Filed 9/23/19 Chocholak v. Chocholak CA1/1

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FIRST APPELLATE DISTRICT

DIVISION ONE

JOHN J. CHOCHOLAK, as Trustee, etc.,

Plaintiff and Respondent,

v.

PETER J. CHOCHOLAK,

Defendant and Appellant.

A155173, A156173

(Mendocino County

Super. Ct. No. SCUK CVPO 16-68007)

Defendant Peter Chocholak appeals from a judgment and order awarding plaintiff John Chocholak damages and attorney fees after the trial court found that Peter violated his duties as a trustee of two family trusts. On appeal, Peter contends that the court wrongly (1) calculated damages, (2) denied him discovery relevant to his theory of damages, (3) doubled the damages award under Probate Code section 859, and (4) awarded John attorney fees. We affirm.

I.
FACTUAL AND PROCEDURAL
BACKGROUND

J. and Gizell Chocholak, husband and wife, created a revocable trust in 1994. After J. died in 2001, the trust split into two trusts, a marital trust and a bypass trust. In 2002, Gizell appointed Peter, her grandson, to be a co-trustee of the trusts, and he retained this position until September 2012. Although Gizell was a co-trustee, she was, in Peter’s words, “of such advanced age she had little understanding or interest in the administration of the Trusts and . . . she relied almost exclusively on [him]” for investment decisions. In September 2012, Peter was replaced as trustee by John, who is Peter’s father and J. and Gizell’s son. John soon became concerned about possible irregularities in Peter’s management of the trusts. John hired a forensic accountant, who reported that Peter had commingled money, made risky trading investments, distributed trust funds to himself, failed to keep proper records, and oversaw a loss of over $1 million in the trusts’ valuation.

John brought this action as trustee against Peter alleging various causes of action, including breach of trust, breach of fiduciary duty, conversion of trust property, unjust enrichment, and establishment of a constructive trust. After a February 2018 bench trial the trial court issued a decision finding that Peter breached his fiduciary duty as trustee and that the trusts were entitled to damages, but it declined to impose a constructive trust on certain assets of Peter’s.

On appeal, Peter does not contest his liability, and we therefore do not discuss his wrongdoing in detail. Briefly, however, the trial court found that “Peter failed to maintain proper records, he commingled funds between the Trusts and his own account, he took funds from the accounts for his own benefit, and he failed to properly manage the assets in the Trusts. Furthermore, [he was] unwilling[] to address the financial concerns early on.” The court found Peter’s actions constituted “clear evidence of bad faith.”

The trial court awarded damages for investment losses in the amount of $834,450 ($445,395 for losses in the bypass trust and $389,055 for losses in the marital trust, hereinafter “investment losses”) and $289,100.61 for assets that Peter distributed to himself or could not be accounted for (hereinafter “unaccounted losses”). Combined, the losses came to about $1,123,550.60, which the court doubled under section 859. The court therefore entered a total damages award of $2,247,101.20. Judgment was entered on June 19, 2018, and Peter appealed from it in Case No. A155173.

The trial court subsequently entered a postjudgment order awarding John attorney fees in the amount of $264,886 and costs in the amount of $22,087.89. Peter appealed from this order in Case No. A156173, and we consolidated the two appeals.

II.
DISCUSSION

A. The Standards of Review.

As a general matter, we presume the correctness of the trial court’s orders and indulge all intendments and presumptions to support them on matters as to which the record is silent. (Denham v. Superior Court (1970) 2 Cal.3d 557, 564.) The appellant has the burden to affirmatively show error. (Id. at p. 566.) “An appellant’s challenge to damages, depending upon its specific nature, may be subject to a substantial evidence, abuse of discretion, or de novo standard of review.” (JMR Construction Corp. v. Environmental Assessment & Remediation Management, Inc. (2015) 243 Cal.App.4th 571, 583.) When there is conflicting evidence in the record, a reviewing court will affirm the trial court’s findings if there is substantial evidence supporting them. (Estate of Teel (1944) 25 Cal.2d 520, 526.) But the question “whether a certain measure of damages is permissible given the legal right the defendant has breached . . . is a matter of law, subject to de novo review.” (New West Charter Middle School v. Los Angeles Unified School Dist. (2010) 187 Cal.App.4th 831, 843.) And a trial court’s choice of a measure of damages from among other legally permissible measures is reviewed for abuse of discretion. (Ibid.) A trial court abuses its discretion when it applies the wrong legal standards applicable to the issue at hand. (City of Sacramento v. Drew (1989) 207 Cal.App.3d 1287, 1297–1298.)

B. The Trial Court Did Not Err in Calculating Damages.

Peter argues that the trial court improperly (1) failed to offset the investment losses with increases in the portfolio’s value while and after he was trustee, as well as by the amount the trusts would have lost anyway if he had not breached his duties, and (2) included $91,000 as part of the unaccounted losses.

1. The trial court was not required to offset the investment losses. In accepting $834,450 as the investment losses, the trial court relied on the testimony of Jay Crom, John’s financial expert, who the court found provided “[t]he only financial expert opinion that was credible.” Crom testified that Peter wrongly participated in “totally inappropriate” high-volume securities trading with “highly leveraged investment[s].” Recounting Crom’s testimony, the court found that Peter engaged in “high volume trading which included margin trading, and trading uncovered puts and call[s, i.e., options]. [Crom] testified that as to the By-Pass Trust there were cumulative losses as of December 31, 2012, of $445,395 and the Marital Trust had $389,055 in capital loss carryover as of December 31, 2011.” The court elaborated that “[m]ost or all of the combined realized losses of over [$]834,000 arose from . . . Peter’s trading[, which] took the adjusted portfolio value from $1,578,087 in 2005 to $33,075 in 2008. These losses are supported by the evidence presented. As stated above, Peter failed to follow the basi[c] princip[les] as a Trustee in managing trust funds and making investments. Again, Peter admitted this fact at trial.”

Crom acknowledged that calculating the precise amount of damages was difficult. This difficulty arose in part because there had been “extensive commingling” of assets, “numerous transfers between . . . Trusts[’] accounts and other non-Trust accounts,” a “complete lack of recordkeeping,” and a failure “to turn[]over complete and accurate financial records and a complete accounting.” Crom testified that the investment losses of over $834,000 accounted for both investment gains and losses realized during Peter’s trusteeship. The “actual losses, without the offset or credits for the gains, would be significantly higher” than the $834,450 in losses counted. Crom’s report admitted that “[t]here is . . . an element of subjectivity in measuring losses incurred due to [Peter’s] inappropriate investment management and [Crom did not] attempt[] to do so.” Still, Crom believed “[t]he $834,000 in capital loss . . . may serve as a very crude indicator of losses arising from inappropriate fiduciary investment activity.”

Section 16440, subdivision (a) sets forth three different measures of damages that may apply when a trustee commits a breach of trust: “(1) Any loss or depreciation in value of the trust estate resulting from the breach of trust, with interest. [¶] (2) Any profit made by the trustee through the breach of trust, with interest. [¶] (3) Any profit that would have accrued to the trust estate if the loss of profit is the result of the breach of trust.” Here, the trial court chose the first measure.

In challenging the award for the investment losses, Peter first contends that the trial court wrongly failed to offset these losses with increases in the value of the trusts’ investment portfolio that occurred during his trusteeship. He complains that the investment losses were based on the “accumulated Capital tax losses[, which] do not reflect the value of the portfolio, but instead the realized gains and losses from sales transactions.” According to him, the overall value of the trusts’ investment portfolio increased from a low of $33,075 in 2008 to “at least $599,424 as of September 2012.” (Original italics.) He points out that in some circumstances, courts can compute damages for trustee breaches by netting losses on certain assets with gains on others, and argues that such netting was required here. We disagree.

To begin with, by accepting Crom’s calculation of investment losses, the trial court did engage in some netting because, as we have explained, the realized investment losses were offset by realized investment gains to calculate a cumulative loss. What the court did not do was to offset this cumulative loss with increases in the investment portfolio’s general valuation, but we discern no error. Peter has never offered an alternative damages calculation with any specificity. Below, he complained about John’s proposed calculation, but he did not propose an alternate one tethered to evidence about the portfolio’s valuation. On appeal, other than pointing to the fluctuation in the portfolio’s valuation, Peter does not explain why the occasional increases in valuation should be used to offset the investment losses, and he does nothing to calculate what the total damages should be if they were so used.

Furthermore, even if we agreed that the portfolio’s valuation should be a factor in the damages calculation, it is unclear how this would benefit Peter. True enough, the portfolio’s valuation may have increased from a low of approximately $33,000 in 2008 to approximately $599,000 when Peter was replaced as trustee in 2012, but this ignores the staggering decreases in the portfolio from 2002 to 2008. In 2005, the portfolio’s value was $1,578,087. Thus, the portfolio suffered a near-$1 million decrease in value during the time Peter was trustee from 2002 to 2012. In any event, it was not the trial court’s role, nor is it ours, to search for evidence that might support a theory of damages advantageous to Peter and then to calculate a number under it.

For similar reasons, we reject Peter’s claim that he was entitled to an offset of the investment losses by the amount of losses the trusts would have sustained during his trusteeship even if he had not breached his duties. In theory, he has a point when he argues that the value of the trusts would have fallen anyway during his trusteeship because of the general decline in the economy and markets during that period and that he should not be responsible for those losses. Generally, “the liability of a trustee who is sued and found to have committed a breach of trust is the amount required to restore the values of the trust estate . . . to what [it] would have been if the affected portion of the trust estate had been properly administered.” (Rest.3d Trusts, § 100, com. b, p. 64.) When these losses are, as they were here, incurred in an investment portfolio, the recovery “ordinarily would be the difference between (1) the value of those investments and their income and other product at the time of surcharge and (2) the amount of funds expended in making the improper investments, increased (or decreased) by a projected amount of total return (or negative total return) that would have accrued to the trust . . . if the funds had been properly invested.” (Rest.3d Trusts, § 100, com. b(1), p. 65.)

But as viable as this approach is as a general principle, Peter cannot avail himself of it because, again, he presented no evidence to support it. No evidence was introduced to show the amount the trusts’ investment portfolio would have lost during Peter’s trusteeship if he had discharged his duties. When, as here, it has been shown that a “trustee has committed a breach of trust and that a related loss occurred, the burden shifts to the trustee to prove that the loss would have occurred in the absence of the breach.” (Rest.3d Trusts, § 100, com. e, p. 69.) Peter wholly failed to satisfy this burden, and the trial court properly declined to offset the investment damages by some speculative amount to reflect what the portfolio might have lost even if it had been properly diversified and managed.

Peter lastly insists that the trial court improperly failed to offset the investment losses by increases in the investment portfolio’s valuation after he was replaced in 2012 as the trustee. Even if the court could have exercised its discretion to offset the amount of the investment losses sustained during his trusteeship by subsequent gains, we cannot say it was required to do so, and Peter has cited no authority to the contrary.

In light of this conclusion, we also reject Peter’s argument that the trial court abused its discretion by denying discovery of information about the investment gains the trust realized after John became the trustee. “[W]hen a [party] does not seek writ review of the trial court’s discovery rulings and instead appeals from the judgment, he or she must ‘show not only that the trial court erred, but also that the error was prejudicial’; i.e., the [party] must show that it is reasonably probable the ultimate outcome would have been more favorable to [him or her] had the trial court not erred in the discovery rulings.” (MacQuiddy v. Mercedes-Benz USA, LLC (2015) 233 Cal.App.4th 1036, 1045.) Peter can show no such prejudice, since the court was not required to consider gains in the trusts’ assets after he was replaced as trustee.

2. The trial court’s award of unaccounted losses was based on

substantial evidence.

The award for unaccounted losses was also based on Crom’s testimony. Crom reported that he was unable to account for $289,100.61 that was withdrawn from the trusts’ accounts while Peter was trustee. The trial court found that Crom “present[ed] enough evidence to support a finding that the Trust[s are] owed the net sum of $289,100.61 in unaccounted funds.”

Peter concedes he took approximately $184,000 from the trusts’ accounts for his own benefit and did not repay it. But he argues that Crom’s $289,100.61 figure is too high and should be reduced by $91,000, an amount he claims Crom “acknowledged . . . [was] incorrectly included.” Specifically, Peter contends that Crom conceded that the $91,000 was properly accounted for because $6,000 of it consisted of two checks (one for $2,000 and another for $4,000) that were proper payments to Gizell, and the remaining $85,000 consisted of transfers between, not withdrawals from, the trusts’ brokerage accounts.

Peter’s argument presents a close question, but we must ultimately reject it. As we have said, we review a trial court’s factual findings for substantial evidence. “ ‘In brief, the appellate court ordinarily looks only at the evidence supporting the successful party, and disregards the contrary showing.’ [Citation.] All conflicts, therefore, must be resolved in favor of the respondent.” (Nestle v. City of Santa Monica (1972) 6 Cal.3d 920, 925–926.) Moreover, we must resolve any doubts about the evidence against Peter because of his complete lack of recordkeeping. “Trustees are . . . under the duty to prove every item of their account by ‘satisfactory evidence’; the burden of proof is on them and not on the beneficiary; and any doubt arising from their failure to keep proper records, or from the nature of the proof they produce, must be resolved against them.” (Estate of McCabe (1950) 98 Cal.App.2d 503, 505.)

Crom’s testimony on cross-examination does provide some evidence to support Peter’s contention. As to the two checks, Crom acknowledged that a statement he was shown on cross-examination “seem[ed] like pretty good evidence” that the checks were payments to Gizell. And when shown a statement indicating that the $85,000 reflected a transfer between brokerage accounts, he was asked whether “those transfers . . . ought to be credited as a positive to this account.” He answered, “Yes, yeah.”

But the $289,100.61 amount for unaccounted losses was identified and explained in Crom’s report and testimony, and this constitutes substantial evidence for the award. The trial court was not required to credit the testimony Peter elicited from Crom on cross-examination over the calculation Crom explained in his report and on direct examination. Indeed, Crom’s responses on cross-examination about the $91,000 were somewhat equivocal. He testified that the references to Gizell as the payee on a statement he was shown were “unusual,” and he was unsure who had “key[ed] it in.” He was also unsure if the statements he was shown on cross-examination were the same as the statements he relied upon in preparing his report. He explained that he would want to “match up” the statements to be satisfied that the $91,000 was truly and properly accounted for. As for one transfer on the statement, Crom said he did not see “an offsetting account” and he could not “draw a conclusion.” In short, we cannot say that the evidence Peter elicited from Crom on cross-examination erased all doubts such that it required the court to reduce the amount of the unaccounted losses by $91,000.

C. The Trial Court Properly Doubled the Damages Award Under Section 859.

The trial court ruled that Peter’s wrongdoing justified the “imposition of double damages in accordance with [section] 859.” Peter accepts that the court was authorized to double the part of the damages award representing the unallocated losses, but he argues that the court was not authorized to double the part of the award representing the investment losses. According to him, the investment losses were based on his breach of his duty to invest prudently, and such a breach falls outside section 859 because it did “not constitute a wrongful taking, concealment, or disposition, within the scope of [section] 859, but rather a negligence[-]based liability.” We are not persuaded.

Section 859 states, “ ‘If a court finds that a person has in bad faith wrongfully taken, concealed, or disposed of property belonging to . . . a trust, . . . the person shall be liable for twice the value of the property recovered by an action under this part.’ ” These “double damages are not punitive damages, and the proof required for punitive damages is not required.” (Hill v. Superior Court (2016) 244 Cal.App.4th 1281, 1284, 1291.) Thus, bad faith under section 859 does not require a separate showing of oppression, fraud, or malice. (Id. at p. 1288.)

As we have mentioned, the trial court found “clear evidence of bad faith.” The court found that Peter acted in bad faith not only in taking trust funds for his own benefit, but also in otherwise breaching his duties as trustee. While we need not decide whether double damages are always available when trustees breach their fiduciary duty by making imprudent investments, we have little trouble concluding that such damages were available under the circumstances presented here. Gizell was elderly and vulnerable. Peter took advantage of her by using trust assets that were intended for her benefit to indulge in high-volume, high-risk investing. He commingled funds, failed to keep proper records, and ignored the mounting financial losses he was generating. Contrary to Peter’s argument, this conduct was far more egregious than simple “imprudent investing.” The court acted within its authority to find that Peter “in bad faith . . . disposed of property belonging to” the trusts within the meaning of section 859.

D. Peter Is Not Entitled to Reconsideration of the Attorney Fees Award.

Peter also appeals from the order awarding the trusts attorney fees, but he seeks a remand for the trial court to reconsider the fees award only if “this court remand[s] this matter back to the trial court for proper calculation of damages.” Because we do not do so, we reject his challenge to the fees award as well.

III.
DISPOSITION

The judgment and the order awarding attorney fees are affirmed. John is awarded his costs on appeal.

 

_________________________

Humes, P.J.

We concur:

_________________________

Banke, J.

_________________________

Sanchez, J.

Chocholak v. Chocholak, A155173, A156173