Lazzarone v. Bank of America

Each of Bank’s reports alleged in pertinent part, “All investments made on property retained in the trust during the current accounting period were in conformity with law or were authorized by the terms of the trust and have been carefully, prudently and in good faith made, purchased or retained for the purpose of serving the best interest of the trust and all persons interested therein.” Bank’s accountings showed plaintiff’s trust funds were invested in part in Bank’s common trust funds. The accountings further showed on their face that, for each year except 1976, the common trust funds had suffered capital losses.

Plaintiff filed this action in 1983, after Bank was finally discharged, alleging causes of action for negligence and fraud and deceit based on representations as well as concealment. Plaintiff’s first cause of action alleged in pertinent part that Bank negligently and imprudently invested his funds and neglected to inform him of the poor return being achieved on its common trust funds. Plaintiff’s second cause of action alleged in pertinent part that Bank falsely and fraudulently represented to plaintiff that Bank’s trust funds would provide an ideal environment for the growth of plaintiff’s funds. Bank knew such trust funds were yielding one of the lowest rates of return in the nation and a rate of return lower than its own savings accounts. Bank had no reasonable basis to believe its representations were true. Plaintiff reasonably relied on Bank’s representations to his detriment. Bank’s investment of his trust funds suffered losses.

Plaintiff’s third cause of action incorporated the second cause of action and alleged in pertinent part that Bank held itself out as an expert in the fields of banking and management of trust funds. Bank knew these representations to be false. Plaintiff reasonably relied on Bank’s representations to his detriment. Once again, plaintiff’s damage consisted of the losses incurred on his trust account.

Plaintiff’s fourth cause of action was substantially similar to his third cause of action. It, too, alleged that Bank made representations which plaintiff relied upon to his detriment, to wit, losses sustained on investment of his trust funds.

Although plaintiff pleaded causes of action for fraud he failed to plead a cause of action to set aside any of the orders settling the accountings and

A

Ordinarily, a demurrer tests the sufficiency of the complaint alone and not the evidence or other extrinsic matters. Thus, a demurrer ordinarily lies only where a defect appears on the face of the complaint. (5 Witkin, Cal. Procedure (3d ed. 1985) Pleading, § 895, pp. 334-335.) Affirmative defenses such as res judicata are not properly alleged in a complaint and ordinarily may not be raised on demurrer. (5 Witkin, Cal. Procedure, supra, § 895, p. 335.)

However, a complaint may be read as if it included matters judicially noticed. (CodeCiv. Proc., § 430.30, subd. (a); see5 Witkin, Cal. Procedure, supra, § 896, p. 337.) Such matters may show the complaint fails to state a cause of action though its bare allegations do not disclose the defect. (See Weiner v. Mitchell, Silberberg & Knupp (1980) 114 Cal.App.3d 39 , 47 [ 170 Cal.Rptr. 533 ].) In this case Bank requested the trial court to take judicial notice of all orders, pleadings, and other matters on file in the matter of the estate of Carlo Lazzarone. The trial court was required to judicially notice those matters upon Bank’s request (Evid. Code, §§ 452, subd. (d), 453) and we must do likewise on appeal (Evid. Code, § 459, subd. (a)(1)). Since the res judicata bar appears on the face of the documents judicially noticed, the defense is appropriately considered in reviewing the demurrer. (Code Civ. Proc., § 430.30, subd. (a); Flores v. Arroyo (1961) 56 Cal.2d 492 , 496-497 [ 15 Cal.Rptr. 87 , 364 P.2d 263 ]; Miller v. R.K.A. Management Corp. (1979) 99 Cal.App.3d 460 , 465, 467-468 [ 160 Cal.Rptr. 164 ].)

B

As noted, before this action was filed, Bank had obtained from the probate court orders settling its several accounts and reports as trustee. As we shall explain, these orders are entitled to res judicata effect as to issues of trustee negligence and fraud where, as here, the proximate result of that negligence or fraud is manifest on the face of the accountings in the form of economic losses.

On appeal the remaindermen of the trust claimed the executrix’s claim was barred by the res judicata effect of the decree of distribution and the several orders settling the trustees’ accounts. Our Supreme Court disagreed, reasoning the allocation of income issue was never presented or passed upon in any of the prior proceedings. (50 Cal.2d at pp. 486-487.)

We find de Laveaga and Howard entirely consistent with our result. Those cases stand for the proposition an issue which is not passed upon in the prior order carries no res judicata effect. Here, as in Ringwalt and Carr, the losses of which plaintiff complains were fully disclosed in the accountings presented to the probate court. Of necessity, the probate court inquired generally into the truth and accuracy of the facts presented in the accountings and the propriety of the trustee’s management of the trust. (See McLellan, supra, 17 Cal.2d at p. 554; Carr, supra, 11 Cal.2d at p. 373.) By approving the several accountings and discharging the trustee the probate court conclusively determined that, despite the losses, Bank’s management of the trust was lawful and prudent. The probate court’s orders settling the trustee’s accounts and reports and discharging the trustee are entitled to res judicata effect unless they are vitiated by extrinsic fraud. (§ 1123; Carr, supra, 11 Cal. 2d at p. 374; Ringwalt v. Bank of America etc. Assn., supra, 3 Cal.2d atp. 684; see also Willson v. Security-First Nat. Bk. (1943) 21 Cal.2d 705 , 709 [ 134 P.2d 800 ]; Estate of Crane (1946) 73 Cal.App.2d 93 [ 165 P.2d 940 ]; Ormerod v. Security-First Nat. Bank (1937) 21 Cal.App.2d 362 [ 69 P. 2d 469 ]; McLaughlin v. Security-First Nat. Bk. (1937) 20 Cal.App.2d 602 [ 67 P.2d 726 ].)

The Complaint Does Not Plead Extrinsic Fraud and Plaintiff Has Shown No Reasonable Possibility of Amendment

Where a judgment has been obtained through extrinsic fraud it may be set aside, though long since final, by independent suit in equity. (Neubrand v. Superior Court (1970) 9 Cal.App.3d 311 , 317 [ 88 Cal.Rptr. 586 ].) In Estate of Sanders (1985) 40 Cal.3d 607 [ 221 Cal.Rptr. 432 , 710 P.2d 232 ], our Supreme Court recently held an executor committed extrinsic fraud

Here, plaintiff’s complaint nowhere alleges any conduct by Bank which prevented him from having his day in court to challenge the propriety of Bank’s investments. Plaintiff did not allege Bank encouraged him not to attend the hearing or suggested he not make a claim. Nor did plaintiff allege Bank obtained probate court approval of its accounting in secret or in the absence of required statutory notice. Nor did plaintiff allege Bank in effect told him it would look out for his interest in the judicial proceeding. (Compare Estate of Sanders, supra, 40 Cal.3d at p. 614.) As in Gale v. Witt, supra, 31 Cal.2d at page 367, “there is no allegation that the [plaintiff was] not given the required notice of the hearing on the petition .... Nor [does plaintiff] charge that [he] did not have knowledge of all of the proceedings in connection with the administration of [his trust.]” (See also Tobelman v. Hildebrandt (1887) 72 Cal. 313 , 316 [ 14 P. 20 ].)

Plaintiff does allege Bank concealed from him the poor rate of return on Bank’s investments. However, he does not allege Bank concealed any trust assets or trust losses from the probate court. (Compare Adams v. Martin, supra, 3 Cal.2d at p. 248; Morgan v. Asher, supra, 49 Cal.App. at pp. 176-179.) Indeed, in his brief plaintiff concedes Bank’s accountings filed with the court show the losses in the trust accounts. Having received notice of these accountings, plaintiff is charged with the information disclosed by them. Had plaintiff availed himself of the opportunity to attend any of the hearings on the accountings, he would have seen that the accountings showed his trust funds had sustained economic losses. The fact of losses, in turn, should have prompted him to inquire further into the possibility of negligent or fraudulent conduct by Bank. Once plaintiff “became aware of facts which would make a reasonably prudent person suspicious, [he] had a duty to investigate further, and [he] was charged with knowledge of matters which would have been revealed by such an investigation.” (Miller v. Bechtel Corp. (1983) 33 Cal.3d 868 , 875 [ 191 Cal.Rptr. 619 , 663 P.2d 177 ].) This is so even though Bank occupied the position of a fiduciary. (Id., at pp. 874-875.) Thus, plaintiff was properly chargeable with knowledge of easily ascertained matters, such as the performance of Bank’s trust funds as compared with those of other financial institutions.

Plaintiff relies particularly on In re Marriage of Brennan, supra, 124 Cal.App.3d 598 , where a husband fraudulently persuaded his wife to enter

Brennan is distinguishable in that the settlement agreement presented to the court wholly concealed community assets and therefore prevented wife from litigating their existence or value. Here, Bank informed the probate court of the true status of the trust accounts and of the losses they had incurred. The Bank’s submission to the court therefore provided plaintiff with information sufficient to put him on notice of his fraud claims. Plaintiff’s complaint fails to allege extrinsic fraud. (Gale v. Witt, supra, 31 Cal.2d at p. 367.)

Plaintiff contends his complaint may be amended to show Bank’s extrinsic fraud. In reviewing this argument, we shall apply two rules. The first is that the burden of proving a reasonable possibility of a saving amendment is squarely on the plaintiff. (Blank v. Kirwan (1985) 39 Cal.3d 311 , 318 [ 216 Cal.Rptr. 718 , 703 P.2d 58 ].) The second is that the facts constituting fraud must ordinarily be pleaded with particularity. (Committee on Children’s Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197 , 216 [ 197 Cal.Rptr. 783 , 673 P.2d 660 ].) While this rule is not always applied with rigor (id., at p. 217), we believe it is appropriately invoked where plaintiffs sue in damages with respect to matters previously heard in probate. A lax rule allowing the vague pleading of extrinsic fraud would open the door to the wholesale avoidance of probate proceedings and to the relitigation on the law side of the court of matters properly heard and resolved in probate.

Plaintiff first suggests he can plead that Bank committed extrinsic fraud by sending him a statutory notice of hearing (§§ 327, 328), on a standard Judicial Council form, which stated in pertinent part that “this notice does not require you to appear in court, ...” There are two answers to this absurd suggestion. First, the disputed notice was prepared by the Judicial Council and executed by the clerk of the court, not by Bank. Any representations contained in the notice are not Bank’s doing. Second, as

Plaintiff suggested at oral argument he could amend his complaint to allege Bank “prevented” his attending the hearing on the trustee’s accounting by telling him it was properly handling his trust funds. (See Estate of Sanders, supra, 40 Cal.3d at p. 614, quoting United States v. Throckmorton, supra, 98 U.S. at pp. 65-66 [25 L.Ed. at p. 95].) However, as its facts make clear (see fn. 10, ante), Sanders does not stand for the proposition that an executor’s or trustee’s representation an estate is being properly administered constitutes extrinsic fraud excusing attendance at a probate hearing. In order to assert extrinsic fraud in this context, the plaintiff must be led to believe his interest will be looked after in the judicial proceeding. (See Estate of Sanders, supra, 40 Cal.3d at pp. 612-613; see also Gale v. Witt, supra, 31 Cal.2d at pp. 365-367.)

By plaintiff’s theory, Bank’s allegedly false statement that it was properly handling trust funds would suffice to avoid the res judicata effect of a probate order. However, nearly all executors and trustees expressly or impliedly represent that they are lawfully doing their jobs. Consequently, as a practical matter, plaintiff’s view would simply allow the widespread avoidance of probate hearings by aggrieved parties who could assert plaintiff’s theory to avoid the res judicata effect of probate orders. That result, in turn, would inject an unacceptable degree of uncertainty into the business of administering trusts and estates. Consequently, we will not promulgate a rule containing such potential for the erosion of the jurisdiction of the probate court. We conclude Bank’s statements do not constitute extrinsic fraud as a matter of law.

Plaintiff also suggested at oral argument he could plead that Bank conspired with unidentified other parties to prevent him from going to court. However, this vague allegation does not meet the requirement that the facts constituting extrinsic fraud be pleaded with specificity.

We recognize the trial court was inclined to grant plaintiff leave to amend his complaint had it not felt the demurrer was properly sustained without leave to amend on other grounds. However, none of plaintiff’s proposed amendments come close to alleging extrinsic fraud. Considering all circumstances, we conclude it is not reasonably possible plaintiff can amend his complaint to allege extrinsic fraud sufficient to set aside the orders of the probate court. (Blank v. Kirwan, supra, 39 Cal.3d at p. 318.) Defendant's demurrer was therefore properly sustained without leave to amend.