Hughes v. Klein CA1/3 ( 2015 )

Filed 3/30/15 Hughes v. Klein CA1/3
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication
or ordered published for purposes of rule 8.1115.
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIRST APPELLATE DISTRICT
DIVISION THREE
ALEXANDER REYNOLDS HUGHES,
Plaintiff and Respondent,
v. A138983
CONRAD LEE KLEIN et al., (Los Angeles County
Defendants and Appellants. Super. Ct. No. BP063500)
This is an appeal from an order to immediately suspend and remove Conrad Lee
Klein, Jack Reynolds and Christopher Pair (collectively, appellants) as Co-Trustees of the
Mark Hughes Family Trust (Trust). Appellants contend the trial court committed several
errors in imposing this order, including applying the wrong legal standard and otherwise
abusing its discretion in finding they committed gross negligence when handling a
significant trust asset known as the Tower Grove property. Appellants further contend
the trial court erred when rejecting their affirmative defense of consent. For reasons set
forth below, we affirm the trial court’s order.
1
FACTUAL AND PROCEDURAL BACKGROUND1
Mark R. Hughes (Mark) died in 2000, leaving a substantial estate derived from
Herbalife International (Herbalife), the corporation he personally formed and built (the
Estate).2 At the time of Mark’s death, the Estate was worth over $300 million, the bulk
of which was placed in the Trust. His son, respondent Alexander Reynolds Hughes
(Alexander), was born in 1991 and is the sole non-contingent beneficiary of the Trust, as
well as the primary beneficiary of the Estate. According to Mark’s instructions, the
principal is to remain in the Trust until Alexander reaches age 35.
Mark originally named himself sole Trustee and Alexander’s mother, Suzan
Hughes (Suzan or Guardian), as Successor Trustee upon his death. After the couple
divorced, however, Mark named as Successor Trustees upon his death appellants Jack
Reynolds, Alexander’s grandfather and chairperson of Herbalife’s board of directors;
Conrad Klein, an Herbalife senior executive and director; and Christopher Pair, a friend
since childhood and Herbalife’s chief executive officer until resigning in 2001. Mark
also named appellants as Co-Executors under his will. Separately, Mark established a
custodianship on behalf of Alexander, of which Reynolds served as custodian until his
resignation in 2006 (Custodianship).
Based upon Mark’s plan, most of the Trust assets were held by limited liability
companies (LLCs) owned by the Trust. Soon after assuming the role of Co-Trustees,
appellants named Klein as Manager of these Trust-owned LLCs.3 Appellants also named
Klein as lead, full-time Trustee.
1
Matters relating to the Estate of Mark R. Hughes have been before this court
several times in the past. For this reason, and for the sake of judicial efficiency, we set
forth only those facts relevant to the issues raised in the present appeal. A more complete
history of these proceedings may be obtained from one or more of our prior opinions.
(See, e.g., Estate of Mark R. Hughes, 2006 Cal.App.Unpub. LEXIS 8275 (Sept. 20, 2006;
nonpub.); Klein v. Hughes (2005) 133 Cal.App.4th 121.)
2
Herbalife was sold in 2002.
3
Klein had been identified in the LLC agreements as a candidate to succeed Mark
as LLC Manager upon his death.
2
Almost immediately upon Mark’s death, legal disputes arose among appellants,
Suzan, and others involved with Mark’s Estate and Trust. To name just a few examples,
Suzan, acting as Guardian of the Estate, sued appellants in 2001 in their capacity as
Executors, alleging that they had been grossly negligent in approving certain creditors’
claims against the Estate, including three such claims submitted by Herbalife. This
litigation resulted in a $200,000, plus interest, surcharge imposed against appellants, a
decision we subsequently affirmed on appeal. (Estate of Mark R. Hughes, supra, 2006
Cal.App.Unpub. LEXIS 8275.) In addition, in 2001 and again in 2004, when Alexander
was still a minor, Suzan unsuccessfully petitioned the court on his behalf to remove
appellants as Trustees. The 2001 petition was decided against Suzan on summary
judgment, a ruling we affirmed on appeal. (Hughes v. Klein, 2004 Cal.App.Unpub.
LEXIS 9683 (Oct. 25, 2004). The 2004 petition, in turn, appears to have become moot in
2009, before trial was held, when Alexander reached age 18.
This present appeal, in turn, was brought by Alexander on his own behalf, having
reached the age of maturity in 2009. Specifically, Alexander filed a petition on
December 15, 2010 seeking to suspend and remove appellants in their capacities of
Trustees based upon the following alleged acts and omissions: (1) mismanaging the
investment of Trust assets; (2) acting with gross negligence and without candor in
connection with the so-called Graegin transaction and proposed Zacadia litigation
settlement4; (3) committing a breach of trust by failing to fund the Custodianship;
(4) committing a breach of trust by failing to support Alexander; (5) acting with gross
negligence in connection with the so-called Tower Grove real property sale;
(6) exhibiting excessive hostility toward Alexander; and (7) paying themselves and their
agents excessive compensation. In addition, Alexander argued more generally that
appellants had engaged in an ongoing pattern of concealing material information,
misleading the court and other parties, and otherwise acting dishonestly in their role of
Trustees.
4
As the trial court recognized, the matter of the legality of the Graegin transaction
was finally adjudicated in an earlier lawsuit.
3
On March 18, 2013, following a lengthy trial that included testimony from
appellants, Alexander, and other key players, the trial court issued a 44-page minute
order.5 Under this order, the trial court decided to remove all three appellants as
Trustees. In a separate order, the court also ordered appellants’ immediate suspension.
As this minute order reflects, the trial court identified one situation in particular
that warranted appellants’ immediate suspension and removal – to wit, appellants’ acts
and omissions in connection with the sale of Tower Grove, a 157-acre parcel of
previously undeveloped real property located on a ridgeline in Beverly Hills. The trial
court’s minute order also noted other acts of misconduct by appellants in connection with
their Trust-related activities, including their failure to properly fund the Custodianship.
However, the court ultimately did not find these acts worthy of appellants’ removal or
suspension. With respect to Alexander’s remaining claims, the trial court likewise found
no basis for ordering appellants’ suspension or removal.
On April 12, 2013, the trial court issued a final order, expressly based on “the
findings set forth in the court’s minute order,” removing appellants as trustees and
appointing Fiduciary Trust International of California as interim successor trustee. The
court also set a status conference to address the issue of appointing and confirming
permanent successor trustee(s). Appellants did not request, and the trial court did not
prepare, a statement of decision. Nor was the lengthy minute order formally incorporated
into the final order. Appellants did, however, file a timely notice of appeal on May 14,
2013.
DISCUSSION
Appellants raise four related arguments on appeal. First, appellants contend the
removal order must be reversed because the trial court applied the wrong legal standard
when determining whether grounds exist for their removal. Second, appellants argue for
5
Before trial, the court dismissed Alexander’s related claims seeking to remove
Klein as LLC Manager and to bar Reynolds as a candidate to succeed Klein as LLC
Manager after concluding it lacked jurisdiction over the LLCs. This decision has not
been appealed.
4
reversal on the ground that the undisputed evidence does not support a finding that they
committed gross negligence. Alternatively, appellants contend the trial court abused its
discretion in ordering their removal for arbitrary and unreasonable reasons. And, finally,
appellants argue reversal of the order is required because a consent agreement exists
among the parties that bars Alexander’s breach-of-trust claim as a matter of law and
undisputed fact. We address each argument in turn below after a brief discussion of the
relevant law.
As mentioned above, Mark, the sole trustee when the Trust was formed,
specifically appointed Klein, Pair and Reynolds as Successor Trustees upon his death.
Generally, a heightened standard governs a court’s decision to remove a trustee, at least
where the factors triggering the petition for removal were recognized or recognizable at
the time of the trustee’s designation: “ ‘When the settlor of a trust has named a trustee,
fully aware of possible conflicts inherent in his appointment, only rarely will the court
remove that trustee, and it will never remove him for potential conflict of interest but
only for demonstrated abuse of power detrimental to the trust. [Citations.] . . . .’
[Citation.]” (Copley v. Copley (1981) 126 Cal.App.3d 248, 286-287; see also Estate of
Bixby (1961) 55 Cal.2d 819, 826 [“court[s] will not ordinarily remove a trustee appointed
by the creator of the trust”]; Estate of Gilliland (1977) 73 Cal.App.3d 515, 528 [where
the settlor appoints a particular individual as trustee, removal is appropriate only “for
extreme grounds, such as incapacity, dishonesty, or lack of the qualifications necessary to
administer the trust”].) As courts have long-recognized: “No man is infallible; the wisest
makes mistakes; but the law holds no executor responsible for the consequences of his
mistakes which are the result of the imperfection of human judgment and do not proceed
from fraud, gross carelessness, or indifference to duty.” (Estate of Buchman (1954) 123
Cal.App.2d 546, 556.)
On appeal, we must remain cognizant that “[w]hether a trustee should be removed
. . . is a matter within the sound discretion of the trial court and is ‘ “ ‘dependent upon the
circumstances of each particular case.’ ” ’ ” (Estate of Keyston (1951) 102 Cal.App.2d
223, 228; see also Estate of Gilmaker (1962) 57 Cal.2d 627, 633. See also Rest.2d
5
Trusts, § 107, p. 235 [the court has reasonable discretion to remove a trustee “if his
continuing to act as trustee would be detrimental to the interests of the beneficiary”].)
Where, however, “the trial court’s ruling is based on assertedly improper criteria or
incorrect legal assumptions, we review those questions de novo.” (Hypertouch, Inc. v.
Superior Court (2005) 128 Cal.App.4th 1527, 1537; accord City of Marina v. Board of
Trustees of the California State University (2006) 39 Cal.4th 341, 355 [“In the context of
review for abuse of discretion, . . . ‘use of an erroneous legal standard constitutes a failure
to proceed in a manner required by law’ ”].) The trial court’s factual findings, in turn, are
reviewed for substantial evidence. (Khani v. Ford Motor Co. (2013) 215 Cal.App.4th
916, 920.)
I. Did the trial court apply the appropriate legal standard for removal?
Appellants’ first argument is that the trial court’s suspension and removal order
must be reversed because the court relied upon the wrong statute – to wit, Probate Code
section 16040, subdivision (a), instead of Probate Code section 16052, subdivision (a).6
Alexander responds that, whether section 16052, subdivision (a) or section 16040,
subdivision (a) controls, the trial court’s exercise of discretion in ordering appellants’
suspension and removal was proper and well-supported by evidence. (Shaw v. County of
Santa Cruz (2008) 170 Cal.App.4th 229, 269 [“we will affirm a judgment correct on any
legal basis, even if that basis was not invoked by the trial court. [Citation.] There can be
no prejudicial error from erroneous logic or reasoning if the decision itself is correct”].)
We agree with Alexander.
As an initial matter, it is not entirely clear which statute the trial court relied upon
in finding grounds for appellants’ suspension and removal for breach of fiduciary duty in
connection with the Tower Grove sale. Indeed, the trial court refers alternatively to both
statutes at different points in its minute order. And, as Alexander notes, there is no
statement of decision; nor was one requested by appellants. Under these circumstances,
we decline to find reversible error based on purported faulty legal reasoning: “A formal
6
Unless otherwise stated, all statutory citations herein are to the Probate Code.
6
statement of decision enables a reviewing court to determine what law the trial court
employed. A failure to request a statement of decision results in a waiver of findings and
conclusions necessary to support the judgment and we will accordingly infer such
conclusions.” (Shaw v. County of Santa Cruz, supra, 170 Cal.App.4th at p. 269.)
Instead, we assume the correctness of the trial court’s reasoning and “indulge all
legitimate and reasonable inferences to uphold the judgment.” (In re Marriage of Schmir
(2005) 134 Cal.App.4th 43, 50.)
In any event, despite the parties’ legal posturing, the basic legal framework for
removing a trustee does not appear to be in dispute. “California statutes authorize . . .
removing a trustee (Prob. Code, § 17200, subds. (a)(8), (10)), and give the court power to
make decrees and take other necessary action to dispose of matters presented by the
[removal] petition. (Former Prob. Code, § 1138.2, now Prob. Code, § 17206.)” (Getty v.
Getty (1988) 205 Cal.App.3d 134, 140.) In particular, a trustee may be removed for
committing any breach of trust (§ 15642, subd. (b)(1)), which, broadly speaking, is “[a]
violation by the trustee of any duty that the trustee owes the beneficiary.” (§ 16400.) Of
significance here, one fundamental duty a trustee owes its beneficiary is “to take
reasonable steps under the circumstances to take and keep control of and to preserve the
trust property.” (§ 16006; see Rest.2d Trusts, § 176, com. b, p. 381 [“It is the duty of the
trustee to use reasonable care to protect the trust property from loss or damage”].)
The trustee’s general standard of care when administering the trust is set forth in
section 16040, subdivision (a): “The trustee shall administer the trust with reasonable
care, skill, and caution under the circumstances then prevailing that a prudent person
acting in a like capacity would use in the conduct of an enterprise of like character and
with like aims to accomplish the purposes of the trust as determined from the trust
instrument.” Similarly, the Trust instrument in this case provides: “When investing,
reinvesting, purchasing, acquiring, exchanging, selling and managing the trust property,
the Trustee shall act with the care, skill, prudence and diligence under the circumstances
then prevailing . . . that a prudent person acting in a like capacity and familiar with such
7
matters would use in the conduct of an enterprise of a like character and with like aims.”
(Trust, Art. 8.1.6.)
Our legislature has prescribed a different statutory rule, however, where, as here,
the authority to manage a particular trust asset has been delegated to someone other than
the trustee. Under such circumstances, section 16052 provides in relevant part:
“(a) A trustee may delegate investment and management functions as prudent under the
circumstances. The trustee shall exercise prudence in the following:
“(1) Selecting an agent.
“(2) Establishing the scope and terms of the delegation, consistent with the purposes and
terms of the trust.
“(3) Periodically reviewing the agent’s overall performance and compliance with the
terms of the delegation.
“(b) In performing a delegated function, an agent has a duty to exercise reasonable care to
comply with the terms of the delegation.
“(c) Except as otherwise provided in Section 16401, a trustee who complies with the
requirements of subdivision (a) is not liable to the beneficiaries or to the trust for the
decisions or actions of the agent to whom the function was delegated.” (§ 16052, subds.
(a)-(c). See also § 16040, subd. (c) [“This section does not apply to investment and
management functions governed by the Uniform Prudent Investor Act, Article 2.5
(commencing with Section 16045)”].)
Here, as previously stated, the trial court found appellants failed to act with
reasonable prudence, and thereby violated their fiduciary duties to the Trust beneficiaries,
in connection with the Tower Grove sale. Tower Grove, recall, is a 157-acre parcel of
real property on a Beverly Hills ridgeline that Mark purchased for $8 million two years
before his death. This property, undeveloped when Mark acquired it, was held by one of
the Trust-owned LLCs and represented one of the Trust’s most significant assets. Indeed,
as the trial court pointed out, appellant Pair described Tower Grove as “the most
significant non-liquid asset of the Trust.”
8
Around 2003, appellants decided it was time to either develop or sell Tower
Grove. The Trust considered several options for developing or selling the property
before it was ultimately offered to Charles Dickens, an Atlanta-based businessman.7
Initially, Dickens was granted a lease on the property with an all-cash option to buy and a
mandate to secure tract map approval.8 In the end, however, Dickens was extended a no-
cash deal for Tower Grove due to his inability to provide the down payment.9 Then, after
years of breaching the terms of this no-cash deal despite additional extensions of credit
from the Trust, Dickens was ultimately forced to file for bankruptcy.
The trial court quite aptly summarized the pertinent details of the Tower Grove
sale as follows:
“The Trust-owned LLC sold Tower Grove to a buyer [Charles Dickens] for $23,750,000
with absolutely no money down; the Trust-owned LLC financed the entire transaction.
The Trust-owned LLC received a security interest in the property representing the full
sales price.”
“[Dickens] was someone with whom the Co-Trustees had a relationship as they had
previous business dealings with him related to Tower Grove. The Co-Trustees were
familiar with his past performance. [¶] . . . [¶]
“According to Mr. Klein, Mr. Dickens was of ‘limited financial resources.’ A ‘poor
man.’ His company had no assets.
“Mr. Dickens had no formal education in real estate, property management, real estate
financing, and no professional licenses or certifications. He had very little experience in
7
The decision to sell Tower Grove followed the trial court’s denial of appellants’
petition for approval of their own plan to develop the property.
8
For the sake of convenience, our references to “Dickens” include both the person
and his corporate interests, including Tower Park Properties and Tower Park
Development Company LLC, the entities involved in the Tower Grove transactions.
9
According to appellants, the $23,750,000 sale price for this no-cash deal was
almost 20 percent higher than any prior offer they had received at the time, justifying
their decision to support it.
9
real property development and no prior experience in entitlement work or the recordation
of a tract map.
“Mr. Dickens was also in breach of a lease entered into with the Trust-owned LLC dated
January 8, 2004. (Exhibit 599) (The lease between Mr. Dickens and the Trust-owned
LLC was part of the overall sales transaction.) Mr. Dickens breached many of the lease
terms: the obligation to pay rent (albeit $1 per month), payment of impositions
(Mr. Dickens did not know what the term meant), payment of insurance premiums, the
payment of property taxes (during the lease term), and the funding of an $850,000
development account (in fact no such account was opened).”10
As the trial court thus recognized, the Trust itself did not actually own or sell
Tower Grove. Rather, it was an asset owned and sold by one of the Trust-owned LLCs,
MH Holdings IIH, LLC. Further, pursuant to the Trust instrument, appellants were
authorized to (and did) “employ . . . agents” to manage the Trust-owned LLCs “as the
Trustee . . . deem[ed] necessary for the best interest of the trust estate . . . .” The Trust
instrument expressly states that “the Trustee shall not be responsible for the acts of such
person . . . beyond the obligation to use reasonable care in the selection of such . . .
agents.”11 (Trust, Art. 8.1.24.)
Consistent with these Trust provisions, the Trust-owned LLC agreements provided
in relevant part that a manager shall manage and control the LLC’s business and affairs
10
Appellants do not challenge any of these facts for purposes of this appeal.
11
Section 16401 delineates six circumstances where a trustee may be held liable to
the trust beneficiary for an act of its agent: (1) the trustee directs the agent’s act; (2) the
trustee delegates to the agent the authority to perform an act that the trustee is under a
duty not to delegate; (3) the trustee fails to use reasonable prudence in selecting the agent
or retaining the agent selected by the trustee; (4) the trustee fails to periodically review
the agent’s overall performance and compliance with the terms of the delegation; (5) the
trustee conceals the agent’s act; or (6) the trustee fails to take reasonable steps to compel
the agent to redress the wrong in a case where the trustee knows of the agent’s acts or
omissions. (§ 16401, subd. (b).) Section 16000 provides, however, that “On acceptance
of the trust, the trustee has a duty to administer the trust according to the trust instrument
and, except to the extent the trust instrument provides otherwise, according to this
division.”
10
rather than the trustees: “[T]he Manager shall have full, complete and exclusive
authority, power and discretion to manage and control the business, property and affairs
of the [LLC], to make all decisions regarding those matters, to supervise, direct and
control the actions of the officers . . . .” Relevant here, as mentioned above, appellant
Klein was named Manager of the Trust-owned LLC with ownership interest in the Tower
Grove property.
Appellants rely upon this Trust-sanctioned broad delegation of authority to Klein
to manage and control the business of the Trust-owned LLC to argue that they cannot be
held in breach of any duty of trust or care arising from decisions made by Klein during
the course of the LLC’s sale of Tower Grove to Dickens. For reasons explained below,
and in light of the circumstances at hand, we disagree with appellants’ argument.
First, as the trial court noted, the Trust-owned LLC agreements empowered the
appellants, in their capacities as Trustees, to remove the Manager “at any time for any
reason upon Approval by the Members.” In so providing, the agreements imposed a
quite significant check on Klein’s otherwise broad authority to control the LLCs’ affairs,
including the LLC’s sale of Tower Grove to Dickens.
Further, this power vested in the appellants, to remove the Manager must be
viewed in light of the even more fundamental duty owed by the appellants, to their
beneficiaries – namely, to preserve the Trust’s assets by, among other things, preventing
unnecessary loss or damage. (§ 16006; see Rest.2d Trusts, § 176, p. 381.) As such, the
mere fact that power to control the business and affairs of the Trust-owned LLCs
(including those related to Tower Grove) was delegated exclusively to the Manager does
not mean all powers vested in the appellants, were delegated to the Manager or otherwise
excused or surrendered. We know of nothing in the statutory framework, the Trust
instrument, or the LLC agreements that provides as much. To the contrary, reservation of
power in the hands of the appellants, to remove the Manager for any reason at any time
suggests quite the opposite.
Thus, we are left with a more factual question – to wit, whether appellants
committed a breach of trust by failing to exercise reasonable prudence in monitoring
11
Klein’s overall performance as LLC Manager so as to permit proper assessment of
whether his removal or some other act of intervention was warranted to prevent loss or
damage to Trust assets in connection with the Tower Grove sale.12 (See Getty v. Getty,
supra, 205 Cal.App.3d at pp. 139-140 [“The purpose of removing a trustee is not to
inflict a penalty for past action, but to preserve the trust assets. [Citation.] “ ‘The question
in each case is whether the circumstances are such that the continuance of the trustee in
office would be detrimental to the trust . . . ’ (2 Scott on Trusts (4th ed. 1987) The
Trustee, § 107, p. 104.)”]. Accord, § 16052, subd. (a) [“The trustee shall exercise
prudence in the following: [¶] . . . [¶] Periodically reviewing the agent’s overall
performance and compliance with the terms of the delegation”]; Trust, Art. 8.1.6.) To this
question, we now turn.
II. Does the evidence support the trial court’s suspension/removal order?
The trial court found that appellants’ conduct with respect to the Tower Grove sale
(and development) constituted “a gross breach of trust” that “borders on recklessness.”
The court also found this breach “resulted in significant damage to the Trust . . . .”
Several factors are identified in the trial court’s minute order in support of these findings.
First, the trial court noted that appellants had engaged in previous business
dealings with Dickens, Tower’s buyer, and thus knew that he had “limited financial
resources”; no formal education, licenses or certifications in the areas of real estate or
property management; and little, if any, prior experience in real property development,
entitlement work or tract map recordation.13
12
Contrary to appellants’ contention, the trial court correctly identified the pertinent
legal issue: “The [appellants’] duty to preserve assets included an obligation to
appropriately oversee an LLC manager of a Trust-owner LLC in an effort to prevent loss
or damage. That supervision would necessarily include ensuring that the management of
the Trust-owned LLC assets was consistent with the purposes of the Trust and in the best
interests of the beneficiaries and taking appropriate corrective action with the LLC
Manager when necessary.”
13
Appellants maintained, nonetheless, that Mr. Dickens had an impressive work
ethic.
12
Second, the court also pointed out that appellants knew Dickens was in breach of
the lease he had entered into with the Trust-owned LLC on January 8, 2004, before the
deal to sell him the property with no cash down was consummated. Specifically, they
knew Dickens had failed to comply with lease terms requiring payment of monthly rent,
property taxes, insurance, and “impositions” (a term Dickens did not know), and
requiring funding of an $850,000 development account (which Dickens never opened).
Nonetheless, under Klein’s management, the Trust-owned LLC continued to extend loans
to Dickens in connection with Tower Grove’s development. For example, one of the
Trust-owned LLCs provided Dickens an unsecured, no-guaranty loan in the amount of
$1.5 million for the purpose of ensuring the property’s tract map would be recorded.
Dickens was later granted an extension on this loan when he failed to repay it in a timely
fashion. In addition, a Trust-owned LLC then extended an additional $12 million in
credit to Dickens for the purpose of building infrastructure and paying property taxes,
among other things. This loan, secured by a deed of trust, was also extended despite
Dickens’ failure to make the required payments. Ultimately, however, the LLCs issued
notices of default on this loan due to Dickens’ continued failure to make required
payments.
In light of appellants’ awareness of these and other facts, and in light of the
significant value that Tower Grove held for the Trust,14 the trial court concluded
appellants had a duty to act in their oversight capacity to ensure the financial soundness
of the Tower Grove sale, and, in addition, to ensure Dickens complied with the terms of
the sale once it was executed by, for example, making the requisite payments as they
became due. (§ 16052, subd. (a).) Further, the trial court concluded that, once it became
clear to a reasonably prudent person that the Tower Grove sale was or had become
financially unsound, appellants had a duty to take steps to preserve the Trust’s assets by
opposing the sale, removing Klein as Manager under the terms of the Trust-owned LLC
agreement, or taking some other measure designed to prevent further loss or damage.
14
The record reflects Tower Grove was worth about $23,750,000.00 at the time of
sale.
13
(See § 16052, subd. (a); Getty v. Getty, supra, 205 Cal.App.3d at pp. 139-140.) In other
words, had appellants acted in a reasonably prudent manner, they would not have sat idly
by, essentially doing nothing, while the Tower Grove sale was consummated and,
thereafter, while Dickens repeatedly failed to abide by its bargained-for terms. Yet,
according to the trial court, that is exactly what happened.15
Having reviewed the relevant record, we conclude there is indeed substantial
evidence to support the findings relied upon by the trial court to suspend and remove
appellants based on their conduct in connection with the Tower Grove sale. In short, the
trial court appropriately identified evidence of a multitude of acts or failures to act
committed by appellants in connection with the Tower Grove sale that, viewed
collectively, met the legal standard for removal. These acts and omissions include, but
are not limited to, appellants’ failure to assess whether the sale was financially sound,
their failure to investigate Dickens’ creditworthiness or business competence, their failure
to intervene when the Manager granted multiple extensions to Dickens with respect to his
loan payments or provided him additional loans to finance the Tower Grove project, and
more generally, their failure to actively monitor or oversee issues arising from the Tower
Grove sale that would have raised significant red flags for a reasonably prudent
fiduciary.16 The end result of these failures was, thus, that title to the Trust’s most
15
The trial court acknowledged that appellant Pair and his counsel “voiced [their]
concerns” about the sale. One email, in particular, from Pair’s attorney to Klein’s
attorney stated: “I still do not understand why [Klein] is so in favor of this and it appears
he is now placing himself in a position as Manager to go ahead with developing the
property, although there does not appear to be any additional benefit to the Trust from
what would have been the sale to Tower Park Properties LLC.” However, as the trial
court also acknowledged, Pair and his counsel “took no effective action.” Appellant
Reynolds, in turn, “actively avoided overseeing the issues with the Tower Grove sale.
Mr. Reynolds deferred to Mr. Klein on most everything. (Exhibits 609 and 884).”
16
Klein even agreed to extend another line of credit for $7 million after Dickens
initiated bankruptcy proceedings. In doing so, he explained that his goal was to enable
Dickens to perform further infrastructure work in order to attract potential investors for
Tower Grove, which would, in turn, facilitate his emergence from bankruptcy so that the
LLCs could hopefully recoup their investment.
14
valuable non-liquid asset was passed to Dickens, an individual who never paid any
money whatsoever to the Trust or the Trust-owned LLC for the Tower Grove property
and ultimately filed for bankruptcy protection in federal court, costing the Trust an
estimated $2 million to $3 million in legal fees.17 Under these circumstances, we agree
with Alexander that the trial court’s suspension/removal order was a reasonable exercise
of discretion.
In reaching this conclusion, we accept appellants’ assertions that the LLC’s
interest in Tower Grove was at all relevant times over-secured, and that Tower Grove’s
value increased significantly due to Dickens’ development efforts (including his
finalization of the property’s tract map and building of infrastructure).18 However, these
facts, even if undisputed, are not dispositive. As stated above, we review a trial court’s
suspension or removal order for abuse of discretion and its factual findings for substantial
evidence. (Estate of Gilmaker, supra, 57 Cal.2d at p. 633; Rest.2d Trusts, § 107, p. 235
[the court has reasonable discretion to remove a trustee “if his continuing to act as trustee
would be detrimental to the interests of the beneficiary”].) And, for all the reasons just
identified, we conclude there is substantial evidence in this record supporting the trial
court’s reasonable decision to suspend and remove appellants to prevent further detriment
to the Trust in light of their numerous inexcusable failures of oversight.
Moreover, we also acknowledge appellants’ contention that the trial court erred by
focusing on Tower Grove without considering the Trust’s overall investment
performance or the Manager’s overall performance. Appellants note that Tower Grove,
17
The Trust-owned LLCs were also subsequently named in adversary proceedings
subsequently brought by the debtor. These proceedings have been dismissed without
prejudice. Apparently, the parties have engaged in settlement negotiations that include
the possibility of reducing the loan balances owed by Dickens to the Trust in exchange
for certain releases. It is unclear to the court whether any settlement agreement has been
finalized.
18
According to appellants, the value of Tower Grove has continued to increase since
its sale to Dickens and, as of the close of evidence, Dickens had received a legitimate
offer of $60 million for the property, which amount “would reflect an annual return on
the LLCs’ actual monetary investment in Tower Grove of over 7%.”
15
when sold, constituted less than seven percent of the LLCs’ assets, and that the overall
Trust portfolio had performed well.19 While perhaps true, however, appellants do not,
and could not, seriously dispute the fact that Tower Grove, a 157-acre parcel of real
property on a Beverly Hills ridgeline, represented a significant asset in the Trust’s
portfolio. Indeed, as the trial court pointed out, Pair himself described Tower Grove as
“the most significant non-liquid asset of the Trust.” Further, as reflected in the applicable
statutory framework, court authority to remove a trustee for breach of fiduciary duty does
not hinge upon the extent, or even the existence, of monetary loss to the trust arising from
the breach; rather, the decision to remove a trustee to preserve trust assets is a matter left
to the court’s sound discretion in light of the particular circumstances at hand. 20 (Estate
of Keyston, supra, 102 Cal.App.2d at p. 228; Estate of Gilmaker, supra, 57 Cal.2d at
p. 633. See also Rest.2d Trusts, § 107, p. 235 [the court has reasonable discretion to
remove a trustee “if his continuing to act as trustee would be detrimental to the interests
of the beneficiary”].) Accordingly, we reject appellants’ fact-based challenge to the trial
court’s exercise of discretion.
III. Did the trial court err in rejecting appellants’ consent defense?
Finally, appellants seek reversal of the order for their suspension and removal
based upon the purported written consent to the Tower Grove sale by Suzan, Alexander’s
mother and guardian. They reason that, because Suzan consented to the sale, Alexander
should be equitably estopped from challenging it as a breach of trust.
19
As appellants point out, the trial court rejected for insufficiency of the evidence
Alexander’s removal request based upon poor performance of the Trust portfolio as a
whole.
20
While monetary loss is not a prerequisite to court removal of a trustee (§ 15642),
in this case, the trial court found significant monetary loss in the form of “several
millions of dollars” in legal fees “incurred by the Co-Trustees in defending their actions
connected to Tower Grove, both in this court and the Bankruptcy court.” This, of course,
provides further evidence in support of the trial court’s decision to suspend and remove
appellants for their breach of fiduciary duty. (Getty v. Getty, supra, 205 Cal.App.3d at
pp. 139-140.)
16
Below, the trial court rejected this argument, primarily on the ground that Suzan
did not consent in writing to the actual transaction that took place – to wit, the “100
percent seller financed no money down sale” of Tower Grove to Dickens. Rather, she
consented to “the transactions . . . as reflected in the documents enclosed with Kenneth
A. Ziskin’s memorandum to Hillel Chodos[, Suzan’s attorney,] dated January 8, 2004.”
The transactions in the referenced documents, in turn, reflect an all-cash sale that never
transpired. As such, the court found appellants’ reliance upon Suzan’s consent
misplaced. This is particularly true, the court found, given that Suzan lacked certain
material facts when offering her “consent” to the Tower Grove sale, including the key
fact that the Trust-owned LLC intended to finance the entire sale.
We conclude the trial court’s rejection of appellants’ consent defense was entirely
reasonable on this record. Documentary evidence admitted at trial reflects that, on
January 8, 2004, Kenneth Ziskin, counsel for the Trust-owned LLCs, wrote a
memorandum to Suzan’s attorney, Hillel Chodos, enclosing a consent form for Suzan’s
signature and twelve documents regarding the proposed sale of Tower Grove. This
memorandum stated: “I submit these documents to you in order to obtain the consent of
Suzan Hughes to the transactions reflected therein . . . .” (Italics added.) “[T]he
documents,” as appellants admit, “reflect an all-cash deal,” rather than the seller-financed
deal that was ultimately executed.21
Further, on January 9, 2004, the day after Suzan received Ziskin’s memorandum
with the enclosed documents, she executed on behalf of Alexander a written “Consent of
the Beneficiary” pursuant to section 16463.22 In doing so, Suzan acted in accordance
21
More specifically, as Dickens testified, the deal reflected in the documents given
to Suzan’s attorney required $23.75 million in cash at close of escrow and included a
deferred purchase price agreement granting the Trust a percentage of the property’s gross
sales proceeds going forward.
22
Section 16463 provides in relevant part:
“(a) Except as provided in subdivisions (b) and (c), a beneficiary may not hold the trustee
liable for an act or omission of the trustee as a breach of trust if the beneficiary consented
to the act or omission before or at the time of the act or omission.
“(b) The consent of the beneficiary does not preclude the beneficiary from holding the
17
with Ziskin’s directions by expressly consenting to the transactions relating to the
proposed sale of Tower Grove “as reflected in the documents enclosed with Kenneth A.
Ziskin’s memorandum to Hillel Chodos dated January 8, 2004. [¶] Suzan Hughes
confirms that she has been represented and advised by counsel with regard to the terms of
the transactions set forth above and with regard to this consent.” (Italics added.)
At trial, Dickens himself confirmed exactly what the trial court found to be true:
The transactions to which Suzan consented in writing differed from those to which the
parties to the Tower Grove sale ultimately agreed. Specifically, Dickens testified that the
no-cash deal by which he acquired Tower Grove was a completely “different” deal than
that the “$23,750,000 for purchase, all cash” deal to which Suzan gave her consent in
exchange for $250,000 in consideration. Further, during direct examination, Dickens
agreed the difference between the two deals was “all cash versus no cash,” and explained
that, after telling Klein he did not have the means to pay a cash down payment, Klein told
him, “we’ll have to find a way to get you the property without any money down.”
Based upon this record, we affirm the trial court’s decision to reject appellants’
affirmative defense of consent. Simply put, Suzan provided written consent for a deal
that never came to fruition. Suzan did not, and never purported to, consent to the Tower
Grove sale at issue here – to wit, the no-cash, seller-financed deal forming the basis of the
trial court’s decision to suspend and remove appellants.
Moreover, because we agree with the trial court that Suzan never consented to the
relevant transaction – to wit, the Tower Grove sale – we need not delve into what
appellants call an “issue of first impression”: whether for purposes of section 16463
trustee liable for a breach of trust in any of the following circumstances:
“[¶] . . . (2) Where the beneficiary at the time consent was given did not know of his or
her rights and of the material facts (A) that the trustee knew or should have known and
(B) that the trustee did not reasonably believe that the beneficiary knew.” (§ 16463,
subds. (a), (b)(2).)
18
Alexander has the burden to disprove, or appellants have the burden to prove, valid
consent.23
Nor must we enter the fray with respect to appellants’ arguments regarding the
relevance and admissibility of Exhibit 875, an email communication from Ziskin to
Chodos, appellants, and others. This email, admitted at trial for the limited purpose of
proving notice of its contents, attached “a memo re status on the Tower Grove sale” also
prepared by Ziskin. Undisputedly, this email and attached memorandum were dated
December 18, 2003, several weeks before Suzan was presented with and executed the
relevant consent form. As such, this exhibit, even assuming for the sake of argument the
trial court erred by restricting the scope of its admission, provides no basis for rethinking
our conclusion that appellants’ consent defense was properly rejected. As explained
above, Suzan consented only to the transactions “reflected in the documents enclosed
with Kenneth A Ziskin’s memorandum to Hillel Chodos dated January 8, 2004.”
Accordingly, the documents enclosed with Ziskin’s memorandum dated December 18,
2013 are beside the point.
And lastly, even if Suzan had consented to the Tower Grove sale, the fact remains
that much of the conduct underlying the challenged order arose after the property sale
was finalized when, for example, appellants took no action in response to Klein’s
imprudent decisions to forgive Dickens’ multiple violations of the sale terms and to
continue to extend him credit despite his obvious inability to repay. (Pp. 12-15.) As
such, valid grounds nonetheless support the trial court’s order to suspend and remove
appellants given their breach of the duty to preserve trust assets following the Tower
Grove sale.24 (See In re Marriage of Schmir, supra, 134 Cal.App.4th at pp. 49-50 [the
23
Specifically, appellants argue that section 16463, subdivision (a) places the burden
on the trustee to prove consent was granted, while section 16463, subdivision (b) then
shifts the burden to the beneficiary to prove the consent was invalid.
24
Appellants argue there is no evidence that the trial court would have ordered their
removal even if Suzan had consented to the Tower Grove sale. However, as explained
above (pp. 6-7), appellants did not request a statement of decision from the trial court
and, thus, cannot challenge its purported reasoning for ordering their removal: “[F]ailure
19
reviewing court must accept as true all evidence tending to establish the correctness of
the trial court’s findings and indulge all legitimate and reasonable inferences to uphold
the judgment].)
DISPOSITION
The order to suspend and remove appellants as Co-Trustees of the Mark Hughes
Family Trust is affirmed. Appellants shall bear costs of the appeal.
_________________________
Jenkins, J.
We concur:
_________________________
McGuiness, P. J.
_________________________
Pollak, J.
to request a statement of decision results in a waiver of findings and conclusions
necessary to support the judgment and we will accordingly infer such conclusions.”
(Shaw v. County of Santa Cruz, supra, 170 Cal.App.4th at p. 269.)
20