This article was posted on Friday, Mar 30, 2012

The biggest pitfall in any litigation or arbitration 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.  On December 28, 2011, the California Court of Appeal simply and unequivocally ruled that the property party to a legal proceeding is not a trust, but rather the trustees.  Failure to name the trustees, instead of the trust, is fatal.
In a nutshell, the appellate court decided in Portico Management Group v. Allan J. Harrison that even though an arbitration decision for a monetary award (in that case, about $1.6 million) was the final determination of the arbitration and could not be overturned by the court, it was not judicially enforceable because the award was rendered only against the trust, rather than 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.

Understanding a Family Trust
A family living trust is primarily a probate avoidance device, though it may also have incidental tax benefits for the heirs.
A revocable intervivos trust, as distinguished from an irrevocable trust, does not prevent a creditor of the creators of the trust, who are also the trustees and the sole beneficiaries during their lifetimes, from reaching or attaching the trust property.
But a trust is not a legal entity.  Nor is it deemed to be a legal person, unlike a corporation which is a person.  A trust is not allowed to sue or to be sued.  It does not hold title to property.
Even though real property and other assets are often said to be owned by the trust, title is technically held by the trustee(s).  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 living trust, any eviction action must thereafter be brought in the name of the owner, as the trustee of the trust, rather than in the name of the trust itself.  In other words, the proper designation of the plaintiff 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 where a buyer of an apartment building sues the seller, who previously transferred his property into his living trust, for specific performance or breach of contract.  Thus, Bob Buyer, who is suing for money damages or to compel the seller to convey title to him, must sue the seller as Sam Seller, as Trustee of the Sam Seller Family Trust.  The buyer could not properly sue the Sam Seller Trust.
Returning to the Portico case, the arbitration proceedings were brought by Portico against the Harrison Trust, rather than against Harrison as the trustee of the trust.  Portico prevailed, whereupon an arbitration award was entered in Portico’s favor for somewhat over $1.6 million.  But the arbitration award was only against the trust, and not the individual trustees.

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 in the context of family trusts.  That lesson is that if you are suing a trust (whether in court or in an arbitration), be certain that the 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 proceeding was not made by Portico itself, but rather 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.

Understanding the Finality And
Enforceability of Arbitrations
The second lesson to be learned from Portico is the legal effect of an arbitration award.  Portico illustrates the finality of an arbitrator’s award, but also exposes the principle that it may not be judicially enforceable.
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 to an independent neutral known as the arbitrator.  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 that 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.

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The method for that enforcement is that the prevailing party at the arbitration petitions 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 yacht, his apartment building or his Mercedes.
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.
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.
Again 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.

Concluding Remarks
As discussed, there are two important lessons to be learned from the Portico case.
First, all lawsuits and arbitrations 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.  A court judgment against the trust itself will be ineffective to reach the assets held in trust because a trust may not 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.
Second, 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 is if (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 judicially enforceable.

Dale Alberstone is a prominent litigation and transactional real estate attorney who has specialized in real property law for the past 36 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, which is a registered certification of Reed Elsevier Properties, Inc.  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.  His firm is rated A+ by the Better Business Bureau.
The foregoing article was authored on February 1, 2012, and 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.
Address correspondence to Dale S. Alberstone, Esq., ALBERSTONE & ALBERSTONE, 1801 Avenue of the Stars, Suite 600, Los Angeles, California 90067.  Phone:  (310) 277-7300.

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