Estate of Rule
Filed 9/14/12 Estate of Rule CA4/1
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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COURT OF
APPEAL, FOURTH APPELLATE DISTRICT
DIVISION
ONE
STATE OF CALIFORNIA
Estate of PAUL ALLEN RULE, Deceased.
JAMES KEENAN,
Plaintiff
and Appellant,
v.
BETTY M. RULE,
Objector
and Respondent.
D058759
(Super. Ct.
No. P161699)
APPEAL from orders of the Superior
Court of
County, William H. Kronberger, Judge. Affirmed.
Petitioner and appellant James Keenan (Keenan), who served until 2004 as
the administrator of the Estate of Paul Rule, deceased ("Rule's Estate"), filed his
amended final account and petition for settlement of the estate and allowance
of fees, under
Probate Code
title="">[1]
section 1060 et seq. (the amended account). Objections were
filed by the current administrator, respondent and objector Betty Rule
(Objector or Betty Rule, mother of Paul Rule).
The probate
court conducted a bench trial in 2008 on the disputed issues identified by the
parties in their joint trial statement.
The probate court's September 16,
2010 order surcharged Keenan over $1.9 million for his breaches of
care and fiduciary duty that took place while he was acting as independent
administrator of the Rule Estate. The
court approved, only in part, his amended account, while deferring final
settlement of the estate until further proceedings were conducted on the
requests to allow fees (not involved in this appeal). Keenan's motion for new trial was denied.
Keenan appeals the orders imposing the surcharges and
partially approving the amended account.
(§ 1300, subd. (g) [surcharge order appealable]; Code Civ. Proc.,
§ 904.1, subd. (a)(2) [denial of new trial, appealable order].) Keenan contends the probate court utilized an
incorrect burden of proof standard,
and further, that insufficient evidence supported the imposition of the
surcharges as remedies for his breaches of fiduciary duty and the applicable
standard of care in his administration of Rule's Estate. A large portion of his Rule Estate
administration was carried out while Keenan was participating in his personal
beginning in 1996, in which Rule's Estate was an alleged creditor and debtor.
During Keenan's bankruptcy proceedings, from 1996 to
2002, the trustee for his bankruptcy estate brought several adversary
proceedings to determine the respective interests of Keenan and Rule's Estate
in several of their real property ventures, and the results of those
proceedings were reflected in the probate court's decision upon Keenan's
amended account. As relevant here,
Rule's Estate, acting through Keenan, entered into a stipulated judgment in
favor of Keenan's bankruptcy estate and against the Rule Estate, for $849,392,
stemming from "investment loans" that Keenan represented he had made
to Paul Rule ("Mr. Rule'), when granting Mr. Rule a percentage interest in
certain property ventures. Also, Keenan
as the Rule Estate administrator failed to contest his own bankruptcy trustee's
decision to disallow a particular 1988 promissory note that Keenan had made in
favor of Mr. Rule, which had a balance due in 1993 of approximately $84,590.36
(the "$84,000 note").
Having reviewed the record, we conclude it strongly
supports the probate court's orders surcharging Keenan and accepting, with
restrictions, his amended account.
Substantial evidence supports the court's determinations that as the
Rule Estate administrator, Keenan breached his fiduciary duties, did not act
with due care, and caused losses to that Estate for which he should be
surcharged. The court did not apply an
incorrect burden of proof nor incorrectly assess the evidence, and the orders
are affirmed.
I
BACKGROUND
This
general outline of facts concerning the Rule Estate and its relationship with
Keenan's bankruptcy proceedings will be supplemented in the discussion portion
of this opinion, as necessary.
A. Creation of Estate in 2004; Keenan as
Administrator
In the
1980's-1990's, Keenan
ran a real estate management company, Data Property Services, and Mr. Rule was
his longtime employee and friend. Mr.
Rule had a California real estate broker's license, and
Keenan had a real estate sales agent license.
In the 1984-1987 time frame, Mr. Rule and Keenan entered into several
oral agreements that Mr. Rule would obtain an unrecorded ownership interest in
some of Keenan's real property partnership or joint venture projects, and
Keenan would be compensated through credits given to Mr. Rule, who sometimes
acted as the broker, from the sales proceeds or rents from the various
projects. They did not arrange to have
Mr. Rule's name added to the title on any of those properties they obtained or
managed.
Keenan's business
employed accountants, Thomas Perlowski and Kenneth Cunningham, for business and
tax purposes, and they worked with both Keenan and Rule.
Their accounting ledgers showed some of the property interest
transactions between the two principals. In
1988, Keenan executed a $185,000 promissory note in favor of Mr. Rule in one of
their business transactions (sometimes referred to as a mirror note), and the
copy of the note in the record shows that it was paid down to the $84,000 owing
to Mr. Rule.
On December 6, 1993, Mr. Rule died without leaving a will. His closest survivor and heir, his elderly
mother Betty Rule, accepted Keenan's offer to serve as the independent
administrator of his estate, because Keenan was knowledgeable about Mr. Rule's
financial affairs, and Betty was not.
(§ 10400 et seq.) Mr. Rule's
other family members agreed (brother and girlfriend, Karen Barberio).
Keenan
was appointed as administrator in 1994.
On September 8, 1994, Keenan filed his inventory and appraisement
(I&A), showing that the Rule Estate had assets amounting to $1,651,787.65,
mostly from its agreed-upon percentage interests in their partnership real property
projects. This I&A described the
four Oceanside real properties in which Rule had obtained a specified
percentage interest, and gave their assessor's parcel numbers. They included: 2001-2003 South Hill Street (a 40 percent
tenancy in common interest); 2009 Hill Street (a 40 percent tenancy in common
interest); and a property on South Tremont St. (a 20 percent tenancy in common
interest). For the Loma Alta Industrial
Park, Keenan reported that Rule had a 7.672 percent interest as a tenant in
common with Keenan and others (who are not parties to this appeal).
The
same 1994 I&A was attached as an exhibit to the amended account Keenan filed in
2005, after his removal. The
supplemental I&A filed in 2004 by the replacement administrator, Betty
Rule, added a fifth Rule Estate property interest, the
"Wisconsin-Cleveland" property (a 20 percent undivided interest,
addition not disputed here; these Keenan/Rule projects are designated here the "five real
properties").
Keenan
did not file any creditor's claims on his own behalf against the Rule Estate,
for amounts Mr. Rule might have owed to him on the five real properties. (§ 9100 et seq.; Code Civ. Proc.,
§ 366.2.) In the 1996 federal tax
return Keenan filed on behalf of the Rule Estate, "Form 706," he showed
that he personally owed a $67,640 promissory note to the estate, and the Rule
Estate owed him $350,000 in "investment loans."
From
1998 to 2004, Keenan, as administrator, employed attorney Kevin C. Young for
some Rule Estate business, particularly in the bankruptcy proceedings. Young also represented another of Keenan's
and Mr. Rule's assets, the Mikal Corporation, in the bankruptcy. Attorney Young did not review the probate
files for the Rule Estate, and Keenan was still conducting the majority of the
Rule Estate's business.
In
2004, Keenan was removed as the administrator for the Rule Estate.
B. Litigation About Rule Estate Interests in
Keenan's Bankruptcy Proceedings
In
January 1996, when Keenan filed for personal bankruptcy reorganization under
Chapter 11, he listed the Rule Estate as one of many creditors and debtors of
his bankruptcy estate. For several years
beginning in 1996, the bankruptcy trustee (Ross Pyle, represented by attorney Jeffrey Isaacs) litigated two
adversary actions he filed to determine the Rule Estate's interests in the five
real properties, as Keenan was claiming he was entitled to offsets for monies
the Rule Estate owed him from other partnership projects.
The
bankruptcy trustee hired an accountant, Francine Meyers (since deceased) to go
over Keenan's 800-900 boxes of business documents, which had been seized due to
the trustee's concerns about maintaining their integrity. Negotiations to resolve the existence and
amount of the Rule Estate interests were unsuccessful. In 2001, the bankruptcy trustee filed a
motion for summary judgment in the adversary matter, to resolve the alleged
Rule Estate indebtedness. No written
note from Mr. Rule in Keenan's favor was ever found, and his name was not on
the title of the five real properties.
Until
2004, Keenan continued to serve as the administrator for Rule's Estate, and he
and his accountants, Cunningham and Perlowski, worked with Keenan's bankruptcy
trustee and Meyers, the CPA hired by the trustee, to resolve the interrelated
financial issues between the two estates (Rule and bankruptcy). In April 1999, Keenan amended his bankruptcy
petition asset schedule to add references to a note receivable from Paul Rule
in the amount of $349,998.
According
to testimony from Mr. Rule's girlfriend, in her presence, many times between
1998 and 2005, Keenan told Betty Rule she need not be concerned about her son's
financial affairs with Keenan, and she need not pay any attention to any of
those things; roughly, "Don't worry about it. I'm taking care of it. If anything comes of this, I'm going to pay
you back. You're not going to lose any
money, so don't worry about it. I'm taking
care of everything."
At
Keenan's request, Betty Rule signed documents to be filed in the bankruptcy
matter concerning the summary judgment motion and opposition that eventually
led to the stipulated judgment in the adversary matters. She later filed a motion to set aside that
stipulation, but the bankruptcy court and the federal district court denied her
request.
During
the Keenan bankruptcy proceedings, he never opposed the bankruptcy trustee's
disallowance of Keenan's promissory note owed to the Rule Estate, which
occurred on April 20, 1999, while Keenan was still serving as the administrator
for the Rule Estate. The note was
originally in the amount of $185,000, and the copy admitted at trial shows
handwritten calculations of the $84,000 balance due.
On
July 15, 2002, Keenan, as the Rule Estate administrator, stipulated to a
$849,392 judgment to resolve the adversary proceedings that had been brought by
the bankruptcy trustee, to avoid the five
real property interests of the Rule Estate. The noncontested order
approving the stipulation was entered on August 27, 2002. This judgment in favor of Keenan's
personal bankruptcy estate was based in part upon his representations in the
bankruptcy schedules that there was a note receivable from Paul Rule in the
amount of $349,998. However, the record
does not contain such a written note, and the amount of the stipulated
judgment, including interest, was arrived at through the calculations of
Keenan's accountants, Cunningham and Perlowski, in cooperation with the
bankruptcy trustee's accountant, Meyers.
C. Current Probate Proceedings; Trial and
Rulings
Once Keenan was removed as the administrator for the Rule
Estate, in May 2005, he filed his account and petition for settlement, as
amended in August 2005. (§§ 10952, 1061, subd. (a)(1).) In the amended account, he attached a copy of
his original 1994 I&A that described all Rule Estate property on hand, and
that specifically identified the percentage interests owned by the Rule Estate
in the five real properties.
In October 2005, Betty Rule filed objections to the
amended account, and the matter was set for trial. In the joint trial statement, the parties limited the contested
major issues to (a) whether Keenan breached his fiduciary duty and should be
surcharged, based on the stipulated judgment against the Rule Estate entered in
favor of his own bankruptcy estate; (b) breach of Keenan's duties based on his
nonopposition to his bankruptcy trustee's disallowance of the Keenan note
balance owed to the Rule Estate; and (c) the tax return and liability issues
(not pursued on appeal; see fn. 3, ante).
At the six-day trial in 2008, numerous witnesses
testified and numerous exhibits were received in evidence, as will be described
in further detail, post. Work papers from Keenan's accountants,
Cunningham and Perlowski, were entered into evidence at trial. Other work papers from the bankruptcy
trustee's accountant, Meyers, that were found in the file of the attorney for
the bankruptcy trustee were offered at trial, but only a portion of them was
received into evidence.
name="_ftnref4" title="">[4]
At
trial, Betty Rule testified that she did not understand what her late son's
financial interests in the five real properties were, or what the summary
judgment proceedings in bankruptcy were supposed to achieve, or how or why the
stipulated judgment was necessary for the interests of the Rule Estate.
At the conclusion of trial on March 11, 2008, the probate
court rendered its oral ruling on submitted matters, explaining its reasoning
process in detail and summarizing the evidence.
On September 16, 2010, the court issued its formal order, making findings of fact that Keenan
had not established, by a preponderance of the evidence, that Mr. Rule was
indebted to Keenan for the acquisition of the five real properties (the subject
of the stipulated judgment against the Rule Estate). The court disapproved the amended
account with respect to
its treatment of the percentage ownership interests of the Rule Estate in the
five real properties. In the order,
these interests were recited in the order as they were "reflected in the
Inventory and Appraisements" filed by Keenan.
With
respect to the stipulated judgment, the court ruled that Keenan had failed to
exercise ordinary prudence and care when he compromised his bankruptcy claim
against the Rule Estate, through his entry into the stipulation on its behalf. With respect to the bankruptcy trustee's
disallowance of the Keenan note to Rule, the court found that he had breached
his fiduciary duty to the Rule Estate, by not contesting that action by the
trustee.
In the formal order, the court approved the amended
account, with the exception of the treatment of the percentage interests, and
ordered that Keenan was surcharged for his breaches of duty, in the total
amount of $1,980,333.54 including interest.
This amount was broken down, first, into a sum of $406,642.94 to compensate
for the disallowed Keenan note plus interest owed to the Rule Estate. Next, regarding the stipulation in the
bankruptcy proceedings of Keenan's claim against the Rule Estate, Keenan was
surcharged for the total amount of $1,573,690.60.
Later, Keenan's motion for new trial was denied. Keenan
appeals.
II
ISSUES
PRESENTED AND CONTENTIONS ON APPEAL
A. Applicable
Standards of Review
Keenan challenges several aspects of the order
surcharging him on his amended account.
He contends the probate court did not utilize the correct burden of
proof at trial, there was evidentiary error, and insufficient evidence
supported the factual findings underlying the imposition of the
surcharges. Specifically, he contends there
was no adequate showing that (1) he breached the applicable standard of care,
with regard to his entry as administrator into the stipulated judgment in
bankruptcy against the Rule Estate, or (2) breached his fiduciary duty as
administrator by failing to contest, in his bankruptcy, the trustee's
disallowance of his debt to Rule.
This order settling the amended account and surcharging
Keenan was issued
following a bench trial, in which the probate court heard testimony and
reviewed documents to resolve the issues identified in the joint trial
statement. In reviewing such an order
after trial, "any conflict in the evidence or reasonable inferences to be
drawn from the facts will be resolved in support of the determination of the
trial court decision." (
Cal.App.3d 351, 358.) The ultimate facts found in the court's order,
equivalent in this case to a statement of decision, necessarily include
findings on the intermediate evidentiary facts that sustain them. (Muzquiz
v. City of Emeryville (2000) 79 Cal.App.4th 1106, 1125 (
The
appellate court will "consider all of the evidence in the light most
favorable to the prevailing party, giving it the benefit of every reasonable
inference, and resolving conflicts in support of the [findings]." (Howard
v. Owens Corning (1999) 72 Cal.App.4th 621, 630.) "Substantial" evidence has
" 'ponderable legal significance, . . . [and is] reasonable in
nature, credible, and of solid value.' "
(Bowers v. Bernards (1984) 150
Cal.App.3d 870, 873.) In determining its
existence, we look at the entire record on appeal rather than simply
considering the evidence cited by a party.
(Ibid.) We
may not reweigh the evidence and are bound by the trial court's credibility
determinations. (Howard, supra, at p. 631; see Heller
v. Pillsbury Madison & Sutro (1996) 50 Cal.App.4th 1367, 1384.)
The substantial evidence rule applies on appeal of a
probate court's decision to accept or disapprove an administrator's accounting,
and the appellant has the burden of showing error. (Estate
of Bonaccorsi (1999) 69 Cal.App.4th 462, 471; Estate of Massaglia (1974) 38 Cal.App.3d 767, 774-778.) "[I]in the absence of a challenge to
findings it is assumed that they are supported by the evidence and that they
support the judgment [citation]." (
appellant to set forth all of the evidence on an issue if the sufficiency
thereof is challenged." (
To
the extent the trial court's evidentiary rulings are challenged on appeal, we
apply an abuse of discretion standard. (
717-718.) The
probate court's discretionary decisions are
evaluated in light of the record and applicable precedents, and the
court must " ' "exercise [its] discriminating judgment within the
bounds of reason. [Par.] To exercise the power of judicial discretion
all the material facts in evidence must be known and considered, together also
with the legal principles essential to an informed, intelligent and just
decision." [Citations.]' 'The appropriate [appellate] test for abuse
of discretion is whether the trial court exceeded the bounds of reason.' [Citations.]
[¶] '. . . To be entitled to relief on appeal from the result of an
alleged abuse of discretion it must clearly appear that the injury resulting
from such a wrong is sufficiently grave to amount to a manifest miscarriage of
justice . . . . ' [Citation.]" (Estate
of Gilkison (1998) 65 Cal.App.4th 1443, 1448-1449.)
B. Duties of Administrator
As the standard of care for an
administrator's management and control of the estate, section 9600, subdivision
(a) requires the use of ordinary care and diligence, and "[w]hat
constitutes ordinary care and diligence is determined by all the circumstances
of the particular estate." Section
9640 provides that the independent authority of an administrator or personal
representative under the IAEA (§ 10400 et seq.) is not limited by those
standards. However, section 10500 in the
IAEA further requires that the independent administrator "shall administer
the estate in the same manner as a personal representative who has not been
granted authority to administer the estate under this part," i.e., by
using ordinary care and diligence, and the probate court appropriately applied
that standard in this case.
Section 10501, subdivision (a)(8) in
the IAEA requires that an independent administrator shall seek probate
court supervision and authority for any "[a]llowance, payment, or
compromise of a claim of the personal representative, or the attorney for the
personal representative, against the estate." Where an
administrator has acted outside the applicable statutory framework (e.g., to
compromise an estate's claim personally involving the administrator), that
action in excess of authority waives statutory protections from liability, such
as would have been provided by prior court approval of the particular kind of
claim. The estate can recover against
the former administrator if it shows "the compromise was improvident and
damaged the estate." (
878, 886.)
Where an administrator has
improperly "in effect abdicated all of her duties to the estate" and
failed to maintain control and thus to protect the estate, she may properly be
surcharged for losses to the estate. (
818, 826.) Although the administrator
might have been protected from liability for a different estate-related
decision, if she could have shown there was reliance on advice of legal counsel
on a matter of "business advice," that was not the case before the
court, where that attorney had made false representations, and that
administrator failed "to assure administrative integrity." (Id.
at p. 825.)
Under section 9601, remedies are provided for proven
breaches of fiduciary duty by an administrator, who may be surchargeable in the
discretion of the court, as "appropriate under the circumstances,"
for losses caused to the estate, or for recovery of personal profits
attributable to the administrator's breach of duty. (14 Witkin, Summary of Cal. Law (10th ed.
2005) § 525, pp. 602-603, citing Cal. Law Revision Com. com., 53A West's Ann.
Prob. Code (1991 ed.) foll. § 9601, p. 513.)
In light of these basic governing principles, we turn to
the specific contentions on appeal.
III
PRELIMINARY LEGAL ISSUES
A. Contentions About Burden of Proof
Under the comprehensive statutory scheme of section 1060
et seq., Keenan's amended account appropriately included summaries, supporting
schedules and reports on the inventory and appraisal of estate assets. "Filing of an account is deemed to
include a petition requesting its approval." (§ 1064, subd. (b); § 10952 [court
may compel the account];§ 10900 [financial statement; report of
administration]; see 14 Witkin, Summary of Cal. Law, supra, Wills, § 384, pp. 467-468; § 710, pp. 794-795.)
As the objector, Betty Rule contested some of the claims
in the amended account, claiming Keenan had breached fiduciary duties or
lesser, applicable duties of care.
Keenan contended at trial and on appeal that the Objector had, but
failed to carry, the burden of proof.
The record does not bear out Keenan's approach. At the beginning of trial, Keenan's attorney
told the court the disputed issues concerned the Rule Estate's objections and
surcharge requests to his amended account, and agreed with the court that he
was going to rest his case on the accounts he filed. The Objector then presented witnesses,
herself and others, and as an adverse witness, Keenan. Keenan responded by calling the bankruptcy trustee's
attorney, his own accountants Perlowski and Cunningham, and Attorney Young, and
he testified on his own behalf. Closing
argument was heard, the matter submitted, and the court rendered an oral
tentative decision, first explaining the analysis it used.
The standards of section 9254, subdivision (a) normally
require that in a court supervised probate matter, the burden of proof for a
contest to an account falls on the contestant.
However, since this was an independently administered estate
(§ 10400 et seq.), these separate statutory standards apply: "The validity of an allowed or approved
claim may be contested by any interested person at any time before settlement
of the report or account of the personal representative [administrator] in
which it is first reported as an allowed or approved claim. The burden of proof is on the contestant,
acted under the Independent Administration of Estates Act [§ 10400 et
seq.], in which case the burden of proof is on the personal representative." (§ 9254, subd. (a); italics added.)
The probate court's oral tentative decision at the close
of trial correctly framed the issues before it by stating that the parties'
dispute was not about the dollar accuracy of the accounting, but rather about
the nature of the actions Keenan took in entering into the stipulated judgment
against the Rule Estate, as well his failure to object to the disallowance of
his own debt to the Rule Estate. Although
Keenan, as an independent administrator, was required to seek court approval
under section 10501, subdivision (a)(8), of his personal claims or defenses
against the Rule Estate, he never did so.
The probate court took that factual scenario into account and
accordingly focused upon whether his actions as the administrator were
otherwise appropriate and defensible within the applicable standards of
care. In effect, because there had been
no effort to seek court approval of his own claims against the Rule Estate, the
burden of proof fell upon Keenan to show the settlement had been made in its
best interests, such as if it actually owed him a large debt.
Likewise, since Keenan was able to avoid liability on his
own $84,000 debt to the Rule Estate, and he never objected to the disallowance
of this debt during his bankruptcy, Keenan effectively compromised his own
claim, again without seeking court authority.
The probate court correctly applied the statutory scheme for the burden
of proof under all these circumstances, and we will proceed to examine the
substantial evidence support for its conclusions. First, however, we briefly address those
arguments made by Keenan that appear to fall well outside the scope of his
petition and the ruling.
B. Scope of Keenan's Petition; Side Issues
Some of Keenan's various arguments on appeal essentially
attempt to reopen the bankruptcy proceedings and to relitigate this probate
matter. First, Keenan incorrectly
contends the probate court could not properly make orders determining the
extent of the Rule Estate's percentage interests in the subject
properties. Although his petition did
not expressly include any request for relief under section 850 for a court
order quieting title, his own allegations and admissions about the contents of
the I&A of the Rule Estate's assets (as found in his amended accounting)
served to establish an adequate basis for the probate court's underlying
findings about the percentage interests owned by the Rule Estate in the five
real property projects, for purposes of resolving the accounting and surcharge
issues.
unpersuasive for him, in his reply brief, to refer to a pending quiet title
action pursued by the Rule Estate concerning the Wisconsin-Cleveland and Loma
Alta properties, as arguably supporting his claim that title issues were never
litigated here. Nor can he realistically
claim that the probate court in this matter went beyond the scope of his
petition by quieting title to the percentage interests in the five real
properties, since that is not what was actually ordered.
Keenan fails to recognize that the legal issues raised by
his petition, and the objections framed by the joint trial statement, required
the court to resolve, on the facts alleged and proven, whether the Rule Estate's
valuable property interests had been inappropriately interfered with by
Keenan's actions as administrator, in stipulating to the judgment against
it. It was Keenan who reported the Rule
Estate's percentage interests to the probate court, and he is bound by that.
Earlier, when the bankruptcy trustee sought to avoid any
Rule Estate interest in the subject properties, Keenan claimed in response that
ownership was not in dispute, only the amount the Rule Estate owed him, and the
stipulated judgment reflects that amount.
He now argues this must indicate all of his actions were proper, since
he was then defending the Rule Estate interests. However, the questions presented to the
probate court remained whether, under all the other circumstances, those Rule
Estate transactions (made without any court approval) were done according to
the best interests of the Rule Estate.
(§ 10501, subd. (a)(8).)
We cannot accept Keenan's argument, apparently made for
the first time on appeal, that the Objector should now be judicially estopped
from disputing in probate that the bankruptcy stipulated judgment was seriously
adverse to the Rule Estate interests.
This record does not demonstrate that Keenan obtained the informed
consent of Betty Rule, as a beneficiary, to stipulate to the judgment against
her son's estate, based on Keenan's unsubstantiated representations that there
was some kind of written agreement by Mr. Rule to pay Keenan money. Merely because Betty Rule now admits she
signed what Keenan told her to sign (declaration in summary judgment opposition
in bankruptcy) does not mean that this court can reopen the validity of the
stipulated judgment.
Similarly, Keenan cannot be heard to rely on the 2005
district court rulings that the Rule Estate had not successfully shown grounds
in the federal courts to vacate the stipulated judgment (e.g., on the grounds
Keenan failed to file a timely probate claim during his administration). That is a different issue from whether substantial
evidence supports the probate court's evaluation of Keenan's overall
performance of his administrator duties and amended account, as we next
inquire.
IV
SUBSTANTIAL EVIDENCE ANALYSIS
A. Disallowance by Bankruptcy Trustee of
Keenan's Debt to Rule Estate
During the bankruptcy proceedings, Keenan failed to
oppose the disallowance of his own promissory note owed to the Rule
Estate. This record contains the
original $185,000 note, with handwriting on it showing that approximately
$84,000 remained owing by 1999.
Although Keenan generally attacks the sufficiency of the
evidence supporting the findings and conclusions of the probate court, he does
not appear to specifically challenge the portion of the surcharge that is based
upon the losses to the Rule Estate from the bankruptcy disallowance of the
Keenan indebtedness to it ($406,642.94).
To the extent Keenan is actually arguing there is no
substantial evidence supporting the surcharge based upon the disallowed note,
he is mistaken. The probate court
appropriately framed its inquiry as determining whether each disputed item in
the amended account should be approved, based upon its effect on the interests
of the Rule Estate. Keenan's position as
administrator required him to affirmatively protect the Estate's
interests. As the probate court explained: "The failure to file the opposition
directly to Mr. Keenan's benefit to his bankrupt estate and his obligations,
and to the direct detriment of the Rule Estate." (Italics added.) Failing to oppose the disallowance of the
note was clearly a breach of his administrative duties and the court's
determination on that ultimate fact was legitimately based upon its express and
implied findings from the evidence, about the manner of performance of Keenan's
duties in that regard. (See
The surcharge based on the disallowed note is supported by the record.
B. Evidentiary Argument
Next, Keenan claims that the ruling
denying admission into evidence of his exhibit 170 was an abuse of discretion
under these circumstances. The record
shows that counsel told the probate court that trial exhibit 170 was a
443-page compilation that included numerous documents from the files of the
attorney for the bankruptcy trustee, and that the trustee's accountant, as well
as Keenan's accountants and attorney, had utilized such documents in
calculating the amount of the stipulated judgment. Some of the same information is found
in an admitted exhibit 136, a 1987 worksheet from Perlowski.
Keenan sought admission of
exhibit 170 at various points in trial, while Attorney Young and the trustee's
Attorney Isaacs were testifying, claiming that it supported his version of the
amount of the Rule Estate's debt to him as payment due for the percentage interests
in the five real properties. Keenan
argued the files overall would show that the settlement in bankruptcy was for a
reasonable amount.
After hearing argument, the court deferred ruling and
inquired whether laying a foundation was possible, to show that this document
was part of Keenan's consideration when he made the decision to accept the
stipulated judgment on behalf of the Rule Estate. This evidentiary request was not pursued
further, and the court's ruling has not been shown to represent any abuse of
discretion, in light of the numerous times the matter was discussed and the
lack of foundation referred to by the court.
C. Surcharge Based on Stipulated Judgment
Against Rule Estate
The probate court ruled that the Objector had sufficiently shown
"there was little or no evidence to support [Mr. Rule's property interest]
debt, which evidence was sufficient, in my view, to make a prima facie case
demonstrating that the stipulation was not in the estate's best interest, and
thus shift[ed] the burden of proof to Mr. Keenan." The court concluded from the evidence that
Keenan had acted outside of his authority by compromising the claim against the
Rule Estate without court approval, thus waiving the protection of statute. (§ 10501, subd. (a)(8) [probate court
authority is required for compromise of a claim of the personal representative
against the estate].) Keenan was
therefore required to demonstrate that he met the applicable standards of care
when agreeing to the stipulated judgment against the Rule Estate, to pay off
his bankruptcy estate.
On appeal, Keenan points to several factors in the record
to support his claim the probate court acted without substantial evidence
support. Keenan relied on the work paper
exhibits and testimony of his accountants Cunningham and Perlowski, as well as
his own testimony, to claim that there was once a written note from Mr. Rule,
or at least some accounting ledgers showed the same debt or offsets were due to
Keenan, because of the Rule Estate's acquisition of the percentage interests in
the five real properties. Keenan did not
know whether he ever had any such writing, but he believed it might have been
in the boxes of documents that the bankruptcy trustee had seized, although none
was ever produced or found by the attorney for the trustee.
However, the probate court did not find that evidence
persuasive, and questioned the reliability and credibility of Keenan's
witnesses. The court noted that there
was conflicting testimony about how the initial amount of the debt was computed
and what type of interest rate would apply.
Later, other figures were arrived at through the collaboration between
Keenan's accountants and the bankruptcy trustee's accountant Meyers, during the
bankruptcy summary judgment and stipulation proceedings, taking into account
various claims of offsets and the "mirror note" Keenan was
presenting. In analyzing all that
evidence, the probate court commented that Keenan had not produced anything
more than working papers, and consequently, "[t]here may well have been an
indebtedness, but it doesn't appear to have ever been a meeting of the minds as
to the exact amount or terms."
Subsequently, the probate court disapproved the amended
account with respect to Keenan's treatment of those percentage interests,
because all the evidence "doesn't demonstrate the existence of a debt as
of the date of the decedent's death, nor, if the court were able to conclude
there was a debt, does the evidence support the amount of such debt at the date
of the decedent's death, nor does it support the terms."
From the evidence that Keenan was acting as administrator
from 1994 throughout his 1996 bankruptcy filing and until removed, but he never
made any written creditor's claim against the Rule Estate, the probate court
could have reasonably inferred that there was no certain amount of debt. He did not add a reference to the Rule Estate
debt to his bankruptcy schedules until 1999, by which time he had allowed
interest to accrue against the Rule Estate, harming its interests. He also rejected a settlement offer from the
bankruptcy trustee, which would have been more favorable to the Rule Estate,
before entering into the stipulated judgment.
Keenan did not consistently treat Mr. Rule's acquisition of the
percentage interests in the properties as requiring a certain amount of
monetary compensation. It was not
dispositive that the interests were unrecorded, because the pleadings showed
there was some actual ownership interest that was not a matter of public
record. Keenan has not set forth all of
the relevant evidence on the issue to successfully challenge the sufficiency of
support for the ruling. (See
Keenan further argues that the stipulation represented
only his effort to protect the Rule Estate from losing its interest in the
properties, due to the bankruptcy trustee's request for avoidance, and Keenan
contends he and Betty Rule were following the advice of counsel (Young) in
doing so, and no better result was possible, since the trustee was on a winning
streak. Under all these circumstances,
it is unpersuasive for Keenan to claim that an advice of attorney defense
should entirely protect him from any liability for surcharge. (See Estate
of Guiol, supra, 28 Cal.App.3d
818, 824 [administrator can be liable for surcharge where she abdicated duty by
turning over possession and control of estate to attorney]; 14 Witkin, Summary
of Cal. Law, supra, § 526, pp.
604-605.) Keenan seems to argue in his
reply brief that an attorney malpractice analysis should now be used to examine
the "case within a case," to determine if a different result should
have been reached, but that is not what was placed before the probate court.
Rather, the testimony and declarations presented to the
probate court showed that Attorney Young participated in the
proceedings, mainly for one of Keenan's and Mr. Rule's other businesses, Mikal
Corporation, while Young nominally also represented the Rule Estate in the
bankruptcy court. However, Young
admitted that he never reviewed the Rule Estate probate file and that Keenan
was carrying out most or all of the Rule Estate business. Keenan cannot now properly shift the focus to
the conduct of Attorney Young, as opposed to his own conduct as
administrator. Advice of counsel is not
an available defense for an administrator whose
personal actions and breaches of duty failed to protect the estate. (Estate
of Guiol, supra, 28 Cal.App.3d
818, 826.)
When Keenan reached the stipulation without consulting
the probate court for approval, that was done at his own risk. (§ 10501, subd. (a)(8).) The court evaluated the conflicting evidence
about the nature and amount of any Rule Estate indebtedness, as part of the
overall examination of Keenan's performance of his duties as
administrator. The court then properly
concluded that the stipulated judgment was not achieved in the best interests
of the Rule Estate. Since Keenan had
been acting outside his authority as administrator, and "the compromise was improvident and damaged the estate," the
Rule Estate was entitled to be compensated by him for the loss he caused. (
imposed and the ruling that approved the amended account with the exception of
its treatment of the percentage interests.
DISPOSITION
The orders are affirmed. Costs are awarded to Objector and Respondent.
HUFFMAN, Acting P. J.
WE CONCUR:
HALLER, J.
McDONALD, J.
unless noted. Keenan served from
1994-2004 under the Independent Administration of Estates Act. (IAEA;
§ 10400 et seq.)
In Re James Keenan,
U.S. Bankruptcy Court, No. 96-00871 B11 (the Keenan bankruptcy).
