In a recent California case, a beneficiary of his parents’ revocable trust (“the Menefield trust”) asserted on appeal that the trial court erred in denying him leave to amend the complaint to state a cause of action for wrongful foreclosure. The plaintiff (James) had been in prison since at least 2014 and was unaware of the actions affecting the trust. The Trustee refused to pursue the case while the beneficiary wanted to sue. The court, in this unpublished case, indicated he may have standing to sue if he amended his complaint. If this trend continues this case could be the beginning of major empowerment for beneficiaries dealing with trustees who refuse to take action on behalf of the trust or the beneficiaries. Historically a beneficiary has not had the right to sue on behalf of the “trust” but in this case, a beneficiary may be able to seek his own justice.
The trust property included his parents’ home in Inglewood, CA. Before his death, James’s father signed a reverse mortgage. After the father died, the reverse mortgage company recorded and mailed to the estate a notice of default and election to sell the home. The probate court found the home to be an asset of the Menefield trust, and the trustee put the home on the market. The trustee sold the home to satisfy the reverse mortgage terms.
However, at the same time, the reverse mortgage company went ahead with the foreclosure sale and set a public auction to which neither the trustee nor the real estate company representing the estate received notice. A buyer purchased the home at the auction.
James and the trustee sued the reverse mortgage company and its trustee (RMT) for wrongful foreclosure. RMT argued that James lacked standing as a beneficiary of the trust to bring a lawsuit against them. RMT also asked the court to strike the trustee from the complaint since he couldn’t sue on his own or consent to James’s representation of the Menefield trust because neither of the two had a license to practice law.
James asserted that as the heir to his father’s estate, he had standing to maintain the lawsuit and recover the property.
The trial court found that as only a trust beneficiary, James wasn’t authorized to bring suit. The court observed that although the trustee had standing, he couldn’t bring the suit on his own on the trust’s behalf because he wasn’t an attorney. Since there was no indication the plaintiffs would hire an attorney to represent the trustee, the court dismissed the case. The court denied the motion to strike as moot. James, but not the trustee, appealed.
Associate Justice Laurence J. Rubin the California Court of Appeal, Second Appellate District wrote that the only issue presented was whether James had standing as a beneficiary of the trust to sue for wrongful foreclosure. Justice Rubin explained that the standing rules for trust-related actions are settled in California and that the person who has the right to file suit under the substantive law is the real party in interest. At common law, the justice said, where a cause of action is prosecuted on behalf of an express trust, the trustee is the real party in interest because the trustee has legal title to the cause.
Because of this rule, the beneficiary of a trust generally is not the real party in interest and may not sue in the name of the trust. A trust beneficiary has no legal title or ownership interest in the trust assets…his or her right to sue is ordinarily limited to the enforcement of the trust, according to its terms, the justice wrote.
James acknowledged the rule but argued that if he was allowed to amend his complaint to join the trustee as a defendant, he would gain standing to bring a claim for wrongful foreclosure against RMT. Justice Rubin and the Court of Appeal agreed.
“[W]here a trustee cannot or will not enforce a valid cause of action that the trustee ought to bring against a third person, a trust beneficiary may seek judicial compulsion against the trustee. In order to prevent loss of or prejudice to a claim, the beneficiary may bring an action in equity joining the third person and the trustee,” Justice Rubin wrote, quoting earlier California appellate decisions
Although James didn’t expressly assert a claim against the trustee of the Menefield trust in the complaint, he argued on appeal that he can allege that the trustee “failed or refused to hire a lawyer to maintain the action to recover the trust property, even after the court held that a wrongful foreclosure cause of action had been stated.” That worked for Justice Rubin, who said that this was sufficient to allow James the opportunity to join the trustee in the wrongful foreclosure lawsuit against RMT. If James amended his complaint in this way, the justice said he would appear to have standing to sue for wrongful foreclosure.
As a result, the Court of Appeals reversed the judgment. Menefield v. Fin. Freedom Senior Funding Corp., 2017 Cal. App. Unpub. LEXIS 6939 (California Unpublished Opinions 2017).
Trusts can be incredibly complicated—both in their creation, as well as in their administration. The law of trusts frequently centers on whether a trust has been legally created, whether it is a public or private trust, and whether the trustee has lawfully managed the trust and trust property.
Contact N·M Law, APC (949-253-0000) to speak to an experienced trust and estate planning attorney to determine if a trust is the right option for your situation and if so, to work with you in creating a trust that incorporates your wishes and goals. In addition, our staff can assist you with any questions you may have about a trust’s terms or a trustee’s obligations and duties. Contact us today.
Disclaimer: This article is intended to provide a general summary of laws in the State of California and should not be construed as a legal opinion nor a complete legal analysis of the subject matter. Noelle Minto is an attorney at NM Law, APC in Tustin, California, a law firm specializing in Trusts & Estates and Business Transactions.