Opinion
B158189.
7-10-2003
A.C. WATSON et al., Plaintiffs and Respondents, v. ALLEN WATSON et al., Defendants and Appellants.
Besser & Chapin, Robert S. Besser, and Christopher Chapin for Defendants and Appellants Roger Rebbe and Miles Klein. Christopher J. Nance for Defendants and Appellants Allen and Barbara Watson, et al. Law Offices of Cohon and Gardner and Steven H. Gardner; Paul A. Beck for Plaintiffs and Respondents.
This lawsuit was brought by plaintiffs and respondents Angela Watson and her loan-out company, Clarang, Inc., against Angelas parents, defendants and appellants Allen and Barbara Watson (individually and as a trustee of the Barbara Watson Revocable Trust), and Angelas and Clarangs former accountants, defendants and appellants Roger Rebbe and Miles Klein. The trial court entered judgment in plaintiffs favor, and against all these defendants. We reverse as to Rebbe and Klein and affirm as to Barbara and Allen.
There were other defendants, notably Angelas former managers. Our record does not reflect the disposition of the case as to them. They are not, at least, parties to this appeal.
We refer to Angela Watson, Allen Watson, and Barbara Watson by their first names, to avoid confusion.
Factual and Procedural Summary
In 1975, when Angela was born, her father was a farmer in Illinois and her mother was a housewife. In 1985, Angelas father retired and the family moved to Florida. Angela began to enter beauty pageants and to find work as a model. When Angela was fourteen the family moved to Los Angeles to further her career. In 1991 she obtained work on a television show called "Step by Step." The Superior Court ordered that a trust account be established in her name, with her parents as trustees, and that 25 percent of her "Step by Step" salary be deposited into that account and blocked from withdrawal until her eighteenth birthday. (Fam. Code § 6752.)
Angela continued to work on the show until February of 1997. At first, her earnings over and above the 25 percent ordered into the blocked account were deposited into an "in trust for" checking account which Barbara opened at Bank of America, on Angelas managers recommendation. The ITF account was closed in 1994. Allen, Barbara, and Angela (no longer a minor) opened joint checking accounts, and Angelas earnings were deposited into those accounts. The evidence at trial, and the findings of the court, were that Barbara and Allen also deposited their own funds into the ITF and joint checking accounts and that family expenses were paid from the accounts.
Rebbe, a certified California tax preparer, prepared individual tax returns for Allen, Barbara, and Angela for the years 1991 to 1995, as well as payroll tax and income tax returns for Clarang, after it was formed in 1995. Klein was a certified public accountant who became Rebbes employee in 1994. The case against them largely involved the fact that Angelas 1992, 1993, and 1995 tax returns were audited by the IRS and found wanting, and that Rebbe and Klein requested and received powers of attorney to represent her in those audits.
This lawsuit was filed in 1998. As to Barbara and Allen, plaintiffs brought causes of action for breach of fiduciary duty, money had and received, fraud, breach of trust, conversion, and negligence. They sought punitive damages, an accounting, and imposition of a constructive trust. Factually, the complaint alleged that Barbara and Allen mismanaged Angelas career and her finances and misappropriated her income.
The factual allegations against Rebbe and Klein were that they negligently failed to advise Angela to incorporate until 1995, failed to properly report deductions, failed to respond to IRS inquires, failed to keep Angela advised of the status of her income tax obligations, concealed the fact the IRS had sent deficiency notices, concealed their "misadvice," and negligently allowed Barbara and Allen to use Angelas earnings for their own benefit. Rebbe and Klein were named as defendants in causes of action for breach of fiduciary duty, negligence and, nominally, fraud and an accounting. During trial, the court allowed plaintiffs to amend to seek punitive damages.
The cause of action for fraud was titled one against "all defendants," but goes on to specify that Barbara and Allen are the defendants. It does not include any factual allegations against Rebbe or Klein. During oral argument on the motions for nonsuit, the trial court agreed that Rebbe and Klein were not sued for fraud, but, confusingly, the courts statement of decision lists fraud as a cause of action against both these defendants. Rebbe and Kleins motion for nonsuit on a cause of action for money had and received was granted at the close of plaintiffs case. The problems with the cause of action for an accounting are discussed later.
On its own motion, the court appointed a Special Master to prepare an accounting report. The Special Masters report described the scope of his duties: for the years 1991 through 1996, he analyzed Angelas earnings records and income tax returns, Barbara and Allens earnings records and income tax returns, deposits into and disbursements from Barbara and Allens bank accounts, and deposits into and disbursements from Angelas bank accounts, defined to include the blocked account, the ITF account, and the joint checking accounts. He also analyzed Clarangs bank records for 1996. He wrote that "The purpose of this analysis was to determine the sources and uses of funds in these bank accounts."
Pre-trial, plaintiffs moved to bifurcate the accounting cause of action from the remainder of the trial and at the courts invitation also moved to have the existence of a fiduciary relationship between plaintiffs and all defendants, and breach of fiduciary duty, tried to the court. All defendants opposed both motions, except that Rebbe and Klein took no position on the question of the accounting, since they and plaintiffs agreed that it did not apply to them. The court ruled that the accounting would be tried to the court and would be tried first.
The court then asked the parties to clarify the issues concerning fiduciary duty. Barbara and Allen agreed that they had a fiduciary duty with regard to the blocked account and might have a limited duty as Angelas business managers, but did not otherwise agree that they had any fiduciary duties. Klein and Rebbe did not agree that they had any fiduciary duties. At that point, over defendants objections, the court ruled that Barbara and Allen were Angelas fiduciaries in the management of the blocked account and the "in trust for" account, in the management of "any of her monies when she was a minor," and "in terms of the management of her finances, if they touched those finances and they sought to deal with them in any way." As to Rebbe and Kline, the court ruled that they had fiduciary duties based on a power of attorney prepared in connection with IRS audits and in the preparation of her tax returns.
The court trial on the accounting began. The Special Master testified, as did Barbara, Allen, and Angela. At the close of that trial, the court adopted the Special Masters report, and over defendants objections, ruled that all additional matters would be tried to the court.
The court also incorporated the evidence at the accounting trial into the trial on the remaining issues. Based on its finding that Barbara and Allen were fiduciaries and trustees of all of Angelas earnings, the court found that funds which the Special Master could not account for due to lack of records would be allocated to Barbara and Allen.
At the conclusion of the second phase of the trial, the court entered judgment against all defendants. As to Barbara and Allen, the court found that plaintiffs had prevailed on the causes of action for breach of fiduciary duty, fraud, conversion, and negligence. Factually, the court found that Barbara and Allan controlled, supervised, and maintained the ITF account and joint checking accounts, and mingled their own funds into those accounts.
Legally, the court found that Barbara and Allen had relinquished their rights to Angelas earnings as a minor, and that they were her agents (and thus, fiduciaries) from the date of her majority through 1996, in that they were paid as financial managers and acted as such in the handling of her earnings. The court further found that Barbara and Allen violated their duties and failed to exercise the degree of skill and care required of trustees by paying personal and family expenses through the joint and ITF accounts; co-mingling their own earnings and Angelas earnings; failing to maintain adequate financial records, necessitating the Special Masters accounting; and failing to invest trust assets for Angelas benefit. They also breached their fiduciary duties by mismanaging Angelas career and her finances, hiring incompetent managers and agents, and using her earnings for their own purposes while leaving the entire tax burden to her. The findings on the negligence cause of action are the same, with the addition of a finding that Barbara and Allen mishandled Angelas tax returns and failed to direct and coordinate her career as an actress.
Parents are otherwise entitled to a childs earnings. (Fam. Code § 7500.)
As to the cause of action for fraud, the court found that Barbara and Allen committed fraud by making knowing false representations to Angela that her earnings would be placed in a blocked account and used solely for her benefit. The court found conversion in the evidence that Barbara and Allen used Angelas earnings for their own benefit and did not bear the tax burden on those earnings.
The court awarded $ 671,814 in compensatory damages, comprised of $ 416,596 for amounts converted and misappropriated by Barbara and Allen for their own personal use from Angelas earnings, $ 8,262 for expenditures not classified by the Special Master, $ 154,956 of Funds Not Accounted for by the Special Master, a $ 50,000 fee paid to Barbara and Allen as financial managers in 1995, and $ 42,000 for 14 months rental of the home purchased with Angelas earnings. Based on the breach of fiduciary duty, the court assessed $ 250,000 in punitive damages jointly and severally against Barbara and Allen.
The court ordered these defendants to pay the Special Masters fees and imposed a lien on all real property owned by these defendants in the sum of $ 40,000, to secure that payment, and also imposed a constructive trust in favor of plaintiffs on specified real property owned by Barbara and Allen.
As to Rebbe and Klein, plaintiffs prevailed on the causes of action for breach of fiduciary duty, negligence, and accounting. The court found that Angela gave Rebbe and Klein the notices of the IRS and Franchise Tax Board audits, that they requested and received her power of attorney to represent her in those audits, and told her that they were taking care of things. In fact, they ignored the notices or rendered insufficient or untimely responses, and failed to perform the basic duties they undertook with respect to the audits, in accord with the standard of care for accountants.
The court awarded compensatory damages of $ 51,705 jointly and severally against Rebbe and Kline, representing $ 34,482 in unabated interest and penalties assessed against plaintiffs by the IRS; $ 9,589 in unabated interest and penalties assessed by the Franchise Tax Board; and $ 7,634 in fees paid to another CPA. The court also awarded punitive damages against Rebbe in the amount of $ 100,000.
Barbara and Allens Appeal
The sole contention in the opening brief filed by these defendants is that the trial courts finding that they were trustees and fiduciaries with respect to the ITF account (which they assert was a Totten trust) must be reversed because it was made prior to the time the court heard any evidence. In their reply brief, they asked us to consider an additional issue, whether the trial court erred in imposing a constructive trust on their home in Florida. We requested, and received, a brief from plaintiffs on the issue.
See Government Code section 68081. Plaintiffs motion to strike the reply brief is denied. We could refuse to consider the argument as untimely but choose to do otherwise, given the complexity of the case, the paucity of the opening brief filed on behalf of these appellants, and the fact that we have given plaintiffs an opportunity to brief the question. (Ochoa v. California State University (1999) 72 Cal.App.4th 1300, 1304.) Nor do we agree with plaintiffs that the issue is waived through lack of objection in the trial court. In their cause of action for constructive trust, plaintiffs named only these defendants farm property in Illinois, not the Florida house, and they renewed that argument — and only that argument — in their closing. We cannot see that Barbara and Allen were given full and fair opportunity to make a timely objection.
The finding of fiduciary duty
We agree that the trial court erred by making factual findings without taking evidence. However, under the circumstances before us, it is not a reversible error. Barbara and Allen have not challenged the trial courts ruling that existence of a fiduciary duty was a question for the court or contend that they were entitled to a jury on the issue. Further the challenged finding was incorporated into the statement of decision issued after a trial in which both sides could, and did, present evidence on the question. We can see no instance in which Barbara and Allen were prevented from presenting any evidence on the issue on the ground that it had already been decided. It is notable, too, that Barbara and Allen moved for nonsuit on the ground that there was no proof of a fiduciary duty, indicating that they believed that the issue was still open.
Fiduciary duties may be imposed by law or undertaken through a confidential relationship. In the first case, the existence of a duty is a question of law for the court, but in the second, it is question of fact for a jury. (GAB Business Services, Inc. v. Lindsey & Newsom Claim Services, Inc. (2000) 83 Cal.App.4th 409, 415-419, Maglica v. Maglica (1998) 66 Cal.App.4th 442, 447.) "Where a complaint states both legal and equitable causes of action, plaintiffs are entitled to a jury trial on the legal causes of action." (Van de Kamp v. Bank of America (1988) 204 Cal. App. 3d 819, 862, 251 Cal. Rptr. 530.)
We thus examine the record to determine whether there was substantial evidence for the courts ruling, and find that there was. At both phases of the trial, the court heard evidence concerning the ITF account. Barbara testified that when she opened the account she did not understand that "ITF" meant "in trust for" and that she never considered herself a trustee, but also testified that she considered herself a trustee for the accounts into which Angelas earnings were placed before Angela was eighteen, and that she believed that she had "the highest obligation there was to take care of [Angela] and her money." Allen testified that his answers to the questions asked of Barbara would be the same as hers. Angela testified that she was present when her then-manager told Barbara and Allen that they should open an ITF account for Angela and that ITF meant "in trust for." She testified that "the bank lady" told Barbara the same thing, that Angelas earning would be in trust for her. Bank statements on the account were entered into evidence. That is sufficient evidence.
Finally, given the finding that Barbara and Allen relinquished their right to Angelas earnings as a minor, and undertook additional fiduciary duties when she was no longer a minor, it is not clear what effect the reversal of the finding of fiduciary duty with regard to the ITF account would have on this judgment.
The constructive trust
The trial court imposed a constructive trust on, inter alia, real property these defendants owned in Cape Coral, Florida. Imposition of a constructive trust "requires `money or property identified as belonging in good conscience to the plaintiff [which can] clearly be traced to particular funds or property in the defendants possession. [Citation.]" (Korea Supply Co. v. Lockheed Martin Corp. (2003) 29 Cal.4th 1134, 1150.) The propriety of granting this kind of equitable relief in a particular case generally rests upon the sound discretion of the trial court, exercised in accord with the facts and circumstances of the case. (David Welch Co. v. Erskine & Tulley (1988) 203 Cal. App. 3d 884, 894, 250 Cal. Rptr. 339.)
The evidence on the issue was as follows: On questioning by plaintiffs, Barbara testified that she and Allen were living in the Cape Coral house, and that it had been purchased by Lillian Elleson, an elderly relative who lived in Florida. In February of 1998, while Barbara and Allen were visiting, Elleson said that she wished they could stay and take care of her. She suggested that she buy a house for the three to live in, and give it to Barbara and Allen. Plaintiffs had five checks marked for identification and elicited the testimony that the checks were used for purchase of the home. They also marked a 1998 gift tax return and elicited the information that the document indicated that a gift had been made by Elleson. The evidence was thus that plaintiffs money or property could not be traced to the house.
The statement of decision itself supports these defendants position on the issue. The trial court found that plaintiffs assets were used to improve and support other real property owned by these defendants "and possibly to acquire a home in Florida." "Possibly" is not sufficient to impose a constructive trust.
Plaintiffs cite Elliott v. Elliott (1964) 231 Cal. App. 2d 205, 41 Cal. Rptr. 686. There, half-interest in a promissory note in favor of a husband was awarded to the wife in a divorce action. He later allowed the statute of limitations to run, so that collection on the note was impossible. In a subsequent lawsuit, the court found that the husband held the note as a constructive trustee for the wife and awarded her a judgment for half the amount of the note. The Court of Appeal found it "logical and reasonable" that a constructive trustee should account for the loss he caused the beneficiary to suffer and made the comments quoted in plaintiffs letter brief. The Court also noted that the husband had a close relationship with the maker of the note, and a motive to do a financial injury to his ex-wife, and found that "Perhaps the greatest justification for applying the doctrine of constructive trust" was the difficulty of learning the truth surrounding the husbands actions. (Id. at p. 212.)
Here, plaintiffs factual argument is only that these defendants spent plaintiffs money, and that the money judgment may be impossible to satisfy. Those facts do not bring this case under Elliot or justify the imposition of a constructive trust on the Florida property.
Rebbe and Kleins Appeal
These defendants raise several contentions, one of which is that the trial court erred in depriving them of a jury trial. We agree. The error is reversible per se (Van de Kamp v. Bank of America, supra, 204 Cal. App. 3d at p. 863) and we thus reverse without considering their other contentions.
The right to a jury trial is guaranteed by our states Constitution. In general, the right exists for a civil action at law, but not an action in equity. If the action is essentially one in equity and the relief sought depends on the application of equitable doctrines, the action is one in equity. If, however, the "gist of the action" is legal, the parties are entitled to a jury trial. (C & K Engineering Contractors v. Amber Steel Co. (1978) 23 Cal.3d 1, 9, 151 Cal. Rptr. 323, 587 P.2d 1136; Martin v. County of Los Angeles (1996) 51 Cal.App.4th 688, 694.)
Here, the trial judge ruled that the cause of action for an accounting meant that the entire case against these defendants was one in equity. We need not examine the legal merits of that proposition, because our examination of the record reveals that plaintiffs did not seek an accounting (or any other equitable remedy) against these defendants, did not get one, and did not need one.
The cause of action for an accounting, though titled one against "all defendants," is actually addressed only to Barbara and Allen. It alleges that "the defendants" refused Angelas request for information concerning the handling of her earnings and that they misappropriated her earnings, allegations which did not form part of plaintiffs case against Rebbe or Klein. During oral argument on the motion to bifurcate the accounting, plaintiffs agreed that the accounting cause of action did not address Rebbe or Klein.
Nor did the trial on the accounting involve the allegations against Rebbe or Klein, who were not witnesses at that trial. Instead, the witnesses were the Special Master, Angela, Barbara, and to a lesser extent Allen, each of whom was questioned about Watson family checkbook registers, credit card statements, household expenses, and the like. The Special Masters report had nothing to do with these defendants, except (if it is an exception) that a table listed taxes paid and penalties and interest assessed between 1991 and 1996.
Plaintiffs choice not to seek an accounting against these defendants is explained by the nature of the allegations against Rebbe and Klein, which bear all the hallmarks of law, and not of equity. The complaint alleged that they negligently failed to advise Angela to incorporate, failed to properly prepare her tax returns, failed to appropriately respond to IRS inquiries, and allowed Barbara and Allen to use her earnings for their own benefit. The allegations are classic professional malpractice allegations.
Plaintiffs argue that the matter was equitable because it involved breach of a fiduciary relationship. An allegation of breach of fiduciary duty is not enough, in and of itself, to render an action equitable. In Mortimer v. Loynes (1946) 74 Cal. App. 2d 160, 168 P.2d 481, the basis of the action was breach of fiduciary duty by a corporate officer. The Court held that "From the fact that equitable principles are thus used to establish the alleged liability of the defendants, it does not necessarily follow that the action to enforce that liability is equitable. The law courts now recognize and apply many equitable principles and grant relief based thereon where, as here, legal relief is sought in the form of a judgment for a specific amount." (Id. at p. 167.)
Interactive Multimedia Artists Inc. v. Superior Court (1998) 62 Cal.App.4th 1546, cited by plaintiffs, is not to the contrary. In that case, the fiduciary duty was that of a controlling shareholder or director to a minority shareholder, a relationship which the Court held was based on powers in trust. The Court observed that trust relationships are premised on equitable principles and that "the sole method of obtaining damages in this case is by application of equitable principles. It follows that this action, under California law, is properly classified as an equitable action." (Interactive Multimedia Artists, supra, 62 Cal.App.4th at p. 1555.)
The issues in this case are not remotely similar. As plaintiffs concede in their reply brief, the breach of fiduciary duty claims and negligence claims against these defendants were based on identical facts. The allegations (and findings) were that a fiduciary duty arose through the powers of attorney which allowed Rebbe and Klein to represent Angela in connection with the IRS audits, and that the duty was breached when they did a poor job in connection with that representation. Those are malpractice allegations. The damages were the sums their negligent representation cost Angela, again proving that application of equitable principles was not necessary.
Plaintiffs also argue that Rebbe and Klein waived this issue by failing to file written responses to the motion which asked that the existence and breach of fiduciary duty be tried to the court. We know of no rule of law which would hold that the right to a jury is waived unless written objections to such a motion are filed. These defendants objected to the courts ruling when it was made. That is sufficient.
Disposition
The judgment against defendants and respondents Allen and Barbara Watson (individually and as a trustee of the Barbara Watson Revocable Trust) is affirmed, except that it is reversed insofar as it establishes a constructive trust on real property owned by those defendants in the State of Florida, as described in the judgment. As to this portion of appeal, each party is to bear its own costs.
The judgment against defendants and appellants Roger Rebbe and Miles Klein is reversed. Those defendants and appellants are to recover their costs on appeal.
We concur: TURNER, P.J., GRIGNON, J.