People ex rel. Harris v. Shine

• Decision Date: 23 October 2017
• Docket Number: A148505
• Citation: 16 Cal.App.5th 524,224 Cal.Rptr.3d 380
• Court: California Court of Appeals Court of Appeals
• Parties: The PEOPLE EX REL. Kamala HARRIS and Xavier Becerra, as Attorneys General, etc., Plaintiff and Appellant, v. William SHINE, Individually and as Trustee, etc., et. al., Defendants and Respondents.

16 Cal.App.5th 524

224 Cal.Rptr.3d 380

The PEOPLE EX REL. Kamala HARRIS and Xavier Becerra, as Attorneys General, etc., Plaintiff and Appellant,

v.William SHINE, Individually and as Trustee, etc., et. al., Defendants and Respondents.

A148505

Court of Appeal, First District, Division 5, California.

Filed October 23, 2017

Kamala D. Harris and Xavier Becerra, Attorneys General, Tania M. Ibanez, Senior Assistant Attorney General, Elizabeth S. Kim, Susan J. Kawala, Alicia K. Berry and James Toma, Deputy Attorneys General, for Plaintiff and Appellant.

Epstein Law Firm, Robert F. Epstein, San Francisco, Robyn B. Christo ; Bien & Summers, Elliot L. Bien, San Rafael; Law Office of Joseph Wolberg and Joseph G. Wolberg, Kentfield, for Defendants and Respondents.

BRUINIERS, J.

William B. Shine was the trustee of a family trust. Pursuant to statutory authority for supervision of charitable trusts ( Gov. Code, §§ 12591, 12598 ), the Attorney General petitioned for Shine's removal and for surcharge based on his mismanagement of the trust, and an interim substitute trustee was appointed. Shine successfully petitioned the trial court for advanced fees from the trust for defense of the petition, subject to repayment if he was ultimately found not entitled to indemnification. The People appeal. Because the probate court applied an incorrect legal standard, failing to weigh all relevant factors, in making the pendente lite fee award, we reverse and remand for reconsideration.

I. BACKGROUND

The 1995 Trust

Robert A. and Eva M. Lindskog (Robert and Eva) established a revocable trust in 1995 (Trust) as an estate planning vehicle. As later amended, the Trust provided that on Eva's death all but $1 million of her share of trust property "shall be irrevocably set aside for charitable purposes and held as the LIVEWIRE LINDSKOG FOUNDATION" (Foundation).¹ Robert and Eva designated themselves original cotrustees and Shine successor trustee. Robert resigned in 2001 due to dementia, and Shine became the sole trustee after Eva's death in early 2004. Trust assets were worth about $40 million on Eva's death, consisting mostly of real property holdings.

2005 Petition and 2008 Settlement

In 2005, Robert's conservator objected to Shine's accounting, petitioned to remove Shine as trustee and surcharge him for mismanagement, and charged him with financial elder abuse. The probate court ordered an accounting, a valuation of Trust assets, and a division of assets between Robert's and Eva's estates. Eva's estate was valued at about $20 million. A 2008 settlement, approved by the court, ratified prior distributions to Robert, distributed an additional $1 million to Robert, and confirmed the remainder of the Trust estate as Eva's share.² The settlement required Shine to "form the Foundation and allocate and distribute to it the remaining assets pursuant to the provisions of the Trust."

In June 2009, Shine filed articles of incorporation for the Foundation. However, he failed to appoint officers or directors, apply for tax-exempt status, or transfer Eva's estate to the Foundation. In 2011, after the Attorney General initiated an audit of the Trust, Shine appointed two long-time friends, Marty Mancebo and Thomas Harrington, as cotrustees.

2013 Petition by Attorney General

In December 2013, the Attorney General petitioned on behalf of the People of the State of California for removal of the trustees, appointment of a receiver, and an accounting.³ The People argued that Shine failed to fulfill his duties as trustee following Eva's death in 2004 and the settlement in 2008 to obtain a valuation of Trust assets for the purpose of dividing them between the Foundation and Trust, create the Foundation, fund the Foundation from Eva's share of the assets, and transfer title to real property assets to the Foundation. The People also alleged Shine engaged in prohibited self-dealing by employing his own firm as a tax consultant for the Trust; improperly prepared tax returns and falsely reported a $7 million donation to the Foundation on the 2005 return for Eva's estate; failed to accurately account for expenses and income in the Trust or maintain written records of his actions as trustee; and improperly used Trust assets to make loans to business associates and friends, failed to exercise due diligence in doing so, and on some occasions had to foreclose on property securing those loans. The People brought causes of action for breach of fiduciary duty and removal of trustees (§§ 15642, 16049, 16420, 17200), an accounting (§§ 16420, 17200), and removalof trustees and appointment of a receiver (§§ 16420, 17200).

At a February 2014 hearing on the People's petition, the court stated its intention to deny the trustees' request for a continuance of the hearing unless the trustees agreed to relinquish control over the Trust in the interim. The trustees (hereafter former trustees) agreed, and the court appointed David A. Bradlow as temporary trustee.

Bradlow filed an initial status report in May 2014. He reported that "at a minimum ... the affairs of the trust have not been managed appropriately." The former trustees provided a list of key personnel involved in Trust affairs that was "replete with inaccuracies," including misidentification of the managers of real property assets. Tenants in a Berkeley property were paying $100 and $400 a month in rent; the property had a high vacancy rate and unreported landmark status that threatened insurance coverage; and the property, which was acquired after a 2012 foreclosure, was worth substantially less than the amount of outstanding debt to the Trust. A Mill Valley rental complex lost more than $115,000 in 2013, and records were inconsistent as to the Trust's ownership interest in the corporation that owned the property. An initial review of the Trust's cash flow disclosed a $120,000 payment to Shine, $225,000 in payments to attorneys, and $1 million in checks to payees identified as "Miscellaneous" in the accounting system. Bradlow's seventh status report in January 2016 reported: "[T]he condition of the records for the Trust was a problem for the Trustee. In many instances, to understand an asset and/or address that asset, an independent investigation had to be conducted .... [D]uring the [former trustees'] administration, important tax issues and deferred maintenance issues were not addressed."

2016 Petition for Fees

In March 2016, the former trustees petitioned the court to instruct Bradlow to use Trust assets to reimburse their past defense costs (personally paid by Shine) and pay their future attorney fees and costs, as the surcharge petition was expected to go to trial. They claimed that, despite extensive discovery, the Attorney General had not uncovered evidence of misappropriation, asset diversion, fraud or wrongdoing by the former trustees, and "the only remaining allegations to which there is any potential liability ... arise out of their acts (and omissions) taken (or not) during the course of their administration of the Trust," including their alleged failure to fund the Foundation, failure to operate the Trust as a charity, and failure to maintain accurate books and records. They argued that their "actions in administering the Trust have at all times been reasonable and prudent exercises of the broad discretion afforded to them by the Trust and under the Probate Code[, and] ... were in good faith and on the advice of counsel ...." Specifically, they did not fund the Foundation "[b]ecause the Trust estate included primarily encumbered real estate assets that could not be used to fund a charitable foundation, and the Trust documents contained a series of provisions discouraging diversification of assets, [so Shine] and his attorneys were unsure how to proceed. ... [¶] ... [An attorney, Laura J. O'Kane,] advised [Shine] to delay funding the Foundation on the basis that it would risk grave tax consequences due to the passage of time spent in the intervening litigation. ... [Accordingly,] the Former Trustees ... began making charitable gifts in conformity to the legal required percentage as advised by O'Kane [,] ... [¶] ... operating the administrative Trust as if a properly registered charitable Foundation ...." As authority for an interim fee award, the former trustees cited the Trust's indemnification provisions, Probate Code provisions authorizing payment of trustees' legal expenses, and case authority they claimed authorized payment of attorney fees incurred by trustees who had been removed, had resigned, or were fighting removal ( Kasperbauer v. Fairfield (2009) 171 Cal.App.4th 229, 232, 234–235, 88 Cal.Rptr.3d 494 ( Kasperbauer ); Estate of Cassity (1980) 106 Cal.App.3d 569, 574, 165 Cal.Rptr. 88 ; Hollaway v. Edwards (1998) 68 Cal.App.4th 94, 95–96, 80 Cal.Rptr.2d 166 ).

In opposition, the People argued the former trustees were not entitled to fees because their defense of the petition was not for the Trust's benefit. On the contrary, the former trustees "performed their fiduciary duties with gross negligence and in some cases willfully refused to carry out the trust provisions." The People specifically contested the former trustees' claim that Shine reasonably relied on the advice of O'Kane to delay funding the Foundation and liquidating the real estate assets: "Shine hired the attorney [ (Jake Walker) ] who drafted Eva's trust instruments, but [Shine] did not share with attorney Walker his apparent confusion over perceived inconsistencies within the trust instrument, nor did he share any confusion with his later retained attorneys at Adler Colvin. Shine also never filed a petition for instructions with the court during the ten-year period that he acted as trustee." The People described numerous instances of wrongdoing by Shine, which it supported by citations to evidence . Shine never established the Foundation as required by the Trust document and the 2008 settlement; falsely reported a $7.8 million donation to the Foundation...