Hello everybody.  It marvels me how often apartment owners enter into leases in the name of their family living trust, or worse still, file lawsuits under the name of the trust.  

As I have counseled AOA members for many years, a family trust is not a legal entity, nor does it have standing to sue in its own name. Only the trustee of the trust in his or her capacity as a trustee should be the landlord under a lease or the litigant in a lawsuit (including unlawful detainer actions).

Failure to enter into a lease or other rental agreements in the name of the trustee of a trust or file suit in the trustee’s name rather than in the name of trust itself, can have adverse legal consequences, and in the case of litigation, can be fatal.

More specifically, the lessor under a rental agreement or the plaintiff in an unlawful detainer should be identified as:  “John Smith, as Trustee of The John Smith Family Trust,” and not as “The John Smith Family Trust.” In other words, the proper party to a lease and the proper party to a lawsuit is not the trust, but rather the trustee of the trust.                        

That point was well illustrated in the California Court of Appeal case entitled Portico Management Group v. Alan J. Harrison (202 C.A.4th 464).  There, the court held that an arbitration award of $1.6 million was not judicially enforceable because the award was rendered only against the trust, rather than against the trustees of the trust.

The court also held that arbitrations and judicial actions must be pursued in the name of the trustees of a family trust in their representative capacities, not by the trust itself.

The court explained that the reason the trust itself cannot be a party is because it is not a legal “person” under California law.  Only trustees of the trust are “persons.”

 

Understanding a Family Trust

A family living trust is primarily a probate avoidance device, though it may also have important tax benefits for the heirs.

But a trust is not a legal entity.  Nor is it deemed to be a legal “person,” unlike a corporation or LLC, each of which is a “person” for purposes of being a landlord, a tenant, or a litigant in court.  A trust cannot sue or be sued, nor does it hold title to property.

Title is technically held by the trustee, even though real property is often, and loosely, said to be owned by the trust.  A trust is simply a collection of assets and liabilities, but is not the holder of title.

Unlawful detainer proceedings are common instances where the distinction between trustees and trusts is critical.  If the owner of an apartment building transfers his property into his family living trust, rental agreements should thereafter be executed in the name of the trustee of the trust, not in the name of the trust itself.  Any eviction action must then be brought in the name of the landlord, as the trustee of the trust, rather than in the trust’s name.  In other words, the proper designation of the landlord in a lease and the plaintiff in an eviction lawsuit would be “John Smith, as Trustee of The John Smith Family Trust.”  The plaintiff cannot be the “The John Smith Family Trust.”

Another example would be a case when a buyer of an apartment building sues the seller after the latter had previously transferred his property into his living trust.  Thus, Bob Buyer, who is suing for breach of contract or to compel the seller to convey title to him, must sue the seller defendant as “Sam Seller, as Trustee of The Sam Seller Family Trust.”  Bob Buyer could not properly sue “The Sam Seller Family Trust.” “The Sam Seller Family Trust” is not a legal person or entity.

Returning to the Portico case, the arbitration proceeding was brought by Portico Management Group, LLC, against “The Harrison Trust,” rather than against “Alan Harrison, as Trustee of The Harrison Trust.”  Portico prevailed, whereupon an arbitration award was entered in Portico’s favor for over $1.6 million. But the arbitration award was only against the trust, and not the individual trustee, because only the trust was named as a defendant in the proceeding.

Procedurally speaking, once an arbitration award is rendered, the prevailing party will petition the Superior Court to confirm the award by adopting it as a judgment.  But confirming an award (which courts routinely do) is different from a later enforcement of it.

In Portico, because the award (and subsequent judgment) was against the trust rather than the trustee, the court had no power to enforce an arbitration award even if it wanted to.  Ouch!

The first lesson to be learned from the Portico case is that if you intend to sue a trust (whether in court or in an arbitration), be certain that the named defendant is the trustee of the trust, in his/her representative capacity, rather than the trust itself.  

As an aside, the fundamental mistake in the Portico arbitration was not made by Portico itself.  The error was by its attorney. Portico’s counsel failed to understand that a trust is not a legal entity and that only a trustee of the trust may be sued as a defendant.

The second lesson to be learned from Portico concerns the legal effect of an arbitration award.  Portico illustrates the finality of an arbitrator’s award, but also exposes the pitfall that it might not be judicially enforceable.

Let’s talk a little more about arbitrations. 

 

Understanding the Enforceability 

of Arbitrations

For our purposes as members of the Apartment Owners Association, an arbitration is a non-judicial legal proceeding in which the parties agree to submit their disputes for decision by an independent neutral known as an arbitrator.  Usually, the arbitrator is a retired judge or seasoned attorney in the relevant field of law.  

In almost all such arbitrations, the parties agree (generally in the underlying lease or other contract), that the decision of the arbitrator will be final, binding and non-appealable.

While finality may be the case, the subsequent enforceability of an arbitrator’s award is the exclusive domain of the judicial system.  For example, if the claimant obtains an arbitration award for money damages or a determination that the seller must convey his property to the buyer at the agreed upon contract price, only the court, not the arbitrator, has the power to enforce that award.

The method for that enforcement is for the prevailing party at the arbitration to petition the court to confirm the award and thereupon enter a judicial judgment in accordance with the award.  If the judgment is for money, the sheriff or other levying officer may compel payment by sale of the property. That sale may be of personal or real property, such as targeting the losing party’s bank account, his Mercedes, his apartment building, or his diamond studded solid gold Rolex watch.

If the judgment is for specific performance, the court can compel the title to be transferred by ordering the seller to deliver a deed, or in the alternative, ordering that a copy of the judgment, authenticated by its clerk, be recorded with the county recorder.  [AOA members who are attorneys should review Blueberry v. Chow (230 C.A.4th 1017) for the appointment of an “elisor” if the owner refuses to sign the deed.]

Unfortunately, an arbitrator has no legal power to enforce his or her own award.  In fact, with extremely limited exceptions, the arbitrator’s power ends at the time he/she renders his final award.

 

Here is What is Important to Know 

(1) Landlords in leases and other rental agreements should not be identified as a family trust.  Instead, leases and rental agreements should identify the landlord as the trustee of the trust (if that is the case), rather than the trust itself.

(2)  Family trusts are not legal entities.  They cannot sue or be sued. 

(3)  All arbitrations and lawsuits, including unlawful detainers, should be prosecuted in the name of the trustee of the trust in his/her representative capacity, rather than by the trust itself.  

(4)  When providing in a lease to have any disputes resolved by arbitration, bear in mind that if the arbitrator reaches an unfair or erroneous determination, the court normally will not overturn it.  

(5)  While arbitration awards are generally final and non-appealable, they are not necessarily enforceable.  

(6)  A judgment against a trust itself will be unenforceable and ineffective to reach the assets held in trust because a trust cannot be a judgment debtor.  It is not a “person” under law. Instead, the judgment must be against the trustee, which means that the trustee should be named from the inception of the case as a party.  

 

A Riddle!

Even though this article is being published in the April 2020 issue of AOA’s monthly magazine, nothing in it is an April Fool’s joke.  It is all true. But for some levity, let’s conclude with an April riddle: April only has 30 days, so why is it such a tired month? Answer:  Because it follows a long March! Okay, I know that was bad. Sorry. But it might be humorous to any young kids in your family–and they will probably repeat it to their friends.

 

Dale Alberstone is a prominent real estate attorney who has specialized in real property and resident manager law for 40+ years.  He also serves as a mediator of real estate disputes and is a former arbitrator for the American Arbitration Association and a former Judge Pro Tem. 

Mr. Alberstone has been awarded an AV rating from Martindale-Hubbell.  An AV rating reflects an attorney who has reached the heights of professional excellence and is recognized for the highest levels of skill and integrity.

The foregoing article was authored in March 2020.  It is intended as a general overview of California law only and may not apply to the reader’s particular situation.  Readers are cautioned to consult an advisor of their own selection with respect to any particular matter.

Address correspondence to Dale S. Alberstone, Esq., ALBERSTONE & ALBERSTONE, 269 S. Beverly Drive, Suite 1670, Beverly Hills, California 90212.  Phone: (310) 277-7300.