Walter v. Estate Strategies, Inc.
| Decision Date | 05 December 2022 |
| Docket Number | 2d Civil B280172 |
| Parties | SALLY PATTON WALTER et al., Plaintiffs and Appellants, v. ESTATE STRATEGIES, INC., et al., Defendants and Appellants. VENTURA COUNTY COUNCIL OF BOY SCOUTS OF AMERICA et al., Defendants and Respondents. |
| Court | California Court of Appeals Court of Appeals |
NOT TO BE PUBLISHED
Superior Court County of Ventura No. P079997 Henry Walsh Judge
Smith Law Firm and Craig Smith, for Plaintiffs and Appellants.
Nemecek & Cole, Frank W. Nemecek, Jonathan B. Cole, Mark Schaeffer, Jon D. Robinson, for Defendants and Appellants.
Young Wooldridge and Robert J. Noriega, for Defendant and Respondent, Jack Patton.
Matthew B. Mack, for Defendants and Respondents, Matthew B. Mack, Matthew B. Mack Counselor at Law and Matthew B. Mack, A Professional Corp.
Law Offices of Greg May and Greg May; Jones & Lester and Mark A. Lester, for Defendant and Respondent, Ventura County Council of the Boy Scouts of America.
Monroy, Averbuck & Gysler and Jon F. Monroy, for Defendant and Respondent, Mark Sherwood.
Sally Patton Walter, as an individual, as trustee of the Patton Family Lead Trust and as executor of the estate of Lowell Patton, and Jodi Patton Ream (plaintiffs) appeal from the judgment entered after a court trial in favor of defendants Estate Strategies, Inc. (ESI), Richard Sorensen[1], Matthew Mack, Mark Sherwood, Jack Patton and the Ventura County Council of the Boy Scouts of America (VCC) (collectively, defendants).
Plaintiffs contend defendants defrauded, breached fiduciary duties toward, were professionally negligent and engaged in elder financial abuse when they drafted and administered an estate plan for their parents, Lowell and Mary Lou Patton (the Pattons). The estate plan included three charitable remainder unitrusts (the CRUTs) and a charitable lead annuity trust (CLAT or lead trust) through which the Pattons made substantial, irrevocable gifts to various charities. They contend the trusts did not significantly benefit their parents or satisfy their desire to leave the maximum amount possible to their children. Although ESI, Sorensen and Mack disclosed that their fees for creating the estate plan would be paid by the charities, they did not disclose the estimated amount of their compensation or that it would be based on the size of the Pattons' gifts.
Sitting as trier-of-fact, the trial court found in favor of defendants, concluding the estate plan was competently designed to achieve the Pattons' goals and that defendants had no duty to disclose how the charities would calculate respondents' compensation because the Pattons' money was not used to pay it. In addition to awarding costs, the trial court awarded defendants their expert witness fees under Code of Civil Procedure section 998.[2] Although the trial court denied defendants ESI and Sorensen's motion for contractual attorney fees, it awarded them cost of proof sanctions of $1,000,981.50 based on plaintiffs' denial of 32 requests for admission. (§ 2033.420.) Plaintiffs contend the trial court erred because the section 998 offers to compromise were not made in good faith and because they had a reasonable basis for denying the requests for admission. We agree. In a cross-appeal, ESI and Sorensen contend the trial court erred when it denied their motion for contract-based attorney fees.
We reverse the order awarding costs of proof sanctions and in all other respects affirm.
Lowell and Mary Lou Patton, both of whom were born in 1928, had been married for more than 40 years when Mary Lou became seriously ill with leukemia in early 2002.[3] She died of the disease on April 8, 2002. Before January 2002, the couple did not have an estate plan. They had three adult children, Sally Patton Walter, Jodi Patton Ream and Jack Patton, and several grandchildren. In addition to Lowell's pharmacy business, the Pattons owned commercial and residential real estate and other assets. As relevant here, these assets included a commercial building on 16th Street in Santa Monica, and a minor league baseball team known as the Bakersfield Blaze.[4]
Lowell's long-time accountant, Don Hedrick, urged him to create an estate plan. Hedrick introduced the Pattons to Mark Sherwood a lawyer Hedrick knew from church.[5] Hedrick gave Sherwood some background information about the Pattons and their assets before Sherwood met with the Pattons at Hedrick's office for the first time. That information indicated the Pattons' assets were worth about $15,000,000. It assigned a value of $3,800,000 to the Bakersfield Blaze and $3,000,000 to the 16th Street property.
At his first meeting with the Pattons and Hedrick on February 5, 2002, Sherwood talked with the Pattons in general terms about creating an estate plan. Based on his conversation with the Pattons, Sherwood understood that Mary Lou was concerned Lowell would treat their daughters unfairly in the estate planning. She did not want their daughters to receive a large, lump sum of money because she was concerned about their ability to manage it. Mary Lou was also concerned that the sons- in-law would exert too much influence over the surviving spouse, Lowell or Mary Lou, after the first spouse died. Although she wanted as much money as possible to go to her daughters, she also wanted the distributions to be managed over time. During the meeting, the Pattons retained Sherwood to prepare several documents for them including pour-over wills, living trusts, advanced health care directives, a community property agreement, durable powers of attorney and a family revocable trust.
Sherwood understood from this and other meetings that the Pattons were also interested in giving money to charity. They were life-long members of the LDS Church and had given generously to it by tithing and making other donations. He recommended that the Pattons engage an estate planner to design the remainder of their estate plan, including any charitable trusts they decided to establish, and to draft the necessary documents. Although he gave them several names, the Pattons wanted to work with Richard Sorensen and his firm, Estate Strategies, Inc. (ESI) because they knew him from church.
After the meeting, Sherwood spoke with Sorensen about creating charitable remainder unitrusts (CRUTs) for the Pattons. Sorensen provided Sherwood with illustrations of how a CRUT would impact future tax liability and generate income. All of the written illustrations that were shown to the Pattons included the purchase of life insurance by the trust. The Pattons were not shown a written illustration of a CRUT that did not involve the purchase of life insurance.
On February 7, 2002, Sherwood met with the Pattons again. They reviewed and signed the documents Sherwood had drafted, including their wills and the revocable trust. These documents do not reflect that the Pattons had decided to make any charitable donations or to transfer assets to a charitable trust.
Sorensen joined the meeting later that afternoon; it was the first time he met with the Pattons in person. Sorensen understood that Mary Lou was very ill. At the meeting, however, she was alert, interested and engaged. The estate plan was very important to her. She wanted an irrevocable estate plan that would provide a controlled income stream to her children. She also wanted to reduce their tax liability. Minimizing taxes and avoiding attorney and estate planning fees were more important to Lowell but were also of interest to Mary Lou. Sorensen believed the CRUT was the best way to accomplish all of these goals simultaneously.
At the February 7 meeting, Sorensen and Sherwood reviewed the ESI engagement letter with the Pattons and they signed it. The engagement letter explained that ESI would prepare the Pattons' charitable trust documents for them, at no cost to the Pattons, if they chose to make gifts to participating charities. Alternatively, the Pattons could pay an hourly rate for ESI's services, and for the services of its attorney, Matthew Mack. The Pattons did not ask Sorensen to explain how ESI's compensation agreements with the charities worked or how much his compensation would be.
Sorensen explained to the Pattons that a charitable remainder unitrust (CRUT) would require them to irrevocably transfer an asset to the trust. Income generated by the trust could be distributed either to the Pattons or to their designated income beneficiaries. After 20 years, the trust would terminate and the charities would receive the remainder. Sorensen, Hedrick and Sherwood advised that the Blaze should be incorporated and sold to fund a CRUT because the asset had appreciated in value and its sale would otherwise generate significant tax liability.[6] Transferring the asset to a CRUT would remove the asset from the estate and generate tax deductions. Sorensen prepared illustrations to show the Pattons how a CRUT would impact their tax liability. These illustrations compared a taxable sale of the Blaze to a sale that occurred after ownership of the team was transferred to a tax-exempt trust. Sorensen did not prepare an illustration comparing the CRUT to a taxable sale that occurred after the death of one spouse caused a step-up in the basis of that asset.
By the end of the meeting, the Pattons had agreed that they would incorporate the Blaze baseball team, establish a CRUT, and fund it with the Blaze stock. They engaged Sherwood to be the management trustee of the CRUT. The Pattons had also agreed to form an LLC or LLP to hold ownership of the 16th Street property. Sherwood and Sorensen discussed with them the possibility of placing the 16 Street property into a CLAT.
The Pattons eventually designated four charities as charitable...
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