Robert L. GUMP et al., Plaintiffs and Appellants, v. WELLS FARGO BANK, NATIONAL ASSOCIATION, Defendant and Appellant.
The appeal and cross-appeal in this case arise out of an action brought by the six income beneficiaries of the testamentary trust established by the will of Abraham L. Gump against Wells Fargo Bank, National Association (Wells Fargo), the former successor trustee of that trust.1 The action was one for intentional and negligent breach of fiduciary duty.
Abraham L. Gump died in 1947. At the time of his death, he had three children, Richard, Robert and Marcella, and three grandchildren, Robert's daughters Marilyn, Antoinette and Suzanne. He also had a step-grandchild, Marcella's stepdaughter Melanie.
Abraham's will devised approximately 36 percent of his estate to his son Richard Gump and the residue in trust for the benefit of the plaintiffs as income beneficiaries. Robert was to receive 23 percent of the trust's income, Marcella 38 percent, Marilyn, Antoinette and Suzanne each 11 percent, and Melanie 6 percent. The remainder was to go to the surviving issue of the named income beneficiaries, exclusive of Melanie.2 Richard and another individual were named as co-trustees, and Wells Fargo was named as successor trustee in the event the others failed to serve.
The final distribution of Abraham's estate occurred in 1952. The assets distributed to the trust consisted of 60.41 percent of the stock of S & G Gump Company, which owned and operated the retail store at 250 Post Street, San Francisco, known as Gump's, and also owned other property.3 At that time, Richard served as president of S & G Gump Company. The trust owned a 60.41 percent interest in the 250 Post Street property and Richard owned the remaining 39.59 percent interest. Richard, with two successive individual co-trustees, served as trustee from 1952 to 1969.
In 1969, the Gump's Inc. business (the retail store), a subsidiary of the S & G Gump Company, was sold to Crowell, Collier & Macmillan, Inc. (Macmillan). The S & G Gump Company was liquidated and 60.41 percent of the proceeds, including the real property located at 250 Post Street and real property in Tahiti and elsewhere, as well as cash and securities, were transferred into the trust. The 250 Post Street property was leased for 25 years to Macmillan. Richard, who owned the remaining 39.59 percent interest in the 250 Post Street property and lease, continued to serve as president of Gump's pursuant to a five-year employment contract with Macmillan.
The Post Street lease provided for payment of a guaranteed minimum annual rent of $350,000, plus an annual percentage rent based upon “gross sales” as specifically defined in the lease. The guaranteed rental was paid monthly, while the additional percentage rent (sometimes referred to as “rent override”) was calculated and paid annually in the spring following the close of each calendar year.
Richard Gump and his co-trustee resigned as trustees and Wells Fargo became the successor trustee of the Gump trust on December 11, 1969. Pursuant to powers set forth in Abraham's will, Wells Fargo segregated the trust assets and formed separate trusts for the benefit of the six beneficiaries in the proportions to which they were respectively entitled. These trusts are hereafter referred to collectively as “the Gump trusts.”
II. THE PROBATE PROCEEDINGS
A. Approval of the First Five Accounts
At the conclusion of each year of its administration of the Gump trusts, Wells Fargo filed in the superior court probate proceeding known as the Estate of Abraham L. Gump, Action No. 108109, petitions for settlement of its accounts of administration. Each account reported the amount of rent collected under the Post Street lease and paid out to the beneficiaries that year. The court entered decrees approving and settling Wells Fargo's first through fifth accounts for the administration of the Gump trusts from December 12, 1969, through December 11, 1974.4 None of the beneficiaries objected at any time to the amount of rent collected, although commencing with the second account some of the beneficiaries did retain counsel and contest other aspects of the trust administration and fee requests, none of which are relevant to this appeal. The decree approving the fifth account was filed July 31, 1975.
B. The Depreciation Reserve and Sixth and Seventh Account Litigation
On March 11, 1976, Wells Fargo filed in the probate proceeding a “Petition for Instructions of Court Concerning Establishment of Depreciation Reserve,” alleging that it believed it necessary to establish a depreciation reserve from trust income in order to preserve the value of the improvements located at the 250 Post Street property. Wells Fargo proposed a reserve of approximately $1.3 million, which would be funded from trust income at the rate of $75,000 per year, a reduction of each beneficiary's income of approximately one-third. Wells Fargo also requested the appointment of a guardian ad litem for all minor, unborn and unknown beneficiaries of the trust, and that request was subsequently granted.
The beneficiaries filed exceptions and amended exceptions to the petition for instructions, alleging, inter alia, that establishment of a reserve would unfairly discriminate against the income beneficiaries in favor of the remaindermen; that the amount of the proposed reserve was unreasonable and excessive; that Wells Fargo had acted fraudulently and in bad faith and its decision to establish the reserve was based upon improper, unrevealed motives; and that Wells Fargo had acted fraudulently and in bad faith by breaching its duties of impartiality, loyalty and full disclosure to the beneficiaries. The beneficiaries also asked that Wells Fargo be surcharged all costs and expenses, including attorney's fees, which they had incurred in connection with the petition.
On October 22, 1976, Wells Fargo filed its sixth account and petition for settlement thereof. The beneficiaries filed exceptions and amended exceptions to that account, objecting to the allowance of any trustee's or attorney's fees attributable to the depreciation reserve matter and making allegations of fraud, bad faith and breach of duty of loyalty, impartiality and full disclosure similar to those contained in their amended exceptions to the petition for instructions regarding a depreciation reserve.
It appears that extensive discovery was conducted by the beneficiaries in connection with the depreciation reserve litigation and their exceptions to the sixth account. Prior to a scheduled trial of the depreciation reserve matter, the parties reached a settlement which was approved by Wells Fargo, the beneficiaries and the guardian ad litem. On September 16, 1977, Wells Fargo filed an amended petition for instructions concerning establishment of a depreciation reserve, indicating that the beneficiaries and the guardian ad litem had agreed to a depreciation reserve in the amount of approximately $311,000, funded by annual contributions of $8,500 for five years, $28,500 for the following five years, and $18,500 thereafter until April 30, 1994. On the date it filed the amended petition for instructions Wells Fargo also filed its seventh account and petition for settlement thereof.
On October 24, 1977, the beneficiaries filed their response to the amended petition for instructions and also filed a response to the petitions for settlement of the sixth and seventh accounts. They indicated that they had agreed to a depreciation reserve as set forth in the amended petition for settlement purposes only and had withdrawn exceptions to the sixth account and withheld objections to the seventh account as part of the settlement. The beneficiaries also stated in those responses that, for the record, they wished to take exception to those portions of the petitions asserting that Wells Fargo had faithfully managed and conducted the trusts strictly in accordance with the terms thereof.
The court held a hearing on the petitions on October 25, 1977. On November 29, 1977, it entered its order instructing the trustee and settling the sixth and seventh accounts in accordance with the settlement of the parties.5
C. The Eighth Account Litigation
On May 19, 1978, Wells Fargo petitioned for settlement of its eighth account. On June 22, 1978, all of the beneficiaries except Antoinette filed exceptions to that account, alleging, inter alia, that Wells Fargo had failed and refused to properly administer the Post Street lease with Macmillan. The action below was filed shortly thereafter. The eighth account litigation eventually resulted in a determination on May 23, 1979, that Wells Fargo's administration of the Post Street lease had been negligent for the year 1976 and disallowance of a $22,689 fee for ordinary services requested by Wells Fargo. An appeal resulted in reversal, in part, of the order disallowing the fee because the record did not disclose the evidentiary basis for the lower court's disallowance in an amount greater than that attributable to the mismanaged lease. (Estate of Gump (1982) 128 Cal.App.3d 111, 117, 180 Cal.Rptr. 219.)
III. THE PROCEEDINGS BELOW
The beneficiaries filed their complaint in the court below on June 30, 1978 entitling it “Complaint for (1) Intentional Breach of Fiduciary Duty; (2) Negligent Breach of Fiduciary Duty; (3) Compensatory Damages; (4) Punitive Damages.” 6 The complaint described the establishment of the Gump trusts and designation of Wells Fargo as successor trustee in 1969. It asserted that Wells Fargo had filed a petition concerning establishment of a depreciation reserve in the probate proceeding in 1976 and alleged that, during the period April 1974 to March 1976, Wells Fargo withheld and concealed from plaintiffs its true intentions and resolve to establish a depreciation reserve. Paragraphs ten through twenty-three of the complaint alleged various acts of misconduct on the part of Wells Fargo in its plan and efforts to establish a depreciation reserve.
Paragraph 24 of the complaint alleged that since the inception of the Post Street lease, Wells Fargo had failed and refused to monitor the provisions of the lease, to analyze Macmillan's rent reports, to assure that catalogue sales and mail order sales were properly accounted for in the computation of the rent override, to assure that bad debts were properly allocated in computation of the rent override and to do all other things necessary for the protection of plaintiffs to whom Wells Fargo owed a fiduciary duty in connection with the administration of the lease. Plaintiffs alleged that the foregoing acts and omissions were unknown to them until 1977 and that as a result of the facts alleged they were owed additional rent in an unknown amount.
Paragraphs 25 and 26 of the complaint further alleged that Wells Fargo had refused to take steps to obtain access to the books of Macmillan; that thereafter Macmillan acknowledged to a certified public accountant employed by plaintiffs that there had been errors in the 1976 computer printout from which the 1976 rent reports were prepared and that those errors had not been rectified. Paragraph 27 alleged that, through inquiry by some of the plaintiffs, Wells Fargo had subsequently been placed on notice concerning errors in the rent reports and had neglected, failed and refused to take action with respect thereto, claiming lack of expertise and recommending that plaintiffs expend $10,000 of their own funds for the purpose of performing an audit.
The complaint then alleged as a first cause of action that Wells Fargo had intentionally breached its fiduciary duties in that it failed to act fairly and in good faith, discriminated against plaintiffs, failed to disclose material facts to which plaintiffs were entitled in order to protect their interests, misled plaintiffs and failed to properly administer the provisions of the Post Street lease. It further alleged that the acts of Wells Fargo had been wilful, wrongful and coercive and that Wells Fargo was guilty of malice, oppression and fraud.
The complaint alleged as a second cause of action that Wells Fargo had negligently breached its fiduciary duties by failing to exercise ordinary and reasonable care in the administration of the Gump trusts. The complaint sought both compensatory and punitive damages.
On March 6, 1979, Wells Fargo filed its answer to the complaint. The answer included affirmative defenses that all allegations regarding the depreciation reserve were barred by res judicata by virtue of the settlement and court order of November 29, 1977, and that all issues which had been or could have been raised in the probate proceeding on the petitions for settlement of the first through seventh accounts were res judicata.
On March 22, 1979, an amendment to the complaint was filed. It added a new paragraph 27.1, alleging: “At all relevant times herein, defendant Wells Fargo Bank has maintained a conflict of interest between itself, as trustee, and the plaintiffs herein in that it has engaged, and continues to engage, in a business relationship with the Lessee from which it profits. Said business relationship has created and continues to create an interest adverse to the income beneficiaries.” Paragraph 30, which alleged that Wells Fargo had intentionally breached its fiduciary duties, was amended to include the maintaining of a conflict of interest as a breach.
Trial proceedings commenced on June 27, 1983. On that date, Wells Fargo filed a motion to strike plaintiffs' jury demand on the grounds that the proceedings were equitable in nature and no right to jury trial existed.7 The trial court granted this motion and ruled that the case would proceed to trial by the court without a jury.
Testimony commenced on July 6, 1983, and concluded on October 7, 1983.8 Following post-trial briefing and argument, judgment was entered on December 19, 1983. The court awarded plaintiffs compensatory damages of $23,262.04, with compound interest accrued thereon in the sum of $31,076.95, and punitive damages of $1,000,000.
IV. THE DECISION OF THE TRIAL COURT
On February 17, 1984, the trial court filed its amended statement of decision nunc pro tunc to the date of judgment. It noted that Wells Fargo had become trustee of the Gump trusts on December 11, 1969, and had served until its powers were suspended on July 17, 1979, when Chartered Bank of London (later merged with Union Bank) was appointed custodian of assets for the Gump trusts. Wells Fargo's resignation as trustee was accepted on November 29, 1979, and Chartered Bank of London was appointed successor trustee on January 11, 1980.
The trial court found that during the period of the first seven accountings, from December 11, 1969, through December 31, 1976, Wells Fargo had breached its fiduciary duties by (1) failing to collect all rent due on the 250 Post Street lease, (2) failing to enforce the 250 Post Street lease, (3) failing to require that adequate records be kept by the lessee of 250 Post Street to assure that rent could be properly calculated and (4) failing to resolve uncertainties and ambiguities in the lease. The court held that the first seven accountings were not res judicata as to these breaches of fiduciary duty because the facts establishing the breaches were not disclosed to the court by Wells Fargo in the probate proceedings and were not considered or ruled upon by the court in settling the annual accountings. It ruled that “pro forma” language to the effect that Wells Fargo's accountings showed all receipts on behalf of the trust and were full, true and correct, and that Wells Fargo had faithfully managed and conducted the trusts in accordance with the terms thereof, was insufficient to tender to the court for its consideration all of the acts of misconduct committed by Wells Fargo as trustee.
The court further found Wells Fargo guilty of actual fraud for the period of the first seven accountings in concealing from plaintiffs its “nonadministration” and “nonenforcement” of the 250 Post Street lease, holding that such fraud was extrinsic to the annual accountings and thus prevented the accountings from having any res judicata effect upon plaintiffs' rights to assert those breaches of fiduciary duty in this litigation. It also held that extrinsic fraud had been adequately pleaded by plaintiffs.
The court also found Wells Fargo guilty of actual fraud in concealing from and misrepresenting to plaintiffs its intention to establish a depreciation reserve. However, it held plaintiffs' depreciation reserve claims barred by res judicata by virtue of the settlement of the depreciation reserve issue in 1977 and the failure of plaintiffs to reserve, either expressly or otherwise, any objections to the depreciation reserve. The court stated that plaintiffs had stipulated that the only extrinsic fraud they had asserted which could avoid res judicata on the depreciation reserve matter was conflict of interest. Holding that conflict of interest had not been proven, the trial court found no need to determine whether, as claimed by Wells Fargo, extrinsic fraud had not been adequately pleaded to avoid res judicata.
The court held that to find an actionable conflict of interest, it must “find that the defendant consciously disregarded its fiduciary obligations as trustee for the purpose of promoting its own interest.” The court found that “while there is a strong suspicion that Wells Fargo did so,” the plaintiffs had failed to establish by a preponderance of the evidence that Wells Fargo had so consciously disregarded its fiduciary obligations.
Plaintiffs had introduced evidence pertaining to a sale by the trust of property in Tahiti to Richard Gump, which they asserted had been made on terms overly favorable to Richard due to Wells Fargo's conflict of interest in courting the business of Macmillan, for whom Richard served as president of the retail store, Gump's. The trial court found that plaintiffs had not adequately pleaded any claim for relief arising out of the Tahiti transaction, including extrinsic fraud. It found that Wells Fargo had been prejudiced by plaintiffs' failure to adequately plead their claim relating to this issue and stated that it had not considered any evidence pertaining to the Tahiti transaction in its award of compensatory or punitive damages.
With respect to the period of the eighth account, which was 1977, the court took judicial notice of the findings of fact and conclusions of law in the probate proceeding. Since the court in that proceeding found Wells Fargo guilty of negligence only (see Estate of Gump, supra, 128 Cal.App.3d 111, 180 Cal.Rptr. 219), and there was no express reservation of issues of fraud during that proceeding, the trial court found the determination therein res judicata as to fraud in Wells Fargo's administration of the Gump trusts during 1977.
The court further found that Wells Fargo had intentionally breached its fiduciary duties to plaintiffs by (1) cutting off periodic information regarding sales and purchases of securities despite requests that such information be provided, (2) threatening to charge additional trustee's fees for making trust property productive by depositing into a savings account a reserve of ten percent of trust income which had previously been held in a noninterest bearing account, (3) threatening to charge additional fees for correspondence if the beneficiaries did not cease inquiries about Wells Fargo's handling of trust assets, and (4) threatening that the costs of an audit of Macmillan's records for the business located at 250 Post Street would be charged only to those beneficiaries who objected to the eighth account (all beneficiaries except Antoinette). The court held, however, that plaintiffs had not proved any actual damage as a result of the acts designated as items 3 and 4 above. It stated that none of the above acts had been disclosed to, or considered or ruled upon by, the court in any of the probate proceedings and, consequently, no decree settling the annual accounts was res judicata as to them.
The trial court awarded compensatory damages for lost rents for the years 1969 through 1977 in the amount of $23,262.04, with compound interest. Included in those damages was the amount of $3,355.17 for the period of the eighth account (1977), determined in the proceeding remanded from the Court of Appeal in Estate of Gump, supra, 128 Cal.App.3d 111, 180 Cal.Rptr. 219. The damages were based upon incorrect calculation of rents due in connection with certain departments of the Gump's store, catalogue sales and bad debts.
The court also found that plaintiffs were damaged by the payment of trustee's fees to Wells Fargo for the first seven accountings but held that such fees could not be recovered as compensatory damages in a civil proceeding and could only be recovered in probate proceedings. It also held that plaintiffs had not established with sufficient certainty the amount of trustee's fees requested by and paid to Wells Fargo for administration of the Post Street lease to enable the court to make an award of such fees as compensatory damages.
The trial court refused to award damages for rent lost during 1978 and 1979. It found that, acting through their counsel, plaintiffs had entered into an agreement with the successor trustee, Chartered Bank of London, providing that the successor trustee would be relieved of all responsibility to pursue collection of past due rent and, as a result thereof, no attempt was made by the successor trustee to collect past due rent. It also found that plaintiffs had failed to pursue collection of past due rent from Macmillan after Wells Fargo's suspension as trustee on July 17, 1979, because they wanted to reserve that issue as a basis for punitive damages in this litigation. The court held that such conduct reflected unclean hands, barring plaintiffs from recovering lost rent for 1978 and 1979. The court also stated that, in the event it was in error in this holding, the lost rent to which plaintiffs would be entitled for 1978 was $1,898.08 and for 1979, $879.56.
As indicated, the trial court awarded punitive damages of $1,000,000. In this connection, the court stated that during the course of its administration of the Gump trusts, Wells Fargo had undertaken numerous actions which reflected malice, oppression and fraud toward plaintiffs, including (1) cutting off “advices” of sales and purchases of securities, (2) concealing and misrepresenting its plans and efforts to establish a depreciation reserve, (3) handling inquiries and requests by the beneficiaries concerning the ten percent reserve in a hostile and evasive manner, (4) advising that it would charge additional fees for placing the ten percent reserve in a savings account, although it was obligated as trustee to make trust assets productive, (5) threatening Antoinette Gump that if her inquiries about the handling of the trust did not cease she would be assessed additional fees for Wells Fargo's correspondence, (6) pressuring plaintiffs to terminate their opposition to establishment of a depreciation reserve and (7) threatening to charge the cost of an audit of Macmillan's records to those beneficiaries objecting to the eighth account. The court stated that Wells Fargo's conduct throughout its administration of the trusts reflected its intention to vex, annoy and harass plaintiffs, to pressure them, to coerce them to refrain from exercising their legal rights, and to intimidate them in conscious disregard of their rights.
In making its punitive damage award the court stated that $500,000 of the $1,000,000 award was based upon the malicious and oppressive state of mind of Wells Fargo in connection with the establishment of the depreciation reserve. It also stated, however, that no part of the punitive damage award was based upon any actual damages suffered by plaintiffs as a result of any conduct of Wells Fargo related to the depreciation reserve, but, rather, the award was based upon actual damages separate and apart from the depreciation reserve. The court concluded that in awarding punitive damages it was entitled to consider all evidence which reflected Wells Fargo's state of mind, regardless whether such evidence included conduct for which it had concluded compensatory damages were appropriate.
V. THE CONTENTIONS ON APPEAL
Wells Fargo contends on appeal that (1) the award of damages for fraud is unsupported by the findings of the trial court or the evidence, (2) the breaches of fiduciary duty found by the trial court do not reflect malice or oppression as a matter of law, (3) the claims of breach of fiduciary duty with respect to uncollected rent are barred by res judicata by virtue of the orders settling the accounts in the probate proceeding, (4) the judgment is based upon claims and theories never pleaded, litigated or tried, (5) punitive damages cannot be awarded on the basis of conduct related to the depreciation reserve because claims with respect to that matter were, as the trial court found, barred by res judicata, and (6) the punitive damages awarded were excessive as a matter of law.
On their cross-appeal, the beneficiaries contend that (1) the trial court applied the wrong standard of proof to their claim of conflict of interest, (2) their claims with respect to the depreciation reserve were not barred by res judicata, (3) they were entitled to recover trustee's fees paid for the first seven accountings as compensatory damages, (4) they were entitled to a trial by jury, (5) the evidence regarding the sale of the Tahiti property to Richard Gump should not have been stricken, (6) they were entitled to recover lost rent for 1978 and 1979 and (7) the trial court incorrectly ruled that communications between the attorneys who advised Wells Fargo with respect to administration of the trust and Wells Fargo were protected from disclosure by the attorney-client privilege.
Following the submission of Wells Fargo's briefs in this appeal, the beneficiaries moved to strike portions of Wells Fargo's reply brief and brief in opposition to the cross-appeal. We deferred a ruling upon that motion until plenary consideration of this case.
VI. THE MOTION TO STRIKE **
VII. WELLS FARGO'S APPEAL
A. Res Judicata
We first consider Wells Fargo's argument that the trial court erroneously ruled that the decrees rendered in the probate proceedings approving the first seven accounts of Wells Fargo's trusteeship were not res judicata as to claims for damages based upon maladministration of the 250 Post Street lease.
“The doctrine of res judicata precludes parties or their privies from relitigating a cause of action that has been finally determined by a court of competent jurisdiction.” (Bernhard v. Bank of America (1942) 19 Cal.2d 807, 810, 122 P.2d 892; Lazzarone v. Bank of America (1986) 181 Cal.App.3d 581, 591, 226 Cal.Rptr. 855.) The doctrine is applicable in probate proceedings. (Estate of Charters (1956) 46 Cal.2d 227, 234, 293 P.2d 778; Lazzarone v. Bank of America, supra, 181 Cal.App.3d at p. 591, 226 Cal.Rptr. 855.) The res judicata effect given orders settling trustee accounts is established by Probate Code section 1123, which provides: “A decree rendered under the provisions of this chapter, when it becomes final, shall be conclusive upon all persons in interest, whether or not they are in being.” (See Estate of Charters, supra, 46 Cal.2d at pp. 234–235, 293 P.2d 778; Lazzarone v. Bank of America, supra, 181 Cal.App.3d at p. 591, 226 Cal.Rptr. 855.)
Probate Code section 1120 gives the superior court, sitting in probate,10 authority to issue orders settling trustees' accounts and passing on acts of trustees. (See generally Estate of Bissinger (1964) 60 Cal.2d 756, 765–769, 36 Cal.Rptr. 450, 388 P.2d 682; Lazzarone v. Bank of America, supra, 181 Cal.App.3d 581, 591, 226 Cal.Rptr. 855; 7 Witkin, Summary of Cal.Law (8th ed. 1974) Wills and Probate, § 254, p. 5757.) “The scope of a proceeding under section 1120 includes virtually all controversies that might arise between trustees and beneficiaries, including matters of trustee misconduct. [Citations.]” (Estate of Howard (1976) 58 Cal.App.3d 250, 257, 129 Cal.Rptr. 836; Estate of Gump, supra, 128 Cal.App.3d 111, 116, 180 Cal.Rptr. 219.) Although the court sitting in probate has no authority to assess damages against a negligent trustee, it is empowered to charge the trustee for shortages. (Willson v. Security—First Nat. Bk. (1943) 21 Cal.2d 705, 712, 134 P.2d 800; Estate of Gump, supra, 128 Cal.App.3d at p. 116, 180 Cal.Rptr. 219.) The probate decree may be enforced by contempt proceedings or an action at law based upon the decree. (Willson v. Security—First Nat. Bk., supra, 21 Cal.2d at p. 712, 134 P.2d 800.)
In Willson v. Security—First Nat. Bk., supra, 21 Cal.2d 705, 134 P.2d 800, the Supreme Court held, in circumstances similar to those presented here, that probate decrees approving the accounts of a testamentary trustee would, through the doctrine of res judicata, bar a subsequent civil action for fraud against the trustee. The plaintiff there alleged that the trustee bank had invested trust funds in a participation certificate issued by it without securing a permit from the Commissioner of Corporations, that the participation certificate was therefore void and valueless, and that she was entitled to recover the amount paid for the certificate ($10,000). The purchase of the participation certificate was disclosed in a trustee's account. “Subsequent accounts listed the certificate as an asset of the trust and included a statement substantially as follows: ‘All investments made for said trust are in securities authorized by law or by the terms of said trust and have been carefully made for the purpose of serving the best interests of said trust and all persons interested therein.’ There was no statement however, that the certificates had been issued without a permit from the Corporation Commissioner․ No objections to the account were filed by the beneficiary.” (Willson v. Security—First Nat. Bk., supra, 21 Cal.2d at p. 710, 134 P.2d 800.)
A demurrer on the ground of uncertainty was sustained in Willson. The Supreme Court affirmed, concluding that there was no point in directing that the plaintiff be granted leave to amend because undisputed matters of public record “demonstrated that the plaintiff's right to hold the defendant personally liable for trust funds invested in the purchase of the participation certificate was foreclosed by the orders approving defendant's accounts.” (21 Cal.2d at p. 712, 134 P.2d 800.) In reaching this result, the Willson court cited with approval McLaughlin v. Security—First Nat. Bk. (1937) 20 Cal.App.2d 602, 67 P.2d 726 and Ormerod v. Security—First Nat. Bank (1937) 21 Cal.App.2d 362, 69 P.2d 469. Both of those cases similarly held that actions for fraud against the trustee bank for purchasing participation certificates issued without a permit were foreclosed by the probate decrees approving the trustee's accounts.
The beneficiaries urge, and the trial court apparently agreed, that res judicata operates as a bar only if the breaches of fiduciary duty later complained of were actually disclosed to the court in the probate proceeding. It is true that in many of the cases finding probate decrees approving trustee accounts a bar to a later civil action against the trustee, the breach complained of or some notice thereof appeared in the accounts filed in the probate court. (See, e.g. Ringwalt v. Bank of America Etc. Assn. (1935) 3 Cal.2d 680, 45 P.2d 967 [failure to sell corporate stock]; Carr v. Bank of America Etc. Assn. (1938) 11 Cal.2d 366, 79 P.2d 1096 [same]; Lazzarone v. Bank of America, supra, 181 Cal.App.3d 581, 226 Cal.Rptr. 855 [investment in trustee's common trust funds yielding very low rate of return].) We are not persuaded, however, that disclosure of the breach of duty is essential to application of the doctrine of res judicata. To the contrary, in Willson, McLaughlin and Ormerod, the issuance of the participation certificates without a permit, the gravamen of the plaintiffs' claims, was not in any way disclosed in the probate proceeding.
The beneficiaries rely upon Estate of de Laveaga (1958) 50 Cal.2d 480, 326 P.2d 129, Estate of Howard, supra, 58 Cal.App.3d 250, 129 Cal.Rptr. 836 and Estate of Schneider (1979) 95 Cal.App.3d 55, 156 Cal.Rptr. 838. In Estate of de Laveaga, the life tenant of a testamentary trust sought to obtain from the trustee income earned on principal during the period of probate administration. The trustee's previous accounts had not segregated predistribution income and had treated as corpus all assets received under the decree of distribution. The court there held that the life tenant's claim was not foreclosed because the decree of distribution and orders settling the trustee's previous accounts raised no issue concerning the segregation or allocation of such income. (50 Cal.2d at p. 487, 326 P.2d 129.) In Estate of Howard, the Court of Appeal held that an order settling trustee accounts would not operate as res judicata where the superior court expressly, and erroneously, refused to rule upon claims of trustee misconduct. (58 Cal.App.3d at pp. 257–258, 129 Cal.Rptr. 836.) In Estate of Schneider, the court refused to give res judicata effect to orders approving trustee accountings where the trustee had never reported gross income or expenses but, rather, had reported only net income of the trust. The court there held that “[w]here a trustee who has knowledge of income failed to account for that income there is nothing to which the jurisdiction of the probate court can attach․” (95 Cal.App.3d at p. 58, 156 Cal.Rptr. 838.)
The situations described in de Laveaga, Howard and Schneider present limited exceptions to the application of res judicata in the context of probate proceedings. In de Laveaga, the probate court did not pass upon segregation of predistribution interest income because that issue was completely unnecessary to its decree of distribution and orders approving accounts. In Howard, claims of trustee misconduct were not ruled upon because the superior court expressly refused to do so. We find these cases inapposite to the one at bench.
Schneider is more difficult to reconcile with the Supreme Court's decision in Willson, which the Schneider court did not cite. It is, however, distinguishable from Willson in that an entire category of trust income was omitted from the accountings and therefore there was nothing for the order of the probate court to operate upon with respect to that category. Additionally, Schneider is different from the case presented here because the trustee in Schneider knew about the unreported income. There is no evidence here that Wells Fargo actually knew about the errors in rent computation.
Also distinguishable is our recent decision in Conservatorship of Coffey (1986) 186 Cal.App.3d 1431, 231 Cal.Rptr. 421. There a conservator failed to pay a premium due on a life insurance policy, thereby causing the policy to lapse. His accounting filed in the probate department of the superior court failed to list the policy as an asset on his inventory and made no mention of the lapse of the policy. In other words, the conservator in Coffey made no disclosure whatsoever of the issue later raised by the beneficiary. In the instant case, on the other hand, Wells Fargo revealed the leasehold interest as an asset of the trust and disclosed the rents collected during the period of each accounting. As a result of these disclosures, the beneficiaries here were provided notice of the issue and an opportunity to more closely scrutinize the trustee's fulfillment of its fiduciary responsibilities.
The purpose of the doctrine of res judicata is, of course, to promote the finality of judgments. “The rule is based upon the sound public policy of limiting litigation by preventing a party who has had one fair trial on an issue from again drawing it into controversy.” (Bernhard v. Bank of America, supra, 19 Cal.2d 807, 811, 122 P.2d 892.) “[A] hearing on a testamentary trustee's petition for approval of its accounts is the proper time and place for a beneficiary to raise the issue of the trustee's neglect of duty or failure to properly discharge its office. [Citations.] Indeed failure to challenge the trustee's accounting at that time would in all probability preclude any challenge at a later date and make everything in the accounts res adjudicata. (Prob.Code, § 1123; Willson v. Security—First Nat. Bank, 21 Cal.2d 705 [134 P.2d 800]; [additional citations].)” (Coberly v. Superior Court (1965) 231 Cal.App.2d 685, 688, 42 Cal.Rptr. 64.)
The law charges the probate court with the duty of scrutinizing the accounts of an executor and trustee and determining the issues presented by a petition for approval of the accounts. (McLellan v. McLellan (1941) 17 Cal.2d 552, 554, 110 P.2d 1034; Lazzarone v. Bank of America, supra, 181 Cal.App.3d 581, 593, 226 Cal.Rptr. 855.) “The ‘issues presented’ by the petition include not only the account's arithmetical accuracy but also whether the trust has been mismanaged. Approval of the account thus negates a claim of mismanagement. [¶] ․ the probate court, in the exercise of its duty to scrutinize Bank's management of the trust with care, necessarily determined that Bank had carefully and prudently managed the trust. This determination, in turn, necessarily encompassed a rejection of any claims that the trustee had defrauded plaintiff, a beneficiary.” (Lazzarone v. Bank of America, supra, 181 Cal.App.3d at p. 594, 226 Cal.Rptr. 855, citations and footnote omitted.) No reason appears why the present claims that Wells Fargo improperly administered the 250 Post Street lease could not have been made in the earlier probate proceedings. This being true, and considering the need to maintain the significance of probate proceedings, it is of no moment that such claims were not then advanced. The law disfavors the avoidance of probate proceedings and the litigation on the law side of the court of matters properly heard and resolved in probate. (Bank of America v. Superior Court (1986) 181 Cal.App.3d 705, 717, 226 Cal.Rptr. 685.) The belated claims are now barred by the doctrine of res judicata.
B. The Finding of Extrinsic Fraud
“[A] court may exercise its equitable jurisdiction to set aside orders and decrees of probate proceedings in cases of fraud or mistake. [Citations.] It is well settled, however, that ‘only upon proof of extrinisic and collateral fraud can plaintiff seek and secure equitable relief from the judgment. A showing of fraud practiced in the trial of the original action will not suffice.’ [Citation.] The courts have required a showing of extrinsic fraud in order to accommodate both the policy in favor of resolving issues in a final judgment and the policy in favor of a fair adversary proceeding in which each party is provided an opportunity to fully present its case. [Citations.]” (Estate of Sanders (1985) 40 Cal.3d 607, 614, 221 Cal.Rptr. 432, 710 P.2d 232.)
The Sanders court went on to observe: “The courts are particularly likely to grant relief from a judgment where there has been a violation of a special or fiduciary relationship. The commentators have observed that breach of a fiduciary duty may warrant setting aside the judgment even though the same conduct in a nonfiduciary relationship would not be considered extrinsic fraud. [Citations.]” (Id., at p. 615, 221 Cal.Rptr. 432, 710 P.2d 232, footnote omitted.) “ ‘The failure to perform the duty to speak or make disclosures which rests upon one because of a trust or confidential relationship is obviously a fraud for which equity may afford relief from a judgment thereby obtained, even though the breach of duty occurs during a judicial proceeding and involves false testimony and this is true whether such fraud be regarded as extrinsic or as an exception to the extrinsic fraud rule. [Fn.]’ (Freeman, Judgments (5th ed. 1925) § 1235, p. 2576.)” (Id., at p. 615, fn. 7, 221 Cal.Rptr. 432, 710 P.2d 232.)
The trial court found Wells Fargo guilty of extrinsic fraud “in concealing from the plaintiffs its nonadministration and nonenforcement of the 250 Post Street lease.” Wells Fargo contends that extrinsic fraud was not adequately pleaded and that the conduct found by the court does not constitute extrinsic fraud. We need not decide those issues, however, because we agree with Wells Fargo's additional contention that the finding of fraud in this regard is not supported by substantial evidence.
The beneficiaries rely upon several cases in which relief from the res judicata effect of a probate decree was granted on the basis of extrinsic fraud. We find each distinguishable.
In Simonton v. Los Angeles T. & S. Bank (1923) 192 Cal. 651, 221 P. 368, it was alleged that an executrix had designedly concealed property from the probate court and wrongfully appropriated it to her own personal use. The court found those allegations sufficient to survive a demurrer.
In Silva v. Santos (1903) 138 Cal. 536, 71 P. 703, the court found sufficient to withstand a demurrer allegations that the guardian of the estate of an incompetent had mingled property of the estate with his own funds and kept false books of account with the intent to deprive the ward of his property.
In Goldberg v. Goldberg (1963) 217 Cal.App.2d 623, 32 Cal.Rptr. 93, the plaintiff alleged that her brothers-in-law, trustees of a testamentary trust established by the will of her husband and themselves contingent remaindermen, had represented that all of her husband's estate was separate property and that they would take care of everything for her, knowing these statements to be false and making them for the purpose of gaining control of assets of the estate and keeping the plaintiff out of court. The court held these allegations sufficient to survive a demurrer.
In Estate of Anderson (1983) 149 Cal.App.3d 336, 196 Cal.Rptr. 782, this court upheld a trial court judgment finding the Bank of America, an executor and testamentary trustee, guilty of extrinsic fraud. The bank had, inter alia, failed to advise the beneficiaries that a federal estate tax audit was pending and that a proposed sale of property could generate capital gains and additional taxes; procured a beneficiary's waiver of special notice of hearing on return of sale without explaining the adverse tax consequences which were evident to the bank; “studiously avoid[ed]” the beneficiaries' attorney, who might otherwise have become aware of the situation and protested; and failed to disclose a new Internal Revenue Service valuation of the sold property. We found such conduct tantamount to depriving the beneficiaries of their day in court.
What is apparent in Simonton, Silver, Goldberg and Anderson is that the fiduciary acted or was alleged to have acted intentionally or wilfully in making misrepresentations or concealing information commensurate with traditional notions of fraud. “Knowledge of falsity or ‘scienter’ is ordinarily considered an essential element of fraud. [Citations.]” (4 Witkin, Summary of Cal.Law (8th ed. 1974) Torts, § 465, p. 2728.) If one believes representations to be true and merely lacks reasonable grounds for the belief, he is guilty only of negligent misrepresentation.
In Estate of Sanders, supra, 40 Cal.3d 607, 221 Cal.Rptr. 432, 710 P.2d 232, the conduct of the fiduciary again involved intentional misrepresentation and concealment. The executor of an estate led the appellants to believe that a will offered for probate would leave them the entire estate, concealing the fact that he had arranged for the decedent to change her will to leave most of the estate to him. He also told them that they need not become involved in the probate proceeding and advised them not to contact the probate attorney. Such conduct clearly evidenced an intent to deceive. The Supreme Court described it as conduct which seemed “clearly intended to prevent appellants from appearing to contest the will.” (Id., at p. 617, 221 Cal.Rptr. 432, 710 P.2d 232.)
The beneficiaries do not point to any evidence in this case indicating that Wells Fargo intended to deceive them in connection with the administration of the Post Street lease. There is no evidence Wells Fargo was even aware of the errors in rent collection until Victor Levi, an accountant hired by the beneficiaries, looked at Macmillan's records and discovered discrepancies in the fall of 1977, the period of the eighth account. The beneficiaries point to evidence that Wells Fargo did nothing to administer the lease except to receive payments of rent tendered by Macmillan without any questions asked. They then state that “[t]he concealment and the misrepresentation of Wells Fargo is in the bank's repeated representation to the court and the beneficiaries during the first seven accountings that it ‘faithfully managed and conducted the trust in accordance with the terms thereof.’ ” They contend that this constitutes intentional concealment of the nonenforcement of the lease. Such a statement was expressly rejected as a basis for extrinsic fraud in Lazzarone v. Bank of America, supra, 181 Cal.App.3d 581, 226 Cal.Rptr. 855: “By plaintiff's theory, Bank's allegedly false statement that it was properly handling trust funds would suffice to avoid the res judicata effect of a probate order. However, nearly all executors and trustees expressly or impliedly represent that they are lawfully doing their jobs. Consequently, as a practical matter, plaintiff's view would simply allow the widespread avoidance of probate hearings by aggrieved parties․ That result, in turn, would inject an unacceptable degree of uncertainty into the business of administering trusts and estates․ We conclude Bank's statements do not constitute extrinsic fraud as a matter of law.” (Id., at p. 599, 226 Cal.Rptr. 855.)
For the same reasons, the boilerplate provisions in Wells Fargo's accounts regarding faithful conduct and management of the trusts cannot be deemed to constitute extrinsic fraud. There is abundant evidence Wells Fargo was negligent in administering the lease. There is no substantial evidence, however, that it engaged in extrinsic fraud.11
C. Punitive Damages
With respect to the award of punitive damages, all of the claims upon which the trial court found compensatory damages due for fraud or intentional breach of fiduciary duty were claims which we have found barred by res judicata by virtue of the probate orders approving the first seven accountings. The only other compensable damage found by the trial court was rent due for the period of the eighth account (1977), based upon negligence only. Consequently, there was no basis for the award of punitive damages.
D. Wells Fargo's Other Contentions
It is not necessary to resolution of this appeal for us to consider Wells Fargo's contentions that the judgment is based upon claims and theories never litigated, pleaded or tried.
VIII. THE BENEFICIARIES' CROSS–APPEAL
A. Conflict of Interest
The beneficiaries contend that the trial court applied the wrong standard of proof to their claim of conflict of interest by requiring a showing that Wells Fargo consciously disregarded its fiduciary obligations as trustee for the purpose of promoting its own interests. The beneficiaries are thus claiming that Wells Fargo's failure to disclose a conflict of interest created by its relationship with Macmillan amounted to extrinsic fraud, thereby creating an exception to the bar of res judicata.12
After presentation of the beneficiaries' case in chief, Wells Fargo moved for judgment pursuant to Code of Civil Procedure section 631.8, subdivision (a), arguing, inter alia, that the beneficiaries had failed to prove their claim of conflict of interest. The trial court granted the motion with respect to conflict of interest relating to administration of the Post Street lease, holding that the beneficiaries had failed to prove that Wells Fargo's commercial banking relationship with Macmillan had influenced its administration of the lease. The court denied the motion with respect to conflict of interest relating to the establishment of the depreciation reserve. Later, however, in its statement of decision, the court held that claims relating to the depreciation reserve were barred by res judicata and that the beneficiaries had proved no conflict of interest which would avoid the res judicata bar.
The beneficiaries' theory at trial with respect to conflict of interest was that Wells Fargo did some commercial banking business with Macmillan and that its interests in maintaining that business and seeking additional business from Macmillan had influenced Wells Fargo to (1) refrain from properly enforcing the rent override provision of the Post Street lease in order not to antagonize Macmillan, (2) sell trust property in Tahiti to Richard Gump without an adequate appraisal to curry favor with him because the bank hoped that, as president of Gump's, he would act as its advocate in obtaining further business from Macmillan, and (3) seek to establish the depreciation reserve because it would provide benefits to Macmillan, as lessee of the Post Street property, by allowing for improvements to the property and perhaps even the construction of a new building on the site.
Evidence was presented that Wells Fargo had a commercial relationship with Gump's for a number of years prior to the sale of the business to Macmillan. In January 1969, Roland Wynne, the commercial officer responsible for the Gump's business, was advised that the business was going to be sold and that Macmillan would probably move the Gump's business to the Bank of America with which it had primarily been doing its banking in California. Wells Fargo asked Richard Gump to make a strong recommendation on behalf of Wells Fargo to Macmillan.
Macmillan maintained accounts with Wells Fargo for some of its other subsidiaries, including the Berlitz School and Brentano's, Inc. Otto Reisman, the Wells Fargo commercial officer responsible for the Macmillan accounts, considered them significant accounts, having average balances of at least six figures. This was an important business relationship to seek to maintain and to expand if possible.
Reisman met with the treasurer of Macmillan on January 14, 1969, in an effort to encourage Macmillan to continue to maintain Gump's commercial banking business with Wells Fargo. At that meeting Reisman was advised that Macmillan was interested in mergers and acquisitions with other companies and that it was also interested in obtaining assistance in the Eurodollar market, to which Wells Fargo had access through Western America Bank of which it owned 40 percent. Reisman agreed to make an introduction to assist Macmillan and did so. After the January meeting, Reisman nonetheless had misgivings that it had amounted to a “last supper.”
Following the sale of Gump's to Macmillan in April 1969, Wells Fargo did lose its loan business with Gump's. Reisman had a subsequent meeting with Macmillan's treasurer in May 1969, and was advised that the Gump's deposit account would remain with Wells Fargo. Reisman recommended to the bank that calls should be made on Macmillan on a fairly regular basis, with Macmillan's treasurer given as much attention as possible.
When Wells Fargo became trustee of the Gump trust in November 1969, it was aware that Richard Gump wanted to purchase property in Tahiti owned by the trust.13 On December 18, 1969, the head of the trust department advised the responsible trust officer to obtain an independent appraisal of the property. In the meantime, Reisman had met the day before with Macmillan's treasurer. Reisman was interested in obtaining a portion of the $100 million revolving credit accounts Macmillan maintained with several banks, and the treasurer indicated he would consider that request. Reisman noted in a report of that meeting that “prospects here look considerably brighter than in the past and calls should be made on a regular basis.”
On December 22, 1969, four days after his original instruction to obtain an independent appraisal of the Tahiti property and five days after Reisman's meeting with Macmillan's treasurer, the head of the trust department instructed the responsible trust officer that it would not be necessary to obtain an independent appraisal after all, and Wells Fargo determined to rely solely upon Richard Gump's appraisal of the Tahiti property as a basis for its sale to him.
In an internal memorandum prepared in January 1970, Wells Fargo decided not to pressure Macmillan to provide certain documentation required for issuing letters of credit, prompted by concern that the Gump's account would be transferred to the Bank of America. This concern continued throughout 1970.
Throughout the early 1970's, Wells Fargo repeatedly solicited Macmillan's business. In May 1970, Reisman advised Macmillan's treasurer of a merger opportunity he had learned of through the bank's acquisition and merger department. In July of that year, there were discussions between Wells Fargo and Macmillan concerning the purchase by Wells Fargo's trust department of Macmillan's commercial paper. Macmillan also advised that it would attempt to include Wells Fargo in its revolving credit arrangements. In February 1971, Wells Fargo attempted to arrange a loan of ten to fifteen million Eurodollars for Macmillan.
Wells Fargo had long sought to place Mastercard in the Gump's store. (These attempts pre-dated the sale of Gump's to Macmillan, going back as far as 1967.) It was finally successful in September 1974. Arrangements such as this were important to Wells Fargo because they “would assure [Wells Fargo] the position as the second bank on the West Coast for this company.”
Wells Fargo also pursued increased connections with officers of Macmillan. Ronald Wynne, a vice president in Wells Fargo's commercial division, frequently saw Richard Gump and assisted him with financial needs for cash and foreign exchange services. Wynne asked Per Nevard, controller of Gump's, to advocate Wells Fargo's position with Macmillan. Wynne also introduced an executive vice president of Gump's to the bank's trust department in order to assist him in setting up a personal trust.
Wells Fargo did receive certain additional business from Macmillan. It maintained a $250,000 credit line for Gump's. Wells Fargo served as the trustee for the Gump's pension plans. In 1974, Armando Bonvicino, at that time the trust officer responsible for administering the Gump trusts, signed an authorization necessary for Richard Gump to obtain distributions from the pension trusts.
Wells Fargo also attempted to become Macmillan's West Coast transfer agent, a potentially profitable business as a result of service charges for transfers of stock. Wells Fargo sought to extend a $4,000,000 loan to Macmillan for construction of an air pollution control facility, hoping that such a loan “would ensure [Wells Fargo's] position with this company.” Wells Fargo eventually increased its line of credit for unsecured letters of credit for Macmillan to $800,000.
Antoinette Gump testified that her trust officer at Wells Fargo in Carmel, where she was then living, told her that the purpose of the depreciation reserve was to tear down the building and build a new one on the 250 Post Street site. Mr. Bonvicino testified that the bank's intention for the use of the depreciation reserve was to depreciate the improvements so that, at the end of the lease term, the trust would be in a position to construct a new building for the current or other lessee if that was required. Bonvicino conceded, however, that Wells Fargo never discussed with Richard Gump the possibility of his contributing to the cost of any such new construction. Richard Gump's contribution would, of course, have been essential, as he owned approximately 40 percent of the building.
No direct evidence was presented indicating that Wells Fargo was influenced in any way in its administration of the Gump trusts by its business relationship with Macmillan. At the hearing on Wells Fargo's motion for judgment, the trial court stated to the beneficiaries' counsel, “I am aware of circumstantial evidence. I am aware that sometimes circumstantial evidence is more telling, more probative than direct evidence. And there is a lot of circumstantial evidence here. But, to say that you proved that it's more likely than not that there was this conspiracy to do this [curry favor with Macmillan by administering the Gump trusts in a manner detrimental to the beneficiaries], it's hard to accept Mr. Wisch.”
The beneficiaries contend that they were legally required “to show only that Wells Fargo placed itself in a position where its personal interest might conflict with their interest”, and that since they had done so, the burden of proof shifted to Wells Fargo to demonstrate that it was not influenced by a conflict of interest in carrying out its trust obligations.
The beneficiaries devote a considerable portion of their brief to a description of the high duty of honesty and loyalty owed by a trustee fiduciary to its beneficiaries. These principles are well known. Civil Code section 2230 provides in pertinent part: “Neither a trustee nor any of his agents may take part in any transaction concerning the trust in which he or any one for whom he acts as agent has an interest, present or contingent, adverse to that of his beneficiary ․” The general rule is that “the trustee is under a duty to the beneficiary to administer the trust solely in the interest of the beneficiary.” (Rest.2d Trusts, § 170, p. 364–365.) “One of the most fundamental duties of the trustee is that he must display throughout the administration of the trust complete loyalty to the interests of the beneficiary, and must exclude all selfish interest and all consideration of the interests of third persons.” (Bogert, Trusts and Trustees (2d ed. 1978) § 543, pp. 197–198.)
The beneficiaries cite authorities holding that a trustee cannot place himself in a position which would expose him to the temptation to act contrary to the best interest of his beneficiary irrespective of his good faith or bad faith, Overell v. Overell (1926) 78 Cal.App. 251, 256–257, 248 P. 310, and that equity will strike down all disloyal acts rather than attempt to separate the harmless and the harmful by permitting the trustee to justify his representation of two interests. (Bogert, supra, at pp. 204– 207; Wickersham v. Crittenden (1892) 93 Cal. 17, 29, 28 P. 788.) These authorities do not, however, stand for the proposition that beneficiaries seeking damages against a trustee based upon a conflict of interest need not prove that the trustee was influenced by a desire to promote its own interests. Overell was an action to remove a trustee where he and the beneficiaries, two of his brothers, were alleged to have a hostile relationship. Wickersham was an action to set aside a transaction due to the trustee's direct self-dealing with the trust property in causing a $45,000 loan of trust funds to be made for his own benefit.
The beneficiaries additionally rely upon Civil Code section 2235, which provides in pertinent part: “All transactions between a trustee and his beneficiary during the existence of the trust, or while the influence acquired by the trustee remains, by which he obtains any advantage from his beneficiary, are presumed to be entered into by the latter without sufficient consideration, and under undue influence.” Clearly this statute shifts the burden of proof to a trustee to show that such a transaction was not entered into by a beneficiary under undue influence. That statute, however, has no application here for we are not concerned with the validity of any transactions entered into by the beneficiaries and Wells Fargo.
The beneficiaries also rely upon Conservatorship of Pelton (1982) 132 Cal.App.3d 496, 183 Cal.Rptr. 188 with respect to the burden of proof. In that case Wells Fargo sold assets of a conservatee's estate and deposited the proceeds (approximately $264,000) in a 5 1/4 percent Wells Fargo savings account. At the same time, amounts in excess of $100,000 deposited in 30–day accounts at various banks were earning a minimum of 9 1/2 percent. The Court of Appeal held that the bank had the burden of proving that the investment decision was justified. The issue in Pelton was not whether a conflict of interest existed, but whether the trustee had made a prudent investment. Normally, the deposit of trust funds by a bank with itself would be a direct and impermissible conflict of interest. (Id., at pp. 501–502, 183 Cal.Rptr. 188.) By statute, however, such a deposit was made permissible subject, the Pelton court ruled, to the prudent investment standard. This case has no application to the instant situation.
The beneficiaries have cited additional cases, from California and elsewhere, which we do not find germane to the situation here; in particular to the question of the burden of proof. Wells Fargo also has been unable to direct our attention to relevant cases. It does, however, rely upon the following view of Professor Scott, which we do find pertinent: “[W]here a bank has both a trust department and a commercial department, there is inevitably built into the situation the possibility of conflicts of interest. This does not make all transactions by the trust department voidable when there is a conflict of interest, but only those in which the bank has been influenced by a desire to promote its own interests, rather than those of the beneficiaries of the trusts.” (2 Scott on Trusts (3d ed., 1985 pocket supp.) § 170.23A, p. 113, italics added.)
While there is no California case law discussing this idea in connection with the burden of proof issue presented here, we have found two federal appellate opinions, one written by Judge Learned Hand for the Second Circuit and the other by Judge John R. Brown for the Fifth Circuit, that are instructive.
In Phelan v. Middle States Oil Corporation (2d Cir.1955) 220 F.2d 593, cert. den. sub nom Cohen v. Glass, 349 U.S. 929, 75 S.Ct. 772, 99 L.Ed. 1260 bondholders objected to the final account and application for discharge of the receivers of a corporation. The receivers had reorganized the corporation. Among the bondholders' grounds for objection was the claim that one of the receivers, Glass, had a conflict of interest in pursuing the reorganization because he expected to gain a personal advantage by being hired as counsel for the reorganized company. The bondholders argued that this showing shifted the burden of proof to Glass to demonstrate that this expectation did not influence his conduct. In rejecting this contention, Judge Hand observed as a policy consideration: “ ‘The law ought not make trusteeship so hazardous that responsible individuals and corporations will shy away from it. As we said in York v. Guaranty Trust Co., 2 Cir. , 143 F.2d 503, 514: “Of course, the courts should not impose impractical obligations on a trustee. Merely vague or remote possible selfish advantages to a trustee are not sufficient to prove such an adverse interest as to bring his conduct into question.” ’ ” (Id., at p. 604, quoting the opinion of Hand, J., in Dabney v. Chase Nat. Bank of City of New York (2d Cir.1952) 196 F.2d 668, 675.) 14
With this idea in mind, the Phelan court stated: “It is true we cannot know that the chance of employment could not have had any influence upon [the receiver's] conduct; and it is of course true that, if the ‘Bondholders' had shown that in fact it did have any, he would not only have to disgorge any profits he had got, but to prove that what he did was an impeccable discharge of his full duty, or to make good any loss that it caused. But we are not dealing with such an occasion; we have to determine the scope of the implementary rule that dispenses with the need of proving that his personal interest had any part in determining the fiduciary's conduct; ․ We have found no decisions that have applied this rule inflexibly to every occasion in which the fiduciary has been shown to have had a personal interest that might in fact have conflicted with his loyalty.” (220 F.2d 593, 603.) The court held that the prospect of Glass being retained by the reorganized company was not a “personal interest ․ of such a substantial nature” as was sufficiently likely to cause him to fail in his fiduciary duty that the burden of proof should be thrown upon him. (Id., at p. 604.)
In Fulton National Bank v. Tate (5th Cir.1966) 363 F.2d 562, the beneficiaries of an estate demonstrated that the executor was negotiating with a third party for sale of his own real property at the same time he was negotiating for lease of estate property to that party. The third party refused to consummate the deal as to the executor's property unless agreement could simultaneously be reached as to the lease of estate property. Agreement was reached and both deals closed on the same day. The court held that this showing demonstrated such a substantial conflict of interest as, under Georgia law, to shift to the executor the burden of proving that lease of the trust property was in all respects fair or that he received no personal profit from the transaction.15 (Id., at p. 564.)
In reaching this conclusion Judge Brown reviewed the “two opposing policy considerations in this area which must be weighed in the individualistic scales of each concrete situation.” (Id., at p. 570.) On the one hand is the caveat expressed by Judge Hand in Phelan and Dabney regarding the danger of making trusteeship too hazardous. On the other is “the first commandment of fiduciary relations: thou shalt exalt thy beneficiary above all others. As expounded in the oft-quoted words of Judge Cardozo: ‘Many forms of conduct permissible in a workaday world for those acting at arm's length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior. As to this there has developed a tradition that is unbending and inveterate. Uncompromising rigidity has been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty by the “disintegrating erosion” of particular exceptions. * * * Only thus has the level of conduct for fiduciaries been kept at a level higher than that trodden by the crowd.’ Meinhard v. Salmon, 1928, 249 N.Y. 458, 164 N.E. 545, 546, 62 A.L.R. 1.” (Fulton National Bank v. Tate, supra, 363 F.2d 562, 570.)
The Fulton National Bank court observed that the general principles requiring a trustee to disgorge any profits made in a transaction involving a third party “are only brought into play if there is some connection between the transaction in which the fiduciary personally engaged and the administration of his trust․” (Id., at p. 573.) It noted that there, however, the representatives of the executor admitted, “as they must, ‘a nexus between the contracts arising out of the fact that the fiduciary's assent to the contract negotiated in his representative capacity constituted a condition precedent to the contract being negotiated with the fiduciary in his individual capacity․’ ” (Id., at p. 573–574, citations and footnotes omitted.) The court concluded that the danger that the executor received significant concessions on the sale of his own property as a consequence of his agreement to renew the estate lease was sufficiently substantial to justify shifting the burden of proof to the executor. (Id., at pp. 577–578.)
We agree with the observation in Fulton National Bank that policy considerations must be weighed in the circumstances of individual cases (363 F.2d 562, 570), and with the proposition, expounded in Phelan, that the case law does not indicate an inflexible rule with respect to the burden of proof in circumstances in which the fiduciary has been shown to have had a personal interest that might have conflicted with his loyalty. (220 F.2d 593, 603.)
In the present case, which is more like Phelan than Fulton National Bank, no connection was shown between the fiduciary's relationship with a third party and its administration of the trusts. There is no evidence that anyone at Wells Fargo or at Macmillan was actually aware of any discrepancies in rent collection, let alone any indication Wells Fargo purposefully “went easy” on the lease to curry favor with Macmillan. There is no indication that establishment of a depreciation reserve was in any way a condition precedent to Macmillan doing business with Wells Fargo. We hold that where, as here, there is no sufficient prima facie showing that the trustee was influenced by a desire to promote its own interests, rather than those of the beneficiaries of the trusts it administers, the burden of proof as to a claim of conflict of interest does not shift to the trustee. Accordingly, the trial court did not err in ruling that the beneficiaries had failed to prove their case for lack of a showing that Wells Fargo had been influenced to disregard its fiduciary duties by its desire to promote its own interest in maintaining and attracting banking business from Macmillan.
D. Right to Trial by Jury
The beneficiaries contend that they were entitled to a trial by jury and that their jury demand was therefore improperly stricken on the second day of trial.
“The right to a jury trial is guaranteed by our Constitution. (Cal. Const., art. I, § 16.) We have long acknowledged that the right so guaranteed, however, is the right as it existed at common law in 1850, when the Constitution was first adopted․ As a general proposition, ‘[T]he jury trial is a matter of right in a civil action at law, but not in equity.’ [Citations.]” (C & K Engineering Contractors v. Amber Steel Co. (1978) 23 Cal.3d 1, 8, 151 Cal.Rptr. 323, 587 P.2d 1136.) 16 “If the action has to deal with ordinary common-law rights cognizable in courts of law, it is to that extent an action at law. In determining whether the action was one triable by a jury at common law, the court is not bound by the form of the action but rather by the nature of the rights involved and the facts of the particular case—the gist of the action. A jury trial must be granted where the gist of the action is legal, where the action is in reality cognizable at law.” (People v. One 1941 Chevrolet Coupe (1951) 37 Cal.2d 283, 299, 231 P.2d 832, fn. omitted.) “On the other hand, if the action is essentially one in equity and the relief sought ‘depends upon the application of equitable doctrines,’ the parties are not entitled to a jury trial. [Citations.]” (C & K Engineering Contractors v. Amber Steel Co., supra, 23 Cal.3d 1, 9, 151 Cal.Rptr. 323, 587 P.2d 1136.) Although the legal or equitable nature of a cause of action is ordinarily determined by the mode of relief to be afforded, the prayer for relief in a particular case is not conclusive. (Ibid.)
The beneficiaries contend that their action was “legal” in nature because they sought only money damages against Wells Fargo, and not any form of equitable relief.17 The leading treatises, however, do not agree. Section 197 of the Restatement Second of Trusts provides: “Except as stated in § 198, the remedies of the beneficiary against the trustee are exclusively equitable.” Section 198 provides that if the trustee is under a duty to pay money immediately and unconditionally to the beneficiary or if the trustee of a chattel is under a duty to transfer it immediately to the beneficiary, the beneficiary can maintain an action at law against the trustee. (Rest.2d Trusts, §§ 197–198, pp. 433–437.)
Professor Scott takes a similar view: “Just as the early English courts of law refused to protect the interest of the cestui que use by permitting him to maintain an action for tort against the feoffee to uses who violated his duties to the cestui que use, so the modern courts have not permitted the beneficiary of a trust to maintain an action at law for tort against the trustee for breach of trust.” (3 Scott on Trusts, supra, § 197.1, p. 1627.) Like the Restatement Second, Professor Scott recognizes two exceptions for cases where “the liability of the trustee is definite and clear and no accounting is necessary to establish it. The first situation includes cases where the trustee is under an immediate and unconditional duty to pay money to the beneficiary. The second situation includes cases in which the trustee is under a duty immediately and unconditionally to transfer a chattel to the beneficiary. In other situations it is held by the weight of authority that the remedies of the beneficiary are exclusively equitable.” (Id., § 198, p. 1631.) Equitable remedies available to a beneficiary of a trust include “redress [for] breach of trust, either by making specific reparation or by the payment of money or otherwise.” (Id., §§ 199, 199.3, pp. 1638–1639.)
Witkin concurs with these authorities. “Most actions involving trusts are equitable. [Citation.]” (5 Witkin, Cal.Procedure (3d ed. 1985) Pleading, § 784, p. 228– 229.) “Actions to establish or to enforce trusts are traditionally equitable. [Citations.]” (3 Witkin, Cal.Procedure (3d ed. 1985) Actions, § 86, p. 113–114; see also Annot., Remedy at Law Available to Beneficiary of Trust as Exclusive of Remedy in Equity (1947) 171 A.L.R. 429, 430 [courts of equity generally have jurisdiction of suits “for relief or damages for a violation of the trust”].)
The beneficiaries rely upon Mortimer v. Loynes (1946) 74 Cal.App.2d 160, 168 P.2d 481 and Ripling v. Superior Court (1952) 112 Cal.App.2d 399, 247 P.2d 117. In Mortimer a fiduciary sold an apartment house and withheld part of the proceeds from the owner, who sued to recover the money. In Ripling, the complaint stated “a common count for money had and received,” alleging that the defendant had wrongfully withheld a specific sum of money given her for the benefit of the plaintiff's ward. Although it was held that the plaintiffs were entitled to a jury trial in each case, these cases obviously fall within the first exception noted by the Restatement Second of Trusts and Professor Scott. The Ripling court recognized this exception: “ ‘[I]f the trustee is under a duty to pay money immediately and unconditionally to the beneficiary, the beneficiary can maintain an action at law against the trustee to enforce payment.’ [Citations.]” (Ripling v. Superior Court, supra, 112 Cal.App.2d at p. 404, 247 P.2d 117.) These cases do not support the view advanced by the beneficiaries.
The parties have not directed us to, and we are not aware of, any California decisions directly addressing the question whether there is a right to jury trial in an action seeking solely money damages for breach of trust. Several California courts, however, have held that there is no right to jury trial in actions to establish and enforce trusts. [See, e.g., Hillman v. Stults (1968) 263 Cal.App.2d 848, 876–877, 70 Cal.Rptr. 295; Tibbitts v. Fife (1958) 162 Cal.App.2d 568, 328 P.2d 212; Lane v. Whitaker (1942) 50 Cal.App.2d 327, 331, 123 P.2d 53; Woolsey v. Woolsey (1932) 121 Cal.App. 576, 581, 9 P.2d 605; Reay v. Reay (1929) 97 Cal.App. 264, 268–270, 275 P. 533.)
Some of the principles discussed in Tibbitts v. Fife and Lane v. Whitaker are supportive of Wells Fargo's position that no right to jury trial exists in this case. The Tibbitts court recognized the two exceptions noted by the Restatement Second and Professor Scott as the only exceptions to equity jurisdiction in the matter of trusts: “The common law rule is reflected in the Restatement, Trusts, sections 197– 198, to the effect that the remedies of a beneficiary against the trustee are exclusively equitable, except that the beneficiary may maintain an action at law to enforce the trustee's immediate and unconditional duty to (a) pay money or (b) deliver a chattel.” (Tibbitts v. Fife, supra, 162 Cal.App.2d 568, 573, 328 P.2d 212.) The beneficiaries here did not sue for a specific and known sum of money nor seek delivery of a chattel. The Lane court observed that “the enforcement of a trust in equity has in contemplation, among other things, the terms, conduct and management of the trust․” (Lane v. Whitaker, supra, 50 Cal.App.2d 327, 332, 123 P.2d 53, italics added.) The beneficiaries' claims here related specifically to the conduct and management, i.e., the administration, of the trust.
Some federal courts have expressly considered whether a right to jury trial exists in an action to recover money damages for breach of trust.18 In Dixon v. Northwestern National Bank of Minneapolis (D.Minn.1969) 297 F.Supp. 485, the court denied a motion to quash a jury demand in an action seeking money damages against a trustee of a profit sharing trust alleged to have improperly used trust funds to buy and invest in worthless stock. The court stated: “It is of course true that generally the remedies of the beneficiary against the trustee are exclusively equitable.” (297 F.Supp. at p. 488.) However, noting the exception recognized by the Restatement Second that an action at law may be maintained when a trustee is under a duty to pay money immediately and unconditionally to the beneficiary, the court held that the case there fell within this exception. (Ibid.) Citing Dixon, the Seventh Circuit reached a similar conclusion in Jefferson Nat. Bank v. Central Nat. Bank in Chicago (7th Cir.1983) 700 F.2d 1143, an action for breach of fiduciary duty brought by beneficiaries of an inter vivos trust, alleging that the trustee had failed to act prudently and conscientiously. The Jefferson court cited the exception set forth in the Restatement Second which Dixon had relied upon and determined that the case before it fell within the exception as a determinable sum of money was sought. (700 F.2d at pp. 1149–1150.)
After the decisions in Dixon and Jefferson, the issue was considered in Nobile v. Pension Committee of Pension Plan (S.D.N.Y.1985) 611 F.Supp. 725, an action alleging, inter alia, claims for common law breach of fiduciary duty and breach of trust arising out of the alleged failure of the benefits manager of a pension plan to adequately disclose information concerning the plan, resulting in the plan participant failing to elect a ten-year guaranteed annuity and resulting in damages of a specifically ascertainable amount. The Nobile court declined to follow the conclusions reached in Dixon and Jefferson. It did not dispute that the exception relied upon in the Restatement Second was a correct statement of law but felt that Dixon and Jefferson misapplied the exception: “Those cases proceed on the assumption that a jury should be afforded where the sole remedy sought by the plaintiff is the payment of money, regardless of whether or not equitable considerations give rise to the defendant's duty to make such payment․ We believe that those cases misread the cited Restatement section, and that their conclusion is unsound․ The instant case ․ presents the traditionally equitable question of whether or not the alleged ‘common law trustee’ breached its fiduciary duty. Unless and until that equitable question is resolved in plaintiff's favor, the alleged trustee is under no duty to make any payment whatsoever. We therefore find that plaintiff[s'] common law claims are not such as would entitle them to bring an action at law which would be triable before a jury.” (Nobile v. Pension Committee of Pension Plan, supra, 611 F.Supp. at pp. 728–729, fns. omitted.)
Noting that many jurisdictions try “all or almost all actions for breach of trust to the court,” one commentator has observed that “a dogged adherence to [statutory language providing for jury trials in actions for recovery of money] has often resulted in trying by jury cases whose complexity, together with the traditional close supervision of trustees by the court, makes them extremely inappropriate for jury determination․ Some courts have denied jury trial in all but the most elementary situations, while others seem to have eliminated the ‘legal’ jurisdiction entirely. This last seems to be the most successful approach, as it provides both an unequivocal rule and a convenient mode of trial.” (Note, The Right to Jury Trial Under Merged Procedures (1952) 65 Harv.L.Rev. 453, 460–461, fns. omitted.)
We agree that the traditional close supervision of trustees by the courts and the subject matter of actions claiming breach of trust make such cases particularly appropriate for trial to the court. Like the Nobile court, we deem the question whether a trustee has breached its fiduciary duty a traditionally equitable one and conclude that the trial court did not err in striking the jury demand.
G. Attorney-Client Privilege
During the course of discovery, the trial court refused to compel disclosure of documents Wells Fargo claimed were subject to the attorney-client privilege. (Evid. Code, § 954.) The document request had sought all documents reflecting communications between Wells Fargo and the law firm of Heller, Ehrman, White & McAuliffe specifically relating to the administration of the Gump trusts from 1969 to 1980. That firm represented Wells Fargo throughout most of its administration of the trusts. Wells Fargo's objections to the document request were based upon claims of attorney-client privilege, work product, overbreadth, irrelevance and burden. The court ordered Wells Fargo to provide a list of all documents as to which it claimed attorney-client privilege, identifying the sending and receiving parties on each communication and stating the date and subject matter of each communication. After conducting a hearing and examining the list provided by Wells Fargo, the court denied the beneficiaries' motion to compel production on the grounds that the documents were protected by the attorney-client privilege. The beneficiaries contend this ruling was erroneous.
There are no California cases addressing the issue whether, or under what circumstances, trust beneficiaries are entitled to discover communications between the trustee and counsel for the trustee. Indeed, the lack of authority on this issue throughout the country has been judicially noted: “Incredibly, counsel agree that American case law is practically nonexistent on the duty of a trustee in this context.” (Riggs Nat. Bank of Washington, D.C. v. Zimmer (Del.Ch.1976) 355 A.2d 709, 712.) The Riggs court held that the attorney-client privilege did not protect from disclosure to the beneficiaries a memorandum prepared by counsel for the trustee to aid him in his duties as administrator of the trust rather than for the purpose of his own defense in connection with litigation or threatened litigation against him.
The Riggs court relied upon Scott on Trusts, Bogert on Trusts and the Restatement Second of Trusts, which indicate that the trustee's duty of disclosure requires that upon request the trustee furnish to beneficiaries opinions of counsel procured to guide him in the administration of the trust unless a conflict of interest has arisen between the trustee and the beneficiaries and the trustee procures an opinion of counsel for his own protection. (2 Scott on Trusts, supra, § 173, p. 1407; Bogert on Trusts (rev. 2d ed. 1983) § 961, p. 11; Rest.2d Trusts, § 173, com. b, p. 378.) “This fiduciary duty has led the English courts to conclude that beneficiaries have the right to inspect the opinions of counsel in circumstances such as those in the case at bar. Indeed, that has been the English rule for over one hundred years. (Talbot v. Marshfield, 2 Drew & Sm. 549, 62 Eng.Rep. 728 (Ch.1865). See also Wynne v. Humberston, 27 Beav. 421, 54 Eng.Rep. 165 (1858).” (Riggs Nat. Bank of Washington, D.C. v. Zimmer, supra, 355 A.2d 709, 712.) 19
While we agree with the rationale of Riggs, we recognize that courts of this state may not create nonstatutory exceptions to statutory privileges “because the area of privilege ‘is one of the few instances where the Evidence Code precludes the courts from elaborating upon the statutory scheme.’ (Evid.Code, § 911, Cal.Law Revision Com. comment.)” (Dickerson v. Superior Court (1982) 135 Cal.App.3d 93, 99, 185 Cal.Rptr. 97.) We conclude that when an attorney counsels a trustee to aid him in his duties as administrator of a trust, the trust beneficiaries are ordinarily to be treated as clients of the attorney and the “joint clients” exception to the attorney-client privilege established by Evidence Code section 962 applies.20
“An attorney who acts as counsel for a trustee provides advice and guidance as to how that trustee may and must act to fulfill his obligations to all beneficiaries. It follows that when an attorney undertakes a relationship as adviser to a trustee, he in reality also assumes a relationship with the beneficiary akin to that between trustee and beneficiary.” (Morales v. Field, DeGoff, Huppert & MacGowan, supra, 99 Cal.App.3d 307, 316, 160 Cal.Rptr. 239.) Under these circumstances, the attorney's services are actually performed for the benefit of the beneficiaries. The Riggs court held that the legal memorandum in question there “was prepared ultimately for the benefit of the beneficiaries of the trust and not for the purpose of the trustees' own defense in any litigation against themselves․ [T]he ultimate or real clients were the beneficiaries of the trust, and the trustee, ․ in his capacity as a fiduciary, was, or at least should have been, acting only on behalf of the beneficiaries in administering the trust. At that stage, there were no proceedings requiring the trustees to seek legal advice personally.” (Riggs Nat. Bank of Washington, D.C. v. Zimmer, supra, 355 A.2d 709, 711.) Similarly here, some of the documents requested by the beneficiaries were very likely prepared for the purpose of aiding Wells Fargo in administering the Gump trusts for the benefit of the beneficiaries and not for the purpose of protecting Wells Fargo after disagreements with the beneficiaries arose.
Wells Fargo relies upon Dickerson v. Superior Court, supra, 135 Cal.App.3d 93, 185 Cal.Rptr. 97 and Lasky, Haas, Cohler & Munter v. Superior Court (1985) 172 Cal.App.3d 264, 218 Cal.Rptr. 205. In Dickerson, the court held that minority shareholders in a corporation were not entitled to discover communications between the president and controlling shareholder and counsel to the corporation. The court stated that it could not create a nonstatutory exception to the attorney-client privilege.21 No argument was made in Dickerson that the joint clients exception of Evidence Code section 962 applied. Consequently, that case is inapposite.
It is correct, as Wells Fargo contends, that the Lasky court stated that trust beneficiaries are not clients of the trustee's attorney. (Lasky, Haas, Cohler & Munter v. Superior Court, supra, 172 Cal.App.3d 264, 282–286, 218 Cal.Rptr. 205.) Such a determination was, however, completely unnecessary to the holding in Lasky and is therefore dictum. The issue there was whether a law firm was entitled to rely upon the work product privilege as to writings and discussions not communicated to its client.22 The court held that there was an absolute privilege which could be asserted against the client pursuant to Code of Civil Procedure section 2016, subdivision (b). Thus, it did not matter whether the beneficiaries were clients of the trustee's attorney. We are not bound by the Lasky court's conclusion on the joint clients issue and do not choose to follow it.
We hold that when beneficiaries of a trust establish that communications they seek are between the trustee of that trust and attorneys who have advised the trustee and that the communications relate to the trust, those beneficiaries have made a prima facie showing that the joint clients exception of Evidence Code section 962 applies and they are entitled to discover the communications. The burden then shifts to the party asserting the attorney-client privilege to demonstrate that the exception does not apply because the communications were made primarily for the purpose of protecting the trustee's own interests in connection with a dispute or controversy between the trustee and the beneficiaries.
Upon remand, the trial court shall determine whether any of the documents sought by the beneficiaries should have been disclosed to them under the guidelines set forth in this opinion. In so doing the court may, in the exercise of its discretion, conduct an in camera inspection of the documents if that appears to be necessary in order to determine whether the joint clients exception applies. Although Evidence Code section 915, subdivision (a), generally precludes a court from requiring disclosure of information claimed to be privileged in order to rule on the claim of privilege,23 “where an exception to a privilege depends upon the content of a communication, the court may require disclosure in camera in making its ruling.” (Mavroudis v. Superior Court (1980) 102 Cal.App.3d 594, 606, 162 Cal.Rptr. 724, fn. omitted, citing In re Lifschutz (1970) 2 Cal.3d 415, 437, fn. 23, 85 Cal.Rptr. 829, 467 P.2d 557.) 24 This is so because the question in such a situation is not whether a communication comes within a privilege, but whether a statutory exception applies. Referring to Mavroudis, a leading commentator has observed that Evidence Code section 915, subdivision (a), “was really not applicable because the issue is one of whether an exception to an admittedly confidential communication removes the privilege from operating. [Citation.]” (2 Jefferson, Evidence Benchbook (2d ed. 1982) § 35.5, pp. 1321–1328.) Similarly here, the issue is not whether the communications between Wells Fargo and its attorneys were within the attorney-client privilege but whether the joint clients exception removes the privilege from operating.25
Some of the factors to be considered by the trial court in making this determination are whether the beneficiaries were represented by independent counsel, whether Wells Fargo had informed its counsel of any complaints from or conflicts with the beneficiaries, the source of payment of the attorneys for their services and the over-all posture of the parties at any given time. Any doubt as to whether a document should be disclosed shall be resolved in favor of the beneficiaries, to whom Wells Fargo owes a fiduciary duty of disclosure.26
If the trial court determines that none of the documents as to which Wells Fargo asserted the attorney-client privilege should have been disclosed to the beneficiaries in accordance with the views expressed in this opinion, it shall enter judgment in favor of Wells Fargo as to all issues other than compensatory damages for negligence during the period of the eighth account.
If the trial court determines that any of the documents as to which Wells Fargo asserted the attorney-client privilege should have been disclosed to the beneficiaries, it shall order such disclosure and allow the beneficiaries a reasonable amount of time to pursue any additional discovery prompted by the information disclosed.27 The court shall then hold a hearing to determine whether the newly afforded discovery has led to any evidence which requires a retrial, in whole or in part, of this case according to the following guidelines.
If the court concludes that no newly discovered evidence would materially affect the substantial rights of the beneficiaries, it shall enter judgment in favor of Wells Fargo as to all issues other than compensatory damages for negligence during the period of the eighth account. Due to the conclusions we have reached in this opinion, only newly discovered evidence as to extrinsic fraud, including the claim of conflict of interest, could so materially affect the substantial rights of the beneficiaries.28
If the court concludes that there is newly discovered evidence, identified as a result of disclosure of documents as to which Wells Fargo asserted the attorney-client privilege, which will materially affect the substantial rights of the beneficiaries, a limited or full retrial shall be necessary. If the judge who presided over the original trial of this action is available, he may hold a limited retrial, admit any relevant evidence produced by the additional discovery, make findings in accordance with the evidence adduced at the original trial and the limited retrial, taking into account the views expressed in this opinion, and enter judgment accordingly.29 If that judge is not available, or if he is available but determines in his discretion that substantial justice cannot be done through a limited retrial, the case shall be retried in full.
The judgment is reversed and the cause is remanded to the trial court for further proceedings consistent with the views expressed in this opinion.30 Each party shall bear its own costs on appeal.
1. The plaintiffs in the action were Robert L. Gump, Marcella Gump Curley, Suzanne Gump Mallory, Melanie Eve Arens, Marilyn Gump Montague and Antoinette Gump Williams. Robert L. Gump and Marcella Gump Curley are now deceased. It appears from papers on file with this court that the administrator and executor, respectively, of the estates of these plaintiffs have consented to the interests of the estates being represented in this proceeding by counsel for the remaining plaintiffs. In this opinion, the plaintiffs are sometimes referred to collectively as “the beneficiaries.” For convenience, they are also sometimes referred to individually by their first names.
2. The six income benficiaries survived the entire period of Wells Fargo's trusteeship, December 11, 1969, through July 17, 1979.
3. The retail store had been founded by Abraham's uncle and father, from whom he inherited the business.
4. The trial court took judicial notice of the first through seventh accounts of administration of the Gump trusts filed by Wells Fargo in the probate proceeding, Action No. 108109 in the San Francisco Superior Court, and of the decrees settling and approving each of these accounts. (See Evid.Code, § 452, subd. (d).) We also take judicial notice of these accounts and decrees, pursuant to Evidence Code section 459, subdivision (a)(1).
5. The depreciation reserve was later terminated by an order filed October 5, 1981, apparently on the theory that it was unnecessary.
6. The complaint was originally brought by all beneficiaries except Antoinette. Antoinette joined as a plaintiff by an amendment to the complaint filed July 11, 1979, the sole function of which was to add her as a party plaintiff.
7. Wells Fargo's moving papers indicated that it had twice moved to vacate the setting of the action for jury trial and to have it reset for a court trial, but the law and motion judge denied these motions without prejudice, deferring the issue of whether there was a right to jury trial to the trial judge.
8. Various recesses, including a break of over one month, were taken during the course of trial.
FOOTNOTE. See footnote *, ante.
10. There is no separate and distinct “probate court.” References to the “probate court” in opinions of the reviewing courts of this state are actually to “the superior court sitting in the exercise of its probate jurisdiction.” (Schlyen v. Schlyen (1954) 43 Cal.2d 361, 375, 273 P.2d 897.)
11. The beneficiaries have cited two cases indicating that, under some circumstances, relief can be granted from a probate decree in the absence of evidence of intent to deceive. In Bacon v. Bacon (1907) 150 Cal. 477, 89 P. 317, relief was granted from a decree of final distribution where a holographic will had initially been read as providing for certain legacies of “two” thousand dollars when the will actually stated “ten” thousand dollars. The error was continued by a typist for the attorney for the executors. The granting of relief was upheld on the basis of mistake, not fraud. (Id., at p. 493, 89 P. 317.) Consequently, this case is inapposite.In Morales v. Field, DeGoff, Huppert & MacGowan (1979) 99 Cal.App.3d 307, 160 Cal.Rptr. 239, the Court of Appeal held that the trial court had erred in sustaining a demurrer where the remainderman of a testamentary trust alleged that the defendant attorneys for the executor and trustee failed to disclose to her and the probate court, in the course of a transaction making her mother's estate a guarantor of a loan to a corporation, that they represented not only the executor but also the corporation and its three shareholders, who included appellant's father, the life beneficiary of the trust. The court held that the attorneys had an affirmative duty to disclose the dual representation. It also observed that “[t]he issue of reliance is part of the broader question of causation, and whether respondents' failure to make the required disclosure caused damage to appellant is, of course, a question of fact which cannot be resolved in this appeal. [Citation.]” (Id., at p. 317, 160 Cal.Rptr. 239.) We deem the holding in Morales limited to the situation there presented, i.e., the sustaining of a demurrer in the face of allegations that attorneys failed to disclose dual (or even triple) representation. We do not find it supportive of the theory that failure to disclose maladministration of a lease, without proof of an intent to deceive, can support a finding of extrinsic fraud. Furthermore, in Morales the attorneys had sent the appellant two letters stating that no action on her part was required in any further probate proceedings, that they would keep her advised if anything unusual were to arise and that she should feel assured that her interests would be protected. Here, by contrast, there is no indication that Wells Fargo engaged in any conduct calculated to deprive the beneficiaries of their day in court.
12. Such an exception, if warranted by the facts, would apply to the probate decrees rendered prior to the time the beneficiaries acquired actual knowledge of the facts claimed to comprise the conflict of interest. The parties stipulated at trial that neither the beneficiaries nor their counsel had knowledge of the existence of a commercial banking relationship between Wells Fargo and Macmillan until the beneficiaries' counsel took the deposition of Per Nevard, the retired controller of Gump's, on October 26, 1978, during the eighth account litigation. After the beneficiaries acquired this information, the asserted conflict of interest would constitute intrinsic, not extrinsic, fraud.
13. Following the close of evidence in the trial, the court, on the motion of Wells Fargo, struck all testimony pertaining to the Tahiti property sale transaction. The propriety of this ruling is a further subject of the beneficiaries' cross-appeal and is dealt with in an unpublished portion of this opinion.
14. In Phelan, the jurisdiction of the federal court was based upon diversity of citizenship and it appears that the substantive rights of the parties were governed by New York law. (220 F.2d 593, 616.) The discussion of the burden of proof issue did not make reference to the applicability of any particular state law. The court cited the Restatement of Trusts and Scott on Trusts, as well as cases from Massachusetts, Pennsylvania and the Second Circuit. (Id., at pp. 603–604.)
15. Fulton National Bank, like Phelan, was a diversity case. The court stated that it was Erie -directed to Georgia law. Like the Phelan court, the court reviewed general principles of trust law set forth in such treatises as the Restatement Second of Trusts; Bogert on Trusts; and Scott on Trusts. It concluded that Georgia follows these general principles. (363 F.2d 562, 570–572.) In addition to reviewing Georgia cases, the court cited Phelan and Dabney from the Second Circuit and a New York state case.
FOOTNOTE. See footnote *, ante.
16. Code of Civil Procedure section 592 also guarantees a right to trial by jury of issues of fact “[i]n actions for the recovery of specific, real, or personal property, with or without damages, or for money claimed as due upon contract, or as damages for breach of contract, or for injuries․” This section applies only to legal actions and not to equitable proceedings. (Maldonado v. Superior Court (1984) 162 Cal.App.3d 1259, 1267, 209 Cal.Rptr. 199.)
17. Although the beneficiaries assert that they sought no equitable relief, they attempted at the trial of this action to escape the res judicata effect of prior decrees on the basis of extrinsic fraud. As we pointed out in part VII. B of this opinion, supra, such relief can only be granted by a court in the exercise of its equitable jurisdiction.
18. These cases involve the right to jury trial under the Seventh Amendment, pursuant to which a claim entitles a litigant to a jury trial only if it “involves rights and remedies of the sort traditionally enforced in an action at law, rather than in an action in equity or admiralty.” (Pernell v. Southall Realty (1974) 416 U.S. 363, 375, 94 S.Ct. 1723, 1729, 40 L.Ed.2d 198.) Since determination of the right to jury trial under California law also depends upon an analysis of whether a claim was traditionally tried at law or in equity at common law, the federal decisions are germane.
FOOTNOTE. See footnote *, ante.
19. The Riggs court noted that one federal decision, In re Prudence-Bonds Corporation (E.D.N.Y.1948) 76 F.Supp. 643, had reached a different result in somewhat analogous circumstances. There the court refused to compel disclosure of opinions of counsel for a trustee of mortgage bonds to the debtor corporation and bondholders. Riggs distinguished Prudence-Bonds as involving the interests of multiple entities in an indenture trust agreement and not involving a typical trust. We agree with this distinction and additionally question the conclusion reached in Prudence-Bonds.
20. Evidence Code section 962 provides: “Where two or more clients have retained or consulted a lawyer upon a matter of common interest, none of them, nor the successor in interest of any of them, may claim a privilege under this article as to a communication made in the course of that relationship when such communication is offered in a civil proceeding between one of such clients (or his successor in interest) and another of such clients (or his successor in interest).”
21. The Dickerson court noted that the Fifth Circuit held in Garner v. Wolfinbarger (5th Cir. 1970) 430 F.2d 1093, cert. den. (1971) 401 U.S. 974, 91 S.Ct. 1191, 28 L.Ed.2d 323 that stockholders in a corporation should be given an opportunity to show cause why the attorney-client privilege should not protect from disclosure communications between the corporation and its attorneys. Pursuant to rule 501 of the Federal Rules of Evidence, federal courts may develop common law rules of privilege on a case-by-case basis. (Trammel v. United States (1980) 445 U.S. 40, 47, 100 S.Ct. 906, 910, 63 L.Ed.2d 186.)
22. The attorneys in Lasky had already produced and disclosed to the trust beneficiaries all their actual written and oral communications to the trustee. (Lasky, Haas, Cohler & Munter v. Superior Court, supra, 172 Cal.App.3d 264, 269, 218 Cal.Rptr. 205.)
23. With exceptions not here relevant, Evidence Code section 915, subdivision (a), provides that a court “may not require disclosure of information claimed to be privileged under this division  in order to rule on the claim of privilege․” Division 8 of the Evidence Code includes the following privileges which are subject to section 915, subdivision (a): attorney-client (§ 954), marital privileges (§§ 970, 971, 980), physician-patient (§ 994), psychotherapist-patient (§§ 1014, 1014.5), clergyman-penitent (§§ 1033, 1034), sexual assault counselor-victim (§ 1035.8), domestic violence counselor-victim (§ 1037.5), and secrecy of vote (§ 1050). A court has no jurisdiction to require in camera disclosure of documents as to which such privileges are claimed in order to determine whether the privilege exists. (Carlton v. Superior Court (1968) 261 Cal.App.2d 282, 293, 67 Cal.Rptr. 568, 68 Cal.Rptr. 469; see also Romo v. Southern Pac. Transportation Co. (1977) 71 Cal.App.3d 909, 922, 139 Cal.Rptr. 787; Cal.Law Revision Com. com., 29B West's Ann.Evid.Code (1966 ed.) § 915, p. 501 [“Subdivision (a) states the general rule that revelation of the information asserted to be privileged may not be compelled in order to determine whether or not it is privileged. This codifies existing law. (Citations.)”].)
24. Mavroudis involved records falling within the psychotherapist-patient privilege. The issue was whether an exception set forth in Evidence Code section 1024 (concerning disclosure necessary to prevent threatened danger) applied. The Evidence Code provides numerous exceptions to the privileges set forth in Division 8 of that Code other than the clergyman-penitent privilege, as to which the Code provides no exceptions.
25. We leave to the discretion of the trial court the precise method to be used in conducting any in camera inspection of documents or in camera hearing. The Supreme Court has observed in the context of a claim of the patient litigant exception to the psychotherapist-patient privilege: “[A] patient may have to reveal some information about a communication to enable the trial judge to pass on his claim of irrelevancy [to the litigation]. Upon such revelation, the trial judge should take necessary precautions to protect the confidentiality of these communications; for example, he might routinely permit such disclosure to be made ex parte in his chambers. (Compare the procedure suggested in Evid.Code, § 915, subd. (b).) (See also Developments in the Law—Discovery (1964) 74 Harv.L.Rev. 940, 1017–1018.)” (In re Lifschutz, supra, 2 Cal.3d 415, 437, fn. 23, 85 Cal.Rptr. 829, 467 P.2d 557; see also Mavroudis v. Superior Court, supra, 102 Cal.App.3d 594, 606, fn. 4, 162 Cal.Rptr. 724.) Evidence Code section 915, subdivision (b), provides for an in camera determination of certain claims of privilege for official information, identity of informers and trade secrets. If the court is unable to make a ruling without disclosure of the information, it may require disclosure of the information “in chambers out of the presence and hearing of all persons except the person authorized to claim the privilege and such other persons as the person authorized to claim the privilege is willing to have present. If the judge determines that the information is privileged, neither he nor any other person may ever disclose, without the consent of a person authorized to permit disclosure, what was disclosed in the course of the proceedings in chambers.”
26. In addition to objecting to the document request upon the basis of attorney-client privilege, Wells Fargo objected on the basis of attorney work product, overbreadth, irrelevance and burden. If the trial court determines that the joint clients exception to the attorney-client privilege applies to any of the documents, it need not consider these additional objections because the beneficiaries, as clients of their trustee's attorney, will have an absolute right to disclosure of these documents by their fiduciary trustee. The court may, however, upon appropriate request, make a protective order in its discretion regarding the manner in which the beneficiaries shall be given access to the documents. (See Code Civ.Proc., § 2019, subd. (b)(1).)
27. We emphasize that any further discovery must result from information obtained through such document disclosure. The beneficiaries shall not be permitted to otherwise reopen discovery.
28. This is so because we have determined that in the absence of extrinsic fraud, all of the beneficiaries' claims except for the negligence damages for the period of the eighth account are barred by res judicata.
29. We note that a similar procedure was used in a federal case in which the Court of Appeals determined on appeal following a trial that discovery of certain documents had been wrongfully denied: “Since the case was tried to the court we do not believe there is need for a complete new trial on remand. Rather, the court should reopen the case to permit the additional discovery of personnel files․ At an evidentiary hearing it should allow [additional questioning] and admit any relevant evidence produced by the additional discovery. The court should make such additional or substitute findings as are necessary or appropriate.” (Weahkee v. Norton (10th Cir.1980) 621 F.2d 1080, 1083–1084.)
30. If the court below conducts a limited retrial, that retrial will not include the issue of liability for negligence during the eighth account. We note, however, that the amount of compensatory damages due for that period is unclear from the present record and should be clarified upon any retrial or upon entry of judgment pursuant to a determination that a retrial is not necessary. On page 8 of the trial court's amended statement of decision it is stated that the amount is $3,355.17. Page 11, however, lists that amount due from April 1, 1977, which would represent rent for the period of the seventh account (1976). Page 11 also lists rent due from April 1, 1978, as $3,608.08, which should be rent due for the period of the eighth account (1977).
KLINE, Presiding Justice.
SMITH and BENSON, JJ., concur.