By Caroline Heindel, of Greenberg Glusker Fields Claman & Machtinger LLP
In a recent, published opinion, the California Court of Appeal upheld a Los Angeles Superior Court’s decision, directing Rochelle H. Sterling, as sole Trustee of the Sterling Family Trust, to sell the Los Angeles Clippers to former Microsoft CEO Steven Ballmer for an unprecedented $2 Billion. The deal with Mr. Ballmer was made in the wake of the public release of an audio recording of Mrs. Sterling’s husband Donald Sterling voicing “‘deeply offensive, demeaning, and discriminatory views toward African Americans, Latinos, and “minorities” in general.’” The audio recording had prompted the NBA to impose a lifetime ban and a $2.5 Million fine on Mr. Sterling and to set a hearing on a vote to terminate the Trust’s ownership of the franchise.1 The appellate court found that the evidence before the probate court “overwhelmingly” supported both Mrs. Sterling’s removal of her husband as Co-Trustee of the Trust for incapacity and the conclusion that “exigent circumstances” supported a sale of the Clippers to prevent “extraordinary loss” to the Trust.
The Court first found that by characterizing the facts on appeal in a manner “directly contrary to the probate court’s findings,” Mr. Sterling had “forfeited” any argument that he was improperly removed as Co-Trustee of the Trust.2 For example, while the probate court found that Mr. Sterling’s expert had presented “no credible evidence” that the two physicians who examined him and deemed him incapacitated had breached any professional duties to Mr. Sterling, he nonetheless argued on appeal that his expert had testified to an “acceptable standard of care” with respect to patient disclosure, and that he “should have been told the purpose of the assessment.” Similarly, despite the probate court’s finding that there was no “‘credible or compelling evidence’” that Mr. Sterling had been distracted or under stress during the examinations, he argued on appeal that he had been “distracted” and “preoccupied.”
The Court next found that even if Mr. Sterling had not waived his arguments based on sufficiency of the evidence, the evidence below “overwhelmingly showed” that he was properly removed as Co-Trustee for incapacity both under the terms of the Trust and under California Probate Code sections 810 and 811. The testimony of the two physicians who examined him “amply supported” the conclusion that Mr. Sterling is “incapable of managing his affairs” under the criteria set forth in Section 811, the relevant criteria under the Trust. Both physicians testified to Mr. Sterling’s multiple impairments, including that he was “substantially unable to manage his finances” or to “resist fraud and undue influence.” The Court found that those impairments correlated to his ability to manage the assets of the Trust which, in addition to the Clippers, includes 150 apartment buildings and a hotel.
The Court then affirmed the probate court’s reliance on California Probate Code section 1310(b) to direct Mrs. Sterling to sell the Clippers to Mr. Ballmer notwithstanding any future appeal by her husband. Section 1310(b) provides that, notwithstanding an appeal of a judgment or order, a trial court may direct a fiduciary to exercise its powers “for the purpose of preventing injury or loss to a person or property” as if no appeal were pending, and that all acts of the fiduciary pursuant to that direction are valid regardless of the outcome on appeal. The Court found that the “extraordinary” circumstances here satisfied the “strict standard” set forth by the California Supreme Court in Gold v. Superior Court, 3 Cal.3d 275 (1970) for application of the statute.
The Court rejected Mr. Sterling’s argument that Section 1310(b) does not apply where the risk of loss is purely monetary and the result would be the loss of a unique asset but that the statute was intended solely to “‘protect the well-being of those deemed vulnerable by the law.’” The Court found that “[n]either the plain language of the statute nor its legislative history” supported this argument. First, the statute may be invoked to prevent a “substantial monetary loss.” Here, the Trust owned a $2 Billion asset which Richard Parsons, interim Clippers’ chief executive officer, testified was facing an imminent “‘death spiral,’” creating a potential loss to the Trust of $400 Million if the sale to Mr. Ballmer did not close. Sponsors threatened to pull out, season ticket holders threatened not to subscribe, and the Clippers’ head coach and several players threatened not to perform if the team was not sold. Second, there is no limitation on the application of Section 1310(b) to a “unique asset” such as an NBA franchise. Third, the statute does not expressly limit its application to “‘those deemed vulnerable by law.’” However, even if it was so limited, Mr. Sterling could be characterized as “vulnerable under the law” given that he was “deemed to be at risk of making serious lapses of judgment” and found “unable to manage his finances or to resist fraud and undue influence.”
Finally, the Court confirmed that Mr. Sterling’s revocation of the Trust after the deal with Mr. Ballmer was entered did not preclude Mrs. Sterling from consummating the sale under her “winding up” powers. Probate Code section 15407(b) provides that a trustee’s powers do not end at the trust’s termination but instead may be exercised to wind up administration of the trust consistent with the trust’s purpose and the beneficiaries’ interests. Thus, a trustee may exercise winding up powers “‘as are reasonable and appropriate for the preservation of trust property,’” including increasing the trusts assets. In this case, the Court found Mrs. Sterling had “acted in the beneficiaries’ best interests” when she sold the Clippers for $2 Billion, an amount “higher than [she] and her advisors thought possible” and which had caused Mr. Sterling “to congratulate her.” In addition, the probate court had found that the sale to Mr. Ballmer was “necessary to preserve the unusually high sale price” and “afforded the trust a $400 million benefit over the next best price and substantially more than the team likely would have received at an NBA auction.”
The Court of Appeal’s decision became final on December 16, 2015. The deadline for Mr. Sterling to petition the California Supreme Court for review of the decision is December 28, 2015.
Caroline Heindel specializes in the areas of entertainment and general commercial litigation. During her career, Ms. Heindel has successfully resolved numerous disputes in state and federal courts and in arbitrations on behalf a wide variety of individual and corporate clients in disputes involving breach of contract, breach of fiduciary duty, intellectual property, and fraud.
1. The Trust had owned the Clippers through its ownership of 100% of the stock in the corporation that owned the team.
2. The Court found additional procedural defects in Mr. Sterling’s appeal, including that he failed to cite to the record in support of his factual assertions and failed to cite any legal authority for his request that the sale to Mr. Ballmer be “undone.”
