Litigation Alert

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LITIGATION ALERT

By Jeremiah J. Moffit, Esq.,* Catherine M. Swafford, Esq.,*

Matthew R. Owens, Esq.,* and Courtney A. Sorensen, Esq.*

AN ADMINISTRATOR IS NOT "INCAPABLE OF PROPERLY EXECUTING THE DUTIES OF THE OFFICE" UNDER PROBATE CODE SECTION 8502(b) UNLESS HE OR SHE SUFFERS FROM PHYSICAL OR MENTAL INCAPACITY, OR IS A MINOR

Estate of Sapp (2019) 36 Cal.App.5th 86

The Fourth District Court of Appeal held that the meaning of "incapable" in Probate Code section 8502(b) refers to physical or mental incapacity or minority.

The decedent died testate owning numerous parcels of real property. The court appointed decedent’s granddaughter as administrator. She petitioned for instructions concerning disposition of the estate, arguing that the decedent’s will was ambiguous regarding whether the real property should be sold or retained for disabled heirs. The trial court ordered her to sell the estate’s properties. In the 14 years following the order, the court approved the sale of four properties, but the administrator made no other progress in distributing the estate. Two beneficiaries filed petitions to remove the administrator based on her substantial delays in administration. They also argued she acted in bad faith because she tried to convince the beneficiaries to accept $10,000 in lieu of their beneficial interests. The trial court granted the removal petitions under Probate Code section 8502(b) on the ground the administrator was incapable of properly executing the duties of office. The administrator appealed.

The Court of Appeal affirmed the ruling on different grounds. The administrator was not "incapable" of executing the duties of office within the meaning of section 8502(b), which applies to instances of physical or mental incapacity, or minority. However, the administrator was "otherwise not qualified" to execute the duties of office under section 8502(b) due to her delays, her disregard of the court’s order, her failure to effectively market the estate’s real property, and her bad faith and lack of impartiality towards beneficiaries. Additionally, the beneficiaries did not need to prove intentional wrongdoing in their removal petitions. The court could and did properly remove the administrator on the ground of waste under section 8502(a).

STATES MAY NOT TAX TRUSTS BASED SOLELY ON IN-STATE RESIDENCY OF TRUST BENEFICIARIES

North Carolina Dept. of Revenue v. Kimberley Rice Kaestner 1992 Family Trust (2019) 588 U.S. ___ [139 S.Ct. 2213]

The United States Supreme Court held the due process clause of the Fourteenth Amendment of the United States Constitution prohibits states from taxing trusts based solely on the in-state residency of trust beneficiaries.

The settlor, a New York resident, formed a trust for the benefit of his children. The trust was governed by New York law. The trustee had absolute discretion over distributions to the trust beneficiaries. The trustee divided the trust into three subtrusts, including one for the settlor’s daughter. The daughter moved to North Carolina in 2005 and lived there until 2008. During the daughter’s time in North Carolina, the trustee, who was not a North Carolina resident, made no distributions to the daughter or her children. Nevertheless, the North Carolina Department of Revenue assessed tax on the income attributable to the daughter’s subtrust, resulting in a total tax of approximately $1.3 million for tax years 2005-2008. The trustee paid the tax and then sued in state court, arguing the tax as applied to the daughter’s subtrust violated the due process clause of the Fourteenth Amendment to the United States Constitution. The trial court agreed and held the law to be unconstitutional as applied to the daughter’s subtrust because the state lacked the required minimum contacts with the trustee to impose tax. The appellate court and the North Carolina Supreme Court both affirmed. The Department of Revenue sought review by the United States Supreme Court.

The United States Supreme Court affirmed. In the context of state taxation, the due process clause limits states to imposing only those taxes that bear a fiscal relation to protection, opportunities, and benefits given by the state. The presence of in-state beneficiaries alone does not empower a state to tax trust income that has not been distributed to the beneficiaries if the beneficiaries have no right to demand that income and are uncertain ever to receive it. By taxing the daughter’s subtrust under such circumstances, the North Carolina law violated the due process clause of the Fourteenth Amendment.

An analysis of the application of the Kaestner decision to California fiduciary income taxation also appears in this issue.

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SLUSA DOES NOT PRECLUDE FEDERAL JURISDICTION OVER STATE LAW CLAIMS BROUGHT BY AN IRREVOCABLE TRUST BENEFICIARY ALLEGING IMPRUDENT INVESTMENTS BY THAT TRUSTEE

Banks v. Northern Trust Corporation (2019) 929 F.3d 1046

The United States Court of Appeals for the Ninth Circuit held that the Securities Litigation Uniform Standards Act ("SLUSA") did not pre-empt a beneficiary’s state law claims regarding improper trustee actions where the beneficiary had no control over the actions of the trustee.

A beneficiary of an irrevocable California trust brought a class action lawsuit against an institutional trustee for violations of state law involving alleged breaches of fiduciary duty. The beneficiary alleged the institutional trustee (1) prioritized its interests over those of the beneficiaries by investing trust assets in its own affiliated investment portfolio rather than seeking superior outside investments; (2) charged improper and excessive fees without proper documentation; and (3) participated in elder abuse and unfair competition, premised on the same factual allegations. The institutional trustee brought a motion to dismiss, contending that SLUSA prohibited these state law claims from proceeding in federal court. SLUSA deprives a federal court of jurisdiction to hear a class action based on state law claims alleging the defendants made a misrepresentation or omission or employed any manipulative or deceptive device in connection with the purchase or sale of a covered security. The federal district court, reasoning that the imprudent investments were "in connection with" the purchase or sale of covered securities, dismissed the beneficiary’s complaint without leave to amend. The beneficiary appealed.

The Ninth Circuit reversed and remanded. The Ninth Circuit focused on whether the institutional trustee’s alleged activity was in connection with the purchase or sale of a covered security. The connection requirement is interpreted broadly—it is enough that the alleged fraud coincide with a securities transaction to meet the "in connection with" requirement. The Ninth Circuit agreed with the beneficiary that, as the beneficiary of an irrevocable trust, she had no power to control the institutional trustee’s action and no ability to decide to purchase or sell securities. The institutional trustee’s alleged conduct resulted only in the institutional trustee purchasing affiliated funds. SLUSA does not preclude federal jurisdiction in cases where the only party who decides to buy or sell a covered security as a result of the fraudulent conduct is the party who engaged in fraudulent conduct. SLUSA does not preclude claims brought by an irrevocable trust beneficiary, who has no control over a trustee, alleging imprudent investments by that trustee. SLUSA also does not preclude other claims, relating to improper fees or elder abuse, which have no connection with the purchase or sale of a covered security.

CREDITOR MAY FILE A PETITION TO ENFORCE A MONEY JUDGMENT AGAINST A NONDISCRETIONARY PRINCIPAL DISTRIBUTION BEFORE THE DISTRIBUTION IS DUE AND PAYABLE

Blech v. Blech (2019) 25 Cal.App.5th 989

The Second District Court of Appeal held that a creditor may file a petition under Probate Code section 15301(b) to enforce a money judgment against a nondiscretionary principal distribution before the distribution is due and payable.

A debtor was the beneficiary of a trust that contained a spendthrift provision. The trust required, without consideration of the debtor’s needs for support, quarterly distributions of income and annual distributions of principal according to a specific formula over the course of ten years. Four creditors obtained an order under Probate Code section 15306.5 that the trustee distribute 25% of the debtor’s future trust distributions to the creditors until their judgments were satisfied. After the decision of the California Supreme Court in Carmack v. Reynolds (2017) 2 Cal.5th 844, which clarified a creditor’s ability to reach amounts due and payable to a trust beneficiary while those funds are still in the hands of the trustee, the creditors sought an order directing the trustee to distribute the remaining 75% of an upcoming principal distribution to them to pay down their judgments. The creditors filed this petition before the principal distribution was due and payable. The court ordered the trustee to distribute 25% of the scheduled distribution to the creditors, and ordered the trustee to retain the final 75% pending a final ruling. Shortly after the remaining 75% of the distribution became due and payable, the court ordered the trustee to pay the distribution directly to the creditors. The debtor appealed.

The Court of Appeal affirmed. Contrary to the debtor’s assertion on appeal, a judgment creditor may file a petition under Probate Code section 15301(b) before a judgment debtor/trust beneficiary’s trust distribution is due and payable. The court could further direct the trustee to withhold the nondiscretionary principal distribution until after the court issued its final order on the petition requiring the payment to be made instead directly to the creditors.

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STATE’S RIGHT TO REIMBURSEMENT OF MEDICAL BENEFITS FROM A SPECIAL NEEDS TRUST AFTER THE BENEFICIARY’S DEATH IS NOT LIMITED BY THE BENEFICIARY’S AGE

Gonzalez v. City National Bank (2019) 36 Cal.App.5th 734

The Second District Court of Appeal held that probate statutes governing reimbursement of Medi-Cal expenses from a special needs trust do not incorporate a former Welfare and Institutions Code section that limited reimbursement where a beneficiary under age 55 received Medi-Cal services.

A child was the beneficiary of a special needs trust. During her lifetime, the child received Medi-Cal services costing approximately $4 million. The special needs trust was designed to terminate on the child’s death, and explicitly stated it was subject to Probate Code sections 3604 and 3605. The special needs trust also contained a "payback" provision requiring reimbursement of Medi-Cal services up to an amount equal to the total medical assistance paid on the child’s behalf. When the child died, approximately $1.6 million remained in the special needs trust. The state filed a creditor’s claim for nearly $4 million, seeking reimbursement for the Medi-Cal payments. The parents filed a petition seeking an order directing the trustee to distribute the remainder of the trust to the child’s heirs. The parents argued that former Welfare and Institutions Code section 14009.5, which limited the state’s right to reimbursement for Medi-Cal expenses to those expenses incurred when a beneficiary was under age 55, prohibited the state from receiving reimbursement from the special needs trust. The trial court denied the parents’ petition and ordered the trustee to pay the state’s creditor’s claim from the remaining special needs trust assets. The parents appealed.

The Court of Appeal affirmed. As a participant in the federal Medicaid program, the state has agreed to abide by certain federal requirements. Under the terms of the Social Security Act, so long as the state will recover for Medi-Cal services provided to a special needs trust beneficiary during her lifetime, the beneficiary remains eligible for such services, even if the amount in the special needs trust would otherwise disqualify the beneficiary from receiving such services. Although former Welfare and Institutions Code section 14009.5 generally prohibited the state from seeking reimbursement for Medi-Cal services from the estate of a decedent who was under age 55 when services were received, the federal and state statutes requiring reimbursement of benefits from a special needs trust preempt this former state statute. Federal and state statutes instead mandate special treatment for the remainder of a special needs trust, so that instead of being subject to general reimbursement rules for a Medi-Cal beneficiary’s estate, a blanket mandatory reimbursement rule applies to the assets remaining in special needs trusts up to the amount paid by Medi-Cal during the beneficiary’s lifetime. The "quid pro quo" for not considering assets in a special needs trust for Medi-Cal eligibility purposes is that any assets remaining in such a trust at the death of the beneficiary must be used to reimburse the state for its Medi-Cal expenses on behalf of the beneficiary. Additionally, both the Centers for Medicare & Medicaid Services, which administer the Medicare and Medicaid programs, public policy, and the special needs trust itself at issue mandated reimbursement of Medi-Cal expenses from the special needs trust.

TRIAL COURT’S FAILURE TO SET FORTH FACTORS RELIED UPON IN DETERMINING THAT AN LPS CONSERVATEE IS INCOMPETENT TO GIVE MEDICAL CONSENT IS NOT REVERSIBLE ERROR

Conservatorship of D.C. (2019) 39 Cal.App.5th 487

The Second District Court of Appeal held that an initial order appointing a conservator under the Lanterman-Petris-Short Act (LPS) is a separately appealable order, and that the trial court’s failure to set forth the factors relied upon in determining that a conservatee was incompetent to give medical consent was not a reversible error.

The public guardian petitioned to be appointed LPS conservator. The proposed conservatee denied that she suffered from any mental illness, needed medications, or was gravely disabled. The conservatee’s counsel indicated that the conservatee was willing to submit the petition to the court, and the trial court found she waived her right to a speedy trial. The trial court found the conservatee to be gravely disabled, appointed the public guardian conservator of her person and estate, and imposed several legal disabilities upon the conservatee, including the right to consent to medical treatment. Several months later, the conservatee filed a demand for a jury trial. At the conclusion of the jury trial, the jury found the conservatee to be gravely disabled. The trial court ordered that the conservatorship remain in effect, including the legal disabilities. The conservatee appealed.

The Court of Appeal affirmed. First, the conservatee’s failure to timely appeal the trial court’s initial order imposing the conservatorship barred appellate review of that order. An order granting letters of conservatorship is a separately appealable order, and the merits of that order are not reviewable on appeal from a subsequent order. However, to the extent the appeal to the later order challenges the same legal disabilities set forth in the initial order, the Court of Appeal considered the merits. A finding of grave disability alone is not sufficient to justify the imposition of legal disabilities, including the right to consent to medical treatment. A court may only divest a conservatee of the right to make medical decisions after a specific determination by the court that the conservatee cannot make these decisions. Here, the court made a finding of incompetence in its earlier order, supported by ample evidence. Although the trial court did not state in its order the specific factors it relied upon to determine that the conservatee was incompetent to give medical consent, this failure did not constitute reversible error.

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IN AN ACTION FOR REAPPOINTMENT OF AN LPS CONSERVATOR, THERE IS NO REQUIREMENT OF A FINDING THAT A CONSERVATEE IS UNWILLING OR UNABLE TO VOLUNTARILY ACCEPT TREATMENT

Conservatorship of K.P. (2019) 39 Cal.App.5th 254

The Second District Court of Appeal held that, on petition for reappointment of a conservator under the Lanterman-Petris-Short Act (LPS), a jury is not required to find, beyond a reasonable doubt, that the conservatee is "unable or unwilling voluntarily to accept meaningful treatment."

The public guardian petitioned for reappointment as LPS conservator of the person and estate of K.P., a conservatee. The jury instructions provided included versions of CACI No. 4000 and CACI No. 4002. CACI No. 4000 states that to prove that a person "is gravely disabled due to a mental disorder," the petitioner must prove three "essential factual elements" beyond a reasonable doubt. One of those elements is proof that the individual "is unwilling or unable voluntarily to accept meaningful treatment." CACI No. 4002 explains the term "gravely disabled," without mentioning whether the individual "is unable or unwilling voluntarily to accept meaningful treatment."

When it instructed the jury after a three-day trial, the court modified both CACI No. 4000 and CACI No. 4002.

When it gave its instruction on CACI No. 4000 identifying the elements of grave disability, the court instructed the jury that it could find that K.P. was gravely disabled if it determined beyond a reasonable doubt that the public guardian had established just two of the three elements identified in CACI No. 4000. That is, the court instructed the jury that it could determine that the conservatorship could be renewed if it determined that K.P. "has a mental disorder" and "is gravely disabled as a result of the mental disorder." The court’s instruction under CACI No. 4000 omitted the third CACI requirement that the jury determine that the conservatee "is unwilling or unable voluntarily to accept meaningful treatment."

When it gave its instruction on CACI No. 4002— explaining "grave disability"—the court instructed the jury that "[i]n determining whether K.P. is presently gravely disabled, you may consider whether he is unable or unwilling voluntarily to accept meaningful treatment."

Thus, the court’s instruction moved K.P.’s ability or willingness to accept treatment voluntarily from an element that had to be proved to establish the conservatorship to a factor that the jury could consider when determining if a grave disability existed.

The jury found that K.P. was gravely disabled. The trial court granted the petition for reappointment. The conservatee appealed.

The Court of Appeal affirmed. The conservatee contended on appeal that the trial court erred in omitting from the jury instructions the requirement (included in the wording of CACI No. 4000) that the jury find, beyond a reasonable doubt, that the conservatee "is unwilling or unable voluntarily to accept meaningful treatment." After a thorough discussion of the cases, the Court of Appeal held that the definition of "gravely disabled" in Welfare & Institutions Code section 5008, subdivision (h)(1) does not require proof of the proposed conservatee’s willingness or ability to accept treatment voluntarily.

The Court distinguished Welfare & Institutions Code section 5352. That statute provides that a professional person in charge of an agency providing comprehensive mental health evaluations may bring a petition to establish a conservatorship, if the professional determines that a person in his or her care is gravely disabled and unwilling to accept or incapable of accepting treatment voluntarily. The court determined that, while a proceeding commenced under section 5352 requires a determination of the proposed conservatee’s willingness or ability to accept treatment voluntarily, that requirement was inserted to provide treatment facilities an additional mechanism for initiating conservatorships. The insertion of that requirement into section 5352 did not add an additional element to be proved to establish or reestablish an LPS conservatorship when the petitioner was not a treatment facility.

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