Thursday, April 30, 2009

Confusing Facts, Not so Confusing Law

It's been said that bad facts make bad law. It can also be said that confusing facts make confusing law. Or at least hard-to-read law.

Darrell Prindle shot and killed his estranged wife Angela in May 2002. He also shot and injured several others, including Angela's sister Jessica. Angela's mother Earline opened a probate in July 2002. In May 2003, Jessica sued Darrell and Earline (as administrator for Angela's estate) for negligence in failing to warn her that Darrell would return to the residence. Earline notified Traveler's insurance of the lawsuit and asked them to defend the estate. Jessica made a policy limits demand against Traveler's for $100,000. Travelers rejected the claim and refused to defend the estate. Jessica did not make a claim against the estate before the exipration of the deadline.

The matter went to trial, and the judge found the estate liable to Jessica for $7 million. The estate assigned their insurance bad faith claim against Travelers for failing to defend and indemnify to Jessica in exchange for Jessica's agreement not to execute the judgment against the estate. Jessica and the estate then sued Travelers for bad faith (which if successful would open Travelers to liability in excess of the policy limits of $100,000). Jessica finally made a late creditor's claim against the estate for the $7 million, and also filed a petition to allow the late claim. The estate asked the court to approve the late filing of the claim, or at least to acknowledge that the estate's actions constitute a waiver of the claim filing requirement.

Some background is in order. Typically, a creditor has four months from being notified of a probate to file a claim against the estate. If they fail to meet that deadline, they can file a petition for the court to approve a late claim. The court here held that the estate did not have the power to allow the filing of a late claim, but also found that the estate's actions constituted a waiver.

This case is all about insurance. The estate had only about $16,000 in it, so there was no way they would be able to pay the $7 million judgment. Travelers argued that because Jessica's claim was not timely filed, they were off the hook. The court disagreed. Because Travelers refused to indemnify and defend the estate, Travelers is on the hook for the $7 million judgment just as much as Earline is as administrator of the estate. The court held that the estate waived the right to refuse a late claim by Jessica (because they were aware of the claim before the deadline expired), so Travelers, as the insurer of the estate, cannot use the late filing as a defense to their obligation to pay.

I suppose the rule here is that when an estate waives the claim filing deadline, that waiver can extend to others who might benefit from the claim filing deadline, such as an insurer.

The other lesson is that Travelers could have gotten out of this for $100 grand, but is now on the hook for $7 million.

Wednesday, April 29, 2009

Safe Harbors and Jilted Children

Chris and Cindy adored their parents James and Mildred. James and Mildred did what a lot of married couples do in their later years, they created a trust to benefit them during their lifetimes, minimize the affect of estate taxes on their deaths, and distribute their assets to their children. This is the story of how all that planning can be threatened by undue influencers, and how the family can fight back.

Mildred died in 1994, about two years after they created the trust. The trust was split into three trusts: one revocable trust for James, and two irrevocable trusts designed to minimize estate tax exposure. Chris was named as the successor trustee to his father James.

Enter Flora Ibarra. A few months after his wife's death, James became romantically involved with Flora, and she then moved in with him and became his full-time caregiver. Eventually, Flora got James to amend his revocable trust nine times, giving Flora and her family greater shares of his estate, and removing Chris as successor trustee. James also exercised a power of appointment he had over the assets in one of the irrevocable trusts, and sold property in the trust to his revocable trust (which now had Flora and her family as beneficiaries). Flora also isolated James from his children Chris and Cindy. Finally, in one of the amendments to his trust, he added a long and draconian no-contest clause that would disinherit anyone who tried to challenge the provisions of the trust.

James died in 2006. Chris and Cindy did not find out about this until they got a probate notice and a notice of change of trustee. Chris then learned of the nine amendments to the revocable trust. Chris was now trustee of the two irrevocable trusts, which still named him as successor trustee, so he began to look into the assets of those trusts. The trust over which James had the power of appointment had no assets, and the other irrevocable trust had about $177,000 in it. Chris knew that prior to his mother's death, the trusts had over $7 million in assets.

Chris believed Flora Ibarra unduly influenced James to change his revocable trust and take the money out of the irrevocable trusts using his power of appointment to benefit her and her family. He sought to contest the changes, but he knew that the no-contest clauses would disinherit him. He filed a "safe harbor" petition, which asked the court whether his proposed challenges would be a contest subject to the no-contest clause.

Chris was smart, though. His challenge was as trustee of the irrevocable trusts, not as a beneficiary of his father's revocable trust. As trustee, he had a duty to marshall the assets of the irrevocable trusts, which had been siphoned off for Flora's benefit using the power of appointment. Flora, naturally, argued that this was a contest, and he should be disinherited.

The court disagreed with Flora. A trustee has a duty as a fiduciary to administer the trust, and cannot be subject to a no contest clause for exercising that duty. The probate code (at section 21305(b), if you're interested), specifically states that a pleading challenging the exercise of a fiduciary power is not a contest.

Although all the drafting under the sun cannot protect an estate from the Flora Ibarras of the world, the probate code and the courts do their best to keep the undue influencers in check.

Bradley v. Gilbert.

Tuesday, April 28, 2009

Notice is Notice, or, When Probate Attorneys Attack

Sometimes, in a the middle of an otherwise mundane appellate court opinion, you get a snippet if the flavor of the underlying litigation. In Estate of Kelly, there was just such a whif.

The rule of law should keep most probate attorneys on their toes. Stanley Kelly died leaving an estate of over $1 million. His father, E. George Kelly, petitioned the court for letters of administration (which is what you do so you can probate the estate). George also notified Human Rights Campaign, Inc. (HRC) that it was the beneficiary of several of Sanley's bank accounts. George filed a petition stating that Stanley died without a will or trust (i.e., he died intestate), and asking the court to approve distributing Stanley's estate to himself as the sole heir. HRC responded with a petition to probate a handwritten (or "holographic") will by Stanely leaving his entire estate to them. George claimed that the time period for HRC to admit the holographic will had expired, and so they could not receive Stanley's estate under the will. The court held that the clock never started ticking on the time period for admitting the holographic will because George never gave HRC notice of the petition for letters of administration. George argued that he did six different things that communicated to HRC that he was probating Stanley's estate, all of which effectively notified HRC that he was the administrator. The court was having none of it, and held that Notice means Notice. The only thing that starts the clock ticking for someone to admit a will to probate is Notice using the proper Judicial Council form. Sorry, George, but HRC gets to admit to probate Stanley's holographic will giving his $1 million estate to them.

Now for the interesting part. The factual statement in the opinion contained this passage: "The bigger picture was that the Administrator and his counsel had superfiduciary duties 'not to mislead the court, and they have duties to make sure that the estate is probated and tha tit follows the wishes and intent of the decedent.' The court rejected the argument that counsel for the administrator was placed in an adversarial position; his duty was to probate the estate, not to obtain a distribution for [George] Kelly." In other words, counsel, remember who your client is! The attorney George hired represented the Estate of Stanley Kelly, not George as sole heir. Somehwere along the way, this attorney lost sight of this, and fought for George over the estate. I can't help but think that court was, in part, bringing counsel back in line by using the "strict construction" of the notice requirements of Probate Code section 8226.

Although I love the phrase "superfiduciary duties," I must admit I fear that it is going to start showing up fairly regularly in pleadings.

Sunday, April 26, 2009

Back with More Trouble from the Astors

Yes, yes, it's like ducks in a barrell, but the Astors have been so good to the world of estate planning and litigation that I feel almost duty-bound to report.

The N.Y. Times today had this article on the similarities between the recent fighting over Brooke Astor's will, and the fight nearly 50 years ago over her husband Vincent's will. Vincent Astor's half brother, John Jacob Astor VI, was left out of Vincent's will, so he contested it. John VI argued that Vincent was unduly influenced to change his will, which Vincent had done 26 times. Allegations of drunkenness, lack of mental capacity, and other sordid behavior flew freely. In the end, John VI, who was born to John Jacob Astor IV's second wife four months after he died in the Titanic, settled with Vincent's estate for $250,000. Vincent's estate was worth hundreds of millions of dollars, so the settlement was, really, "go away" money. In fact, Brooke Astor's long time attorney Louis Auchincloss claimed that the $250,000 was less than the cost of the attorney's fees if the matter had gone to trial.

Two-hundred fify thousand dollars in attorney's fees? In 1959!? The very rich are different from you and me.