IN RE: the ESTATE of Elsinore Mechris GILLILAND

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Court of Appeal, Second District, Division 2, California.

IN RE: the ESTATE of Elsinore Mechris GILLILAND, also known as Elsinore C. Machris and as Elsinore C. Machris Gilliland, Deceased. The SALVATION ARMY, Braille Institute of America, Inc. and American Heart Association, Appellants, v. William L. MURPHEY, Norman L. Essig and Union Bank, Trustees, Petitioners and Respondents, Hi-Desert Memorial Hospital and Damon Runyon Cancer Fund, Exceptors.

Civ. 35407.

Decided: January 29, 1971

Meserve, Mumper & Hughes, Cromwell Warner, Jr., Los Angeles, and John Deacon, by John Robert Deacon, Los Angeles, for appellants. William L. Murphey, San Marino, and Larwill & Wolfe, by Charles W. Wolfe, Los Angeles, for respondents.

Appellants, three charitable organizations, who are residual beneficiaries of a testamentary trust, appeal from an award of compensation made to respondents as trustees of said trust.

The trust was created by the will of Elsinore M. Gilliland, deceased. An order for preliminary distribution of the estate was signed on October 31, 1967, and provided for distribution of assets of over $16,000,000 to the testamentary trustees.

Subsequently by a petition covering the period of October 20, 1967 to October 31, 1968, the trustees sought compensation for services rendered on behalf of the trust.

In a nonjury hearing the superior court awarded trustee fees in the amount of $125,000, plus $25,000 attorney's fees. Findings of fact and conclusions of law were signed by the court.

Finding of fact Number 5 which is the target of appellant's attack and the central point of controversy reads as follows:

‘5. The Trustees have rendered services to the Trust Estate, the corpus of which required the exercise of exceptional business judgment on the part of the Trustees, and through their skill and experience, and fidelity to the Trust work, and through a high degree of skill and judgment exercised by them, the administration of said Trust Estate was successful and the Trust Estate has increased greatly in value, and now has a value in excess of the carrying values thereof. Said Trust assets having increased in value during said accounting period by more than $2,294,334.00. That a just and reasonable fee for the services rendered by said Trustees during said accounting period is the sum of $125,000.00, which fee, according to the terms of the Trust, is to be paid from income of the Trust.’

Appellants concede that for the performance of the services which respondents described in their petition and established by the evidence, the sum of $125,000 was reasonable. They contend, however, that all of said services were not performed by respondents in their capacity as trustees nor did all of said services directly benefit the trust. Therefore they assert that the trust should not be assessed for the total amount of the fees.

At the time of the hearing in this matter there existed three entities, the Estate, the Testamentary Trust, and a corporation known as Sky Harbor Ranchos and Estates (hereinafter referred to as Sky Harbor).

During the accounting period respondent Essig was a co-trustee of the trust, a co-executor of the estate, an officer and director of the corporation and a 41 tockholder in the corporation. He received a salary of $18,000 per year as an employee of the corporation. Additionally he is a beneficiary of the trust. At the same time respondent Murphey was a co-trustee, a co-executor, andAND officer and director of the corporation and served as attorney for the trustees, the executors and the corporation.

Union bank was both a co-executor and a co-trustee.

The multiple capacities of the respondents and the fact that the testamentary trust is itself a stockholder in Sky Harbor, form the backdrop for appellant's assault on Finding of Fact Number 5 and the decree which flowed therefrom.

Some history of Sky Harbor and the details of what shall be referred to as the ‘Haskell Compromise’ is important.

In June of 1958, and prior to her death, decedent Gilliland acquired certain real property in Yucca Valley, California. In December of the same year she, together with John Haskell and respondent Essig, formed Sky Harbor to act as sales agent for the property. Stock in Sky Harbor was issued as follows: 624 shares to Haskell, 624 shares to Essig and 252 shares to Gilliland.

Subsequently, Haskell borrowed $56,160 from decedent on a promissory note secured by a pledge of his shares in Sky Harbor.

This note and the pledged shares were covered by the preliminary distribution order and became assets of the trust.

At the time of the organization of Sky Harbor a written contract of employment was executed between Haskell and Sky Harbor at a salary of $1500 per month. Haskell was to act as vice president in charge of sales.

Various transactions between Haskell, Gilliland, Sky Harbor and third parties, the details of which are not material here, ultimately led to the filing by Haskell of a creditor's claim against the estate.

Additionally in 1959 decedent Gilliland and Haskell formed a co-partnership in the acquisition of a restaurant known as the ‘Copper Room.’ This venture produced a series of promissory notes evidencing Haskell's indebtedness to decedent on account of operating losses. The notes were transferred to the trust under the preliminary order for distribution.

Finally, under the terms of her will decedent bequeathed to Haskell $25,000.

The foregoing gave rise to a myriad of disputes between Haskell and respondents, which disputes were laid to rest by a court affirmed compromise.

This compromise approved in March of 1968 resulted in the following:

(1) Cancellation of all of Haskell's promissory notes;

(2) The surrender of Haskell's shares of Sky Harbor stock to the testamentary trust;

(3) Cancellation of the partnership agreement and the transfer of all interest in the Copper Room to Haskell;

(4) Waiver of Haskell's creditor's claim against the estate;

(5) Indemnification of the estate by Haskell against all obligations and liabilities in connection with the Copper Room;

(6) Termination of Haskell's employment contract with Sky Harbor;

(7) Surrender by Haskell to Sky Harbor of all prospect lists;

(8) Use by Sky Harbor of Haskell's real estate broker's license for 90 days;

(9) Payment to Haskell of the $25,000 legacy.

Thus, as a result of the original distribution order and the compromise order the testamentary trust became a holder of 58.4% of the stock in Sky Harbor. Respondent Essig holds 41.6% of the stock.

It is clear that the removal of Haskell from his position with Sky Harbor enhanced that corporation's ability to increase its profit and thus increase the value of the stock. Following Haskell's removal a new sales operation was organized and the development of the property accelerated.

Respondents' petition for trustee fees includes, among the various services rendered to the trust, a recitation of actions taken in connection with the ‘Haskell Compromise.’ Evidence was produced in support thereof.

Significantly, respondents stated in their petition that ‘[t]he primary role in this settlement was taken by the Co-Executors and their attorneys, although the Trust Estate, as a distributee, was involved. Due to this fact, the Trustees will not, and have not asked for any over-lapping fees in this settlement with John E. Haskell.’

Section 1122 of the Probate Code provides in pertinent part: ‘If the will does not specify a trustee's compensation, the trustee shall be entitled to such compensation as may be reasonable under the circumstances and the court may, in the decree of distribution or thereafter, determine such reasonable compensation * * * On settlement of each account the court shall allow the testamentary trustee his proper expenses and compensation for services as provided herein.’

It is well established that pursuant to section 1122 of the Probate Code, ‘the trustees must be allowed ‘such compensation for services as the court may deem just and reasonable.’ That allowance rests in the sound discretion of the trial court, whose ruling will not be disturbed on appeal in the absence of a manifest showing of abuse. [Citations.] The trustee must present to the trial court satisfactory evidence of the accuracy and propriety of the items in his account [citations]; but the sole question before an appellate court when the fee allowed him is attacked as excessive is whether there is substantial evidence to support the trial court's finding. [Citation.] A finding that such a fee is a reasonable one states the ultimate fact in issue and is formally sufficient. [Citations.]' (Estate of McLaughlin, 43 Cal.2d 462, 465–466, 274 P.2d 868, 870.)

On the other hand where, as here, the trustees are serving in multiple capacities with the resultant potential for mischief, it is essential that the record clearly demonstrate that the trust is being burdened only to the extent that it is directly being served.

Respondents point out that they attributed a relatively small proportion of their time to the ‘Haskell Compromise’ compared to other services rendered the trust and they further make it abundantly clear that they do not intend to seek dual compensation from the other entities.

These assertion however miss the point. The question is not dual compensation, but the proper source of the single compensation. Furthermore the need for integrity in trust administration does not vary according to the amount involved.

At the time of the ‘Haskell Compromise’ the estate was still open and contained a substantial amount of assets over and above those distributed to the trust. Thus, respondents' roles as co-executors were still active ones. Similarly, respondents' duties as directors of Sky Harbor were complex and demanding. Respondents continued to be actively involved in the development of the project even after the compromise.

The implementation of the compromise agreement required action by both Sky Harbor and the Estate.

True the trust ultimately gained a large amount of Sky Harbor stock, but it was not the only entity which benefited from said agreement.

The trust benefited directly from the Haskell Compromise and indirectly as beneficiary of the estate and as shareholder in Sky Harbor. The estate and Sky Harbor also benefited directly. The value of a share of Sky Harbor stock increased in value during the accounting period from around $80 to $1500.

A portion of the benefit to the trust was indirect and resulted from activities of respondents acting not as trustees but as executors of the estate and as directors of Sky Harbor. In neither instance should the trust be required to compensate respondents.

The evidence offered by respondents covered in some detail the various activities surrounding the Sky Harbor development. Each of the respondents' witnesses including respondent Murphey himself concedes that these services made up a portion of their request for fees.

Mr. Murphey, as an expert witness, was unable to make any breakdown of the amount of the total fee which was attributable to the trustees role in the Haskell Compromise, neither was Mr. Schmidt another expert witness called by respondent.

A Mr. Nelson, who was the officer of the Union Bank charged with the responsibilities of administering the Gilliland Estate and Trust, after first testifying that most of the work in the Haskell settlement was done by the co-executors, finally came to the opinion that about 60% was done by the co-trustees and 40% by the co-executors.

The nature of the problem in this case is exemplified by the fact that respondents in their petition and their testimony often interchanged the terms ‘Estate’ and ‘Trust’ as if they were identical.

For example, respondent Murphey in describing the benefits of the Haskell Compromise testified that the ‘Estate’ had benefited by an increase of about $1,000,000.

In other parts of his testimony he stated that the ‘Trust’ benefited from this same $1,000,000 increment.

Finally, respondent Murphey testified as to Sky Harbor, ‘I have always visualized this corporation, * * * as an alter ego, an instrumentality * * * to enable the subdivision of this property up there and primarily for tax reasons.’

Estate of McLaughin, supra, holds that there is no fundamental bar to a trustee serving and receiving compensation as a director of a corporation in which the trust is a shareholder. It appears clear to us, however, that such a person cannot be compensated by the trust for services he was required as a director to render to the corporation.

Similarly, an executor who, in carrying out his duties as such, is obligated to take action which benefits a trust of which he is also a trustee should not be compensated therefor by the trust. (See Bemmerly v. Woodard, 136 Cal. 326, 68 P. 1017.)

The advantages to respondents of being compensated by the trust rather than the estate or the corporation is obvious.

Executors fees are statutorily limited except where the services are shown to be extraordinary. No such limitation or distinction between ordinary and extraordinary fees is involved in the court's awarding of trustee compensation.

In the case of respondent Essig, a significant factor is that his individually held 41% of the Sky Harbor stock is benefited to the extent that the corporation can shift costs to the trust.

Throughout the proceedings below, appellants sought a specific determination by the court as to that portion of the fees attributable to the ‘Haskell Compromise.’ They requested special findings.

The court's failure to make such a finding constitutes a failure to find on a material issue. Because of the multiple capacities of the respondents, the generalized finding number 5 as set out above was simply inadequate to insure that the court's judgment did not improperly burden the trust.

The attorneys fees require precise allocation as well. It seems obvious that the award of attorneys fees must be tied to the capacity of the individual to whom the legal services were rendered.

Section 6341 of the Code of Civil Procedure prevents us from inferring that the court found in favor of respondents as to material facts necessary to support the judgment.

Since the uncontroverted evidence establishes that a portion of the services for which respondents sought compensation as trustees was rendered in capacities other than as co-trustees, it was incumbent upon the trial court to either specify in its findings the precise services for which he was ordering compensation or to expressly state that the amount awarded was for services rendered solely and directly for the benefit of the trust.

The judgment is reversed.

FOOTNOTES

1.  Section 634: ‘When written findings and conclusions are required, and the court has not made findings as to all facts necessary to support the judgment or a finding on a material issue of fact is ambiguous or conflicting, and the record shows that such omission, ambiguity or conflict was brought to the attention of the trial court either prior to entry of judgment or in conjunction with a motion under Sections 657 or 663, it shall not be inferred on appeal or upon a motion under Sections 657 or 663 that the trial court found in favor of the prevailing party as to such facts or on such issue.’

COMPTON, Associate Justice.

ROTH, P. J., and FLEMING, J., concur.