The California Court of Appeal blocked Donald Sterling’s last second shot at undoing the sale of the Los Angeles Clippers. Donald sought to overturn the results of an eight day trial that occurred in July 2014. The opinion, issued on November 16, 2015, should be of interest to settlors, trustees, and beneficiaries of “ordinary” trusts in California that do not hold a $2 billion NBA franchise.
The Court of Appeal hammered Donald for procedural deficiencies with his appellate briefs before ruling against Donald on all three issues on appeal. The court held that: (1) Donald was properly removed as trustee on the basis of his incapacity; (2) the trial court appropriately allowed the sale of the Clippers despite the pending appeal; and (3) Donald’s effort to revoke his trust was ineffective to stop the sale of the Clippers.
Evidence supported Donald’s removal as trustee
After a recording of Donald’s “deeply offensive, demeaning, and discriminatory views towards African Americans, Latinos, and ‘minorities’ in general” was made public in 2014, there was pressure on the Clippers, the NBA, and the Sterling Family Trust to remove Donald from power and sell the Clippers. The team was owned by a corporation that was, in turn, held by the trustees of the Sterling Family Trust.
The trustees were Donald and his wife Rochelle. While it seemed Rochelle was inclined to sell the team and move on, Donald defiantly sought to remain in control of the franchise. The default rule under the Probate Code is that where two co-trustee serve, their actions must be unanimous. Donald’s agreement or his removal as a trustee thus was necessary to move forward with the sale.
The Trust provided for the removal of a trustee “incapable of managing an individual’s affairs under the criteria set forth [in the California Probate Code].” The Probate Code presumes that all people have capacity, but that presumption can be overcome by evidence of a deficit of specific mental function.
These mental functions, listed at Probate Code section 811, include such things as orientation as to time and place, the ability to concentrate, and the ability to carry out a plan in one’s self-interest. If a person does not know where they are, a doctor is likely to conclude that he or she has a deficit as to orientation, which would be evidence supporting a determination of incapacity.
The Sterling Family Trust additionally provided that a trustee would be deemed incapacitated when two licensed physicians with experience with capacity determinations certified in writing that the trustee was “incapacitated.”
The Court of Appeal determined that the opinions presented by Rochelle’s two expert witnesses were sufficient to substantiate a finding of Donald’s incapacity. For example, when asked by one doctor to count backwards from 100 by serial sevens, Donald could not make it past 93. (Attention math students: mastery of subtraction really matters!) The doctor concluded that Donald suffered from cognitive impairment secondary to Alzheimer’s disease.
The court also noted the complexity that Donald faced as trustee of the Sterling Family Trust in justifying his removal for incapacity. In addition to the valuable Clippers franchise, the Trust contained vast real estate holdings. The medical evidence of impairment, coupled with the myriad assets to manage, weighed in favor of the incapacity determination. If the only asset of the Trust had been a single-family home in Roseville, perhaps Donald would have had sufficient mental function to remain as trustee.
Coaching point: A mental capacity assessment is a heavily fact dependent analysis that usually requires expert medical opinion. A testifying doctor will go beyond an Alzheimer’s diagnosis to an evaluation of functional impairment. The ruling by the trial judge is likely to stand because appellate justices give wide deference to the judge who heard the evidence.
Evidence supported exigent circumstances warranting sale of the Clippers during period of appeal
Generally, an appeal of a judgment in a probate matter automatically stays (i.e., pauses) the judgment while the parties wait for the outcome of the appeal. There is an exception where injury or loss may occur if the stay is applied. In those instances, the trial court (under Probate Code section 1310(b) ) can authorize a trustee to exercise certain powers as if no appeal were pending. The section applies only to the exceptional case in which imminent injury or loss to a person or property is clear.
The Court of Appeal found substantial evidence justifying the trial court’s invocation of Probate Code 1310(b) because if Donald remained in control of the team its value was likely to continue to decrease in an irreparable way, i.e., there was evidence of a “death spiral” in the team’s value absent a prompt sale.
Coaching point: If you win a judgment in the probate court, you should determine whether the judgment will be stayed by your adversary’s appeal. If the stay arises and you can show extraordinary circumstances, the judge may grant you an exception from the stay under section 1310(b). Get such a ruling and you can implement the order without waiting a year or two for a decision from the Court of Appeal.
Donald’s effort to revoke trust did not block the team’s sale
The Court of Appeal rejected Donald’s attempt to avoid the sale by terminating the Trust. On May 22, 2014, Donald authorized Rochelle as trustee to sell the Clippers, but by June 9, 2014 he had a change of heart and attempted to revoke the Trust. Donald may have been thinking that if the Trust was revoked, the position of trustee would not exist and Rochelle would have no authority to sell. But the court said that even when a trust is revoked or terminated, the trustee continues to have power to wind up the trust’s affairs, which here included selling the Clippers for the handsome sum of $2 billion.
Coaching point: A trick play often fails in probate court. Terminating a trust may not preclude a trustee from making a prudent decision with regard to asset management.