TRUST ACCOUNTING LAWSUIT/PETITION PROCEDURES
By: David L. Crockett, Attorney, CPA
Trust terminology basics. A trust is created by a written document known as a declaration of trust, and is then funded by transfer of money into trust bank accounts and/or deeding or transferring of properties to the trust. The creator of the trust is known as the “Trustor” or the “Settlor.” Trusts are usually prepared by attorneys because each trust is custom for the situation and there are many types of trusts. The persons who are to receive money and property out of the trust are known as the “Beneficiaries. The person or institution that takes care of the money and property of the trust is the “trustee”. The trustee is bound by law to follow the directions contained in the declaration of trust. Trusts are not supervised by the court system and are not registered with the state government upon formation. Trusts are essentially private contracts between the trustors, the trustees and the beneficiaries. There are laws written into the California probate code that control the governance of trust matters.
Trust litigation types. The Probate Code gives people interested in trusts the right to file lawsuits known as “petitions” in the probate court. Trust petitions fall into several broad categories. One category is that of people attacking the formation of the trust for lack of capacity by the trustor or fraud or undue influence in the signing of the trust. Also in included are disputes over interpretation of the terms and meaning of the trust. The other category is people complaining about the breach of the trust by the trustee for failure to follow the instructions in the trust, failure to account, failure to distribute, wrongful payments to the trustee or others, failure to properly invest and for removal of the trustee.
What is meant by “accounting”? – 60 DAY NOTICE REQUIRED. The California probate code has specific laws and procedures about the handling and reporting of the money and assets of any trust or estate generally referred to as “accounting”. A trust and estate attorney would be able to advise a trustee as to just exactly what must be done to comply with the accounting laws. I have written a separate article describing what is meant by “accounting” for trusts. Before any interested person can file a court petition to compel an accounting, they must make a 60 day written demand to the trustee. If the 60 day demand is not met, then they can file a petition to compel accounting with the court.
Starting a breach of trust/accounting case. A trust case is started by filing the petition with the probate court. The petition is a custom prepared court pleading. It describes the trust, the details of the dispute the parties involved and the relief sought. The relief asked for is typically (i) to file a proper accounting; (ii) damages for violation of the trust; (iii) a court order to distribute the trust and (iv) for removal of the trustee.
Initial court hearing. When the petition is filed, the court sets it for an initial hearing about 3 to 6 months ahead, depending upon how crowded the court calendar is. This varies by county. At the first hearing, the Judge has a brief discussion with the attorneys for both sides as to what the case is about and how much time is needed to conduct investigations and get the case ready for trial. Nothing is decided at the first hearing except that a date is selected by the Judge for a status hearing and/or trial setting conference typically months in the future. No testimony by witnesses occurs at the first hearing and no evidence is presented. Typically, the first hearing is only for the attorneys and the clients involved in the petition do not have to appear if they are represented by an attorney.
Legal response by the person being sued. By the time of the first court hearing, the person being sued, typically the trustee of the trust, must file a written response with the court or at least show up at the court hearing to state that he/she is contesting the petition.
Possible court order to do an accounting right away. Depending upon the case, if the petition includes a request for an accounting, the Judge at the first hearing may make an order that the an accounting be prepared and filed with the court within 60 to 90 days and then that the petitioner file objections to the accounting within 30 to 60 days thereafter.
The accounting is often a significant interim step in the litigation. The accounting is often a pivotal event that needs to occur before other aspects of the case can be decided. This is because the accounting may reveal money mishandling and wrongdoing that is maybe only suspected when the petition is filed. Thus, the filing of the accounting does not necessarily end the case but is only a milestone that gives specific information about the finances of the trust and may lead to further claims against the trustee. Once the accounting is filed and after objections to the accounting are filed, then the case can be set for trial. The trial would then be to decide (a) the accounting objection issues and (b) the other issues in the case such as trustee removal, damages for improper expenditures and for an order to pay out the trust money to the beneficiaries.
How long until the trial? Trust petitions typically take a year or more to get decided, if they are contested by the people being sued. Because the courts are overcrowded and because there is a lot of paperwork filed with the court and exchanged back and forth among the disputing parties it is rare for a case to get have a trial and final decision earlier than a year after it is filed.
What happens between the first hearing and the trial? If the petition calls for an accounting, then there may be an order to file the accounting right away. That usually takes up 3 to 4 months or more by the time the accounting gets filed and the objections are filed. Either side can subpoena documents (such as bank and securities account statements) and take depositions of witnesses. This is all known as “discovery” in litigation terms. Discovery is very precisely governed by the California Code of Civil Procedure to which trust and probate cases are subject. Discovery disputes and procedures can take many months and cause the Judge to set cases for review/status conferences every couple of months.
Possible mediation. Some courts, and in particular Los Angeles County Superior Court, require the parties to undergo a process known as mediation before they will set a case for trial. In a mediation, both sides meet with a mediator who is typically a retired Judge and/or experienced attorney. Mediations can last all day and involve the mediator meeting separately with both sides to try to determine what each sides wants. The mediator then tries to get both sides to agree to some sort of compromise settlement. Mediations can often requires a lot of advance preparation work and briefing to the mediation Judge. Preparation for a mediation is similar to preparation for trial from an attorney’s point of view.
Mandatory settlement conference. After both sides say they are done with discovery and if mediation is unsuccessful, then the case is typically set for a mandatory settlement conference where both sides including the attorneys must personally show up at the courthouse to discuss settlement. More than half of all cases do settle at the mandatory settlement conference.
The trial and preparation for same. Before the trial there is typically a trial setting conference between the attorneys and the Judge to discuss how long the trial is expected to last. The Judge then sets the date on his calendar for the trial which may be 30 to 60 days after the trial setting conference. The court has rules for preparation for the trial including mandatory meetings between the attorneys and specific lists of evidence, witnesses and trial issues that have to be given to the Judge at least a week before the trial. When the trial finally occurs, there are specific laws and rules as to how the trial is to be conducted. Each side is given an opportunity to present its witness testimony and documents and arguments. Each side is given an opportunity to cross-examine the other side’s witnesses and evidence. The Judge of course hears everything and typically takes notes. Also, there is usually a court reporter present who is making a word-for-word transcript of the entire trial.
The Judge’s decision. Trust and probate trials do not have juries so the Judge is the one who decides all the issues. The Judge does not usually make a decision when the trial ends but rather “takes the case under submission”. This means that the Judge won’t actually decide until 30 or more days after the last day of trial. Ultimately the Judge will issue a written statement of his/her decision on the various issues in the case. Then, the winning side will prepare a form known as a “Judgment” for the Judge to sign and which becomes part of the permanent court record of the case. A typical Judgment in a trust accounting case might state that (i) the trustee is in breach of trust and must pay damages in a specific amount back to the trust for improper withdrawals; (ii) that the trustee is removed; (iii) that the trustee is required to distribute the trust assets; (iv) that trustees fees are allowed in a certain amount and/or disallowed; and (v) that the petitioner is entitled to recover attorneys fees and court costs from the trust and/or the trustee. (Note that attorneys are often NOT recoverable in estate and trust litigation and recovery depends upon certain rules of law that are beyond the scope of this article).
Enforcement of the Judgment. Depending upon what the Judgment says, the sheriff may need to be engaged to “levy/collect” the Judgment if the losing trustee refuses to pay. Also, contempt of court proceedings might be needed, depending upon the situation.
Possible appeal. Either side in a trust litigation case can appeal to the court of appeal. While appeals are rare, there are very specific time deadlines and legal papers which must be filed to initiate an appeal and various fees and costs to be paid. Sometimes people wait until appeal deadlines run before taking steps to enforce the Judgment.
CONCLUSION. The court system can eventually rule on trust accounting disputes but the above procedures are time consuming and can be expensive. Litigation should be a last resort but sometimes it is necessary.