Hearst v. Ganzi

• Decision Date: 19 December 2006
• Docket Number: No. B184659.,B184659.
• Citation: 52 Cal.Rptr.3d 473,145 Cal.App.4th 1195
• Parties: William R. HEARST II, et al., Plaintiffs and Appellants, v. Victor F. GANZI, as Co-Trustee, etc., et al., Defendants and Respondents.
• Court: California Court of Appeals Court of Appeals

52 Cal.Rptr.3d 473

145 Cal.App.4th 1195

William R. HEARST II, et al., Plaintiffs and Appellants, v. Victor F. GANZI, as Co-Trustee, etc., et al., Defendants and Respondents.

No. B184659.

Court of Appeal, Second District, Division 3.

December 19, 2006.

Bartlit Beck Herman Palenchar & Scott, Fred H. Bartlit, Jr., Jeffrey A. Hall, Santa Cruz, James B. Heaton, III; Sacks, Glazier, Franklin & Lodise, Robert N. Sacks and Matthew W. McMurtrey, Los Angeles, for Plaintiffs and Appellants William R. Hearst, II and Deborah Hearst.

Thomas M. Di Franco for Plaintiff and Appellant Phoebe Hearst Cooke.

Carmody & Torrance, David L. Sfara, Matthew R. Peterson; Greines, Martin, Stein & Richland, Irving H. Greines and Feris M. Greenberger, Los Angeles, for Patricia Hearst Shaw as Amicus Curiae on behalf of Plaintiffs and Appellants.

Loeb & Loeb, Andrew S. Garb, David C. Nelson, Los Angeles; Skadden, Arps, Slate, Meagher & Flom, Jeffrey H. Dasteel,

Los Angeles, and Carl Alan Roth for Defendants and Respondents.

KLEIN, P.J.

Plaintiffs and appellants William R. Hearst, II (William), Deborah Hearst (Deborah) and Phoebe Hearst Cooke (Phoebe) (collectively, plaintiffs or appellants) appeal an order denying their petition to declare that an action they propose to bring against defendants and respondents Victor F. Ganzi, as co-trustee of the Hearst Family Trust, et al. (collectively, the Trustees), would not amount to a will contest.¹,²,³

This appeal involves the latest challenge by certain beneficiaries of the Hearst Family Trust (the Trust) to the actions of the Trustees thereof.⁴ The plaintiffs, who are income beneficiaries of the Trust, contend the Trustees have breached their fiduciary duty of impartiality by favoring the remainder beneficiaries over the income beneficiaries. Plaintiffs propose to bring a petition against the Trustees for breach of fiduciary duty in order to compel the Trustees to increase the income distribution to them.

The first step in that process is the filing by plaintiffs of a petition under section 21320 to obtain a preliminary determination from the trial court as to whether their proposed petition against the Trustees, alleging a breach of fiduciary duty, would constitute a contest within the meaning of the no contest clause in the will of William Randolph Hearst (WRH). The trial court ruled the proposed petition against the Trustees would constitute a contest. Our review is de novo.

The essential issue presented is whether the proposed petition, alleging the Trustees breached their fiduciary duty by favoring the remainder beneficiaries over the income beneficiaries, would amount to a contest within the meaning of the no contest clause in WRH's will.

The fiduciary duty of a trustee includes the duty to deal impartially with the beneficiaries (§ 16003), unless the trust instrument provides otherwise (§ 16000). Here the trust instrument specifically authorizes the Trustees to make long-term investment decisions which may inure to the benefit of remainder beneficiaries at the expense of current income beneficiaries. As a result, plaintiffs' proposed petition, which challenges and seeks to alter the Hearst Corporation's (Corporation) dividend policy and seeks to impose personal liability on the Trustees for conduct that falls short of bad faith, gross neglect or fraudulent misconduct, would constitute a contest. Therefore, the order is affirmed.

FACTUAL AND PROCEDURAL BACKGROUND

1. Introduction.⁵

The Corporation is one of the largest diversified communication companies in the world. Its major interests include magazine, newspaper and business publishing, cable networks, television and radio broadcasting, internet businesses, television production and distribution, newspaper features distribution, and real estate.

The Corporation was founded by WRH, the decedent. WRH died in 1951. His will created the Trust for the benefit of his descendants. The Trust is the sole shareholder of the common stock of the Corporation. The Trust's corpus consists of the stock of the Corporation which, together with its subsidiaries, is referred to as the Company.

The Trust has income beneficiaries and contingent remainder beneficiaries. The Trust is to terminate upon the death of the last measuring life, and is unlikely to end before the year 2040.

At present, there are 17 income beneficiaries, including Deborah, William and Phoebe, and more than 40 contingent income and remainder beneficiaries of the Trust.

a. WRH's intent as manifested in his will.⁶

In accordance with WRH's apparent intent to perpetuate his media empire, his will vested the Trustees with considerable discretion in their management of the Trust. The instrument, inter alia, confers upon the Trustees the discretion "to continue or retain [the Corporation] as long as they see fit and without time limit"; to not dispose of the Corporation or any of its businesses "unless it shall in their opinion be necessary or prudent do so so"; to hold assets regardless of the amount of income they produce, "for such periods of time and to such extent as to them may from time to time seem best"; and "to decide what is income and what is corpus or principal" of the Trust.

b. The no contest clause.

The will includes a broad no contest clause, which states, inter alia: "If any person who is or would be a ... beneficiary of a trust created herein or hereunder ... directly or indirectly shall institute or participate or cooperate in the institution or filing or prosecution of any proceeding or proceedings of [any] kind or character whatsoever tending in any manner or to any extent to change, annul, revoke, set aside or invalidate this my Will or any of its provisions, including but not limited to any trust created herein or hereunder or any of the provisions of any such trust ..., then and in any such event I hereby revoke and annul all bequests, devises and provisions made or interest created in or under this my Will for any such person." (Italics added.)

c. Limitation as to personal liability of the Trustees.

With respect to the personal liability of the Trustees, the will provides no Trustee shall be answerable for any losses which may occur other "than by reason of [the Trustee's] own individual gross neglect or fraudulent misconduct." (Italics added.)

2. The instant proceeding.

a. The proposed petition alleges the Trustees breached their fiduciary duty by favoring the remainder beneficiaries over the current income beneficiaries of the Trust.

On September 27, 2004, Deborah and William, income beneficiaries of the Trust, filed a "Petition For Determination That Proposed Petition Will Not Violate No Contest Clause." Said petition, which was brought under the safe harbor provision of section 21320 (hereafter, the 21320 Petition), requested a determination by the trial court that the petition they proposed to file against the Trustees would not constitute a contest within the meaning of WRH's will and thus would not risk their disinheritance.⁷

The "[Proposed] Petition By Beneficiaries for Relief From Breach of Fiduciary Duty by the Trustees of the Hearst Family Trust" (hereafter, the Proposed Petition) was appended to the 21320 petition as an exhibit. The Proposed Petition, which spanned six pages, alleged in relevant part:

"A fiduciary relationship exists between the Trustees and Petitioners. The Trustees must manage the Hearst Family Trust solely in the interests of the beneficiaries. [Citations.] Pursuant to ... section 16003, the Trustees owe Petitioners a fiduciary duty of impartiality to make trust property productive for current income beneficiaries."

The Proposed Petition further alleged:

The Trust holds legal title to all the issued and outstanding common stock of the Corporation for the sole benefit of the Trust beneficiaries. In a July 18, 2003 letter, the Trustees estimated the value of the Corporation as of December 31, 2002 to be between $10.53 billion and $10.64 billion. Press accounts have estimated the value of the Corporation to be in excess of $30 billion. Based on the value range assigned by the Trustees to the common stock of the Corporation, the Trust yielded income to the income beneficiaries of 1.19 percent to 1.29 percent for the year ending December 31, 2001, and 1.24 percent to 1.25 percent for the year ending December 31, 2002.

Citing the above figures, the Proposed Petition alleged the Trustees "have breached their fiduciary duties owed to current income beneficiaries.... In at least the years 2000, 2001, and 2002, the property held by the [Trust] generated income to current income beneficiaries ... which was substantially lower than the income normally earned by trust investments, thereby favoring the remainder beneficiaries over the current income beneficiaries of the [Trust].⁸ ... [¶] The Trustees' breaches of fiduciary duties have proximately caused the current income beneficiaries, including Petitioners, to suffer damages because current income beneficiaries would have received higher income in at least the years 2000, 2001, and 2002 had the Trustees not breached their fiduciary duties by failing to take steps to secure a reasonable income yield on the ... Trust. [¶] ... This Court should award damages according to proof at trial against the Trustees and in favor of all income beneficiaries as redress for the Trustees' breaches of their fiduciary duties. In addition, this Court should order that the Trustees in the future must take steps to ensure that the Trust's income is increased so that the income beneficiaries each year receive an adequate amount of income based upon the size of the ... Trust." (Italics added.)

By way of relief, the Proposed Petition "pray[ed] for judgment as follows: [¶] 1. That the Trustees be compelled to redress their breach of fiduciary duty by payment of money damages ...; [¶] 2. That the Trustees be ordered to ensure that all income beneficiaries of this Trust receive in the future...