Creighton University v. Kleinfeld, CIV-S 94-1594 GEB/PAN.

• Decision Date: 13 December 1995
• Docket Number: CIV-S 94-1594 GEB/PAN.
• Citation: 919 F. Supp. 1421
• Court: U.S. District Court — Eastern District of California
• Parties: CREIGHTON UNIVERSITY, a Nebraska non-profit organization, Plaintiff, v. Oscar Budd KLEINFELD, et al., Defendants.

919 F. Supp. 1421

CREIGHTON UNIVERSITY, a Nebraska non-profit organization, Plaintiff, v. Oscar Budd KLEINFELD, et al., Defendants.

CIV-S 94-1594 GEB/PAN.

United States District Court, E.D. California.

December 13, 1995.

Charles P. Wolff, Evans Latham Harris and Campisi, San Francisco, CA and George A. Penry, pro hac vice, Law Offices of George A. Penry, Omaha, NE, for plaintiff.

James R. Kirby, II, Segal and Kirby, Sacramento, CA and Michael K. Johnson, Larson and Burnham, Oakland, CA, for defendants.

ORDER^*

BURRELL, District Judge.

Defendants Oscar Budd Kleinfeld and Kleinfeld & Heiser (collectively referenced as "Kleinfeld Defendants") move for summary judgment, arguing that the pay-all-taxes clause in Blanche Kroloff's will did not exonerate the remainder beneficiaries to Yale Kroloff's qualified terminable interest property ("QTIP") trust from paying the federal taxes attributable to that trust. Further, defendants Mayall, Hurley, Knutsen, Smith & Green ("Mayall, Hurley") and the Kleinfeld Defendants¹ move for summary judgment, arguing they owed no duty to plaintiff Creighton University ("Creighton"). For the reasons stated below, the motions are denied.

I. BACKGROUND

This is a case of purported legal malpractice. In 1984, Oscar Budd Kleinfeld ("Kleinfeld") drafted a will for Blanche's husband, Yale Kroloff, establishing a QTIP trust. See 26 U.S.C. § 2056. The QTIP trust provided that Blanche would receive the income generated by the trust during her lifetime. Upon her death, the trust corpus was left to the residual trust beneficiaries, Yale's brother, Leonard, and Leonard's daughter, Julie. The QTIP trust permitted Blanche to elect to defer paying estate taxes she would otherwise owe on the QTIP trust until her own death. Blanche made this election.

Shortly after Yale's death in 1987, Kleinfeld drafted and Blanche executed her last will and testament leaving her entire estate to two charities, Creighton and Diabetes Research Institute Foundation ("DRIF"). At Blanche's request, Kleinfeld made revisions to her will in 1988 and 1991. The 1991 revision provided pecuniary bequests to four legatees in the amount of $355,000. The residue of Blanche's estate was to be divided equally between Creighton and DRIF. Each of the wills included a "pay-all-taxes" provision, stating:

"THIRD: All estate, inheritance and other death taxes, together with interest and penalties thereon required to be paid by reason of my death, shall be paid from the residue of my estate without apportionment and shall not be charged against or collected from any beneficiary under my will, and any codicil hereto, or any transferee or beneficiary of taxable property that passes outside of my probate estate."

See Decl. of C. Wolff, Exh. A, Article Third.

In October 1991, Blanche stopped using Kleinfeld as her personal attorney and retained Carter Holly, a partner at Mayall, Hurley. Holly managed various estate planning matters for Blanche from that time forward until her death.

Upon Blanche's death in 1992, her 1991 will and codicil were admitted to probate in the Superior Court of California for the County of San Joaquin. The value of Blanche's testamentary estate at the time of her death, excluding any taxes arguably owed on Yale's QTIP trust, was approximately $2,600,000. A dispute subsequently arose between the residual beneficiaries of Blanche's testamentary estate (Creighton and DRIF), and the QTIP trust beneficiaries (Leonard and Julie). The dispute centered on whether Blache's direction in Article Third to pay all "estate, inheritance and other death taxes" exonerated Leonard and Julie from payment of the federal estate taxes attributable to the QTIP trust.

To resolve this dispute, Kleinfeld filed a Petition to Determine Proration of Taxes with the probate court. Leonard and Julie sought summary judgment in that probate action, arguing that Article Third constituted Blanche's direction to her testamentary beneficiaries to pay all federal estate taxes owed on the QTIP trust property. They argued that any proration of the QTIP estate taxes to the QTIP trust or its beneficiaries would violate Blanche's specific instruction in Article Third that taxes "shall not be charged against or collected from ... any transferee or beneficiary of taxable property that passes outside of my estate."

Leonard and Julie supported their motion with a declaration from Kleinfeld, in which he appeared to agree with their construction of Blanche's will. In that declaration, Kleinfeld stated:

I discussed with Blanche Kroloff the terms and provisions of each will and explained all the substantive provisions in each will ... I explained to Blanche that she had the option of declaring whether she wanted her residuary estate to pay all taxes payable upon her death or whether she wanted the taxes to be apportioned, in which event the portion of the estate and inheritance taxes attributable to Trust C as a result of the inclusion of said trust in her taxable estate would be paid from the principal of Trust C prior to passing of the assets thereof into Trust B.

On each occasion, BLANCHE told me that she did not want any apportionment of taxes, did not want to reduce the interests that LEONARD and JULIE would receive from Yale after her death and that she wanted all taxes due on her death, including the taxes due as a result of the inclusion in her taxable estate of Trust C, to be paid from her residuary assets. On each occasion, I explained to BLANCHE that the way she wanted her will drafted would result in the payment of all estate and inheritance taxes due as a result of her death, including the taxes due as a result of the inclusion in her taxable estate of Yale's Trust C, from the assets in her probate estate, that LEONARD and JULIE would pay no estate and inheritance taxes on the money they received from Yale's Trust C, and that only the remainder of her residuary assets after the payment of all of the specific bequests and taxes would go to her residuary legatees. On each occasion, BLANCHE told me that she understood the applicability of the tax provisions and agreed with them.

See Creighton Request For Judicial Notice Of Facts In Opposition To Defendant's Motion For Summary Judgment, Exh. E, ¶¶ 10, 11. Creighton countered by arguing that Article Third did not exonerate the remainder trust beneficiaries, Leonard and Julie, from payment of the federal estate taxes attributable to the trust assets.

The parties settled their dispute before the probate court ruled on Leonard and Julie's summary judgment motion. That settlement provided that Creighton and DRIF would receive assets from Blanche's estate in the amount of $1,550,000. Creighton subsequently filed this legal malpractice action against Defendants.

II. DISCUSSION

The parties agree that California substantive law controls the disposition of this motion. When interpreting state law, a federal court is bound to follow the decisions of the highest state court. Minnesota ex rel. Pearson v. Probate Court, 309 U.S. 270, 273, 60 S.Ct. 523, 525, 84 L.Ed. 744 (1940). "In the absence of such a decision, a federal court must predict how the highest state court would decide the issue using intermediate appellate court decisions, decisions from other jurisdictions, statutes, treatises, and restatements as guidance." In re Kirkland, 915 F.2d 1236, 1239 (9th Cir.1990). However, "in the absence of convincing evidence that the highest court of the state would decide differently, a federal court is obligated to follow the decisions of the state's intermediate courts." Id. (citations omitted).

A. WHETHER OSCAR BUDD KLEINFELD WAS NEGLIGENT IN DRAFTING BLANCHE KROLOFF'S WILL

Kleinfeld Defendants now argue that the pay-all-taxes provision did not bar Blanche's estate from recouping taxes paid on Yale's QTIP trust. Creighton responds by arguing that Article Third constitutes a direction to pay the federal estate taxes on the QTIP trust property, which is inconsistent with Blanche's true testamentary intent. According to Creighton, Blanche never intended her will to have this effect. As is explained below, this dispute is factual and cannot be resolved as a question of law.

In California, construction of a will is a question of law, unless the construction turns on the credibility of extrinsic evidence. Estate of Heim v. C.I.R., 914 F.2d 1322, 1325 (9th Cir.1990). "If extrinsic evidence renders the language of the will susceptible to two or more meanings, the will is said to be ambiguous and the construction of the will then turns on the credibility of the extrinsic evidence." Id. Extrinsic evidence is admissible to make this determination. Id. If the extrinsic evidence does not render the will susceptible to two or more meanings, then the will is deemed unambiguous, the extrinsic evidence is disregarded, and the plain language of the will is dispositive of the testator's intent. Id. On the other hand, if the extrinsic evidence renders the will ambiguous, the extrinsic evidence can be used in determining the testator's intent. Id. In that event, interpretation of the will is a question of fact and summary judgment is not appropriate. De Oliveira v. United States, 767 F.2d 1344, 1347 (9th Cir.1985); cf. IBEW, Local 47 v. Southern California Edison Co., 880 F.2d 104, 107 (9th Cir.1989); United States v. King Features Entertainment, Inc., 843 F.2d 394, 398 (9th Cir.1988).

There is conflicting evidence in the record on whether Blanche intended to have the "pay-all-tax" provision apply to the federal taxes owing on Yale's QTIP trust. On the one hand, the declaration filed by Kleinfeld in the probate action indicates that Blanche did not intend for Leonard and Julie, the remainder trust beneficiaries, to be responsible for any of the federal estate taxes owed on Yale's QTIP trust.² Creighton, however, presented evidence to the contrary. See Creighton's Memorandum In Opposition To Defendant's Motion For...