Go After The Trustee. Not The Trust. Trust Me!

January 9, 2012

By Antonio P. Garcia, Jr., Esq.

Before you sue anyone, you better know the correct party to sue. Before you have a monetary award entered against a party, you better know the correct party from whom to collect. Sometimes knowing who is the correct party is not so obvious. However, if you fail to get it right, then the results could be painfully clear.

In Portico Management Group, LLC v. Harrison, No. C062060 (Dec. 28, 2011), the California Court of Appeal, Third Appellate District analyzed the issue of the legal effect of enforcing a judgment against a trust. Portico contracted with, among others, Harrison Children's Trust to purchase an apartment building owned by Harrison's trustees. The sale never completed, and Portico sued the trust. The matter went to arbitration and Portico was awarded $1.6 million. Although Portico properly had named the trustees in its complaint, the arbitration award was entered only against the trust.

Portico subsequently had the arbitration award entered by the trial court. The trial court entered judgment against the trust, but did not enter the award against the trustees. Portico failed to correct the judgment to enter it against the trustees. Instead, protracted litigation ensued between the parties. Portico later sought to enforce the judgment against the trust, and attempted to add the trustees as judgment debtors. The trial court ruled that the judgment was unenforceable as to the trust, did not permit adding the trustees as judgment debtors, and awarded attorney's fees to the trustees as prevailing parties. Portico appealed.

On appeal, the key dispute was the effect of the judgment having been entered against the trust, rather than against its trustees. Portico asserted that it was proper to enter judgment against a trust and since the trial court believed otherwise, its judgments and orders should be reversed. Harrison countered that a judgment against a trust was unenforceable because a trust was not an entity; it could not sue or be sued, or hold title to property.

The Third District found for Harrison because the trust was not a proper judgment debtor. The court noted that unlike a corporation, which California law recognized as a person, a trust actually was a fiduciary relationship with respect to property. Legal title to property belonged to the trustees, not the trust. The court also noted that, under California law, a trust could not be sued and the trustee was the real party in interest. Any lawsuit involving trust property was required to be brought against the trustees in their representative capacities.

Trusts also did not fall under the statutory definition of a judgment debtor. California Probate Code Section 680.280 defined a judgment debtor as "the person against whom the judgment is entered." Since a trust did not constitute as a person, then the trust did not qualify as a judgment debtor. The judgment against the trust, therefore, was meaningless.

Although Portico cited authorities that suggested that a judgment could be entered against a trust, the court of appeal found them unavailing because none of them dealt squarely with the issue of whether a judgment may be enforced against a trust. In fact, the language relied upon by Portico was merely commentary by the courts and the Legislature, and did not qualify as legal holdings. In addition, the court of appeal found that the cited cases showed merely that many courts use a shorthand, albeit technically incorrect, description for a judgment against trustees in their representative capacities, referring simply to a judgment against a "trust." As the court noted: "Selective quotation of imprecise language does not provide authority that a judgment entered against a trust, a nonentity that cannot hold title to property, is enforceable against trust assets. It is not."

The Third District further pointed out that Portico could have remedied the situation if it acted in a timely fashion. Faced with an erroneous arbitration award, Portico had several possible remedies. Portico could have applied to the arbitrator to correct the award within ten days of service of a signed copy of the award. In addition, Portico had one hundred days to petition the court to correct the award. Portico failed to take these actions timely. Had Portico done so, then remand to the arbitrator to correct the award would have been appropriate. In addition, Portico could have appealed from the 2007 judgment after the trial court rejected the proposed judgment naming the trustees. Because Portico failed to timely remedy the situation, Portico became bound by the terms of the arbitrator's award and, unfortunately, could not levy upon trust assets for the estate.

So if your lawsuit involves a trust, then you better name the trustees in your complaint. If you obtain an award involving a trust, then you better have the award entered against the trustees. Otherwise, at the end of the day you might end up with a judgment against an entity that does not qualify as a judgment debtor under California law. Like Portico, you could end up being a winner--and a loser--at the same time.