TRUST PROVISION CANNOT PROTECT FORMER TRUSTEE’S ATTORNEY-CLIENT COMMUNICATIONS FROM DISCLOSURE TO SUCCESSOR TRUSTEE

In Morgan v. Superior Court, 23 Cal. App. 5th 1026, the Court of Appeal denied Petitioner Thomas Morgan’s petition for writ of mandate and/or prohibition from the lower court’s formal order and minute order on the grounds that the orders improperly required him to turn over documents protected by the attorney-client privilege.  The case turned on the validity of a provision in the trust that expressly allowed Morgan to shield his attorney-client communications from the successor trustee.  The Court held the provision was void as a matter of public policy.

Thomas Morgan, one of Beverly Morgan’s three adult children, was appointed the successor trustee of the Beverly C. Morgan Family Trust (the Trust) upon the death of his mother, Beverly, who was the initial trustee of the Trust.  Two years into Thomas’s tenure as trustee, Nancy Morgan Shurtleff, Thomas’s sister, moved the Court to suspend Thomas as trustee, based on his alleged misuse of his powers, alleging Thomas spent Trust funds on his personal attorneys, engaged in self-dealing and caused businesses owned by the Trust to make undocumented, interest-free loans totaling millions of dollars.  The Court initially denied Nancy’s motion, conditioned on, among other things, Thomas filing an accounting of all Trust assets used to pay his personal litigation expenses and of all loans made by or to the Trust.

Thomas filed the accounting but the Court found it grossly inadequate and, sua sponte, suspended Thomas as trustee, appointed new interim co-trustees, and ordered Thomas to cooperate with the independent trustees and to deliver communications between Thomas and any person or entity on behalf of the Trust, as well as all documents and records concerning the Trust, its transactions and assets. Thomas refused to turn over what he and his attorney described as “attorney-client communications or billing invoices,” relying on language in the Trust which expressly allowed the former trustee to withhold from a successor trustee all of his or her communications with legal counsel and statutory and case law.

The Appellate Court denied Thomas’s petition and held that such a provision is unenforceable and void as a matter of public policy as it would permit the former trustee to conceal possible evidence of intentional or grossly negligent or recklessly indifferent breach of the trustee’s duties.  A trust may thus not allow a former trustee to withhold from a successor trustee all communications between that former trustee and the trust’s legal counsel, since the attorney-client privilege vests in the office of the trustee, not in any particular person.

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IRS Takes Aim at State Tax Credit Proposed by Certain High Tax States

As many know, President Trump’s recent tax legislation, entitled the Tax Cuts & Jobs Act, included as one of its provisions a $10,000.00 total limitation on the amount of the itemized deduction for state and local income and property taxes, starting in 2018.  Some high tax states have passed legislation establishing state income tax credits for gifts to certain charitable organizations and state governmental units.  The effect on an individual’s federal income tax liability could be a fully deductible charitable contribution rather than a deduction limited to $10,000.00.  Bills in the California Senate [SB 227] and Assembly [AB 2217] reportedly propose a similar change in the state’s tax law but have not yet advanced to the Governor.

As many likely suspected would happen though, last week the Treasury Department issued Notice 2018-54 communicating its intent to issue proposed regulations addressing the federal income tax treatment of charitable gifts made by taxpayers for which they receive a credit against their state and local tax.  Based on this recent action it now appears clear the Treasury Department views these arrangements as an end-run around the new limitation on state/local income tax deduction, and intends to limit the tax benefit available from any such contributions.

 

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Couple Could Bring Action for Elder Abuse Involving Misuse of Funds Held for Their Children in Trust

The First Appellate District Court recently determined that even though funds deposited into a Trust were “owned” by the Trust, the elderly couple who funded the Trust could sue under the Elder Abuse and Dependent Adult Civil Protection Act for mismanagement of those funds under several provisions of the Act.  Mahan v. Charles W. Chan Ins. Agency, Inc., 12 Cal. App. 5th 442 (Cal. App. 1st Dist. June 2, 2017)

Frederick Mahan, 86, and his 79-year-old wife Martha purchased two life insurance policies in the mid-1990s totaling $1 million and naming their children as beneficiaries under a revocable living Trust with their daughter Maureen as Trustee.  The Mahans also sufficiently funded the Trust to cover the $14,000 annual premium costs.  Some 20 years later, in 2012, Martha was diagnosed with Alzheimer’s and gave power of attorney to Fred to handle their affairs.  Soon thereafter, Fred began to exhibit signs of confusion and cognitive decline.  During this time, defendants helped Fred obtain casualty and earthquake insurance on the home and subsequently offered to review Fred’s life insurance plan.  When defendants discovered that the two insurance policies had accumulated a substantial cash value, they told Fred that he could use the cash value to obtain additional coverage while keeping the same annual premium cost.  They then dealt entirely with Fred, discussed none of the changes to the Trust with Maureen, and only provided her with signature pages or blank forms containing Fred’s signature as a sign of his approval.

Defendants ultimately carried out an elaborate scheme involving the surrender of one of the policies and the replacement of the other with a policy offering less coverage at a massively increased cost.  The premiums totaled $800,000, forcing the Mahans to take cash from the Trust to pay them and in effect consuming most of their intended $1 million gift to their children, including $100,000 in commissions paid to the defendants.

The Mahans and Maureen sued for negligence, breach of fiduciary duty, fraud, violation of Business and Professions Code section 17200 and for damages under the Elder Abuse Act.  Defendants countered with an attack that the Trust owned the life insurance policies and all commissions paid to them were by the Trust.  Whatever money the Mahans paid into the Trust was done voluntarily for the benefit of their children and the only proper plaintiff was the Trust, which did not have an Elder Abuse Act claim “because [it] is not 65 years old.”   The trial court ruled that the Mahans had not alleged any “deprivation of property” owned by them within the meaning of Section 15610.30 of the Elder Abuse Act since the Trust was the only party that suffered harm and dismissed the Mahans’ claims in favor of the defendants.  The Mahans appealed.

Based upon the belief that “the primary issue here is whether the Mahans have stated legally cognizable harm to themselves,” the Appellate Court reviewed the statutory text of the Elder Abuse Act and especially its provisions regarding deprivation of an elder’s “property” taken for a “wrongful use” or with intent to defraud and committed by “undue influence.”  No one disputed that the Mahans were elders, but defendants contended that they were not deprived of any “property” because the Trust owned whatever was allegedly taken, and thus defendants committed no statutory violation because they did not take the “property of an elder” to obtain the commissions they were allegedly paid.  The Appellate Court determined that the Mahans had properly alleged that they had been deprived of their rights through (1) damage to their estate plan and (2) loss of money they felt compelled to transfer to the Trust to cover the lost insurance proceed funds for their children and to cover the defendants’ commissions.  In determining that the Mahans had in fact suffered a loss to their estate plan, the Court stated that because they had had to reach into their pockets and sell assets to provide cash to the Trust– something they had never intended to have to do — they had been deprived of “property” when they were separated from their money.

In assessing the issue of “wrongful use” the Court found this case to be very similar to the issues in Zimmer v. Nawabi, 566 F. Supp. 2d 1025 (E.D. Cal. May 13, 2008) involving insurance agents who were held liable for financial elder abuse for what essentially amounted to “churning” where brokers make excessive stock trades primarily to generate commissions.  Just as in Zimmer, defendants here wrongfully obtained thousands of dollars in commissions through their false statements about the terms of the Mahans’ refinance, which defendants knew were less favorable than their previous insurance policies.

Finally, the Appellate Court reviewed the issue of “undue influence.”  Its determination that there was undue influence was based upon the defendants’ alleged expertise as insurance professionals who, upon finding two aged individuals in a state of cognitive decline, had used their influence to carry out an elaborate scheme to deprive the Mahans of their money in a manner completely inconsistent with their estate planning goals.  The Court thus found in favor of the Mahans, reversing the lower court’s ruling and remanding the case for further proceedings consistent with its opinion.

 

 

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Child Lacked Standing to Bring an Elder Abuse Action on the Mother’s Behalf

In Tepper v. Wilkins (2017) 10 Cal.App.5th 1198, the Court of Appeal affirmed the trial court’s order sustaining a demurrer, without leave to amend, and dismissing the first amended complaint of Belinda Wilkins Tepper alleging elder abuse. Tepper sued her three siblings on behalf of her 88-year old mother, Eileen Wilkins, claiming her siblings, while acting as co-trustees of Eileen’s revocable living trust, were misusing the trust’s assets and committing financial abuse of an elder or dependent adult.  Tepper’s siblings demurred, asserting Tepper had no standing to sue on Eileen’s behalf, and Eileen, separately represented by counsel, joined the demurrer.

Under the Elder Abuse and Dependent Adult Civil Procedure Act an action must be prosecuted by the real party in interest or, while the elder is still living, by a conservator or a trustee of the elder, an attorney-in-fact who acts within the authority of a power of attorney, a person appointed as a guardian ad litem, or other person legally authorized to seek the relief.  Here, as set forth affirmatively in her amended complaint and on appeal, Tepper stated that she did not seek appointment as her mother’s conservator or guardian ad litem.  Further, she did not have her mother’s consent to pursue the action on her behalf through a power of appointment.

On appeal, Tepper contended that section 48 of the Probate Code afforded her standing as Eileen’s child to bring the elder abuse action on behalf of Eileen.  However, simply being Eileen’s child is not enough as section 48 defines an “interested person” by his or her relationship to a “decedent,” i.e., as a child with an interest in a trust estate or estate of the decedent that may be affected by the proceeding.  Tepper never alleged she was named as a beneficiary in Eileen’s revocable trust, and even if she was one, assets held in a revocable trust belong to the settlor who may dispose of those assets at will, effectively eliminating a beneficiary’s interest altogether.  (See, Babbitt v. Superior Court (2016) 246 Cal.App.4th 1135, 1145.)

The Court held that the cause of action for elder financial abuse belonged to the mother as the real party in interest, and found that since Tepper had not been appointed her mother’s guardian, she had no standing to bring suit in the mother’s name or on her claims.

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Under LPS Act, Court Must Either Obtain Waiver of Jury Trial or Provide Jury Trial, Unless Proposed Conservatee Lacks Capacity to Waive

A recent case clarifies the rights of a proposed conservatee in proceedings held pursuant to the Lanterman–Petris–Short (LPS) Act.

In Conservatorship of Heather W. (2016) 245 Cal.App.4th 378, the Public Guardian of San Luis Obispo County had been appointed as conservator to Heather W. in 2013 under the LPS Act (Cal. Welf. & Inst. Code, § 5000 et seq.) on the grounds that she was gravely disabled due to a mental disorder. In 2014, the Public Guardian petitioned to be reappointed as Heather W.’s conservator on the same grounds. Heather W.’s counsel did not request a jury trial, and while the court advised Heather W. of her right to testify at trial, the court did not advise her that she had a right to a jury trial. The trial court set a date for a bench trial.

At trial, Dr. Rose Drago, a psychiatrist, testified that Heather W. suffered from schizoaffective disorder, which caused psychosis and mood swings, and that she had been hospitalized several times because she was gravely disabled and a danger to others. Dr. Drago also testified that Heather W. had a history of refusing to take her medication. At one point, while living in a homeless shelter, she acted “bizarrely, pacing, responding to hallucinations.” Dr. Drago concluded that Heather W. should be in a locked facility until she could become stabilized through treatment. Conservatorship of Heather W., 245 Cal.App.4th at 381–382.

Specifically citing Heather W.’s high number of hospitalizations, the trial court found Heather W. to be gravely disabled. The court appointed the Public Guardian as her conservator with the power to detain and care for her and require placement “in a suitable institution, facility, home or hospital.” Id. at 382.

The Court of Appeal reversed, resting its decision on a wealth of case law from no less than the California Supreme Court. For example, the Court cited Conservatorship of Roulet (1979) 23 Cal.3d 219, 235, in which the California Supreme Court held, “The due process clause of the California Constitution requires that proof beyond a reasonable doubt and a unanimous jury verdict be applied to conservatorship proceedings under the LPS Act.” Id.

The Court also relied on analogous California Supreme Court decisions from the field of criminal law. For example, in People v. Blackburn (2015) 61 Cal.4th 1113, 1130, the California Supreme Court held that in a mentally disordered offender (MDO) commitment proceeding, “the decision to waive a jury trial belongs to the defendant in the first instance, and the trial court must elicit the waiver decision from the defendant on the record in a court proceeding.” Likewise, in People v. Tran (2015) 61, Cal.4th 1160, 1167, the California Supreme Court held that for extension of hospital commitments for defendants who plead not guilty by reason of insanity (NGI), the NGI defendant has a right to a jury trial, and the defendant’s waiver of that right can be made by his or her counsel only if the defendant “lacks the capacity to make a knowing and voluntary waiver.” Id. at 383.

The Court of Appeal noted that the policy behind all commitment proceedings is “protecting the public and treating severely mentally ill persons.” Id. But in the LPS context in particular, the Court (quoting Conservatorship of Roulet, cited above) noted the importance of carefully balancing the conservatee’s liberty against the public safety, because “the gravely disabled person for whom a conservatorship has been established faces the loss of many other liberties in addition to the loss of his or her freedom from physical restraint. Indeed, a conservatee may be subjected to greater control of his or her life than one convicted of a crime. Consequently, the right to a jury trial to contest an LPS conservatorship is a right guaranteed by the California Constitution.” Id. (Internal citations and quotation marks omitted. Emphasis added.) Citing both Blackburn and Conservatorship of Kevin A. (2015) 240 Cal.App.4th 1241, 1252, the Court noted that the “potentially transitory and treatable nature of mental illness and the potentially limited areas of functioning impaired by such illness preclude any categorical inference that a [conservatorship defendant]…cannot competently decide whether to waive a jury trial.” Id. at 384.

Finally, the Court of Appeal cited Cal. Prob. Code § 1828, which provides in relevant part that “before the establishment of a conservatorship of the person or estate, or both, the court shall inform the proposed conservatee of all of the following․.. [p] The proposed conservatee has the right to oppose the proceeding, to have the matter of the establishment of the conservatorship tried by jury.” Cal. Prob. Code § 1828(a)(6). (Emphasis added.) The Court noted, “Here the trial judge did not give such an advisement to Heather W. and obtain her personal waiver of that right.” Id. at 384.

The Court of Appeal easily rejected the Public Guardian’s reliance on Conservatorship of Mary K. (1991) 234 Cal.App.3d 265 for the simple proposition that “counsel may make the waiver for the proposed conservatee.” That case not only was decided before Blackburn and Tran, but was distinguishable because in Mary K., the client had told her counsel that she wanted to waive a jury trial. In contrast, Heather W. had not even been told she had a right to a jury trial at all. Likewise, the Court of Appeal rejected the Public Guardian’s argument that any error was harmless, citing Tran, which held that “[an error] resulting in a complete denial of the defendant’s right to a jury trial on the entire cause in a commitment proceeding…is not susceptible to ordinary harmless error analysis and automatically requires reversal.” Id. at 385.

The Court of Appeal summed up its holding as follows: “In conservatorship proceedings pursuant to the LPS Act, the trial court must obtain a personal waiver of a jury trial from the conservatee, even when the conservatee expresses no preference for a jury trial. Absent such a waiver, the court must accord the conservatee a jury trial unless the court finds the conservatee lacks the capacity to make such a decision.” Id. at 381. The Court of Appeal did not discuss how a conservatee’s attorney might go about deciding whether to waive a jury trial for a client who lacks capacity to waive. Presumably, counsel would rely on the usual strategic concerns that lawyers consider when gauging whether their clients would get the best result from a jury trial or a bench trial.

The Court remanded the case, ordering the trial court to determine “whether Heather W. lacked the capacity to make a knowing and voluntary waiver at the time of counsel’s waiver.” The trial court had authority to reinstate its order only if it found “substantial evidence that [she] lacked the capacity to make such a waiver.” Id. at 385.

 

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A CLEARLY WORDED FORFEITURE CLAUSE IN A RESIDENTIAL LEASE MAY NOT BE ENFORCEABLE

An important question of law — whether a tenant’s breach of a residential rental contract, regardless of the breach’s materiality or impact on the landlord, justifies the landlord forfeiting the agreement and terminating tenancy – was recently decided by the Court of Appeal for the Second District of California, in Boston LLC v. Juarez, 2016 Cal. App. LEXIS 146 (Cal. App. 2d Dist. Feb. 25, 2016.

In that matter, Boston LLC had rented an apartment to Juan Juarez subject to the Los Angeles Rent Stabilization Ordinance (LARSO). The rental agreement contained a forfeiture clause for any failure of compliance or performance by Juarez and a provision which required Juarez to obtain insurance coverage for personal injury or property damage.  After having failed to obtain this insurance for 15 years, Boston gave Juarez a three-day notice to perform or quit.  Boston served its three-day notice to quit on Friday, February 14th, the beginning of a three-day weekend for President’s Day, a legal holiday, which was on Monday, February 17th.  Juarez obtained insurance on February 21st, shortly after the expiration of the three-day period.

Boston then sued Juarez for unlawful detainer in the Los Angeles Superior Court, contending that the forfeiture clause allowed it to terminate Juarez’s tenancy for any breach, regardless of the breach’s materiality.  Juarez argued, among other things, that the law requires a material breach to justify forfeiture and that he should be allowed to present evidence that his breach was immaterial.  The court agreed with Boston that the forfeiture clause made any breach, regardless of materiality, grounds for termination of tenancy.  The parties stipulated to a bench trial and the court ruled that Juarez’s failure to obtain insurance within the three-day notice period constituted a breach of the lease and thus Boston could forfeit the lease.  The trial court did not make a determination about the breach’s materiality.  Juarez appealed to the appellate division of the Superior Court, but it affirmed.

Juarez then appealed to the Appellate Court, arguing that a tenant’s breach must be material to justify a landlord’s forfeiture of a rental agreement.  The court agreed with Juarez, holding that a tenant’s breach must be material to justify forfeiture. In this case, the Court determined that, because the intended purpose of the insurance coverage was to protect the interests of Juarez, the tenant, not Boston LLC, the landlord, Juarez’s failure to obtain the coverage could not have harmed Boston and accordingly was not a material breach constituting grounds for forfeiture.

The Court did not address whether there are any circumstances under which a landlord can seek forfeiture of a rental agreement based on the tenant’s failure to obtain insurance.  Perhaps this is because this case is limited to a residential lease agreement subject to the LARSO, which imposes certain limitations and restrictions landlords are not otherwise subject to under usual freedom to contract purposes.  (L. A. Mun. Code. § 151.01).  However, in a commercial situation where a tenant fails to obtain insurance in compliance with the terms of its lease, the lack of such insurance could be problematic in the event of a loss which prevents the tenant from continuing its business and meeting its obligation to pay rent which could seemingly be construed to be a material and/or substantial breach.

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CALIFORNIA LEGISLATURE AUTHORIZES REVOCABLE TRANSFER UPON DEATH DEED

On September 23, 2015, Governor Brown signed AB 139, a bill introduced by Assemblyman Mike Gatto, which allows Californians to take advantage of a new, low-cost way to avoid probate on residential real property – the revocable transfer on death deed (RTDD).  With AB 139, codified at California Probate Code section 5600, et seq., California has joined more        than 20 other states offering this tool, for at least five years – since unless it is extended, the new law will expire January 1, 2021.

An RTDD basically allows a transferor, who has the capacity to contract, to deed his or her property (limited to a condominium, property comprised of one to four residential units, or 40 acres or less of agricultural land improved with a single-family residence) to a chosen beneficiary upon death, bypassing the often costly, time-consuming process of probate. The RTDD would work like the payable-upon-death forms already used to pass on assets like insurance policies, bank and brokerage accounts or IRAs, without going through probate.

The RTDD must be substantially similar to the statutory form described in Probate Code section 5642, subdivisions. (a) and (b), and must be signed, dated, notarized, and recorded within sixty (60) days of signing to be valid.  If recorded and not revoked, the RTDD will be effective upon death to transfer the property to the named beneficiary.  Inasmuch as this would represent a revocable transfer, the transferor can always change his or her mind and either name a new beneficiary or simply revoke the prior transfer.  The property transferred via the RTDD would remain in the transferor’s estate, including for Medi-Cal eligibility and for the transferor’s creditors.  Because the transfer does not occur until the grantor’s death, there is no completed gift for purposes of gift tax.  And there is no documentary transfer tax payable or Proposition 13 reassessment at the time of recording the new RTDD.

While advocated as a convenient and inexpensive way for a non-probate transfer of a residence, there are concerns that the availability of this simple transfer deed raises concerns regarding the risk of fraud, incompetency, and duress in the making of RTDDs by elderly and vulnerable users. Also, since the RTDD option is only effective for transfers of residential real estate and does not include other types of real property and other assets that would still be subject to probate, such as non-residential real property (industrial, large ag, etc.), cars and personal property like jewelry, many commentators find the device too limited in scope and flexibility.  Finally, if the property is held as community property with right of survivorship and the transferor is the first joint tenant or spouse to die, the RTDD is ineffective.

RTDDs may also create difficulties for title insurers. Unlike probate, which transfers the decedent’s real property only after creditors have been paid and there is a clear determination of who owns the property, RTDDs convey real estate immediately upon death—even though claims against the property may subsequently be filed by the decedent’s creditors. Therefore, until the applicable claims period has expired, it is difficult for a company to issue title insurance on the conveyed property.  According to a recent newspaper article, “At least one national title insurance company’s underwriting policy requires an in-depth factual investigation and senior underwriting review and approval to issue a new owner’s policy of title insurance following the death of a revocable TOD deed grantor.”  (Barnes, Usefulness of TOD Deeds Uncertain, S. F. Daily Journal (January 5, 2016).)  Once attorneys, creditors and title companies become more familiar with RTDDs, any wariness about them may lessen, but until then, we can only wait and see.

While the new RTDD holds much promise as a way of simplifying transfer of a home upon the owners’ death, it is not suitable for everyone, and may end up being a fairly limited means of assuring an intended post-death conveyance.  If a grantor wants to leave property in trust, or wants to plan to reduce estate taxes, or wants to make sure that a trusted person can maintain or sell the property during the grantor’s incapacity, an RTDD is not the proper means of doing so and, at the end of the day, is not a substitute for a complete Estate Plan – a Will, Trust, Advance Health Care Directive and/or Power of Attorney.  Before deciding upon the use of an RTDD, it is strongly recommended that individuals seek professional guidance from an elder law or estate planning attorney.

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