Not final after all: Ruling voids 1991 probate court decree

On Feb. 24, a panel of the 1st District Court of Appeal issued a remarkable opinion in Roth v. Jelley, 2020 DJDAR 1508. Reversing the trial court, the opinion concludes that a 1991 decedent estate decree of final distribution approving a settlement agreement was void because of failure to give notice to a contingent beneficiary who seemingly had little chance of ever receiving a distribution. The potential consequences for the losing party and his attorneys may be significant because of their reliance on the supposed validity of the decree.

For the rest of us, the opinion is a pointed reminder that the sufficiency of notice of court proceedings in matters involving future interests is ultimately a question of whether the given notice satisfies the requirements of the due process clause of the 14th Amendment to the U.S. Constitution.

The gist of the events in Roth goes something like this. Grandma died in 1966. Surviving spouse Grandpa became the executor of her will and, eventually, the trustee of her testamentary trust. The couple's issue included Son, Son's siblings Daughter 1 and Daughter 2, and Son's only child, Grandson.

Later Grandpa married Yvonne, who had a child named James by a previous marriage. Grandpa died in 1988. Among other things, his will provided for the creation of a trust for Yvonne that qualified for the federal estate tax marital deduction by giving Yvonne the right to all trust income during her lifetime and also giving her a testamentary general power of appointment that enabled her to direct the disposition of the remainder in any manner she wished. The terms of the trust further provided that in the event Yvonne did not effectively exercise her power of appointment as to any assets, those assets were to be distributed in equal shares to the members of a group consisting of Grandpa's three children and Yvonne's only child, James. If a member of that group did not survive Yvonne, the share of that member was to be distributed to that member's issue per stirpes.

Following Grandpa's death, one of Grandpa's attorneys became executor of Grandpa's estate and Son filed a creditor's claim in the estate proceeding alleging Grandpa had not properly managed Grandma's estate. Soon the resulting litigation also included malpractice claims filed against some of the attorneys involved.

In 1990, a settlement agreement was reached by Son, Daughter 1 and Daughter 2, Yvonne, and the attorneys. The settlement agreement provided in part that a total of $2,250,000 would distributed immediately in various shares to Grandpa's three children. It also provided that Grandpa's three children renounced all of their interests in the assets of the trust and purported to amend that trust to make Yvonne's son James (or his issue if he failed to survive Yvonne) the sole remainder beneficiary of the trust in the event Yvonne did not exercise her testamentary power of appointment.

In 1991 the settlement was confirmed by a court decree approving a "Final Account and Petition for Distribution" issued in the proceeding for the administration of Grandpa's estate. No notice of the petition for the order was given to Grandson or Grandpa's other grandchildren. At the time, Grandson was already an adult.

Son died before Yvonne and was survived by Grandson. Yvonne died in 2016 survived by Grandson, James, and Daughter 1 and Daughter 2. Although Yvonne could have solved the problems that were to come by exercising her testamentary power to appoint the remaining assets of the trust, she did not do so. (Indeed, perhaps for reasons involving some sort of tax planning, she actually purported to renounce her appointment power in 2005.) Yvonne died in 2016. Her son James no doubt assumed that he had now become the sole beneficiary of the trust.

In April 2017, Grandson initiated the present proceeding. His petition requested that he be recognized as the beneficiary of a 1/2 share of the trust and that the court impose a constructive trust on any trust distributions made after Yvonne's death. (Because Daughter 1 and Daughter 2 were still living, the children of those daughters could not similarly claim to be persons entitled to a share of the trust remainder.) Grandson alleged that the right to receive distributions if Yvonne did not exercise of her power of appointment was a property right and that the 1991 decree deprived him of it with without satisfying the requirements of the due process clause of the 14th Amendment because of lack of notice. The trial court denied the petition.

The Court of Appeal has now reversed in an opinion that relies heavily on the landmark due process case of Mullane v. Central Hanover Bank & Trust Co., 339 US 306 (1950). In Mullane, a trust case involving a corporate trustee's petition for court approval of its administration of its common trust funds. The trustee complied with the relevant New York statute by giving notice of the proceeding by newspaper publication. The Supreme Court reversed, ruling that the published notice did not satisfy due process requirements of the Constitution with respect to parties whose names and addresses were known because such notice was not "reasonably calculated, under all circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections." See also Mennonite Bd. of Missions v. Adams, 462 U.S. 791 (1983). Mullane also held that supposed distinctions between in rem and in personam jurisdiction were irrelevant for purposes of determining satisfaction of Due Process Clause requirements.

The current opinion also cites Ammco Ornamental Iron, Inc. v. Wing, 26 Cal. App. 4th 409 (1994), for the proposition that "persons in existence, who are takers in default of an exercise of a power of appointment by the holder of the preceding estate, are beneficiaries of the trust and acquire vested remainder interests, although their interests are subject to complete divestment."

Regardless of the eventual disposition of Roth, which is not yet final, reflection suggests that there are some particular circumstances in which trust and estates attorney need to be particularly concerned about the sufficiency of notice. The first of these involves giving notice under Probate Code Section 15804 in cases involving future interests. Subsection (a) of that statute sets forth relatively straight forward notice rules, but subsection (b) then states: "(b)If a conflict of interest involving the subject matter of the trust proceeding exists between a person to whom notice is required to be given and a person to whom notice is not otherwise required to be given under subdivision (a), notice shall also be given to persons not otherwise entitled to notice under subdivision (a) with respect to whom the conflict of interest exists."

It is up to the practitioner to figure out whether subsection (b) applies to a particular case. And that duty is continuing, because, as illustrated by Roth, the conflict of interest can arise long initial the beginning of a particular court proceeding. Similar conflicts of beneficiary interests frequently arise in proceedings to modify or terminate trusts under the such provisions as Probate Code Section 15409. And, in many cases additional notice is not enough and it become necessary for the court to appoint a guardian ad litem. See, e.g., Probate Code Section 15405. 

Jeffrey A. Dennis-Strathmeyer is an attorney in Pleasant Hill.