Opinion
NOT TO BE PUBLISHED
APPEAL from an order of the Superior Court of San Diego County, No. PN24815, Robert P. Dahlquist, Judge.
HALLER, J.
John Michael Paulson (Michael) appeals from an order removing him as trustee of his deceased father's trust. (Prob. Code, § 15642.) Michael raises numerous contentions, including: (1) the court had no authority to consider removal on its own motion; (2) he was denied due process; (3) the court applied the wrong legal standards; and (4) substantial evidence did not support the court's removal order. We reject Michael's contentions and affirm the order.
All further statutory references are to the Probate Code unless otherwise specified.
FACTUAL AND PROCEDURAL SUMMARY
Under well-settled appellate rules, we view the evidence in the light most favorable to the court's rulings. (See Conservatorship of Ramirez (2001) 90 Cal.App.4th 390, 401.)
In his appellate brief, Michael frequently ignores this rule and sets forth facts unsupported by the record and/or which are based on his own favorable inferences from the evidence. We disregard these factual assertions.
A. The Paulson Trust
Allen Paulson (Paulson), a successful businessman and entrepreneur, engaged in many ventures throughout his career, including those involving hotels and casinos, horse racing and breeding, aviation, real estate, and oil and gas exploration. In January 2000, Paulson executed a restatement of his prior living trust, and transferred all of his assets into this restated trust. At the time, he was married to Madeleine Paulson (Madeleine), and had three adult sons from a prior marriage: Michael, Richard, and James. Paulson also had one grandchild (Crystal), who was the daughter of his deceased fourth son. Within months after he executed this restatement, Paulson amended his trust several times. Paulson died shortly thereafter. We shall refer to the final version of this restated trust as the Paulson Trust or the Trust.
Paulson named two successor cotrustees in the Paulson Trust: his son Michael and his long-time friend Edward White. The Trust provided that if White was unwilling or unable to serve, then Dr. Nicholas Diaco should succeed him as cotrustee, and if Dr. Diaco was unwilling or unable to serve, then Paulson's sons James or Richard should succeed Dr. Diaco. The Trust further provided that if Michael was unwilling or unable to serve as cotrustee, then James or Richard shall be appointed as cotrustee.
The Paulson Trust gave the trustees broad discretion to implement the purposes of the trust. This included the authority to "continue or to participate in any... business... so long as in the discretion of the Trustee it seems advisable to do so...." The trustees were also given broad investment powers, and the authority to sell or lease property and to borrow money for any trust purpose. The Trust expressly permitted "Self Dealing, " and states that Paulson's "selection of Trustees was made with full knowledge" that the trustee may have conflicts of interest, and that a trustee "shall not be subject to surcharge or any other claim" because of the conflict.
The Paulson Trust further provided broad immunity for the trustees' discretionary decisions. The Trust states that the trustees have the power "[t]o construe the terms and conditions of the trust after obtaining responsible legal advice. Any reasonable construction thereof thus adopted shall be binding on all beneficiaries hereunder and other claimants to any trust assets." The Trust additionally states: "Any Trustee shall be fully protected in any action or nonaction taken, permitted or suffered in good faith and in accordance with the opinion of counsel...."
But the Paulson Trust also placed certain limits on the trustees' broad powers. First, the Trust provided that although a trustee has the power to "continue to hold any [Trust] property..., [¶] [n]otwithstanding [this] provision[ ]..., upon the death of Trustor, the Trustee shall sell promptly the entire interest of the trust estate... in all horses...." (Italics added.)
Second, the Paulson Trust mandated that the trustees fund several specific gifts upon Paulson's death. These gifts included: (1) an endowment to the Georgia Southern University; (2) gifts to Madeleine; (3) $1.4 million to a trust for granddaughter Crystal; (4) $985,000 to a trust for Paulson's brother (Artemus); and (4) $995,000 to a trust for Paulson's deceased brother's widow (Violet). The Trust also required the creation of a "Children's Trust, " to be shared equally by his surviving children, and provided for certain distributions to these beneficiaries three years and seven years after Paulson's death, and then required distribution of all remaining assets 10 years after Paulson's death.
Third, the Paulson Trust expressly limited the discretionary powers of a successor trustee pertaining to distribution decisions if the trustee is also a beneficiary. In this regard, the Trust states a trustee is prohibited from participating "in the exercise of any discretion to distribute or not distribute which shall directly or indirectly affect the amount of property distributable to said Trustee-beneficiary..., or which shall affect the time or times at which said distributions are made." When this prohibition applies, the distribution decision "shall be exercised exclusively" by a disinterested cotrustee, or, if there is no disinterested cotrustee, the decision must be made by a third party appointed for that purpose.
Fourth, the Trust mandated certain actions by the successor trustees pertaining to Paulson's involvement in the development of a supersonic jet with Lockheed-Martin Corporation (the supersonic jet project). Specifically, the Trust directs the cotrustees upon Paulson's death "to take all steps feasible to continue to support the [supersonic jet] project, including, without limitation, postponing distributions to beneficiaries, restructuring the Paulson Assets and borrowing funds and securing one or more of the Paulson Assets...." But Paulson provided a specific limit on the monetary amount that can be invested in this project: "the total commitment of Paulson Assets to the [supersonic jet] project subsequent to Trustor's death shall not exceed Twenty Million Dollars..., (or Forty Million Dollars... if the total value for Federal Estate Tax purposes in the estate of Trustor of CardioDynamics International Corporation stock exceeds Sixty Million Dollars)..., without the consent of a majority of the then adult beneficiaries who are then entitled to distributions of income from the Childrens' Trust or the Marital Trust...."
The Paulson Trust also contains a no contest clause, stating that if any beneficiary "shall contest... and/or attack or seek to impair or invalidate any of the provisions of Trustor's Will and/or this [Trust], ... all interests given under this... Trust to each such person shall be forfeited and shall be disposed of as if such person had predeceased, without issue, the Trustor." The Trust defines a "contest" to include "any attempt to remove (or prevent the appointment of) [a named trustee] for any reason, other than affirmative malfeasance...." (Italics added.)
B. Events After Paulson's Death
Paulson died on July 19, 2000. Although the record is not entirely clear, it appears that at the time, the Paulson Trust held more than $100 million in assets, but these assets were subject to numerous liabilities and claims.
Under the terms of the Paulson Trust, Michael and White became the cotrustees. Soon after, disputes arose between: (1) Michael and Madeleine; (2) the Paulson brothers and Madeleine; and (3) Michael and White. These disputes concerned various trust administration matters, including the disposition of the 225 horses (including racehorses) owned by the Trust at the time of Paulson's death. Although the cotrustees sold many of these horses shortly after Paulson's death, Michael wanted to continue the horse business with the remaining horses to generate cash to pay the outstanding debts and to obtain higher sales prices for the horses. The parties brought several probate court petitions seeking instructions pertaining to these and other issues.
In October 2001, White resigned as trustee and Dr. Diaco took his place. Michael and Dr. Diaco thereafter had numerous conflicts as to trust administration.
On January 2, 2003, the court entered an order requiring the cotrustees to sell all of the horses owned by the Paulson Trust within two months, pursuant to the "prompt sale" provision in the trust instrument.
Several weeks later, Michael, James, Richard, Madeleine, and Dr. Diaco entered into a settlement and mutual release agreement (the 2003 Settlement), seeking to settle their differences pertaining to trust administration matters. The parties agreed to give Madeleine certain Trust assets outright (including full ownership of the Del Mar Country Club), and she agreed to release Michael and his brothers from any further claims. Two additional provisions are of particular relevance here. First, the settlement agreement provided that Michael would serve as sole trustee, and that "Richard and James hereby decline to act as Co-Trustees and consent to Michael's appointment as sole Trustee of the [Paulson] Trust." Second, the parties requested the court to vacate its order directing the sale of the horses, and agreed that Michael could continue to operate the horse business. This provision stated in relevant part: "[F]rom and after execution of this Agreement..., [Michael] (or any of his successors) shall be under no obligation to sell or otherwise dispose of any horses held in the Trust and may continue the operation of a horse business."
The court (Superior Court Judge Richard Cline) entered an order approving the settlement, finding the settlement "is in the parties' best interests." The court also vacated its order requiring the horses to be sold.
C. Safe Harbor Petitions and Petition to Be Appointed Trustee
Four years after the settlement was approved, in April 2007, James and Richard filed a safe harbor petition, seeking a determination whether a proposed petition to remove and surcharge Michael for affirmative malfeasance violated the Paulson Trust's no contest clause. In the proposed petition, James and Richard alleged that seven years after Paulson's death, Michael has continued to maintain the horse business, his two brothers had not received any distributions of income or principal from the Trust, and several other beneficiaries had not been paid their full bequests. The case was assigned to Superior Court Judge Robert Dahlquist. Several months later, Richard died. Shortly after, on October 19, 2007, Judge Dahlquist entered an order declining to "make the Safe Harbor determinations, " finding the proposed petition "as currently drafted... is too broad to fall in the category not to be determined as a no contest."
Two months later, on December 14, James filed new safe harbor petitions seeking a determination that several narrower proposed petitions did not violate the Paulson Trust's no contest clause. The proposed pleadings included petitions to surcharge and remove Michael for affirmative malfeasance, and focused on three specific areas of alleged misconduct: (1) Michael continued the horse business in direct violation of the Trust terms; (2) Michael willfully and knowingly exceeded the $20 million limitation on the Trust's investment in the supersonic jet project; and (3) Michael failed to make the required distributions to beneficiaries. The petitions also alleged various acts of self-dealing and other forms of misconduct. The executor of Richard's estate (his surviving spouse, Vikki Paulson (Vikki)) brought a separate safe harbor petition seeking a ruling whether a similar proposed petition would violate the Trust's no contest clause.
Although the hearing on these safe harbor petitions was initially scheduled for May 2008, the court rescheduled the hearing to August 19, 2008 to allow the parties to present testimony on the relevant safe harbor issues.
Before this August hearing, on June 16, James filed a petition asking to be appointed as a cotrustee of the Paulson Trust, noting that he was named a successor trustee in the Trust. James stated that although he consented to Michael acting as the sole trustee in the 2003 Settlement, this agreement should not bar his current request because of various facts, including that he signed the settlement agreement based on Michael's representations that about $32 million would be promptly distributed to the beneficiaries. James also sought the appointment based on Michael's alleged breaches of the Trust terms, including that: (1) Michael had made no distributions to the Children's Trust; (2) Michael had made only portions of the required distributions to several other trust beneficiaries; and (3) Michael had violated the Trust by investing $28 million of trust assets in the supersonic jet project.
D. Court Sua Sponte Raising Removal Issue
At the August 1 status hearing on the petitions for appointment and for safe harbor, the court notified the parties it intended to raise an issue sua sponte, under section 15642, whether Michael should be removed as trustee. The court said it had presided over the case for more than one year and had held numerous hearings in the case, and certain undisputed facts concerned the court, including Michael's activities in continuing to operate the horse business, his failure to distribute any money to the remainder beneficiaries, and the fact that Michael was acting on his own without any checks on his broad authority. The court stated: "I have responsibility to [the] beneficiaries to make sure that trust assets that were set aside by this trustor are there for them. I am concerned from what I have heard that they may not be there...." The court said it had not made any decisions, and would not take any action without a hearing and permitting Michael to present evidence on the issues.
Section 15642, subdivision (a) provides: "A trustee may be removed in accordance with the trust instrument, by the court on its own motion...."
One week later, the court held a hearing to discuss the parties' proposed witnesses on the court's section 15642 motion. At this hearing, the court reiterated that Michael was "welcome to bring forward all of the witnesses" and "to hire experts..., " and the court assured Michael that it "will listen to all of them... " and that it would not remove the trustee without a "full" hearing. The court explained it was initiating this inquiry not to "fight" with the trustee, but to ensure the "wishes of the trustor [are] complied with." The court scheduled the evidentiary hearing to begin on August 19. The court stated it would not remove the trustee after the first day, but would consider suspending his powers and therefore cautioned Michael's counsel to have the witnesses ready to testify. Michael's counsel responded "Will do."
On August 19, most of the day was devoted to evidence on the safe harbor petitions, but at the end of the day the court shifted to hearing evidence relevant to the section 15642 motion, and then continued this hearing to August 20. At these hearings, Michael testified at length regarding various aspects of his trust management. We summarize this testimony below.
First, Michael said that he funded all specific bequests required under the Paulson Trust, except for about one-half the required sums to the trusts for Paulson's granddaughter Crystal and for Paulson's brother and sister-in-law, and funds owed for the university endowment. Michael also acknowledged he had not distributed any funds to the Children's Trust. He said he had not paid these bequests because he was "trying to be prudent, " in light of "ongoing obligations in the trust, " including estate taxes and the supersonic jet project. Michael said his current plans were to sell a substantial portion of share assets later in the year, to obtain funds for these bequests.
Michael also testified he had earned about $3 million in trustee fees since 2000. The first two years, Michael paid himself $2,500 per day; in 2002 and 2003 he earned about $500,000 annually; in 2004 and 2005 he earned $1,600 per day; and in 2006 and 2007 he earned about $20,000 per month. Additionally, Michael paid his Trust attorneys more than $15 million since Paulson's death. Michael said that at the time of Paulson's death, Paulson had outstanding debts of more than $191 million and was a plaintiff or defendant in about 12 lawsuits. By early 2004, Michael had settled 11 of the 12 lawsuits for a net gain to the Paulson Trust of about $3.8 million.
At a later hearing, Michael testified that the attorney fees were "somewhere in the $13 to $14 million range, not $15 million."
With respect to the horse racing business, Michael testified he sold many of the 225 horses owned by the Paulson Trust shortly after Paulson's death, but he has continued to actively operate the business because it has "definitely" been a money-making venture and has brought "so much funds into the trust." Michael said the Trust has earned "well in excess of $8 million in [horse] race earnings, " and more than $40 million in horse sales. When the court asked "if the horse business has been profitable, why hasn't some of that profit been put into the Children's Trust?" Michael responded: "My attorneys advised me that I was personally responsible for the IRS taxes. So once all the IRS taxes are paid off and all the creditors are paid off, that the Children's Trust were the residual beneficiaries, so all of the other obligations of the trust need to be paid off. And that is what I was advised by counsel."
With respect to taxes, the 2001 federal estate tax return showed a gross estate of $187 million, with substantial deductions and credits. Michael said that when he filed the Trust's federal tax return in 2001 he elected, on the advice of counsel, to claim a "section 6166" tax deferral. (26 U.S.C. § 6166.) Under this federal statute, a taxpayer may defer taxes for 15 years, with the first five years paying only an interest payment at a low rate, and the next 10 years paying principal and interest in installments. At the time of the section 15642 hearing, $11 million was still owed for estate taxes. Michael testified the Trust did not have the liquidity to pay the current annual tax payment, and therefore he had loaned the trust about $3 million. Michael said the Trust still owes him $2.3 million on this loan.
Michael also testified about the Paulson Trust's ownership of about 31 percent of the stock in Full House Resorts, Inc., which develops and manages Indian gaming facilities. Michael said the stock is now worth about $5 million to $6 million, which he claimed to be a substantial increase from the value at the time of Paulson's death. Michael testified that he is the chair of the Full House Resorts board of directors, and his annual compensation (paid to him personally) is $30,000 to $40,000. Michael testified he had not sold the stock because he believed the stock would substantially increase when the company opens a large casino project in Michigan the next summer.
Michael also testified that although he had previously been close with his brother James, the brothers terminated their communications in early 2007. Michael said he also stopped speaking with his brother Richard after August 2003 because "[w]e had a personal call that I thought was unacceptable." Michael said that in 2005 he had agreed to loan $150,000 to James and Richard (who apparently had terminal cancer at the time), but they did not repay these amounts to the Trust. Shortly after Richard died, Michael filed a creditor's claim against Richard's estate for the loan principal plus interest.
Based on the parties' schedules, the court continued the section 15642 hearing six weeks to October 1. At the continued hearing, Michael called Trust attorney Robert Metzger, who represents one of the businesses owned by the Paulson Trust pertaining to the supersonic jet project, to testify about the status of this project and a potential licensing agreement with a third party. The evidence showed that Michael had spent about $28.5 million in Trust assets on the supersonic jet project since his father's death. Michael also called another Trust attorney, Jeffrey Loeb, who testified about the value of the CardioDynamics stock for purposes of determining whether the investment limit on the supersonic jet project was $20 million or $40 million. (See pp. 32-33, post.)
During the October hearing, Michael's attorney expressed concern that he was unclear as to the precise issues relevant to the court's evaluation of Michael's performance as a trustee, particularly because "we don't have a petition on file." The court responded that this was a "fair comment" and it would reiterate the relevant issues. The court began with the "big picture, " stating "it appears that this trust started out with a lot of assets, a lot of money. It appears that there isn't very much left on a relative basis.... So I'm trying to find out what happened to it all, where did all of this money go." The court said it was uncomfortable "just letting things go on when it appears that the trust assets are diminishing in value, and we have a trustee who is acting entirely on his own with no supervision at all...." The court elaborated: "[T]he perception... may be wrong and everyone is entitled to a full hearing. But the perception is that [Michael] is managing [the] trust as if it is his own personal empire while all of the other beneficiaries get nothing." The court stated "we need to have a full hearing" to determine what "happened to all the assets in the trust...." The court then identified several specific areas of concern: (1) the supersonic jet project and the fact that it appears that Michael has invested more funds than is allowed by the Trust; (2) Michael's active continuance of the horse business, despite the Trust provision providing that the horses were to be sold promptly; (3) Michael's failure to distribute funds owed to Artemus, Violet, Crystal, and the Children's Trust; (4) the amount of compensation received by Michael; and (5) the fact that Michael is serving as the sole trustee despite Trust provisions reflecting the trustor's intent that there would be cotrustees.
When Michael's counsel stated that the court should hear from percipient and expert witnesses before it made a decision on these issues, the court agreed, stating it had not yet made a decision. The court said it recognized "these are important and serious concerns, " and assured counsel it understood that section 15642 "contemplate[s] there should be a full and fair opportunity for all of those witnesses" before any action is taken to remove a trustee. After further discussion, the court repeated that it understood "the parties are entitled to a full and fair hearing" and that although it would encourage the parties to be efficient and reasonable in their presentations, it would not "make any limitations at this time on the presentation."
The court later continued the hearing one month to November 3, 2008, but stated that because it appeared that "trust property or the interest of a beneficiary may suffer loss or injury pending a decision, " the court was immediately imposing certain limits on the trustee's powers, including that Michael could not spend more than $5,000 in trust assets without James's approval or by court order. The court identified several reasons for this action, including: (1) it appeared Michael was continuing to use trust assets to pay for his travel to numerous horse racing events, and that the court believed it was an "inappropriate use of trust assets, " particularly because Paulson expressly intended the horses to be sold and many trust beneficiaries had not received their required distributions; (2) the trustee fees appeared to be excessive; and (3) it appeared that Michael had spent more than $8 million on the supersonic project in excess of that permitted under the Trust. On October 14, the court issued a written order reflecting this ruling.
On October 23, the court denied James's safe harbor petitions. The court stated that although the proposed petitions contain specific factual allegations of " 'affirmative malfeasance' " - including Michael's conduct with respect to the horse business and the overfunding of the supersonic jet project - it would not grant safe harbor protection because the petitions contain additional allegations that did not constitute " 'affirmative malfeasance, ' " such as " 'acts of self-dealing, ' " which the Trust allows.
At the November 3 hearing, the court stated its preliminary finding that a prima facie showing had been made for removal of Michael as the trustee. The court noted that the evidence showed Michael had used trust assets for his personal benefit and had failed to distribute funds to the required beneficiaries. The court thus concluded that Michael had the burden to respond to the issues and show that he had performed his trustee duties appropriately. Based on the parties' request, the court rescheduled the continuation of the evidentiary hearings for four months until March 2009.
When the section 15642 hearing resumed in early March 2009, Michael represented himself. At the outset, the court repeated that it would allow Michael to "present whatever additional information or evidence he wished to present." Michael responded that this manner of proceeding was "acceptable" to him. Michael then directed the court to his lengthy trial brief, which he said contained "all of our argument[s] and facts" and to his recently-submitted annual financial summaries (unaudited and unverified). The financial summary for the most recent year (2008) showed the Trust's assets and liabilities were about equal (after deducting Michael's $28.5 million supersonic jet investment), leaving the Trust with little or no net value. Michael stated that all of the relevant information was contained in his brief and the financial summaries, and that he would give a brief argument (and/or testimony) and the court could then ask questions.
The first portion of the March 2009 hearings concerned James's petition to be appointed as cotrustee, which the parties agreed did not constitute a "contest." Michael was represented by counsel at this hearing. The second portion of the hearings concerned the court's section 15462 motion. Michael elected not to be represented by counsel in this proceeding, apparently because of his concern that the court would not later approve the Trust paying for Michael's attorney fees incurred on the trustee removal issue.
A focus of Michael's ensuing testimony was the work that he performed within one or two years after his father's death. This work included his involvement in the 12 existing lawsuits and retiring "virtually all" of 81 creditor claims (asserting "over $322 million in claims") within six months after his father's death. Michael also discussed the numerous additional lawsuits in which he had been involved as trustee which "exceeded $200 million in alleged damages, " and his work in settling or arbitrating the lawsuits for "around $13- to $14 million." Additionally, Michael said he "sold and negotiated over $50 million in real estate deals...."
Michael also testified about the operation of the horse business, including that he relied on advice from counsel in operating the business and that he had moved some of the Trust's horses to Ireland because he believed this was a better place for the horses to train, and that the Trust had paid for his expenses to visit the training facility in Ireland. Michael additionally testified about: his status as director of Full House Resorts, Inc.; the recent conditional licensing agreement on the supersonic jet project valued at $30 million; the amount of his trustee fees; and the Trust's outstanding tax burden.
At the conclusion of this presentation, the court said to Michael: "My understanding, Mr. Paulson you submitted all of the evidence that you wish to submit in connection with this hearing...." Michael responded: "That's correct." The court then permitted James's attorney to question Michael (at his own risk with respect to whether the questions constituted a contest). During this examination, Michael confirmed he had attended about 12 horse races over the past two years, and the Trust paid for these travel expenses.
The court thereafter invited the parties to provide closing argument, orally or in writing, but the parties expressly waived this right.
E. Court's Rulings
After taking the matter under submission, the court issued an order removing Michael as a trustee and appointing James and Vikki as cotrustees of the Paulson Trust. The court stated it reached this conclusion after "carefully considering all of the evidence and arguments" presented at the six days of evidentiary hearings. The court then detailed its factual findings and reasoning in a 19-page written decision. We briefly summarize those findings, and will discuss certain of these findings in more detail in the Discussion section below.
With respect to its general findings, the court stated that "the totality of the evidence establishes that Michael has treated the trust and its assets, to a significant degree, as his own personal estate to do with as he pleases" and that Michael "has put his own personal interests ahead of the interests of the trust beneficiaries, " and has used his position as trustee for his own personal benefit to the detriment of the beneficiaries, and "has been motivated, at least in part, by feelings of ill will toward [his brothers and/or their heirs]." The court further found Michael violated several express terms of the Paulson Trust and/or breached his duty of loyalty by: (1) investing in the supersonic jet project in the amount of about $28.5 million, when the Paulson Trust authorized an expenditure only of $20 million; (2) continuing to operate the horse business to the detriment of the beneficiaries; (3) failing to distribute the remaining funds owed to several individual beneficiaries; (4) failing to place any funds in the Children's Trust; and (5) failing to sell the stock in Full House Resorts, Inc. and personally receiving an annual directors fee earned from this corporation because of his position as trustee.
The court also explained its rejection of Michael's defenses that: (1) the trust provisions provide for absolute immunity for his decisions; (2) he reasonably and in good faith relied on counsel in making his challenged decisions; (3) the 2003 Settlement permitted his actions; and (4) the Trust's tax obligations excused him from making the required distributions.
The court concluded that when "viewed in its totality, the evidence establishes that the Court must act to preserve the trust assets and to protect all of the trust's beneficiaries. If the Court does not act, there is a serious risk that the remaining trust assets will be dissipated, lost or misused." The court thus issued the order removing Michael and replacing him with James and Vikki as cotrustees.
In appellate briefs spanning 133 pages, Michael challenges virtually all of the court's findings and procedures. For the reasons explained below, we conclude the court's findings are supported by the evidence and the court accorded Michael fair procedures before it reached its conclusions.
DISCUSSION
I. Legal Principles Governing the Removal of a Trustee
Removal of a trustee is governed by section 15642, which identifies several specific grounds for removal, including the trustee's breach of trust, failure to act, and excessive compensation, and the catch-all, "[f]or other good cause." (Id., subd. (b)(1)(4)(5)(9).) A trial court has broad discretion in determining whether to remove a trustee based on one of these statutory grounds. (See Estate of Gilmaker (1962) 57 Cal.2d 627, 633; Schwartz v. Labow (2008) 164 Cal.App.4th 417, 430.) The court's determination must be upheld unless " 'after calm and careful review of the entire record, it can fairly be said that no judge would reasonably make the same order under the same circumstances.' " (In re Marriage of Berland (1989) 215 Cal.App.3d 1257, 1261-1262.) We apply a de novo review to arguments that the probate court did not apply the correct procedure and/or did not have the jurisdiction to remove a trustee. (See In re Marriage of Jensen (2003) 114 Cal.App.4th 587, 592.)
Section 15642 states in relevant part: "(a) A trustee may be removed in accordance with the trust instrument, by the court on its own motion, or on petition of a settlor, cotrustee, or beneficiary under Section 17200. [¶] (b) The grounds for removal of a trustee by the court include the following: [¶] (1) Where the trustee has committed a breach of the trust. [¶] (2) Where the trustee is insolvent or otherwise unfit to administer the trust. [¶] (3) Where hostility or lack of cooperation among cotrustees impairs the administration of the trust. [¶] (4) Where the trustee fails or declines to act. [¶] (5) Where the trustee's compensation is excessive under the circumstances. [¶]... [¶] (7) If... the trustee is substantially unable to manage the trust's financial resources or is otherwise substantially unable to execute properly the duties of the office.... (8) If the trustee is substantially unable to resist fraud or undue influence.... (9) For other good cause."
II. Procedural Issues
As the centerpiece of his appellate challenge, Michael contends the court employed improper procedures to reach its decision to remove him as trustee. Specifically, he contends: (1) the court had no authority to sua sponte initiate an inquiry as to whether he should be removed; (2) the procedures violated his due process rights; (3) the court erroneously shifted the burden to Michael; and (4) the no contest clause precluded the court from conducting the inquiry on its own motion. We reject each of these contentions.
In his procedural argument section, Michael also contends the court erred by applying the wrong legal standards to review the evidence. We address these arguments in connection with Michael's substantial evidence challenges to the court's specific factual findings.
A. Court Had Authority to Initiate a Proceeding Under Section 15642
Michael begins his appellate brief by asserting that the court removed him as a trustee "through a proceeding unknown to California law." Not true.
Section 15642 expressly provides that a trustee "may be removed in accordance with the trust instrument by the court on its own motion...." (Italics added.) A Court of Appeal recently recognized that the statute means what it says. (Schwartz v. Labow, supra, 164 Cal.App.4th at p. 427.) A probate court has "the express power to remove a trustee on its own motion, without a petition." (Ibid.) Moreover, a court's authority to remove a trustee derives not only from section 15642, but also from its broad equitable powers to supervise the administration of a trust. (Schwartz, supra, at p. 427.) A probate court has the responsibility "to protect the estate and ensure its assets are properly protected for the beneficiaries." (Estate of Ferber (1998) 66 Cal.App.4th 244, 253.) Thus, the court has the inherent equitable power to "take remedial action" and to " 'intervene to prevent or rectify abuses of a trustee's powers.' " (Schwartz, supra, at p. 427.)
It was undisputed here that before the court initiated these proceedings the parties had submitted themselves to the probate court's jurisdiction by filing numerous petitions in connection with the Paulson Trust. In particular, in June 2008, James had filed a petition to be appointed a successor cotrustee, and in 2007 and 2008, James, Vikki, and Michael had filed several safe harbor petitions. In reviewing these petitions, the court became aware of certain undisputed facts triggering a concern as to whether the trustee was acting consistent with the trust provisions and complying with his duty of loyalty towards the beneficiaries. At that point, the court had the authority (if not the responsibility) to inquire and take action if it believed there were improprieties with the trustee's administration of the trust. Thus, the court took appropriate steps to determine whether its initial concerns were justified or were unsupported. The court had the statutory and inherent authority to raise these issues on its own motion. (See Schwartz v. Labow, supra, 164 Cal.App.4th at pp. 426-429.)
Michael's specific challenges to the court's authority are unpersuasive. First Michael argues that because section 15642 does not provide a specific statement that courts may "initiate" proceedings to remove a trustee on its own motion, the Legislature must have intended that courts would not have this power. This argument is unsupported. If a statute expressly provides that a court may take action on its own motion, it necessarily follows that the Legislature intended that the court would have the authority to initiate this action.
Michael alternatively argues that a court may move sua sponte only "in the context of regular, authorized proceedings." But that is precisely what occurred in this case. The petitions to appoint a cotrustee and for safe harbor were fully "authorized" proceedings under the Probate Code. The fact that the safe harbor petitions did not involve the merits of the petitioners' claims does not negate their status as authorized proceedings. Moreover, the court had before it James's petition to be appointed as cotrustee, which does require the court to reach issues on their merits based on the evidence presented. James's petition to be appointed as cotrustee raised issues similar to those raised on the court's own motion-whether Michael, as the sole successor trustee, was acting consistent with Paulson's intent as expressed in the Paulson Trust provisions.
Relying on Schwartz v. Labow, Michael suggests the court's removal power under section 15642 is authorized only if a party files a petition asserting a substantive issue regarding a breach of a trust. (Schwartz, supra, 164 Cal.App.4th 417.) In Schwartz, the court raised an issue of the trustee's fitness to continue his service after the trustee had filed a petition seeking to settle his account. (Id. at pp. 422-424.) However, the court did not state or suggest a court's powers under section 15642 are limited to this factual scenario, and we do not read the case so narrowly. Because the court here had personal jurisdiction over the parties and subject matter jurisdiction over the Trust, it had the authority to take actions authorized under the statute, regardless of the specific reason the matter was brought before the court. (See Schwartz, supra, 164 Cal.App.4th at pp. 426-429.) This is not a situation where the court reached out beyond its courtroom to seek to impose its authority over a trust that was not already before it.
Michael contends that unless the court exercises its sua sponte authority in an ongoing evidentiary hearing, the court's determination will be improper because it will be "unbound by any normal rules of procedure." The argument is speculative. We agree a trustee is entitled to fair procedure before he or she is removed from this position. But the fact that a court raises the issue on its own motion does not mean the procedure necessarily will be unfair. The critical issue is whether the trustee was provided fair notice and an opportunity to be heard before he or she is removed from office. As discussed below, we find Michael was provided these protections.
B. Due Process
A trustee is entitled to due process before he or she is removed from this position. (See Schwartz v. Labow, supra, 164 Cal.App.4th at p. 429.) Generally, due process entails two fundamental elements: "notice and an opportunity to respond." (Gilbert v. City of Sunnyvale (2005) 130 Cal.App.4th 1264, 1279.) However, because due process is a flexible concept (Matthews v. Eldridge (1976) 424 U.S. 319, 334), the precise nature of the requisite notice and hearing depends on the particular circumstances of the case and a balancing of various factors. (Conservatorship of John L. (2010) 48 Cal.4th 131, 150; In re Earl L. (2004) 121 Cal.App.4th 1050, 1053.)
Weighing the competing interests at issue here, Michael's private interests at stake were minimal. The removal remedy was not a penalty for past action, but was an action to preserve the trust assets. (Getty v. Getty (1988) 205 Cal.App.3d 134, 139-140.) A trustee does not serve for his or her own interest, and instead must act to implement the trustor's intent and to protect the interests of others. Balanced against this limited private interest, the court had a substantial interest in ensuring proper administration of the Trust and that the assets were preserved for the beneficiaries as intended by the trustor. With these interests in mind, we evaluate Michael's contentions that he did not receive proper notice or a proper hearing.
With respect to the adequacy of the notice, the court initially told Michael in August 2008 that certain undisputed facts had triggered the court's concern, including Michael's continued active operation of the horse business and the fact that Michael had not distributed any funds to the remainder beneficiaries. Later at the October 1 hearing, the court stated that it appeared the Trust had started out with millions of dollars in assets and these assets have substantially diminished, and that Michael was "managing [the] trust as if it is his own personal empire while all of the other beneficiaries get nothing." The court identified several specific areas of concern: (1) the supersonic jet project and the fact that it appears that Michael has invested more funds than is allowed by the Trust terms; (2) Michael's active continuance of the horse business, despite the Trust provision providing that the horses were to be sold "promptly"; (3) Michael's failure to distribute funds owed to Artemus, Violet, Crystal, and the Children's Trust; (4) the amount of compensation received by Michael; and (5) the fact that there is a sole trustee despite trust provisions reflecting the trustor's intent that there be cotrustees. The hearings were later continued to the first week in March, providing Michael with several additional months to prepare to meet these concerns.
On this record, Michael received proper notice, fully adequate to satisfy any constitutional imperative. The fact that the court did not provide written notice of the precise charges did not violate Michael's due process rights. The record shows that Michael was orally given clear and specific notice of the court's concerns and had a reasonable time to prepare to respond to those concerns.
In an effort to show the charges were "ill-defined, " Michael quotes comments by the parties and court at various hearings, which he says reflect that the court never properly articulated the relevant issues. However, many of these quotations are taken out of context and do not reflect the events as they actually occurred. For example, Michael cites to his counsel's statements at the October 1 hearing, at which his counsel stated that he did not know " 'exactly what the scope of the court's inquiry is' " and thus " 'we are guessing what the court might find informational....' " However, immediately after that comment, the court repeated at length the specific issues of concern and Michael thereafter had five additional months to prepare to present evidence on these issues. On our review of the entire record, we are satisfied that the court fully informed Michael of the issues with respect to his handling of the Trust.
The other fundamental aspect of procedural due process is the opportunity to be heard. This entails "the right to be heard in a meaningful manner" by the court. (In re James Q. (2000) 81 Cal.App.4th 255, 265.) But it does not necessarily mandate a full civil trial. (See Gilbert v. City of Sunnyvale, supra, 130 Cal.App.4th at pp. 1276-1279.)
The record shows this requirement was satisfied. Michael was provided a full opportunity to present all of the evidence relevant to the issues raised by the court. The hearings were formal and governed by evidentiary rules applicable to civil trials. Michael was permitted to call witnesses, present documentary evidence, object to any evidence presented by the beneficiaries, submit a trial brief, and present argument at trial. Further, the court repeatedly encouraged Michael to present all relevant evidence, and made clear it would not reach a final decision until it heard all the evidence. The court reached factual conclusions based on the evidence presented, and explained its findings in a lengthy and detailed written statement.
On this record, Michael had the opportunity to address the court's concerns in a meaningful manner that satisfied due process requirements.
C. Shifting Burden of Proof
Michael next contends the trial court erroneously shifted the burden of proof.
After hearing testimony from Michael and other witnesses, the court notified the parties that it found a prima facie case for removing Michael, and thus wanted to provide Michael the opportunity to present evidence to rebut this initial finding. Michael then had the opportunity to present evidence to meet this burden.
Michael argues that this procedure was improper because a trustee "[is] entitled to a presumption that he acted in good faith in the absence of any evidence to the contrary." (See Estate of Ferrall (1953) 41 Cal.2d 166, 177.) However, the court did initially apply the presumption, but once it heard testimony at the August and October hearings indicating that the trustor's intentions were not being implemented-including that the horse business was continuing at full strength, many of the required distributions had not been paid, and Michael had spent $8 million more on the supersonic project than the Trust permitted-it shifted the burden. The court did not place the burden on Michael until it found various fundamental problems with the trust administration.
This shifting of the burden was appropriate particularly because the relevant facts were solely within Michael's knowledge. The Trust did not require detailed accountings or reports, and therefore the court and the beneficiaries did not have access to the facts pertaining to the nature of the Trust's holdings or the trustee's activities and transactions. Michael had exclusive access to the relevant information and he was the sole trustee over this complex trust that held millions of dollars in assets. Under these circumstances, and having found a prima facie case warranting removal, the court properly placed the burden on Michael to show the questioned conduct was consistent with the trustor's intentions.
D. No Contest Clause
Michael next contends the court erred because it essentially became an advocate for the beneficiaries who could not assert their claims based on the Trust's no contest clause. He maintains that Paulson intended to protect the trustees from intermeddling by beneficiaries and the court's actions violated this intent.
This argument is without merit. As Michael recognizes, a no contest clause does not bar a court's inquiry into the trustee's actions. A court has broad equitable powers to ensure the trustee is acting on behalf of the beneficiaries, and to prevent the trustee from wasting the assets to the detriment of the beneficiaries. (Schwartz v. Labow, supra, 164 Cal.App.4th at pp. 427-428.) A no contest clause is unenforceable to the extent it violates the fundamental public policy requiring courts to supervise trust administration matters. (See Estate of Ferber, supra, 66 Cal.App.4th at p. 253.) Moreover, the Paulson Trust's no contest clause specifically excludes "affirmative malfeasance" from the scope of the clause. Based on our review of the entire record, we are satisfied that the court's removal proceedings were consistent with Paulson's intent.
Additionally, Michael's argument that the court had previously ruled that the same claims by beneficiaries would constitute a "contest" is not accurate. In ruling on James's safe harbor petitions, the court noted that the Trust's definition of a "contest" did not include allegations of "affirmative malfeasance" and James's "proposed petition contains specific factual allegations of 'affirmative malfeasance' or willful misconduct" as to the operation of the horse business and the overfunding of the supersonic jet project. (Italics added.) However, the court refused to grant the safe harbor petitions because James's petitions contained additional factual allegations, including those pertaining to alleged " 'multiple acts of self-dealing, ' " which the court recognized were not expressly precluded by the trust language.
At that point, James could have brought another round of safe harbor petitions seeking protection for revised petitions that contained only narrow allegations of "affirmative malfeasance." The court did not abuse its discretion in deciding that it was appropriate to raise the issues on its own motion, rather than waiting for James to bring this additional safe harbor litigation and generate more attorney fees.
III. Substantial Evidence Supports the Court's Order
Michael alternatively challenges the sufficiency of the evidence to support the court's removal decision, and argues that the court used the wrong standards in evaluating the evidence.
A. Governing Legal Principles
Section 15642 permits a court to remove a trustee for breach of the trust, failure to act, excessive compensation, and any other "good cause" ground. (See fn. 6, ante.) "The purpose of removing a trustee is not to inflict a penalty for past action, but to preserve the trust assets. [Citation.] 'The question in each case is whether the circumstances are such that the continuance of the trustee in office would be detrimental to the trust.' " (Getty v. Getty, supra, 205 Cal.App.3d at pp. 139-140.) "The removal and substitution of a trustee is largely within the discretion of the trial court" (Estate of Gilmaker, supra, 57 Cal.2d at p. 633), and we review the trial court's decision for abuse of discretion.
In reviewing the factual determinations underlying the trial court's exercise of its discretion, we apply the substantial evidence test. (See Adoption of Matthew B. (1991) 232 Cal.App.3d 1239, 1254.) "Under the substantial evidence test, the evidence on appeal must be viewed in a light most favorable to the prevailing party. [Citations.] Therefore, an order challenged on appeal 'is presumed correct and all intendments and presumptions are indulged to support the order on matters to which the record is silent. It is appellants' burden to affirmatively demonstrate error and, where the evidence is in conflict, [the appellate court] will not disturb the trial court's findings.' " (People v. $497,590 United States Currency (1997) 58 Cal.App.4th 145, 152-153.)
The court found that Michael violated express terms of the trust, misused trust assets for his own personal benefit, and used his trustee position to harm other beneficiaries against whom he bears ill will. The court supported these conclusions with specific factual findings.
On appeal, Michael takes a scattershot approach, challenging almost every factual finding made by the court in its lengthy written opinion. Although we detail our reasons for rejecting each of these arguments, it is important to keep focused on the critical issue-whether the court had a reasonable basis for concluding that Michael committed a breach of trust, e.g., acted in a manner showing he was not properly preserving the trust assets or acting consistent with the trustor's intentions. In conducting this analysis, the issue is not whether any single action required removal, but whether Michael's actions, viewed collectively over the eight-year period, showed that he was no longer acting on behalf of the beneficiaries and the court was required to step in to protect the trust assets and the trustor's wishes. After reviewing the entire record, we conclude substantial evidence supported the court's determination that removal of Michael as trustee was warranted under the circumstances.
B. Supersonic Jet Project
The court found that Michael invested $8.5 million more in trust funds in the supersonic jet project than was authorized under the Trust terms. Michael contends this finding was unsupported.
Factual Summary
Paulson spent much of his career in the aviation business, including promoting new aircraft design projects. Shortly before his death, Paulson was collaborating with Lockheed Martin Corporation in an attempt to develop a supersonic business jet, and Paulson wanted this project to continue to be supported by his Trust assets after his death. To ensure this intent would be implemented, Paulson amended his Trust to state that upon his death, the trustees should "take all steps feasible to continue to support the [supersonic jet] project, including, without limitation, postponing distributions to beneficiaries, restructuring the Paulson Assets and borrowing funds and securing one or more of the Paulson Assets...." But Paulson qualified this broad discretion by stating that "the total commitment of Paulson Assets to the... project... shall not exceed Twenty Million Dollars..., (or Forty Million Dollars... if the total value for Federal Estate Tax purposes in the estate of Trustor of CardioDynamics International Corporation stock exceeds Sixty Million Dollars...), without the consent of a majority of the then adult beneficiaries...."
Within one or two years after Paulson's death, Michael invested $20 million in a feasibility study of the supersonic jet project. When that study was completed in late 2003 or early 2004, Michael then invested about $8 million more in the project without obtaining consent from the other specified beneficiaries. Under the express Trust terms, this $8 million was proper only if at the time of Paulson's death the "total value for Federal Estate Tax purposes" of the CardioDynamics stock held by the Trust exceeded $60 million. Thus, a critical issue at the section 15642 proceedings was whether Michael had a reasonable basis for valuing the stock at this level before he invested the additional $8 million in the supersonic jet project.
To support his position that the CardioDynamics stock was valued at more than $60 million, Michael called the Trust's attorney (Jeffrey Loeb) who testified that an appraiser determined that the CardioDynamics shares had a market value of about $69 million on the date of Paulson's death. But Loeb said that "for federal estate tax purposes" it was appropriate in 2001 to claim substantially less as the stock value, based on an alternate federal tax valuation date and based on a 38 percent discount for holding only a part ownership in the entity. Thus, based on this advice, in his federal estate tax form, Michael claimed the value of the CardioDynamics stock was approximately $31 million. After an audit by the IRS and a settlement in 2005, the CardioDynamics shares for federal income tax purposes were valued at about $33 million (using a 32 percent discount).
After considering this evidence, the court found that the value of the CardioDynamics stock was less than $60 million for "federal estate tax" purposes, and Michael breached the duty of administering the Trust in accordance with the trust instrument (see § 16000) by funding the supersonic jet project in an amount $8.5 million greater than authorized by the Paulson Trust, and not using these assets to distribute funds to the required beneficiaries.
On appeal, Michael argues the court's conclusion is unsupported because the evidence shows he reasonably relied on legal advice in deciding to invest the additional $8 million. In support, he relies on the Trust provisions which state that "[a]ny Trustee shall be fully protected in any action or nonaction taken, permitted or suffered in good faith and in accordance with the opinion of counsel..." and that a trustee has the power to "construe the terms and conditions of the trust after obtaining responsible legal advice, " and any "reasonable construction thereof... adopted shall be binding on all beneficiaries...."
The court rejected Michael's reliance on these provisions, finding the evidence did not support Michael's assertion he was given advice that he was legally entitled to invest the additional $8.5 million, and/or that he relied on this advice in good faith in making the additional investment. In so ruling, the court found that a letter dated May 11, 2006 from Michael's trust attorney (Loeb) did not constitute an opinion that Michael was permitted to invest the additional $8.5 million into the supersonic jet project.
This determination was supported by the record. First, the letter was written in 2006, about two years after Michael invested the additional $8 million in the supersonic jet project. Second, as the court noted, Loeb's letter does not state an opinion that Michael could invest the funds under the trust terms. Instead, the letter appears to be a statement of the prior appraised market value of the stock and an attempt to justify Michael's prior conduct.
In his appellate brief, Michael argues that the evidence also shows that the Gibson, Dunn & Crutcher law firm advised him that the total value of the CardioDynamics stock for federal tax purposes "was over $60 million and that he could invest up to $40 million." However, in support of this assertion, he cites to a letter he wrote to his brothers on May 26, 2006, after the brothers began challenging his investments. The court thus had a reasonable basis to find this evidence not credible on the CardioDynamics stock valuation issue.
Additionally, Michael cites to Attorney Loeb's testimony at the October 1 hearing, during which Loeb referred to advice that Michael had received in 2000 from the Gibson Dunn law firm. However, Loeb did not describe the nature of the advice, nor did Loeb say he gave Michael any advice concerning the supersonic jet investment, except for his statements in the May 11, 2006 letter. The court thus had a reasonable basis to find that this evidence did not establish that Michael relied on attorney advice to make the $8 million investment decision.
Michael additionally argues the court erred because it improperly believed that Michael was required to obtain a formal written legal opinion before he could assert reliance on the immunity provisions. Michael is misreading the court's memorandum decision. The court did not state that a formal written opinion was required to invoke the protection of the Trust's legal-advice immunity provisions. Instead, the court explained that it found Michael's testimony that he received these oral opinions from counsel was not believable, and that the submitted written evidence did not show that counsel gave the purported advice or that Michael relied on this advice in making the investment decision. The court's reference to the lack of formal opinion letters provided further support for the court's conclusion that Michael's claims that he had received this advice were not credible. The court also expressly found that to the extent Michael received any advice from counsel, Michael did not rely on the advice " 'in good faith.' "
Michael alternatively contends the court erred in concluding that the total value of CardioDynamics stock was less than the $60 million amount for "federal estate tax purposes" because he presented evidence that the total market value of the stock was about $69 million. However, the evidence did not necessarily support that the market value of an asset is equivalent to the value of an asset for "federal estate tax purposes."
At the October 1 hearing, Michael called the Trust's attorney (Loeb) to testify about his current opinion of the "federal estate tax purposes" language. Although Loeb did suggest that the "federal estate tax purposes" trust language referred solely to the market value of an asset before any discounts are taken, this opinion was inconsistent with his earlier testimony that he had explained to the appraiser that "for payment of estate tax purposes the best thing to do is to recognize the availability of a discount and claim it." (Italics added.) Moreover, the evidence showed Loeb's law firm had been paid $2 million by Michael for legal services to the Trust, and therefore the court had a reasonable basis to question the reliability of Loeb's current opinion as to the meaning of the language in the trust instrument.
Michael also argues that even if the amount of the stock "for federal estate tax purposes" was below the required $60 million, the court should have upheld Michael's interpretation because he had broad discretion to interpret the Trust terms. However, a trustee does not have the discretion to violate the express terms of the trust. The court had a legitimate basis to find that no reasonable person would interpret "for federal estate tax purposes" to mean something other than what it says.
Finally, Michael contends that the court's factual conclusions pertaining to the supersonic jet project violated Paulson's fundamental trust purpose, which was to provide funds to the project. However, the court could properly find that although this was one of Paulson's central objectives, it was not his sole objective. Paulson placed specific limits on the amount that could be invested in the project. Had Paulson wanted all or most of his assets to be directed to the supersonic jet project upon his death, he could have easily provided this in the Trust. The terms of Paulson's Trust show that Paulson had other equally important objectives, which included the immediate funding of trusts for certain relatives.
C. Michael's Continued Operation of the Horse Racing Business
The court also found that Michael's continued operation of the horse business violated the express terms of the Trust and showed he was acting "for his own personal benefit and pleasures" to the detriment of the other beneficiaries. Substantial evidence supports these conclusions.
The Paulson Trust states: "Notwithstanding the... provisions [permitting the trustee to continue to hold any property], upon the death of the Trustor, the Trustee shall sell promptly the entire interest of the trust estate... in all horses...." It is undisputed that Michael did not comply with this prompt sale requirement.
In the proceedings below, Michael argued he was entitled to continue the horse business based on a provision in the 2003 Settlement signed by Michael, James, Richard, Madeleine, and Dr. Diaco. This provision expressly allowed Michael to continue to operate the horse business. Judge Cline entered an order confirming the settlement agreement, and then vacated an earlier order requiring the horses to be sold.
Judge Dahlquist rejected Michael's reliance on this settlement provision and the prior court order, stating: "This argument misses the mark. The vacating of the prior order did not relieve Michael of his continuing obligations to comply with the trust instrument, did not authorize Michael to keep the horses indefinitely in contravention of [Paulson's] stated intentions, did not authorize Michael to buy more horses, and did not authorize Michael to keep the horses for his own personal benefit and enjoyment, while at the same time failing to pay the specific gifts established by [Paulson's] trust and failing to pay any amounts at all to James and Richard."
The record supports the court's conclusions. First, as Michael has conceded, the 2003 Settlement Agreement cannot be reasonably interpreted to allow him to continue the horse racing business indefinitely. The purpose of the settlement provision pertaining to the horse business was to ensure that the Trust would not be economically disadvantaged by an immediate sale, and that the sale would occur at a time that was financially beneficial to the Trust beneficiaries. Under section 15409, a court may alter a trustor's stated intentions and approve a modification of trust provisions only "if, owing to circumstances not known to the settlor and not anticipated by the settlor, the continuation of the trust under the terms would defeat or substantially impair the accomplishment of the purposes of the trust."
Consistent with this statutory provision, Judge Dahlquist had a reasonable basis to interpret the 2003 Settlement and court order as permitting the continuation of the horse business for a reasonable period to the extent the continued business benefited the remaining beneficiaries. Under this interpretation, the court did not err in concluding that Michael could not rely on the 2003 Settlement to justify his actions in 2008. Specifically, the court found that by 2008, the operation and continuation of the horse racing operation was primarily for Michael's personal satisfaction, and was burdening the rights of the beneficiaries to Trust assets. In reaching this conclusion, the court cited the facts showing that Michael used Trust assets to expand the horse racing venture by purchasing new horses and moving some horses to Ireland, and he used Trust assets for his personal domestic and international travel to attend horse races and to manage the horse business, and that all of this occurred while the beneficiaries' trusts were not being funded and Michael's brothers had not received any monetary distribution from the Trust (other than the $150,000 "loans").
Michael contends "there is no evidence that a prudent investor would have managed the horse business differently...." He directs us to his testimony that "prudence required training some horses in Ireland and required him to occasionally attend races" and argues that there was no contrary expert evidence "that one can responsibly manage a horse business without this kind of personal involvement, or without incurring the expense of hiring someone else to perform these tasks."
The premise underlying these arguments is faulty. As Michael notes in his reply brief, " 'one who asks the wrong question gets the wrong answer.' " (Lugosi v. Universal Pictures (1979) 25 Cal.3d 813, 825 (conc. opn. of Mosk, J.).) The issue here is not whether a reasonable business person would have traveled to races where his or her horses were racing, but whether Michael should have been operating the business at all. Put otherwise, it is not the reasonable investor standard that governed the trial court's decision whether to remove Michael as a trustee; instead, it was whether Michael was acting in a manner consistent with the trustor's intentions. The trial court had a reasonable basis for concluding that in actively operating the horse business Michael had violated the trustor's express intent and acted inconsistent with the beneficiaries' interests.
For similar reasons, we reject Michael's argument that the court erred because there was no expert testimony supporting the court's conclusions on the horse racing issues. It is the trustee's overriding duty to effectuate the trust purpose, and in this case a fundamental purpose of the Trust (after the maximum funds were invested into the supersonic jet project) was to ensure the funds would be available for use by the designated beneficiaries. The court did not need expert testimony to determine that Michael was not acting consistent with this purpose.
In his appellate briefs, Michael suggests it was necessary to defer selling the horses because he took a "section 6166 election" on the advice of his counsel. (26 U.S.C. § 6166 (§ 6166).)
"Section 6166 allows the [personal representative] of an estate to pay all or part of the estate tax in up to ten equal installments if over 35 percent of the adjusted gross value of the estate is comprised of an interest in a closely held business." (Estate of Bell v. C.I.R. (9th Cir. 1991) 928 F.2d 901, 902; see § 6166(a)(1).) "The purpose of section 6166 is to prevent the forced liquidation of closely held businesses because substantial estate taxes must be paid" and to allow the representative "to defer payment of the estate tax up to five years and to make payments in ten annual installments." (Estate of Bell, supra, at p. 902; see Hansen v. United States (8th Cir. 2001) 248 F.3d 761, 764.)
On advice from his tax attorneys, Michael elected to take the section 6166 tax deferral. However, the probate court found that this election did not reasonably justify Michael's decision to continue the horse business. This conclusion was supported by the evidence. First, the facts did not show the section 6166 deferral would be eliminated upon a sale of some or all of the horses. Michael testified, for example, that the racehorse Azeri (valued at more than $4 million) was not a significant part of the section 6166 assets because its value was very low at the time the tax return was filed. Therefore a sale of Azeri would not necessarily accelerate the tax obligation.
Moreover, the trial court found that Michael's reliance on the tax burden to continue the horse business and deny a distribution to the beneficiaries was improper circular reasoning. By refusing to distribute any funds until taxes have been paid, but continuing to rely on a tax deferral election to deny any distributions, Michael was violating the trustor's intent. The court found that if Michael had sold the horses in a timely manner, he would have had funds to pay the taxes and then to begin to distribute funds to the beneficiaries. This conclusion was supported by the record.
In his appellate brief, Michael argues that the court erred in criticizing his settlement with the Internal Revenue Service (IRS) because the settlement reduced the estate tax liability to less than one-third of the IRS's demand. However, the court's conclusion that the section 6166 deferral could not justify the continued operation of the horse racing business eight years after Paulson's death was not a judgment on the wisdom of the IRS settlement or the initial decision to elect the section 6166 tax deferral. The court's conclusion pertained to the events that had occurred several years after the IRS settlement, when the beneficiaries (e.g., Crystal, Artemus, and Violet) and/or their trusts still had not received the funds that Paulson had intended would be distributed upon his death.
Michael also contends that "the horse business... enabled the trust to pay its bills" and argues that the gross revenue of this business was $67 million. However, the court stated that it had "significant doubts about the reliability and transparency of the limited, unverified financial information that has been provided by the trustee." Moreover, when the court asked Michael "if the horse business has been [so] profitable, why hasn't some of that profit been put into the Children's Trust?" Michael responded that he could not distribute any profits based on advice of counsel until the tax burden was paid. The court had a reasonable basis to find that this response was not credible, and either the horse business was not making a significant profit, or the profits were not being used to benefit the beneficiaries.
To the extent Michael argues he reasonably relied on his counsel's advice in operating the horse business, the court rejected the argument and had a reasonable basis to do so. The court essentially found the evidence did not show that Michael actually received any such advice, particularly without any supporting written evidence. In this regard, the court noted it was "skeptical that any responsible lawyer would render an opinion that Michael could, many years after his father's death, properly use $4 million of trust assets to buy additional horses, move horses from the United States to Ireland, pay for Michael's expenses to attend horse races in the United States and Ireland, pay for Michael to travel by private plane, and pay for Michael to attend national and international air shows, while Michael was simultaneously refusing to pay the remaining $1.9 in specific gifts that his father directed should be paid upon his death."
Michael contends the court erred in reaching these conclusions because it mistakenly believed he purchased the additional horses "many years after his father's death." In support, Michael directs us to his testimony that he bought the additional horses on behalf of the Trust in 2001 as part of a required buy-sell agreement, and at that time a cotrustee was assisting in the management of the Trust. However, even assuming the court misunderstood the specific timing and details with respect to the horse purchase, we are satisfied this misunderstanding would not have changed the court's overall conclusions that Michael was operating the horse business for his own benefit and to the detriment of the Trust beneficiaries, and did not rely on counsel's advice for his decisions to continue the horse business.
D. Full House Resorts
The court also found that Michael acted improperly by personally accepting compensation for his position on the board of directors of Full House Resorts, Inc., and for refusing to sell shares of stock while he continues to receive this compensation.
At the time of Paulson's death, the Paulson Trust owned about 31 percent of the stock in Full House Resorts, Inc., an entity involved in developing Indian gaming facilities. After Paulson's death, Michael did not sell any of this stock. Instead, based on the Trust's ownership share, Michael was appointed to serve as chair of the corporation's board of directors, and he received compensation, in the form of cash and shares of stock, for his service as a director. Michael accepted this compensation in his personal capacity and not as trustee of the Trust. Michael testified he did not sell the stock to pay the required distributions to the beneficiaries because the stock price went down, and he was waiting for the price to increase based on the entity's plans to open a large casino in Michigan the next summer.
On appeal, Michael argues the court erred in relying on his involvement with Full House Resorts as a basis for his removal. Specifically, he contends the Paulson Trust "expressly permits the trustee to have conflicts of interest, and that permission trumps the Probate Code's prohibition" against such conflicts. However, the court's primary concern was not a conflict of interest or the fact that Michael had a director position with one of the entities owned by the Trust. Instead, it was the fact that Michael was receiving financial compensation for his service as trustee, which he did not return to the Trust. The Trust instrument specifically provides that a trustee has the power to continue, or participate in, any business operation, but that "the profits or losses therefrom" must "inure or to be chargeable to the trust estate[ ] as a whole and not to the Trustee." (Italics added.)
Citing Estate of McLaughlin (1954) 43 Cal.2d 462, Michael argues that it is not necessarily improper for a trustee to receive compensation for services as an officer of a corporation based on the stock which he holds as trustee. However, Estate of McLaughlin is distinguishable because in that case, the trustees were officers/employees of the corporation before assuming the trustee position. (Id. at pp. 470-471.) Thus, the appellate court found the trial court was justified in concluding that the corporate salaries "were not unreasonable but constituted just compensation for a continuation of former duties." (Id. at p. 471, italics added.) In this case, the evidence supports that Michael's status as a corporate director was obtained merely because of his trustee position and not because of his prior employment with the company.
Michael contends he was not provided notice that the Full House Resorts director fees was an issue relevant to the court's section 15642 motion. However, Michael was repeatedly given notice that the court was concerned that he was personally benefiting from his trustee position to the detriment of his brothers and the other beneficiaries. This issue reasonably encompasses a claim that Michael had personally received compensation from a third party for his work on behalf of the Trust.
E. Excessive Compensation
Michael testified that he was paid approximately $3 million for his trustee work over an eight-year period. The court found this compensation was excessive under the circumstances, particularly because his brothers (Michael's cobeneficiaries) had not received any money at all from the trust almost nine years after their father died. The court also found Michael received numerous additional personal and financial benefits from his trustee position, including fees for serving as director on the Full House Resorts board, domestic and international travel to horse races and airshows, and the prestige benefits from controlling this multi-million dollar trust estate.
In challenging the findings that his compensation was excessive, Michael cites to his testimony that he worked "12 to 18 hours a day" during the first year after his father's death, and states that he presented evidence that he consulted with the Trust's attorney in 2000 about his fees and she advised him that $2,500 per day was a reasonable amount of compensation. However, even assuming the court credited this testimony, this does not mean Michael's compensation over the eight-year period was reasonable. Although the $2,500 per day may have been appropriate at the outset, the court had a reasonable basis to find that Michael's decision to continue to pay himself the large sums was not reasonable after much of the initial work had been completed.
Further, contrary to Michael's assertions, the court did not need an expert witness to opine that Michael's substantial earnings, without any specific indication of how many hours were worked per day or the nature of the tasks performed, were unreasonable and excessive, particularly in light of the fact that the specific bequests in the Trust had not been fulfilled. Moreover, the court found that Michael's financial reports were not fully credible, and it appeared that Michael may have received substantial additional indirect compensation. Specifically, the court noted that it had "been unable to fully assess all of the indirect compensation received by Michael because Michael has declined to provide complete and detailed accountings to the Court and/or to the beneficiaries. The Court has significant doubts about the reliability and transparency of the limited, unverified financial information that has been provided by the trustee."
Although the Trust did not require Michael to provide regular accountings, the court gave Michael substantial time to be prepared to present a reasonable summary of the financial history and current financial status of the Trust. When Michael provided only unaudited and unverified financial information, the court had a reasonable basis to conclude that this information was not complete and/or not fully accurate.
F. Failure to Distribute Trust Assets to Designated Beneficiaries
The Paulson Trust provided that "[u]pon the death of Trustor, the Trustee shall distribute" certain amounts to certain designated individuals, which included: (1) $1.4 million to granddaughter Crystal's trust; (2) $995,000 to sister-in-law Violet's trust; and (3) $985,000 to his brother Artemus's trust. (Italics added.) At the time of the section 15642 hearings, Michael had distributed only about one half of these funds to these trusts and owed interest on the outstanding amounts. Specifically, the Trust owed Crystal $957,000, Violet $519,000, and Artemus $514,000.
Additionally, the Trust provided for the creation of a "Children's Trust, " to be shared equally by his surviving children (Michael, James, and Richard), and provided for certain distributions to this trust at three years and seven years after Paulson's death, and then required distribution of all remaining assets 10 years after Paulson's death. At the time of the hearings, Michael had not distributed any funds to the Children's Trust. Michael testified the reason he had not distributed these funds was because he believed the investment in the supersonic jet project had priority over this funding and because of the outstanding tax obligations.
The court found that Michael breached his duty of loyalty and violated the express terms of the Trust by "failing, for a period of nearly nine years, to pay the specific gifts" while he has: (1) paid himself more than $3 million in trustee's fees; (2) spent $4 million in trust assets to buy race horses to satisfy his own personal interest in horse racing; (3) held onto Trust assets that could be used for his own personal benefit, such as the race horses (with a claimed net value of $11 million) and the shares of Full House Resorts (with a claimed net value of $6.5 million); and (4) invested $8.5 million more than authorized in the supersonic jet project. The court also found that the "totality of the evidence establishes that Michael has elected not to fund the Children's Trust due, at least in part, to (i) his feelings of ill will towards James, Richard and/or Richard's heirs; and (ii) his desire to maintain control over the entire trust estate for his own benefit and pleasures." Substantial evidence supports the court's findings.
Michael concedes there was evidence his relationship with his brothers had deteriorated, but argues that the court erred in relying on these facts because "there was no evidence of a causal relationship between these broken relationships and Michael's administrative decisions." The argument is without merit.
After the court presided over numerous hearings at which Michael testified and after the court considered the various correspondence with his brothers, the court concluded that Michael bore ill will toward his brothers because they were questioning his decisions and attempting to limit his authority and control over the Trust, and Michael thereafter took actions for the purpose of financially burdening his brothers. Michael's arguments that we should reach a different inference is inconsistent with the applicable standard of review. Although many of the facts were undisputed, the court was entitled to reach reasonable inferences from those facts, even though contrary inferences could also be reached.
The court further found that in deciding not to distribute assets to the beneficiaries, Michael violated the provision in the Paulson Trust precluding a trustee who is also a beneficiary from making discretionary distribution decisions " 'which shall directly or indirectly affect the amount of property distributable to said Trustee-beneficiary.' " The court stated, "Michael is an interested trustee-beneficiary and is not authorized by the trust instrument to make discretionary decisions that affect potential distributions to the residual beneficiaries, including decisions to postpone distributions to the residual beneficiaries."
The court's reasoning was supported by the express terms of the Trust and was reasonable.
G. Sole Trustee
Michael contends the court erred in "express[ing] concern that Michael was serving as sole trustee, " because the 2003 Settlement abrogated the cotrustee requirement.
However, this argument misses the point. The court did not necessarily find that Michael breached the Trust agreement by acting as the sole trustee. Instead, the court identified the fact that Michael was serving as a sole trustee as a factor in creating the circumstances under which Michael was able to use the Trust for his personal benefit and to breach the trust provisions. The court did not err in this regard.
H. Court Properly Rejected Immunity Defense
Michael contends the court erred in rejecting his defense that the Paulson Trust provided him with complete immunity for his discretionary decisions to hold Trust property, rather than to liquidate and distribute the funds. In support, he cites Article XIII(A)(27) of the Trust, which states that "Unless specifically limited, all discretions conferred upon the Trustee under this Article shall be absolute, and their exercise conclusive on all persons interested in these trusts."
The probate court found this provision did not insulate Michael from judicial review or preclude the court from exercising its authority to oversee trust administration and to take appropriate steps to preserve the trust assets. We agree. If a trustee exercises his or her discretionary power in a manner that shows the trustee is not acting for the benefit of the trust, the court has the statutory and equitable power to act.
Michael contends the court "ignored the fact that the trust gave substantial interpretational responsibility to the trustee." (Italics in original.) The argument is without merit. The court specifically cited the provision giving the trustee broad discretionary powers and recognized the broad scope of these powers, but expressly found this provision did not bar the court from taking action to prevent abuses of this power.
IV. Appointment of Successor Trustees
Michael contends the court erred in appointing James and Vikki as cotrustees because the appointment violated section 15660.
At oral argument, the parties notified the appellate panel that the probate court has since removed James as cotrustee. Our appellate review is based on the circumstances existing at the time the order was entered. We thus have maintained the identification of the parties as they existed in the proceedings below. Additionally, under the circumstances of this case, we have determined it is appropriate to remove lower court party designations from the appellate caption.
Section 15660 governs the appointment of a trustee when the trustee position has become vacant. It provides in relevant part: "(b) If the trust instrument provides a practical method of appointing a trustee or names the person to fill the vacancy, the vacancy shall be filled as provided in the trust instrument. [¶] (c) If the vacancy in the office of trustee is not filled as provided in subdivision (b), the vacancy may be filled by a trust company that has agreed to accept the trust on agreement of all adult beneficiaries who are receiving or are entitled to receive income under the trust or to receive a distribution of principal if the trust were terminated at the time the agreement is made.... [¶] (d) If the vacancy in the office of trustee is not filled as provided in subdivision (b) or (c), on petition of any interested person or any person named as trustee in the trust instrument, the court may, in its discretion, appoint a trustee to fill the vacancy.... In selecting a trustee, the court shall give consideration to any nomination by the beneficiaries who are 14 years of age or older."
The court's appointment of James and Vikki as cotrustees was proper under this code section. First, the Paulson Trust specifically designates James to be a successor cotrustee, if Michael, White, and Dr. Diaco become unable or unwilling to serve. Under this Trust provision, the court properly appointed James in Michael's place under section 15660, subdivision (b).
The court also properly appointed Vikki, who is the surviving spouse of Paulson's son Richard. Under section 15660, subdivision (d), the court had the authority to select a trustee upon Vikki's petition for appointment and in accordance with the expressed wishes of two of the beneficiaries (Vikki and James). Paulson intended that there be two trustees to provide checks on the trustees' broad powers in this complicated trust estate. Moreover, because Paulson named Richard as a successor cotrustee, and Vikki was Richard's surviving spouse, it was appropriate for the court to appoint Vikki as the cotrustee.
Michael suggests the court erred in appointing the substitute trustees because it did not "purport[ ] to follow... the procedures required by" the Probate Code. However, by failing to explain or develop this argument, he has waived his right to assert it on appeal. Moreover, if Michael is arguing that the court erred by failing to specifically find section 15660, subdivision (c) inapplicable before it appointed a cotrustee under section 15660, subdivision (d), this argument is without merit. Section 15660, subdivision (c) states that "If the vacancy of the office of trustee is not filled as provided in subdivision (b)..., the vacancy may be filled by a trust company that has agreed to accept the trust on agreement of all adult beneficiaries...." Section 15660, subdivision (d) provides: "If the vacancy in the office of trustee is not filled as provided in subdivision (b) or (c), on petition of any interested person or any person named as trustee in the trust instrument, the court may, in its discretion, appoint a trustee to fill the vacancy...."
Under these provisions, the court did not err in appointing Vikki under section 15660, subdivision (d) without expressly finding that section 15660, subdivision (c) is inapplicable. Section 15660, subdivision (c) merely states that a vacancy "may be filled by a trust company, " not that the court is required to do so, or that a court cannot appoint a qualified trustee based on the petition of an interested party. (Italics added.)
DISPOSITION
Order affirmed. Appellant John Michael Paulson to pay respondents' costs on appeal.
WE CONCUR: McCONNELL, P. J., McINTYRE, J.