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Appellate court recognizes the “impossibility doctrine” in trusts

California’s First District Court of Appeals has applied the doctrine of impossibility to a trust case in Schwann v. Permann. The doctrine of impossibility generally excuses one party from performing a specific condition of a contract, or in this case, a trust, if the party can no longer perform that condition due to circumstances beyond the party’s control. In other words, performance has become impossible. California used to recognize the impossibility doctrine in probate law as it applied to “conditions precedent” to receiving a bequest of some sort until the legislature repealed the law in 1982. 

Background of the case

Walter Permann had a successful business in the 1990’s called Control Master Products. He wanted to reward three of his top employees, Schwan, Johnson and Ostrosky, if they stayed with the company even after Walter and his wife died. To accomplish this goal, Walter created a trust in 1999, which distributed a gift to these three employees if they met his condition. 

In 2008, Walter decided to sell the business assets and changed the name and focus of the business he retained. Part of the sales contract required all employees of Control Master Products to be fired and re-hired under the new owners, IEWC. IEWC hired Schwan and Johnson, but Ostrosky had retired the year before due to health issues. Ostrosky did still work occasionally for Walter in his new endeavor. Despite this change, Walter still made comments to all three about being “taken care of” in his trust.

An impossible condition

Once Walter died, Schwan, Ostrosky and Johnson petitioned the probate court to strike the employment condition from the trust on the grounds of impossibility, among others. Other trust beneficiaries contested the petition. After a bench trial, the probate court agreed that Schwan and Johnson had a valid claim if they survived Walter’s wife, Verla, but that Ostrosky did not meet the conditions because she retired before the sale of the business.

The appellate court reviewed the legal matter of applying the doctrine of impossibility to a probate case. The court noted that the legislature had repealed the statute on this issue in 1982, but did not find that conclusive. In fact, the court surmised that the legislature may have removed the statute because it restricted the application of the doctrine. The court decided that the doctrine survived as a legal canon and could apply to this case.

The court focused on intent, as it does with most probate matters. Did Walter intentionally leave his trust as it was, knowing his three employees could not meet the conditions therein? Or did he think the conditions would no longer apply, and his employees would be “taken care of?”

The court took the approach that Walter’s intent was to encourage his employees to work for him as long as he owned and ran the business as a reward for their loyalty and assistance. Therefore, Johnson and Schwan had a valid claim to the trust. The court also gave Ostrosky the chance to re-argue her case before the probate court regarding whether her continued part-time work for Walter satisfied the condition. 

How could this have been avoided?

Walter Permann should have updated his trust after he sold his business. He could have enlisted an attorney’s help in revising the trust language to clarify whether he still intended for Schwan, Johnson and Ostrosky to receive a distribution from his trust now that the circumstances had changed. Anytime you have a major change in your life, be sure to review your own estate plan to make sure it still accomplishes your wishes.