Han v. Hallberg: Playing Pick-up Sticks with Presta Logic

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Han v. Hallberg: Playing Pick-up Sticks with Presta Logic

Layton L. Pace

Layton L. Pace is a tax and closely-held-business attorney practicing in Hermosa Beach, California. He is a past chair of the Corporate and Pass-Through Entities Committee of the Taxation Sections of the State Bar of California (now part of the California Lawyers Association) and Los Angeles County Bar Association. He has served on the LLC Committee of the Business Law Section of the CLA. He represents partnerships, limited liability companies, and their managers and owners, but has no stake in the outcome of, relationship to, or financial interest in, the Han v. Hallberg litigation.

Can a trust be a partner in a partnership? Does the death of a partner who has transferred a partnership interest into a trust trigger buy-out provisions of a partnership agreement? In May 2019, the Second Appellate District of the Court of Appeal of California in Han v. Hallberg concluded yes and no to those questions. That result conflicts with the November 2009 decision reached by the Fourth Appellate District in Presta v. Tepper. In August 2019, the California Supreme Court granted review in Han v. Hallberg to decide those questions. This article sets out the issues.

I. INTRODUCTION

California has adopted uniform acts to govern various of its legal entities and codified them as part of the California Corporations Code. Specifically, California has adopted: (i) the Revised Uniform Partnership Act of 1994 ("RUPA"),1 governing general partnerships, (ii) the Uniform Limited Partnership Act of 2008 ("ULPA"),2 governing limited partnerships, and (iii) the Revised Uniform Limited Liability Company Act ("RULLCA"),3 governing limited liability companies ("LLCs").

Uniform acts arise from the efforts of the Uniform Law Commission ("ULC"), which is a national organization that for well over a century has prepared and submitted comprehensive legislation to be adopted by the states of the United States in many areas of law. The ULC website summarizes itself as: "[P]racticing lawyers, judges, legislators and … law professors … appointed … to research, draft, and promote enactment of uniform state laws in areas of state law where uniformity is desirable and practical."4 The uniform acts come with detailed comments that explain various provisions.

RUPA, ULPA, and RULLCA came about in California because the Business Law Section of the then State Bar of California sought to keep California current with business needs and developments occurring in other states. This author firmly believes that the Business Law Section did so on behalf of the people of California, and not special interests. The Business Law Section wrote legislative proposals, obtained bill sponsors, and otherwise assisted in ushering RUPA, ULPA, and RULLCA through the California Legislature. Although as initially proposed the bills for RUPA, ULPA, and RULLCA generally followed the uniform acts prepared by the ULC, marching those bills through the California Legislature resulted in the inclusion of various provisions unique to the concerns of California legislators and their constituents.

Why does that matter? Drilling down into RUPA, ULPA, and RULLCA, each refers to "Person" in defining the owners of partnerships and LLCs. Each of those acts also includes a "trust" in the definition of "Person." Moreover, the definition of "Person" came from the same source, the uniform acts, and not from changes made by the California Legislature. Accordingly, decisions such as Han v. Hallberg5 or Presta v. Tepper,6 which are the subject of this article, that involve general partnerships governed by RUPA, also can impact limited partnerships and LLCs governed by California law, and entities formed under the same uniform acts adopted by many other states.

II. CAN TRUSTS BE PARTNERS UNDER RUPA?

In November 2009, Presta v. Tepper directly answered the question of whether an ordinary express trust, created and governed by the California Probate Code, could be a partner of a California general partnership. After reviewing California trust and partnership law, the Presta court said "no," the individual trustees were the partners.

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In Presta, Mr. Presta and Mr. Tepper had entered into three California general partnerships. The individuals involved entered into their 1986 partnership agreement in their own names, but denoted that they entered into their 1993 and 1995 partnership agreements in their capacities as trustees of their respective trusts. All three partnership agreements contained identical mandatory buy/sell provisions that required the partnerships to buy the partnership interests of a deceased partner upon his death. Mr. Tepper died, and Mrs. Tepper, as successor trustee of the pertinent trusts, agreed to sell the partnership interest in the 1986 partnership, but refused to sell the partnership interests in the 1993 and 1995 partnerships. She contended that, because the trigger for the buy/sell provisions was the death of a partner and the partner of those partnerships was the trust, rather than the trustee, she was not obligated to sell.

The Presta court upheld the lower court’s conclusion that the death of Mr. Tepper triggered the buy/sell provisions. The Presta court first reasoned that an ordinary express trust is a relationship and not an entity under well-settled California law, so a trust could not be a partner. The Presta court then reviewed the meaning of "Person" in RUPA, which has the following language:

"Person" means an individual, corporation, business trust, estate, trust, partnership, limited partnership, limited liability partnership, limited liability company, association … or any other legal or commercial entity.

The Presta court interpreted that phrase, "or other legal or commercial entity," to limit the term "trust" to mean only a trust to the extent that California law recognizes it as a legal or commercial entity. The court concluded that longstanding California law held that an ordinary express trust was not a legal entity, so an ordinary express trust could not be a partner.

Next, the Presta court undertook to find other provisions of RUPA to support that conclusion. The court found section 16601(8) of the California Corporations Code. Section 16601(8) deals with the circumstances in which a partner is dissociated from a partnership.7 The court found the language of section 16601(8) to recognize that either a trust or a trustee of a trust (when the trust itself cannot be a partner) can be a partner.

The court completed its analysis by stating its conclusion was "bolstered by the language of the partnership agreements" in two respects. First, it found it significant that Mr. Tepper and Mr. Presta had signed the two partnership agreements in their own names, as trustees. The court suggested that if the parties had intended the trusts to be the partners, they would have listed the trust names differently. They would have listed the trust names and then followed them by "through its trustee," such as "The Tepper Family Trust of 1982 u/t/d December 10, 1982, through its trustee Robert M. Tepper." Second, the court pointed out that the partnership agreement used the pronoun "his," rather than "its," which the court found to show that the partner was an individual, rather than an entity.

To this author, the Presta decision has many shortcomings. Although the Presta court made clear that it was interpreting a provision in partnership agreements, the court articulated no rules of contract interpretation. Specifically, although the decision states that the trial court found the buy/sell provision to be ambiguous, the decision does not discuss the impact of ambiguous contract terms or extrinsic evidence on its review and conclusions or to give plain and ordinary meaning to terms. It certainly seems that the Presta court could have reached its decision simply by finding that the parties intended that the mandatory buy/sell provisions applied upon the death of either Mr. Tepper or Mr. Presta, without resorting to any analysis or discussion of RUPA. The Presta court made findings as a matter of law, although it seemed to reach the same result with its findings of fact.

Second, although the Presta court interprets the definition of "Person" in RUPA, the court does not appear to follow normal rules of statutory construction. For instance, the Presta court ignores the legislative history of the definition of "Person" in RUPA, which was not generally effective for all California general partnerships until on and after January 1, 1999.8 Before RUPA, the California Uniform Partnership Act did not specifically mention trusts. Therefore, at the time that Mr. Presta and Mr. Tepper signed the partnership agreements in issue, California partnership law did not expressly identify a trust as a person or partner. Since the Presta court did not review the legislative history, the court does not analyze whether RUPA merely codified existing partnership law in existence when the parties signed the partnership agreements or changed it.

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More profoundly, the Presta court does not consider the genesis of RUPA as a uniform act. Accordingly, the decision lacks any reference to official comments to RUPA or to cases in other jurisdictions that had adopted the same uniform laws. It seems to be well-settled law throughout the United States that "trusts" are not legal entities.9 Practicing lawyers, judges, legislators, and law professors of the ULC from around the country should have known that law well.

Third, the Presta court also does not check its interpretation of the definition of "Person" in RUPA for internal consistency. If "trust" means only a trust that is a separate legal or commercial entity, as interpreted in Presta, then to what different trust does "business trust" refer? As discussed further below, Delaware law lists species of "trusts" and includes statutory trusts and voting trusts, as well as common law and business trusts, which suggests that "business trust" was added to the definition of "Person" for clarification and not as a separate category. The Presta court would have you believe there are business trusts, trusts that are legal or commercial entities but are not "business trusts," and all other trusts, which are mere relationships.

The definition of "Person" set forth above is a list or series of objects separated by commas. The Presta court effectively holds that each object in that list, including "trust," must be a legal or commercial entity, since the list ends with "or other legal or commercial entity." However, "individual" is the first object in the list, so if the Presta court’s interpretation of "trust" is correct, "individual" should mean an individual who is a legal or commercial entity, which is nonsensical. The rules of sentence construction do not allow what the Presta court asserts. A better interpretation is that "other legal or commercial entity" does not refer back at all to the prior objects in the list, and what was intended was a catchall for entities not expressly included. That conclusion seems supported by the official comments to section 101 of the Uniform Partnership Act (1997), which state, "[t]he definition includes other legal or commercial entities such as limited liability companies."

Fourth, the Presta court’s reliance upon section 16601(8) of RUPA to back up the court’s interpretation of "Person" seems to miss the point. That provision refers to a partner with a trustee acting as a partner in defining a dissociation event of a partnership. A reasonable interpretation of that provision is not that the trustee can be a partner when the trust cannot, but that the trustee is "acting" as a partner, while the trust itself is the actual partner. The balance of the provision supports that conclusion by referring to a "distribution of the trust’s entire transferable interest in the partnership"10 and making the appointment of a successor trustee a non-event.

Fifth, the Presta decision omits key facts. The decision does not state whether Mr. Tepper, the decedent, was the settlor, held a power to revoke, or was a beneficiary of either of the two trusts. One of the trusts had a name, the "C.A.L. Trust of 1990," that suggested it might have been irrevocable, and perhaps, not even established by Mr. Tepper, since the other trust was named "The Tepper Family Trust." The absence of those facts further confirms that the court held the "two men" to be the partners by virtue of being trustees and not in any other capacity. However, the opinion confuses this point by stating that "although both men are identified in the paragraphs as acting in the capacity of a trustee, it is nonetheless they who are identified as the contracting parties."11

Sixth, the decision does not state whether Mrs. Tepper held any community property interest in the partnership interests or signed consents to sell her community property interest. Perhaps she had no such interest, or consented to the buy/sell provisions, but the decision does not dispose of the community property implications.

The logical extension of Presta shows shortcomings. Could Mr. Tepper simply have appointed his wife or a bank as the trustee on his death bed to escape the buy/sell provision? Would the reference to "partner" in the buy/sell provision have continued to apply to Mr. Tepper, although a successor trustee took over his responsibilities as trustee? The buy/sell provisions did not refer to Mr. Tepper or Mr. Presta by name. What about the appointment of a co-trustee? Would the death of only one trustee trigger the buy/sell provision, perhaps with respect to only half of the partnership interests?

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III. Along Comes Han v. Hallberg

In May 2019, the Second Appellate District of the California Court of Appeal decided Han v. Hallberg.12 The Hallberg court held that (i) an ordinary express trust (e.g., a trust formed for estate planning purposes) could be a partner of a general partnership governed by the Revised Uniform Partnership Act of 1994 (RUPA), and (ii) as a trust, the partner did not "die," so as to trigger a buy-out provision in the partnership agreement, upon the death of its trustee.

In Hallberg, four dentists formed a partnership to buy a dental building in 1975. In 1994, they amended the partnership agreement to allow one of the partners, Dr. Hallberg, to assign his partnership interest to a trust (the "Hallberg Trust") and Dr. Hallberg, as trustee, to be substituted as a partner. The Hallberg court refers to the trust as "his living trust," so presumably an ordinary express trust governed by the California Probate Code, although the decision says little about the terms of the Hallberg Trust. In 2009, Dr. Hallberg’s son became the sole trustee of the Hallberg Trust.

In 2010, Dr. Hallberg died. Later in 2010, other partners exercised an option to purchase the partnership interest held by the Hallberg Trust. Dr. Hallberg’s son refused to sell, and the other partners filed suit in 2011 to compel compliance with the buyout terms of the partnership agreement, among other items. Among other proceedings, the trial court found the "partner" to be Dr. Hallberg and the efforts of Dr. Hallberg’s son, as trustee, to distinguish Presta to be "valiant, but unavailing." The matter was appealed.

The Hallberg court could not ignore the 1994 amendment that substituted the Hallberg trust as a partner in the partnership. It stated, "we will not pretend the substitution of general partners in 1994 did not happen."13 Consistent with that approach, the Hallberg court then stated that RUPA "plainly contemplates" that an express trust can be a partner and "we do not find Presta’s contrary assessment persuasive."14

The Hallberg court granted that case precedents in California have long held that a trust is not a person, but rather a fiduciary relationship. However, the Hallberg court found that RUPA "expressly provides that a trust may associate in a partnership."15 It found the "plain definitional language" in the definition of "Person" under RUPA to be "controlling."16 It also found the interpretation of section 16601(8) to support the conclusion that there is no termination of partnership status of a trust when the trustee dies. Both statutory interpretations of RUPA are 180-degree changes from the interpretations of the same language by the Presta court.

The Hallberg court then looked to the legislative history of RUPA, which the Presta court had ignored. The Hallberg court found that the California Legislature had followed the uniform act. Accordingly, the Hallberg court concluded that there was no controversy over the inclusion of an ordinary express trust among persons that may form a partnership.17

Next, the Hallberg court addressed the Presta decision.18 The Hallberg court did not agree with the analysis of Presta (as laid out in the discussion of that case, above) that "any other legal or commercial entity" meant that a "trust" had to be a legal or commercial entity. The Hallberg court could not reconcile that interpretation with the inclusion of "estates" in the same statutory sentence. The Hallberg court also did not believe that the language or legislative history of RUPA required limiting a "trust" to trust companies, real estate investment trusts, or the like.

In summary, the Hallberg court found that the Hallberg trust did not "die," so as to trigger the buy/sell provisions of the partnership agreement. Accordingly, the Hallberg court reversed the trial court. The other partners then appealed to the California Supreme Court.

IV. DISPOSITION BY SUPREME COURT

On August 21, 2019, the California Supreme Court granted review in Han v. Hallberg. The court singled out to be briefed: (i) Can a trust be a partner in a partnership; and (ii) does the death of a partner who has transferred his partnership interest into a trust trigger a buy-out-on-death term in the partnership agreement?

As a preliminary matter, under Rule 8.1105(e) of the California Rules of Court, amended effective July 1, 2016, the grant of review in Han v. Hallberg does NOT automatically depublish the decision of the court of appeal. However, Han v. Hallberg has no binding or precedential effect, and may be cited for potentially persuasive value only. Accordingly, with the grant of review of Hallberg, the California decision outstanding on this issue reverts back to Presta. Nevertheless, Han v. Hallberg should not be ignored.

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It is not clear to this author why the California Supreme Court granted review. The Hallberg court did a good job of positioning Presta to die a "distinguished" death. Speculation serves no purpose, but the grant of review may indicate a short life for Hallberg. At least once before, a California court of appeal decision that attempted to distinguish Presta was depublished.19

As discussed above, though, Hallberg appears well-reasoned; it simply does not find that California law’s treatment of trusts as not being legal persons overrides the statutory language and framework of RUPA. However, the California Supreme Court may be concerned that some provisions of California law treat express trusts as "persons" while others do not. The court may be concerned of other collateral ramifications of Hallberg, as parties to litigation or otherwise.

It is not clear whether the court’s concern is that a trust can act only through its trustees. That seems not to be a compelling reason to distinguish "trusts" from other "persons," since limited partnerships can act only through general partners, corporations can act only through directors, officers, employees, etc., and many LLCs act through managers who may have no ownership interests in the LLCs.

It is not known whether the court knows that its decision could ripple through limited liability company law and laws of states that have adopted uniform acts with the same definitions of "Person." It is unknown whether the court will find persuasive that Delaware resolved this question legislatively by inserting, for general partnerships, limited partnerships, and LLCs, a parenthetical after "trust" that reads: "(including a common law trust, business trust, statutory trust, voting trust, or any other form of trust)."20 Delaware trust law is in title 12, chapter 35 of the Delaware Code, entitled "Fiduciary Relations." Accordingly, Delaware seems to have no problem with a fiduciary relationship being a "person." That treatment also accords with the general proposition in Delaware and California law of the "freedom of contract" embodied in partnership and limited liability company law.

It is also unknown to what extent the California Supreme Court will or should rely upon its decision in Steinhart.21 Steinhart was a property tax case involving a trust. The Steinhart court decided that the settlor and life beneficiary of a revocable ordinary express trust transferred to the remainder beneficiaries of the trust the equivalent value of a fee interest in a California residence when she died. The result was a reassessment at full value of the California real property held by the trust. To reach its decision, the Steinhart court found that under general principles of trust law, (i) the trust beneficiaries are regarded as the real owners of the trust corpus, and the trustee is merely the depository of the legal title who holds no more than the shadow of that corpus following the equitable estate, and (ii) property held by a revocable trust is that of the settlor.22

Steinhart’s view of a California ordinary express trust controls over Presta’s view of that law. Presta does not state whether the trusts were revocable or identify the beneficiaries of the trusts. Hallberg simply did not believe the California trust law treatment mattered.

V. CONCLUSION

As determined by Hallberg, it seems that trusts should be considered as persons who can own general partnership interests, limited partnerships interests, and LLC membership interests in entities governed by California law. As discussed above, the statutory definition of "person," as confirmed by a parenthetical under Delaware law, does not support that "trust" needs to be narrowed by California trust law. Why should the death of a person holding mere legal title to property as a fiduciary have bearing on who gets to maintain ownership of interests in legal entities? Trustees should have the authority to act as partners or members in voting, inspecting records, signing agreements and contracts, and all other matters set forth in the trust document and partnership or operating agreement, but not be partners, since trusts can act only through their trustees.

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A more manageable view is that the terms of a partnership agreement and operating agreement generally should control the trigger events that invoke buy/sell provisions. Unless those terms expressly include the death of a trustee as a trigger event, the death of the trustee acting in that capacity should be irrelevant in determining whether those provisions should apply. A trust should be able to terminate, but not die, by contract of the parties. Needless to say, the buy/sell provisions should be drafted in a clear and comprehensive fashion, which can expressly refer to the death of specific individuals, regardless of capacity, and create rights of first negotiation, first offer, and first refusal, options, and mandatory buy backs upon specified voluntary and involuntary transfers; as well as identify transfers that are permitted transfers. The buy/sell provisions should include consents of spouses or others that may have ownership interests in the partnership or LLC membership interests. Default provisions in RUPA, ULPA, and RULLCA should apply only in the absence of provisions in the partnership or operating agreements, unless those acts expressly prohibit modification by agreement.

We will have to wait and see what the California Supreme Court has in mind.

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Notes:

1. Cal. Corp. Code §§ 16100 et seq.

2. §§ 15900 et seq.

3. §§ 17701.01 et seq.

4. See the overview page of the ULC website found at http://uniformlaws.org/aboutulc/overview.

5. Han v. Hallberg, 35 Cal. App. 5th 621 (2d Dist. 2019), review granted, __ Cal. 4th __, 250 Cal. Rptr. 3d 720 (Aug. 21, 2019) (answer brief due Feb. 2020).

6. Presta v. Tepper 179 Cal. App. 4th 909 (Cal. App. 4th Dist. 2009).

7. The provision includes, as a dissociation event, when "a partner that is a trust or is acting as a partner by virtue of being a trustee of a trust, distribution of the trust’s entire transferable interest in the partnership, but not merely by reason of the substitution of a successor trustee." Cal. Corp. Code § 16601(8).

8. § 16111(b).

9. See generally, Am. Jur. 2d Trusts § 2 (2016); Hess, Bogert & Bogert, The Law of Trusts and Trustees § 1 (2007).

10. CAL. CORP. CODE § 16601(8) (emphasis added).

11. Presta, 179 Cal.App. 4th at 918 (emphasis in original).

12. Han v. Hallberg, supra note 5.

13. Hallberg, 35 Cal. App. 5th at 631.

14. Id.

15. Hallberg, 35 Cal. App. 5th at 632.

16. Id.

17. Hallberg, 35 Cal. App. 5th at 633-34.

18. Hallberg, 35 Cal. App. 5 at 634-35.

19. Dunbar v. Willis, No. D054146, 2010 WL 336406 (Cal. App. 4th Dist., Feb. 5, 2010) (depublished).

20. Del. Code Ann. tit. 6, §§ 15-101(18), 17-101(16), 18-101(14).

21. Steinhart v. Cty. of L.A., 47 Cal. 4th 1298, 1319 (2010).

22. Steinhart, 47 Cal. 4th at 1320.