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The disgorgement of profits is a remedy to prevent unjust enrichment. The determination of the amount of a defendant's profits attributable to wrongful conduct can be a difficult task. It involves questions of causation and remoteness, that is, how far to follow a chain of causation before deciding that the causal connection is too attenuated to justify a recovery. The presence or absence of but-for causation is not necessarily determinative of unjust enrichment. Moreover, in deciding whether the defendant's profits are properly attributable to misconduct, the court should consider not only justice between the parties but also the incentives to be created for others. The general rule applicable under California law to a trustee who has committed a breach of trust is that profits subject to disgorgement include any form of consequential gains or other secondary enrichment that is identifiable and measurable on the facts of the case and not unduly remote. The party seeking disgorgement has the burden of producing evidence permitting at least a reasonable approximation of the amount of the wrongful gain. Residual risk of uncertainty in calculating net profit is assigned to the wrongdoer.
Neil Kadisha served as the trustee of two trusts. The beneficiaries, Dafna Uzyel and her children Izzet and Joelle Uzyel (collectively the Uzyels), filed petitions for breach of trust against Kadisha and terminated the trusts. After a nonjury trial, the trial court awarded the Uzyels over $ 59 million in compensatory damages and disgorgement of profits, plus $ 5 million in punitive damages and over $ 13 million in attorney fees. Kadisha appeals the judgment, challenging the awards on several claims, the punitive damages, and the attorney fee award. The Uzyels also appealed, challenging the denial of relief on some of their claims, the denial of prejudgment interest on some claims, the punitive damages, and the costs award. These consolidated appeals raised several questions concerning a trustee's liability for breach of trust under Probate Code section 16440, subdivision (a).
Was tracing required for the disgorgement of profits made by the trustee through the breach of trust under Prob. Code, § 16440, subd. (a)(2)?
The court found that tracing was not required for the disgorgement of profits made by the trustee through the breach of trust under Prob. Code, § 16440, subd. (a)(2). The fact that an act was consistent with or even compelled by the duty of prudent investing did not excuse the trustee from liability for breach of the duty of loyalty, including liability for appreciation damages as lost profits under § 16440, subd. (a)(3). The trial court had no jurisdiction to vacate the modification of its statement of decision and judgment. The determination as to which of the statutory measures of liability was appropriate under the circumstances under § 16440, subd. (a), was reviewed for abuse of discretion. Although prejudgment interest was mandatory on an award of damages under § 16440, subd. (a)(1), the award of damages resulting from the trustee's use of trust funds to pay for his legal defense included excessive prejudgment interest. The denial of prejudgment interest on the amounts awarded on some of the beneficiaries' claims was error. The award of attorney fees to the beneficiaries was unauthorized because the trustee had reasonable cause to defend against the beneficiaries' claims.