As I advised AOA members in this column five years ago, the biggest pitfall in any arbitration or litigation, including unlawful detainers, brought or defended by a family living trust is the failure of the pleadings to properly identify the trustees of the trust as parties to the proceeding.
In December 2011, the California Court of Appeal ruled that the proper party to a legal proceeding is not the trust, but rather the trustee of the trust. Failure to name the trustee(s), instead of the trust, was then, and continues to be, fatal.
In a nutshell, the appellate court held in Portico Management Group v. Allan J. Harrison (202 C.A.4th 464) that even though an arbitration decision for an award of $1.6 million was the determination of the arbitrator and could not be overturned by the court, it was not judicially enforceable because the award was rendered only against the trust, rather than against the trustees of the trust.
Thus, Portico is not only important for its holding that an award of an arbitrator is a final adjudication that ordinarily may not be overruled by the court (a fact which is well known by trial attorneys), but also, that arbitrations and court actions must be prosecuted or defended by the trustees of a family trust in their representative capacities.
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 which is a “person,” for purposes of suing in court. A trust is not allowed to sue or to be sued. It does not hold title to property.
Title is technically held by the trustees, even though real property and other assets are often but 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, leases 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 plaintiff in an eviction lawsuit would be “John Smith, as Trustee of the John Smith Family Trust.” The plaintiff cannot be the “John Smith Trust.”
Another example would be a case when an individual 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, fraud, 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 Trust.”
Returning to the Portico case, the arbitration proceedings were brought by Portico Management Group, LLC, against The Harrison Trust, rather than against Allan Harrison as the Trustee of the 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 trustees, because only the trust was 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 defendants are the trustees of the trust, in their representative capacities, 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.
Understanding the Finality and 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 an underlying 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 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 attachment and sale. That liquidation 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 a 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 lawyer members reading this column should review Blueberry v. Chow [230 C.A.4th 1017] for the appointment of an elisor.)
On the other hand, an arbitrator has no legal power to enforce his own award. In fact, with extremely limited exceptions, his power ends at the time he renders his final award.
Returning to the Portico case, the court noted that an exception to the finality of an arbitration award is that where the award is unenforceable due to a patent ambiguity, the arbitrator may have the power to thereafter clarify it. Unfortunately, Portico (or more precisely, his attorney) did not timely seek a clarification from the arbitrator.
There are several important lessons to be learned from the Portico case.
First, all arbitrations and lawsuits, including unlawful detainers, should be prosecuted or defended in the name of the trustees of the trust in their representative capacities, rather than by or against the trust itself.
Second, a court judgment against the trust itself will be 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 trustees, which means that they should be named from the inception of the case as parties to it.
Third, while arbitration awards are generally final and non-appealable, they are not necessarily enforceable. When agreeing to have any disputes resolved by arbitration, bear in mind that if the arbitrator reaches an unfair or erroneous determination, the court will not overturn it. Indeed, the only grounds for the court to reject an arbitration award are (1) there was fraud, corruption or other impropriety by the arbitrator, (2) the arbitrator exceeded his powers, or (3) the arbitrator refused to allow material evidence to be presented during the proceedings. But an arbitrator’s award against a trust which is named in the pleadings is not erroneous; it is just not enforceable in court.
Finally, bear in mind that leases and rental agreements should identify the lessor or landlord as the trustee of the trust, (if that is the case), rather than the trust itself.
Next month I will discuss all the important laws pertaining to the employment of resident managers in 2017.
Dale Alberstone is a prominent litigation and transactional real estate attorney who has specialized in real property law for the past 40 years. He has been appointed to periodically serve as a judge pro tem of the Los Angeles Superior Court and is a former arbitrator for the American Arbitration Association. He also testifies as an expert witness for and against other attorneys who have been accused of legal malpractice.
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. You may Google “Dale S. Alberstone” for further background.
The foregoing article was authored on November 1, 2016. It is intended as a general overview of the law and may not apply to the reader’s particular case. Readers are cautioned to consult an advisor of their own selection with respect to any particular situation.
Questions of a general nature are warmly invited. Address correspondence to Dale S. Alberstone, Esq., ALBERSTONE & ALBERSTONE, 1900 Avenue of the Stars, Suite 650, Los Angeles, California 90067. Phone: (310) 277-7300.