Opinion
3-29-1954
In re McLAUGHLIN'S ESTATE * SEYMOUR v. McLAUGHLIN et al. Civ. 15649.
Martin Minney, Jr., Michael J. Cullen, Heller, Ehrman, White & McAuliffe, San Francisco, J. Arthur Leve, Leve, Hecht, Hadfield & McAlpin, New York City, for appellants. Cooley, Crowley & Gaither, San Francisco, for respondents.
In re McLAUGHLIN'S ESTATE *
SEYMOUR
v.
McLAUGHLIN et al.
March 29, 1954.
Rehearing Denied April 28, 1954.
Hearing Granted May 27, 1954.
Martin Minney, Jr., Michael J. Cullen, Heller, Ehrman, White & McAuliffe, San Francisco, J. Arthur Leve, Leve, Hecht, Hadfield & McAlpin, New York City, for appellants.
Cooley, Crowley & Gaither, San Francisco, for respondents.
BRAY, Justice.
Appellant, who was referred to below as objector, appeals from the 'Order Settling Sixth Account and Report of Trustees; Approving Activities of Trustees During Period Covered, and Fixing Trustees' Compensation for Trustees and Trustees' Attorneys, and Overruling Certain Objections Thereto,' exception certain portions.
Questions Presented.
1. Alleged abuse of discretion in allowance of trustees' fees.
2. Effect of trustees' receiving salaries from allied entities.
Appellant appeals primarily from the allowances to the trustees for fees, and does not now complain of the approval by the court of the trustees' actions save insofar as such actions affect the allowance for fees. The court allowed $7,500 as compensation to each of the three trustees for the one year period covered by the account, $22,500 in total.
1. Alleged Abuse of Discretion.
The allowance of fees and expenses is a matter within the discretion of the trial court and cannot be interfered with by this court unless an abuse of discretion is manifest. Estate of Mills, 119 Cal.App.2d 8, 258 P.2d 1028. Our task is to determine whether there is any substantial evidence to support the allowance made by the court. Estate of Griffith, 97 Cal.App.2d 651, 655, 218 P.2d 149.
Dorsey E. McLaughlin by his will created a trust for the benefit of his widow, his son and appellant daughter. At his death in 1945 the estate was valued at $4,804,550.65 (according to the account, the trust assets are presently carried at a valuation of $2,282,675.72, apparently a net reduction in principal for the year of $26,273.98) before taxes. Until the death of the widow the beneficiaries share equally in the trust income. Of the three trustees named in the will, the widow alone remains in office. The original trustees nominated the two other incumbent trustees, Honn and Mrs. Wales. They were former business associates of the trustor. This is the sixth account of the trustees and covers the period January 1 to December 31, 1951. The son has approved the account, and obviously, the widow is satisfied with it.
The record fails to show how the court arrived at the sum it allowed for fees. While there was considerable evidence concerning the operation of the trust, it is difficult to determine how much of the services applies to the year in question, how much of the services was rendered by Honn and Mrs. Wales as trustees, as distinguished from their duties as directors and trustees of certain corporations and another trust in which the trust held interests. There can be no question that the allowance was very generous. Whether it amounted to an abuse of discretion is the difficult question.
A consideration of the activities of the trustees during the year follows:
1. At the end of the year the estate had stocks and bonds valued at $1,729,211.57, which yielded $75,880. As to this portfolio the stocks were constantly watched and a watching account maintained, information and advice was informally obtained from brokers, trustees took several publications and services for review and studied sources of information. Stocks were priced daily during the first part of the year and then once a week, with entire portfolio being priced every 90 days. Stock purchases were $234,809.42 while stock sold was $77,618.39.
2. Two unimproved lots on McAllister Street, San Francisco, valued at $57,918.45 yielded a rental of $9,000 under lease previously made. Inquiries from brokers and agents were received and negotiations for sale carried on, although no sale was made during the period. (Sale made later.)
3. Collected $3,600 in interest on note of son.
4. The estate owns a controlling interest (51%) in The Pacific Dock and Terminal Company, valued at $78,555, and a demand note of that company valued at $161,046.73 after trustees collected $7,159.50 principal and $14,985 interest. The Dock company also owed as of January 1, 1951, to the estate back accrued interest of $403,779.67. The operation of this company is one of the controversial matters here. There are five directors including Honn and Mrs. Wales. Honn and Mrs. Wales receive directors' fees of $50 plus travel expenses per meeting (usually four meetings per year). Mrs. Wales as secretary-treasurer receives $200 per month. The principal property of the company consists of 95 acres of upland and approximately 5 acres of submerged land in the Long Beach Inner Harbor area. Richfield Oil Company operates 49 wells on the property as holdover lessee under an expired lease. The net oil and gas royalty to the Dock company for 1951 was over $127,000. Surface leases bring the company about $13,000. The gross income of the company was $141,000 with operating expenses of $76,000, of which $41,000 was taxes. The company is heavily indebted, owing over $1,800,000. According to the trustees the company's principal problem is to keep Richfield interested in oil production and development. However, the evidence shows that any activity in this respect is that of the president and not of the trustees. Apparently, the only activities of the trustees distinguishable from their activities as directors of the corporation were efforts to find a buyer for the estate's interest in the company and the indebtedness due the estate. There were perhaps five or six tentative proposals, some made in person, others by phone, and there was correspondence. Possibly the trustees met with brokers or possible buyers on five different days. There was considerable testimony about the income tax situation and the bookkeeping of this company. However, the company employed a firm of certified public accountants and a full time bookkeeper.
5. The estate owns a 40 per cent interest in the Wilson Estate valued at $63,871.25. The sole asset of the Wilson Estate is a note of The Pacific Dock and Terminal Company, which with interest amounted on January 1, 1951, to $566,513.77. The trust received $4,800 payment on principal and $2,400 on interest--total, $7,200. A most peculiar situation exists with reference to this Wilson Estate. Although the only asset of the Wilson Estate is the indetedness to it of the Dock company, and the only duties of the Wilson trustees are to accept payment made to it once a year by the Dock company and then prorate that payment to the McLaughlin estate and the other 32 persons interested in the Wilson Estate, a very expensive setup is maintained by the Wilson Estate trustees. Honn is one of these trustees and at least up to May, 1951, received $50 per month compensation from that estate. Mrs. Wales receives $40 per month therefrom for secretarial services. The Wilson Estate pays 10 per cent of the expense of operating the office jointly maintained by it with the McLaughlin estate and certain corporations. Apparently it costs the Wilson Estate $2,727.58 per year to make the one collection from the Dock company. In view of the interlocking situation in which Honn and Mrs. Wales are directors of the Dock company and trustees of both the Wilson and McLaughlin estates and receive pay from all of them, it is difficult to understand the necessity for the cost of operating the Wilson Estate. Certainly no extraordinary services are rendered by the McLaughlin trustees in this matter. None were claimed.
6. The Spring Hill Corporation, entirely owned by the estate, is carried on the books at no value, except $111,110.09 which is advances made to it by decedent and the trustees, although the actual indebtedness to the estate is $299,000. The main property of the corporation is approximately 230 acres of surface property and 340 acres of mineral rights in Nevada County. A gold mine was once operated by decedent on the property but it ceased to operate in 1949. The trustees have been disposing of the machinery and equipment from time to time, paying agents 10 per cent commission on the sales. $16,000 worth of equipment was sold in 1951. Pursuant to a plan devised by the deceased and later approved by the beneficiaries 35 acres were cleared for a residential subdivision. One house was built and sold. Now, however, the trustees are doing no building but are endeavoring to sell lots through local brokers. No money was spent in 1951 for roads or buildings. Only two lots were sold that year, although an oral agreement to sell four more to a contractor was made. The corporation shares offices with the McLaughlin estate and pays 20 per cent of the cost. Mrs. Wales receives $90 per month as secretary-treasurer, having charge of the books and correspondence. Tax matters are handled by the certified public accountant firm and the actual bookkeeping by the office bookkeeper. The major part of the salvage of equipment has been completed. Correspondence was had with the assessor of Nevada County and Honn visited him there once. As a result, there is to be a substantial reduction in taxes in 1952. Honn testified that it would be hard to differentiate between the services of the directors of the company and the trustees in this matter. Both Honn and Mrs. Wales are directors. Foreclosure proceedings were started by the corporation against one Valerga and he made full payment. What the trustees did as trustees in this respect does not appear. The operation of the corporation for the year showed a net profit of $900 before depreciation and a loss of $6,700 after. The expense of operating the company for the year was $2,794. No money was paid the McLaughlin trust, although next year $25,000 was paid. The record does not show over what period this sum was accumulated.
7. Beck Iron Ore Property valued at $12,500 and yielding $185 on a lease entered into in 1951. This about pays the taxes on the property. Inquiries from brokers for option-leases were received and negotiations were had culminating in 1952 in what is apparently a very advantageous option to lease. It is difficult to determine how much time was devoted by the trustees in 1951 to the negotiations.
8. Other services. Distribution to the beneficiaries of decedent's household furniture, valued at $20,000 and the payment to the beneficiaries of $69,335.85 in trust income by monthly payments. The total trust income was $106,687.02, the total expenses were $28,228.39, leaving a net income of $78,458.63.
Although we have referred throughout this opinion to the work of the trustees, it is conceded that the widow participated very little in the trust activities. She was consulted by the trustees on all major decisions and sat in meetings to determine action on major problems. Direct administration was left to the other two trustees. The 'working trustees' were the other two. Section 1122 of the Probate Code provides that where there are several trustees the court shall apportion compensation according to the respective services rendered. This section undoubtedly is for the benefit of the trustees. If the total compensation is proper, the beneficiary cannot object if a trustee performing more services than his fellow trustee is willing to permit that fellow trustee to obtain a greater portion of the over-all fee than the services rendered by him would strictly justify. The request by the trustees was for $7,500 each. The trial court did not attempt to determine a gross fee and then divide it in accordance with the wishes of the trustees. It allowed each $7,500 and as to the amount to be paid to the widow stated: 'I think when these testamentary trusts are created and when widows are named executors in the will, they rarely do any of the work, but they receive the same compensation. * * * I think it is pretty well accepted that a widow should receive equal compensation with either working executors or working trustees, so I am going to allow her the same compensation. * * *' Thus, it appears that the over-all allowance was not based upon the value of the total services rendered by the trustees.
The record shows that the trustees in the operation of this trust, of the companies and the Wilson Estate in which they are directors and trustees, have had the help of attorneys, accountants, stock brokers, real estate brokers, bookkeepers, etc. This, of course, is proper. With a trust of this size, it cannot be expected that the trustees can do this type of detail work themselves. An expense of $28,228.39 (of which only $2,817.01 is taxes) is a considerable percentage of the income of $106,687.02. It is doubtful if the trustees needed all the help and the office expense incurred by all the various entities. Apparently, not much effort has been made to reduce expenses that either directly or indirectly affect the net income received by the beneficiaries. Perhaps the dual relationship of the trustees as such and as representatives of the other entities has something to do with this fact. Moreover, the fact that they had all this assistance lifted the burden somewhat from the trustees.
This brings us to the effect of that relationship. It was not disclosed to the court in any of the prior accountings. Mrs. Wales receives $200 per month from the Dock company, $90 per month from Spring Hill Corporation, $40 per month from the Wilson Estate. Hoon received $50 per month as trustee of the Wilson Estate. The record is not clear as to whether this is continuing or ended in May, 1951. Both Mrs. Wales and Honn receive director's fees from the Dock company. The record does not disclose whether they received director's fees from the Spring Hill Corporation. While the acceptance of such fees may not be improper, these facts should have been called to the court's attention right from the first. See Overell v. Overell, 78 Cal.App. 251, 248 P. 310. We are unable to find in the record any indication that the court segregated in any manner the services rendered by the trustees as distinguished from those rendered in their other capacities, nor can we find any indication that in arriving at compensation the court gave any consideration to their compensation in those capacities.
It is true that trustees Honn and Mrs. Wales were acting in the other capacities during the lifetime of the decedent and being paid therefor. That fact, however, does not exonerate them from their duty to disclose the situation to the court. An individual may do many things with his money which the trustees may not do.
Let us examine the six categories of services which the trustees characterize as extraordinary services.
1. The operation of Spring Hill Corporation. As pointed out before, even trustee Honn could not differentiate between the services rendered as trustees and as directors. Most of the operations were routine. Certainly very little could be allowed for extraordinary services here.
2. Review and scrutiny of affairs and operations of The Pacific Dock and Terminal Company. Again, with the exception of negotiations for sale of the trust's interests in the corporation, practically nothing was done that was not done by the corporation itself. As to the negotiations for sale, there was some activity, but not of any great amount. The testimony concerning this activity, and, in fact, all attempted sales or leases during the year, was very indefinite. It is impossible to determine how much time was devoted to it. Apparently it is the custom of the trustees each year to ask for and receive extraordinary compensation for the negotiation of leases and sales during the year, and then if they result in leases or sales during a particular year to obtain additinal extraordinary compensation in that year. This practice is permissible. See Conant v. Lansden, 1950, 341 Ill.App. 488, 94 N.E.2d 594; Probate Code, § 1122. But the difficulty is that as far as the record shows, no consideration in any one year is given to the fact that compensation has been given in a previous year nor to the question of whether, although the action culminates in a particular year, the bulk of the negotiations took place, and a large compensation was received, in the prior year.
3. Negotiations with reference to notes and advances receivable by trustees. This applies to those due from the Dock company and the Wilson Estate. But as pointed out before, these matters are handled by the officers of those entities. While the trustees as such obviously must advise with the debtor entities, the bulk of their duties as trustees is merely to accept the moneys due the estate when paid to them.
4. Management of the trust real property and negotiations for sale. While there are some extraordinary services here, they are not very great. What was said under paragraph 1 above as to the inability to determine how much negotiations occurred in this particular year applies to these properties.
5. Lease on Beck Iron Ore Properties and negotiations with regard to the lease and option later entered into. According to the trustees the latter is a very valuable project. However, it was not entered into during the year. The trustees are entitled to extraordinary compensation for the negotiations during the year. But it is practically impossible to determine how much time was devoted to this matter.
6. Federal and state income tax returns and adjustments on previous years, including negotiations of claims for refund previously filed. Here again the work done by the trustees is delightfully indefinite. While, of course, there was some supervision by the trustees, obviously the main work was done by the accountants. There is no basis upon which to figure what compensation should be allowed for the trustees' services.
Mrs. Wales testified that she was at the office over 40 hours per week. No attempt was made to inform the court how much of this time was devoted to the various entities from which she received about $330 per month. Honn spent only about one-half of his time at the office but as to what portion of that time was devoted to the trust as distinguished from his services in other capacities and to his other activities does not appear. The burden was on the trustees to establish the services rendered by them. See Purdy v. Johnson, 174 Cal. 521, 163 P. 893.
Considering the income for the year, the part of the services performed by the trustees which can be distinguished from that performed in their other capacities, the fact that the compensation to the widow was not based upon services rendered by her or by the other trustees, the fact that the record shows that many of the services claimed to have been performed by the trustees were actually performed by employees and other officers of the entities involved, the compensation received by the trustees from allied sources, show that the compensation allowed was so far out of line as to constitute an abuse of discretion by the court. There is no evidence to support such extraordinary allowances.
We have in mind that one of the matters to be considered in fixing fees is the responsibility which the trustees assume. Here, there is a large estate and a large responsibility. Here, the trustees are entitled to a reasonable fee for the ordinary services rendered and a liberal fee for their extraordinary services and their responsibility. But in view of the state of the record there is no evidence to support the allowance made.
Much of the transcript and the trustees' brief is devoted to showing that the trustees did excellent service in the past. Apparently they were well compensated therefor, too. We are concerned only with their activities in 1951.
The trial court will have to make a complete review of the services rendered in the year 1951 in accordance with the views herein expressed. The only portions of the order challenged are those approving compensation for trustees and allowing trustees' fees. Those portions are reversed.
PETERS, P. J., and FRED B. WOOD, J., concur. --------------- * Subsequent opinion 274 P.2d 868.