by Morgan Wiener
Perhaps lost in the scandal and drama surrounding Donald Sterling’s offensive comments earlier this year and the now impending sale of the Los Angeles Clippers is the fact many of the issues in this saga turn on questions of trust law and the terms of a family trust.
The Clippers are owned by the Sterling Family Trust, of which Donald and his estranged wife, Shelly Sterling, served as co-trustees. However, following Donald’s offensive comments and rambling interviews given in the wake of the scandal, he was diagnosed with Alzheimer’s disease and declared mentally incapacitated. The determination of incapacity allowed Shelly to remove him as co-trustee and assume control over the trust. As the sole trustee, Shelly then negotiated the sale of the Clippers to former Microsoft CEO Steve Ballmer for $2 billion. Prior to the trial in this matter and Shelly’s assuming control as sole trustee, and perhaps in an attempt to avoid the current result, Donald had dissolved the trust. Also at stake are certain debts owed by the trust – if the sale to the Clippers does not go through, the trust could be in default on up to $500 million in loans.
At issue in the weeks-long probate trial about the proposed sale of the Clippers was whether Shelly was able to, and properly did, remove Donald as co-trustee of the trust. Los Angeles County Superior Court Judge Michael Levanas ruled that Shelly did have authority to enter into the sale, that the trust was unambiguous, and that the proposed sale of the team could go through. A written ruling has not yet been issued.
While the specifics of this case are unusual and headline grabbing, the underlying issues are quite common. Questions involving capacity, removal of trustees, division of duties among co-trustees, and termination of trusts are pervasive both in the drafting of trusts and in litigation involving trusts and trustees. While most practitioners will probably not encounter a trust that owns an NBA franchise and billions of dollars in assets, this case highlights the importance of considering these issues, making sure that clients understand the ramifications and impacts of including certain provisions in their trust documents, and the options available to trustees in a situation where a dispute has arisen or a trustee may be incapacitated.