A Trust is Not an Entity, it is a Relationship

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[author: Ryan Cunningham]

The Problem: Practitioners, and occasionally even some courts, will refer to assets as being “owned” by a trust, or will say that someone is “suing” the trust. This likely arises from the fact that proper designation often involves cumbersome syntax. For instance, saying a home is “owned by a trust” is shorter and far more natural than saying a home is “legally owned by Jane Trustee to hold in trust for the benefit of John Beneficiary.” And, in casual conversation, both phrases would communicate the same idea. But the difference between the two can have serious repercussions, as the California Court of Appeal recently struck back against this loose language in Portico Management Group, LLC v Alan Harrison et al Case No. C062060, December 28, 2011

The Case: In Portico, a property management company entered into a contract to buy an apartment complex that was owned by a married couple as trustees of two trusts. When the deal fell through, the company sued the trustees. The lawsuit properly named the couple as trustees and the case was sent to arbitration pursuant to the purchase contract. The company won an award of $1.6 million, but while the company properly sued the couple as trustees, the arbitrator’s award read “the General Trustees are not personally liable for their acts as trustees of an irrevocable Trust… Thus, the award in this case is against [the trusts] in proportion to their ownership interest in [the property].” When petitioning for the trial court to confirm the arbitrator’s award, the company proposed that judgment be entered against the couple as trustees of the trust. The couple objected and the trial court agreed with them. Judgment was entered against the trusts, not against the couple as trustees of the trust.

Instead of applying to the arbitrator to change the award or petitioning the trial court to correct the award, the company tried to enforce the judgment against the trustees. After years of litigation, the Court of Appeal eventually found that the company could not enforce the judgment because the judgment was against the trust itself, and to add judgment debtors at this stage would violate the trustees’ due process rights. A judgment debtor must be a person, and a trust is not a person, it is a relationship.

The Takeaway: Despite the fact published opinions will often employ casual shorthand to the effect that trusts “own” property or a trust is “being sued,” this is not technically correct. And as the company learned, painfully, technicalities matter. A trust is not an entity; it is a relationship with respect to certain property. Trusts cannot satisfy judgment debts because trusts are not persons. If judgment is mistakenly entered against a trust, the remedy is to appeal the judgment that is actually entered, not to try to enforce a judgment as it should have been written.

 

Published In: Alternative Dispute Resolution (ADR) Updates, Civil Procedure Updates, Civil Remedies Updates, General Business Updates, Wills, Trusts, & Estate Planning Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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