Fasten Your Seatbelts: The Testy Track of Advising Trustees In Litigation

Fasten Your Seatbelts: The Testy Track of Advising Trustees In Litigation

This outline from the ABA RPTE Spring Symposium in Orlando provides an in-depth look at representing trustees in litigation and covers topics such as asset management, discovery issues, and settlement agreements.

Crystal Patterson, David Lieberman, and Kara Greuel
Fasten Your Seatbelts:  The Testy Track of Advising Trustees In Litigation

Fasten Your Seatbelts: The Testy Track of Advising Trustees In Litigation

AMERICAN BAR ASSOCIATION
SECTION OF REAL PROPERTY, TRUST AND ESTATE LAW

30TH ANNUAL SPRING SYMPOSIA
Four Seasons Hotel, Orlando, FL
May 10-11, 2018

Fasten Your Seatbelts: The Testy Track of Advising Trustees In Litigation

            A trustee enters your office, Petition in-hand, with a look of worry.  Litigation has been commenced against the Trust, calling into question not only the conduct of certain trust beneficiaries, but also that of the trustee.  “How can this be? We have always done what we thought was right. Do they really get to challenge our decisions? Do they really get to see my files?  What about how much this going to cost me to defend? Can I recover my fees?”  The questions are un-ending. Today, we’ll try to navigate some the issues that arise on the testy track of advising trustees involved in litigation.

I.                BASIC FIDUCIARY PRINCIPALS GOVERNING YOUR CLIENT

A.    You Are An Agent of a Fiduciary

           

A “fiduciary relationship is one in which one party (the fiduciary) exercises discretionary power over the significant practical interests of another (the beneficiary).” Paul B. Miller, Justifying Fiduciary Duties, 58 McGill L.J. 969, 1011-12 (2013).  The resultant power to “act purposively on behalf of another” requires that a trustee, in exercising his authority, abide by the twin fiduciaries duties of loyalty and care.  Id. at 1019. “The duty of loyalty proscribes misappropriation and appropriation and regulates conflicts of interest by requiring a fiduciary to act in the ‘best’ or even ‘sole’ interest” of those he is required to protect….The duty of care prescribes the fiduciary’s standard of care by establishing ‘reasonableness’ or ‘prudence’ standard that is informed by industry norms and practices.”  Robert H. Sitkoff, An Economic Theory of Fiduciary Law, Philosophical Foundations of Fiduciary Law 198 (Andrew S. Gold and Paul B. Miller eds. 2014), https://dash.harvard.edu/bitstream/handle/1/15274343/PhilosophicalFoundationsFiduciaryLaw.pdf?sequence=1 (last accessed April 8, 2018).  In the context of litigation then, the attorney’s role critical role becomes how to advise a fiduciary in such a way that the fiduciary is permitted to protect his or its own interests while simultaneously abiding by the trustee’s fiduciary duties of loyalty and care.  A testy track, indeed.

B.    Balancing Zealous Advocacy With Fiduciary Considerations

1.Model Rules tell us:

a.      A lawyer must also act with commitment and dedication to the interests of the client and with zeal in advocacy upon the client's behalf. (cmt to MR 1.3)

2.But a fiduciary client often owes competing duties.  It is key that the litigant-fiduciary and its counsel heed, and sometimes strike a balance, among other duties:

a.      The duty of loyalty

b.     The duty to furnish information

c.      The duty to inform

d.     The duty of confidentiality

e.      The duty to preserve trust property

f.      The duty to defend actions

g.     The duty to deal impartially with beneficiaries

II.             DEFINING WHO IS THE CLIENT

A.    Counsel to the Fiduciary vs. Counsel to the “Trust”

 

1.     Duties Run to the Fiduciary Only

The majority view is that a lawyer representing a fiduciary owes a duty only to the fiduciary, and not the beneficiaries of the trust or estate.  An ABA legal ethics opinion succinctly articulates this view:

            A lawyer who presents the fiduciary in a trust or estate matter is subject to the same limitations imposed by the Model Rules of Professional Conduct as are all other lawyers.  The fact that the fiduciary has obligations to the beneficiaries of the trust or estate does not in itself either expand or limit the lawyer’s obligations to the fiduciary client under the Model Rules, nor impose on the lawyer obligations toward the beneficiaries that the lawyer would not have toward other third parties.  Specifically, the lawyer’s obligation to preserve the client’s confidences under Rule 1.6 is not altered by the circumstance that the client is a fiduciary.  See ABA Legal Ethics Opinion 380 (May 9, 1994); see also Kentucky Bar Ass’n Legal Ethics Opinion E-401 (September, 1997) (“We reject the view that a lawyer who represents a fiduciary owes obligations to the beneficiaries that in some circumstances will override obligations otherwise owed by the lawyer to the fiduciary, such as the obligation of confidentiality;

            The California Court of Appeals espoused a similar view:

It is of course the purpose and obligation of both the fiduciary and his attorney to serve the estate. In such capacity they are obligated to communicate with, and to arbitrate conflicting claims among, those interested in the estate. While the fiduciary in the performance of this service may be exposed to the potential of malpractice (and hence is subject to surcharge when his administration is completed), the attorney by definition represents only one party: the fiduciary. It would be very dangerous to conclude that the attorney, through performance of his service to the administrator and by way of communication to estate beneficiaries, subjects himself to claims of negligence from the beneficiaries. The beneficiaries are entitled to evenhanded and fair administration by the fiduciary. They are not owed a duty directly by the fiduciary’s attorney.

Goldberg v. Frye, 217 Cal. App. 3d 1258, 1269, 266 Cal. Rptr. 483 (1990); see also Bain v. Mcintosh, 2015 U.S. App. LEXIS 3116 (11th Cir. March 2, 2015) (concluding that under Florida law, “only the person or entity acting as a [trustee] is considered a client of the lawyer,” and affirming summary judgment in favor of an attorney whose accountings he prepared at the behest of his trustee client were the basis of a claim by the trust beneficiaries against him individually); Huie v. DeShazo, 922 S.W.2d 920, 925 (Tex. 1996); Spinner v. Nutt, 631 N.E.2d 542, 546 (Mass. 1994).

2.     Limited Duties Run to the Beneficiaries.

Conversely, other jurisdictions follow the approach espoused by the Restatement (Third) of Law Governing Lawyers in recognizing that a lawyer may owe a duty to non-clients (such as trust beneficiaries) if the lawyer knows the fiduciary is violating its own duty and the lawyer does not act to stop the fiduciary.  Restatement (Third) of Law Governing Lawyers Section 51(4) (2000).  Specifically, a lawyer may be liable to a nonclient when:

(a)    the lawyer’s client is a trustee, guardian, or [performs] similar functions for the nonclient;

(b)   the lawyer knows that appropriate action by the lawyer is necessary with respect to a matter within the scope of representation to prevent or rectify the breach of fiduciary duty owed by the client to the nonclient where (i) the breach is a crime or fraud or (ii) the lawyer has assisted or is assisting the breach;

(c)   the nonclient is not reasonable able to protect its rights; and

(d)   such a duty would not significantly impair the performance of the lawyer’s obligations to the client.

Id.; see also Charleson v. Hardesty, 839 P.2d 1303, 1306 (Nev. 1992) “[W]hen an attorney represents a trustee in his or her capacity as trustee, that attorney assumes a duty of care and fiduciary duties towards the beneficiaries as a matter of law.”; ACTEC Commentaries MRPC 1.2 (the “lawyer for the fiduciary owes some duties to the beneficiaries of the fiduciary estate although he or she does not represent them”).

B.    Individual vs. Corporate Trustee

Where the trustee is an individual, serving in his or her individual capacity, it is clear who is the client: the individual. The question gets murkier when the trustee is a corporate trustee, trust company, or bank with a trust division.  By and large, the corporate fiduciary is deemed to be the client.  Individuals retained or employed by a corporate trustee are generally thought to directly owe fiduciary duties to trust beneficiaries, as well.   In re Estate of Daniel Swiewicki, 106 Ill. 2d 111, 1167-17 (1985).

III.           TACKLING CONFLICTS

A.    Reconciling Conflicts of Interest When Fiduciary Is Also a Beneficiary

B.    Duty of Impartiality vs. Personal Interest

C.    Fiduciary’s Duty to Defend Will or Trust Contest

D.    Should a Fiduciary Seek to Enforce a No-Contest Clause

1.     Generally

2.     Do fiduciary duties trump a no-contest clause

3.     What if the fiduciary is the alleged wrong-doer

E.    Special Issues with Trustees Who Also Are Attorneys and/or the Drafting Attorney

Attorneys and other professional advisors, such as accountants and financial advisors who serve as trustees are governed not only by fiduciary and negligence standards, but often by the ethical standards of their professions.

ABA Formal Opinion 02-426, “Attorney Serving as Fiduciary for an Estate or Trust”  which gives important insight into the ethical norms in this area. Under the current Model Rules, attorneys can seek appointment as a fiduciary, but must not allow self-interest to cloud their exercise of independent professional judgment in recommending trustees. When there's a significant risk that the attorney's independent professional advice will be "materially limited," the attorney must obtain the client's

informed consent in writing. An attorney may prepare an instrument appointing himself as trustee only if the client is properly informed, the appointment does not violate the conflict of interest rules of Model Rule 1.7 and the appointment does not result from undue influence or improper solicitation by the attorney.101 Finally, attorneys should familiarize themselves with Model Rule 1.8 ("Conflict of Interest:

Current Clients: Specific Rules"). Model Rules 1.7 and 1.8, which may be modified in a particular jurisdiction, are the primary ones dealing with the ethical issues that arise when attorneys serve as trustees.

Resources

Amy K. Kanyuk, Perils and Potential Profit of a Lawyer Serving as Trustee, Estate Planning Journal (Feb. 2014),

ABA Formal Opinion 02-426, "Attorney Serving as Fiduciary for an Estate or Trust" (5/31/2002).

Charles D. Fox IV, "Ethical Considerations in Acting as an Executor or Trustee: Do You Really Want to Do This?", 49 U. Miami Heckerling Inst. on Est. Plan. Ch 14 (2015)

F.     How Much Protection Do Exculpatory Clauses Offer

An exculpatory clause is a provision designed to relieve a fiduciary of liability for certain types of breaches of trust.  Such a clause typically appears in a will or trust instrument.  In essence, an exculpatory provision is meant to relieve a trustee of liability.  Mark L. Ascher Et. Al., Scott and Ascher on Trusts §24.27, at 1798-99.  Exculpatory clauses are designed to avoid the duties that would otherwise apply to a fiduciary’s dealings with the trust property.  In general, exculpatory clauses are strictly construed by the courts.  A trustee is relieved from liability for a breach of trust only when the provision clearly provides for relief with respect to the breach in question.  “Thus the courts have often held that the breach of trust in question did not fall within the terms of an exculpatory provision.”  See Mark L. Ascher Et. Al., Scott and Ascher on Trusts §24.27.2, at 1804.  Further, exculpatory clauses are not enforced if the provision itself is against public policy.  Id. at §24.27.3, at 1805. 

The law on exculpatory clauses has evolved over the years.  Historically, such clauses were often held unenforceable as against public policy.  Kevin J. Parker, Trustee Defenses:  Statute of Limitations, Laches, Self-Executing Accounting Release Provisions, and Exculpatory Clauses, 23 Probate & Property 53, at 53.  Today, exculpatory clauses are enforced, with certain limitations.  Most states follow one of three systems:  the Restatement; the Uniform Trust Code (UTC); or statutes nullifying exculpatory clauses based on public policy concerns.  Id.

1.               Restatement.

            The Second and Third Restatement allow a trustee to defend claims of breach of trust by invoking an exculpatory clause in the trust instrument.  According to the Third Restatement, such a clause is enforceable to the extent its inclusion was not due to the trustee’s abuse of his relationship to the settlor.  Restatement (Third) of Trusts § 96(1); see Restatement (Second) of Trusts § 222 (1959).  Further, an exculpatory clause is enforceable except to the extent that it purports to relieve the trustee “of liability for a breach of trust committed in bad faith or with indifference to the fiduciary duties of the trustee, the terms or purposes of the trust, or the interests of the beneficiaries, or . . . of accountability for profits derived from a breach of trust.”  Restatement (Third) of Trusts §96(1); see Restatement (Second) of Trusts § 222 (1959).

2.         Uniform Trust Code.

The UTC generally provides a trustee the same defenses to claims of breach of trust as those found in the Restatements.  Section 1008, much like its equivalent in the Restatements, provides that an exculpatory clause is enforceable except to the extent that it purports to exculpate a trustee for breaches committed in bad faith or with reckless indifference to trust terms or beneficiary interests, or to the extent it was included as a result of the trustee’s abuse of his relationship with the settlor.  UNIF. TRUST CODE §1008(a) (amended 2005). 

There are differences between the UTC and the Restatements.  One significant difference is that the UTC allows a settlor to exculpate a trustee for a profit resulting from his breach, while the Restatement expressly prohibits exculpation of such profits, i.e., an exculpatory clause is enforceable except to the extent that it purports to relieve the trustee of accountability for profits derived from a breach of trust.  Id.; Restatement (Third) of Trusts § 96; Restatement (Second) of Trusts § 218 (1959).  Further, the UTC adds a presumption that an exculpatory clause drafted by the trustee is invalid as an abuse of his relationship with settlor.  Id. at § 1008(b).  A trustee cannot draft an exculpatory clause in order to avoid liability.  The trustee, however, can rebut the presumption by proving that the term is fair and that its terms were made known to the settlor.  Id.

Jurisdictions that have adopted the UTC have included various modifications to §1008.  In Florida, the law adds the requirement that an exculpatory clause drafted by or at the direction of the trustee must be directly communicated to the settlor in order to be enforceable.  See §F.S. 736.1011; 3-39 Florida Estates Practice Guide § 39.07.  Similarly, in the version of UTC §1008 adopted in Utah, the exculpatory clause is invalid if it “was inserted by the trustee or fiduciary without disclosure of its existence and contents.”  Utah Code Ann. § 75-7-1008. 

3.               Statutes.

Some states use statutes to limit the scope of exculpatory clauses.  For example, under the California Probate Code, “[a] provision in the trust instrument is not effective to relieve the trustee of liability . . . for breach of trust committed intentionally, with gross negligence, in bad faith, or with reckless indifference to the interest of the beneficiary.”  Charles W. Pieterse and Charles E. Coates III, “Exculpation and Proaction,” SR003 ALI-ABA 14. 

In New York, any provision in a will exonerating a trustee from liability for its failure to exercise reasonable care, diligence, and prudence is contrary to public policy.  N.Y. EST. POWERS & TRUSTS LAW §11-1.7 (Consol. 2009).  Unlike New York’s Prudent Investor Act, the Massachusetts and North Carolina Prudent Investor Acts do not expressly prohibit the enforcement of exculpatory clauses.  The Massachusetts and North Carolina Acts provide that the prudent investor rule may be expanded, restricted, or eliminated by the provisions of a trust.  Mass. Ann. Laws Ch. 203C § 2(b); N.C. Gen. Stat. Ann. § 36C-9-901(b).  JPMorgan Chase Bank, N.A. v Loutit, 2013 N.Y. Misc. LEXIS 452 (N.Y. Sup. Ct. Jan. 12, 2013), appeal withdrawn, 984 N.Y.S. 2d 591 (N.Y. App. Div. 1st Dep’t 2014).

Delaware has adopted an even less restrictive approach that allows the settlor of a trust to relieve the trustee of liability for following the terms of a trust as long as there is no willful misconduct.  The relevant portion of 12 Del. C. § 3302 (e) states:

Any fiduciary acting under a governing instrument shall not be liable to anyone whose interests arise from that instrument for breach of fiduciary duty for the fiduciary's good faith reliance on the express provisions of such instrument. The standards set forth in this section may be expanded, restricted, or eliminated by express provisions in a governing instrument.

12  Del. C. § 3302 (e).

G.   Special Issues When Representing Trustees in Litigation with Charitable Beneficiaries

                                                            1.     Notice of Litigation

                                                            2.     Authority of and Enlisting Help from the Attorney General

IV.           PRE-LITIGATION STRATEGY

A.    Resignation vs. Removal

If there is a risk that an interested party may seek removal of a trustee, it is appropriate to consider whether the trustee should simply, prophylactically resign as trustee.  Removal of a trustee is an extreme form of equitable relief that places a high burden of proof on the beneficiary.  McNeil v. Bennett, 792 A.2d 190, 220 (Del. 2001).  A removal petition generally requires the petitioning party to make a “clear showing of abuse or wrongdoing in the actual administration of the trust.”  Gresham v. Strictland, 784 So. 2d 578, 581 (Fl. App. 4 Dist. 2001); see also Capaldi v. Richards,  870 A.2d 493, 496 (Del. 2005) (a court “may remove a trustee who fails to perform his duties through more than mere negligence”); Williams v. Duncan, 55 S.W.2d 896, 902 (Mo. App. S.D. 2001) (removal of a trustee is a remedy that the court should use sparingly).  Section 706 of the Uniform Trust Code set forth several bases upon which a trustee might be removed:

(a)             The settlor, a cotrustee, or a beneficiary may request the court to remove a trustee, or a trustee may be removed by the court on its own initiative.

(b)              The court may remove a trustee if:

(1)             the trustee has committed a serious breach of trust;

(2)             lack of cooperation among cotrustees substantially impairs the administration of the trust;

(3)             because of unfitness, unwillingness, or persistent failure of the trustee to administer the trust effectively, the court determines that removal of the trustee best serves the interests of the beneficiaries; or 

(4)             there has been a substantial change of circumstances or removal is requested by all of the qualified beneficiaries, the court finds that removal of the trustee best serves the interests of all of the beneficiaries and is not inconsistent with a material purpose of the trust, and a suitable cotrustee or successor trustee is available.

(c)             Pending a final decision on a request to remove a trustee, or in lieu of or in addition to removing a trustee, the court may order such appropriate relief under Section 1001(b) as may be necessary to protect the trust property or the interests of the beneficiaries.

Section 706’s official comment is instructive in how the removal grounds should be construed:

Subsection (b) lists the grounds for removal of the trustee. . . . A trustee may be removed for untoward action, such as for a serious breach of trust, but the section is not so limited. A trustee may also be removed under a variety of circumstances in which the court concludes that the trustee is not best serving the interests of the beneficiaries. The term “interests of the beneficiaries” means the beneficial interests as provided in the terms of the trust, not as defined by the beneficiaries. Removal for conduct detrimental to the interests of the beneficiaries is a well-established standard for removal of a trustee. 

Subsection (b)(1) . . . makes clear that not every breach of trust justifies removal of the trustee. The breach must be “serious.” A serious breach of trust may consist of a single act that causes significant harm or involves flagrant misconduct. A serious breach of trust may also consist of a series of smaller breaches, none of which individually justify removal when considered alone, but which do so when considered together. A particularly appropriate circumstance justifying removal of the trustee is a serious breach of the trustee’s duty to keep the beneficiaries reasonably informed of the administration of the trust or to comply with a beneficiary’s request for information as required by Section 813.  Failure to comply with this duty may make it impossible for the beneficiaries to protect their interests. It may also mask more serious violations by the trustee.

U.T.C. Section 706, cmt.  While mere disagreement, resentment, or antagonism is not sufficient cause for removal, a trustee’s conduct in causing animosity amongst beneficiaries may be grounds for removal.  In re Ex’rs of Koretzky, 8 N.J. 506, 528 (1951).

While the trustee client may not be all that interested in getting involved in protracted litigation, and resigning to “get out of the middle” may sound like a good idea, it is unlikely to yield any appreciable benefit.  First, if the trustee’s conduct is being challenged in any way, resignation will not prevent the trustee from being required to participate in discovery or the imposition of potential remedies, such as disgorgement, on the trustee.  Second, the trustee’s ongoing service as a trustee may aid in the trustee’s ultimate recovery of its fees and costs incurred in participating in the litigation. Finally, there is a subconscious implication of wrongdoing if a trustee steps down at the first sniff of trouble.  Accordingly, unless there are extenuating circumstances, resignation is likely not an effective early strategy.

B.    Retention of Counsel and Payment of Fees

Consideration must be given to whether the trustee will use trust funds to compensate the attorney or whether the trustee will use his or its own / personal funds to compensate the attorney.  Most trust instruments give trustees the power to retain and compensate counsel with trust funds. Even when a trust does not explicitly reference such power, trustees are generally deemed to have the power to retain counsel under statute or common law of most jurisdictions.  Webbe v. First National Bank and Trust Company of Barthington, 487 N.E.2d 711, 715 (Ill. App. Ct. 1985) (trial court did not abuse its discretion in awarding the trustee its’ fees and costs and assessing them against a single beneficiary’s share of the trust remainder).  Moreover, a trustee who successfully defends himself against a challenge to his conduct may be entitled to reimbursement of his fees from trust assets under the theory that the trustee’s defense of his actions conferred a common benefit, not only a personal benefit:

Coming then to the merits of the dispute, the plaintiff's first complaint is the allowance to the defendant out of the trust assets of his expenses in defending himself in the action. The argument is that these expenses were incurred in the defendant's individual interest, and may not be charged against the trust. That completely misses the true situation: a trustee was appointed to administer the assets; the settlor selected him to do so, and whatever interferes with his discharge of his duty pro tanto defeats the settlor's purpose. When the trustee's administration of the assets is unjustifiedly assailed it is a part of his duty to defend himself, for in so doing he is realizing the settlor's purpose. To compel him to bear the expense of an unsuccessful attack would be to diminish the compensation to which he is entitled and which was a part of the inducement to his acceptance of the burden of his duties. This has been uniformly the ruling, so far as we have found.

Weidlich v. Comley, 267 F.2d 133, 134 (2d Cir. 1959) (citations omitted); see also Regions Bank v. Lowrey, 154 So.3d 101, 112 (Ala. 2014) (finding that trial court improperly reduced reimbursement of attorneys’ fees and costs incurred by trustee in successfully defending surcharge claims and stating that to hold otherwise would diminish the compensation that was an inducement to the trustee accepting the burden of serving).

However, if a trustee uses trust funds to compensate counsel, and the trustee is ultimately found to have done something wrong or exceeded its authority, then there is a risk that counsel will be required to disgorge the fees and potentially, pay the fees of the other litigants.  In re: Niles, 176 N.J. 282 (2003) (where an executor or trustee enjoys substantial economic benefits from committing undue influence, that person may be required to pay the counsel fees of the parties establishing that undue influence).  If a trustee uses personal funds to compensate counsel, there is a risk to the trustee that a court may not approve reimbursement to the trustee for the trustee’s funds expended in the litigation.

V.              LITIGATION OPTIONS

A.    Wait and See – Let Others Commence Suit

B.    Proactive Options

1.     Petition for Instructions

2.     Declaratory Judgment Action

3.     Interpleader

4.     Construction Actions

5.     Admission of Errors in Administration

C.    Forum Selection and the Probate Exception to Federal Jurisdiction

1.     Forum selection considerations

2.     Scope of probate exception to federal jurisdiction

VI.           PRIVILEGE ISSUES, THE DEAD MAN’S STATUTE, AND DISCOVERY

A.              Privilege Generally

Undoubtedly one of the most frequently sought items in fiduciary litigation, is the attorney’s file. The discoverability of that file hinges on whether the communications between the trustee and counsel are protected by the privilege.  In the seminal case of Riggs National Bank of Washington D.C. v. Zimmer, 355 A.2d 709, 712 (Del. Ch. 1976), the Delaware Court of Chancery found that a trustee could not use the attorney-client privilege to prevent disclosure of communications between the attorney and trustee.  The court reasoned:

As a representative for the beneficiaries of the trust which he is administering, the trustee is not the real client in the sense that He is personally being served.  And, the beneficiaries are not simply incidental beneficiaries who Chance to gain from the professional services rendered.  The very intention of the communication is to aid the beneficiaries.  The trustees here cannot subordinate the fiduciary obligations owed to the beneficiaries to their own private interests under the guise of attorney-client privilege.  The policy of preserving the full disclosure necessary in the trustee-beneficiary relationship is here ultimately more important than the protection of the trustees’ confidence in the attorney for the trust….The fiduciary obligations owed by the attorney at the time he prepared the memorandum were to the beneficiaries as well as to the trustees. In effect, the beneficiaries were the client of Mr. Workman as much as the trustees were, and perhaps more so.

Id. at 713-14.  The Court concluded that if a trustee instructs attorneys to perform work that ultimately benefits the beneficiary, then the beneficiary is the “real client” and holder of the attorney-client privilege.  Consequently, while the communication is privileged, the beneficiary (i.e., the “real client”) may discover the communication because there was no privilege as to him. Alternatively, if the work benefits solely the trustee, then the trustee is the holder of the privilege and the communication may not be discovered by the beneficiary.  Id.; see also United States v. Jicarilla Apache Nation, 131 S. Ct. 2313 (2011) (although not a trust case per se, the Supreme Court acknowledged that the fiduciary exception exists in American law); Hammerman v. Northern Trust Company, No. 1 CA-CV 13-0260 (Ariz. Ct. App. 2014) (holding that “[w]e therefore adopt the fiduciary exception and hold that a component of a trustee’s duty under A.R.S. § 14–10813(A) is a duty to disclose legal consultations and advice obtained in the trustee’s fiduciary capacity concerning decisions or actions to be taken in the course of administering the trust”); Zook v. Pesce, 91 A.3d 1114, 1120 (Md. Ct. App. 2014) (holding that “in a dispute between putative heirs or devisees under a will or trust, the attorney-client privilege does not bar admission of testimony and evidence regarding communication between the decedent and any attorneys involved in the creation of the instrument, provided that evidence or testimony tends to help clarify the donative intent of the decedent”  But see Kentucky Bar Association Legal Ethics Opinion E-401 (September 1997) (“We reject the view that a lawyer who represents a fiduciary owes obligations to the beneficiaries that in some circumstances will override obligations otherwise owed by the lawyer to the fiduciary, such as the obligation of confidentiality”).

Of course, not all jurisdictions are in accord as such a result can chill the otherwise free exchange of information between trustees and counsel.  In some jurisdictions, such as Florida, legislation has been adopted to clarify the mechanics of how the privilege operates in the context of representing fiduciaries:

A communication between a lawyer and a client acting as a fiduciary is privileged and protected from disclosure …to the same extent as if the client were not acting as a fiduciary….only the person or entity acting as fiduciary is considered a client of the lawyer.  This section does not affect the crime or fraud exception to the lawyer-client privilege…

Fla. Stat. Section 90.5021 (2011).  Application of the statute was plagued for years by the Florida Supreme Court’s adoption of countervailing court rules, such as Rule 5.240(b)(2) (fiduciaries must give notice to beneficiaries of the fiduciary lawyer-client privilege), and vaguely conflicting interpretations of the “need” for and constitutionality of the statute by the Florida Supreme Court and the South District of Florida.  See Bivins v. Rogers, 207 F. Supp.3d 1321 (S.D. Fla. 2016) (applying the statute and noting that the Florida Supreme Court did not “vitiate or overturn the statute” when questioning its need).  In January, however, any doubt was resolved when the Florida Supreme Court in In re: Amendments to the Florida Evidence Code – 2017 Out-of-Cycle Report, adopted the statute retroactive to its passage date of 2011.

            New Hampshire has similarly codified its rejection of a fiduciary exception to the attorney-client privilege:

(a)        A communication between an attorney and a client acting as a trustee, trust advisor, or trust protector is privileged and protected from disclosure to the same extent as if the client was acting in his, her, or its individual capacity and was not acting as a trustee, trust advisor, or trust protector.
 (b)      The privilege is not waived by (1) a fiduciary relationship between the trustee, trust advisor, or trust protector and a beneficiary of the trust or (2) the use of trust property to compensate the attorney for legal services rendered to the trustee, trust advisor, or trust protector.
(c)        If an attorney's client is a trustee, trust advisor, or trust protector, then the attorney's client is only the person acting as trustee, trust advisor, or trust protector.

New Hampshire RSA 564-B:2-205; See also Heisenger v. Cleary, 150 A.3d 1136, 323 Conn. 765, 769 n.2 (2016) (affirming trial court decision, but declining to address appellants’ argument that trial court erred in refusing to adopt the fiduciary exception to the attorney-client privilege).

B.              Dead Man’s Statutes

1.     What Are They?

·       Statutes law prohibiting the admission of a decedent’s statement as evidence in certain circumstances, as when an opposing party or witness seeks to use the statement to support a claim against the decedent’s estate.

·       designed to close the mouth of an interested survivor in suits involving transactions with a decedent

·       Rooted in common law distrust of interested party, one with a stake in the outcome of the proceedings, deemed incompetent to testify

2.     Broad Disapproval

·       Scholars, judges and lawyers widely criticize

·       Criticisms

o   assume some people are more dishonest than honest

o   present an injustice to honest witnesses with valid claims against decedent or intestate

o   riddled with exceptions that can be exploited, e.g., allowing third parties to testify

o   confusion arising from conflicting and inconsistent judicial decisions and application

o   statutes are vague

o   confusing to lawyers, judges and scholars

o   complicated, technical and confusing

3.     Abolished or Ignored in Many Jurisdcitions

·       Approximately 30 states have repealed or refuse to recognize

o   Permit the historically excluded testimony to be heard

o   Charge fact-finder with determining weight and credibility

·       Remaining states recognize it fully or with some degree of limitation.

o   AZ, CO, ID, IL, IN, LA, MD, MI, NJ, NY, NC, PA, SC, TN, TX, VT, VA, WI, WY

4.     Variability Among Jurisdictions Still Applying Statutes

·       Statutes vary widely from state to state

·       Each is different, affecting a different person or limited to a specific type of action

o   most focus on the same criteria

o   most are strictly construed to limit application to a limited set of events

·       Variations and issues

o   When does it apply?

§  At trial, not in discovery

o   Recurring Areas of Confusion

§  Scope of cases in which it applies

·       Will contests?

·       Trust contests?

§  Who can invoke

§  Types of testimony subject to Act

§  What are the exceptions

·       When the representative opens the door

·       Testimony is admitted

·       Waiver

·       Illlinois: broad, traditional prohibition

o   “no adverse party or person directly interested in the action shall be allowed to testify on his or her own behalf to any conversation with the deceased [person] . . . or to any event which took place in the presence of the deceased [person].”

·       Maryland and other jurisdictions narrow the scope by applying statutes only to a limited category of cases, such as those that affect the size or obligations of the estate.

·       Ternnessee: statute interpreted narrowly because of policy considerations and strictly construed in favor of admission of testimony

o   Generally applies only to cases where the subject transaction did not increase or diminish the decedent’s estate

·       Virginia and other states permit otherwise disqualified testimony if corroborated independently from a disinterested party who is not financially interested in the outcome of the case

o   designed to prevent litigant from having benefit of his own testimony when, because of death or incapacity, the personal representative of another litigant has been deprived of the testimony of the decedent or incapacitated person.

5.     Effect of Fed. R. Evid. 601 and State Counterparts

·       FRE 601 generally eliminated common law witness incompetency rules, but not dead man’s statutes

·        Adopted in most states

6.     Suggested Resources

·       Fred Franke and Anna Katherine Moody, The Terms of the Trust: Extrinsic Evidence of Settlor Intent, 40 ACTEC LAW JOURNAL (2014)

7.     Ed Wallis, Outdated Form of Evidentiary Law: A Survey of Dead Man's Statutes and a Proposal for Change, 53 Clev. St. L. Rev. 75 (2005)

C.    Discovery / Third Party Litigation Discovery

1.               Discovery Generally

2.               Third Party Litigation Discovery

a.      Responding to Subpoenas

b.     No good deed goes unpunished

VII.         MANAGING TRUST ASSETS WHILE LITIGATION IS PENDING

A.    Duty of Prudence

 

B.    Duty to preserve and protect trust property

 

C.    Duty to make property productive

 

D.    Prudent Investor Rule

 

E.    Other Considerations

VIII.      LITIGATION SETTLEMENTS THAT SEEK TO MODIFY TESTAMENTARY INSTRUMENTS OR TERMINATE A TRUST.

 

1.               Beneficiaries and Legatees engaged in will or trust contests, construction actions, petitions for instructions or other trust and estate litigation often seek to settle disputes by terminating a trust or otherwise modifying dispositive provisions of a will or trust.

The fiduciary may face a dilemma if the proposed modification is at arguably at odds with the material purposes of the trust, or the settlor’s intent. 

In resolving trust contests, construction actions and other trust litigations, or non-judicial settlement agreements, beneficiaries may seek to terminate or modify a trust in a manner at odds with settlor intent. 

What is the trustee’s duty to preserve or protect settlor intent?

How does the trustee reconcile its duties of loyalty?

2.               Judicial Modifications and Terminations Permitted Under the Family Settlement Doctrine

Many courts allow modification of a will or trust, or trust termination, if the family settlement doctrine applies. The doctrine reflects policy recognizing the desirability of ending family disputes about the disposition of an estate through settlement agreements, rather than litigation.

While state rules vary, generally a court will allow parties to modify terms of a will or trust by agreement as long as the agreement was valid and there was a reasonable or substantial basis for the disputed claims advanced by the parties that are resolved by the agreement, thus showing there was a bona fide dispute.

Requires a bona fide dispute.  Parties must often show a reasonable basis to conclude that costly and protracted litigation will result over the proceeds or distribution of an estate, materially depleting the estate, and family relationship will be torn asunder.

3.               Judicial Modification of Irrevocable Trusts Permitted Absent a Family Settlement.

Traditionally courts have allowed modification of irrevocable trusts only upon: (1) consent of all beneficiaries as long to a modification not contrary to the material purposes of the trust, and (2) changed circumstances that would defeat or substantially impair accomplishing the purposes of the trust.

4.               Modern Statutorily Permitted Modification of Irrevocable Trusts

UTC Sections 410-414 identify permissible modifications and terminations of trusts other than by its express terms. The objective of the is to enhance flexibility while adhering to the principle that preserving the settlor’s intent is paramount.

Termination or modification may be allowed upon beneficiary consent if the court concludes that the trust or a particular provision no longer achieves a material purpose or if the settlor concurs (Section 411), by the court in response to unanticipated circumstances or due to ineffective administrative terms (Section 412), or by the court or trustee if continued administration under the trust's existing terms would be uneconomical (Section 414).

Virtual representation statutes permit many modifications as long as the proper parties are served and have an opportunity to participate in the proceedings.

5.               A Fiduciary Must Balance and Consider Its Relevant Duties.

a. A trustee stands in a special relationship of fiduciary responsibility to the grantor of the trust and to the beneficiaries. In carrying out his or her fiduciary duties, the trustee must be mindful of that unique relationship.

b. Trustee’s Duties to Settlor

Some scholars maintain that the trust can be viewed primarily as a contract between the settlor and the trustee who accepts trusteeship.  See, e.g., Langbein, John H., “The Contractarian Basis of the Law of Trusts” (1995).  The trust instrument sets forth the terms of the contract and the applicable state statutes and common law fill in any terms to the extent the governing trust document is silent.

Thus the trustee must administer the trust in strict accordance with the trust's terms and the settlor's intent as expressed in the trust instrument.

c. Trustee’s Duties to Beneficiaries.

Duty to Administer Trust by Its Terms:  The starting point is the trust instrument and its terms prescribing what the trustee must do to accomplish its purposes. The trustee is obligated to administer the trust strictly by its terms.

Duty of Loyalty:  The trustee’s fundamental legal and ethical obligation owed to beneficiaries is the duty of loyalty.  The trustee must put a beneficiary’s interests first, before the trustee’s own interests. It imposes three general requirements. The trustee must act with good faith, must not self-deal, and should avoid conflicts of interest.  Put otherwise, the trustee is obligated to administer the trust solely in the interests of the trust beneficiaries. The trustee may not engage in any act that puts his or her personal interests in conflict with those of any of the trust beneficiaries.

Duty of Impartiality: A trustee has a duty to deal fairly and impartially with all beneficiaries and to act with appropriate regard for their respective interests.  It is not an obligation to treat beneficiaries equally, and some scholars suggest it is better described as a duty of “due regard.”

Duty of Protect and Preserve Trust Assets.  Trustee’s duty of prudence entails a duty to preserve and protect the property.

Duty to Defend Validity or Integrity of the Trust Instrument.

6.               Is Trustee Merely a “Stakeholder.”

Some courts have so diminished the trustee’s role..  .

7.               Consider Seeking Judicial Instructions.

Courts of equity permit a trustee to obtain protection by applying to the court for instructions where there is doubt as to its powers or duties.  The right has been codified by statute in many states.   Matters subject to petition for instructions include proper construction of the trust instrument and the extent of the trustee's powers and duties.

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