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The Exchange of MoneySince California trustees generally can use trust funds to pay lawyers to handle disputes, litigation can drain away the funds available for distribution to beneficiaries.  Hence, an overaggressive beneficiary can pursue litigation that penalizes all beneficiaries, even those who have no responsibility for the fight.

Last week the California Third District Court of Appeal, based in Sacramento, clarified the scope of liability for litigants who act in bad faith in trust disputes.  In Pizarro v. Reynoso (2017) 10 Cal.App.5th 172, the Court of Appeal ruled that a probate court’s equitable authority to charge the trustee’s legal expenses against a party who has litigated in bad faith is limited to the party’s share of the trust estate and does not extend to the party’s personal assets.

The case involved a trustee’s sale of real estate in Sacramento County.  The trust specifically permitted trustee Melissa Reynoso to sell the property to her mother (Karen Bartholomew), herself, or her brother (Anthony Pizarro) at a price $100,000 below market value.  Reynoso chose to sell to Bartholomew.  Pizarro claimed that the sale was a sham, Reynoso had breached her duties as trustee, and the sale should be set aside.  After a trial, the Sacramento County Superior Court (Judge Matthew Gary presiding) overruled Pizarro’s petition and affirmed the sale.

The appellate court first rejected Pizarro’s attack on the sale, finding that he had forfeited his argument by failing to organize his arguments in his appellate briefs with proper subject headings.  The court blasted Pizarro’s counsel for presenting “a muddle of various statements of fact and law” and failing “to provide coherent organization.”  Lesson to all appellants: appellate courts have a low tolerance for disorganized briefs.

More interesting is the discussion about attorney’s fees.  Pizarro had no vested beneficial interest in the trust – rather, he merely had a potential opportunity to acquire the property at sub-market price if the trustee (his sister) offered the property to him, which she did not.  Thus, after finding Pizarro had contested the sale of the property in bad faith, the only way that Judge Gary could penalize Pizarro for causing the trustee to incur legal expense was by holding him personally liable to pay the trustee’s legal expenses.

Judge Gary did so, relying on his equitable authority as a judge overseeing the affairs of a trust, not on any particular provision in the California Probate Code.  Judge Gary relied on the Court of Appeal’s decision in Rudnick v. Rudnick (2009) 179 Cal.App.4th 1328.

Not so fast, wrote Justice George Nicholson of the Court of Appeal.  A court’s equitable jurisdiction over trust disputes extends to the trust’s assets, not to the pockets of the litigants.  Pizarro had no beneficial interest in the trust that could be applied to reimburse the trust for the trustee’s legal expenses.  Hence, in the absence of some statutory authorization to require Pizarro to pay the trustee’s legal expenses, the trial court could not compel him to do so.

The appellate court declined to rule on the trustee’s arguments that California Probate Code sections 15642(d) and/or 17211(a) provided an alternative basis for the fee award against Pizarro because Judge Gary had not considered the applicability of those code sections.  Yet these sections apply only under limited circumstances, i.e., trustee removal and accounting disputes.  Hence, while the case will go back to the trial court for further review, Pizarro may end up with no liability for bad faith litigation conduct.

Although Pizarro v. Reynoso precludes a trial court from using its inherent equitable authority to hold litigants personally responsible for a trustee’s legal expenses, another aspect of the decision broadens a court’s discretion to ding a beneficiary who litigates in bad faith.

Although Bartholomew did not initiate the trust litigation, she eventually sided with her son Pizarro against her daughter Reynoso (the trustee).  Judge Gary found that Bartholomew knowingly had provided false testimony in an effort to manipulate the outcome of the litigation.

The appellate court concluded that a trial court’s inherent authority to charge a beneficiary with the trustee’s legal expenses is not limited to situations where the beneficiary instigates the litigation.  Instead, a trial court’s “broad equitable powers over trust assets are sufficient to justify an award of attorney fees and costs against any trust beneficiary who takes an unfounded position and litigates in bad faith, causing the trust to incur fees and costs.”

Overall, Pizarro v. Reynoso is a mixed bag.  A trust beneficiary who dives into litigation that another person has started runs the risk of losing some or all of his/her beneficial interest in the trust.  On the other hand, unless a special statutory rule applies, the liability at worst will result in zeroing out what the beneficiary otherwise would have received from the trust.  To use a school setting by analogy, a principal can discipline everyone who joined a food fight by taking away privileges, but the principal cannot fine the students.

The case also shows that relatively low dollar trust disputes (here a fight worth perhaps $100,000) can go to trial and even establish new legal precedent on appeal.