December 30, 2011 | Bulletin No. 988789.1

In Portico Management Group, LLC v. Harrison (--- Cal.Rptr.3d ----, Cal.App. 3 Dist., December 28, 2011), a California Court of Appeal considered whether an arbitrator’s judgment against a trust could be enforced. The Court ruled that it could not because a trust is a fiduciary relationship with respect to property, not an entity that can sue or be sued.

Facts

Alan Harrison and Wei-Jen Harrison, a married couple, owned an apartment complex called the Continental in Carmichael. When they divorced in 1999, they transferred ownership of the Continental to Harrison Children's Trust ("HCT"), a trust they had created for the benefit of their two daughters, with themselves as trustees. Following the Harrisons' separation, Wei-Jen Harrison, as "trustee asset manager" of HCT, entered into a purchase agreement to sell the Continental to Portico Management Group ("Portico"). However, Alan Harrison refused to sign the deed and closing documents.

Portico brought suit for breach of contract for failure to complete the sale and pursuant to the terms of the purchase agreement, moved to compel arbitration. In 2007, the arbitrator found for Portico on the breach of contract claim and ordered an award against HCT for Portico in the amount of $1,621,435.80. By this time, the Harrisons' now adult children had succeeded them as trustees of HCT. Alan Harrison moved to vacate the award. The court ruled that the arbitrator made a mistake in naming HCT as the judgment debtor, rather than Alan and Wei-Jen Harrison, that the award against HCT was not enforceable, and that the arbitrator's error was not subject to judicial review. Portico appealed.

Decision

The issue, the Court said, is whether a judgment against a trust is enforceable. The Court cited several case law precedents ruling that a trust is a "fiduciary relationship with respect to property," but not an entity that can sue or be sued.

The Court added that the Code of Civil Procedure defines a judgment debtor as "the person against whom a judgment is rendered." A trust is not a person, and therefore not a judgment debtor, the Court said. "Since the HCT is not a separate entity, does not itself hold title to any property, and is not a judgment debtor, a judgment against HCT is meaningless and cannot be enforced. To be enforceable against the trust property, the judgment should have been entered against those who held title to such property - the trustees."

Portico had avenues available to correct the arbitrator's "obvious error," but did not pursue them. It could have applied to the arbitrator to correct the award within 10 days of its service, or it could have petitioned the court to correct the award within 100 days. It did neither. "Having accepted and confirmed the arbitration award against HCT, without any attempt to have either the arbitrator or the court correct it to name the trustees as the proper parties, Portico is bound by the terms of the arbitration award," the Court ruled.

Further, courts generally do not review arbitrators' decisions for errors of law and fact because upon entering arbitration, the parties agree to some increased risk of error in exchange for a quick, inexpensive, conclusive resolution to their dispute. Therefore, the Court affirmed the trial court's judgment that the trust was not an entity that could be sued and the award against it could not be enforced.

Questions

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Linda M. Monje | 661.864.3800