Getty v. Getty

Citations: 28 Cal. App. 3d 996; 105 Cal. Rptr. 259; 1972 Cal. App. LEXIS 814Docket: Civ. 29688

Court: California Court of Appeal; November 27, 1972; California; State Appellate Court

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Gordon Peter Getty appeals a judgment favoring his father, J. Paul Getty, regarding the allocation of stock dividends from a 1934 inter vivos spendthrift trust. The appeal raises two main issues: the proper allocation of stock dividends to the trust’s income versus corpus and the percentage of trust assets affected by J. Paul Getty’s waiver of income. Gordon argues that the stock dividends should have been treated as income, claiming J. Paul was not a trustor, that his waiver included the dividends, and citing a Pennsylvania rule favoring such treatment. However, the court’s findings highlight the trust's creation context, noting that George F. Getty, the previous owner of the family business, left a substantial estate to his wife, Sarah, and that J. Paul Getty, as a minority shareholder, faced operational constraints. After a series of financial missteps, J. Paul sought to relieve his burdens by having Sarah place her stock in trust, agreeing to waive income from his contributions to enhance their value. This arrangement aimed to instill a sense of fiduciary responsibility in J. Paul, ensuring a conservative approach to managing the family business for future generations. The court ultimately supported the judgment based on these facts.

The arrangement aimed to preserve and enhance a capital corpus for distribution to J. Paul's descendants while providing him with cash income during his lifetime. Sarah’s gift was contingent upon J. Paul adding his own assets to the fund, promoting cautious management of the oil business established by her late husband by imposing fiduciary duties on J. Paul. Both parties intended to maintain control of the business as a growing enterprise without dissipating that control. 

In 1934, J. Paul owned all capital stock of George F. Getty, Incorporated, while Sarah held five promissory notes from the corporation totaling $2.5 million. On Christmas Day 1934, they entered an oral agreement to establish an irrevocable inter vivos spendthrift trust, with Sarah contributing the notes and J. Paul contributing approximately $1 million in stock. The trust stipulated that J. Paul would receive income from Sarah’s contribution for life and waive income from his contributions.

On December 31, 1934, J. Paul received the notes from Sarah and executed a 'Declaration of Trust,' designating him as the sole income beneficiary during his lifetime, with subsequent income distribution to his children and grandchildren. That day, he restructured one note and transferred shares of stock to the trust, with the total trust corpus consisting of $2,150,000 in promissory notes from Sarah and 3,500 shares of stock from J. Paul, valued at $868,420. J. Paul incurred a gift tax on these shares. The Declaration of Trust allowed J. Paul to waive his right to any part of the net income.

J. Paul irrevocably waived his right to receive net income from 3,500 shares of George F. Getty, Incorporated, as outlined in a written instrument related to an oral agreement with Sarah on December 25, 1934. This waiver stipulated that the net income would be distributed by the trustee to designated beneficiaries in accordance with the trust's provisions upon J. Paul's death. Aside from a waiver of certain income in 1938 and 1939, J. Paul did not waive income from other trust assets. Both he and Sarah interpreted the waiver to apply solely to income from the 3,500 shares and any income derived from them, with the intent that such waived income would go to beneficiaries as if J. Paul were deceased. They did not intend for stock splits or dividends to count as income, and all income-related terms were understood to refer only to cash, with other forms of accretion becoming part of the trust corpus.

The purpose behind J. Paul's waiver was to facilitate his contribution to the trust, ensuring he had no beneficial interest in the assets while holding legal title. Both parties aimed to protect the trust fund and maintain the integrity of the corpus, ensuring that it would not be diminished by income distribution. This intent was confirmed by the handling of stock dividends and splits from Getty Oil Company between 1951 and 1957, which resulted in additional shares being added to the trust corpus, while the fundamental interests of stockholders remained unchanged. All stock received from dividends, splits, reconstitution, and spin-offs was placed into the trust corpus and treated as such at all times.

No part of the trust has been treated or distributed as income. All cash dividends received by J. Paul, acting as trustee, were distributed according to the trust's provisions. Gordon does not contest the evidence supporting the trial court's findings but argues that the court should weigh the documentary evidence. However, when conflicting evidence exists, an appellate court will uphold the trial court's conclusions if there is substantial supporting evidence. Gordon's claim that J. Paul was not a trustor is rejected as unfounded. The trust was established through J. Paul's unilateral declaration and subsequent actions, with Sarah's concurrence, making him both trustee and trustor.

The creation of the trust is also affirmed by a prior court decision, which established that both Sarah and J. Paul were involved in its formation. Gordon's argument that J. Paul's waiver of net income included stock dividends misinterprets the trust's purpose. The trial court found that the intent behind the trust was to maintain control of the Getty Oil Company by making it the majority stockholder. J. Paul had significant powers as trustee, with the trust only terminating upon his and his children's deaths, indicating no intention to benefit Gordon and his brothers.

Sarah's will established testamentary trusts for her grandchildren, who would receive income until age 30, ensuring that profits were reinvested to maintain control over the oil companies. Allocating stock dividends to corpus was essential to preserve the trust's controlling interest. J. Paul's dual role as trustor and trustee provides compelling evidence of his intent to treat stock dividends as corpus. The evidence shows that all stock dividends were consistently allocated to the trust’s corpus following its creation. Gordon's assertion that stock dividends were largely unknown at the time of the trust's creation does not support his argument but instead indicates a reasonable rationale for their omission from the term 'net income' in the trust documents.

Stock dividends are typically declared during periods of prosperity, but the trust in question was established during an economic depression with deflated values. Gordon's argument regarding Article IV is invalid, as Article III mandates the trustee to first pay all taxes and assessments, meaning 'entire net income' in Article IV refers to the remaining amount after such payments. Gordon's interpretation of 'net income' in the waiver is also flawed; the waiver explicitly pertains to the net income from the 3,500 shares of George F. Getty, Incorporated, which J. Paul interpreted as 'cash.' The term 'net income' should adhere to its common understanding unless specified otherwise in the document. 

Gordon further claims that stock dividends should mainly be allocated to income based on Pennsylvania law for trusts established before 1941. However, the court emphasized that the trustor's intent overrides any presumptions from this rule. The court concluded that J. Paul's allocation of stock dividends aligned with this intent, rendering further discussion on the Pennsylvania rule unnecessary. 

Gordon's second major contention is the trial court's adjustment of the trust assets ratio related to J. Paul's income waiver from 36 percent to 20.70776 percent. The trial court established that the trustee had the authority to manage and reinvest the trust corpus, which J. Paul exercised through corporate reorganizations. By 1958, the trust owned 7,948,272 shares of Getty Oil Company stock. Of these, J. Paul's waiver of income applies to 1,645,900.18 shares from the 3,500 shares, with 1,173,126.29 shares being his contributions to the trust. As of December 31, 1966, the breakdown of trust assets indicated that J. Paul waived income on a portion of the shares while retaining rights to income on the majority. Gordon mistakenly believes the initial 36 percent allocation must remain unchanged throughout the trust's duration, which the court rejected.

The argument presented is deemed unmeritorious. The waiver executed by J. Paul pertained solely to the income from the 3,500 shares he contributed, not a specific percentage of the trust corpus. By 1958, those shares had transformed into 1,645,900.18 shares of Getty Oil Company stock due to various corporate changes, while the remainder of the corpus included 6,302,371.82 shares from promissory notes contributed by Sarah. The trust's value significantly increased, reaching nearly half a billion dollars at trial, largely due to a 1935-1936 transaction involving the acquisition of shares from several companies and the Tidewater option in exchange for canceled notes. Despite J. Paul’s contributions growing at a slower rate, this did not entitle Gordon to income from any corpus portion not waived by J. Paul. The issue of income waiver is resolved by collateral estoppel. J. Paul resigned as trustee in 1941 but returned to that role in 1948 following the resignation of his successors, with a court judgment settling and approving the trustees' accounts. The 1948 account indicated that income distribution was 20.70776% to the sons and 79.29234% to J. Paul, binding Gordon under collateral estoppel as he was represented by a guardian ad litem during that action. The judgment is upheld, and a petition for rehearing was denied on December 27, 1972. Additional notes clarify that all beneficiaries were involved in the proceedings, that simplifications regarding shares were stipulated, and that the irrevocability of the trust was established in 1940. The trustee had the authority to classify stock dividends as corpus, aligning with the trust's objectives. The trustee was required to distribute the net income annually or more frequently as conditions allowed.

The Pennsylvania rule regarding the distribution of income or proceeds from trust property to life tenants and remaindermen focuses on the timing of earnings rather than the nature of the dividend. If a dividend or distribution is derived entirely from earnings generated before the life interest began, it is allocated entirely to the trust corpus, regardless of whether it is in cash or stock. Conversely, if the earnings are entirely from the period after the life interest commenced, the entire distribution is designated as income. In cases where earnings are accrued both before and after the life interest, the distribution is apportioned between the life tenant and remainderman based on their respective interests.

Gordon claims that Mr. Walsh's evidence was relevant, but the trial court declined to make a finding on this matter. In 1935, promissory notes totaling $2,150,000 were sold, and the proceeds were utilized to acquire all stock of the George F. Getty Oil Company, George F. Getty Petroleum Corporation, and an option for shares in Tidewater Associated Oil Company. A statutory consolidation on December 30, 1936, formed a new entity, George F. Getty, Inc., which acquired the net assets of the three companies. J. Paul, as trustee, exchanged stock from George F. Getty, Incorporated for shares of the new corporation, leading to a transformation of the original $2,150,000 notes into 35,779.775 shares of George F. Getty, Inc.

In May 1946, George F. Getty, Inc. merged with Pacific Western Oil Corporation, resulting in a stock exchange at a ratio of 15.5 to 1. J. Paul exchanged his shares, resulting in 144,833.9375 shares from waived income and 554,588.0625 shares from unwaived income, totaling 699,422 shares by May 1946. In 1950, Pacific Western amended its capital structure to convert part of its stock into preferred shares, maintaining the stockholders' interests while issuing 699,422 preferred shares to the trust. The company was renamed Getty Oil Company in 1956 and, in 1958, the company offered a one-for-three exchange of common stock for preferred stock, resulting in J. Paul receiving 233,140 shares of common stock.

The valuation on December 31, 1934, indicated that the 3,500 shares were worth $1,218,420; combined with the notes, the trust assets totaled $3,369,420. By the time of the appeal's oral argument, the trust was reportedly valued at around one billion dollars.