There are times when beneficiaries can challenge the sale of an asset but it is important to determine whether such a challenge is in good faith. A recent California case shows what happens when a probate court determines that the beneficiaries are opposing the sale in bad faith and that their lawsuit against the trustee is in bad faith. The beneficiaries ended up being charged with $226,000 in attorneys' fees and had their future trust distributions reduced by that amount.
Our firm handles many estate disputes but it is always important to assess the risks and benefits. In addition, it is important to not let emotions alone drive the litigation. This recent case is a lesson on how beneficiary disputes can go wrong. In a case decided on December 2, 2009, Rudnick v. Rudnick, the California Court of Appeal held that a probate court had authority to charge approximately $226,000 in attorney fees generated defending a trustee’s proposed sale of an asset solely against the shares of the minority of beneficiaries who brought the challenge in "bad faith."
The probate case was in Kern County. This was a complicated trust (RET) which was created in 1965 by the beneficiaries of 11 separate trusts, which each owned an undivided interest in various real property and business entities and were managed as an integrated enterprise. Its purpose was to liquidate the trusts’ assets and distribute proceeds to beneficiaries, and any sale or disposition negotiated by the trustee was subject to approval by a majority of beneficiaries.
The trust was intended to expire in 1974, but the Court of Appeal ruled in 1999 that it would continue to exist for a reasonable time until either the assets were sold or a majority of beneficiaries elected to terminate it. Trustee Oscar Rudnick petitioned the probate court for instructions on consummating the sale to real estate investor CIM Acquisition Group and a proposed distribution after a majority of RET beneficiaries (60 percent) gave their approval.
Thethree minority beneficiaries (Philip Rudnick, Robert Rudnick and Milton Rudnick) brought their challenge when they claimed that the Rudnick Estates Trust’s principal asset—the 68,000-acre Onyx Ranch, located in the Sierra Nevada Mountains just outside of Bakersfield—was worth substantially more than $48 million, that the trustee violated his fiduciary duty and that the transaction violated the terms of the RET. The minority beneficiaries sued the trustee in probate court.
After extensive litigation, Kern Superior Court Judge Robert S. Tafoya made the award against the minority beneficiaries (Philip Rudnick, Robert Rudnick and Milton Rudnick) after concluding it was unfair to burden the majority of beneficiaries who approved the sale by a vote of 60 percent. Judge Tafoya also determined that their opposition was primarily for the purpose of causing unnecessary delay and in bad faith.
Reasoning that a Kern County judge had the equitable power to make the award, the court upheld an order reducing the shares of three beneficiaries who sought to keep the trustee from closing the $48 million sale of a ranch on time. Judge Tafoya, concluding that the minority beneficiaries’ opposition was unfounded, awarded approximately $226,000 in attorney fees and costs to the trustee and ordered the fees charged against the minority beneficiaries’ future trust distributions.
The beneficiaries appealed, but Justice Bert Levy said that Judge Tafoya had authority for the award under the broad equitable powers that a probate court maintains over the trusts within its jurisdiction. The decision written by Justice Levy set forth the rule of law as follows: “[W]hen a trust beneficiary instigates an unfounded proceeding against the trust in bad faith, a probate court has the equitable power to charge the reasonable and necessary fees incurred by the trustee in opposing the proceeding against that beneficiary’s share of the trust estate.”
In an unpublished portion of the opinion, Justice Levy also concluded that Judge Tafoya did not abuse his discretion in making the attorney fees award. “[T]he court determined that appellants had demonstrated their ‘intent to derail any sale approved by the majority,’” he said. “In the court’s opinion, appellants had made their position clear, ‘namely that they oppose any sale of the Onyx Ranch unless it involves wind energy development’ and hoped to disrupt the sale by preventing respondent from closing by the due date…." Justice Levy concluded that “[o]n this record, it cannot be said that there was no reasonable basis for the probate court’s ruling.
Attorney Commentary: This case is a lesson for all beneficiaries to consider when deciding to challenge the sale of an asset especially where the majority of beneficiaries has approved the sale. The downside of filing this lawsuit against the trustee in this case was paying the attorneys' fees for their own attorneys and for the other side. An expensive lesson.
We aggressively represent our clients but it is important to remember that if we are representing the trustee that there are fiduciary duties to the beneficiaries. Similarly, if we represent the beneficiaries we need to ensure that there is evidence demonstrating good faith if we decide to challenge the trustee's actions in court.
Posted by Henry (Hank) J. Moravec, III, a partner at Moravec, Varga and Mooney. For a complimentary 30 minute consultation (telephonic or in person), you can e-mail Hank Moravec at hm@moravecslaw.com or call him at (626) 793-3210 or (818) 769-4221.
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 has two offices and consultations and meetings can be held at either office.
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