Decision Alert: Failed Power of Appointment

Law Finance Group Client Wins Huge Appellate Reversal in Trust Case

Court Awards 1/3 Share of $55M Estate to Heir Under Invalid Exercise of a Nonexclusive Power of Appointment

 On April 24, 2015, in the case of Sefton v. Sefton, Case No. D065898 (Sefton II), the California Court of Appeal for the Fourth Appellate District reversed a probate court’s determination that $565,350 was a “substantial share” of a $55M trust estate.  The Court held that plaintiff, Thomas Sefton, Jr. (“Thomas”), was entitled to a full 1/3 share of the trust estate along with his brother and sister because, under the governing common law, the purported testamentary appointment by Thomas’ father (“Father”) wrongly excluded Thomas completely from the trust estate distribution.  Looking to the express terms of the trust created by Thomas’ grandfather (“Grandfather”), which stated that, upon any default of appointment, the trust estate should be distributed to all of Father’s living issue on principles of representation, the Sefton II court decided that each of Father’s three children was entitled to an equal share of the estate.

Grandfather established the trust in 1955.  It granted Father a life estate with a power of appointment to his then living issue, to be exercised by Father in his will.  Grandfather’s trust further directed that, “in default of appointment,” the property subject to the power should go “to [Father’s] then living issue on the principles of representation.”

Grandfather died in 1966, at a time when the common law made the power of appointment “nonexclusive” and required Father to appoint at least a “substantial” share of the estate to each of his surviving issue.  The California Powers of Appointment Act (“CPAA”), effective in 1970, changed the law so that a power such as Grandfather’s would be “exclusive,” meaning that Father could exclude any of the permissible appointees from the trust estate. In 1994, Father executed a will that split the appointive property into three shares:  two shares were appointed to a trust for Thomas’ brother and his children, and one share to a trust for Thomas’ sister and her children.  Father appointed nothing  from Grandfather’s trust estate to Thomas.  Father died in 2006.

Thomas filed a probate petition in 2010, alleging that, under the common law in effect at the time Grandfather created his power, Father did not have the right to exclude any of the objects of appointment listed in Grandfather’s trust (i.e., Father’s then living issue) from a “substantial distribution.”  Thomas’ brother and sister demurred, arguing that the later-enacted CPAA in force at the time Father exercised the power allowed Father to completely exclude anyone. The probate court sustained the demurrer and Thomas appealed the dismissal.

In the first appeal heard in this case (Sefton I), the initial question was whether the power was controlled by the common law presumption of non-exclusivity, which governed at the time Grandfather granted the power of appointment, or by the CPAA’s later enacted presumption of exclusivity.  The Sefton I court determined that according to the CPAA’s provisions regarding retroactivity (Cal. Probate Code Section 601) as well as the presumption that testators intend their wills to be governed by the law in effect at the time they create them, the common law presumption of non-exclusivity continued to govern Grandfather’s power of appointment even after the subsequent passage of the CPAA.  The Sefton I court noted that this result avoided constitutional concerns over subsequent legislation taking away Thomas’ vested rights under Grandfather’s trust.

To craft the proper remedy, according to Sefton I, the probate court needed to look to the common law (in particular, the case of Estate of Sloan, 7 Cal.App.2d 319, 332 (1935) (“Sloan”)).  But it remanded the case “for a determination of what constitutes a ‘substantial’ share of the estate.”

Upon remand, Law Finance Group was engaged by Thomas’ counsel, Van Dyke & Associates, LLP, to provide financing that helped fund its continued work on Thomas’ case.  At that that time, and in light of the language remanding the case, Thomas’ ultimate recovery in the trust estate was uncertain.

After further litigation, the probate court concluded that it was required (under Sefton I) to determine what amounted to a “substantial share” that Father should have appointed to Thomas.  The probate court decided that Thomas should receive only 7% of 1/7 of the trust estate, or $565,350, plus interest.  The total value of the appointive property in the trust estate was approximately $55 million.

Thomas again appealed the probate court’s decision, arguing that the common law required enforcement of Grandfather’s default of appointment provision.  In its Sefton II ruling, the Court of Appeals clarified what it deemed was an ambiguity in its Sefton I decision that had led the probate court to a “reasonable,” but erroneous, decision.  Specifically, the court held that its direction to the probate court – to follow the common law and Sloan – was not compatible with the idea that the court should determine the amount of a “substantial share.”  Because Father invalidly exercised the power by not giving Thomas at least a “substantial distribution” in the first place, the common law required the courts to look to the donor’s testamentary scheme to determine the proper remedy upon a default of appointment.

Sefton II stated that Grandfather, as the donor, evidenced his testamentary scheme in his trust, which provided that in default of appointment, the property would be distributed to all of Father’s then living issue, along principles of representation.  The court held that, under this provision, each of Thomas, his brother, and his sister was entitled to an equal 1/3 share of the trust estate.  The court found that this result comports both with Grandfather’s expressed intent, and the constitutional concerns of altering Thomas’ vested rights.

Law Finance Group is a leading law-related financier of multi-million dollar trust and estate litigation and appeals.  Van Dyke & Associates, a California law firm, represents clients facing complex trust and probate matters.  Jim Bush, of counsel to Van Dyke & Associates, argued the case on behalf of Thomas on appeal.

 “From the outset, we understood the significant uphill battle we were facing. With the trial court having granted our wealthy opponent’s demurrer without leave to amend, our disinherited client’s case was entirely in the hands of the court of appeal. As a case of first impression, the outcome was anything but certain. LFG stepped in to assist us when we needed them most. Together, we debated the merits and analyzed the probability of success. After two separate appeals, we finally emerged with a total victory for our client. Many others believed in the case, but few had the wisdom to invest in it.  Only one had the resources to fund it to the finish line. Thanks again LFG.” – Richard S. Van Dyke, Esq., Managing Partner, Van Dyke & Associates, LLP

The Sefton II opinion can be reviewed at: http://www.courts.ca.gov/opinions/documents/D065898.PDF

For more information regarding Law Finance Group’s trust and estate litigation finance practice, please contact:  Wendy A. Walker at (212) 446-6767 or  wwalker@lawfinance.com.