I. Introduction
In the world of modern lawyering, the standards and subsequent punishments for professional misconduct are often incongruous across different fields and different jurisdictions. In some contexts, lawyers are disciplined harshly for what many of us would deem simple mistakes or oversights, while in others, lawyers may face no liability at all for seemingly serious infractions. Lawyers who act as trustees and employ broad exculpatory clauses fall into the latter category. The disparate experiences of two attorneys, Jerre Miller and James Farr, are illustrative of this troubling trend.
In August 1971, John Togstad suffered an extreme neurological episode at the hands of his doctor that left him severely disabled for the rest of his life. Fourteen months after the incident, John’s wife, Joan Togstad, met with attorney Jerre Miller “regarding her husband’s condition.” Prior to this meeting, neither Joan nor John had a relationship with Miller or his law firm. John’s former supervisor, Ted Bucholz, “who knew Miller through a local luncheon club,” made the appointment for Joan and accompanied her there. At the time of the appointment, Joan did not know that her husband’s “tragic condition” was the result of conduct by one of John’s doctors and his team, but she had “become suspicious.”
The meeting “lasted [forty-five] minutes to an hour,” and Joan, Bucholz, and Miller were present in the room. Joan told Miller “‘every-thing that happened at the hospital,’ including the nurses’ statements and conduct which had raised a question in her mind.” Miller asked questions and took notes, and at the meeting’s conclusion, according to Joan, Miller stated that he did not think Joan had a viable case but would “discuss [it] with his partner.” Joan and Miller never discussed fee arrangements, “no medical authorizations were requested, nor was [Joan] billed for the interview.” Joan did not hear from Miller again regarding her case, and she did not consult another attorney until one year after her meeting with Miller, presumably after the statute of limitations for a claim against the doctor had run, “because of her reliance on Miller’s ‘legal advice’ that they ‘did not have a case.’” Joan then sued Miller for legal malpractice. A jury found that Miller was negligent, and therefore liable for legal mal-practice, and that he owed $610,500 in damages to John and $39,000 in damages to Joan, totaling $649,500.
Miller’s treatment contrasts with that of James Farr, a prominent Boston lawyer, who worked as Sara Wirt Marsman’s attorney “for many years.” Sara and T. Frederik Marsman (Cappy) “lived well and entertained frequently” during their marriage, residing together in their home in Wellesley from 1956 until Sara’s death in 1971. Cappy was an expert horseman who worked as a riding director and instructor at a local school. Wealthy from her first marriage, Sara managed the couple’s financial affairs and treated Cappy as the “Lord of the Manor,” giving him money for lavish personal expenses. Sara also had a daughter, Sally Marsman Marlette, from her prior marriage.
Before her death, Sara worked with Farr to draw up her will and two testamentary trusts. In the will, she gave Cappy a life estate in the “household furnishings” of the Wellesley house, with the remainder to Sally. Additionally, Sara created one trust to provide Cappy with “reasonable maintenance, comfort[,] and support” after her death. Sara structured the trust so that one third of her estate would be entrusted to a designated trustee who would use that principal to pay Cappy in amounts the trustee “deem[ed] advisable for [Cappy’s] comfortable support and maintenance.” Sara created a second trust, for the benefit of Sally and her family, which would serve as a receptacle for remaining accumulated funds from Cappy’s trust upon Cappy’s death. Sara named Farr as trustee for both trusts. The will contained the following exculpatory clause with regard to the testamentary trust: “[n]o trustee hereunder shall ever be liable except for his own willful neglect or default.”
Cappy lost his job shortly after Sara’s death in 1971, which caused him to “substantially” reduce his standard of living. In 1972, Cappy married his second wife, Margaret Marsman, and took out a mortgage on the Wellesley house for $4,000, the proceeds of which he used to pay bills. Between Sara’s death and Cappy’s admission to a nursing home in 1983, Farr made “made no investigation whatsoever of Cappy’s needs or his ‘available sources of support.’” When Cappy asked Farr multiple times for payments from his $65,000 trust fund during those years, Farr sent one check for $300 in 1974 and asked Cappy “to explain in writing the need for some support and why the need had arisen.”
Following Cappy’s death in 1987, Margaret brought suit against Farr—in her capacity as executor of Cappy’s estate—for making only one payment to Cappy from the trust, which had thrust Cappy into such a dire financial situation that he ultimately conveyed the Wellesley house. The court held that Farr had committed a breach of trust by failing to “become familiar with Cappy’s finances,” yet asserted, with no explanation, that Farr’s actions did not constitute “willful neglect or default.” The court further held that Farr, as trustee, had no personal liability in the situation given that the “exculpatory clause . . . drafted by the trustee was valid because the beneficiary could not prove that the clause was inserted as a result of an abuse of a fiduciary relationship.” Notably, the 1991 opinion was prior to Massachusetts adopting the American Bar Association’s Model Rules of Professional Conduct (MRPC) or the Uniform Trust Code (UTC).
Farr came out unscathed, while Miller faced more than half a million dollars in damages. These asymmetrical results demonstrate a snapshot of the glaring shortcoming of professional responsibility standards. This Article posits that reforms must be made to the law governing attorneys who act as trustees and employ blanket exculpatory clauses to shield them-selves from personal liability, as the lack of consequences for Farr seem to contradict well-founded principles of legal ethics. This Article proceeds in four Sections. Section I provides an overview of trust formation and the use of exculpatory clauses as an element of trusts. Section II lays out the current law governing exculpatory clauses in trusts by assessing the UTC, the MRPC, and state statutes in New York and Delaware. Section III contrasts the standard for exculpatory clause enforcement with the standard for legal malpractice liability. Finally, Section IV proposes and defends two amendments to the UTC’s current rules on exculpatory clauses.
II. What Are Trusts, Trustees, and Exculpatory Clauses?
In its most basic form, a trust is a legal device that enables one person to deal with property for the benefit of another person, but it may also enable multiple people to deal with property for the benefit of multiple other people. Most often, a trust is used as a vehicle for “disposing of property” and “enabling the [settlor] to provide flexibly for varied purposes and for a number of beneficiaries, often in sequence over time and often including persons yet to be born.” The property held in trust is the trust property. One who creates a trust is a settlor, one who holds property in trust is a trustee, and one for whose benefit property is held in trust is a beneficiary.
A trustee may be an individual or an entity such as a corporation, partnership, or unincorporated association, and does not require confirm-ation by a court. A corporation, private trust company, or individual who makes a repeat practice of serving as a trustee is often known as a professional trustee. Professional trustees typically charge a fee, and settlors rely on professional trustees because of their reputations for “loyalty and skill” or their representations that they are “experts at managing trust assets and effectuating settlors’ long-term objectives.” A trustee may also be a non-professional trustee selected by the settlor because of “closely-knit family situations” or “the bonds of love and trust.” Non-professional trustees often offer the “knowledge of family dynamics or the beneficiaries’ peculiarities,” are not likely “to be trustees of other trusts” or “to participate in drafting the trust’s terms, and are likely to be on a level playing field with the settlor in terms of sophistication.” All trustees are entitled to “reasonable compensation for services as a trustee from the assets of the trust estate unless the terms of the trust provide otherwise or the trustee agrees to forgo compensation.”
To create a trust, a settlor must direct a person to hold property “as trustee” for at least one other person as beneficiary, all while “properly manifest[ing] an intent to create a trust relationship.” A settlor may create a trust during the settlor’s life—an inter vivos trust—or through the settlor’s will—a testamentary trust—which allows the trust to be created only upon the settlor’s death. A settlor may create an inter vivos trust orally or by writing, while a settlor may only create a testamentary trust in by a writing in a valid will.
Upon the creation of a valid trust, a trustee has the expansive power “to manage the trust property and to carry out the terms and purposes of the trust,” but the trustee is also subject to the “fiduciary duties of trusteeship” that include the “duties of prudence, loyalty, and impartiality” and “a duty to adhere to the terms of the trust.” The duty of loyalty requires a trustee to administer the trust exclusively in the beneficiary’s interest. The duty of impartiality applies to trusts that have two or more beneficiaries and requires a trustee to “act impartially” when “investing, managing, and distributing the trust property,” taking the “beneficiaries’ respective interests” into account. The duty of prudence requires a trustee to administer the trust “as a prudent person would,” which requires the trustee to consider the “purposes, terms, distributional requirements, and other circumstances of the trust” and exercise “reasonable care, skill, and caution.” A trustee’s tangible duties may include “ascertaining the duties and powers of the trusteeship; collecting and protecting trust property; managing the trust estate to provide returns or other benefits from trust property; and applying or distributing trust income and principal.” Trustees are also responsible for keeping “full, accurate[,] and orderly” records of the trust and all administrations of trust property, including the amount of principal and income the trustee receives from different entities or parties, how much of the trust the trustee disburses and to whom, and how much trust property is available at a given time.
If a trustee fails to comply with any duty that the trustee owes to the beneficiary as trustee, the trustee commits a breach of trust. In the case of Marsman v. Nasca, Farr committed a breach of trust by failing to meet his fiduciary duty to Cappy by “neglect[ing] to inquire” about Cappy’s financial needs. In the case of Jimenez v. Lee, the trustee committed a breach by using the designated trust funds to buy stock when he was supposed to hold the funds in trust and use them only to fulfill the beneficiary’s “educational needs.” Some courts have also held that a breach of trust occurs not only when a trustee “violates a duty in bad faith, or intentionally although in good faith, or negligently” but also when a trustee violates a duty “because of a mistake.”
In the case of a breach of trust, a beneficiary or a person acting on a beneficiary’s behalf may bring suit against the trustee “to enjoin or redress a breach of trust or otherwise to enforce the trust.” Litigation against a trustee alleging a breach of trust typically involves one or both of the claims that the trustee:
[U]ndertook to perform an act that the trustee was not empowered, either by law or by terms of the trust, to perform or [] that, even if the act in question was one the trustee had power to perform, the trustee exercised that power in a manner inconsistent with the applicable standards of fiduciary conduct.
A trustee who commits a breach of trust is personally liable for either “the amount required to restore the values of the trust estate and trust distributions to what they would have been” but for the breach or “the amount of any benefit to the trustee personally as a result of the breach.”
A provision known as an exculpatory clause may be inserted in the terms of a trust to relieve a trustee of liability for a breach of trust. These clauses “reduce the risk of serving as a trustee,” “provide the greatest level of flexibility to the trustee,” and “lessen the potential for litigation.” The broader the clause, the more flexibility for the trustee and less potential to be litigated against. In some cases, a settlor and a trustee might both want an exculpatory clause “to give the trustee some room to maneuver without fear of liability” especially when the trustee is a non-professional trustee who the settlor has a close personal relationship with.
A settlor may also have independent reasons for seeking an exculp-atory clause. First, a settlor may seek an exculpatory clause because the settlor “might fear frivolous litigation [against the trustee] by disappointed beneficiaries,” which would reduce the ultimate value of the trust for other beneficiaries. “Second, the settlor may believe that trustee compensation will be less expensive if the trustee is not bound by common-law fiduciary duties and their attendant risk of litigation,” so the exculpatory clause may be a way to lower costs and make the trust arrangement feasible. Third, a settlor may suggest inserting an exculpatory clause into the trust document in order to persuade an individual to act as a trustee, especially when the trustee duties are “sub-optimal” and “the trustee is reluctant to accept.”
While these reasons for seeking exculpatory clauses are nonfrivolous, allowing all trustees—especially professional attorney-trustees—seems not only unnecessary but potentially unethical. Indeed, “some scholars [have] found . . . little justification for allowing professional trustees to use broad exculpatory clauses for protection.” Certain limitations do currently exist on how much protection exculpatory clauses can actually provide to trustees and to settlors, as discussed in the following Section, but this Article posits that attorneys acting as trustees, such as Farr, should only be able to limit their personal liability as trustees in a very narrow set of circumstances.
III. Existing Legal Parameters For Exculpatory Clauses
A. The Uniform Trust Code Rules on Exculpatory Clauses
John H. Langbein, a professor at Yale Law School and adviser for the Restatement (Third) of Trusts, describes the Uniform Trust Code as “the first comprehensive national codification of the American law of trusts.” Originally drafted and published in 2000, thirty-four states and the District of Columbia have adopted the UTC. The UTC’s guidance on exculpatory clauses in trusts is as follows:
SECTION 1008. EXCULPATION OF TRUSTEE. (a) A term of a trust relieving a trustee of liability for breach of trust is unenforceable to the extent that it: (1) relieves the trustee of liability for breach of trust committed in bad faith or with reckless indifference to the purposes of the trust or the interests of the beneficiaries; or (2) was inserted as the result of an abuse by the trustee of a fiduciary or confidential relationship to the settlor. (b) An exculpatory term drafted or caused to be drafted by the trustee is invalid as an abuse of a fiduciary or confidential relationship unless the trustee proves that the exculpatory term is fair under the circumstances and that its existence and contents were adequately communicated to the settlor.
The UTC allows an exculpatory clause to be enforced so long as a lawyer acts in “good faith with regard to the purposes of the trust and the interests of the beneficiaries.” Under this standard, any trustee—including an attorney-trustee—who commits a breach of trust as a result of negligence or recklessness can skirt liability so long as the trustee maintains they had good intentions.
With regard to UTC section 1008(b), the accompanying comments explicitly state that UTC section 1008 “disapproves” of cases like Marsman, where the court “held that an exculpatory clause in a trust instrument drafted by the trustee was valid because the beneficiary could not prove that the clause was inserted as a result of an abuse of a fiduciary relationship.” However, the UTC also does not define two key terms used in this rule: “as the result of an abuse” and “fair under the circumstances.” While UTC section 1008 Comments state that a trustee who—either individually or through an agent—inserts an exculpatory clause has the affirmative duty of “overcom[ing] the presumption of abuse,” the lack of clarification in the text leaves the Rule open to broad interpretation and potentially vulnerable to trustees who will naturally argue that the drafting of the clause was indeed “fair” and did not occur as the result of any “abuse.” UTC section 1008 Comments suggest only that courts evaluating the fairness of a clause and whether its terms were adequately communicated to the settlor “may wish to examine” factors such as the extent of the relationship between the settlor and the trustee, whether the settlor received independent advice regarding the clause, the settlor’s level of sophistication with respect to business and fiduciary matters, the trustee’s justifications for inserting the clause, and the scope of the particular clause.
UTC section 1008 Comments additionally state that “[t]he requirements of subsection (b) are satisfied if the settlor was represented by independent counsel,” meaning that the clause can still be enforceable even if the terms of the exculpatory clause disadvantage the settlor or beneficiaries, so long as the settlor retained counsel. There is no requirement for when in the process the settlor would need to retain independent counsel nor how much time that independent counsel would need to spend reviewing the terms of the trust. And if the settlor has independent counsel, “the settlor’s attorney is considered the drafter of the instrument even if the [settlor’s] attorney used the [attorney-]trustee’s form.”
Notably, UTC section 1008 applies uniformly to all trustees, regardless of their profession or certification. This is especially interesting when read in conjunction with UTC section 806, which provides that “[a] trustee who has special skills or expertise, or is named trustee in reliance upon the trustee’s representation that the trustee has special skills or expertise, shall use those special skills or expertise.” UTC section 806 implies that the standard of care applied to trustees is not always a blanket standard of “the reasonable professional” but rather varies based on the trustee’s special skills or expertise. An example of such special skills or expertise could be legal training, yet UTC section 1008 allows all trustees to shield themselves from liability equally, regardless of special skills or expertise. UTC section 806 thus suggests that UTC section 1008 be read to hold an attorney-trustee to a higher standard than a non-attorney trustee.
B. The Model Rules of Professional Conduct’s Implicit Guidance on Exculpatory Clauses
While the Model Rules of Professional Conduct allows attorneys to serve as fiduciaries for their clients, the MRPC is silent on attorneys using exculpatory clauses when serving as trustees. However, there are several sections of the MRPC—specifically the Preamble, Rule 1.15, Rule 2.4, Rule 5.7, and Rule 1.8—that when read together strongly suggest that the UTC’s guidance on exculpatory clauses conflicts with the intent of the MRPC and must be reformed. Some of these sections of the MRPC also imply that attorney-trustees may be subject only to the parts of the MRPC that apply to lawyers, even when they are not providing legal services, which reinforces the need for revisions to the UTC that would not give attorney-trustees greater leniency in skirting liability than they would have if they were acting exclusively as lawyers. Moreover, although the MRPC officially governs only disciplinary action against lawyers and not civil penalties, the principles of the MRPC permeate all legal practice and are thus relevant here.
First, the Preamble to the MRPC makes clear that a licensed and practicing attorney is held to a higher professional and ethical standard than the average citizen. Indeed, the Preamble states that attorneys have a “special responsibility for the quality of justice” even when acting as public citizens and that an attorney’s “responsibilities as a representative of clients, an officer of the legal system[,] and a public citizen are usually harmonious.” Additionally, there are certain Rules in the MRPC “that apply to lawyers who are not active in the practice of law or to practicing lawyers even when they are acting in a nonprofessional capacity.” Rule 8.4, for example, requires that “a lawyer who commits fraud in the conduct of a business is subject to discipline for engaging in conduct involving dishonesty, fraud, deceit[,] or misrepresentation.” The Preamble also explicitly states: “A lawyer’s conduct should conform to the requirements of the law, both in professional service to clients and in the lawyer’s business and personal affairs.” So while a lawyer almost certainly would not be subject to discipline for lying to a relative at the Thanksgiving dinner table about how much she likes the string beans, she could be subject to discipline for creating and distributing counterfeit twenty-dollar bills out of her garage. Given this emphasis on lawyers being bound to act with professional responsibility even when not providing traditional legal services, it seems that at least certain parts of the MRPC and accompanying principles should apply to attorneys acting as trustees.
Second, reading Rules 1.15, 2.4, and 5.7 and accompanying Comments suggest that both the MRPC and the UTC should apply to lawyers acting as trustees. Rules 1.15 and 2.4 and accompanying Comments make clear that lawyers acting in non-lawyer roles are at minimum subject to the parts of the MRPC that govern a lawyer’s non-professional conduct, such as Rule 8.4. While Rule 5.7 and accompany-ing Comments leave room for the argument that some attorney-trustees may be subject to the MRPC as a whole.
Rule 1.15 provides rules for lawyers holding property for their clients or third parties, and Comment 5 to Rule 1.15 asserts that “[t]he obligations of a lawyer under this Rule are independent of those arising from activity other than rendering legal services.” The Comment explains that “a lawyer who serves only as an escrow agent is governed by the applicable law relating to fiduciaries even though the lawyer does not render legal services in the transaction and is not governed by this Rule.” Relatedly, Rule 2.4 governs lawyers serving as third-party neutrals such as arbitrators or mediators. Comment 2 to Rule 2.4 explains that the “role of a third-party neutral is not unique to lawyers” but that lawyers serving as third-party neutrals “may be subject to court rules or other law that apply either to third-party neutrals generally or to lawyers serving as third-party neutrals,” as well as various other codes of ethics besides the MRPC. Comment 5 to Rule 2.4 explains that the MRPC govern only “[l]awyers who represent clients in alternative dispute-resolution processes,” as that role constitutes legal service to a client rather than neutral third-party service.
Rule 5.7 controls lawyers performing law-related services, which are defined as services that “might reasonably be performed in conjunction with and in substance are related to the provision of legal services, and that are not prohibited as unauthorized practice of law when provided by a nonlawyer.” Rule 5.7(a)(1) states that a lawyer will be subject to the MRPC with regard to the provision of law-related services if the services are provided “by the lawyer in circumstances that are not distinct from the lawyer’s provision of legal services to clients,” but Comment 2 to Rule 5.7 clarifies that even if those services are distinct from the provision of legal services to clients, “the conduct of a lawyer involved in the provision of law-related services is subject to those Rules that apply generally to lawyer conduct, regardless of whether the conduct involves the provision of legal services.” Comment 9 to Rule 5.7 also lists “trust services” as an example of law-related services. Therefore, if the attorney-trustee is engaging in law-related services under Rule 5.7 by serving as a trustee, then she is at the very least subject to the “Rules that apply generally to lawyer conduct.”
Reading these three Rules and accompanying Comments together, whether an attorney-trustee is subject to all of the MRPC may depend on whether an attorney-trustee’s services as a trustee are deemed to be “law-related services” provided “in circumstances that are not distinct from the [attorney]’s provision of legal services to clients.” If these services are not distinct, then the attorney-trustee is definitely subject to the entirety of the MRPC, in addition to the UTC. One could argue, for example, that attorney-trustee’s services as a trustee are not distinct if that lawyer has worked with a particular client for many years, has drawn up that client’s will and trust documents, and subsequently serves as the trustee of that client’s trust. However, if an attorney-trustee’s services as a trustee are distinct from the legal services that she provides to clients, then the attorney-trustee would only be subject to the Rules that “apply generally to lawyer conduct, regardless of whether the conduct involves the provision of legal services,” such as Rule 8.4. For example, an attorney in the latter scenario would still be barred from “engag[ing] in conduct involving dishonesty, fraud, deceit[,] or misrepresentation” under Rule 8.4(c) but would not have to adhere to the Rules requiring “the protection of client confidences, prohibitions against representation of persons with conflicting interests, and obligations of a lawyer to maintain professional independence.” In both of these situations, the MRPC still demonstrate that attorney-trustees are subject to a higher standard of ethical responsi-bility than trustees who are not lawyers, though the exact height of that standard could vary. Indeed, this notion that lawyers serving in roles available to non-lawyers may be subject to more stringent standards or additional sets of rules is not unprecedented. For example, the Massachusetts Supreme Judicial Court has rejected the proposition that “any activity becomes the practice of law solely because it is performed by a lawyer” but has nonetheless held that “[a]n activity that may not constitute practicing law when performed by another category of professional may well become the practice of law when a lawyer, disbarred or not, performs it.” Accordingly, Rules 5.7, 1.15, and 2.4 and accompanying Comments thus demonstrate that reforms to the UTC are necessary because attorney-trustees may not necessarily be subject to all provisions of the MRPC but should still be held to higher ethical standards as licensed attorneys, and UTC reforms can better ensure that these higher standards are enforced.
Finally, Rule 1.8 provides a blueprint for creating exculpatory clauses that align with the MRPC. Rule 1.8(a) lays out parameters for lawyers who seek to “enter into a business transaction with a client or knowingly acquire an ownership, possessory, security or other pecuniary interest adverse to a client.” Under Rule 1.8, a lawyer seeking to do any of these actions must ensure that:
- the transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing in a manner that can be reasonably understood by the client;
- the client is advised in writing of the desirability of seeking and is given a reasonable opportunity to seek the advice of independent legal counsel on the transaction; and
- the client gives informed consent, in a writing signed by the client, to the essential terms of the transaction and the lawyer’s role in the transaction, including whether the lawyer is representing the client in the transaction.
Rule 1.8(h)(1) covers legal malpractice liability and states that a lawyer shall not “make an agreement prospectively limiting the lawyer’s liability to a client for malpractice unless the client is independently represented in making the agreement.” Currently, it is markedly more difficult for a lawyer to enter into a business transaction with a client or to limit the lawyer’s own malpractice liability than it is for an attorney-trustee to create an exculpatory clause in a trust. Reforming the UTC to better align with the MRPC would ensure that attorney-trustees are subject to the principles of the MRPC even if they are not technically subject to all of the MRPC.
C. Non-Uniform Trust Code States’ Statutory Approaches to Exculpatory Clauses
In light of how many states have adopted the UTC, most states allow at least some kinds of exculpatory clauses to be enforced. In states that have not adopted the UTC, the treatment of exculpatory clauses varies. New York and Delaware are two examples of states at opposite ends of the spectrum, with New York law “appear[ing] to prohibit exculpation from even ordinary negligence” and Delaware law “allow[ing] virtually unlimited exculpation of the trustee.” Indeed, neither New York nor Delaware includes specific provisions for exculpatory clauses shielding attorney-trustees from liability, but no state does.
Under New York state statute, clauses exonerating trustees “from liability for failure to exercise reasonable care, diligence and prudence” are “contrary to public policy.” Given that negligence can be defined as “conduct which falls below the standard established by law for the protection of others against unreasonable risk of harm” that does “not include conduct recklessly disregardful of an interest of others,” this statute can be read to ban clauses exculpating trustees from all forms of negligence. To that end, some New York courts have strictly construed the relevant statute in precisely this manner. For example, in In re Estate of Lubin, the Bronx County Surrogate Court evaluated the validity of an exculpatory clause with language that relieved the attorney acting as trustee from liability “for any loss or injury to the property * * * except * * * as may result from fraud, misconduct or gross negligence.” The court held that the clause “attempt[ing] to exonerate [the attorney-trustee] from liability for his failure to use reasonable care, diligence and prudence” was “contrary to public policy and void” under the relevant state statute. There, the attorney-trustee was also the drafter of the exculpatory clause, and the court asserted that “[w]here the attorney-draftsman is also the nominated fiduciary and, contrary to public policy, he inserts such an [exculpatory] clause . . . he is displaying a contempt for the law which is antithetical to the honor that the profession requires.” The court evidently regarded the attorney’s use of a self-drafted exculpatory clause as abhorrent to professional responsibility, though it did not expound on whether its holding would have been different if the attorney-trustee had not drafted the clause himself or if the trustee had not been an attorney at all.
Even more extreme, the Nassau County Surrogate Court found in In re Estate of Allister that a “provision of the will authorizing the retention of assets by the trustee in his uncontrolled discretion without liability for any decrease in value” was “offensive to public policy as an attempt to exonerate the [trustee] from the duty of exercising reasonable care and prudence.” The court stated that such a provision “exculpating the [trustee] from loss caused by his negligent conduct is void” under New York law, thereby holding that exculpatory clauses cannot even be used to shield trustees from actions constituting ordinary negligence.
Handed down by two different courts that do not have binding authority over each other, In re Estate of Lubin demonstrates the general unwillingness of New York courts to exonerate trustees from liability based on “gross” or “wrongful” negligent behavior, while In re Estate of Allister goes so far as to disallow exoneration for simply “negligent conduct.” In re Estate of Allister stands in stark contrast to the UTC, which allows imprudent or negligent behavior so long as the trustee purports to have acted in “good faith,” and establishes a standard for exculpatory clauses that makes it difficult to conceptualize what protections such clauses could even provide.
At the other end of the spectrum, Delaware takes an even friendlier approach to exculpatory clauses than the UTC. The relevant state statute governing trusts states that “nothing contained in this section shall be construed to permit the exculpation or indemnification of a [trustee] for the [trustee]’s own wil[l]ful misconduct or preclude a court of competent jurisdiction from removing a [trustee] on account of the fiduciary’s wil[l]ful misconduct.” Therefore, “the only conduct from which a trustee cannot be exculpated is wil[l]ful misconduct.” The statute does not mention gross negligence or the “reckless indifference” standard of the UTC section 1008, nor does it discuss insertion of the clause, fairness of the terms, or the interests of the beneficiaries. Under Delaware’s standard for exculpatory clause enforcement, any trustee—including an attorney-trustee—could feasibly escape liability for a breach a trust committed with gross negligence or reckless indifference. Such action by an attorney-trustee would certainly seem to be in direct opposition to professional responsibility, fiduciary duty, and potentially other standards for determining a lawyer’s liability.
IV. Incongruent Standards For Determining Liability
When a lawyer’s professional misconduct harms a person, she can bring a tort claim against that lawyer for legal malpractice. To that end, the majority standard for determining when an attorney is civilly liable for committing legal malpractice is much stricter on lawyers than the standards typically employed for determining when attorney-trustees who are protected by exculpatory clauses face liability for committing breaches of trust. Under the UTC and the state law of Delaware, attorney-trustees escape liability unless they are found to have acted “in bad faith or with reckless indifference” or have committed “wil[l]ful misconduct,” two relatively difficult standards to meet. In contrast, in most jurisdictions a plaintiff will succeed in a legal malpractice action against her former attorney if she alleges and proves “the existence of an attorney-client relationship, [] acts constituting negligence or breach of contract, [] that such acts were the proximate cause of the plaintiff’s damages, and [] that but for the attorney-defendant’s conduct the plaintiff would have been successful in the prosecution or defense of the action.”
Proving negligence or breach of contract is necessarily an easier task than proving bad faith or reckless indifference, given the former’s lower standards. For example, in Togstad, the court found that Miller’s actions constituted negligence when he “failed to perform the minimal research that an ordinarily prudent attorney would do before rendering legal advice in a case of this nature.” But in Marsman, the court found, rather arbitrarily, that Farr’s complete failure to inquire about Cappy’s needs or available sources of financial support did not constitute “willful neglect or default.” Yet given the Marsman court’s conclusions that Farr “did not meet his responsibilities either of inquiry or of distribution under the trust” and that Cappy would not have had to give up his house had Farr “exercised sound judgment” and made appropriate payments to Cappy, Farr’s actions clearly constituted negligence. These cases illustrate just how incongruent standards for liability are depending on whether an attorney is acting as an attorney or as an attorney-trustee, and this discrepancy underscores the need for revisiting and ultimately revising the current law surrounding exculpatory clauses.
While following the In re Estate of Allister model and forbidding attorney-trustees from being exonerated of liability for any kind of negligent conduct may be too harsh, allowing attorney-trustees to escape liability for any conduct short of bad faith or reckless indifference seems too lenient given existing standards for determining liability like those used for evaluating legal malpractice claims. The final Section of this Article offers a potential middle ground.
V. Proposed Uniform Trust Code Guidance On Exculpatory Clauses
Taking into consideration the current law governing exculpatory clauses and the aforementioned problems with it, this Section proposes inserting the below text as UTC sections 1008 (c) and (d) and as additions to non-UTC state statutes governing exculpatory clauses:
(b) When an attorney licensed in any United States jurisdiction serves as a trustee to someone who is not a part of the attorney’s nuclear family, a term of the trust relieving the trustee of liability for breach of trust is unenforceable to the extent that it: (1) relieves the trustee of liability for breach of trust committed in bad faith, [with reckless indifference to the purposes of the trust or the interests of the beneficiaries, with gross negligence, or in the course of conduct that falls below the standard of knowledge, skill, thoroughness, and preparation reasonably necessary for maintaining the trust and furthering the interests of the beneficiaries;] or (2) was inserted as the result of an abuse by the trustee of a fiduciary or confidential relationship to the settlor.
(c) An exculpatory term drafted or caused to be drafted by [an attorney licensed in any United States jurisdiction serving as a trustee to someone who is not a part of the attorney’s nuclear family] is invalid as an abuse of a fiduciary or confidential relationship unless the trustee proves that the exculpatory term is [fair and reasonable to the settlor and is fully disclosed and transmitted in writing in a manner that can be reasonably understood by the settlor, the client is independently represented and is given a reasonable opportunity to seek the advice of that independent legal counsel on the insertion of the exculpatory term, and the settlor gives informed consent, in a writing signed by the settlor, to the essential provisions of the exculpatory term.]
Similar to how New York’s Bronx County Surrogate Court has evaluated exculpatory clauses, these provisions would not allow lawyers to use exculpatory clauses to shield themselves from acting with gross negligence. Additionally, these provisions would not place a higher burden or standard on attorney-trustees who also draft the trust terms, as cases like In re Estate of Lubin and In re Accounting of Tydings seem to suggest should happen, as section (c) provides ample protections for settlors against potential abuse.
The proposed amendments also borrow significant language from the MRPC—namely Rules 1.1 and 1.8—because of the Preamble’s implications that lawyers are subject to the principles of the MRPC even when not performing traditional legal services. Section (b)(1) borrows language from Rule 1.1, which requires that a lawyer represent her clients competently, as lawyers should also be required to act competently in their service as trustees. Section (c) pulls heavily from Rule 1.8(a), which governs entering into business transactions with clients, because creating a relationship with both the settlor and any beneficiaries is akin to a business relationship. Offering the settlors who are entering exculpatory clauses into their trust terms the same protections offered to clients enter-ing into business transactions with their lawyers maintains protections for those who may be at a bargaining power disadvantage to an attorney. Indeed, Section (c) would actually provide settlors with slightly more protection than clients entering into business transactions, as settlors would not be merely “advised in writing of the desirability of seeking” independent counsel but would be required to be independently repre-sented. The requirement for independent counsel comes from the Rule 1.8(h) mandates for lawyers seeking to limit their malpractice liability, as it should not be easier for lawyers to limit their liability as attorney-trustees than for legal malpractice.
If enacted, there exists the possibility that these amendments could have a chilling effect on lawyers considering whether to act as trustees. However, that is not necessarily a poor result. In order to ensure that lawyers acting as trustees will exercise the highest level of care when deciding to undertake this task—which typically entails compensation—more stringent rules are necessary. And if such rules would turn certain attorneys off to the challenge of serving as a professional trustee, then those attorneys were probably rightfully weeded out. The proposed amendments also specify that these rules would not apply to an attorney acting as a trustee for their parents, siblings, spouse, or children, as an attorney doing so would likely be acting as a non-professional trustee in that instance. Finally, while the current law governing exculpatory clauses does not sufficiently incorporate professional responsibility principles when applied to attorney-trustees, there is no reason to do away with exculpatory clauses completely because they can serve settlors’ interests in certain scenarios as previously discussed. Rather, the best remedy is carving out specific rules for attorney-trustees to ensure that attorneys act ethically in the administration of trusts and cannot hide from liability under exculpatory clause blankets.
