We regularly compile a few recent rulings that may be of interest to our clients and friends.  Feel free to contact any of the firm's litigation attorneys should you have questions about these cases.

[1. Trust & Estates]

LOOTERS BEWARE: BREACHES OF FIDUCIARY DUTY ARE ACTIONABLE BY BENEFICIARIES OF A REVOCABLE TRUST AFTER A SETTLOR'S DEATH

In Estate of Giraldin; 12 S.O.S. 6575, the California Supreme Court ruled in a 5-2 opinion by Justice Ming Chin that the beneficiaries of a revocable trust (a trust which is revocable by the settlor), have standing to sue a non-settlor-trustee of the trust after the settlor's death for a breach of a fiduciary duty owed to the settlor while the settlor was living.

Generally speaking, under Probate Code section 15800, unless the trust provides otherwise, while the settlor is living and holds the power to revoke the trust, the trustee's fiduciary duties are owed to the settlor only because, by definition, a revocable trust can be revoked or amended by the settlor at any time while the settlor is living and has the mental capacity to do so.  Until the trust becomes irrevocable at the settlor's death and the rights of the beneficiaries are vested, the named beneficiaries merely have a contingent interest in the trust.  Giraldin holds that despite a beneficiary's mere contingent interest in a revocable trust during the settlor's lifetime, the beneficiary has standing to bring an action against a non-settlor trustee who breaches fiduciary duties owed to the settlor prior to the settlor's death.

The facts of the case are not uncommon.  The settlor, William Giraldin ("William"), established a trust for the benefit of his blended family consisting of his wife, his four children from another marriage, his wife's three children from another marriage and their twin sons from their marriage.  One of the twin sons of the current marriage, Timothy, was appointed as the sole trustee.  Under his control, the trust made substantial investments in a company owned by Timothy and his twin brother, Patrick.  The company failed and the trust lost substantial value.  The trust included fairly standard revocable trust language which attempts to relieve some of the duties and liabilities of the trustee during the settlor's lifetime, namely, waiving accounting duties, relaxing the prudent investor rule, discounting the importance of the remainder beneficiaries and making the trustee's distribution decisions binding on all beneficiaries.  After William's death, his four children from his first marriage sued Timothy in his capacity as trustee alleging that the self-interested investments in his and Patrick's unsuccessful company and the personal loans that the trust made to both Timothy and Patrick had deprived the other seven children of their inheritance.

The trial court sided with the petitioners and ordered Timothy to be removed as trustee and to provide an accounting to the beneficiaries, and to be surcharged for his various breaches of fiduciary duties owed to the petitioners themselves.   The Court of Appeal reversed and the Supreme Court reversed the Court of Appeal and found that the beneficiaries had standing to sue "[b]ecause a trustee's breach of the fiduciary duty owed to the settlor can substantially harm the beneficiaries by reducing the trust's value against the settlor's wishes."

[2. Real Estate] 

OOPS!  TRUSTEE'S ERROR IN FORECLOSURE SALE RESULTS IN BUYER'S WINDFALL 

A mistake made by the trustee acting as the lender's agent in a foreclosure sale is not a "procedural irregularity," thus the sale is final.

In Biancalana v. T.D. Service Company (2011) 200Cal.App.4th 527, review granted February 15, 2012, 137 Cal.Rptr.3d 248, the plaintiff successfully bid on a piece of real property for a mere $21,894 at a trustee's sale.  After the sale, T.D. Service Company (TD), the trustee which conducted the sale for the lender, realized that the opening bid should have been $219,105.  When TD discovered its own error, it refused to deliver a deed to the buyer, forcing the buyer to sue to acquire title to the property.

TD contended that its mistake of soliciting an opening bid at one-tenth (1/10) of the correct price was a "procedural error," rendering the sale based on its mistake voidable.  The trial court set aside the sale, relying on Millennium Rock Mortgage, Inc. v. T.D. Service Co. (2009) 179 Cal.App.4th 804.  In Millennium, the auctioneer made a mistake by selling a property with a wrong street address, and the seller was able to set aside the sale.

Distinguishing the subject case from Millennium, the Biancalana court held that, unlike the mistake made by an auctioneer, an independent third-party, the mistake in this case was made by the trustee, who is the lender's agent. Because the mistake made by TD in the course and scope of its duty as the lender's agent arose solely from its negligence, the Court of Appeal held that there was no "procedural irregularity" in the foreclosure sale and that the sale would stand.

As the California Supreme Court granted review of this decision, whether or not the buyer's investment in the sale and ensuing litigation will pay off remains to be seen.

[3. Contract Law]

SIGNATORIES TO CONTRACT CAN RECOVER ATTORNEY FEES INCURRED IN DEFENDING AGAINST LAWSUIT FILED BY THIRD PARTY BENEFICIARY 

Signatories to a contract are entitled to attorney fees incurred in defending against a lawsuit filed by a third party beneficiary, which would have been entitled to fees had it prevailed.

In Cargill, Inc. v. Souza (2011) 201 Cal.App.4th962 Mr. and Mrs. Souza made loans to Mr. and Mrs. Teixeira ("the Debtors"), evidenced by promissory notes and secured by an interest in dairy cattle and farm equipment.  Cargill, Inc. ("Plaintiff") was an unsecured creditor of the Debtors.  Upon the Debtors' default on the promissory notes, the Souzas and the Debtors entered into a Transfer In Lieu of Foreclosure Agreement ("the Transfer Agreement").  The Transfer Agreement provided that (1) the Debtors agree to transfer the dairy cattle and farm equipment to the Souzas; and (2) the Souzas agree to pay the Debtors' outstanding obligations listed on Exhibit G to the Transfer Agreement, which was left blank.

The Souzas failed to pay the Debtors' loan from Plaintiff, and litigation ensued.  Plaintiff filed a complaint against the Souzas to reform and enforce the Transfer Agreement in order to list Plaintiff's loan to the Debtors on Exhibit G.  The Souzas then moved for summary judgment, which Plaintiff did not oppose.  Judgment was entered in favor of the Souzas.  The trial court did not grant the Souzas' motion for attorney fees, and the Souzas appealed.

In reaching its decision to award attorney fees' to the Souzas, the appellate court noted two situations when a nonsignatory may recover attorney fees under a contract containing an attorney fees clause.  The first is where the nonsignatory party "stands in the shoes of a party to the contract."   The second is where the nonsignatory party is a third party beneficiary of the contract. If the Transfer Agreement was made for the benefit of Plaintiff, Plaintiff is entitled to attorney fees.  Though Plaintiff was not expressly named in the Transfer Agreement, the agreement nevertheless reflects the intent to benefit the unnamed creditors including Plaintiff.  Since Plaintiff, as a third party beneficiary of the Transfer Agreement, would have been entitled to attorney fees had it prevailed, the Souzas, too, were entitled to fees as the prevailing party under the Transfer Agreement.

[4.  Real Estate ]

HOMEOWNERS ASSOCIATION HAS STANDING TO PURSUE ACTION AGAINST REALTORS

The Homeowners Association ("HOA") has standing to pursue an action against realtors for concealment or misrepresentation in a matter pertaining to damage to the common area, though the HOA was not the realtors' customers.

In Glen Oaks Estates Homeowners' Association v. Re/MaxPremier Properties, Inc. (2012) 203 Cal.App.4th 913, the HOA brought an action against the realtors which acted as dual-agents for both the developers of the Glen Oaks Estates and the members of the HOA who purchased individual condominium units.

The action arose out of a significant slope failure in 2005, which occurred along parts of the Glen Oaks Estates common slope area and common driveway.  In the aftermath of the landslide, a negligence lawsuit was filed against the HOA and two of its members in 2007.  The HOA filed a cross-complaint against the developers for indemnity and contribution.  During discovery process, the HOA discovered that the realtors falsely advised the developers that the Department of Real Estate ("DRE") did not require a homeowners' association for Glen Oaks Estates.  The HOA also learned that the developers and the realtors were required to, but failed to, provide a final public report to each buyer, which would have included a DRE-approved budget worksheet and other material transactional disclosures and documents.

The trial court agreed with the realtors who contended that the HOA had no standing to sue them under the David-Sterling Common Interest Development Act ("CIDA"), more specifically, Civil Code section 1368.3, because Section 1368.3 affords the HOA standing to sue developers only, and not realtors.  The Court of Appeal disagreed. The standing conferred upon HOAs under the CIDA is a statutory creature.  Section 1368.3 does not, by its plain terms, contain a limitation on whom the HOA may sue.

The realtors also argued that the HOA does not have standing because realtors owe no duties to third parties who were not parties to the contract of sale, and the HOA was not a party to the contracts between the realtors and the individual HOA members.  The Court of Appeal disagreed with the realtors again and concluded that Civil Code section 1368.3 provides standing.  "We are dealing here with a specific legislative grant of standing that permits an association to bring the claims of its members."  The HOA, therefore, was allowed to prosecute its claims against the realtors despite the fact that no contract was ever entered into between the realtors and the HOA.