Opinion
A155833
02-19-2020
THE PEOPLE ex rel. XAVIER BECERRA, as Attorney General, etc., Plaintiff and Respondent, v. WILLIAM SHINE, Individually and as Trustee, etc., Defendant and Appellant.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (Marin County Super. Ct. No. PRO 1305238)
In February 2018, after a lengthy bench trial on a petition for William Shine's removal as trustee of a trust, the trial court issued a statement of decision addressing alleged breaches of fiduciary duty by Shine and requiring Shine to reimburse the trust in the amount of $1,421,598. In April 2018, Shine requested reimbursement of his attorney fees and costs. Shine appeals the court's denial of his request. We affirm.
In our opinion filed in case No. A154234, we agree with Shine's challenge to a portion of this award and we modify the judgment to vacate the award of $290,684 against Shine. In all other respects, we affirm the judgment.
FACTUAL AND PROCEDURAL BACKGROUND
In December 2013, the Attorney General petitioned for an accounting relating to a trust established in 1995 by Robert A. and Eva M. Lindskog (the Trust). The People alleged that Shine, one of the trustees, failed to fulfill his duties as trustee, and that he failed to create a charitable organization to be named the "Livewire Lindskog Foundation." The Attorney General brought causes of action against Shine for breach of fiduciary duty, an accounting, and removal of the trustees (Prob. Code, §§ 15642, 16049, 16420, 17200).
In February 2014, the court removed without prejudice Shine and the other trustees. In February 2017, the other trustees were dismissed from the case. The case went to trial in October 2017. During the trial, Shine agreed to permanently step down as trustee and the court appointed David Bradlow as permanent trustee to administer the Trust.
In February 2018, the court issued a 35-page statement of decision and judgment. When addressing the Attorney General's claim that Shine should be disgorged of all fees he was paid as trustee of the Trust, the court found "that Shine violated most, if not all of his fiduciary responsibilities and duties." For example, the court found that "Shine allowed improper tax returns to be filed, allowed a Subchapter S corporation status to be lost (by failing to follow prudent legal advice) and [Shine] used Trust funds to loan money to friends. His job performance was wholly unacceptable. Due to Shine's mismanagement, the Trust was damaged significantly."
Nevertheless, the court entered judgment in favor of Shine on many of the examples of his alleged breaches of fiduciary duty because the Attorney General either failed to prove that Shine was grossly negligent or failed to prove specific damages. Based on the instances in which the Attorney General met its burden of proof, the court ordered Shine to reimburse the Trust in the amount of $1,421,598.
See footnote 1, ante.
In April 2018, Shine petitioned for an order instructing the Trust to reimburse him for attorney fees and costs incurred defending the litigation. Shine relied in part on one of the Trust's indemnity provisions. In September 2018, the court denied the petition. As explained by the court, "Eva Lindskog wanted to protect Shine from personal liability as long as he was not grossly negligent in the management of the Trust. This court found that Shine was grossly negligent in the management of the Trust and he was ultimately permanently removed as Trustee. Accordingly, the trust indemnification clause does not apply and he should be held personally responsible for his attorney's fees."
DISCUSSION
On appeal, Shine contends the Trust's "indemnity provision requires an award reflecting the magnitude of Shine's successful defense." We disagree.
I. Governing Law and Standard of Review
"Indemnity may be defined as the obligation resting on one party to make good a loss or damage another party has incurred." (Rossmoor Sanitation, Inc. v. Pylon, Inc. (1975) 13 Cal.3d 622, 628.) "[T]he question whether an indemnity agreement covers a given case turns primarily on contractual interpretation, and it is the intent of the parties as expressed in the agreement that should control. When the parties knowingly bargain for the protection at issue, the protection should be afforded. This requires an inquiry into the circumstances of the damage or injury and the language of the contract; of necessity, each case will turn on its own facts." (Id. at p. 633.)
Here, Shine argues for a de novo standard of review, while the Attorney General contends we should review the trial court's decision for an abuse of discretion. In our view, we address a mixed question of law and fact. As our Supreme Court intimated in Rossmoor Sanitation, Inc. v. Pylon, Inc., supra, 13 Cal.3d at page 633, we review de novo the trial court's interpretation of the Trust's indemnity provisions, but the trial court's determination of whether Shine is entitled to indemnification for his defense costs also depends upon the facts of this case.
II. The Trust's Indemnity Provisions
As amended, section 4.9(3)(C) of the Trust provides: "Except for the Trustee's willful misconduct or gross negligence . . . , the Trustee shall be indemnified and held harmless . . . by the trust estate . . . from and against any and all liens, claims, liabilities and expenses, including reasonable attorneys' fees, for which the Trustee may be liable or subjected, arising out of, emanating from or made with respect to the trust or any assets or liabilities thereof . . . ."
Section 4.9(3)(D) provides: "The trust shall indemnify and hold the Trustee harmless from any loss, cost or expense incurred as a result, directly or indirectly, of acting as the Trustee of the trust, unless such loss, cost or expense arises out of the Trustee's violation of this trust or arises out of an act or omission performed in an unreasonable manner or in bad faith."
III. Shine's Mismanagement of the Trust
Relying on section 4.9(3)(C), Shine argues he is entitled to partial indemnity commensurate with his "nearly complete success." We are not persuaded.
Preliminarily, we reject Shine's characterization of the outcome in this case. The Attorney General's 2013 petition sought Shine's removal as trustee. Soon after the petition was filed, the court removed Shine without prejudice. During the second day of trial in 2017, Shine withdrew his request to be reinstated as trustee and was permanently removed.
In its statement of decision, the court found that Shine—acting as trustee of the Trust—was grossly negligent in numerous ways. For example, the court found Shine's failure to take action in relation to the loss of favorable tax treatment for trust property known as Central Valley Homes was grossly negligent. The court found Shine was grossly negligent by failing to maintain another property, by loaning Trust money to personal friends, by failing to maintain proper records of Trust transactions, and by submitting incorrect tax returns. The court found it was "intentionally improper" for Shine to loan Trust money to friends and to allow his daughter to rent an apartment owned by the Trust at below market rent. As a result of "Shine's misconduct and gross negligence," the court ordered that Shine should be disgorged of all fees he received as trustee.
Furthermore, the court expressly found "Shine violated most, if not all of his fiduciary responsibilities and duties." The court found Shine's "job performance was wholly unacceptable. Due to Shine's mismanagement, the Trust was damaged significantly." Based on the instances in which the Attorney General met its burden of proving Shine's conduct was grossly negligent, the court ordered Shine to reimburse the Trust in the amount of $1,421,598.
See footnote 1, ante. --------
Despite these findings and this award against him, Shine claims his defense of this litigation was successful, and he points out the court entered judgment in his favor on many examples of his alleged breaches of fiduciary duty. But, for many of these instances, the court did not exonerate Shine; instead it found the Attorney General failed to prove his conduct rose to the level of gross negligence or failed to prove specific damages. Moreover, as the court explained in its order rejecting Shine's request for reimbursement of attorney fees, these instances were often so intertwined with Shine's prior acts of gross negligence that it would be "near impossible to separate fees associated with each of the Court's findings."
Based primarily on figures from the Attorney General's closing brief, Shine claims the Attorney General sought over $26 million and that he "succeeded in defeating approximately 95% of the People's claims." But the Attorney General's petition asserted three causes of action for breach of fiduciary duty, for an accounting, and for Shine's removal as trustee of the Trust. As a result of the Attorney General's lawsuit, Shine was found to have "violated most, if not all of his fiduciary responsibilities," he was found to have "ignored the financials completely," and he was permanently removed as trustee of the Trust. Given the court's extensive findings of Shine's gross negligence and willful misconduct, findings supported by substantial evidence and to which we defer, we reject Shine's claim that the outcome of this case was a "success" for Shine. (Merriam-Webster's Dict. <https://www.merriam-webster.com/dictionary/success> [as of Feb. 19, 2020] [defining "success" as "favorable or desired outcome"].)
IV. Shine Is Not Entitled to Indemnity for Attorney Fees
A trustee must "administer the trust solely in the interest of the beneficiaries." (Prob. Code, § 16002, subd. (a).) As a result, "litigation seeking to remove or surcharge a trustee for mismanagement of trust assets would not warrant the trustee to hire counsel at the expense of the trust. Such litigation would be for the benefit of the trustee, not the trust." (Whittlesey v. Aiello (2002) 104 Cal.App.4th 1221, 1227.) " 'If the trustee exceeds his [or her] powers in incurring an expense and no benefit is conferred thereby upon the trust estate, [the trustee] is not entitled to indemnity.' " (Conservatorship of Lefkowitz (1996) 50 Cal.App.4th 1310, 1314, quoting Rest.2d Trust, § 245, subd. (1), com. a.)
Shine contends this general rule may be relaxed by the terms of the Trust. Relying on section 4.9(3)(C) of the Trust, Shine claims this indemnity provision covers the personal liability claims asserted against him because it provides that, except for his gross negligence or willful misconduct, he "shall be indemnified and held harmless . . . by the trust estate . . . from and against any and all . . . claims." Shine seeks reimbursement of attorney fees based on "his success against the great bulk of the People's claims."
However, as the Attorney General points out, the next paragraph of the Trust, section 4.9(3)(D), provides a broader exception to the requirement to indemnify the trustee. It provides the Trust shall not indemnify a trustee for any cost or expense arising out of the trustee's "violation of this trust," or arising out of "an act or omission performed in an unreasonable manner or in bad faith."
We agree with the Attorney General that the exception to the requirement to indemnify the trustee in section 4.9(3)(D) is broader than the exception in section 4.9(3)(C) of the Trust. Nevertheless, as Shine points out in his reply brief, section 4.9(3)(C), unlike section 4.9(3)(D), specifically mentions indemnification for attorney fees. But even accepting Shine's contention that the narrower exception to indemnification in section 4.9(3)(C) applies, we still conclude this exception bars Shine's recovery of the attorney fees he incurred defending this action. It provides an exception to the requirement to indemnify the trustee when the trustee has engaged in conduct amounting to "willful misconduct or gross negligence."
Here, as explained ante, the court found numerous instances of conduct by Shine amounting to both gross negligence and willful misconduct. As Shine pointed out at oral argument, the court's decision on his request for reimbursement of attorney fees listed seven examples of Shine's gross negligence. The trial court's factual findings provide ample support for its conclusion that Shine is not entitled to indemnification for his attorney fees. Furthermore, this outcome comports with the general principle that when litigation is for the personal benefit of the trustee, not the trust, then "there is no basis for the recovery of expenses out of the trust assets." (Whittlesey v. Aiello, supra, 104 Cal.App.4th at p. 1230.)
The trial court did not find, and we do not hold, that one or a few examples of gross negligence defeat Shine's indemnification claim. Rather it is the pervasiveness of his mismanagement of the Trust and the overarching significant damage he caused to the Trust that bar his claim to indemnification. Based on the court's extensive findings of gross negligence and unreasonable conduct, we are persuaded that the exceptions to indemnification in both sections 4.9(3)(C) and 4.9(3)(D) of the Trust apply.
Relying on Oltmans Construction Co. v. Bayside Interiors, Inc. (2017) 10 Cal.App.5th 355, Shine argues the "except for" clause in section 4.9(3)(C) "does not impose a forfeiture for any finding of gross negligence, but simply requires an appropriate reduction of the indemnity." Shine contends he is entitled to partial indemnification because he successfully defended against many of the Attorney General's examples of his alleged breaches of fiduciary duty.
Shine's reliance on Oltmans Construction Co. is misplaced. In this construction case, the court determined the words "except to the extent" created a comparative fault standard, and that the parties' intent was "to apportion liability as between the indemnitor [the subcontractor] and the indemnitee [the general contractor] based on the proportionate—or comparative—fault of the parties." (Oltmans Construction Co. v. Bayside Interiors, supra, 10 Cal.App.5th at p. 366.) But here, comparative indemnity principles are not involved, and the Trust does not provide that Shine is entitled to indemnification "except to the extent" of his willful misconduct or gross negligence. In addition, unlike in Oltmans Construction Co., Shine seeks indemnity from the Trust itself, not from another entity that may be partly responsible for a victim's injuries or damages.
Next, based on the reasoning of Estate of Cassity (1980) 106 Cal.App.3d 569, Shine contends his successful defense of the litigation justifies an award of attorney fees. The case is distinguishable. Even though the trustee in Estate of Cassity was guilty of some malfeasance, the Court of Appeal allowed the trustee to recover attorney fees because the trial court found the trustee " 'at all times acted conscientiously and in good faith and was not negligent.' " (Id., at p. 574.) The court here found quite the opposite. As well as finding numerous examples of conduct amounting to gross negligence and willful misconduct, the court also found that "Shine violated most, if not all of his fiduciary responsibilities and duties," that his "job performance was wholly unacceptable," and that due to "Shine's mismanagement, the Trust was damaged significantly."
Shine claims that in this court's prior opinion in People ex rel. Harris & Becerra v. Shine (2017) 16 Cal.App.5th 524, we implicitly determined that the Trust's indemnity provision covers personal liability claims and, according to Shine, this "premise establishes law of the case." Shine also suggests it is the law of the case that he is entitled to partial reimbursement of attorney fees based on his successful defense.
We disagree. In our prior opinion, we addressed Shine's claim to interim or pendente lite attorney fees. (People ex rel. Harris & Becerra v. Shine, supra, 16 Cal.App.5th at p. 537.) We reversed the court's award of interim attorney fees and remanded for the trial court to reconsider the award. (Id. at p. 541.) We made no implicit finding that "the [T]rust's indemnity provision . . . cover[s] the claims at issue here," or that Shine is entitled to partial indemnification. The law of the case doctrine has no application. Based on the court's numerous findings against Shine of gross negligence and willful misconduct, the exceptions in sections 4.9(3)(C) and (D) preclude Shine from recovering attorney fees.
DISPOSITION
We affirm the trial court's order denying Shine's petition for reimbursement of attorney fees and costs. The parties shall bear their own costs on appeal. (Cal. Rules of Court, rule 8.278(a).)
/s/_________
Jones, P. J. WE CONCUR: /s/_________
Simons, J. /s/_________
Needham, J.