RICHARD GUEST v. GLORIA GUEST FRAZIER (2011)

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

The court further found that “[appellant] did not testify that she relied in good faith on the terms of the Trust to withhold the distribution of Trust assets to [respondent.]   To the contrary, [appellant] testified that when she received Ms. Capritto's letter of May 15, 2008, requesting distribution of [respondent's] asset[s] held in trust she decided to do nothing because she thought litigation was imminent.”   The court added:  “[Appellant] did testify that she called Ms. Capritto and even after stating that she would turn over all of the Trust assets she continued to resist and fight the petition for her removal at the October 30, 2008 hearing.   The Court found that [appellant's] conduct was in retaliation for [respondent] retaining an attorney and demanding that the Trust assets be distributed to him.”

On appellant's claim that she was entitled to an offset for trust funds that were distributed to respondent, the court found:  “[Appellant] did not pay all of the income from the Trust to [respondent] during the years 2006, 2007 and 2008.   In 2006 [appellant] reported income from the Trust on her personal income tax return in the amount of $19,855.   If [appellant] did not receive any income distributions from the Trust during 2006, then why would she report taxable dividend and interest income from the Trust on her 2006 income tax return?”   With regard to 2007 and 2008, “[t]he claim by [appellant] that she distributed all of the Trust income to [respondent] does not correlate with the actual information shown on the income tax returns or the information shown on the TD Ameritrade statements and is thus not credible.”

DISCUSSION

I.Breach of Fiduciary Duty-The Prudent Investor Rule (§ 16046 et seq.)

The court's ruling that appellant breached her fiduciary duty is premised on the findings that she (1) violated the prudent investor rule (§ 16045 et seq.) by failing to diversify the investment of respondent's share of the trust assets;  and (2) failed to distribute respondent's entire share of the trust to him as provided in the trust.   Appellant contends the court's ruling is erroneous because her powers to invest and distribute the trust proceeds were not governed by the prudent investor rule.   She further contends that she in any event did not violate the prudent investor rule by investing respondent's entire share of the trust assets in the DWS fund.   Neither contention has merit.

Trust decisions made after January 1, 1996, are generally governed by the Uniform Prudent Investor Act (Act) (§ 16045 et seq.).   The Act is a codification of the prudent investor rule, as described in the Restatement Third of Trusts.   Under the Act, trustees have the duty to “invest and manage trust assets as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust.   In satisfying this standard, the trustee shall exercise reasonable care, skill, and caution.” (§ 16047, subd. (a).)  “In making and implementing investment decisions, the trustee has a duty to diversify the investments of the trust unless, under the circumstances, it is prudent not to do so.” (§ 16048.)

On appeal, we evaluate the court's finding that appellant breached the prudent investor rule under the highly deferential substantial evidence standard of review.  (Estate of Gilliland (1977) 73 Cal.App.3d 515, 527;  2 Cal. Trust and Probate Litigation (Cont.Ed.Bar 2009) Appeals, § 23.34 [appellate court defers to trial court's factual determinations where supported by any substantial evidence, contradicted or not].)   Under this standard, we must affirm the court's finding “even [if] we ourselves might have formed a different opinion on the degree of prudence exercised.”  (Gilliland, at p. 527.)   We “ ‘consider all of the evidence in the light most favorable to the prevailing party, giving it the benefit of every reasonable inference, and resolving conflicts in support of the [findings].  [Citations.]’  [Citation.]  We may not reweigh the evidence and are bound by the trial court's credibility determinations.  [Citations.]  Moreover, findings of fact are liberally construed to support the judgment.  [Citation.]”  (In re Estate of Young (2008) 160 Cal.App.4th 62, 76.)

In challenging the court's finding that she violated the prudent investor rule, appellant claims that she was not subject to the rule.   As appellant notes, subdivision (b) of section 16046 provides that “[t]he settlor may expand ․ the prudent investor rule by express provisions in the trust instrument.”   According to appellant, the settlors did so by including a provision stating that “the Trustees are authorized, in their discretion” to utilize any of the wide variety of traditional investment vehicles, including bonds, that the Trustees “in their discretion may select,” and that “the Trustees have full power to invest and reinvest the trust funds without being restricted to forms of investment that the Trustees may otherwise be permitted to make by law.” ⁶  Appellant asserts as she did below that this provision gave her “unbridled discretionary power to invest and distribute the Trust assets as she saw fit[.]”

The court found otherwise, and we agree.   The trust language at issue here bears no resemblance to the express, unequivocal statements by which a settlor's intention to grant absolute discretion has been inferred.  (Compare, e.g., Estate of Nicholas (1986) 177 Cal.App.3d 1071, 1085, and cases cited therein [absolute discretion conferred by use of terms “absolute discretion,” “absolute control,” “absolute power,” “sole discretion,” or “sole judgment”].)  [W]here trust instruments have specified it is ‘the duty and power’ of a trustee to make a decision [citation] or where the trustees are empowered to act ‘in their discretion’ [citation], the powers have been ruled merely discretionary and not absolute.  (Nicholas, at p. 1085.)   The language here, providing that the trustees are authorized “in their discretion” to select the type of investment and have “full power” to invest the trust funds without restriction as to the form of investments, merely paraphrases the Act's recognition that “[a] trustee may invest in any kind of property or type of investment or engage in any course of action or investment strategy consistent with the standards of [the Act].” (§ 16047, subd. (e).)

Because the trust instrument does not reveal any intent to convey absolute discretion to the trustee, appellant's management and investment decisions as trustee were governed by the prudent investor rule.   Substantial evidence supports the court's finding that appellant violated the prudent investor rule by investing respondent's entire share of the trust proceeds in the DWS fund.   In arguing to the contrary, appellant contends that the court's finding is fatally undermined by the trust provision stating that she had the authority “to invest and reinvest all or any portion of the trust property constituting separate shares in a single commingled fund.”   She also asserts that “[a]lthough the DWS fund may not have been diversified across a broad spectrum of asset classes, it was internally diverse across a broad spectrum of bonds․”  Appellant also alleges that the court evaluated the propriety of her investment decision in hindsight, in violation of section 16051.   None of these arguments has merit.

Appellant's reliance on the trust provision giving her the authority to place the separate shares in a commingled fund is forfeited because it was not raised below.   In any event, the authority to commingle separate shares in a single fund did not absolve appellant of the duty to ensure that the fund was diversified.   As stated by the court, “[t]he argument that the DWS High Income A fund consisted of many different bonds fails to establish proper diversification.   Bond[s] are an asset class.  ‘Junk’ bonds are a subset of the asset class of bonds.   Placing all of the trust assets in the asset class of bonds, and particularly in the subset of ‘Junk’ bonds, is a failure to comply with the requirements of Probate Code section 16048.   Compliance with the Prudent Investor Rule is determined in light of the facts and circumstances existing at the time of [appellant's] decision or action and not by hindsight.  (Probate Code section 16051.)”

This also disposes of appellant's claim that the court's decision was based on hindsight.   The court's comments make it clear that its conclusion was based on the fact that the investment was imprudent at the outset, regardless of the ultimate outcome.⁷

Even if appellant could establish that she had absolute discretion, the court's finding that she breached her fiduciary duty by refusing to distribute the assets would stand.   The Probate Code provides (subject to additional requirements not relevant here) that even “if a trust instrument confers ‘absolute,’ ‘sole,’ or ‘uncontrolled’ discretion on a trustee, the trustee shall act in accordance with fiduciary principles and shall not act in bad faith or in disregard of the purposes of the trust.” (§ 16081, subd. (a).)  In rejecting appellant's claim that she had reasonably relied on the disability provision of the trust, the court found:  “[Appellant] did not testify that she relied in good faith on the terms of the Trust to withhold the distribution of Trust assets to [respondent.]   To the contrary, [appellant] testified that when she received Ms. Capritto's letter of May 15, 2008, requesting distribution of [respondent's] asset[s] held in trust she decided to do nothing because she thought litigation was imminent.”   The court added:  “[A]ppellant did testify that she called Ms. Capritto and even after stating that she would turn over all of the Trust assets she continued to resist and fight the petition for her removal at the October 30, 2008 hearing.   The Court found that [appellant's] conduct was in retaliation for [respondent] retaining an attorney and demanding that the Trust assets be distributed to him.”   These credibility findings, which are based in large part on the court's observation of appellant's demeanor on the stand, cannot be disturbed on appeal.  (In re Estate of Young, supra, 160 Cal.App.4th at p. 76.)

II.

Attorney Fees (§ 17211, subd. (b))

Appellant contends the court abused its discretion in awarding respondent his attorney fees pursuant to section 17211, subdivision (b).  She asserts that the court failed to find she acted without reasonable cause in contesting the action and that its finding of bad faith is not supported by substantial evidence.   Neither claim has merit.

“Section 17211, subdivision (b) authorizes an award of attorney fees and litigation expenses in favor of a beneficiary who contests the trustee's account if the trustee's opposition to the contest was ‘without reasonable cause and in bad faith.’  [Citation.]” ⁸  (Uzyel v. Kadisha (2010) 188 Cal.App.4th 866, 926, fn. omitted.)  “ ‘Reasonable cause,’ when used with reference to the prosecution of a claim, ordinarily is synonymous with ‘probable cause’ as used in the malicious prosecution context.  [Citation.]”  (Ibid.) “ ‘Probable cause’ to prosecute an action means an objectively reasonable belief that the action is legally tenable.  [Citation.]  There was no probable cause to prosecute an action only if no reasonable attorney would have believed that the action had any merit and any reasonable attorney would have agreed that the action was totally and completely without merit.   [Citations.]  The probable cause determination is objective and is based on the facts known to the malicious prosecution defendant at the time the action was initiated or prosecuted.  [Citation.]”  (Id. at pp. 926-927, fn. omitted.)

“Whether there was probable cause to prosecute an action in light of the facts then known to the malicious prosecution defendant is a legal question for the court to decide.  [Citations.]  Any controversy as to what facts were known to the malicious prosecution defendant at the time the action was initiated presents a question of fact for the trier of fact.  [Citation.]”  (Uzyel v. Kadisha, supra, 188 Cal.App.4th at p. 927.)   Whether appellant acted in bad faith in opposing the action is also a question of fact to be decided by the probate court.  (Leader v. Cords (2010) 182 Cal.App.4th 1588, 1600.)   Because section 17211 is remedial, it must be liberally construed.  (Id. at p. 1598.) ⁹

The record belies appellant's claim that the court failed to find she acted without reasonable cause in opposing respondent's attempts to remove her as trustee and obtain his full share of the trust assets.   Although the court never expressly referred to appellant acting “without reasonable cause,” its detailed ruling clearly evinces such a finding.   As respondent notes, the court twice referred to appellant's conduct as “very disturbing.”   The finding that appellant acted without reasonable cause is also inherent in the court's finding that she acted in bad faith in refusing to distribute respondent's share of the trust assets.   Moreover, that conclusion is amply supported by the court's factual finding that appellant withheld respondent's trust assets not out of concern for his well-being, but in retaliation for exercising his right to obtain relief from the courts.   Appellant's reliance on evidence that might have supported a contrary finding is to no avail.   Because substantial evidence supports the court's findings that appellant opposed the action without reasonable cause and in bad faith, respondent was entitled to his attorney fees under subdivision (b) of section 17211.

III.

Calculation of Damages

In her opening brief, appellant contends the court miscalculated respondent's damages in finding that she had overdrawn her share of the trust assets by approximately 14 percent.   Appellant's argument on this point is based on the testimony she gave at trial, most notably her claim that she was entitled to an offset for distributions she had made to respondent that totaled approximately $48,000.   She also faults the court for calculating respondent's damages “exclusively on total dollar value percentages, and not total share percentages.”

As respondent notes, appellant failed to offer any evidence that she was entitled to the $48,000 offset.   Moreover, the record establishes the correctness of the court's calculations, which are based on the value of the share percentages to which respondent was entitled.   According to the statement of decision, appellant withdrew shares equal to 20.9 percent of the trust's value on May 18, 2008, even though she was only entitled to shares equal to 6.16 percent.   The excess shares, to which respondent was entitled, were valued at $36,266.65 as of the date they were wrongfully withdrawn.

IV.

Appellant's Request for Attorney Fees

Appellant asserts that she is entitled to reimbursement of her attorney fees from the trust assets as contemplated in Kasperbauer v. Fairfield, supra, 171 Cal.App.4th 229.   In her reply brief, she acknowledges that this claim “is premised on her success in this appeal.”   Because we find in favor of respondent, the claim is moot.

V.

Respondent's Attorney Fees on Appeal

Respondent requests his costs and attorney fees on appeal in accordance with subdivision (b) of section 17211.   Although the statute is silent on the matter, “appellate courts have consistently permitted a successful party to recover attorney fees incurred on appeal when a statute expressly permits such an award in the trial court or other lower tribunal.”  (Morcos v. Board of Retirement (1990) 51 Cal.3d 924, 927.)

Appellant urges us to conclude that respondent is not entitled to his fees on the ground that she did not bring the appeal without reasonable cause or in bad faith.   Because substantial evidence supports the probate court's finding that appellant has opposed the action without reasonable cause and in bad faith, we have no authority to reach a contrary conclusion with regard to the appeal.   Accordingly, respondent is entitled to apply to the probate court for the payment of the attorney fees he reasonably incurred in defending against the appeal.  (See, e.g., Wells Fargo Bank v. Marshall (1993) 20 Cal.App.4th 447, 458 [trust beneficiary was entitled to apply to the probate court for payment of reasonable attorney fees incurred on appeal in “vindicating” her right to trust distributions].)

DISPOSITION

The judgment is affirmed.   Respondent shall recover his costs on appeal.   Respondent is also entitled to recover the reasonable attorney fees he incurred on appeal, in an amount to be determined in the probate court. (§ 17211, subd. (b).)

NOT TO BE PUBLISHED.

PERREN, J.

We concur:

YEGAN, Acting P.J.

COFFEE, J.

Kent Kellegrew, Judge

Superior Court County of Ventura

Lascher & Lascher, Aris E. Karakalos, Eric R. Reed;  Ferguson Case Orr Paterson LLP, for Appellant.

Nordman Cormany Hair & Compton LLP, Meghan B. Clark and Danielle R. Everson for Respondent.

FOOTNOTES

FN6. The provision states in pertinent part:  “In the administration of the Trust Estate and the trusts established hereunder, the Trustees shall have all the authority, powers, privileges, discretions and immunities given by law to executors and trustees, and in amplification of the foregoing, the Trustees are authorized, in their discretion:  [¶] 1. To open and maintain margin accounts for the purchase and sale of securities.   To invest and reinvest all or any part of the Trust Estate in such common or preferred stock, shares of investment trusts and investment companies, bonds, debentures, mortgages, deeds of trust, mortgage participations, notes, real estate, or other property as the Trustees, in their discretion may select[,] ․ it being the Trustors' express desire and intention that the Trustees have full power to invest and reinvest the trust funds without being restricted to forms of investment that the Trustees may otherwise be permitted to make by law.”.  FN6. The provision states in pertinent part:  “In the administration of the Trust Estate and the trusts established hereunder, the Trustees shall have all the authority, powers, privileges, discretions and immunities given by law to executors and trustees, and in amplification of the foregoing, the Trustees are authorized, in their discretion:  [¶] 1. To open and maintain margin accounts for the purchase and sale of securities.   To invest and reinvest all or any part of the Trust Estate in such common or preferred stock, shares of investment trusts and investment companies, bonds, debentures, mortgages, deeds of trust, mortgage participations, notes, real estate, or other property as the Trustees, in their discretion may select[,] ․ it being the Trustors' express desire and intention that the Trustees have full power to invest and reinvest the trust funds without being restricted to forms of investment that the Trustees may otherwise be permitted to make by law.”

FN7. The court reasoned:  “Really the problem that I had with respect to the junk bond investment, I can even imagine that a certain percentage of a portfolio could legitimately be invested in junk bonds, but I'm thinking a single digit percentage, 5 percent or less, in the hands of a skilled money manager might have warranted a riskier investment, but more than 90 percent of the assets in junk bonds was really substantially out of balance with respect to what I believe a prudent investor would do.”   In addressing the fact that appellant's share of the trust assets were also invested in the DWS fund, the court stated:  “[Appellant's] ability to withstand a particular loss is her business.   But [respondent], who is not just her nephew, he was someone that had very special needs.   And I just found all of that very disturbing.”.  FN7. The court reasoned:  “Really the problem that I had with respect to the junk bond investment, I can even imagine that a certain percentage of a portfolio could legitimately be invested in junk bonds, but I'm thinking a single digit percentage, 5 percent or less, in the hands of a skilled money manager might have warranted a riskier investment, but more than 90 percent of the assets in junk bonds was really substantially out of balance with respect to what I believe a prudent investor would do.”   In addressing the fact that appellant's share of the trust assets were also invested in the DWS fund, the court stated:  “[Appellant's] ability to withstand a particular loss is her business.   But [respondent], who is not just her nephew, he was someone that had very special needs.   And I just found all of that very disturbing.”

FN8. The statute provides:  “If a beneficiary contests the trustee's account and the court determines that the trustee's opposition to the contest was without reasonable cause and in bad faith, the court may award the contestant the costs of the contestant and other expenses and costs of litigation, including attorney's fees, incurred to contest the account.   The amount awarded shall be a charge against the compensation or other interest of the trustee in the trust.   The trustee shall be personally liable and on the bond, if any, for any amount that remains unsatisfied.” (§ 17211, subd. (b).).  FN8. The statute provides:  “If a beneficiary contests the trustee's account and the court determines that the trustee's opposition to the contest was without reasonable cause and in bad faith, the court may award the contestant the costs of the contestant and other expenses and costs of litigation, including attorney's fees, incurred to contest the account.   The amount awarded shall be a charge against the compensation or other interest of the trustee in the trust.   The trustee shall be personally liable and on the bond, if any, for any amount that remains unsatisfied.” (§ 17211, subd. (b).)

FN9. Appellant does not dispute that the entire action constitutes a beneficiary “contest,” as contemplated in subdivision (b) of section 17211.  (See Leader v. Cords, supra, 182 Cal.App.4th at pp. 1596-1599.).  FN9. Appellant does not dispute that the entire action constitutes a beneficiary “contest,” as contemplated in subdivision (b) of section 17211.  (See Leader v. Cords, supra, 182 Cal.App.4th at pp. 1596-1599.)