State Bar of California v. Statile

• Decision Date: 20 November 2008
• Docket Number: No. A118124.,A118124.
• Citation: State Bar of California v. Statile, 168 Cal.App.4th 650, 86 Cal. Rptr. 3d 72 (Cal. App. 2008)
• Court: California Court of Appeals
• Parties: STATE BAR OF CALIFORNIA, Plaintiff and Appellant, v. WILLIAM J. STATILE, Defendant and Respondent.

168 Cal.App.4th 650

86 Cal. Rptr. 3d 72

STATE BAR OF CALIFORNIA, Plaintiff and Appellant, v. WILLIAM J. STATILE, Defendant and Respondent.

No. A118124.

Court of Appeals of California, First District, Division Four.

November 20, 2008.

David Julian Cook and Nathaniel L. Dunn for Plaintiff and Appellant.

Bradley Allen Bartlett for Defendant and Respondent.

OPINION

SEPULVEDA, J.

Respondent William J. Statile, a former attorney, settled lawsuits brought by parties alleging that he had misappropriated trust funds. The settling plaintiffs reserved their right to seek additional reimbursement from the Client Security Fund (CSF), administered by appellant State Bar of California (State Bar or the bar). Those same settling plaintiffs (as well as a trustee of a separate trust alleging wrongdoing by Statile) applied for reimbursement from the CSF, which reimbursed them for losses allegedly caused by Statile. The State Bar brought this action for reimbursement pursuant to its rights of subrogation under Business and Professions Code section 6140.5 (section 6140.5). On appeal, the bar challenges the trial court's conclusion, following a court trial, that the bar's right of recovery was limited to money due under the agreement settling lawsuits against Statile. We reverse the judgment.

I. FACTUAL AND PROCEDURAL BACKGROUND

A. Statile Settles Lawsuits Alleging Misappropriation of Trust Funds.

Statile was an attorney licensed to practice law in the state. In that capacity, he represented the trustees of various trusts. A trust known as the Barbettini Revocable Trust and its successor trustee, Bette Nicholas, filed three lawsuits against respondent in San Diego Superior Court: In re Barbettini (Super. Ct. San Diego County, 2000, No. PN24805) (the probate case) and Nicholas v. Statile (Super. Ct. San Diego County, 2000, No. GIN012457) and Nicholas v. Statile (Super. Ct. San Diego County, 2001, No. GIN012797) (collectively, the Barbettini cases). The lawsuits alleged that Statile, in his capacity as trustee of the trust, misappropriated trust funds and kept them for his own benefit. Respondent Statile, the Barbettini Revocable Trust, and Nicholas entered into a settlement agreement to resolve the Barbettini cases on August 8, 2002 (settlement agreement).

The settlement agreement called for Statile, among other things, to pay $20,000 to the Barbettini Revocable Trust by August 10, 2002, and to pay an additional $80,000 (plus interest) in periodic installments, with the final payment due on January 2, 2008.¹ In the event of any default in payment, the settlement agreement called for a stipulated judgment to be entered against Statile in the amount of $300,000 (minus previous payments). It was undisputed at the time of trial in this case (in Feb. 2007) that Statile had timely made all payments required under the settlement agreement as they had come due.

The settlement agreement also required Statile to submit his resignation to the State Bar with charges pending, which he did on September 26, 2002. The Supreme Court accepted Statile's resignation on August 13, 2003.

Finally, the settlement agreement provided that Statile not object to any notice of intention to pay sent by the CSF for any claims made by "the trustees and/or beneficiaries" (presumably of the Barbettini Revocable Trust) for reimbursement from the fund. Statile agreed to cooperate in "obtaining or providing any additional documentary evidence required by the Client Security Fund in connection with claims made by Mrs. Nicholas." The agreement further provided that Statile's failure to object to any notice to pay "not constitute an admission of the truth of anything alleged in the [Barbettini] cases or in the application to the Client Security Fund." Each party was to execute a mutual general release of claims, except that Statile's release would "contain no provision precluding the trustee from claiming and receiving the maximum allowable reimbursement from [the] Client Security Fund."

B. CSF Applications.

Four trusts that were continuations of, or created out of, the Barbettini Revocable Trust that was the subject of the settlement agreement (collectively, the Barbettini trusts) filed applications for reimbursement with the CSF in March and May 2003. All four applications sought reimbursement for Statile's alleged misappropriation of trust funds and assets before execution of the settlement agreement. The Barbettini Family Trust submitted an application requesting $38,308.99. The Barbettini Marital Trust submitted an application requesting $50,000. The marital trust claimed that its total losses amounted to $298,232.27; however, the maximum allowable payment to a CSF applicant is $50,000. (Rules of State Bar, tit. 3, Client Security Fund Matters, rule 4(c) (CSF rules).) The Barbettini Q-Tip Trust submitted an application requesting $50,000. The Q-Tip trust claimed that its total losses amounted to $89,149.67. Finally, the Barbettini By-Pass Trust submitted an application requesting $32,782.69.²

Statile received notice that the State Bar was processing at least three of the four applications. A State Bar paralegal notified Statile on May 27, 2003, that Nicholas had filed applications against Statile on behalf of the Barbettini Family Trust, the Barbettini Marital Trust, and the Barbettini Q-Tip Trust. (The Barbettini By-Pass Trust submitted its application after the bar sent its letter to Statile.) The bar's letter stated, "If reimbursement is made from the Fund, the State Bar is assigned all rights the Applicant may have against you." Statile's attorney wrote to the State Bar paralegal indicating that Statile had settled the claims of "the Barbettini Trust" and was precluded under the parties' settlement agreement from objecting to the applications. The State Bar and the CSF received a copy of the settlement agreement before issuing notices of intent to pay on the applications. The CSF never requested additional documents from Statile, did not subpoena him to testify, and did not hold a hearing.

In November 2003, the CSF served notices of intention to pay informing Statile that the fund planned to pay the entire amount requested in all four applications. The notices set forth the factual allegations against Statile and concluded that, if uncontroverted, they established a reimbursable loss under CSF rules. Consistent with the terms of the settlement agreement, Statile did not file any written objection to the notices.

In January 2004, the CSF paid a total of $171,091.68 to the four trusts that had filed applications, the entire amount requested. The parties to this appeal stipulated in the trial court that at the time the CSF made payments to the four Barbettini trusts, Statile's only obligations to those trusts were defined by the terms of the settlement agreement, a copy of which the bar received before paying the applicants.

In July 2004, Nicholas submitted two applications to the CSF in her capacity as beneficiary of two of the Barbettini trusts: one sought reimbursement for $13,702.38 in connection with Statile's alleged wrongdoing with respect to the Barbettini Q-Tip Trust; the other sought reimbursement for $50,000 in connection with Statile's alleged wrongdoing with respect to the Barbettini Marital Trust. Like the applications on behalf of the Barbettini trusts, Nicholas's applications sought compensation for Statile's alleged misappropriation of trust funds that occurred before the execution of the settlement agreement.

On August 4, 2005, the CSF Commission issued a tentative decision granting Nicholas payment of $50,000 as a beneficiary of the Barbettini Marital Trust, but denying her payment as a beneficiary of the Barbettini Q-Tip Trust. The CSF Commission concluded that Nicholas had established a reimbursable loss within the meaning of CSF rules. The tentative decision acknowledged that (1) Statile and Nicholas had entered into a settlement agreement that called for Statile to pay $100,000 in installments, (2) Statile had already repaid $57,500, and (3) the CSF had already reimbursed the Barbettini trusts a total of $171,091.68. The commission concluded that Nicholas had established a total loss of $298,232.27. It then subtracted the $57,500 that Statile had already paid (as opposed to the total amount due under the settlement agreement) and the $50,000 that the CSF had already reimbursed to the marital trust, which left a balance of $190,732.27. As a beneficiary of 35 percent of the marital trust, Nicholas therefore had a balance owing of $66,756.29 (35 percent of $190,732.27). Because the maximum reimbursement allowed from the CSF is $50,000, the commission concluded that Nicholas was entitled to reimbursement in that amount. After receiving no objection from Statile, Nicholas was paid on September 13, 2005. As with the payments made to the Barbettini trusts, the parties stipulated before trial in this case that at the time the CSF paid Nicholas, Statile's only obligations to her were defined by the terms of the settlement agreement.

Although Statile could have challenged the CSF's decisions to reimburse the various applicants by seeking a writ of mandate in superior court pursuant to Code of Civil Procedure section 1094.5 (CSF rule 17), he did not do so.

C. Proceedings Below.

On April 11, 2005, appellant State Bar commenced this action when it filed a complaint (No. 440262) against respondent Statile seeking $32,782.69, the amount the CSF paid to the Barbettini By-Pass Trust. The complaint alleged causes of action for "embezzlement and breach of fiduciary duty" and "theft of client property." The complaint alleged that Statile embezzled money from "APPLICANTS" (a term that was undefined in the complaint) and had failed to return money to them. Statile filed a cross-complaint for declaratory relief, seeking a declaration that his obligation to the bar (if any) was limited to his obligations set forth in the settlement...