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Fairness of the Agreement is Determined at the Time of Execution

The California Court of Appeal analyzed the validity and fairness of a buyout agreement. Allyn and Joline Ferguson bought a flat in London for $200,000 and put title in Trust. In 1990s, the Fergusons borrowed $210,000 from their attorney, Robert Yaspan, secured by a note on the flat. In 1995, the Fergusons and Yaspans entered into an agreement, whereby the Yaspans became 50% co-owners of the Trust, in exchange for assuming half of the Note and paying the Fergusons the equivalent of $200,000, which enabled the Fergusons to recover nearly all of their original purchase price for the flat and still own half of it. The agreement included a buyout provision, which provided that upon the death of both Fergusons or both Yaspans, the Trust would buy out the deceased parties’ interest at 50% of “a deemed total value of $650,000.” When the parties signed the agreement in 1995, Allyn and Joline Ferguson were 70 and 68 years old, and the Yaspans were 49 and 47. A year after her husband died in 2010, Joline Ferguson’s lawyer filed a petition to rescind the agreement.

The trial court upheld the agreement, concluding Joline’s lawyer’s petition was barred, both by the four-year statute of limitations, and also on the merits, finding: (1) Mr. Yaspan had been representing the Fergusons at the time the agreement was signed (2) the transaction did not comply with California Rules of Professional Conduct, rule 3-300 and was presumptively unfair under Probate Code section 16004, but (3) Mr. Yaspan had rebutted that presumption by demonstrating the agreement was fair and reasonable, and that the Fergusons had independent counsel who had explained the agreement and its implications to them. The Court of Appeal affirmed.

With respect to the statute of limitations, the Court of Appeal explained that, given the fiduciary relationship between the parties, “the statute of limitations clock does not begin to tick until the [putative plaintiff] has knowledge of notice of the ac constituting a breach of fidelity.” The Court further stated, “The existence of the fiduciary relationship limits the plaintiff’s duty of inquiry by eliminating the plaintiff’s usual duty to conduct due diligence, but it does not empower that plaintiff to sit idly by when facts sufficient to arouse the suspicions of a reasonable [person] come to his [or her] attention.” The Court held Joline’s rescission claim was time-barred, stating: “Once the Fergusons’ rust attorney explained the significance of that language, the Fergusons had before them sufficient facts to raise the voidability argument that she waited until 2011 to assert in her petition.”

With respect to the validity of the agreement, the Court of Appeal held Mr. Yaspan was acting as the Fergusons’ attorney when they entered the agreement, such that there was presumption of undue influence under Probate Code § 16004 that could only be rebutted by showing that “the dealing was fair and just” and the client was fully advised. Joline’s lawyer argued the agreement was unfair and unjust because the buyout provision guaranteeing the surviving couple the right to buy the non-surviving couple’s 50% interest in the Trust for a fixed price of $325,000 unfairly benefited the Yaspans over the Fergusons given that (1) the value of the flat was more likely to appreciate than depreciate over time (making the $325,000 buyout price an unreasonably low price), and (2) the Fergusons were less likely than the Yaspans to be the beneficiary of this windfall because they were older an thus statistically more likely to die first. Joline further argued the trial court erred by giving insufficient weight to the statistical likelihood that the buyout provision would favor the Yaspans.

Rejecting Joline’s lawyer’s arguments, the Court of Appeal held that the fairness of an agreement is determined at the time of the signing, and that because unknown variables were obvious to the parties at the time of execution, the buyout agreement was fair and valid:

“It is the black letter law that whether a contract is fair… is determined with reference to the time when the contract was made and cannot be resolved by hindsight…” (Coon v. Nicola (1993) 17 Cal.App.4th 1225, 1238, quoting Yen Sue Chow v. Levi Strauss & Co. (1975) 49 Cal.App.3rd 315, 325; O’Connell v Lampe (1929) 206 Cal. 282, 285 [looking to fairness at “the inception of the agreement”.]) This case confirms why this focus makes sense. The buyout provision could be either a boon or a curse to the Fergusons depending on two variables unknown to the parties in 1995: (1) whether the flat would appreciate or depreciate in value (which could make the locked-in $325,000 buyout price a good or bad deal); and (2) whether the Fergusons or Yaspans would live longer. Although the buyout provision could to this day be better for the Fergusons if the property provision could to this day be better for the Fergusons if the property suddenly declines in value or if Joline outlives both Yaspans, Joline asks us to declare the Agreement invalid based upon the statistical likelihood of the various scenarios. We decline to do so. Injecting actuarial and other statistical studies into the assessment of fairness not only transgresses the “blackletter law” discussed above, it is also particularly inappropriate here where both variables – the parties’ respective ages and the elasticity of real estate values – were obvious to the parties at the time the Agreement was signed. For these reasons, the trial court did not err in evaluating the Agreement’s terms based what was known to the parties in 1995.

In re Ferguson v. Yaspan (2015) 233 Cal.App.4th 676