Opinion
A133707
07-24-2012
WILLIAM PARDUCCI, Plaintiff and Appellant, v. DEBRA DEMELLO individually and as Trustee, etc., Defendant and Respondent.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.
(Contra Costa County Super. Ct. No. PROMSP09-01542)
The beneficiary of a trust, William Parducci, brought a probate petition against former trustee Debra DeMello alleging breach of fiduciary duty for misappropriation of trust assets. The court sustained a demurrer without leave to amend on the ground that DeMello owed no duty to Parducci because the alleged conduct occurred when the inter vivos trust was revocable and Parducci's interest was merely contingent. The court relied upon Probate Code section 15800, which provides that a trustee's duties are owed only to the settlor holding the power to revoke "during the time that a trust is revocable and the person holding the power to revoke the trust is competent." The California Supreme Court is presently considering whether, following the death of the settlor, a trustee may be held responsible to a beneficiary for acts committed during the period when the settlor was competent and held the power to revoke. (Estate of Giraldin (2011) 199 Cal.App.4th 577, review granted Dec. 21, 2011, S197694.) We do not reach that issue because the misconduct alleged here falls outside the terms of the statute, when the settlor allegedly was not competent to revoke the trust and after the trust became irrevocable upon the settlor's death. We shall reverse the judgment of dismissal.
STATEMENT OF FACTS AND PROCEDURAL HISTORY
The amended petition alleges that in 1997, Edythe Wittich established a revocable trust funded with real property and other assets, and also executed a will devising any remaining assets to the trust upon her death. Wittich named herself as the initial trustee and designated two individuals as co-executors of the will and as successor co-trustees in the event she ceased to act as trustee. The trust was later amended to designate Wittich's niece, Debra DeMello, as successor trustee.
The trust provides that, during her lifetime, Wittich was to receive income from the trust and had the power to revoke the trust or to alter the trust's terms, assets and beneficiaries. By its terms, the trust became irrevocable upon Wittich's death and the bulk of the trust estate was to be divided and shared among multiple beneficiaries, including DeMello and Parducci.
Years after establishing the trust, the amended petition alleges, Wittich was diagnosed with dementia and moved into an assisted living facility. DeMello told family members, in a 2003 communication, that she had undertaken management of Wittich's property because Wittich "is no longer able to make those types of decisions." DeMello referred to using a power of attorney from Wittich that is "part of her trust." In the following years, real property was deeded from the trust to DeMello and the trust's security account was depleted.
Wittich died in 2009 and a maelstrom of litigation ensued. The estate's personal representative sued DeMello for elder abuse and recovery of real property and Parducci sued for an accounting and to remove DeMello as trustee. The court removed DeMello in May 2010 and appointed a successor trustee, who then also sued DeMello. At issue here is Parducci's petition alleging a breach of fiduciary duty by DeMello during the time she acted as trustee, which Parducci alleges began around 2002, when Wittich allegedly became incompetent, and continued until DeMello was removed as trustee in 2010. (See Prob. Code, § 17200, subd. (a)(12).)
Parducci's original petition was filed in August 2010 and asserted several causes of action. DeMello demurred and Parducci filed a first amended petition before the demurrer was heard. DeMello then demurred to the first amended petition, arguing that Parducci was not a beneficiary at the time of the alleged misconduct but only a contingent beneficiary under a revocable trust to whom no fiduciary duty was owed. The court accepted the argument, stating at the hearing on the demurrer that "there was no duty owed to beneficiaries that were merely possibilities." The court sustained the demurrer with leave to amend the breach of fiduciary duty cause of action and gave Parducci an opportunity "to allege facts [to] show that [DeMello] had a duty." Parducci filed a second amended petition and then a third amended petition, which is the operative pleading. DeMello again demurred and the court sustained the demurrer without leave to amend. The court held that there was no duty owed Parducci because the trust had not become irrevocable until Wittich's death. The court entered judgment for DeMello and Parducci timely appealed.
Two related appeals by Parducci remain pending in this court. They concern the dismissal of Parducci's petition for damages against a successor trustee (A135414) and Parducci's challenge to an order approving a settlement reached by other litigants (A134282).
DISCUSSION
"A trust is created by the manifestation of intention of the settlor to create a trust, trust property, a lawful trust purpose, and an identifiable beneficiary." (Chang v. Redding Bank of Commerce (1994) 29 Cal.App.4th 673, 684.) "[T]he nature of a beneficiary's interest differs materially depending on whether the trust is revocable or irrevocable." (Empire Properties v. County of Los Angeles (1996) 44 Cal.App.4th 781, 787.) "With the creation of an irrevocable trust, trust beneficiaries acquire a vested and present beneficial interest in the trust property, and their interests are not subject to divestment." (Ibid.) Trust beneficiaries of a revocable trust, in contrast, acquire only a contingent interest in the property. (Id. at p. 788.) A beneficiary's interest in a revocable trust is " 'merely potential' and can 'evaporate in a moment at the whim of the [settlor].' " (Steinhart v. County of Los Angeles (2010) 47 Cal.4th 1298, 1319.) A revocable inter vivos trust, like the Wittich trust at issue here, is a "probate avoidance device[]" that gives the settlor " 'the equivalent of full ownership of the property' " during the settlor's lifetime and bestows an interest upon beneficiaries only at the settlor's death. (Walgren v. Dolan (1990) 226 Cal.App.3d 572, 578.)
A number of California statutes reflect the contingent nature of a beneficiary's interest in a revocable trust. (See Steinhart v. County of Los Angeles, supra, 47 Cal.4th at p. 1319, fn. 14 [listing statutes].) Among them is Probate Code section 15800, which provides: "Except to the extent that the trust instrument otherwise provides or where the joint action of the settlor and all beneficiaries is required, during the time that a trust is revocable and the person holding the power to revoke the trust is competent: [¶] (a) The person holding the power to revoke, and not the beneficiary, has the rights afforded beneficiaries under [the Trust Law; and] [¶] (b) The duties of the trustee are owed to the person holding the power to revoke."
Parducci argues that the statute simply postpones a beneficiary's rights under a revocable trust and that once the settlor dies and the trust becomes irrevocable, the beneficiary may seek redress for trustee misconduct during the time that the trust was revocable. He relies upon Evangelho v. Presoto (1998) 67 Cal.App.4th 615, 617-625, which held that beneficiaries of a revocable trust are entitled to an accounting upon the settlor's death for the entire period of the trust, including the period when the trust was revocable. The Evangelho court stated that the contingent rights of beneficiaries of the revocable trust "were postponed while the holder of the power to revoke was alive" but "mature[ed] into present and enforceable rights" upon the settlor's death, allowing the trustee's conduct to "be attacked for fraud or bad faith and an accounting compelled for improper acts which had been hidden from the ultimate beneficiaries." (Id. at p. 624; accord Brundage v. Bank of America (Fla. Ct.App. 2008) 996 So.2d 877, 882-883.)
As noted above, the issue presented in Evangelho is now before our high court in Estate of Giraldin, supra, 199 Cal.App.4th 577. The Giraldin court questioned Evangelho and interpreted Probate Code section 15800 to mean that a trustee's duties are owed exclusively to the settlor during the period of revocability and bars a beneficiary's claim for breach of fiduciary duty for alleged misconduct occurring during that period. (Giraldin, pp. 594-598.) The court expressly rejected the contention, advocated by Parducci here, that "the beneficiaries of a revocable trust develop standing to pursue claims against the trustee, for actions taken while the trust was revocable, as soon as the trust becomes irrevocable." (Id. at p. 596.) The court reasoned, "if the trustee's duties are not owed to the beneficiaries at the time of the acts in question, the death of the settlor cannot make them retroactively owed to the beneficiaries. To rule otherwise would put the trustee in an impossible position: while the settlor is alive, he is obligated to do what the settlor wants, even if it harms the expectations of the beneficiaries, but once the settlor dies, the trustee would have to answer for allowing the interest of those same beneficiaries to be diminished by conduct during the settlor's lifetime." (Id. at p. 597.)
The sufficiency of the pleading in this case does not turn upon the issue now before the Supreme Court. This case is factually distinct from Giraldin. In Giraldin, "no one ever claimed [the settlor] lacked sufficient competency to exercise his power to revoke the family trust." (Estate of Giraldin, supra, 199 Cal.App.4th at p. 595, fn. 18.) In this case, Parducci alleges precisely that. He alleges that in late 2002 or early 2003 the settlor was "diagnosed as suffering from dementia," that DeMello "began acting as trustee," and that the settlor "was not competent to revoke the Wittich Trust pursuant to Probate Code section 15800" from that time forward.
DeMello has not filed a respondent's brief on appeal but asserted in the trial court that she was named in 2002 as a successor trustee for the future and did not actually become the trustee until Wittich's death in 2009. But Parducci alleges that DeMello "began acting as the trustee" and "assum[ed] the title and position as successor trustee" around 2002. (See Rest.3d Trusts, §§ 34-35 [trusteeship may be accepted by conduct and need not be confirmed by court].) In reviewing the sufficiency of a pleading against a general demurrer, we treat the demurrer as admitting all material facts properly pleaded. (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.)
The allegation of the settlor's incompetency takes the case outside the terms of Probate Code section 15800, which restricts the rights of a beneficiary "during the time that a trust is revocable and the person holding the power to revoke the trust is competent." (Italics added.) The Restatement of the Law reinforces this point. "California trust law is essentially derived from the Restatement Second of Trusts. Over a number of years, the Restatement Second of Trusts has been superseded by the Restatement Third of Trusts. [Citation.] As a result, we may look to the Restatement Third of Trusts for guidance." (Lonely Maiden Productions, LLC v. GoldenTree Asset Management, LP (2011) 201 Cal.App.4th 368, 379.) Similar to section 15800 of the Probate Code, section 74, subsection (1) of the Restatement Third of Trusts provides that "[t]he rights of the beneficiaries are exercisable by and subject to the control of the settlor" while "a trust is revocable by the settlor and the settlor has capacity to act." The preeminence of the settlor's rights, and the concomitant limitation on beneficiary rights, apply when the settlor has "the mental capacity to exercise the power to revoke, withdraw, or appoint and to make and understand the business, financial, personal, and other judgments appropriate to the matters involved in an exercise of authority or control under this Section." (Rest.3d Trusts, § 74, com. (a)(2).) When the settlor "lacks the requisite mental capacity, the authority described and rules stated in this Section generally do not apply." (Ibid.) If the settlor becomes incompetent, "the other beneficiaries are ordinarily entitled to exercise, on their own behalf, the usual rights of trust beneficiaries, and the trustee is ordinarily under a duty to provide them with accountings and other information concerning the trust and its administration." (Rest.3d Trusts, § 74, com. (e).)
Parducci therefore had "the usual rights of trust beneficiaries" if, as he alleges, Wittich was incompetent. In sustaining the demurrer, the probate court focused on language in Probate Code section 15800 limiting a beneficiary's rights if "the person holding the power to revoke the trust" is competent and observed that a settlor's incompetence does not necessarily take a case out of the statute's reach because a person other than the settlor may hold the power to revoke. For example, in Johnson v. Kotyck (1999) 76 Cal.App.4th 83, 87-88, the court held that a trust beneficiary was not entitled to receive accountings upon the settlor's incompetency because a court-appointed conservator held the power to revoke the trust. The court concluded that Probate Code "section 15800 does not give a beneficiary . . . any right to a trust accounting so long as a conservator retains authority . . . to have the trust revoked and to abrogate [the beneficiary's] interest in the trust proceeds." (Id. at p. 88.) An accounting to the court was required under conservatorship law but no accounting to the beneficiary was required under trust law. (Id. at p. 89.)
Johnson is not relevant here because, so far as appears from the amended petition, there was no conservator with power to revoke or any other competent person with the power to revoke the Wittich trust. Parducci alleges that Wittich became incompetent and that DeMello took over Wittich's personal and business affairs without court intervention, under a power of attorney and as successor trustee. "A trust may not be revoked by an attorney in fact under a power of attorney unless it is expressly permitted by the trust instrument" (Prob. Code, § 15401, subd. (c)), which the trust instrument here does not permit. Parducci alleges that Wittich alone, who was allegedly incompetent, held the power to revoke. By its terms, the limitation on a beneficiary's rights in section 15800 was extinguished when Wittich became incompetent.
There is an additional issue to consider, as to what section 15800 means by incompetency. We do not understand the statute to require a prior judicial determination of incompetency before a beneficiary is entitled to rights under the trust, as the lower court seemed to assume. Some state statutes expressly require a formal determination of incompetency before a trustee's duties devolve to beneficiaries under a revocable inter vivos trust (e.g. Mo. Ann. Stat. § 456.6-603) while others refer generally to incompetency without further specification. (Bogert, The Law of Trusts & Trustees, § 964, fn. 28; see Unif. Trust Code, § 603 [noting variations].) "Exactly when a trust settlor 'loses capacity' to revoke a revocable trust, absent a judicial determination of incapacity, is an issue that would seem to be exceedingly problematic." (Volkmer, 39 Estate Planning 46, Duty Owed by Trustee of Revocable Trust (Feb. 2012), italics omitted.) Probate Code section 15800 speaks of the settlor's incompetency generally and does not require a formal adjudication of incompetency, as do other state statutes.
In construing a statutory provision, we are "limited to the construction of the plain language of the statute as enacted and the intention therein expressed" and "are not authorized to insert qualifying provisions." (Rowan v. San Francisco (1966) 244 Cal.App.2d 308, 314.) The plain language of section 15800 speaks simply of the incompetency of the person holding the power to revoke. The statute is intended to limit "the enjoyment of rights of beneficiaries of revocable trusts until the death or incompetence of the settlor or other person holding the power to revoke the trust." (Cal. Law Revision Com. com., Prob. Code, § 15800.) The limitation on the beneficiaries' rights is a recognition that "the holder of a power of revocation is in control of the trust and should have the right to enforce the trust." (Ibid.) The purpose of the limitation no longer applies once the holder of a power of revocation becomes incompetent and can no longer control the trust. The incompetency of the settlor or other person holding the power to revoke is thus the crucial element, not a formal adjudication of incompetency that may occur later in the settlor's lifetime or not at all. In fact, one of the purposes of an inter vivos trust is to avoid the need for a competency hearing and the cumbersome process of a conservatorship by "providing management for settlors late in life, often on a contingent or standby basis by settlors who initially at least serve as their own trustees but designate successors to assume responsibility in the event the settlor resigns or becomes incompetent." (Rest.3d Trusts, § 25, com. (a).) When such a successor trustee assumes responsibility for the trust upon the settlor's incompetency, the trustee's duty transfers to the beneficiaries without requiring the beneficiaries to have the settlor judicially declared incompetent.
A strict standard of proof safeguards against a beneficiary's unfounded assertion that a settlor is or was incompetent and that a beneficiary has acquired rights under a revocable trust. To prove a settlor's incompetency, one must overcome the presumption that the settlor was competent (Prob. Code, § 810) in the sense of lacking testamentary capacity. (Andersen v. Hunt (2011) 196 Cal.App.4th 722, 726-731; Conservatorship of Bookstra (1989) 216 Cal.App.3d 445, 450.) A trustee administering a revocable trust for the settlor's benefit may generally rely upon this presumption of competency and need not scrutinize the soundness of the settlor's mind. A trustee cannot, however, ignore clear signs of mental deficits affecting the settlor's capacity to understand the nature of his or her acts affecting the trust. Parducci alleges here that Wittich "suffer[ed] from dementia" and that her examining physician found that she did "not have the capacity to understand and make decisions." Parducci further alleges that DeMello assumed all management of Wittich's personal and business affairs after informing the family that Wittich had Alzheimer's disease and was unable "to function on her own." Parducci should be permitted an opportunity to prove the allegations and to establish that he was entitled to the rights of a beneficiary under the trust because Wittich was incompetent.
Parducci must also be given an opportunity to prove, as he alleges, that DeMello's alleged misconduct as trustee continued after Wittich's death, when the trust became irrevocable. Probate Code section 15800 limits the rights of a beneficiary "during the time that a trust is revocable." The trust became irrevocable upon Wittich's death in May 2009 and DeMello was the trustee until May 2010. Parducci alleges that DeMello misappropriated trust assets "through 2010" and, more specifically, that DeMello "continued to transfer funds to herself from a trust bank account after Wittich's death. This alleged misconduct falls outside the terms of section 15800 and is thus actionable.
DISPOSITION
The judgment is reversed. The case is remanded to the probate court with directions to overrule the demurrer and to conduct further proceedings consistent with the views expressed in this opinion. Parducci shall recover his costs on appeal.
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Pollak, J.
We concur:
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McGuiness, P. J.
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Siggins, J.