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California Prob. Code 18100 Protects a Trustee in Good Faith

January 21, 2022

California

,

United States of America

Issue

What are the effects of a trustee's failure to list a parcel of real property on the open market before accepting a private offer?

Conclusion

Cal. Prob. Code § 18100 protects a third party who deals with a trustee in good faith and for valuable consideration unless the third party has actual knowledge that the trustee is improperly exercising powers under the trust. Constructive knowledge or inquiry notice of the trustee's powers is not sufficient to deprive a good faith transferee of the protection. (Adler v. Manor Healthcare Corp., Vournas v. Fidelity Nat. Title Ins. Co., Stearns v. Balistrieri, Kelly v. Mayer)

Cal. Prob. Code § 18100 applies to real property transactions. (Adler v. Manor Healthcare Corp., Vournas v. Fidelity Nat. Title Ins. Co.)

In Vournas v. Fidelity Nat. Title Ins. Co., a trustee was required to obtain the consent of at least two of the trust beneficiaries before selling trust property; however, he sold three parcels of trust real property without obtaining beneficiary consent. A successor trustee filed suit against the defendant, which was the escrow holder, title insurer, and trustee under the deeds of trust for the sales, seeking damages based on negligence. The defendant was protected from liability by Cal. Prob. Code § 18100 where the complaint did not allege and the appellant did not show that the defendant had actual knowledge that the trustee was acting in violation of the trust provisions, did not act in good faith, nor that they acted without consideration.

In the unpublished case of Stearns v. Balistrieri, the defendant was not a bona fide purchaser under Cal. Prob. Code § 18100 where the former cotrustee gifted her condominiums that were purchased with assets belonging to the trust. The California Court of Appeal for the Fourth District affirmed the trial court's order ordering the defendant to return the condominiums to the trust.

Law

Cal. Prob. Code § 18100 sets out protection for third parties who deal with trustees if the third party acts in good faith, for valuable consideration, and without actual knowledge that the trustee is exceeding their powers or improperly exercising them:

With respect to a third person dealing with a trustee or assisting a trustee in the conduct of a transaction, if the third person acts in good faith and for a valuable consideration and without actual knowledge that the trustee is exceeding the trustee's powers or improperly exercising them:

(a) The third person is not bound to inquire whether the trustee has power to act or is properly exercising a power and may assume without inquiry the existence of a trust power and its proper exercise.

(b) The third person is fully protected in dealing with or assisting the trustee just as if the trustee has and is properly exercising the power the trustee purports to exercise.

In Adler v. Manor Healthcare Corp., 7 Cal.App.4th 1110, 9 Cal.Rptr.2d 732 (Cal. App. 1992), the California Court of Appeal for the First District affirmed the trial court's ruling that the defendant was a bonafide purchaser of an easement and was entitled to summary judgment on the plaintiff's suit for a reconveyance of the easement and a declaratory judgment that the easement was void. The Court explained that Cal. Prob. Code § 18100 protects a third person dealing with a trustee who acts in good faith and for a valuable consideration unless the third person had actual knowledge that the trustee was improperly exercising powers under the trust. Constructive knowledge or inquiry notice of the trustee's powers is not sufficient to deprive a good faith transferee of the protection (at 1114-1116):

This case turns on the applicability of section 18100, 3 which states: "With respect to a third person dealing with a trustee or assisting a trustee in the conduct of a transaction, if the third person acts in good faith and for a valuable consideration and without actual knowledge that the trustee is exceeding the trustee's powers or improperly exercising them: [p] (a) The third person is not bound to inquire whether the trustee has power to act or is properly exercising a power and may assume without inquiry the existence of a trust power and its proper exercise. [p] (b) The third person is fully protected in dealing with or assisting the trustee just as if the trustee has and is properly exercising the power the trustee purports to exercise."

[7 Cal.App.4th 1115] Section 18100 replaces former Civil Code section 2243, which the courts consistently interpreted as creating a duty of inquiry making constructive notice as binding on third-party purchasers as actual notice. 4 (Central Construction Co. v. Hartman (1935) 7 Cal.App.2d 703, 708-710, 47 P.2d 484; Huntoon v. Southern T. & C. Bank (1930) 107 Cal.App. 121, 126-127, 290 P. 86; People of State of Cal. v. Larkin (N.D.Cal.1976) 413 F.Supp. 978, 982-983.) The new statute is drawn from section 7 of the Uniform Trustees' Powers Act of 1964. (See Cal.Law Revision Com. com., 54A West's Ann.Prob.Code (1991 ed.) foll. § 18100, p. 241.)

In recommending replacement of former Civil Code section 2243 with section 18100, the Law Revision Commission expressly intended to give greater protection to the rights of a third-party purchaser of trust property. The commission's report states: "The proposed law protects a third person who acts in good faith and for a valuable consideration unless the third person has actual knowledge that the trustee is improperly exercising powers under the trust. Constructive knowledge or inquiry notice of the trustee's powers is not sufficient to deprive a good faith transferee of protection. This rule is generally consistent with changes that have been made in the law concerning negotiable instruments, securities, and bank accounts. [p] The proposed law also continues the existing provisions that protect third persons who rely on documents relating to real property recorded with the county recorder." 5 (18 Cal.Law

Page 735

Revision Com.Rep., supra, at p. 593, emphasis added, fns. omitted; 11 Witkin, Summary of Cal.Law, Trusts, supra, § 267, at p. 1105.)

Thus, section 18100 was specifically adopted to change the prior law, which placed third-party purchasers of trust property on constructive or [7 Cal.App.4th 1116] inquiry notice of possible breaches of trust. The new law gives such purchasers protected bona fide status except where they have actual knowledge of a breach. This interpretation of section 18100 is consistent with the plain meaning of its language, as well as the comments of the Law Revision Commission that proposed its enactment and the history of the Uniform Trustees' Powers Act on which it is based. (Fratcher, Trustees' Powers Legislation (1962) 37 N.Y.U.L.Rev. 627, 662-663.)

The Court rejected the appellant's argument that Cal. Prob. Code § 18100 does not apply to real property transactions because it does not mention real property while another section, Cal. Prob. Code § 18103, does. The Court held thatt Cal. Prob. Code § 18100 is not inconsistent with Cal. Prob. Code § 18103. Cal. Prob. Code § 18103 applies only where the recorded deed does not mention the trust; otherwise Cal. Prob. Code § 18100 applies (at 1117-1118):

[7 Cal.App.4th 1117] Relevant statutory history further rebuts appellants' argument that section 18100 cannot apply to real property transactions because it contains no mention of real property, while section 18103 does. Section 18103 replaces and essentially restates former Civil Code section 869. 6 Former Civil Code section 870 declared "absolutely

Page 736

void" any transfer or other act of trustees in contravention of a real property trust that has been disclosed in the instrument creating the estate. 7 This section was not continued in the revised probate law. Together with former Civil Code section 2243, these three separate statutes formerly governed the issue presented here. 8

In Firato v. Tuttle (1957) 48 Cal.2d 136, 139-140, 308 P.2d 333, a trustee conveyed real property in violation of a deed of trust that named the trustee and was recorded. The Supreme Court applied former Civil Code section 2243 to validate the conveyance to innocent purchasers, notwithstanding the facts that that statute did not expressly mention real property transactions, and that former Civil Code section 870, which did specifically mention real property, presumably would have made the improper transfer absolutely void. (Firato, supra, at pp. 139-140, 308 P.2d 333.) The court reasoned that this result accorded with the rule protecting bona fide purchasers who acquire their interests "from a trustee under a secret trust [citations]," and cited former Civil Code section 869 as authority for the rule regarding secret trusts. (Firato, supra, at p. 139, 308 P.2d 333.) Thus, Firato applied section 18100's predecessor, former Civil Code section 2243, to real property transactions notwithstanding its failure specifically to mention such transactions.

Moreover, appellants' argument that section 18103 governs both where the trust is disclosed and where it is not disclosed ignores the separate fates of former [7 Cal.App.4th 1118] Civil Code sections 869 and 870. As seen, these statutes formerly stated separate rules for two distinct situations. Only former Civil Code section 869, which states the rule for "secret trusts," i.e., those where the deed does not state the trust, was reenacted as section 18103; former Civil Code section 870, which applied to disclosed trusts, was omitted, probably because it was inconsistent with Firato, which applied former Civil Code section 2243 to validate an improper conveyance even though the deed set forth the trust and the conveyance would therefore have been void under former Civil Code section 870. Appellants' argument ignores this history and erroneously assumes that section 18103 reenacted both former Civil Code sections 869 and 870.

In its repeal notes for former Civil Code section 870, the Law Revision Commission states: "For provisions relating to the general subject of former Section 870, see Prob.Code ... [§ ] 18100 (protection of third person dealing with trustee)." This reference to section 18100 in the repeal notes for former Civil Code section 870, which once stated the rule for disclosed trusts, lends further support to the conclusion that section 18103, like its predecessor, former Civil Code section 869, applies only where the recorded deed does not mention the trust, and that otherwise, section 18100 applies. 9

Page 737

In this case, the Golden Rain trust agreement was recorded in the official records of Contra Costa County in April 1964. 10 Thus, under section 18103, Golden Rain could not deal with third persons as though the trust property belonged to it without restrictions. On the other hand, under the clear and express provisions of section 18100, third parties dealing with [7 Cal.App.4th 1119] Golden Rain in good faith and without actual knowledge that it was (allegedly) exceeding or improperly exercising its trust powers were not bound to inquire into those powers, and could assume without inquiry that Golden Rain had authority to act as it did.

Cal. Prob. Code § 18103 provides:

If an express trust relating to real property is not contained or declared in the grant to the trustee, or in an instrument signed by the trustee and recorded in the same office with the grant to the trustee, the grant shall be deemed absolute in favor of a person dealing with the trustee in good faith and for a valuable consideration.

In Vournas v. Fidelity Nat. Title Ins. Co., 86 Cal.Rptr.2d 490, 73 Cal.App.4th 668 (Cal. App. 1999), a trustee was required to obtain the consent of at least two of the trust beneficiaries before selling trust property; however, he sold three parcels of trust real property without obtaining beneficiary consent. A successor trustee filed suit against the defendant, Fidelity, which was the escrow holder, title insurer, and trustee under the deeds of trust for the sales, seeking damages based on negligence. The California Court of Appeal for the Fourth District affirmed the trial court's grant of summary judgment in favor of the defendant. The Court explained that Cal. Prob. Code § 18100 protects third parties who deal with or assist the trustee by excusing them from investigating and permitting them to assume that the trustee is acting pursuant to a trust power and its proper exercise except where the third parties have actual knowledge of a breach of the trust (at 493-494):

Appellant alleged that Fidelity as escrow holder, title insurer and deed of trust trustee assisted Skouras's sale of the trust properties and owed a duty to appellant and to the beneficiaries of the trust to investigate and determine whether Skouras had obtained the required beneficiary consent. However, under applicable trust principles, the trustee of the trust is vested with legal title to the trust property. When third parties deal with the trustee in connection with trust property, section 18100 provides that:

"With respect to a third person dealing with a trustee or assisting a trustee in the conduct of a transaction, if the third person acts in good faith and for a valuable consideration and without actual knowledge that the trustee is exceeding the trustee's powers or improperly exercising them: [p] (a) The third person is not bound to inquire whether the trustee has power to act or is properly exercising a power and may assume without inquiry the existence of a trust power and its proper exercise. [p] (b) The third person is fully protected in dealing with or assisting the trustee just as if the trustee has and is properly exercising the power the trustee purports to exercise." (Emphasis added.)

Section 18100 was specifically adopted to change the prior law that placed third parties on constructive or inquiry notice of possible breaches of the trust. 4 Section 18100 protects third parties who deal with

Page 494

or assist the trustee by excusing them from investigating and permitting them to assume " 'the existence of a trust power and its proper exercise,' " except where the third parties have actual knowledge of a breach of the trust. 5 (Adler v. Manor Healthcare Corp. (1992) 7 Cal.App.4th 1110, 1114-1116, 9 Cal.Rptr.2d 732, quoting section 18100.)

The complaint does not allege and appellant did not show that Fidelity had actual knowledge Skouras was acting in violation of the trust provisions, did not act in good faith or acted without consideration. 6 Because the statutory scheme exempts third parties from a duty to investigate, Fidelity breached no duty owed to appellant. 7

In the unpublished decision of Stearns v. Balistrieri, 2005 Cal. App. Unpub. LEXIS 9671, 2005 WL 2746637 (Cal. App. 4th Dist. October 25, 2005), the California Court of Appeal for the Fourth District affirmed the trial court's order that the defendant return condominiums to the trust. The condominiums were purchased by a cotrustee and primary beneficiary of a trust, using assets belonging to the trust, and then gifted to the defendant. A trustee has a duty to act reasonably, in good faith, consistent with the purpose of the trust instrument, and in accordance with the standard for distributions set out in the trust. The Court found that the evidence that the cotrustee withdrew money from the trust in derogation of the purpose of the trust, attempted to hide these actions from the cotrustee and others, and ultimately confessed to his wrongful conduct was sufficient to support the trial court's conclusion that he violated his duties as a cotrustee by acting in bad faith (at 12-15):

Under California law and the trust instrument, then, Peyton, as a cotrustee, had a duty to act reasonably, in good faith, consistent with the purpose of the trust instrument [*13] and in accordance with the standard for distributions set out in the trust. The evidence at trial shows that he did not do so. Peyton withdrew principal from the trust and transferred it as a gift in the form of two condominiums to a stranger to the trust, Angela. These withdrawals do not fit within the trust's express standard for distribution -Peyton's "health, education, support and maintenance." (Veronica's Trust, art. 3.2; see Estate of Nunn (1974) 10 Cal.3d 799, 807, 112 Cal. Rptr. 199 [a standard allowing the invasion of the trust by a beneficiary for his own use "precludes invasions for gifts to others"].) The gifts also significantly depleted the assets of the trust, frustrating the settlor's intent to provide first for Peyton's welfare -pursuant to the standard noted above, and then for the welfare of her children and grandchildren. Thus, Peyton's disbursements of trust principal to Angela were contrary to the purpose of the trust and a breach of his duties as a cotrustee under California law.

We also conclude that the evidence of Peyton's withdrawals in derogation of the purpose of the trust, combined with his efforts to hide these actions from cotrustee [*14] Stearns and others, and ultimate confession of wrongful conduct, is sufficient to support the trial court's conclusion that Peyton violated his duties as a cotrustee by acting in bad faith. [*15] (See Bogert, Trust & Trustees (2d rev. ed. 1980) § 560, pp. 196-199 [noting that courts use the phrases "abuse of discretion," "bad faith," "dishonesty," or "arbitrary" to "cover a variety of improper actions, for example, acting for the benefit of the trustee himself or some third person . . . or an action contrary to the purposes of the trust," fns. omitted].)

The Court also found that the defendant was not a bona fide purchaser under Cal. Prob. Code § 18100 and thus the statute did not protect her from liability. Cal. Prob. Code § 18100 gives third party purchasers of trust property protected bona fide purchaser status except where they have actual knowledge of a breach of the trust. The protection is limited to third persons who act in good faith and for a valuable consideration. The defendant was not a bona fide purchaser because she was a donee and did not receive the trust property in exchange for valuable consideration (at 15-20):

Angela next argues that even if Peyton breached his duties as a cotrustee, she should not have to return the condominiums because she was a bona fide purchaser under section 18100. We reject this argument because the evidence did not show that Angela acquired the condominiums for "valuable consideration" as required by that section.

[*16] Section 18100 gives "third party purchasers of trust property . . . protected bona fide status except where they have actual knowledge of a breach" of the trust. (Adler v. Manor Healthcare Corp. (1992) 7 Cal.App.4th 1110, 1115-1116.) The statue expressly limits its protection to third persons "dealing with a trustee" who "act[] in good faith and for a valuable consideration." (§ 18100; 18 Cal. Law Revision Com. Rep. (1986) p. 593 [discussing intended purpose of proposed trust law].) The trial court here found that section 18100 did not apply because Angela was "not 'a third person dealing with a trustee'" and did not provide "valuable consideration." The court specifically found that Angela "was a donee" with respect to the condominiums.

Angela disputes the trial court's findings, arguing that her 13-year "romantic relationship," which included companionship and socializing, "was clearly valuable consideration" under section 18100. Angela cites no cases under section 18100 or analogous law to support this claim. We conclude that her argument fails for two related reasons.

[*17] First, the trial court specifically found, with respect to the property at issue here, that Angela "was a donee," i.e., that Peyton transferred the condos to her as gifts and not for consideration of any kind. Substantial evidence supports this factual finding. Angela herself testified that the condominiums were given to her as gifts, and she did not claim (nor was there any evidence) that she and Peyton had any express or implied agreement with respect to the transfer of those condominiums. As a donee, Angela cannot receive the protection of section 18100 -by definition, she did not receive trust property in exchange "for a valuable consideration." (§ 18100; see Bogert, Trust & Trustees (2d rev. ed. 1995) § 887, pp. 239-241 ["donees by an inter vivos transaction" are excluded from rule requiring "valuable consideration"]; Newport v. Hatton (1924) 195 Cal. 132, 151 [recipients of trust funds "as donees . . . are not protected against the claims of the true owners" of the trust]; Allen v. Meyers (1936) 5 Cal.2d 311, 314 [where "defendant paid no consideration for the real property conveyed by" the trustee, she held the property subject to trust]. [*18] )

Second, even if Angela had provided evidence of an implied agreement that encompassed her receipt of the condominiums in exchange for her ongoing companionship, this would not constitute "valuable consideration" under existing law. (Ehret v. Ichioka (1967) 247 Cal. App. 2d 637, 643, 55 Cal. Rptr. 869 [rejecting a claim that a second wife's receipt of trust assets in exchange for "love and affection" was sufficient to make her a bona fide purchaser of those assets]; Hanscome-James-Winship v. Ainger (1925) 71 Cal.App. 735, 741 [transfer of real property in insolvency context from husband to wife for "love and affection" presumptively invalid as not made for "valuable consideration"]; Bogert, Trust & Trustees, supra, § 887, pp. 239-241 ["love and affection" do not constitute "valuable consideration"].) As this Court has explained, in a different context, consideration does not include "such services as being a constant companion and confidant" because, in circumstances like those presented here, such services "would likely be considered so intertwined with the sexual relationship as to be inseparable." (Whorton v. Dillingham, supra, 202 Cal. App. 3d at p. 454, [*19] citing Walters v. Calderon (1972) 25 Cal. App. 3d 863, 873, 102 Cal. Rptr. 89; see also Bergen v. Wood (1993) 14 Cal.App.4th 854, 859-860 [holding agreement unenforceable "because services as a social companion and hostess are not normally compensated and are inextricably intertwined with the sexual relationship," and therefore could not be basis of valid consideration].)

[*20] In sum, Angela fails to show that she received the two condominiums for "valuable consideration," and therefore, the trial court did not err in determining that section 18100 does not apply.

In the unpublished case of

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