Monday, September 27, 2010

Recent California Decision On Breach Of Trust & Trustee Fiduciary Duties - Uzyel v. Kadisha

A recent decision from the California Court of Appeal (10 S.O.S. 5529) serves as an incredible reminder about the duties of a trustee not to engage in self-dealing even if the trustee believes he or she is also acting in the best interest of the trust and beneficiaries.

It also demonstrates how long these cases can take to run through the courts. The lower court trial lasted for almost four years before it went to the appellate courts.
In this case, the Court of Appeal affirmed a judgment against trustee Neil Kadisha, a venture capitalist and philanthropist who is reportedly one of Los Angeles’ wealthiest residents, for actions arising from two trusts he was administering for a young widow. The lower court found that Neil Kadisha used the trusts for his own benefit. Neil Kadisha served as the trustee of two trusts.

The beneficiaries, Dafna Uzyel and her children Izzet and Joelle Uzyel (collectively the Uzyels), filed petitions for breach of trust against Kadisha and terminated the trusts. After a nonjury trial, the trial court awarded the Uzyels over $59 million in compensatory damages and disgorgement of profits, plus $5 million in punitive damages and over $13 million in attorney fees. The Court of Appeal upheld the lower court's findings and also added about $20 million in prejudgment interest to the judgment.

Justice Walter Croskey, writing for the Court of Appeal, cited numerous instances of self-dealing by Mr. Kadisha, who agreed to assist then-28-year-old Dafna Uzyel, who had a 10th grade education and spoke little English, after her 40-year-old husband died unexpectedly. Rafael Uzyel had emigrated from Israel with his wife and two children and had a successful export-import business.

Mr. Kadisha appealed the judgment, challenging the awards on several claims, the punitive damages, and the attorney fee award. The Uzyels also appealed, challenging the denial of relief on some of their claims, the denial of prejudgment interest on some claims, the punitive damages, and the costs award.

This case raised several questions concerning a trustee’s liability for breach of trust under Probate Code Section 16440(a). With respect to these questions, the Court of Appeal concluded:
(1) tracing is not required for the disgorgement of profits made by the trustee “through the breach of trust” under section 16440(a)(2);
(2) the fact that an act is consistent with or even compelled by the duty of prudent investing does not excuse a trustee from liability for breach of the duty of loyalty, including liability for appreciation damages as lost profits under section 16440(a)(3);
(3) the determination as to which of the statutory measures of liability “is appropriate under the circumstances” under section 16440(a) is reviewed for abuse of discretion;
(4) an investment loss resulting from a breach of trust should be offset against a profit resulting from a breach of trust only if the breaches were not separate and distinct;
(5) prejudgment interest is mandatory on an award of damages under section 16440(a)(1); and
(6) the absence of an express provision for prejudgment interest under section 16440, subdivision (a)(3) does not preclude an award of prejudgment interest under Civil Code section 3287, subdivision (a) on damages awarded under that provision.

Citing legal treatises and the 3d Restatement of Trusts, Justice Croskey wrote: “A trustee is strictly prohibited from administering the trust with the motive or purpose of serving interests other than those of the beneficiaries....A trustee also is strictly prohibited from engaging in transactions in which the trustee’s personal interests may conflict with those of the beneficiaries without the express authorization of either the trust instrument, the court, or the beneficiaries...."

"It is no defense that the trustee acted in good faith, that the terms of the transaction were fair, or that the trust suffered no loss or the trustee received no profit. This is known as the no further inquiry rule...Such a transaction is voidable at the election of the beneficiaries, and other remedies may be available, including an award of profits that the trust would have made if not for the breach of trust.”

Mr. Kadisha argued, among other things, that many of the challenged transactions, such as a sale of Qualcomm stock in 1992 at the time the investment was properly classified as risky, were in the trusts’ best interests. But a trustee cannot enter into a transaction solely for his personal benefit, even if it makes economic sense from the trust’s point of view, Croskey wrote.

Croskey said the additional prejudgment interest, which the trial judge denied as a matter of equity, had to be added to the award under Probate Code provisions setting forth remedies for breach of trust.

Attorney Comments: Where there is a conflict of interest or possible conflict of interest, obtaining written consent or legal advice is important at the outset. The fiduciary duties a trustee holds to the trust and beneficiaries impose serious legal duties that sometimes get overlooked especially where the trustee is also a beneficiary (which was not the case in Mr. Kadisha's case). Trustees should seek legal advice before making decisions that could cause them potential liability and exposure. In Mr. Kadisha's case, it seems he obtained legal advice and then ignored some of it to his later detriment.

Mr. Moravec is a very experienced estate planning, trust administration and probate litigation attorney. He has more than 20 years' experience in probate and is extremely dedicated to his clients and helping them create a plan that is tailored to their wishes, finances, helps avoid probate and taxes, and takes into account their families' unique situation.

He focuses his practice on Estate Planning, Trust and Probate Administration, Beneficiary and Trustee Representation, Probate Litigation, Tax Law, and Nonprofit Law. He represents clients throughout Southern California and his offices are conveniently located for clients in the Los Angeles, Orange, Santa Barbara, Riverside and San Bernardino Counties.

The firm website is http://www.moravecslaw.com/. His email is hm@moravecslaw.com

The Los Angeles area office is located at 2233 Huntington Drive, Suite 17, San Marino, California 91108. Telephone: (626) 793-3210.