City of Atascadero v. Merill Lynch, Pierce, Fenner & Smith, Inc. (68 Cal. App. 4th 445, 1998)

Opinion

McGUINESS, J.

This appeal arises from the wreckage of the Orange County bankruptcy. Appellants are 14 California cities and local agencies who deposited funds with the Orange County (the County) Treasurer for investment.in the County Investment Pools (the Pool), a statutory investment trust. After the Pool collapsed in December 1994 and the County declared bankruptcy, most Pool participants elected to settle with the County by releasing their claims against the County and assigning to the County any claims they had against third parties in exchange for a contingent, contractual right to participate in any recovery the County might obtain from its various lawsuits against third parties. Appellants opted not to waive or release their rights to proceed on direct claims against the County and third parties. They then proceeded to bring suit against Merrill Lynch, Pierce, Fenner & Smith, Inc. (Merrill Lynch), and other entities and individuals associated with Merrill Lynch.

Appellants now appeal from entry of judgment in favor of respondents following the sustaining of a demurrer without leave to amend to their second amended complaint. Appellants contend they have properly pleaded causes of action against respondents based on breaches of duties owed directly to them, separately and independently of any duties respondents owed to the Pool or its trustee. Respondents argue that appellants’ claims against them are actually claims seeking recovery for injury to the trust property of the Pool itself; and, as such, they must be made not by appellants, as beneficiaries of the trust, but by the trustee himself as the sole real party in interest. On the basis of our review of the applicable principles of the law of trusts, considered in light of both the controlling stipulations of the County as trustee and the decisions of the federal bankruptcy court, we conclude that appellants have pleaded facts in their second amended complaint sufficient to state causes of action on direct claims for relief against respondents. We therefore reverse the judgment and decision of the trial court sustaining the demurrer.

I. Factual and Procedural Background

Under applicable California law, California counties are authorized to accept funds from cities, counties, and other government agencies or entities for deposit in trust. (Gov. Code, §§ 27100.1, 53684.) Pursuant to this law, the Pool was formed by the County and administered by the County Treasurer in order to invest.excess funds of various local agencies. Once public entities deposited their funds into the Pool, a trust was created under California law, and the County itself became the trustee of Pool deposits held in trust by the County Treasurer on behalf of the depositors. (§§ 27100.1, 53684; In re County of Orange (Bankr. CD.Cal. 1996) 191 B.R. 1005, 1013-1018; In re County of Orange, supra, 183 B.R. at pp. 596-597, 605-606.)

Appellants are 14 of the nearly 200 governmental entities (Pool Participants) that deposited funds into the Pool for investment by the County Treasurer, Robert L. Citron. By late 1994, approximately $7.6 billion was invested in the Pool, $200 million of which was deposited by appellants alone. The County implemented a highly speculative investment strategy that placed principal at risk with little liquidity to provide protection from market volatility. Merrill Lynch acted as securities and financial broker and adviser for the County in these transactions. In December 1994, the Pool’s investment scheme collapsed. Ultimately, on December 6, 1994, the County filed for bankruptcy protection under chapter 9 of the United States Bankruptcy Code. {In re County of Orange, supra, 183 B.R. at p. 596.) Appellants collectively suffered the loss of a large portion of their invested funds.

On January 12, 1995, shortly after filing for bankruptcy, the County brought suit against Merrill Lynch in bankruptcy court. In mid-1995, the County entered into a settlement agreement (the Comprehensive Settlement Agreement, or CSA) with the various local governmental entities, districts, and public agencies that had deposited funds in the Pool (identified in the CSA as “Non-County Pool Participants”). Under the CSA, the County agreed to return to all these Pool Participants specified portions of the funds they had deposited into the Pool, amounting to approximately 77 percent of those funds. The CSA required the Pool Participants to make a choice as to the remainder of their claims, or the “Deficiency Amount.” The large majority of Pool Participants chose “Option A,” pursuant to which they (a) settled any claims they had against the County for their losses, and (b) expressly assigned to the County “any and all” additional claims they may have had against third parties, in return for a specified share of the net litigation proceeds that might be realized as a result of the County’s pursuit of such claims itself. Appellants chose “Option B,” pursuant to which they (a) retained all their rights to proceed directly against the County for the Deficiency Amount, and (b) reserved and retained all claims and rights to proceed independently against third parties. Thus, the Option B Pool Participants did not assign to the County any of their claims against third parties, including Merrill Lynch. Instead, they retained their right to pursue such claims independently.

The bankruptcy court entered its order authorizing and approving the CSA on May 2, 1995. On October 25, 1995, the County filed a second amended complaint against Merrill Lynch in bankruptcy court. In its amended complaint against Merrill Lynch, the County made clear that the only direct claims of any Pool Participants it was pursuing were those specifically assigned to it by the Option A Pool Participants, and that it was pursuing such claims as the assignee of the Option A Pool Participants.

Meanwhile, in October 1995, each of the appellants proceeded to file suit in the bankruptcy court against the County pursuant to its rights under Option B, alleging breaches of trust and fiduciary duty and seeking damages for its losses from the collapse of the Pool. On May 16, 1996, under the jurisdiction of and with the express approval of the bankruptcy court, the County and appellants negotiated a settlement agreement (the “Stipulation re Dismissal of Adversary Proceeding and Resolution of All Claims of Option B Pool Participants Against the County,” or Stipulation).

In the Stipulation, appellants agreed to release their claims against the County for their Pool investment losses, in return for the County’s agreement to pay appellants (a) an additional $7.5 million, (b) County warrants in the principal amount of $8 million at interest of 6.5 percent per annum, and (c) the first $9 million of net litigation proceeds from the County’s own third party litigation. In addition, the Stipulation expressly stated that appellants “can preserve their direct claims against third parties,” such as Merrill Lynch. In this regard, the Stipulation provided that “[t]he County shall not . . . give any third party . . . any release of liability such third party may have to any Settling Option B Pool Participant on account of any direct claim that a Settling Option B Pool Participant may have, if any, against any third party” on various grounds. The County expressly agreed that it “shall not assert any claim to any proceeds recovered or determined by a court to be recoverable by Settling Option B Pool Participants, if any, on such direct claims. . . On the other hand, the Stipulation also reserved the rights of both the County and appellants with regard to their separate third party litigation,* ***** and stated that “[t]he parties reserve for future determination whether or to what extent the Settling Option B Pool Participants can assert any claims against third parties alleged to be owned by or held in any trust which is alleged to be applicable to the deposits of the Settling Option B Pool Participants with the Pools. ...” In short, while the Stipulation provided that appellants retained their “direct claims against third parties,” the County also retained its right to assert claims for itself or the Option A Pool Participants against those same third parties.

Appellants initially filed their complaint against Merrill Lynch on September 15, 1995, in San Francisco Superior Court. On the motion of Merrill Lynch for change of venue, the case was transferred from San Francisco to Contra Costa County on February 14, 1996. On April 12, 1996, appellants filed a first amended complaint in the Contra Costa County Superior Court, seeking compensatory and punitive damages for losses in excess of $80 million. In addition to alleging Merrill Lynch had breached various legal duties owed directly to appellants—breach of fiduciary duty, aiding and abetting a breach of fiduciary duty, fraud and deceit, conversion, civil liability for receiving stolen property under Penal Code section 496, negligent misrepresentation and violation of RICO—the first amended complaint made several claims alleging that Merrill Lynch had violated obligations to the Pool as a trust and to the County as trustee, and that the trustee was not properly representing appellants’ interests as trust beneficiaries. Appellants also filed a parallel complaint in federal court in November 1995. Merrill Lynch had not responded to either complaint as of September 1996. On September 17, 1996, appellants voluntarily dismissed the federal court action without prejudice, in order to pursue their litigation in the single forum of the state court.

On October 11, 1996, respondents filed a demurrer to appellants’ first amended complaint. Respondents’ demurrer contended that, as beneficiaries of the statutory Pool trust, appellants were not real parties in interest with standing to pursue causes of action against Merrill Lynch for injury to trust property. Because the County in its capacity as trustee of the Pool was already pursuing claims against Merrill Lynch in a separate action, respondents argued appellants’ lawsuit should either be dismissed or stayed. In opposing the demurrer, appellants argued (a) they were pursuing their own “direct claims” against Merrill Lynch and were the only parties with standing to pursue such claims; and (b) they were also the real parties in interest with respect to the trust claims because the County had failed to pursue those claims on appellants’ behalf.

At oral argument on respondents’ demurrer to the first amended complaint, appellants argued their claims against Merrill Lynch were legally and factually separate and distinct from those of the County, because the relationship of Merrill Lynch with the County was different in substance from Merrill Lynch’s relationship with appellants. Thus, while Merrill Lynch managed the Pool portfolio for the County and made investments for it, it was the alleged misrepresentations of Merrill Lynch to appellants that induced them to invest in the Pool in the first place. On November 5, 1996, the trial court sustained the demurrer with leave to amend. The trial court ruled that appellants’ “trust claims cannot be prosecuted in this action” because the Trustee was already prosecuting an action on such claims against Merrill Lynch, and any “[challenges to the jurisdiction or authority of [the Trustee of the Pool] must be made by [appellants] in the pending federal action.” However, the trial court also ruled appellants could “prosecute direct actions to recover damages, other than losses sustained by the trust,” and it permitted appellants to amend their complaint to allege “independent, separate claims for damages . . . with specificity.”

On December 2, 1996, appellants filed their second amended complaint. Like the earlier complaint, this alleges causes of action for fraud and deceit, conspiracy to defraud, negligent misrepresentation, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, civil liability for receiving stolen property (Pen. Code, § 496), and violation of RICO, and seeks recovery of $80 million for lost investment principal, interest and consequential damages, together with all fees, profits and commissions realized by Merrill Lynch “which are attributable to [appellants’] own deposits in the [County ¡Pool],” treble and punitive damages. The second amended complaint greatly expands the factual allegations regarding Merrill Lynch’s alleged oral and written misrepresentations made directly to appellants, individually and as a group, and makes additional allegations that Merrill Lynch had direct broker-dealer relationships with three of the fourteen appellants: the cities of Milpitas, Mountain View, and Santa Barbara. In addition, the second amended complaint details the terms of the CSA and the Stipulation reserving appellants’ right to bring direct claims against third parties, such as Merrill Lynch, and expressly alleges that appellants “are pursuing their direct claims to recover damages,” and that “[t]he damages sought by [appellants] are damages other than losses sustained by the trust, which are being prosecuted in the federal action brought by Orange County against Merrill Lynch.”

Respondents filed a demurrer to appellants’ second amended complaint, again arguing that appellants lacked standing to pursue their claims for recovery of damages attributable to their investments in the Pool trust. The trial court sustained respondents’ demurrer without leave to amend, ruling as a matter of law that appellants had failed to allege facts sufficient to state a cause of action against respondents because, as trust beneficiaries, there were no real parties in interest with standing to sue Merrill Lynch for losses attributable to their investments in the Pool trust. Judgment in favor of respondents was entered on March 17, 1997, and this appeal followed.

On June 3, 1998, subsequent to the briefing in this appeal, the County settled its lawsuit against Merrill Lynch for $400 million. As a result of this settlement, appellants will receive the $9 million that the County previously agreed to pay appellants under the Stipulation settling appellants’ lawsuit against the County. Pursuant to the County’s agreements with appellants in the CSA and Stipulation, the County did not release appellants’ direct claims against Merrill Lynch in this action.

II. Standard of Review

A demurrer tests the pleading alone, and not the evidence or the facts alleged. Thus, a demurrer will be sustained only where the pleading is defective on its face. In our review of this judgment of dismissal sustaining a demurrer without leave to amend, we are guided by well-settled principles governing the testing of the sufficiency of a complaint. Although a demurrer makes no binding judicial admissions, it provisionally admits all material issuable facts properly pleaded, unless contrary to law or to facts of which a court may take judicial notice. On the other hand, it does not admit contentions, deductions or conclusions of fact or law alleged in the challenged pleading. (Blank v. Kirwan (1985) 39 Cal.3d 311, 318 [216 Cal.Rptr. 718, 703 P.2d 58]; White v. Davis (1975) 13 Cal.3d 757, 765 [120 Cal.Rptr. 94, 533 P.2d 222]; Serrano v. Priest (1971) 5 Cal.3d 584, 591 [96 Cal.Rptr. 601, 487 P.2d 1241, 41 A.L.R.3d 1187]; Daar v. Yellow Cab Co. (1967) 67 Cal.2d 695, 713 [63 Cal.Rptr. 724, 433 P.2d 732]; Dale v. City of Mountain View (1976) 55 Cal.App.3d 101, 105 [127 Cal.Rptr. 520]; 5 Witkin, Cal. Procedure (4th ed. 1997) Pleading, §§ 899-903, pp. 357-364.) To the extent there are factual issues in dispute, however, this court must assume the truth not only of all facts properly pled, but also of those facts that may be implied or inferred from those expressly alleged in the complaint. (White v. Davis, supra, 13 Cal.3d at p. 765; Marshall v. Gibson, Dunn & Crutcher (1995) 37 Cal.App.4th 1397, 1403 [44 Cal.Rptr.2d 339]; Rose v. Royal Ins. Co. (1991) 2 Cal.App.4th 709, 716 [3 Cal.Rptr.2d 483].)

On appeal, the trial court’s decision to sustain the demurrer without leave to amend and subsequent judgment are subject to review for abuse of discretion. As a general rule, if there is a reasonable possibility the defect in the complaint could be cured by amendment, it is an abuse of discretion to sustain a demurrer without leave to amend. Nevertheless, where the nature of the plaintiff’s claim is clear, and under substantive law no liability exists, a court should deny leave to amend because no amendment could change the result. The burden is on the plaintiff to demonstrate the manner in which the complaint might be amended, and the appellate court must affirm the judgment if it is correct on any theory. (Code Civ. Proc., § 472c; Hendy v. Losse (1991) 54 Cal.3d 723, 742 [1 Cal.Rptr.2d 543, 819 P.2d 1]; Blank v. Kirwan, supra, 39 Cal.3d at p. 318; Berkeley Police Assn. v. City of Berkeley (1977) 76 Cal.App.3d 931, 942-943 [143 Cal.Rptr. 255].)

III. Discussion

In sustaining the demurrer to appellants’ second amended complaint, the trial court accepted respondents’ contention that appellants are not the real parties in interest and, thus, have no standing as a matter of law to pursue claims against Merrill Lynch for losses sustained as a result of their investments in the Pool. Respondents’ argument may be summarized as follows: Under California law, the Pool is a statutory trust. (§ 27100.1; In re County of Orange, supra, 191 B.R. at pp. 1013-1014.) As depositors in the Pool, appellants are beneficiaries of the trust. Despite attempts to disguise the fact by means of their allegations of “direct claims,” appellants’ second amended complaint actually seeks recovery for losses they sustained as a result of their investment in the trust—specifically, the $80 million in Pool deposits appellants allege they have not recovered from the County under either the CSA or the Stipulation. Because only the trustee has legal title to any cause of action for injury to trust property, trust beneficiaries such as appellants are not entitled to assert such claims. Thus, respondents’ argument concludes, the trial court was correct in sustaining the demurrer to the second amended complaint without leave to amend. For the reasons which follow, we disagree with this argument of respondents.

First, although generally the trustee is the real party in interest with legal title to any cause of action on behalf of or in the name of the trust, under certain circumstances a trust beneficiary may sue third persons who directly participated with the trustee in breaches of trust. Thus, under long-established trust law, trust beneficiaries retain the right to bring claims directly against third parties who have induced the trustee to commit a breach of trust, aided or abetted such a breach by the trustee, or received and retained trust property from the trustee in knowing breach of trust. (Saks v. Damon Raike & Co. (1992) 7 Cal.App.4th 419, 428 [8 Cal.Rptr.2d 869]; Pierce v. Lyman (1991) 1 Cal.App.4th 1093, 1101-1110 [3 Cal.Rptr.2d 236]; Rest.2d Trusts, §§ 291-295, 326, pp. 57-73, 124-125; 4 Scott on Trusts (4th ed. 1989) §§ 282, 291, 294.1, pp. 27-28, 77-87, 98-101; Bogert on Trusts (2d ed. rev. 1995) §§ 868-869, 901, pp. 103-123, 304-320; 11 Witkin, Summary of Cal. Law (9th ed. 1990) Trusts, § 164, p. 1017.)

Second, the express provisions of the CSA and the Stipulation between the County and appellants, as well as the allegations of the County’s own complaint against Merrill Lynch and the terms of the recent settlement of that lawsuit, all make it clear that the County, as trustee of the Pool, has expressly ceded to appellants the right to press their direct claims against third parties such as Merrill Lynch, and proceeded against Merrill Lynch only as to its own claims and those of the Option A Pool Participants specifically assigned to it. Unlike the Option A Pool Participants, appellants specifically did not assign their third party claims to the County and, instead, retained such claims to pursue on their own.

Third, the County, its Pool, and the trust itself are now insolvent debtors under the jurisdiction of the federal bankruptcy court. Federal bankruptcy law preempts any conflicting provisions in section 27100.1 and the California law of trusts. Under federal law, the relationship between Pool Participants and the County is not simply that of beneficiaries and trustee, but has become that of debtor and creditor. As Pool Participants, appellants have obtained claims as general creditors under federal law on all funds they transferred to the Pool and cannot now trace, irrespective of the existence of the trust under California law. (In re County of Orange, supra, 191 B.R. at pp. 1013-1018; In re County of Orange, supra, 183 B.R. at pp. 605-606; First Federal of Michigan v. Barrow (6th Cir. 1989) 878 F.2d 912, 915; In re Bullion Reserve of North America (9th Cir. 1988) 836 F.2d 1214, 1217-1218.) The bankruptcy court has expressly approved and authorized the CSA, including the provisions under which appellants reserved their rights to assert claims against third parties. By operation of federal bankruptcy law, therefore, appellants’ contractual retention of their right to pursue claims against third parties such as Merrill Lynch supersedes any conflicting principle of California trust law.

For each of these reasons, whether considered individually or collectively as a whole, there is no reason in law or equity why appellants may not bring direct claims against Merrill Lynch for losses they suffered by investing in the Pools, on the grounds Merrill Lynch participated with the trustee of the pool in alleged breaches of trust and committed torts directly against appellants themselves. On the basis of the allegations in appellants’ second amended complaint, we conclude they have properly stated causes of action for direct claims against Merrill Lynch. The trial court therefore erred in sustaining the demurrer without leave to amend.

A. The Law of Trusts

In attacking the allegations of appellants’ second amended complaint, respondents have placed principal reliance on the doctrine of the law of trusts that the trustee of an express trust is the real party in interest with legal title to any cause of action on behalf of or in the name of the trust, and a trust beneficiary has no legal title or ownership interest in the trust assets. In accordance with this principle, generally a trust beneficiary is not the real party in interest and therefore may not sue in the name of or for the benefit of the trust. (Saks v. Damon Raike & Co., supra, 7 Cal.App.4th at p. 427; Botsford v. Haskins & Sells (1978) 81 Cal.App.3d 780, 784 [146 Cal.Rptr. 752]; Powers v. Ashton (1975) 45 Cal.App.3d 783, 787-788 [119 Cal.Rptr. 729].) Because the County is pursuing its own action against Merrill Lynch for losses incurred by the Pool, respondents argue, appellants may not separately maintain their own lawsuit. The trial court itself relied on this principle in sustaining the demurrer to appellants’ second amended complaint without leave to amend.

Respondents overlook the important exceptions to the general rule on which they rely. Thus, it is well established that where a trustee has committed a breach of trust, the trust beneficiaries may prosecute an action against third persons who, for their own financial gain or advantage, induced the trustee to commit the breach of trust; actively participated with, aided or abetted the trustee in that breach; or received and retained trust property from the trustee in knowing breach of trust. (Saks v. Damon Raike & Co., supra, 7 Cal.App.4th at pp. 427-428 [“The beneficiary may also sue third persons who directly participated with the trustee in breaches of trust”]; Pierce v. Lyman, supra, 1 Cal.App.4th at pp. 1101-1110; Rest.2d Trusts, §§ 291-295, 326, pp. 57-73, 124-125; 4 Scott on Trusts, supra, §§ 282, 291, 294.1, pp. 27-28, 77-87, 98-101; Bogert on Trusts, supra, §§ 868-869, 901, pp. 103-123, 304-320; 11 Witkin, Summary of Cal. Law, supra, Trusts, § 164, p. 1017.) Appellants allege causes of action in their second amended complaint against Merrill Lynch as beneficiaries of the trust Pool pursuing their own direct claims against a third party who actively participated in the breach of trust of the County and its former treasurer, Citron. There is ample appellate precedent and scholarly authority for such a suit by trust beneficiaries where the third party has reaped financial advantages by participating in a trustee’s breach of fiduciary duty, as Merrill Lynch is alleged to have done here.

The rights of trust beneficiaries vis-á-vis third parties who participate in a breach of trust ultimately derive from the obligations of the trustee himself. The violation by a trustee of any duty owed to the beneficiaries of the trust constitutes a breach of trust. (Rest.2d Trusts, § 201, pp. 442-444.) Such duties include the duty of loyalty, the duty to avoid conflicts of interest, the duty to preserve trust property, the duty to make trust property productive, the duty to dispose of improper investments, and the duty to report and account. (Pierce v. Lyman, supra, 1 Cal.App.4th at pp. 1102-1103; Prob. Code, §§ 16002-16006, 16060; Rest.2d Trusts, §§ 175-176, 181, 230-231, pp. 380-383, 391-392, 544-555.) The standard of care with respect to trust investments is the “prudent investor” rule. (Pierce v. Lyman, supra, 1 Cal.App.4th at p. 1103; 11 Witkin, Summary of Cal. Law, supra, Trusts, § 79, p. 958.) The beneficiaries of a trust may sue a trustee to recover profits or recoup losses resulting from a trustee’s breach of any of these duties. (Work v. County Nat. Bank etc. Co. (1935) 4 Cal.2d 532, 536 [51 P.2d 90]; Pierce v. Lyman, supra, 1 Cal.App.4th at p. 1103.)

At common law, the beneficiaries of a trust could also sue third parties who participated with a trustee in such a breach of the trustee’s duties. Thus, as set forth in the Restatement, a beneficiary could bring a direct action to compel a third party either to restore trust property that had been transferred by the trustee with notice to the third party of the breach of trust, or to pay the value of such trust property if the third party had disposed of it. (Rest.2d Trusts, §§ 291-295, pp. 57-73.) In addition, “[a] third person who, although not a transferee of trust property, has notice that the trustee is committing a breach of trust and participates therein is liable to the beneficiary for any loss caused by the breach of trust.” (Rest.2d Trusts, § 326, p. 124.) Significantly, the comments to section 326 of the Restatement of Trusts apply this principle to the precise factual situation at issue in this case, in noting that where a trustee purchases speculative securities through a stockbroker who has knowledge that it is a breach of trust for the trustee to purchase such securities, “the broker is liable for participation in the breach of trust.” (Rest.2d Trusts, § 326, com. a, p. 124.)

Under California law, the right to sue a third party for participating in a fiduciary’s breach of trust is limited to situations in which the third party was acting for personal gain or in furtherance of his or her own financial advantage. (Pierce v. Lyman, supra, 1 Cal.App.4th at pp. 1103-1106, citing Doctors’ Co. v. Superior Court (1989) 49 Cal.3d 39, 46-48 [260 Cal.Rptr. 183, 775 P.2d 508] [Doctors’ Co.].) The basic principle remains the same in this state as under the common law, however. As long as the third parties were acting to further their own individual economic interests, they may be hable for actively participating in a fiduciary’s breach of his or her trust. gy extension, therefore, trust beneficiaries may sue third parties who participated with a trustee in alleged breaches of trust, as long as the third parties’ participation was both active and for the purpose of advancing their own interests or financial advantage. (Pierce v. Lyman, supra, 1 Cal.App.4th at pp. 1103-1106 [trust beneficiaries may sue third parties who actively participated with trustee in breaches of trust for third parties’ own personal gain].)

These principles are also restated in the leading treatises on the law of trusts. As respondents point out, of course, Scott on Trusts does reiterate the general rules that the trustee is the real party in interest representing the interests of the trust and the trust beneficiaries; the interests of the beneficiaries are protected against third persons acting adversely to the trust through proceedings brought by the trustee and not by the beneficiaries; and the beneficiaries cannot maintain a suit against adverse third parties as long as the trustee is ready and willing to undertake the necessary proceedings. (4 Scott on Trusts, supra, §§ 281-282, pp. 21-28.)

However, in the same section restating these general principles, the Scott treatise states: “Very different is the situation where the third person does not act adversely to the trustee but participates with the trustee in a breach of trust. Thus if the trustee in breach of trust transfers trust property to a third person who knows of the breach of trust, the third person holds the property on a constructive trust for the beneficiaries. Here the third person commits a wrong directly to the beneficiaries; he is interfering with the trust relationship. If he induces to trustee to commit a breach of trust, he incurs a liability to the beneficiaries, much as a person who induces a breach of contract incurs a liability .... In such a case, it is true, the trustee is also permitted to sue the third person, but primarily it is the beneficiaries who are wronged and who are entitled to sue. . . .” (4 Scott on Trusts, supra, § 282, p. 28, fns. omitted, italics added.) Because in these circumstances the wrong committed by the third party is a wrong to the beneficiaries and not to the trustee, the third party incurs a liability to them directly, and the beneficiaries themselves can maintain a suit against the third party. “. . . It is true that the trustee, if he can be subjected to the jurisdiction of the court, should ordinarily be joined as a party. But this is in order that the whole controversy may be determined in a single suit, and not because the right of the beneficiaries against the [third party] is only a derivative right through the trustee. Primarily the liability of the [third party] is to the beneficiaries rather than to the trustee, and the right of the beneficiaries against the [third party] is a direct right and not one that is derivative through the trustee.” (Id., § 294.1, pp. 98-100, fn. omitted, italics added.) Like the Restatement, Scott specifically notes that securities and stockbrokers employed by a trustee may be liable for participation in a breach of trust if they have notice that the trustee is committing a breach of trust in undertaking securities transactions.

The discussion of this issue in Bogert on Trusts is to the same effect. Thus, Bogert emphasizes that a third party who participates with a trustee in a breach of trust is liable to the trust beneficiaries, whether the third party actually knows or “should have known that the act was wrongful,” and cites “numerous” examples of cases “in which a third party who has assisted a trustee in committing a breach of trust has been held liable in a suit by the beneficiary or by his representative . . . .” (Bogert on Trusts, supra, § 868, pp. 104, 109, fn. omitted.) Like both Scott and the Restatement, Bogert emphasizes that a third party who “by any act whatsoever assists the trustee in wrongfully transferring the benefits of the trust property to the trustee, another person, or the alleged participant, or aids in destroying or injuring that property,” may be liable to the beneficiaries directly for participation in a breach of fiduciary duty. (Id., § 901, p. 313.) Finally, in language particularly pertinent to the facts of the case before us, Bogert specifically states that third party liability directly to beneficiaries may be based on “aiding the trustee to deceive the beneficiaries of an investment trust as to the financial stability of the trust,” or “assisting the trustee to speculate with the trust funds . . . .” (Id., § 901, pp. 315, 317, fns. omitted.)

In short, trust beneficiaries may bring suit on their direct claims against third persons who have actively participated with a trustee in a breach of trust for their own financial advantage, whether by inducing, aiding or abetting the trustee’s breach of duty, or by receiving trust property from the trustee in knowing breach of trust. (Pierce v. Lyman, supra, 1 Cal.App.4th at pp. 1103-1106.) Ordinarily, when a third party acts to further his or her own economic interests by participating with a trustee in such a breach of trust, the beneficiary will bring suit against both the trustee and the third party. However, it is not necessary to join the trustee in the suit, because “primarily it is the beneficiaries who are wronged and who are entitled to sue. . . .” (4 Scott on Trusts, supra, § 282, p. 28.) The liability of the third party is to the beneficiaries, rather than to the trustee, “and the right of the beneficiaries against the [third party] is a direct right and not one that is derivative through the trustee.” (Id. § 294.1, pp. 99-100, italics added.)

Scott notes that, at least in the case of a trustee transferring trust property to a third party who is not a bona fide purchaser, if the breaching trustee is thereafter removed and a successor trustee is appointed, the successor trustee will himself maintain the action against the third party. “In such a case it would seem that the beneficiaries cannot maintain a suit against the transferee unless the successor trustee has refused to sue or is unavailable.” (4 Scott on Trusts, supra, § 294.4, pp. 104-105, fn. omitted.) Respondents contend that this principle applies here. They insist a successor trustee has been appointed in the person of County Treasurer Moorlach, that successor trustee is suing Merrill Lynch, and appellants therefore cannot maintain a separate lawsuit against respondents in this case.

It is true the County has pursued a lawsuit on behalf of the Pool against Merrill Lynch and that Moorlach was also named as a plaintiff in that action, “in his official capacity as the Treasurer-Tax Collector of the County.” Nevertheless, this is not an ordinary trust case. Here, the bankruptcy court has specifically held that the County itself was the trustee of the Pool, and the County Treasurer, as a public officer of the County, was merely an agent who represented the County in carrying out its statutory obligations. Thus, although there is a successor treasurer, there actually is no “successor” trustee—the County has always itself been and still is in fact the trustee of the Pool. Moorlach, the present treasurer and successor to former Treasurer Citron, is simply a representative or agent of the trustee County. Like Citron, who represented the County in carrying out its trust obligations with regard to the Pool, Moorlach “retain[s] his status as a county officer while performing these trustee duties.” (In re County of Orange, supra, 191 B.R. at p. 1014.) Under California law and the decision of the bankruptcy court, then, it is the County itself, not the individual currently occupying the office of treasurer, which bears the responsibilities and obligations of trustee.

Thus, the County alone has been and still is the trastee of the Pool at all times relevant to this lawsuit. The County’s lawsuit against Merrill Lynch has always been expressly limited to the County’s own claims and those assigned to the County by Pool Participants other than appellants. Hence, there is no reason appellants must now defer to the County’s lawsuit against Merrill Lynch and forego their independent right as beneficiaries to press their own claims directly against third parties such as Merrill Lynch, who are alleged to have induced, aided, abetted, or knowingly benefited from a breach of trust by the trustee itself.

Moreover, the County, as trustee of the Pool, and appellants, as beneficiaries, have negotiated two separate agreements that specifically address appellants’ direct claims against third parties for losses connected with the collapse of the Pool, and explicitly recognize appellants’ right to bring their own lawsuits directly against such third parties. These agreements were executed under the jurisdiction of, and with the express approval and authorization of, the bankruptcy court itself. The jurisdiction of that court, and its interpretation of federal bankruptcy law, preempt the California law of trusts whenever there is a conflict. By approving the County’s agreements with appellants as part of the bankruptcy plan, the bankruptcy court has specifically authorized this action. We turn now to a consideration of these contractual agreements between the County and the Pool Participants, and the jurisdictional and res judicata implications of the decisions of the federal bankruptcy court in this matter.

B. Agreements Between the County and the Pool Participants

The County and the “Non-County Pool Participants” negotiated the CSA under the aegis and jurisdiction of the bankruptcy court. The CSA specifically identified the County and the Pool as “debtors” in federal bankruptcy proceedings. In return for the County’s rendering to them approximately 77 percent of the funds they had deposited into the Pool, the Pool Participants were required to choose between sharing in any litigation proceeds the County might obtain in its own litigation against such third parties (Option A); or retaining their independent rights to proceed directly against both the County and third parties (Option B).

As Option B Pool Participants, appellants refused to assign to the County any of their claims against third parties and, thus, retained their right to pursue such claims independently. By the same token, the County and the Pool itself also reserved and retained their rights to challenge the validity or allowability of any such claims made by Option B Pool Participants, and to assert claims against any third parties or against the Option B Pool Participants themselves. In contrast to the Option B Pool Participants, each settling Option A Pool Participant assigned to the County “any and all” of its Pool-related claims, including any such claims against third parties; and irrevocably released the County, the Pool, all other Option A Pool Participants, and all third parties from any and all Pool-related claims. The bankruptcy court issued an order expressly authorizing and approving the CSA in its entirety.

After appellants filed their own lawsuit in bankruptcy court against the County pursuant to their reserved rights under Option B, the County and appellants negotiated the Stipulation under the jurisdiction of and with the express approval of the bankruptcy court. As pertinent here, the Stipulation expressly preserved appellants’ “direct claims against third parties,” and affirmed that the County would neither release any third party from its liability to appellants nor assert any claim to proceeds recovered or found to be recoverable by appellants on such “direct claims.” At the same time, the Stipulation reserved the rights of both the County and appellants with regard to their respective third party litigation, and reserved “for future determination whether or to what extent” appellants “can assert any claims against third parties alleged to be owned by or held in any trust which is alleged to be applicable to the deposits of the Settling Option B Pool Participants with the Pools.”

Thus, the CSA and the Stipulation both explicitly preserved appellants’ rights to pursue their “direct claims against third parties,” while retaining the County’s own right to assert claims for itself or the Option A Pool Participants against those same third parties. Under these provisions of the CSA and the Stipulation, only the Option A Pool Participants assigned any rights to the County to pursue Pool-related claims on their behalf against third parties; appellants expressly did not do so.

The County’s own pleadings in bankruptcy court support appellants’ position in this appeal. Contrary to respondents’ contention, nothing in the County’s second amended complaint against Merrill Lynch indicated that it purported to make claims on behalf of appellants or the Option B Pool Participants. To the contrary, the County’s complaint specifically stated that, “[p]ursuant to the CSA,” it was asserting “any and all ‘Pool-Related Claims’ against third parties” as the “assignee” of the Option A Pool Participants. The County’s lawsuit against Merrill Lynch made no mention of asserting any claims on behalf of Option B Pool Participants such as appellants.

Respondents argue, however, that neither the CSA nor the Stipulation gives appellants any rights to pursue claims against third parties separately or apart from the County as trustee of the Pools. Specifically, respondents point to the provisions in the Stipulation in which (a) the parties “reserve for future determination whether or to what extent the Settling Option B Pool Participants can assert any claims against any third parties alleged to be owned by or held in any trust which is alleged to be applicable to the deposits of the Settling Option B Pool Participants with the Pools”; and (b) the County reserved its right to oppose any attempt by appellants to join the County in third party litigation.

Any contract must be construed as a whole, with the various individual provisions interpreted together so as to give effect to all, if reasonably possible or practicable. (Civ. Code, § 1641; Code Civ. Proc., § 1858; 1 Witkin, Summary of Cal. Law (9th ed. 1987) Contracts, § 686, pp. 619-620.) Courts must interpret contractual language in a manner which gives force and effect to every provision, and not in a way which renders some clauses nugatory, inoperative or meaningless. (New York Life Ins. Co. v. Hollender (1951) 38 Cal.2d 73, 81-82 [237 P.2d 510]; Titan Corp. v. Aetna Casualty & Surety Co. (1994) 22 Cal.App.4th 457, 473-474 [27 Cal.Rptr.2d 476].) The fundamental goal of contractual interpretation is to give effect to the mutual intention of the parties. (Civ. Code, § 1636; Bank of the West v. Superior Court (1992) 2 Cal.4th 1254, 1264 [10 Cal.Rptr.2d 538, 833 P.2d 545]; Parsons v. Bristol Development Co. (1965) 62 Cal.2d 861, 865 [44 Cal.Rptr. 767, 402 P.2d 839]; 1 Witkin, Summary of Cal. Law, supra, Contracts, § 684, pp. 617-618.) The mutual intention to which the courts give effect is determined by objective manifestations of the parties’ intent, including the words used in the agreement, as well as extrinsic evidence of such objective matters as the surrounding circumstances under which the parties negotiated or entered into the contract; the object, nature and subject matter of the contract; and the subsequent acts and conduct of the parties. (Civ. Code, §§ 1635-1656; Code Civ. Proc., §§ 1859-1861, 1864; Universal Sales Corp. v. Cal. etc. Mfg. Co. (1942) 20 Cal.2d 751, 761 [128 P.2d 665]; Southern Cal. Edison Co. v. Superior Court (1995) 37 Cal.App.4th 839, 851 [44 Cal.Rptr.2d 227]; Hernandez v. Badger Construction Equipment Co. (1994) 28 Cal.App.4th 1791, 1814 [34 Cal.Rptr.2d 732]; General Motors Corp. v. Superior Court (1993) 12 Cal.App.4th 435, 442 [15 Cal.Rptr.2d 622]; 1 Witkin, Summary of Cal. Law, supra, Contracts, §§ 688-689, pp. 621-623.)

Applying these rules of contractual interpretation, we conclude that, contrary to respondents’ assertion on appeal, the provisions of the CSA and Stipulation reserving the County’s own rights to pursue third parties do not undercut or take away the rights reserved by appellants elsewhere in those agreements. In the first place, we note the statement in paragraph 1 of the Stipulation reserving for “future determination” appellants’ power to “assert any claims against any third parties alleged to be owned by or held in any trust which is alleged to be applicable to the deposits of the Settling Option B Pool Participants with the Pools” is somewhat ambiguous. As written, the lengthy subordinate clause “alleged to be owned by or held in any trust,” etc., most logically refers to and modifies the immediately preceding phrase “any third parties,” and not the earlier phrase “any claims.” If so read, the provision clearly has no relevance in this case, where appellants’ claims are against Merrill Lynch and entities associated with it, none of which is a third party “alleged to be owned by or held in any trust.”

Even if this sentence is read such that the subordinating clause refers to and modifies the entire phrase “any claims against any third parties,” it must still be construed in light of the immediately preceding sentence expressly stating that the parties “intend to clarify that the Settling Option B Pool Participants [appellants] can preserve their direct claims against third parties.” (Italics added.) Reading these two sentences together in context as such, we interpret them simply to mean that the parties recognize appellants’ right to assert claims directly against third parties, without purporting to decide whether the law of trusts will allow appellants to do so when the County also maintains its right to make identical claims as trustee of the Pool. Interpreted in this way, the provision does not render meaningless the Stipulation’s reservation of appellants’ right to pursue direct claims against third parties. Instead, it simply leaves for “future determination,” necessarily by the courts, the effect of applicable trust law on this reservation of rights. Indeed, it is that “future determination” which it falls upon us to make in this very case.

Respondents seriously misinterpret the provision in paragraph 11(c) of the Stipulation reserving the County’s right to oppose any motion by appellants to join the County in a third party action. This provision is concerned with the impact of the automatic stay in bankruptcy, not appellants’ property interests in or rights to pursue direct claims against third parties such as Merrill Lynch. Rather than contesting appellants’ rights or property interests in such direct claims, the provision merely states that the County reserves the right to oppose any attempt by appellants to seek relief from the automatic stay in order to name the County as an additional plaintiff or defendant in third party litigation.

This provision, and all the other provisions in the Stipulation reserving the County’s rights to bring claims against third parties on its own account or on behalf of the Option A Pool Participants, must be interpreted in harmony with the other provisions in the Stipulation expressly and repeatedly reserving appellants’ rights to pursue their own litigation against third parties and disclaiming any assertion by the County of claims to proceeds recovered or found recoverable by appellants on such direct claims. Interpreting these provisions as a whole, as we must, we conclude it was the parties’ intention that appellants be permitted to pursue their direct claims against third parties such as Merrill Lynch as freely as possible, given the constraints and considerations imposed by the bankruptcy court’s jurisdiction over the County and the County’s reservation of its own claims against third parties on behalf of itself and the Option A Pool Participants. In short, the CSA, the Stipulation and the admissions of the County in its own pleadings establish the intent of the County that appellants retain the right to press their claims against Merrill Lynch directly.

C. Federal Bankruptcy Law

Equally important to our consideration of the legal sufficiency of appellants’ second amended complaint against Merrill Lynch is the impact of federal bankruptcy law in general and the specific holdings of the bankruptcy court with respect to the County’s position as trustee of the Pools and appellants’ position as beneficiaries. For several reasons, the position of the Pool and the County itself as insolvent debtors under the jurisdiction of the federal bankruptcy court tends further to support appellants’ standing to pursue their claims against respondents, and the viability of their second amended complaint.

First, as noted, the bankruptcy court has expressly authorized and approved both the CSA and the Stipulation in their entirety. Thus, insofar as any provisions in these agreements authorize appellants to proceed directly against third parties on Pool-related claims despite appellants’ status as beneficiaries, such provisions must be treated as having received the endorsement and sanction of the bankruptcy court itself. The orders of the bankruptcy court adopting the CSA and the Stipulation establish that appellants have the right to pursue their direct claims against third parties such as Merrill Lynch, and that the County will not assert any claim to or seek reimbursement of proceeds recovered by appellants, or determined recoverable by them. This determination is binding and res judicata in this action. (11 U.S.C. § 1141(a); Levy v. Cohen (1977) 19 Cal.3d 165, 172-174 [137 Cal.Rptr. 162, 561 P.2d 252] [a bankruptcy court order confirming an arrangement or agreement between the parties in bankruptcy is res judicata in any subsequent state court action]; In re Kelley (Bankr. 9th Cir. 1996) 199 B.R. 698, 702-703 [a confirmed plan in bankruptcy is binding on the parties, and operates to preclude the assertion of issues arising out of the prebankruptcy petition relationship of the parties that were or could have been raised earlier]; In re Bowen (Bankr. S.D.Ga. 1994) 174 B.R. 840, 847 [the contents of an arrangement or plan approved by a bankruptcy court are res judicata and binding for all purposes, and may not be relitigated by the parties even if arguably contrary to applicable law].)

Second, as previously discussed, the bankruptcy court specifically held that the County itself is and has always been the trustee of the Pool. Even though the County Treasurer acts as trustee under section 27100.1, he is merely the agent and representative of the County in this respect. (In re County of Orange, supra, 191 B.R. at pp. 1011-1015.) Thus, even though the individual (Citron) who dealt with appellants as the County’s agent for the Pool under section 27100.1 has now been replaced as County Treasurer by another individual (Moorlach), the bankruptcy court has determined that it is the County which has always held in trust all funds deposited by appellants in the Pool. In short, the identical trustee of the Pool at the time appellants deposited their funds is still the trustee. That same trustee has expressly stipulated that appellants may bring their own direct claims against Merrill Lynch pursuant to the authority of the bankruptcy court. That trustee, of course, is the County. For purposes of this action, therefore, there is no “successor trustee” to the original trustee of the Pool, and appellants may proceed directly against third parties such as Merrill Lynch alleged to have participated in breaches of trust with the trustee of the Pool.

Third, the bankruptcy court has held that federal bankruptcy law preempts any conflicting provisions of section 27100.1 or the California law of trusts with regard to the debtor-creditor status of the County and trust depositors such as appellants. (In re County of Orange, supra, 191 B.R. at pp. 1013-1018; In re County of Orange, supra, 183 B.R. at pp. 605-607.) Thus, for purposes of federal bankruptcy law, the County Pool is a debtor and a debtor-creditor relationship exists between the Pool and its depositors, even though the Pool is also a trust and the Pool Participants are trust beneficiaries under section 27100.1. “[A] [Pool Participant] obtained a claim upon the transfer of funds to the [Pool] irrespective of the existence of the trust. [Citation.] Simultaneously, the [Pool] has a debt on that claim, thereby creating a debtor-creditor relationship. HQ The [Pool] also has debts to its participants even if the [Pool] is a trust because participants cannot trace their funds in the [Pool]. . . .” (In re County of Orange, supra, 183 B.R. at p. 606.) In the County’s lawsuit against Merrill Lynch, the bankruptcy court specifically rejected Merrill Lynch’s contention that the nature of the Pool as a trust under section 27100.1 has not been affected by the County’s bankruptcy regardless of the level of commingling of funds in the Pools, the solvency of the County, or the inability of the Pool Participants to trace their trust funds in the Pool. Instead, the bankruptcy court upheld the County’s position that when an insolvent trustee-debtor controls assets consisting of commingled funds of the debtor and the trust itself, the assets are “property of the debtor” subject to the equitable jurisdiction of the bankruptcy court to ensure appropriate distribution to the debtor’s general creditors. When a trustee debtor is insolvent and the beneficiaries cannot trace their funds, the beneficiaries stand in the position of general creditors despite any conflicting provisions of section 27100.1. (In re County of Orange, supra, 191 B.R. at pp. 1012-1018.)

Thus, because they cannot trace the funds they invested in the Pool, appellants have the status of general creditors of the County and the Pool irrespective of the existence of the trust. By operation of federal law, then, the relationship between the County and appellants is no longer that of trustee and beneficiaries, but of debtor and creditors. Because of its basic similarity to an investment fund in which the Pool Participants deposited their funds, the County Pool was never a garden-variety trust instrument in the first place. In the present bankruptcy context, the Pool is even less a typical trust. Appellants’ contractual rights to pursue claims directly against third parties such as Merrill Lynch have been specifically authorized and affirmed by the bankruptcy court itself. As such, those rights now have an independent basis in federal law, regardless of any conflicting principle of California trust law.

In a related unpublished decision, Irvine Ranch Water District v. Merrill Lynch & Co., Inc. (C.D. Cal. Apr. .14, 1997) 1997 U.S. Dist. LEXIS 7030, the federal District Court for the Central District of California denied Merrill Lynch’s alternative motions to dismiss or stay a direct action brought by a Pool Participant against Merrill Lynch. As in the instant case, Merrill Lynch argued that Irvine Ranch Water District (Irvine Ranch) was a beneficiary of the Pool trust and not a real party in interest under principles of California trust law, and its action could therefore only be brought by the Pool trustee. The district court rejected Merrill Lynch’s argument. Concluding that Irvine Ranch had a “long-standing advisor-advisee relationship with Merrill Lynch through which [it] relied on Merrill Lynch for advice concerning its investment portfolio and financial affairs,” and that it had alleged a breach of a duty “separate and distinct from any obligations Merrill Lynch owed to the Pool,” the district court held that Irvine Ranch had standing to bring its own action against Merrill Lynch to recover damages for independent torts. (1997 U.S. Dist. LEXIS 7030, supra, at p. *4.)

As respondents correctly argue, the Irvine Ranch decision is factually distinguishable from the instant case. Of the 14 government entities that make up the appellants herein, only 3 are alleged to have had direct client-broker relationships with Merrill Lynch as their specific investment adviser. In addition, Irvine Ranch itself was never an Option B Pool Participant. It is therefore presumably an Option A Pool Participant and, as such, has assigned all its Pool-related claims to the County for the latter to pursue in its own action against Merrill Lynch. Nevertheless, the Irvine Ranch case is clearly analogous to this one, and instructive to our analysis.

As the district court pointed out, Irvine Ranch alleged the same monetary loss as that alleged in the County’s own complaint against Merrill Lynch— namely, the loss it suffered to its principal investments in the Pool. The district court nevertheless found that because Irvine Ranch’s complaint was based on an alleged breach of a separate duty to itself rather than an alleged breach of duty to the trust, “[t]he fact each case may involve the same monetary loss is not controlling . . . .” What was significant in the case was that Irvine Ranch, although a beneficiary of the trust Pool, was able to allege a separate cause of action for liability damages owed directly to it by Merrill Lynch, even though the actual monetary loss it complained of was the same monetary loss from the collapse of the Pool for which the County sought reimbursement in its action against Merrill Lynch.

We agree with the decision in Irvine Ranch. As applied to this case, we conclude that as long as appellants have adequately alleged breaches of duty by Merrill Lynch owed directly to themselves, the fact they are seeking recovery for the same monetary losses as the County is seeking in its own complaint on behalf of the Option A Pool Participants will not by itself prevent appellants from pursuing this action separately from the County, (Sawyer v. First City Financial Corp. (1981) 124 Cal.App.3d 390, 399-403 [177 Cal.Rptr. 398] [plaintiffs may proceed separately on tort and contract theories to recover the same single monetary loss, because the harm effected by the tortious conduct was different from that caused by the breach of contract].) We therefore turn to the specific causes of action of appellants’ second amended complaint.

IV. Appellants’ Second Amended Complaint

Appellants’ second amended complaint alleges causes of action against Merrill Lynch for fraud, conspiracy to defraud, negligent misrepresentation, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, receiving stolen property, and violations of RICO. Our present task is to determine, in light of the applicable principles of trust law and the particular circumstances of this case, whether appellants have properly stated any cause of action against respondents sufficient to withstand demurrer.

Each of the causes of action of appellants’ second amended complaint is based on factual allegations in the complaint to the effect that Merrill Lynch, with the purpose and intent of advancing its own financial interests, actively participated with the County in designing and implementing an investment strategy for the Pool, and then made a variety of misrepresentations through its affirmative public statements, actions and nondisclosures in order to induce appellants to deposit their funds in the Pool and keep them there despite growing concerns about the safety of the Pool’s investment policies. The misrepresentations alleged were to the effect that the investment strategies employed by the County and Merrill Lynch on behalf of the Pool were prudent, sound, and well calculated to minimize volatility, to protect principal, and to provide liquidity. These representations were in fact false, in that the investment strategy designed and promoted by Merrill Lynch for the County Pool actually placed appellants’ funds at a high degree of risk, failed to provide liquidity, and resulted in extremely volatile returns. Respondents made these misrepresentations in written prospectuses and reports, as well as in oral statements to appellants and to the general public. In addition, Merrill Lynch failed to disclose information to appellants that would have put them on notice of the extent of the risk they undertook by inves