Opinion
B317784
03-22-2023
DON J. REYNOLDS, Plaintiff and Respondent, v. JAMES V. BACON, SR., as Trustee, etc., Defendant and Appellant.
Mitchell Silberberg & Knupp and Seth W. Krasilovsky for Defendant and Appellant. Musick, Peeler &Garrett, Cheryl A. Orr, Richard S. Conn and Erin M. Donovan for Plaintiff and Respondent Don J. Reynolds.
NOT TO BE PUBLISHED
APPEAL from an order of the Superior Court of Los Angeles County No. 20STPB04557, Michael Small, Judge. Affirmed.
Mitchell Silberberg & Knupp and Seth W. Krasilovsky for Defendant and Appellant.
Musick, Peeler &Garrett, Cheryl A. Orr, Richard S. Conn and Erin M. Donovan for Plaintiff and Respondent Don J. Reynolds.
WEINGART, J.
The probate court granted a petition by respondent Don J. Reynolds to modify the Don J. Reynolds Protective Trust No. 1 (the Don trust), of which Don is the sole beneficiary, in a way that would require appellant James V. Bacon, Sr. to step down as trustee. James, Sr. challenges the order, contending that the probate court erred by granting relief on a basis not alleged in the original petition, and by failing to hold an evidentiary hearing to resolve contested factual questions. We disagree and affirm.
We refer to the members of the Reynolds and Bacon families by their first names in order to avoid confusion. We intend no disrespect.
FACTS AND PROCEEDINGS BELOW
This case presents a narrow question regarding the modification of a trust agreement, but underneath it lurks a fierce dispute among members of an extended family over the control of a family business. In December 2012, Virginia and Gwynn Bacon devised an estate plan to shield their business, the Allen Gwynn Chevrolet dealership in Glendale (AG Chevy or the dealership), from estate taxes. Under this plan, Virginia and Gwynn's children, Nancy Reynolds and James, Sr., established trusts for the benefit of their own children. Nancy established trusts for her son Don and daughter Patricia L. Kezerle, with James, Sr. as trustee. James, Sr. did the same for his sons, James V. Bacon, Jr. and Stephen W. Bacon, naming Nancy as trustee. Virginia and Gwynn then distributed shares of AG Chevy to each trust.
In the words of the attorney who drafted the trust documents, the trusts envisaged a system of "reciprocal checks and balances," to ensure fair and equal treatment among the various family members. By installing Nancy and James, Sr. as trustee of each other's children's trusts, with the right to vote and control the securities in the trusts, the estate plan sought to ensure that neither side of the family could disadvantage the other.
The record does not show the number of shares of AG Chevy in each trust, but according to the lawyer who drafted the documents, Virginia and Gwynn intended for Nancy and James, Sr. to each control 50 percent of the shares of AG Chevy through the trusts.
The particular agreement that created the Don trust, which is at the center of this dispute, makes no reference to this overarching plan, however. Indeed, the trust agreement does not mention Virginia or Gwynn, or AG Chevy, at all. In the agreement, Nancy, as settlor, names James, Sr. as the sole trustee, and Don as the sole beneficiary. Don's sister, Kezerle, is named as reserve trustee if James, Sr. is unwilling or unable to serve. James, Sr.'s son James, Jr. is named trust protector, with authority to modify certain aspects of the trust agreement. The trust agreement requires the trustee to "pay to or apply for the benefit of [each] beneficiary as much of the income and principal of his or her . . . [t]rust as the [t]rustee shall, in the [t]rustee's discretion, deem necessary for his or her proper health, education, support and maintenance." The trust agreement contains no mechanism for its revocation.
Relationships among the family members grew increasingly hostile in the years after the trusts were created. Two members of the younger generation, Don and Stephen, who worked as managers at AG Chevy, disagreed with decisions by James, Sr., the longtime president of the dealership, regarding personnel and business practices. In December 2017, Don and Stephen, disappointed that James, Sr. had failed to pay them bonuses that they believed he had promised them, arranged for AG Chevy's accountants to pay them $102,650 each in bonuses without obtaining James, Sr.'s prior approval. James, Sr. became aware of the payments months later and demanded that Don and Stephen repay the money. After some negotiations among the parties, Don eventually repaid at least some of the money. Don and Stephen continued working at the dealership, but the situation finally came to a head in April 2020. According to Don, the final straw was James, Sr.'s demand that Don and Stephen return the company cars they had long used for both business and personal purposes. Don and Stephen refused to comply, and James, Sr. fired them. For his part, James, Sr. claims he fired Don and Stephen for theft and insubordination. Don alleges that James, Sr. got rid of him and Stephen in order to install James, Sr.'s wife and daughter as managers at AG Chevy.
James, Jr. and Stephen are James, Sr.'s children from a prior marriage. James, Sr.'s wife Martha and daughter Lindsey are not beneficiaries of any of the trusts described in this opinion.
According to Don, he was unable to support himself or his family following his termination from AG Chevy, and James, Sr. ignored his request for a distribution from the Don trust. In June 2020, Don filed a petition to modify the Don trust pursuant to Probate Code section 15403. Under section 15403, "if all beneficiaries of an irrevocable trust consent, they may petition the court for modification or termination of the trust." (Id., subd. (a).) The court's authority under the statute is subject to an exception, in that it "cannot modify or terminate a trust where 'the continuance of the trust is necessary to carry out a material purpose of the trust' unless 'the court, in its discretion, determines that the reason for doing so under the circumstances outweighs the interest in accomplishing a material purpose of the trust.'" (Boys &Girls Club of Petaluma v. Walsh (2008) 169 Cal.App.4th 1049, 1051, quoting § 15403, subd. (b).)
At about this same time, Don filed another petition to compel an accounting of the Don trust. In addition, Don, Nancy, and Stephen filed a lawsuit against James, Sr. alleging several causes of action, including breach of fiduciary duty, and seeking to remove James, Sr. as director for mismanagement. James, Sr. filed a suit of his own against Don, Nancy, and Stephen for
Unless otherwise specified, subsequent statutory references are to the Probate Code.
Don proposed to modify the trust to prohibit any person from serving as trustee after reaching 70 years of age. At the time of the filing of the petition, James, Sr. was 71. Don explained that James, Sr. had "become increasingly arbitrary and capricious in his management of" AG Chevy in recent years, and that his replacement "is urgently necessary in order to avoid waste of the assets of the [t]rust." The trust agreement called for Don's sister Kezerle to serve as trustee if James, Sr. were unable or unwilling to take that role. Don submitted a statement from Kezerle consenting to serve as successor trustee, as well as a statement from Nancy consenting to the modification. Don also proposed to modify the trust to prohibit close relatives from breach of fiduciary duties and other causes of action. The probate court deemed all of these cases related and ordered them reassigned to probate court. This appeal concerns only the petition to modify the Don trust and does not address the related cases. serving as trust protector, thus disqualifying James, Jr. from continuing to serve in that role. Jeff Toalson, an associate of Don, agreed to serve as trust protector following modification.
James, Sr. objected to the petition. He argued that he remained competent to continue managing AG Chevy as well as serving as trustee, and explained that he was unable to distribute money to Don because the Don trust lacked liquid assets. James, Sr. also argued that Don's stated justification for modifying the trust was pretextual, and that Don's true purpose was to gain majority control of AG Chevy within his own immediate family. If the court imposed the requested modification, Kezerle, as trustee, would gain voting control over the AG Chevy shares in the Don trust, while Nancy, as trustee of the trusts established for the benefit of James, Jr.'s children, would retain voting control over the shares in those trusts. According to James, Sr., this was contrary to a material purpose of the trust, which was to maintain an equilibrium between James, Sr.'s and Nancy's families.
On October 15, 2020, shortly after James, Sr. filed his objection, Don submitted a supplement to his petition. In the supplement, Don alleged "an alternative ground for the relief sought," in the form of section 15404. This statute provides that "[a] trust may be modified or terminated by the written consent of the settlor and all beneficiaries without court approval of the modification or termination." (Id., subd. (a).) Thus, section 15404 differs from section 15403 by substituting the consent of the settlor in place of the approval of the court for modification of a trust. Nancy, the settlor of the Don trust, had already filed a document consenting to the proposed modification.
The trust agreement listed Don as the sole beneficiary, but it provided that, in case of Don's death, the trust would be for the benefit of his "living issue," or to Nancy's living issue if Don died without any issue of his own. Under both sections 15403 and 15404, "If the trust provides for the disposition of principal to a class of persons described only as 'heirs' or 'next of kin' of the settlor, or using other words that describe the class of all persons who would take under the rules of intestacy, the court may limit the class of beneficiaries whose consent is necessary to modify or terminate a trust to the beneficiaries who are reasonably likely to take under the circumstances." (§§ 15403, subd. (c); 15404, subd. (c).) Don has one daughter, Hailey, who was nine years old at the time Don filed the petition. The probate court appointed a guardian ad litem to represent Hailey in the proceedings and determine whether Hailey consented to the modification. (See § 15405 ["For the purposes of Sections 15403 and 15404, the consent of a beneficiary who lacks legal capacity, including a minor, . . . may be given in proceedings before the court by a guardian ad litem, if it would be appropriate to do so . . ."].) The guardian ad litem was chosen randomly from a court approved list of individuals who met mandatory experience and training requirements, and had no prior relationship with any of the parties involved in the probate proceeding.
Additional beneficiaries might exist if Don had additional children, or if Don predeceased Nancy and left no living issue. As noted above, section 15404 permits the court to "limit the class of beneficiaries whose consent is necessary to . . . the beneficiaries who are reasonably likely to take under the circumstances." (§ 15404, subd. (c).) James, Sr. does not contend that the probate court was required to appoint an additional guardian ad litem to represent the interest of any additional potential beneficiaries beyond Hailey.
In December 2020, the guardian ad litem filed a report on behalf of Hailey consenting to Don's proposal to modify the trust. One month later, Don filed a motion for summary judgment. He argued that, since the settlor (Nancy) and both beneficiaries (he and Hailey) had consented to the modification, there was no basis for denying the petition.
James, Sr. opposed the motion for summary judgment on two grounds. First, he argued that Don had never properly amended his petition to seek modification under section 15404. Second, he contended that there was a triable question of material fact as to whether the guardian ad litem's consent to the modification was appropriate under the circumstances. He noted that the guardian had spoken with Don and Nancy, but not with James, Sr., before filing the report, and argued that as a result, the guardian had not taken seriously either the allegations of misconduct by Don or the purposes of the family estate plan.
Over the ensuing months, the guardian ad litem filed several additional reports responding to James, Sr.'s criticisms, and James, Sr. continued finding purported defects in the new reports. As part of his subsequent investigations, the guardian interviewed James, Sr. and reviewed additional documents provided by James, Sr.'s attorney. The guardian also delved deeper into the questions surrounding the bonus payments, as well as an alleged failure by Nancy to repay AG Chevy for money AG Chevy paid her as an unnecessary reimbursement for a tax payment.
In his final report, the guardian "concluded that neither [Don] nor Stephen 'stole' any funds from [AG Chevy], whether in the form of bonus payments or otherwise." Instead, the guardian stated that "at most, the bonus payments reflected poor communication as among corporate managers and that efforts by [Don] and Stephen to mitigate the effects of any error in judgment were more than sufficient to eliminate the bonus issue as grounds for discipline." As to James, Sr.'s allegation that Nancy stole from the dealership by failing to repay a $60,000 excess reimbursement for a tax debt, the guardian characterized the allegation as "so lacking in logic as to need no rebuttal." The guardian determined that James, Sr. had become a "poor manager" in recent years, and that the dealership would likely perform better under the supervision of Don and Stephen. In addition, the guardian concluded that James, Sr.'s animus toward Don would make it difficult for him to act as a fiduciary on behalf of Don in managing the trust. For these reasons, the guardian "conclude[d] with a high degree of confidence that Hailey's interests will best be served by my consent as [g]uardian ad [l]item to the proposed modification of the [t]rust. The modification if granted will serve to allow general family benefits to accrue to the current family and moreover, to Hailey as a contingent beneficiary of the [t]rust."
On August 31, 2021, shortly after receiving the guardian's final report, the probate court granted Don's petition to modify the trust pursuant to section 15404. The court found that the guardian ad litem's decision to approve the modification was reasonable, and that it was not the role of the court to hold an evidentiary hearing on that question because section 15404 permits modification with the consent of the settlor and the beneficiaries, and, therefore, "The settlor and the beneficiaries are the stakeholders in a [section] 15404 proceeding and the [guardian ad litem] too, [but] the trustee's not." The court found it had an independent obligation to determine whether the guardian ad litem's consent on behalf of the minor was appropriate, and the extensive record before the court supported that there was a benefit to Hailey and the modification was in her best interest without the need for an evidentiary hearing. The court acknowledged that the guardian's report contained facts disputed by James, Sr., but determined that it was not the court's function to resolve those disputes. Having granted the petition on those terms, the court denied the motion for summary judgment as moot.
DISCUSSION
James, Sr. challenges the probate court's order granting Don's petition on two grounds. First, he contends that the court erred by granting the petition under section 15404, when Don did not seek to modify the petition on that basis in his initial petition and failed to file an amended petition to assert a new basis for relief. Next, he contends that the probate court was required to hold an evidentiary hearing to resolve disputed questions of fact before deciding the petition. Don disagrees with these arguments and also argues that James, Sr. lacks standing to contest the modification of the trust under section 15404.
A. James, Sr.'s Standing to Challenge the Modification of the Trust
Don argues that James, Sr. lacks standing to challenge the modification of the trust because the trustee has no role in proceedings under section 15404. Under the terms of that statute, all that is required to modify or terminate a trust is the consent of the settlor and all beneficiaries. The trustee has no say in the matter.
We generally agree with Don's view of section 15404, but it does not necessarily follow from this that James, Sr. lacked standing to appear before the court to object to the modification. Section 17200 provides that, with exceptions not relevant here, "a trustee or beneficiary of a trust may petition the court under this chapter concerning the internal affairs of the trust or to determine the existence of the trust." (Id., subd. (a).) The statute includes a nonexhaustive list of 23 issues that constitute internal affairs of a trust, one of which is "Appointing or removing a trustee." (Id., subd. (b)(10).) We further note that our Supreme Court has stated that, "as a general matter, the Probate Code' "was intended to broaden the jurisdiction of the probate court so as to give that court jurisdiction over practically all controversies which might arise between the trustees and those claiming to be beneficiaries under the trust."' [Citations.]" (Barefoot v. Jennings (2020) 8 Cal.5th 822, 827.)
The original ground on which modification was sought was section 15403. No party disputes that a trustee has standing to participate in a proceeding pursuant to that section. Relief was then sought on an additional alternate ground, namely section 15404, that does not involve the trustee. James, Sr. (as trustee) objected to consideration of this alternate ground. We see no reason James, Sr. should lack standing to object to the perceived procedural impropriety of the court considering this alternative ground given that he was already a party for purposes of the request under section 15403. Beyond that, we need not decide if a trustee has standing to participate in the court's consideration of a proposed trust modification under section 15404 involving a minor, because even if James, Sr. had such standing as explained below we perceive no reversible error in the court's approval of the requested modification.
As noted above, if no minor is involved, there is no question of standing because the settlor and the beneficiaries can modify the trust "without court approval." (§ 15404, subd. (a).)
B. Any Alleged Procedural Error in the Court's Consideration of Section 15404 Was Harmless
James, Sr. contends that, because Don filed his petition for modification under section 15403, and never filed an amended petition, the trial court erred by relying on section 15404 as a basis for approving the modification of the trust. We need not decide whether the trial court erred because even if so, the error did not prejudice James, Sr., who was aware of Don's intention to seek modification under section 15404 for many months before the probate court made its ruling.
As we have explained above, the chief difference between sections 15403 and 15404 is that modification under section 15403 requires the court's approval, and the court must consider whether the modification would prevent "carry[ing] out a material purpose of the trust." (§ 15403, subd. (b).) Under section 15404, no court approval is required so long as the settlor and all beneficiaries agree. The California Law Revision Commission, which drafted the legislation that formed the basis of the current trust law, explained that "This rule stands on the firm footing that if everyone with an interest agrees to a modification or termination, there is no reason not to allow it." (Recommendation Proposing The Trust Law (Dec. 1985) 18 Cal. Law Revision Com. Rep. (1986) pp. 568-569.)
In this case, where Nancy, the settlor of the trust, consented to the modification from the outset, the advantage of proceeding under section 15404 is obvious. Although Don's June 2020 petition sought modification under section 15403, he filed a supplement in October 2020 in which he alleged that "section 15404 affords an alternative ground for the relief sought, in that, upon the giving of the written consent of the guardian ad litem for Hailey Reynolds, both the trustor and all beneficiaries will have given their consent to the modification requested."
James, Sr. claims that this was not sufficient. He notes that, under the local court rule, "A 'supplemental pleading' sets forth additional allegation[s] after the original notification is filed, usually in response to [p]robate [n]otes. An 'amended pleading' seeks new or additional relief from the original petition." (Super. Ct. L.A. County, Local Rules, rule 4.27, Pleadings.) James, Sr. argues that, because Don sought relief under a different statute, he was required to file an amended pleading, which would have meant providing "the same notice (including publication) as the [original petition] and must be filed and set for hearing as though an original petition." (Ibid.)
We need not decide whether James, Sr. is correct because even if so, he has failed to show that the alleged defect in the pleading prejudiced him. As the court explained in Reedy v. Bussell (2007) 148 Cal.App.4th 1272, "In order to obtain a reversal based upon such a procedural flaw, the appellant must demonstrate not only that the notice was defective, but that he or she was prejudiced. [Citations.] . . . 'Procedural defects which do not affect the substantial rights of the parties do not constitute reversible error.' [Citation.]" (Id. at p. 1289, quoting Lever v. Garoogian (1974) 41 Cal.App.3d 37, 40.)
In this case, James, Sr. was aware of Don's intent to rely on section 15404 as a basis for modifying the petition no later than March 30, 2021, when he filed an opposition to Don's motion for summary judgment in which he referred to the supplemental petition and its reliance on section 15404. He argued at a court hearing on April 13 that Don needed to file an amended pleading if he wanted to seek modification under section 15404. The probate court disagreed and stated unequivocally that "This is a [section] 15404 case." The court did not issue its ruling approving the modification until August 31, more than four months later. In the interim, James, Sr. filed one supplemental brief, two responses to reports from the guardian ad litem, a supplemental opposition to Don's petition, and two replies to pleadings filed by Don. He also participated in three additional hearings. James, Sr. suffered no lack of notice or opportunity to argue against granting the petition under section 15404. As the trial court noted during the hearing where it granted modification of the trust, "It's no surprise today . . . that the petition is based on [section] 15404," and James, Sr. had the opportunity prior to the hearing to file "reams of paper on whether the court should grant the petition to modify under [section] 15404." At no point along the way, including in his appellate briefs, has James, Sr. explained how the filing of an amended petition could have made a substantive difference in the case.
C. The Probate Court Was Not Required to Hold an Evidentiary Hearing
James, Sr. lastly contends the trial court erred by granting Don's petition without holding an evidentiary hearing. He notes that, except where the Probate Code provides otherwise, "the rules of practice applicable to civil actions . . . apply to, and constitute the rules of practice in, proceedings under" the Probate Code. (§ 1000, subd. (a).) Because, in civil proceedings," '[a] party is entitled to have received in evidence and considered by the court, before findings are made, all competent, relevant and material evidence on any material issue'" (Meadows v. Lee (1985) 175 Cal.App.3d 475, 488), and because the Probate Code does not provide for any other rule, he argues that the probate court was required to hold a hearing to consider the evidence before making a ruling on Don's petition.
We agree with James, Sr. to this extent: where the probate court acts as a finder of fact, it must hold an evidentiary hearing before making findings on any contested questions of material fact. For example, in Estate of Lensch (2009) 177 Cal.App.4th 667, where the parties' right to an inheritance depended on the order in which two of their relatives died, the probate court was required to hold an evidentiary hearing to determine the order of death. (Id. at p. 677.) Similarly, in Estate of Bennett (2008) 163 Cal.App.4th 1303, the petitioners sought to set aside a settlement agreement in which they gave up their right to any interest in the decedent's estate. They argued that they signed the settlement agreement under fraud and duress, without receiving adequate consideration, and under a mistake of fact. Because the resolution of the petitioners' claims required the probate court to determine disputed questions of fact, the Court of Appeal held that an evidentiary hearing was required. (Id. at pp. 1308-1310.)
But Don's petition to modify does not involve factual questions in the same way. As we have noted above, a modification of a trust under section 15404 requires only "the written consent of the settlor and all beneficiaries," with no need for court approval. (Id., subd. (a).) There is no dispute that, in this case, the settlor, Nancy, and both beneficiaries, Don and Hailey, submitted written consent.
Of course, Hailey, as a minor, could not consent to the modification on her own. Section 15405 provides that a minor's consent "may be given . . . by a guardian ad litem, if it would be appropriate to do so," and states that, "[i]n determining whether to give consent, the guardian ad litem may rely on general family benefit accruing to living members of the beneficiary's family." Thus, it is the guardian, not the court, who decides whether the minor consents to a modification.
Section 1003 governs the appointment of a guardian ad litem in probate proceedings. The "guardian ad litem is not a party to the action; instead, he or she is a representative of record of a party who lacks capacity to sue. [Citation.] 'The guardian ad litem's powers include the right to compromise or settle the action [citation], to control the procedural steps incident to the conduct of the litigation [citation], and, with the approval of the court, to make stipulations or concessions that are binding on the minor, provided they are not prejudicial to the latter's interests.' [Citation.]" (Safai v. Safai (2008) 164 Cal.App.4th 233, 245.) Thus, while "a guardian ad litem is an officer of the court" and, as such, "is subject to court supervision" (Regency Health Services, Inc. v. Superior Court (1998) 64 Cal.App.4th 1496, 1502), the probate court is not authorized or required to revisit every issue the guardian has considered and make an independent determination. "[A] court may not substitute its judgment for that of the guardian unless it plainly appears that a case has been made justifying its interference with the discretion of the guardian as to what is for the best interests of the ward." (Guardianship of Reynolds (1943) 60 Cal.App.2d 669, 680.)
As the probate court noted, there are disputed issues of fact in this case regarding the circumstances of the bonus payments to Don and Stephen, as well as the competence of James, Sr. in managing AG Chevy. Information about those issues might play a key role in the guardian ad litem's determination regarding whether it is in the best interest of Hailey to remove James, Sr. as trustee. But that determination was the guardian's to make in the first instance, not the court's. The court had a duty to supervise the guardian, but we can see no role for an evidentiary hearing or interfering with the guardian's discretion where the court believed the ample record already before it demonstrated the guardian ad litem's due diligence and that his decision on Hailey's behalf appeared to be in her best interest. In reviewing the guardian's decision to consent to the modification, the court stated, "the court has evaluated the competing positions of the parties and has concluded that [the guardian] standing in for [Hailey] has made a reasoned and reasonable determination." James, Sr. has cited no case law suggesting that the probate court's view of its role was inappropriate.
DISPOSITION
The probate court's order granting the petition to modify the trust is affirmed. Plaintiff is awarded his costs on appeal.
We concur: ROTHSCHILD, P. J. CHANEY, J.