NON-LICENSED "CONTRACTORS" BEWARE

By Laurie Murphy

Laurie Murphy

The Court of Appeals just held that an arbitration award which favored an unlicensed contractor which award was entered as a judgment by the trial court must be set aside.  Grounds for setting aside an arbitration award are very limited in California.  One of the grounds is that the award violates the public policy of the State. 

In Ahdout v. Hekmatjah, the court found that the arbitrator's award which awarded damages to an unlicensed contractor violated the public policy of the state under the Contractor's State Licensing Law which holds, in part, that parties who use the services of an unlicensed contractor are entitled to reimbursement for any compensation paid while the person was unlicensed and are also shielded from liability for claims by the unlicensed person for compensation.  This case reinforces prior court decisions that hold, in essence, that no matter how unfair it would be to deny compensation to someone who is unlicensed who did construction work on a project, that is the law in this state. 

Anyone who does construction work without a license is well advised to get a license or risk the very serious consequences of not having one.  By the same token, anyone who hires someone without a license has carte blanche to refuse to pay for the work.

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Looters Beware: Breaches of Fiduciary Duty are Actionable by Beneficiaries of a Revocable Trust After a Settlor’s Death

By Autumn Ronda, Esq.

Autumn Ronda

In Estate of Giraldin; 12 S.O.S. 6575, the California Supreme Court ruled in a 5-2 opinion by Justice Ming Chin that the beneficiaries of a trust which is revocable by the settlor have standing to sue the non-settlor-trustee of the trust after the settlor's death for a breach of a fiduciary duty owed to the settlor while the settlor was living.  Under Probate Code Section 15800, unless the trust instrument otherwise provides, while the settlor is living and holds the power to revoke the trust, the trustee must only account to and owes fiduciary duties only to the settlor of the revocable trust. This is consistent with the fact that, by definition, a revocable trust can be revoked or amended by the settlor at any time while the settlor is living and has mental capacity, thereby divesting a beneficiary's interest in the trust. Thus, until the trust becomes irrevocable at the settlor's death and in doing so vests the rights of the beneficiaries, the named beneficiaries merely have a contingent interest in the trust.  This ruling provides a precedent that despite a beneficiary's mere contingent interest in a revocable trust during the settlor's lifetime, any fiduciary breaches committed by the non-settlor-trustee against the settlor, while the trust is revocable by the settlor, are actionable by the beneficiaries after the settlor's death, to the extent that the violation harmed the beneficiaries' interests.  The Court proclaimed, "A trustee…cannot loot a revocable trust against the settlor's wishes without the beneficiaries' having recourse after the settlor has died."

The factual circumstances giving rise to this case are not uncommon.  The settlor, William Giraldin established a trust for the benefit of his blended family consisting of his wife, his four children from another marriage, his wife's three children from another marriage and their twin sons from their marriage. One of the twin sons of the current marriage, Timothy, was appointed as sole trustee.  The trust made substantial investments in a company owned by both Timothy and his twin brother Patrick.  The company failed and the trust lost substantial value.  The trust terms included fairly standard revocable trust language which attempts to relieve some of the duties and liabilities of the trustee during the settlor's lifetime, namely, waiving accounting duties, relaxing the prudent investor rule, discounting the importance of the remainder beneficiaries and making the trustee's distribution decisions binding on all beneficiaries.  The four children of the settlor's first marriage sued Timothy in his capacity as trustee alleging that his self-interested investments in his and Patrick's unsuccessful company and the personal loans that the trust made to both Timothy and Patrick had deprived the other seven children of their inheritance.  The trial court sided with the plaintiffs, order Timothy to be removed as trustee, provide an accounting to the beneficiaries and to be surcharged for his various breaches of fiduciary duties. 
 

On appeal, Timothy argued that the plaintiffs did not have standing to sue him and the Court of Appeal agreed, explaining that the plaintiffs' claims consisted of breaches of fiduciary duties allegedly owed to the plaintiffs themselves, rather than breaches in the trustee's fiduciary duties owed to William, stating that the trustee's "duties as trustee were owed solely to [William] during [the time William was alive], and not to the trust beneficiaries…" 

The California Supreme Court's limited review of the standing question resulted in a reversal of the Court of Appeal's decision. The Court disagreed with the Court of Appeal and found that the plaintiffs had actually alleged breaches of fiduciary duties owed directly to William as the settlor of the trust during his lifetime.  Thus, the Court's question was only whether the plaintiffs had standing to bring a lawsuit based on a trustee's breaches of fiduciary duties owed to a now deceased settlor which occurred during the settlor's lifetime. The Court answered yes, stating that the beneficiaries had standing to sue, "[b]ecause a trustee's breach of the fiduciary duty owed to the settlor can substantially harm the beneficiaries by reducing the trust's value against the settlor's wishes."  The Court did not however address the question of whether or not the alleged breaches of fiduciary duties had in fact occurred and remanded the case with instruction to rule on this issue in a manner consistent with their ruling.

 

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California Supreme Court Overruled a Long Standing Parole Evidence Rule

by Laurie Murphy

The California Supreme Court has just overruled a long standing ruling in a seminal case (Bank of America v. Pendergrass (1935) 4 Cal.2d 258, 263. 

Under Pendergrass, evidence of alleged oral promises, which conflicted with the written terms of a fully integrated written contract, were barred – referred to as the parol evidence rule.  The effect of the Pendergrass rule was that a plaintiff could not argue that promises the defendant with whom he contracted made before or at the time of contracting that varied with the terms of a fully integrated written agreement, i.e. that the defendant would not take certain action if the Plaintiff defaulted on his payment obligations.  This rule has been a mainstay in the arsenal that lenders had to protect themselves against disgruntled borrowers. 

Under Riverisland Cold Storage v. Fresno-Madera Production Credit Association dated January 14, 2013, the Supreme Court examined the parol evidence statute (Code of Civil Procedure section 1856) and many of the cases decided under it both pre- and post-Pendergrass as well as case law from other jurisdictions and held that the fraud exception to the parol evidence rule as codified in CCP  §1856 basically holds that if the defendant defrauded the Plaintiff into signing a fully integrated agreement, the agreement itself is not valid and the courts can no longer bar evidence that goes to prove fraud, including promissory fraud, which Pendergrass had heretofore prohibited. 

It is expected that this will greatly increase lender's exposure to fraud claims by borrowers.  Indeed, all a borrower would have to allege is that the lender orally misstated the terms of the loan, promised that the lender would not foreclose if the borrower did not make timely payments, said that the interest rate would be lower than the loan actually provides, etc.  Up until now, the Pendergrass rule could be used at summary judgment or even demurrer. Under Riverisland these cases will be allowed to proceed to trial.

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