Schwerin v. Kuhns CA1/4 ( 2014 )

Filed 4/14/14 Schwerin v. Kuhns CA1/4
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication
or ordered published for purposes of rule 8.1115.
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIRST APPELLATE DISTRICT
DIVISION FOUR
MICAH SCHWERIN,
Plaintiff and Appellant,
A138444
v.
WILLIAM A. KUHNS, Trustee, etc. et al., (Marin County
Super. Ct. No. CIV 1200218)
Defendants and Respondents.
Micah Schwerin seeks to collect personal injury damages from trust assets held for
the benefit of a woman who struck him with her automobile. The trial court ruled
Schwerin could not reach the trust assets. The court granted the trustee’s motion for
summary judgment and entered judgment against Schwerin.
We conclude there are triable issues of fact and therefore reverse the judgment.
I. FACTUAL AND PROCEDURAL BACKGROUND1
A. The Accident and Personal Injury Judgment
In November 2010, Schwerin was struck by a car driven by Claire Bradenberg.
Schwerin was walking in a crosswalk at the time of the accident and he suffered serious
injuries. Bradenberg had no auto insurance. Schwerin sued Bradenberg and obtained a
judgment against her in the amount of $865,573.90.
1
Respondents did not dispute many of the facts set forth in Schwerin’s separate statement
of facts in opposition to the motion for summary judgment. Instead, they labeled them
“irrelevant.” We consider any facts respondents labeled as irrelevant undisputed for
purposes of this appeal.
1
Bradenberg died from causes unrelated to the accident after Schwerin obtained his
judgment against her. A petition for letters of administration, filed in superior court on
behalf of Bradenberg’s estate, stated that she died with property with an estimated value
of $1.5 million. Later, however, an attorney for the estate told the court there had been a
mistake, that Bradenberg personally had no assets, and that any assets used or controlled
by Bradenberg belonged to a trust.
B. The Trust
The trust in question was the Hiroko Friedman Revocable Trust (dated
October 22, 1999, as amended in 2005; hereafter, the Trust). Hiroko Friedman was
Bradenberg’s mother. Friedman was the settlor and the original trustee of the Trust. She
funded the Trust with two pieces of improved real property located in Mill Valley,
California, all of her financial accounts, and all of her tangible personal property.
Friedman, as trustee, generally retained control over the principal and income of the Trust
to use as she saw fit during her lifetime.
Friedman died in January 2008. The Trust named Bradenberg as the successor
trustee. The Trust provided for mandatory payments of income to Bradenberg following
Friedman’s death. The trustee (Bradenberg) had the power to make discretionary
payments of principal to Bradenberg for her “health, education, support, and
maintenance.” A “special trustee” could make additional discretionary payments of
principal for Bradenberg’s “comfort, welfare, and happiness.” The Trust named
respondent William A. Kuhns as special trustee. Finally, the Trust contained a
“Spendthrift Clause,” which provided the interests of the beneficiaries of the Trust were
not transferable and were to be free from the claims of creditors.
Bradenberg acted as trustee until her death in 2011. The Trust provided that upon
the death of Bradenberg, the Trust was to terminate, with the trustee distributing the Trust
property to Bradenberg’s “then-living issue.” In the event Bradenberg died with no
living issue, as actually happened, the trustee was to distribute the Trust property in equal
shares to Ichiro Inoue and Kuniko Hyoto, Friedman’s nephew and niece, respectively.
Kuhns succeeded Bradenberg as trustee after her death.
2
C. Schwerin’s Attempt to Collect from the Trust Assets
In January 2012, Schwerin filed a petition to enforce his money judgment against
the assets of the Trust. (See Code Civ. Proc., § 709.010.) The petition named Kuhns, in
his capacity of trustee, as the respondent to the petition. After discovering Kuhns had
paid over $1 million in Trust assets to Hyoto and Inoue, Schwerin amended his petition to
name them as additional respondents.
Schwerin alleged several theories of recovery that turned on Bradenberg’s role as
both trustee and beneficiary of the Trust. He alleged that Bradenberg was the de facto
owner of the Trust assets and that she had defrauded her creditors. Alternatively, he
alleged that Bradenberg’s dual roles caused the Trust to terminate under the doctrine of
merger; or that Bradenberg controlled the assets of the Trust in such a way as to create a
unity of interest between her and the Trust, allowing the court to “lift the veil of the
Trust.”
Kuhns moved for summary judgment. He argued the Trust assets were not subject
to the claims of Schwerin or any other creditor of Bradenberg given the spendthrift
clause. Kuhns further contended there were no material issues of fact with respect to
Schwerin’s fraud, merger, or alter ego theories.
Schwerin countered with evidence showing Bradenberg treated the Trust assets as
her own. A tenant living in one of the Trust’s Mill Valley properties declared that she
leased the property pursuant to a written lease between herself and Bradenberg. The
tenant paid her deposits and monthly rent by check made payable to Bradenberg. Kuhns
testified at his deposition that, as successor trustee to Bradenberg, he could recall no
records of receipts and disbursements from the Trust maintained by Bradenberg.
Similarly, he was unable to confirm that Bradenberg maintained a separate bank account
for the Trust. He was able to verify that she never filed tax returns for the Trust. Finally,
despite his role as special trustee during Bradenberg’s life, Kuhns had never met her or
spoken to her on the telephone.
The trial court granted the motion for summary judgment, finding Kuhns had
established the Trust was a spendthrift trust and that the Trust owed no money to
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Bradenberg that could be used to satisfy Schwerin’s judgment against her. The court
entered judgment in favor of Kuhns. The court also entered judgment in favor of Hyoto
and Inoue on the ground that the ruling in favor of Kuhns resolved any claims by
Schwerin against them.
II. DISCUSSION
A. The Standard of Review
We review the trial court’s decision on the motion for summary judgment de novo.
(Wilson v. 21st Century Ins. Co. (2007) 42 Cal. 4th 713, 717.)
“The motion for summary judgment shall be granted if all the papers submitted
show that there is no triable issue as to any material fact and that the moving party is
entitled to a judgment as a matter of law.” (Code Civ. Proc., § 437c, subd. (c).) “There is
a triable issue of material fact if, and only if, the evidence would allow a reasonable trier
of fact to find the underlying fact in favor of the party opposing the motion in accordance
with the applicable standard of proof.” (Aguilar v. Atlantic Richfield Co. (2001) 25
Cal. 4th 826, 850, fn. omitted.) We liberally construe the evidence presented by the
opposing party, resolving any doubts concerning the evidence in that party’s favor.
(Wilson v. 21st Century Ins. Co., supra, 42 Cal.4th at p. 717.)
B. The Merger Doctrine
Schwerin’s first contention remains, as he argued below, that the Trust terminated
as a matter of law when legal title to the Trust property was held by a trustee,
Bradenberg, who was also the beneficiary of the Trust. This merger of legal and
beneficial interests violates the very nature of a trust according to Schwerin.
The parties have cited, and we have uncovered, relatively few California appellate
decisions that discuss the trust principles sometimes referred to as the “merger doctrine.”
One of the more recent decisions summarized the doctrine as follows: “[W]hen the sole
trustee of a trust and the sole beneficiary of the trust become one and the same person, the
duties of the person, in his or her role as trustee, and the interests of the person, in his or
her role as beneficiary, ‘merge,’ meaning that the trust terminates as a matter of law, and
the trust’s assets irrevocably vest in the beneficiary. [Citation.] The determination
4
whether the duties of a trustee and the interests of a beneficiary have become united in a
single person is a question of law resolved by construction of the trust instrument.
[Citation.]” (Weinberger v. Morris (2010) 188 Cal. App. 4th 1016, 1021; see 13 Witkin,
Summary of Cal. Law (10th ed. 2005) Trusts, § 213, p. 795; Rest.3d Trusts (2003) , § 69,
pp. 535-537.)
The merger doctrine does not apply here because Bradenberg was never sole
trustee.2 The Trust designated a second (special) trustee who was to act in concert with
Bradenberg on spending beyond necessities. The Trust did give Bradenberg power to
invade Trust principal, but not unlimited power. Further, rather than irrevocably vesting
the assets in Bradenberg, the Trust provided for the possibility of assets passing to
Bradenberg’s children or Friedman’s niece and nephew.
Schwerin nevertheless insists the merger doctrine applies despite the existence of
the special trustee because “it is evident that [Kuhns] had no role as a genuine trustee
following the Settlor’s death.” He points to Trust provisions purportedly giving
Bradenberg unrestricted discretion to use Trust property without being challenged by any
interested party.
Schwerin first cites the Trust provision that gave Bradenberg discretion to tap
Trust assets for health, education, support, and maintenance. Using that as his starting
point, Schwerin next cites a provision allowing the trustee to terminate the Trust if the
assets were depleted. He then suggests Bradenberg could cause de facto revocation of
the Trust through waste and use of Trust assets under the provision allowing her to spend
trust principal. He also notes the trustee’s broad powers to manage the Trust assets.
2
Respondents assert Bradenberg was also not the sole beneficiary of the Trust given the
Trust provisions benefitting Inoue and Hyoto. Schwerin, however, appears to have the
better argument on this point because Inoue and Hyoto were only contingent
beneficiaries. (Compare Ammco Ornamental Iron, Inc. v. Wing (1994) 26 Cal. App. 4th
409, 418 (Ammco) [merger principles do not apply when there are additional vested
beneficiaries].) But given our conclusion that Bradenberg was not the sole trustee, we
need not reach the beneficiary issue.
5
Finally, he points to a Trust provision absolving trustees of liability for their acts or
omissions.
Schwerin would have us disregard the restriction on Bradenberg’s spending for
comfort, welfare and happiness.3 Read as a whole, however, the Trust reveals
Friedman’s intent to provide for Bradenberg’s necessities. Spending for items beyond
necessities was left to the discretion of Kuhns.
Schwerin’s argument also presupposes that trustees with the power to invade
principal can act with impunity. Obviously the law does not allow that. (See e.g., Prob.
Code, § 16081 [trustee with absolute power shall not act in bad faith or disregard
purposes of the trust].) Nor did the Trust itself. The Trust forgave a trustee’s ordinary
negligence, but it did not absolve a trustee from liability for willful misconduct or gross
negligence. As the appellate court in Ammco, supra, 26 Cal.App.4th at page 419
explained in rejecting a similar merger doctrine argument, a trustee who is also a
beneficiary and who is given discretion to invade trust principal has a fiduciary obligation
to the remaindermen to confine his or her demands within reasonable limits.
Schwerin also believes the facts confirm his interpretation of the Trust as
bestowing unfettered discretion on Bradenberg acting as trustee. Here Schwerin confuses
his legal argument with his factual arguments. That Bradenberg may have failed to
observe the terms of the Trust in dealing with Trust assets raises a different question.
(See In re Gillespie (Bankr. E.D. Ark. 2001) 269 B.R. 383, 388 [fact that debtor
apparently did not comply with terms of trust or may have entered into transactions
3
Paragraph 6.1(c) of the Trust provides: “Additional Discretionary Payments of
Principal. At any time or times during the trust term, the special trustee described in
paragraph 7.19, shall pay to or apply for the benefit of CLAIRE as much of the principal
of the trust as the special trustee deems proper for CLAIRE’s comfort, welfare, and
happiness (but subject to subdivision (c) of California Probate Code Section 16081 if
CLAIRE is the special trustee). In exercising discretion, the special trustee shall give the
consideration that the special trustee deems proper to all other income and resources that
are known to the special trustee and that are readily available to CLAIRE for use for
these purposes. All decision of the special trustee regarding payments under this
provision, if any, are with the special trustee’s discretion and shall be final and
incontestable by anyone.”
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beyond her capacity and authority does not alter the written provisions of trust or their
legal effect].) We therefore turn to Schwerin’s argument that Bradenberg’s actions made
the assets available to satisfy her debts.
C. Schwerin’s Alter Ego Theory
Schwerin contends the same result—termination of the Trust—can be reached as a
matter of fact based on Bradenberg’s failure to observe any trust formalities. He points to
the evidence showing Bradenberg held herself out as the owner of Trust assets and
Kuhn’s lack of supervision in his role as special trustee. Schwerin argues the Trust
became Bradenberg’s alter ego.
Respondents dispute neither Schwerin’s statement of the law (that alter ego
principles can apply to reach trust assets) nor his evidence. Instead, in two brief
paragraphs of argument, they assert the alter ego doctrine does not apply here because the
Trust assets were “intact” after Bradenberg’s death. Respondents fail to explain how this
single fact resolves all questions concerning Bradenberg’s handling of Trust assets, such
that respondents are entitled to summary judgment.
The alter ego doctrine typically applies to pierce “ ‘the corporate veil.’ ” (See
Mesler v. Bragg Management Co. (1985) 39 Cal. 3d 290, 300.) The doctrine has two
general requirements: (1) there is such a unity of interest and ownership that the separate
personalities of the corporation and the individual no longer exist, and (2) an inequitable
result will follow if the acts of the corporation are treated as those of the corporation
alone. (Ibid.)
The alter ego doctrine can also apply in the trust context. (Wood v. Elling Corp.
(1977) 20 Cal. 3d 353, 365.) In the case of a trust, the question is whether the trustee
lacks independence and simply carries out the bidding of the equitable owner of the trust
property. (Greenspan v. LADT LLC (2010) 191 Cal. App. 4th 486, 521-522; see In re
Schwarzkopf (9th Cir. 2010) 626 F.3d 1032, 1037-1040 [alter ego doctrine applied where
equitable owner dominated and controlled all decisions of the trust]; see also Steinhart v.
County of Los Angeles (2010) 47 Cal. 4th 1298, 1319 [trust beneficiaries hold equitable
estate and are regarded as real owners of trust property under general principles of trust
7
law].) The trust itself cannot be a person’s alter ego because a trust is not a separate legal
entity. (Greenspan v. LADT LLC, supra, 191 Cal.App.4th at pp. 521-522.) Instead, the
alter ego doctrine provides “ ‘a viable legal theory for creditors vis-a-vis trustees.’ ” (Id.
at p. 522.)
It appears the alter ego scenario in the Trust context commonly involves a settlor
transferring assets to a trust to shield them from creditors, while still maintaining control
over the assets. (See e.g., In re Gillespie, supra, 269 B.R. 383, 388-389.) In such a case,
the trust is a sham from the outset. Here Schwerin does not claim the Trust was a sham
when it was created. It was only after the settlor’s death that observance of trust
formalities allegedly ceased. If Schwerin can prove the requisite unity of interest (legal
and equitable ownership), the alter ego doctrine should provide a viable legal theory for
Bradenberg’s creditors.
Among the factors suggesting an alter ego relationship are commingling of assets
and funds, and disregard of legal formalities. (Misik v. D’Arco (2011) 197 Cal. App. 4th
1065, 1073.) Schwerin produced evidence showing both factors were present. That
evidence takes on a particular significance because the equitable owner of the Trust
assets was one of the trustees. In fact the evidence suggested Bradenberg was effectively
the alter ego of herself. She dealt with Trust assets as she pleased with no supervision.
There is a triable issue of fact as to whether Bradenberg was the real owner of the
Trust assets under the theory of alter ego. (See In re Schwarzkopf, supra, 626 F.3d at
p. 1040 [failure to find alter ego liability would sanction a fraud or promote injustice].)4
DISPOSITION
The judgment is reversed. Schwerin shall recover his costs on appeal.
4
Schwerin also argues he can reach Trust assets because the automobile Bradenberg was
driving when she struck him was a Trust asset. Schwerin may attempt to prove the
automobile was a Trust asset on remand. We express no opinion, however, on the legal
effect of proving that fact. We also express no opinion on Schwerin’s argument that the
transfer of Trust assets to Inoue and Hyoto was fraudulent (Civ. Code, §§ 3439.04,
3439.05) because Schwerin must first prove he is entitled to reach Trust assets to satisfy
his judgment against Bradenberg.
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_________________________
REARDON, ACTING P. J.
We concur:
_________________________
RIVERA, J.
_________________________
HUMES, J.
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