California Trust Case: Chatard v. Oveross, 179 Cal. App. 4th 1098 (Nov. 30, 2009)

February 4, 2010

In 1989, Frederic and Vera Chatard created the Chatard Family Trust. Upon the death of the surviving spouse, part of the trust was distributed to the Chatards’ three adult children, Joyce, David and Jeanee. Part of it was retained in trust for the four children of a deceased son until these grandchildren were all older than age 30.

The trust contained a spendthrift provision that prevented the interest of any beneficiary from being subject to claims of creditors or others, or liable to attachment, execution or other process of law.

The surviving spouse died in September 2002, and the Chatards’ daughter Joyce began serving as trustee of the trust in February 2003. Disputes between Joyce and her siblings arose over the next several years, including a disagreement over the sale of certain real estate. David and Jeanee each filed petitions against Joyce requesting for the real property to be sold; Joyce to furnish an accounting; removal of Joyce as trustee; and appointment of an interim successor trustee.

The trial court granted all of the requests, finding that Joyce breached her fiduciary duties by failing to make trust property productive, awarding herself excessive compensation, using trust assets to pay personal expenses, and failing to distribute trust assets within a reasonable time. In addition, the trial court found that Joyce’s opposition to the petitions was without reasonable cause and in bad faith, and assessed David’s and Jeanee’s legal fees and costs against Joyce.

The interim successor trustee filed an account and petition requesting that Joyce’s share of the trust be reduced by the surcharge against her and the amount of the legal fees and costs owed to David and Jeanee. Joyce then sued the interim successor trustee, conceding that the legal fees and costs could be taken from her portion of the trust, but arguing that her interest in the trust could not be used to satisfy the surcharge because of the spendthrift provision.

The Court of Appeal looked to section 257 of the Restatement Second of Trusts, “Impounding Share of Trustee-beneficiary,” to determine whether a spendthrift provision precludes using a beneficiary’s share to satisfy a surcharge award. Section 257 provides that “[i]f a trustee who is also one of the beneficiaries commits a breach of trust, the other beneficiaries are entitled to a charge upon his beneficial interest to secure their claims against him for the breach of trust, unless the settlor manifested a different intention.”

The court then examined whether the Chatards would have intended to protect a trustee-beneficiary against the claims of other beneficiaries for breach of trust. The court held that the language of the trust suggested protection against claims of persons foreign to the trust, but did not refer to the claims of fellow beneficiaries relating to a breach of trust.

The court concluded that the Chatards did not intend the spendthrift provision to allow Joyce to abuse her authority as trustee, cause financial damage to the trust, and reduce the share of the other beneficiaries. The court reasoned that because the damage caused by the breach of trust would otherwise be sustained by all of the beneficiaries, the trustee’s interest could be reached to satisfy the surcharge, regardless of the existence of the spendthrift provision.

While the provisions of the Restatement Third of Trusts relating to the impounding of a share of a trustee-beneficiary have not yet been published, this holding is in line with the comments to section 59, “Spendthrift Trusts: Exceptions for Particular Types of Claims,” which state that “[t]he interest of a beneficiary […] who – by breach of duty as trustee or otherwise – causes harm to the trust estate and the beneficial interests of others, may ordinarily be reached by set-off or impounding to satisfy the resulting obligation, even in the case of a spendthrift trust.” (emphasis added).

Kelly L. Hellmuth is the principal author of this release.