REDKE v. SILVERTRUST (1971)

Plaintiff and respondent Mitzi Lee Redke instituted this action to enforce the terms of an oral agreement allegedly made for her benefit between Samuel Hayden and Ann Hayden, both of whom are now deceased. Defendants are executors of Samuel Hayden's estate, co-trustees of a trust created by Samuel Hayden and testamentary co-trustees under the will of Ann Hayden. This is an appeal from a judgment in Mitzi's favor.

Ann Hayden was Mitzi's mother and Samuel was Mitzi's stepfather. The basis of Mitzi's claim was Samuel's breach of a promise made to Ann that he would, on his death, bequeath certain of Ann's separate property to Mitzi.

Samuel, a successful real estate developer, was married to his first wife Katie for almost 50 years. That marriage which ended in 1955 with the murder of Katie at the hands of a servant, produced three children and six grandchildren.

Shortly after the death of Katie, Samuel married Ann, who was herself a widow and the mother of two adult children, Mitzi, the plaintiff and respondent, and Warren, who died in 1963, and whose death apparently precipitated the dispute which now engages our attention.

It was at the height of the family's grief over the untimely death of Warren that the oral agreement between Samuel and Ann was allegedly consummated, which agreement, if given effect, would have drastically altered previously well-documented and carefully developed plans for the disposition of the estates of Samuel and Ann.

During the seven year marriage between the two, Ann's estate, as a result of Samuel's acumen and generosity, grew from an estimated $20,000 to $40,000 to over a million dollars. Approximately 7 weeks after Warren's death, Ann died. Her estate was distributed in accordance with the previously established Estate Plan. By the terms of the will, one-half of her separate property went to Samuel, the other one-half was placed in trust for the benefit of Mitzi. Thus, as a result of her mother's marriage to Samuel, Mitzi benefited at that time to the extent of receiving approximately $680,000.00.

Some 7 weeks after Ann's death in 1963, Samuel married Ruth Allender Hayden who is a defendant in this action both in her individual capacity and as a co-trustee of an inter vivos trust created by Samuel.

When Samuel died in 1965, the disposition of his estate made no provisions for Mitzi, but instead provided for his natural children and Ruth his surviving widow, all of whom are natural objects of his bounty.

The line was thus drawn between Mitzi on the one hand seeking the additional one-half of her mother's separate property, basing her claim on the oral agreement, and the widow and the natural children on the other hand defending the integrity of the written will and trust instrument.

FACTS

The date of the critical oral agreement was February 23, 1963.

On that date it appears without question that there was in existence a will executed by Ann Hayden which together with a revocable inter vivos trust also established by her had the combined effect as follows:

(1) One-half of Ann's property would on her death go to or for the benefit of Samuel, free of death taxes.

(a) Ann's personal effects including jewelry and furs would go to Samuel outright,

(b) The rest of this one-half was to be held in marital deduction trust for the benefit of Samuel during his lifetime and Samuel was to have an unrestricted power of appointment as to the remainder.

(2) The other one-half of Ann's property was to be held in residuary trust for the benefit of Mitzi, the respondent, and her brother or their respective issue.

Samuel had prepared a similar plan naming Ann, Mitzi and Warren as beneficiaries.

This Estate Plan had been developed with the guidance and consultation of expert tax and legal advisers. One of the major factors influencing the structure of this plan was the tax benefit afforded by the so-called ‘marital deduction.’ In simple terms, this deduction provides for the elimination of Federal and State death taxes on one-half of the separate property of the first spouse to die.

The major condition necessary for realizing the benefits of this deduction is that the property be transferred to the surviving spouse with an unrestricted title or, if transferred in trust, with an unlimited power of appointment over the remainder. (26 U.S.C. § 2056; Rev. & Tax.Code, § 13805.) If Samuel's power of appointment were limited by the oral agreement, this condition would not be satisfied.

On the fateful day of February 22, 1963, Warren, Ann's son and Mitzi's brother died from a heart attack at the age of 37 years. At that time Ann herself was critically ill with cancer. The following morning Ann was told of the tragedy. A few hours after being told of the death, Ann was visited by Mitzi.

There was testimony that, in a conversation between Ann and Samuel and overheard by Mitzi and others, Ann stated in substance that in view of the death of Warren she wished to summon the lawyers and ‘change my will and my trust,’ and ‘I want Mitzi to have my property, my furs, my jewels and everything of mine.’ Samuel attempted to dissuade his wife from seeing the lawyers at the time. When she insisted Samuel replied, ‘I promise you that I'll take care of Mitzi. I'll give her everything. I'll give her your furs, jewelry, property, whatever it is. I just don't want you to worry.’

There was also testimony that in this same conversation Ann stated that she wanted the share that would have gone to Warren to go to Mitzi.

Subsequently, Ann discussed amending her will and the trust instrument with both her tax and legal advisers. As a result of these discussions certain changes were made, the thrust of which was to provide for Mitzi to receive what would have been her brother's share and a concomitant reduction in the benefits which had been provided for the brother's children.

In these discussions Ann specifically indicated her interest in the tax structure and her interest in not disturbing the provisions whereby Samuel would receive one-half of her estate.¹

In March of 1963, following the discussions and the changes in the critical documents, Ann told Mitzi that the changes had been made and ‘You now have Warren's share.’

At no time during these and other conversations, including those with Mitzi herself, did Ann mention the oral agreement with Samuel. Samuel, however, allegedly mentioned the agreement to persons who significantly were individuals other than the tax and legal advisers.

Ann died on April 5, 1963.

In the administration of Ann's estate pursuant to the will and trust instruments the marital deduction was claimed and allowed with a tax saving of approximately $178,000.00.

Subsequently, Samuel did two significant things: (1) he exercised his power of appointment over the residue of the marital deduction trust and placed it in the trust which he previously had created, and (2) he amended his trust and will eliminating provisions for Mitzi and adding benefits for his new wife Ruth as well as his natural children.

Samuel died in January 1965.

Respondent filed creditor's claims against Samuel's estate alleging the oral agreement and a separate completed gift of the furs and jewelry.

This lawsuit followed.

THE TRIAL COURT'S FINDINGS

The trial court made voluminous findings of fact covering almost every detail at issue in the case.

A summary of the findings as they are germane to our decision is as follows: That on February 23, 1963, Samuel and Ann made an oral agreement for the benefit of Mitzi; that the purport of that agreement was that in exchange for Ann's forbearance in not changing her will and trust, Samuel promised, on his death, to leave all of Ann's property, furs and jewelry to Mitzi; that Ann fully performed her part of the agreement and relied on Samuel's promise to carry out his part of the agreement; that Ann did not abandon the agreement; that Ann had no part in choosing the method by which Samuel would perform the agreement and that because Ann had little familiarity with business transactions Samuel was the dominant influence in the management of their affairs and finally that Ann did not have any reason to suspect that Samuel would do anything illegal.

Of utmost significance is the court's choice of language in its findings relating to Ann's knowledge of the possible illegal effect of the agreement. The court found that ‘[I]t is doubtful that Ann had any particular or clear comprehension or understanding * * * of the technical aspects of a ‘marital deduction or an unlimited power of appointment’ of the legal requirements for preserving the so-called ‘marital deduction.’ (Emphasis added.)

The trial court's conclusions of law, many of which were identical in wording to certain findings of fact, declared the oral contract to be legally enforceable and not affected by the Statute of Frauds for the reason that all of the necessary elements of an estoppel were present. This latter conclusion flowed from other conclusions that Ann seriously and unalterably changed her position to her detriment in reliance on Sam's promise; that the appellants were unjustly enriched by Sam's breach of the agreement; and by denying enforcement of the agreement an unconscionable injury would result to Ann and Mitzi.

Finally the court concluded that by reason of the oral agreement Samuel was during his lifetime a constructive trustee of Ann's property for the benefit of Mitzi, and that Samuel breached the agreement upon his death when he failed to leave all of Ann's property to Mitzi.

THE JUDGMENT

Appellants are ordered by the judgment to deliver to respondent certain designated stock having a total fair market value as of November 19, 1968, of $392,186.48 together with any and all dividends, stock splits, stock rights and all other increments of every nature, kind or description with interest thereon. The judgment also provides that in addition respondent is to recover from appellants the sum of $457,916.06, together with interest. This latter sum represents money received either as income on stock or proceeds from the sale of stock, and the value of the jewelry and furs and other assets no longer held by appellants. Appellants were enjoined and restrained from distributing any of the property or money held by them as constructive trustees for the use and benefit of the respondent.

CONTENTIONS ON APPEAL

Appellants, while indicating skepticism, concede that the trial court's finding as to the fact of the oral agreement is supported by evidence in the record and that on review we are bound by that finding.

They contend, however, that conceding the correctness of the court's findings as to the making of the agreement and the trial court's interpretation thereof, (1) the agreement was abandoned; (2) the agreement is unenforceable because of the Statute of Frauds, and (3) the agreement is unenforceable because it is contrary to public policy as an illegal evasion of Federal and State death death taxes.

With the single exception of an attack on the finding of a separate gift of the jewelry and furs which will be dealt with later, each of appellants' remaining contentions are necessarily dependent upon our decision concerning the main issue in the case, i. e., the enforceability of the disputed oral agreement.

The often repeated maxim that an appellate court will not reweigh evidence or judge the credibility of witnesses requires that we accept the trial court's finding that the so-called ‘bedroom conversation of February 23, 1963’ did occur. The witnesses to that conversation vary somewhat in re-counting the actual words used but the trial court synthesized the various testimonies into the findings as summarized to us above.

Taking the oral contract as found² by the trial court we now consider appellants' contentions concerning its enforceability.

It is settled law that a contract to make a particular disposition of property by will may be legally enforceable. While Civil Code section 1624(6) requires such agreements to be in writing, oral contracts of this nature are enforceable where an estoppel can be raised. (Day v. Greene, 59 Cal.2d 404, 29 Cal.Rptr. 785, 380 P.2d 385; Mintz v. Rowitz, 13 Cal.App.3d 216, 91 Cal.Rptr. 435.)

In the case at bar the trial court found that Ann had not abandoned the agreement and her failure to change her trust and will in reliance on Samuel's promise to provide for Mitzi, created an estoppel to plead the Statute of Frauds against Samuel and his heirs. Ann's failure to make these changes and her failure to inform her legal and tax advisers of the oral agreement were construed as evidence of her performance of the agreement rather than evidence that she abandoned it as appellants have contended.

The court's finding that there was no abandonment of the contract is supported by the evidence.

The legality of the agreement and the public policy to be offended by its enforcement is something else again. Under the facts of this case the claimed estoppel to plead the Statute of Frauds and the asserted illegality are so interdependent that they present a single issue.

The Statute of Frauds which is designed to prevent fraud cannot be relied on when to do so would itself work a fraud.

Thus, an estoppel may prevent reliance on the Statute. A mere change in position may be the basis of the ‘unconscionable injury’ which must underlie estoppel to plead the Statute of Frauds.

This change of position refers to that of the contracting parties and not that of the heirs.

Thus, in Mintz v. Rowitz, supra, a constructive fraud sufficient to raise an estoppel was found to exist when the first spouse to die failed to make a change in her will because of reliance on the belief that mutual wills would remain in effect.

On the other hand, the basic policy underlying the Statute of Frauds is so exalted in the law that only a substantial injustice to an innocent party will prevent its invocation. The refusal to apply it must have a strong appeal to equity.

If the agreement has a tendency to work a fraud on third parties or the public, this tendency will have the effect of denying to the parties to the agreement the equitable considerations necessary to negate the application of the Statute of Frauds. In this situation, even though a party to the agreement has detrimentally altered his position in reliance thereon, it cannot be said that the resulting injury is ‘unconscionable.’

No case has come to our attention which deals with a mixture of potential fraud on the public in the enforcement of an agreement and an estoppel to plead the Statute of Frauds based on a potential fraud on one of the parties to the agreement.

In such a situation equity and justice would seem to require that the latter yield before the former. Thus, if the oral agreement was illegal or offensive to public policy it is unenforceable both for that reason and for the reason that the Statute of Frauds applies.

Appellants' argument which we feel has merit is that to enforce the agreement is to sanction an arrangement for the disposition of property in circumvention of Federal and State tax law. If Samuel was bound by the oral agreement to give the property in question to Mitzi, then he did not have an unlimited power of appointment and thus the marital tax deduction was not proper.

Respondent concedes that when Ann died without changing her estate plan, the marital deduction resulted in substantial but improper tax savings. However, she contends that this was the result of Samuel's wrongdoing, a result for which Ann cannot be blamed.

The trial court attempted to negate any basis for denying enforcement of the agreement because of illegality or public policy by adopting findings, the net effect of which were, that Ann had no intention to achieve any illegal result, and was not in pari delicto with Samuel.

We thus turn to an analysis of the court's findings and the evidence upon which they were based, as to the significance of Ann's partial amendment of her trust and will, her silence as to the oral agreement and ultimately her state of mind at the time of the agreement and during her subsequent conduct and silence.

The uncontroverted evidence established that Ann had received expert and explicit advice concerning the legal and tax ramifications of her estate plan at the time it was structured.

The prologue to the conversation which resulted in the oral agreement with Samuel was Ann's dramatic request to send for the lawyers so that she could effect a change in her plans. From this we can infer at least a minimal awareness of the existence of the documents involved, the provisions thereof and the need for legal advice in altering them.

When she was dissuaded from this precipitous action by Samuel's promise to ‘take care of Mitzi,’ the agreement which the trial court found to have ripened at that time was, as a matter of law, freighted with the presumption that the parties knew the applicable laws and had them in mind.

‘* * * all applicable laws in existence when an agreement is made, which laws the parties are presumed to know and to have had in mind, necessarily enter into the contract and form a part of it, without any stipulation to that effect, as if they were expressly referred to and incoporated.’ (Swenson v. File, 3 Cal.3d 389, 390, 90 Cal.Rptr. 580, 582, 475 P.2d 852, 854; also see Robertson v. Dodson, 54 Cal.App.2d 661, 664, 129 P.2d 726.)

Respondent here suggests that we equip ourselves with blinders and look only at the words spoken between the parties without reference to the existing estate plan. Her position is that the oral agreement supplanted the written documents and that since no mention was made of the terms of those documents they are irrelevant to our decision.

We cannot divorce the written estate plan from this factual setting. The sole consideration for Samuel's promise was that Ann would leave that plan unaltered.

Further uncontroverted evidence established that Ann shortly thereafter did make certain changes in her will and trust (eliminating Warren and giving his share to Mitzi) and specifically asked her advisers if these changes would affect the tax picture. She further expressed a desire not to disturb the provisions she had made for Samuel. (See footnote, supra.) And finally it is undisputed that she at no time told her advisers of the oral agreement.

The trial court characterized the testimony of appellants Silvertrust and Cohen, the Haydens' tax and legal advisers to the effect that they were not told of the oral agreement, as negative and unpersuasive on the issue of whether the oral agreement was consummated. This, however, would not justify rejecting their affirmative testimony concerning conversations with Ann in which she discussed her estate plan and was told of its tax consequences. The court impliedly found that these conversations did occur.

The trial court also found that Ann did not purposely conceal the oral agreement from her advisers, a finding which cannot stand in the face of the evidence and the court's finding of no abandonment. Respondent cannot have it both ways. If Ann did not abandon the agreement than her silence under the circumstances must be viewed as active concealment of the agreement from those persons who would have been in a position to ‘rock the boat’ if they were told of it.

Respondent can take little comfort from the trial court's finding that ‘it is doubtful’ that Ann comprehended the legal and tax significance of her actions. This finding is simply unsatisfactory as a finding of any fact. Its weakness as a prop for respondent's position is increased by the fact that it appears to be premised upon nothing more solid than the intuition of the trial judge.

The court's preamble to this finding was that ‘* * * Ann was merely a housewife with little more than housewife experience.’ The leap from this characterization of Ann to the assumption that she was ignorant of what she was doing is too great to be made as easily as the trial court apparently did. Especially when that leap was made as the court itself said ‘* * * notwithstanding any explanations that may have been offered to her * * *’ (Emphasis added.)

The very minimum knowledge with which Ann must be charged was that she alone had the power to change the documents and that if left unchanged her estate would be disposed of according to their terms. Furthermore, it cannot be argued that she was not at least aware that this plan was structured with tax advantage in mind and that this was the most compelling reason for Samuel's insistence that she maintain the status quo.

The freedom of individuals to contract enjoys a highly protected status in our law. It is elementary contract law, however, that our courts will not lend their aid to enforcement of contracts which are illegal and contrary to public policy.

The illegality, and hence of unenforceability of a contract, may be found in the consideration, the promise or the performance.

These rules are more easily stated than they are applied to a given set of facts. The term ‘public policy’ itself defies precise definition.

Contracts which have been declared by our courts to be unenforceable run the gamut from those where parties undertake to breach a criminal statute to those which, though legal and innocent on their face, result by their performance in illegality or contravention of public policy.

At the risk of oversimplification we think it safe to say that the granting or withholding of judicial aid in the enforcement of contracts depends in large measure on the gravity of the offense to public policy and the equitable posture of the person seeking the enforcement. Mitzi who now stands in the shoes of Ann must succeed or fail according to the application of these considerations to Ann's conduct.

Evasion of taxes is an extremely serious matter for which severe criminal penalties can attach. In addition, the public has a strong interest in the integrity of the application of its tax laws. Thus where ‘[t]he effect of [the] agreement would be to deprive * * * the State of California and the United States Government of taxes properly due * * * the agreement [is] void as against public policy * * *.’ (Kopasz v. Wymer, 118 Cal.App.2d 119, at p. 121, 257 P.2d 707, at pp. 708–709.)

Respondent argues that the oral agreement itself was perfectly legal and could have been performed without any fraud or evasion of taxes. The ultimate fact is that it was not so performed and it is inescapable that it was Ann who knowingly equipped Samuel with the means by which it was performed.

In any event, “If the effect of the agreement is to accomplish an unlawful purpose, however, the agreement will be declared illegal regardless of the intention of the parties. Indeed, the mere tendency of an agreement to promote unlawful acts may render it illegal as against the policy of the law. [Citation.]” (Stockton Morris, etc., Co. v. Calif. etc., Corp., 112 Cal.App.2d 684, 690, 247 P.2d 90, 93.)

If this judgment is allowed to stand, the taxing authorities will probably be able to recoup whatever might be owing in light of the disclosures here made. (See Estate of Sisk, 269 Cal.App.2d 823, 75 Cal.Rptr. 549; Stewart v. Flournoy, 8 Cal.App.3d 449, 87 Cal.Rptr. 672.)

But what if Samuel had fulfilled the contract? No one would be the wiser. Herein lies the vice of enforcing the agreement.

If this court were to put its imprimatur on this agreement under these circumstances, it would be an invitation to others to structure similar devices running only the risk of paying the taxes if the defect was discovered. Disclosure would be discouraged as well.

The refusal of such judicial aid tends to reduce the number of such agreements and in this case lend a measure of stability to the rules which guide practitioners in the field of tax law. This is the goal we seek.

Our conclusion is that this agreement is unenforceable as being against public policy.

Finally, we must examine the equities to assure that our refusal to enforce this agreement does not itself offend public policy.

Having found that Ann was to a degree in pari delicto with Samuel we find it unnecessary to measure their relative culpabilities for the reason that the ultimate equities here lie with non-enforcement. By leaving the parties where we found them we permit the bulk of the contested property to remain with the surviving widow and natural children of the person who was the original source of the wealth. In our view, a perfectly just result consistent with the latter's desires.

THE GIFT OF THE JEWELRY AND FURS

We deal with this aspect of the judgment separately because it rests on a basis distinct and apart from the oral agreement.

In addition to finding that certain jewelry and furs belonged to Mitzi as a result of the oral agreement, the trial court also found that Samuel had made a completed gift of them to Mitzi, later re-purchasing them from her but failing to deposit the purchase price to her credit as he contracted to do.

The evidence relied upon to establish the gift and resale of the jewelry and furs is found in two conversations related by Mitzi and her husband.

Mitzi testified that, within a few days after Ann's death, Samuel exhibited to her jewelry and furs belonging to Ann, stating that he wanted her to have them. Mitzi did take three of the fur pieces and then directed Samuel to give one fur piece to Warren's widow and to retain the jewelry and the rest of the furs, saying ‘whenever I want them I will come and get them.’ The second conversation, overheard by Mitzi's husband, was one in which Samuel acknowledged the gift and stated he would purchase the items from Mitzi and put the proceeds in her trust. Mitzi agreed. The jewelry was found by the trial court to include a ring which was not inventoried as Ann's property in her estate. The court valued the jewelry and furs at $76,800.00.

Appellants assert (1) that there was no completed gift because the element of delivery is lacking, (2) that the claim is barred by laches, and (3) that as to the one disputed ring, Mitzi is bound by the decree of distribution of Ann's estate, which decree did not include the ring as part of Ann's property, and which fixed the value of the jewelry at $37,915.00.

The question of whether there was a completed gift and the significance of the fact that Samuel retained physical custody of the property were questions of fact for the trial court. (See Bank of America Nat. Trust & Savings Ass'n v. Cottrell, 201 Cal.App.2d 361, 20 Cal.Rptr. 126.) As a reviewing court we consider only whether there was evidence in the record to support the findings of the trial court. That support was present.

The trial court concluded that Mitzi, relying on the confidential relationship between her and her stepfather and on the oral agreement with Ann for her benefit did not learn, until after his death, of Samuel's failure to deposit money for the jewelry in the trust, and thus her claim was not barred by laches.

The fact that we have found the oral agreement with Ann to be unenforceable does not prevent Mitzi's reliance upon it to the extent of avoiding the impact of laches. The trial court's finding on this point was proper.

The remaining question to be answered is whether the valuation placed upon the jewelry by the probate court in the administration of Ann's estate is binding on respondent.

The value of the jewelry fixed by the trial court in the instant action was approximately double that fixed by the probate court. The principal source of the augmentation was the disputed ring.

The trial court specifically found that that decree of distribution was not binding on respondent Mitzi Redke. Although our reasons for doing so are somewhat different from the trial court's, we also conclude that the trial court was at liberty to fix the reasonable value of the jewelry without reference to the order of the probate court.

Mitzi's claim against Samuel's estate is essentially based on a debt due her as a result of Samuel's purchase of the jewelry. In enforcing this contract of sale, which did not specify an exact purchase price, the trial court could fix the price at the fair market value of what was sold. These issues were not litigated in the probate matter and are therefore not res judicata.

‘[A] decree in the course of administration is conclusive only as respects the res and the facts involved in the determination, and does not conclude further uncontested and unlitigated matters.’ (20 Cal.Jur.2d, § 79, § 79, p. 112.)

In view of our holding it is unnecessary to discuss the other contentions raised by the appellants.

The judgment is reduced to the sum of $76,800, plus interest at 7% per annum from January 17, 1965. All other provisions of the judgment are vacated. As so modified, the judgment is affirmed. Each party to bear his own costs on appeal.

FOOTNOTES

1.  Appellant Silvertrust testified to a conversation with Ann in early March of 1963, as follows:‘Q Now, can you tell us the conversation which you had with Mrs. Hayden on this occasion at the Hayden home? A Well, she told me she wished to change or amend her trust so that what she had previously provided for her son should now go to her daughter instead. Q Her son Warren? A Her son Warren, and should go to her daughter Mitzi. She explained that her daughter's husband was rather ill and if anything should happen to herself, her daughter wouldn't have anyone else to help her as in the case of Warren's wife who still had her folks living, and she would like to have Warren's share for that reason go to Mitzi. Q Now, did you discuss the subject matter or did she ask about whether or not this change would in any way affect the interest which had been preciously provided for her husband, Samuel Hayden? * * * She told me then that the purpose of her checking with me was whether or not such a change would have any bearing of what she had provided for Mr. Hayden in her trust and whether or not it would change the tax picture. She was anxious—she told me she was anxious not to disturb the situation where she had provided for Mr. Hayden by way of a marital tax deduction trust or giving him under which she gave him half of her property and under which she provided for $30,000 a year minimum to him. My response was that if this was the only change she is making, that it would be no effect upon Mr. Hayden's interest of it but that the overall tax would be increased somewhat because the California State tax rates would be higher somewhat by reason of the fact that there would only be one beneficiary instead of two.’

2.  The trial court apparently rejected what appears to be an equally tenable construction, i. e., that Ann simply wanted Mitzi to have Warren's share.

COMPTON, Associate Justice.

HERNDON, Acting P. J., and FLEMING, J., concur.