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Don’t Skimp on Notice to Beneficiaries

Ensure that probate orders remain enforceable in perpetuity.

A recent ruling by a California appeals court underscores the importance of giving notice to all beneficiaries in cases regarding trusts. In 1991, a court issued an order pursuant to a settlement agreement.  It purported to eliminate the contingent future interest in a trust of trust beneficiary Mark Roth. Time passed. And passed. Until 25 years passed. In 2016, the contingencies occurred on which, but for the 1991 order, Mark’s interest would have vested. Mark then sued, claiming the 1991 order was void because no one gave him notice of the proceedings or an opportunity to object. In Roth v. Jelley, (2020) 45 Cal.App.5th 655, the Court of Appeal agreed with Mark and voided the then-29-year-old order.

Roth implicates two primary considerations:  the constitutional right to due process and statutory notice requirements. Roth and related cases also spawn various lessons regarding extrinsic fraud and representing fiduciaries.  But the burning question is, how can a prudent attorney avoid such disasters? 

The Roth Analysis

A comedy of avoidable errors led to Roth. At their core was a failure to provide notice to Mark of a settlement and the resulting modification of the trust’s terms encapsulated by the trial court’s 1991 order. In 2016, Mark filed a petition collaterally attacking the 1991 order. Contending that the order was void for lack of due process and for failing to comply with Probate Code section 15403 et seq., he sought an order directing the trustee to recognize him as a trust beneficiary.

The trial court denied Mark’s petition. Perhaps to reach what it considered a just result, it ruled that: (1) Mark wasn’t entitled to notice because his unvested contingent remainder interest and his “abstract concern in obtaining an inheritance” were insufficient to require notice to him; and (2) the settlement didn’t modify the trust because its signatories instead “bargained for the vesting and release of their interests.”

In reversing, the appellate opinion focuses on due process, but also discusses settlement agreements modifying a trust.

Regarding due process, the court stated that under the Fourteenth Amendment, “[n]otice by mail or other means as certain to ensure actual notice is a minimum constitutional precondition to a proceeding which will adversely affect the liberty or property interests of any party [whose]… name and address are reasonably ascertainable.” Mennonite Bd. of Missions v. Adams (1983) 462 U.S. 791, 800. This rule traces back to Mullane v. Cent. Hanover Bank & Trust Co. (1950) 339 U.S. 306, 314, which California probate courts have followed since 1968.

The court disagreed with the trial court’s conclusion that Mark “had no more than a unilateral expectation” to a share of the trust and therefore lacked any right to notice. “The law has long recognized that a contingent future interest is property no matter how improbable the contingency …” In re Marriage of Brown (1976) 15 Cal.3d 838, 846, fn. 8. Even if a property interest is subject to complete divestment, it still exists. See Roth, 45 Cal.App.5th at 669. Roth also rejected the argument that satisfying statutory probate notice requirements also satisfies constitutional due process requirements. Roth, 45 Cal.App.5th at 674.

The court also ruled that Mark’s father’s disclaimer of his interest in the trust didn’t prevent Mark’s independent interest from vesting because it didn’t derive from his father’s interest. Similarly, the settlement agreement couldn’t divest Mark of his interest because he wasn’t a party to it. Finally, the court deemed the 1991 order to be an impermissible vehicle to change the trust’s terms by eliminating all of the contingent future remainder interests under it.

Four Lessons

Practitioners can learn four lessons from Roth and related case law: 

Construe “property interest” broadly. Give notice to every individual who holds or might later hold a right or interest under a testamentary instrument, contract or deed if the order you seek might impair any such right or interest. Give notice even to those who may not be adversely affected—that is, those who could be affected, not just those who would be affected. Even if there will be no apparent economic impact on the beneficiary, give notice if there may be a legal impact.

Give notice to beneficiaries with contingent future interests. Give notice to any known or “reasonably ascertainable” interested person. Analyze the instrument’s dispositive scheme and the pertinent statute(s). As a tool, consider identifying each statute, summarizing its requirements and alleging compliance with it. Take the approach that you really need to find these individuals.

Treat notice as an active issue throughout a case. Notice isn’t a cursory requirement that only an initial petition must address. Reevaluate it as new pleadings are filed. Have the beneficiaries changed through births and deaths, or have minor beneficiaries become adults?  How will or might a ruling impact unborn or non-signatory beneficiaries?

Consider beneficiaries’ conflicting interests, including intergenerational conflicts. The interests of parents and their children often diverge when a settlement terminates a trust. Other conflicts among generations or categories of beneficiaries may also exist. Should the court appoint guardians ad litem to act on behalf of any minor, unborn, unknown or unascertained beneficiaries?  Does the complex “virtual representation statute” come into play?  See Prob. Code Section 15804; Estate of Lacy (1975) 54 Cal.App.3d 172; see also The Doctrine of Virtual Representation of Incapacitated, Minor, Unborn and Unascertained Beneficiaries in Relation to Notice of and Representation in a Probate Code §17200 Proceeding.

Another Prong: Extrinsic Fraud

Roth also implicates an important corollary issue: the possibility that an aggrieved beneficiary will allege extrinsic fraud to attack an unfavorable order or court-approved settlement. Complying with Roth’s dictates for adequate notice won’t immunize an order from attack if the underlying documents mischaracterized or failed to disclose pertinent facts or if the order’s proponent can’t prove otherwise.

Extrinsic fraud occurs when a party fraudulently prevents another party from fully participating in a proceeding; whereas with intrinsic fraud the party has the opportunity to fully participate. Kuehn v. Kuehn (2000) 85 Cal.App.4th 824, 833. Extrinsic fraud provides grounds to set aside a judgment; intrinsic fraud doesn’t. Examples of extrinsic fraud are failure to give notice or failure to identify an interested party, such as an illegitimate grandson.

California fiduciaries also face a higher standard with regard to extrinsic fraud. “[A] breach of a fiduciary duty may warrant setting aside the judgment even though the same conduct in a nonfiduciary relationship would not be considered extrinsic fraud.”  Estate of Sanders (1985) 40 Cal.3d 607, 615; see also Prob. Code Section 7250(a) and (c) (judgment releases personal representative unless obtained by fraud, misrepresentation, etc.).

Avoid Disaster

Roth teaches that the ink from a court’s rubber stamp doesn’t guarantee protection. So how can a prudent trust and estate attorney avoid the disaster of an order’s invalidation years or even decades after its filing?  Simple: don’t skimp on notice. Obtain, analyze and disclose sufficient information for all involved to vet the notice issue, as well as the order’s potential effect on the beneficiaries. Ensure that clients, particularly fiduciaries, understand that proper notice can be a moving target, and a lack of candor creates significant risks. After all, even 25 years later the client could be left holding the bag—to say nothing of clients who turn their ire on the attorney and his malpractice carrier.

David Y. Parnall is a senior associate with Hartog, Baer & Hand in Orinda, California.

David W. Baer is a principal with Hartog, Baer & Hand.

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