In Bellows v. Bellows, (— Cal.Rptr.3d —-, Cal.App. 1 Dist., June 9, 2011), a court of appeal considered whether a trustee could require a trust beneficiary to release the trustee from liability as a condition to accepting trust funds to which the beneficiary was entitled. The court of appeal held the trustee could not condition the payment of trust funds on the beneficiary’s release of other claims and demands against the trustee.
Facts
Beverly Bellows established a trust and named herself and her son, Frederick Bellows, as trustees. The trust provided that upon Beverly’s death, the assets of the trust were to be divided equally between Frederick and his brother, Donald Bellows. After Beverly’s death, Donald asked Frederick for his share of Beverly’s trust. Frederick failed to distribute any trust funds so Donald filed a petition in probate court for an accounting and distribution of trust assets. The court ordered Frederick to provide an accounting of trust assets and distribute to Donald one-half of the assets within 10 days. The court awarded Donald $9,800 in attorney fees.
In November 2009, Frederick mailed Donald’s attorney a check for $30,376.80, which Frederick claimed was one-half of the trust assets. Frederick included with the letter a document titled, “Final Trust Accounting,” which showed the total trust assets at the time of Beverly’s death in December 2008 and the income and expenses of the trust since Beverly’s death. Donald’s attorney returned the check and informed Frederick “the amount was insufficient because Frederick had improperly deducted from the remaining corpus of the trust approximately $13,000 of his own attorney fees prior to dividing the trust assets in half.” Donald’s attorney also claimed there was a trust account containing $12,000 that Frederick had omitted from the accounting. Frederick denied the existence of any additional account and claimed the deduction for attorney fees was proper. However, Frederick offered to give Donald $6,718.25, one-half of the attorney fees paid by the trust, “provided there is no petition forthcoming soon.”
Frederick’s attorney forwarded to Donald’s attorney a check for $37,520.48 and a letter that stated “Donald is ‘authorized to negotiate the check when he has signed and returned the enclosed receipt of final distribution.'” The receipt also contained “an acknowledgment that the payment represented ‘a final distribution of the trust estate.'” Although Donald cashed the check, he did not sign or return the receipt. Two months after Donald cashed the check, he filed a motion to compel compliance with the court’s previous order to provide an accounting. Frederick filed a cross motion asserting Donald’s action in the probate court should be abated because Donald had filed a civil action while Beverly was alive that made allegations about Frederick’s management of the trust. He further alleged that Donald had cashed the check in full satisfaction of his claim to trust assets.
The trial court found “that by negotiating the check presented by Frederick, ‘Don[ald] agreed to the terms under which it was tendered.'” The court held that Donald agreed the check was a final distribution of all of the trust assets and that Donald “effected an accord and satisfaction of all obligations that Frederick owed under [the trust].” The court awarded Frederick attorney fees. It also found Donald’s action for accounting should be abated in favor of the civil action Donald filed while Beverly was alive.
Decision
The court of appeal reversed the decision of the trial court and held the doctrine of accord and satisfaction was not applicable in this case. Commercial Code section 3311 provides that in order to state a claim for accord and satisfaction based on the acceptance of a negotiable instrument, a debtor must show: (1) he or she “in good faith tendered an instrument to the claimant as full satisfaction of the claim,” (2) the claim amount “was unliquidated or subject to a bona fide dispute,” and (3) “the claimant obtained payment of the instrument.” Where the debtor shows the tender of the negotiable instrument was accompanied “with a conspicuous statement that the amount was tendered as full satisfaction of the claim,” and “the claimant does not prove that he tendered repayment of the amount within 90 days, the debt is discharged.” Donald asserts that Commercial Code section 3311 is not applicable in this case because Probate Code section 16004.5 precludes the application of accord and satisfaction under the facts presented here. The court of appeal agreed.
Pursuant to Probate Code section 16004.5, subdivision (a), “A trustee may not require a beneficiary to relieve the trustee of liability as a condition for making a distribution or payment to, or for the benefit of, the beneficiary, if the distribution or payment is required by the trust instrument.” Section 16400, subdivision (b), provides, in part, that section 16004.5 should not be construed as affecting the trustee’s right to do any of the following: “(2) Seek a voluntary release or discharge of a trustee’s liability from the beneficiary;” . . . . “(4) Withhold any portion of an otherwise required distribution that is reasonably in dispute;” or “(5) Seek court or beneficiary approval of an accounting of trust activities.”
There was no dispute Frederick was required by court order to distribute one-half of the trust assets. Frederick asserted that Donald’s claim against the trust was unliquidated. The court of appeal rejected this argument and found that although Frederick disputed Donald’s right to receive more than $30,376.80, or half the amount the trust paid for Frederick’s attorney fees, “there was no dispute that Donald was entitled to receive from the trust at least $30,376.80, based on Frederick’s own accounting.” As trustee of the trust, Frederick “was required to make this distribution to Donald without any strings attached.” Frederick could not “condition the payment on the release of other claims or demands of the trust beneficiary.”
Frederick argued that the release was authorized by section 16004.5, subdivision (b)(2) or (b)(5). The release was not proper under subdivision (b)(2) because the release was not voluntary. Although subdivision (b)(2) allows for a trustee to seek a voluntary release or discharge of his or her liability, “[a] release obtained as a condition of accepting payment to which the beneficiary is entitled is in no sense voluntary.” Subdivision (b)(5) allows a trustee to “[s]eek court or beneficiary approval of an accounting of trust activities.” Pursuant to subdivision (b)(5), Frederick could have entered into an agreement with Donald to resolve the disputed attorney fee issue and then distributed the agreed amount. Frederick, however, could not condition any such agreement on Donald’s release of his right to any claims he might have against Frederick.
Subdivision (b)(4) provides that a trustee may withhold from distribution any amount “that is reasonably in dispute.” When there is a dispute, the trustee may seek instructions from the court. The trust may not “extract from the beneficiary an agreement to accept a compromise concerning a disputed issue as a condition of receiving a distribution to which the beneficiary is unquestionably entitled.” The court emphasized, “A trustee may not under any circumstances condition a required distribution on an involuntary release of liability.”
The court of appeal also held the trial court erred in abating the accounting proceeding in favor of the pending civil action. Probate Code section 854 provides, in part, “If a civil action is pending with respect to the subject matter of a petition filed pursuant to this chapter and jurisdiction has been obtained in the court where the civil action is pending prior to the filing of the petition, upon request of any party to the civil action, the court shall abate the petition until the conclusion of the civil action.” The reference to “a petition filed pursuant to this chapter” refers to petitions filed pursuant to part 19. Donald’s petition in probate court was not filed under “part 19, but under section 17200, which appears in chapter 3 of part 5 of division 9 of the Probate Code.” A beneficiary is authorized under section 17200 to “‘petition the court under this chapter concerning the internal affairs of the trust’ including compelling the trustee to provide an accounting.” The court of appeal held the trial court was not authorized by section 854 to abate the proceedings brought under section 17200 of the Probate Code pending the outcome of the civil action.
Questions
If you have any questions concerning the content of this Legal Alert, please contact the following from our office, or the attorney with whom you normally consult.
Linda M. Monje | 661.864.3800