Conservatorship of Person and ESTATE OF Ben WEINGART, Conservatee. John POAG and Sol Price, Individually and as Conservators of the Person and Estate of Ben Weingart, Conservatee; and Jack Rosenburg, Individually and as a Resigned Conservator, Appellants, v. George DEUKMEJIAN, as Attorney General, etc., Objector and Appellant.
Appellants John Poag, Sol Price and Jack Rosenberg, conservators of the person and estate of Ben Weingart (collectively “conservators”) appeal from those portions of the order settling third and fourth accounts of conservators dated September 11, 1979 (“judgment”) surcharging them for failing properly to respond to a tender offer for conservator stockholdings in Fed-Mart Corporation and reducing the fees awarded them and their attorneys. Objector Attorney General cross-appeals from those portions of the judgment awarding compensation to the conservators and attorneys' fees to their counsel and failing to set aside prior orders on grounds of extrinsic fraud.
Ben Weingart, the conservatee (now deceased) had been a very successful business man, amassing a fortune primarily in real estate and to a lesser extent through his investment portfolio. At the time here in question estimates of his wealth ranged from $140 to $180 million. When the conservatorship was instituted in October 1974 the conservator estate was appraised at $56,000,000 and income assets exceeded $2 million annually during the third and fourth accounting periods. Mr. Weingart and his wife Stella, who died in 1957, were charitable people. They had no children and created an estate plan which left the great bulk of their fortune to charity. The primary charity created by them was the Weingart Foundation (formerly known as the B. W. Foundation). Mr. Weingart conducted his business through several corporations, including Tragniew, Inc. and Consolidated Hotels of California (“the other entities”). The conservators were long-time personal and/or business associates of Mr. Weingart. It was mainly they who served as directors and trustees of the Weingart entities. They were represented by Leon Cooper, who served as counsel for the entities and Mr. Weingart. Through their relationship with various Weingart entities the conservators rendered services to those entities as well as to the conservatorship.
During the period immediately following the establishment of the conservatorship the estate owned shares of common stock in Fed-Mart Corporation (“Fed-Mart”), a publicly traded corporation. In October 1971 Mr. Weingart, by letter, expressed his desire that “unless conditions require, you [the conservators] do not sell the [Fed-Mart] stock for a period of seven (7) years after my death.” He also said “Sol [Price] has particular knowledge of the various aspects of those shares of stock as they pertain to the purposes of my trusts. I wish, therefore, that Sol's voice with regard to the voting of that stock, for as long as you hold it, shall be the determining factor among you if you cannot agree on how to vote the stock.”
In April 1975 at a time when the conservatorship owned 95,418 shares of Fed-Mart stock, Hugo Mann, a German entrepreneur, made a tender offer to all Fed-Mart shareholders. The conservators decided to tender 75,000 shares to Mr. Mann. Mr. Mann purchased 75 percent of all shares tendered, including 56,250 of the conservatorship's shares. The purchase price was $25 per share, a price which enabled the estate to recoup Mr. Weingart's investment, realize a cash profit of $212,211 and retain 39,168 shares. Mr. Price, who was the founder and chief executive officer of Fed-Mart and who beneficially owned 118,286 shares at the time of the tender offer, negotiated the stock purchase agreement. By that agreement he bound himself to retain at least 40,000 shares after consummation of the tender offer transaction. In fact, he sold 75,000 shares (approximately 63 percent of his holdings) to Mr. Mann and retained 43,000 shares. Mr. Rosenburg, who also owned Fed-Mart shares, tendered all of his; Mr. Mann purchased 75 percent or 3,750 of them. The average market value of Fed-Mart shares for 1969–1973, before the tender offer, was $175/858. Shortly after Mr. Mann acquired a majority of the Fed-Mart common shares, Mr. Price was discharged, the corporate policy changed, the value of the shares declined, and the conservatorship became involved in litigation relating to Fed-Mart.
The sale of the Fed-Mart shares occurred during the first accounting period. Sale of the stock was included among a number of items listed in the first account, as follows:
No mention was made of the tender offer or the fact that some of the shares had not been tendered, and the conservators did not seek instructions regarding their proposed response to the tender offer. The first account current, including an order ratifying, allowing, confirming and approving “[a]ll the acts and transactions of the Conservators” set forth in the petition, account and report “or relating to the matters set forth therein” was settled in March 1976.
In May 1978 the superior court appointed Fred L. Leydorf, Esquire, to serve as Mr. Weingart's guardian ad litem to render a report independent of the conservators and objectors, and to participate in the hearings on the third and fourth accounts. The Attorney General filed objections to the third account which were deemed applicable to the fourth account as well. Among the objections was one concerning “any and all activity by the conservatorship and the conservators in that [Fed-Mart] litigation (consisting of a number of lawsuits) as well as their handling of the stock and payment of expenses and costs of litigation.” There were also objections to the fees requested for the conservators and their counsel. The Attorney General additionally asked the trial court to set aside orders of June 14, 1976, approving conservatorship participation in Fed-Mart litigation, and April 13, 1977, among other matters approving Fed-Mart and other litigation and allowing conservators' and attorneys' fees.
The hearings were extensive. Evidence was presented on the issue of fees and there was a considerable amount of testimony proffered by the Attorney General as relevant to his objection to approval of various Fed-Mart lawsuits. The evidence included some proof that certain people known by the conservators, who tendered Fed-Mart shares during the tender offer, tendered 100 percent of their shares.
After the hearings on the third and fourth accounts current, the court directed that simultaneous post trial briefs be filed. In his brief the Attorney General argued that the conservators should be surcharged for failing to tender all the Fed-Mart shares in response to Mr. Mann's tender offer, and requested their removal.
The trial court declined to remove the conservators. “While the conservators made a mistake in speculating that Fed-Mart stock would rise to an amount beyond tender offer, such mistake is one in judgment and not in fraud, gross carelessness or indifference to duty and therefore not a basis for removal from office.” The judge did, however, make an order surcharging the conservators for their failure to offer all the shares.
The court found that the requests for both fees and compensation were “high in light of services rendered” and allowed only reduced fees to the conservators and their counsel. The court denied the Attorney General's motions to set aside prior orders “for lack of proof in support thereof.”
ISSUES, DISCUSSION AND RESOLUTION
1. The Surcharge Order
The conservators argue that (a) they had no notice that the Fed-Mart tender offer was an issue in the third and fourth accounts; (b) the conservators' response to the Fed-Mart tender offer had been approved by the court as part of the first account, which was by then a final order; (c) the conservators' decision to tender less than all the Fed-Mart shares may not subject them to a surcharge under applicable rules of law.
Conservators assert that they had no notice that the tender offer was an issue as it was neither part of the accounts to be settled nor objected to in writing or orally. Conservators point out that the tender offer was not part of the third or fourth accounts. The tender offer had occurred during the first accounting period and the sale of shares in response to it had been listed in the first account. Furthermore, the Attorney General had made no objection to the tender offer, per se, at any time prior to or during the proceedings below, until his post trial brief. Notwithstanding that there was no notice, certain aspects of the tender offer and the conservators' response to it, are in evidence. The fact that every person close to the conservators tendered all his or her shares is in evidence. Also in evidence is the fact that Mr. Price tendered less than all his shares, pursuant to his contract with the Mann group requiring him to retain 40,000 of his Fed-Mart shares. The tender offer related evidence was proffered by the Attorney General and admitted by the court on the theory that it was relevant to the issue of the Fed-Mart litigation. The surcharge was not because of that litigation.
Does the fact that the evidence on which the court relied came before it on another issue invalidate the surcharge order? The applicable principle is: It is the general rule that in the absence of an independent inquiry undertaken by the court, the issues for settlement are limited by the account and report on the one hand and the written objections on the other. (Estate of Fraysher (1956) 47 Cal.2d 131, 139, 301 P.2d 848; Estate of Cooper (1970) 11 Cal.App.3d 1114, 1123, 90 Cal.Rptr. 283.) In the case at bar the third and fourth accounts did not encompass the tender offer; that was an event within the first accounting period. And, the exceptions filed by the Attorney General merely referred to the Fed-Mart litigation. The Attorney General's cryptic objection to the conservators' “handling of the stock” was nothing more than an objection to the conservators' “handling of the stock” as it related to the Fed-Mart lawsuits. The Attorney General made no oral objection so as to alert anyone that the conservators' response to the tender offer was an issue. And the evidence was repeatedly justified by the Attorney General, frequently over objection, as relevant to the Fed-Mart litigation. It is clear that the particular event which resulted in the surcharge order was never the subject of an objection, written or oral, and was no part of the third and fourth accounts.
The court conducted no “independent inquiry.” In response to an argument first made in the Attorney General's post trial brief the court examined the evidence before it. Then, finding inadequate basis for removing the conservators, the court adopted a different course: it surcharged them expressly for having failed to tender 100 percent of the Fed-Mart shares when they could have sold more than they did at a price which, with hindsight, proved to be very good.
The conservators' actions when the tender offer was made and the propriety of their failure to tender all the shares was not in issue. The court should not have surcharged the conservators for “speculating that Fed Mart stock would rise to an amount beyond the tender offer․”
“It is frequently the case that evidence which is admissible to establish one issue may tend to establish another issue than that for which it is offered, and it is a rule that evidence so introduced is available to establish any of the issues in the case. This rule is, however, limited to the issues which are to be tried. If the other issue that the evidence may tend to establish is not before the court the evidence must be limited to the actual issue. The fact of its introduction cannot be used to establish an issue that the parties have not made in their pleadings. The court would not be authorized to consider it as establishing an issue that was not before it for trial. Even a finding upon such evidence would be disregarded in determining the correctness of the judgment.”
(Riverside Water Co. v. Gage (1895) 108 Cal. 240, 245, 41 P. 299; Trafton v. Youngblood (1968) 69 Cal.2d 17, 32, 69 Cal.Rptr. 568, 442 P.2d 648; Stockton v. Ortiz (1975) 47 Cal.App.3d 183, 193, 120 Cal.Rptr. 456.) The rule announced in the Riverside Water Co. case is applicable here. In Estates of Boyes (1907) 151 Cal. 143, 90 P. 454, the court reversed an order in a guardianship proceeding because evidence admissible on an issue presented by the account and objections had been admitted and relied on for a matter not in issue. The court said: “[T]he fact that some of the papers might have been admissible and could have been properly considered for some other purpose, would ․ not preclude the guardian from asserting error in the admission of the papers for the purpose for which they were offered and considered.” (151 Cal. at 149, 90 P. 454.)
The rule limiting consideration of evidence to the issue presented by the pleading may be invoked even though there has been no objection to the evidence.
“ ‘[E]vidence which is relevant to an issue actually raised by the pleadings cannot be considered as authorizing the determination of an issue not presented.’ (Freeman v. Gray-Cowan, Inc., 219 Cal. 85, 87 [25 P.2d 415].)
So applicable is the fundamental proposition that a party cannot object to the introduction of evidence which is pertinent to an issue made by the pleadings. (Greiss v. State Investment & Insurance Co., 98 Cal. 241, 244 [33 P. 195].)”
(Miller v. Peters (1951) 37 Cal.2d 89, 93, 230 P.2d 803).
In the case at bar the conservators' response to the tender offer was not before the court. Evidence tending to show that they retained shares believing the stock might appreciate in value was introduced with reference to the propriety of the conservators' conduct of the Fed-Mart litigation only. The litigation issue was properly before the trial court and the conservators could not have objected, validly, to evidence relevant on that issue. Thus, although the evidence on which it acted was before it, the court below erroneously surcharged the conservators for conduct wholly outside the issues framed by the accounts and the Attorney General's objections.
Furthermore, the court below was in error when it surcharged the conservators for the reason it did: their failure to tender all the Fed-Mart shares. The surcharge was not for “fraud, gross carelessness or indifference to duty.” It was for speculating with the shares. In the trial court's view retention of some shares “in hopes of a higher market price in the future” was tantamount to speculation, “a risk which an individual might assume, but not a fiduciary.” The court relied on Rippey v. Denver United States National Bank, 273 F.Supp. 718, 735 (D.C.Colo.1967) 1 and Civil Code section 2261 subdivision (1), and in so doing utilized an improper legal standard.
Civil Code section 2261 subdivision (1) is controlling with respect to the investment of trust property:
“In investing, reinvesting, purchasing, acquiring, exchanging, selling and managing property for the benefit of another, a trustee shall exercise the judgment and care, under the circumstances then prevailing, which men of prudence, discretion and intelligence exercise in the management of their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of their capital. Within the limitations of the foregoing standard, and subject to any express provisions or limitations contained in any particular trust instrument, a trustee is authorized to acquire every kind of property, real, personal or mixed, and every kind of investment, specifically including, but not by way of limitation, corporate obligations of every kind, and stocks, preferred or common, which men of prudence, discretion and intelligence acquire for their own account.”
In the case before us the conservators were surcharged for retaining stock already in their trust. Civil Code section 2261 subdivision (2) provides the standard by which a trustee's decision to retain property in an estate must be judged:
“In the absence of express provisions to the contrary in the trust instrument, a trustee may continue to hold property received into a trust at its inception or subsequently added to it or acquired pursuant to proper authority if and as long as the trustee, in the exercise of good faith and of reasonable prudence, discretion and intelligence, may consider that retention is in the best interests of the trust. Such property may include stock in the trustee, if a corporation, and stock in any corporation controlling, controlled by, or under common control with such trustee.”
Two differences between Civil Code section 2261 subdivisions (1) and (2) are readily apparent. One is that subdivision (1) directs the use of a prudent person standard, while subdivision (2) directs prudence in relation to the best interests of the trust. In other words, subdivision (1) seems to call for an objective assessment of prudence, subdivision (2) for a subjective determination. The other is that subdivision (1) forbids speculation, whereas subdivision (2) allows for the retention of property which is speculative. No California case has construed Civil Code section 2261 subdivision (2). A New York decision, In re Mendleson's Will, (1965) 261 N.Y.S.2d 525, 46 Misc.2d 960, is, however, in point. There, the testator had requested that certain stock be retained, “unless a sale thereof is deemed for the best interests of my estate by my said executor or trustee.” (261 N.Y.S.2d at 533.) The trustee sold some of the shares at an extremely good price—three times their book value. There were objections to the retention of the unsold portion and an attempt to surcharge the trustee for not selling all the shares. The court considered whether or not the trustee had acted in the best interests of the estate in reaching its decision to retain some shares.
“The judgment not to sell to reap the profit could be deemed prudent in that retention was the equitable way to serve all beneficiaries. It is true that subsequent events brought a decrease in both market value and dividends, yet the status of the matter in January, 1947 didn't indicate the future course of things to be such that the trustee had a duty then and there to provide for it. It cannot be charged with failing to prevent what it was powerless to foresee. When it comes to peering ahead, prophetic omniscience is not demanded of the fiduciary. Prudent judgment as to the present is sufficient and was so here. The trustee had no duty to sell, and if there were dire consequences because of retention in 1947, liability does not fall upon the petitioner therefor.”
(261 N.Y.S.2d at 538.)
The court then discussed specific contentions by objectors:
“One objectant states that decision to sell a portion was an indication that the trustee knew it was proper to sell all. There is a non sequitur here. The trustee could well have decided that it was a wise business move to obtain public financing ․, yet at the same time maintain family control, by retention of a controlling block. If the trustee had the right to sell some, it doesn't have the right much less the duty to sell all. No one here is assailing the partial sale and it stands justified. The retention stands on its own feet, right or wrong.
Other objectants claim there should have been a total sale because ․ the stock was speculative, ․
As for the speculative nature of the stock, this trustee had the right to retain it in the first instance and for as long a period as it served the purposes of the trust. Labeling of the security as speculative or investment type seems unimportant. This trustee made the judgment in January, 1947, the stock was serving the purpose and as hereinbefore set forth there is no demonstration of a lack of prudence in connection with that judgment.”
(261 N.Y.S.2d at 538–539.)
In the instant case the court gave no consideration to the best interest of the conservatorship. Yet that is what Civil Code section 2261 subdivision (2) mandates (and what the court in Mendleson evaluated in interpreting identical language in a will). Here, the court relied on the supposed risk of retention. Notably, it is only with hindsight that the Fed-Mart shares may be called risky. At the time in question Fed-Mart was a solid corporation, its shares had reached a high of 261/212 during the period between 1969 and 1973, had an average value during that period of 175/858 and reached 213/434 during 1974. Mr. Mann was investing millions of dollars of capital into Fed-Mart for growth and expansion. The company's successful policies were to be continued after the Mann group took over. Mr. Price, the corporation's successful founder and director, was going to continue providing leadership as its chief executive officer. There was nothing risky about the shares at the only relevant time: when the conservators decided to retain some of the Fed-Mart shares. (Interestingly, had they tendered all, the conservatorship would still have ended up with some Fed-Mart stock.)
In addition, the court below incorrectly focused on what it perceived as the implementation by the conservators of a “different judgment for shares owned by them than that judgment which they applied to estate property.2 The court fell into this error, apparently, by taking the Civil Code section 2261 subdivision (1) standard to mean that it need only compare the conservators' individual actions with their fiduciary acts in deciding whether they had used the same judgment in the estate's affairs as “in the management of their own affairs.” It is not at all clear that a prudent fiduciary must reach the same decision for his trust as he does for his own property, even as to actions governed by Civil Code section 2261 subdivision (1). (See, e.g. Bank of New York v. Spitzer (1973) 349 N.Y.S.2d 747, 43 A.D.2d 105.) The law merely requires him to apply the same standards. It is quite clear that under Civil Code section 2261 subdivision (2) what decision the trustee reaches for his personal property is unimportant, as long as he in “good faith” and with “reasonable prudence, discretion and intelligence,” decides that “retention is in the best interests of the trust.” The applicable statute requires only that the fiduciary consider factors relevant to his trust. If he does so and, based on factors known to him at the time, arrives at the conclusion that the property should be retained, he has discharged his duty. No amount of comparison between the decision he makes for himself and that which he makes for his trust may convert his judgment into a breach of his fiduciary duty.
The court below improperly looked, not to whether the conservators had taken into consideration what was in the best interests of the conservatorship when they decided to tender less than 100 percent of the Fed-Mart shares, but to what others thought was in their best interests. The court had no basis in law for what it did.
The surcharge order must be reversed.
2. The Attorneys' and Conservators' Fees
The conservators requested a fee of $105,000 for each of the third and fourth accounting periods, amounting to a total of $70,000 for each conservator. The Attorney General objected to the fees as excessive and both the Attorney General and the court-appointed guardian ad litem asked the court to take into consideration the amounts the conservators had paid themselves from the other Weingart entities in determining appropriate compensation. The court awarded $17,500, $12,000, and $10,000 for each account to Messrs. Poag, Rosenburg and Price respectively.
The conservators requested as attorneys' fees for the two accounting periods a total of $243,000. This averaged $75 per hour for attorneys' services. As with the conservators' compensation, the Attorney General objected to the requested item. The court reduced attorneys' fees to $125,000.
The conservators contend that the trial court used an improper legal standard and abused its discretion in reducing fees. The Attorney General argues that the court should have applied the Walker principle (Estate of Walker (1963) 221 Cal.App.2d 792, 34 Cal.Rptr. 832) and reduced fees even further. It is acknowledged by both sides that fees are within the sound discretion of the court, “whose ruling will not be disturbed on appeal in the absence of a manifest showing of abuse.' ” (Estate of Gilliland (1971) 5 Cal.3d 56, 59, 95 Cal.Rptr. 343, 485 P.2d 543.) There is no abuse of discretion here. With reference to the Walker principle, it is clear that the court below considered and rejected it. In the court's memorandum opinion the court said, “ ‘the facts of the case may be analogous to Estate of Walker․ [T]he attorneys have received $289,927 in fees from various Weingart entities other than the conservatorship which sum may be deemed adequate compensation for all services. To be awarded an additional $243,977 may be violative of the Walker principle.
“However, it is not clear what services were rendered to the Weingart entities other than the conservatorship. Putting aside, therefore, any analogy to Walker, the court finds that the requests for both fees and compensation are high in the light of the services rendered.” The court then enumerated all the factors it had taken into consideration in reaching its conclusion. These included the factors enumerated in Estate of McLaughlin (1954) 43 Cal.2d 462, 467–468, 274 P.2d 868.
The court was not required to utilize the Walker principle. The Walker court recognized that broad discretion is vested in the trial court, a discretion not abused by the denial of extraordinary fees in an appropriate case. The case does not compel the offset of fees earned in one capacity against those earned in another; it suggests that in some cases it is proper to do so. Here the trial court, after considering voluminous evidence, declined to rely on an analogy to Walker. It was entirely within the court's prerogative to so rule.
With reference to the McLaughlin standard, it is equally clear that the court followed the law. It did not, as argued by the conservators, merely pay lip service to the various relevant factors. The McLaughlin decision recognizes that there is no inflexible measure; reasonable compensation depends upon the circumstances of each case. (43 Cal.2d at 467–468, 274 P.2d 868.) As to conservators' compensation, the trial court had before it testimony of the conservators indicating the time each devoted to conservatorship business, the fact that the conservators rendered services to the other Weingart entities but couldn't sort out how much energy was devoted to them, rather than to the estate; the fact that some of the duties they performed for the conservatorship were being performed for the benefit of the conservators personally as well. The court also had evidence of the complexity of the estate holdings, the benefit conferred by the conservators' management, the skills required and the conservators' estimate of the worth of their services (in the case of Mr. Rosenberg—nothing in dollars, according to his testimony). From all of this, and from its opportunity to weigh and evaluate the testimony of witnesses throughout a lengthy trial, the court arrived at its conclusion as to the reasonable value of the conservators' services. Its decision is well within its discretion.
The same is true of the attorneys' fees. Among other matters, the court had before it ample evidence that the number of hours attributed to services rendered the Weingart conservatorship was unreasonable in light of general experience. The court also had before it the fact that other law firms did a good deal of the litigation work for the estate, further putting in question the number of hours claimed. These facts are sufficient to sustain the court's finding on attorneys' fees.
3. The Refusal to Set Aside Prior Orders
The Attorney General specifically requested the court to set aside the prior order in which the conservators' fees for the second accounting period were approved, and asked that the conservators be surcharged in the amount of those fees. The court refused to set aside the prior order.
As the Attorney General notes in his brief, the court made its orders in this case after a ten week trial. As a result of that trial the court had ample basis for deciding whether or not the order complained of should be set aside. The court's refusal to set aside the prior order was “for lack of proof in support thereof.” The court's conclusion was an exercise of its informed discretion; it was not a refusal to consider the issue. (Cf. Morales v. Field, de Goff, Hubbart & McGowan (1979) 99 Cal.App.3d 307, 160 Cal.Rptr. 239.) Absent a claim of abuse, the court's discretion will not be disturbed on appeal.
The order surcharging the conservators is reversed with instructions to enter judgment not inconsistent with this opinion. In all other respects the judgment below is affirmed.
1. Rippey is inapposite. In Rippey, the trustee violated its fiduciary duty when, after deciding to sell, it sold privately and secretly at a lower price than it knew had been offered by another prospective buyer. The court called the trustee's conduct “not simple negligence․ Such conduct is in law reckless․” (273 F.Supp. at 737.) Rippey is a case involving a sale, not a retention, and reckless conduct not some undefined mistake of judgment. It cannot point the way here, where the event was a non-negligent retention.
2. The court based its statement on supposed proof that the conservators tendered all their shares, personally, but not for the conservatorship. The record shows only that Mr. Rosenburg tendered his 5000. Mr. Price tendered only so many shares as would leave him with at least 40,000, pursuant to an agreement he negotiated. Mr. Poag owned none. Thus, it appears no different judgment was applied; each conservator did what he thought best for his own interests; Mr. Price stayed with the corporation in a greater proportion than did the conservatorship.
GOLDIN, Associate Justice.* FN* Assigned by the Chairperson of the Judicial Council.
KLEIN, P. J., and LUI, J., concur. Hearing denied; RICHARDSON, J., dissenting; MOSK and KAUS, JJ., did not participate.