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Court of Appeal Rebuffs Hearst Heirs in Bid to Sue Trustees
By KENNETH OFGANG, Staff Writer
Heirs to William Randolph Hearst’s fortune who claim that the Hearst Family Trust has treated them unfairly cannot sue the trustees without risking the loss of their entire interest, the Court of Appeal for this district ruled yesterday.
Div. Three affirmed an order by Los Angeles Superior Court Judge Aviva K. Bobb, who denied a petition by William R. Hearst II, Deborah Hearst, and Phoebe Hearst Cooke. The three wanted the judge to declare that they could maintain an action for breach of fiduciary duties against the trustees without violating the no-contest clause in their grandfather’s will.
William R. Hearst, a onetime congressman who founded a chain of newspapers known for their sensationalist journalism—the phrase “yellow journalism” began as a reference to a color comic strip in one of Hearst’s papers—died in 1951 at age 88. The trust, which is governed by 13 trustees, of whom five are trust beneficiaries and the others Hearst Corporation executives from outside the family, came to own all of the corporation’s common stock after Hearst’s death.
Trust Provisions
The trust will terminate and the stock distributed among the remaining beneficiaries sometime around 2040, after the death of the last of numerous heirs who were alive at the time of the media magnate’s death. There are currently 17 income beneficiaries, including the three plaintiffs in yesterday’s action, and more than 40 contingent income and remainder beneficiaries.
The best known of the heirs, Patricia Hearst Shaw, who is both an income and a potential remainder beneficiary, was not a party to the litigation but filed an amicus brief in support of her cousins.
The will gives the trustees broad powers over the Hearst empire, which has expanded to include holdings in newspapers, television and radio stations, cable networks, magazines, and real estate.
The trustees are entitled “to continue or retain [the corporation] as long as they see fit and without time limit;” to refuse to sell the stock “unless it shall in their opinion be necessary or prudent do so”; to hold assets, regardless of the amount of income they produce, “for such periods of time and to such extent as to them may from time to time seem best”; and “to decide what is income and what is corpus or principal” of the trust.
The will further provides that, among other things:
““If any person who is or would be a . . . beneficiary of a trust created herein or hereunder . . . directly or indirectly shall institute or participate or cooperate in the institution or filing or prosecution of any proceeding or proceedings of [any] kind or character whatsoever tending in any manner or to any extent to change, annul, revoke, set aside or invalidate this my Will or any of its provisions, including but not limited to any trust created herein or hereunder or any of the provisions of any such trust . . . , then and in any such event I hereby revoke and annul all bequests, devises and provisions made or interest created in or under this my Will for any such person.”
In their “safe harbor” petition filed in 2003 under Probate Code Sec. 21320, the plaintiffs—who had filed several previous petitions unsuccessfully—contended that the trustees had breached their fiduciary duties by distributing less than 1.3 percent of the value of the common stock to the income beneficiaries annually between 2000 and 2002.
Because those distributions represented substantially less than the income normally earned on trust investments, the plaintiffs reasoned, the trustees were favoring the remainder beneficiaries over the income beneficiaries. They asked that they be allowed to sue for payment of money damages and for an order requiring future payment of “an adequate amount of income based on the size of this Trust.”
The trustees responded that they were carrying out the wishes of the testator; that the corporation’s board—made up of the 13 trustees and six other directors—declared dividends based on sound business judgment; and that the beneficiaries had profited handsomely from the corporation’s performance, seeing their annual income shares grow into the millions of dollars.
No-Contest Clause
Presiding Justice Joan Dempsey Klein, writing yesterday for the Court of Appeal, agreed with the trial judge that the proposed action would violate the no-contest clause.
Klein noted that the trustees were not being accused of gross neglect or fraud, or of discriminating against the income beneficiaries based on personal animus or some other consideration. Under that circumstance, the presiding justice said, the court must defer to the intent of the testator.
The practice of the corporation to distribute about 20 percent of its available cash in the form of dividends, with the rest going to growth, acquisitions, repayment of debt, and reinvestment, is consistent with the founder’s “apparent intent to perpetuate his media empire,” the presiding justice wrote.
The language of the will indicates that Hearst clearly intended to allow the trustees to treat the income and remainder beneficiaries differently. The statutory rights of income beneficiaries to impartial treatment by the trustees, she noted, are subject to an express exception when the trust instrument provides otherwise.
Klein went on to say that the proposed action would violate the intent of the no-contest clause by interfering with the trust’s business operations. In order to produce more income for the beneficiaries, she explained, the trustees and other directors would be forced to change the corporation’s dividend policy or sell stock, contrary to Hearst’s expressed desire to leave such matters to the trustees’ discretion.
The case is Hearst v. Ganzi, B184659.
Copyright 2006, Metropolitan News Company