Conservatorship of Elmira Phillips

Case Number

19PR00416

Case Type

Hearing Date / Time

Mon, 04/22/2024 - 08:30

Nature of Proceedings

Second and Final Accounting and Report

Tentative Ruling

Probate Notes:

Appearances of Conservator, and both co-counsel required.

The following defects must be corrected before the petition may be approved:

Discrepancy no. 1 – Estate on hand at beginning of account does not match the amount on hand at the end of the last account. (Prob. Code, §1061(a).) The estate on hand at end of last account shows a total estate value of $1,841,894.02.  The property on hand at the beginning of this account shows $1,886,267.99, a difference of $44,373.97.  The property on hand should have reflected the amount in the Final Inventory and Appraisal. (Prob. Code, § 1061(a)(1).)

UPDATE FOR 6/10/24 HEARING – The supplement filed on 2/15/24 resolves this issue.  Although the amended accounting should have been filed as an amended petition (because an addition of $40,000+ in assets is a material change per CRC, Rule 7.3(4)), that accounting has already been approved, and thus is moot to address here.

Discrepancy no. 2 – Schedule A “Reinvested Dividends” is ambiguous and may indicate erroneous calculations that throw off the entire account.  If estate dividend funds are reinvested, the reinvestment is not properly a receipt to be listed in Schedule A, because they are expenditures and changes in the form of assets, which have their own schedules set aside in the Probate Code. As the Fiduciary Accounting Handbook explains:

In a fiduciary accounting, the dividend is a receipt from an entity, the purchase of additional shares is a change in form of asset, and the result of the reinvestment is that the number of shares carried, and the carry value, increases—an increase shown on the schedule Assets on Hand—End of Period.

(Fiduciary Accounting Handbook (C.E.B. 2023), §1.8 “Dividend Reinvestment”.)

If the dividend reinvestment is part of a “DRIP” program of automatic reinvestment by the company:

Many companies that pay dividends offer shareholders the opportunity to reinvest their dividends in additional shares of the company, through a "dividend reinvestment program," or DRIP. As an enticement, these companies usually do not charge shareholders a commission on the shares purchased through reinvestment and a small number of companies even sell shares purchased through reinvestment at a discount.

Broken into its constituent parts, a DRIP transaction is always (1) a receipt, followed by (2) a purchase, that (3) increases the number of shares the shareholder owns. The trustee who participates in a DRIP must account for each step of the transaction, as follows:

Report the dividend as a receipt on the schedule of Receipts;

Report the purchase of additional shares on the schedule Changes in Form of Assets; and Adjust the quantity and carry value of the aggregate shares.

(Fiduciary Accounting Handbook (C.E.B. 2023), §6.44 “Dividend Reinvestment Program”.)

A supplement explaining the entries must be submitted.

UPDATE FOR 6/10/24 HEARING – Resolved with instruction. The additions to Schedule H of this petition contain a list of securities with two carry values.  The schedule is not properly formatted in a manner that communicates what the change in form of asset was, nor is it totaled.

An example of how dividends reported in the Change in Form of Assets Schedule should appear is found in the Fiduciary Accounting Handbook:

Date             Shares            Description                            Cash           Carry Value

1/23/23       32      Reinvestment in [name of security] (345.23)        345.23

(See Fiduciary Accounting Handbook (Cont. Ed. Of the Bar 2023) §6.60.)

Any deviance from this reporting method fails to properly convey that cash is exchanged for securities of the same value.

Further problematic is the fact that the ten new entries in the Supplement Schedule H are not nearly as numerous as the entries labeled “Reinvested Dividend” in the supplemental Schedule A.

This could be leading to the issue in discrepancy no. 3, detailed and updated as follows:

Discrepancy no. 3 – Missing Cash/Schedule H errors.  The cash on hand at the beginning of the account was $789,209.56.  The cash on hand at the end of the account was $705,300.29.  This $83,903.27 reduction in cash should be accounted for in either Schedule C (Disbursements) or Schedule H (Change in the Form of Assets).  Since Schedule C only amounts to $11,139, the missing cash is not accounted for there.  The missing cash is also not accounted for in Schedule H, because Schedule H shows $2,214,069.49 cash was reinvested in securities, which is more than the entire stated value of the estate, thus is clearly miscalculated.  A supplement and detailed reconciliation are at least required, if not a full amendment of the accounting.  Petitioner must explain how over two million dollars of cash existed in the first place, or was “reinvested” without any gains or losses of sale.  Nowhere in the accounting does it show securities were sold for cash.

UPDATE FOR 6/10/24 HEARING – After recalculation of schedule H, it appears the $2,214,069.49 cash figure was miscalculated.  However, the numbers still do not reconcile.  There is a discrepancy of $29,930.65 accounted for improperly in Schedule H (as petitioner admits), and supplemental Schedule H only accounts for $75,358.60 of the $83,903.27 in missing cash, leaving $8,544.67 unaccounted for.

The $29,930.65 in cash that was transferred from the conservatorship estate to the trust account of Petitioner’s attorney “FBO” the Estate of Nathaniel Phillips is not a change in the form of assets, it is a transfer (technically) between conservatorship accounts, which need not be reported. (See Prob. Code, § 1063, subd. (b).)  However, Petitioner otherwise properly accounted for that transfer by listing it on hand at end of account, and describing its location in the client trust fund.

Discrepancy no. 4 – Apparent Breaches of Fiduciary Duties.  The relationship of conservator and conservatee is a fiduciary relationship that is governed by the law of trusts.  Thus, all trustee duties are applicable to conservators. (Prob. Code, § 2101.)  The following fiduciary duties appear to have been breached by the transactions listed beside them:

A.  Failure to preserve estate property (Prob. Code, §16006):

• Brokerage fees are excessive. Conservatee died in September of 2020.  Thus, there are no apparent reasons for the sale or purchase of securities (i.e. a conservatee who passed away has no needs that would require the sale or exchange of securities).  For an accounting period of 13 months, conservator paid over $6,000 for brokerage fees even though the estate lost $78,742 in overall carry value. 

B. Failure to make estate property productive (Prob. Code, §16007.)

• The real property on 1946 Mono Street, Oxnard, CA, was not rented out to generate income. Please explain why this property was not used to generate income, or sold to keep it from being a liability.

C.  Comingling estate property with non-estate property (§16009):

• Schedule H transaction of $29,930.65 on July 15, 2022 shows payment to the Estate of Nathanial Phillips.  This is not only not a change in the form of assets (it is a disbursement that must be accounted for in Schedule C), but there is no evidence of a court order to disburse those funds to that Estate.  A supplement should explain every detail about this transaction, and the accounting will have to be amended to properly account for the transaction.

UPDATE FOR 6/10/24 HEARING – A. Not resolved by supplement.  Petitioner’s explanation is misleading, in that it presumes a gain in non-cash assets is an overall gain to estate value.  This is easily refuted by the Summary of Account, which shows a loss of cash of $83,903.27, compared to only a $78,741.90 gain in non-cash assets (i.e. securities).  This means the investments not only failed to benefit the estate overall, but actually cost the estate.  This is, objectively, not prudent.  These figures also do not take into account all the issues pointed out in discrepancy no. 3 above, which likely would worsen the loss.

B.  The explanation in the Supplement leaves the following questions unanswered: When was the tenant removed? How long after the tenant was evicted did the property sit vacant? Why could it not be rented out during that time?

C.  Supplement resolves, but the funds should be ordered returned to a conservatorship estate account, or distributed to the decedent’s estate account.

Recommended reductions to Attorney Becker’s Fee Request. Initial review of Attorney Becker’s fee request reveals two primary issues the Court should take into consideration when determining the reasonableness of the request:

1.  The bulk of the time billed was for work done by a paralegal at $200 per hour.  While this rate is not particularly offensive, most of the tasks performed were not for work that was “legal” in nature, but were for clerical tasks that this Court historically reimburses for at a much lower rate ($35-50/hr). 

2. A hefty portion of the legal work performed by both the attorney and paralegal was for work required to correct the multitude of errors in the previous accounting.  “[I]nefficient or duplicative efforts is not subject to compensation.”  (Ketchum v. Moses (2001) 24 Cal.4th 1122, 1132.)

UPDATE FOR 6/10/24 HEARING – It is recommended the Court accept the offered reduction in fees and consider the above issues to further reduce.