We regularly compile a few recent rulings that may be of interest to our clients and friends. Feel free to contact any of the firm's litigation attorneys should you have questions about these cases.
[1. Trust & Estates]
LOOTERS BEWARE: BREACHES OF FIDUCIARY DUTY ARE
ACTIONABLE BY BENEFICIARIES OF A REVOCABLE TRUST AFTER A SETTLOR'S DEATH
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 revocable trust (a trust which is
revocable by the settlor), have standing to sue a 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.
Generally speaking, under
Probate Code section 15800, unless the trust provides otherwise, while the
settlor is living and holds the power to revoke the trust, the trustee's
fiduciary duties are owed to the settlor only because, by definition, a
revocable trust can be revoked or amended by the settlor at any time while the
settlor is living and has the mental capacity to do so. Until the trust
becomes irrevocable at the settlor's death and the rights of the beneficiaries
are vested, the named beneficiaries merely have a contingent interest in the
trust. Giraldin holds
that despite a beneficiary's mere contingent interest in a revocable trust
during the settlor's lifetime, the beneficiary has standing to bring an action
against a non-settlor trustee who breaches fiduciary duties owed to the settlor
prior to the settlor's death.
The facts of the case are not uncommon. The settlor,
William Giraldin ("William"), 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 the sole trustee. Under his control, the trust
made substantial investments in a company owned by Timothy and his twin
brother, Patrick. The company failed and the trust lost substantial
value. The trust 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.
After William's death, his four children from his first marriage sued
Timothy in his capacity as trustee alleging that the 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 petitioners and ordered
Timothy to be removed as trustee and to provide an accounting to the
beneficiaries, and to be surcharged for his various breaches of fiduciary
duties owed to the petitioners themselves. The Court of Appeal
reversed and the Supreme Court reversed the Court of Appeal and found 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."
[2. Real Estate]
OOPS! TRUSTEE'S ERROR IN FORECLOSURE SALE RESULTS IN
BUYER'S WINDFALL
A mistake made by the trustee
acting as the lender's agent in a foreclosure sale is not a "procedural
irregularity," thus the sale is final.
In Biancalana v. T.D. Service Company (2011) 200Cal.App.4th 527, review granted February 15, 2012, 137 Cal.Rptr.3d 248, the
plaintiff successfully bid on a piece of real property for a mere $21,894
at a trustee's sale. After the sale, T.D. Service Company (TD), the
trustee which conducted the sale for the lender, realized that the opening bid
should have been $219,105. When TD discovered its own error, it refused
to deliver a deed to the buyer, forcing the buyer to sue to acquire title to
the property.
TD contended that its mistake of
soliciting an opening bid at one-tenth (1/10) of the correct price was a
"procedural error," rendering the sale based on its mistake
voidable. The trial court set aside the sale, relying on Millennium Rock Mortgage, Inc. v. T.D.
Service Co. (2009) 179 Cal.App.4th 804. In Millennium, the
auctioneer made a mistake by selling a property with a wrong street address,
and the seller was able to set aside the sale.
Distinguishing the subject case
from Millennium, the Biancalana court held that, unlike the mistake made by an
auctioneer, an independent third-party, the mistake in this case was made by
the trustee, who is the lender's agent. Because the mistake made by TD in
the course and scope of its duty as the lender's agent arose solely from its
negligence, the Court of Appeal held that there was no "procedural
irregularity" in the foreclosure sale and that the sale would stand.
As the California Supreme Court
granted review of this decision, whether or not the buyer's investment in the
sale and ensuing litigation will pay off remains to be seen.
[3. Contract Law]
SIGNATORIES TO
CONTRACT CAN RECOVER ATTORNEY FEES INCURRED IN DEFENDING AGAINST LAWSUIT FILED
BY THIRD PARTY BENEFICIARY
Signatories to a contract are
entitled to attorney fees incurred in defending against a lawsuit filed by a
third party beneficiary, which would have been entitled to fees had it
prevailed.
In Cargill, Inc. v. Souza (2011) 201 Cal.App.4th962 Mr. and Mrs. Souza made loans to Mr. and Mrs. Teixeira ("the
Debtors"), evidenced by promissory notes and secured by an interest in
dairy cattle and farm equipment. Cargill, Inc. ("Plaintiff")
was an unsecured creditor of the Debtors. Upon the Debtors' default on
the promissory notes, the Souzas and the Debtors entered into a Transfer In
Lieu of Foreclosure Agreement ("the Transfer Agreement"). The
Transfer Agreement provided that (1) the Debtors agree to transfer the dairy
cattle and farm equipment to the Souzas; and (2) the Souzas agree to pay the
Debtors' outstanding obligations listed on Exhibit G to the Transfer Agreement,
which was left blank.
The Souzas failed to pay the
Debtors' loan from Plaintiff, and litigation ensued. Plaintiff filed a
complaint against the Souzas to reform and enforce the Transfer Agreement in
order to list Plaintiff's loan to the Debtors on Exhibit G. The Souzas
then moved for summary judgment, which Plaintiff did not oppose. Judgment
was entered in favor of the Souzas. The trial court did not grant the
Souzas' motion for attorney fees, and the Souzas appealed.
In reaching its decision to award
attorney fees' to the Souzas, the appellate court noted two situations when a
nonsignatory may recover attorney fees under a contract containing an attorney
fees clause. The first is where the nonsignatory party "stands in
the shoes of a party to the contract." The second is where the
nonsignatory party is a third party beneficiary of the contract. If the
Transfer Agreement was made for the benefit of Plaintiff, Plaintiff is entitled
to attorney fees. Though Plaintiff was not expressly named in the
Transfer Agreement, the agreement nevertheless reflects the intent to benefit
the unnamed creditors including Plaintiff. Since Plaintiff, as a third
party beneficiary of the Transfer Agreement, would have been entitled to
attorney fees had it prevailed, the Souzas, too, were entitled to fees as the
prevailing party under the Transfer Agreement.
[4. Real Estate ]
HOMEOWNERS ASSOCIATION HAS STANDING TO
PURSUE ACTION AGAINST REALTORS
The Homeowners Association
("HOA") has standing to pursue an action against realtors for
concealment or misrepresentation in a matter pertaining to damage to the common
area, though the HOA was not the realtors' customers.
The action arose out of a
significant slope failure in 2005, which occurred along parts of the Glen Oaks
Estates common slope area and common driveway. In the aftermath of the
landslide, a negligence lawsuit was filed against the HOA and two of its
members in 2007. The HOA filed a cross-complaint against the developers
for indemnity and contribution. During discovery process, the HOA
discovered that the realtors falsely advised the developers that the Department
of Real Estate ("DRE") did not require a homeowners' association for
Glen Oaks Estates. The HOA also learned that the developers and the realtors
were required to, but failed to, provide a final public report to each buyer,
which would have included a DRE-approved budget worksheet and other material
transactional disclosures and documents.
The trial court agreed with the
realtors who contended that the HOA had no standing to sue them under the
David-Sterling Common Interest Development Act ("CIDA"), more
specifically, Civil Code section 1368.3, because Section 1368.3 affords the HOA
standing to sue developers only, and not realtors. The Court of Appeal
disagreed. The standing conferred upon HOAs under the CIDA is a statutory
creature. Section 1368.3 does not, by its plain terms, contain a
limitation on whom the HOA may sue.
The realtors also argued that the
HOA does not have standing because realtors owe no duties to third parties who
were not parties to the contract of sale, and the HOA was not a party to the
contracts between the realtors and the individual HOA members. The Court
of Appeal disagreed with the realtors again and concluded that Civil Code section
1368.3 provides standing. "We are dealing here with a specific
legislative grant of standing that permits an association to bring the claims
of its members." The HOA, therefore, was allowed to prosecute its
claims against the realtors despite the fact that no contract was ever entered
into between the realtors and the HOA.
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