Menlo v. Klein

• Court: California Court of Appeals
• Writing for the Court: KALRA, J.
• Decision Date: 20 July 2018
• Docket Number: B281058
• Citation: Menlo v. Klein, B281058 (Cal. App. Jul 20, 2018)
• Parties: FRANKLIN HENRY MENLO et al., Plaintiffs and Respondents, v. LESLIE KLEIN, as Trustee, etc., Defendant and Appellant,

FRANKLIN HENRY MENLO et al., Plaintiffs and Respondents, v. LESLIE KLEIN, as Trustee, etc., Defendant and Appellant,

B281058

COURT OF APPEAL OF THE STATE OF CALIFORNIA SECOND APPELLATE DISTRICT DIVISION THREE

July 20, 2018

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

(Los Angeles County Super. Ct. No. BP136769)

APPEAL from an order of the Superior Court of Los Angeles County, Maria E. Stratton, Judge. Affirmed.

Parker, Milliken, Clark, O'Hara & Samuelian, Terence S. Nunan, Alan Weinfeld; Buchalter and Michael L. Wachtell, for Defendant and Appellant.

Donald L. Saltzman for Plaintiffs and Respondents.

____________________

INTRODUCTION

Leslie Klein, trustee of 24 irrevocable trusts for various members of the Menlo family, appeals from the order of the probate court denying his petition for instructions (Prob. Code, § 17200).¹ The beneficiaries have demanded distribution of trust principal as required by the various instruments. Fearing he could be surcharged by the beneficiaries in their ongoing, bitter litigation against him, Klein's petition for instructions seeks court permission to withhold from the distributions 50 percent of the assets to pay for his personal legal defense. We conclude that the probate court did not abuse its discretion in declining to render what is effectively an advisory opinion. Accordingly, the order denying Klein's petition for instructions is affirmed.

FACTUAL AND PROCEDURAL BACKGROUND

1. The 24 trusts at issue

Sam and Vera Menlo² had five children, Franklin Henry Menlo (Franklin), Deborah Menlo Deutsch (deceased), Norine Eve Menlo, Judith Menlo Frankel (deceased), and Madelein Menlo Lipschitz. Sam amassed an extensive fortune and, together with Vera as trustors, established at least 96 separate irrevocable trusts for each of their children, grandchildren, and future generations. Only 24 of those trusts are at issue in this appeal (the Menlo Trusts).

Each of the Menlo Trusts is an express, irrevocable, inter vivos trust. They are funded by millions of dollars in cash, securities, and by approximately $54 million in life insurance policies on Sam's and Vera's lives. The proceeds of these life insurance policies are to be paid out to the Menlo Trusts upon the last of Sam and Vera to die. Sam is alive but, because of a stroke, is no longer competent. Vera is alive and competent.

Klein has been the sole trustee of the Menlo Trusts for 18 years. According to Klein, the settlors' intention was that the initial policies would create sufficient cash value so that loans could be taken against them to pay the yearly premiums, and to enable the acquisition of other life insurance policies more favorable to all of the trusts. The premiums on the policies are extremely high.³

2. The beneficiaries' petitions for accounting and for the removal of the trustee

In late 2012 or early 2013, the Menlo Trust beneficiaries petitioned the probate court for removal of Klein as trustee and for an accounting. They asserted that they had never received any accounting from him. The 24 petitions were consolidated into one action with the lead case being that brought on behalf of the Franklin Henry Menlo Irrevocable Trust, established March 1, 1983 (the Franklin Menlo Trust). The probate court issued several orders to Klein to provide accountings. The litigation isbitter and parties are still involved in extensive discovery (the consolidated proceeding).

3. The demand for distribution of trust principal

In March 2016, Franklin, the son of Sam and Vera who administers the Menlo family affairs and business, demanded a distribution of the assets in the Menlo Trusts pursuant to the requirements in each of those instruments. The language of the Franklin Menlo Trust is similar to that contained in the remaining Menlo Trusts. Franklin's demand cited Paragraph 2.B of his trust, requiring the trustee to distribute 1/4 of the then principal of the Trust to Franklin upon his 30th birthday, 1/3 of the then principal on his 35th birthday, and the remainder of the Trust estate upon his 40th birthday.⁴ At the time, Franklin was age 56 and should have already received the full distribution 16 years earlier. Four of the 24 Menlo Trust beneficiaries were also beyond the age by which they were entitled to distribution of the entire principal and the others had passed various interim milestones (see Exhibit A to this opinion).

4. The trustee's petition for instructions

Klein filed his verified petition pursuant to section 17200.⁵ He sought instruction from the probate court about the Menlo Trust beneficiaries' requests for distribution and asked for permission "to withhold fifty percent (50%) of the current value of each Trusts' estate to cover each Trust's share of (1) taxes . . . , (2) accounting fees and taxes for future tax returns, (3) costs for a final accounting . . . , (4) reconciliation of amounts owned by any Trust to another Trust for money previously advanced; and (5) the Trustee's future costs for attorneys, accountants and other professionals advising and assisting him in this litigation." (Italics added.)

With respect to the beneficiaries' demands for distributions, Klein explained that when he became trustee of the Menlo Trusts in 1996, Sam "made it very clear that notwithstanding the provisions of the Trust documentation no distributions should be made from any of the Menlo Trusts to any of the beneficiaries without his (Sam's) prior approval. Sam also told the Trustee that if any of the Trust Beneficiaries demanded release of some or all of the assets of their respective Trusts without Sam's approval, they would be disinherited and totally cut out from any further distributions from Sam and Vera's estate, including the Menlo Trusts." Since Sam's stroke, Klein had sought Vera's advance approval each time a beneficiary requested release ofTrust assets, primarily to enable beneficiaries to purchase housing.

Klein expressed his concern, because of the litigation against him as trustee, that he would be forced to use Trust assets to pay his attorneys. His petition sought probate court approval of the distribution while withholding half of the value of the Trusts "so that he is not subject to subsequent criticism or surcharge for the loss of the valuable insurance policies and their proceeds." (Italics added.)

The record contains copies of the 24 Menlo Trust instruments. Of particular relevance, they empower the trustee to distribute the principal according to their schedules and to retain and pay professionals, including accountants and attorneys. (See Franklin Menlo Trust, arts. 5.A(9); 5.A(15), italics added) The instruments also set Klein's compensation as trustee. (Id. at art. 7.D.)

5. The opposition

The Menlo Trust beneficiaries argued that Klein had unjustifiedly failed to make the asset distributions to them as specified in each of the Trust instruments. Although Klein insisted he was simply following Sam's orders, the beneficiaries observed that Klein did not produce a single document corroborating Sam's oral instructions. Klein admitted he never attempted to amend the Menlo Trusts to reflect those instructions. Also, Vera was unaware that Klein had withheld distribution of funds based on discussions he had apparently had with Sam, as she had not been part of those discussions.

The beneficiaries also took issue with Klein's request to withhold 50 percent of the Trusts' principal from the distributions. The terms of the Menlo Trusts required distribution without deduction with the result, they argued, that Klein was not entitled to probate court instructions directing him to withhold any Trust property. They also argued that none of Klein's proffered reasons for withholding funds from the asset distributions was valid. First, the beneficiaries would pay their pro-rata share of the insurance premiums. They had already asked Klein for payment amounts. Second, they argued, the Trusts did not provide for creation of lines of credit, and Klein had taken millions of dollars from the lines of credit for which he had not accounted. Finally, they contended that Klein was not entitled to withhold " 'anticipated future litigation expenses' " from Trusts that by their terms had already called for a full or partial distribution to beneficiaries.⁶

6. The trial court's ruling

At the hearing on Klein's petition for instructions, the parties agreed that the probate court could rule on the papers without the introduction of evidence. Klein represented to the probate court that he proposed to distribute a portion of each Trust but "reserve[] the balance to cover attorneys' fees." The probate court denied Klein's petition for instructionsstating, "The petition is essentially asking for instructions on a question of law, whether the trustee can, without fear of future litigation, withhold trust distributions to pay for future attorney fees and costs. This is an inappropriate use of a petition for instructions. (Estate of Schneider (1944) 62 Cal.App.2d 463, 465)." Klein's timely appeal ensued.

CONTENTION

Klein contends that the probate court erred in declining to rule on his section 17200 petition for instructions.

DISCUSSION

Section 17200 is the general method for initiating proceedings in the probate court " 'concerning the internal affairs of the trust.' " (Schwartz v. Labow (2008) 164 Cal.App.4th 417, 427, citing §§ 17201 & 17200, subd. (a).) Probate court proceedings under section 17200 embrace, among other things, instructing the trustee (§ 17200, subds. (a) & (b)(6)), and "[s]ettling the accounts and passing upon the acts of the trustee, including the exercise of discretionary powers." (Id., subd. (b)(5)). They are the "well-established...