Cheng v. Cheng

BERNICE CHENG et al., Plaintiffs and Respondents, v. CAROLINE CHENG et al., Defendants and Appellants.

B294628

COURT OF APPEAL OF THE STATE OF CALIFORNIA SECOND APPELLATE DISTRICT DIVISION TWO

July 15, 2020

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

(Los Angeles County Super. Ct. No. 16STPB00645)

APPEAL from a judgment of the Superior Court of Los Angeles County. Mary House, Judge. Affirmed.

Einwechter & Hyatt and John P. Einwechter; Law Offices of James A. Bush and James A. Bush for Defendants and Appellants.

Robert D. Feighner for Plaintiff and Respondent Bernice Cheng.

C. B. Jackson Law and C. Bennett Jackson, Jr. for Plaintiff and Respondent Arlene Cheng.

Appellants Caroline Cheng Jones (Caroline)¹ and Diana Cheng (Diana) (collectively, appellants) appeal from the judgment entered in favor respondents Bernice Cheng and Arlene Cheng (collectively, respondents) after respondents successfully petitioned the probate court for an order removing appellants as co-trustees of the Katherine W. Cheng Revocable Family Trust dated 2/15/2006 (the trust), requiring Caroline to return to the trust certain real properties she had transferred to herself, requiring appellants to provide an accounting of the rental income of those properties, and awarding surcharges and double damages against appellants. We affirm the judgment.

BACKGROUND

Sales by trustees Caroline and Diana

Siblings Caroline, Diana, Bernice, and Arlene are beneficiaries of the trust. Each of them has a 25 percent interest in the trust assets. Caroline and Diana became co-trustees of the trust upon the death of the trustor, Katherine W. Cheng, on October 4, 2012.

At the time of Katherine's death, the trust owned Coastal L.B. Associates, LLC (Coastal 1) as its sole member. Caroline became the sole manager of Coastal 1 on October 4, 2012.

The assets of Coastal 1 included an undivided 50 percent interest in a four-unit rental property located at 232 Euclid Avenue in Long Beach (the Euclid property), and an undivided 75 percent interest in a five-unit rental property located at 14 38th Place in Long Beach (38th Place property). The remaining 50 percent interest in the Euclid property and 25 percent interest in the 38th Place property were owned by Coastal LB2 (Coastal 2), alimited liability company owned by Caroline and her husband, Jeffrey Jones.

In March 2014, Caroline, as manager of Coastal 1, sold Coastal 1's undivided 50 percent interest in the Euclid property and its undivided 75 percent interest in the 38th Place property to Coastal 2. Diana, as co-trustee of the trust, consented to the sales.

The purchase price for the 50 percent interest in the Euclid property was $172,267.68, based upon an October 2012 value for the entire property of $900,000. The $379,242.50 purchase price for the 75 percent interest in the 38th Place property was based upon an October 2012 value of $1,100,000. The purchase prices for both properties were set by Caroline, or by Caroline and Diana jointly, and reflected discounts for partial interests, sales expenses, and brokerage fees, although no sales expenses or brokerage fees were actually incurred. Had the properties been sold in the open market, no discounts would have applied. The sales were structured as unsecured seller-financed transactions that required no down payment.

Respondents were not informed of the property sales before the transactions were completed, and they did not approve or participate in the transactions.

The current action

Arlene filed a petition to remove Caroline and Diana as trustees, for an accounting, surcharge, and other relief on May 23, 2016. Bernice filed a separate but similar petition on November 28, 2016. The matter proceeded to a court trial.

Appellants and respondents testified, as did Jeffrey Jones and Edward Inouye, an attorney who represented Caroline and Diana as trustees. An expert witness, Alex Borden, testified thatthe sales transactions were a conflict of interest and that appellants' actions fell below the standard of care. The only appraisals admitted into evidence to show proof of the value of the properties were prepared in October 2012 and showed a value for the Euclid property of $910,000 and a value for the 38th Place property of $1,068,000.

At the conclusion of the trial, the probate court issued a statement of decision in which it found that appellants had breached their fiduciary duties in connection with the sales of the Euclid and 38th Place properties; Caroline, as both the seller and buyer of the properties, had irreconcilable conflicts of interest in violation of Probate Code section 16004, and had acted for her own personal benefit to the detriment of the trust; and Coastal 1, the trust, Arlene, and Bernice did not receive full and adequate consideration as a result of irregularities in the sales transactions and were damaged in that they received reduced distributions as beneficiaries of the trust.

The probate court further found that appellants breached their duty of loyalty as trustees and engaged in self-dealing. The court rejected appellants' argument that provisions of the trust absolved them from liability: "The Trust provision, Article 5.14, that permits self-dealing absolves a trustee only if they act in good faith and for adequate consideration. It does not apply here because there was no adequate consideration and the failure to advise the beneficiaries of the intended sale is substantial evidence of bad faith." The court found Diana jointly liable with Caroline because by acquiescing to Caroline's actions, Diana breached her duties as a trustee. The probate court found that a surcharge against appellants was appropriate and that "any ultimate determination of damages," following an accounting,should be doubled as to both Diana and Caroline because "without the imposition of a surcharge, these breaches would be rewarded." Finally, the court found that appellants, through their pleadings, had "admitted that the [trust] was the member and sole member of [Coastal 1], and that admission is a binding judicial admission."

The probate court ordered appellants removed as trustees and the Euclid property and the 38th Place property restored to the trust. The court imposed a surcharge against appellants in the amount of $914,000 for the 38th Place property and $920,000 for the Euclid property, based on the lost appreciation of the properties during the period from 2012 to 2018.² The probate court further found appellants liable for double damages underProbate Code section 859,³ in an amount to be determined after an accounting of the rental income for both properties during the period from March 31, 2014, through the date of termination of appellants' position as trustees.

Judgment was entered on September 25, 2018. The probate court denied appellants' motion for a new trial, and this appeal followed.

CONTENTIONS ON APPEAL

Appellants raise the following contentions on appeal:

1. The probate court misapplied the doctrine of judicial admissions in finding that the trust was the sole owner of Coastal 1.

2. The damages award is not authorized under section 859 because the statutory remedy is limited to either (1) return of the property to the trust, plus its monetary value, or alternatively, (2) twice the value of the property recovered. The award is also improper because it does not account for the trust's partial interest in Coastal 1 and existing mortgages encumbering the properties.

3. The probate court erred in finding that appellants had acted in bad faith because there was no evidence of intentional misconduct, fraud, or deception, and appellants' reliance on advice of counsel shields them from liability.

DISCUSSION

I. Judicial admissions

"The admission of fact in a pleading is a 'judicial admission.'" (Valerio v. Andrew Youngquist Construction (2002) 103 Cal.App.4th 1264, 1271 (Valerio).) Such an admission "'isfundamentally different from evidence: It is a waiver of proof of a fact by conceding its truth, and it has the effect of removing the matter from the issues. Under the doctrine of "conclusiveness of pleadings," a pleader is bound by well pleaded material allegations or by failure to deny well pleaded material allegations. [Citations.]'" (Ibid., citing 4 Witkin, Cal. Procedure (4th ed. 1997) Pleading, § 413, pp. 510-511.) "Because an admission in the pleadings forbids the consideration of contrary evidence, any discussion of such evidence is irrelevant and immaterial. [Citation.] '"When a trial is had by the Court without a jury, a fact admitted by the pleadings should be treated as 'found.' . . . If the court does find adversely to the admission, such finding should be disregarded in determining the question whether the proper conclusion of law was drawn from the facts found and admitted by the pleadings. . . . In such case the facts alleged must be assumed to exist. Any finding adverse to the admitted facts drops from the record, and any legal conclusion which is not upheld by the admitted facts is erroneous." [Citations.]' [Citation.]" (Valerio, supra, 103 Cal.App.4th at p. 1271.)

We review for abuse of discretion the probate court's finding that appellants' admission in their pleadings that the trust was the sole member of Coastal 1 was a binding judicial admission. (Kurinij v. Hanna & Morton (1997) 55 Cal.App.4th 853, 871.)

The record discloses no abuse of discretion. Arlene's petition alleged, in paragraph 17, that "[o]n October 4, 2012, the date of Mrs. Cheng's death, the Trust was the sole Member of Coastal [1], by prior assignment of Mrs. Cheng's membership interest in Coastal to the Trust." In their response to Arlene'spetition, appellants stated: "Responding...