Uzyel v. Kadisha

• Citation: 116 Cal.Rptr.3d 244,10 Cal. Daily Op. Serv. 12, 417,188 Cal.App.4th 866
• Decision Date: 15 December 2010
• Docket Number: Nos. B196045, B198007, B199850, B201425, B203804.,s. B196045, B198007, B199850, B201425, B203804.
• Court: California Court of Appeals Court of Appeals
• Parties: Dafna UZYEL, Plaintiff and Appellant, v. Neil KADISHA, as Trustee, etc., Defendant and Appellant. Dafna Uzyel et al., Plaintiffs and Appellants, v. Neil Kadisha, as Trustee, etc., Defendant and Appellant.

188 Cal.App.4th 866

116 Cal.Rptr.3d 244

10 Cal. Daily Op. Serv. 12,417

2010 Daily Journal D.A.R. 14,911

Dafna UZYEL, Plaintiff and Appellant,

v.Neil KADISHA, as Trustee, etc., Defendant and Appellant.

Dafna Uzyel et al., Plaintiffs and Appellants,

v.Neil Kadisha, as Trustee, etc., Defendant and Appellant.

Nos. B196045, B198007, B199850, B201425, B203804.

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

Sept. 22, 2010.

Review Denied Dec. 15, 2010.

**253 Akin Gump Strauss Hauer & Feld, Rex S. Heinke, Hyongsoon Kim, Orly Degani, Katharine J. Galston, Scott J. Street; Krane & Smith, Samuel Krane and Marc Smith, Los Angeles, for Plaintiffs and Appellants.

Sonnenschein Nath & Rosenthal, Bernard J. Nussbaum, John E. Walker, Los Angeles; Howard Rice Nemerovski Canady Falk & Rabkin, Jerome B. Falk, Jr., Douglas A. Winthrop, John P. Duchemin, Simona A. Agnolucci, San Francisco; Horvitz & Levy, Ellis J. Horvitz, S. Thomas Todd, Mitchell C. Tilner, Encino; Morrison & Foerster, Miriam A. Vogel, Sean P. Gates and Benjamin J. Fox, Los Angeles, for Defendant and Appellant.

CROSKEY, J.

*877 Neil Kadisha served as the trustee of two trusts. The beneficiaries, Dafna Uzyel and her children Izzet and Joelle Uzyel (collectively the Uzyels), filed petitions for breach of trust against Kadisha and *878 terminated the trusts. After a nonjury trial, the trial court awarded the Uzyels over $59 million in compensatory damages and disgorgement of profits, plus $5 million in **254 punitive damages and over $13 million in attorney fees. Kadisha appeals the judgment, challenging the awards on several claims, the punitive damages, and the attorney fee award. The Uzyels also appeal, challenging the denial of relief on some of their claims, the denial of prejudgment interest on some claims, the punitive damages, and the costs award.

These consolidated appeals raise several questions concerning a trustee's liability for breach of trust under Probate Code section 16440, subdivision (a).¹ With respect to these questions, we conclude as follows: (1) tracing is not required for the disgorgement of profits made by the trustee "through the breach of trust" under section 16440, subdivision (a)(2); (2) the fact that an act is consistent with or even compelled by the duty of prudent investing does not excuse a trustee from liability for breach of the duty of loyalty, including liability for appreciation damages as lost profits under section 16440, subdivision (a)(3); (3) the determination as to which of the statutory measures of liability "is appropriate under the circumstances" under section 16440, subdivision (a) is reviewed for abuse of discretion; (4) an investment loss resulting from a breach of trust should be offset against a profit resulting from a breach of trust only if the breaches were not separate and distinct; (5) prejudgment interest is mandatory on an award of damages under section 16440, subdivision (a)(1); and (6) the absence of an express provision for prejudgment interest under section 16440, subdivision (a)(3) does not preclude an award of prejudgment interest under Civil Code section 3287, subdivision (a) on damages awarded under that provision.

In addition, with respect to two other issues, we conclude that a plaintiff is not entitled to the reversal of a punitive damages award for redetermination of the amount of punitive damages just because the compensatory award is increased on appeal; and "reasonable cause" to oppose a contest of an account, within the meaning of section 17211, subdivision (b), means an objectively reasonable belief, based on the facts then known to the trustee, either that the claims are legally or factually unfounded or that the petitioner is not entitled to the requested remedies.

In light of these conclusions and, after determining that (1) the trial court had no jurisdiction to vacate the modification of its statement of decision and judgment, (2) the award of damages resulting from Kadisha's use of trust funds to pay for his legal defense included excessive prejudgment interest, (3) the denial of prejudgment interest on the amounts awarded on some of the Uzyels' claims was error, and (4) the award of attorney fees to the Uzyels *879 was unauthorized, we will reverse the judgment in part, with directions, and reverse the order awarding attorney fees. In all other respects, however, the judgment will be affirmed.

FACTUAL AND PROCEDURAL BACKGROUND

1. Establishment of the Trusts

Rafael Uzyel died intestate in May 1986, survived by his wife Dafna Uzyel and their young children Izzet and Joelle Uzyel. Dafna Uzyel was 28 years old at the time. She had only a tenth-grade education, a very limited ability to communicate in the English language, and no financial or business experience. Kadisha was a family friend. Kadisha lent money to Dafna Uzyel after her husband's death to help pay her substantial living expenses.

**255 Kadisha referred Dafna Uzyel to an attorney, Hugo DeCastro, for assistance in marshaling foreign assets. DeCastro also represented Kadisha or entities in which he was an investor. Rafael Uzyel's sister, Lillian Nomaz, sought to prevent Dafna Uzyel from gaining control of assets in Switzerland. DeCastro represented Dafna Uzyel in connection with the dispute. The Uzyel Irrevocable Trust No. 1 (Trust No. 1) was established in February 1988 to resolve the dispute, with Kadisha as the trustee. Dafna Uzyel was the settlor of the trust, and Izzet and Joelle Uzyel were the beneficiaries.

A second trust, the Uzyel Irrevocable Trust No. 2 (Trust No. 2) was established contemporaneously with Trust No. 1, with Kadisha as the trustee. Dafna Uzyel was the settlor of the trust and was its sole beneficiary. Dafna Uzyel conveyed the Uzyels' personal residence and other assets to Trust No. 2.

2. Namco Loan

The trusts initially had no liquid assets. Kadisha, as trustee of Trust No. 2, borrowed $500,000 from Namco Financial, Inc. (Namco), in May 1988. The short-term loan was secured by the Uzyels' personal residence. Kadisha deposited the loan proceeds in his personal Union Bank checking account and, within three weeks, spent the entire amount for his own purposes rather than for the benefit of the trust or its beneficiaries. He used $240,000 of the loan proceeds to repay his Union Bank line of credit, which he had previously drawn on to lend $151,000 to Leon Farahnik.²

*880 3. Omninet and the Qualcomm Settlement

Kadisha was an officer and director of, and an investor in, Omninet Corporation (Omninet). Omninet and Qualcomm Corporation (Qualcomm) were parties to an agreement under which Omninet was obligated to develop communications technology for use with mobile telephones. The agreement provided that Qualcomm would acquire ownership of the intellectual property rights to the technology if Omninet defaulted under the agreement. Omninet was unable to obtain the funds needed to continue its development efforts and served a notice of its default under the agreement in April 1988. Qualcomm filed a complaint against Omninet in June 1988 for breach of the agreement, seeking to acquire the intellectual property rights. The litigation together with other liabilities and potential liabilities threatened to bankrupt Omninet.

Kadisha negotiated a settlement with Qualcomm, which was consummated in August 1988. Under the terms of the settlement agreement, Qualcomm acquired certain assets from Omninet; Qualcomm paid Omninet and its investors $4 million in cash, $1 million in promissory notes, and 200,000 shares of stock; and Kadisha and other Omninet investors became Qualcomm directors.³ The parties to the settlement agreement and others also executed a stock purchase agreement on the same date, pursuant to which Kadisha and others purchased a total of 4 million shares of Qualcomm stock at $1 per share (and also received warrants to purchase an additional 93,750 shares of stock); in addition, they lent Qualcomm a total of **256 $750,000. Kadisha and others obtained the funds to purchase their portion of the 4 million shares by borrowing $8.5 million from Sanwa Bank (Sanwa). After payment of another obligation, approximately $3.5 million of the Sanwa loan funds remained for use in connection with the stock purchase and the $750,000 loan.

Kadisha purchased 662,000 shares of Qualcomm stock in August 1988 for himself pursuant to the settlement and purchased an additional 390,000 shares for his friends and family members, who reimbursed him $390,000 within one day. The total of $1,052,000 paid for those stock purchases was drawn from the Sanwa loan funds. The Sanwa loan funds also paid $344,000 of the $750,000 loan to Qualcomm. Kadisha contributed an additional $136,000 toward the $750,000 loan, drawing that amount from his personal Wells Fargo Bank account into which he had deposited the $390,000 that he received in reimbursement from his friends and family. Kadisha's share of the $750,000 loan was $250,000.

Kadisha acknowledged in a declaration filed in other litigation that Qualcomm was "an extremely risky investment" at the time and that it had *881 consistently lost money. Qualcomm continued to experience financial difficulties. Kadisha lent Qualcomm an additional $100,000 in September 1988, at a time when the Namco loan was in default, and received a $350,000 promissory note from Qualcomm for the $100,000 loan and his prior $250,000 loan. In consideration for the making of this loan, Kadisha received warrants for the purchase of 43,750 shares of Qualcomm stock at $8 per share.⁴

4. Imperial Savings Loan

Kadisha, individually and as trustee of Trust No. 2, borrowed $2 million from Imperial Savings Association (Imperial) in December 1988. The loan was secured by the Uzyels' personal residence. Kadisha used the loan proceeds to repay the Namco loan and took $1 million of the loan proceeds from the trust for his personal use.⁵ From the remaining loan proceeds held by Trust No. 2, he made a $300,000 loan from the trust to...