Opinion
NOT TO BE PUBLISHED
APPEAL from a judgment of the Superior Court of Los Angeles County, No. BP067911 Michael I. Levanas, Judge.
Hinojosa & Wallet, Lynard C. Hinojosa, Katerina F. Perreault and Kelly L. Hinojosa for Defendant and Appellant.
Sacks, Glazier, Franklin & Lodise, Margaret G. Lodise and Benazeer Roshan for Plaintiff and Respondent.
ALDRICH, J.
As successor trustee of the Herbert R. Cole Trust (trust), Michael Schiff invested $650,000 of the trust principal in Fund Management International, LLC (FMI), which was later renegotiated into what became an illiquid promissory note. Respondent Museum Associates, doing business as Los Angeles County Museum of Art (LACMA), as the remainder or residuary beneficiary of the trust, brought this action against Schiff for breach of trust for failure to comply with the prudent investor rule (Prob. Code, § 16047 et seq.), which caused him to invade the trust principal to pay scheduled annuity distributions. Schiff asserted that LACMA’s petition was untimely and barred by the three-year statute of limitations set forth in section 16460, subdivision (a)(1) because LACMA had actual notice or was on inquiry notice about the existence of a claim against him in 2002, almost five years before LACMA filed the petition.
Unless otherwise indicated, all further statutory references are to the Probate Code.
Following a multi-day court trial, the trial court rejected Schiff’s statute of limitations defense. Schiff contends the trial court legally erred by misreading and misapplying section 16460. Schiff also contends the trial court legally erred by concluding section 16441 imposes a mandatory requirement to award prejudgment interest at the legal rate. Finding no legal or reversible errors, we affirm the judgment.
FACTUAL AND PROCEDURAL BACKGROUND
1. The Trust
Pursuant to the terms of a charitable annuity trust created under the will of Herbert R. Cole, Susan Cole received 6 percent of the initial fair market value of the trust per year for the remainder of her life. Upon Susan Cole’s death, LACMA received the remainder of the trust assets to be used for the purchase of Japanese and/or Chinese art.
The trust was established by court order in 1984. When established, the fair market value of the trust was approximately $1.3 million. Susan Cole’s lifetime annuity of $75,497 was to be paid from trust income, and if income was not sufficient, from the trust principal.
In 2001, Schiff became the successor trustee. A bond was set at $1.1 million, and was guaranteed by American Contractor’s Indemnity Company (ACIC). When Schiff took over as trustee, Susan Cole was in her mid-50’s, with a life expectancy of an additional 26 years.
ACIC participated at trial but is not a party to this appeal.
2. Schiff’s Annual Letters to LACMA
Beginning in 2001, Schiff prepared annual letters at LACMA’s request. As part of its annual audit, LACMA reviews the market values of the charitable trusts that name the museum as a beneficiary. It is the contents of these letters and enclosures that Schiff claims establishes his statute of limitations defense and put LACMA on notice of a claim against him. At trial, the following exhibits and testimony were presented to the court.
August 2001 Letter
In August 2001, LACMA sent a letter to Schiff requesting the “bank or brokerage statement” indicating the market value of the trust as of June 30, 2001. Schiff responded stating the value as $932,952.65, “consisting of cash in the amount of $437,100.80, equities in the amount of $417,562.85, and debt securities in the amount of $78,288.00.”
Lawrence Webster, now LACMA’s controller, testified that he requested a present value calculation of the trust. The present value was calculated at approximately $25,000 based upon Susan Cole’s life interest and life expectancy. For purposes of LACMA’s annual audit, Webster determined not to “book” the value of the trust as an asset. Webster testified that as an accounting practice, LACMA does not record as assets a beneficiary interest that is uncertain or not likely to mature for years. This decision was unrelated to the nature of the investment and did not entail an evaluation of the successor trustee’s investments.
July 2002 Letter
Following a similar audit request, Schiff’s 2002 letter enclosed several documents, including financial statements and a copy of a document entitled “FMI LLC Short Form Investment Management Contract.” Schiff’s letter described the FMI contract, stating: “There are no periodic statements. The investment pays 12.54% per annum in quarterly payments of $20,377.50 for each full quarter for not less than 28 consecutive quarters, at which time the $650,000 will be returned. All quarterly payments of interest due have been timely received.”
July 2003 Letter
Schiff’s 2003 letter again enclosed the FMI contract. Schiff made the same representations about the FMI investment as he made in the 2002 letter.
July 2004 Letter
Schiff’s 2004 letter informed LACMA that it was “necessary to renegotiate” the FMI investment by taking an assignment of a promissory note dated March 31, 2003 from DollarWorks, Inc. to FMI in the sum of $650,000, together with interest at the rate of 6 percent per annum paid quarterly plus an additional 2 percent per annum deferred interest on the unpaid balance. Schiff informed LACMA that the principal and unpaid interest would come due on August 17, 2008. Schiff stated the obligation was secured by 157, 500 shares of DollarWorks stock.
Schiff also explained in his letter that because of the shortfall in interest from the original rate of 12.54 percent in the FMI contract, it would be necessary to use the principal to pay the life beneficiary.
3. LACMA’s Petition for Surcharge
In 2006, Susan Cole renounced her life interest in the trust. On July 10, 2006, Susan Cole assigned all of her beneficiary interest under the trust to LACMA. When LACMA learned the trust assets would be distributed, it attempted to obtain information concerning the value of the trust.
In April 2007, LACMA filed a petition for surcharge, which included a request that the court order a formal accounting. The petition alleged Schiff breached his duty to invest and manage trust assets as a prudent investor would by his investments in FMI and DollarWorks. As a result of the imprudent investment with FMI and DollarWorks, LACMA alleged the successor trustee was forced to invade the principal to make the scheduled annuity distributions to Susan Cole. LACMA requested a surcharge against the successor trustee for damages resulting from violations of the Prudent Investor Act and breaches of trust.
Schiff filed his final accounting and report on August 31, 2007 for the period from January 2001 through December 31, 2006. The accounting revealed a total distribution of $738,118.36, which included the $650,000 DollarWorks promissory note. LACMA received interest payments on the promissory note totaling $39,000. The interest payments stopped after the October 2007 payment. Thus, excluding the promissory note, the total amount LACMA received including interest was less than $80,000.
4. The Trial Court’s Judgment
Following a court trial, the court concluded the successor trustee breached his duty by violating the Prudent Investor Act through “failure to diversify with the investment of F.M.I. and then DollarWorks, ” and ordered a surcharge against the successor trustee for damages in the amount of $532,701. The damages award excluded the interest on the promissory note earned after distribution. The court also awarded prejudgment interest beginning July 10, 2006 (the distribution of the trust) at the legal rate of 10 percent pursuant to section 16441.
In reaching this conclusion, the court found the petition was filed within the limitations period. The judgment states: “The Court finds no violation of the statute of limitations as the Court views Exhibits 66 [2002 letter] and 68 [2003 letter] as insufficient accountings to trigger the commencement of the statute of limitations.”
The trial court denied Schiff’s and ACIC’s motion to set aside the judgment. Schiff timely appealed.
DISCUSSION
Schiff attacks the trial court’s legal conclusions that there was no violation of the statute of limitations in section 16460, and LACMA was entitled to prejudgment interest at the legal rate pursuant to section 16441. As shall be discussed, neither challenge has merit.
1. Standards Of Review
When an appeal challenges the trial court’s resolution of factual issues, such as whether the 2002 and 2003 letters adequately disclosed a claim against Schiff, we apply the substantial evidence rule in which our review begins and ends with a determination as to whether there is any substantial evidence, contradicted or uncontradicted, to support the findings below. (See Penny v. Wilson (2004) 123 Cal.App.4th 596, 603; see also Crawford v. Southern Pacific Co. (1935) 3 Cal.2d 427, 429.) In assessing whether any substantial evidence exists, we view the record in the light most favorable to the prevailing party, giving it the benefit of every reasonable inference and resolving all conflicts in its favor. (Crawford v. Southern Pacific Co., supra, at p. 429.) When an appeal involves a mixed question of law and fact, we review the trial court’s resolution of disputed historical fact under the deferential substantial evidence rule, exercise our independent judgment of the law to be applied, and review the application of the law to the facts as a question of law when legal concepts and their underlying values must be considered or when the issue has practical significance beyond the confines of the case at hand. (Ghirardo v. Antonioli (1994) 8 Cal.4th 791, 800-801.)
When an appeal challenges the trial court’s discretion, we review the trial court’s decision to determine whether the trial court exceeded the bounds of reason. (Estate of Gilkison (1998) 65 Cal.App.4th 1443, 1449.)
The issues raised in this appeal require us to exercise our independent judgment in identifying the correct legal standard to be applied, to defer to the trial court’s findings on the particular facts and circumstances of this case that are supported by substantial evidence, and to honor the trial court’s discretionary determinations unless the record shows the trial court acted arbitrarily or capriciously.
Schiff argues that a de novo standard applies. Schiff contends the underlying facts are undisputed and the only issue to be decided is the legal significance of those facts. It is difficult to understand how the contested issue of adequate notice in the 2002 and 2003 letters can be considered “undisputed.”
2. The Trial Court’s Conclusion that LACMA’s Petition Was Not Barred by the Statute of Limitations is Supported by Substantial Evidence
Schiff contends the limitations period to petition for a surcharge is three years, and the court erred in rejecting his statute of limitations defense because the 2002 and 2003 letters describing the FMI investment and enclosing the contract contained sufficient information to commence the running of the statute of limitations.
The three-year limitations period is set forth in section 16460, subdivision (a)(1), which provides in relevant part: “If a beneficiary has received an interim or final account in writing, or other written report, that adequately discloses the existence of a claim against the trustee for breach of trust, the claim is barred as to that beneficiary unless a proceeding to assert the claim is commenced within three years after receipt of the account or report. An account or report adequately discloses existence of a claim if it provides sufficient information so that the beneficiary knows of the claim or reasonably should have inquired into the existence of the claim.”
Subdivision (c) of section 16460 states a written report or account need not meet the requirements of an accounting as set forth in section 16063.
Section 16460, subdivision (a)(1) is not a straightforward statute of limitations provision that absolutely precludes claims based on trust management filed more than three years after receiving an interim or final account in writing or other written report. Rather, it specifies the three-year period commences only when the written account or report “adequately discloses [the] existence of a claim[.]” (§ 16460, subd. (a)(1).)
Schiff contends the trial court misread section 16460, subdivision (a)(1) that the statute is triggered only upon the submission of an accounting, and disregarded the statutory language that a written report is sufficient. We disagree with Schiff’s interpretation of the trial court’s decision as set forth in the judgment.
The judgment does not state that the defense fails as a matter of law because Schiff did not present a formal accounting. (See §§ 16062, 16063.) Rather, the trial court focused on the content of the 2002 and 2003 letters to determine if the letters contained information that adequately disclosed the existence of a claim against Schiff. When read in context, the trial court’s use of “accounting, ” immediately following the reference to the 2002 and 2003 letters addresses the insufficient content, not a formal statutory requirement. Thus, the trial court did not misinterpret the statute or run afoul of the holding in Noggle v. Bank of America (1999) 70 Cal.App.4th 853, 858-859, which discusses the alternative written report requirement in the statute.
Schiff contends Noggle v. Bank of America, holds a letter is a “written report” and is sufficient to trigger the statute of limitations. Noggle looked at the content of the letter to determine adequate disclosure. The remaindermen in Noggle received a letter in which the trustee informed them the assets had been invested to maximize income for the income beneficiaries. (Noggle v. Bank of America, supra, 70 Cal.App.4th at p. 861 & fn. 6.) The remaindermen also received accountings from which the market value of the trust accounts could have been calculated to determine the absence of growth to the principal. (Id. at p. 861 & fn. 6.)
Schiff also contends the 2002 and 2003 letters, along with the FMI contract, contained adequate information to put LACMA on notice of the existence of a claim, and thus disagrees with the trial court’s assessment of the contents of these letters.
The general rules for assessing the time of accrual of a cause of action against a trustee were discussed in Noggle v. Bank of America, supra, 70 Cal.App.4th at pages 860-861. The factual question is “who knew what and when was it known.” (Id. at p. 860.) A duty to inquire, as stated in the statute, arises when sufficient information is received to put a beneficiary on notice of a claim. (Id. at p. 860, fn. 5; see also Miller v. Bechtel Corp. (1983) 33 Cal.3d 868, 874-875.)
In Noggle v. Bank of America, supra, 70 Cal.App.4th 853, the remainder beneficiaries of a trust sued the trustee for failure to manage the trust assets for the benefit of the remaindermen. (Id. at p. 856.) The trial court concluded there was sufficient information from which the remaindermen were on notice that a claim existed against the trustee. (Id. at p. 861.) The types of information available to the remaindermen were various communications from the trustee that included accountings and a letter explaining the trustee’s investment strategy to invest assets in order to maximize the income for the income beneficiaries. As the Noggle court stated, “We don’t see how the Bank could have made it any plainer....” (Ibid.) Additionally, the accountings provided sufficient information to enable some of the remaindemen to calculate the market value for the assets in the trusts to make comparisons and observe the absence of growth in the principal. (Ibid.) This information was sufficient to put the remaindermen on notice and triggered the statute of limitations.
The information presented to LACMA is distinguishable from what the remainder beneficiaries in Noggle v. Bank of America, supra, 70 Cal.App.4th 853 received. Neither the 2002 and 2003 letters nor the FMI contract put LACMA on notice of its claim against Schiff. The question is, “who knew what and when was it known.” (Id. at p. 860.) The letters informed LACMA of the investment of assets into a different form, which would not raise the duty to inquire of a reasonable residuary beneficiary in LACMA’s position. Schiff’s 2002 and 2003 letters assured LACMA that the FMI contract was performing and paying quarterly interest. The FMI contract revealed the entire principal amount of $650,000 would be returned in 84 months, and FMI guaranteed the return of the principal. The contract further stated FMI would “invest funds in collateralized and/or promissory instruments of debt made in the name of FMI and to leverage such instruments to obtain credit with which to make further similar investment(s) provided the funds are never unsecured.” As of 2003, LACMA knew the trust assets were invested in FMI and the principal was guaranteed and secured. LACMA had no information to suspect any trust mismanagement related to the principal until the 2004 letter. Therefore, based upon the trial court’s assessment of the contents of these documents, Schiff did not prove LACMA had sufficient information of a claim against him. The petition was not barred by section 16441, subdivision (a)(1).
When LACMA received these letters in response to the annual audit, the beneficiary interest in the trust was not likely to mature for about 26 years, given Susan Cole’s life expectancy.
3. The Trial Court Did Not Err in Awarding Prejudgment Interest
Schiff contends the trial court erred by misreading section 16441 as a mandatory requirement to impose prejudgment interest at the legal rate of 10 percent. Schiff also contends there is no factual basis to impose 10 percent interest. The trial court did not err.
Schiff also presents this argument on behalf of ACIC. ACIC did not appeal from the judgment and is not a party to this appeal.
Section 16441 states in relevant part: “If the trustee is liable for interest pursuant to Section 16440, the trustee is liable for the greater of the following amounts: [¶ ] (1) The amount of interest that accrues at the legal rate on judgments in effect during the period when the interest accrued. [¶] (2) The amount of interest actually received....” (§ 16441, subd. (a)(1), (2).) Subdivision (b) of section 16441 gives the trial court discretion, if the trustee acted in good faith, to excuse the trustee in whole or in part from liability under subdivision (a) if it would be equitable to do so.
Section 16440, subdivision (a)(1) states if the trustee commits a breach of trust, the trustee is chargeable with any loss or depreciation in value of the trust estate resulting from the breach of trust, with interest. Thus, as the trial court acknowledged, interest is recoverable unless the trial court exercises its discretion to reduce the liability under section 16440, subdivision (b). The trial court followed the statutes to award interest and rejected the equitable and policy arguments presented here that LACMA has been “made whole” because it already has recovered what it lost.
The trial court did not miscalculate the interest. Section 16441 permits the trial court to exercise its discretion to impose the legal rate when the liability accrued. The trial court determined the liability occurred in July 2006, and awarded interest from that point forward. While Schiff points out that LACMA received and kept interest payments under the promissory note during this period until the default, the trial court deducted those payments from the damages. There was no error in the interest calculation. (See Cal. Law Revision Com. com., 54A West Ann. Prob. Code (1991 ed.) foll. § 16441, p. 169.)
DISPOSITION
The judgment is affirmed. Costs to respondent.
We concur: CROSKEY, Acting P. J., KITCHING, J.