Filed 3/5/20 Gres v. Gres CA2/2

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.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

SECOND APPELLATE DISTRICT

DIVISION TWO
JOSEPH GRES,

Plaintiff and Appellant,

v.

BARRY GRES et al.,

Defendants and Respondents.

B295772

(Los Angeles County

Super. Ct. No. 17STPB05243)

APPEAL from an order of the Superior Court of Los Angeles County. Clifford L. Klein, Judge. Reversed.

Weinstock Manion and Blake A. Rummel; Greines, Martin, Stein & Richland, Cynthia E. Tobisman and Carolyn Oill for Plaintiff and Appellant.

Blank Rome, Gregory Bordo, Christopher Petersen, and Harrison Brown for Defendants and Respondents.

Four siblings are in a dispute over the handling of a multi-million dollar trust, of which all four siblings are beneficiaries. Initially, two of the siblings, appellant Joseph Gres (Jerry) and his sister Eva Gres Weinfield (Eva), jointly petitioned the probate court for an order removing their brothers Barry Gres (Barry) and Hillel Gres (Hillel) as trustees and for reimbursement to the trust of funds Barry and Hillel allegedly misappropriated from the trust.

Hillel and Barry came to an agreement with Eva to settle her claims against them. The settlement gives Eva money and property out of the trust in exchange for Eva’s release of her claims against Hillel and Barry for misappropriating funds from the trust. The settlement agreement also provides that the settling parties’ attorneys’ fees and costs be paid from the residual assets of the trust.

Jerry appeals from the probate court’s order approving the settlement, arguing that the settlement essentially steals from the trust in order to pay for Hillel and Barry’s alleged misdeeds. We agree that the settlement agreement is not in the best interests of the trust. The claims against Hillel and Barry for reimbursement to the trust, if proven, should result in assets being returned to the trust. The settlement agreement does the opposite — it depletes the trust, in favor of one beneficiary. Hillel and Barry cannot use trust assets to settle their potential liability to the trust for misappropriation of trust assets.

Further, the settlement agreement violates the trust itself, which delegates to the trustee alone the power to make distributions. Pursuant to the Probate Code, the trustee has limited authority to delegate that power. (Prob. Code, § 16012, subd. (a).) The trustee must administer the trust according to the trust instrument. (§ 16000.) Barry, Hillel and Eva cannot decide how trust assets will be distributed.

Finally, even if the trustee had authorized the settlement, it would violate his obligation of neutrality to the beneficiaries. The trustee is obliged to act impartially towards all beneficiaries of the trust. (§ 16003.) This settlement depletes the trust assets in favor of Eva.

For these reasons, we reverse the order approving the settlement.

BACKGROUND

The trust

Simon and Serena Gres established the Gres Family Trust (the trust) on March 27, 1987. The trust was revised in 2004 and in 2006 by Simon and Serena. Simon and Serena had four children: Barry, Eva, Jerry, and Hillel.

The trust gives specific gifts to Eva and Hillel. It leaves a one-half share of the residue to Barry and the other half of the residue to Jerry. The trust also contains an equalization clause requiring a redistribution of assets if the value of the residue should exceed the value of the specific gifts to Eva and Hillel.

The trust appointed Barry, Eva, Jerry and Hillel trustees of the trust upon the death of the surviving spouse. Simon died on February 4, 2009. Serena died on August 26, 2016. The trust is irrevocable.

Jerry and Eva’s petition

On June 14, 2017, Jerry and Eva filed a petition seeking removal of Barry and Hillel as co-trustees, for appointment of a successor trustee, for an accounting, for an order requiring that funds wrongly taken or used from the trust be returned to the trust, and for surcharge against Hillel and Barry in accordance with the losses caused to the trust by their alleged breaches. The petition was authorized under section 17200.

The petition alleged that prior to Serena’s death, Hillel, acting as attorney-in-fact for Serena, used Serena’s assets, which were held by the trust, for his personal benefit, and that he continued to do so following Serena’s death while acting as co-trustee of the trust. The petition alleges that Barry was complicit in Hillel’s misuse of funds. Hillel and Barry, in their response, explained that when Simon became ill, Serena requested that Hillel move with his family from Minnesota to Los Angeles to assist Serena in caring for Simon and the family’s business interests. In light of the hardship and costs to Hillel’s family, Hillel and Barry asserted that Serena told Hillel that she would pay for all of his family’s living and educational expenses. Hillel does not dispute that his accounting of his actions as Serena’s attorney-in-fact include payment of Hillel’s family living and educational expenses.

On November 30, 2017, the court issued an order temporarily suspending all of the children as co-trustees and appointing a temporary successor trustee of the trust.

The settlement

On July 5, 2018, Hillel and Barry reached an agreement to settle Eva’s claims against them (the settlement). On July 27, 2018, Hillel, Barry, and Eva agreed to amend certain parts of the settlement.

Under the settlement, Eva would promptly receive her interest in the Sixth Street Duplex and her 50 percent share of the Royal Bellingham business. In addition, Eva would receive a property known as the “Desert Property,” which was part of the trust but not specifically gifted to any one of the four siblings. Finally, Eva would receive $125,000 “from residual assets/funds” of the trust, and would receive her share of the residue if any becomes distributable to her under the equalization clause. Hillel and Barry waived any claim of right to remaining personal property left by Simon and Serena.

Under the settlement, the parties agreed that Eva’s counsel would be paid $157,825.94 “from the residual assets/funds of the [t]rust” and Hillel and Barry’s counsel would be paid $70,000 “specifically allocable to the defense of Eva’s claims and the negotiation of [the settlement]” from the trust residue. The settlement was conditioned on the court’s approval.

Court proceedings to approve the settlement

On July 30, 2018, Hillel, Barry and Eva jointly filed a petition for an order approving the settlement. They argued that the settlement should be approved as being in the best interests of the trust. The petition set forth four main reasons that approval was in the best interests of the trust. First, the matter was “extremely contentious” with “numerous attorneys working on behalf of the parties some or all of which will be entitled to the payment of attorneys’ fees from the [t]rust.”

Hillel, Barry and Eva further argued that three of the four named co-trustees supported the settlement as being in the best interests of the trust. They also argued that the settlement would not have an impact on Jerry’s continuing claims against Hillel and Barry. They argued that in fact, such recovery to Jerry would increase, as he would not be required to share any recovery with Eva.

Finally, Hillel, Barry and Eva argued at length that Eva is under intense stress due to the litigation, and that Jerry and his family are attempting to assert undue influence over her, causing her mental and physical distress. A significant factor in approving the settlement, therefore, would be to allow Eva to remove herself from the litigation. Eva understood that she may be receiving less than she would if she proceeded to litigation on the claims in the petition against Hillel and Barry, however, she wanted peace.

On August 29, 2019, Jerry filed an objection to the petition to approve the settlement. Jerry argued that Eva had agreed to accept money and assets of the trust to which she was clearly not entitled under the terms of the trust, in exchange for releasing Hillel and Barry from her claims that they looted the trust. Jerry argued that the settlement was to his financial detriment. Jerry further objected to any payment of attorneys’ fees at the time. He argued that there had not been a finding that the purported settlement benefited the trust. Rather, the fees appeared to have been incurred defending Hillel and Barry’s breaches of fiduciary duties and putting Eva’s interest above the interests of all other beneficiaries. Jerry objected that the distribution to Eva was preliminary, and that she was not entitled to any residue and had no right to those funds.

A preliminary hearing was held on August 31, 2018. The court determined that a further hearing was necessary and permitted 60 days for discovery. Jerry’s counsel objected again that Hillel, Barry and Eva were “settling with money that is not theirs.” Jerry’s counsel articulated that if Eva wanted to settle, “she can get [money] from her brothers who took the money from the trust to start with.”

On November 15, 2018, Jerry filed supplemental objections to the settlement, arguing that the agreement improperly raided the residue in favor of Eva, in direct contrast to the terms of the trust, which designate only Jerry and Barry as residual beneficiaries. The supplemental petition articulated objections to the payment of attorney fees from the residue as well, and argued that the settlement did not benefit the trust. Further, Jerry pointed out that because the desert property was not specifically designated in the trust, it was part of the residue. Thus the gift of the desert property to Eva would further reduce the residue. Jerry also argued that the temporary successor trustee had not approved the settlement.

Hillel, Barry and Eva responded by arguing that Jerry was not hurt by the settlement. They argued that if Jerry prevailed, “he will then be the recipient of all that money because Eva is not going to be in the case anymore.” They also argued that Jerry had failed to undertake any discovery. They pointed out that the properties Hillel and Barry would receive under the terms of the trust would be sufficient to satisfy any potential surcharge imposed upon them. As to attorneys’ fees, they argued that Hillel’s and Barry’s counsel had “essentially financed the bulk of this litigation” and that Jerry should not continue to be permitted to “starve out [Hillel] and Barry by preventing them from having access to [t]rust funds to defend themselves.”

At the hearing on the petition for approval of the settlement, the temporary trustee, Alex Borden indicated that he would not “stand in the way” of a settlement, in order to “get everything to the finish line.” He took the position that he did not “have a dog in the fight.” However, he did agree that what Jerry’s attorney was arguing was true — “the funds that are being requested to be disbursed do come from a residue.” As to that residue, there were only two certain beneficiaries, Jerry and Barry. Borden agreed that Jerry could possibly be losing rights to that residue. It was unclear whether Eva would ultimately be entitled to residue under the equalization clause, and whether her potential future share of the residue would be equivalent to what she was being paid under the settlement.

The trial court’s order approving the settlement

On December 11, 2018, the probate court issued a written order approving the settlement. The court noted that the trust is worth $11 million, and that if Hillel is proven to possess a property worth $2.5 million, and Barry is proven to possess a residence worth approximately $5.6 million, “there will be sufficient assets to pay Jerry Gres.” The court also noted that Barry had “agreed on the record to compensate Jerry out of his share of the residue should there be any shortfall due to this settlement.” As to the desert property, the court stated, “According to the petitioner [(Eva)] in court, Eva was receiving the desert property irrespective of the settlement, and that distribution was already in progress.” However, the court noted that the desert property “was not specifically mentioned in the trust.” As to the payment of attorneys’ fees, the court stated, “the temporary trustee appointed on this case has made no representations as to the timing of any payment of attorney’s fees” and that the objector (Jerry) “retains the right to contest any disputes about these fees with the court.”

Jerry’s motion to amend the order

On January 23, 2019, Jerry moved the court nunc pro tunc to correct or modify the December 11, 2018 order. Jerry pointed out that Barry had not, in fact, agreed to compensate Jerry, and the record reflected no such promise. Thus, Jerry asked that the court clarify that the settlement was approved if Barry confirmed in writing his promise to Jerry to compensate Jerry for any shortfall in the residue of the trust due to the settlement. Jerry argued that exigent circumstances existed for the court to hear the motion on an ex parte basis, prior to the deadline to appeal the trial court’s order.

At the hearing on Jerry’s motion, the probate court admitted that the order was not accurate, as “[Barry] did not agree to compensate Jerry.” The court stated that upon review:

“What I should have written, if I had the transcript in front of me, which I didn’t, is that he’s agreed on the record that the court has the power to reallocate the resources . . . to compensate Jerry should there be any shortfall, and that would come from Barry.”

However, the court denied Jerry’s motion on the ground that the present appeal was pending, which the probate court believed stayed its ability to change the ruling. On March 1, 2019, the probate court issued a minute order denying Jerry’s ex parte application for nunc pro tunc order on the ground that this appeal was pending.

DISCUSSION

I. Applicable trust law

A trust is an arrangement which exists whereby property is transferred with an intention that it be held and administered by the trustee or trustees for the benefit of named beneficiaries. (Presta v. Tepper (2009) 179 Cal.App.4th 909, 914.) Trustees have a duty to administer the trust according to the trust instrument. (§ 16000.) Among other obligations, trustees are obliged to administer the trust solely for the benefit of the beneficiaries; deal impartially with beneficiaries, avoid using the trust property for the trustee’s own profit, preserve trust property, and keep trust property separate from nontrust property. (§§ 16002, 16003, 16004, 16006, 16009.) When a trustee violates these obligations, and uses trust money for his own purposes, the trustee is liable to the trust for the trust’s losses. (§ 16440, subd. (a).) A proper remedy is disgorgement of the profits from the malfeasant trustee for the trustee’s use of the trust assets for his own benefit. (See, e.g., Uzyel v. Kadisha (2010) 188 Cal.App.4th 866, 885.) The misappropriated trust property may be traced and recovered to the trust. (§ 16420, subd. (a)(9).)

There is no authority suggesting that a reallocation of trust property, against the express provisions of the trust and to the detriment of certain beneficiaries, is an appropriate remedy for a trustee’s alleged breach of trust.

II. Standard of review

Jerry and Eva filed their petition for removal, disgorgement and surcharge against Hillel and Barry pursuant to section 17200. Under section 17206, the probate court “in its discretion may make any orders and take any other action necessary or proper to dispose of the matters presented by the petition.” However, a court cannot enforce a contract that is “‘tainted with illegality.’” (Little v. Auto Stiegler, Inc. (2003) 29 Cal.4th 1064, 1074). The term “illegality,” when used in this context, is “a broad term,” encompassing the violation of any statute or rule. (Kashani v. Tsann Kuen China Enterprise Co. (2004) 118 Cal.App.4th 531, 542.) A court abuses its discretion when it takes action that “transgresses the confines of the applicable principles of law.” (City of Sacramento v. Drew (1989) 207 Cal.App.3d 1287, 1297.)

III. The settlement agreement violates principles of trust law as well as the trust instrument

The settlement agreement between Hillel, Barry and Eva permits Hillel and Barry to give Eva property from the trust that was not designated to her in the trust. This is contrary to the trust instrument, which gives the trustee alone the power of distribution and specifies how the assets of the trust must be distributed.

Hillel and Barry are no longer co-trustees and thus have no power to make distributions from the trust.

Even if Hillel and Barry were trustees, they could not act in a way that is contrary to the trust instrument. (§ 16000.) The trust specifies that trustee’s acts are limited by “the [t]rustee’s fiduciary obligations, the [t]rustee’s duty to treat the beneficiaries fairly and equitably,” as well as the restrictions and limitations “expressly set forth” in the written trust instrument. Under the express terms of the trust, Eva and Hillel receive specific bequests, and Barry and Jerry receive the residue. The gifts to Eva out of the residue of the trust thus violate the trust’s express terms. Hillel and Barry cite no provision of the trust allowing them to change the specific gifts and distributions set forth in the trust.

Because the settlement is contrary to general principles of trust law and the trust instrument itself, the probate court abused its discretion in approving it.

Hillel, Barry and Eva argue that a settlement is advantageous because it avoids the potential for large attorney fees that might be incurred in litigation. They cite Estate of Lucas (1943) 23 Cal.2d 454 (Lucas) as support for their position that consideration of the amount of attorneys’ fees which may be incurred in litigating this claim should enter into the determination of whether a compromise of the claim is appropriate. (Id. at pp. 466-467.) However, Lucas is distinguishable. There, the settlement disposed of a mortgage against real property which was the “only asset of any value” in the Lucas estate. (Id. at p. 457.) Because the claim against the main asset of the estate could not “be conclusively determined without litigation,” the representative of the estate acted in the best interests of the estate in entering into a compromise of the claim. (Id. at p. 466.)

Here, in contrast, the claim at issue is not a claim against the estate. It is a claim against Hillel and Barry as individuals, alleging that they wrongfully misappropriated from the trust. Under these circumstances, the attorney fees incurred in litigation will not necessarily be paid out of the trust. “‘The underlying principle which guides the court in allowing costs and attorneys’ fees incidental to litigation out of a trust estate is that such litigation is a benefit and a service to the trust.’ [Citation.]” (Whittlesey v. Aiello (2002) 104 Cal.App.4th 1221, 1230 (Whittlesey).) Thus, the potential litigation between the beneficiaries of the trust in this case will only result in attorney fee payments out of the trust if such litigation ultimately benefits the trust. The litigation has not concluded, and whether such litigation ultimately benefits the trust remains to be determined. Thus, the trial court erred in approving a settlement that pays attorney fees out of the trust.

Hillel, Barry and Eva point to Estate of Wilson (1953) 116 Cal.App.2d 523 (Wilson), to illustrate the great deference a reviewing court will afford to a probate court’s order approving a settlement. Wilson involved claims against a decedent’s estate by her surviving spouse, who claimed, among other things, that certain assets of the estate were community property. (Id. at p. 528.) The compromise permitted the community property to be sold and the property equally divided between the estate and surviving spouse. The issues could not be settled without litigation, and the executor was convinced that the surviving spouse could establish that the real property was community property. (Id. at pp. 528-529.) Again, Wilson differs from the present matter due to the nature of the claim, which was against property of the estate, not against individuals who allegedly misappropriated from the estate.

Further, in Wilson, the executor took the position that the compromises at issue were in the best interest of the estate. (Wilson, supra, 116 Cal.App.2d at p. 530.) Here, the temporary trustee has made no such representation. Instead, he has simply indicated he will not stand in the way of a compromise between the beneficiaries. This is a far cry from the finding of a benefit to the estate that existed in Wilson.

Hillel, Barry and Eva point out that the probate court noted that “the policy underlying [Code of Civil Procedure] section 877.6 is to encourage settlements, equitably allocate costs, and insure the amounts in the settlement are ‘within the reasonable range’ of the settling parties’ proportional exposure.” Though the probate court appeared to take into consideration the individual parties’ potential exposure, it did not seem to consider the best interests of the trust, which it was required to do.

IV. The attorney fee awards are not appropriate because the settlement did not benefit the trust

In addition to improperly amending the trust distributions, the settlement agreement also purports to use trust assets to provide attorney fees to both Eva’s and Hillel and Barry’s attorneys. This is an improper use of trust assets under the circumstances because the settlement agreement did not benefit the trust estate.

“‘[W]here litigation is necessary for the preservation of the trust, it is both the right and duty of the trustee to employ counsel in the prosecution or defense thereof, and the trustee is entitled to reimbursement for his expenditures out of the trust fund.’ [Citation.]” (Whittlesey, supra, 104 Cal.App.4th at pp. 1226-1227.) However, “litigation seeking to remove or surcharge a trustee for mismanagement of trust assets would not warrant the trustee to hire counsel at the expense of the trust. Such litigation would be for the benefit of the trustee, not the trust.” (Id. at p. 1227.)

In this matter, Hillel and Barry are accused of mismanagement of trust assets. They have been removed as co-trustees. Their efforts to defend themselves of the accusations of wrongdoing are for their own benefit, not the benefit of the trust. They may not use trust assets to pay their attorneys for the work on their settlement with Eva.

Similarly, Eva’s acceptance of gifts from the trust that were not designated to her do not benefit the trust. The agreement depletes the trust in contravention of the terms of the trust instrument. Trust assets are not properly disbursed to Eva’s attorneys for their work in settling this litigation because the settlement is detrimental to the trust.

The probate court abused its discretion in approving the settlement agreement because it provided attorney fees for work that was not done for the benefit of the trust.

V. Reallocation from Barry to Jerry does not remedy the error

Hillel, Barry and Eva find it critical that the probate court can reallocate funds that would otherwise be distributed to Barry or Hillel. They point out that under section 11604, subdivision (c), the probate court “may refuse to order distribution, or may order distribution on any terms that the court deems just and equitable” under certain circumstances.

Jerry, on the other hand, argues that there is no evidence that Barry promised to compensate Jerry for his share of the residue if the settlement diminished Jerry’s share. Jerry points out that the court later recognized that Barry never made such a promise. However, the court stated its belief that it had the power to “reallocate” the resources, and compensate Jerry should there be any shortfall.

We find that a promise from Barry to compensate Jerry reveals a misunderstanding of the claims — and appropriate remedies — at issue in Jerry and Eva’s petition. In their petition against Hillel and Barry, Jerry and Eva asserted that the two brothers misappropriated funds from the trust. The remedy for this wrongdoing, if proven, would be for the brothers to return the misappropriated funds to the trust, to be distributed pursuant to the terms of the trust. (See, e.g., Estate of Kraus (2010) 184 Cal.App.4th 103, 110 (Kraus) [ordering wrongfully converted property belonging to estate to be provided to court appointed representative of the estate, to be “distributed pursuant to the testamentary provisions of the pour-over Will” of the testator].) In fact, in their petition, Jerry and Eva specifically asked for an order requiring that funds wrongly taken or used from the trust be returned to the trust.

Kraus is instructive. The decedent, Janice Helene Kraus, executed a will providing that the funds in her bank account would pour over into a trust. The beneficiary of that will was the trust, and the two residuary trust beneficiaries were the Regents of the University of California and the Make-A-Wish Foundation of Greater Los Angeles. Janice’s brother David executed a power of attorney while Janice was semi-conscious and undergoing hospice care two days before her death. (Kraus, supra, 184 Cal.App.4th at pp. 108-109.) Upon finding that the power of attorney drafted by David was void, and that David had wrongfully and in bad faith converted property belonging to the trust, the probate court ordered such funds to be paid to a court-appointed personal representative of the estate of Janice. (Id. at pp. 109-110.) The probate court “made no final determination as to the beneficiaries’ right to the funds.” (Id. at p. 110.) The Kraus court did not require the petitioners to prove a specific right to the funds, because “the trust beneficiaries sought an order requiring David to relinquish misappropriated property.” (Id. at p. 113.) Once relinquished, the misappropriated funds would be returned to the estate to be “distributed pursuant to the testamentary provisions of the pour-over Will.” (Id. at p. 110.)

Similarly, here, if Jerry prevails in his petition against his brothers, the misappropriated funds will not go directly to Jerry. Instead, they will be returned to the trust, to be distributed according to the intentions of the settlors.

DISPOSITION

The order approving the settlement is reversed. Appellant Jerry Gres is awarded his costs of appeal.

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS.

____________________________, J.

CHAVEZ

We concur:

__________________________, Acting P. J.

ASHMANN-GERST

__________________________, J.

HOFFSTADT