"KAUFMAN v. JP MORGAN CHASE BANK, N.A.
GLORYA KAUFMAN, Plaintiff and Appellant,v.JP MORGAN CHASE BANK, N.A., as Trustee, etc., Defendant and Respondent.
No. B218174.
Court of Appeals of California, Second District, Division Two.
Filed October 28, 2010.
Liner Grode Stein Yankelevitz Sunshine Regenstreif & Taylor, Edward A. Klein, Miles J. Feldman, and Daniel R. Gutenplan; Greines, Martin, Stein & Richland, Kent L. Richland, Robin Meadow, and Barbara W. Ravitz for Plaintiff and Appellant.
Proskauer Rose, Andrew M. Katzenstein, Michael A. Firestein, and Keith Butler for Defendant and Respondent.
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NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
CHAVEZ, J.
Plaintiff and appellant Glorya Kaufman (plaintiff) appeals the orders denying her applications under Probate Code section 213201 for a judicial declaration that her proposed petitions to remove defendant and respondent J.P. Morgan Chase Bank, N.A. (defendant) as the trustee of two trusts created for her benefit, and to surcharge defendant for alleged breaches of fiduciary duty, would not violate the no contest provisions of the trusts. In her proposed petitions, plaintiff claimed that defendant breached its fiduciary duty and acted with gross negligence and reckless indifference by failing to divest the trusts of unreasonably large amounts of stock in American International Group, Inc. (AIG).
Defendant opposed the applications, arguing that plaintiff's proposed petitions constituted a contest because they sought to invalidate a trust provision that authorized defendant to retain the stock of Kaufman & Broad, Inc. (KBI) or its "successor in interest" and that immunized defendant from liability for doing so. Defendant maintained that AIG was KBI's successor in interest.
The trial court denied plaintiff's applications on the ground that they would require a determination on the merits of plaintiff's proposed petitions, specifically, whether AIG was KBI's successor in interest. We agree that a judicial determination of whether the proposed petitions would violate the no contest clause would also require a determination on the merits of the claims asserted in those petitions. We therefore affirm the trial court's orders.
BACKGROUND
Plaintiff is a beneficiary of a survivor trust, and an irrevocable marital trust,2 both of which were created by the Donald B. Kaufman Revocable Trust (the Kaufman Trust) in 1982. Donald Kaufman, plaintiff's husband and a co-founder of KBI, died in 1983. Defendant is the corporate trustee authorized to oversee and administer the assets of the trusts.3
In March 2009, plaintiff filed two applications under section 21320 for a determination that proposed petitions to remove and surcharge the trustees would not constitute a contest of the trusts. The proposed petitions alleged that the trustees breached fiduciary duties owed to plaintiff "due to their failure to monitor and timely sell AIG stock" as it declined in value. Plaintiff's applications sought a declaration that the proposed petitions would not violate the following no contest provision in the Kaufman Trust:
"If any beneficiary of any trust hereunder or under the Will of the Grantor shall, alone or in conjunction with any other person or persons, contest the validity of any such trust or attack or seek to impair or invalidate any of its provisions, or conspire with or voluntarily assist anyone attempting to do any of these things, then the right of such person to take any interest given to him by such trust shall be determined as if such person had predeceased the execution of this instrument."
Defendant opposed plaintiff's applications, arguing that the proposed petitions violated the no contest provision by seeking to attack, impair, and invalidate article IV, paragraph A(4) of the Kaufman Trust, which states:
"In particular, the Trustee is hereby authorized to retain all shares of the capital stock of KAUFMAN & BROAD, INC., or its successor in interest, and to acquire additional shares notwithstanding the fact that such shares may pay no dividends from time to time, without regard to the normal principles of diversification applicable to the Trustee's investments. The Trustee shall not be liable to any beneficiary of any trust created under this instrument or to any other person for losses resulting from retaining any of said shares or the shares of such successor in interest."
Defendant argued that AIG is a successor in interest to KBI and that paragraph A(4) of the Kaufman Trust shielded it from liability for losses resulting from retaining the AIG shares. In support of this argument, defendant submitted a two-page explanation of the corporation history of KBI, claiming that it demonstrated that AIG is KBI's current successor in interest. Defendant also noted that plaintiff's proposed petitions made no allegations that defendant acted with gross negligence or reckless indifference, and that absent such allegations, the proposed petitions conflicted with paragraph A(4) of the Kaufman Trust.
In response, plaintiff filed a supplemental application that withdrew the original proposed petitions and substituted two new petitions.
The new petitions included allegations of gross negligence and reckless indifference in addition to a breach of fiduciary duty claim. Defendant responded to the new allegations raised in the substituted petitions by arguing that a decision on plaintiff's applications would require a determination on the merits of the proposed petitions, and that section 21320 prohibits such a merits determination. Plaintiff filed objections, including evidentiary objections, to defendant's response.
A hearing on the matter was held on May 29, 2009, and the trial court took the matter under submission. On July 9, 2009, the trial court issued orders denying plaintiff's section 21320 applications on the ground that a decision on the applications would require a determination of whether AIG is KBI's successor in interest.4 This appeal followed.
DISCUSSION
I. Applicable Law and Standard of Review
A. Contests and No Contest Clauses
The Probate Code defines a contest as "any action identified in a `no contest clause' as a violation of the clause." (§ 21300, subd. (a).) The term includes both direct and indirect contests. (Ibid.) A direct contest is a pleading "alleging the invalidity of an instrument or one or more of its terms based on" certain specified grounds, such as undue influence, fraud, or forgery. (§ 21300, subd. (b).) An indirect contest is a pleading "that indirectly challenges the validity of an instrument or one or more of its terms based on any other ground." (§ 21300, subd. (c).) "[U]nder the statute and the applicable common law, an indirect contest is one that attacks the validity of an instrument by seeking relief inconsistent with its terms." (Johnson v. Greenelsh (2009) 47 Cal.4th 598, 605, fn. omitted.)
A no contest clause is "a provision in an otherwise valid instrument that, if enforced, would penalize a beneficiary if the beneficiary files a contest with the court." (§ 21300, subd. (d).) The purpose of a no contest clause is to discourage contests by imposing a penalty of forfeiture against beneficiaries who challenge the will or trust. (Estate of Kaila (2001) 94 Cal.App.4th 1122, 1128 (Kaila).)
With respect to the interpretation and enforcement of no contest clauses, conflicting policies apply. "On the one hand, they are favored, since they discourage litigation and give effect to the testator's intent. [Citations.] On the other hand, no-contest clauses are disfavored because they work [as] a forfeiture. [Citation.] Resolution of these competing policies requires no-contest clauses be strictly construed and not extended beyond `what was plainly the testator's intent.' [Citation.]
However, a court may not rewrite a will so as to exempt contests or legal proceedings from the scope of the no-contest clause which would frustrate the testator's purpose as expressed in his or her will. [Citation.] [¶] Whether there has been a `contest' within the meaning of a particular no-contest clause depends upon the circumstances of the particular case and the language used. [Citation.]" (Estate of Watson (1986) 177 Cal.App.3d 569, 572.)
B. The safe harbor provision of section 21320
A beneficiary seeking to institute legal proceedings concerning a will or trust containing a no contest clause may seek a judicial determination whether the proposed legal challenge would be a contest. Section 21320 provides a procedure for obtaining declaratory relief as to whether a proposed action would violate the no contest provision of a will or trust. The statute provides in relevant part: "If an instrument containing a no contest clause is or has become irrevocable, a beneficiary may apply to the court for a determination of whether a particular motion, petition, or other act by the beneficiary . . . would be a contest within the terms of the no contest clause." (§ 21320, subd. (a).)
"`[S]ection 21320 provides . . . a "safe harbor" for beneficiaries who seek an advance judicial determination of whether a proposed legal challenge would be a contest [under a particular no contest clause.]' [Citation.] If a court determines that a particular proposed action would constitute a contest, the beneficiary will then be able to make an informed decision whether to pursue the contest and forfeit his or her rights under a will or to forgo that contest and accede to the will's provisions. [Citation.]" (Kaila, supra, 94 Cal.App.4th at p. 1130.)
C. Relationship between a section 21320 application and the merits of a proposed action
A trial court ruling on whether a proposed action is entitled to the safe harbor protection afforded by section 21320 may not consider the merits of the proposed action itself. The statute provides: "
A determination under this section of whether a proposed motion, petition, or other act by the beneficiary violates a no contest clause may not be made if a determination on the merits of the motion, petition, or other act by the beneficiary is required." (§ 21320, subd. (c).) This prohibition exists because "the beneficiary is not entitled to two determinations of the merits of the proposed action.
If the merits of the proposed action are determined in the section 21320 proceeding, the petitioner is not entitled to disregard that determination and later decide whether to assert the proposed action; the proposed action will already have been asserted and its merits determined in the section 21320 proceeding." (Kaila, supra, 94 Cal.App.4th at p. 1136.) "This makes sense.
Otherwise, the summary procedure [provided by section 21320] could be used to allow the very form of challenge and protracted litigation the [trustor] sought to prevent." (Estate of Ferber (1998) 66 Cal.App.4th 244, 251.) "If the court must determine the merits of the proposed action the section 21320 petition itself is not entitled to a safe harbor and the determination on the merits of the proposed action may, or may not, result in a violation of the no contest clause." (Kaila, at p. 1136.)
D. Standard of Review
In reviewing the trial court's ruling on plaintiff's application for a safe harbor determination under section 21320, we apply a de novo standard of review. (Betts v. City National Bank (2007) 156 Cal.App.4th 222, 231.)
II. Plaintiff's section 21320 application would require a determination on the merits of her proposed petitions
We agree with the trial court's conclusion that a ruling on plaintiff's section 21320 applications would require a determination as to whether AIG is the successor in interest to KBI. Because that same determination is necessary in order to adjudicate the merits of plaintiff's proposed petitions, the applications were properly denied under section 21320, subdivision (c).
A. Whether the proposed petitions constitute a contest depends on whether AIG is KBI's successor in interest
Determining whether plaintiff's proposed petitions violate the Kaufman Trust's no contest provision requires a determination as to whether AIG is the "successor in interest" to KBI. This is because paragraph A(4) of the Kaufman Trust immunizes defendant from liability for losses resulting from its retention of the capital stock of KBI or its "successor in interest." If AIG is KBI's successor in interest, then paragraph A(4) shields defendant from liability for losses resulting from its retention of AIG stock, and plaintiff's proposed petition to surcharge defendant for such losses would seek "relief inconsistent" with the terms of paragraph A(4). (Johnson v. Greenelsh, supra, 47 Cal.4th at p. 605.) Under those circumstances, plaintiff's proposed petitions would constitute a contest. (Ibid.)
B. Whether plaintiff can surcharge defendant for losses resulting from AIG stock depends on whether AIG is KBI's successor in interest.
Whether AIG is KBI's successor in interest is also the central issue that must be determined in order to adjudicate the merits of plaintiff's proposed petitions. Plaintiff's petitions seek to remove defendant as trustee because it retained too much AIG stock and to surcharge defendant for resulting investment losses.
Paragraph A(4) of the Kaufman Trust immunizes defendant from liability for such losses if AIG is KBI's successor in interest. Plaintiff concedes that she cannot surcharge defendant for such losses if AIG is KBI's successor.
Plaintiff seeks to avoid this result by arguing that a finding as to whether AIG is KBI's successor in interest is not a "determination of the merits" of her proposed petitions within the meaning of section 21320, subdivision (c).5 She maintains that the merits of her proposed petitions are more narrowly focused on defendant's alleged misconduct, and not on whether AIG is the successor to KBI. The conduct at issue, however, is defendant's retention of AIG stock, and that conduct may be authorized by paragraph A(4) of the Kaufman Trust.
Whether defendant can be held liable for retaining the AIG shares under any theory depends on whether paragraph A(4) shields defendant from such liability. That determination in turn depends on whether AIG is the successor in interest to KBI. The two issues are inextricably linked.
III. Plaintiff's proposed petitions seek more than an interpretation of the trust language
Plaintiff argues that her proposed petitions do not constitute a contest because they seek only an interpretation of the trust language.
It is true that an action brought to construe a trust document is not a contest because the moving party does not by such means seek to set aside or annul the document, but to ascertain the true meaning of the testator. (Graham v. Lenzi (1995) 37 Cal.App.4th 248, 258; Estate of Kruse (1970) 7 Cal.App.3d 471, 476.)
To the extent that plaintiff's claim to surcharge defendant for losses resulting from the AIG stock can be considered a request to interpret paragraph A(4) of the Kaufman Trust, the interpretation plaintiff seeks requires a determination on the merits of her claim. As discussed, it is not possible to determine whether or not paragraph A(4) shields defendant from liability in this case without also deciding whether AIG is KBI's successor in interest.
IV. Plaintiff's public policy issues cannot be resolved in a section 21320 proceeding
Plaintiff contends the trial court should have ruled on her applications because the relief sought in her proposed petitions — removal of the trustees and surcharging the trustees — cannot, as a matter of public policy, violate the trusts' no contest clause.
If a beneficiary argues that a proposed action based on public policy grounds would not violate a no contest clause, "and that determination can be made as a matter of law without reference to any factual matters, the determination may be made in a section 21320 proceeding." (Estate of Ferber, supra, 66 Cal.App.4th at p. 251.) In contrast, if the proposed public policy challenge requires the evaluation of factual issues, a safe harbor determination under section 21320 is not available.
Those factual issues may not be resolved in a section 21320 proceeding because such a proceeding may not address the merits of the proposed action. (Ibid.)
Plaintiff's proposed public policy challenge cannot be resolved as a matter of law. Her proposed actions to remove defendant as trustee and to surcharge defendant for breach of duty requires evaluation of a factual issue — whether AIG was KBI's successor in interest. That factual issue must be resolved in order to determine whether or not defendant's retention of AIG stock was a breach of duty under the terms of the trusts.
V. Section 16461 6 does not entitle plaintiff to a safe harbor determination
Plaintiff contends that her amended petitions seeking to surcharge defendant for acting with "gross negligence" and "reckless indifference" by retaining the AIG stock do not constitute a contest as a matter of law, regardless of whether or not AIG is KBI's successor in interest.7 She maintains this is the case because section 16461 renders paragraph A(4) of the Kaufman Trust ineffective to shield defendant from liability for breaches of trust committed with "gross negligence" or "reckless indifference."
Section 16461 allows a trustor to exculpate a trustee from liability by provisions in a trust instrument, but states that such an exculpatory clause cannot shield the trustee from liability for breaches of trust "committed intentionally, with gross negligence, in bad faith, or with reckless indifference to the interest of the beneficiary."
The statute provides:
"(a) Except as provided in subdivision (b), (c), or (d), the trustee can be relieved of liability for breach of trust by provisions in the trust instrument.
"(b) A provision in the trust instrument is not effective to relieve the trustee of liability (1) for breach of trust committed intentionally, with gross negligence, in bad faith, or with reckless indifference to the interest of the beneficiary, or (2) for any profit that the trustee derives from a breach of trust."
Section 16461, subdivision (b)(1) does not entitle plaintiff to a determination, as a matter of law, that her proposed petitions do not constitute a contest. Subdivision (b)(1) does not apply unless (1) the trustee is liable (or potentially liable) for breach of trust, and (2) the breach of trust was committed intentionally, with gross negligence, in bad faith, or with reckless indifference. Whether or not a breach of trust occurred in this case depends on whether defendant had a duty to divest the trusts of the AIG stock — a determination that goes to the merits of plaintiff's proposed petitions.
The legislative history to section 16461 supports this two-part interpretation of the statute. The Law Revision Commission comment to section 16461 states that the statute "is the same in substance as part of Section 222 of the Restatement (Second) of Trusts (1957)" and refers to comments b and c of that section of the Restatement.8 Comment c states:
"c. Distinction between exculpatory provisions and those limiting trustee's duties. If by the terms of the trust it is provided that the trustee shall not be under any duty to do or to refrain from doing an act which but for such provision it would be the duty of the trustee to do or refrain from doing, the trustee does not commit a breach of trust in doing or failing to do the act, unless such provision is ineffective as contrary to public policy.
If, however, the trustee is not relieved of such a duty either because there is no provision to that effect in the terms of the trust or because such provision is ineffective as against public policy, a provision in the terms of the trust that the trustee shall not be liable for breach of trust is against public policy to the extent stated in Comment b."
9 Paragraph A(4) of the Kaufman Trust contains language limiting the duty of the trustee with regard to retaining shares of KBI or its successor in interest. That provision may or may not have relieved defendant of a duty to sell the AIG stock. That determination cannot be made at this juncture as a matter of law."
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