Chatard v. Oveross

• Decision Date: 30 November 2009
• Docket Number: No. B213392.,B213392.
• Citation: 101 Cal. Rptr. 3d 883,179 Cal.App.4th 1098
• Court: California Court of Appeals Court of Appeals
• Parties: JOYCE CHATARD, Plaintiff and Appellant, v. GREG OVEROSS, as Trustee, etc., Defendant and Respondent.

179 Cal.App.4th 1098

101 Cal. Rptr. 3d 883

JOYCE CHATARD, Plaintiff and Appellant, v. GREG OVEROSS, as Trustee, etc., Defendant and Respondent.

No. B213392.

Court of Appeals of California, Second District, Division Four.

November 30, 2009.

Panitz & Kossoff and Kenneth W. Kossoff for Plaintiff and Appellant.

Berman & Berman, Ronald Berman; Oldman, Cooley, Sallus, Gold, Birnberg & Coleman, Marc L. Sallus and Mary-Felicia Apanius for Defendant and Respondent.

OPINION

WILLHITE, J.

INTRODUCTION

This appeal raises the issue whether the beneficiary of a spendthrift trust who also acts as trustee and commits a breach of trust causing financial harm to the trust can have her interest in the trust estate impounded to satisfy a claim arising from her misfeasance. Because the damage resulting from the trustee's breach of her fiduciary duty will otherwise be sustained by the beneficiaries, we hold that the trustee's interest can be reached to satisfy the claim notwithstanding the existence of the spendthrift provision. We therefore affirm the trial court's order directing that its surcharge order upon former trustee appellant Joyce Chatard be satisfied from her distributive share of the trust estate.

FACTUAL AND PROCEDURAL BACKGROUND¹

In 1989, Frederic and Vera Chatard, husband and wife, created the Chatard Family Trust (the Trust), naming themselves as beneficiaries. The Trust provides for the distribution of income and principal to them during their joint lifetimes. Upon the death of the first of them, the Trust divides into two subparts, Trusts A and B.² Income and principal from each subpart are distributed to the surviving spouse. Upon the death of the surviving spouse, the assets in Trust B are distributed to the settlors' three adult children (Joyce/appellant herein, David, and Jeanee) and the four children of the settlors' deceased son Douglas.³ Each of the settlors' three adult children receives outright a gift of one-fourth of Trust B.⁴ As for Douglas's four children, each receives an equal share of one-fourth of Trust B unless one of them is under 30 years old at the time the first settlor died. In that event (which occurred here), one-fourth of Trust B is held in trust for all four of Douglas's children, with the trustee (who was ultimately appellant) having the discretion to distribute income and principal to each of them. When none of Douglas's children is younger than 30, the trustee distributes the remainder of the Trust estate to them.⁵

The Trust contains a spendthrift provision that reads: "The interest of any beneficiary in the principal or income of any trust created by this instrument shall not be subject to claims of his or her creditors, or others, or liable to attachment, execution or other process of law, and no beneficiary shall have any right to encumber, hypothecate or alienate his or her interest in the trust in any manner; provided, however, that this shall not be construed to restrict the general power of appointment granted the surviving Trustor over Trust A as set forth hereinabove. The Trustee may, however, deposit to any bank designated by the beneficiary, to his or her credit, income or principal payable to such beneficiary." (Italics added.)

Frederic died in 1995 and Vera died in September 2002. Vera's death triggered the duty to distribute the remaining trust assets to the beneficiaries. At that point, the assets consisted of cash, securities and two parcels of property. One property is residential (the San Pablo property) and the other is commercial (the Sunset property). Shortly after Vera's death, appellant moved into the San Pablo property.

In February 2003, appellant began serving as trustee of the entire trust (subparts A and B). Over the next several years, disputes arose between her and the other beneficiaries. One involved whether the Trust should sell or retain ownership of the real estate holdings. Another disagreement concerned appellant's administration of the Trust. Consequently, David and Jeanee (appellant's two adult siblings) filed, at different times, petitions requesting that the two properties be sold; that appellant furnish an accounting; and that appellant be removed as trustee and an interim successor trustee be appointed. The trial court granted all of the petitions.

In regard to the two parcels of realty owned by the Trust, a public auction was conducted in January 2007 at which appellant successfully bid on both properties. She put down deposits on each parcel but then did not complete the purchases. Thereafter, the interim successor trustee successfully moved for orders to vacate the sale of both properties to appellant, to bar her from bidding in any subsequent sales, to withhold her deposits pending determination of the damages the Trust had suffered as a result of her breach of contract, and to initiate an unlawful detainer action to remove her from the San Pablo property. Eventually, the Trust sold the Sunset property for the same price appellant had offered but was compelled to sell the San Pablo property for $90,000 less than appellant's offer.

In June 2007, a five-day court trial was conducted to determine, "the myriad of controverted Trust issues in this matter."⁶ Appellant, among others, testified. The trial court did not find her credible.⁷ The trial court's statement of decision sets forth multiple breaches of appellant's obligation to act as a fiduciary in her capacity as trustee. She breached her duty to make the trust property productive by failing to rent or to pay rent on the San Pablo property that she occupied. She awarded herself excessive compensation as trustee. She inappropriately used trust assets to pay personal expenses. She unnecessarily incurred attorney fees on behalf of the Trust by hiring an attorney to oppose the other beneficiaries' well-founded petitions to remove her as trustee and to surcharge her for mismanagement.⁸ And she failed to distribute David and Jeanee's share of the Trust assets within a reasonable time. The trial court therefore surcharged appellant $244,489, payable to Trust B and $88,762.83, payable to Trust A.⁹ In addition, the trial court found that because appellant's opposition to David's and Jeanee's petitions for an accounting and to remove her as trustee was "without reasonable cause and in bad faith," David and Jeanee were, based upon Probate Code section 17211, subdivision (b),¹⁰ entitled to an award against appellant for $100,368.11, representing the legal fees and costs they had incurred in litigating their successful petitions. In January 2008, the trial court filed a "judgment after trial" incorporating all of these orders.

In July 2008, the interim successor trustee, relying upon the trial court's January 2008 judgment, filed an amended first and final account and petition requesting that appellant's $477,239.10 share of Trust B be reduced by the $333,251.83 surcharge due Trusts A and B and the $100,368.11 owed to David and Jeanee for legal fees and costs. This left approximately $44,000 to be distributed to appellant from Trust B. (Appellant is not a beneficiary of Trust A (see fn. 4, ante).)

Litigation ensued about the propriety of reducing appellant's distributive share. Appellant conceded that the $100,368.11 in attorney fees and costs that the court ordered her to pay David and Jeanee could be taken from her portion of the Trust. However, after that deduction, appellant sought the remainder of her distributive share, claiming that she would reimburse the Trust for the surcharge. She contended that because the Trust contained a spendthrift provision, her beneficial interest in the Trust could not be used to satisfy the surcharge.

After receiving additional briefing from the parties, the trial court rejected appellant's arguments. It approved the interim successor trustee's first and final account and ruled that "[appellant's] distribution from the Trusts shall be offset by the amount of the surcharge against her. The ... spendthrift provision of the Trust does not apply to this distribution."¹¹

This appeal follows. (§ 1300, subds. (b), (c).)

DISCUSSION

Relying upon the Trust's spendthrift provision, appellant challenges the trial court's order that the surcharge be taken from her distributive share of Trust B. She does not challenge the trial court's earlier order finding that she had breached her fiduciary duties and surcharging her for those breaches. Nor does she challenge the trial court's order that David and Jeanee can recover their attorney fees and costs from her distributive share.

(1) "A spendthrift trust is created where the settlor gives property in trust for another, and provides that the beneficiary cannot assign or otherwise alienate his or her interest, and that it shall not be subject to the claims of the beneficiary's creditors." (13 Witkin, Summary of Cal. Law (10th ed. 2005) Trusts, § 151, p. 715, italics omitted; see also 60 Cal.Jur.3d (2005) Trusts, §§ 127-131, pp. 194-199.) Spendthrift trusts are authorized by statute. (§§ 15300, 15301.)

(2) The issue here is whether the Trust's spendthrift provision precludes taking from appellant's distributive share of the Trust the amount that she was surcharged for breaching her duties as trustee. Section 257 of the Restatement Second of Trusts, entitled "Impounding Share of Trustee-beneficiary" and published in 1959, directly addresses this situation.¹² It provides: "If a trustee who is also one of the beneficiaries commits a breach of trust, the other beneficiaries are entitled to a charge upon his beneficial interest to secure their claims against him for the breach of trust, unless the settlor manifested a different intention."¹³

Comment f to section 257 of the Restatement Second of Trusts explains the section's applicability to a spendthrift trust. It provides: "Spendthrift trust. The rule stated in this Section is applicable although the interest of the trustee-beneficiary is not transferable by him...