By Noël Margaret Lawrence*

INTRODUCTION

It is every estate and trust litigator’s worst nightmare: Triggering a no contest clause by mistake.  A client in consultation with his lawyer makes a conscious decision, a strategic decision, to contest a will or a trust.  It happens all the time.  The client makes an informed decision to proceed with a will contest, or a trust contest, knowing that the contest will result in loss of a gift under the contested instrument.  The client proceeds nonetheless because he hopes that the instrument will be struck down, and he will inherit under a different instrument.  So far so good.

By contrast, and what is greatly to be avoided, is taking action that results in a contest by accident.  This article will describe a way to accidentally contest a will, and a way to accidentally contest a trust.  Obviously, if a practitioner fails to warn a client that the action the lawyer is going to take on behalf of a client constitutes, or could constitute a contest, and that failure to advise the client results in loss to the client, the attorney has incurred liability.  It is the kind of liability that will be easy for a jury to understand, in the second suit, the one against the lawyer.

I. CONTESTING A WILL BY MISTAKE

Probate Code Section 21311(a)(1) provides that “A no contest clause shall only be enforced against the following types of contests:  (1) a direct contest that is brought without probable cause.”

Section 21311(b) explains what constitutes probable cause:  “For purposes of this section [21311], probable cause exists if, at the time of filing a contest, the facts known to the contestant would cause a reasonable person to believe that there is a reasonable likelihood that the requested relief will be granted after an opportunity for further investigation or discovery.”

What is important under this statute are the facts known at the time of the filing of the contest.  But what if, after the filing, further investigation or further discovery reveals that the contest lacks probable cause?  Then it is almost certainly time to dismiss, and it is time to argue that at the time of filing the contest, probable cause existed, even though it came clear later on that it did not.

Every cause of action of the contest has to have been brought with probable cause or an unsuccessful plaintiff might face a malicious prosecution action.  Crowley v. Katleman¹.  “[A] defendant cannot escape liability for the malicious prosecution of an unjustified charge by joining with it a justified charge.”²

Probate Code Section 21313 provides:  “This part is not intended as a complete codification of the law governing enforcement of a no contest clause.  The common law governs enforcement of a no contest clause to the extent this part does not apply.”

As explained below, under California common law, offering a subsequent will in bad faith (i.e. without probable cause) can be a contest of the earlier will.  It all depends on the state of mind of person who offered that later will.  It depends on what that person knew.  That’s what makes it tricky.  Just as Probate Code Section 21311(a)(1) turns on whether or not the party had probable cause, whether or not offering a subsequent will triggers the no contest clause turns on the good or bad faith of the proponent of that later will.

The case of Estate of Gonzalez/Gonzalez v. Gonzalez³ is a good example of a later will offered in bad faith constituting a contest of the prior will.

Jose Gonzalez died at the age of 81, survived by 12 children.  They ranged in age from 18 to 66.  Some of them were legitimate, and some were not.  Jose entered into a will in 1992 that divided his estate equally between the four children born of his marriage to Carmen Garza Gonzalez:  Enedina, Rosalinda, Roy and Jorge.  Jorge, the youngest, and a sergeant with the San Jose Police Department, was named executor.

Jose’s 1992 will contained a no contest clause that stated:  “If any beneficiary under this Will in any manner, directly or indirectly, contests or attacks this Will or any of its provisions, any share or interest in my estate given to that contesting beneficiary under this Will is revoked, and shall be disposed of in the same manner provided herein as if that contesting beneficiary had predeceased me.”

In early March, 1998, three weeks before Jose died, Jorge delivered to Jose for his signature (1) a grant deed that transferred title of Jose’s San Jose home to Jorge, and (2) a will that disinherited Jose’s other children and left Jose’s estate entirely to Jorge (consisting of property Jose owned in Mexico).

Roy filed a petition seeking to void the grant deed to the home in San Jose.  Enedina and Rosalinda filed a petition to recover funds in bank accounts held jointly by Jose and Jorge.  And they filed a motion to consolidate Jorge’s petition to probate the 1998 will, on the grounds of undue influence or fraud, with the siblings’ petition seeking a decree declaring the grant deed void, and the siblings’ petition seeking to impose a constructive trust on the funds in the bank accounts.

The case went to trial in 2000 on a set of facts that were very unfavorable to Jorge.  A few highlights:

The court found that Jorge was in a confidential relationship with Jose.  The court found that Jorge had actively participated in procuring the grant deed and the will.  And the court made numerous findings regarding how ill and vulnerable Jose had been at the time the deed and the trust were entered into:  Jose was unable to eat, he had a fever that came and went, he was in pain, he was weak, he was confused, he was forgetful, he had limited memory, he was disoriented, and he had constant headaches.

The court found that Jose was entirely dependent upon Jorge for management of his affairs.  The court further found that Jose was totally dependent on others for assistance in bathing, eating, and performing personal hygiene.

It was Jorge who had his (Jorge’s) tax preparer draft the deed to the home in San Jose, which deed Jorge brought to his father’s bedside.  Jorge brought a notary as well.  Jorge had a fellow police officer (who had recently become an attorney) draft the will.  Jorge brought the lawyer to Jose’s bedside.  Jorge provided some translation for Jose and the lawyer.  Jorge never left the room.  Then, after the will was prepared, Jorge arranged for two witnesses:  Jorge’s best friend (another police officer) and a neighbor (whose daughter had formerly been romantically involved with Jorge).  Many bad facts for Jorge.

The last health care professional to see Jose before he died, saw him on March 13, 1998, within four days of the signing of the will and the deed.  That health care professional described Jose as “frail, weak, incontinent, having cloudy urine, barely arouseable, disoriented, severely malnourished and severely dehydrated, and in a word, moribund.”  The doctor who cared for Jose testified that on a scale of one to ten, with ten being the maximum risk of undue influence, Jose’s susceptibility was at 12.  The court found that the deed and the will to be the product of Jorge’s undue influence.⁴

After the trial, each of Roy and Jorge filed a new petition seeking admission to probate of the 1992 will and each seeking his appointment as executor.  The sisters and Roy each filed objections to Jorge’s petition, and Jorge filed objections to Roy’s petition.

Time for Jorge to get his comeuppance:  The sisters filed a “petition to determine entitlement to estate distribution” to Jorge because he violated the will’s forfeiture clause.  How did he do that?  By offering for probate a will that he surely knew was not valid.

Following the hearing on the petition seeking to determine if Jorge had violated the no contest clause in the 1992 will, the judge issued a Statement of Decision finding that Jorge had indeed violated the 1992 will’s no contest clause, and hence Jorge had forfeited any interest he had under that will.

Jorge argued that the no contest clause in his father’s 1992 will should not be enforced against him because he had “reasonable cause” to offer the 1998 will to probate.  Really?

The case cites Probate Code Section 21306(a) (now repealed):

“(a)  A no contest clause is not enforceable against a beneficiary to the extent the beneficiary, with reasonable cause, brings a contest that is limited to one or more of the following grounds…(2)  Revocation.  (b)  ‘Reasonable cause’ is defined for the purposes of this section to mean that the party filing the action, proceeding, contest, or objections has possession of facts that would cause a reasonable person to believe that the allegations and other factual contentions in the matter filed with the court may be proven or, if specifically so identified, are likely to be proven after a reasonable opportunity for further investigation or discovery.”⁵

That language is nearly identical to the language of new Probate Code Section 21311(a)(1) and (b):

(a) “A no contest clause shall only be enforced against the following types of contests:

(1)  A direct contest that is brought without probable cause.

*            *            *            *            *            *            *

(b)  For purposes of this section, probable cause exists if, at the time of filing a contest, the facts known to the contestant would cause a reasonable person to believe that there is a reasonable likelihood that the requested relief will be granted after an opportunity for further investigation or discovery.”

Would what Jorge did in offering the later will for probate be a direct contest under the new California no contest code sections?  Clearly, yes.

Probate Code Section 21310(a) and (b)(5) provides:

“(a)  ‘Contest’ means a pleading filed with the court by a beneficiary that would result in a penalty under a no contest clause, if the no contest clause is enforced.

(b)  ‘Direct contest’ means a contest that alleges the invalidity of a protected instrument or one or more of its terms based on one for more of the following grounds:

*            *            *            *            *            *            *

(5)  Revocation of a will pursuant to [Probate Code] Section 6120….”

Probate Code Section 6120(a) provides:

“A will or any part thereof is revoked by any of the following:

(a)  A subsequent will which revokes the prior will or part expressly or by inconsistency.”

Most attorney drafted wills expressly revoke all prior wills.  So, that is express revocation.  Revocation by inconsistency?  Most wills will do that simply because they dispose of some or all of the property disposed of by the earlier will.  Where a will purports to dispose of all of decedent’s property, a will previously executed is wholly revoked.⁶  A later will, containing no express revocation of the earlier will [often a holographic will], but disposing of the entire estate, revokes the earlier will.⁷

The converse is also true.  Offering a later will in good faith is not a contest brought without probable cause.  “A provision in a will that if any beneficiary object to the distribution of the estate as made by the will or attempt to defeat the provisions of the will, any gift to such beneficiary other than five dollars shall be annulled and revoked, has no application to an attempt in good faith to probate what purports to be a later will.”  (Emphasis added.)⁸

“An attempt in good faith to probate a later purported will, spurious in fact, but believed to be genuine by the party seeking its probate, does not fall within the forfeiture clause of the genuine will.”⁹

“If an attempt were made knowingly to probate a spurious will of a later date which purported to distribute the testator’s estate in a manner different than that of the genuine will, such an attempt would quite certainly come within the language of the forfeiture clause as an attempt to defeat the provisions of the will.”¹⁰

The Colorado Court of Appeals case of In Re the Estate of Henry Peppler¹¹ has an unusual set of facts.  In Peppler, “the [trial] court denied admission of [a] 1992 will to probate, finding that the testator lacked testamentary capacity to execute it and that it was the product of undue influence exerted upon testator by beneficiary” however, “the [trial] court declined to order enforcement of the no-contest clause.  It concluded that the beneficiary did not directly or indirectly contest the 1984 will by offering the 1992 will for probate.  The trial court found that the beneficiary was ‘well-intended’ and seemed to have been doing what she felt was right, but had herself been ‘badly advised and improperly influenced by her then-attorneys’ when the 1992 will was executed.”¹²

It is difficult to see how a trial court can find that a will is the product of a beneficiary’s undue influence and executed at a time when the testator lacked testamentary capacity, yet also find that the beneficiary was “well intended.”  Yet that indeed is what the trial court did in Peppler – without explanation of how in fact that undue influence could be laid at the feet of the lawyers.

The Colorado Court of Appeals addressed the issue of whether “a finding of undue influence precludes applying a good-faith probable cause exception” to enforcement of the no contest clause, holding that no, the particular facts and circumstances of a given case might form the basis “for concluding that a beneficiary acted in good faith and with probable cause in offering a will for probate even if it is later determined that the will was the product of undue influence.”  (Emphasis added.)¹³  Alright, but it is still hard to imagine, is it not?

In the first instance, the Court of Appeals agreed with the appellant that, indeed, the trial court erred in concluding that the beneficiary’s acts did not constitute an attack on the earlier will.  The appellate court confirmed that “[o]ffering a subsequent will for probate can constitute a contest or attack within the meaning of a no-contest clause.”

But the Court of Appeals agreed with the trial court that “the evidence showed the attorneys ‘plotted this whole scenario and left [the beneficiary] holding the bag.’”  Why the attorneys would do so is not explained, and we are left to wonder about the manner in which the attorneys would have benefitted from the new will.

So, having determined that a contest had occurred, the appellate court remanded Peppler to determine if, nonetheless, the beneficiary acted in good faith and with probable cause in offering the later will for probate, i.e. to determine “whether the [no contest] clause is nevertheless unenforceable because enforcement would be contrary to law or public policy.”¹⁴

The Oklahoma case of Estate of Westfahl¹⁵ is another difficult one to understand.  L.C. Westfahl died on December 5, 1976.  Thereafter, his daughter Betty Lou Goforth sought to probate his 1963 will.  His son Harold Westfahl proffered his father’s 1976 will and sought to probate it.  The trial court found that the 1976 will was the product of undue influence exerted upon the senior Westfahl by the son Harold.  The court then admitted the 1963 will to probate.

Thereafter, Betty Lou sought to enforce the 1963 will’s no contest clause against Harold.  The Oklahoma Supreme Court stated that “an attempt to probate a will known not to be a genuine instrument falls within the forbidden behavior of the in terrorem clause….”¹⁶  The Supreme Court went on, however, to find that “[u]nder the facts of the case, we find that Harold did not contest the validity of the 1963 will; he performed his statutory duty by propounding the 1976 will.  Had he failed to produce the will , any of the Westfahl heirs could have compelled its production and Harold’s incarceration.” (Emphasis added.)¹⁷  The court goes on:  “The statutes require that all wills be presented to the court for its determination concerning which is to be given full force and effect.  We agree with the trial court’s finding that the no contest clause was inapplicable to Harold’s actions.”

It is difficult to see how Harold could be found to have exerted undue influence on his father to make the 1976 will, and at the same time be found to have offered that will in good faith and with probable cause.  “An attempt in good faith to probate a later purported will, spurious in fact, but believed to be genuine by the one presenting it for probate does not render the offeror subject to the forfeiture provisions of the no contest clause is he/she has probable cause to believe that the instrument is genuine and entitled to probate.”¹⁸

Yes, the custodian of an original will is obligated to lodge the will with the Superior Court of the county of residence of the decedent.  That certainly is the rule in California.  According to Probate Code Section 8200(a), unless a petition for probate is filed earlier, within 30 days after learning of decedent’s death, the custodian of decedent’s will must do both of the following:  (1) Deliver the original will to the clerk of the superior court of the county in which the estate may be administered; and (2)  Mail a copy of the will to the named executor or, if the named executor’s whereabouts are unknown, to a named beneficiary whose whereabouts are known.  Section 8200(b) provides that a custodian who fails to comply with the delivery requirements will be held liable for all damages sustained by any person injured thereby.  If the court orders a custodian to produce a will, that order can be enforced by the contempt power of the court.

The Westfahl  case cites very similar code sections in effect in Oklahoma, 58 O.S. 1981 Sections 21 and 24.  Fine, Harold had a duty to deliver the 1976 will to the court.  But did he have a duty to seek the 1976 will’s admission to probate?  Because that is what he did.

Are we to believe that Harold was unaware of his own exertion of undue influence on his father?  Can Harold be both the exerter of undue influence, and also in good faith when he offered the product of his undue influence for probate?

Apparently yes, however the Westfahl case does not explain how that could be possible.  It says simply that the “no contest clause was inapplicable to Harold’s actions” without explaining why that was so.

The Arkansas case of Seymour v. Biehslich¹⁹ is easier to understand, under very similar facts.  Floyd Ray Davis Sr. died on May 18, 2002.  Shortly thereafter his daughter, Gladys Biehslich filed a petition to probate a will dated May 6, 2002.  The will provided for a few specific bequests, and bequeathed the remainder of the decedent’s property to his seven children and to the issue of his one deceased son.  The will contained a no contest clause.

A few weeks later, another daughter of the decedent, Murriel Seymour, filed a petition to probate a will dated May 13, 2002, one week after the first will, and six days before Mr. Davis died.

The second will was handwritten (not by Mr. Davis but by Murriel!).  It gave $1,000 to be shared by Mr. Davis’s children and grandchildren and the remainder of the estate entirely to Murriel.  A hearing was held on Murriel’s petition to probate the later will, and the court denied the petition.

Thereafter, Gladys sought to exclude Murriel from inheriting under the earlier will.  The Seymour Court found that Murriel’s actions in seeking to probate the second will were not in good faith, and relying on Estate of Peppler, Estate of Westfahl and Estate of Gonzalez, found that Murriel had violated the no contest clause of the May 6, 2002 will.²⁰

Similarly, in the New York case of Kirkholder’s Estate,²¹ the court observed that while courts are indulgent and generous in interpreting a clause in a will forfeiting a bequest in case of a contest by the legatee, “[t]he offer and attempt to prove a false and spurious document in the place and stead of the last will of the testator is equivalent to a contest and a breach of the conditions of the legacy.”²²

So, the take away from Gonzalez (and the related cases from foreign jurisdictions) is this:

As the plaintiff:  If your client has a “fall back” position – meaning, if he hopes to inherit a lesser amount, or inherit something different under a prior will, and is counting on that when he offers the later will, he better have probable cause to offer the later will.  He better be in good faith.

And his lawyer better warn him (put it in writing) that he could well be put in the position of defending the reasonableness of his actions.  The short of it is:  One can never be sure.  It is a calculated risk.  Not for nothing do most wills contain a no contest clause.  They seek to cause just this kind of caution, concern, hesitation and reluctance.

As the defendant:  You will want to defend the contest of course.  But your job is larger than that.  You also want to gather as much evidence as possible that this contest was brought without probable cause.  If the defendant prevails, very soon thereafter on behalf of the proponents of the earlier will, you will want to challenge the reasonableness of the contest.  Time might be short, and you need to be prepared.

And, if the defendant can make out the case that there was no probable cause, and can prove that in addition, the case was commenced and pursued with malice, the defendant has a malicious prosecution case against the plaintiff.  According to Crowley v. Katleman²³ a malicious prosecution case can be brought when only some or only one of the causes of action of the will contest lacked probable cause and was brought with malice.

In the course of litigating the contest, be mindful of whether one or more causes of action should be dismissed.  If as the evidence is developed it comes clear that a cause of action is not supported by evidence, dismiss it. And immediately prior to the commencement of trial, the plaintiff will know, as well as he is ever going to know, what evidence supports each cause of action.  Reassess each claim and if any of them lacks probable cause, dismiss it.  No one wants to be on the receiving end of a malicious prosecution action.  Also, because the notion of what a “reasonable person” might believe is very subjective, remove the possibility of trouble down the road.

Be sure in particular to scrutinize any lack of testamentary capacity claim.  In this author’s experience, since the enactment of the Due Process in Competence Determinations Act in 1995, Probate Code Section 810 et seq., it has become extraordinarily difficult to prove lack of testamentary capacity.  Why?  Because many of the sorts of things that need to be evaluated and examined are the sorts of things that are best evaluated and examined by a health care professional while the decedent is still alive.  E.g. Probate Code Section 811:  “ability to attend and concentrate (part (a)(1)(C)),” “ability to understand and appreciate quantities,” (part (a)(2) (D)), “uncontrollable repetitive or intrusive thoughts”(part (a)(3)(D)),  “ability to modulate mood and affect “(part (a)(4)).

To take this author’s thirty plus years of litigating will contests and trust contests as an example, only once was a lack of testamentary capacity claim sustained, and that poor man was practically in a coma at the time he signed the will.  Again, in this author’s experience, the great majority of contests that are successful, are successful based on an undue influence claim.  Do not weaken your case, or undercut your credibility, by including a lack of capacity claim that cannot be sustained.

II. CONTESTING A TRUST BY MISTAKE

Contesting a trust by mistake is easy to do.  In this example, the client is the defendant to a trust contest.  The plaintiff has alleged that the trust is invalid.  The plaintiff seeks to have the later trust declared invalid.  The plaintiff wants an earlier trust to be given effect.  Typically when a new trust is entered into, the settlor executes a writing revoking the earlier trust.

So, there is a separate document in the nature of a trust revocation.  It usually is signed just prior to, or at the same time the new, later trust is entered into.  Probate Code Section 15401(a)(2) provides that “A trust that is revocable by the settlor may be revoked in whole or in part…(2) By a writing (other than a will) signed by the settlor and delivered to the trustee during the lifetime of the settlor….”

And, typically, at the same time that the plaintiff contests the later trust, he also contests the trust revocation document.  The plaintiff wants to restore the earlier trust, so he wants to eliminate both the later trust, and the document that revoked the earlier trust.  The plaintiff alleges that both the later trust and the trust revocation are invalid.  The defendant denies those allegations.  The defendant answers the contest and defends the validity of the revocation.

There it is.  The defendant was not thinking in terms of contesting anything.  He was just answering the complaint.  He was doing what defendants do.  He was denying the allegations made by the plaintiff.  But in doing so, he was advocating for the revocation of the trust.  Probate Code Section 21310(b) provides that a direct contest includes a contest that alleges the invalidity of a protected instrument based on “revocation of a trust pursuant to Section 15401.” Probate Code Section 21310(a) provides that a contest means “a pleading filed with the court by a beneficiary that would result in a penalty under a no contest clause if the no contest clause is enforced.”  Section (d) states that a “pleading” means…an answer [or] a response….”  There it is.  There is your pleading, your answer to the contest.  And there is the new contest, the other one, the one brought by the defendant.

By defending the revocation document and advocating for its validity, the defendant has in essence alleged the invalidity of the earlier trust.  The defendant has contested the earlier trust.  Whether or not he has done so with probable cause is, of course, another issue.

This is an easy mistake to make.  And maybe it is not even a mistake, depending on the circumstances of the case.  But, of course, what is important for the lawyer to realize is that answering the complaint and advocating for the revocation document is indeed a contest.  The lawyer needs to advise the client in advance, and only proceed if the client decides to assume that risk.  It may very well be reasonable to proceed notwithstanding.  The point is, the lawyer should counsel the client, and should document that he counseled the client, and that the client decides to go forward anyway.

III. RETHINKING NO CONTEST CLAUSES

As described above, a beneficiary can contest an earlier trust by defending and advocating for the document that revoked the earlier trust.  When the later trust is contested, almost certainly the contestant will also contest the document of revocation.

The defendant has no good options.  He or she either allows the contest of the revocation instrument to go unopposed, or he or she answers the complaint by defending the validity of the instrument of revocation.  When the defendant defends the validity of the instrument of revocation, the defendant has contested the earlier trust under Probate Code Section 21310(a)(5).

What to do?  “[The] [d]rafter may consider expanding the definition of ‘probable cause’ to include filing a responsive pleading to avoid the incongruous and unfair result that a pleading filed in defense will cause a forfeiture.”  John A. Hartog, Taking the Fright Out of Drafting No Contest Clauses Under the New Regime.²⁴

“‘Non-beneficiaries’ under the instrument have nothing to lose by contesting the instrument.  In fact, if a ‘non-beneficiary’ attacks and instrument, the presence of a no contest clause applicable to all beneficiaries may limit the range of responses available to named beneficiaries in defending their interests.”²⁵

See also Neil F. Horton, The New No Contest Law:  New Challenges for Trusts and Estates Attorneys²⁶ for a good discussion and explanation of the new no contest code sections.  That article ends with some good advice:

“Estate planning attorneys should use no contest clauses sparingly and cautiously.  They should make sure that their clients understand the possible draconian consequences to their loved ones of including a no contest clause.  They should consider less severe alternatives to achieve their clients’ wishes, such as conditional gifts.  They should consider tailoring the object of the clause to a particular beneficiary or class of beneficiaries, rather than allowing the clause to apply to ‘any beneficiary.’  Above all, they should not insert a boilerplate no contest clause into every trust and will they draft.”²⁷

That’s good advice.  But right now the law firm safes and bank safe deposit boxes are full of wills containing no contest clauses written long ago that all of us have to deal with, and navigate around. When you think you are doing one thing (offering will no. two for probate or defending trust no. two) be aware that you could be doing something else as well:  Contesting will no. one, or trust no. one.  That may be the right decision, but make sure both you and your client do so knowingly.

*Noël Margaret Lawrence Oakland

1. Crowley v. Katleman (1994) 8 Cal.4th 666.
2. Id. citing Albertson v. Raboff (1956) 46 Cal.2d 375, 385.
3. Estate of Gonzalea/Gonzalez v. Gonzalez (2002) 102 Cal.App.4th 1296.
4. Id. at pp. 1301.
5. Id. at pp. 1303.
6. In Re Martin’s Estate (1939) 31 Cal.App.2d 501; In Re Mallon’s Estate (1938) 28 Cal.App.2d 106.
7. In Re Marx’s Estate (1917) 174 Cal. 762.
8. Estate of Bergland (1919) 180 Cal.629.
9. Id. at pp. 634.
10. Id. Citing In re Kirkholder’s Estate (1916) 149 N.Y. Supp. 87.
11. Estate of Peppler (1998) 971 P.2d 694.
12. Id. at pp. 696.
13. Id. at  pp. 698.
14. Id.
15. In re Estate of Westfahl (1983) Ok 119, 674 P.2d 21
16. Id. at pp. 24.
17. Id.
18. Citing Bergland (supra), Kirkholder (supra) and Annot., “What Constitutes Contest Or Attempt To Defeat Will Within Provisions Thereof Forfeiting Share of Contesting Beneficiary,” 49. A.L.R. 198, 241-43 (1956).
19. Seymour v. Biehslich (2007) 371 Ark. 359, 266 S.W. 3d 722
20. 371 Ark., 359, 364.
21. In Re Kirkholder’s Estate (1916) 149 N.Y.Supp. 87
22. Id. at pp.89.
23. Crowley v. Katleman (1994) 8 Cal.4th 666.
24. Estate Planning 2009, UCLA/CEB Estate Planning Institute, pp. 449.
25. Id.
26. Neil F. Horton, The New No Contest Law: New Challenges for Trusts and Estates Attorneys, California Trusts and Estates Quarterly, Vol. 14, Issue 3, Fall 2008 page 7.
27. Id.

© 2012 by Noël Margaret Lawrence

University of California Continuing Education of the Bar
Estate Planning & California Probate Reporter
April 1996

Beware:  All Fiduciary Law Is Not Created Equal

NOËL M. LAWRENCE & JAMES A. BARRINGER

Laws pertaining to decedents’ estates are similar in many ways to those pertaining to inter vivos and testamentary trusts. Personal representatives and trustees are both charged with the collection, management, and distribution of property. Each is a fiduciary having certain duties of care and loyalty, and each must be ready to account for the management of the assets under his or her control. Nevertheless, the laws applicable to trusts, in a given situation, can differ greatly from the laws applicable to estates in a comparable or identical situation. More often, these differences are accidents of statutory evolution rather than the result of deliberate legislative action.

Certain of these differences in the law are significant and can greatly influence the course and outcome of litigation to which an estate, a trust, or the beneficiaries of either might be a party. A particular difference can even determine whether or not litigation is pursued at all. Accordingly, it is usually a mistake, when handling estate litigation, to assume that the rules governing personal representatives and estate beneficiaries resemble those that apply to trustees and trust beneficiaries, and vice versa. This article discusses some of the more significant differences.

Access to Information

A trust beneficiary’s right to information about the trust and its management differs significantly from an estate beneficiary’s right to similar information concerning the estate. In some rather limited ways, estate beneficiaries have greater access to information than do trust beneficiaries, in particular during the period immediately after the decedent’s death. In general, however, trust beneficiaries have broader rights to information than do estate beneficiaries, especially if there is no question about their status as trust beneficiaries and they are beneficiaries of an on-going trust (as opposed to mere recipients of one-time gifts).

Notice of Death

The advantages of an estate plan built around a living trust include the ease with which the deceased settlor’s affairs can be wound up and the ability to distribute the settlor’s assets privately, without court supervision and with little information becoming a matter of public record. These advantages are in the nature of mixed blessings, however, because doing things easily and privately can mean doing them with stealth and secrecy.  Estate practice differs from trust practice from the outset in that administration of a deceased settlor’s trust can begin and continue without notice of death to the decedent’s heirs and without notice to his or her creditors.

In short, a living trust can be administered and distributed without the knowledge of the settlor’s relatives, provided they are not named as beneficiaries under the trust instrument. By contrast, at the outset of a probate administration, all known and “reasonably ascertainable” persons interested in the estate are constitutionally and statutorily entitled to receive actual notice of the proceedings. Tulsa Prof. Collection Servo v Pope (1988) 485 US 478, 490,99 L Ed 2d 565, 578, 108 S Ct 1340; Prob C §§8003(b), 8110, 8120, 9050-9052.  For example, suppose you are the sole heir at law to your great uncle’s estate, as his only living relative. You had a nice relationship with him but, aside from exchanging Christmas cards, you corresponded with him only at his birthday in the summer. For many years, you were the sole beneficiary of his will. In the absence of a will, you stood to inherit his estate because you are his sole heir at law.

Without your knowledge, your great uncle’s housekeeper procures a living trust. When your great uncle later dies shortly after Christmas, you know nothing about it. By the time you call him on his birthday and learn that he has died, six months have gone by. The housekeeper has distributed all of the trust assets to herself, converted them to cash, and moved to South America. You received no notice of the death. If there had been no living trust, you would have received notice of death as an heir at law or as beneficiary under a will before any action was taken to dispose of the decedent’s assets.

Information About Beneficial Interests

A person who is uncertain whether he or she is a beneficiary of a trust or uncertain about the terms of a trust is at a decided disadvantage. It is often impossible to obtain a copy of the trust document from its custodian, short of commencing litigation and engaging in discovery. By contrast, in the decedents’ estates arena, wills are a matter of public record. Anyone can visit the clerk’s office (and, indeed, even bring along an expert such as a handwriting expert) and review the instrument before instituting litigation.

Consider the plight of your new client, whose father has died and whose brother claims that he is named as successor trustee of their father’s living trust. Your client’s brother further states that your client is not entitled to anything under the trust. Your client asks her brother for a copy of the living trust in order to verify her brother’s assertions. The brother refuses to provide it, stating that his attorney told him that only persons named as beneficiaries in the trust instrument are entitled to information about the trust. What should you advise the client to do? Should the client institute a lawsuit so that a copy of the trust could be obtained through discovery?

“You are flying blind, drafting a complaint in total or near total ignorance. “

There are serious problems inherent in commencing litigation without any knowledge of the terms of the instrument. You are flying blind, drafting a complaint in total or near total ignorance. Very possibly when you file the complaint you would not have probable cause (because you have no information yet); the risk of exposing yourself and your client to liability for malicious prosecution is very real.  A person who is interested in a decedent’s will and probate estate would not face the threshold question of entitlement. He or she could simply review the provisions of the will, the information regarding the estimated value of the estate (contained in the petition for probate). And, in the case of a postprobate contest, any inventories in the court’s file.

Consider the same facts as in the preceding example, except your client’s brother says that all your client receives is $25,000 under the living trust. Your client is not sure how much money her father had (and, unlike an estate beneficiary, has no easy way to find out). On behalf of your client you request a copy of the trust and a statement of the assets and liabilities of the trust in order to advise your client about her beneficial interest. In reply the brother’s attorney provides only a narrowly redacted version of the trust showing your client’s $25,000 gift.   This copy is accompanied by a learned letter citing Prob C §16061, which provides that on reasonable request by a beneficiary, the trustee shall provide the beneficiary with a report of information about the assets, liabilities, receipts, and disbursements of the trust, the acts of the trustee, and the particulars relating to the administration of the trust relevant to the beneficiary’s interest, including the terms of the trust that describe or affect the beneficiary’s interest. (Emphasis added.)

The brother’s counsel takes the position that only the redacted terms of the trust describing your client’s gift need be supplied. The attorney further states that, because your client receives only a $25,000 “specific gift” under the trust, general information concerning the trust’s assets and liabilities is not relevant to your client’s interest and will not be provided. Should you meekly submit to these contentions, or file a petition under Prob C §17200(b )(7) to compel further disclosure of the trust’s terms and its assets and liabilities? Dealing with an evasive trustee can be frustrating; before filing such a petition, it would be wise to request a copy of any “no contest” provision of the trust and, if necessary, to petition under Prob C §21320 to avoid triggering such a clause.

Information About Estate or Trust Management

In some situations, a trust beneficiary’s rights to request information under Prob C §16061 are far greater than an estate beneficiary’s rights to similar information. The trust beneficiary is entitled to petition the court to compel the trustee to provide the requested information or accounting if the trustee has failed to do so within 60 days after the beneficiary’s request and more than six months have expired since the last report or account.  Prob C §17200(b)(7). An estate beneficiary has no similar right to serve a 60-day demand on the personal representative to provide information. The estate beneficiary’s right to information about the administration of the estate is restricted by the Probate Code rules pertaining to status reports and accounts. Prob C §§ 10900-11052.

Unlike trust beneficiaries, who are entitled to any kind of information they want (so long as the request is “reasonable”), estate beneficiaries must be satisfied with what is disclosed in a status report or an accounting.  Moreover, an estate beneficiary must wait at least 12 months, and often 18 months, for the status report. If no federal estate tax return is required, the personal representative is supposed to petition for final distribution within one year from the date of issuance of letters. Prob C §12200(a).   If a federal estate tax return is required, the petition for final distribution must be filed within 18 months from the date letters are issued. Prob C §12200(b). Only after the applicable period of time has elapsed and the deadline has not been met must the personal representative file the verified report of the status of administration showing the condition of the estate, the reasons why it cannot be distributed and closed, and an estimate of the time needed to close the estate administration. Prob C §12201(a).

If the personal representative fails to petition for final distribution or file a status report within the required time limit, the court may, on petition of an interested person or on its own motion, require the personal representative to appear and show the condition of the estate and why it cannot be closed. Prob C §12202(a). At the hearing, the court can either order the estate administration to continue or order the personal representative to petition for final distribution. Probe §12202(b).

Attorney-Client Privilege

In sharp contrast to the usual protection afforded a client by the attorney-client privilege, a trustee can be compelled to disclose to beneficiaries any legal advice the trustee receives concerning the administration of the trust. Strauss v Superior Court (1950) 36 C2d 396, 401, 224 P2d 726; Riggs Nat’l Bank v Zimmer (Del 1976) 355 A2d 709; Restatement (Second) of Trusts §173; see dicta in Lasky, Haas, Cohler & Munter v Superior Court (1985) 172 CA3d 264, 280, 218 CR 205. This rule apparently does not, however, extend to legal advice obtained at the trustee’s expense that concerns a dispute with a beneficiary. Restatement (Second) of Trusts §173, Comment b.

Further, the holding in Lasky, is that internal, uncommunicated attorney work product is privileged against disclosure.  It is not clear to what degree these special rules apply to decedents’ estates. The rulings in Strauss and Riggs, requiring disclosure in the trust context, were based on the trustee’s duty to provide beneficiaries with information on reasonable request, which duty is codified in Prob C §16061. As mentioned above, however, the disclosure duties of estate representatives are not as broad as the trustee’s disclosure duties, and it is conceivable that the attorney-client privilege could be given stronger application in the estate context.

Investments

Investments are one of the areas in which the laws applicable to trustees and personal representatives differ most significantly. The fiduciary duty of care imposed on trustees with respect to investments is considerably more stringent than that imposed on estate representatives, and counsel should consider this difference before taking an estate representative to task for portfolio losses. The trustee has a duty to invest and to exercise care in investments. The trustee must make the trust assets productive and must diversify the trust portfolio to protect the interests of both the income and remainder beneficiaries. It is much less clear whether an estate representative has an affirmative obligation to make prudent investments for the estate or to divest the estate of imprudent investments, and the statutory and case law guidance is minimal.

“The fiduciary duty of care imposed on trustees with respect to investments is considerably more stringent than that imposed on estate representatives. ”  The personal representative has a duty to use “ordinary care and diligence” in managing and controlling the estate. Prob C §9600. The personal representative must exercise, or refrain from exercising, a power (including the power to invest) to the extent required by “ordinary care and diligence.” Prob C §9600(b). In either event, the personal representative is held to “that degree of prudence and diligence which a [person] of ordinary judgment would be expected to bestow upon his [or her] own affairs of a like nature.” Estate of Beach (1975) 15 C3d 623, 631, 125 CR 570. Professional personal representatives, such as banks and trust companies, are held to a somewhat higher standard of care, and must apply “the skill and knowledge ordinarily possessed by such professional fiduciaries.” 15 C3d at 631.  Most significantly, estate representatives are not subject to the “prudent investor rule.”

Moreover, even if the same person serves first as personal representative and then as trustee under a testamentary trust, the prudent investor rule does not apply until the estate is closed and the property is distributed to the trust. 15 C3d at 638.  A lay personal representative has a duty to invest and reinvest estate property only if the exercise of “ordinary care and diligence” would require a “reasonable person” in like circumstances to invest or reinvest. Prob C §9600(b). The personal representative is not liable for any decreases in value of estate assets attributable to his or her “good faith” acts or omissions to act under the circumstances. See Prob C §9601(b); Estate of Beach (1975) 15 C3d 623, 639, 125 CR 570.

By contrast, a trustee’s good faith is no excuse for otherwise imprudent investments. Trustees are held to the highest standard of care under the detailed provisions of the recently enacted Uniform Prudent Investor Act (Prob C §§16045-16054). Under that statute, trustees are required to “invest and manage trust assets as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust . . . exercis[ing] reasonable care, skill, and caution.” Prob C §16047(a).  A trustee’s investment and management decisions “must be evaluated not in isolation, but in the context of the trust portfolio as a whole and as part of an overall investment strategy having risk and return objectives reasonably suited to the trust.” Prob C §16047(b).

In investing, the trustee should consider (1) the general Economic conditions; (2) the possible effect of inflation or deflation; (3) tax consequences; (4) the role that each investment plays within the overall portfolio; (5) the expected total return from income and capital appreciation; (6) other resources of the beneficiaries known to the trustee; (7) needs for liquidity, regularity of income, and preservation or appreciation of capital; and (8) “[a]n asset’s special relationship or special value, if any, to the purposes of the trust or to one or more of the beneficiaries.” Prob C §16047(c).   The trustee must “make a reasonable effort to ascertain facts relevant to the investment and management of trust assets.”  Prob C §16047(d). The trustee also has a “duty to diversify the investments of the trust unless, under the circumstances, it is prudent not to do so.” Prob C §16048.

If  estate representatives and trustees are both fiduciaries, why should trustees be held to a much higher and more detailed investment duty? If the rationale is that estate representatives serve for only a limited and (usually) shorter period of time than trustees, it is a dubious one indeed, because the estates usually remain open for at least two years, especially estates with extensive investments. It is also said that an estate representative’s management of estate assets is only “incidental” to other duties of probate administration such as presenting the will for probate, marshaling assets, paying creditors and taxes, and distributing assets.  This does not explain why estate representatives should not be subject to the prudent investor rule, as long as allowances are made for the limited duration of the estate administration and the estate’s needs for liquidity and comparatively low volatility.

Standards for Removal

The statutory grounds for removal of estate representatives differ from the grounds for removal of trustees without any apparent rational basis:

Removal of Estate Representatives  

In the estates area, there is a basic removal statute and there are some specific removal statutes. The basic removal statute is Prob C §8502, which provides that a personal representative may be removed from office for any of the following causes:  (a) The personal representative has wasted, embezzled, mismanaged, or committed a fraud on the estate, or is about to do so.  (b) The personal representative is incapable of properly executing the duties of the office, or is otherwise not qualified for appointment as personal representative.  (c) The personal representative has wrongfully neglected the estate, or has long neglected to perform any act as personal representative.  (d) Removal is otherwise necessary to protect the estate or interested persons.  (e) Any other cause provided by statute.

There are seven additional “other causes” for removal listed in other statutes:  1. Failure to file an inventory within the prescribed time (Prob C §8804(b). Case law provides that there must be a loss to the estate resulting from the failure to inventory in order to justify removal. See, e.g., Estate of Hammer (1993) 19 CA4th 1621, 1636, 24 CR2d 190, reported at 15 CEB Est Plan R 79 (Dec. 1993).  2. Failure to give a bond ordered by the court (Prob C §8480(c)).  3. Failure to render an account (Prob C §§1l051(b), 11052).  4. Being found in contempt for disobeying a court order (Prob C §8505(a)).  5. Failure of a nonresident personal representative to comply with the statement of permanent address requirements (Prob C §8577(a)).  6. Taking a proposed action without complying with notice requirements (Prob C §§10592(b), 10589).  7. Failure to comply with an order regarding final distribution (Prob C §12204).

A personal representative may also be removed for conflicts of interest, based on Prob C §8502(d) (“necessary for protection of the estate or interested persons”). Comment to Prob C §8502; see Estate of Hammer (1993) 19 CA4th 1621, 1641,24 CR2d 190; Luckey v Superior Court (1930) 209 C 360, 366,287 P 450. The conflict must be one that presently threatens the security of the estate or compromises the personal representative’s fiduciary obligations. See Maltaman v State Bar (1987) 43 C3d 924,952,239 CR 687; Estate of Guzzetta (1950) 97 CA2d 169, 217 P2d 460. A mere potential conflict of interest is not enough for removal. Estate of Wemyss (1975) 49 CA3d 53,61, 122 CR 134.

Removal of Trustees

The statutory grounds for removal of a trustee are listed in Prob C §15642(b):  (1) Where the trustee has committed a breach of the trust.  (2) Where the trustee is insolvent or otherwise unfit to administer the trust.  (3) Where hostility or lack of cooperation among cotrustees impairs the administration of the trust.  (4) Where the trustee fails or declines to act.  (5) Where the trustee’s compensation is excessive under the circumstances.  (6) Where the sale trustee is [a disqualified person under Prob C §21350(a), e.g., an instrument drafter].  (7) For other good cause.  

The insolvency ground for removal of a trustee (Prob C §15642(b)(2) is not specifically available in the decedent’s estate context. It might be possible, however, if an estate representative filed for bankruptcy, to petition for his or her removal on the grounds that it was “necessary for protection of the estate” or that he or she was “incapable of executing the office” under Prob C §8502. An argument to the contrary would be that the legislature, by specifically including insolvency in the trustee removal statute and not in the estate representative removal statute, has expressed its intent not to include it by implication in the estates area.

Similarly, although hostility or lack of cooperation among cotrustees is a specific statutory ground for removal under Prob C §15642(b)(3), there are no parallel provisions in the estate context. The argument for removal of warring estate representatives would be that they are “incapable of properly executing the duties of the office” under Prob C §8502(b) or that removal is “necessary for protection of the estate or interested persons” under Prob C §8502(c).

Conclusion

It would be conceptually neater if the Probate Code rules regarding estates and trusts were the same where they ought logically to be the same, and differed only where it was sensible that they should be different. Often the rules are the same or substantially similar; but just as often they are not. The only safe way to practice in this area is to return to the statute with each new matter and never assume anything.

JAMES A. BARRINGER received his B.A. from the University of California (Santa Barbara) and his J.D. from Hastings College of the Law.

NOËL M. LAWRENCE received her B.A. from the University of California (Berkeley) and her J.D. from the University of San Francisco. She is Co-Chair of the Litigation Subcommittee of the Probate Section of the Bar Association of San Francisco.

The authors are both Certified Specialists in Estate Planning, Trust, and Probate Law and members of the firm of Barringer & Lawrence, San Francisco. Their practice emphasizes estate and trust-related litigation.

University of California Continuing Education of the Bar
Estate Planning & California Probate Reporter
Volume 23 Number 4 February 2002

NOËL M. LAWRENCE

Introduction

Those who practice in the area of estates and trusts confront widely divergent legal challenges. One aspect the practice is typified by the charming white-haired client carefully planning for the benefit of loved ones. Another aspect is a shadowy one, typified by the sinister quasi-criminal who would prey on that elderly, frail, vulnerable client.

“Undue influence” and “financial elder abuse” are terms of art that describe conduct as old as humankind: overreaching, exploitation, and misappropriation—conduct motivated by the basest of instincts. Although it might be expected that undue influence and elder abuse always plague society, our legal system attempts to provide both criminal and “civil” remedies for punishing wrongdoers and preventing them from profiting from their actions.

In the context of noncriminal litigation, the plaintiff’s objective is to build a case against the defendant, with the twin goals of forcing settlement on favorable terms or taking the case through trial to a successful resolution.

With those goals in view, this article sets forth a checklist of useful tools by which the practitioner can

(i) Obtain information as efficiently and as economically as possible;

(ii) Block the defendant’s planned avenues of “escape” from the consequences of his
wrongdoing, usually by rendering himself judgment-proof; and

(iii) Exert a maximum amount of pressure on the defendant, including presenting him with a “downside.”

A downside in this context means a result more unfavorable than merely returning misappropriated assets or receiving the hoped for inheritance—an adverse money judgment that includes attorney fees and punitive damages, for example, or criminal conviction resulting in fines or incarceration. All three sorts of methods are used simultaneously throughout the litigation. The ultimate goal, of course, is to persuade the defendant that capitulation, or at least settlement on terms favorable to the plaintiff, is the best option. Particularly useful are those methods that disproportionately shift the burden of the litigation, both evidentiary and financial, to the defendant.

Information Gathering

Investigation of the facts is usually the most important part of counsel’s job in an undue influence or elder abuse case. This is especially so if the defendant not only has procured an estate plan that inappropriately benefits him, but has also wrongfully obtained the victim’s assets during lifetime. See Barringer & Lawrence, The Effect of Elder Abuse Lawon the Conduct of Estate & Trust Litigation, Cal Trust & Est Q (Winter 1996).

Typically, discovery will not be narrowly focused on the circumstances surrounding the preparation of a set of estate planning documents, but will require extensive investigation
of other possible premortem and postmortem mischief.

The Pre-Complaint Phase

Before commencement of the litigation, the would-be plaintiff may have the right to
information or an accounting from the future defendant or from a third party. The defendant might be a fiduciary who has a statutorily imposed duty to provide information to the plaintiff. Or, a third party fiduciary may have information regarding the victim that supports the plaintiff’s belief that undue influence and over-reaching has occurred. Pre-litigation discovery, in the form of information or accounting requests, may provide facts that will later enable the plaintiff to file a more specific petition or complaint and to conduct better-focused formal discovery.

To Obtain an Account

From a Conservator

Probate Code §2620 requires a conservator to account to the court at the end of the first year of the conservatorship and every two years thereafter. Notice of the hearing on the account must be given in accordance with Prob C §§2621, 1460. If the plaintiff is not one of those persons otherwise entitled to notice under Prob C §2621, he can file a Request for Special Notice as an “interested person” (Prob C §48) under Prob C §2700.

A wide variety of persons may file written objections to a conservator’s account, including “the spouse or domestic partner of the conservatee” or “any relative or
friend” of the conservatee. Prob C §2622. Subsequent objections to the account and demands for explanations often yield additional information. See Prob C §2616 under which a citation may be issued compelling witnesses to “appear and be examined” regarding wrongful taking, concealment, or disposition of the assets of the conservatee.

See also Prob C §2622.5, which provides for an award of attorney fees and costs for bad faith objections or bad faith opposition to objections to an accounting. Note also that orders approving a conservator’s earlier accounts can be set aside in whole or part if the order was obtained by fraud, conspiracy, or misrepresentation as to any material fact. Prob C §2103(b).

From the Personal Representative of an Estate

Unless formally waived, a final account is always required upon conclusion of estate administration, and interim accounts are required under several circumstances. Prob C §§10950-10954. If the personal representative is an innocent third party witness or repository of information, the plaintiff may rely on Prob C §10950(a), which provides that on its own motion, or on petition by an interested person, the court may order an account at any time. Probate Code §10950(b) makes an account order mandatory upon an interested person’s petition after one year from the date of the last account or, if none, after one year from issuance of letters. If, however, the personal representative is the defendant/wrongdoer, the plaintiff may be in a position to rely on Prob C §10952, which provides for an account within 60 days after the personal representative is removed from office or his authority is otherwise terminated.

Alternatively, the plaintiff might invoke Prob C §10953 when the personal representative has absconded. In addition to the account, an interested person can request that the personal representative produce for inspection or audit the documents that support the account. Prob C §10901.

From the Trustee of a Trust

Subject to certain exceptions, Prob C §16062 sets forth the general duty to account “at least annually, at the termination of the trust, and upon a change of trustee to each beneficiary to whom income or principal is required or authorized in the trustee’s
discretion to be currently distributed.” Of particular importance in the financial elder abuse arena are the provisions of Prob C §§15800, 16064(b). During the time the trust is revocable and the person holding the power to revoke is competent, the trustee does not have a statutory duty to report information to, or account to, beneficiaries other than the holder of the power to revoke (i.e., the settlor).

Although the code is not specific on this point, it seems apparent that if and when the settlor becomes incompetent, that duty is owed to the other beneficiaries of the trust as provided in Prob C §§16061 and 16062. See, however, Johnson v Kotyck (1999) 76 CA4th 83, 90 CR2d 99, reported in 21 Est Plan R 88 (Dec. 1999), in which the court concluded that during the period an incompetent settlor has a conservator of the estate, the duty is owed to the conservator.

Obviously, an incompetent person is more likely to be the target of financial elder abuse than is a competent person, so the rules regarding the duty to account forth in Prob C §15800 take on added importance. Note too, that Prob § l6062(e) contains a useful safeguard against financial elder abuse insofar as it provides “[a]ny limitation or waiver in a trust instrument of the obligation to account . . . shall be void as to any sole trustee who is a disqualified person as defined in Section 21350.5.” Probate Code §§21350-21356 impose restrictions on transfers to drafters of donative instruments, care custodians of dependent adults, and others. Those code sections, powerful weapons to combat undue influence and financial elder abuse, are discussed below.

Probate Code §17200(b )(7) provides that a trust beneficiary may petition the Probate Court to compel an accounting if “(A) the trustee has failed to submit a requested … account within 60 days after written request of the beneficiary and (B) no … account has been made within six months preceding the request.”

Note that the wording of Prob C §17200(b )(7) has the effect of shortening the period between accounts. While Prob C §16062 provides that a trustee must account at least annually, Prob C §17200(b )(7) apparently permits the beneficiary to compel an account every eight months-the six-month waiting period plus the two month trustee performance period.

If delay in obtaining the account would result in further loss to the trust, the beneficiary should be able to rely on Prob C §I7200Cb)(12) to ask the court to take any and all actions necessary to compel “redress a breach of the trust by any available remedy.”

“[A]n agent under a power of attorney shoulders the lightest burden when it comes to
the duty to account.”

From an Agent Under a Power of Attorney

Compared with the fiduciaries mentioned above, an agent under a power of attorney shoulders the lightest burden when it comes to the duty to account. Ironically, such an
agent is probably the most likely of the fiduciaries to commit a breach of trust, often out of ignorance. See Barringer & Lawrence, The Perils of Powers of Attorney for Property Management, 16 CEB Est Plan R 85 (Feb.1995). The agent under a power of attorney must keep records, but has no duty to account except under certain circumstances and to certain persons set forth in Prob C §4236.

If the principal is unable to request an accounting due to incompetency, but is not yet under a conservatorship, either a conservatorship has to be put in place so the conservator can make the request under Prob C (b)(3), or a court order for such an account under
§4236(b)(5) must be sought. Persons with stand to seek such a court order are listed in Prob C §4540.

It is a broad list that includes, among others, the principal, spouse, relative, conservator, personal representative, successor in interest, and “[a]ny other interested person or friend of the principal.” If the power holder is engaged in criminal conduct, Prob C §2952 can be used to protect the victim’s assets pending the appointment of a conservator or issuance of a court order that the power holder render an accounting.

Requests for Special Notice and Other Methods of Obtaining Information

From a Conservator

A spouse, domestic partner, relative or creditor of the conservatee, as wll as “any other interested person,” may file a Request for Special Notice with the court. That request will entitle that person to receive notice of petitions, inventories and appraisals,accountings, and proceedings for the final termination of the conservatorship. Prob C §2700.

From the Personal Representative of an Estate

Any person “interested in the estate” (which is broadly described) may file a Request for Special Notice directed to the personal representative of an estate. Prob C §1250. The interested person can obtain, among other things, inventories and appraisals of property, accounts, and reports of status of administration.

From the Trustee of a Trust

A Request for Special Notice directed to a trustee of a trust is far narrower, both in terms of who may make such a request and the sort of information the trustee must produce. If proceedings involving a trust are pending (and subject to the limitations set for in Prob C §15802), a trust beneficiary can request notice of the filing of a petition under . Prob C §17200. Prob C §17204.

Often there will be no pending trust proceeding, but, subject to certain limitations set forth in Prob C §16064, the Probate Code offers trust beneficiaries greater opportunity to obtain information from the fiduciary than it does beneficiaries of an estate, Upon reasonable request by a beneficiary, the trustee shall provide the beneficiary with a report of information about the assets, liabilities, receipts and disbursements of the trust, the acts of the trustee, and the particulars relating to the administration of the trust relevant to the beneficiary’s interest, including the terms of the trust. Prob C §16061

Other Sources of Information

Title Companies

Customer service at most large title companies will provide title information on an informal basis and at no charge. The plaintiff may want to know the manner in which disputed property is titled and the nature of the encumbrances on an item of real property.
Or, if there was a period during which suspect transactions took place, plaintiff s counsel might request every document in the chain of title during that period. Usually a title company will comply with this sort of request within a few hours or a day, and will fax the documents to counsel.

A Private Investigator

Of course, the plaintiff can always employ a private investigator. Often private investigators have contacts that enable them to obtain information on an informal basis, contacts (for example, in law enforcement) that simply are not available to counsel. Because so many private investigators are former FBI agents, a private investigator can bring a different perspective and skills to the investigation.

The Post-Complaint Phase Form Interrogatories

After the answer to the complaint has been received, the plaintiff can immediately obtain all the facts, witnesses, and documents on which the defendant currently relies by serving Judicial Council Form Interrogatories, specifically JC Form FJ-120. CCP§2030. While many of the form interrogatories are admittedly ill-suited to estate, trust, or elder abuse litigation, two in particular are tremendously helpful in any context.

Form Interrogatory No. 15.1 requires the defendant to identify each denial of a material allegation and each affirmative defense in his pleadings. The interrogatory further requires the defendant, with respect to each such denial and each affirmative defense, to (1) provide all facts that support the denial or defense; (2) provide the names, addresses, and telephone numbers of all witnesses who have knowledge of those facts; (3) identify
all documents and tangible things that support those denials and defenses and (4) provide the name, address, and telephone number of the person who has each such item.

Form Interrogatory No. 17.0 contemplates that the plaintiff will serve a set of Form Requests for Admission along with the Form Interrogatories. CCP §2033.5;
JC Form FJ-l00. Form Interrogatory No. 17 requires the defendant to identify each such request for admission that was denied, and (for each request) to (1) provide all facts upon which the response is based; (2) identify all witnesses who have knowledge of those facts; (3) identify all documents and other tangible things that support those facts; and (4) provide the name, address, and telephone number of the person who has those items.

That is a very significant amount of information. It is (or should be) the totality of the defendant’s defense as of that point in time. As soon as the documents and other items referred to in those two interrogatories have been identified, the plaintiff can follow up promptly with an inspection demand seeking the production of all of the identified items that the defendant possesses or controls. CCP §2031.

Moreover, the plaintiff can update this body of information at least three times before trial by sending a “supplemental interrogatory” that requires the defendant to correct his answers to all previously served interrogatories to the extent the earlier answer is no longer correct or complete. CCP §2030(c)(8). Having sent the form interrogatory so early on in the case, counsel will want to have the answers updated at least once before
trial.

Specially Prepared Interrogatories

This is not to suggest that form interrogatories will discover the totality of the defense. Plaintiff will undoubtedly propound specially prepared interrogatories into other subject matter areas, seeking witnesses and tangible evidence that shed light on, among other things, the decedent’s medical and mental condition, on the quality and nature of the decedent’s relationship with the defendant and others, and on the circumstances surrounding the preparation and execution of all the disputed documents. CCP §2030(c)(1)-(3).

Other Discovery

The circumstances of each case will, of course, prescribe the subject matter areas of the plaintiff’s discovery. Where, however, undue influence and/or elder abuse deprived the elder of money or assets during lifetime, the clearest and most compelling evidence of those misappropriations will usually be the financial records.

A favorite cartoon from the New Yorker shows an accountant and his businessman client looking at a tax return together. The accountant points to the return and says to his client: “Look there … at line 23 …. See that figure? That figure there? That’s why you have to go to jail.” It may just be a number on a page, but when it is the wrong number, the consequences can be both cut
and dried and severe.

Obtaining Financial Records

The plaintiff must begin the investigation by determining what the decedent owned before becoming a victim of undue influence or elder abuse. Often the best source of that information will be the last federal and state income tax returns the victim filed before his
assets began to disappear. Those returns may not be available to the plaintiff without a fight if, for example, they are in the possession of a defendant who, acting as the executor of the decedent’s estate, attempts to raise a right-of-privacy claim. However, the plaintiff should usually prevail against such a claim on the ground that the need to protect elders outweighs the need to protect their privacy, particularly after the elder is deceased.

For a general discussion of the privilege against disclosure of tax returns, see King v Mobile Home Rent Review Bd (1989) 216 CA3d 1532, 265 CR 624. Tax records and similar documents can provide the information needed for securing additional records from third parties. See Obtaining Financial Records From Third Parties, below.

“Records of loan applications can also be exceptionally useful. ”

The plaintiff is well served by taking an exhaustive approach to the investigation of financial records. Although this runs contrary to a principal topic of this article—i.e., ways in which to obtain information as easily and economically as possible—without complete financial records the plaintiff cannot hope to accurately trace assets and reconstruct the transactions that constituted the financial elder abuse.

Obtaining Financial Records From Third Parties

Financial records can be obtained fairly easily because, in general, they will be obtained not from the defendant but from disinterested corporate third parties: banks, brokerage houses, title companies, accountancy firms and the like.

It is advisable to use a two-step method in obtaining financial records. The plaintiff should serve two subpoenas on each third party recipient, one requiring the production of the financial records and one requiring that a person knowledgeable regarding the records appear for deposition. CCP §§2020, 2025. The first form is JC Form 982(a)(l5.2) (Deposition Subpoena for Production of Business Records) (Rev. Jan. 1, 2000).

The second form is JC Form 982(a)(l5.3) (Deposition Subpoena for Personal Appearance). The plaintiff can direct this subpoena to a financial institution to subpoena a witness from that institution even though the plaintiff does not know the identity of the would-be deponent. At the time the subpoena is prepared, the plaintiff may know only, for example, that he wishes to examine a knowledgeable witness regarding certain records and certain transactions. Those “matters upon which the witness is to be examined” must be set forth in the subpoena. The recipient institution is, by the terms of the subpoena, “ordered to designate one or more persons to testify on [the institution's] behalf as to [those] matters.”

It is recommended that in the first records-only subpoena the plaintiff specify a production date for the financial records that is at least two weeks before the date the knowledgeable witness deposition, to allow for delivery and to allow time to review the records and prepare for the deposition.

The law authorizes a “Deposition Subpoena for Personal Appearance and Production of Documents and Things” (JC Form 982(a)(15.4), which requires the witness to appear for his deposition and bring the documents and other tangible things specified in the subpoena. CCP §§2020, 2025. If the plaintiff uses this sort of a subpoena, however, plaintiff s counsel will not have a chance to see the documents before the witness brings them to the deposition. It is almost impossible to review those records thoroughly in such a setting.

Plaintiff’s counsel will be in the presence of the defendant, defendant’s counsel, and the court reporter, all of whom are waiting to get on with the deposition. There will be little opportunity to compare the records with other available information in order to trace assets and reconstruct transactions. In addition, plaintiff’s attorney will make a better impression an his opponent if he arrives at the deposition thoroughly familiar with the subpoenaed documents and ready to examine the witness regarding their contents.

Finally, it may be the case that, once the financial records been reviewed, plaintiff’s counsel can see that it is unnecessary to take the deposition of the knowledgeable corporate deponent. If that is so, it is a simple matter to inform the witness and all interested parties that the deposition is indefinitely postponed or canceled.

A cost-savings tip: Often a financial institution mistakenly believes that it is permitted to charge the subpoenaing party for records production in accordance with an in-house schedule of its own making, and will demand the payment of huge fees before it will produce the records. In fact, a custodian of records is entitled only to “reasonable costs” in producing the records. See Evid C §1563(b)(l), (6).

Obtaining Financial Records From Defendant

The defendant’s knowledge regarding the victim’s assets should also be explored. The defendant may feign ignorance and that too, can be helpful. If the investigation later uncovers assets that the defendant should have known about, especially if the defendant procured some or all of those assets from the victim during the victim’s lifetime, the defendant’s credibility will be greatly impaired.

In addition, the plaintiff should obtain a set of records as complete as possible, regarding the defendant’s assets. Plaintiff’s counsel will want to trace the assets that passed from the victim to the defendant. If the perpetrator managed to convert the victim’s accounts into accounts standing in the names of both the victim and the perpetrator, those may show up when the victim’s records are subpoenaed. It is helpful, however, to specify that the subpoena seeks all accounts in the name of the victim alone, in the name of the victim and the name of the perpetrator, and in the name of the victim and any other person.

Obtaining Information During Mediation

Public policy in favor of promoting settlement of litigation is reflected in Evid C §1119, which prohibits a litigant from offering into evidence information obtained in a mediation. However, that code section does not turn otherwise nonprivileged material into protected information merely on the grounds that it was uttered in a mediation or in a writing prepared in connection with a mediation. Evid C §1120. If the information is discoverable outside the mediation, it is still discoverable and admissible into evidence.

A mediation can be the best, most cost-effective method of investigating the case. The goal of such a proceeding is full and final resolution of the case. However, a mediation is still successful and cost-effective if the plaintiff comes away having learned more about the case than he could have by spending an equal number of hours conducting research or discovery. When compared with a deposition, which incurs the cost of a court reporter and perhaps a videographer, a mediation is almost always a more economical way to obtain great quantities of information.

“The plaintiff should not hesitate to schedule a mediation, even if the case has almost no chance of settling. ”

The plaintiff should not hesitate to schedule a mediation, even if the case has almost no chance of settling. A good mediator will help narrow and crystallize the issues, will bring into sharp relief the areas where the plaintiff and the defendant differ, and will identify the legal and factual reasons for those differences. Along the way, the plaintiff will be receiving valuable information.

Blocking the Defendant’s Means of ”Escape”

Not surprisingly, it is very common for an undue influence/elder abuse defendant to develop a “fall back” plan for avoiding the consequences of his wrongdoing. For example, he might scheme to sell or make gifts of assets to defeat any judgment the plaintiff might obtain. He might plan to encumber real property and thereby drain it of its equity. He might assume that he can avoid liability by simply declaring bankruptcy. He almost certainly will assume that sums paid to his lawyers are beyond the plaintiff’s reach.

As important as it is to develop the evidence necessary to prevail at trial, it is equally important to prevent the defendant from putting the stolen assets beyond the plaintiff’s reach during the course of the litigation and thus prevailing in a practical (if not legal) sense. Protection of assets pending litigation falls into two categories: protecting the assets of an elder who is currently the target of undue influence or financial elder abuse and protecting the assets of an elder who was victimized during lifetime but who has since died. Unfortunately, in many cases the wrongdoing is not discovered until the elder has died.

Protecting Assets of a Vulnerable Elder Who Is Not Conserved

Probate Code §2952 provides for the immediate protection of the elder’s property through intervention of the public guardian in certain circumstances. This code section comes into play if the elder’s assets are not otherwise protected by a conservatorship of the estate. Under Prob C §2952(a), a peace officer may issue a declaration concerning an elder if (1) there is probable cause to believe the elder is substantially unable to manage his or her financial resources or resist fraud or undue influence, (2) there is a significant danger that the elder will lose all or portion of his or her property as a result of fraud or incapacity, (3) there is probable cause to believe a crime is being committed against the elder,
(4) the crime is connected to the elder’s inability to manage financial resources or resist fraud or undue influence as a result of mental deficits, and (5) the peace officer has consulted with an individual qualified to perform a mental status examination. The statutory form for such a declaration is set forth in Prob C §2954. Upon receiving the declaration, the public guardian is authorized, but not required, to take immediate possession or control of the elder’s property. Prob C §2952(c).

An incompetent elder who has been targeted for elder abuse should, of course, be placed under a conservatorship without delay. Good cause for an ex parte temporary appointment of conservator is shown when a third party has control of the proposed conservatee’ s assets and notice is likely to result in loss to the estate. Prob C §2250(c). See California Conservatorships and Guardianships §16.2 (Cal CEB 1990).

Protecting Assets of an Elder Under a Conservatorship of the Estate

If an elder under a conservatorship becomes a financialabuse victim, the perpetrator almost certainly will be the elder’s own conservator, because it is the conservator who has control of the assets. Probate Code §2620.2(c) sets forth the court’s powers to protect the
conservatee’s assets, including removing the conservator from office, suspending his or her powers, appointing a temporary conservator, appointing legal counsel and investigating the conservator, if the conservator failed to file an account as required by Prob C §2620 after written notice directing the conservator to file the account within 60 days under Prob C §2620.2(a).

Probate Code §2620.2(d) provides that the court can also take any other action in response to a failure to file a proper account. Ironically, because Prob C §2620 apparently gives the conservator at least 45 days to file the accounting, the method for putting a stop to criminal conduct is not as swift as that set forth in Prob C §2952 for persons not under a conservatorship. Presumably though, if there is evidence of criminal conduct, the
probate court would use the power to suspend a conservator under Prob C §2654 to provide the same sorts of protections that Prob C §2952 does. See Removing Defendant as Fiduciary, below.

Protecting Assets After an Elder’s Death
Real Property

If real property is in dispute, plaintiff’s counsel should file and record a Notice of Pending Action (a “lis pendens”) on the real property immediately upon filing the complaint. Recordation of a lis pendens is allowed when the plaintiff has a real property claim. CCP
§405.1. A real property claim is one that, if sustained, would, among other things, affect title to or the right to possession of specific real property. CCP §405.4. Recording a lis pendens preserves the plaintiff’s interest in the property pending the final determination of the action. The requirements for filing and recording a lis pendens are set forth in CCP §§405-405.24.

To avoid the risk of slandering title, plaintiff’s counsel must ensure that the complaint disputes a right in real property. For instance, the complaint might attack a deed transferring real property from the victim to the perpetrator, or might challenge the validity of a trust amendment providing for distribution of the real property to the perpetrator.

Filing and recording a lis pendens in the chain of title of the subject real property puts the world on constructive notice of the dispute. The lis pendens should effectively prevent a sale or any encumbrance of the property pending the outcome of the litigation. Any purchaser or encumbrancer is deemed to have constructive notice of the pendency of the noticed action, and the rights and interest of the claimant, as ultimately determined, relate back to the date the lis pendens was recorded. CCP §405.24.

Bank Acccounts, Brokerage Accounts and Other Assets

Three Day Non-Judicial Freeze of Bank and Savings Accounts

Protecting assets that are not real property is considerably more difficult, and involves going to court. In order to protect such assets pending litigation, a temporary restraining order and a preliminary injunction must be sought. A temporary restraining order protects assets until a hearing can be held on the application for the preliminary injunction.

Injunctive relief always takes time to accomplish, even ex parte. In emergency situations, when the plaintiff suspects that the perpetrator may move and hide assets, there are useful statutory provisions in the Financial Code that, in effect, allow for a short-term asset freeze until judicial intervention can be obtained. For funds or other personal property on deposit at banks or savings associations, if the perpetrator is a fiduciary (e.g. a trustee named under a wrongfully procured trust or a holder of a power of attorney), the first thing to do is to give notice of adverse claim to each institution under Fin Code §952(a) (banks) and §661(a) (savings associations).

Those statutes provide that an adverse claimant may deliver to the bank or savings association, at the office at which the deposit or account is carried, his or her affidavit (or declaration under penalty of perjury) stating (1) that of his or her own knowledge the person to whose credit the deposit stands is a fiduciary for the adverse claimant; (2) that the adverse claimant has reason to believe the fiduciary is about to misappropriate the deposit or account or the property; and (3) the facts on which that claim of fiduciary relationship and that belief are founded. If such a notice of an adverse claim is made, the bank or savings association must freeze the account for a period of not more than three court days (including the date of delivery) from the date that the bank or association received the claimant’s declaration.

Preliminary Injunction

Longer term protection against further misappropriation will generally require court orders. For example, the plaintiff may seek orders enjoining withdrawals from a brokerage account formerly belonging to the decedent and now standing in the name of the defendant. Such relief is usually initiated by applying for a temporary restraining order (TRO) and preliminary injunction. A TRO may be issued for a limited period of time pending consideration of an application for a preliminary injunction. See CCP §527.

In many cases, the plaintiff will be well into the discovery phase of the case before he is armed with enough evidence for a successful TRO application. The application is typically made by providing the court with a copy of a verified complaint, additional affidavits or declarations, and a memorandum of points and authorities.

A preliminary injunction may be granted when it appears by the verified complaint or affidavits that the commission or continuance of some act during the litigation would produce waste or great or irreparable injury to a party in the action. CCP §526(a)(2).

Normally, an injunction will not issue if only money is involved, because the legal remedy of damages is supposedly adequate. CCP §526(a)(4). However, in an action to recover specific funds, as distinct from a “naked claim for damages,” an injunction may issue to prevent dissipation of the funds. See Heckmann v. Ahmanson (1985) 168 CA3d 119, 136, 214 CR 177, In the undue influence/elder abuse arena, it is often possible to identify the needed specific fund. The preliminary injunction may also issue when the obligation arises from a trust. CCP §526(a)(7).

In deciding whether or not to grant a preliminary injunction, the court must consider the likelihood that the applicant will succeed on the merits at trial, the harm to the applicant in the injunction is denied, and the harm to the responding party if the injunction is issued.

When seeking to establish the likelihood of success on the merits, Prob C §21350 can be very helpful when it applies. In general, the statute shifts the burden of proof to the defendant in cases involving transfers to such persons as a fiduciary who transcribed the instrument or a care custodian of a dependent adult. This assumes the transferee is not related to the transferor by blood or marriage and is not a cohabitant with the transferor.

If the plaintiff is successful in obtaining a preliminary injunction, he will not only have preserved assets, hw ill have demonstrated to the defendant the first judge before whom the case was presented agreed that the plaintiff will probably prevail. That knowledge combined with the defendant’s deprivation of the subject funds with which to litigate, could promote resolution of the case on terms satisfactory to the plaintiff.

Removing Defendant as Fiduciary

If the defendant is a fiduciary, the plaintiff generally will seek court orders suspending the powers of the fiduciary or removing the fiduciary. In some cases, this may be an effective alternative to obtaining a preliminary injunction, in terms of preventing further misappropriation of the victim’s assets. In other cases, it may reduce problems that arise 13or attempts to claim evidentiary privileges that belong to the victim.

Provisions for the removal of fiduciaries include Prob C §§8500-8505, 9614 (removal or suspension of a personal representative of an estate); Prob C §§15642, 17200(b)(10) (suspension and removal of a trustee); Prob C §2654 (suspension of a conservator); and Prob C §4541(d) (revocation of authority of attorney-in-fact). In cases involving a decedent’s estate, the need for removal can usually be avoided by preventing the appointment of the defendant as the personal representative in the first place.

Removal is particularly important in cases involving estates and trusts, because the executor or trustee may be able to claim a fiduciary duty to defend the will or trust. If the defendant is removed, the new personal representative may still be able to defend the will or trust, or he may have a different view of the litigation. He may believe that expending the estate’s resources in defense of the will contest is not in the best interests of the estate. See e.g. Prob C §9611. Alternatively, an “interested person” (Prob C §48) may bring a petition for an order directing the fiduciary not to defend, if he believes defending a will contest will cause the estate to suffer “great or irreparable injury.” Prob C §9613.

The grounds for removal of a trustee are set forth in Prob C §15642(b). Note that a sole trustee may be subject to removal if he is a person described in Prob C §21350(a) (i.e., if he drafted the trust instrument), regardless of whether said sole trustee is the named recipient of a donative transfer under the instrument.

Attacking Source of Defendant’s Attorney Fees

The defendant’s attorney may be the greatest obstacle to settlement. Although no ethical attorney would condone the practice, some few of the profession may continue to litigate until the client’s ability to pay his fees is exhausted, without regard to the merits of a case.
The money to pay those fees probably comes from one or both of two sources: the perpetrator’s personal funds and the victim’s funds in the possession of the perpetrator. Either way, funds that might otherwise be available to the plaintiff to satisfy claims against the defendant are being depleted.

Charles Dickens, who as a young man worked at the Inns of Court, observed this practice and wrote about it in Bleak House regarding the fictional Chancery Court case of Jarndyce and Jarndyce:

“Mr. Kenge,” said Allan … Do I understand that the whole
estate is found to have been absorbed in costs?”

“Hem! I believe so,” returned Mr. Kenge ….

“And that thus the suit lapses and melts away?”
“Probably,” returned Mr. Kenge ….

“My dearest life,” whispered Allan, “this will break.
Richard’s heart!”

This observation raises the question of whether there are steps that can be taken to prevent the use of the victim’s funds for the payment of attorney fees, or at least raise enough doubt about a possibility of nonpayment that the defendant’s attorney will not assume there is no risk of nonpayment or of an order to reduce fees.

As just indicated, the plaintiff needs to seek the suspension or removal of the defendant if the defendant is still an acting fiduciary. That measure may at least protect remaining trust or estate assets, as may court orders preventing payment of fees without further court authorization. However, the remedy of removal may be relevant or ineffective in cases where the defendant did not hold a formal fiduciary position or where assets have long since ended up titled in the name of the defendant individually

When Perpetrator, as Fiduciary, Is Using Trust or Estate Assets To Pay Fees

Even if the defendant holds a fiduciary position and can assert a duty to defend a will or trust or an attack on an action, a fiduciary’s right to reimbursement of attorney fees is limited. A fiduciary may not obtain reimbursement of attorney’ fees and other litigation costs of a trust unless the trustee’s prosecution or defense of the litigation resulted in an objective benefit to the trust and the fees were incurred in subjective good faith. Conservatorship of Lefkowitr (1996) 50 CA4th 1310, 1315, 58 CR2d 299, reported in 18 CEB Est Plan R 89) (Dec. 1996).

In many cases, the plaintiff should be able to obtain a court order barring payment of attorney fee without court approval or enjoining the defendant’s attorney from making trust account distributions without approval. In the latter case, this presupposes that there is evidence that the fees received by the attorney can be, traced to the estate or the victim. However, even when this cannot be demonstrated initially, a written warning to defendant’s attorney may be sufficient to convince the attorney that there is a potential risk of being required to return estate or victim funds at some point in the future as a result of the imposition of a constructive trust on misappropriated funds.

Uniform Fraudulent Transfer Act May Apply to Transfer of Unearned Attorney Fees

In rare cases, a transfer of funds to an attorney may raise issues concerning the possible application of the Uniform Fraudulent Conveyances Act (CC §§3439-3439.12) if, at the time those transfers were made, theywere intended to hinder, delay, or defraud the plaintiff as a creditor of the defendant, in violation of CC §§3439.04(a). This might require a showing that the monies transferred exceeded the cost of contemplated legal
res. See Convincing Defendant That “Avenues of Escape” Will Be Ineffective, below.

Convincing Defendant That “Avenues of Escape” Will Be Ineffective

Uniform Fraudulent Transfer Act

The defendant may seek to defeat the plaintiff’s rights by rendering himself insolvent in the course of the litigation. The defendant might sell assets for less than money’s worth, or transfer assets as gifts or retitle them in the names of family members and others, or drain the equity out of real property by encumbering it. Rather than waiting until they happen, the plaintiff can seek to prevent such conveyances. The plaintiff can inform the
defendant that, if and to the extent that any such transfers would render the defendant unable to meet his obligations, such transfers would violate the Uniform Fraudulent Transfer Act (CC §§3439-3439.12) Under CC §3439.04(a), “[a] transfer made or
obligation incurred by a debtor is fraudulent as to a creditor … if the debtor made the transfer … [w]ith actual intent to hinder, delay, or defraud any creditor of the debtor. If the defendant made any such transfers without receiving reasonably equivalent value at a time when the defendant believed or reasonably should have believed that he would incur debts beyond his ability to pay as they became due, those transfers would violate
CC §3439.04(b)(2).

In addition to the other remedies (CC §3439.07), punitive damages are, of course, available for fraud. CC §3294(a). Defendant’s commission of fraud must be established by clear and convincing evidence.

A transferee who is innocent, i.e., has no intent to defraud creditors, is not personally liable if as he returns the assets transferred, and the assets may not be recovered from a subsequent good faith transferee. CC §3439.08(b)-(c). The good faith transferee also has a lien on those assets to the extent of value given. CC §3439.08(d). However, a transferee who colludes with the transferor to intentionally defraud creditors can be held personally liable on a conspiracy theory. Taylor v S & M Lamp Co. (1961) 190 CA2d 700, 706, 12CR 323.

Bankruptcy Law

The defendant may believe he can defeat the plaintiff’s rights by declaring bankruptcy. As a consequence, the defendant may fail to treat the plaintiff’s claims seriously or may adopt unreasonable positions in settlement negotiations. Bankruptcy filings can indeed be a problem for a plaintiff, but the defendant may have less protection than he expects, and there may be situations in which the plaintiff can convince the defendant that such a strategy will not be successful.

Debts arising from “defalcation in a fiduciary capacity” are nondischargeable in Chapter 7 proceedings if the plaintiff (creditor) files a nondischargeability complaint in the bankruptcy court within 60 days after the first date set for the meeting of creditors. 11 USC §523(a)(4); Fed R Bankr P 4007(c). Such debts can be discharged in a Chapter 13 proceeding, but that assumes court approval of the debtor’s plan. A restitution order
made in a criminal proceeding is not dischargeable. 11 USC §1328(a)(3). Further, a bankruptcy proceeding usually will not defeat a constructive trust claim to specific
property that was not voluntarily transferred to the debtor by the claimant. See Reliance Ins. Co. v Brown (WD Mo 1984) 40 BR 214; Blachy v Butcher (6th Cir
2000) 221 F3d 896.

Persuading Defendant That Capitulation or Settlement Is Best Option

As a practical matter, a real perpetrator, meaning one who acts with scienter, typically does not settle his case because he should or because it is the right thing to do. Like a criminal defendant who for a variety of reasons including the magnitude of evidence against him decides to plea bargain, a perpetrator capitulates or settles when the plaintiff has succeeded in rendering that kind of resolution the best possible option. Obviously, this involves rendering the perpetrator acutely uncomfortable
in his position as defendant.

Litigation inherently puts pressure on the defendant. The means by which the plaintiff prosecutes his case, discovery, attorney fees, the freezing of assets through injunction, the recordation of one or more lis pendens, blocking the various “avenues of escape”–creates that pressure. What else might the plaintiff do to improve his position at the expense of the defendant?

Involving the Police and District Attorney

The case against the defendant may be sufficiently egregious to warrant the involvement of the authorities. Certainly, if the elder is still living and is a crime victim, steps should be taken to protect the victim’s assets with the assistance of the police under Prob C §2952. And, obviously, any crime should be reported to the police. When it is less certain that criminal activity has occurred, it is more difficult to determine whether, how,
and when to involve the police or the district attorney, and that discussion is beyond the scope of this article.

Remember, however, that while the plaintiff has every right to go to the police or the district attorney, no person has the right to threaten to do so. If such a threat were made by an attorney, that attorney would be in violation of Cal Rules of Prof Cond 5-100(A) (“A member shall not threaten to present criminal …. charges to obtain
an advantage in a civil dispute.”). Moreover, if any person (including plaintiff’s attorney) threatens to accuse the defendant of a crime, that action could be within the definition of the crime of extortion.

Penal Code §518 includes in that definition “the obtaining of property from another, with his consent … induced by the wrongful use of … fear. … ” Penal Code §519 defines such fear to include that caused by “accusing] the individual threatened . . . of any crime.” An agreement to conceal or “compound” a crime in exchange for money or property is also punishable under Pen C §153.

That having been said, the point is this: The defendant will be made acutely uncomfortable by the involvement of the authorities, even if the police and the D.A.’s investigator never take the matter past the investigation phase. Fortunately, a growing number of law enforcement agencies are taking an active interest in
elder abuse matters and some police departments and D.A. offices now have special units.

Awards of Fees and Costs and Punitive Damages Under the Law of Elder Abuse

If the plaintiff’s will contest, trust contest, or similar action is based solely on undue influence, ordinarily the defendant has nothing to lose but the case itself. The defendant has no “downside,” no personal liability. By contrast, if the facts support a claim for elder abuse, the defendant faces the possibility of a personal judgment against him. Such a judgment could include an award of punitive damages if fraud, malice, or oppression is proven, as well as an award of attorney fees and costs. CC §3294; Welf & I C §15657.

A cautionary note: Would-be elder abuse plaintiffs often make the mistake of assuming that the same sorts of persons who have standing to bring a will or trust contest have standing to bring an elder abuse action on behalf of a deceased elder. In fact, after the victim’s death, standing is limited to the personal representative of the deceased elder’s estate or, if none, the elder’s successors in interest. Welfare and Institutions Code §15657.3 provides:

(c) The death of the elder or dependent adult does not cause the court to lose jurisdiction of any claim for relief for abuse of an elder or dependent adult. (d) Upon petition, after the death of the elder or dependent adult, the right to maintain the action shall be transferred to the personal representative of the decedent, or if none, to the person or persons entitled to succeed to the decedent’s estate. [Emphasis added.]

Award of Attorney Fees and Costs Under Prob C §21350

When the statute applies, a plaintiff prosecuting a case of undue influence and/or elder abuse has no greater friend in the law than Prob C §21350. The statute limits donative transfers to specified transferees, including a person who is in a fiduciary relationship
the transferor and who transcribed the donative instrument or caused it to be transcribed, or the care custodian of a dependent adult (without regard to who drafted caused the donative instrument to be transcribed). The statute does not apply if the transferee is related to the transferor by blood or marriage or if he or she is a co-habitant with the transferor, or if an attorney executes a certificate of independent review, or a court approves the transaction in advance. And after the fact, all transferees except a drafter of the instrument are afforded the opportunity to prove, if they can, that the subject transfer was not the product of fraud, menace, duress, or undue influence. Prob C §21351.

When the defendant attempts to rely on the last exception and fails, the plaintiff is entitled to reasonable attorney fees and litigation costs. Prob C §21351(d). The possibility that the plaintiff will prevail is high, because the statute places burden of proof on the relevant issues on the transfere raises the burden to “clear and convincing evidence,” and prohibits the defendant from using his own testimony.

If the defendant actually drafted the instrument, the plaintiff’s advantage is even greater: The defendant is not given the opportunity to prove lack of fraud, menace, duress, or undue influence and the transfer is therefore void. Prob C §§21350(a)(l), 21350.5, 21351(e). (See also certain narrow exceptions set forth in Prob
§21351(f).)

NOËL M. LAWRENCE received her B.A. from the University of California (Berkeley) and her J.D. from the University of San Fran-
Co. Ms. Lawrence is Certified as a Specialist in Probate, Estate Planning & Trust Law. She specializes in estate and trust related
litigation and financial elder abuse, Ms. Lawrence practices in Oakland.

University of California Continuing Education of the Bar
Estate Planning & California Probate Reporter
February 1992

Part 1

NOËL M. LAWRENCE & JAMES A. BARRINGER

Non-litigating estate planners and probate attorneys are sometimes called on to represent clients during the early stages of actual or potential estate and trust related litigation. There is often a period of time between the first signs of litigation and the appropriate time for retaining a litigation specialist. During this period the practitioner must take the steps necessary to protect the client and to position the case so that the litigator will be unhampered by previous procedural mistakes if the dispute is not resolved at an early stage.

Will and trust contests, disputes over ownership and distribution rights, disputes over fiduciary appointments, and accounting and surcharge matters are some of the most frequently encountered proceedings where familiarity with Probate Code and other procedural and discovery rules can be critical.

It is equally important for the attorney to be sensitive to the major ethical issues that arise with unusual frequency in these situations due to family relationships of the parties, the fiduciary obligations of trustees and personal representatives, or both.

This article addresses many of the problems that frequently arise at the threshold level of estate and trust disputes. It is intended to provide practical guidance and general suggestions as to available strategies and procedures. The article is published in two parts. The first part contains discussions of ethical problems and proceedings related to decedent estates. The second part, which will appear in the April issue of the Reporter, will discuss trust proceedings and discovery issues.

Ethical Considerations

Duty of Competence

The probate, estate planning, and trust law practitioner (referred to in this article as “the practitioner” in distinction from “the litigator”) is an attorney who, in addition to having skill in those areas of the law, may have some greater or lesser level of experience in litigation, depending on the overall nature and history of his or her practice. Some practitioners are skillful and comfortable in contested matters. Others, however, frequently discover that the demands of specializing in estate and trust work conflict with developing or maintaining litigation skills, and many estate planners simply have little inclination to do so even if time permits.

Whatever the practitioner’s particular circumstances, the practitioner needs to be realistic about his or her own litigation skills, scrupulously avoiding violation of the Cal Rules of Prof Cond 3-110 requirement to perform legal services competently.

In this context, the practitioner needs to be particularly careful to avoid being lulled into delaying retention of a litigator due to the relative informality of probate litigation. Litigation in the probate department has a way of appearing not quite as litigious as the “real thing.” Deadlines for filing responsive papers are generally more informal (and often not even embodied in local rules).

Discovery deadlines are often worked out informally among the parties. Minor contested issues are sometimes determined on offers of proof. And the atmosphere of the probate department may be more relaxed, more forgiving, and less intimidating.

As a result, the litigation skill required to represent a client in the probate department can be something of a “moving target.” With respect to any stage of the proceeding, there may be no opposition, mild opposition, energetic opposition, or all out war. Making matters worse, the level of difficulty can change quite quickly in many counties, where the time required in the probate department to obtain a date for a full blown contested evidentiary hearing may be as little as five or six weeks.

On the other hand, delay in retaining a litigation specialist may be prudent in many circumstances. Escalation of minor disputes in not always inevitable and clients are properly concerned about expense of litigation.

Duty To Avoid Conflicts of Interest

Trust and estate administration is a fertile field for attorney conflict of interest. Conflicts must be avoided out of fairness to clients, for disciplinary reasons, and because they increasingly serve as the basis for malpractice litigation. Common conflict problems include:

• Representation of more than one party in the current matter (e.g., more than one member of a decedent’s family).

• The possibility that the practitioner will be called as a witness (e.g., called to testify as to a testator’s competence or to interpret a will or trust).

• The possibility that the practitioner will become a malpractice defendant (e.g., there is a possibility that allegations will be made that the practitioner violated the standard of care in drafting an instrument).

• The practitioner formerly represented an opposing party.

Dual Representation

California Rules of Professional Conduct 3-310(B) provides that: “A member shall not concurrently represent clients whose interests conflict, except with their informed written consent.” According to Cal Rules of Prof Cond 3-310(F), “informed written consent” means “full disclosure to the client of the circumstances and advice to the client of any actual or reasonably foreseeable adverse effects of those circumstances upon the representation.”

Conflicts of interest through dual representation arise most often when the practitioner fails to make clear to all parties whom it is that he or she does, and does not, represent.

Dual representation of fiduciary and beneficiary. A frequent source of trouble is the beneficiary’s misunderstanding of the role of the “lawyer for the estate.”

Despite the opinions of many beneficiaries (and some practitioners), phrases such as “lawyer for the estate” are inaccurate at best. At worst, the understandings implicit in such phrases may result in attorney malpractice liability, professional discipline, and waiver of attorney-client privilege.

At least in California, it is now fairly clear that the “attorney for the estate” is actually the attorney for the personal representative, acting in that person’s capacity as a fiduciary. Goldberg v Frye (1990) 217 CA3d 1258, 1268, 266 CR 483, 489, reported at 11 CEB Est Plan R 122 (Apr. 1990) (“such retention [of the attorney by the personal representative] constitutes the counselor the attorney for the fiduciary, and not the attorney for the estate, its beneficiaries, its creditors or others who may be interested therein. … It is of course the purpose and obligation of both the fiduciary and his attorney to serve the estate.”)

This being the case, the practitioner is confronted with a conflict of interest problem if the attorney also represents a beneficiary. Similarly, although it is not truly a “conflict problem” (yet may arise to the level of a fraud problem), the practitioner may have various liability risks if the beneficiary is allowed to believe that the practitioner represents the beneficiary. Consider, for example, the implications of a beneficiary’s claim that the beneficiary did not investigate and challenge the fiduciary’s accounting because the beneficiary believed that the practitioner was looking after the interests of the beneficiary with respect to the account.

In theory, the California Rules of Professional Conduct do not preclude dual representation of the fiduciary and a beneficiary, if the clients give their informed consent in writing, but the fiduciary, in particular, may be reluctant to give consent if properly and adequately informed of the probable loss of attorney-client privilege and the probable prejudice to the fiduciary if the fiduciary makes a mistake that comes to the attention of the practitioner.

In all events, warning signs of litigation should cause the practitioner to immediately review potential conflict problems. If the practitioner does not actually represent any beneficiaries, prudence dictates writing letters to beneficiaries or otherwise taking steps to make sure the beneficiaries understand this and cannot make contrary contentions later. If a conflict already exists, this fact may hasten the practitioner’s need to withdraw from the case or make sure the parties obtain independent counsel with respect to the dispute. Even if the practitioner obtained a conflict waiver at the beginning of the representation, a new waiver may be needed if the fact of the dispute requires providing more information to the clients regarding the disadvantages of the dual representation.

Dual representation of beneficiaries. Dual representation of beneficiaries also poses problems. Common beneficiary conflict situations include:

• Nonprorata funding of shares of an estate.

• A beneficiary claim of ownership of property which might also be claimed by an estate.

• A beneficiary’s use of an estate asset during administration without paying rent.

• Settlement of will contest claims when the represented beneficiaries do not have identical interests with respect to the value or character of their claims.

• Once again, the warning signs of litigation are a signal to review the conflict problems and make sure they are appropriately addressed.

Conflict When Estate Planner May Be Called as a Witness

It is possible that the practitioner who drafted a disputed will or trust will be called to testify as a witness to the capacity or intent of the testator or settlor. That attorney is prohibited from acting as “an advocate before a jury which will hear [that testimony] unless: … (C) The member has the informed, written consent of the client.” Cal Rules of Prof Cond 5-210. Because jury trials are not available for many types of trust and estate litigation, the rule may not literally apply. Nevertheless, it remains the case that the partisanship of the “practitioner as advocate” is unlikely to enhance the trier of fact’s opinion of the credibility of the “practitioner as witness.”

Conflict When Estate Planner is Potential Malpractice Defendant

In the early stages of a dispute that may later explode into full-blown litigation, the practitioner who drafted the will or trust that is under attack will often attempt to represent the parties seeking to uphold the document. This happens particularly often when the attorney who drafted the will is the same attorney who offers it for probate. Paradoxically that attorney is in a conflict of interest with his or her clients (those who will take under the document if it is upheld) even though both the attorney and the clients seek the same result. This is because the attorney has an interest in the subject matter of the litigation within the meaning of Cal Rules of Prof Cond 3-310(A), which provides:

(A) If a member has or had a relationship with another party interested in the representation, or has an interest in its subject matter, the member shall not accept or continue such representation without all affected clients’ informed written consent.

The problem here is that the attorney may be motivated to settle the case too cheaply. The attorney will presumably be more fearful of going to court than an attorney who did not draft the document because of the risk of a ruling that the document was invalid for lack of capacity, undue influence, lack of due execution, or otherwise. If it can be shown that it was the testator’s intent that certain beneficiaries take under the instrument and the instrument fails due to attorney error, the attorney could be liable to the intended beneficiaries under Lucas v. Hamm (1961) 56 C2d 583, 15 CR 821.

By contrast, if the practitioner brings about a settlement between the would-be beneficiaries and the contestants, the likelihood of a suit against the attorney is greatly reduced. As tempting as it is to remain involved in the dispute negotiations, the estate planner should not proceed without an informed waiver of the conflict of interest under Cal Rules of Prof Cond 3-310.

Conflict When Attorney Formerly Represented Opposing Party

California Rules of Professional Conduct 3-310(D) provides:

(D) A member shall not accept employment adverse to a client or former client where, by reason of the representation of the client or former client, the member has obtained confidential information material to the employment except with the informed written consent of the client or former client.

The effect of this rule is to create a presumption of a conflict of interest that can be overcome only by proof of a negative: that the attorney did not obtain any confidential information material to the employment. Even if the attorney can meet this burden of proof, if one of the adverse clients refuses to give informed written consent, prudence would dictate getting out of the case to avoid the appearance of impropriety and the malpractice exposure.

When the Personal Representative Has a Conflict of Interest

Frequently the practitioner will represent a fiduciary who has a conflict of interest. This commonly occurs when the fiduciary is a beneficiary of the estate, a creditor of the estate, or a surviving spouse or surviving business partner of the decedent. A detailed explanation of the ethical problems which may confront the practitioner is beyond the scope of this article, but practitioners are warned that the frequency of these problems does not justify failure to analyze them carefully and respond appropriately. Particular consideration should be given to:

• Review of the same ethical issues discussed above with respect to dual representation of a fiduciary and beneficiary particularly including the possible risk of defrauding beneficiaries if it is not made clear to beneficiaries that the practitioner is representing the personal representative’s individual interest and does not owe any duties to the other beneficiaries.

• The confusing questions raised in this context by the Cal Rules of Prof Cond 3-310(B) prohibitions against representation of clients whose interests conflict without informed written consent.

• Obvious issues pertaining to the source of funds to be used to pay the practitioner’s fees, and compliance with requirements for written fee agreements.

• The desirability or necessity of separate counsel to represent the client’s personal interests, particularly when the client wishes to maintain the attorney-client privilege with respect to communications.

• The risk of removal of the fiduciary for conflict of interest under Prob C §8502.

• The possibility of seeking appointment of a special administrator authorized to represent the estate only with respect to matters creating the conflict. Prob C §8540(b).

Attorney-Client Privilege Problem

Under many of the scenarios in which an estate planner or probate attorney will be representing a client at the early stages of a dispute, the client is a fiduciary such as a personal representative or a trustee. From the outset of such a representation, the practitioner needs to keep in mind that there is some legal authority for the proposition that a trustee can be compelled to disclose to beneficiaries any legal advice the trustee receives concerning the administration of the trust. See Lasky, Haas, Cohler & Munter v Superior Court (1985) 172CA3d 264,280,218 CR 205, 214, reported at 7 CEB Est Plan R 65 (Dec.1985).

(For a discussion, see Campesi, The Legal Framework for Trust and Estate Litigation, Estates and Trusts: Dispute Resolution and Litigation 133 (Cal CEB Program Handbook Sept 1991).) This conclusion is based on the trustee’s duty of disclosure. It is recognized that the rule does not extend to legal advice acquired by the trustee at the trustee’s own expense and for the trustee’s own protection. Restatement (Second) of Trusts §173, Comment b (1959).

The law on this issue is less than settled, but the mere risk of discovery should suggest prudence on behalf of both counsel and client in terms of avoiding the creation of documents which will cause embarrassment when blown up to poster size and taped on the wall of a courtroom.

In addition, the onset of litigation should prompt the additional precautions of: (1) establishing a separate file and time log for the litigation issue; and (2) executing a separate retainer agreement which clearly provides that the “client” is the individual as such, that the individual as such is the person responsible for paying the bill, and that the “matter” is the defense of beneficiary claims against the individual.

Decedent Estate Litigation

Will contests present major procedural and tactical problems for both the proponents of the will and the contestants. For a number of reasons, delay by either party can be prejudicial if the case is eventually litigated. On the other hand, the opportunity for a reasonable and early settlement can be lost if there are immediate contested proceedings over such things as the appointment of a special administrator. In those cases in which a will contest involves family members, the practitioner’s evaluation of strategies should also involve consideration of the apparent psychological needs of the potential litigants. The motivations for will contests are not always purely monetary.

Determining the Application of a No-Contest Clause

A frequent threshold problem in estate and trust litigation is the effect of a no-contest clause in the instrument or a related instrument. The scope of the problem has increased in recent years as document drafters have expanded the scope of these clauses. For example, it is now common to see coordinated no-contest clauses in wills and trusts under which the contest of one document constitutes a contest of the other.

Some practitioners go even further, providing that a dispute regarding the beneficiary designation of a nonprobate asset, such as life insurance or a pension fund, will result in loss of benefits under a will or trust. It is also possible for a clause to provide expressly that filing a creditor’s claim constitutes a contest.

For an elaborate clause covering almost every contingency imaginable, see Garb, Avoiding Trust and Estate Litigation, UCLA-CEB Estate Planning Institute 1, 24 (Cal CEB Program Handbook May 1991) and Estates and Trusts: Dispute Resolution and Litigation 7,31 (Cal CEB Program Handbook Sept 1991), to be included in the forthcoming Estate Planning 1991 (Cal CEB).

Even if a clause is not elaborate, the scope may not be limited to a direct attack on the validity of a will or trust. See, e.g., Estate of Kazian (1976) 59 CA3d 797, 130 CR 908, holding that a spouse’s suit against the estate claiming a community property interest in property was a will contest, because the will contained a declaration that the property was the separate property of the decedent.

Given the potential risks, practitioners taking actions that may trigger a no-contest clause should give thought to making use of Prob C §21320, which provides in pertinent part:

(a) If an instrument containing a no contest clause is or has become irrevocable, a beneficiary may apply to the court for a determination whether a particular motion, petition, or other act by the beneficiary would be a contest within the terms of the no contest clause.

If such a petition is desirable, it usually must be filed quickly in order to meet whatever deadline applies to the underlying petition or claim. Presumably an order determining that a no-contest clause does not apply can be relied on immediately. It is not listed as an appealable order under Prob C §7240, and the purpose of the statute would be completely subverted if a party could not rely on the determination in good faith.

There are two other points to be made here. First, Prob C §§21306 and 21307 declare that a no-contest clause is not enforceable in certain situations. These include: (1) claims of forgery, (2) claims of revocation, and (3) challenges with probable cause to provisions that benefit persons involved in drafting or witnessing the instrument or in giving directions with respect to its contents.

Second, the practitioner who is contemplating filing a contest notwithstanding the existence of a no-contest clause should carefully explain the consequences of the clause to the client. The explanation and the practitioner’s advice should be in writing in order to protect against a later claim by a disappointed client that the client was not adequately advised of the risks.

Prompt Filing of Will Contests

A will contest must be filed within 120 days after the will is admitted to probate. Prob C §8270. However, the contest can be filed before the will is admitted to probate, and there are benefits to doing so from the point of view of the contestant. Failing to contest before the will is admitted to probate results in a presumption in favor of the validity of the will. Estate of Ross (1962) 204 CA2d 82, 92, 22 CR 135, 141.

Delay may also result in the executor being entitled to payment of compensation and attorneys’ fees from the estate for defending the contest even if the executor loses, provided the personal representative acted in “good faith.” This was expressly authorized under former Prob C §902, pertaining to extraordinary compensation for personal representatives. Probate Code §902 was repealed effective July 1, 1991, and replaced with Prob C §10801. The new statute no longer mentions will contests, but the California Law Revision Commission comment following the new statute states that the “former list [contained in §902] was incomplete” and that “omission of the list is not intended to change the law.”

Finally, delaying a contest until after appointment of an executor will prejudice the contestant’s opportunity to have the estate administered by a special administrator. It is generally easier to block the appointment of an executor than to remove one.

Appointment of A Special Administrator

When the admission of a will to probate is blocked, at least temporarily, by the filing of a will contest, the appointment of a special administrator under Prob C §8540 is usually appropriate. The period of time between the inception of the litigation and its resolution, judicially or through negotiated settlement, can range from weeks to years. During that time, many if not all of the tasks necessary to complete the administration can be accomplished by the special administrator, minimizing delay in final distribution following the contest.

The selection of the person to serve as special administrator can have an important psychological impact on the litigation. For example, if the contestant is contending that the will is the product of undue influence exerted on the decedent by the named executor and the court permits the named executor to serve as special administrator, a subtle message is sent to all concerned that the court, at least for the time being, is not sufficiently concerned about the integrity of the nominee to preclude the nominee from serving in a fiduciary capacity.

The selection of the person can also be important in bringing about a quick settlement. If the would-be personal representative is confronted with the possibility of being deprived of control of the estate, that person may be quickly motivated to discuss settlement possibilities in a reasonable manner.

In view of the importance of the selection, the contestant should normally move for the appointment of a desired special administrator at the same time the contest is filed. If the practitioner intends to handle the hearing on the application without help from a litigator, the practitioner should be prepared to marshal some persuasive evidence to deprive the named executor of the post of special administrator.

In the authors’ experience, in the absence of a strong showing by the contestant, courts are inclined to install the named executor as special administrator, and failing that to appoint an independent third party. Contestants need to be advised of the modest chances for success in obtaining appointment of their nominee, and serious consideration should be given to recommending a clearly qualified independent third party.

Protecting Against Wrongful Transfers

Disputes frequently arise regarding ownership and rights of possession with respect to property in which the decedent had an interest. Roommates may claim or simply take tangible property, out-of-town relatives may misappropriate a “remembrance” after the funeral, “for convenience” joint tenants develop convenient memory problems, etc. As a result, occasions may arise when the necessity for immediate action is a factor in the practitioner’s choice to initiate legal action without awaiting retention of a litigator. This section describes some of the procedures available in these cases.

The Prob C §9860 Proceeding

Under Prob C §9860, the court has the power to adjudicate title and possession claims with respect to property claimed by an estate and a third party. The petition can be filed by the personal representative, the third party, or other interested person, at any time before the estate is closed. The proceeding can be used for a wide range of purposes, including: (1) obtaining a determination of whether a joint tenancy was created “for convenience”; (2) obtaining a determination of whether a gift or nonprobate transfer was procured by undue influence.

Although regular civil actions and quiet title proceedings can be used for these purposes, a Prob C §9860 proceeding may be a better choice in terms of convenience, speed, and the likelihood of obtaining a judge with experience in handling these types of issues. If the relief available under Prob C §§9860-9868 is too limited (e.g. because punitive damages might be available in a civil action for fraud), the practitioner can initially proceed under Prob C §9860, then later file a civil action and move to consolidate the civil action into the probate action.

If the need for initial action is urgent, a possible strategy is to initiate the probate procedure with an application for an ex parte appointment of a special administrator whose only authority will be to take whatever actions are necessary to protect the asset in question. (Seeking only limited authority helps minimize bonding requirements and should minimize judicial concern about acting ex parte.) The special administrator can then file the Prob C §9860 petition and any necessary application for a restraining order. If the proceeding involves title to real property, a lis pendens should be recorded.

Discovery Under Prob C §§8870-8874

Probate Code §§8870-8874 provide seldom used and somewhat obsolete discovery procedures to aid the personal representative or other interested person in gathering facts to reverse a wrongful transfer or to ascertain the location of assets. The procedures can still be useful in some situations, and it may well be the practitioner, rather than a litigator, who undertakes this initial discovery. Probate Code §8870 provides:

(a) On petition by the personal representative or an interested person, the court may order that a citation be issued to a person to answer interrogatories, or to appear before the court and be examined under oath, or both, concerning any of the following allegations:

(A) A deed, conveyance, bond, contract, or other writing that contains evidence of or tends to disclose the right, title, interest or claim of the decedent to property.

(B) A claim of the decedent.

(C) A lost will of the decedent.

Disobedience of such a citation may be punished as a contempt of court. Written interrogatories may be put to the person cited, as an alternative to requiring in-court testimony. Prob C §8871.

If at a witness examination it appears that the allegations in the petition for a discovery citation are untrue, the person’s expenses and attorneys’ fees must be charged against the petitioner or allowed out of the estate, in the court’s discretion. Prob C §8872(c). The personal representative (or other petitioner) should, therefore, be fairly certain of his or her position before using this procedure. If there is doubt, the personal representative may find it preferable to propound written interrogatories under Prob C §8871 or to obtain a citation compelling the person to account for possession or control of property under Prob C §§8873.

Neither of these devices pose the danger of an attorneys’ fees and costs award against the personal representative. Alternatively, the practitioner can file a Prob C §9860 proceeding, as discussed in the previous section, and take a deposition under CCP §2025. Discovery will be discussed in greater detail in the next issue.

The advantages of Prob C §8870 examinations are speed and attention grabbing. If the examinee fails to appear, a bench warrant can be issued. The procedure is particularly useful if there is concern that the proposed examinee may leave the jurisdiction. When culpability is clear and the amount in dispute is small, mere service of the citation to appear in court several days later may result in the examinee’s prompt reconsideration of the wisdom of withholding property or information. Local court policy should be checked in advance to determine whether the initial examination can be held out of the presence of the judge in a manner similar to a judgment-debtor examination. If so, the practitioner should arrange for a court reporter to be present for the portion of the examination conducted outside the courtroom.

Blocking Collection by Small Estate Affidavit

Small estate affidavit procedures provide considerable opportunity for persons to claim property which does not belong to them. These risks have been reduced in recent years by enactment of provisions that generally prevent collection by affidavit for 40 days after death. The 40-day rule, however, does not apply to automobiles and other motor vehicles transferred under Veh C §5910 (a 40-day rule does apply to vessels transferred under Veh C §9916 and mobilehomes transferred under Health & S C §18102), nor to employee compensation claimed by a surviving spouse under Prob C § § 13600-13606.

In all events, the affidavit procedures are not available if a proceeding is being conducted for administration of the estate. Thus, the usually adequate solution to the problem is an ex parte application for appointment of a special administrator, followed by a demand for transfer of the property to the special administrator.

Recording A Notice of Interest in Real Property

Under Prob C §13540, a surviving spouse can dispose of community or quasi-community real property if 40 days have elapsed since death and no interested party records a notice of interest under Prob C §13541. This statute is most relevant in situations in which children of a prior marriage are the beneficiaries under the will. The attorney for the children should always record, thus providing protection against both voluntary and involuntary transfers.

Attacks on Personal Representatives Removal Actions

Under Prob C §8500(a), any interested person may petition to remove the personal representative on the grounds specified in Prob C §§8502-8505. On filing the petition, the court issues a citation to the personal representative to appear and show cause why the personal representative should not be removed. The court may suspend the powers of the personal representative and make such orders as necessary to deal with the property pending the hearing. In rare cases a court will issue a citation on its own motion.

The removal petition may (and as a tactical matter should) be combined with a petition for appointment of a successor personal representative under Prob C §§8520-8525. Prob C §8500(a). An action seeking the removal of the personal representative may be resolved at any stage short of the conclusion of a full-blown court proceeding. Much depends on the motivation for the petition. Although many removal petitions are brought solely for the purpose of removing the personal representative, it is not uncommon to see a removal petition used as a leverage device designed to pressure the fiduciary to exercise discretion in a manner more favorable to a particular beneficiary.

Statutory grounds for removal petitions include waste, embezzlement, mismanagement, fraud, contempt of court, and failure to appear and account. If removal is to be based on waste, mismanagement, fraud, or neglect, the facts constituting such misconduct must be alleged in the petition with particularity.

If the removal petition is based on waste, mismanagement, fraud or neglect, the complexity of the factual and legal issues involved will normally require the representative’s counsel to obtain a stipulated or court ordered continuance and schedule for discovery and briefing. Discovery issues in estate and trust related litigation will be discussed in the second part of this article. Assuming a continued hearing, the petitioner should once again seek orders protecting property of the estate pending hearing, including such remedies as the deposit of funds in blocked bank accounts.

A court that was unwilling to issue such orders ex parte may be more inclined to grant the application at the time of the hearing that is to be continued. When a removal petition is filed, the attorney for the personal representative needs to give immediate attention to making sure that a bad situation does not become worse. In particular, the personal representative needs to be reminded that he or she occupies a fiduciary position which continues to require the ability to treat the beneficiaries fairly and to properly protect their legal interests.

It is extremely important that the personal representative avoid making any threats or other statements to the beneficiaries that could be used as evidence that the personal representative should be removed. Indeed this advice should be given all fiduciaries at the first sign of most disputes with beneficiaries.

Accounting Controversies

Under Prob C §10950(a), the court may order the personal representative to file an interim account on its own motion or on petition of an interested person. The court shall order the personal representative to account on petition of an interested person more than one year after the last account was filed or, if no previous account has been filed, more than one year after issuance of letters. Prob C §10950(b). The court has control over the time within which the personal representative must file the account. Prob C §10950(c).

The problems that give rise to demands for accountings can range from the benign to the horrific. The same can be said of the problems that the accounting reveals. Obviously, it may be necessary to involve a litigator in such a proceeding.

Generally, personal representatives are well-advised to avoid being ordered to account. Once there is clear evidence of a dispute in an estate administration, the personal representative should account voluntarily for the personal representative’s own protection. If this is done soon enough, one or more accountings may be settled and approved before family disputes rise to the level in which beneficiaries choose to contest the accounts.

Limiting IAEA Powers

When disputes arise with respect to a personal representative’s management of the estate but the court declines to remove the personal representative or otherwise limit the powers of the personal representative, the beneficiaries may choose to petition under Prob C §10454 to terminate any power of the personal representative to administer the estate under the Independent Administration of Estates Act (IAEA) (Prob C §§ 10400(10592).

Before doing so, the practitioner should assess the effectiveness of the alternative of simply objecting to notices of proposed action which propose undesired actions under Prob C §10587, or of applying for ex parte restraining orders preventing proposed actions under Prob C §10588. In all cases, the attorney for the beneficiaries should consider whether such steps truly prevent undesired actions. In some cases it may be necessary to give third parties notice of new limitations on the powers of the personal representative.

Proceedings Under Prob C §§11700-11705 To Determine Distribution Rights

There are a number of instances in which it may be necessary for an interested party to seek an order determining distribution rights. These include pretermitted heir claims, a wide variety of will construction problems, heir identity problems, and determination of intestate succession right of relatives of a predeceased spouse. See 3 California Decedent Estate Practice §24.36 (Cal CEB 1987). Although a number of these issues could be determined under a petition for a decree. of distribution, Prob C §11700 allows an earlier resolution of the issues.

NOËL M. LAWRENCE of San Francisco received her B.A. from the University of California (Berkeley) and her J.D. from the University of San Francisco. She is Co-Chair of the Litigation Subcommittee of the Probate Section of the San Francisco Bar Association and a Certified Specialist in Probate, Estate Planning and Trust Law. Her practice emphasizes estate and trust related litigation.

JAMES A. BARRINGER of Hyde & Drath in San Francisco received his B.A. from the University of California (Santa Barbara) and his J.D. from Hastings College of the Law. His practice emphasizes estate and trust litigation and estate planning and administration.

©1991 by The Regents of the University of California

University of California Continuing Education of the Bar, 13
Estate Planning & California Probate Reporter
April 1992

Part 2

NOËL M. LAWRENCE & JAMES A. BARRINGER

Frequently estate planning and probate attorneys who do not consider themselves litigators will find themselves representing clients in the early stages of actual or potential estate and trust related litigation. In many such cases, the attorney postpones decisions regarding retention of a litigator for a period sufficient to gain a clearer understanding of the facts of a dispute and the possibilities of settlement. During this period the attorney may need to perform a variety of pretrial tasks to avoid adverse consequences to the client.

Part 1 of this article, which appeared in the February 1992 issue of the Reporter (13 CEB Est Plan R 101), discussed problems related to ethical issues, attorney-client privilege, the application of no-contest clauses, and a variety of statutory proceedings related to the administration of decedent estates. Part 2 addresses the litigation pertaining to trusts and a collection of issues pertaining to both trusts and decedent’s estates.

Trust Litigation

Preliminary Jurisdiction and Pleading Problems

Practitioners involved in the early stages of trust litigation assume the burden of filing the initial pleadings. Frequently this task immediately raises a number of procedural problems.

The “Civil or Probate” Issue

In general, causes of action provided for in the Probate Code require filing petitions and responses. Such petitions are typically filed at the “probate” window of the superior court clerk’s office and assigned a “probate file number.” Short matters are heard on the “probate calendar.” Jurisdiction is acquired by proper publication and/or service of “notice.” Further, in counties large enough to dedicate a judge or commissioner to the hearing of these matters on a full-time basis, such cases are assigned to a “probate department.”

If a cause of action is not expressly authorized by the Probate Code, matters of pleading and procedure are governed by the Code of Civil Procedure. This is also true of Probate Code matters except to the extent the Probate Code provides otherwise. (Prob C §1000). The initial pleadings for such a “civil action” would normally be a complaint and an answer. The action is assigned a regular case number and papers are filed at the “civil” window. Jurisdiction over the defendant is acquired by service of a subpoena, and the case is not transferred to a particular department.

Hybrid Cases

This works fine until the practitioner is suddenly confronted with a trust litigation matter that involves both “probate” matters and “civil” matters in a single case.

EXAMPLE:

In 1984, Husband and Wife execute wills consistent with their agreement that the first spouse to die will leave his or her estate to the survivor and the survivor will leave thr survivor’s estate to X. Husband dies in 1986. In 1992, Wife executes a new pourover will and revocable trust leaving the estate to Y, who may have exert undue influence on Wife. Wife transfers most of her assets to the trust before her death three months later. Attorney for X decides to initiate court proceedings to:

(1) Offer the 1986 will for probate and contest any offer of the 1992 will on the ground of undue influence;
(2) contest the trust and the inter vivos transfers to the trust on the grounds of undue influence;
(3) based on the contract between Husband and Wife seek imposition of a constructive trust for the benefit of X on assets held by the trustee; and
(4) seek tort damages for fraud and conversion against Y who is also trustee of the trust.

Note that it is clear that the will contest is a cause of action under the probate code and the action for fraud and conversion is not. The status of the trust contest and constructive trust causes of action are less clear. They are trust matters, but they do not clearly involve the “internal affairs” of a trust under Prob C §§17000, 17200.

The Confusing State of California Law

In planning to initiate this sort of hybrid action, practitioners must confront the realities of the confusing state of California law regarding the consequences of whether a cause of action is “probate” or “civil.” In particular, the practitioner must take into account the controversy over whether filing a cause of action using the wrong pleading (a complaint rather than a petition or vice versa) is an error having jurisdictional rather than merely procedural ramifications.

This is not an issue that will be resolved soon. A current example of the confusing state of affairs is illustrated by the facts and rulings to date in Saks v Damon Raike & Co. Mar. 26, 1992, A052630) 92 Daily Journal DAR 4142,92 Recorder CDOS 2627, reported on p 153. As of the press deadline for this article, a petition for rehearing is pending in the court of appeal.

History

The source of this controversy is a combination of history, combined with the practical consequences of having two sets of procedures. In a nutshell:

• The Probate Court was abolished as a separate court in California in 1879. 18 Cal L Revision Comm’n Reports 1281 (1986). The Probate Court had been a court of limited jurisdiction.

• Following abolition of the probate court as a separate court, the California courts managed to retain limited jurisdiction concepts for probate matters by creation of the concept of the “superior court sitting in probate.” This resulted in decades of litigation regarding the parameters of the power of the superior court sitting in probate, particularly with respect to jurisdiction to decide cases involving “third parties” and powers to grant equitable remedies.

• Until 1971, testamentary trust matters were probate matters, but inter vivos trusts were treated as civil matters. At that juncture, some matters concerning inter vivos trusts became probate matters. Stats 1970, ch 849, enacting former Prob C §§1138-1138.13.

• The foregoing state of affairs led to a situation in which practitioners for prudent plaintiffs would “double file” cases which even vaguely appeared to involve a combination of “probate” and “civil” matters. A petition would be filed with a probate case number. A complaint would be filed with a regular case number. The various notice and service of process requirements would be satisfied for both cases. The plaintiff would then make a motion for consolidation.

• In 1986, the new California Trust Law was enacted. New Prob C §17000 made clear that the superior court had jurisdiction over the internal affairs of trusts, and Prob C §17001 made clear that the court was a “full power court” when exercising that jurisdiction. The latter provision presumably made clear that the court could exercise all of its powers, including equitable powers, when exercising jurisdiction over trusts. (A similar provision in Prob C §7050(b) applies to decedent estates, but there is apparently no such provision applicable to guardianships or conservatorships.)

• Many practitioners thought Prob C §§17000-17001 had the effect of eliminating any jurisdictional distinctions between the superior court acting in exercise of its trust jurisdiction and the superior court operating in exercise of its general jurisdiction. This view was not shared by the court in Estate of Mullins (1988) 206 CA3d 924, 930, 255 CR 430, 433, reported at 10 CEB Est Plan R 104 (Feb. 1989). The probate “petition” in that case claimed that the deceased settlor of a living trust was contractually obligated to leave half of her estate to specified persons. It sought a declaration that the trustee of the decedent’s revocable trust held half of the trust estate as a constructive trustee for the benefit of petitioners. The probate department dismissed the case on the grounds of lack of jurisdiction and the appellate court affirmed.

• Loud protests quickly followed Mullins, contending, in effect, that there is no such thing as a “probate court” in California and that it was therefore impossible for a department of the superior court to lack superior court jurisdiction. See, e.g., 10 CEB Est Plan R 104-105 (Feb. 1989). The CLRC promptly sponsored legislation amending Prob C §17001. Stats 1990, ch 710, §44. The Law Revision Commission Comment for the amendment stated in part: “This amendment is needed to reject dicta in recent cases as to limitations on the power and jurisdiction of the court in proceedings properly commenced under this division. See Estate of Mullins [(1988») 206 [CA)3d 924, 930, 255 [CR] 430, [433)." 20 Cal L Revision Comm'n Reports 2263 (1990).

• Now we may have Raike, a "man bites dog" case in which the court ruled that the "civil superior court" lacked jurisdiction of a claim---a novel position which is just the reverse of the supposedly repealed concept of a limited jurisdiction "superior court sitting in probate."

Why Jurisdiction Issues Are Raised

Sane persons may wonder why these issues are litigated and why the courts continue to issue opinions which attempt to resurrect a court which has not existed for more than a century. A certain amount of speculation is required, but the motives of parties concerned with these matters may include:

• A desire to get an earlier or later trial date. In some counties, a matter may get to trial much more quickly on the probate calendar than on the civil calendar. "Fast track" may be improving the civil calendar delays in some counties.

• A desire to get or avoid a jury. Generally, jury trials are not available for probate matters, although there are probably constitutional limitations on this generalization. In any event, a litigant may perceive, probably erroneously in terms of constitutional rights to a jury, that the right to a jury trial may be affected by whether or not the case is being handled in the probate department.

• A desire to obtain or avoid a judge or commissioner who is familiar with probate matters. Court inclination to sustain claims that probate/civil distinctions have jurisdictional consequences may be influenced by everything from practical considerations faced by court clerks in assigning case numbers and collecting filing fees, to the mere fact that the words "probate court" seem to have an enduring life of their own-surviving the real court by more than a century.

Practical Response

Given this type of confusion, much remains to be said for the traditional practice of double filing and then consolidating cases involving both "probate" and "civil" matters. This will require extra filing fees, and the expense of making and appearing at the motion for consolidation. Nevertheless, the procedure should avoid problems with court personnel and no one will claim that the court does not have jurisdiction to hear a particular cause of action. The procedure may also go a long way in assuring that issues pertaining to availability of jury trials and the availability of certain remedies (notably punitive damages) are treated as being dependent on the substantive cause of action pled and remedy demanded rather than the room number of the particular department in which the case is heard.

"The nature of an action and the issues involved are to be determined, not from the appellation given the pleading, but from the facts alleged and the relief that they support."

Surviving "Probate" versus "Civil" Squabbles

If the double filing approach is not used, or counsel otherwise ends up defending a claim that a cause of action is filed in "the wrong court" or using the wrong procedure, some help is available. Code of Civil Procedure §396 provides that a case filed in a court without jurisdiction is to be transferred to a court having jurisdiction. Raising this point should effectively deter attempts to obtain dismissal of a cause of action. Objections of use of a petition rather than a complaint or vice versa can be addressed by asking the court to treat the filed document as the other form of pleading. ''The nature of an action and the issues involved are to be determined, not from the appellation given the pleading, but from the facts alleged and the relief that they support." Bloniarz v Roloson (1969) 70 C2d 143, 149, 74 CR 285, 288; Estate of Linnick (1985) 171 CA3d 752, 759, 217 CR 552, 555, reported at 7 CEB Est Plan R 44 (Oct. 1985).

Parties

In the preliminary stages of trust litigation, the practitioner must determine whether all indispensable and desirable parties have been included in the case, whether by petition or complaint. A full examination of the rules pertaining to parties in trust litigation is beyond the scope of this article but readers are cautioned to check statutes and case law carefully. In general:

• In cases involving proceedings expressly authorized by the Trust Law, the minimum party requirements are those implicit in the notice requirements discussed later in this article. This includes a requirement of giving notice to the Attorney General if the matter involves a charitable trust. Prob C §17203(c).

• In most cases in which a third party wishes to sue a trust, the proper defendant is the trustee and not the trust. Beneficiaries may be joined, but this is normally not necessary when no judgment will result that will run against the beneficiaries directly. The beneficiaries must be joined in the case of a trust contest. See 4 Witkin, California Procedure, Pleading §117, 118 (3d ed 1985).

• In many cases in which damage has been caused to a trust by a third party, the trustee may sue without joining the beneficiaries. CCP §369(a). If the beneficiaries wish to sue, but the trustee declines, the result is uncertain. There is case law authority for the proposition that a beneficiary may bring suit, in which case the beneficiary must join the-trustee as a necessary party. Triplett v Williams (1969) 269 CA2d 135, 74 CR 594. The scope of Triplett is unclear. See the rulings with respect to "standing" in Saks v Damon Raike & Co. (Mar. 26, 1992, A052630) 92 Daily Journal DAR4142, 4145, 92 Recorder CDOS 2627, 2629, reported at p 153.

Particular Matters

Trust Contests

The validity of trusts can be challenged on most of the same grounds available to will contestants, such as fraud, undue influence, incapacity, and mistake. See Restatement (Second) of Trusts §§ 19,333 (1959); Walton v Bank of Cal. (1963) 218 CA2d 527,541,32 CR 856,865. Except as changed by statute, the common law of trusts governs in trust proceedings. Prob C §15002.

An attack on a trust often takes the form of either an action to impose a constructive trust on its assets or an action (or Prob C §9860 proceeding) to bring the trust assets into the probate estate.

When the action involves contest of the formerly revocable living trust of a deceased settlor, additional action must be taken to contest any pourover will that might otherwise revive the trust or make an undesirable disposition of the assets. If the plaintiff's standing is based on an earlier will, the earlier will should be offered for probate. Such a contest produces an added problem with respect to proper parties.

The personal representative of the deceased settlor's estate may be a necessary party if a successful contest will cause the property to be part of the probate estate. If the personal representative is the executor named in a pourover will, the personal representative is not likely to participate voluntarily. Presumably the personal representative can be joined in a direct suit by the complaining parties under the rationale of cases such as Triplett v Williams (1969) 269 CA2d 135, 74 CR 594, but see the discussion above regarding the uncertain status of that case.

Attacks on the Trustee

Outside the realm of trust contests, most trust litigation focuses on beneficiary complaints regarding the actions of trustees. Such claims present a variety of issues regarding "civil matter/probate matter" distinctions and the scope of available remedies. Generally, it appears to be the case that it is proper to raise all causes of action against the trustee using a probate petition, and obtain all remedies that would be available in a hybrid probate/civil consolidated action. Statutes and California Law Revision Commission comments to the Trust Law which support this conclusion include:

• Probate Code §17001, providing that in proceedings under the Trust Law the court is a court of general jurisdiction and has all powers of the superior court. This provision is explained in part by the CLRC study indicating that the court in these matters "will not be limited by the existing concept of the superior court 'sitting in probate.'" 18 Cal L Revision Comm'n Reports 1282 (1986).

• Probate Code §17200(b)(7), authorizing petitions to compel the trustee to account and report if the trustee fails to do so within 60 days after written demand.

• Probate Code §17200(b )(5), authorizing proceedings to settle the accounts of trustees.

• Probate Code §16420(a), listing the remedies for breach of trust. The remedies include monetary damages, injunction, appointment of a receiver, and declaration of constructive trust. This provision is accompanied by a CLRC Comment that indicates that the procedure for obtaining the remedies is a petition under Prob C §17200.

• Probate Code §16420(b), providing that the listing of remedies "does not prevent resort to any other appropriate remedy provided by statute or the common law." This point is augmented by the following statement in the underlying CLRC study: "While the existing law needs reform, it is not advisable to over-legislate on this subject. Remedies should remain sufficiently flexible, as they are under the common law, so that courts can fashion an appropriate response in particular circumstances. The proposed law seeks only to provide a brief description of the basic remedies for breach of trust as a guide to parties, without altering the basic principles of existing law." 18 Cal L Revision Comm'n Reports 1253 (1986).

• Probate Code §§16440-16442, pertaining to the measure of liability for breach of trust and indicating the provisions "do not prevent resort to any other remedy available under the statutory or common law." Prob C §16442.

• Probate Code §15002, providing that the common law of trusts applies except as modified by statute.

This statutory scheme thus contemplates using probate procedure, but clearly departs from the former notion that remedies in probate matters are limited to those provided in the Probate Code. Thus, for example, it appears proper for a petition under the Trust Law to request exemplary damages for fraud under CC §3294.

The one cause of action which might require filing a separate civil action is an action for "fiduciary abuse" under new Welf & I C §15657. The statute applies if a fiduciary takes, secretes, or appropriates the money of an elder (a person over age 65) or a dependent adult in a manner not in due and lawful execution of his or her trust. Welf & I C §15610(f). Among other things, the statute authorizes attorneys' fees. If the elder has a conservator, the claim may properly be brought in a probate petition without the need for filing and consolidating a separate civil action, but such an action is otherwise a civil matter.

Statutes of Limitations

Practitioners bringing and defending beneficiary claims against trustees need to pay careful attention to the applicable statutes of limitation. Claims are cut off immediately by a court-ordered settlement of account as to matters adequately disclosed. In the absence of court action, Prob C §16460 provides, in effect, that claims against trustees must be brought within three years of a trustee's account or report which discloses the existence of the grounds for the claim.

Standing

Practitioners should also remember that a beneficiary of a revocable trust generally has no rights to bring claims against a trustee if the person holding the right to revoke is competent. Prob C §15800. A similar rule applies if someone has a general power of appointment to withdraw property from a trust. Prob C §15803.

Procedural Matters Encountered in Early Stages of Trust and Estate Litigation

Notice, Requests for Special Notice, and Appointment of a Guardian Ad Litem

Notice

Throughout the Probate Code, when a proceeding concerning a decedent's estate is contemplated, the requirements for the giving of notice will be specified. In the trust arena, Prob C §§17100, 17105, and 17203 govern the giving of notice in proceedings concerning trusts under Prob C §§17200-17210. Section 17100 refers to §§ 1200-1212 for the requirements of giving adequate notice, and §15804 specifies the persons entitled to notice in the case of beneficiaries of future interests.

Clearly, the practitioner must carefully comply with the statutes, but situations may arise in which the practitioner must decide whether the trustee should give notice to persons who are not strictly entitled to it under the statutes. There appear to be two schools of thought on the subject. There are those who hold that giving notice to persons not strictly entitled to notice only invites unwanted involvement and potential litigation. There are others who believe that giving notice to "potential plaintiffs" heads off litigation and resolves sooner, rather than later, simmering future disputes. Obviously, the circumstances of each case will argue for or against exceeding the requirements of statutory notice.

One practical consideration for the practitioner, especially the attorney for the trustee, is the fact that if a potential problem affecting the trust is dealt with while the trustee is in office, the trustee should be entitled to compensation for the expenditure of the trustee's time, and further entitled to pay the trustee's attorney from trust assets.

See Prob C §15684, which provides that the trustee is entitled to the repayment out of the trust property for "[e]xpenditures that were properly incurred in the administration of the trust.” Conversely, if the trustee defers resolution of a dispute until after he is out of office, he may find that his status is that of a mere witness who is not entitled to such payments from trust funds.

Requests for Special Notice

Probate Code §§ 1250-1252 allow for the submission of a request for special notice in a decedent’s estate and Prob C §17204 allows for such a request by a beneficiary of a trust with respect to proceedings relating to any purpose described in Prob C §17200. Unfortunately, the authorized notice requests are to be directed to the fiduciary or the fiduciary’s lawyer. The code sections are silent regarding requests for responsive pleadings filed by other interested parties.

In most cases, the fiduciary and/or his attorney can be counted on to keep the requesting party apprised of the other pleadings filed in the subject proceeding. But there is apparently no requirement to do so. This may be a problem if the trustee’s interests are adverse to the requesting party.

For example, a beneficiary may be interested in a proceeding for determination of entitlement to the estate brought by another party under Prob C §11700. Although the beneficiary can expect to receive the pleadings filed by the executor pursuant to his request for special notice directed to the fiduciary’s lawyer, the law does not explicitly require the fiduciary to provide that beneficiary copies of pleadings filed by other beneficiaries whose interests could very well be adverse to this beneficiary with respect to the subject matter of the petition.

This problem is exacerbated by the fact that it is common for petitions to be filed in probate matters only a few days before hearing.

Guardian Ad Litem

Notice and the opportunity to be heard can be afforded to minors, incapacitated persons, unborn or unascertained persons, and persons whose identity or address is unknown only through the appointment of a guardian ad litem to represent the interests of such person(s), as provided for in Prob C §1003. When the practitioner has some discretion as to whether to involve a guardian ad litem, the concerns are similar to those discussed above regarding the giving of notice to persons not strictly entitled to notice. The practitioner should weigh the risks of involving a guardian ad litem in the present proceeding against the risk of failing to involve someone in that role and facing a proceeding years later which seeks to upset or undo the outcome in the present proceeding.

Discovery

Formal Discovery

The rules applicable to discovery in civil actions generally apply to discovery in the estate and trust arenas. Prob C §1000. Most practitioners have faced the very real, very practical difficulties of grafting the ordinary discovery deadlines onto a proceeding in Probate Court.

Most Probate Code petitions are heard within six weeks of filing. From the moment the petition is filed and set for hearing, it is no longer possible to comply with the statutory time limits for discovery. Even ignoring for a moment the statutory time limits for responding to interrogatories, demands for production of documents, and other discovery requests, CCP §2024(a) provides that discovery shall be completed not later than 30 days before the date originally set for trial.

There are several approaches to this problem:

• Under the appropriate Code of Civil Procedure sections, the practitioner can seek to alter the otherwise applicable time limits for discovery. See CCP §§2025(f) (to shorten the notice period for depositions), 2030(h) (to shorten the time for responding to interrogatories), and 2024(e) (to extend discovery beyond 30 days before trial). See 1 Civil Discovery Practice in California §§2.36, 8.26, 8.43 (Cal CEB 1988). Local probate rules and court personnel must be consulted to determine the proper procedure for making a discovery motion with respect to a Probate Code petition.

• When the practitioner represents the petitioner, he can attempt to have the matter set a sufficient length of time in the future to allow for discovery. However, it is often the case that local court practice does not allow for setting hearings far in advance. In that case, the petitioner may need to request a continuance. See 7 Witkin, California Procedure, Trial §§9-11 (3d ed 1985) for general authorities on the issue of the court’s discretion in acting on such requests.

• The petitioner may be able to take the matter off calendar. This may require the consent of any parties who have filed a response. When some cooperation exists between the parties, they should be able to complete their discovery and then reset the petition for hearing. When the parties are unable to cooperate, the responding party might be able to argue that because the petition is off calendar, the petitioner is no longer in a litigation posture and is therefore not entitled to conduct discovery.

• The parties can stipulate to a discovery schedule. When no agreement is entered into and the petition Remains set for hearing on the original hearing date, at the hearing the responding party can make an oral objection (see Prob C §1043 and seek a continuance in order to conduct discovery and formulate written objections. Section 1043(b) does not, however, guarantee that the matter will be continued in order that the objecting party can conduct discovery or put his objections in writing. “An interested person may appear and make a response or objection orally at the hearing. The court in its discretion shall either hear and determine the response or objection at the hearing, or grant a continuance for the purpose of allowing a response or objection to be made in writing.” [Emphasis added.]

Discovery in Will Contests

When the subject litigation is a will contest, the potential contestant may be in a difficult situation. Often the would-be contestant needs more information in order to determine whether the will should be contested, but cannot file the contest and initiate discovery without risking application of a no-contest clause. There is no reliable solution for this dilemma.

Informal “Discovery” in Trust Matters

A beneficiary of a trust, who is contemplating litigation against the trustee, has the opportunity to conduct some informal “discovery” under Prob C §16061 by going to no more trouble than directing a simple letter to the trustee. The beneficiary can also request an accounting. If the information or the accounting is not forthcoming within 60 days following a written demand, the beneficiary can compel the accounting or the production of the information under Prob C §17200(b)(7).

No similar code section authorizes a beneficiary of an estate to obtain information from the personal representative of the estate, although, in the authors’ opinion, such a code section would be helpful, appropriate, and consistent with general fiduciary concepts. Of course, the beneficiary can file a petition for an order requiring an accounting under Prob C §10950, but this is much more burdensome than mailing a letter.

Court Rulings Without Evidentiary Hearings

Local probate rules do not say as much, but it has long been the practice for short matters on probate calendars to be heard without oral testimony. The “evidence” consists of the verified pleadings and any additional affidavits or declarations under penalty or perjury filed with the court.

Despite the fact that Prob C §I022 only directs the use of affidavits and petitions as evidence in uncontested proceedings, the procedure is valid in the absence of objection, As stated in Estate of Nicholas (1986) 177 CA3d 1071, 1088, 223 CR 410,419, reported at 7 CEB Est Plan R 114 (Apr. 1986):

Ordinarily affidavits may not be used in evidence unless Permitted by statute. (Estate of Fraysher (1956) 47 Cal.2d 131, 135, 301 P.2d 848, [851].) However, where the parties do not object to the use of affidavits in evidence, and where both parties adopt that means of supporting their positions, the parties cannot question the propriety of the procedure on appeal.

In view of the virtually universal acceptance of holding short matter probate hearings in this manner, it is extremely important that practitioners make every effort to have necessary petitions and affidavits on file in advance. If the practitioner intends to demand a full evidentiary hearing, the practitioner should consult local probate rules and court personnel regarding the procedure for requesting a hearing time, and give the court and opposing counsel advance notice of the fact that the request will be made.

All of this leaves open the question of what happens if a practitioner shows up at a hearing and derails the proceeding with an unexpected hearsay objection to consideration of the petitions and affidavits. Such objections are obviously valid, but making them may leave the practitioner conducting subsequent proceedings before a very unsympathetic judge or commissioner.

NOËL M. LAWRENCE of San Francisco received her B.A. from the University of California, Berkeley and her J.D. from the University of San Francisco. She is Co-Chair of the Litigation Subcommittee of the Probate Section of the San Francisco Bar Association and a Certified Specialist in Probate, Estate Planning and Trust Law. Her practice emphasizes estate and trust related litigation.

JAMES A. BARRINGER of Hyde & Drath in San Francisco received his B.A. from the University of California, Santa Barbara and his J.D. from Hastings College of the Law. His practice emphasizes estate and trust litigation and estate planning and administration.

©1992 by The Regents of the University of California

JAMES A. BARRINGER & NOËL M. LAWRENCE

Durable powers of attorney for property management have become widely accepted in the estate planning community as a method of planning for incapacity.  Durable powers offer a way to avoid the inconvenience and stigma of a conservatorship and the cost of establishing a living trust.  Because durable powers do not terminate on incapacity of the principal (unlike other types of agency), they are often given by elderly clients to trusted friends or relatives, so that someone can pay bills, make bank deposits, and handle other financial matters after the principal is not longer able.  Some estate planners have their clients execute durable powers of attorney for property management as a routine part of the estate planning “package,”  whether their clients ask for them or not.

Throughout this article, the terms “agent” and “power holder” are used rather than the more clumsy “attorney in fact.”

The Vulnerable Agent

In our practice, we have  seen a number of durable power holders facing serious liability exposure.  A typical fact pattern emerges in which an elderly person, as part of his or her estate plan, gives a power of attorney for property to a trusted confidante, such as one of the principal’s children or a close friend, or a housekeeper.  The power of attorney is drafted by a competent attorney experienced in estate planning.  The prospective agent however is not represented by counsel and receives little or no guidance about his or her duties, including the duty to keep accurate records and account for transactions using the power.  The agent is not educated that he or she has assumed the role of fiduciary, with obligations and presumptions adverse to the agent.

The discretion exercised by the agent under the durable power is later questioned, perhaps by the relatives of the principal either before or after the principal’s death. Litigation ensues, e.g. to compel the agent to account, to impose a constructive trust and to assess damages.  As a routine part of the complaint or petition, the agent is charged with fiduciary elder abuse, which increases the stakes because of the potential for an attorney fee award, punitive damages and even criminal liability.  Welf & I C Sections 15657, 15656.  Elder abuse charges also carry with them a terrible stigma that can damage the agent’s reputation in the community, regardless of the outcome of the litigation.

It is very easy and inexpensive for a critic of an agent to demand an accounting.  All it takes is a letter from the principal, the principal’s conservator, or a deceased principal’s personal representative (or other “successor in interest”) requesting an accounting.  Prob C Section 4236(b).  The agent is then put to a huge amount of work if he or she is unprepared to meet this demand, which, because no one has educated the agent about the law’s view of the nature and extent of his or her obligations is almost always the case.

It is really hard to reconstruct transactions, and the struggle is made especially difficult if the agent does not have actual bank records.  Very often, the accounts stood in the name of the principal, to whom statement were mailed, and the agent never received copies.  As a result, everything has to be subpoenaed, and the agent is left to puzzle over faint photocopies received from the archives of banks and brokerage houses.  The agent may be forced to reconstruct events stretching back many years, involving a conglomeration of transactions by both the agent and the principal.  All the while, the law resolves all doubt against the agent.  Any transactions that cannot be remembered or reconstructed make the agent look bad, and unexplained disbursements are usually charged against the hapless agent.

The Statutory Framework

Obligations and Compensation

Under prior law, a durable power holder was treated as an agent, with all the fiduciary duties of a trustee but the statute itself did not list those duties.  The new law provides that, except where the new power of attorney statute provides a specific rule, the general law of agency, including CC Sections 2019-2022 and 2295-2326, continues to apply to powers of attorney.  Prob C Section 4051.  The statutory form durable power of attorney for property also continues, under the new law, to warn that the holder of the power “assumes the fiduciary and other legal responsibilities of an agent.” Prob C Section 4401.

The new law also spells out the agent’s duties:  the duty of care and skill (Prob C Section 4231), the duty of loyalty (Prob C Section 4232), the duty to keep the principal’s property separate and identified (Prob C Section 4233), and the duty to keep the principal informed and to follow the principal’s instructions (which may be disobeyed only with court approval)(Prob C Section 4234).

The prior law was silent about compensation for the agents and whether they could charge the principal’s estate for expenses incurred in acting as agent.  Under the new law, agents are entitled to reasonable compensation and to reimbursement for reasonable expenses.  Prob C Section 4202.  This is comparable to the provisions under the Trust Law for trustee compensation (Prob C Section 15681) and reimbursement (Prob C Section 15684(s)).  Compensation comes at a price however because agents who receive compensation are subject to a higher standard of care than those who do not.  Uncompensated agents are not liable for losses unless they result from the agent’s bad faith, intentional wrongdoing, or gross negligence.  Prob c Section 4231(b).

Reimbursement of attorney fees is covered in Prob C Section 4947, which continues prior law without substantive change.  Under Prob C Section 4947, in a statutory proceeding against the agent (such as to compel an accounting or remove the agent), reasonable attorney fees may be awarded to the agent if the court determines that the proceeding was commenced “without any reasonable cause.” On the other hand, attorney fees may be awarded to the party complaining of the agent’ s conduct if the court determines that that the agent clearly violated fiduciary duties or failed without reasonable cause to submit accounts.  Prob C Section 4947(b).

There are three ways in which the new statute lessens the full burden of fiduciary duties under durable powers for property.  First, as a general rule, an agent must “observe the standard of care that would be observed by a prudent person dealing with property of another and is not limited by any other statute restricting investments by fiduciaries.”  Prob C Section 4231(a).  The California Law Revision Commission explains that this is a nonprofessional standard of care analogous to that undertaken by a custodian under the Uniform Transfers to Minors Act (Prob C Sections 3900-3925).  See 24 Cal Law Rev’n Comm’n Reports 346.  An agent who has special expertise however must observe the standard of care that would be observed by others with similar expertise.  Prob C Section 4231(c)

Second, as mentioned above, new Prob C Section 4231(b) sets a lower standard for uncompensated power holders:  If an agent is not compensated, the agent is not liable for loss to the principal’s property unless the loss results from the agent’s bad faith, intentional wrongdoing, or gross negligence.  It is noteworthy that this differs from the rule applicable to lawyers that, whether compensated or not, one must do a good job and the same standard of care applies.

Third, the new law clarifies that an agent’s duties do not arise unless and until the agent acts under the power or has expressly agreed to act.  Prob C Section 4230.  Moreover, acting in one transaction will not obligate the agent to act in a subsequent transaction (unless the agent has consented to act).  Prob C Section 4230(b).  Duties will not arise from merely being named as an agent.

These are good rules.  We have had clients who either did not know that they were power holders and did not act on the principal’s behalf, or acted for the principal, but not explicitly pursuant to the power of attorney; but because of the existence of the power everything done after its creation was suspect.  Under prior law it was possible for fiduciary duties to arise even if the individual named under a power of attorney was unaware of the appointment or was uncertain about when the duty to act commenced.

Authority

With respect to the authority of agents, the new statute does not provide a list of powers.  Instead, it distinguishes between “general” and “limited” authority, and allows the drafter to incorporate by reference various powers form other statutory schemes such as the Trust Law and the guardianship and conservatorship statutes.  Prob C Section 4263.  “General” authority is defined in somewhat circular fashion in Prob C Section 4261.

If a power of attorney grants general authority  to an attorney-in-fact and is not limited to one or more express actions, subjects, or purposes for which general authority is conferred, the attorney-in-fact has all the authority to act that a person having the capacity to contract may carry out through an attorney-in-fact specifically authorized to take the action.

Under Prob C Section 4262, “limited authority” means the “authority granted in the power of attorney, as limited with respect to permissible actions, subjects, or purposes,” and the “authority incidental, necessary, or proper to carry out the granted authority.”

The provisions for legal proceedings to interpret durable powers and to review the conduct of attorneys-in-fact have been reorganized in the new law, but remain substantially unchanged for the most part.  In such proceedings there is no right to a jury trial.  Probate Code Section 4904.  The agent can be compelled by the court to submit the agent’s accounts or report the agent’s acts attorney-in fact to the principal, the spouse of the principal, the conservator of the principal or the estate of the principal, or to any other person required by the court in its discretion, if the agent has failed to submit an accounting or report within 60 days after written request from the person filing the petition.  Probate C Section 4941(c).

This is similar to the requirement under Probate C Section 16061 that a  trustee provide information after a beneficiary requests it.  It is interesting  that the Trust Law differes from the Durable Power of Attorney Law, however, by providing that a trustee can be compelled to provide information to a beneficiary only once every six months.  Probate Code Section 17200(b)(7).

Agents are also subject to proceedings for their removal and to determine whether they have violated the fiduciary duties under the power of attorney.  Prob C Section 4941(d).

Elder Abuse

Another part of the legal framework is that an agent under a durable power of attorney for property is subject to the elder abuse provisions of the Welfare and Institutions Code.  In each of the cases in which we have represented an agent in litigation, the plaintiff brought or threatened to bring a claim for fiduciary elder abuse.  If an agent (who is by definition a fiduciary) fails to discharge his or her duties under the power of attorney appropriately, it is very easy to plead and elder abuse claim.

Welfare  & Institutions Code Section 15610(f) defines such abuse as “a situation in which any person who has the care or custody of, or who stands in a position of trust to an elder or dependent adult, takes, secretes, or appropriates their money or property, to any use or purpose not in the due and lawful execution of his or her trust.” The elder abuse statute facilitates awards of attorney fees and costs as well as punitive damages against a defendant who is shown by clear and convincing evidence to be liable for any form of elder abuse, including fiduciary abuse.  Welf & I C Section 15657.

An elder abuse claim can have a very adverse effect on an agent’s defense, especially if the plaintiff has involved the District Attorney in the dispute or is likely to do so.

Continuing Causes for Concern

Although the durable power of attorney statute has been consolidated and improved, there remain a variety of problems associated with them.

Bank Accounts, Brokerage Accounts and Other Assets

Three-Day Nonjudicial Freeze of Bank and Savings Accounts.  Protecting assets that are not real property is considerably more difficult and involves going to court.  In order to protect such assets pending litigation, a temporary restraining order and a preliminary injunction must be sought.  A temporary restraining order protects assets until a hearing can be held on the application for a preliminary injunction.

Injunctive relief always takes time to accomplish, even ex parte.  In emergency situations, when the plaintiff suspects that the perpetrator may move and hide assets, there are useful statutory provisions in the Financial Code that, in effect, allow for a short-term asset freeze until judicial intervention can be obtained.  For funds or other personal property on deposit at banks or savings associations, if the perpetrator is a fiduciary (e.g. a trustee named under a wrongfully procured trust or holder of a power of attorney), the first thing to do is to give notice of adverse claim to each institution unlder Fin Code Section 952(a) (banks) and Section 6661(a) (savings associations).

Those statutes provide that an adverse claimant may deliver to the bank or savings association, at the office at which the deposit or account is carried, his or her affidavit (or declaration under penalty of perjury) stating (1) that of his or her own knowledge the person to whose credit the deposit stands is a fiduciary for the adverse claimant; (2) that the adverse claimant has reason to believe the fiduciary is about to misappropriate the deposit or account or the property; and (3) the facts on which the claim that claim of fiduciary relationship and the belief are founded.  If such a notice of an adverse claim is made, the bank or savings association must freeze the account for a period of not more than three court days (including date of delivery) from the date that the bank or association received the claimant’s declaration.

Preliminary Injunction.    Longer-term protection against further misappropriation will generally require court orders.  For example, the plaintiff may seek orders enjoining withdrawals from a brokerage account formerly belonging to the decedent and now standing in the name of the defendant.  Such relief is usually initiated by applying for a temporary restraining order (TRO) and preliminary injunction.  A TRO may be issued for a limited period of time pending consideration of an application for a  preliminary injunction.  See CCP Section 527.

In many cases, the plaintiff will be well  into the discovery phase of the case before he is armed  with enough evidence for a successful TRO application.  The application is  typically made by providing the court with a copy of a verified complaint, additional affidavits or declarations, and a memorandum of points of authorities.

A preliminary injunction may be granted when it appears by the verified compliant or affidavits that the commission or continuance of some act during the litigation would produce waste or great or irreparable injury, to a party to the action.  CCP Section 526(a)(2).

Normally an injunction will not issue if only money is involved, because the legal remedy of damages supposedly adequate.  CCP Section 526(a)(4).  However, in an action to recover specific funds, as distinct from a “naked claim for damages,” an injunction may issue to prevent dissipation of the funds.  See Heckmann v Ahmanson (1985) 168 CA 3d 119, 136 214 CR 177.  In the undue influence/elder abuse arena, it is often possible to identify the needed specific fund.  A preliminary injunction may also issue when the obligation arises for a trust   CCP Section 526(a)(7).

In deciding whether or not to grant a preliminary injunction, the court must consider the likelihood that the applicant will succeed on the merits at trial, the harm to the applicant if the injunction is denied, and the harm to the responding party if the injunction is issued.

When seeking to establish the likelihood of success on the merits, Prob C Section 21350 can be very helpful when it applies. In general, the statute shifts the burden of proof to the defendant in cases involving transfers to such persons as a fiduciary who transcribed the instrument or a care custodian of a dependent adult.  This assumes  the transferee is not related to the transferor by blood or marriage and is not a cohabitant with the transferor.

If the plaintiff is successful in obtaining a preliminary injunction, he will not only have preserved assets, he will have demonstrated to the defendant that the first judge  before whom the case was presented agreed that the plaintiff will probably prevail.  That knowledge, combined with the defendant’s deprivation of the subject funds with which to litigate, could promote resolution of the case on terms satisfactory to the plaintiff.

Removing Defendant as Fiduciary

If the defendant is a fiduciary, the plaintiff generally will seek court orders, suspending the powers of the fiduciary or removing the fiduciary.  In some cases this may be an effective alternative to obtaining a preliminary injunction, in terms of preventing further misappropriation of the victim’s assets.

Probate Code Section 4234(a) requires the attorney-in-fact to “keep in regular contact” with the principal.  This duty could, in theory, be construed as a duty to monitor the principal’s condition if coupled with an agreement in writing by the agent to act.  Like all duties applicable to agents, the duty to keep in regular contact does not apply until the agent acts under the power or has “expressly agreed in writing to act for the principal.” Prob C Section 4230.

Controversies may arise over whether agents have so agreed.  For example, an agent who consented in writing to be named in a typical “springing” power (e.g. by signing the document) might be held to have agreed to act on the principal’s incapacity.  Why, after all, would a principal sign a springing power if he or she did not intend by this device that the agent would affirmatively “mind the store” when the principal no longer could?  And why would the agent sign the document if he or she did not intend to act in that manner?

Lack of awareness of the principal’s incapacity would probably not be an excuse, because of the duty under Prob C Section 4234(a) to “keep in regular contact.” It might be more difficult to imply such a duty to act in the case of the “nonspringing” durable power because it might be less clear that the agent “agreed” to do anything on the principal’s incapacity.  Finding an “agreement to act” would be crucial to any case against an agent based on a failure to act because Prob C Section 4230(a) states:

Except as provided in Prob C Section 4230(b) and (c) (where the agent acts or expressly agrees to act in writing), a person who is designated as an attorney-in-fact has no duty to exercise the authority granted in the power of attorney and is not subject to the other duties of an attorney-in-fact [including the duty to keep in contact with the principal], regardless of whether the principal has become incapacitated, is missing, or is otherwise unable to act.

Thus an agent who is merely designated but does not agree expressly in writing to act can sleep soundly while completely ignoring the principal.

Comment:  An agent who wishes to avoid being bound by an express agreement to act on the principal’s behalf should not sign the durable power.  Mere knowledge of the existence of the durable power is not enough to impose liability for the agent’s failure to act.  The California Law Revision Commission Comment to Prob C Section 4230 makes it clear that (24 Cal Law Rev’n Comm’n Reports 400): being named as an attorney-in-fact under a durable or nondurable power of attorney imposes no duty on the named person to act.  This is true even if the attorney-in-fact knows of the designation and has received the power of attorney.  A duty to act under this part arises only by reason of an express agreement in writing. Reliance is not sufficient to impose a legal duty to act.

Recommendations

Clarify Attorney-Client Relationship

Lawyers should make clear to the agent or prospective agent who that attorney represents and who that attorney does not represent.  Attorneys who represent principals should advise prospective agents that they have the right to seek independent counsel.

Educate the Agent

Whether or not independent counsel is brought in, at the very least, it would be good practice to provide the agent with a detailed explanation of his duties and liabilities under the durable power of attorney.  This is in the best interests of both the principal and the agent.  A form of letter that could be sent to an agent describing his or her duties and powers follows this article.  (To avoid confusion, such a letter should probably not be sent to an agent who has not accepted any duties as discussed above.)  If the attorney sending the letter does not represent the agent, that fact should be made very clear.  Indeed, because of the inherent conflict of interest, dual representation in such situations is not advisable.

Educate the Principal

Principals should be informed of the responsibility and potential liability they are shifting to their agents.  They might then be more reluctant to place their cherished friends and trusted family members in this situation.

Identify Risky Situations

Some situations can be recognized in advance to have significant potential for problems between competing beneficiaries to an estate.  That kind of  situation seems particularly ill-suited to a durable power of attorney, especially one that appoints only one of the competing beneficiaries as agent.

Multiple Agents

Consider naming two agents and requiring them to act unanimously.

Authorize Hiring Attorneys

Practitioners drafting durable powers of attorney should consider including provisions for hiring attorneys and accountants.  This may defer frivolous actions against the agents.

Limit Agent Powers

Durable powers of attorney have a logical place in many estate plans.  In the opinion of the authors, however, durable powers should be used with precision and care, usually limited in some way and not in the broad general form that is too often recommended to unwitting clients.  If for example, the principal has a living trust, the agent’s power can be limited to the power to transfer assets to the trust.

Use a Living Trust Instead

Consistent with the previous suggestion, practitioner should strongly consider using living trusts rather than durable powers of attorney as the primary method of planning for incapacity, especially if there is a potential for conflict among beneficiaries.  The body of law applicable to trusts is highly developed having evolved  over 600 years.  Durable powers of attorney are recent statutory creatures that have received little judicial gloss.

The trustee’s duty to account is much clearer and the trustee can do so regularly, disclose all of his or her acts and rest safe in the knowledge that, unless someone timely objects, the fiduciary has no further liability for the acts and transactions disclosed.  A trustee of a living trust, with control of most of the principal’s assets, can do.  Besides, if a power of attorney is carefully drafted to cover investment, accounting and other administrative powers, exculpation of the agent, definitions of incapacity, gift powers or other types of substituted judgment (akin to a trustee’s dispositive discretion), compensation of the agent, and authority to hire counsel, you wind up with a document as lengthy and involved as a trust.

Conclusion

The legal profession invented durable powers of attorney for property management to provide a convenient, low-cost substitute for trusts and conservatorships.  In doing so, however we have created a potential monster that only the legal profession can tame.  Durable power documents should be drafted as narrowly as practicable, given the principal’s situation and needs.  Living trusts should be considered as an alternative to durable powers because the expense and hassle of creating and administering each of these devices is approaching parity.   Above all principals and agents should be educated about the duties the agents are expected to perform.

Form:  Letter from Principal’s Attorney to Agent,
Describing Agent’s Duties
Re:  Durable Power of Attorney Dated_________________
Principal:  _____________________
Agent___________________________

Dear_______________:
We represent [name] the principal who named you as agent under a durable power of attorney for property management.  You have accepted the duties of an agent under that durable power of attorney.  We are writing this letter to make you aware of certain of your more important duties under the power of attorney and to encourage you to seek advice from your own attorney regarding those duties.

It is important for you to understand that we do not represent you, and that you should seek independent legal counsel as needed.  Please also note that this letter must not be considered a substitute for your careful reading of the durable power of attorney document itself.

As agent under a durable power of attorney, you have the following duties under California’s Durable Power of Attorney statute:

1. You must act strictly in accordance with the powers granted to you in the power of attorney document, and avoid any actions as agent that are not authorized by that document.  You must carefully review the power of attorney document to determine the scope and limitations of the powers granted to you by the principal.

2. As a fiduciary you have a duty of care in dealing with the principal’s property.  You must act as a prudent person in all transactions on behalf of the principal.  If you have special skills or expertise, you must apply the full extent of those skills in serving as agent.

3. You have a duty of loyalty.  This means that you must act solely in the interest of the principal and must avoid conflicts of interest.  You may not use or deal with the principal’s property for your personal profit, or take part in any transaction in which your interest is adverse to the principal’s.

4. You must keep the principal’s property separate and distinct from other property in a manner to identify the property clearly as belonging to the principal.  You can comply with this duty by making sure that title to the principal’s assets is held in the principal’s name or in your name as attorney-in-fact for the principal.  You must never commingle the principal’s property with assets of any other party, including your assets.

5. To the extent reasonably practicable, you have a duty to keep in regular contact with the principal, to communicate with the principal , and to follow the principal’s instructions.  The “reasonably practicable” language basically means that if there is not enough time to communicate with the principal, you can still act.  If you believe that following the instructions of the principal would not be in the principal’s best interest, you may disobey the principal’s instructions only with prior court approval. If the principal becomes incapacitated or there is some question about the principal’s capacity to give instructions to you, you may consult with the principal’s spouse, physician, attorney, accountant, other member of the principal’s family, or any other person, government agency or business agency, to assist you in carrying out your duties under the durable power of attorney.

6. You must keep careful records of all transactions you undertake on behalf of the principal. The importance of this duty cannot be overemphasized.  As an agent you must be prepared to account for your dealings on behalf of the principal within 60 days after demand for an accounting is sent to you by a person authorized by law.

You can be compelled to account to the principal or to the principal’s spouse, conservator, or the personal representative of the principal’s estate regarding the principal’s property and your dealings with it.  In such an accounting, you would have to identify all receipts and disbursements, all assets under your management, any liabilities of the principal known to you and any compensation paid to you as agent.  Failure to account or failure within an account to adequately explain transactions could expose you to substantial liability.

The foregoing is intended to make you aware of your most important duties under the durable power of attorney.  Again we urge you to consult with independent counsel about how to perform your duties as agent, the scope of your powers,  how to protect yourself against liability, and other matters.

Please sign and return the enclosed copy of this letter.

Sincerely,
[signature of attorney]
[name of attorney]
Dated:___________________

I have read and understand this letter.
[signature of agent]
[name of agent]

By Noël M. Lawrence*

I. Introduction

Times are tough. According to the United States Department of Labor, Bureau of Labor Statistics, employment in the U.S. continued to decline throughout the spring of 2009, another 267,000 jobs were lost in July, and as of the end of that month, employment stood at 9.4% nationwide. The situation is significantly worse in the Golden State. As of the end of July, 2009, the Employment Development Department of the State of California reported that well over two million Californians are jobless and that the unemployment rate statewide had reached 11.9 %. California’s current rate of unemployment exceeds that of all other states with only four exceptions: Michigan (15%), Nevada (12.5%), Rhode Island (12.7%) and Oregon (tied with California at 11.9%).

And, as most California lawyers are well aware, the economic crisis is being felt severely within the legal community. The Los Angeles Times cites “lackluster spending” in certain areas, including “legal services,” which has “left California’s economy listless, just about guaranteeing that the state’s … unemployment [rate] will march upward at least until the end of the year….”

According to the New York Times Editorial Observer, Adam Cohen, “[t]he economic downturn is hitting the legal world hard …. Top firms are rapidly thinning their ranks and several – including Heller Ehrman, a venerable 500-plus-lawyer firm founded in 1890 – have closed….”

In particular, the downturn has resulted in a reexamination of the manner in which attorneys charge for their services. As observed in a recent New York Times article, “Lawyers are having trouble defending the most basic yardstick of the legal business – the billable hour. Clients have complained for years that the practice of billing for each hour worked can encourage law firms to prolong a client’s problem rather than solve it. But the rough economic climate is making clients more demanding, leading many law firms to rethink their business model.” The article quoted Evan R. Chesler, of Cravath, Swaine & Moore: “[I]nstead of paying for hours worked, more clients are paying flat fees for handling transactions and success fees for positive outcomes.”

There will always be good clients with meritorious cases who are unable to compensate their attorney currently and out of pocket. The present economic crisis can only have swollen their ranks.

For the attorney who is in a position to assume some degree of risk, a contingent fee offers a way of addressing the problem of a would-be client who lacks the means of paying for legal services, and of the attorney who has seen a slowdown in demand for legal services brought about by the current economic crisis.

This article will discuss the practicalities of assuming representation of a client on a contingent fee basis in estate and trust litigation matters. This article will review the rules applicable to contingent fee arrangements in general, as well as the statutory and case law unique to contingent fee arrangements entered into by the personal representative of an estate or by a beneficiary of an estate or trust.

II. The Law Governing Contingent Fee Contracts

Witkin defines a continent fee contract as “one providing for a fee the size or payment of which is conditioned on some measure of the client’s success.” Under a contingent fee agreement, the attorney’s right to receive the fee is conditioned on obtaining a successful outcome for the client. Typically the attorney agrees to provide legal services in return for a percentage of the client’s recovery. If no recovery is made, the attorney does not receive a fee. The justification for the contingency fee arrangement is that it allows individuals who might not otherwise be able to afford legal representation an opportunity to protect their legal rights. Contingent fee arrangements are common in actions on behalf of persons claiming interests in estates, and their validity is well established.

A. Professional Ethics Rules

The basic requirements for a fee agreement between a lawyer and his or her client are set forth in California Business & Professions Code section 6148. That section is, however, expressly inapplicable to contingent fee arrangements. Instead, Section 6147 sets forth special requirements for a contingent fee agreement.

Section 6147 begins by requiring that the attorney provide to the client (or to the client’s guardian or representative) a duplicate copy of the contingent fee agreement, signed by both the attorney and the client (or signed by the client’s guardian or representative). The statute further provides, in pertinent part, that such a contract must include all of the following:

1. A statement of the contingency fee rate that the client and attorney have agreed upon.
2. A statement as to how disbursements and costs incurred in connection with the prosecution or settlement of the claim will affect the contingency fee and the client’s recovery.
3. A statement as to what extent, if any, the client is required to pay any compensation to the attorney for related matters that arise out of their relationship not covered by the contingency fee contract. This may include any amounts collected for the plaintiff by the attorney.
4. Unless the claim is subject to the provisions of Section 6146 [having to do with contingent fee cases against health care providers and therefore not applicable to estate and trust litigation] a statement that the fee is not set by law, but is negotiable between attorney and client.

Failure to comply with any provision of Section 6147 renders the agreement voidable at the option of the client.In that event, the attorney is entitled to collect a reasonable fee. Where only part of the agreement fails to comply with Section 6147, the client can void part, but not all, of the contingency fee contract. And, not surprisingly, modifications to a contingency fee contract also must comply with Section 6147.

The American Bar Association expressly approves contingent fee agreements and provides the following guidance in its Model Rules of Professional Conduct, Rule 1.5 Fees:

(a) A lawyer shall not make an agreement for, charge, or collect an unreasonable fee or an unreasonable amount for expenses. The factors to be considered in determining the reasonableness of the fee include the following:
. . .

(4) the amount involved and the results obtained.
. . .

(8) whether the fee is fixed or contingent.
. . .

(c) A fee may be contingent on the outcome of the matter for which the service is rendered, except in which a contingent fee is prohibited [in domestic relations cases and in criminal cases].

Similarly, the California Rules of Professional Conduct, rule 4-200, provides that a member shall not charge an unconscionable fee. Among the criteria for determining whether a fee is unconscionable are the following:

1. The amount of the fee in proportion to the value of the services performed.
. . .

5. The amount involved and the results obtained.
. . .

9. Whether the fee is fixed or contingent.

10. The time and labor required.

When entering into a contingent fee contract, practitioners should also be mindful of California Rules of Professional Conduct, Rule 3-300:

A member shall not enter into a business transaction with a client; or knowingly acquire an ownership, possessory, security, or other pecuniary interest adverse to a client unless each of the following requirements have been satisfied:

(A) The transaction or acquisition and its terms are fair and reasonable to the client and are fully disclosed and transmitted in writing to the client in a manner which should reasonably have been understood by the client; and

(B) The client is advised in writing that the client may seek the advice of an independent lawyer of the client’s choice and is given a reasonable opportunity to seek that advice; and

(C) The client thereafter consents in writing to the term of the transaction or the terms of the acquisition. (Emphasis added.)

B. The Customary Contingent Fee Percentage

There are no hard and fast rules concerning the permissible contingent fee percentage. The California Court of Appeal, in Hendricks v. Sefton, gave voice to the commonly held view that a contingent fee of one third of the recovery is common and is fair and equitable, and noted that ‘[c]ontracts calling for a greater percentage have been upheld.”

In Swanson v. Hempstead, the court allowed for the possibility of a contingent fee of 50 percent of the recovery. The court refused to characterize a fee of 50 percent as “unconscionable” and went on to describe an unconscionable contract as one “such as no man in his senses and not under a delusion would make on the one hand, and as no honest and fair man would accept on the other.”

The court in Estate of Raphael observed that a “contingent fee contract, since it involves a gamble on the result, may properly provide for a larger compensation than would otherwise be reasonable” and that “[c]ontingent fees of 50 per cent have been upheld in this state and by many other courts.” A few years later, the Court of Appeal ruled that a 50 percent contingent fee and assignment of claims was not unconscionable.

A contingent fee equal to more than 50 percent of the recovery will probably be very difficult to enforce. According toWitkin, “if the services are slight, or though substantial, the amount of the fee is more than one-half, a court may refuse to enforce the provision.”

C. Treatment of Out-Of-Pocket Costs

The manner in which out of pocket costs will be paid should be articulated in the fee agreement. Specifically, Business and Professions Code section 6147(a)(2) requires that the contingency fee contract state how case related disbursements and costs will affect the client’s net recovery and the attorney’s total fee.

California Code of Professional Conduct, Rule 4-210 makes clear that it is permissible for the attorney to advance the costs associated with litigation whether or not those costs might or might not be reimbursed. Rule 4-210 provides that while a member of the bar is prohibited from paying the personal or business expenses of a client, there is no prohibition upon “advancing the costs of prosecuting or defending a claim or action or otherwise protecting or promoting the client’s interests, the repayment of which may be contingent on the outcome of the matter. Such costs … shall be limited to all reasonable expenses of litigation or reasonable expenses in preparation for litigation or in providing any legal services to the client.” (Emphasis added.)

Moreover, the American Bar Association Model Rules of Professional Conduct speak to the issue of costs in a contingent fee matter. Rule 1.5, part (c) provides:

A contingent fee agreement shall be in a writing signed by the client and shall state … litigation and other expenses to be deducted from the recovery; and whether such expenses are to be deducted before or after the contingent fee is calculated. The agreement must clearly notify the client of any expenses for which the client will be liable whether or not the client is the prevailing party.

Whatever the method for paying costs, and for reimbursing costs, it should be clearly set forth in the fee agreement. Who will advance the costs? How will costs be reimbursed? Will the costs come “off the top,” with the result that the client’s recovery and the attorney’s fee will be proportionately burdened by the costs? Or, will the attorney’s fee come off the top, and the client’s share of the recovery bear all the costs? Finally, what if there is no recovery? Is the attorney ultimately responsible for the costs in that case, or is the client responsible under those circumstances?

One method that is particularly favorable to the attorney calculates the attorney’s fees based the gross recovery rather than the net recovery after costs (meaning the attorney’s share is not burdened by the costs). California Forms of Pleading and Practice explains the distinction between gross and net fee accounting methods for handling case costs, as follows:

The gross fee or recovery method. Under this method the contingency fee is calculated on the gross recovery, costs and expenses are deducted from the remainder, and the client receives the balance ….

The net fee recovery method. Under this method, the costs and expenses are deducted from the gross recovery, the contingency is calculated on the remainder, and the client receives the balance.” The California Court of Appeal has held that the gross fee method is not unfair to the client, where the fee did not thereby become “so exorbitant and wholly disproportionate to the services performed [by the attorney] as to shock the conscience.

In addition, the fee agreement should make clear that the contingent fee nature of the arrangement does not mean that the litigation is totally risk free for the client. Even if the cost arrangement is most favorable to the client, i.e. the attorney advances the costs with no expectation of reimbursement if the case is unsuccessful, the client should be made aware that if the client loses the case, the opponent’s costs may be awarded against the client as provided for in California Code of Civil Procedure Section 1032 et seq. One must not let the basic simplicity of a contingent fee arrangement induce the client to assume that he has no risk if indeed he or she loses the case.

As articulated in Code of Civil Procedure section 1033.5(c) (2) and (3), not every out of pocket cost is recoverable by the prevailing party to litigation. Only those that are “reasonable in amount” and “reasonably necessary to the conduct of the litigation.” For instance, Code of Civil Procedure sections 1032 and 1033.5(b) do not allow for reimbursement of the following sorts of costs: private investigator fees, postage, telephone expenses, fees of experts not ordered by court and transcripts of court proceedings not ordered by the court. The Rutter California Practice Guide on civil trials and evidence provides a good discussion of recoverable costs by the prevailing party.

D. Securing Payment of the Contingent Fee

There are several methods to secure the payment of the contingent attorney’s fee. One is by a lien on the recovery, i.e. a lien on the money or property secured by the client as a result of successful litigation.

Regardless whether the attorney decides to rely on a lien, or some other method to secure the payment of the attorney’s fee, if the contingent fee contract provides for payment of the attorney’s fee out of the recovery secured by reason of the litigation, the attorney will have an equitable lien on that recovery. “Resulting trusts, constructive trusts and equitable liens are very much akin to each other, and their basic purposes is to identify and impress upon certain property the beneficial rights that have arisen in an innocent party who in some way contributed to the acquisition, protection or improvement of that property ….” An equitable lien is a direct charge or encumbrance on property such that “the property itself may be proceeded against in an equitable action and either sold or sequestered and its proceeds applied in favor of the person in whose favor it exists.”

Civil Code section 2881 provides that a lien is created “by contract of the parties” or “by operation of law.” And Civil Code section 2884 provides, “A lien may be created by contract [such as a contingent fee contract] as security for the performance of future obligations [such as paying for legal services].” Civil Code section 2883(a) provides:

An agreement may be made to create a lien upon property not yet acquired by the party agreeing to give the lien, or not yet in existence. In that case the lien agreed for attaches from the time when the party agreeing to give it acquires an interest in the thing, to the extent of such interest.

Section 2883(b) is explicit as to when a lien attaches with respect to real property of an estate which has yet to be distributed – as for instance, when a contingent fee is entered into and the subject matter of the litigation is entitlement to distribution of an item of real property from an estate. Subdivision (b) provides:

For purposes of subdivision (a) [of Civil Code section 2883], an agreement by a beneficiary of an estate that is subject to administration … to create a lien upon real property in the estate that is undistributed at the time the agreement is entered into, shall create no lien upon the real property unless and until the real property is distributed to that beneficiary.

Subdivision (b) further provides, “[u]pon recordation of an order confirming the sale of the real property pursuant to Probate Code section 10313 of the and the recording of a duly executed deed in accordance therewith, any expectancy of a lien in the real property under the agreement shall be extinguished.”

Hence, a valid sale of real property during estate administration eliminates any future interest in that property on the part of the lien holder. Of course, the lien holder still has a lien on those estate assets the lien holder secures for his client apart from real property sold before distribution, which assets might include the sale proceeds.

In Estate of Kerr, the California Supreme Court both upheld a 50 percent contingent attorney’s fee and sustained the lower court’s ruling that the attorneys had a lien on the estate assets to secure payment of their fees. “Their contract with [client] specifically gives them a lien on his claim to the estate or ‘any sum recovered by way of settlement.’ No impropriety is shown.”

A fee agreement should include a lien provision because the client has the absolute right to discharge the attorney with or without cause. The lien will survive a discharge. After discharge, however, the attorney may not recover the full contingent fee but rather the reasonable value of the legal services.

The following is a lien provision from the Sample Written Fee Agreement Forms approved by the State Bar Board of Governors:

[ ] LIEN. You hereby grant __________ a lien on any and all claims or cause of action that are the subject of our representation under this Agreement. Our lien will be for any sums owing to us for any unpaid costs, or attorney’s fees, at the conclusion of our services. The lien will attach to any recovery you obtain, whether by arbitration award, judgment, settlement or otherwise.

As an alternative form of security for payment of the attorney’s fee, the attorney can take a promissory note from a client. In so doing, the attorney must comply with California Rules of Professional Conduct, rule 3-300 quoted above. Similarly, the attorney can secure the payment of his fee with a Deed of Trust, subject to the same requirements of California Code of Professional Conduct, rule 3-300.

Another method of securing the payment of the attorney’s fee is by means of an assignment. Probate courts are accustomed to assignments because it is by way of assignment that heir hunters secure payment of their fees. And, indeed, Probate Code section 1020.1, the predecessor code section to Probate Code section 11604, was originally enacted to give the court authority to review the fairness of those heir hunter assignments. Courts later construed that code section to have application to assignments whose purpose was to secure payment of attorneys’ fees.

Just as Section 11604 provides protection to estate beneficiaries who execute an assignment of a share of their inheritance, an attorney holding a valid assignment acquires rights customarily held by the beneficiary by reason of being the holder of that assignment. Where an heir or beneficiary has assigned his interest, the assignee is entitled to receive distribution directly under the order for distribution. Obviously direct distribution is desired as it eliminates the possibility that once the distribution is in the hands of the client, the client might fail to honor the contingent fee contract.

Moreover, the attorney as assignee of a share of an estate is an “interested person,” and as such has standing to bring a petition for preliminary or final distribution under Section 11600.

Similarly, an attorney who has a contingent fee agreement with an estate beneficiary has standing to file a Section 11700 to determine who is entitled to succeed to the property of a decedent’s estate and in what shares or amounts. Section 11700 provides:

Any time after letters are first issued to a general personal representative and before an order of final distribution is made…any person otherwise entitled to distribution of a share of the estate, may file a petition for a court determination of the persons entitled to distribution of the decedent’s estate. The petition shall include a statement of the basis of the petitioner’s claim.

One can imagine a number of instances in which the attorney holding an assignment from an estate beneficiary might employ Section 11700, including in the event that the client has changed attorneys and the payment of the fee is in question. Section 11700 can provide an expeditious means of resolving the issue.

E. What if the Need to Secure Payment of Attorney’s Fee Extends Beyond the End of the Case?

Even if the payment of the attorney’s fee has been secured by a lien, an assignment or some other means, what if at the end of the case, the time is not ripe for payment? For example, what if the recovery consists of an item of real property, and because of a softening of the market, the client and the attorney agree the time is not right to sell the property?

The lawyer could take a fractional undivided interest in the property in payment of the fees. Receiving such a deed in payment of the fees would raise tax related issues, including income tax and reassessment of the property for property tax purposes. Instead, the lawyer might be better served by ensuring that the property will remain in tact until it is finally sold and the proceeds are distributed in the agreed upon percentages.

The form of security previously put in place will probably suffice to ensure payment. However, once the case is concluded, the attorney and the client will almost certainly not be communicating so frequently. Through the passage of time, circumstances could change. For instance, the client might pass away without the lawyer’s knowledge. Accordingly, the lawyer might consider asking the client to sign a writing, in recordable form, to the effect that the property will not be encumbered or conveyed without the express written consent of the lawyer. That writing could then be recorded, thereby putting the world on notice of the rights of the attorney.

III. Restrictions on Entering into a Contingent Fee Agreement for Estate and Trust Litigation

A. Must a Trustee Seek Court Approval Before Entering Into a Contingent Fee Agreement?

There is no requirement that a trustee seek court approval before entering into a contingent fee agreement. The trustee will want to review his powers as articulated by the trust instrument and, probably, if cautious, may want to petition the court for instructions pursuant to Section 17200(b)(6) authorizing the retention of an attorney on a contingent fee basis.

There are no reported decisions regarding the filing of a petition under Section 17200 seeking approval of entering into a contingent fee agreement by the trustee. But it is clear from subdivision (b) of that section that the sorts of proceedings set forth in the statute, i.e. proceedings “concerning the internal affairs of a trust” are not exclusive. “The list of grounds for a petition concerning the internal affairs of a trust under subdivision (b) is not exclusive and is not intended to preclude a petition for any other purpose that can be characterized as an internal affair of the trust.”

B. Must the Personal Representative of An Estate Seek Court Approval Before Entering Into a Contingent Fee Agreement?

Unlike a trustee, the personal representative of an estate has an affirmative duty to seek court approval if he or she wishes to hire an attorney to perform extraordinary services on behalf of a decedent’s estate. Section 10811(c) provides:

An attorney for the personal representative may agree to perform extraordinary services on a contingent fee basis subject to the following conditions:

(1) The agreement is in writing and complies with all the requirements of Section 6147 of the Business & Professions Code;
(2) The agreement is approved by the court following a hearing noticed as provided by Section 10812.
(3) The court determines that the compensation provided in the agreement is just and reasonable and the agreement is to the advantage of the estate and in the best interests of the persons who are interested in the estate.

It should be noted that California Rule of Court 7.703 tracks the provisions of Section 10811, and adds:

In the absence of an emergency or other unusual circumstances, the personal representative must obtain the court’s approval of the contingency fee agreement before the services are performed under it.

C. Are There Any Restrictions on a Trust Beneficiary Or an Estate Beneficiary Entering Into a Contingent Fee Agreement?

The Probate Code places no restrictions on a trust beneficiary entering into a contingent fee agreement. However, the trust instrument may well contain a spendthrift provision. The following is an example of a simple spendthrift clause from CEB’s Drafting California Revocable Trusts Section 19.13 (4th ed. 2008):

The interests of the beneficiaries in the income and principal of the trusts created by this document are not subject to voluntary or involuntary transfer.

The usual spendthrift provision provides that the beneficiary shall not anticipate his or her interest by way of assignment. An attempted assignment in violation of a spendthrift clause gives the assignee no rights in the property or against the trustee, and the latter may deliver the property to the beneficiary in accordance with the terms of the trust. But the purported assignment is treated as a contract to assign, between the beneficiary and assignee, giving the latter the usual remedies for breach.

Thus, while a trust beneficiary is free to enter into a contingent fee agreement, if there is a spendthrift clause, the trustee should ignore the assignment of a share of the recovery to the attorney. The trustee must distribute to the beneficiary in accordance with the terms of the trust. The attorney must then look to the beneficiary to honor the contingent fee contract by delivering the attorney’s share of the trust distribution to the attorney.

By contrast, the Probate Code places no restrictions upon an estate beneficiary entering into a contingent fee agreement. The beneficiary of an estate can sell or transfer his expectant interest for fair consideration.

D. Is the Probate Court Empowered to Review a Contingent Fee Arrangement Entered Into by a Trust Beneficiary or an Estate Beneficiary?

1. A Trust Beneficiary Entering Into a Contingent Fee Contract

There is no Probate Code provision that explicitly empowers the court to review a contingent fee agreement entered into by a trust beneficiary. As mentioned previously, Section 17200 is very broad and states explicitly that the matters as to which a court order can be sought include those listed in that section, but are not limited to those listed therein.

There are no reported decisions construing Section 17200 to empower the court to review a contingent fee agreement entered into by a trust beneficiary. Would the court find that such an agreement concerns the internal affairs of the trust such as to give the court jurisdiction pursuant to Section 17200? Perhaps, if the trustee were in doubt as to whether to honor an assignment made by a trust beneficiary to the beneficiary’s lawyer pursuant to a contingent fee agreement. Could a beneficiary use Section 17200 himself to file a petition challenging the agreement he entered into and seek relief from the Probate Court? In the absence of case law on this issue, the answer is unclear.

2. An Estate Beneficiary Entering Into a Contingent Fee Contract

By contrast, the probate court has explicit—and very broad—powers to review a contingent fee contract entered into by an estate beneficiary after the contract has been entered into but before a share of the estate is paid to the attorney under the said agreement. So, while Section 10811 provides for court review of a contingent fee arrangement before the personal representative enters into it, Section 11604 allows for an examination of such an agreement entered into by an estate beneficiary after the fact.

Section 11604 applies where distribution is to be made to (1) the transferee of a beneficiary; or (2) any person other than a beneficiary under an agreement, request, or instructions of a beneficiary or the attorney in fact of a beneficiary. Under subdivision (b), “[t]he court on its own motion, or on motion of the personal representative or other interested person or of the public administrator, may inquire into the circumstances surrounding the execution of, and the consideration for, the transfer, agreement, request, or instructions, and the amount of any fees, charges, or consideration paid or agreed to be paid by the beneficiary.”

Section 11604(c) empowers the court to refuse to order distribution, or to order distribution on any terms that the court deems just and equitable, if the court finds either of the following: (1) The fees, charges, or consideration paid or agreed to be paid by a beneficiary are grossly unreasonable or (2) the transfer, agreement, request or instructions were obtained by duress, fraud or undue influence.

When the client who has hired the lawyer on a contingent fee basis is the beneficiary of an estate, the fees, charges or consideration paid or agreed to be paid by a beneficiary, can be reviewed by the probate court under Section 11604. While the predecessor to Section 11604 (Section 1020.1) was originally enacted to protect beneficiaries from “grossly unreasonable” amounts charged by heir hunters, that section consistently has been held to apply more broadly to assignees and transferees generally.

The authority of the probate court, on its own motion, to inquire into the consideration paid for the assignment is permissive rather than mandatory. The statute gives discretion to the probate judge to inquire into the circumstances; it does not impose a duty to conduct a full inquiry on every assignment. An order under Section 11604 is appealable.

Notice of the hearing on a Section 11604 motion must be served on the beneficiary, on the transferee of the beneficiary, and on any person other than a beneficiary under an agreement, request or instructions of a beneficiary, or the attorney in fact of a beneficiary at least 15 days before the hearing in the manner provided by Code of Civil Procedure section 415.10 (personal delivery) or 415.30 (service by mail).

As to the reasonableness of consideration paid for an assignment of an interest in a probate estate, the probate judge is empowered to give much stricter scrutiny to the fairness of the consideration than would be the case under ordinary contract principles.

The probate court has jurisdiction to rescind and set aside an assignment of interests in a decedent’s estate. The court can also set aside and rescind a settlement agreement requiring such an assignment, or it can modify the agreement to the extent it finds the consideration grossly unreasonable. The Probate Court cannot, however, arbitrarily refuse to honor a perfectly proper assignment of an interest in an estate.

The scope of the probate court’s review under Section 11604 is broad. The court can even review an agreement that includes property that isoutside of the probate estate. In Estate of Stanley, consent to distribution between heirs embraced both property that was a part of the estate and property that was not a part of the estate. The probate court asserted jurisdiction to determine rights under contracts ancillary to its probate jurisdiction. The California Supreme Court affirmed, holding that the probate court had jurisdiction to determine the validity of the entire agreement.

In Estate of Brown, the court of appeal held that the probate court could alter the amount of the fee and the nature of the fee. More specifically, the Brown court held that under the statutory power to review the fairness of an assignment of heir’s interest, the court has both the power to reduce attorney’s fee arrangement in amount and the power to substitute a fixed fee for an indefinite contingent one.

The Brown court further explained that if the probate court finds that an assignee or attorney has already received from the heir as much as the court deems fair and equitable, the court has the power to deny any further distribution on the assignment. Moreover, if after examining all surrounding circumstances the court finds that the assignee or attorney has been overpaid in some collateral matter, it may legitimately deem that it would be fair and equitable for the heir to offset that overpayment against a probate assignment or fee and to deny further distribution out of probate estate. In short, the court can bring a halt to any further payments of attorneys’ fees.

In Burchell v. Strube, the California Supreme Court held that where the consideration for an assignment of interest in a decedent’s estate by an heir to an heir hunter or another is “grossly unreasonable,” the burden is on assignee to prove the real value of the consideration. Burchell seems to contemplate an initial determination of the nature of the fee, and if it is found to be grossly unreasonable, the case proceeds with the burden of proof borne by the assignee.

The Probate Court’s wide latitude under Section 11604 does have limits. The court has no jurisdiction to adjudicate a claim to distribution by an assignee or grantee of an heir under a conveyance made prior to the ancestor’s death.

In Estate of Boyd, the Court of Appeal held that while Section 11604 is intended to protect beneficiaries from unfair agreements, it is not intended to relieve beneficiaries of the effects of circumstances which changed after the agreement was entered into. In Boyd, the decedent’s will gave a parcel of real property to his nephew. After the decedent’s death, the nephew unsuccessfully tried to obtain an advance from the estate to care for his ill mother. The nephew was then introduced to a real estate broker who offered him $16,500 for the property. The nephew agreed on condition he immediately be paid $3,000. The nephew later challenged the agreement, arguing the consideration was insufficient because at the time of the hearing the property was worth over $51,000. The trial court found consideration was sufficient. The court of appeal affirmed, holding that the value of consideration for an estate assignment is properly determined as of the date the assignment was made.

The attorney expecting to be paid from an estate pursuant to an assignment from his or her client should consult local court rules for any requirement that the assignment be put before the court at the time a petition for distribution of the estate is filed. For example, Los Angeles County Local Rule 10.60 provides that such a petition must include an allegation concerning the specifics of the assignment or transfer, and requires that the assignment or other document of transfer be filed with the court. If there is no separate assignment, arguably the “document of transfer” could be the fee agreement itself. Under the Los Angeles rule, however, it would normally be preferable to use a separate assignment so that the fee agreement, which necessarily contains confidential attorney-client communications, need not be filed with the court.

The San Francisco local rules have also addressed the issue of assignments. San Francisco Superior Court Local Rule 14.79, parts D and E, require filing the original written assignment agreement with the court. Given that the San Francisco rule speaks only of the assignment, and not of a “document of transfer” as does the Los Angeles rule, the attorney might do well to obtain an assignment separate from the fee agreement.

E. Is an Assignment the Preferable Method for Securing Payment of the Attorney’s Fee, or Does a Lien Better Serve the Purpose?

An assignment holds the promise of direct payment from the party holding assets for distribution – a party such as a trustee or the personal representative of the estate. By contrast, if the lawyer is relying on a lien, the attorney will have to perfect or enforce his lien by judicial action.

Where, however, the assignment is one made by an estate beneficiary, local court rules may require submission of the assignment to the court. The submission of the assignment to the court might in turn prompt the Probate Court on its own motion to review the underlying fee agreement under Section 11604. Once the court does that, the possibility that the agreement will be altered comes into play, which argues against use of an assignment in the estate setting.

Moreover, as discussed above, it may be that a spendthrift clause will thwart any distribution from being made directly from the custodian of the funds to the attorney in payment of his fees.

One should review California Forms of Pleading and Practice, Attorney Practice Section 72.196 for a comprehensive discussion of contingent fee agreements see. For State Bar sample contingent fee agreement forms see sections 72.675 and 72.676 in California Forms of Pleading and Practice.

IV. Estate-Tax Deductibility of Attorneys’ Fees

If the litigation involves a contested inheritance from an estate or from a trust, and the decedent had a taxable estate, the beneficiary’s recovery could be enhanced, perhaps significantly, by deducting the attorney’s fee for federal estate tax purposes. This is true in any case, not solely in cases involving a contingent fee arrangement.

Administration expenses are deductible for federal estate tax purposes under IRC section 2053(a)(2). The related Treasury Regulations provide that, to be deductible, an administration expense must be incurred “in the administration of the decedent’s estate; that is, in the collection of assets, payment of debts, and distribution of property to the persons entitled to it.” Attorneys’ fees are specifically identified as a permissible administration expense.

The regulations provide that administration expenses are not deductible if they are “not essential to the to the proper settlement of the estate, but incurred for the individual benefit of the heirs, legatees, or devisees…” With respect to attorneys’ fees, the regulations state that fees incurred in litigation with respect to beneficiaries’ respective interests “are not deductible if the litigation is not essential to the proper settlement of the estate…” Stated positively, attorneys’ fees incurred in litigation necessary to the proper settlement of the estate are deductible.

Whether or not the attorneys’ fees will be deducible will turn on the nature of the dispute. In Pitner v. United States, a will leaving all but $100 of the estate to one beneficiary was contested by the decedent’s sister, the sole heir, and by the decedent’s nieces, based on an oral contract to make a will. Each of the potential beneficiaries employed her own attorney under separate fee agreements. The U.S. Court of Appeals for the 5th Circuit held that the fees were deductible even though the litigants were acting in their own self-interest: “[i]f the litigation in which the expenses were incurred facilitated the distribution of the property to the persons entitled to it then the expenses come within the statute.”

The court narrowly interpreted Treasury Regulation section 20.2053-3(c), which disallows a deduction for attorney fees incurred by beneficiaries in litigation as to their “respective interests.” The court held that the regulation refers to situations where “beneficiaries are suing to determine their share in the estate as against other beneficiaries, not as here, where parties have sued to have their interest in the estate in general… recognized.” Thus, the rule articulated by Pitner is that if the litigation raises the issue of who are beneficiaries of the estate, the attorneys’ fees are deductible; but if the litigation merely concerns how much each beneficiary is to receive, the fees are not deductible.

To be deductible, the attorneys’ fees need not be incurred in a winner-take-all context. Sussman v. United States involved a will disinheriting the decedent’s daughter. Her contest of the will resulted in a settlement that gave her half of the residuary estate. The settlement agreement provided that the attorneys’ fees of both the daughter and the executor were to be charged to the estate.

The fee was fixed and ordered by the Surrogate Court in New York. The Federal District Court determined that the fees were deductible for estate tax purpose. The fact that the fees were ultimately paid pursuant to court order seemed important to reaching the result upholding the deduction. The deduction was sustained even though the will contest settlement was in the nature of a compromise between the contestant and the defendants.

The Sussman court reasoned: “[I]f the test [of deductibility] is benefit to the estate, at best a loose if not illusory one, the test ought not to be incapable of embracing the idea that achieving a correct result is beneficial to the estate. … [T]he question in a contested will case is determination of the intention of the decedent and hence whoever prevails should be able to charge his fee to the estate.” The court concluded: “Wills that are so drafted or drafted in such circumstances that they are set aside without trial to the extent of half their dispositive effect must in the generality of instances provoke special classes of administration expense of which the legal cost of the contest to arrive at the right rule of distribution of the estate is one.”

This author has been involved in three taxable estates where attorney’s fees earned on a contingent fee basis were claimed as a deduction on an amended estate tax return. In each instance the deduction was allowed, and a refund resulted. Moreover, in each instance, the return contemplated a refund, and claimed a further deduction for the share of the refund to be paid as a contingent fee. The additional payment of fees, resulted in another deduction, another refund, another contingent fee and so the calculation continued until the refund and the contingent fee vanished to zero. In other words, in all instances, the IRS accepted the deduction on the amended return, made the refund, and further accepted that the refund resulted in further fees which were also deductible and in their turn resulted in further refunds and fees and so forth.

V. Conclusion

The areas of estate and trust litigation are particularly well suited to representation on this basis because both areas involve an identifiable source for payment of the fees – the estate, or the trust upon ultimate distribution, which money or property is held safe by a trustee or a personal representative pending resolution of the litigation. The contingent fee presents attorneys with a way to provide legal services to the public during a time when, for many, financial constraints are an obstacle to accessing the legal system and hence an obstacle to clients in protecting and asserting their rights.

*San Francisco, California.