When an individual passes away, and their estate is required to pass through the probate process, sale of the assets allows for a straightforward distribution to those entitled to them. As such, heirs of a decedent and estate beneficiaries would be distributed cash to satisfy their inheritance by a personal representative (i.e., an executor/administrator of an estate) who has been appointed by the court to administer the estate of a deceased individual.
Personal representatives have a duty to manage and control the estate, including any bank accounts in the name of the estate. As a result, they generally have direct access to substantial amounts of money. Prob. C. § 9600.
What is stopping the personal representative from taking the funds on deposit in the bank account owned by the estate?
Continue reading to learn about the tools that can be used to facilitate estate asset protection for heirs and beneficiaries, and what the recent appellate court case, The Law Firm of Fox and Fox v. Chase Bank, N.A. (2023) 95 Cal.App.5th 182, had to say about a bank’s duties and responsibilities regarding the distribution of funds placed in a blocked account.
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Why Is Estate Protection for Heirs and Beneficiaries Necessary?
One of the main functions of estate administration, among others, is to marshal and manage all assets subject to probate to pay debts and taxes owed by the decedent and the estate. Prob. C. § 9650. Only after this is complete, can the remaining assets be distributed to the beneficiaries named in the will, or if a person died without a will, to their heirs.
To marshal all assets, a personal representative must identify all of the bank accounts in which the estate has an interest. Next, they must transfer all these bank accounts into the name of the active personal representative of the estate. All cash must be invested in interest-bearing accounts or other investments authorized by law. Prob. C. § 9652.
What Mechanisms Can Provide Estate Asset Protection to Heirs and Beneficiaries?
Understanding that a personal representative will have access to substantial sums of money to which they are not the rightful owner, the legislature instituted several laws that provide estate asset protection to the decedent’s heirs and beneficiaries.
What Is a Probate Bond?
One such protection is the probate bond. The purpose of the probate bond (also called a probate surety bond) is to ensure the personal representative faithfully carries out their fiduciary duties. Prob. C. § 8480(b).
What Do Probate Bonds Do?
Probate bonds protect the state, heirs, beneficiaries and creditors by providing security in the form of a promise by the surety to cover any court-ordered surcharge against the personal representative for fiduciary misconduct, including theft of estate assets.
Should a representative flee with estate assets, the probate surety bond will place the money into the estate and pursue recovery against the representative. The bond, having been signed by the representative and the surety, makes both the representative and the surety jointly and severally liable. Code Civ. Proc. § 996.460.
When Is a Probate Bond Required?
Every person appointed as a personal representative must give a probate bond approved by the court before letters of administration are issued, except as otherwise provided by statute. Prob. C. § 8480(a). When a probate bond is required by the terms of a will, it cannot be waived. Prob. C. § 8481(a)(2).
When Is a Probate Bond Waiver Possible?
A probate bond waiver may be available in certain situations.
First, when the will of a decedent waives the California probate bond requirement. Prob. C. § 8481. However, even if the will waives the probate bond requirement, the court may require a bond on its own motion or on petition of an interested person, for good cause, or if the proposed personal representative resides outside of California. See Prob. C. § 8481(b); Cal. Rules of Ct. 7.201(b).
The next instance in which a probate bond waiver may be possible is if all the heirs or beneficiaries waive California’s probate bond requirements in writing and the will does not require a probate bond or there is no will. Prob. C. §§ 8481(a)(2), 8543(b).
Finally, a probate bond is not required when the public administrator or a trust company serves as the personal representative of an estate.
Are There Alternatives to Probate Bonds?
While a probate bond offers protection to beneficiaries and heirs, it is not always practical. A personal representative must qualify for a bond, which requires the surety to run a credit check. The personal representative may not qualify for the court-ordered bond amount, or they may not qualify for a bond at all.
In addition, if the personal representative does qualify, a bond premium must be paid annually, which is a proper administrative expense that can be reimbursed to the personal representative. Prob. C. § 8486. When an estate contains property of significant value, bond premiums are substantial.
An alternative to a bond can be accomplished when the money that the personal representative is supposed to manage is placed into a blocked bank account.
What Is a Blocked Account?
A blocked account can be any insured account in a financial institution in California. An “insured account in a financial institution,” means an account in a bank, an account in an insured credit union, and an account in an insured savings and loan association, to the extent that the account is insured. Prob. C. § 46.
On application of the personal representative, the court may order that the money or personal property deposited be subject to withdrawal only on authorization of the court. Prob. C. § 9703(a). The personal representative must deliver a copy of the court order to the financial institution or trust company at the time the deposit is made. Prob. C. §9703(b).
It is common practice for a court to require the financial institution or trust company to prepare and file an Acknowledgment of Receipt of Order and Funds for Deposit in Blocked Account, a Judicial Council form. This form acknowledges the receipt of the signed order requiring a blocked account. In addition, it acknowledges that no withdrawals will be permitted without a signed, file-stamped order from the court.
Case Analysis: Does a Bank's Duty of Care Extend to Intended Third-Party Beneficiaries of a Blocked Bank Account?
As mentioned above, the protections of a probate bond and a blocked bank account are afforded to beneficiaries, heirs and creditors of a decedent’s estate. But what happens if a blocked account is unable to provide adequate estate asset protection? And is there anyone else that is protected by these estate protection mechanisms?
The Law Firm of Fox and Fox v. Chase Bank, N.A. is a recent decision by the Court of Appeal that examines the issue of whether a bank owes a duty to intended third-party beneficiaries (in this case, a law firm) in ensuring that funds in a blocked account are not distributed absent a specific court order allowing the bank to do so.
In this case, the California Court of Appeal found that the bank did owe a duty to the depositor (i.e., the law firm) to protect the funds placed into the court-blocked account, given the special relationship the bank had with the law firm as an intended beneficiary of the probate court order directing for those funds to be placed into a blocked account.
Here, the Law Firm of Fox and Fox filed an action against Chase Bank, N.A. (“Chase”) alleging negligence in disbursement of funds from a blocked account containing estate funds to the sole signatory on the account, Jazzmen Brumfield, as administrator of the estate.
The Law Firm of Fox and Fox represented Ms. Brumfield as administrator and obtained an order from the court that approved the final account and set the amounts Ms. Brumfield and the Law Firm of Fox and Fox were authorized to receive before payment to beneficiaries. Upon receipt of the order from Ms. Brumfield, Chase distributed the funds to her. Ms. Brumfield then fled with the funds.
In its complaint, the Law Firm of Fox and Fox alleged that Chase was negligent in disbursing the entirety of the estate funds to Ms. Brumfield despite a probate court order specifying that Ms. Brumfield would receive at most $16,000 from the account, with the remaining funds being paid to the Law Firm of Fox and Fox and then to the other beneficiaries as funds became available.
It is important to note that the final order issued by the probate court stated that Ms. Brumfield was “authorized and directed to receive statutory compensation for services rendered, in the sum of $16,000.00.”
It further added that the Law Firm of Fox and Fox was “authorized and directed to receive: a. Statutory compensation for services rendered, in the sum of $16,000.00; b. Extraordinary compensation for legal services rendered, in the sum of $44,151.25; and c. Costs, in the sum of $6,173.39.”
The order specified that “[t]he amounts detailed in paragraphs 2 and 3, above, shall be paid from the balance of the funds remaining ($47,383.47). It did not direct Chase to pay any specific amounts to Ms. Brumfield or the Law Firm of Fox and Fox or authorize withdrawals of any particular amounts by any particular person.
Trial Court Rules That Chase Owes No Duty to the Law Firm
The four elements of the Law Firm of Fox and Fox’s negligence claim are: 1) duty; 2) breach; 3) proximate causation; and 4) injury.
In response to the complaint filed by the Law Firm of Fox and Fox, Chase filed a motion for summary judgment, arguing that it owed no duty to the Law Firm of Fox and Fox.
Chase asserted seven arguments:
- banks have limited general duties toward their depositors;
- banks have limited general duties to noncustomers;
- the economic loss rule barred recovery;
- Chase and the Law Firm did not have a fiduciary relationship;
- there was a lack of foreseeability of harm;
- the narrow duty placed on banks to guard against specific types of check fraud did not apply; and
- Chase had only a limited duty “to keep the funds frozen in the [b]locked [a]ccount until the court determined that the funds could be released.”
Chase argued that it satisfied this duty by waiting to release the funds until the final probate order unblocked the account.
In its opposition, the Law Firm of Fox and Fox argued that Chase owed them a duty based on a special relationship arising from the probate proceedings that required Chase to exercise due care in distributing funds from the blocked bank account.
The Law Firm of Fox and Fox further asserted that the factors set forth in the California Supreme Court Case Biakanja v. Irving (1958) 49 Cal.2d 647 (“Biakanja”) supported imposition of the bank’s duty of care, and that the final probate order did not direct Ms. Brumfield to withdraw money to pay the Law Firm of Fox and Fox, but rather, directed Chase to pay the specified funds directly to the named recipients.
After hearing argument from counsel, the trial court granted Chase’s motion for summary judgment, reasoning that it was undisputed Ms. Brumfield was the customer, not the Law Firm of Fox and Fox, and that Chase did exactly what it was told to do by the order.
California Court of Appeal Finds That the Bank's Duty of Care Did Exist
On appeal, the Law Firm of Fox and Fox argued that it raised triable issues of fact with respect to whether Chase owed a duty to them, whether Chase breached its duty, and whether Chase’s conduct in distributing the funds was the proximate cause of damages.
In coming to its decision, the appellate court analyzed duties generally owed to third parties. It first cited to Civil Code section 1714, subdivision (a), which provides, “Everyone is responsible, not only for the result of his or her willful acts, but also for an injury occasioned to another by his or her want of ordinary care or skill in the management of his or her property or person…” However, “21uty is not universal; not every defendant owes every plaintiff a duty of care. A duty exists only if ‘“the plaintiff’s interests are entitled to legal protection against the defendant’s conduct.”’
The appellate court then cited a significant exception to the general duty of care under Civil Code section 1714, known as the economic loss rule. It explained that, in general, there is no recovery in tort for negligently inflicted “purely economic losses,” meaning “financial harm unaccompanied by physical or property damage.”
The appellate court noted that while that is exactly what happened to the Law Firm of Fox and Fox, there is yet another exception that applies, this time to the economic loss rule’s limitation on liability where the plaintiff and defendant have a special relationship and policy considerations support finding a duty.
The appellate court cited the California Supreme Court in Southern California Gas Leak Cases (2019) 7 Cal.5th 391, 398, stating “[t]he primary exception to the general rule of no recovery for negligently inflicted purely economic losses is where the plaintiff and the defendant have a ‘special relationship.’ [Citation.] What we mean by special relationship is that the plaintiff was an intended beneficiary of a particular transaction but was harmed by the defendant’s negligence in carrying it out.”
The appellate court found that this case falls squarely within the rubric of a special relationship as first articulated by the Supreme Court in Biakanja.
The Appellate Court went on to analyze the six factors typically described as the Biakanja factors:
- the extent to which the transaction was intended to affect the plaintiff;
- the foreseeability of harm to the plaintiff;
- the degree of certainty that the plaintiff suffered injury;
- the closeness of the connection between the defendant’s conduct and the injury suffered;
- the moral blame attached to the defendant’s conduct; and
- the policy of preventing future harm.
In short, the appellate court found that the bank’s duty of care did extend to the Law Firm of Fox and Fox based on the special relationship it had with the Law Firm of Fox and Fox as an intended beneficiary of the probate court order directing that the funds be deposited into a blocked account from which withdrawals could only be made on court order, and based on the bank’s acceptance of that order by executing an Acknowledgment of Receipt of Order and Funds for Deposit in Blocked Account.
Furthermore, the appellate court found that although banks do not generally have a duty to police customer accounts for suspicious activity, Chase owed a duty to the Law Firm of Fox and Fox as an intended beneficiary of the blocked account order and due to the acknowledgment filed with the Court. Specifically, Chase had a duty to act with reasonable care in limiting distributions from the blocked account to those authorized by court order.
Key Takeaways: Banks Can Be Held Liable for Failing to Provide Adequate Estate Asset Protection of Funds Held in Blocked Accounts
While probate bonds and blocked accounts are put in place to protect beneficiaries and heirs, issues can still arise.
The holding in Law Firm of Fox and Fox v. Chase Bank, N.A. demonstrates that banks may be held accountable to intended beneficiaries for distributing funds out of a court-blocked account without an appropriate order for distribution.
The ruling provides redress to beneficiaries who were supposed to be protected by blocked accounts, but due to the negligence of a third party, were harmed.
Have concerns about estate asset protection? Our attorneys can help you feel at ease.
Personal representatives owe fiduciary duties to beneficiaries. One of their main duties is protecting estate assets. But what happens when the person tasked with protecting estate assets is the same person that is causing damage to the estate?
This is where having a probate attorney in your corner can make all the difference. A probate attorney can help ensure the proper steps are taken for estate asset protection, whether those steps involve the personal representative securing a probate bond or estate funds being placed in a blocked bank account.
It’s important to play an active role in the protection of estate assets. By doing so, you can rest assured you will receive your rightful inheritance at the close of administration. Request a free consultation with our talented team today to learn how we can help.
