Estate of Feraud

• Decision Date: 03 May 1979
• Citation: 92 Cal.App.3d 717,154 Cal.Rptr. 889
• Court: California Court of Appeals Court of Appeals
• Parties: Estate of Ernest C. FERAUD, Deceased. John P. ARMSTRONG et al., Petitioners and Appellants, v. Grace Feraud BECKNER et al., Objectors and Respondents. Civ. 54215.

Page 889

154 Cal.Rptr. 889

92 Cal.App.3d 717

Estate of Ernest C. FERAUD, Deceased.

John P. ARMSTRONG et al., Petitioners and Appellants, v. Grace Feraud BECKNER et al., Objectors and Respondents.

Civ. 54215.

Court of Appeal, Second District, Division 3, California.

May 3, 1979.

Kindel & Anderson, Keith A. Pursel and Bruce E. Cooperman, Los Angeles, for petitioners and appellants.

Benton, Orr, Duval & Buckingham and Edwin Duval, Ventura, for objectors and respondents.

COBEY, Acting Presiding Justice.

Testamentary co-trustees, Fred M. Yasukochi and John P. Armstrong, appeal from provisions of a judgment surcharging them $133,876.50, which amount represents the adjusted difference between the total of the annual bonuses paid or credited to Yasukochi by Ramirez and Feraud Chili Company (hereafter Company) for six years (1971-1972 to 1976-1977, inclusive) and 10% Of the Company's net income after taxes for the same period.

The principal issues presented by this appeal are whether the corporate bonuses paid trustee Yasukochi were fair and reasonable and whether trustee Armstrong was properly held liable for the surcharge. More specifically, the two trustees contend that (1) the trial court should have applied a corporate standard rather than a trust standard in evaluating the reasonableness of Yasukochi's bonuses for successfully managing an estate corporation; (2) the evidence in support of the finding of unreasonableness with respect to Yasukochi's bonuses is insubstantial; and (3) Armstrong was improperly surcharged without either findings or evidence that he either consented to Yasukochi's bonuses or negligently enabled them to be paid or credited. (See Civ.Code, § 2239.)

For reasons that follow, we have decided to reverse the surcharge order for the sole purpose of a further evidentiary hearing upon what would be fair and reasonable bonuses to Trustee Yasukochi for the period in question.

FACTS

The decedent, Ernest C. Feraud, at the time of his death in 1966, owned all of the outstanding stock of the Company, a California corporation. Yasukochi at that time was vice president of the Company and in charge of its operations whenever the decedent was unavailable. Since that time Yasukochi has been the president and chief operating officer of the Company as well as one of its directors. Armstrong is a public accountant who, for many years prior to the decedent's death, did the outside accounting work for the Company. He has been the secretary-treasurer of the Company since approximately 1965 and a director as well since approximately 1970. The decedent named Yasukochi and Armstrong in his last will as co-executors of his estate and as co-trustees of the testamentary trusts created by the will. As such trustees they became the sole owners of all the stock of the Company. Yasukochi, since the decedent's death, has been the only full-time officer of the Company and has personally handled the entire management of both production and sales including, as incident thereto, labor relations and finance.

As the sole stockholders, Yasukochi and Armstrong controlled the Company and selected three other businessmen from Ventura to constitute with them the five-person board of directors. In June 1971 two of these three outside directors were appointed by the board of directors to study, at Yasukochi's request, the matter of providing him with incentive compensation. At the board of directors meeting the following month, these three directors passed a motion by one of them (with Yasukochi and Armstrong abstaining) that beginning July 1, 1971, Yasukochi's compensation would be his existing salary of $30,000 a year (which had remained unchanged since the decedent's death) plus 2% Of gross sales (after the deduction of promotional rebates and discounts and the income from the sale of raw products, by-products and miscellaneous items) to the extent that these sales exceeded $1.5 million per year. ¹

Decedent's last will created three trusts. Twenty percent of the stock of the Company was allocated equally to two separate trusts for two stepchildren of the decedent. The remaining 80% Of the stock was allocated to the residuary trust. The three life beneficiaries of the net income of this trust were the decedent's three adult daughters and the remainder interest of this trust was owned by their issue. The stock of the Company constituted over 90% Of the fair market value of the residuary trust.

This litigation began with the filing on June 13, 1977, of exceptions to the Sixth Account of the co-trustees that covered the fiscal year 1975-1976, by two of the three life-income beneficiaries of the residuary trust. These same objectors also filed objections on September 7, 1977, to the trustees' Seventh Account covering the period of September 1, 1976 to July 31, 1977.

The annual accounts, which Yasukochi and Armstrong submitted to the probate court as testamentary trustees starting in 1968, contained nothing about the Company's situation and operations except statements of the total dividends declared by the Company and the trustees' estimates of the market values of the Company's stock. On May 31, 1977, the two trustees, however, submitted to the probate court with their petition to the court for instructions regarding the trusts' retention of the Company's stock and the Company's dividend policy, a statement of the financial position of the Company as of June 30, 1976, and a comparative statement of the income of the Company for the years ending June 30, 1975 and June 30, 1976.

Under the incentive compensation plan adopted in July 1971, Yasukochi received $262,841.13 in bonuses for the six fiscal years 1972 through 1977 ending June 30. The trial court found this bonus of 2% Of essentially gross sales of the Company to be "grossly unfair to the beneficiaries" and unreasonable and that a reasonable bonus for Yasukochi for these years would be 10% Of the Company's net income after taxes or a total for this period of $118,713.33. ²

During the six years in question, the Company's gross sales went from $2,284,383.00 to $5,621,720.00. Yasukochi's annual bonus, which was based essentially on the annual gross sales in excess of $1.5 million, steadily rose during this period from $14,611.95 to $74,476.02....