What happens when the settlor (i.e., creator) of a trust imposes a condition precedent on receipt of a distribution from the trust, but the condition cannot be met because the circumstances have changed? Is the beneficiary out of luck for reasons beyond his or her control?
The First District Court of Appeal took up this issue in Schwan v. Permann (2018) ___ Cal.App.5th ___, finding that the doctrine of impossibility can excuse a condition precedent. While impossibility comes into play infrequently in California trust and estate disputes, the doctrine allows some flexibility in the terms of trusts and wills so as to achieve an equitable result.
Walter Permann Wants to Retain Key Employees
Walter Permann for decades owned a wire and cable distributing business called Control Master Products. In 1999, he established a trust that offered distributions to three Control Master Products employees (Schwan, Johnson and Ostrosky) if they remained employed when he and his wife were deceased. Walter included these provisions to incentivize his key employees to remain at the company following his death as his wife was not involved in running it.
Schwan, Johnson and Ostrosky had worked with Walter for many years and they socialized together.
In 2008, Walter sold the assets of Control Master Products to another company. He changed the name of the entity he retained to Custom Model Products and thereafter sold model trains.
Walter did not amend the trust before he died. Schwan, Johnson and Ostrosky thus could not meet the condition of being employed by Control Master Products. They sought to have the employment condition stricken so that they would be eligible to receive property under the trust upon the death of Walter’s wife.
A judge from Contra Costa County Superior Court conducted a bench trial on the dispute.
Court Recognizes Impossibility Doctrine in Trust/Will Context
In the contract setting, impossibility can excuse nonperformance with a condition precedent. In California probate law, impossibility was a recognized concept until 1982, when the Legislature repealed former Probate Code section 142.
The appellate court concluded that the Legislature did not mean to reject the doctrine of impossibility, but rather sought to modernize California probate laws. The court reviewed decisions from California and other jurisdictions, concluding that by 1982 the “modern rule” recognized impossibility as an exception to the rule enforcing conditions precedent.
The court then parsed Walter’s intent with respect to the employment precondition, finding substantial evidence that Walter’s failure to modify the trust following his sale of the company’s assets did not reflect a desire to allow the gifts to Schwan and Johnson to lapse. As the trial court found, Walter’s purpose was to encourage Schwan and Johnson to continue working for the company, which they did as long as Walter owned it. Schwan and Johnson thus complied with the trust’s terms as far as they possibly could.
Ostrosky, on the other hand, retired just prior to the sale of the company’s assets. Though she had health problems and had worked for Control Master Products for 45 years, she did not show that it was impossible for her to continue to work. Thus, her noncompliance with the employment condition was caused by her own decision to retire.
The appellate court, however, gave Ostrosky another chance. Since she continued to work occasionally for Walter and Custom Model Products after the asset sale, she might be able to show that such work sufficed to meet the condition in the trust in that she was working for a company operated by Walter (albeit not Control Master Products). The trial court did not discuss this possibility in its statement of decision such that the appellate court sent the question back for further review.
Drafting Attorney Loses Gift Due to Change in Probate Code
The trust was drafted by Walter C. Youngman, Jr., a tax attorney and longtime friend (but not blood relative) of Walter Permann.
Walter wanted to include a bequest to Youngman. Accordingly, Youngman asked a colleague, who worked in same building, to review the trust with Walter. Under the law in effect in 1999, a “certificate of independent review” from such an attorney could validate the bequest to Youngman, i.e., save a gift that otherwise would fail as the presumptive result of undue influence. The attorney concluded that Walter was acting of his own free will with respect to favoring Youngman and executed the certificate.
However, the Legislature amended the statutory scheme in 2010 to add California Probate Code section 21384, which imposed a more stringent “independent attorney” requirement on the review process. Thus, if (as the trial court found) the statute applied retroactively, the “certificate of independent review” prepared back in 1999 was insufficient to validate the gift.
Youngman lost the bequest that his friend had given him and also apparently had to pay legal expenses of the other parties. This was a harsh result given that the trial court specifically found that the gift to Youngman was the reflection of a long-standing relationship, not the product of any affirmative fraud or undue influence.
California Probate Courts, Sometimes, Can Reach Equitable Results
Even if a beneficiary may seem to be ineligible to receive a distribution from a trust because a condition has not been satisfied, a court may excuse the condition if it became impossible to meet and if recognizing the excuse would square with the settlor’s overall intent.
On the other hand, when the Legislature has spoken, the courts generally must follow along. The statutory restriction on donative transfers to drafters such as attorney Youngman is unyielding even when the evidence shows that the drafter has not done anything wrong.
Bigger picture, Schwan v. Permann shows the importance of updating trust documents following major life events such as the sale of a business. Walter should have reviewed his trust with counsel to clarify his intent with respect to his three key employees, thereby avoiding litigation among his beneficiaries. Also, if Walter had seen a knowledgeable trust lawyer after 2010, the lawyer would have been able to properly document the gift to Youngman under the new statutory scheme so that it would be validated instead of nullified.