This tension is on full display in the recent en banc decision in U.S. v. Milovanovic, ___ F.3d ___ (9th Cir. April 24 2012). The majority decision found liability under the Mail Fraud Statute, 18 U.S.C. § 1341, based on the holding in Skilling v. U.S., 130 S. Ct. 2896 (2010).

Explained the Ninth Circuit, “A close examination of the Supreme Court’s opinion in Skilling reveals that embedded in the Court’s holding – ‘that § 1346 criminalizes only the bribe-and-kickback core of the pre-McNally case law’ – is the implication that a breach of a fiduciary duty is an element of honest services fraud.”

The Ninth Circuit then reached for soft law, holding that “a fiduciary duty for the purposes of the Mail Fraud Statute is not limited to a formal ‘fiduciary’ relationship well-known in the law, but also extends to a trusting relationship in which one party acts for the benefit of another and induces the trusting party to relax the care and vigilance which it would ordinarily exercise.”

Truly, that’s about as soft and broad a definition of a fiduciary relationship as is possible.  Continued the court, “Because allegations in the indictment, which we must take as true for the purposes of this appeal, assert that the State, through outsourcing the work to private contractors, reposed a special trust in Lamb and Milovanovic to ensure the integrity of the testing of CDL applicants, and thus relied on the provision of their honest services in administering the tests and certifying the results, we hold that a jury could find that Milovanovic’s and Lamb’s conduct falls within the ambit of §§ 1341 and 1346.”

Remember, this is the same Ninth Circuit that held that, when a raisin grower is required to turn over a portion of his crop to an agency of the federal government, there is no “taking without just compensation” for Constitutional purposes.  Horne v. U.S. Dept. of Agriculture, ___ F.3d ___ (9th Cir. July 25, 2011). The Horne opinion is certainly a low point in the scholarly tenure of Judge Michael Hawkins.

Back to U.S. v. Milovanovic. The concurring opinion by Judge Richard Clifton drives home the casual nature of the majority’s analysis. Judge Clifton begins by “repeat[ing] an observation made nearly 50 years ago:

“‘Fiduciary’ is a vague term, and it has been pressed into service for a number of ends.  My view is that the term `fiduciary’ is so vague that plaintiffs have been able to claim that fiduciary obligations have been breached when in fact the particular defendant was not a fiduciary stricto sensu but simply had withheld property from the plaintiff in an unconscionable manner.”

Judge Clifton continues.  “’Fiduciary’ has not gotten any clearer in the half-century since then, and our decision here does not help.  We accede to the agreement of the parties that the Supreme Court defined a breach of fiduciary duty as an essential element required for honest services mail fraud.  But we conclude that ‘fiduciary’ here does not mean a ‘formal, or classic, fiduciary duty.’  Rather, we hold that a fiduciary duty as an element of mail fraud ‘is not limited to a formal fiduciary relationship well-known in the law.’”

Here’s where Judge Clifton shines. “But we should not muddy the meaning of ‘fiduciary’ any further by employing it here to mean something other than ‘fiduciary.’  By doing so we further devalue the term and invite that much more confusion as to what the word means in other situations.”

“In some contexts, after all, the term ‘fiduciary’ is intended to mean ‘fiduciary,’ not our variation on that concept.  We should instead simply define the essential element for honest services mail fraud as the trusting relationship described in the majority opinion and leave the word ‘fiduciary’ out of it.”

The concurrence has the better of the argument. A published opinion that establishes a soft, murky definition for the essential term “fiduciary” does no benefit to the development of the law.

U.S. v. Milovanovic, ___ F.3d ___ (9th Cir. April 24 2012).

Ah, but the mysterious law of estate planning trusts.  Instead of providing a decision that is consistent with probate law, the court broke rank and gave a contrary decision based on its interpretation of the trust agreement.

Folks, this is dumb.  The artificial dichotomy between the law of wills and the law of trusts, at least when the trust is simply a will substitute, must change.  We need conformity in the law, so the rules and outcomes are in conformity.

Here is the decision.  “In 2001, Mrs. Howery opened a checking account and a savings account at the Bank of America. Although she named [Lori Younkin] as the beneficiary of the savings account, Howery was the only person authorized to withdraw funds from it.”

To my analysis, this is a contract-based question.  Lori Younkin is the named beneficiary on the bank account, and should take the funds at death.

“In August 2005, Mrs. Howery established the Lucia Howery Living Trust . . . The Schedule listed ‘Savings accounts’ as among the categories of personal property delivered to the trust.”

Mrs. Howery died on April 29, 2009. The Trust Agreement provided that Mrs. Howery gave the Bank of America account to Gabriella Reeves.

On appeal, Lori Younkin contended that “she was the sole owner of the savings account because Mrs. Howery named her as the beneficiary and never changed that designation in a manner authorized by Probate Code section 5303.”

That is a great argument under the law of wills.  But this court was determined to muddy the waters, by creating an artificial distinction involving estate planning trusts.

Explained the court, “The type of savings account Howery established is referred to in the Probate Code as a ‘Totten trust’ account. The term Totten trust describes a bank account opened by a depositor in his or her own name as trustee for another person where the depositor reserves the power to withdraw the funds during his or her lifetime. If the depositor has not revoked the trust then, upon his or her death, any balance left in the account is payable to the beneficiary.”

Bingo.  End of analysis.  “Subdivision (b) lists the methods by which the terms of a multiple-party account may be modified. It provides: ‘Once established, the terms of a multiple-party account can be changed only by any of the following methods: [¶] (1) Closing the account and reopening it under different terms. [¶] (2) Presenting to the financial institution a modification agreement that is signed by all parties with a present right of withdrawal.’”

Not so fast.  “This narrow reading of the statue, however, fails to harmonize it with section 5302. Section 5302, subdivision (c)(2) provides that sums remaining on deposit in a Totten trust after the death of the sole trustee belong to the person named as beneficiary, ‘unless there is clear and convincing evidence of a different intent.’”

“Here, although the signature card for the savings account named appellant as the beneficiary, there is clear and convincing evidence that Mrs. Howery had a ‘different intent’ at the time of her death. She established a living trust that expressly stated her intention to give the savings account to Gabriella Reeves. The trial court properly relied on the living trust to find that Mrs. Howery intended to change the beneficiary of the her Totten trust from appellant to Gabriella Reeves. Because the change was made by a living trust rather than by a will, it is not invalidated by section 5302, subdivision (e).”

According to this court, a change in beneficiary designation for a Totten trust cannot be made by Will, but it’s ok to make such a change by way of an estate planning trust.  There is no substantive difference in result between a will and an estate planning trust.  Both serve the same purpose.  The procedural  difference is that a Will involves probate, while an estate planning trust is handled in private, without court supervision.  The court provided a careless analysis.

Araiza v. Younkin (Sept. 30, 2010) 188 Cal.App.4th 1120, 2010 Daily Journal D.A.R. 15,225

The broker represented the seller.  According to the opinion, “the buyers and the seller agreed to the purchase and sale of a residential real property for the price of $749,000 . . . The counter offer did not disclose that the property was subject to three deeds of trust totaling $1,141,000 . . .  Unbeknownst to the buyers, the property was subject to a first deed of trust in the amount of $695,000, a second deed of trust in the amount of $196,000 and a third deed of trust in the amount of $250,000, for a total debt of $1,141,000.”

Thus, the amount offered was $392,000 less than the debt encumbering the property.  When the sale did not close for the price in the listing agreement, the buyer’s sued the listing agent.

Stop here.  How could the buyers have any expectancy damages?  The debt was $1.1 million, while the offer was $750,000.  The buyers expected to pay $750,000, while the debt was $1.1 million.  The buyers did not lose the benefit of their bargain, as they did not offer enough to purchase the property.

Instead, the buyers could claim only reliance damages, being amounts they reasonably expended in reliance on the contract.  “According to the buyers, after they signed the deal with the seller, they sold their existing home in order to enable them to complete the purchase of the seller’s property.  Only then did they learn that the seller could not convey clear title because the property was overencumbered.”

However, didn’t the buyers receive a preliminary title report listing the encumbrances?  If so, how could the buyers claim reasonable reliance, when they had full disclosure of the encumbrances, albeit from a third party?  From the opinion, it seems that the court feels that the broker is on the hook, regardless of future information learned by the buyer.

According to the opinion, “The case before us presents the interesting question of whether the real estate brokers representing a seller of residential real property are under an obligation to the buyers of that property to disclose that it is overencumbered and cannot in fact be sold to them at the agreed upon purchase price unless either the lenders agree to short sales or the seller deposits a whopping $392,000 in cash into escrow to cover the shortfall.”

OK, that’s one way to frame the issue, although the court will proceed to explain that brokers are required to police the real estate market.  “Under the facts of this case, the brokers were obligated to disclose to the buyers that there was a substantial risk that the seller could not transfer title free and clear of monetary liens and encumbrances.”

Duties of Agent

As explained by the court, “It is now settled in California that where the seller knows of facts materially affecting the value or desirability of the property which are known or accessible only to him and also knows that such facts are not known to, or within the reach of the diligent attention and observation of the buyer, the seller is under a duty to disclose them to the buyer. When the seller’s real estate agent or broker is also aware of such facts, he [or she] is under the same duty of disclosure.”

The court continued.  “Despite the absence of privity of contract, a real estate agent is clearly under a duty to exercise reasonable care to protect those persons whom the agent is attempting to induce into entering a real estate transaction for the purpose of earning a commission.”

“The allegation here is that the brokers had a duty to disclose the liens before the buyers signed the agreement.  Only then could the buyers weigh the risks of entering into an agreement, and preparing their finances and related affairs to facilitate completion of the purchase, considering there was a significant possibility the transaction would fall through.  Disclosing the liens only after the buyers had entered into the escrow failed to protect them in this context.”

“Here, the buyers say that they sold their existing home in order to purchase the seller’s property and were damaged when the seller failed to convey title . . . To impose a duty on the brokers here to disclose information alerting the buyers that the sale was at high risk of failure would be to further the purpose of protecting buyers from harm and providing them with sufficient information to enable them to wisely choose whether to enter into the transaction.”

Reliance by the Buyers

“The buyers expected, based on the standard form documents they signed, as representative of industry standards, that they would receive a preliminary title report after their offer was accepted and escrow was opened.  They were given no reason to believe that they needed to pay for a title search before even making an offer on the property.”

“Just because a purchaser has constructive notice of a matter of record, this does not eliminate all of the duties of disclosure on the part of a seller or its agents.  In the matter before us, assuming a title search would have revealed the existence of deeds of trust against the property, this does not mean that constructive notice of those recorded deeds of trust would necessarily preclude an action based on the alleged breach of a duty to disclose.”

“The rule we articulate in this case is simply that when a real estate agent or broker is aware that the amount of existing monetary liens and encumbrances exceeds the sales price of a residential property, so as to require either the cooperation of the lender in a short sale or the ability of the seller to put a substantial amount of cash into the escrow in order to obtain the release of the monetary liens and encumbrances affecting title, the agent or broker has a duty to disclose this state of affairs to the buyer, so that the buyer can inquire further and evaluate whether to risk entering into a transaction with a substantial risk of failure.”

Duty of Confidentiality

“Turning now to moral blame, we observe that California cases recognize a fundamental duty on the part of a realtor to deal honestly and fairly with all parties in the sale transaction.  Surely a sense of rudimentary fairness would dictate that buyers in a case such as this should be informed before they open escrow and position themselves to consummate the same that there is a substantial risk that title cannot be conveyed to them . . . Both the policy of preventing future harm and considerations of moral blame compel the imposition of a duty on the part of a realtor never to allow a desire to consummate a deal or collect a commission to take precedence over his fundamental obligation of honesty, fairness and full disclosure toward all parties.”

“At a minimum, the brokers did not act fairly towards these residential buyers when signing them up for a real estate purchase the brokers had reason to know was a highly risky proposition. Since the brokers had a duty to act fairly towards the buyers, and fairness under the circumstances dictated disclosing that either lender approval or a substantial seller payment was required to close escrow, the portion of Civil Code section 2079.16 upon which the brokers rely did not exempt them from the duty to disclose.”

“To recapitulate, in balancing the factors [ ], we conclude that the brokers in the matter before us had a duty to disclose to the buyers the existence of the deeds of trust of record, of which the brokers allegedly were aware . . . so the buyer can make an informed choice whether or not to enter into a transaction that has a considerable risk of failure.”

“By so holding, we do not convert the seller’s fiduciary into the buyer’s fiduciary. The seller’s agent under a listing agreement owes the seller a fiduciary duty of utmost care, integrity, honesty, and loyalty.”  Although the seller’s agent does not generally owe a fiduciary duty to the buyer, he or she nonetheless owes the buyer the affirmative duties of care, honesty, good faith, fair dealing and disclosure, as reflected in Civil Code section 2079.16, as well as such other nonfiduciary duties as are otherwise imposed by law.

Holmes v. Summer (Oct. 6, 2010)  188 Cal.App.4th 1510

When a distribution is made by will (or by intestate succession), the gift is effected at the time of death.  Absent a disclaimer, the recipient and his or her heirs are entitled to the property.  If the recipient dies before the transfer is completed from the estate, his heirs take the property when the transfer is subsequently finished.

Most of us would have expected the same result with an estate planning trust.  If a gift to a child made by a trust takes effect at the death of the parent, we would expect that the gift became “permanent” if the child survived the parent, even if the final distribution was delayed.

Alas, things are never as settled or certain with a trust agreement.  In Weinberger v. Morris (Sept. 24, 2010) 2010 WL 3720812, 2010 Daily Journal D.A.R. 15,073, the child survived the parent, but died before final distribution from the trust.  The court held that the property passed to a different family member (not the child’s heirs) based on a slanted reading of the trust agreement.  Here is the court’s analysis.

“During her lifetime, Mrs. Weinberger had two children, Sheila and Robert . . . On October 12, 1996, Mrs. Weinberger executed a declaration of trust [ ].  On the same date, Mrs. Weinberger executed a quitclaim deed transferring her Atoll Avenue property to the Trust.”

Stop here.  This meant that Mrs. Weinberger wanted the Atoll Avenue property to be distributed in accordance with the trust agreement.  What did the trust say?

“The Trust provided that after Mrs. Weinberger’s death . . . all trust assets, save the personal effects which Mrs. Weinberger requested distributed in separate written instructions, were to go to Sheila.”

“Article 5.2 of the Trust instrument provided that, if Sheila died prior to receiving final distribution, the undistributed principal and income was to go to Davis.  Article 5.2 further provided that, if all of the named beneficiaries died prior to final distribution of the Trust estate, its remainder was to go to the heirs of the trustees.”

Most of us would conclude that daughter Sheila received the property if she survived her mother, which she did.  “Mrs. Weinberger died in May 1997.  On December 22, 1997, Sheila recorded an Affidavit Death of Trustee/Trustor.”

Sheila almost certainly believed the Affidavit of Death was sufficient to complete the distribution.  Here is the critical fact that caused the distribution to bypass Sheila.  “After recording the affidavit of Mrs. Weinberger’s death as trustee/trustor of the Trust, Sheila never executed, delivered or recorded – in her role as successor trustee of the Trust – any documents to transfer the Atoll Avenue property out of the Trust and to herself as the beneficiary of 100 percent of the Trust estate.”

So what, you ask?  Why do Sheila’s heirs lose out on the inheritance?  “Sheila died in September 2002 . . .  In November 2005, Davis recorded an Affidavit – Death of Trustee disclosing that Sheila had died.  At the same time, Davis, as Successor Trustee, executed a quitclaim deed transferring the Atoll Avenue property out of the Trust, and to himself. Davis recorded the quitclaim deed in December 2005.”

“Robert contend[ed that] Davis never acquired any right, title or interest in the assets held by the Trust.  More specifically, Robert argue[d] that the assets owned by the Trust irrevocably vested in Sheila on the death of Sue Weinberger.  Robert contend[ed] that he [was] entitled – as Sheila’s sole heir – to the assets which were once held by the Trust [because the] Trust did not exist after the death of Sue Weinberger and certainly not after Sheila Weinberger’s recording of her Affidavit Death of Trustor/Trustee on December 22, 1997.”

On appeal, the court rejected this argument.  Explained the court, “Robert’s argument implicates the ‘merger doctrine,’ which may be summarized as follows:  When the sole trustee of a trust and the sole beneficiary of the trust become one-and-the-same person, the duties of the person, in his or her role as trustee, and the interests of the person, in his or her role as beneficiary, ‘merge,’ meaning that the trust terminates as a matter of law, and the trust’s assets irrevocably vest in the beneficiary.”

Wow.  That’s an old theory from real property law, and not the best analogy.  The better analogy comes the law of wills.  To no avail for Robert, as the court held that, “The language employed by Mrs. Weinberger in her trust instrument provided that, upon her death, the trustee would pay certain expenses and distribute her personal effects in accord with her written directions, and distribute the remainder to Sheila.  If Mrs. Weinberger’s trust instrument ended there, then Robert’s argument might prevail, but it did not. Mrs. Weinberger’s trust instrument further provided in Article 5.2.A: ‘If Sheila should die prior to receiving final distribution, the undistributed principal and income of such beneficiary’s share shall be held, administered and distributed for the benefit of Lee Davis.’”

“We see no language in Mrs. Weinberger’s trust instrument indicating that it imposed upon a trustee an affirmative duty to make a prompt distribution of the Trust’s assets to Sheila upon Mrs. Weinberger’s death.  At the same time, the Trust included express language governing the contingency of Sheila’s death prior to a distribution of trust assets to her.”

“The primary cases cited by Robert [ ] involved a will, meaning any interpretation of the instrument had to be rendered in light of the public policy favoring the ‘prompt’ distribution of an estate.  Depending upon its terms, a trust may serve significantly different purposes than a will.”

Correct.  Now, to hold against Robert, the court has to state that this was a property management trust, not an asset distribution (aka estate planning) trust.  Which it cannot do, but it could bend the language to serve its own purposes.  “Taylor involved an instrument which included no language regarding the time limits for distribution of estate assets . . .  The language found in Mrs. Weinberger’s trust instrument gives no such indication that she intended a prompt distribution of her trust’s assets.”

Oh, the mischief that comes from these non-probate distributions.  Time to change your trust agreements.

Weinberger v. Morris (Sept. 24, 2010) 2010 WL 3720812, 2010 Daily Journal D.A.R. 15,073

His new report raises a number of troubling issues, but none more so than the dissembling tactics of lenders.

Writes Prof. White, “The reason that many strategic defaulters struggle so long before deciding to default is that fear and anxiety are not typically enough in isolation to cause them to stop making payments.  Rather such anxiety more frequently serves as a call to action, driving homeowners to try to do something about their situation – such as contacting their lender to try to work out a loan modification or a short sale.

“In fact, not a single strategic defaulter in the 356 accounts reviewed for this article reported having stopped paying their mortgages without first contacting their lender . . . Many underwater homeowners who seek help from their lenders, however, are turned away at the door. As one homeowner explains, ‘I called my lender and ask if I could discuss a loan modification and they said absolutely not.’  Lenders give numerous reasons for this, most commonly that homeowners are current on their mortgages.”

If you are current on your loan, regardless of the financial struggles to maintain the loan, you will never get your loan modified.  “The fact being a ‘responsible’ borrower is the surest way not to get a loan modification can be a rude awakening for many homeowners.”

Prof White continues.  “This is because most lenders don’t modify mortgages or agree to short sales for homeowners who might continue making their payments absent such accommodation. The best predictor that a homeowner will continue making payments is a good credit score and a past history of making their payments.  Homeowners with such characteristics thus have little chance of getting help unless they first miss some payments, and they are frequently told this by the loan servicing personnel who take their calls.”

Worse yet, “The loan modification process turns out, however, to be immensely frustrating[.]   Homeowners are frequently unable to reach anyone to discuss their applications’ status[.]  Their paperwork is ‘lost’ repeatedly[.]  They are treated rudely and lied to[.]  Worse, after months of frustration, most homeowners learn that their lender is not willing to work with them after all.”

Prof. White is not exaggerating.  I have yet to meet a borrower with anything positive to say about the loan modification process.  As a society, we are not serious about helping borrowers with troubled home loans.

Brent T. White, Take this House and Shove it: The Emotional Drivers of Strategic Default (May 2010)

Foreclosures Are Continuing:  There does not seem to be any slowdown in foreclosures.  Lenders buy in for the amount of the unpaid debt, then sell at a slight markup.  The buyer then markets the property for a greater profit.

Example:  A house might sell at foreclosure to the lender for $120,000.  The lender resells the property for $150,000.  The buyer in turn markets and sell the house for $200,000.  All of this takes place within six months.  The original owner takes nothing on the mark up.

Cash is King: Lenders have little risk on foreclosure sales because houses re-sell quickly on all-cash offers.  Evictions follow rapidly after the foreclosure sale, and are sometimes started on the day of the sale.

Securitization Creates Murky Ownership:  Because of the securitization of mortgages, it is extremely difficult to determine who is calling the shots for the lender.  It seems that mortgages have been sold off piecemeal, and the third-party mortgage holders are conducting the foreclosures.  The owner is greatly distanced from the lender, and it is almost impossible to identify the entity that is in control of the mortgage and the foreclosure process.

The Home Affordable Modification Program is a Failure:  This writer has yet to see one mortgage that was modified as a result of the federal Home Affordable Modification Program.  The external evidence on the HAMP program is damning.

Professor Jean Braucher from The University of Arizona Law School explains that “HAMP provided for modification of first-lien mortgage loans originated on or before January 1, 2009, where the loan was secured by a one- to four-unit property, one unit of which was the borrower‘s principal residence.”

In order to qualify for a HAMP modification, “the debtor‘s gross monthly mortgage payment had to exceed 31 percent of gross income [and] the borrower had to document a financial hardship and be delinquent on the loan.”

That would cover a lot of troubled mortgages.  Explains Prof. Braucher, “The goal of HAMP is to create a partnership between the government and private institutions in order to reduce borrowers‘ gross monthly payments to an affordable level. The level has been set at 31 percent of the borrowers‘ gross monthly income.”

However, the rules have never been explained.  “The HAMP [ ] formula was not made public, in part out of concern that doing so would have allowed borrowers to game the calculation, but making it difficult for borrowers and their mortgage counselors to know whether to apply for a modification and to assess denial of an offer.”

Further, the lender bears the costs.  “HAMP made investors responsible in full for the cost of bringing the debtor‘s gross monthly mortgage payment down to 38 percent of gross monthly income.  HAMP also provided for the government to then share equally with investors the further cost of bringing the mortgage payment down to 31 percent of income.”

So, in order for HAMP to work, the lender has to admit it made a bad lending decision, and has to agree to eat part of the loss.  Sadly, given the availability of cash in the housing market, it’s easier for the lender to precipitate a foreclosure sale, then sell the property for the full amount of the loan and all delinquency charges, meaning that the lender is made whole, and the owner absorbs the entire loss.

Notes Prof Braucher, “through September 1, 2009, the Congressional Oversight Panel reported that HAMP, with a goal of avoiding three to four million foreclosures in three years, had achieved only 362,348 three-month trial modifications.  Even more disappointing, the Congressional Oversight Panel reported that the program had achieved only 1,711 permanent modifications through September 1, 2009.”

Thus, the federal loan modification program has been a profound failure.  This writer’s experiences with troubled borrowers have been similar.

Jean Braucher, Humpty Dumpty and the Foreclosure Crisis: Lessons from the Lackluster First Year of the Home Affordable Modification Program (May 2010).

A private trust company is first an entity established under state law.  “Most states that authorize private trust companies allow them to be formed as a corporation or a limited liability company.”  However, “there is no information available to ascertain the number of unregulated trust companies that have been formed in the U.S.”

By way of history, “U.S. Trust Company (est. 1853), Northern Trust (est. 1889), and Bessemer Trust (est. 1907) were originally formed as private trust companies, but today they are known and respected as public trust companies that provide a wide range of fiduciary and trust services.”

A private trust company is a state-chartered institution that is formed to manage assets for wealthy families into the future.  Thus, “it is a state chartered entity that is formed for the express purpose of providing trust and fiduciary services to a single family” and is tied to one or more irrevocable trusts established by the family.

State the authors, “there are a variety of states which promote private trust companies. Most of these states have favorable tax laws, and they have modernized their trust laws.  In that regard, Wyoming, Nevada, South Dakota, and Texas are some of the more popular states where wealthy families are chartering private trust companies.”

States have different requirements for physical presence in the jurisdiction, but the requirements are not difficult to satisfy.  For example, “Licensed family trust companies in Nevada must have at least one officer who is a Nevada resident, a physical office in Nevada, and “a bank account with a state chartered or national bank having a principal or branch offices in Nevada.”

The authors further explain that, “State banking commissioners have less incentive to subject a private trust company to the same regulatory oversight that a public trust company has because there is no public interest to protect.  This distinction is formally recognized in states which permit private trust companies to seek exemption from certain regulatory provisions that apply to trust companies transacting business with the public.”

So, the state sanctions the formation of an entity, accords it the privileges of conducting business and of limited liability, but provides for little if any public or regulatory oversight.  “A private trust company must meet minimum capital requirements in order to exercise the fiduciary powers granted to it by the chartering state.  These capital requirements vary from state to state.  South Dakota has the lowest capital requirement at $200,000.”

The authors add that, “a private trust company must apply for and obtain a charter from the state where it is to be located.  Once the charter is granted, the private trust company is subject to the laws and regulations of that state.  The lone exception is an unregulated trust company which can be formed in Massachusetts, Nevada, Pennsylvania, Virginia, and Wyoming.”

That’s private justice for the very wealthy in America, which is a distressing topic.

Attendance was steady.  Gambling is up.  There were more people at the tables than last year. That’s two good signs for the economy.

But, the Fortune 500 stayed away, which is a bad sign for the economy.  Here are some of the prior year’s attendees who were noticeably absent:

• Benq (made a big splash a few years back, now vanished)
• Hewlett Packard (are you kidding me?  No presence whatsoever on the floor?  No one could drive from Palo Alto to Las Vegas with a few printers?)
• Xerox
• Dell (This ticks me off.  Dell has no presence on the floor, but snags 11 “innovation” awards?  Ditto for Nikon.  Not at CES, but also wins an award?  Smells like some kind of “pay for play,” and certainly cheapens the CEA Innovation Awards).
• Philips (used to have a huge display on the floor. Here’s all I could find in 2010).

How the mighty have fallen. Sad days for Philips

Now, the good guys (i.e., Corporate America that showed up at CES and plugged away at restoring the economy):

• Microsoft
• Sharp
• Samsung
• Panasonic
• Sony
• Casio

The foregoing were all at 2010 CES and marketing at full speed.  Bravo.

There were no visible empty spaces on the convention floor, unlike 2009.  However, some spaces had increased in size.

Embarrassment Award:  Lost-in-space Polaroid names Lady Gaga as its “artistic director.”  Come on.  You guys couldn’t find one person with a credible background in photography?

Very Cool Product.  The Toshiba Cell LCD television has a lovely picture.  Available now in Japan, coming to the U.S. in the second half of 2010.   Learned that the extra-thin LCDs achieve their weight loss by putting all the lights at the bottom, then shooting up to fill the screen.  You certainly make some sacrifices for the Twiggy look.

3-D Television.  All the rage in 2010.  What is this?  1953 revisited?

Reel-to-Reel Tape Decks.  Ditto.  Saw several at the high end stereo show.  Give me a break.  Just because some audio geeks (oops – I meant, “audiophiles”) still listen to vinyl is no excuse to attempt to reintroduce reel-to-reel decks.

Digital Music.  The stereo world is catching on that we listen to electronic files, but they are about three years behind, as the manufacturers finally embrace  Ipod connectivity.  (Even Sony has an Ipod slot on some products.  Tall about being ubiquitous.)

Dudes, look forward.  I want wireless connectivity from my amp to my PC.  That’s the future, not an Ipod interface.

Cool computer stuff.  Big (i.e., two terrabyte) solid state storage units.  USB 3.0.

Class D amplifier.  The little amps from International Rectifier smoked some systems costing thousands of dollars more.  Quite impressive, even if I’m not a convert to Class D.

Gorgeous Home Projector.  If you have the dough, get the $15,000 projector from Meridian.  It will knock your socks off.

No Way Award.  A start-up speaker company from Novato, CA rolls out its first speakers – at $125K for a pair?  A dude from Sweden showing a $90K pair of monoblock amplifiers as his only product?  (At least Lars named the amp after himself.)

In Berg & Berg Enterprises, LLC v. Boyle (Oct. 29, 2009) 2009 DJDAR 15513, the court of appeal explained that “Berg & Berg Enterprises, LLC is the largest creditor of the failed Pluris, Inc. . . . The thrust of Berg’s claim, as finally pleaded, was that the individual directors owed a fiduciary duty to Berg and other Pluris creditors on whose behalf Berg is purportedly proceeding.”

The trial court sustained demurrers to the complaint without leave to amend, which ruling was affirmed.  The appellate court gave a good, clear analysis of the issue, explaining that, “it is without dispute that in California, corporate directors owe a fiduciary duty to the corporation and its shareholders and now [ ] must serve ‘in good faith, in a manner as such director believes to be in the best interests of the corporation and its shareholders.’”

The court explained that the potential fiduciary obligations owed by corporate directors to creditors arose from an unpublished 1991 Delaware decision involving the leveraged buyout of MGM, “which laid the ground for the insolvency exception to the general rule that directors owe exclusive duties to the corporation and its shareholders, but not to shareholders.”

The question involves what duties are owed by corporate directors to unpaid creditors when the corporation is insolvent.

The Berg & Berg court squarely held that, “under the current state of California law, there is no broad, paramount fiduciary duty of due care or loyalty that directors of an insolvent corporation owe the corporation’s creditors solely because of a state of insolvency [ ].  And we decline to create any such duties, which would conflict with and dilute the statutory and common-law duties that directors already owe to shareholders and the corporation . . .

“We accordingly hold that the scope of any extra-contractual duty owed by corporate directors to the insolvent corporation’s creditors is limited in California, consistent with the trust-fund doctrine, to the avoidance of actions that divert, dissipate, or unduly risk corporate assets that might otherwise be used to pay creditors’ claims.  This would include action that involves self-dealing or the preferential treatment of creditors.”

The court further held that a finding of actual insolvency is needed to trigger these duties, rather then the amorphous “zone or vicinity of insolvency.”  Thus, the court held that “there is no fiduciary duty prescribed under California law that is owed to creditors by directors of a corporation solely by virtue of its operating in the ‘zone’ or ‘vicinity’ of insolvency.”

(Note that the court also observed that “there are multiple definitions of insolvency,” adding that “a finding of insolvency by the standard of the debtor not paying debts when they become due requires more than merely establishing the existence of a few unpaid debts.”)

Thus, the court held that, “under the trust-fund doctrine, upon actual insolvency, directors continue to owe fiduciary duties to shareholders and to the corporation but also owe creditors the duty to avoid diversion, dissipation, or undue risk to assets that might be used to satisfy creditors’ claims.”

Even more, the court held that decisions of the directors are presumptively entitled to protection under the business judgment rule.  “The rule establishes a presumption that directors’ decisions are based on sound business judgment, and it prohibits courts from interfering in business decisions made by the directors in good faith and in the absence of a conflict of interest.”

Explained the court, “in most cases, the presumption created by the business judgment rule can be rebutted only by affirmative allegations of fact which, if proven, would establish fraud, bad faith, overreaching or an unreasonable failure to investigate material facts . . . The failure to sufficiently plead facts to rebut the business judgment rule or establish its exception may be raised on demurrer, as whether sufficient facts have been so pleaded is a question of law.”

I for one do not support the expanding toward “tortification” of business law.  The decision in Berg & Berg is a step in the right direction.  The court gives clear guidance, holding that the fiduciary obligations of directors to creditors arise only when the corporation is actually insolvent, and then only when the creditors can plead facts showing that the actions of the directors were in violation of the business judgment rule.  The court also held that it will not intervene in the “ill-defined sphere known as the zone of insolvency.”

This case marks the second published appellate opinion driven by the unpaid creditor.  (The prior opinion is Berg & Berg Enterprises, LLC v.  Sherwood Partners (2005) 131 Cal.App.4th 802.)   Considering that legal counsel included O’Melveny & Myers and Winston & Strawn, it is almost certain that the legal fees to date in this dispute exceed $1 million.

Here’s a point that seems somewhat unfair.  The trial judge based his decision on an unpublished 2006 trial court decision from the federal district court for the Northern District of California.

The problem for trial attorneys is that we cannot cite unpublished opinions as authority in our briefs.  It seems incongruous to have a trial court make a decision based on an unpublished federal court ruling, then have that unpublished ruling cited with approval by the California appellate court.

This problem arises because the two major legal publishers – Lexis and West – continue to make unpublished decisions available via their websites.  When these unpublished decisions become part of the database, it becomes very tempting to cite them, notwithstanding the California Rules of Court.  In this case, the trial court and the appellate court found the temptation to great to resist.

As trial attorneys, what we don’t get is direct feedback from the bench on what works and what doesn’t work in the courtroom.  Trial Skills helps fill that gap.

One of the judge’s points repeated throughout the book is that trial lawyers should use visual props in the courtroom, be they PowerPoint presentations or exhibits blown up on the big screen.  In our current media culture, a trial attorney must start thinking about the visual aids that he or she will use the courtroom from the beginning of the case: the attorney can’t wait till the last weeks before trial before getting serious about the visual aids he will use the courtroom.

The chapter on dressing appropriately for the courtroom contains a wonderful anecdote.  According to Judge Perry, “a favorite clothing story was shared by defense attorney Michael Russo, who told his client to ‘dress well’ for court.  At the next court appearance, the client showed up in a rented tuxedo.”

While Trial Skills focuses on criminal trials, there are pointers that will help civil trial lawyers as well.  I particularly valued Chapter 23 on trial objections.  Judge Perry explains why the bench will make rulings on certain questions, which rulings may be based on the way the question is phrased rather than the information that is solicited from the witness.

Every trial lawyer has had situations in which the court sustained an objection and the lawyer shook his head wondering what was wrong with the question.  Trial Skills helps explain some of the reasoning behind these rulings.

Judge Perry reminds us that trial lawyers should enjoy the moment.  Says he, “there are few activities in law more satisfying than composing and delivering an effective closing argument.  When your days of trying jury trials are over, you will fondly recall the times the courtroom when you are on your feet, your adrenaline pumping, your mind racing, as you addressed the jury and argued the merit of your client’s case.”

Concludes Judge Perry, “Enjoy being a real lawyer – a trial lawyer.”

Published by The Rutter Group, Trial Skills is a bargain at $45.00.  I cannot imagine any trial lawyer, no matter how experienced, who could not pick up several good pointers from this title.

Here’s my most recent story, from a will contest trial last week in Tulare County.  One of the matter is in dispute involved the mental competency of the decedent.  I asked a witness for her opinion on an issue.  The other attorney wanted to hear the answer, and didn’t object.

However, the trial judge himself interposed an objection, stating from the bench that the question asked for any improper opinion.  (Remember, there are no juries in trials arising under the Probate Code.)   When I asked the judge to confirm that he was objecting to my question, he smiled and said yes.  What could I do?  I moved on to the next question.