Now What? Enforcement and Collection of a Surcharge Order

• Publication year: 2020

NOW WHAT? ENFORCEMENT AND COLLECTION OF A SURCHARGE ORDER

By Scott A. Fraser^* and Ryan D. Cunningham^**

MCLE Article

I. INTRODUCTION

The Probate Code governs many fiduciary relationships, and it equips judges with an arsenal of remedies to address bad behavior by fiduciaries. Although probate courts are armed with this wide arsenal, there is often just one remedy clients care about, and just one important outcome: the recovery of money to make the estate whole and, perhaps, to punish the wrongdoer.

Regardless of the type of fiduciary, the Probate Code gives the court affirmative statutory authority to surcharge and order the fiduciary to pay money damages for personal liability arising from a fiduciary role: section 2401.3 of Division 4 covers conservators and guardians; section 9601 of Division 7 addresses personal representatives; and section 16440 of Division 9 applies to trustees. Indeed, a surcharge order can arise from any damage caused by the fiduciary, including breach of fiduciary duty, loss of property, disgorgement of profits, or other liability arising from acts in a fiduciary capacity.¹

This article reviews general enforcement of judgment procedures that every trust and estate attorney should be aware of, and then highlights practice-specific enforcement procedures for both trust and estate attorneys and attorneys in other practice areas. Because the recovery of money in this context can depend entirely on minute pleading details—particularly in the bankruptcy context (Part IV, infra) —it is important for practitioners to have an enforcement strategy for a surcharge order at the earliest possible stage and to have the following ground rules firmly in mind.

II. THE RULES OF ENGAGEMENT—GENERAL CONSIDERATIONS FOR ENFORCEMENT OF A SURCHARGE ORDER

A successful litigant may enforce a surcharge order obtained in probate court by utilizing the same general procedures as civil litigants for the enforcement of judgments.² Under the Enforcement of Judgments Law ("EJL"), all property of a judgment debtor is subject to the enforcement of a money judgment unless an exception is expressly provided by law.³ Often a creditor in proceedings governed by the Probate Code will have the benefit of a bond,⁴ but that is not always the case. Even when it is, bonds are not always sufficient to cover a surcharge order.

The rules governing the enforcement of judgments are sufficiently distinct that there are attorneys whose entire practice focuses solely on the EJL. It is an area of the law with specific rules and considerations with which trust and estate attorneys generally may not be familiar. Further, some aspects of enforcement turn on matters that ideally would be analyzed prior to the entry of the surcharge order, whether in litigation or planning. Accordingly, and before setting out some situation-specific rules, this article reviews general enforcement procedures useful to a trust and estate attorney.

A. When Enforcement of a Surcharge Order Can Begin

When a superior court, exercising its powers under the Probate Code, determines that a fiduciary has breached his or her duties, what happens next for the wronged beneficiary—and how fast it happens—invokes the interplay of multiple statutory schemes. Understanding these schemes is critical to determining when the creditor may begin enforcement. Often, a dispute over a fiduciary's actions arises in the context of a broader trust, conservatorship, or probate estate administration. When a beneficiary obtains an adjudication against a breaching fiduciary, one of the first questions counsel for the beneficiary must resolve is whether that adjudication is an "order" for purposes of immediate enforcement. If the determination is not an "order" then the beneficiary must wait until an order has been entered before beginning enforcement. Whether a court's written determination constitutes an "order" turns on whether the document "constitutes the trial judge's determination on the merits" and "contemplates no further judicial action to give it vitality as an order."⁵ Accordingly, whether a judge's decision is an "order" capable of being enforced as such depends on the intended finality of the document, and counsel representing the about-to-be-surcharged fiduciary should consider arguments targeted at the interim nature or non-finality of the decision.

If the determination is an order for the purposes of enforcement, the right to seek satisfaction of a surcharge order begins upon entry of the decision as a judgment.⁶ When the right to a surcharge order is established at a bench trial, as can often be the case in trust and estate litigation,⁷ judgment is entered immediately upon filing of the decision.⁸ Once the order is entered, the Probate Code expressly authorizes the use of the EJL under the Code of Civil Procedure.⁹

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The question of what can be enforced is therefore closely linked to when enforcement can occur. A money judgment can generally be enforced immediately.¹⁰ If the court's determination is sufficiently final—that is, if the surcharge order is in fact an order—then it falls within the definition of a money judgment as that term is defined in the EJL.¹¹ Of course, just as the surcharge order takes on many of the characteristics of a money judgment thereby allowing for enforcement, so too does the entry of a surcharge order offer the fiduciary-debtor opportunities to delay and challenge the decision.

B. Effect of Appeal of Surcharge Order

Mirroring the immediate enforceability of a surcharge order, the Probate Code allows for a direct appeal from "the making of, or the refusal to make any ... order[] ... (g) [s]urcharging ... a fiduciary."¹² However, an appeal does not automatically stay enforcement.¹³ Although the general rule is that the filing of a notice of appeal does mandate a stay of enforcement, that general rule is subject to a series of exceptions, the most common of which likely to be encountered by a practitioner is the exception for a "judgment for money or an order directing payment of money..."¹⁴ Thus, even a surcharge order from which an appeal has been taken can be immediately enforced. To prevent this, the surcharged fiduciary may post a bond or undertaking, the purpose of which is to ensure that, should the appeal be unsuccessful in whole or in part, the prevailing party's ability to collect is secured during the appeal.¹⁵ If the reviewing courts uphold the surcharge order, the judgment creditor can collect on the bond, a process discussed in Section III.A, infra.

Interestingly, the judgment creditor appears to have one further opportunity under the Probate Code to obtain immediate enforcement of a surcharge order. Probate Code section 1310, subdivision (b) empowers a court, "for the purpose of preventing injury or loss to a person or property," (italics added) to direct a fiduciary to act as if no appeal were pending or to appoint a temporary fiduciary to do the same.¹⁶ Going a step further, that same statute validates such emergency acts of the fiduciary "irrespective of the result of the appeal." One Court of Appeal recently upheld the application of this provision to direct a fiduciary to exercise the powers under a trust instrumentin order to follow through with the sale of an NBA franchise.¹⁷ Although the challenged order in Sterling was not a surcharge order, the risk-of-loss was the risk of not being able to sell the team for as high of a price—a risk that appears to be entirely monetary.¹⁸ In light of Sterling, a judgment creditor seeking immediate enforcement can show that staying enforcement presents a risk of loss so serious that enforcement should not be stayed notwithstanding the appeal, though it will be the rare case that fits this criterion.¹⁹

In sum, before enforcement can occur, counsel on the creditor's side needs to be sure of obtaining the court's final written determination of the merits, while, conversely, counsel for the fiduciary hoping to avoid immediate enforcement should posture the decision as interim or non-final. Absent unusual circumstances, an appeal will not stay enforcement of a surcharge order that is final without the posting of an appeal bond to secure recovery.

C. Allocation of Surcharge Liability Among Married Persons

A next step for any enforcement proceeding is to determine the marital status of the debtor. If a surcharged fiduciary is married, consideration of community property rules is essential. The Family Code has detailed rules which prescribe how to determine if a debt is separate property or community property and the order in which such debts are satisfied from separate property or community property.²⁰ For purposes of the Family Code, a debt arising from a tort is deemed to have been incurred at the time the tort occurs.²¹ The key considerations will be to determine the character of property subject to enforcement and to determine whether the debtor spouse was performing an act for the benefit of the community.

As a preliminary matter, it should be noted that generally a married person is not personally liable for any injury or damage caused by the other spouse.²² As a result, the separate property of a married person is not liable for a debt incurred by that person's spouse before or during marriage.²³ There are some exceptions to this rule for policy reasons (e.g., child support and expenses for necessities) which are beyond the scope of this article.

However, the property of a married person, to the extent that such property is part of the marital estate, is liable for injury or damage caused by the other spouse. The liability of community property for a debt incurred by either spouse before or during marriage applies regardless of which spouse has the management and control of the property and regardless of whether one or both spouses are parties to the debt or to a judgment for the debt.²⁴ Quasi-community property is liable to the same extent as community property.²⁵ One of the primary exceptions...