Williamson v. Brooks ( 2017 )

Filed 1/31/17
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION SIX
JOANNE WILLIAMSON, as 2d Civil No. B265745
Successor Trustee, etc., (Super. Ct. No. 1457582)
(Santa Barbara County)
Plaintiff and Appellant,
v.
THOMAS BROOKS et al.,
Defendants and Respondents.
The beneficiary of a trust seeks the value of
“opportunities lost” resulting from the trustees’ refusal or neglect
to distribute trust assets to the beneficiary. Here we conclude
that such conduct is not actionable. There is a difference between
such a claim and an actionable claim for losses to the trust
resulting from the trustees’ breach of fiduciary duty.
William Morgan (William) created an irrevocable
subtrust for the benefit of his daughter, Beverly Morgan
(Beverly).1 At its creation, the subtrust had an equity value of
We refer to the Morgan family by their first names to
1
avoid confusion. No disrespect is intended.
$67,500. Over the next four years, the cotrustees, Barton E.
Clemens, Jr., and Thomas Brooks, increased the subtrust’s equity
value to over $725,000. Claiming that she did not receive timely
notice of the subtrust, Beverly caused the successor trustee,
Joanne Williamson, to sue Clemens, Brooks, Connie Morgan
(Connie) and William (collectively “respondents”) for damages.
Williamson alleges that if Beverly had been made aware of the
subtrust, she would have used its assets to prevent the loss of her
home.
Following a four-day trial, the trial court entered
judgment in favor of respondents. It found that Clemens and
Brooks did not breach their fiduciary duties and that neither the
subtrust nor Beverly suffered any harm as a result of
respondents’ actions. We affirm.
FACTS AND PROCEDURAL BACKGROUND
William founded Kirby Morgan Dive Systems, Inc.
(KMDSI), a successful business which designs and manufactures
commercial-grade diving helmets. KMDSI is a closely held
company with 200 shares of stock. Before creating his estate
plan, William owned 155 shares. His daughter Connie owned the
remaining 45 shares.
In December 2008, William established the Morgan
2008 Irrevocable Trust (Trust), which contains five separate
subtrusts benefiting five of his adult children, including Beverly.
William selected Brooks, his accountant, and Clemens, his
attorney, to serve as cotrustees. The purpose of Beverly’s
subtrust was to allow William to transfer 18 shares of KMDSI
stock to Beverly in a tax-advantaged manner. William
accomplished this by funding her subtrust with a gift of $67,500.
The cotrustees then purchased the 18 shares of KMDSI stock for
2
$675,000 by using the $67,500 cash as a down payment and
issuing a promissory note to William for the remaining $607,500
of the purchase price. The cotrustees secured their obligations
under the note by pledging the 18 shares of stock. Monetary
distributions authorized by KMDSI’s board were used to pay the
income taxes due on the stock and also to pay down the
promissory note, thereby increasing the equity value of the
subtrust. The subtrust allowed Beverly to withdraw certain
portions of the principal at 40, 50 and 60 years of age.
After the Trust was created, William, Brooks and
Clemens discussed the need to inform William’s children about
the Trust. William said he wanted to tell them himself and it
was agreed he would do so. William wished “to caution [the
children] that it was not for purchases [for which] it wasn’t
intended.” William informed Beverly about her subtrust on at
least two occasions. The first was in an email dated March 22,
2009, in which William responded to an inquiry from Beverly
regarding whether Brooks should file her 2008 taxes. William
advised: “Tom Brooks and Bart Clemens set up Trusts that do
not require you to change any of your tax stuff. File with anyone
you like and the Trust Income has no effect on your taxes since
each Trust is a separate entity and is taxed on its own. I pay the
tax on the Trust. I need to sit with you sometime this year to
explain it all.” The second occasion occurred in late spring of
2009 on the beach at Hollister Ranch in Santa Barbara. William
again informed Beverly of her subtrust and told her she would be
taken care of in the event of his death.
Beverly was on the payroll at KMDSI until 2010,
when William fired her for refusing to perform any work.
William subsequently became concerned that if she gained an
3
ownership interest in KMDSI, she would harm the company. To
ameliorate that concern, William exercised his right under the
subtrust to substitute assets of equal value in place of the 18
shares of KMDSI stock. Effective November 1, 2012, William
reacquired the 18 shares by substituting a promissory note in the
amount of $799,000, representing the value of the shares. The
note, as amended, requires William to pay Beverly’s subtrust
$6,258.01 per month through November 2022, followed by a
balloon payment of $133,919.28 in December 2022.
After William fired Beverly from KMDSI, she was
unable to make the $2,800 total monthly payments on her home
at 1419 Via Rosa in Santa Maria (the “Via Rosa Property”).
William and Connie had helped her purchase the home several
years earlier. KMDSI gave her a $50,000 bonus to serve as a
down payment. Connie paid the remainder of the down payment,
and Connie and Beverly took out a $312,000 mortgage loan.
Connie already had a home and did not reside at the Via Rosa
Property. Her only goal was to help her sister buy a house.
Beverly told Connie she could pay approximately half
of the monthly mortgage payments, but could not pay the rest.
Connie offered Beverly three alternatives: (1) Connie could loan
Beverly the other half of the monthly payments, but Beverly
would be obligated to repay the loan; (2) Connie could quitclaim
her interest in the Via Rosa Property to Beverly and Beverly
could then do whatever she wanted with the property; or (3)
Beverly could quitclaim her interest in the property to Connie,
after which Connie would rent it to Beverly for $1,000 per month.
Beverly did not want to accept the loan from Connie
because it did not make economic sense. At that time, the Via
Rosa Property was worth approximately $100,000 less than the
4
outstanding mortgage. After discussing the matter with William
and Connie, Beverly elected to quitclaim her interest in the
property to Connie. Although Beverly was still obligated to the
lender, Connie made the monthly payments and William assured
her he would deal with any “underwater” issues. At that point,
Clemens prepared a simple quitclaim deed to effectuate the
transfer.
Instead of renting the Via Rosa Property from Connie
for $1,000 per month, Beverly chose to move into Williamson’s
guest room at Hollister Ranch. Beverly testified that her dream
was to live at Hollister Ranch and that her dream came true
when she moved in with Williamson.
Connie continued to make the payments on the Via
Rosa Property until she sold it in August 2012 for $226,495. The
remaining mortgage was approximately $48,000 higher than the
sales price. To close the transaction, William contributed over
$61,000 to cover this difference as well as the closing costs.
In 2012, Beverly contacted Brooks for the first time to
discuss the subtrust. Brooks promptly responded, providing the
information and documents requested. When Beverly made a
request to withdraw assets from the subtrust in September 2012,
“Brooks worked with her to begin making monthly distributions.”
After Clemens and Brooks resigned as cotrustees,
M. Jude Egan, the successor trustee, filed a first amended
petition against respondents for damages suffered as a result of
Beverly’s loss of the Via Rosa Property. The petition alleged
claims for (1) formal accounting, (2) to compel delivery of trust
assets, (3) breach of trust (fiduciary duty), (4) fraudulent transfer,
(5) conversion, and (6) common count. Egan averred, among
other things, that Clemens and Brooks breached their fiduciary
5
duties to Beverly by failing to inform her of the subtrust and by
failing to supervise William’s conduct. He also alleged that
Clemens improperly delegated the trust administration to
Brooks. Before trial, Williamson was substituted in as petitioner
in her capacity as the second successor trustee.
The trial court rejected each of Williamson’s claims.
It determined that Beverly was aware of the subtrust and that, to
the extent she lacked specific information about the subtrust, “it
was [Beverly’s] lack of due diligence and not the failure of
fiduciary duty responsibilities by Clemens or Brooks.” The court
further found that there were no damages to the subtrust and
that “there are no compensable damages of any kind related to
the [Via Rosa Property].” It awarded respondents their attorney
fees and costs of over $500,000. Williamson appeals.
DISCUSSION
A. Standard of Review
The parties dispute the applicable standard of
review. Williamson contends a de novo standard applies: that
this court should review as a question of law the trial court's
application of law to undisputed facts. Respondents contend
Williamson’s challenge is governed by the substantial evidence
standard of review, as the trial court made findings of fact on
conflicting evidence.
The trial court's statement of decision contains both
findings of fact and conclusions of law. We review the court's
findings of fact for substantial evidence. (People v. Mickey (1991)
54 Cal. 3d 612, 649; Westfour Corp. v. California First Bank
(1992) 3 Cal. App. 4th 1554, 1558 (Westfour).) Under that
standard, our review begins and ends with a determination as to
whether there is any substantial evidence, contradicted or
6
uncontradicted, to support the findings below. (Morgan v.
Imperial Irrigation District (2014) 223 Cal. App. 4th 892, 916; see
Crawford v. Southern Pacific Co. (1935) 3 Cal. 2d 427, 429.) In
assessing whether any substantial evidence exists, we view the
record in the light most favorable to respondents, giving them the
benefit of every reasonable inference and resolving all conflicts in
their favor. (Crawford, at p. 429.) “[I]t is not our role to reweigh
the evidence, redetermine the credibility of the witnesses, or
resolve conflicts in the testimony, and we will not disturb the
judgment if there is evidence to support it.” (Morgan, at p. 916;
In re Casey D. (1999) 70 Cal. App. 4th 38, 52-53.)
Where the trial court used findings of fact in drawing
conclusions of law, we independently review the conclusions of
law. (Westfour, supra, 3 Cal.App.4th at p. 1558; M&F Fishing,
Inc. v. Sea-Pac Ins. Managers, Inc. (2012) 202 Cal. App. 4th 1509,
1519.)
B. Claim for Breach of Fiduciary Duty
“The elements of a cause of action for breach of
fiduciary duty are: (1) existence of a fiduciary duty; (2) breach of
the fiduciary duty; and (3) damage proximately caused by the
breach.” (Stanley v. Richmond (1995) 35 Cal. App. 4th 1070, 1086;
Knox v. Dean (2012) 205 Cal. App. 4th 417, 432.) Williamson
asserts that Clemens and Brooks breached their fiduciary duties
to Beverly and that the breach resulted in damages. We disagree
on both counts.
1. Lack of Damages
Probate Code section 16060 provides that “[t]he
trustee has a duty to keep the beneficiaries of the trust
reasonably informed of the trust and its administration.”
Williamson asserts that if Clemens and Brooks had not abdicated
7
that particular duty to William, Beverly would have been aware
of her rights under the subtrust and would have withdrawn
money from the subtrust to maintain her ownership interest in
the Via Rosa Property. The trial court found, however, that even
assuming there was a breach of fiduciary duty, Beverly would not
have elected to maintain that ownership interest. The court
explained: “Beverly intentionally elected to sell the house. There
was no intimidation. She believed the house was toxic. Her
protestations at trial to the contrary were not persuasive. She
was given reasonable options by which she could have stayed an
owner, but decided she no longer wanted to live there or own the
house. Moreover, even assuming for the sake of argument that
she did not ‘know’ of the terms of her trust, the Court finds she
would not have elected to stay. Even now she would only keep
the house ‘as an investment.’ At the time they owed far more for
the house than it was worth; the house was underwater and she
knew it. The fact is, she wanted to live at Hollister Ranch. Thus,
there are no compensable damages of any kind related to the
house.”
Substantial evidence supports the trial court’s
findings. William and Connie both testified that Beverly said she
did not want to live at the Via Rosa Property because it was
underwater, because she believed it was toxic, and because she
had always wanted to live at Hollister Ranch. They also testified
that Beverly chose to leave the Via Rosa Property after she
quitclaimed it to Connie, even though she could have stayed
there for only $1,000 per month, which was less than the
$1,062.67 she said she could afford.
Beverly herself testified to these same facts. She
admitted that she had concerns about the toxicity of the Via Rosa
8
Property and that it was her dream to live at Hollister Ranch.
She stated that even if she had an opportunity to take back the
Via Rosa Property, she would maintain it as an investment
rather than move from Hollister Ranch. This evidence supports
the trial court’s findings that “she would have quitclaimed her
interest in the Via Rosa [Property] even if she thoroughly
understood all the assets available from her trust,” and that “it
may be that she is better off not having an interest in the house,
at least in the short term, especially since she would only rent it
out and is satisfied with living at the Ranch. I cannot quantify
any damages for her, even if she were to prevail on liability.”
Beverly’s reliance on the Nebraska Supreme Court’s
decision in Karpf v. Karpf (Neb. 1992) 481 N.W.2d 891 is not
persuasive. The court in that case did conclude that the trustees
had violated a Nebraska statute requiring that the trustees
inform the current beneficiaries in writing of the trust. But, as in
this case, the court found a lack of damages because there was no
evidence that the beneficiary would have exercised her
withdrawal rights even if she had known of them. (Id. at p. 897.)
Furthermore, trustees accused of breaches of
fiduciary duty may only be held liable for losses to the trust itself,
not for personal damages to beneficiaries. “There must be a
causal connection supporting any monetary award that the
trustee is ordered to pay. [Citation.] Thus, the trustee is only
liable for loss or depreciation resulting from the breach of trust,
for profits that the trustee made through the breach of trust, or
for any profits that would have accrued to the trust but for the
breach of trust. Prob. C § 16440 (a).” (2 Cal. Trust and Probate
Litigation (Cont.Ed.Bar 2016) § 21.65, p. 21-38, italics added.)
9
Although there appears to be no California case
directly on point, In re Eiteljorg (Ind. Ct.App. 2011) 951 N.E.2d
565 is instructive. In that case, the Indiana Court of Appeals
discussed whether a beneficiary may recover the value of
opportunities lost when a trustee refuses or neglects to distribute
assets from the trust. (Id. at pp. 571-574.) The court answered
“no,” based on Indiana Code section 30-4-3-11(b), which mirrors
Probate Code section 16440 and, like Probate Code section 16440,
is premised on the Restatement Second of Trusts, section 205
(1959). (Eiteljorg, at pp. 571-574.) The court explained: “The . . .
commentary [to section 205(c) of the Restatement] clarifies that
the lost profits contemplated by Restatement section 205(c) and
corresponding Indiana Code section 30-4-3-11(b)(3) are those
profits lost to the trust corpus due to a trustee’s misuse of or
failure to acquire trust property. Sections 205(c) and 30-4-3-
11(b)(3) are not addressed to the scenario where, as here, a
trustee has withheld trust property from a beneficiary, and we do
not read these provisions to allow compensation for individual
profits that beneficiaries allegedly would have generated on their
personal shares but for a trustee’s failure to timely distribute.”
(Id. at p. 572; see also Estate of Kampen (2011) 201 Cal. App. 4th
971, 991-993 [holding that lost opportunity damages are not
available as a remedy against a personal representative who had
failed to timely distribute estate assets].)
Thus, we agree with the trial court that, even if a
breach of fiduciary duty did occur, Beverly suffered no
compensable loss with respect to the Via Rosa Property. Beverly
also failed to prove that the cotrustees’ actions resulted in
damage to the subtrust itself. To the contrary, the equity value
of the subtrust increased from $67,500 to over $725,000 during
10
the time of the cotrustees’ management. The court found that the
use of KMDSI distributions to pay down the principal due on the
promissory note given by the cotrustees “was reasonable, avoided
significant risks to the trusts’ assets, minimized interest
expenses, and resulted in the best net financial benefit for the
trusts.”2 In the absence of any damage, Beverly has not
established her claim for breach of fiduciary duty.
2. No Breach of Fiduciary Duties
Although it is not necessary to our decision, we
conclude the record also supports the trial court’s conclusion that
the cotrustees did not breach their fiduciary duties to Beverly.
Williamson emphasizes the testimony of Kenneth Moes, an
attorney who testified that Clemens and Brooks breached their
fiduciary duties to keep Beverly reasonably informed of the
subtrust and its contents. The trial court found Moes to be a
credible witness, but did not find the testimony “to be
preponderating in light of the facts of the case . . . .”
Moes opined that Clemens and Brooks breached their
fiduciary duties by failing to inform Beverly about her subtrust.
The trial court found, however, that “Beverly was informed of her
trust[] shortly after it was created.” William told Beverly about
the subtrust in an email and also told her about again in late
spring 2009 during a walk on the beach at Hollister Ranch.
2 William testified that if the co-trustees had held money in
the subtrust for disbursement to Beverly, instead of making
principal payments on the promissory note, the KMDSI board
would have ceased making distributions to the subtrust. In that
event, the co-trustees would have defaulted on the promissory
note, which required the payment of interest, and William would
have foreclosed on the note, taking back the 18 shares of stock
and leaving no money in the subtrust.
11
Beverly knew that Clemens and Brooks had set up the subtrust
and were the cotrustees. Clemens testified that he confirmed
with William that he had informed Beverly of the subtrust.
Williamson maintains that William was required to
tell Beverly every detail of her subtrust. We disagree. Beverly
was entitled to be informed about her subtrust so that she could
take action to gain more information. As stated in Williamson’s
opening brief, “The most basic action required of a trustee under
the duty to inform is to promptly inform the beneficiary of the
existence of the trust and their status as beneficiaries, so that the
beneficiary may exercise their rights to secure information about
the trust.” The cotrustees fulfilled this duty by ensuring that
William informed Beverly of the subtrust, and when Beverly
eventually asked Brooks for information regarding the subtrust,
he promptly provided it. The trial court found that it was
Beverly’s “lack of due diligence” that prevented her from learning
the details earlier. The court stated: “I think [Beverly] had real
opportunities to inquire about her trust and what income or
assets it had. No one appeared to have been hiding the facts from
her. She appears to be a very bright and articulate person and
the fact that she did not investigate or explore her options [is]
inexplicable; that militates against her position.”
Williamson cites no California authority suggesting
that a trustee may be held liable for breach of trust or fiduciary
duties under the factual scenario presented here. The trial court
found that Beverly was made aware of the subtrust shortly after
it was created. She understood that Brooks and Clemens were
the cotrustees and she had ample opportunity to obtain more
information about the subtrust while she was negotiating with
Connie and William over the fate of the Via Rosa Property. That
12
she failed to do so does not make Clemens and Brooks liable for
breach of fiduciary duty. The trial court “accepted Brooks’ and
Clemens’ explanation of why they did not communicate directly
with Beverly about their appointment as cotrustees; their
testimony was buttressed by William’s testimony.” It also
accepted their explanation regarding the management of the
subtrust. The court properly concluded “[t]he facts do not trigger
liability under the Probate Code or in a court of equity.”
DISPOSITION
The judgment is affirmed. Respondents shall recover
their costs on appeal.
CERTIFIED FOR PUBLICATION.
PERREN, J.
We concur:
GILBERT, P. J.
YEGAN, J.
13
Thomas P. Anderle, Judge
Superior Court County of Santa Barbara
______________________________
Snyder Law, Barry Clifford Snyder and Joseph R.
Billings, for Plaintiff and Appellant.
Seed Mackall, Peter A. Umoff and Alan D. Condren,
for Defendants and Respondents Barton E. Clemens, Jr., William
Morgan and Connie Morgan.
Mullen & Henzell and Jana S. Johnston, for
Defendant and Respondent Thomas Brooks.