Tuesday, November 10, 2009
Court Allows Recovery from Third Party for Ex-Trustee’s Breach
By STEVEN M. ELLIS, Staff Writer
The Fourth District Court of Appeal ruled yesterday that a trust beneficiary could recover from a third party who helped a former trustee breach the trust, even though a successor trustee had been appointed.
Reversing a trial court’s ruling, Div. One held that a woman had standing to sue her grandfather’s stepdaughter for inducing his widow—the stepdaughter’s mother and the trustee—to transfer trust property and mortgage it for her daughter’s benefit, and for then holding herself out as trustee after her mother’s death.
Writing for the three-judge panel, Justice Cynthia Aaron told the trial court on remand to rule for Tammy King on her claim that Barbara Johnston, as a third party, actively participated in the breach of trust by Lenora Gilbert, widow of trust settlor Arthur Gilbert.
De Son Tort
She also directed the trial court to determine whether King could show that Johnston was liable as a trustee for breaches after Lenora Gilbert’s 2002 death as a trustee de son tort. The common law theory allows for those who wrongfully hold themselves out as a trustee and exercise authority over property to be treated as trustee and sued for any breach of duty.
King filed suit as a beneficiary, alleging Johnston induced her mother to transfer a piece of trust property to herself, without consideration, and then induced her mother to mortgage the property for a personal loan.
The bank eventually foreclosed on the property, and Lenora Gilbert lost title. King further alleged that Johnston took money and rents that belonged to the trust and used them for her own personal benefit.
She alternatively argued that Johnston had essentially taken over the role of trustee while her mother was still alive but in failing mental and physical health, and that Johnston’s actions during this period of time and after Lenore Gilbert’s death made Johnston trustee de son tort and liable for failing to properly care for and/or recover trust property.
Lack of Standing
After a bench trial, Imperial Superior Court Judge Jeffrey B. Jones ruled that King should recover nothing from Johnston because she failed to show a conspiracy between Johnston and her mother or establish that Johnston was a de facto trustee before her mother’s death, and because King lacked standing to sue Johnston without joining the current trustee—Lloyd Gilbert, Arthur Gilbert’s son—in the action.
He also concluded that Johnston had unduly influenced her mother to breach the trust and had “acted as trustee” before Lloyd Gilbert accepted the role, but ruled that King could not recover under the theory because she lacked standing.
He further declined to award King any relief on her claim that Johnston acted as trustee after her mother’s death because Lloyd was “actively recouping” the value of the trust rental income that Johnston had wrongfully retained by withholding her share of the trust distributions.
King appealed, and Aaron rejected Jones’ determination on standing.
“If it is true that ‘the right of the beneficiaries against the [third party] is a direct right and not one that is derivative through the trustee’…,” she wrote, “we see no reason why an independent claim that exists prior to the appointment of a successor trustee should be extinguished upon that appointment, and [Johnston] has offered no reason why the appointment of a successor trustee should serve to wipe out a beneficiary’s ‘direct right’ against a third party.”
Aaron also wrote that the trial court erred in failing to consider and make the necessary findings as to whether Johnston’s conduct was sufficient to hold her her liable as a trustee de son tort for some or all of the trust property and, if so, whether she breached her duties and what relief would be appropriate.
“[O]ne should not be permitted to assume the character of a trustee and wrongfully benefit from doing so without also having to assume the responsibilities of a trustee,” she commented.
Presiding Justice Judith McConnell and Justice Terry B. O’Rourke joined Aaron in her opinion.
The case is King v. Johnston, 09 S.O.S. 6416.
Copyright 2009, Metropolitan News Company