Parducci v. Demello













Filed 7/24/12 Parducci v. Demello CA1/3

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California
Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or
relying on opinions not certified for publication or ordered published, except
as specified by rule 8.1115(b). This
opinion has not been certified for publication or ordered published for
purposes of rule 8.1115.





IN
THE COURT OF APPEAL OF THE STATE OF CALIFORNIA



FIRST
APPELLATE DISTRICT



DIVISION
THREE




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WILLIAM PARDUCCI, Plaintiff and Appellant, v. DEBRA DEMELLO individually and as Trustee, etc., Defendant and Respondent.

A133707 (Contra Costa County Super. Ct. No. PROMSP09-01542)

The
beneficiary of a trust, William Parducci, brought a probate petition against
former trustee Debra DeMello alleging breach
of fiduciary duty for misappropriation of trust assets. The court sustained
a demurrer without leave to amend on the ground that DeMello owed no duty to
Parducci because the alleged conduct occurred when the inter vivos trust was
revocable and Parducci’s interest was merely contingent. The court relied upon
Probate Code section 15800, which provides that a trustee’s duties are
owed only to the settlor holding the power to revoke “during the time that a
trust is revocable and the person holding the power to revoke the trust is
competent.” The California Supreme Court is presently considering whether,
following the death of the settlor, a trustee may be held responsible to a
beneficiary for acts committed during the period when the settlor was competent
and held the power to revoke. (Estate of
Giraldin (2011) 199 Cal.App.4th 577, review granted Dec. 21, 2011,
S197694.) We do not reach that issue because the misconduct alleged here falls
outside the terms of the statute, when the settlor allegedly was not competent
to revoke the trust and after the trust became irrevocable upon the settlor’s
death. We shall reverse the judgment of dismissal.

statement of facts and procedural history

The
amended petition alleges that in 1997, Edythe Wittich established a revocable
trust funded with real property and other assets, and also executed a will
devising any remaining assets to the trust upon her death. Wittich named
herself as the initial trustee and designated two individuals as co-executors
of the will and as successor co-trustees in the event she ceased to act as
trustee. The trust was later amended to designate Wittich’s niece, Debra
DeMello, as successor trustee.

The
trust provides that, during her lifetime, Wittich was to receive income from
the trust and had the power to revoke the trust or to alter the trust’s terms,
assets and beneficiaries. By its terms, the trust became irrevocable upon
Wittich’s death and the bulk of the trust estate was to be divided and shared
among multiple beneficiaries, including DeMello and Parducci.

Years
after establishing the trust, the amended petition alleges, Wittich was
diagnosed with dementia and moved into an assisted living facility. DeMello
told family members, in a 2003 communication, that she had undertaken
management of Wittich’s property because Wittich “is no longer able to make
those types of decisions.” DeMello referred to using a power of attorney from
Wittich that is “part of her trust.” In the following years, real property was
deeded from the trust to DeMello and the trust’s security account was depleted.

Wittich
died in 2009 and a maelstrom of litigation ensued. The estate’s personal
representative sued DeMello for elder abuse and recovery of real property and
Parducci sued for an accounting and to remove DeMello as trustee. The court
removed DeMello in May 2010 and appointed a successor trustee, who then also
sued DeMello. At issue here is Parducci’s petition alleging a breach of
fiduciary duty by DeMello during the time she acted as trustee, which Parducci
alleges began around 2002, when Wittich allegedly became incompetent, and
continued until DeMello was removed as trustee in 2010. (See Prob. Code, § 17200, subd.
(a)(12).)

Parducci’s
original petition was filed in August 2010 and asserted several causes of
action. DeMello demurred and Parducci filed a first amended petition before the
demurrer was heard. DeMello then demurred to the first amended petition,
arguing that Parducci was not a beneficiary at the time of the alleged
misconduct but only a contingent beneficiary under a revocable trust to whom no
fiduciary duty was owed. The court accepted the argument, stating at the
hearing on the demurrer that “there was no duty owed to beneficiaries that were
merely possibilities.” The court sustained the demurrer with leave to amend the
breach of fiduciary duty cause of action and gave Parducci an opportunity “to
allege facts [to] show that [DeMello] had a duty.” Parducci filed a second
amended petition and then a third amended petition, which is the operative
pleading. DeMello again demurred and the court sustained the demurrer without
leave to amend. The court held that there was no duty owed Parducci because the
trust had not become irrevocable until Wittich’s death. The court entered
judgment for DeMello and Parducci timely appealed.href="#_ftn1" name="_ftnref1" title="">[1]

discussion

“A
trust is created by the manifestation of intention of the settlor to create a
trust, trust property, a lawful trust purpose, and an identifiable
beneficiary.” (Chang v. Redding Bank of
Commerce (1994) 29 Cal.App.4th 673, 684.) “[T]he nature of a beneficiary’s
interest differs materially depending on whether the trust is revocable or
irrevocable.” (Empire Properties v.
County of Los Angeles (1996) 44 Cal.App.4th 781, 787.) “With the creation
of an irrevocable trust, trust beneficiaries acquire a vested and present
beneficial interest in the trust property, and their interests are not subject
to divestment.” (Ibid.) Trust
beneficiaries of a revocable trust, in contrast, acquire only a contingent
interest in the property. (Id. at
p. 788.) A beneficiary’s interest in a revocable trust is “ ‘merely
potential’ and can ‘evaporate in a moment at the whim of the [settlor].’ ”
(Steinhart v. County of Los Angeles (2010)
47 Cal.4th 1298, 1319.) A revocable inter vivos trust, like the Wittich trust
at issue here, is a “probate avoidance device[]” that gives the settlor
“ ‘the equivalent of full ownership of the property’ ” during the
settlor’s lifetime and bestows an interest upon beneficiaries only at the
settlor’s death. (Walgren v. Dolan (1990)
226 Cal.App.3d 572, 578.)

A
number of California statutes reflect the contingent nature of a beneficiary’s
interest in a revocable trust. (See
Steinhart v. County of Los Angeles, supra, 47 Cal.4th at p. 1319,
fn. 14 [listing statutes].) Among them is Probate Code section 15800,
which provides: “Except to the extent that the trust instrument otherwise
provides or where the joint action of the settlor and all beneficiaries is
required, during the time that a trust is revocable and the person holding the
power to revoke the trust is competent: [¶] (a) The person holding
the power to revoke, and not the beneficiary, has the rights afforded beneficiaries
under [the Trust Law; and] [¶] (b) The duties of the trustee are owed
to the person holding the power to revoke.”

Parducci
argues that the statute simply postpones
a beneficiary’s rights under a revocable trust and that once the settlor dies
and the trust becomes irrevocable, the beneficiary may seek redress for trustee
misconduct during the time that the
trust was revocable. He relies upon Evangelho
v. Presoto (1998) 67 Cal.App.4th 615, 617-625, which held that
beneficiaries of a revocable trust are entitled to an accounting upon the
settlor’s death for the entire period of the trust, including the period when
the trust was revocable. The Evangelho court
stated that the contingent rights of beneficiaries of the revocable trust “were
postponed while the holder of the power to revoke was alive” but “mature[ed]
into present and enforceable rights” upon the settlor’s death, allowing the
trustee’s conduct to “be attacked for fraud or bad faith and an accounting
compelled for improper acts which had been hidden from the ultimate
beneficiaries.” (Id. at p. 624;
accord Brundage v. Bank of America (Fla.
Ct.App. 2008) 996 So.2d 877, 882-883.)

As
noted above, the issue presented in Evangelho
is now before our high court in Estate
of Giraldin, supra, 199 Cal.App.4th 577. The Giraldin court questioned Evangelho
and interpreted Probate Code section 15800 to mean that a trustee’s duties are
owed exclusively to the settlor during the period of revocability and bars a beneficiary’s
claim for breach of fiduciary duty for alleged misconduct occurring during that
period. (Giraldin, pp. 594-598.)
The court expressly rejected the contention, advocated by Parducci here, that
“the beneficiaries of a revocable trust develop
standing to pursue claims against the trustee, for actions taken while the
trust was revocable, as soon as the trust becomes irrevocable.” (>Id. at p. 596.) The court reasoned, “if
the trustee’s duties are not owed to the beneficiaries at the time of the acts
in question, the death of the settlor cannot make them retroactively owed to the beneficiaries. To rule otherwise would
put the trustee in an impossible position: while the settlor is alive, he is
obligated to do what the settlor wants, even if it harms the expectations of
the beneficiaries, but once the settlor dies, the trustee would have to answer
for allowing the interest of those same beneficiaries to be diminished by
conduct during the settlor’s lifetime.” (Id.
at p. 597.)

The
sufficiency of the pleading in this case does not turn upon the issue now
before the Supreme Court. This case is factually distinct from >Giraldin. In Giraldin, “no one ever claimed [the settlor] lacked sufficient
competency to exercise his power to revoke the family trust.” (>Estate of Giraldin, supra, 199
Cal.App.4th at p. 595, fn. 18.) In this case, Parducci alleges
precisely that. He alleges that in late 2002 or early 2003 the settlor was
“diagnosed as suffering from dementia,” that DeMello “began acting as trustee,”
and that the settlor “was not competent to revoke the Wittich Trust pursuant to
Probate Code section 15800” from that time forward.

DeMello
has not filed a respondent’s brief on appeal but asserted in the trial court
that she was named in 2002 as a successor trustee for the future and did not
actually become the trustee until Wittich’s death in 2009. But Parducci alleges
that DeMello “began acting as the trustee” and “assum[ed] the title and
position as successor trustee” around 2002. (See Rest.3d Trusts, §§ 34-35
[trusteeship may be accepted by conduct and need not be confirmed by court].)
In reviewing the sufficiency of a pleading against a general demurrer, we treat
the demurrer as admitting all material facts properly pleaded. (>Blank v. Kirwan (1985) 39 Cal.3d 311,
318.)

The
allegation of the settlor’s incompetency takes the case outside the terms of
Probate Code section 15800, which restricts the rights of a beneficiary “during
the time that a trust is revocable and
the person holding the power to revoke the trust is competent.” (Italics
added.) The Restatement of the Law reinforces this point. “California trust law
is essentially derived from the Restatement Second of Trusts. Over a number of
years, the Restatement Second of Trusts has been superseded by the Restatement
Third of Trusts. [Citation.] As a result, we may look to the Restatement Third
of Trusts for guidance.” (Lonely Maiden
Productions, LLC v. GoldenTree Asset Management, LP (2011) 201 Cal.App.4th
368, 379.) Similar to section 15800 of the Probate Code, section 74, subsection
(1) of the Restatement Third of Trusts provides that “[t]he rights of the
beneficiaries are exercisable by and subject to the control of the settlor”
while “a trust is revocable by the settlor and the settlor has capacity to act.”
The preeminence of the settlor’s rights, and the concomitant limitation on
beneficiary rights, apply when the settlor has “the mental capacity to exercise
the power to revoke, withdraw, or appoint and to make and understand the
business, financial, personal, and other judgments appropriate to the matters
involved in an exercise of authority or control under this Section.” (Rest.3d
Trusts, § 74, com. (a)(2).) When the settlor “lacks the requisite mental
capacity, the authority described and rules stated in this Section generally do
not apply.” (Ibid.) If the settlor
becomes incompetent, “the other beneficiaries are ordinarily entitled to
exercise, on their own behalf, the usual rights of trust beneficiaries, and the
trustee is ordinarily under a duty to provide them with accountings and other
information concerning the trust and its administration.” (Rest.3d Trusts,
§ 74, com. (e).)

Parducci
therefore had “the usual rights of trust beneficiaries” if, as he alleges,
Wittich was incompetent. In sustaining the demurrer, the probate court focused
on language in Probate Code section 15800 limiting a beneficiary’s rights if
“the person holding the power to revoke the trust” is competent and observed
that a settlor’s incompetence does not necessarily take a case out of the
statute’s reach because a person other than the settlor may hold the power to
revoke. For example, in Johnson v. Kotyck
(1999) 76 Cal.App.4th 83, 87-88, the court held that a trust beneficiary
was not entitled to receive accountings upon the settlor’s incompetency because
a court-appointed conservator held the power to revoke the trust. The court
concluded that Probate Code “section 15800 does not give a beneficiary
. . . any right to a trust accounting so long as a conservator
retains authority . . . to have the trust revoked and to abrogate
[the beneficiary’s] interest in the trust proceeds.” (Id. at p. 88.) An accounting to the court was required under
conservatorship law but no accounting to the beneficiary was required under
trust law. (Id. at p. 89.)

>Johnson is not relevant here because, so
far as appears from the amended petition, there was no conservator with power
to revoke or any other competent person with the power to revoke the Wittich
trust. Parducci alleges that Wittich became incompetent and that DeMello took
over Wittich’s personal and business affairs without court intervention, under
a power of attorney and as successor trustee. “A trust may not be revoked by an
attorney in fact under a power of attorney unless it is expressly permitted by
the trust instrument” (Prob. Code, § 15401, subd. (c)), which the trust
instrument here does not permit. Parducci alleges that Wittich alone, who was
allegedly incompetent, held the power to revoke. By its terms, the limitation
on a beneficiary’s rights in section 15800 was extinguished when Wittich became
incompetent.

There
is an additional issue to consider, as to what section 15800 means by
incompetency. We do not understand the statute to require a prior judicial
determination of incompetency before a beneficiary is entitled to rights under
the trust, as the lower court seemed to assume. Some state statutes expressly
require a formal determination of incompetency before a trustee’s duties
devolve to beneficiaries under a revocable inter vivos trust (e.g. Mo. Ann.
Stat. § 456.6-603) while others refer generally to incompetency without
further specification. (Bogert, The Law of Trusts & Trustees, § 964,
fn. 28; see Unif. Trust Code, § 603 [noting variations].) “Exactly when a trust
settlor ‘loses capacity’ to revoke a revocable trust, absent a judicial
determination of incapacity, is an issue that would seem to be exceedingly
problematic.” (Volkmer, 39 Estate Planning 46, Duty Owed by Trustee of Revocable Trust (Feb. 2012), italics
omitted.) Probate Code section 15800 speaks of the settlor’s incompetency
generally and does not require a formal adjudication of incompetency, as do
other state statutes.

In
construing a statutory provision, we are “limited to the construction of the
plain language of the statute as enacted and the intention therein expressed”
and “are not authorized to insert qualifying provisions.” (Rowan v. San Francisco (1966) 244 Cal.App.2d 308, 314.) The plain
language of section 15800 speaks simply of the incompetency of the person
holding the power to revoke. The statute is intended to limit “the enjoyment of
rights of beneficiaries of revocable trusts until the death or incompetence of
the settlor or other person holding the power to revoke the trust.” (Cal. Law
Revision Com. com., Prob. Code, § 15800.) The limitation on the
beneficiaries’ rights is a recognition that “the holder of a power of
revocation is in control of the trust and should have the right to enforce the
trust.” (Ibid.) The purpose of the
limitation no longer applies once the holder of a power of revocation becomes
incompetent and can no longer control the trust. The incompetency of the
settlor or other person holding the power to revoke is thus the crucial
element, not a formal adjudication of incompetency that may occur later in the
settlor’s lifetime or not at all. In fact, one of the purposes of an inter
vivos trust is to avoid the need for a competency hearing and the cumbersome
process of a conservatorship by “providing management for settlors late in
life, often on a contingent or standby basis by settlors who initially at least
serve as their own trustees but designate successors to assume responsibility
in the event the settlor resigns or becomes incompetent.” (Rest.3d Trusts,
§ 25, com. (a).) When such a successor trustee assumes responsibility for
the trust upon the settlor’s incompetency, the trustee’s duty transfers to the
beneficiaries without requiring the beneficiaries to have the settlor
judicially declared incompetent.

A
strict standard of proof safeguards against a beneficiary’s unfounded assertion
that a settlor is or was incompetent and that a beneficiary has acquired rights
under a revocable trust. To prove a settlor’s incompetency, one must overcome
the presumption that the settlor was competent (Prob. Code, § 810) in the
sense of lacking testamentary capacity. (Andersen
v. Hunt (2011) 196 Cal.App.4th 722, 726-731; Conservatorship of Bookstra (1989) 216 Cal.App.3d 445, 450.) A
trustee administering a revocable trust for the settlor’s benefit may generally
rely upon this presumption of competency and need not scrutinize the soundness
of the settlor’s mind. A trustee cannot, however, ignore clear signs of mental
deficits affecting the settlor’s capacity to understand the nature of his or
her acts affecting the trust. Parducci alleges here that Wittich “suffer[ed]
from dementia” and that her examining physician found that she did “not have
the capacity to understand and make decisions.” Parducci further alleges that
DeMello assumed all management of Wittich’s personal and business affairs after
informing the family that Wittich had Alzheimer’s disease and was unable “to
function on her own.” Parducci should be permitted an opportunity to prove the
allegations and to establish that he was entitled to the rights of a
beneficiary under the trust because Wittich was incompetent.

Parducci
must also be given an opportunity to prove, as he alleges, that DeMello’s
alleged misconduct as trustee continued after Wittich’s death, when the trust
became irrevocable. Probate Code section 15800 limits the rights of a
beneficiary “during the time that a trust is revocable.” The trust became
irrevocable upon Wittich’s death in May 2009 and DeMello was the trustee until
May 2010. Parducci alleges that DeMello misappropriated trust assets “through
2010” and, more specifically, that DeMello “continued to transfer funds to
herself” from a trust bank account after Wittich’s death. This alleged
misconduct falls outside the terms of section 15800 and is thus actionable.

disposition

The
judgment is reversed. The case is remanded to the probate court with directions
to overrule the demurrer and to conduct further proceedings consistent with the
views expressed in this opinion. Parducci shall recover his href="http://www.fearnotlaw.com/">costs on appeal.









_________________________

Pollak,
J.





We concur:





_________________________

McGuiness, P. J.





_________________________

Siggins, J.