Fraud claims could reopen court-approved accounts | Brand Downey LLP
Even a court order approving an accounting may not protect a California trustee if the accounting is inaccurate. It is the result of Hudson vs. Foster (2021) ___ Cal.App.5e ___, a recent California Court of Appeals ruling involving guardianship.
The Registrar in this case consented to the Registrar’s account and four years passed before the Registrar complained about its accuracy. The appeals court nonetheless relaunched the curator’s request to quash the order approving the account. Where a trustee misrepresents the facts in an accounting, a court order settling or approving the account will not immunize the trustee from challenging the order on an “extrinsic fraud” theory.
Foster helps a friend in need, but submits inaccurate accounts
Nigel Hudson was seriously injured in a car accident in 2007. His friend, Lucas foster, was a film producer and owner of Channel films. Foster volunteered to serve as the Curator of the Hudson Estate, meaning Foster would handle the bodily injury proceeds and other Hudson resources.
Foster offered to advance funds to Hudson and be reimbursed later, after Hudson resolved his claim for damages. From 2012 to 2013, Foster was curator, receiving $ 9.5 million in assets and disbursing $ 4.3 million.
Foster then filed a petition to approve his first and final account as a custodian. His petition listed over a thousand disbursements made to various entities over the two-year period. Foster explained that 17 checks were paid to him personally or to his film production company in reimbursement of the funds advanced. Foster waived all charges for serving as a curator.
Defects in the disbursement schedule were not easy to spot. Among the many transactions were 28 checks, totaling $ 558,169.47, supposedly paid to third parties who had provided goods or services to Hudson, but in fact these checks were paid to Foster or one of its companies. Hudson did not receive copies of the checks that would reveal the discrepancies.
Finally, four years after the estates court approved the accounting, Hudson filed a motion to quash the order for fraud and misrepresentation of material facts.
Hudson said he was not aware of any fraud until a third-party vendor brought forward a non-payment claim, which resulted in Hudson recovering the images of the check. In addition to the 28 checks addressed to Foster or his companies, Hudson found four undisclosed checks to Foster totaling $ 60,000 which were issued after the close of the accounting period.
Foster opposed the motion, saying no fraud had been demonstrated and the motion was overdue.
A Los Angeles County Superior Court probate judge conducted several hearings on the petition and received a detailed briefing. The judge found that Hudson had failed to exercise due diligence in seeking to overturn the order approving the accounting based on information Hudson knew or should have known.
Trustees can’t hide the ball
The Court of Appeal concluded that the probate judge had abused his discretion in dismissing the motion to quash.
Foster, as Custodian, had a fiduciary duty to accurately report to Hudson all transactions involving Hudson’s property. Trustees must provide âfull disclosure of all material facts that advance the interests of the beneficiaryâ. Therefore, incomplete disclosure may constitute fraud because âthe fiduciary duty is affirmativeâ.
Under established fiduciary law, when one person trusts another person, the person who has voluntarily accepted that trust cannot take advantage of the situation.
Here, Hudson claimed that Foster’s account contained false statements about material facts that constituted “extrinsic fraud” sufficient to overturn the order approving the accounting. Hudson alleged he was denied the opportunity to object to the accounting due to Foster’s fraudulent conduct.
Hudson did not have to verify the accounts, requesting images of checks to verify payees, as he had a right to rely on the accuracy of Foster’s account in the absence of facts which would have led a reasonable person to suspect wrongdoing. The fiduciary relationship relaxed Hudson’s duty of care.
As the Court of Appeal explained, âwhere a judgment is obtained through a breach by a trustee of the duty to disclose to the mover of the motion, the policy of providing a fair adversarial process prevails. on the policy in favor of finality, and the mover’s reasonable confidence in the disclosures of a trustee are considered a satisfactory excuse not to present a defense in the prior proceeding.
The probate judge improperly placed the onus on Hudson to demonstrate that he could not have discovered the false statements in the account before it was approved. Hudson’s “mere access” to information such as the monitor images “did not trigger the obligation to go through the records to verify the veracity of Foster’s representations.” Instead, the judge should have determined when Hudson first uncovered previously unknown information sufficient to put a reasonable person in a state of fraud.
The Court of Appeal therefore returned the case to the Los Angeles Estates Court for “Take 2”, that is to say, a re-examination of the motion to quash to a standard more favorable to Hudson.
Take away food
Hudson offers an uplifting narrative for trustees, professionals and non-professionals. Custodians, trustees and personal representatives of probate estates who fail to disclose material facts in their accounts, especially regarding disbursements they have received, do so at their own risk. Even if they get court approval for such accounts, the approval can be revoked years later when the truth emerges.
The best way for trustees to avoid such fraud claims is to ensure that their accounts are accurate. Additionally, the trustee might consider providing a full set of account records to beneficiaries so that they have all the information they need to spot potential issues.