Tuesday, December 1, 2009
C.A.: Spendthrift Trust Beneficiary Liable for Breach of Duty
By STEVEN M. ELLIS, Staff Writer
A trust beneficiary whose misconduct as trustee harmed the trust cannot rely on a spendthrift provision to protect her interest from other beneficiaries, this district’s Court of Appeal ruled yesterday.
Reasoning that damage from the breach of duty would otherwise be sustained by the others, Div. Four held that they could hold liable a spendthrift trust beneficiary’s distributive share for a surcharge imposed due to her misconduct as a trustee.
Served as Trustee
Joyce Chatard began serving as a trustee of her family’s trust in 2003 after the death of her mother, Vera Chatard, who created the trust in 1989 with her husband Frederic Chatard. The trust included a spendthrift provision, by which beneficiaries could not assign or alienate their own interests, and those interests were not subject to the claims of beneficiaries’ creditors.
When Frederic Chatard died in 1995, the trust divided into two subparts for his wife’s benefit, and after her death their three adult children—Joyce, David and Jeanee Chatard—each received one-quarter of income and principal from one of the subparts.
The remainder of the subpart was to be split between the four children of deceased sibling Douglas Chatard when each reached the age of 30, while the other subpart was split into equal thirds among beneficiaries other than Joyce Chatard, subject to the same age restriction.
Disputes Over Administration
After disputes arose over Joyce Chatard’s administration of the trust, other beneficiaries brought suit. Los Angeles Superior Court Judge Aviva K. Bobb, who has since retired, imposed a surcharge of more than $333,000 on Chatard for breaching her duty as trustee and an award of more than $100,000 for other beneficiaries’ legal fees and costs.
Bobb held that Chatard failed to rent or pay rent on residential property she occupied that was owned by the trust; awarded herself excessive compensation; inappropriately used trust assets to pay personal expenses; unnecessarily incurred attorney fees opposing well-founded petitions to remove and surcharge her for mismanagement; and failed to distribute her siblings’ shares of assets within a reasonable time.
Relying on the trial court’s judgment, an interim trustee then sought to reduce Joyce Chatard’s share by the amounts of the surcharge and attorney fees, but Chatard contended the surcharge could not be taken from her share because of the spendthrift provision.
Bobb concluded that the provision was inapplicable and granted the interim trustee’s request, and the Court of Appeal affirmed in an opinion by Justice Thomas L. Willhite Jr.
The justice explained:
“Reasonably construed, the language of the spendthrift provision here suggests protection against the claims of persons foreign to the trust—‘creditors, or others’—who might use a writ of ‘attachment, execution or other process of law’ to satisfy a claim from a beneficiary’s interest. The language does not reasonably refer to the claims of fellow beneficiaries relating to a breach of trust, which might be satisfied, in the exercise of the probate court’s equitable power, by surcharging the interest of the trustee-beneficiary in the distribution of trust assets.
“In short, absent clear language to the contrary, we decline to read the spendthrift clause so as to permit the perverse result of depriving the court of its equitable power to surcharge the interest of dishonest trustee-beneficiary to compensate other beneficiaries for breaches of the trust.”
Presiding Justice Norman L. Epstein and Justice Steven C. Suzukawa joined Willhite in his opinion.
The case is Chatard v. Oveross, B213392.
Copyright 2009, Metropolitan News Company