Levy v. Blum

• Decision Date: 26 September 2001
• Docket Number: No. F035332.,F035332.
• Citation: 112 Cal.Rptr.2d 144,92 Cal.App.4th 625
• Court: California Court of Appeals Court of Appeals
• Parties: Joseph W. LEVY et al., Plaintiffs and Respondents, v. Gerald H. BLUM, as Trustee, etc., Defendant and Appellant; Gibson, Dunn & Crutcher LLP, Objector and Appellant.

112 Cal.Rptr.2d 144

92 Cal.App.4th 625

Joseph W. LEVY et al., Plaintiffs and Respondents, v. Gerald H. BLUM, as Trustee, etc., Defendant and Appellant Gibson, Dunn & Crutcher LLP, Objector and Appellant.

No. F035332.

Court of Appeal, Fifth District.

September 26, 2001.

Certified for Partial Publication.^*

Review Denied December 12, 2001.

Gibson, Dunn & Crutcher LLP, David Cathcart, Wayne W. Smith, David A. Battaglia and Robert S. Warren, Los Angeles, for Defendant, Objector and Appellants.

Baker, Manock & Jensen, Kendall L. Manock, Jeffrey A. Jaech and Kathleen A. Meehan, Fresno, for Plaintiffs and Respondents.

OPINION

WIELAND, J.^†

This appeal challenges a trial court's $25,992 sanctions award under Code of Civil Procedure section 128.5¹ against Gerald H. Blum (Blum) and his attorney, Gibson, Dunn & Crutcher LLP (Gibson) (collectively appellants), in favor of Joseph W. Levy (Levy), and Bret Levy, Felicia Weston, and Jody Schlesinger (the Levy children) (collectively respondents).

After granting respondents' motion to enforce a settlement agreement that the parties had reached after a full day of negotiations, and which an attorney from Gibson had explicitly entered into the record before the trial court nearly nine months earlier, the trial court found that appellants' action of taking a position in "total disregard of the clear, unambiguous terms of the in-court settlement agreement" was frivolous and in bad faith. Appellants seek reversal contending the trial court erred in finding (1) section 128.5, not section 128.7, was the applicable sanctions statute, (2) then' actions were frivolous, and (3) the attorney fees and expenses sought were incurred as a result of their sanctionable conduct. Appellants further contend the trial court erred in awarding sanctions against Gibson personally, as well as against Blum, without prior notice.

We will find the court awarded sanctions under the appropriate statute, it did not abuse its discretion in finding that appellants' actions were frivolous, and that the amount awarded was incurred as a result of their sanctionable conduct. While we affirm the trial court's finding that Blum was given notice that sanctions were being sought against him, we will reverse the trial court's order awarding sanctions against Gibson because it was not given advance notice that sanctions were being sought against it personally.

FACTUAL AND PROCEDURAL HISTORIES

Following Gertrude H. Klein's death on December 24, 1973, a testamentary trust was created pursuant to Klein's written will (the Klein trust). On January 2, 1974, the petition to admit Klein's will to probate was filed, and the will, creating the Klein trust, was admitted to probate on January 17, 1974. Pursuant to the will's terms, Klein designated Blum as the trustee of the trust, which contained 600 shares of E. Gottschalk & Co., Inc. stock. On February 6, 1979, a decree of final distribution of Klein's estate was filed, incorporating all of the terms of the Klein trust, including the appointment of Blum as trustee. Net income from the Klein trust was to be distributed equally between Levy and Blum. At the time of Blum's death, the trust's assets would be distributed equally, with one-half going to Levy or his offspring, and the other half to Blum's offspring.

On April 23, 1998, Levy filed his first of multiple petitions seeking to have the Klein trust divided into two separate trusts. Subsequently, Levy filed amended petitions on May 15, 1998, and June 25, 1998. The Levy children joined in the amended petition filed on June 25, 1998. Following Blum's objections to the June 25, 1998, petition, the trial court granted Levy leave to file a further amended petition. As a result, Levy filed a fourth petition on August 12,1998.

By this petition, Levy sought to divide the Klein trust to accommodate the different investment objectives of the trust's beneficiaries, and to commence an action for breach of trust against Blum. By that time, the Klein trust had grown through an exchange of the 600 shares of E. Gottschalk & Co., Inc.'s stock for shares of the newly formed Gottschalks Inc., at a ratio of 1,100 to 1, and a later stock split, to nearly one million shares of Gottschalks stock. The trust also consisted of tax-free municipal bonds purchased after the sale of some of the stock. Levy sought to enjoin Blum from committing a breach of trust by selling the Gottschalks stock held in the Klein trust. Alternatively, Levy sought to remove Blum as trustee. Blum and the Blum children, Ryan Blum and Derek Blum, objected to Levy's proposed division of the Klein trust, claiming that Levy's proposal would result in an unequal and non-pro rata division of the trust.

On March 23, 1999, which was the first day of trial on Levy's petition, a settlement conference was held. That same day, respondents entered into a settlement agreement with Blum, individually and as sole trustee of the Klein trust, and the Blum children. Blum's attorney, David A. Battaglia of Gibson, placed the settlement agreement's terms on the record before the trial court.

Paragraph 7 of the settlement agreement provides:

"[Mr. Battaglia:] Paragraph seven: The Klein Trust shall be divided into two trusts.

"Mr. Blum: Say equal.

"Mr. Battaglia: The Klein Trust shall be divided into two trusts. Mr. Blum shall remain trustee of the trust which benefits him and his issue, parens, the, quote, Blum Trust, close quote, close parens. Mr. Levy shall be the trustee of the trust which benefits him and his issue, parens, the, quote, Levy Trust, close quote, close parens. The division shall be equal."

The parties further agreed in paragraph 10 that both trusts were to be administered and distributed in accordance with the terms and conditions as set forth in the decree of final distribution as to the Klein trust, except the Levy trust would benefit the Levy family and the Blum trust would benefit the Blum family.

At the date of settlement, as recited in paragraph 8 of the settlement agreement, the Klein trust consisted primarily of three assets: 975,100 shares of Gottschalks common stock; municipal bonds valued at approximately $1,719,515; and a money market account with an approximate cash value of $28,062.² With respect to these three assets, paragraph 9 of the settlement agreement provides:

"Mr. Battaglia: .... The Blum Trust shall consist of, parens, one, close parens, all bonds and the money market account currently held by the Klein Trust, parens, assuming an estimated value of 1,747,577 dollars, close parens, minus all of the unpaid attorneys' fees pursuant to paragraph three, semicolon, parens, two, close parens, 382,550 shares of Gottschalks stock, parens, assuming that the total shares held by the Klein Trust is 975,100, close parens, semicolon, and, parens, three, close parens, one-half of all other assets held by the trust other than the bonds, money market account, and Gottschalks stock.

"The Levy Trust shall consist of, parens, one, close parens, 592,550 shares of Gottschalks stock, parens, assuming that the amount of the total shares held by the Klein Trust is 975,100, close parens, and, parens, two, close parens, one-half of any other assets held by the trust other than the bonds, money market account, and Gottschalks stock.

"To the extent that more or less than 200,000 dollars of additional attorneys' fees are unpaid currently, then the benefit or expense of the difference shall be split equally between the Blum Trust and the Levy Trust.

Blum shall receive all income from the Blum Trust, and Levy shall receive all income from the Levy Trust as a result of this equal division."³

The settlement agreement did not specify a certain date for division of the Klein trust's assets, but did contain conditions that needed to be satisfied before the division could occur. One such condition required Levy to obtain a private letter ruling from the Internal Revenue Service (IRS) assuring all parties that the division would not cause any of the trusts to lose their generation-skipping tax exempt status. Pursuant to the agreement, the trial court retained jurisdiction to enforce the settlement agreement until it was fully executed.

After the settlement agreement was recorded, Levy's attorneys, believing that the IRS would require Blum, as sole trustee of the Klein trust, be an applicant for the ruling request, submitted their draft of the ruling request to Blum for his comment and signature. Blum, however, suggested that the ruling request be modified to show that the number of Gottschalks shares going to the Blum and Levy trusts would be adjusted as of the date of physical division, based on the shares' market price on that date plus a $0.37 per share premium in favor of the Blum trust. Blum and his attorney contended the parties intended that the assets be equally divided, therefore the allocation of the Klein trust's assets should be determined at the time of division, not at the time the settlement agreement was entered into. Levy, on the other hand, contended that the division of assets was to be made as of the date the settlement agreement was entered into— March 23, 1999—based on an agreed share price of $7.37 per share, regardless of later changes in value.

With respect to the ruling request Levy was required to submit to the IRS, Blum took the position that although the parties disagreed about when the valuation of the Klein trust's assets was to take place for the purpose of dividing those assets, the parties could submit a ruling request to the IRS that set forth each parties' interpretation of the settlement agreement and the respective values of the assets of the Blum and Levy trusts at the time of settlement and at the time of actual division.

On September 2, 1999, respondents filed a motion to enforce the terms of the settlement agreement and requested sanctions pursuant to section 128.5. The basis for the motion was Blum's refusal to execute...