Morales v. Field, Degoff, Huppert & Macgowan

• Decision Date: 03 December 1979
• Citation: 160 Cal.Rptr. 239,99 Cal.App.3d 307
• Court: California Court of Appeals Court of Appeals
• Parties: Patricia D. MORALES, Plaintiff and Appellant, v. FIELD, DeGoff, Huppert & MacGowan, Defendants and Respondents. Civ. 44659.

Page 239

160 Cal.Rptr. 239

99 Cal.App.3d 307

Patricia D. MORALES, Plaintiff and Appellant, v. FIELD, DeGoff, Huppert & MacGowan, Defendants and Respondents.

Civ. 44659.

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

Dec. 3, 1979.

Rehearing Denied Jan. 2, 1980.

Hearing Denied Jan. 30, 1980.

Hartly Fleischmann, Jay Richard Strauss, Fleischmann & Farber, San Francisco, for plaintiff and appellant.

Wilson, Elser, Edelman & Dicker, San Francisco, for defendants and respondents.

SCOTT, Associate Justice.

Patricia Morales appeals from a judgment of dismissal of her complaint following the sustaining of respondents' demurrers without leave to amend, and from the granting of respondents' motion for judgment on the pleadings. Appellant's complaint alleges damages resulting from a breach of duty owing to her by respondent law firm, Field, DeGoff, Huppert & MacGowan.

Appellant Patricia Morales is the adult daughter of Beatrice S. Dennis, who died in September 1969, and Gordon W. Dennis, who died in 1975. This lawsuit involves events which occurred during the probate of Beatrice's estate. When Beatrice died, she left a will which bequeathed her community property to her husband, Gordon, and her separate property to a testamentary trust of which Gordon was life beneficiary and Patricia the remainderman. Wells Fargo Bank was named executor and trustee. To represent it in that capacity, Wells Fargo retained respondents Field, DeGoff, Huppert & MacGowan, who had been the Dennis family's attorneys for many years and who drafted Beatrice's will. After Beatrice's death, respondents sent appellant a letter on October 9, 1969, which stated: "There is no action required to be taken on your part in connection with the hearing or further probate proceedings."." Respondents sent a second letter on October 15, 1969, which stated: ". . . we will keep you advised if anything unusual arises during the probate administration. (P) Since all aspects of probate administration will be under court supervision and subject to court orders, you should feel reasonably assured that your interests will be protected."

Appellant's allegations that respondent attorneys for the trustee breached a duty owing to her as a beneficiary of her mother's estate flow from two transactions which will be discussed separately.

The Hibil Transaction

In March of 1969, shortly before her death, Beatrice guaranteed certain unsecured personal loans of approximately $335,000, made jointly and severally to three shareholders of Hibil, Inc. by The Chartered Bank of London. Gordon was one of those three shareholders; the money was borrowed to provide initial financing for the operation of Hibil. On November 25, 1970, Wells Fargo as executor filed a "Petition for Instructions Authorizing Executor to Execute Guarantee and Compromise of Claim." The petition was prepared by respondents. According to the petition, as part of a compromise and settlement of its claim against Beatrice's estate, Chartered Bank had agreed to refinance the original promissory notes guaranteed by Beatrice. Hibil, Inc. was to be the borrower, with each of Hibil's original three shareholders and Beatrice's estate co-guarantors of the loan. Wells Fargo as executor sought authorization to execute a guarantee of that loan; the trial court authorized and approved Wells Fargo's request on December 10, 1970.

Appellant alleges that respondents breached a duty owed to her when they prepared Wells Fargo's petition for permission to execute the Hibil loan guarantee without notifying her of the proposed transaction, and without disclosing to her and to the court that respondents represented not only the executor but also Hibil, Inc., Gordon, and the other two stockholders of Hibil. Appellant also alleges that as a result of that guarantee the estate lost a right of subrogation and became entitled instead only to a pro rata contribution from the three other co-guarantors for its payments on the guarantee. She further alleges that the estate made more substantial payments on the guarantee than did the other guarantors, and that Hibil made cash distributions to the shareholders, no part of which was paid to the estate.

The guarantee was again before the court when it considered Wells Fargo's petition for settlement of the first account filed on July 26, 1972. That petition set forth in detail The Chartered Bank of London's claim against the estate based on Beatrice's original guarantee, and the compromise of that claim accomplished by the Hibil loan guarantee. Appellant had notice of this petition. No objections to the petition were filed by appellant; no appeal was taken from the order settling the account.

It is first necessary to consider whether appellant can now complain of respondents' participation in the Hibil matter. An order settling an executor's account is res judicata and conclusive against a subsequent claim of liability against the executor for negligence or fraud, and such determination is binding on all the parties interested in the estate. (Carr v. Bank of America etc. Assn. (1938) 11 Cal.2d 366, 371, 79 P.2d 1096; Prob.Code, § 931.) A logical corollary of that rule is that such an order is also res judicata against a subsequent claim against the executor's Counsel for negligence or fraud.

However, on a sufficient showing of Extrinsic fraud, that order may be set aside in an equitable action. (Perna v. Bank of America N.T.& S. Assn. (1938) 28 Cal.App.2d 372, 376, 82 P.2d 605.) Since no appeal has been taken from the order granting the settlement of the first account, appellant can only prevail if she has alleged facts constituting extrinsic fraud. Extrinsic fraud which will warrant a court of equity in setting aside a judgment or decree consists of fraud which prevents a real trial of the issues involved in the case, such as conduct which prevents the injured party from receiving notice of the action or which causes the absence of necessary witnesses. (Ringwalt v. Bank of America etc. Assn. (1935) 3 Cal.2d 680, 684, 45 P.2d 967.)

The failure to disclose to the court an attorney's dual representation in a probate proceeding was held to be extrinsic fraud in Potter v. Moran (1966) 239 Cal.App.2d 873, 49 Cal.Rptr. 229. In Potter one law firm represented both the trustee of a testamentary trust and the guardian of the estates of two minors, life beneficiaries of the trust. The probate court was not informed of this dual representation before it approved certain accounts of the trustee, including payment of attorneys' fees. Some years later, the residuary beneficiary of the trust brought an action seeking inter alia an annulment of the orders approving the account and the restoration of fees. The complaint also alleged the trustee had been negligent in the sale of certain stocks. The court stated (at p. 877, 49 Cal.Rptr. at p. 232): "It is imperative that in matters of probate, and especially so in matters heard ex parte, that the court be fully informed as to all facts that might influence the decision to be made. There is an affirmative duty to furnish such information, and the court will properly assume that nothing material to the matter in hand has been concealed . . . ," and held the failure of the trustee and attorneys to disclose the dual representation to the court amounted to extrinsic fraud on the court. Therefore, the court vacated the orders and ordered a de novo reconsideration of the accounts, to determine whether fees were reasonable and whether the trustee was negligent.

Potter involved counsel's representation of a trustee and the guardian of the beneficiaries, while this case involves the dual representation of a trustee and a third party involved in a transaction. Nonetheless, it appears that the failure to disclose this dual representation to the court amounts to extrinsic fraud according to Potter, as the court apparently was not fully informed as to all facts that might influence its decision. We thus conclude that the court order of July 26, 1972, settling the first account does not preclude appellant by res judicata from now alleging that respondents breached their duty to her.

We must now determine whether appellant's complaint alleges facts sufficient to state a cause of action against respondents. In determining the sufficiency of a complaint against a general demurrer, we consider the demurrer as admitting all material and issuable facts as properly pleaded. "(T)he rule is that if, upon a consideration of all the facts stated, it appears that the plaintiff is entitled to any relief at the hands of the court against the defendants, the complaint will be held good, although the facts may not be clearly stated or may be intermingled with a statement of other facts irrelevant to the cause of action shown, or although the plaintiff may demand relief to which he is not entitled under the facts alleged." (Scott v. City of Indian Wells (1972) 6 Cal.3d 541, 549, 99 Cal.Rptr. 745, 750, 492 P.2d 1137, 1142, citing Matteson v. Wagoner (1905) 147 Cal. 739, 742, 82 P. 436.) A judgment on the pleadings is similar to a judgment following the sustaining of a demurrer, and the standard of appellate review is the same. (Baillargeon v. Department of Water & Power (1977) 69 Cal.App.3d 670, 676, 138 Cal.Rptr. 338.)

It is clear that the attorney for a trustee may be held liable to the beneficiary of the trust when he actively participates in a breach of trust. (See 4 Scott on Trusts (3d ed. 1967) § 326.4, p. 2568; 7 Witkin, Summary of Cal.Law (8th ed. 1974) Trusts, § 89, p. 5449; see also Andrews v. Tuttle-Smith Co. (1906) 191 Mass. 461, 78 N.E. 99, 101 (attorney liable for breach of trust when he actively participated in fraudulent conversion); In re Bond & Mortgage Guarantee Co. (1952) 303 N.Y. 423, 103 N.E.2d 721, 726 ("The basic vice is the existence of a personal interest, entangling their private claims with those of their beneficiaries.").)

Whether the...