fees as trustee in the sum of $636 for its services from March 8, 1936, to March 8, 1937, $50 thereof to be paid from the income and $586 from the principal of said trust estate C–788–A; disallowed appellant's request for attorneys' fees in the sum of $50 for services rendered in connection with the sale of 3000 shares of said stock, and adjudged the said eighth account current to be correct in so far as it related to residuary trust C–788 and the Hubbard trust C–788–B.

Appellant trustee urges as its main point upon this appeal that the order of May 22, 1936, is not subject to collateral attack and is res judicata as to the issues raised by respondent's objections to the eighth account current, arguing that the probate court adjudicated the power of the trustee to sell the stock when it made said order of May 22, 1936, and therefore it is a bar to respondent widow's objections.

In order to prevail in this appeal, it is incumbent upon appellant to show authority in itself to make the sale objected to.

It is established beyond any question that the trustee of a testamentary trust derives his authority as such solely from the decree of distribution which is the judicial construction of the will of the testator. Where no appeal is taken from such decree by the trustee, it becomes conclusive upon him and he can no longer contend for a different construction from that which is imported by its terms “which must be regarded as a construction by the court of the testator's intention, and is to be treated as if he had created the trust in the terms of the decree”. Whittingham v. California Trust Co., 214 Cal. 128, at page 132, 4 P.2d 142, 144, quoting from Goad v. Montgomery, 119 Cal. 552, 51 P. 681, 63 Am.St.Rep. 145.

Also, the decree of distribution becomes the measure of the rights of all claimants to the estate, and “their rights are to be determined by the terms of this decree”. Whittingham v. California Trust Co., supra [214 Cal. 128, 4 P.2d 144], quoting from McKenzie v. Budd, 125 Cal. 600, 58 P. 199. See, also, Manning v. Bank of California, 216 Cal. 629, 15 P.2d 746; Gladding v. Superior Court, 7 Cal.2d 408, 60 P.2d 857, and In re Estate of McLellan, 8 Cal.2d 49, 63 P.2d 1120.

The decree of distribution herein in creating the general or residuary trust, designated by trustee as C–788, in “all the rest, residue and remainder of said estate”, gives to the trustee the right to “hold manage, control, protect and preserve the property of said trust, with power to lease, sell, contract, convey and invest in bonds, mortgages or other income-paying securities; * such part of said trust property as shall not be required for the immediate needs of this trust, as hereinafter provided; also said trustee shall have the authority and power to perform such other acts, through legal process or otherwise, as in his judgment may be necessary for the best protection and interest of said estate”. Said decree then provides for the payment to Mrs. Hubbard the net income from a promissory note and mortgage in the sum of $2,500 owned by decedent covering lands in Michigan, “or such other security or securities into which said note and mortgage may be converted by said trustee, during the natural lifetime of said Mrs. Emma Hubbard, and at her death, said security or securities and all accruing income therefrom shall become a part of the general trust fund in the hands of said trustee”. (Said trust being designated as C–788–B by said trustee.)

Then follow the directions as to trust designated as C–788–A: “Said trustee shall set apart as a separate and special fund all common stock belonging to decedent, in the United States Steel & Wire Company of Battle Creek, Michigan, and shall pay to the said Georgia Keet, widow, the net income derived therefrom during her natural lifetime,—and shall pay to said widow all dividends accruing upon said stock from the date of death of decedent herein; and upon the death of said widow this separate and special trust fund shall become a part of the general trust fund of said estate.”

Directions are then given as to the collection and accumulation of “the income from the remainder of said trust fund and from said special and separate fund referred to in the last preceding paragraph after the death of said widow”, until such time as in the discretion of the trustee the adopted daughter of decedent and her daughter shall require financial aid, whereupon the trustee shall pay the income derived from one-half of said trust fund to each respectively for life and the entire income therefrom to the survivor of them for life.

Finally, “Upon the death of all of the aforesaid beneficiaries said trustee shall close this trust and shall distribute all of the remainder of said trust funds, either general or special, principal, interest and income remaining in his hands” to certain designated beneficiaries among which the respondent Salvation Army of Los Angeles is one. The widow is not named a beneficiary under the general or residuary trust. (Italics added.)

An analysis of the terms of the decree of distribution, the phraseology of which strictly follows the provisions of the last will of testator, reveals that the trustee is given power to sell and otherwise manage and control the property forming the corpus of the general or residuary trust, as well as the power to convert the securities of the trust in favor of Mrs. Emma Hubbard, but with regard to the stock which constitutes the corpus of the special and separate trust fund set up for the benefit of the widow, there is not the slightest intimation that the testator intended or that the probate court decided, when it construed the terms of the last will and made the decree of distribution, that the power to sell the stock should be given to the trustee. To the contrary, the apparent intention of the testator was that the stock should be held intact in a special fund until the death of the widow and then become a part of the general trust. This view gains strength from the phraseology of the general trust wherein certain powers, including a right to sell, are expressly given to the trustee in “such part of said trust property as shall not be required for the immediate needs of this trust, as hereinafter provided”. In other words, the express powers given to the trustee refer exclusively to the general or residuary trust and have no reference to the two succeeding trusts which are thereafter provided for, except that as to the corpus of the Hubbard trust the right to convert is therein specifically given.

The language used throughout the decree of distribution, as well as the wording of the will, to-wit: “Said trustee shall set apart as a separate and special fund all common stock belonging to decedent * and shall pay to * the widow * the net income derived therefrom during her natural lifetime *” negatives any idea that the trustee had the power to sell the stock during the widow's lifetime, but rather indicates that the testator intended that the trustee should retain the stock under its control during the life of the widow. “The specific mention of certain property in the will or other instrument by which the trust is declared, particularly where such property comprises the whole of the trust property, is an indication of an intention that the property should not be sold but should be retained in specie. This is true even though the particular property is unproductive.” Restatement of the Law of Trusts, subd. (e), sec. 190.

Turning to the order of May 22, 1936, which is the real bone of contention here, it is argued by appellant that the terms of section 1120 of the Probate Code “invests the probate court with jurisdiction to instruct trustees of testamentary trusts in their powers and duties”.

Section 1120, supra, reads in part as follows: “When a trust created by a will continues after distribution, the superior court shall not lose jurisdiction of the estate by final distribution, but shall retain jurisdiction for the purpose of determining to whom the property shall pass and be delivered upon final or partial termination of the trust, to the extent that such determination is not concluded by the decree of distribution, of settling the accounts and passing upon the acts of the trustee and for the other purposes hereinafter set forth. Any trustee appointed by will, or appointed to execute a trust created by will, may, from time to time pending the execution of his trust, * render for settlement his accounts and report his acts as such trustee, before the superior court in which the will was probated *. The trustee may also petition such court, from time to time, for instructions as to the administration of the trust. *”

“This statute (1120, Probate Code) confers on the court of a probate a new jurisdiction, a special jurisdiction derived from the statute; it is not a part of the general probate jurisdiction to administer estates of decedents, but corresponds to the equity jurisdiction over trusts which, but for the statute conferring it, the court of probate would not have. (In re Estate of Hubbell, 121 Cal.App. 38 [8 P.2d 530]; Parkman v. Superior Court, 77 Cal.App. 321 [246 P. 334].) Practically a portion of the general jurisdiction over trusts has been reserved to and reposed in the court of probate. Prob.Code, secs. 1120–1127, seem to add nothing to the general administrative law of trusts, but merely to empower probate courts to do what equity always has done.) Nothing beyond the jurisdiction thus granted may be exercised by the court in probate.” 11b Cal.Jur., p. 838.

Referring to the same section, the court in Re Estate of Smith, 4 Cal.App.2d 548, at page 552, 41 P.2d 565, at page 567, said: “We believe the language employed in the present section [1120] of the Probate Code was intended to broaden the jurisdiction of the probate court so as to give that court jurisdiction over practically all controversies which might arise between the trustees and those claiming to be beneficiaries under the trust. This view is strengthened by a consideration of section 1240 of the Probate Code, which provides for an appeal settling an account of a trustee, from an order instructing a trustee”, etc. (Italics added.) See, also, In re Estate of Smead, Cal.Sup., 82 P.2d 182, 183.

As pointed out in Parkman v. Superior Court, 77 Cal.App. 321, 246 P. 334, and In re Estate of Hubbell, 121 Cal.App. 38, 8 P.2d 530, except for this statute, the probate court as such would be lacking in power to determine questions thus presented to it, and the parties would be relegated to the equity arm of the superior court for the relief, if any, to which they might be entitled.

It therefore appears that the probate court has jurisdiction with respect to those matters particularly enumerated in section 1120 of the Probate Code, including a petition by a trustee for instructions as to the administration of his trust, thus making it unnecessary to invoke the aid of a court of equity in the determination of controversies arising between trustees and beneficiaries which come within the purview of said section.

Appellant argues that in making its order of May 22, 1936, in answer to trustee's petition for instructions, the probate court decided that the trustee had the power to sell the stock involved herein. This position cannot be sustained, for the reason that the question of such power was not raised by that proceeding. In the first place, appellant trustee asked for no instructions. While its petition was entitled, “Petition for Instructions, for Authority to Sell Stock and for Authority to Invest Proceeds from Sale of Stock”, it was based solely upon the allegation: “* after careful investigation made by your petitioner, your petitioner has concluded that it is for the best interests of said estate and in order to bring about a more extensive diversification in the assets held by your petitioner, to sell approximately one-half or three thousand two hundred forty (3,240) shares of said common stock of the United Steel & Wire Company; that your petitioner desires this Honorable Court to authorize and direct your petitioner to sell said three thousand two hundred forty (3,240) shares of Common stock of the United Steel & Wire Company on the open market at the current market price on the date of sale at a price not less than $7.50 a share.” This was followed by an allegation regarding the investment of the proceeds of such sale, and a prayer for such authorization. If, as has been asserted by appellant, it was in doubt as to its power to sell the said stock, it would have been an easy matter to allege that fact, as well as such other facts as would have apprized the probate court sitting in equity of the necessity of a determination of that question.

It is now generally accepted that “although by the terms of the trust the trustee is not empowered to sell trust property, or even if he is directed not to sell it, yet if owing to circumstances not known to the settlor and not anticipated by him, the purpose of the trust would be defeated or substantially impaired, unless the property is sold, a sale can be made with the permission of the court. * The mere fact that a sale would be advantageous to the beneficiaries is not of itself a sufficient ground for permitting it.” Restatement of the Law of Trusts, subd. (f), sec. 190. See, also, 26 Ruling Case Law, page 1288, section 139.

Under the facts disclosed by the record, the trial court herein properly found that the probate court by its order of May 22, 1936, “did not determine or attempt to determine the powers of the trustee”, and for all that appears herein, the probate court might well have assumed, and no doubt did assume, from the phraseology of the petition addressed to it, that the trustee had a general power of sale with respect to the particular trust estate.

The trustee having failed to allege sufficient facts to give the probate court jurisdiction under section 1120 of the Probate Code, it follows that the order of May 22, 1936, wherein it is in conflict with the terms of the decree of distribution of November 14, 1927, is void on its face and of no force and effect, and consequently may be attacked either directly or collaterally by parties or strangers. Texas Co. v. Bank of America, 5 Cal.2d 35, 53 P.2d 127. A judgment void on its face is not a bar to an action subsequently commenced (Phelan v. All Persons, 202 Cal. 175, 259 P. 725), and the rule of res judicata does not apply thereto. Willis Finance & Construction Co. v. Porter, 88 Cal.App. 523, 263 P. 842.

By reason of the conclusions reached in this opinion, it is not deemed necessary to discuss other points raised by appellant.

The order and judgment sustaining objections to and disallowing certain portions of trustee's eighth account current is affirmed.

YORK, Presiding Justice.

We concur: DORAN, J.; WHITE, J.