Opinion
B188321
7-2-2008
In re SIX FLAGS CLAIMS TRUST, STEVEN MEIERS et al., Plaintiffs and Appellants, v. B. WAYNE HUGHES, JR., et al., Defendants and Appellants.
Greines, Martin, Stein & Richland, Irving H. Greines, Marc J. Poster and Edward L. Xanders for Plaintiffs and Appellants George DeRoy, individually and as Trustee of Six Flags Claims Turst D/T 4/20/97. Steven Meiers, in pro. per., for Plaintiff and Appellant. Weiss & Hunt, Thomas J. Weiss and Hyrum K. Hunt; Law Offices of Thomas J. Weiss and Thomas J. Weiss for Defendants and Appellants Chester Semel, M.D., Brian Ross, Raymond Jallow, Rodelle Karpman, Hirsch Family Trust dated 10/29/81, Werner Z. & Hilde E. Hirsch, Co-Trustees, Aaron Berman, M.D. and Rita Berman, individually, and as trustees of the Aaron and Rita Berman Family Trust. Sheppard, Mullin, Richter & Hampton, Brian M. Daucher and Randolph B. Godshall; Greenberg Traurig and Vincent H. Chieffo for Defendants and Appellants B. Wayne Hughes, Jr. and Tamara Hughes Gustavson, as Custodians; Kristina Edelbrock Montero and Gregory J. Edelbrock, as Trustees of Edelbrock Childrens Trust; Donald H. Ellis, as Trustee of the Ellis Living Trust; E & J Matyas Family Limited Partnership; Neale M. Bearden; Neale M. Bearden and Jonathan Pardee, as Co-Trustees of Trust Under the Will of G. Nolan Bearden; Morris P. Silver, as Trustee of the Harry M. Kelly Grantor Trust "B"; and Joan B. Aldrich as Trustee of the John F. Sullivan Family Survivors Trust dated 11/8/84. Seed Mackall, Peter A. Umoff, Alan D. Condren and John R. Mackall for Defendants and Appellants C. Wesley Morse and Dolores M. Morse, Co-Trustees of the Morse Family Living Trust dated 3/19/90; Susan P. Fosse, Chris Morse, Christina J. Morse, Brian Mariani, Rolston Investment Company, Genevieve M. Marion and Judith Petrungaro, Co-Trustees of the Stanley W. Marion Trust dated 6/25/88, and Genevieve M. Marion, Trustee under Declaration of Trust dated 11/9/90. Charles B. Baumer, Inc. and Charles B. Baumer for Defendant and Respondent The Restated Garber Family Trust. Michael W. Irving, in pro. per., and for Defendant and Respondent Michael W. Irving Charitable Remainder Unitrust.
Not to be Published
George DeRoy, the trustee of the Six Flags Claims Trust, petitioned the probate court seeking instructions to disburse nearly $45 million in compensation to himself, to Steven Meiers, counsel for the Claims Trust, and to a number of others. The petition was filed after the trustee had solicited and obtained the consent of a majority of the trust beneficiaries. A number of dissenting beneficiaries filed more than 20 objections to the petition, two of which were sustained by the trial court after a 16-day bench trial. Finding the beneficiaries consent had been tainted by misrepresentations contained in the solicitation, the court concluded DeRoy had breached his fiduciary duty to the beneficiaries and denied the petition.
DeRoy and Meiers appeal from the trial courts denial of the trustees petition and invalidation of the trust amendment authorizing the proposed compensation. In their cross-appeals some of the objectors contend the trial court also erred in denying their claims for payment of their attorney fees by the Trust. We reverse the trial courts denial of the petition as to DeRoys compensation but affirm the courts denial of Meierss compensation as well as its denial of the requests for attorney fees.
FACTUAL AND PROCEDURAL BACKGROUND
In 1968 two limited partnerships were formed to purchase and hold the Six Flags Over Georgia theme park in Atlanta, Georgia. Immediately after purchasing the park, the purchasing partnership contributed the park to the holding partnership and became its sole limited partner. Avram Salkin replaced the general partner of the purchasing partnership in 1969 and received, without having to purchase it, a 1 percent interest in the purchasing partnership. The parks operator acted as general partner of the holding partnership. From 1969 until 1996, funds generated by the operation of the park were distributed in layers to the purchasing partnership and the park operator. During those years, annual distributions to the limited partners averaged $21,000 per unit.
In 1991 a subsidiary of Time Warner Entertainment (TWE) succeeded to the interest of the parks operator and expressed interest in buying the interests of the limited partners in the purchasing partnership. Salkin retained the law firm of Gibson, Dunn & Crutcher (Gibson Dunn), in which Meiers was a partner, to provide legal advice regarding the potential sale of the limited partnership interests to TWE. Soon, Salkin and Meiers began to suspect TWE had deliberately suppressed park profits to discourage other potential buyers. In March 1997, after a lengthy and complicated series of negotiations and transactions that are not relevant here, two TWE affiliates acquired a 25 percent interest in the purchasing limited partnership; and the Six Flags Claims Trust was established to pursue claims for fraud and breach of fiduciary duty against TWE on behalf of the original limited partners. Salkin was named as the trustee of the Claims Trust.
Since the inception of the Claims Trust, Los Angeles County has been the principal place of its administration.
The agreement establishing the Claims Trust provides that the trustee "shall . . . be compensated for services rendered in the administration of [the Claims Trust] and performing his duties as Trustee only in such amounts as may be approved by a majority in interest of the Trust beneficiaries." The Claims Trust Agreement also authorizes the trustee to "retain such experts, advisors, consultants, investigators, appraisers or other professionals as [he] may deem necessary or appropriate to assist [him] in carrying out his powers and duties under [the Claims Trust]."
Shortly after the TWE transaction closed and the Claims Trust was established, the TWE affiliates sued the purchasing partnership and Salkin, as trustee of the Claims Trust, in Georgia, seeking declaratory relief with respect to the claims Salkin and Meiers had raised in their discussions with TWE. DeRoy, Salkins former law partner, was appointed trustee of the Claims Trust after counsel in the Georgia litigation advised Salkin he should not serve in that capacity due to his continuing role as managing general partner of the purchasing partnership.
Georgia counsel, working with Salkin, DeRoy and Meiers, prepared and filed cross-claims on behalf of the purchasing partnership, the holding partnership and the Claims Trust. After a five-week trial and multiple appeals, the litigation against TWE resulted in an award of more than $640 million to the Claims Trust and its beneficiaries. Under a contingency agreement negotiated by DeRoy, Georgia litigation counsel received approximately 15.6 percent of the total award.
After obtaining the verdict, DeRoy and others, including Meiers, spent four and one-half years defending it; the appeals reached the Georgia Court of Appeals twice, the Georgia Supreme Court twice and the United States Supreme Court twice.
DeRoy, Salkin and Meiers were each integrally involved throughout the litigation. Although Salkin, as managing general partner and 1 percent owner of the purchasing partnership, and Meiers, as a Gibson Dunn partner, were compensated in some manner for their time, DeRoy was not compensated at all for his efforts during the litigation; instead, he anticipated receiving compensation at the conclusion of the litigation based on the procedure set forth in the Claims Trust Agreement.
In 2000, while various appeals from the judgment were pending, Meiers elected to retire from Gibson Dunn. Although he continued to provide services to the Claims Trust, he did not have a fee agreement with the Trust and was not compensated by the Trust for his efforts after leaving the firm.
After the United States Supreme Court denied certiorari in April 2003 and the judgment in favor of the Claims Trust and its beneficiaries became final, DeRoy retained Gibson Dunn to act as disclosure counsel and, with the help of Meiers and his former colleagues, prepared and sent each beneficiary a 33-page Consent Solicitation Statement. The statement described the history of the Claims Trust and the TWE litigation and sought authorization to compensate DeRoy in the amount of 1 percent as trustee and to pay 4 percent to Salkin and his law firm (to be divided 1 percent to Salkin and the balance to other lawyers and employees in the firm); 1.2 percent to Meiers and his firm (Gibson Dunn); 0.5 percent to the eight directors of SFG, Inc., an advisory group formed to act as co-general partner and assist in the management of the investing limited partnership; and 0.3 percent to several others who assisted in the litigation. The statement explained the proposed payments required the affirmative vote of a majority-in-interest of beneficiaries and the requisite majority vote would amend the Claims Trust Agreement to specify the compensation to be paid.
A majority-in-interest of the Claims Trust beneficiaries approved the compensation requests contained in the Consent Solicitation Statement. Out of slightly more than 101 units of beneficial interest, nearly 80 voted; 66.934065 units voted in favor of the amendment, 9.033400 units against, with 3.75 units abstaining. Thus, the "yes" votes equaled 66.24 percent of the total units of beneficial interest.
DeRoy filed a petition seeking instructions from the court allowing him to pay the amounts approved by the beneficiaries. In a supplement to the petition he sought an instruction authorizing payment of those sums on any alternative ground "that would justify the payment of reasonable compensation for services provided." Several groups of beneficiaries filed objections to the petition, and three of those groups either filed or joined in a cross-petition and a cross-complaint seeking declarations the Claims Trust had no liability to the individuals seeking compensation and voiding the compensation amendment and for an award of their own attorney fees in pursuing their objections.
B. Wayne Hughes, Jr., as custodian for two minor children; Tamara Hughes Gustavson, as custodian for two minor children; and Kristina Edelbrock Montero and Gregory J. Edelbrock, as trustees of the Edelbrock Childrens Trust petitioned for an order declaring the amendment to the Claims Trust obtained by the Consent Solicitation Statement invalid and other, related relief. As did the trial court, we refer to these parties as the Hughes petitioners or Hughes objectors. C. Wesley Morse and Dolores M. Morse, as co-trustees of the Morse Family Living Trust, and others joined in the Hughes petition. Chester Semel, M.D., joined by a third group of beneficiaries, filed a separate cross-complaint seeking the same relief.
After a 16-day trial the court issued a memorandum decision denying the trustees petition and declaring the compensation amendment to be void. Of the multiple objections to the petition raised by the beneficiaries, the trial court sustained only two. The first related to the proposed 4 percent payment to Salkin and his law firm. The objectors contended the Consent Solicitation Statement should have disclosed the other members of Salkins law firm did no work on the Georgia litigation. The court agreed, pointing to the misleading assertion in the statement that approval was being sought to compensate those who were responsible for discovering and preserving substantially all of the claims asserted in the Georgia lawsuit and who participated in, and contributed to, the recovery in that case. The second objection sustained by the court concerned the repeated assertion in the Consent Solicitation Statement that in the Claims Trust Agreement, adopted by the beneficiaries by vote in 1996, the beneficiaries had agreed to consider additional compensation at the close of the litigation, not just for the trustee, but also for others who contributed to the litigations success. In fact, the 1996 agreement included such a provision only for the trustee, whose sole compensation was intended to be awarded at the conclusion of the litigation and tied to its success.
The specific language objected to states: "It was explained at the [December 21, 1996] meeting and in the December 10, 1996 Consent Solicitation Statement [in connection with creating and funding the Claims Trust] that . . . the individuals who would be involved in attempting to obtain a recovery on the claims . . . would, generally, serve without compensation and only ask for compensation after the claims had been recovered upon . . . ."
Utilizing the materiality standard set forth by the United States Supreme Court in the context of proxy litigation (see TSC Industries, Inc. v. Northway, Inc. (1976) 426 U.S. 438 [96 S.Ct. 2126, 48 L.E.2d 757]), the trial court concluded the misleading statements, which constituted breaches of the trustees fiduciary duty to the beneficiaries, materially influenced the vote. Accordingly, the court denied the trustees petition in its entirety. The court granted the objectors request to invalidate the compensation amendment, but denied the fee requests contained in the cross-petition and cross-complaints, finding there was no evidence the trustee had acted in bad faith or recklessly in preparing the Consent Solicitation Statement.
The parties apparently abandoned their additional claims for affirmative relief in the trial court. No effort is made here to resuscitate those claims.
Since the filing of the petition, approximately half of the Claims Trust beneficiaries have settled with the trustee, allowing distribution of their share of the recovery. The Salkin designees independently settled their claims and dismissed their appeal.
CONTENTIONS
DeRoy contends the trial court erred in finding the misstatements contained in the Consent Solicitation Statement required the denial of his compensation as trustee. He urges the misstatements were not material to the beneficiaries approval of his compensation, which may be severed from that of the other designated professionals. Alternatively, he joins Meiers in arguing there was no evidence any beneficiary relied on the misstatements and the courts failure to require such a showing was error.
The non-settling beneficiaries contend the court utilized the proper standard of materiality and correctly ruled the misrepresentations tainted the entire petition. Certain of the beneficiaries also assert Meiers lacks standing to pursue his appeal. Finally, the beneficiaries contend substantial evidence does not support the trial courts conclusion they had failed to establish the trustee acted with reckless indifference to the interests of the beneficiaries and the court erred, therefore, in declining to award them fees and costs incurred in litigating the objections to the trustees petition.
DISCUSSION
1. Meiers Lacks Standing To Pursue His Own Appeal from the Denial of the Trustees Petition, but the Full Scope of the Courts Denial of the Petition Has Been Placed at Issue by the Trustees Appeal
Standing to appeal is jurisdictional. (Marsh v. Mountain Zephyr, Inc. (1996) 43 Cal.App.4th 289, 295; Berg & Berg Enterprises, LLC v. Sherwood Partners, LLC (2005) 131 Cal.App.4th 802, 814-815, fn. 6.) Under Code of Civil Procedure section 902, "Any party aggrieved may appeal in the cases prescribed in this title." Generally, however, only parties of record may appeal. (County of Alameda v. Carleson (1971) 5 Cal.3d 730, 736; Howard Contracting, Inc. v. G. A. MacDonald Construction Co. (1998) 71 Cal.App.4th 38, 58; see Estate of Goulet (1995) 10 Cal.4th 1074, 1079 [to have standing to appeal, one must be both a party and be aggrieved by the judgment or order rendered by the court].)
To be sufficiently aggrieved by the judgment or order, the appellants rights or interests must be injuriously affected in an "immediate, pecuniary, and substantial" way, rather than as a "nominal or a remote consequence" of the judgment or order. (County of Alameda v. Carleson, supra, 5 Cal.3d at pp. 736-737; accord, Ajida Technologies, Inc. v. Roos Instruments, Inc. (2001) 87 Cal.App.4th 534, 540.) A nonparty who is aggrieved by a judgment may take affirmative steps to ensure his or her appellate standing. "[O]ne who is legally `aggrieved by a judgment may become a party of record and obtain a right to appeal by moving to vacate the judgment pursuant to Code of Civil Procedure section 663." (County of Alameda, at p. 736.) Similarly, an aggrieved nonparty may obtain appellate standing by moving for judgment notwithstanding the verdict or a new trial. (Shaw v. Hughes Aircraft Co. (2000) 83 Cal.App.4th 1336, 1342-1343 & fn. 5.) A nonparty can also obtain appellate standing prior to judgment if she or he moves to intervene and, in effect, becomes a party to the action. (Corridan v. Rose (1955) 137 Cal.App.2d 524, 528.)
Meiers, who took no affirmative steps to secure his separate standing in this appeal, contends he nonetheless has standing to appeal as a party in the litigation because he was named in the cross-petition filed by the Hughes objectors and joined by a number of other objectors. We need not decide, however, whether his appeal from that portion of the order invalidating the compensation amendment would be sufficient to provide him affirmative relief on the petition because DeRoy has appealed in his capacity as trustee, as well as in his individual capacity. As trustee, he is entitled to maintain an appeal with respect to the entire scope of relief sought by the petition. (See Rebney v. Wells Fargo Bank (1990) 220 Cal.App.3d 1117, 1132 [class members who are themselves aggrieved by trial court errors may, on appeal, assert those errors on behalf of the entire class if appellants can show they were, in fact, harmed by the errors asserted].) Accordingly, we review the merits of the trial courts denial of the petition with respect to both DeRoys and Meierss compensation.
Meierss stated concern a failure to grant him individual standing will have a preclusive effect on any subsequent effort he takes to recover his fees is groundless. Generally, an attorneys interest in his or her fees is a nominal or remote consequence of a judgment against the attorneys client. (See In re Marriage of Tushinsky (1988) 203 Cal.App.3d 136, 140-142.) The trial courts orders are not res judicata as to Meierss fee claim here because, as the objectors correctly point out, the court did not grant their request for an "order determining that the Claims Trust has no liability, for compensation or otherwise" to Meiers or the other subjects of the trustees petition. In refusing to find Meierss existing compensation as paid by the non-objectors "less than `reasonable," the trial court expressly contemplated the possibility of Meiers filing a separate action against the trustee for additional compensation. (See id. at p. 143 [dismissing nonparty attorneys appeal because judgment had no legal import with respect to claim for fees; attorneys may seek compensation in separate action against client].) Alternatively, although the chances of success may have been limited by prior settlements, the trustee could seek instructions from the court permitting him to do so through a new petition.
2. The Trial Court Erred in Concluding the Misleading Statements in the Consent Solicitation Statement Warrant Denial of the Petition for Instructions Regarding the Trustees Compensation
a. The trustee properly sought instructions from the court
Georgia law, which governs interpretation of the trust instrument in this case, establishes the right of trustees to be compensated for their services. (See, e.g., Ga. Code Ann., § 53-12-173(a) ["[t]rustees shall be compensated in accordance with either the trust instrument or any separate written agreement"]; cf. Estate of Gump (1982) 128 Cal.App.3d 111, 116 (Gump I) ["[i]t is a cardinal principle of probate administration that where the will does not otherwise provide, a trustee is entitled to reasonable compensation for services rendered"].) The Claims Trust Agreement expressly authorized payment of the trustee as approved by a majority of the beneficiaries, and the beneficiaries voted to approve the trustees compensation.
The trustee filed his petition for instructions under Probate Code section 17200, subdivisions (b)(6) and (b)(9), which authorize a court to "fix[] or allow[] payment of the trustees compensation or review[] the reasonableness of the trustees compensation." None of the parties challenges the trustees right to file his petition or the trial courts conclusion "the Trustee is entitled to the instruction sought by his petition unless the objections raised to that petition require a different result."
b. The statements found to be misleading were not material to the question of the trustees compensation
DeRoy does not dispute the courts finding the Consent Solicitation Statement contained erroneous statements. Instead, he contends the objectors failed to demonstrate those statements in any way affected the beneficiaries approval of the compensation he sought for himself.
In denying the instructions sought by the trustees petition, the trial court concluded no proof of actual reliance was required; all the objectors needed to show was the materiality of the misrepresentations under the standard enunciated by the United States Supreme Court in TSC Industries, Inc. v. Northway, Inc., supra, 426 U.S. 438 [96 S.Ct. 2126, 48 L.Ed.2d 757]. In that case, in discussing omissions in a proxy statement, the Supreme Court held a misrepresentation is material "if there is a substantial likelihood that a reasonable [trust beneficiary or partner] would consider it important in deciding how to vote. . . . [This standard] does not require proof of a substantial likelihood that[,] . . . under all the circumstances, the omitted fact would have assumed actual significance in the deliberations of the reasonable [trust beneficiary or limited partner]." (Id. at p. 449.)
Asserting there is no evidence any of the beneficiaries relied on the misleading statements to their detriment, DeRoy argues Georgia courts have refused to adopt the principle of presumed reliance incorporated in the TSC Industries standard. (See, e.g., White v. BDO Seidman, LLP (2001) 249 Ga.App. 668, 671-672 [549 S.E.2d 490, 493-494] [rejecting presumed reliance principles and requiring securities investors suing accountant for misrepresentation in audit report to establish actual reliance]; Wells v. HBO & Co. (N.D. Ga. 1992) 813 F.Supp. 1561, 1569 ["Georgia courts have always required proof of actual reliance, and have not adopted a fraud on the market theory that would allow a court to presume reliance"].)
A presumption of reliance would not seem to be necessary or appropriate in a case involving the affirmative vote of only 67 units (and even fewer holders). Nonetheless, we need not determine whether the White/Wells standard of materiality and reliance controls this case because the governing documents and decisional law specific to trustee compensation in other contexts provide ample ground for resolution of the question presented here.
As the trustee points out, the vote in favor of the amendment was properly executed; and in the words of the court, "the Trustee is entitled to the instruction sought by his petition unless the objections raised to that petition require a different result." The original trust instrument contains a severability clause: "If any provision, or portion of a provision, of this Six Flags Claim Trust shall be unenforceable or not legal in any circumstance, the balance of this Six Flags Claims Trust and, to the extent not enforceable or not illegal, the balance of such provision or portion thereof shall not be affected thereby." The trustee reasonably argues the holders of the units who approved the compensation amendment, which revised existing Section 9.5 of the Claims Trust ("Compensation; Reimbursement"), necessarily intended the revised section, like the balance of the Claims Trust, to be subject to the trusts express severability provision. (See, e.g., Ga. Code Ann. § 13-1-8, subd. (b) [severability of contract provision "determined by the intention of the parties"]; Horne v. Drachman (1981) 247 Ga. 802, 805 [280 S.E.2d 338, 342] ["`[t]he issue of the severability of a contract is determined by the intention of the parties, as evidenced by the terms of the contract"].)
The beneficiaries contend the trustees severance argument should not be addressed because it was never presented to the trial court. The trustee correctly answers that severability, at least in the context of construing a written amendment to a trust instrument containing an express severability provision, presents a question of law we may properly decide on appeal. (See Seeley v. Seymour (1987) 190 Cal.App.3d 844, 856 [appellate courts may always consider an issue that "requires only the interpretation of a document and the application of such interpretation to an undisputed factual situation"]; accord, Raphael v. Bloomfield (2003) 113 Cal.App.4th 617, 621; California School of Culinary Arts v. Lujan (2003) 112 Cal.App.4th 16, 26.) Georgia courts follow a similar rule. (See, e.g., Grove v. Sugar Hill Investment Associates, Inc. (1995) 219 Ga.App. 781, 785-786 [466 S.E.2d 901, 906] [raising issue of severability sua sponte and, based upon express severability clause, finding invalid provisions of lease severable as a matter of law].)
The beneficiaries also contend severability is not an issue because the trial court declared the amendment void in its entirety. The court elected to "void" the amendment pursuant to its equitable powers under Georgia law. The amendment, however, was not void ab initio. To the contrary, the amendment was merely voidable, meaning that a party may assert a defense to some or all of the obligations imposed by the contract. (See Georgia Receivables, Inc. v. Welch (2000) 242 Ga.App. 146, 148 [529 S.E.2d 164, 166-167] [distinguishing void from voidable contracts].) Consequently, in deciding which of the obligations set forth in the amendment were enforceable, it is entirely proper to apply the severance clause of the governing trust instrument.
The beneficiaries fail to identify any additional issue of fact that would preclude a finding of severability as a matter of law, and it is unlikely they could do so on remand. Like California, Georgia recognizes an objective theory of contractual intent that renders inadmissible any testimony as to a partys undisclosed intent. (See, e.g., Greenwald v. Kersh (2005) 275 Ga.App. 724, 727 [621 S.E.2d 465, 468]; Gulbenkian v. Patcraft Mills (1961) 104 Ga.App. 102, 104 [121 S.E.2d 179, 181].)
We are directed, therefore, by the trust instrument itself to decide which portions of the proposed amendment are or are not enforceable, and the fact the compensation package was itself not presented for separate votes on each item of proposed compensation is not determinative. As one Georgia court has observed, "In this state, `where an agreement consists of a single promise, based on a single consideration, if either is illegal, the whole contract is void. But where the agreement is founded on a legal consideration containing a promise to do several things or to refrain from doing several things, and [only some] of the promises are illegal, the promises which are not illegal will be held to be valid." (Dougherty, McKinnon & Luby, P.C. v. Greenwald (1997) 225 Ga.App. 762, 763-764 [484 S.E.2d 722, 723], citation omitted].) Thus, we need not jettison the entire amendment simply because some part of it rested on a misleading or factually incorrect premise.
We reject the beneficiaries reliance on Filet Menu, Inc. v. C.C.L. & G., Inc. (2000) 79 Cal.App.4th 852, 855 for the proposition severability is inapplicable when an agreement is procured by a misrepresentation or omission of fact. The contract in Filet Menu had been induced by fraudulent misrepresentations; here, the trial court determined there was no fraudulent intent on the part of the trustee.
In particular, we look to how courts have treated claims for trustee compensation in instances, like this, where the trustee has been found to be responsible for a breach of his or her duty to the trust beneficiaries. With respect to this question, courts in both California and Georgia have adopted the principles set forth in the Restatement Second of Trusts, including section 243. This section recognizes the courts discretion to "deny [the trustee] all compensation or allow him a reduced compensation or allow him full compensation" if the trustee has breached his or her fiduciary duties to the beneficiaries. (See, e.g., Estate of Gump (1991) 1 Cal.App.4th 582, 598 (Gump II); Citizens and Southern National Bank v. Haskins (1985) 254 Ga. 131, 143 [327 S.E.2d 192, 203].) As the comment to this section explains: "When the compensation of the trustee is reduced or denied, the reduction or denial is not in the nature of an additional penalty for the breach of trust but is based upon the fact that the trustee has not rendered or has not properly rendered the services for which compensation is given." (Rest.2d Trusts, § 243, com. a, p. 612.)
Section 243 provides: "If the trustee commits a breach of trust, the court may in its discretion deny him all compensation or allow him a reduced compensation or allow him full compensation."
The trial court, clearly troubled by the lack of pertinent authority on the issue of materiality of a trustees breach of duty, requested the parties to provide more closely analogous authority to assist it in resolving this question. Such assistance was not forthcoming. Although section 243 of the Restatement Second of Trusts technically governs a trustees compensation in the absence of express direction in the trust instrument, it sheds welcome light on the question whether a particular breach of duty should be considered material to the trustees claim for compensation.
Comment c to section 243 elaborates on the factors to be considered by the court in exercising its discretion: "It is within the discretion of the court whether the trustee who has committed a breach of trust shall receive full compensation or whether his compensation shall be reduced or denied. In the exercise of the courts discretion the following factors are considered: (1) whether the trustee acted in good faith or not; (2) whether the breach of trust was intentional or negligent or without fault; (3) whether the breach of trust related to the management of the whole trust or related only to a part of the trust property; (4) whether or not the breach of trust occasioned any loss and whether if there has been a loss it has been made good by the trustee; (5) whether the trustees services were of value to the trust." (Rest.2d Trusts, § 243, com. c.)
Applying these principles in protracted litigation involving the Abraham Gump estate trust, the First District Court of Appeal provided explicit guidance as to how a court should exercise its discretion when faced with a trustees breach of duty in the course of administering a trust. In Gump I, supra, 128 Cal.App.3d 111, the court reversed the trial courts reduction of the trustee banks compensation based on a finding the bank had acted negligently in one area of trust administration involving a leasehold interest. (Id. at p. 116.) The trustee bank contended it was entitled to reasonable compensation for services rendered in managing trust property unrelated to the leasehold. Acknowledging the trial courts broad discretion in setting a trustees compensation, the Court of Appeal criticized the absence of any evidentiary basis for the trial courts disallowance of compensation in an amount greater than that attributable to the mismanaged lease. "Where it is shown that the trustee neither acted fraudulently nor personally benefited from its negligence, the measure of the trustees liability is generally limited to the amount of loss actually suffered by the trust beneficiaries." (Id. at p. 117.) The Court of Appeal remanded the case to the trial court for reevaluation of the actual losses suffered that could be surcharged against the trustees reasonable compensation. (Id. at p. 119.)
Seven years later the First Appellate District again considered the trial courts disallowance of the bulk of the trustees compensation. In Gump II, supra, 1 Cal.App.4th 582, the court affirmed the trial courts finding the trustee had acted negligently in administering the same lease (for a different time period) and thus had breached its fiduciary duty to the trust beneficiaries. (Id. at pp. 595-596.) Characterizing its earlier decision, the Court of Appeal stated, "[Gump I] teaches that in the absence of fraud, personal benefit by the trustee, or loss to the beneficiaries, the trial court may only deny compensation for services attributable to the mismanaged asset." (Id. at p. 597.) Reviewing section 243 of the Restatement Second of Trusts and other treatises, the court reaffirmed its earlier holding: "We are convinced that the limitations [Gump I] places on the courts discretion to deny all compensation make sense. . . . Where there is no loss, the rationale for reducing or disallowing compensation must be that the beneficiary should not be required to compensate the trustee for services which were rendered negligently or in breach of trust. In such case, and absent evidence of fraud or self-dealing, it seems reasonable to allow compensation for services relating to trust assets which were properly managed, denying compensation only for those assets which were administered negligently or in breach of trust." (Gump II, at pp. 598-599.)
The Gump II court also reversed the trial courts finding of fraudulent conduct by the trustee, concluding the record failed to show the beneficiaries had relied on the trustee banks misleading rental statements for the leasehold. (Gump II, supra, 1 Cal.App.4th at p. 603.) "Absent such evidence of fraud, the trial court abused its discretion in denying the trustee compensation for services rendered which were unconnected with the lease property." (Ibid.) The Court of Appeal remanded the case, instructing the trial court "to determine what portion of the services rendered was unconnected with the lease property and the surrounding litigation and to allow reasonable compensation for those services." (Id. at p. 611.) In other words, the trustee banks breach of trust was not material to its right to be compensated for its otherwise competent administration of the trust estate.
Having found no express authority that would govern DeRoys request for compensation under Georgia law, we nonetheless believe it likely a Georgia court would employ an analysis similar to that set forth in Gump I and Gump II in determining whether a particular breach of duty required invalidation of the compensation authorized by the terms of the trust instrument. In considering this question, we find compelling the trial courts determination the trustees breach of his fiduciary duty to the beneficiaries in failing to ensure the accuracy of the Consent Solicitation Statement was neither fraudulent nor made in bad faith. Although some of the objectors contend DeRoys actions revealed a fraudulent intent or, at least, a reckless disregard for the interests of the beneficiaries, we are not authorized to reweigh the trial courts rejection of those factual contentions, which, in large part, was based on its assessment of the credibility of the witnesses. Nor does this case present an issue of self-dealing by the trustee. To the contrary, the trustee has yet to be compensated by the objectors for what is conceded to be a fabulous recovery by the Claims Trust in all respects.
A fiduciary or confidential relationship arises "where one party is so situated as to exercise a controlling influence over the will, conduct, and interest of another or where, from a similar relationship of mutual confidence, the law requires the utmost good faith, such as the relationship between partners, principal and agent, etc." (Ga. Code Ann., § 23-2-58.) Plainly, as trustee, DeRoy bore the burden of acting in the utmost good faith and in the best interests of the beneficiaries.
When reviewing a challenge to the sufficiency of evidence involving issues of disputed fact, our inquiry is limited to whether, on the entire record, substantial evidence supports the judgment. (Kuhn v. Department of General Services (1994) 22 Cal.App.4th 1627, 1633.) We must view the record in the light most favorable to respondent and resolve all inferences in support of the judgment. (Milton v. Perceptual Development Corp. (1997) 53 Cal.App.4th 861, 867.) We are precluded from reevaluating the trial courts credibility determinations. (Sav-On Drug Stores, Inc. v. Superior Court (2004) 34 Cal.4th 319, 334.)
The 1 percent fee sought by the trustee, while a significant sum in light of the size of the recovery, is far less than he could have recovered if the amount were to be determined under Georgia law. (See Ga. Code Ann., §§ 53-12-173, subd. (b), 29-5-50, subd. (a)(1) [when the trust instrument does not set the trustees compensation, the trustee shall receive "2 1/2 percent commission on all sums of money received" by the trust, plus 2 1/2 percent commission on "all sums paid out" by the trust, plus an annual commission of 0.5 percent of the trust assets].)
Thus, under the guidance of Gump I and Gump II, we conclude the trial court erred as a matter of law in failing to allow the trustees requested compensation in light of his successful administration of the Claims Trust during the TWE litigation and the affirmative vote approving that compensation. We reject the trial courts conclusion the negligent misrepresentations that constituted the breach of duty impermissibly tainted the vote in favor of the trustees compensation. As DeRoy has pointed out, those misrepresentations concerned only the proposed compensation of the Salkin designees and Meiers. Any taint, therefore, was limited to votes in favor of their compensation, which is not governed by the rule enunciated in the Gump decisions.
None of the beneficiaries suffered actual injury as a result of the trustees actions. Although the misleading statements contained in the Consent Solicitation Statement may have induced the beneficiaries vote with respect to Meiers and the Salkin designees, no funds were lost because of those misrepresentations. If the proponents of the Consent Solicitation Statement had paid themselves unilaterally based on the outcome of the vote, there may have been cognizable damage. They instead, properly, sought court approval, which was denied. As a result, the only sums expended have been through voluntary settlements between individual beneficiaries and the requesting parties. (See Gump I, supra, 128 Cal.App.3d at p. 118 [amount of surcharge to trustee in form of reduced compensation limited to actual loss suffered by beneficiaries].)
3. The Trial Court Did Not Err in Denying the Trustees Request To Pay Meiers 1 Percent of the Claims Trust Proceeds
As an attorney for the Claims Trust retained by the trustee, the Claims Trust Agreement authorized the trustee to pay Meiers reasonable compensation for his services. Nonetheless, the trustee sought the approval of the court to pay Meiers the extraordinary amount sought in the petition. (See Estate of Hilton (1996) 44 Cal.App.4th 890, 895; Estate of Gilkison (1998) 65 Cal.App.4th 1443, 1448.) Unlike the question of the trustees compensation, however, the Gump I and II holdings with respect to the materiality of a trustees breach of fiduciary duty to his or her compensation does not have any bearing on the trustees request for permission to pay Meiers 1 percent of the Claims Trust recovery.
In appealing the trial courts denial of compensation to Meiers, the trustee again contends there was no evidence any of the beneficiaries relied on the frequently reiterated misstatement in the Consent Solicitation Statement advising the beneficiaries they had previously agreed to authorize compensation for Meiers and others, in addition to the trustee. Even if, as we noted above, a Georgia court would be reluctant to presume reliance, there is no question that under Georgia law, "Questions of fraud, the truth and materiality of representations made by a defendant, and whether the plaintiff could have protected himself by the exercise of proper diligence are, except in plain and indisputable cases, questions for the jury." (Brown v. Techdata Corp., Inc. (1977) 238 Ga. 622, 625 [234 S.E.2d 787, 790-791]; accord, Perry v. Perry (2007) 285 Ga.App. 892, 894 [648 S.E.2d 193, 196].) As discussed, we are not permitted to weigh the evidence or second-guess factual findings by the trier of fact. Here, there is more than adequate evidence in the record to support the courts finding of materiality, as well as reliance. For example, attempting to understand the basis for paying extraordinary compensation to Meiers and others, an attorney for one of the beneficiaries sent a letter to DeRoy and Salkin before the general circulation of the Consent Solicitation Statement querying, "Your letter refers to consent for the `payment of additional amounts for attorneys fees, trustee fees and other payments . . . . [¶] . . . The Claims Trust itself refers to compensation of the trustee in such amounts as may be approved by a majority in interest of the Claims Trust beneficiaries. . . . [W]hat is the basis in any of the governing documents for payment to `others?" The Consent Solicitation Statements repeated (and erroneous) assertions that the beneficiaries had previously agreed to consider such a request apparently persuaded a number of the beneficiaries not to pursue a similar inquiry. As the trial court reasoned, "[u]ndisputed evidence shows that the Trustee put the 2003 Statement before each of the Beneficiaries and asked them to read it carefully before deciding how to vote on the Proposal . . . and that they returned their ballots as instructed . . . . That the Beneficiaries read the Statement was amply demonstrated by the evidence at trial . . . ." (See, e.g., Doctors Hospital of Augusta, Inc. v. Bonner (1990) 195 Ga.App.152, 164 [392 S.E.2d 897 [issue of reliance under Georgia law subject to proof by circumstantial evidence; denial of directed verdict on this ground not error].)
Meierss firm, Gibson Dunn, analyzed the Consent Solicitation Statement under both TSC Industries and common law and concluded "the proposed allocation of the bonuses payable by the Trust . . . would be viewed as material and should be disclosed."
Accordingly, because the trial court did not err in finding the misrepresentation related to Meierss compensation materially influenced the beneficiaries vote in favor of his compensation, it did not abuse its discretion in denying the trustees request to award extraordinary compensation to Meiers.
4. The Trial Court Did Not Err in Denying the Beneficiaries Request for an Award of Attorney Fees
Georgia Code Annotated section 53-12-193, subdivision (a)(4), provides: "[A] trustee who commits a breach of trust is personally chargeable with any damages resulting from the breach of trust including but not limited to . . . [¶] [i]n the discretion of the court, expenses of litigation, including reasonable attorneys fees incurred by the beneficiary in bringing an action on the breach . . . ." Notwithstanding this subdivision, the Claims Trust Agreement contains an indemnification provision that expressly protects the trustee from personal liability "except, to the extent required by law, for a breach of trust by the Trustee committed in bad faith and intentionally or with reckless indifference to the interests of the Trust beneficiaries . . . ." This language tracks Georgia Code Annotated section 53-12-194, subdivision (a), which provides: "No provision in a trust instrument is effective to relieve the trustee of liability for breach of trust committed in bad faith or intentionally or with reckless indifference to the interest of the beneficiary . . . ."
As described above, the sole breaches identified by the trial court concerned the misleading statements implying participation by the members of Salkins firm in the litigation and the assertion the beneficiaries had previously agreed to determine compensation not only for the trustee, but also for Salkin, Meiers and the other designated professionals. As the court correctly observed, the issue in awarding fees is "whether DeRoy was merely negligent, or whether he acted with reckless indifference to the interest of the Beneficiaries, or intentionally, by including these falsities in the 2003 solicitation document."
Noting the absence of any argument by the objectors DeRoy had acted with reckless indifference, the trial court concluded DeRoys "failure to provide the Beneficiaries with a solicitation document free of material misstatements and omissions could have been the result of mere negligence . . . ." The court cited particular facts in support of this conclusion, including: DeRoy had been merely a passive investor in the limited partnership prior to the initiation of the TWE litigation and did not attend the 1996 meeting at which the agreement to consider compensation for persons other than the trustee was allegedly made; DeRoy hired disclosure counsel to assist him in preparing the Consent Solicitation Statement and followed the advice of that counsel; and Meiers, who was one of the persons acting as counsel to the trustee, was the principal drafter of both the 1996 and 2003 consent solicitations. In the absence of evidence DeRoy himself knew the statements contained in the 2003 Consent Solicitation Statement were incorrect and misleading, the court concluded the objectors had failed to carry their burden of proof on the issue of reckless indifference.
The objectors concede our review of this finding is governed by the substantial evidence test. Their attempt to undercut the trial courts reliance on the above-stated facts is unavailing. As discussed, we have no power — or inclination — to revisit the trial courts findings of fact, particularly on an issue so intricately linked to the credibility of particular witnesses.
DISPOSITION
The judgment is reversed with respect to DeRoys compensation, and the matter is remanded with directions to the trial court to grant the petition instructing DeRoy to pay the trustees compensation as authorized by a majority-in-interest of the Claims Trust beneficiaries. The judgment is affirmed in all other respects. DeRoy is to recover his costs on appeal. All other parties are to bear his, her or its costs on appeal.
We concur:
ZELON, J.
COOPER, J.