July 12, 2018
Author: Richard M. Bryan
Organization: Bryan Hinshaw, a Professional Corporation
I. The Anatomy and Dynamics of Trustee and Beneficiary Disputes.
Hypothetical Fact Situation for Discussion:
Bill Jones founded and developed an innovative high tech company. He recently died. He was a very gifted inventor and entrepreneur. He ran his business as the commander in chief, worked every day, and was personally responsible for the growth of the business. He never took the company public and always wanted to keep the business in his family.
Bill married Mary Jones many years ago. They had three children, Bill Jr., Alexandra, and Stephanie. When the three children were ages 8 to 15, Bill realized that he really never loved Mary and had an affair with Susan. Susan is a bright woman who is very spiritual, warm hearted, unconcerned and disinterested in money. She is an artist. Mary on the other hand is somewhat cold and distant, but has a good head for business, investments and finances.
Bill left Mary and fell in love with Susan. The divorce was devastating to Mary and to the three children. All three children sided with their mother and were angry at their father. The three children also had severe sibling issues. All three required professional help and the end result is that the three children have spent much of their adult life in constant bickering and conflict, often about their parents, but also as a result of their feelings about each other. Bill Jr. and Alexandra have a hatred for Susan. They refuse all contact with Susan. They wanted their father in their lives, but would not allow Susan in their life. Bill Sr. would visit with his grandchildren, but only alone. Stephanie on the other hand, decided to accept Susan and came to enjoy and love her, while at the same time, maintaining a good relationship with her mother, Mary. Bill Jr. and Alexandra consider Stephanie to be a traitor and their relationship is uneasy, superficially cordial.
After the divorce, Bill Sr. ended up owing 67% of the company. Mary owned 33%, but was not active in the business. She did remain on the Board of Directors. After the divorce, Bill Sr.’s creative genius flowered and for nearly 20 years, the company value grew by 500%, all due to Bill Sr.’s leadership. He had no prenuptial agreement with Susan.
Bill died recently. His only estate plan is an older trust document written about 2 years after he married Susan and when the company was worth much less. In the plan, he provides that Susan is to receive $1,000,000 in cash plus an interest in the business equal to 15% of his interest in the business. The remaining 85% of his 2/3 interest in the business is to be divided equally between his three children. The children are the residual beneficiaries for all other assets. Bill also provided that if Susan elected to proceed to assert her community property interest in the business, this would be deemed to be a contest of the trust, and she would be disinherited. He also inserted a very general no contest clause in all of his estate planning documents. The value of the company is difficult to determine. It is a closely held business. Bill Jr. has worked in the business since college, but Bill Sr. was the driving force, until 5 years before his death. In the last five years of his life, Bill Jr. was effectively the President, but Bill Sr. still was active in product development up until his death.
Bill Jr. is the trustee of his father’s trust and has fiduciary duties to all of the beneficiaries. He would like to arrange a buy out of all of the other members of the family, and then take the company public. He has announced this desire to his siblings.
Assume that the lawyers have all researched and investigated the circumstances
and have general agreement that:
1. It is debatable whether Susan could benefit by asserting her CP interest and forfeit the $1,000,000. It would be very expensive and take 2 years to litigate. However, if she can attribute all of the growth in value after her marriage to Bill Sr.’s ability and skill, the value is enormous and she would then own half of two thirds of the company. Yet, her attorney is concerned that it is an “all or nothing gamble” and highly risky.
2. There are many reasonable differences of opinion about the current value of the business.
3. Alexandra feels that her father was unduly influenced by Susan and that she pressured and manipulated him and is considering a contest to the will. She also does not want Bill Jr. to gain control of the company. She thinks that Bill Jr. will take advantage of his siblings to profit from a buy out.
4. Stephanie wants to make everyone happy and avoid conflict.
5. Susan has distrust of all of the family, except perhaps Stephanie. She feels that if she can she wants to get her half of the community growth in value of the company as the dues she paid for all of the unfair treatment of her by Bill Sr.’s children, except Stephanie.
6. Mary resents Susan, but also is in ill health and does not want conflict in her life.
7. All counsel for all parties are concerned that family conflict could destroy the business, and all but Bill Jr. are concerned that he might not have his father’s level of skill. Bill Jr. is extremely confident in his ability to make the business grow.
II. Disputes with Surviving Spouses Over Jointly Owned Assets.
Upon the death of a trustor, it is sometimes necessary to ascertain the community and separate property rights of the trustor’s spouse. Spousal property characterization issues arise when the trustor does not leave all of the trustor’s community and separate property to a surviving spouse. Often it is necessary to rely on legal presumptions in the analysis, because the decedent is unavailable to testify.
The overarching lesson from the current state of California law is that when trustees are confronted with interspousal transactions great care and caution must be exercised to ascertain the true interest of the surviving spouse. The California cases adopt a protective umbrella over spouses who were disadvantaged by interspousal transactions. This protective philosophy is grounded in the practical reality that inter spousal transactions are breeding grounds for unfairness and overreaching or for negligent mistakes due to spousal reliance on legally unsophisticated real estate brokers, lenders, investment advisors, and others who simply draw assumptions from common folklore about the effect of deeds, title documents, etc. Inter spousal transactions can lead to several legal results. The first can be a transmutation in which the character of property as either separate property or community property is changed by spousal agreement. In other circumstances, the character of the property is not changed but the community estate of both spouses or the separate estate of either spouse is obliged to reimburse either the community estate or the separate estate of the other spouse. In certain circumstances, either the community estate or the separate estate of either or both spouses can acquire an equitable interest in either the community estate or the separate estate of either spouse
The principles of transmutation, reimbursement, and equitable apportionment have been developed primarily in marital dissolution cases. There are some uncertainties about the extent to which results may differ in the event of death of either spouse during marriage.
Another factor affecting inter spousal transactions is the confidential relationship between spouses that gives rise to inter spousal fiduciary duties. California law imposes fiduciary obligations of fair dealing and honesty between spouses arising out of the confidential nature of the spousal relationship and is longstanding. Robins v. Hope (1881) 57 C 493; Herbert v. Lankershim (1937) 9 C2 409. Because of the great potential for abuse in such relationships, the law presumes undue influence by an advantaged spouse; and, the burden of proof of the validity of such transactions is on the spouse who benefited thereby. The presumption of undue influence arises, and the burden of producing evidence shifts, where the party challenging an interspousal transaction makes a prima facie case consisting of 1) the existence of a confidential relationship (which is presumed between spouses); 2) a transaction between the spouses arising out of that
relationship; and 3) either an advantage by one spouse over the other or unfairness of the transaction.
A transmutation is a transfer of property rights between spouses which results in a change of legal or beneficial ownership of the property. The transfer may occur by express agreement or by operation of law where the character of property is changed. Transmutations can occur in any number of contexts, so long as they comply with all of the elements of a valid transmutation. Here are some typical scenarios in which transmutations can arise (this list is not exhaustive):
- Transfers of title from one spouse's separate property to the spouses jointly in connection with a refinance of real property;
- Consent to the designation of a third party as the beneficiary of a community asset upon one spouse's death;
- Transfers of property into or out of trust;
- Gifts of property from one spouse's separate estate to the other spouse's separate estate;
- Gifts of property purchased with community funds to one spouse's separate estate;
- One spouse's signing a quitclaim deed to community real property or the other spouse's separate property;
- A pre-1985 agreement between spouses that one spouse's separate asset is ''ours'' or ''yours''; and
- Addition of a spouse's name to the title of a separate property asset upon marriage.
A transmutation may occur with or without consideration. Community property can be transmuted to the separate property of either spouse; separate property can be transmuted to community property; and separate property of one spouse can be transmuted to the separate property of the other. While a transmutation may occur without consideration (i.e., a gift), this issue must be distinguished from the issue of ''adequate consideration'' which is an element in overcoming the presumption of undue influence which arises in a transmutation where one spouse gains an advantage over the other spouse
Transmutation and the presumption of undue influence have been addressed frequently in the last two decades by the California Supreme Court and the California Courts of Appeal. The California Supreme Court brought transmutation issues to the forefront of spousal property law in both the marital dissolution and estate planning context in Estate of MacDonald (1990) 51 C3d 262, 272 CR 153. Fifteen years later, the high court once again addressed a major transmutation issue in In re Marriage of Benson (2005) 36 C4th 1096, 32 CR3d 471. Since the mid-1990s, Court of Appeal cases such as In re Marriage of Haines (1995) 33 CA4th 277, 39 CR2d 673, and In re Marriage of Delaney (2003) 111 CA4th 991, 4 CR3d 378, have helped keep transmutation issues as “hot topics” for California practitioners.
MacDonald and Benson addressed the issue of whether the transmutation was valid as to form, i.e., whether or not it met all of the technical requirements of Family Code § 852(a). Haines and Delaney addressed the issue of whether a transmutation, which was valid as to form, was obtained free of fraud. In most cases this analysis means:
''Did the presumption of undue influence arise?'' If the answer is yes, then: ''Was it overcome?''
The California Legislature became active in the transmutation area in 2004 by enacting Family Code § 2640(c) , effective January 1, 2005, which addresses the right of reimbursement for the contribution of separate property to the acquisition of the other spouse's separate property.
Based on current law, there are at least four steps required to properly analyze a transmutation issue.
1. Was the transmutation valid as to form?
2. Was the transmutation obtained free of undue influence, mistake, and fraud, actual or constructive?
3. Did the transmutation writing waive the right to Family Code § 2640 reimbursement?
4. Is there a right to equitable apportionment in the absence of a transmutation? Litigating a transmutation issue can be difficult and expensive, both financially and emotionally. There can be a tension between legal presumptions and title documents used by the spouses during marriage. If the transmutation is valid as to form, it may often be presumptively invalid due to the presumption of undue influence, particularly if the decedent spouse is the advantaged spouse and thus unable to testify. And, if there is evidence to overcome the presumption of undue influence, the burden of proof is often clear and convincing evidence. Even if that standard can be met, it is highly likely that the spouse claiming the invalidity of the transmutation is entitled to a Family Code § 2640 reimbursement. And, if the transmutation is found invalid, the issue of equitable apportionment still remains.
1. VALIDITY OF THE FORM USED FOR TRANSMUTATION.
a) Transmutations Occurring Prior to January 1, 1985
The elements of a valid transmutation differ, depending on when the transmutation occurred. Effective on January 1, 1985, and applicable to transmutations occurring after that date, Family Code § 850 et seq. (and predecessor statutes Civil Code § 5110.710 et seq. ) imposed stringent form requirements. Under Family Code § 852(e) , the transmutation statutes do not apply to ''transmutations of property made before January 1, 1985, and the law that would otherwise be applicable to that transmutation shall continue to apply.''
Few formalities were imposed on transmutations occurring prior to January 1, 1985. They did not need to be in writing, or any other special form, to be valid. A transmutation could be enforced even where the parties took no action to change the property's physical possession or legal title, and where they treated it no differently after the transmutation than before. One spouse could simply say, for example, ''my house is now our property,'' and such transmutations, if proven by sufficient evidence, would be enforceable even if legal title never changed. However, the party seeking to enforce the transmutation had to provide sufficient evidence to prove the transferring spouse's intent to change the ownership of property, either by evidence of an express statement of such intent or of actions so consistent with such an intent as to provide implicit evidence thereof. Because pre-1985 transactions occurred more than 20 years ago and are now infrequent, the reader is referred to standard California texts and guidebooks for a more in depth understanding of these more than 20 year old transactions.
b) Requirements for Transmutations Occurring on and After January 1, 1985
Family Code § 850 through 853 state the requirements for valid transmutations.
Those statutes provide as follows: Section 850
Subject to Sections 851 to 853, inclusive, married persons may by agreement or transfer, with or without consideration, do any of the following:
(a) Transmute community property to separate property of either spouse.
(b) Transmute separate property of either spouse to community property.
(c) Transmute separate property of one spouse to separate property of the other spouse. (Emphasis added.) Section 851
A transmutation is subject to the laws governing fraudulent transfers. Section 852
(a) A transmutation of real or personal property is not valid unless made in writing by an express declaration that is made, joined in, consented to, or accepted by the spouse whose interest in the property is adversely affected.
(b) A transmutation of real property is not effective as to third parties without notice thereof unless recorded.
(c) This section does not apply to a gift between the spouses of clothing, wearing apparel, jewelry, or other tangible articles of a personal nature that is used solely or principally by the spouse to whom the gift is made and that is not substantial in value taking into account the circumstances of the marriage.
(d) Nothing in this section affects the law governing characterization of property in which separate property and community property are commingled or otherwise combined.
(e) This section does not apply to or affect a transmutation of property made before January 1,
1985, and the law that would otherwise be applicable to that transmutation shall continue to apply. Section 853
(a) A statement in a will of the character of property is not admissible as evidence of a transmutation of the property in a proceeding commenced before the death of the person who made the will.
(b) A waiver of a right to a joint and survivor annuity or survivor's benefits under the federal Retirement Equity Act of 1984 ( Public Law 98-397 ) is not a transmutation of the community property rights of the person executing the waiver.
(c) A written joinder or written consent to a nonprobate transfer of community property on death that satisfies Section 852 is a transmutation and is governed by the law applicable to transmutations and not by Chapter 2 (commencing with Section 5010) of Part 1 of Division 5 of the Probate Code .
c) Estate of MacDonald.
Estate of MacDonald (1990) 51 C3d 262, 272 CR 153 dealt with the evidentiaryrequirements for proof of an ''express declaration'' under Family Code § 852(a) which provides that ‘‘(a) transmutation of real or personal property is not valid unless made in writing by an express declaration that is made, joined in, consented to, or accepted by the spouse whose interest in the property is adversely affected.'' MacDonald involved IRA accounts that were established during marriage with community funds. The accounts were opened by Husband in his name alone. When he opened them, Wife signed a preprinted standard form ''consent agreement'' designating Husband's living trust as the beneficiary of the IRA funds. Wife died and very shortly thereafter, the estate claimed an interest in the accounts and Husband contended that Wife had transmuted her interest in them. The issue before the court was whether or not Wife's signature on the consent agreement was sufficient to transmute the community property IRA into Husband's separate property. The Supreme Court held that a trial court must determine whether a writing constitutes a transmutation by reference only to the writing, and not to extrinsic evidence. The trial court had determined that when Wife signed the consent agreements. Wife intended to waive her community interest in the accounts based on the testimony of Husband and the parties' accountant as to Wife's intentions in making her estate plan. The Supreme Court found the record devoid of any evidence of Wife's intent in signing the agreements. However, even if there had been evidence of such intent, the Supreme Court held that intent is irrelevant to the issue of whether or not the parties had fulfilled the formal requirements for a transmutation and thus actually changed the property's ownership. The majority relied heavily on a 1983 report of the California Law Revision Commission, noting that the purpose of the legislation was to assure certainty in inter spousal transactions so that a spouse may not be disadvantaged by unwritten extrinsic evidence of intent.
The Supreme Court held that in order for a court to find a valid transmutation, there must be language in the writing by which the court can find intent to actually ''transmute'' the property from one form of ownership to another. There must be some language in the writing which shows that the party whose interest is affected knows that the character or ownership of the property is being changed by the instrument. The majority then concluded that Wife's signature on the consent forms did not constitute an express declaration sufficient to result in a transmutation, because it did not contain any such language. The Supreme Court was careful to note that parties need not use magic words to effect a transmutation. All they had to include was language which expressly states that the characterization or ownership of the property is being changed.
d) Post MacDonald Decisions.
Cases decided after MacDonald have analyzed a variety of transactions, but have been clear that the strict writing and evidentiary principles of MacDonald must be followed. Some examples follow. Transfers' of Property Without Express Language Changing Character of Property.
In Marriage of Barneson (1999) 69 CA4th 583, 81 CR2d 726, the Court of Appeal reversed a trial court holding that several documents whereby Husband directed a brokerage to transfer stock into Wife's name were effective to accomplish a transmutation. Although the documents directed the brokerage to ''transfer these same stocks into the name of [Wife],'' and stated that, for value received, Husband ''does hereby sell, assign and transfer unto'' Wife the shares of stock, the appellate court ruled that this language did not satisfy § 852(a) holding that under MacDonald, the verb ''transfer,'' in the context of the case, did not mean ''change ownership to”.
In Barneson, husband directed a brokerage by a written letter to combine four stock certificates into a single stock certificate and transfer the stocks into the name of Wife and executed an “Irrevocable Stock or Bond Power” stating that the stock was sold, assigned, and transferred to Wife with a written request to journal all of the stock into Wife’s account. Nothing in the writings expressly stated that the character of the ownership was being changed. The Court reasoned that the word “transfer” has multiple meanings and refers to a change in possession or a change in ownership; and thus, a transfer is not necessarily synonymous with 'transmutation. Are Deeds A Form of ''Safe Harbor”?'
In Estate of Bibb (2001) 87 CA4th 461, 104 CR2d 415, the Court held that a grant deed contained sufficient language to constitute an express declaration that met the MacDonald standard. The Court reasoned that the word “grant” is a historically operative word for transferring interests in real property which in the context of the case before it was sufficient. Thus, the use of a deed to transfer real property appears to be a primary factor in the Court’s reasoning.
Interestingly, the same Court in Bibb found no transmutation with regard to a Rolls Royce automobile held in the name of Husband ''or'' Wife. The court held that the DMV form Husband signed contained no language indicating that Husband intended to change the ownership of the automobile; therefore, it failed the MacDonald test. Wife contended that the Vehicle Code presumption that this form of title resulted in a joint tenancy in the property should prevail over the ''presumption'' of invalidity of any inter spousal transaction which did not conform to § 852(a). But, the Court concluded that the lack of an ''express declaration'' was fatal to the transmutation's validity, and reversed the trial court.
Gifts of Substantial Value.
One of the effects of the writing requirements of Family Code § 852(a) is to eliminate the ability of spouses to make gifts of substantial value to each other in the absence of the express declaration meeting the MacDonald test. Family Code § 852(c) does permit gifts between the spouses of clothing, wearing apparel, jewelry, or other tangible articles of a personal nature that are used solely or principally by the spouse to whom the gift is made and that is not substantial in value taking into account the circumstances of the marriage. But all other gifts must be made by a writing which complies with Family Code § 852(a) and MacDonald.
Estate Planning Documents.
In Marriage of Starkman (2005) 129 CA4th 659, 28 CR3d 639, the Court of Appeal held that estate planning documents executed by the parties during marriage did not constitute a transmutation of assets subsequently transferred into trust. In so holding, the court said that ''the parties might have stated that any property transferred to the Trust by either of them 'becomes' or 'is changed into' the community property of the parties.'' But lacking any such clear language expressly declaring an intent to change character, a change does not occur.
Starkman illustrates a typical family estate plan that normally includes a revocable ''living trust.'' Thus, if there is separate property involved in the estate planning process, careful consideration should be given to changing the character of the separate property to community property. If the decision is made to make such a change, then a transmutation agreement which complies with Family Code § 852(a) and MacDonald must be prepared.
In addition, estate planning documents often do not attempt to negate the presumption of undue influence which can arise from the transmutation of separate property to community property as part of the estate plan. Likewise, the right to or a waiver of Family Code § 2640 reimbursement is often not addressed. Thus, even if the estate planning documents are valid as to form, they may be presumptively invalid as a result of undue influence. Further, even if both of these obstacles are overcome, the spouse transferring the separate property may still be entitled to Family Code § 2640 reimbursement.
Thus, in trust administration cases, where a revocable trust is used and issues of separate and community property characterization lurk in the background, special attention must be given to determine whether standard boiler plate language used in the marital estate planning process truly results in a transmutation of property character. Estate planning documents can be and are revoked, sometimes long before death. However, if the revoked estate planning documents complied with Family Code § 852(a) and MacDonald, they may still be valid with respect to the characterization of the assets and liabilities. If the estate planning documents were proper as to form and subsequently revoked, the original characterization of the property may not re-established without a new transmutation agreement which complies with Family Code § 852(a) and MacDonald. Put another way, once a valid transmutation has changed the character of property, it takes a new valid transmutation agreement to restore the original character. No Exceptions for Partial Performance of Oral Transmutation Agreements. Can partial performance of an oral agreement to transmute create an exception to the writing requirement of Family Code Section 852(a) and the MacDonald doctrine? In Marriage of Benson (2005) 36 C4th 1096, 32 CR3d 471 the California Supreme Court held that there is no “statute of frauds” exception for partially performed oral agreements to transmute character of marital property. The Court reasoned that section 852(a) makes a valid transmutation much more difficult to accomplish than prior law allowed. The transaction requires a written document expressly acknowledging that it changes the character of marital property, and that the adversely affected spouse understands and accepts this result. And, again, the Court reinforced its ruling in MacDonald that extrinsic evidence such as inferences drawn from oral statements and conduct is not a reliable substitute for the express writing that the statute demands.
B. SPOUSAL FIDUCIARY DUTY AND THE PRESUMPTION OF UNDUE INFLUENCE.
Because of the potential for abuse arising from the trust placed in each other, spouses are held to the highest standard of fair dealing with one another. Family Code § 721(b) and case law impose fiduciary duties arising from the confidential relationship between spouses in interspousal transactions. Thus each interspousal transaction is subject to possible attack on the ground that the transaction was procured by undue influence, even if formal writing requirements are satisfied. The legal analysis includes several factors to be considered in reviewing such transactions.
Was There a De Facto Confidential or Fiduciary Relationship?
The de jure confidential relationship of Family Code § 721 may cease to exist on a de facto basis. If the trust and confidence of the marital relationship is withdrawn or otherwise no longer present, then the confidential relationship is also no longer present and the parties deal with each other at ''arm's length.'' Although the parties are presumed to be in a de jure confidential relationship when they marry, they may not, de facto, be in a confidential relationship when a particular transaction takes place. As an example, evidence indicating the lack of a confidential relationship between spouses includes abuse (physical or verbal), threats of criminal prosecution, and threats relating to community property or the custody of the children. See, e.g., Buchmayer v. Buchmayer (1945) 68 CA2d 462, 467, 470-71, 157 P2d 9 However, with increased scientific
knowledge of the impact of domestic abuse and the underlying legislative policy of the Domestic Violence Prevention Act, the existence of domestic abuse may be a factor that serves to reinforce a fiduciary duty violation.
Did the Parties Resurrect or Opt out of the Confidential Relationship?
The parties can ''opt out'' of the confidential relationship. As the CaliforniaSupreme Court noted in In re Marriage of Connolly (1979) 23 C3d 590, 600, 153 CR 423, it has been repeatedly held that parties may elect to deal with each other at arms' length, and when they do so any fiduciary obligation otherwise owing is thereby terminated. See also Boeseke v. Boeseke, supra, 10 Cal.3d 844, 849; Collins v. Collins (1957) 48 Cal.2d 325, 330331; Jorgensen v. Jorgensen (1948) 32 Cal.2d 13, 23 The confidential relationship presumptively ends at commencement of separation or the dissolution legal proceedings (Marriage of Stevenot (1984) 154 CA3d 1051, 202 CR 116) and may also be resurrected by the parties. For example in Vai v. Bank of America (1961) 56 C2d 329, 336, 15 CR 71, the Plaintiff discontinued the adversary proceedings commenced by her at the request of the defendant who offered to supply full and complete information concerning the property all of which was conceded to be community, and who further stated that he was willing to negotiate a fair and equitable property settlement. The resurrection of the confidential relationship is de facto and is based upon a showing that trust and confidence has once again been reposed in the other spouse. ''The prerequisite of a confidential relationship is the reposing of trust and confidence by one person in another who is cognizant of this fact.'' Vai, above, at, 338.
Did the Transaction Arise out of the Relationship?
If a confidential relationship is shown to have existed when the transaction occurred, the next element of the prima facie case of undue influence is whether or not the parties relied on that relationship in entering into it. Persons who are in presumed relationships of trust and confidence, such as spouses, may enter into arm's-length transactions that will not implicate the confidential relationship and thus not be subject to liability for breach of fiduciary duty. In Collins v. Collins (1957) 48 C2d 325, 331, 309 P2d 420, the Supreme Court said that ''when the parties to a marriage are negotiating [an] agreement with recognition that their interests are adverse and are dealing at arm's length, neither spouse owes to the other the duty of disclosure which he or she would owe if their relation remained in fact a confidential one.'' 'To support a finding of undue influence, the evidence, in addition to a showing of marriage relationship, must also show such unfairness of the transaction to establish that the wrongful spouse made use of the confidence reposed for the purpose of gaining an unreasonable advantage over the mate. In re Marriage of Saslow (1985) 40 C3d 848, 864, 221 CR 546, 710 P2d 346.
The “Unfair Advantage” Element.
Family Code § 721(b) states in pertinent part that : “This confidential relationship imposes a duty of the highest good faith and fair dealing on each spouse, and neither shall take any unfair advantage of the other.” (underline added). The California Supreme Court has stated that “whenever [spouses] enter into an agreement in which one party gains an advantage, the advantaged party bears the burden of demonstrating that the agreement was not obtained through undue influence....” In re Marriage of Bonds (2000) 24 Cal.4th 1, 27, 99 Cal.Rptr.2d 252, 5 P.3d 815. See also; In re Marriage of Haines (1995) 33 Cal.App.4th 277, 293, 39 Cal.Rptr.2d 673. The Supreme Court explained: “The primary consequences of designating a relationship as fiduciary in nature are that the parties owe a duty of full disclosure, and that a presumption arises that a party who owes a fiduciary duty, and who secures a benefit through an agreement, has done so through undue influence.... It has long been the rule that ‘[w]hen an interspousal transaction advantages one spouse, “[t]he law, from considerations of public policy, presumes such transactions to have been induced by undue influence.” ’ ” (Bonds, supra, 24 Cal.4th at pp. 27-28, 99 Cal.Rptr.2d 252, 5 P.3d 815, citations omitted.)
The California Court of Appeal has held that to invoke the presumption, there must be proof that the advantage obtained must be an “unfair advantage”, relying on the express language of Section 721(b). In re Marriage of Burkle (2006) 139 Cal. App.4th 712,730. Something more than a mere benefit or advantage must be shown. See In re Marriage of Delaney (2003) 111 Cal.App.4th 991, 996, 4 Cal.Rptr.3d 378 where the Court stated that “when any interspousal transaction advantages one spouse to the disadvantage of the other, the presumption arises that such transaction was the result of undue influence.” This language supports the holding in Burkle that a mere benefit is not enough, there must be a disadvantage to the other spouse.
The issue of whether the advantage must be “unfair” as stated in the statute or merely an advantage is the subject of much discussion. Many of the cases make a broad statement that the presumption is invoked whenever an advantage is gained or there is disadvantage to one of the spouses, without characterizing the advantage as “unfair”. The California Supreme Court denied a petition for hearing in Burkle; but, given the language used in many cases where the “unfair” advantage requirement is not expressly stated, Burkle may not be the last word.
Effect of Independent Legal Counsel on the Presumption of Undue Influence
What is the effect of legal representation of the disadvantaged spouse during the transaction? There is no clear statement on this, but it appears that the presence of an attorney does not automatically mean that the disadvantaged party's consent was ''voluntary,'' and the availability of legal advice does not always immunize the transaction from being set aside for undue influence. The party seeking to overcome the presumption must still demonstrate that the other party actually was fully advised of the legal effect of the transaction.
For example In re Marriage of Grissom (1994) 30 CA4th 40, discussed the relevance of the fact that Wife had been represented by counsel at the time she signed dissolution documents and held that the mere physical presence of an attorney was insufficient to demonstrate that the party had meaningful legal advice, and did not preclude setting aside a document procured with the ''advice'' of counsel: Similarly, in In re Marriage of Modnick (1983) 33 C3d 897, the California Supreme Court reversed the lower court's refusal to set aside a property settlement agreement which failed to include assets Husband had concealed, even though Wife was represented by counsel in the proceedings resulting in the settlement. Clearly, not every transaction in which an attorney is available or involved is immune from being set aside on the basis of undue influence. The presence of an attorney is a factor that is relevant to overcome the presumption, but does not appear to be a conclusive bar to application of the presumption.
Five Elements Necessary to Overcome the Presumption of Undue Influence
It appears that there are five elements which are necessary to overcome the presumption of undue influence. Three of the elements are discussed in In re Marriage of Delaney, quoting from Haines. These are:
1. The Transaction Was Freely and Voluntarily Made.
2. The Transaction Was With Full Knowledge of All the Facts.
3. The Transaction Was Made With a Complete Understanding of its Legal Effect.
These three elements are seen in the following quotation from Delaney. ''Consequently, it was Wife's burden to establish that Husband's transmutation of the Property to joint tenancy was freely and voluntarily made, with full knowledge of all the facts, and with a complete understanding of the effect of a transfr from his unencumbered separate property interest to a joint interest as Husband and Wife. (Haines, above, 33 CA4th at p. 296.)'' In re Marriage of Delaney (2003) 111 CA4th 991, 999.
Two other elements are also cited and discussed below.
The Transaction Was Fair and Just.
Where an advantage is gained by one spouse in an interspousal transaction, the spouse gaining the advantage “must stand unimpeached of any abuse of the confidence presumptively reposed in him by the wife and resulting from the marital relation, and failing in this, he must bear the burden of showing that the transaction was fair and just and fully understood by the party from whom the advantage was obtained. (Bacon v. Soule, supra; Smith on Fraud, sec. 190; Robins v. Hope, supra; Brison v. Brison, 75 Cal. 525 [7 Am. St. Rep. 189, 17 Pac. 689], Jackson v. Jackson, 94 Cal. 446 [29 Pac. 957]; Diamond v. Sanderon, 103 Cal. 97 [37 Pac. 189].)” In re Estate of Cover, 188 Cal. 133, 143-144 (Cal. 1922) See also: Estate of Marsh (1957) 151 CA2d 356, 361, ''If a husband obtains an advantage over his wife, he must show that he has not abused the confidence reposed in him by her. He has the burden of showing that his transactions with her were fair and just and fully understood by her.''
Adequate Consideration Was Given.
As discussed above, Family Code § 850 provides that a transmutation may be made ''with or without consideration.'' While a transmutation may occur without consideration (as with a gift), this issue must be distinguished from the issue of ''adequate consideration,'' as discussed below, which is an essential element in overcoming the presumption of undue influence which arises in a transmutation where one spouse gains an advantage over the other spouse. As a result of the interplay between former Civil Code § 158, 2219 and 2235, consideration has always been an element in connection with the proof necessary to rebut the presumption of undue influence.
''Adequate'' consideration--as opposed to ''any'' or ''sufficient'' consideration is the test stated in many cases. In Rader v. Trasher (1962) 57 Cal.2d 244, 368 P.2d 360, the California Supreme Court said that ‘‘(w)hile the code section uses the term 'insufficient' consideration and not 'adequate' consideration, it was early held that the code section did not change the rule, long settled in the equity courts, that in attempting to enforce a contract against his beneficiary the fiduciary must ordinarily establish that the consideration was an adequate one.''...
Whether there is any substantive difference between ''adequate'' and ''sufficient'' is always open to debate. Although the initial development of the “adequate” consideration test arose from cases under former Civil Code section that was repealed effective July 1, 1987, the relationship between husbands and wives has been codified by Family Code § 721(b) as being analogous to non marital business partners. However, the family court is still a court of equity; and the adequacy of consideration test is a rule that is well settled in the equity courts. Both Haines and Delaney commented on the inadequacy of consideration and both invalidated transactions in which the advantaged spouse gave no consideration for the advantage obtained. In 2003, in Delaney, the trial court held not only that Wife had failed to overcome the presumption of undue influence, but it also found that she ''had not given sufficient consideration for the transfer of Husband's Property to joint tenancy ....''
Probate Code Sections Excepted From Family Code § 721(b)
In some transactions spouses may waive various spousal rights in the event of death of their spouse. These include the right to receive property that would pass from the decedent by intestate succession; property that would pass from the decedent by testamentary disposition in a will executed before the waiver; a probate homestead; the right to a Family allowance; the right to elect to take community or quasi-community property against the decedent's will; and the right to take the statutory share of an omitted spouse. For a complete listing of rights that a spouse can waive upon the death of their spouse see Probate Code § 141. .
The presumption of Family Code 721 (b) does not apply to such estate planning waivers. The enforceability of such waivers is governed instead by. Probate Code §§ 143, 144 and 146.
Exception to Family Code § 721 for Prudent Investor Act Transactions. As found in Probate Code § 16040.
When former Civil Code § 2215 et seq., (the Title on Trusts referenced in former Civil Code § 158 and 5103) was re-pealed effective July 1, 1987, the duties of trustees were recodified and chaptered in Probate Code § 16000 et seq. Probate Code § 16040 is part of the trustee's standard of care and is commonly referred to as the Prudent Investor Rule. Transactions between spouses that are governed by the Prudent Investor Rule are excepted from the presumption of Family Code § 721 (b). Probate Code § 16047.
C. SPOUSAL REIMBURSEMENT RIGHTS.
Family Code § 2640--Reimbursement Rights Survive Transmutation
If a transmutation is valid as to form and was obtained free of undue influence,the surviving or decedent spouse may still have a right of reimbursement, unless the transmutation waived the right of reimbursement set forth in Family Code § 2640 . That section provides, in relevant part, that
‘‘(i)n the division of the community estate under this division, unless a party has made a written waiver of the right to reimbursement or has signed a writing that has the effect of a waiver, the party shall be reimbursed for the party's contributions to the acquisition of the property to the extent the party traces the contributions to a separate property source.'' (Emphasis added.)
These rights survive a transmutation. Thus, even when there is a valid transmutation, a spouse can be reimbursed to the extent the spouse’s separate property contributed to the acquisition of the re-characterized property.
Family Code § 2640--Reimbursement Rights and Extrinsic Evidence
Family Code § 2640 creates a substantive right of reimbursement that can be relinquished only by an express written waiver by the contributing spouse. However, if there is a writing that allegedly waives the right of reimbursement, but is ambiguous, can extrinsic evidence be admitted to clarify the ambiguity?
Section 2640(b) states that the writing must have ''the effect of a waiver.'' Whether a writing has “the effect of a waiver” seemingly requires an examination of all evidence surrounding the transaction. Certainly, extrinsic or parol evidence is admissible to show the intent of the parties at the time the contract was entered into. No case has yet discussed what is meant by ''the effect of a waiver'' or the ability to introduce extrinsic evidence to clarify ambiguities. The reported cases have simply held that the lack of any explicit waiver language in a writing makes it ineffective.
Reimbursement Rights Where a Transmutation Occurs by Deed
The nature of deeds as a ''safe harbor'' for transmutations was discussed above, in the context of a transmutation being valid as to form. However, in the absence of anexpress waiver in the deed, the cases hold that a deed transferring property into joint form during marriage does not waive Family Code § 2640 reimbursement rights. In In re Marriage of Anderson (1984) 154 Cal. App. 3d 572; 201 Cal. Rptr. 498, the First District held that the grant deed by which Husband conveyed title to Husband and Wife as joint tenants during marriage did not also operate as a waiver of his § 2640 reimbursement rights. The court held the same in In re Marriage of Kahan (1985) 174 Cal. App. 3d 63, 219 Cal. Rptr. 700. In both cases, the non-contributing spouses unsuccessfully asserted that to permit reimbursement would essentially gut the transfer into community property; however, both courts held that the reimbursement rights were not waived by the deed itself.
Family Code § 2640--Reimbursement Rights Where a Gift Was Intended
A spouse is also entitled to § 2640 reimbursement after a transmutation even where the transmutation was expressly a gift to the community. In In re Marriage of Perkal(1988) 203 Cal. App. 3d 1198, 250 Cal. Rptr. 296, Husband signed a ''joint tenancy grant deed'' which said that '' 'For A Gift, Michael L. Perkal does hereby GRANT to Michael L. Perkal and Jeri M. Perkal, husband and wife as joint tenants, the real property thereafter described.'' The court held that even those words were insufficient to waive his reimbursement rights, reasoning as follows:
Wife contends the phrase 'For A Gift' on the deed is such a writing as it was inserted at Husband's direction at the time the deed was executed. As no published case has yet decided what is a writing sufficient to have 'the effect of a waiver' (Civ. Code, § 4800.2) of the right of reimbursement, we first review the general principles of what conduct constitutes a waiver of a legal right.
'Waiver requires a voluntary act, knowingly done, with sufficient awareness of the relevant circumstances and likely consequences. [Citation.] There must be actual or constructive knowledge of the existence of the right to which the person is entitled. [Citation.]' (In re Marriage of Moore (1980) 113 Cal.App.3d 22, 27, 169 Cal.Rptr. 619.) There must be '... an actual intention to relinquish it or conduct so inconsistent with the intent to enforce that right in question as to induce a reasonable belief that it has been relinquished.' (Outboard Marine Corp. v. Superior Court (1975) 52 Cal.App.3d 30, 41, 124 Cal.Rptr. 852.) Viewing the record in light of these principles, we cannot find a waiver. Husband testified the reason for his insertion of the phrase 'For A Gift' was to attempt to negate the payment of a documentary transfer tax and to obviate the possibility of reassessment and a concomitant rise in property taxes. While not laudable motives, these reasons are credible. Wife presented no testimony to the contrary on the meaning of the phrase 'For A Gift.' To accept Wife's argument would mean that Husband, who had not consulted an attorney in regard to the transaction, intended to give up a statutory right created by a statute which had taken effect less than a month prior. In sum, Wife's claim of waiver based upon these facts is simply too strained an argument to accept. Perkal, at 1202-1204.
Similarly, in In re Marriage of Witt (1988) 197 CA3d 103, 242 CR 646, the court held that the reimbursement statute creates a property right in the ''contributing spouse'' which can only be given away by an express writing, and that the statute means what it says; namely, unless the contributing spouse has signed a written waiver of the reimbursement right, ''the court is required to determine the equity value of the contributing spouse's property at the time of the gift and restore to him or her the value of that property (or the property itself where, as here, the present value is less than the original equity value).'' More recently, in In re Marriage of Stoll (1998) 63 CA4th 837, 842, 74 CR2d 506, the court said that ''(t)he transmutation of one spouse's separate property house to community property is one of the most common occasions for section 2640 tracing.''
Family Code § 2640--Reimbursement Rights Where Premarital Agreement Is Involved
A spouse retains § 2640 reimbursement rights even if the transmutation is accomplished anticipatorily by a premarital agreement. In In re Marriage of Carpenter (2002) 100 CA4th 424, 427, 122 CR2d 526, the court affirmed a trial court ruling that refused to find a waiver of Husband's § 2640 rights where he had signed a premarital agreement which provided that he was buying a house, and that upon marriage, the house would be 'deemed to be their community property.' The court held that this language was insufficient to constitute a waiver.
Effect of Family Code § 2640(c) on Transmutations of Separate Property to Separate Property of the Other Spouse
Prior to 2005, the right to reimbursement applied to contributions of separate property to the acquisitions of community property. Effective January 1, 2005, the legislature amended Family Code § 2640 to add subdivision (c). That section states that ‘‘(a) party shall be reimbursed for the party's separate property contributions to the acquisition of property of the other spouse's separate property estate during the marriage, unless there has been a transmutation in writing pursuant to Chapter 5 (commencing with Section 850) of Part 2 of Division 4, or a written waiver of the right to reimbursement.
The amount reimbursed shall be without interest or adjustment for change in monetary values and may not exceed the net value of the property at the time of the division.'' The amendment's language regarding reimbursement for contributions to the other spouse's separate assets differs from its ''community reimbursement'' counterpart. In particular, it omits the phrase that reimbursement is mandatory ''unless a party has made a written waiver of the right to reimbursement or has signed a writing that has the effect of a waiver.'' Instead, it says that reimbursement must be ordered ''unless there has been a transmutation in writing pursuant to Chapter 5 (commencing with Section 850) of Part 2 of Division 4, or a written waiver of the right to reimbursement.'' (emphasis added). The meaning of this provision is unclear, but it appears that the effect of using the word “or” in the newly amended § 2640(c) is to eliminate the right to reimbursement if there is a valid transmutation – even in the absence of a written waiver.
Section 2640 makes reimbursement of a separate property contribution to a community asset mandatory even if the means by which the property became community is a transmutation-- unless there is a clear and specific waiver of the § 2640(b) reimbursement right. As a result a purported transmutation of even the reimbursable separate property ''component,'' previously contributed to a community asset, has remained reimbursable. Under the language of new subdivision (c), however, a separate property contribution to the other spouse's separate property is arguably effective as a waiver of reimbursement even if a writing does not specifically refer to the section but otherwise constitutes a valid transmutation of property.
Also unclear is what happens if the transmutation expressly provides that the transferring party shall receive § 2640 reimbursement. Does that mean that the family court's jurisdiction extends over solely owned separate property? Currently, it only has jurisdiction over jointly owned separate property under Family Code § 2650. Evidently, this statute assumes it has jurisdiction over solely-owned separate property such that it can now order one spouse to reimburse the other from an asset in his or her separate estate--even if it cannot order that property sold in order to do so. Answers to these and other questions must wait for later appellate court or legislative development.
D. APPORTIONMENT – THE MOORE-MARSDEN AND PEREIRA-VAN CAMP DOCTRINES.
Apportionment doctrines apply when community funds or community effort and skill is used during marriage to enhance the value of a spouse’s separate property. This occurs most commonly when funds derived from community effort and skill are used pay off debt against separate property or when community effort and skill us used to enhance the value of a separate property asset; for example, a pre-marital separate property business owned by one of the spouses.
Contexts in which Apportionment is Used
When real property is acquired before marriage in separate property title, but the mortgage is paid down with community funds In this scenario, the property is divided according to a formula that determines the respective separate and community property interests in the appreciation accrued during marriage and before separation Marriage of Marsden (1982) 130 CA3d 426, 181 CR 910. Marriage of Moore (1980) 28 C3d 366, 372, 168 CR 662, 664.
When real property is acquired before marriage in separate property title, mortgage refinanced during marriage The Moore/Marsden apportionment applies where there is a premarital loan secured by a party's separate property and the property is refinanced during marriage and the original mortgage is paid in full with proceeds of a community property loan obtained jointly by the parties. The community is entitled to an interest in the property pursuant to Moore/Marsden since it is treated as having contributed toward the property's acquisition. Marriage of Branco (1996) 47 CA4th 1621, 1627, 55 CR2d 493, 496. When community property real property is converted to separate property by quitclaim deed and the community subsequently makes payments In this scenario, the Moore/Marsden principles are applied to give the community a pro tanto interest in the property. However, only those community payments made after execution of the deed are considered; whatever interest the community might have acquired by making payments prior to execution of the deed were transferred to the other party’s separate property by the quitclaim deed. Marriage of Broderick (1989) 209 CA3d 489, 257 CR 397.
When improvements are made to separate property with community property The Moore/Marsden rule applies where community funds are used to make capital improvements to a spouse's separate property to give the community a pro tanto interest in the property to the extent the community-funded improvements enhanced the value of the property. Bono v. Clark (2002) 103 CA4th 1409, 1423-1425, 128 CR2d 31, 41-42, Marriage of Allen (2002) 96 CA4th 497, 501-502, 116 CR2d 887, 890. When a property is acquired before marriage and converted into joint title during marriage If the owner of the original separate property is able to overcome the §2581 community property presumption (by evidence of a writing showing he was to maintain his separate property interest), the interests in the entire property would be apportion able under Moore/Marsden to the extent community property contributed to the mortgage payments. In re Marriage of Rico (1992) 10 CA4th 706, 710-711 Home acquired jointly before marriage and converted to joint tenancy during marriage
A version of the Moore/Marsden apportionment is used where the parties, before marriage, purchase a home as tenants in common, each making separate property contributions to the purchase price and then, during marriage, convert the home into joint tenancy title and pay down the mortgage with community funds. Marriage of Rico (1992) 10 CA4th 706, 12 CR2d 659, 661.
Apportionment of interests where profits generated from monetary income received through spouse's efforts Income or profits traceable to a spouse's employment (rather than the underlying capital investment) must be characterized in accordance with the spouse's marital status at the time the efforts are expended. Where those efforts are not of the same character as the underlying investment, a community vs. separate property apportionment of the income and profits is required. Beam v. Bank of America (1971) 6 C3d 12, 17, 98 CR 137, 140- 141. See the alternative formulas set out in Pereira v. Pereira (1909) 156 C 1, 7, 103 P 488, 491 or Van Camp v. Van Camp (1921) 53 CA 17, 27-28, 199 P 885, 888-889. 293 Where Presumption of Joint Tenancy Has Been Rebutted, but With No Findings regarding Intention of Parties as to True Characterization In the absence of evidence of any agreement other than that the real property was not in true joint tenancy form, the Court in a relevant case concluded that the parties maintain the respective shares invested by each of the marital parties. Marriage of Mahone (1981) 123 C.A.3d 17, 176 C.R. 274.
III.Trustee Management of Trust Owned Business Entities.
Trust assets sometimes include business entities such as corporations, limited liability companies, and partnerships. Trust ownership varies from 100% ownership to small fractional ownership interests. Sometimes trustees also undertake to manage the operation of the business entities. Trustee managerial power may include participation as a member of a board of directors, a chief executive officer role, or being the sole Manager of a limited liability company.
Typically, trustees manage investment portfolios in a passive investment role and are subject to the prudent investor standards of liability. On the other hand, directors of corporations, for example, are held to the “business judgment rule” standards of liability. Managers of limited liability companies typically are governed by standards of conduct set forth in limited liability operating company agreements or variations on corporate business judgment rules. And, of course, trustees can expand their liability exposure by negligently managing trust assets to cause damage to others.
In some instances, some beneficiaries may also be co-owners of interests in the business interests being managed by the trustee and other beneficiaries have no interest or conflicting interests. For example, a child of a decedent may also have been in business with a deceased parent and wish to have the business grow in value by reinvestment of profits in the business; but other beneficiaries (e.g. a surviving spouse or a sibling not involved in the business) may wish to drain all profits to maximize income or to liquidate the business to obtain diversity of risk. In such instances trustees may find conflicting duties arising from the business judgment rule, the prudent investor rules, and general trustee duties.
The analysis and resolution of these conflicting duties is often not clear, and can be a source of significant trustee conflict with beneficiaries and a source of conflict among beneficiaries. The law is still in an emerging state. The following describes the teaching of several “leading” cases, to the extent there is case precedent. The overarching principle appears to be that trustees who undertake managerial roles in business entities administered in the trust are bound by their trustee fiduciary duties and standards of practice and may not shield themselves from liability for breach of trust by the application of defenses available only by lower standards of accountability afforded by corporate or LLC law.
In the leading case of Johnson v. Witkowski (Mass.App.Ct., 1991), 30 Mass.App.Ct. 697, 573 N.E.2d 513, trustees who were also corporate officers of a closely held corporation were not able to avail themselves of the standard corporate defenses, including the business judgment rule, to shield themselves from claims that they violated several fiduciary duties, including those imposed on them as trustees. As explained by the Court in Johnson:
3. Analysis. We note initially that the difficulty arises here because of the defendants' multiple roles. They were the trustees of the trust and were also stockholders, directors, and officers of a close corporation involved in transactions in which they stood on both sides and in which they had a selfinterest.
In each capacity, the defendants had fiduciary duties. Wearing more than one hat here, at least three requires a fiduciary to be very nimble as well as most prudent. While the fiduciary may purport to wear one hat at a particular moment, in truth, all hats are worn together at all times.
a. The duty of loyalty. With the USSI venture, the defendants were engaging in a business in addition to the business of Johnson Corrugated, which prior to that time had *705 been their primary source of income.
USSI was a business in which the defendants expended substantial energy, held half the stock, and for which, by virtue of their personal guaranties, were taking significant monetary risks if the new venture was not successful. There can be no doubt that, with USSI, another level of complexity was added to the equation of the defendants' duties to the trust and to the corporation. What was good for USSI was not necessarily good for Johnson Corrugated.
**519  We insert a few general observations. Directors' fiduciary duties require that they be loyal to the corporation and not promote their own interests in a manner injurious to the corporation.
FN12 Baker v. Allen, 292 Mass. 169, 172, 197 N.E. 521 (1935). Spiegel v. Beacon Participations, Inc., 297 Mass. 398, 410, 8 N.E.2d 895 (1937). Donahue v. Rodd Electrotype Co. of New England, 367 Mass. 578, 589, 593, 328 N.E.2d 505 (1975) (duty of care by one stockholder to another in close corporation is one of “utmost good faith and loyalty”). There is a similar duty of loyalty imposed on trustees. Ball v. Hopkins, 268 Mass. 260, 266, 167 N.E. 338 (1929). Trustees may not put themselves in a position where their interests are in conflict with the interests of the trust. Comstock v. Bowles, 295 Mass. 250, 258, 3 N.E.2d 817 (1936). See also 3 Scott, Trusts § 193.2, at 155 (Fratcher 4th ed. 1988) (“The trustee will be held accountable by the court if in the exercise of his power of control over the corporation he acts for his own
interest rather than for the interest of the beneficiar[y.”)] [added text missing in original)] FN12. We point to Chief Judge Cardozo's lofty language:
“Joint venturers, like copartners, owe to one another, while the enterprise continues, the duty of the finest loyalty. Many forms of conduct permissible in a workaday world for those acting at arm's length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior. As to this there has developed a tradition that is unbending and inveterate. Uncompromising rigidity has been t