Frahm v. Frahm
Filed 4/3/12 Frahm v. Frahm CA2/2
California Rules of Court, rule 8.1115(a), prohibits courts
and parties from citing or relying on opinions not certified for publication or
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publication or ordered published for purposes of rule 8.1115
IN
THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND
APPELLATE DISTRICT
DIVISION
TWO
CHRISTOPHER FRAHM,
Plaintiff and Appellant,
v.
MITCHEL FRAHM et al.,
Defendants and Respondents.
B227533
(Los Angeles
County
Super. Ct.
No. BP104602)
APPEAL from
a judgment of the Superior Court
of
County. Marvin M.
Lager. Affirmed.
Palmieri,
Tyler, Wiener, Wilhelm & Waldron, Don Fisher and Elise Malia Kern for
Plaintiff and Appellant.
Kurtz, Anderson
and Associates Law Offices, Donald R. Kurtz and Gregory J. Anderson for
Defendant and Respondent Mitchel Frahm.
Oldman, Cooley, Sallus, Gold,
Birnberg & Coleman, Marc L. Sallus and Peta-Gay Gordon for Defendant and
Respondent George Applebaum.
Law Offices
of Nate G. Kraut and Nate G. Kraut for Defendant and Respondent Jacqueline
Frahm.
* * * * * *
Following a bench trial, the trial court denied a
petition filed by plaintiff and appellant Christopher Frahm and sustained the
objections to that petition filed by respondents George Applebaum (Applebaum),
Jacqueline Frahm (Jacqueline) and Mitchel Frahm (Mitchel).
breach of fiduciary duty stemming
from the allocation of trust assets. The
trial court granted several petitions filed by Applebaum, also relating to the
administration of trust assets, and overruled appellant’s objections
thereto. Appellant contends the judgment
should be reversed because the trial court abused its discretion in excluding
evidence to rebut the presumption that certain assets were held in joint
tenancy, the trust did not permit a reallocation of assets and the trustee
failed to comply with his statutory and fiduciary duties.
We affirm. The trial court properly exercised its discretion
to exclude evidence that was irrelevant to rebutting the form of title
presumption contained in Evidence Code section 662. Moreover, substantial
evidence supported the trial court’s findings that the trust authorized
appellant’s father Louis Herman Frahm (Louis) to reallocate trust assets and
that he complied with his fiduciary duties in every respect.
FACTUAL AND PROCEDURAL BACKGROUND
Administration.
Louis and Sylvia Lee Frahm (Sylvia)
married and had two sons, appellant and Mitchel. On October 4, 1998, Louis and Sylvia
established the Living Trust of Louis Herman Frahm and Sylvia Lee Frahm (Trust)
and were both settlors and trustees of the Trust. The Trust provided that upon the death of the
first settlor, the trustees were to divide the trust estate—including any
additions made by reason of the settlor’s death—into three separate trusts,
designated as the Survivor’s Trust, the Marital Trust and the Exemption Trust
(sometimes collectively the Sub-Trusts).
The Survivor’s Trust was to be comprised of “the surviving spouse’s
separate property that is part of the trust estate and the surviving spouse’s
interest in the Settlor’s community estate included in or added to the trust
estate in any manner, including any undistributed or accrued income on
it.” The Marital Trust and the Exemption
Trust were to consist of the balance of the trust estate; the former was
designed to qualify for the marital deduction under Internal Revenue Code
section 2056, while the latter was to be comprised of a monetary amount equal
to the maximum sum allowable to a trust that does not qualify for the federal
estate tax marital deduction. Allocated
assets were to be valued at their fair market value as determined for federal
estate tax purposes.
Upon a settlor’s death, the Trust
gave the surviving spouse the power to amend, revoke or terminate the
Survivor’s Trust, but expressly withdrew those powers with respect to the
Marital Trust and the Exemption Trust.
The Trust required that upon the death or disability of a settlor, the
surviving or non-disabled settlor must appoint an additional trustee to serve
as co-trustee. Upon the death of the
surviving spouse, none of the Sub-Trusts were to be amended, revoked or
terminated. At that point, any remaining
assets (less taxes and expenses) in the Sub-Trusts were to be distributed to a
separate trust and divided into equal shares for the benefit of appellant and
Mitchel.
Sylvia died on October 6,
1998. At the end of October 1998, Louis
retained attorney Donald Kurtz to assist him with the administration of the
Trust, including allocating assets among the Sub-Trusts. As the schedules that identified the property
interests funding the Trust were blank at the time of Sylvia’s death, Kurtz
identified a number of tasks for which Louis was responsible as the trustee,
including to segregate Sylvia’s property from his, prepare a schedule of all
property he and Sylvia owned at the time of her death, obtain professional
appraisals and prepare federal and California estate tax returns. During the next several months, Louis and
Kurtz worked together to identify and allocate assets. In accordance with the Trust requirements,
Louis appointed Mitchel as his co-trustee, and Mitchel in turn delegated his
powers to Louis to the extent permitted by law.
Louis finalized an asset allocation
among the Sub-Trusts on September 14, 1999 (1999 Allocation). Among other items, the 1999 Allocation listed
Louis’s primary residence in Indian Wells (Delgado property) as an asset of the
Marital Trust. Receivable lease payments
from an automobile dealership (Firestone lease) were included as an asset of
the Survivor’s Trust. At the time Louis
executed the 1999 Allocation, Kurtz had informed him that the Trust allowed him
to make amendments to or reallocations of assets among the Sub-Trusts.
Louis
married Jacqueline in July 2001, and together they executed the J&L Living
Trust in September 2001. In early 2002,
Louis retained attorney Brian Lewis to assist him with Trust administration
issues. Lewis quickly determined that
the 1999 Allocation was incomplete and incorrect. Among other things, he discovered
inconsistencies in the way in which certain real property was actually titled
versus its status on the 1999 Allocation.
Kurtz acknowledged some of the inconsistencies with Lewis and indicated
that the 1999 Allocation remained a work in progress. On October 4, 2002, Louis and Mitchel as
trustees executed an Allocation of Assets following the Death of Sylvia Lee
Frahm (2002 Allocation) that incorporated asset schedules for each of the
Sub-Trusts, utilizing valuations established for federal and state estate tax
purposes as of the date of Sylvia’s death.
Among several changes from the 1999 Allocation, the 2002 Allocation
listed the Delgado property as an asset of the Survivor’s Trust and the
Firestone lease as an asset of the Marital Trust. By the time of the 2002 Allocation, appellant
knew that Louis intended for the Delgado property to go to Jacqueline.
Beginning
in November 2000, Louis exercised his right to amend the Trust, executing 11
amendments before restating it entirely in January 2006. Included among the amendments were the
addition of specific bequests from the Survivor’s Trust to the J&L Trust;
the division of appellant’s and Mitchel’s share of the Survivor’s Trust into
multiple shares for the benefit of their children, coupled with the imposition
of a distribution schedule for appellant’s share; and the appointment of
Applebaum as the sole successor trustee and David Couch as the subsequent
successor trustee.
Louis died
in November 2006.
In May 2007, appellant initially
sought to file a Petition Pursuant to Probate Code sections 17200 and 850
for: (1) Turnover of Assets; (2) an
Order for Imposition of a Constructive Trust over Trust Assets Wrongfully
Transferred; (3) an Order Removing George Applebaum as the Acting Successor
Trustee of the Marital Deduction and Exemption Trusts; and (4) Breach of
Fiduciary Duty, together with an application that the proposed petition did not
violate the Trust’s “no contest” clause.
In September 2007, the trial court granted appellant’s application. In an unpublished opinion,
Trustee, etc., et al. (Mar. 10, 2009, B204049 [nonpub. opn.]), we affirmed
the trial court’s order under Probate Code section 21320 that appellant’s
proposed petition for breach of fiduciary duty did not violate the Trust’s no
contest clause. Thereafter, in April
2009 appellant filed his petition (Petition), and Applebaum, Mitchel and
Jacqueline filed objections to the Petition.
In January 2008, while the appeal
was pending, Applebaum filed a Petition for Instructions re Temporary Trustee
of the Marital and Exemption Trusts (Trustee Petition), a Petition for
Instructions re Treatment of Survivor’s Trust’s Payment of Marital Trust’s
Pro-Rata Share of Estimated Estate Taxes as a Loan (Tax Petition) and a
Petition for Instructions re Allocation of Trust Assets (Allocation Petition). Appellant objected to all petitions.
Trial and Judgment.
At a December 2, 2008 hearing, the
trial court agreed to bifurcate the trial, setting a January 2009 date for a
hearing on several motions in limine that the parties conceded would resolve a
number of substantive issues in the case.
At the same hearing, the trial court also ruled on Applebaum’s Trustee
Petition and ordered that Applebaum serve as a temporary trustee of the Marital
and Exemption Trusts until a decision appointing a permanent successor trustee.
Following
the January 21, 2009 hearing, the trial court made several rulings, including
that “[a]ll properties held in joint tenancy by Louis Herman Frahm and Sylvia
Lee Frahm on the date of Sylvia Lee Frahm’s death became the separate property
of Louis Herman Frahm”; the Trust provided the date of Sylvia’s death was the
valuation date to be used for purposes of allocating assets among Sub-Trusts;
Louis had the right to make the 2002 Allocation to correct the 1999 Allocation;
there was no ambiguity in the language of the Trust concerning asset allocation
and tax provisions; and the only evidentiary issue remaining for Applebaum’s
Allocation Petition and Tax Petition was whether under Penny v. Wilson (2004) 123 Cal.App.4th 596 Louis improperly
allocated Trust assets among the Sub-Trusts.
The trial court stayed the remaining issues in the Allocation Petition
and the Tax Petition pending resolution of the appeal.
The balance
of the trial on the Petition, the Allocation Petition, the Tax Petition and the
Trustee Petition commenced on October 19, 2009.
Each party submitted a trial brief and made an opening statement. Kurtz, Lewis, Mitchel, Applebaum, Jacqueline
and appellant testified. In addition,
attorney Harry Westover testified as an expert on appellant’s behalf. He opined that transferring the Delgado
property from the Marital Trust to the Survivor’s Trust was a breach of
fiduciary duty because of the absence of notice and full consideration. A breach occurred because the assets of the
Marital Trust were earmarked for Louis’s children upon his death, while he
retained testamentary control over the assets in the Survivor’s Trust. Nonetheless, he opined that no breach would
have occurred if Louis had provided full consideration for the transfer by
exchanging a different asset such as the Bank of America account. Also with respect to the Delgado property,
Westover opined that Louis had attempted to divert the property into his own
name by filing an affidavit of joint tenant upon Sylvia’s death, despite the property’s
grant deed indicating it was held as community property. He conceded, however, that he did not know
the value of the Delgado property in 2002, nor was he aware whether there had
been any repairs or improvements to the property between the time of Sylvia’s
death and 2002.
Correspondingly,
Westover testified that the transfer of the Firestone lease from the Survivor’s
Trust to the Marital Trust was also a breach of fiduciary duty, specifically a
trustee’s duty of loyalty and duty to avoid conflicts, because the lease was a
“wasting asset” that had a lower value to the remainder beneficiaries at the
time of transfer. On cross-examination,
however, Westover testified that he had no information regarding the value of
the Firestone lease at the date of transfer to the Marital Trust, and he did
not know whether any appreciation, depreciation or its characterization as a
wasting asset was factored into the calculation of its value.
In forming
his opinions, Westover considered the 1999 Allocation to be a final allocation
that could not be revoked and reallocated.
Nonetheless, he later testified that the law provided Louis with the
ability to make changes to the 1999 Allocation after he signed it. He further opined that Mitchel breached his
fiduciary duties as a trustee by acquiescing in and approving Louis’s
actions. Finally, he opined that
attorney fees incurred in connection with litigating the over the safe harbor
application should have been charged solely to the Survivor’s Trust.
Appellant
also relied on certified public accountant Cheryl Schaffer as an expert
witness. On the basis of her knowledge
and experience, she prepared her own correction to the 1999 Allocation. In an effort to maintain the integrity of the
1999 Allocation, she endeavored to make minimal changes to the
allocation—correcting mathematical errors and backing out the joint tenancy
assets. But once those changes were
made, the Marital Trust and the Survivor’s Trust were approximately $1 million
apart. She exercised her discretion to
balance the Sub-Trusts by allocating a previously omitted $560,000 Frahm Dodge
note to the Marital Trust instead of the Survivor’s Trust; she did not think
she had discretion to move the Delgado property from the Marital Trust to the
Survivor’s Trust.
Jacqueline
offered the testimony of certified public accountant Joseph Wheat, who
testified that the 2002 Allocation properly corrected mathematical errors in
the 1999 Allocation, that the 2002 Allocation included an asset that the 1999
Allocation had improperly omitted and that Schaffer’s calculations included
improper adjustments.
In a
statement of decision filed in May 2010, the trial court resolved 22 discrete,
controverted issues, ruling generally that Louis, Mitchel and Applebaum did not
breach their fiduciary duties as trustees.
The June 2010 judgment similarly provided: “The Trustees acted in good faith and in a
manner consistent with their fiduciary duties in making the 2002
Allocation. The actions of the Trustees
were reasonable and not arbitrary or capricious.” Accordingly, the trial court denied
appellant’s petition and sustained all objections thereto. It granted all three of Applebaum’s
petitions, ruling that the 2002 Allocation should be implemented, the Marital
Trust owed the Survivor’s Trust for its pro-rata share of estate taxes, and
Applebaum would remain as trustee until the assets of the Marital and Exemption
Trusts were distributed.
This appeal
followed.
Appellant
contends that the judgment should be reversed because the trial court abused
its discretion in excluding evidence designed to rebut the presumption that
Louis and Sylvia held certain real property as joint tenants, and because
substantial evidence did not support the trial court’s conclusion that the 2002
Allocation was neither a breach of fiduciary duty nor an act in excess of
Louis’s power as a trustee. We find no
merit to appellant’s contentions.
I. The Trial Court Properly Exercised Its
Discretion to Exclude Evidence Purporting to Contradict the Manner of Title
Reflected on Grant Deeds.
A. Joint Tenancy Determination.
The Trust provided that it was
to be funded with the community property of the settlors, Louis and
Sylvia. Upon the death of one settlor
and the division of the Trust into Sub-Trusts, the Trust further provided that
the Survivor’s Trust “shall consist of the surviving spouse’s separate property
that is a part of the trust estate and the surviving spouse’s interest in the
Settlor’s community estate included in or added to the trust estate in any
manner . . . .” While the
1999 Allocation had allocated to the Marital Trust certain real property that
was held in joint tenancy or as Louis’s separate property, the 2002 Allocation
reallocated those properties to the Survivor’s Trust.
As explained in
appellant from offering evidence to interpret unambiguous Trust provisions set
for hearing on January 21, 2009, appellant contended that real properties held
in joint tenancy by Louis and Sylvia should have been treated as community
property for the purpose of Sub-Trusts allocation. In connection with the motion, Applebaum
sought judicial notice of six deeds for properties located in California or
Nevada which provided that the properties were held either in joint tenancy by
Louis and Sylvia or as Louis’s separate property.
At the
January 2009 hearing, the trial court determined that it could rule on the
issue of whether joint tenancy properties flowed into the Trust upon Sylvia’s
death, reasoning that issue was not subject to any stay pending appeal of the
no contest issue. Appellant argued “that
in name they [the six properties] may have been in joint tenancy, but they
weren’t really joint-tenancy property.
It’s a rebuttable presumption and there’s plenty of evidence that this
was not joint-tenancy property but instead community property and that
. . . .” At that point,
the trial court asked “What did the grant deeds say” While Applebaum emphasized that they provided
for joint tenancy, appellant argued that Sylvia’s estate tax return (Form 706)
referred to the properties as community property assets. The trial court and appellant’s counsel then
engaged in the following exchange:
“THE
COURT: At the date of death, the deed
was in joint tenancy
“MR.
FISHER: I believe that’s correct.
“THE
COURT: All right. And that’s recorded with the county recorder
“MR.
FISHER: Understood.
“THE
COURT: And what do you have as of the
date of death to the contrary
“MR.
FISHER: I’m not aware, your honor—
“THE COURT: Okay.
“MR.
FISHER: —Because we haven’t done—I mean,
that’s part of the problem that—
“THE
COURT: It’s not, because there is
such—there is a presumption. That’s why
we have recordation for real property.”
Later in
the hearing, appellant renewed his request to put on evidence that he contended
would rebut the joint-tenancy presumption, identifying as his evidence the
possible existence of deeds transferring some of the joint-tenancy properties
into the Trust. The trial court found no
basis to defer ruling on the matter, and at the end of the hearing “decide[d]
that the joint-tenancy properties held by Louis and Sylvia at Sylvia’s death
became the separate property of Louis . . . .”
B. Applicable Legal Principles.
A
married couple may hold real property as community property, joint tenants, or
tenants in common. (Fam. Code, § 750;
1378, 1385.) They cannot hold property
both as community property and in joint tenancy or tenancy in common, however,
because spouses’ joint tenancy and tenancy in common interests are deemed to be
separate property. (Estate of
Mitchell, supra, at
p. 1385.) Accordingly, when one spouse
dies during the marriage, ownership of any property held by the couple in joint
tenancy passes to the surviving spouse by right of survivorship, assuming the
joint tenancy has not otherwise been terminated. (In re
Marriage of Hilke (1992) 4 Cal.4th 215, 220; Estate of Mitchell, supra, at p. 1385.)
The
Family Code creates a rebuttable presumption that property held by spouses in
joint tenancy is actually community property, but that presumption operates
only upon the dissolution of the marriage.
(Fam. Code, § 2581; Estate of
Mitchell, supra, 76 Cal.App.4th at p. 1386; Dorn v. Solomon (1997) 57 Cal.App.4th 650, 652.) Likewise, the general presumption of
community property in Family Code section 760 does not trump the form of title
presumption. (See Fam. Code, § 760
[“Except as otherwise provided by statute, all property, real or personal,
wherever situated, acquired by a married person during the marriage while
domiciled in this state is community property”].) The court in In re Marriage of Brooks & Robinson (2008) 169 Cal.App.4th 176,
186 explained that the act of specifying a form of ownership in the title
conveyance removes such property from the Family Code presumption. (See also Siberell
v. Siberell (1932) 214 Cal. 767, 773 [community property presumption “has
no application to a case where ‘a different intention is expressed in the
instrument’”].) Thus, where the parties
have specified a form of ownership in a grant deed, the “form of title”
presumption codified in Evidence Code section 662 applies, which provides that
“[t]he owner of the legal title to property is presumed to be the owner of the
full beneficial title. This presumption
may be rebutted only by clear and convincing proof.” (Evid. Code, § 662; accord,
Cal.App.4th 277, 291 [“absent a contrary statute, and unless ownership
interests are otherwise established by sufficient proof, record title is
usually determinative of characterization”].)
The court in Estate of Gallio (1995) 33 Cal.App.4th 592, 596 applied the form of
title presumption to property held in joint tenancy by a husband and wife upon
the husband’s death, explaining: “‘The
law on the issue before us is quite clear.
For the purpose of determining the character of real property upon the
death of a spouse, there is a rebuttable presumption that the character of the
property is as set forth in the deed.
[Citation.] . . .
The burden is on the party seeking to rebut the presumption to establish that
the property is held in some other way; this may be done by a showing that the
character of the property was changed or affected by an agreement or common
understanding between the spouses. Such
agreement may be oral or written, or may be inferred from the conduct and
declarations of the spouses. However,
there must be an agreement of some sort; the presumption may not
be overcome by testimony about the hidden intention of one spouse, undisclosed
to the other spouse at the time of the conveyance. [Citations.]’
[Citation.]” (See also
161, 167 [“For purposes of determining the character of real property on the
death of one spouse, there is a presumption ‘that the property is as described
in the deed and the burden is on the party who seeks to rebut the presumption’”
and “‘[t]he fact that a
deed was taken in joint tenancy establishes a prima facie case that the
property is in fact held in joint tenancy’”].)
The form of title presumption is a
rebuttable presumption that affects the burden of proof. “That is, the party asserting that title is other than as stated in
the deed . . . has the burden of proving that fact by clear and
convincing evidence. [Citations.] The presumption can be overcome only by
evidence of an agreement or understanding between the parties that the title
reflected in the deed is not what the parties intended. [Citations.]
Significantly, ‘the presumption cannot be overcome solely by tracing the
funds used to purchase the property, nor by testimony of an intention not
disclosed to the grantee at the time of the execution of the conveyance.’ [Citations.]
Nor can the presumption be rebutted by evidence that title was taken in
a particular manner merely to obtain a loan.”
(In re Marriage of Brooks &
Robinson, supra, 169 Cal.App.4th at pp. 189–190.) The mere fact that property was acquired
during marriage is inadequate to rebut the form of title presumption. (Id.
at pp. 186–187.) Moreover,
title presumption, the evidence of a contrary agreement or understanding must
be ‘clear and convincing.’
[Citations.] This standard
requires evidence that is ‘“‘“so clear as to leave no substantial doubt” [and]
“sufficiently strong to command the unhesitating assent of every reasonable
mind.”’”’” (Id. at p. 190.)
C. Appellant Failed to Offer Evidence
Relevant to Rebutting the Form of Title Presumption.
Appellant argues that the trial court committed prejudicial error
by precluding him from offering any evidence to rebut the form of title
presumption. “The trial court is
‘vested with broad discretion in ruling on the admissibility of evidence.’ [Citation.]
‘[T]he court’s ruling will be upset only if there is a clear showing of
an abuse of discretion.’
[Citation.] ‘“The appropriate
test for abuse of discretion is whether the trial court exceeded the bounds of
reason. When two or more inferences can
reasonably be deduced from the facts, the reviewing court has no authority to
substitute its decision for that of the trial court.” [Citation.]’”
(Tudor Ranches, Inc. v. State
Comp. Ins. Fund (1998) 65 Cal.App.4th 1422, 1431.) But “even where evidence is improperly
excluded, the error is not reversible unless ‘“it is reasonably probable a
result more favorable to the appellant would have been reached absent the
error. [Citation.]” [Citation.]’”
(Id. at pp. 1431–1432;
see also Pool v. City of Oakland (1986)
42 Cal.3d 1051, 1069.)
a threshold matter, the record does not support appellant’s characterization of
the trial court’s actions a refusal to permit him to offer evidence to rebut
the form of title presumption provided by the grant deeds. Rather, when the trial court asked
appellant’s counsel what evidence he had as of the date of Sylvia’s death that
was contrary to the manner of title provided in the grant deeds, counsel
responded that he was not “aware” of anything.
These circumstances are unlike those in Tomaier v. Tomaier (1944) 23 Cal.2d 754, 756–757, where the
appellate court held it was reversible error for the trial court summarily to
exclude all evidence—including evidence that the property was purchased with
community funds—designed to show that a husband and wife had intended to hold
joint tenancy property as community property.
For the same reason, we do not find that
this was the type of situation where an offer of proof would have been
futile. (See Tomaier v. Tomaier, supra, 23 Cal.2d at p. 760 [“When
the trial court states that it will not receive evidence, a specific offer of
proof is not necessary and would be idle under the circumstances, and it
therefore may be claimed that it was error to exclude such evidence”].) Nonetheless, though appellant did not make an
offer of proof at the January 2009 hearing, in his opposition papers he
identified certain documents that he claimed reflected the community property
nature of the properties; those documents were later admitted during the trial,
albeit for different purposes. He cited
Louis’s September 1999 declaration in which he averred “[a]ll of the property
in the Trust Estate is community property”; the 1999 Allocation which allocated
the six properties to the Marital Trust; and Sylvia’s original Form 706 in
which Louis identified the joint tenancy properties as community property.
The trial court properly exercised its discretion to
conclude that the evidence identified by appellant was not relevant rebuttal
evidence. To overcome the form of title
and convincing evidence that Louis and Sylvia, together, had an “intention,
would be held as community property despite their holding legal title as joint
tenants. (Evid. Code, § 662;
supra, 169 Cal.App.4th at pp. 189–190.)
Each of the documents offered by appellant was prepared after Sylvia’s
death and, at best, necessarily reflected Louis’s sole understanding
of the character of the properties.
Appellant offered nothing that tended to show during Sylvia’s lifetime
the parties reached an agreement or understanding that the properties would be
held as community property. We are
therefore guided by Machado v. Machado (1962)
58 Cal.2d 501, 505 to 506, where the court held that a husband’s and wife’s
testimony about their independent intention not to create a joint tenancy was
insufficient to overcome the form of title presumption. The court stated: “Although a joint tenancy deed is not
conclusive as to the character of real property, it creates a rebuttable
presumption that it is held in joint tenancy.
The presumption created by the deed cannot be overcome by testimony of
the hidden intentions of one of the parties, but only by evidence tending to
prove a common understanding or an agreement that the character of the property
was to be other than joint tenancy.
Since there was no evidence of a common understanding or an agreement
the presumption was not overcome.
[Citations.]” (
Because appellant’s proffered
evidence did not reflect Louis and Sylvia’s common agreement or understanding
as to how the real property would be held, it was not the type of evidence
sufficient to overcome the presumption accorded by Evidence Code
section 662. The trial court acted
within its discretion to decline to consider Louis’s after-the-fact statements
as rebuttal evidence and properly
concluded that appellant did not meet his burden to rebut the form of title
presumption.
II. Substantial
Evidence Supported the Trial Court’s Determination that Louis Complied with his
Fiduciary Duties.
As
part of the judgment the trial court ruled that “[t]he Trustees acted in good
faith and in a manner consistent with their fiduciary duties in making the 2002
Allocation. The actions of the Trustees
were reasonable and not arbitrary or capricious.” Appellant contends that the 2002 Allocation
was unauthorized, unfair and inconsistent with the intent of the Trust. The determination that a trustee has
complied with his fiduciary
duties and the underlying
factual findings required to make such a determination are reviewed for
v. Wilson, supra, 123 Cal.App.4th at p. 603; Briano v. Rubio (1996) 46
Cal.App.4th 1167, 1173.) “On review for
substantial evidence, we examine the evidence in the light most favorable to
the prevailing party and give that party the benefit of every reasonable
inference. [Citation.] We accept all evidence favorable to the
prevailing party as true and discard contrary evidence. [Citation.]”
(In re Marriage of Drake (1997)
53 Cal.App.4th 1139, 1151.)
A. Penny v. Wilson.
At the
beginning of the statement of decision, the trial court outlined the issues
that had been resolved at the January 2009 hearing, including that Louis had
the right to correct the 1999 Allocation, and clarified that “[t]he only
evidentiary issue in this case relates to the second allocation and whether
under Penny v. Wilson (2004) 123
Cal.App.4th 596 Louis improperly allocated the Louis Herman Frahm and Sylvia
Lee Frahm Living Trust’s assets among its sub-trusts.”
In
Penny v. Wilson, supra, 123
Cal.App.4th at page 603, we summarized a trustee’s fiduciary obligations
imposed by statute: “The trustee has the
duty to administer the trust according to the trust instrument. (Prob. Code, § 16000.)
also must deal impartially with all beneficiaries. (§ 16003.)
If a trustee is given discretionary power, the trustee must exercise his
or her power reasonably. (§ 16080.) Even if a trustee is given ‘sole’ and
‘absolute’ discretion, he or she must act in accordance with fiduciary
principles and must not act in bad faith or in disregard of the purposes of the
trust. (§ 16081, subd. (a).)” (Ibid.,
fn. omitted.) Thus, a court may set
aside a trustee’s discretionary act when the act is unreasonable, arbitrary,
capricious, or in bad faith. (
There, a trust which had as its
stated purpose to benefit four children equally obligated a surviving spouse to
divide trust assets into a survivor’s trust and a decedent’s trust upon the
other spouse’s death. The surviving
husband did not do so, instead waiting 16 years to divide the trust property
but then utilizing the valuations at the time of his wife’s death. As a result, he allocated to the decedent’s
trust a property that had declined during the 16-year period to one-third of
its prior value, and allocated to the survivor’s trust a property that had
appreciated four-fold over the same time period. (Penny
v. Wilson, supra, 123 Cal.App.4th at p. 604.) Before his own death, the surviving spouse
had also prepared to transfer the appreciated property in the survivor’s trust
to a residence trust established for the benefit of one child. (Id.
at p. 599.) Applying the governing legal
principles, we concluded that by allocating the appreciated property to the
survivor’s trust without taking into account its enhanced value, the trustee
disregarded the purpose of the trust to distribute the trust estate equally
among the four children. (
In
its statement of decision, the trial court distinguished Penny v. Wilson, supra, 123 Cal.App.4th 596 in several
respects. First, the language of the
Trust here gave Louis a general power over Trust assets, whereas the trust in
limited the trustee’s ability to exercise his power of appointment “‘during any
calendar year only to the extent of Five Thousand Dollars ($5,000.00) or five
percent (5%) of the aggregate value of the Trust Estate, whichever amount shall
be greater.’” Second, the court
found that appellant had failed to offer any competent evidence to show that
the value of the Trust assets had changed between the 1999 Allocation and the
2002 Allocation. Third, the trial court
concluded that appellant had failed to show that Louis acted in bad faith or in
disregard of the purposes of the Trust in making the 2002 Allocation. Finally, the court found ample evidence to
show that the 2002 Allocation was a well-reasoned effort to correct multiple
errors in the 1999 Allocation, and no evidence to suggest that the purpose of
correcting the 1999 Allocation was to favor one beneficiary over another. As discussed in more detail below, substantial
evidence supported the trial court’s findings.
Fiduciary Duties in Making the 2002 Allocation.
1. Louis had authority to modify the 1999
Allocation.
As
a threshold matter, appellant contends that Louis exceeded his authority by
superseding the 1999 Allocation.
order from the January 2009 hearing that Louis “had the right to make a second
allocation to correct the prior allocation of his joint-tenancy properties” to
the Marital Trust and Exemption Trust, he argues that this ruling imposed a
limitation on the scope of any reallocation.
Setting aside the fact that the trial court issued its order years after
Louis had already made the 2002 Allocation and thus the order could not have
governed the scope of any reallocation, appellant ignores that the trial
court’s ruling was solely intended to limit the scope of the issues for
trial. At the January 2009 hearing, the
trial court confirmed that it would take evidence on the allocation issues that
had not been resolved as a matter of law.
In other words, the trial court ruled that Louis had the right, as a
matter of law, to correct the 1999 Allocation for the purpose of removing the
joint-tenancy properties. But its ruling
did not confine the scope of any reallocation to those properties. Rather, it determined that it would rule on
the propriety of the balance of any reallocation issues after receiving
evidence at trial.
On
the basis of the evidence presented at trial, the trial court found that the
Trust gave Louis the power to amend or revise the 1999 Allocation. The Trust itself did not preclude Louis from
making changes to any initial allocation, as it gave the surviving spouse sole
discretion to determine how to allocate assets among the Sub-Trusts. Importantly, the 1999 Allocation
predated the funding of the Trust.
Moreover, Louis prepared the 1999 Allocation before Sylvia’s Form 706
had been filed, meaning that the 1999 Allocation did not contain asset values
consistent with the requirements of the Trust.
Given these circumstances, appellant’s own expert conceded that Louis
had the ability to make changes to the 1999 Allocation even after he had
signed it.
The
trial court further found “[t]he evidence established that there was a documented
and well-reasoned attempt to undo a number of allocation errors in the 1999
Allocation.” Beyond the misallocation of
joint-tenancy property as if it were community property, the 1999 Allocation
failed to use the asset values contained in the Form 706, allocated
Jacqueline’s residence to Louis’s children while it allocated to Jacqueline a
percentage of stock ownership in the family business run by Mitchel and
appellant, omitted community property assets, and contained mathematical
errors. Jacqueline’s expert Wheat
testified about the allocation errors.
He observed that the allocation schedule included six properties which
were Louis’s separate property, the values used in the 1999 Allocation were not
the same as those used on Sylvia’s Form 706, and a $560,000 note to Louis was
excluded from the allocation. He also
identified several mathematical errors within the 1999 Allocation, explaining
that the sum of the Marital Trust was understated and the sum of the Exemption
Trust was overstated. Wheat testified
that the 2002 Allocation corrected the errors he identified. Even appellant’s expert Schaffer conceded
that the Trust provided Louis with the power to allocate assets, as Sylvia did
not earmark particular assets for any particular Sub-Trust.
Accordingly,
substantial evidence supported the trial court’s finding that “Louis had the
ability to make changes to the 1999 Allocation other than to correct for the
allocation of his joint tenancy properties to the Marital Sub-trust and the
Exemption Sub-trust.”
did not act unfairly in making the 2002 Allocation.
Appellant argues that even if Louis was permitted to
modify the 1999 Allocation, the manner in which he did so was unfair and
inequitable, and not permitted under the standards announced in
589. The evidence does not support his
argument.
a. Asset value.
At the time of Sylvia’s death, the Trust was
unfunded. When Louis first allocated
assets among the Sub-Trusts, the total value of the Trust assets was
$12,133,340, with $6,066,670 of those assets allocated to the Survivor’s Trust,
$5,882,452 allocated to the Marital Trust and $184,218 allocated to the
Exemption Trust. Taking into account
that several of the properties identified as Trust assets were joint tenancy
properties that should have been considered Louis’s separate property and
adjusting asset values to correspond to those on the Form 706 estate tax
return, the 2002 Allocation shifted certain assets between Sub-Trusts to
provide for equivalent valuations.
Indeed, appellant’s expert Westover testified that it was not a breach
of fiduciary duty to reallocate assets among Sub-Trusts so long as any transfer
was made for fair and adequate consideration.
In the 2002 Allocation, $6,019,116 in community property
assets was allocated to the Survivor’s Trust, while $5,836,616 and $182,500 in
assets were allocated to the Marital Trust and the Exemption Trust,
respectively. The 2002 Allocation also
included $1,466,443 in joint tenancy and separate property assets as part of
the Survivor’s Trust. Disregarding the
asset values identified in the 2002 Allocation, appellant represents that after
allocation the assets in the Survivor’s Trust were valued at $3,398,781, while
those in the Marital Trust were worth $600,000.
But those values were reported by Applebaum in 2009, seven years after
the 2002 Allocation. Appellant offered
no evidence to show that the valuations provided in the 2002 Allocation were
incorrect in any respect. Westover
expressed no opinion on valuation, instead accepting the figures provided in
the Form 706.
Likewise,
appellant offered no evidence to support his theory that the
2002 Allocation was unfair because of the reallocation of potentially
appreciating and depreciating assets. Westover did not know whether any assets had
appreciated or depreciated between 1999 and 2002. Moreover, appellant offered no evidence to
show that at the time of the 2002 Allocation, Louis knew the Delgado property
allocated to the Survivor’s Trust would appreciate, or that the Frahm Dodge
stock allocated to the Marital Trust would depreciate due to subsequent
difficulties throughout the automobile industry. To the contrary, Mitchel testified that
between 1998 and 2002 the Frahm Dodge business, and correspondingly its stock,
had increased in value. The evidence
further showed that practical considerations governed Louis’s allocation: Jacqueline was living in the Delgado property,
and appellant and Mitchel were running the family business. These circumstances are unlike those in
at page 604, where the trustee allocated assets in 1997 with the full benefit
of hindsight. To purportedly effect an
equal allocation, he utilized the assets’ asserted value as of the time of his
wife’s death in 1981, yet he knew that one asset had significantly depreciated
and the other had significantly appreciated during the ensuing 16 years. (Ibid.)
We
conclude substantial evidence supported the trial court’s finding that
appellant “failed to introduce sufficient credible evidence to meet his burden
of proof to show Louis breached his fiduciary duties by allocating more
valuable assets to one sub-trust over the other in the 2002 Allocation so as to
. . . favor one or more beneficiaries.”
b. Asset quality.
Appellant further argues that even if the 2002 Allocation
on its face appeared to allocate assets of an equivalent value among the
Sub-Trusts, the nature and quality of the assets allocated to the Marital Trust
were inferior to that of the assets transferred to the Survivor’s Trust. He contends that the reallocation of assets
demonstrated that Louis acted in bad faith and in violation of the purposes of
the Trust. (See Penny v. Wilson, supra, 123 Cal.App.4th at p. 603.)
In the 1999 Allocation, Louis allocated to the Marital
Trust the Delgado property; the six properties that were ultimately determined
to be joint tenancy properties outside of the Trust; Frahm Dodge stock; notes
receivable, including 75 percent of a Honda lawsuit settlement (Honda
settlement note); and some cash and personal property. The 2002 Allocation necessarily omitted the
joint tenancy properties from the Marital Trust. Utilizing the appropriate values from the
Form 706, the 2002 Allocation reallocated several assets from the Marital Trust
to the Survivor’s Trust, including the Delgado property and the Honda
settlement note. The 2002 Allocation
allocated three assets to the Marital Trust—49 percent of the Frahm Dodge stock,
the Firestone lease and one-half of a note receivable from Mitchel—the latter
two of which were transferred from the Survivor’s Trust.
With respect to the Frahm Dodge stock, appellant
complains that the asset is a minority interest lacking corporate control and,
as such, amounts to an inferior asset worth less than would appear from its
monetary valuation. But appellant
offered no evidence at trial to support this argument. Instead, the evidence showed that Frahm Dodge
was a profitable company in 1999 and still in 2002. Lewis testified that Louis’s intent in
allocating the company stock to the Marital Trust was to allow the family
business to pass to appellant and Mitchel and was part of a strategy designed
to minimize their estate tax liability.
Even appellant’s expert Westover did not premise his opinion that Louis
breached his fiduciary duty on the allocation of the Frahm Dodge stock,
reasoning that Louis should have put the stock in the Sub-Trust in which the
children running the business were the sole beneficiaries.
Appellant likewise offered insufficient evidence to show
that the Firestone lease was a “wasting asset” worth less than its apparent
monetary value. The Firestone lease was
a long-term sub-lease by which Louis leased the land from the property owner
and received income from a sub-tenant.
The value of the lease was based on an appraisal prepared in connection
with Sylvia’s Form 706. The evidence
showed that two months after the 2002 Allocation, Lewis wrote a letter to Louis
in which he expressed concern about allocating the Firestone lease to the
Marital Trust “because of the fact that the Firestone Lease is potentially a
‘wasting’ asset due to the fact that the term of the Firestone Lease expires on
or about December 31, 2014” and thus the beneficiaries could claim that only
one-half of the lease should have been allocated to the Marital Trust. Westover opined that the Firestone lease was
necessarily worth less in 2002 than 1999 because of its “wasting” character. He opined that Louis breached his fiduciary
duty to the beneficiaries by allocating this asset to the Marital Trust because
of its lesser value at the time of the 2002 Allocation, meaning that the
reallocation was without full consideration.
But the evidence further showed that Lewis raised a
concern because Louis had expressed his own concern about appellant potentially
bringing a lawsuit, and Lewis was trying to protect himself. Lewis did not hold the opinion that
allocating the Firestone lease to the Marital Trust was improper or a breach of
fiduciary duty. He supported Louis’s
decision to keep the Firestone lease in the family as part of its business and
Louis’s desire for appellant and Mitchel to have access to the cash flow from
the lease. Moreover, Westover conceded
that in rendering his opinion he did not consider Louis’s remaining life
expectancy, any terms regarding the renewal of the lease or Probate Code
section 16362 governing the allocation between principal and income for a
liquidating asset. While he assumed that
the Firestone lease had decreased in value between 1999 and 2002, he could
offer no opinion as to its appreciation or depreciation in asset value during
that time period. Nor did Westover know
whether in valuing the Firestone lease Louis had complied with the Trust’s
requirement to consider appreciation and depreciation of an asset between the
date of death and allocation, or whether the Form 706 appraisal factored
the “wasting” nature of the lease into its final valuation.
Substantial
evidence supported the trial court’s finding that appellant failed to introduce
sufficient evidence to meet his burden to show that Louis breached his
fiduciary duty by failing to consider the nature of the Firestone lease as a
wasting asset. Appellant failed to offer
evidence to show that the Form 706 value of the Firestone lease did not take
into account its finite duration and the evidence showed that Louis offered a
good faith and reasonable purpose for allocating the Firestone lease to the
Marital Trust.
Finally, appellant contends that Louis breached his
fiduciary duty by reallocating the entire Honda settlement note to the
Survivor’s Trust, while allocating to the Marital Trust one-half of a
that Louis made to Mitchel during the 1990’s to cover his 25 percent ownership
in a new dealership. The Form 706 value
of the note was $750,000. Before his
death, Louis told Mitchel that he intended to forgive the note at some point in
the future; Louis never prepared anything in writing to that effect. Thus, while the evidence showed that the note
may have been worth nothing by the time of Louis’s death in 2006, appellant
offered no evidence to show that the note was worth less than the $750,000
specified on the Form 706 at the time of the 2002 Allocation.
In view of the evidence showing that the quality of the
assets allocated to the Marital Trust was not of an inferior nature at the time
of the 2002 Allocation, we conclude that substantial evidence supports the
trial court’s finding that appellant “failed to introduce sufficient credible
evidence to meet his burden of proof to show that Louis breached his fiduciary
duties by failing to take into consideration not just the dollar value of the
assets being allocated but also the quality and nature of those assets (for
example, whether the asset was a wasting asset, whether the asset being
transferred was a majority or a minority share in a corporation, whether the
corporation was a closely held corporation, and whether there was a market for
the shares of stock being allocated).”
c. Asset preservation.
Finally, appellant raises a host of issues concerning the
reallocation of the Delgado property from the Marital Trust in the 1999
Allocation to the Survivor’s Trust in the 2002 Allocation, all of which
essentially fall under appellant’s umbrella claim that Louis breached his
fiduciary duty by failing to preserve that asset for appellant’s benefit. The trial court ruled appellant offered insufficient
evidence to show that Louis breached his fiduciary duty in connection with the
transfer of the Delgado property.
Substantial evidence supported this finding.
The Delgado property was initially listed as an asset of
the Marital Trust, though one of the mathematical errors in the 1999 Allocation
was the failure to include the $375,764 value in the trust asset total. The value of the Delgado property was
calculated on the basis of information on the Form 706, which specified an
$875,000 appraised value and a $499,236 mortgage amount. By February 2002, Lewis had prepared a new
allocation that reallocated the Delgado property to the Survivor’s Trust. In March 2002, Louis executed a quitclaim
deed transferring the Delgado property to himself as a trustee of the J&L
Living Trust. The 2002 Allocation
ultimately signed in October 2002 reallocated the Delgado property to the
Survivor’s Trust. Kurtz had advised
Louis that he could make the reallocation so long as he replaced the property
with an asset of equivalent value.
Appellant contends that by transferring the Delgado
property from the Marital Trust and ultimately removing it from the Trust
assets altogether, Louis breached his duty to preserve Trust assets. (See Prob. Code, § 16006.) Westover testified that the transfer of the
Delgado property from the Marital Trust was a breach of fiduciary duty, because
Louis eliminated the beneficiaries’ right to live in and receive that property
without notice and full consideration.
The evidence showed, however, that appellant received both notice of and
full consideration for the transfer. Though
appellant had initially been under the impression that he would receive the
Delgado property, Louis told Mitchel in March 2002 the property had not been
promised to appellant. Mitchel, in turn,
informed appellant that he, as co-trustee, had signed over the Delgado property
to the J&L Living trust. Appellant
confirmed that more than two years before Louis’s death he was aware that the
Delgado property would go to Jacqueline.
Lewis explained that a primary residence is
typically allocated to a survivor and he believed it was appropriate to
allocate the property to the Survivor’s Trust.
With respect to the issue of full consideration, when
Louis moved the Delgado property from the Marital Trust, he intended to replace
it with another asset of equal value.
Kurtz advised him that there were a number of workable asset allocations
that would achieve his objective. In
making the 2002 Allocation, Louis shifted assets between the Survivor’s Trust
and the Marital and Exemption Trusts so that the allocated amounts
balanced. Once the Delgado property was
in the Survivor’s Trust, the Trust gave Louis and Mitchel discretion to utilize
the property for Louis’s benefit.
According to the Trust, “the Trustees shall also pay to or apply for the
benefit of the surviving spouse any sums from the principal of the Survivor’s
Trust that the Trustees, in the Trustees’ discretion, consider necessary for
the surviving spouse’s proper health, support, comfort, enjoyment and welfare.”
Appellant argues that he did not receive full
consideration because the Delgado property was undervalued in the 2002
Allocation. Both the 1999 Allocation and
the 2002 Allocation employed the Form 706 value of $375,764. While appellant urges that an inference can
be drawn that the Delgado property value had increased over that three-year
period because home values had increased and/or the mortgage had been paid
down, he offered no evidence below to support that inference. As the trial court found, appellant “offered
no credible evidence to show that the assets had changed in value when they
were allocated in 2002. [Appellant]
asserted that the Delgado house was reallocated for less than ‘full
consideration.’ Yet, he offered no
appraisal for the Delgado house or other evidence supporting this
argument.” Though appellant points to an
asset schedule attached to Louis and Jacqueline’s July 2001 prenuptial
agreement which listed the Delgado property as having a value of $1,200,000,
the schedule further identified the property as the “primary residence,
$875,000, net of lien.” Given that it is
the trial court’s role to weigh and resolve conflicts in the evidence (e.g.,
52–53), it was reasonable for the trial court to construe the schedule as
inaccurately stating the Form 706 value.
Appellant
finally argues that Louis’s failure to preserve the Delgado property as part of
the Marital Trust was inconsistent with Sylvia’s intent. As explained in Kropp v. Sterling Sav. & Loan Assn. (1970) 9 Cal.App.3d 1033,
1044–1045, “the court ‘must if possible ascertain and effectuate the intention
of the trustor . . . as expressed by the language of the
instrument itself.’ [Citation.] ‘. . . [T]he guiding principle
must be the intention of the settlor—his intention as expressed.
Not, What did he
intend to say but, What did he intend
by what he did say must be the
test.’ [Citation.]” Here, given that the trial court ruled there
was no ambiguity in the Trust language concerning the allocation of assets
among Sub-Trusts, we look to the Trust to ascertain Sylvia’s intent. In the Trust, Sylvia gave Louis (and
vice-versa) discretion to allocate assets among the Sub-Trusts. The Trust did not specify that any particular
asset, including the Delgado property, was to be allocated to any particular
Sub-Trust. Indeed,
appellant’s own expert Schaffer testified that “[t]here’s nothing to prevent
him [Louis] from putting the Delgado property into the Survivor’s Trust.” The only specifications about asset
allocation were that the community estate was to be divided between the
Survivor’s Trust on the one hand, and the Marital and Exemption Trusts on the
other, and that the assets were to be valued as of the time of death. Because substantial evidence supported the
conclusion that these two requirements were satisfied, the evidence likewise
supported the trial court’s finding that “[t]he 2002 Allocation honored the
testamentary intent of the drafters of the Trust.”
In sum, we
supported the trial court’s determination that Louis acted reasonably and in
accordance with his fiduciary duties in making the 2002 Allocation. We agree with the trial court that there was
no convincing evidence that the values used in the 2002 Allocation were
incorrect or inequitable, and that the evidence showed “the 2002 Allocation
resulted in a more rational disposition of assets than the 1999 Allocation.”
DISPOSITION
The
judgment is affirmed. Applebaum,
Jacqueline and Mitchel are entitled to their costs on appeal.
NOT TO
BE PUBLISHED IN THE OFFICIAL REPORTS.
_______________________,
Acting P. J.
DOI TODD
We concur:
_______________________, J.
ASHMANN-GERST
_______________________, J.
CHAVEZ
refer to individuals having the same last name by their first names for the
purpose of clarity and not out of disrespect.
We also note that Mitchel Frahm appears as “Mitchel” and “Mitchell”
alternately throughout the record.
appeal, appellant also identifies Louis and Jackie’s premarital agreement as
confirming the community property nature of the properties, but that agreement
merely incorporates schedules from other documents.
