Consequences of Bad Faith Arguments for Trustee Removal
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If you are a trustee who is at risk of being removed because a beneficiary is making an argument in bad faith against you, know that you are not without recourse if the bad faith claim is denied by the court. Thanks to a new interpretation of California Probate Code section 15642(d), you may be able to hold beneficiaries liable for the financial losses you suffered as a result of their bad faith argument.
What is a bad faith claim in California? In this article, Keystone Law Group delves into the 2022 California Court of Appeal case Bruno v. Hopkins to provide an example of a bad faith argument for trustee removal, and to demonstrate the severity of the financial consequences that can result under California Probate Code section 15642(d) from filing one.
What Is a Trustee?
Trustees are individuals or organizations who have been given authority to administer the property held within a trust for the benefit of the trust’s settlor (the person who created the trust) or the trust’s beneficiaries (i.e., persons who stand to inherit from the trust). When multiple parties are designated as the trustees of a trust, they are called co-trustees, and they generally must act unanimously.
Trusts are not subject to the probate process (i.e., court supervision) since they are considered private entities. By extension, trustees also are not required to report to the courts, unless there is a trust dispute that makes it necessary for the court to get involved.
What Are the Duties and Responsibilities of a Trustee?
Not all trustees of trusts will have the same responsibilities since a trustee’s role will largely depend on the parameters set by the trust creator (i.e., the settlor, grantor or trustor) in the trust document. Thus, a trustee’s powers can be broad or limited, brief or prolonged.
- A duty of loyalty to beneficiaries — i.e., the duty to act with absolute fidelity toward the beneficiaries of the trust and never place the trustee’s own interests above those of the beneficiaries. This is especially important when the trustee is also a beneficiary of that same trust.
- A duty to avoid conflicts of interest — i.e., the duty to avoid situations where the trustee has a direct or indirect interest that conflicts with the interests of the trust’s beneficiaries.
- A duty to provide trust accountings to the beneficiaries and provide information concerning the trust administration process, when requested.
- A duty of impartiality — i.e., a duty to treat all beneficiaries equally.
- A duty to keep trust assets separate from other assets.
- A duty to make trust property productive.
- A duty to enforce or defend claims brought against the trust itself.
What if the Trustee Is Not Doing Their Job?
When a trustee abandons or breaches their fiduciary duties, the consequences can be severe. Regardless of whether the damage is brought upon the trust because of trustees acting improperly, or altogether failing to act, trustees could be held responsible for paying damages out of their own pockets. They may also face trustee removal or suspension and be held liable for paying the opposing party’s attorney’s fees and costs.
Trustee misconduct can include:
- Failing to keep trust beneficiaries reasonably informed during the administration process.
- Withholding distributions to trust beneficiaries without having proper cause to do so.
- Failing to pay the trust’s taxes, creditors, or other expenses.
- Mismanaging or misappropriating trust property.
- Failing to remain impartial, favoring certain beneficiaries’ interests over the interests of other beneficiaries.
When Is It Appropriate to File a Trustee Removal Petition?
Petitions to remove trustees are common in California trust litigation. Courts will temporarily suspend or permanently remove trustees if the petitioner provides sufficient evidence that removal is necessary to protect the trust and its beneficiaries from further harm. In other words, petitioners should be able to demonstrate that the trustee could cause continuing and/or irreversible harm to the trust by remaining in their role.
An interested party, typically a beneficiary or a co-trustee, may petition the probate court in the county where the trust is administered to remove the trustee. Under California Probate Code sections 16000 – 16015, a trustee may be removed for any “good cause” including:
- Where the trustee has committed a breach of the trust;
- Where the trustee is insolvent or otherwise unfit to administer the trust;
- Where hostility or lack of cooperation among co-trustees impairs the administration of the trust;
- Where the trustee fails or declines to act;
- Where the trustee’s compensation is excessive under the circumstance;
- Where the sole trustee is a “Disqualified Person” described in California Probate Code section 21380 (i.e., the drafter of the trust instrument, the care custodian of the settlor, the transcriber of the trust instrument or the person who caused it to be transcribed);
- Where the trustee is substantially unable to manage their own financial affairs and/or substantially unable to properly execute the trustee duties;
- Where the trustee is substantially unable to resist fraud or undue influence.
Bruno v. Hopkins: How a Trustee Handled a Beneficiary’s Bad Faith Argument for Trustee Removal
Mildred and James, who were married for 67 years, had four daughters in common: Gail, Lynne, Jane, and Gwen. Their two eldest daughters, Gail and Lynne, moved to Pittsburg, Pennsylvania, while their two youngest daughters, Jane and Gwen, remained in California and had a close relationship with their parents.
Between 1989 and 1991, James and Mildred executed an estate plan, resulting in the creation of The Francis Living Trust (the “Trust”). Under the terms of the Trust, upon the death of the first spouse, half of the Trust’s assets would be allocated to a revocable surviving spouse’s trust, and the other half of the assets would be placed in an irrevocable marital trust and an irrevocable family trust.
The Trust specified that Lynne and Gail would each receive $200,000 from the revocable surviving spouse’s trust, with the remaining assets being divided equally between Jane and Gwen after other specified distributions had been made. When the Trust was created, the specific gifts to Lynne and Gail totaled about half the value of the Trust assets, so at that time, the four children would have received similarly valued shares.
As time passed, however, the value of the Trust assets grew substantially. Lynne estimated the value of Trust assets to be $4-5 million at the time she commenced her proceedings in the trial court, meaning that Jane and Gwen’s shares were now significantly more valuable than Lynne and Gail’s shares.
Beneficiary Files Trustee Removal Petition Based on Suspicions of Trustee Misconduct and Forgery
James passed away on May 12, 2006. Upon James’s death, Mildred became the sole trustee of the Trust. Mildred waited until early 2015 to authorize Jane to prepare the notification required when a revocable trust becomes irrevocable by the death of one or more settlors of the trust under Probate Code section 16061.7 (Notification by Trustee).
After receiving the Notification by Trustee and a copy of the Trust around March 2015, Lynne filed a petition to remove Mildred as trustee and to declare the Trust instrument a forgery. In the petition, she claimed that Mildred should be removed as trustee because 1) she failed to keep beneficiaries informed, as she waited nine years after James’ death to send Lynne a copy of the Trust, and 2) because the copies of the Trust and James’ Will were ostensible forgeries.
Trial Court Decides Trust Is Not a Forgery
Following a 13-day court trial on the bifurcated forgery claim, the court determined that the Trust instrument was not a forgery.
Although pages 1 and 31 of the Trust contained “original handwriting,” while the internal pages did not, and pages 2 to 30 differed from pages 1 and 31 as they were written on different paper, used different toners, and had different typography – the trial court was more persuaded by the testimony of Mildred’s expert, who opined that these disturbances were consistent with normal wear and tear, as the original Trust instrument was over 25 years old.
Trustee Files Motion for Award of Attorney’s Fees Based on California Probate Code Section 15642(d)
“If the court finds that the petition for removal of the trustee was argued in bad faith and that removal would be contrary to the settlor’s intent, the court may order that the person or persons seeking the removal of the trustee bear all or any part of the costs of the proceeding, including reasonable attorney’s fees.”
Mildred, as trustee of the Trust, filed a motion against Lynne to recover the attorney’s fees and legal costs spent in defending the lawsuit. The trial court granted Mildred’s motion and ordered Lynne to pay over $829,000 in attorney’s fees and $96,000 in costs, on the ground that there was no merit to the position Lynne pursued at trial and that she acted without basis in filing all of her claims.
Court Expands Law to Make Beneficiaries Personally Liable if They File a Bad Faith Claim for Trustee Removal
Lynne appealed the trial court’s decision and claimed that the judge did not have the authority to require her to pay more than the value of her beneficial interest in the trust, which was set at $200,000. She further argued that she acted in good faith in filing her petition, even if she ultimately did not persuade the judge that the trust instrument was forged or that the trustee should be removed. The appellate court disagreed with Lynne and affirmed the lower court’s ruling.
In so doing, the Court of Appeal expanded the law by broadly interpreting Probate Code section 15642(d). The appellate court determined that the probate court has statutory authority to impose personal liability against a beneficiary that exceeds their share of the trust estate under Probate Code section 15642, subdivision (d), as the only limitation in that statute is that the attorney’s fees be “reasonable.”
The legislative history of Section 15642 demonstrates that the addition of subdivision (d) was specifically designed to address the damage to trust estates resulting from beneficiaries arguing in bad faith for trustee removal. In 1995, the Senate Judicial Committee’s rationale for the legislation was that bad faith trustee removal petitions can damage the trust estate and be used to force a settlement payment to the complaining petitioner who has not put “anything of his or her own at risk.”
Further, the statute does not violate constitutional principles of due process, as it provides notice that a person seeking to remove a trustee could be liable for “all or any part of the costs of the proceeding, including reasonable attorney’s fees.”
Here, there was substantial evidence to support the trial court’s finding that Lynne’s petition, which sought in part the removal of Mildred as trustee, was filed in bad faith, and that Mildred’s removal as trustee would be contrary to James’ intent.
Key Takeaways: Trustees Have Recourse When a Beneficiary Argues in Bad Faith for Their Removal
Bruno provides a new perspective on California trust litigation. It emphasizes the importance of trustees filing a motion to recover attorney’s fees and costs when a beneficiary makes a bad faith argument for their removal, since trustee removal claims argued in bad faith not only can damage the trust estate, but also thwart the settlor’s original intent.
Even if a beneficiary’s case is supported by expert testimony, there is a chance they could be found to have made their argument in bad faith — which is why it’s important for trustees to seek out a knowledgeable probate lawyer who specializes in trust and estate litigation and administration as soon as they become aware of a beneficiary’s bad faith claim for trustee removal.