Case Name:   William Price Hall, et al. v. Falk, Cornell & Associates, LLP, et al.

Case No.:       1-13-CV-241258

 

This is an action for legal malpractice and related claims associated with the administration of a trust.  The named plaintiffs in the operative Second Amended Complaint (“SAC”) are William Price Hall (“William”), in his capacity as duly nominated successor trustee (the “Successor Trustee”) of the Tattoo Living Trust and its sub-trusts, the Alvin P. Hall Trust and the Rosemary Hall Family Trust (collectively, the “Trusts”); and William, Robert Daniel Hall (“Robert”), and James Mark Hall (“James”) as beneficiaries of the Trusts (collectively, the “Beneficiary Plaintiffs”).  (SAC, ¶¶ 1-2.)  The Successor Trustee and the Beneficiary Plaintiffs are referred to herein, collectively, as “Plaintiffs.”  The defendants are Falk, Cornell & Associates, LLP (“FCA”), Serra Falk Goldman (“Goldman”) and Mary S. Falk (“Falk”) (collectively, “Defendants”).  (See SAC, ¶¶ 3-4.)

 

The SAC arises out of the appointment of Christine Backhouse and Backhouse Fidelity Services (“Backhouse”) as the trustee for the Trusts.  The original trustee was Alvin P. Hall (“Hall”), father of the Beneficiary Plaintiffs, who died in September 2009 without a surviving spouse.  (See SAC, ¶ 5.)  According to the SAC, in November of 2009, William and Robert, acting on behalf of all the Beneficiary Plaintiffs, asked Defendants to advise and counsel them on the selection and appointment of a new trustee.  (See SAC, ¶ 8.)  On or about November 16, 2009, Goldman unilaterally selected Backhouse to act as the trustee for the Trusts and advised William and Robert that Backhouse was a highly reputable trustee in the community and would serve them, the other beneficiaries, and the Trusts capably and honestly.  (See SAC, ¶¶ 9-10.)  In response to William and Robert’s inquiry, Backhouse stated in the presence of Goldman that she was “bonded” and that all assets of the Trusts would be protected.  (SAC, ¶ 10.)  Goldman advised William and Robert that once Backhouse became trustee, Goldman would commence representing Backhouse as an additional level of protection, and William and Robert understood and believed that Defendants would continue to protect the interests of the Beneficiary Plaintiffs.  (Id.)  Based on Goldman’s and Backhouse’s advice and assurances, William and Robert, on behalf of all the Beneficiary Plaintiffs, agreed to allow Backhouse to become trustee of the Trusts, and in or around November-December 2009, each of the Beneficiary Plaintiffs signed the documents presented to them by Defendants, including a contract entitled “Appointment of Successor Trustee by Beneficiaries.”  (SAC, ¶ 11, Ex. B.)

The SAC alleges that on or about February 15, 2012, the Beneficiary Plaintiffs received a notice from Backhouse which advised them that the Trusts had suffered losses that may have been the result of the Trusts’ assets being looted, stolen, embezzled or otherwise lost.  (See SAC, ¶ 20.)  The Beneficiary Plaintiffs later learned that Backhouse had no bond, and had never had any bond in place to cover losses suffered by the Trusts, and Backhouse did not have adequate insurance to cover the losses incurred as a result of her negligence.  (Id.)

 

The SAC, filed February 25, 2014, asserts three causes of action against all of the Defendants for: (1) legal malpractice; (2) breach of fiduciary duty; and (3) rescission of contract.  These same causes of action were asserted by the First Amended Complaint (“FAC”), Defendants’ demurrer to which the Court (Hon. Peter H. Kirwan) sustained with leave to amend on February 21, 2014.

 

Currently before the Court is Defendants’ demurrer to the SAC.  Defendants demur on the grounds that the SAC and each cause of action asserted therein fails to state facts sufficient to constitute a cause of action (Code Civ. Proc., § 430.10, subd. (e)) and the third cause of action is uncertain (Code Civ. Proc., § 430.10, subd. (f)).

 

Request for Judicial Notice

 

In support of their demurrer, Defendants request judicial notice of the following facts and documents: (1) the fact that William has been continuously represented in this matter by counsel other than Defendants; (2) the “Order Settling Accounts and Passing on the Trustee’s Acts and Instructions to Close the Trust Administration” (the “Order Settling Accounts”) filed on December 14, 2014 in In re Matter of Tattoo Living Trust (Super. Ct. Santa Clara County, No. 1-11-PR-169685) (the “Probate Action”); (3)-(6) the petition requesting entry of the Order Settling Accounts and its exhibits, the Tattoo Living Trust and amendment thereto, the second amendment and restatement of the Alvin P. Hall Living Trust and the third amendment of the Alvin P. Hall Living Trust, and the “Declination to Serve as Trustee”; and (7)-(9) William, Robert, and Mark’s responses to requests for admission.

 

Defendants’ request is DENIED as to item 1 because Defendants failed to provide the Court with a copy of the record reflecting the fact that Defendants ask the Court to take notice of or specify the part of the court file sought to be noticed as required by the California Rules of Court.  (See Cal. Rules of Court, rules 3.1113(l) and 3.1306(c).)  The request is GRANTED as to items 2-6, given that these documents are court records relevant to the procedural history of this action.  (Evid. Code, § 452, subd. (d).)  To the extent that the request is granted, however, the Court takes judicial notice of the existence of these documents only, and not of the truth of statements contained therein.  (See Sosinsky v. Grant (1992) 6 Cal.App.4th 1548, 1564 [a court may take judicial notice of the existence of each document in a court file, but can only take judicial notice of the truth of facts asserted in documents such as orders, findings of fact and conclusions of law, and judgments].)  The request is DENIED as to items 7-9.  “The court will take judicial notice of records such as admissions, answers to interrogatories, affidavits, and the like, when considering a demurrer, only where they contain statements of the plaintiff or his agent which are inconsistent with the allegations of the pleading before the court.”  (Del E. Webb Corp. v. Structural Materials Co. (1981) 123 Cal.App.3d 593, 604-605.)  Here, Defendants do not explain how the admissions they cite are inconsistent with allegations in the SAC, and no inconsistencies appear to the Court.

 

Demurrer to the SAC

 

Defendants contend that the SAC as a whole fails to state a claim because Plaintiffs’ claims are barred by the doctrines of res judicata and/or collateral estoppel in light of the Court’s (Hon. Mark H. Pierce) Order Settling Accounts.

 

As an initial matter, Plaintiffs contend that Defendants waived this argument because they did not raise it in their demurrer to the FAC.  However, “[s]uch a defense does not need to be interposed at any particular stage of the pleadings,” and the failure to raise this argument in a prior demurrer does not waive it.  (Stafford v. Yerge (1954) 129 Cal.App.2d 165, 172 [rejecting plaintiff’s argument that defendants could not assert res judicata in their demurrer to plaintiff’s third amended complaint where they had not raised it in their demurrer to the original complaint].)

 

“An order settling a trustee’s account … is conclusive as to all matters passed upon but is not binding as to those matters not passed upon” (Lazzarone v. Bank of Am. (1986) 181 Cal.App.3d 581, 591), and the burden of showing that an issue was adjudicated by such an order rests with the party asserting this doctrine (see Murphy v. Murphy (2008) 164 Cal.App.4th 376, 400).  Defendants argue that the Order Settling Accounts decided the issues raised by the SAC because it held that Backhouse’s “[a]ppointment” and “actions” were approved, including her “accounting for the period of December 1, 2009 through October 31, 2011.”  (Order Settling Accounts, p. 2, ¶¶ 1-3.)  However, the Order Settling Accounts, which also directed Backhouse to distribute the Trusts’ then-remaining funds, was issued on December 14, 2011.  The SAC alleges that it was not until February 15, 2012 that the Beneficiary Plaintiffs received notice that the Trusts had suffered losses.  (See SAC, ¶ 20.)  Although this point is not entirely clear from the face of the SAC, it appears that the losses occurred after the Order Settling Accounts was issued and before the funds that were the subject of the accounting approved by the Court were distributed.  Consequently, it cannot be said that the Order Settling Accounts approved Backhouse’s actions giving rise to the SAC or that it determined Defendants did not “fail[] to ensure that the assets of the Trusts were distributed to the beneficiaries of the Trusts” as alleged by Plaintiffs.  (SAC, ¶ 19(e).)  Nor does it seem that Plaintiffs or the Court were aware of Backhouse’s lack of bonding at the time her appointment was approved, so Defendants’ argument that the Order Settling Accounts found that they fulfilled any duties to ensure she had bonding before she was appointed (see SAC, ¶ 19(a)-(d)) also lacks merit.  (See Morales v. Field, De Goff, Huppert & MacGowan (1979) 99 Cal.App.3d 307, 312 [court’s approval of executor’s petition for permission to execute a loan guarantee did not bar beneficiary’s claim for breach of duty where beneficiary had not been notified of the proposed transaction and executor had not disclosed to her or the court that executor’s counsel was also representing opposing parties to the transaction]; cf. Lazzarone v. Bank of Am., supra, 181 Cal.App.3d at p. 595 [finding order settling account conclusive but noting that “the losses of which plaintiff complains were fully disclosed in the accountings presented to the probate court”].)

 

The demurrer to the SAC as a whole is thus OVERRULED.

 

Demurrer to the Successor Trustee’s First and Second Causes of Action

 

Defendants argue that the Successor Trustee has failed to cure the deficiencies identified in the Court’s order sustaining their demurrer to the FAC, and that like the FAC, the SAC alleges no facts demonstrating the existence of an attorney-client relationship between the Defendants and the Successor Trustee or the existence of a duty owed to the Successor Trustee by the Defendants.

 

However, a successor trustee has standing to sue for malpractice committed while an attorney represented a predecessor trustee.  (Borissoff v. Taylor & Faust (2004) 33 Cal.4th 523, 535 [“the Probate Code gives successor fiduciaries the same powers and duties their predecessors possessed, including the power to sue for malpractice harming the trust”].)  Here, the SAC alleges that Defendants drafted, prepared, and caused the Trusts to be executed, and entered into a fee agreement with Hall as trustee of the Trusts providing that (where, as here, Hall had no surviving spouse) their scope of employment would be completed “when the assets are distributed to the beneficiaries.”  (See SAC, ¶¶ 5-7.)  Accordingly, the SAC adequately alleges an attorney-client relationship between Defendants and Williams’ predecessor trustees extending to the time at which the Trusts’ assets were distributed, and including the time period during which the events giving rise to the SAC—Backhouse’s selection as and actions as trustee—occurred.  Since an attorney-client relationship is also a fiduciary relationship (see Oasis West Realty, LLC v. Goldman (2011) 51 Cal.4th 811, 821), this also establishes that Defendants’ owed Williams’ predecessor trustees a duty during this time.

 

The demurrer to the Successor Trustee’s first and second causes of action is accordingly OVERRULED.

 

Demurrer to the Beneficiary Plaintiffs’ First and Second Causes of Action

 

Defendants contend that the Beneficiary Plaintiffs fail to allege facts supporting the existence of an attorney-client relationship with Defendants or any duty owed to them by Defendants.  They further argue that the specific duties that the Beneficiary Plaintiffs claim were breached should not be imputed to Defendants and any such breach was not the proximate cause of the Beneficiary Plaintiffs’ damages.

 

Existence of a Fiduciary Attorney-Client Relationship

 

The Beneficiary Plaintiffs argue that the SAC alleges an attorney-client relationship on two theories: first, the Beneficiary Plaintiffs are third-party beneficiaries of Defendants’ agreement to provide legal services to Hall (see SAC, ¶ 15) and second, Goldman agreed in response to William and Robert’s request in November 2009 that Defendants would advise and counsel the Beneficiary Plaintiffs as to the selection and appointment of a new trustee (see SAC, ¶¶ 8-11).

 

Regarding the second theory, Defendants point out that the contract naming Backhouse as trustee includes a disclaimer stating that FCA “does not represent the beneficiaries of the [Trusts].…”  (Appointment of Successor Trustee by Beneficiaries, Ex. B to SAC, ¶ 8.)  Defendants argue that this document contradicts the SAC’s allegation that Defendants agreed to and did undertake to represent the Beneficiary Plaintiffs, and urge that the court must disregard allegations that are contrary to the express terms of an exhibit incorporated into a complaint.  However, the disclaimer does not contradict the complaint in the sense intended by Alphonzo E. Bell Corp. v. Bell View Oil Syndicate (1941) 46 Cal.App.2d 684, 691, the case cited by Defendants, and others applying this principle.  The SAC does not allege that the contract naming Backhouse as trustee created an attorney-client relationship between Defendants and the Beneficiary Plaintiffs, but that an earlier oral agreement by Goldman did, and Defendants do not establish that the later disclaimer impacted the agreement alleged.  Consequently, the oral agreement alleged in the SAC supports the existence of a fiduciary attorney-client relationship.

 

Defendants contend that even if this is so, Plaintiffs allege an agreement with William and Robert only, and not with James.  However, the SAC alleges that William and Robert “act[ed] on behalf of all the beneficiary plaintiffs” when they asked Defendants to advise and counsel them.  (SAC, ¶ 8.)  While Defendants argue that additional facts must be included in support of this allegation, an allegation of agency is generally sufficient to withstand demurrer without such additional support.  (See City of Industry v. City of Fillmore (2011) 198 Cal.App.4th 191, 212-213 [on demurrer, “[a]n allegation of agency is an allegation of ultimate fact that must be accepted as true”]; Garton v. Title Ins. & Trust Co. (1980) 106 Cal.App.3d 365, 376 [“Generally, an allegation of agency is an allegation of ultimate fact and is, of itself, sufficient to avoid a demurrer.”].)  The SAC thus alleges a fiduciary attorney-client relationship between Defendants and the Beneficiary Plaintiffs.

 

Duties Regarding Trustee Bonding and Proximate Causation

 

Noting that the Rose Mary Hall and Alvin P. Hall trust documents provide that no Trustee’s bond is required and the Trustee may purchase as much insurance as he or she deems advisable, while the Probate Code only requires bonding for out-of-state representatives and does not require insurance, Defendants contend that no duty to ensure Backhouse was bonded should be imputed to them.  However, the SAC alleges that Defendants agreed to advise the Beneficiary Plaintiffs in selecting a trustee and recommended Backhouse, and that William and Robert asked both Backhouse and Goldman during a meeting about protections that could be put in place for the Trusts’ assets, prompting Backhouse to advise that she was bonded.  (SAC, ¶¶ 8-10.)  Under these circumstances, it cannot be held as a matter of law that Defendants’ failure to confirm Backhouse was bonded was not a breach of their duties to the Beneficiary Plaintiffs.  (See Onciano v. Golden Palace Restaurant, Inc. (1990) 219 Cal.App.3d 385, 394 [breach of duty is usually a fact issue for the jury; if the circumstances permit a reasonable doubt whether the defendant’s conduct violates the standard of due care, the doubt must be resolved by the jury as an issue of fact rather than of law by the court].)

 

Defendants furthermore assert that their actions were not the proximate cause of the Beneficiary Plaintiffs’ losses, because “Plaintiffs’ damages were caused by the theft of the trust assets by a third party, someone who took advantage of a personal relationship with Christine Backhouse.”  (Motion, p. 11.)  However, this asserted fact is not alleged in the SAC, which states only that the letter from Backhouse advising the Beneficiary Plaintiffs that the Trusts had suffered losses “suggested that the losses may have been a result of the trust’s assets being looted, stolen, embezzled or otherwise lost” and the Beneficiary Plaintiffs later learned “that the losses may  have been a result of Backhouse’s own breaches of fiduciary duties by negligently entrusting the assets to someone and not properly monitoring them.”  (SAC, ¶ 20.)  Given that the cause of the Trusts’ losses is not clearly alleged in the SAC, the Court cannot determine that the intervening act asserted by Defendants even occurred, let alone that it was not foreseeable to Defendants.  (See Landeros v. Flood (1976) 17 Cal. 3d 399, 411 [an intervening act does not amount to a superseding cause relieving the negligent defendant of liability if it was reasonably foreseeable; foreseeability is generally a question for the jury].)

 

The demurrer to the Beneficiary Plaintiffs’ first and second causes of action is consequently OVERRULED.

 

Demurrer to the Third Cause of Action

 

Plaintiffs’ third cause of action is for recession of contract pursuant to Civil Code section 1689.  (SAC, ¶ 41.)  Through this claim, Plaintiffs seek to rescind the “contract for Backhouse as new trustee”: presumably, the 2009 “Appointment of Successor Trustee by Beneficiaries.”  However, to the extent this document (which was executed only by the Trusts’ beneficiaries) constitutes a contract, Defendants were not a party to it.  Accordingly, they are not proper defendants in an action to rescind the appointment of Backhouse as trustee.  (See Clancy v. Becker-Arbuckle-Wright Corp. (1934) 137 Cal.App. 43, 47 [“appellant was not entitled to a judgment for rescission against one who was not a party to the agreement”].)

 

The demurrer to the third cause of action is consequently SUSTAINED WITH 10 DAYS’ LEAVE TO AMEND on the ground that the third cause of action fails to state a claim against Defendants.