"Petition for Instructions"

The Following is a Transcript of this Video. For More Information, CLICK HERE

Hi, this is Keith Davidson from Albertson & Davidson.  In this video, I want to talk about remedies that the court can use to fix your trust problem.  Under Probate Code section 16420, the court has a right to take certain actions against trustees in order to fix whatever problem you’re having with your trust.

Number one on that list is that the court can compel the trustee to take a certain action.  So, for example, if you’re entitled to a distribution of a house from a trust and the trustee refuses to make that distribution, the court has a right to order the trustee to take that action and distribute that asset.  And typically, that’s something that we’ll do on a petition for instructions.  So we’ll file a petition for instructions, that’s the name of the petition, and we’ll ask the court to compel the trustee to take an action.  And we’re allowed to do that and the court’s allowed to take that action under Probate Code section 16420.

The next thing the court can order the trustee to do is not take an action.  So let’s say the trustee is going to do something that will harm the trust.  Maybe they’re going to sell a property at below market value.  The beneficiary can come in and ask the court to not allow that action to take place.  And that’s called enjoining the trustee and the court can do that.

The third item the court can do is require the trustee to pay damages back to the trust for whatever harms the trustee has caused to the trust estate.  We’ll talk in a separate video about how you get to the amount that the trustee has to pay back.  But, for purposes of this video, you should know that the court can order the trustee to pay money back to the trust.  That’s one of the remedies the court has.

Number four is that the court can order the appointment of a temporary trustee or what we call a receiver to manage the trust estate under the court determines whether the main trustee should be permanently removed.  By appointing a temporary trustee, the court can have a neutral third party step in, make sure that everything’s safe during the litigation, and see whether or not whether the trustee should be permanently removed.  This is a common remedy that we ask for in a lot of our trust cases, and this is something the court has the power to do under the Probate Code.

Number five follows that up, which is the court has the right to permanently remove a trustee.  That typically takes a trial, a removal trial, where you have to go and present evidence.  But if the court is persuaded that this trustee should be removed for breaching their fiduciary duties, then the court has the power to apply that remedy and remove the trustee.

Number six, the court has the right to set aside trust actions.  So whatever action the trustee has taken, the court can set that aside.  There’s one exception, however, if the trustee has sold assets to a third party in an arms’ length transaction and that third party has paid full value in that transaction, for whatever asset or whatever the situation was, then the court cannot set aside that action.  Because, the law presumes that this innocent third party didn’t know what was going on with your trust, didn’t understand that there was a problem.  They shouldn’t be penalized for that, the trustee should.  So, instead, the trustee would just have to pay damages back to the trust rather than setting aside an action.  But barring that, the court can set aside trust actions as one of the remedies.

Number seven, the court has the right to reduce the compensation of the trustee as a remedy.  So if a trustee has breached his or her fiduciary duties to the trust and they’re requesting fees, the court has the right to reduce those fees, or even eliminate them altogether, if that was necessary to meet the ends of justice to make the trust whole.  That’s one of the remedies has.

And, number eight, the court has the right to impose an equitable lien, sometimes also referred to as a constructive trust, and to allow you to go out and trace assets.  So if the trustee has taken assets out of the trust, put them in their own accounts, put them in their own name, the court has the right to force the trustee to give those back to the right beneficiaries.  And that’s usually done through an equitable lien, constructive trust, or by allowing the beneficiaries to trace the assets and see where they ended up and pull them back into the trust.

So those are the remedies that the court has to try and fix your trust problem.

What to do if the other party is acting on the docs, pulling assets, selling homes, and you are still preparing your case?

Last week I discussed some of the ways in which Trust and Estate assets can be frozen pending a lawsuit.  In my previous post I discussed Liens and restraining orders/injunctions.  In this post, volume 2, I have a few more ideas:

1.     Petition for Instructions and Blocked Accounts.  California Probate Code Section 17200(b)(6)provides a procedure where a beneficiary can ask the Court to instruct a Trustee to do certain things, such as follow the Trust terms.  And the Court has a good deal of leeway in fashioning remedies to help protect Trust and Estate assets.  One example is the use of Blocked Accounts. 

A Blocked Account is just a bank account set up by the Trustee or Executor into which the estate funds are deposited.  Once on deposit, the money cannot be withdrawn, transferred, spent, etc. without a Court order authorizing the action.  In other words, the account is blocked in the sense that it cannot be accessed without the Court’s approval.  As you might imagine, a blocked account is very helpful in terms of freezing liquid (i.e., cash) assets pending a lawsuit.  Of course, you need a good reason for the Court to order a blocked account.  But where facts are present that Trust assets are being wasted or spent inappropriately, it is a helpful remedy to ensure the funds are not dissipated pending the lawsuit.

2.     Ex Parte Petition to Suspend Trustee.  Many beneficiaries wish to remove the Trustee when the trust administration goes badly.  And the probate Court does allow removal for various reasons (see our earlier blog post on Trustee removal).  But a removal petition takes time to prosecute because the Court ultimately needs to set if for trial and that can take a while (i.e., one to four years!!).  In the meantime, the Trustee is still in office and potentially able to do more damage.

The solution is to seek a suspension of the Trustee.  The Court can temporarily suspend a Trustee and appoint a neutral third party to act as Trustee until such time as the Trustee removal petition is heard at trial (See Probate Code Section 15642(e)).  The benefit of suspension is that it can occur without a full-blown trial because it is just a temporary measure meant to maintain the Trust in its current position without any further harm.  The detriment of suspension is that it’s not always easy to obtain from the Court. 

The easiest way to obtain a Trustee suspension is to show that the Trustee is misappropriating funds (see my earlier blog post of this topic).  With the right set of facts, a Trustee can be temporarily suspended, which makes the beneficiaries breath a little easier during a lawsuit.

3.     Trustee’s Bond.  Requesting that a Trustee be bonded is not so much an asset freeze technique, but rather a safeguard against wrongdoing.  A bond (called a surety bond) is merely a way in which the wrongful acts of the Trustee can be paid by the bonding company.  However, unlike insurance, once a bond pays out, the bonding company has the right to sue the Trustee personally to get its money back.

The benefit of the bond is that it provides a deep pocket from which damages can be paid for any breaches of trust committed by the Trustee.  Most Trusts specifically waive bond for a Trustee, but a Court can still requiring a bond if necessary to protect beneficiaries.

The downside of a bond is that you must prove that the Trustee did breach his or her fiduciary duties before the bond is liable to pay anything.  So you won’t know if money will be paid on the bond until you go through trial and, hopefully, prevail.  And since the bonding company is on the hook if you do prevail at trial, they have the right to have their own attorney at the trial to help defend the Trustee.