Brown v. Labow

• Decision Date: 05 December 2007
• Docket Number: No. B195803.,B195803.
• Citation: 157 Cal.App.4th 795,69 Cal.Rptr.3d 417
• Court: California Court of Appeals Court of Appeals
• Parties: Lorrin BROWN, Plaintiff and Appellant, v. Frumeh LABOW et al., Defendants and Respondents.

69 Cal.Rptr.3d 417

157 Cal.App.4th 795

Lorrin BROWN, Plaintiff and Appellant, v. Frumeh LABOW et al., Defendants and Respondents.

No. B195803.

Court of Appeal, Second District, Division 5.

December 5, 2007.

Plotkin, Marutani & Kaufman, Jay J. Plotkin and Warren W. Kaufman, Sherman Oaks, for Plaintiff and Appellant Lorrin Brown.

Bloom & Ruttenberg and Gary M. Ruttenberg, Los Angeles, for Defendant and Respondent Frumeh Labow.

Ervin Cohen & Jessup and Reeve E. Chudd, Beverly Hills, for Defendant and Respondent Evelyn Joseph.

Tyre Kamins Katz & Granof and Leah K. Phillips Falzone, Los Angeles, for Defendant and Respondent Ross G. Brown.

TURNER, P.J.

I. INTRODUCTION

Lorrin Brown¹ challenges two orders. First, Mr. Brown challenges an order dismissing a petition which sought a determination that the liquidation and dissolution of Brown Wholesale Electric Supply Company ("Brown Wholesale Electric") did not cause an ademption of the specific gifts of its stock. The stock was contained in the Rubin Brown Living Trust ("the trust") under the Tenth Amendment to the trust (dated October 13, 1995). Second, Mr. Brown appeals from a probate court order quashing acceptance of a settlement offer pursuant to Code of Civil Procedure section 998. We reverse the order dismissing a petition which sought a determination that the liquidation and dissolution of Brown Wholesale Electric Supply Company ("Brown Wholesale Electric") did not cause an ademption. Also, we affirm the order quashing acceptance of the statutory offer to compromise.

II. BACKGROUND

Rubin created the trust on February 14, 1983, and named himself as trustee. The principal asset of the trust was 95 percent ownership of stock in Brown Wholesale Electric. Rubin had two sons, Mr. Brown and Ross, both of whom worked for Brown Wholesale Electric. Mr. Brown and Ross were also officers, directors, and minority shareholders of Brown Wholesale Electric. Over time, Rubin executed 12 amendments to the trust. The Ninth Amendment dated March 21, 1994, gave 30 percent of the stock to Mr. Brown and 70 percent to Ross. In the Tenth Amendment dated October 13, 1995, to the trust, Rubin reduced Mr. Brown's gift to 10 percent of the stock and increased Ross's gift to 90 percent of the stock. Ross is the sole residuary beneficiary of the trust.

Paragraph 6.01 of the Tenth Amendment to the trust provides in part: "SPCIFIC GIFTS As soon as administratively possible following the death of Trustor, Trustee shall distribute the following gifts: ... [¶] (c) Trustor's interest in ownership of the preferred and common stock of Brown Wholesale Electric Company shall be allocated and distributed outright to Trustor's two (2) sons, with ten percent (10%) thereof allocated and distributed to LORRIN C. BROWN, and ninety percent (90%) thereof allocated and distributed to ROSS G. BROWN. In the event either such beneficiary shall not survive to the date of distribution, such beneficiary's share shall be added to the residue of the Trust Estate and distributed pursuant to Paragraph 6.02 below."

On July 25, 1996, Ross filed a petition for the appointment of a conservator of the person and estate of Rubin. On September 9, 1996, Ms. Labow was appointed conservator of Rubin's person and estate. On October 16, 1996, Ms. Labow filed a petition to have herself appointed as successor trustee. Ms. Labow asserted that Rubin could no longer serve as trustee and the named successor trustees declined to accept the appointment. The October 16, 1996, petition alleged: Rubin "is unable to handle his own personal care and his own financial affairs and cannot act in any fiduciary capacity." The trust assets consisted of Rubin's residence and his shares in Brown Wholesale Electric; the value of the entire corporation was in excess of $18 million; and no bond was required because there were no cash or other liquid assets. Ms. Labow requested, "[In] lieu of bond the court order that said stock shall not be assigned, transferred, alienated, or encumbered without [a court order] ... and that a legend describing such restriction be prominently imprinted on the certificates evidencing such stock held by the [trust]." In a supplemental petition filed November 25, 1996, Ms. Labow advised the court that the successor trustees, Benjamin Felton and First Interstate Bank, refused to serve due to substantial litigation over the conservatorship, as well as assets of the living trust which had been designated as charitable remainder trusts by Rubin. On December 4, 1996, the probate court appointed Ms. Labow as the successor trustee of the trust as restated in the Ninth Amendment dated March 14, 1994. The December 4, 1996 order provides that: Ms. Labow is not required to file a bond; the stock could not be transferred without a prior court order; and a legend stating the restriction should appear on the stock.

On January 9, 2001, Ms. Labow filed a first account current and report of successor trustee. Ms. Labow also requested: the settlement of accounts and payment of fees; an increase in bond to $14,350,000; a release and substitution of surety; and for the authority to make interim monthly payments to trustee. Ms. Labow reported: the trust had income of $13,954,848.04 during the reporting period; the charitable remainder trust litigation had been settled and approved by the probate court; the business (of which the conservatee, Rubin, owned 95.94 percent of the stock) was subsequently sold for $24 million; and the payments were made to the conservatorship estate and then transferred to the trust. According to Ms. Labow's account and report as trustee, "The 95.54% interest of the stock in Brown Wholesale Electric Company owned by the within Trust and recovered for the benefit of the Trust and Trustor has been valued at [$23,221,895.02], which represents the value after the sale of the assets, the payment of corporate debts, and the receipt of liquidating dividends." On March 6, 2001, the probate court issued an order settling the first account current and report of Ms. Labow and granting the petition as requested.

On April 9, 2003, Ross and Mr. Brown filed an ex parte application to instruct Ms. Labow to distribute the sums of $200,000 and $100,000 to them respectively once in 2003 and again in 2004 if their father, Rubin, was still alive. The application was based on evidence that Rubin's assets in the trust were valued in excess of $10 million and gifts had been made to others including Evelyn Joseph, his long time companion. The brothers argued that their father valued tax-efficient transfer of the assets and the distribution would be consistent with his wishes. They also argued that Ms. Labow did not oppose the distribution. Ms. Labow declared: a gift of the $25,000 to Rubin's niece, Sandy Wolf, had already been made; Rubin's living expenses are less than his annual income and would remain constant for the rest of his life; and there were sufficient assets in the trust to satisfy the gifts to Ms. Joseph. On April 9, 2003, the probate court instructed the trustee to make the $200,000 and $100,000 distributions to Ross and Mr. Brown.

On November 10, 2005, Mr. Brown filed an amended petition: to set aside the Tenth Amendment to the Rubin Brown Living Trust; for determination of nonademption of a specific gift of stock under the trust; and for removal of Ms. Labow as successor trustee. On the first day of trial, Mr. Brown abandoned his challenge to the validity of the Tenth Amendment to the trust. The November 10, 2005 amended petition alleged that Rubin died on November 3. 2004. The amended petition further alleged: Mr. Brown was a beneficiary of a specific gift of the trust originally dated February 14, 1983 and restated on March 21, 1994; Rubin executed a Tenth Amendment to the trust on October 13, 1995, the Eleventh Amendment to the trust on January 3, 1996, and the Twelfth Amendment to the trust on April 3, 1996; Rubin was declared incapacitated and under a conservatorship of his person and estate from July 25. 1996 until his death; and as a result of his incapacity, the Eleventh and Twelfth Amendments to the trust were revoked by court order on November 19. 1997. It was alleged that the main asset of the trust was the stock of Brown Wholesale Electric which was sold by the conservator and successor trustee, Ms. Labow, in January 1998. On January 2, 1998, Ms. Labow while acting as Secretary of Brown Wholesale Electric with Ross acting as President executed a Certificate of Election to Wind Up and Dissolve the corporation. A fourth account filed with the probate court, on November 18, 2004. valued the trust assets at $11 million. Mr. Brown contended that sale of the stock changed the intent of the Ninth Amendment to the trust which gifted 30 percent of the stock to Brown Wholesale Electric stock to him. Citing Probate Code² section 21134 and Estate of Packham (1965) 232 Cal.App.2d 847, 849, 43 Cal.Rptr. 318, Mr. Brown asserted that there had not been an ademption of the specific gift of stock to him which occurred during the conservatorship.

Mr. Brown also requested that Ms. Labow be removed as trustee. Mr. Brown argued that Ms. Labow violated her duties to avoid conflict and to deal impartially with the beneficiaries of the trust. Mr. Brown contended: Ms. Labow violated the loyalty duty by violating the December 4, 1996 order not to sell the stock without prior permission of the probate order; Ms. Labow had decimated the specific stock gift to him; Ms. Labow reallocated millions of dollars to Ross, the remainder beneficiary; as a minority shareholder he was not afforded the opportunity to oppose the liquidation or the consequences to the shift of his specific gift to the remainder of the trust estate; and that Ms. Labow be surcharged.

Ms. Labow responded to Mr. Brown's amended petition as follows. Ms. Labow argued that Ross and Ms. Joseph were major beneficiaries of the trust; Mr. Brown's interest was...