Florida Probate & Trust Litigation Blog

Florida Probate & Trust Litigation Blog

By Juan C. Antúnez of Stokes McMillan Antúnez P.A.

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Thoughts on the Tom Clancy estate tax allocation litigation

Posted in Trust and Estates Litigation In the News
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“This Court is charged with the task of determining the estate tax liability of one of the testamentary trusts created by the Last Will and Testament of renowned author and beloved resident of Baltimore City, Thomas L. Clancy, Jr.” Judge Lewyn Scott Garrett, Orphans’ Court, Baltimore, MD

Baltimore City Orphans’ Court Judge Lewyn Scott Garrett entered this 47-page order ruling that the late author’s estate taxes must be paid exclusively from the trust going to the four adult children of his first marriage, exempting the share going to his second wife and their child from paying any estate tax. The economic implications of this ruling are huge, as reported here by Law360:

Tom Clancy’s widow is not responsible for a multi-million dollar tax bill on the best-selling author’s $83 million estate, which includes a minority share of the Baltimore Orioles, a 535-acre Maryland estate, and a rare World War II tank, a Maryland probate court judge ruled on Friday. Baltimore City Orphans’ Court Judge Lewyn Scott Garrett concluded Friday that none of Alexandra Clancy’s two-thirds share of the $83 million family estate can be used to foot the hefty $11.8 million tax bill. Instead, the taxes must be paid out of the roughly $28.5 million trust Clancy left to his four adult children from his first marriage, the judge said.

A working lawyer’s perspective:

As a person who litigates these kinds of cases for a living, what I found most interesting about the order was how close the call was. This wasn’t a slam dunk. It could have gone either way. At the center of this controversy are the convoluted estate-tax allocation provisions incorporated into Clancy’s will, which Judge Garrett charitably describes as “inartfully drafted.”

Sloppy drafting = heightened litigation uncertainty. Why? Because this kind of drafting often leaves room for more than one “plausible” interpretation that also makes sense and seems fair. That’s what happened in this case.

Under the interpretation advocated by Clancy’s second wife, the court was asked to interpret Clancy’s will in a way that reduced his overall tax bill, but resulted in 3/4 of the net after-tax estate set aside for family members going to Mrs. Clancy and her child, and only 1/4 going to Clancy’s children from his first marriage. Under the interpretation advocated by Clancy’s older children, the tax bill would be higher, but the estate would have been split in three equal shares: 1/3 for surviving spouse, 1/3 for her child, and 1/3 for children of first marriage. So what did Clancy want (i.e., what’s his “overriding intent”)? Less taxes or an even split? Both interpretations make sense and seem fair. And according to Judge Garrett, both are “plausible,” as he repeatedly states in his order:

Respondent’s construction of the plain language of the Will is certainly plausible . . .

* * *

Certainly, both constructions are plausible.

* * *

Respondent’s construction is certainly plausible . . .

Good lawyering = better judging:

When it’s a close call and the stakes are high, the premium on good lawyering goes up exponentially. Why? Because it’s in these kinds of cases that a state court judge is going to rely most heavily on the lawyers giving him or her the “ammunition” needed to do a good job (i.e., thorough, well-written legal briefs and a clear factual record). If you read Judge Garrett’s 47-page order, it’s clear he was the beneficiary of excellent lawyering.

First, the order contains a detailed quantitative analysis of the tax/economic implications of the competing interpretations (who says lawyers can’t do math!). Then, the order wades through Maryland’s estate-tax apportionment statute. These statutes are notoriously complex and difficult to decipher (as I recently noted here in connection with amendments to F.S. 733.817, Florida’s equivalent apportionment statute). Finally, the order applies a three-pronged analysis to deconstruct the key text of Clancy’s will, starting with its “plain language,” then applying an exhaustive analysis of interpretive case law, and concluding with a thoughtfully reasoned determination of Clancy’s “overriding intent.”

For those of us in the trenches, this kind of judicial work product is gold, and certainly worth holding onto for future reference. I’m assuming this order’s going to be appealed. If it is, it’ll be interesting to see how much of it gets folded into the appellate court’s opinion. Stay tuned for more . . .

2015 Florida trust and estate legislative roundup

Posted in Probate & Guardianship Statutes
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The rotunda of the Capitol, the natural habitat of advocates and lobbyists, during the closing week of the legislative session in April. (Photo: Democrat files )

This was another busy year on the legislative front. Most of the changes to our Probate and Trust Codes were rolled into House Bill 343, which I report on below. In a subsequent blog post I’ll report on House Bill 889 (which covers changes to our health-care surrogate statutes), and House Bill 5 (which covers changes to our guardianship statutes).

1. What’s it take to get a court order shifting legal fees in contested probate and trust proceedings?

If you’re ever involved in any contested probate or trust proceedings, this is the single most important legislative item you’ll want to focus on for 2015. Why? Because the fee-shifting statute in our Probate Code (F.S. 733.106) and its analog in our Trust Code (F.S. 736.1005) need to be considered in every one of these cases. There aren’t many statutes you can say that about. And this year both were overhauled in significant ways.

Backstory:

Contested probate and trust proceedings almost by definition involve multiple beneficiaries (what’s to fight over if there’s only one beneficiary?) Often, only one of the beneficiaries is driving the litigation, the others are basically innocent bystanders. The default rule is that the cost of this litigation is borne proportionately by all — not just the litigious beneficiary. To say this is unfair to the “innocent bystander” beneficiaries is putting it mildly. Under F.S. 733.106 (in probate cases) and F.S. 736.1005 (in trust cases) our courts have the authority to work some equity here by shifting the cost of the litigation so it’s borne solely (or at least mostly) by the litigating beneficiary’s share of the estate.

Over the years some of our appellate courts have interpreted these statutes as requiring specific findings of bad faith, wrongdoing, or frivolousness before fees could be shifted, which is akin to a F.S. 57.105 standard (as discussed here). That standard may make sense in the context of civil litigation generally, but it really doesn’t work in the “innocent bystander” scenario (i.e., why should non-litigating beneficiaries bear the cost of litigation they never wanted any part of, even if the claims weren’t technically frivolous?) On the other hand, giving probate judges unbridled discretion to shift fees isn’t a good idea either (see here for what can go wrong).

Statutory revamp:

House Bill 343 tries to balance the competing interests, amending both F.S. 733.106 and F.S. 736.1005 in two fundamental (and identical) ways. First, to the extent courts were requiring specific findings of bad faith, wrongdoing, or frivolousness before fees could be shifted, that requirement’s been statutorily eliminated. In other words, the bar for shifting fees has been lowered to something below what’s currently needed to shift fees under 57.105. Second, both statutes now contain detailed lists of “factors” courts “may” (read should) consider when shifting legal fees:

  • The relative impact of an assessment on the estimated value of each person’s part of the estate.
  • The amount of costs and attorney fees to be assessed against a person’s part of the estate.
  • The extent to which a person whose part of the estate is to be assessed, individually or through counsel, actively participated in the proceeding.
  • The potential benefit or detriment to a person’s part of the estate expected from the outcome of the proceeding.
  • The relative strength or weakness of the merits of the claims, defenses, or objections, if any, asserted by a person whose part of the estate is to be assessed.
  • Whether a person whose part of the estate is to be assessed was a prevailing party with respect to one or more claims, defenses, or objections.
  • Whether a person whose part of the estate is to be assessed unjustly caused an increase in the amount of costs and attorney fees incurred by the personal representative or another interested person in connection with the proceeding.
  • Any other relevant fact, circumstance, or equity.

The bill also codifies case law regarding the assessment of fees in estate proceedings by authorizing a court that assesses fees and costs against one person’s part of an estate, to direct payment of such fees and costs from the person’s part of a trust if the person’s part of the estate is insufficient to fully pay the assessment, a “pour-over” will is involved, and the matter was interrelated with the trust from which payment is made. These amendments apply to proceedings filed on or after July 1, 2015.

2.  What exception applies to the 3-month deadline for filing objections to the validity of a will, venue of the probate proceeding, or the court’s jurisdiction?

I previously wrote here about the split between the 1st DCA and the 3d DCA regarding whether the 3-month statute of limitations period contained in F.S. 733.212(3) applies to personal-representative disqualification motions. 3d DCA said NO, 1st DCA said YES. As I reported here, in Hill v. Davis, — So.3d —-, 2011 WL 3847252 (Fla. Sep 01, 2011), the Florida Supreme Court weighed in on the issue, holding that YES, the 3-month statute of limitations period DOES apply to personal-representative disqualification motions, but left open what some considered to be a huge loophole “where fraud, misrepresentation, or misconduct with regard to the qualifications is not apparent on the face of the petition or discovered within the statutory time frame.” Because objections to the validity of a will, venue of a probate proceeding, or the court’s jurisdiction are also covered by F.S. 733.212(3), the Hill loophole logically applied to those objections as well. House Bill 343 closes that loophole for any basis other than estoppel (and then only in very limited circumstances), as explained in the bill’s Legislative Staff Analysis:

In the case of objections to the validity of a will, venue, or the jurisdiction of a court, the bill partially codifies the holding of the Hill decision and provides that except for estoppel based on the misstatement of a personal representative as to the time that an objection may be filed, the three month time period for objections under s. 733.212, F.S., may not be extended for any reason. Any objection not barred by the three month time period must be filed no later than the earlier of entry of an order of final discharge of the personal representative or one year after service of notice of administration.

These amendments apply to proceedings filed on or after July 1, 2015.

3. But what about statutorily disqualified personal representatives? Does the 3-month SOL still apply?

Under F.S. 733.303 and F.S. 733.304, no matter how well qualified you might be to serve as someone’s personal representative (“PR”) or how badly the decedent wanted you to do the job, you’re statutorily disqualified from serving if:

  • You’ve ever been convicted of a felony.
  • You’re mentally or physically unable to perform the duties.
  • You’re under the age of 18.
  • You’re not a Florida a resident (unless one of the family-member exceptions in 733.304 applies).

One of the primary objections to the Florida Supreme Court’s ruling in Hill was that there should never be a limitation on objecting to a person serving as PR who was statutorily disqualified from doing the job since day one. In other words, this person should have never been appointed PR in the first place, so why give him or her a pass just because no one figured this out until it was too late to object? House Bill 343 addresses that concern by eliminating the limitations period for statutorily disqualified PRs, as explained in the bill’s Legislative Staff Analysis:

The bill amends ss. 733.212(2)(c), 733.212(3), and 733.2123, F.S., to remove the limitation periods for objections to the qualifications of a personal representative after service of notice of administration. All interested persons may object to an unqualified personal representative after the issuance of letters and within 30 days after a personal representative serves a notice of ineligibility under s. 733.3101, F.S. If the personal representative was not qualified to act at the time of appointment, no action will be required on the part of an interested person to remove such personal representative as the bill amends s. 733.504, F.S., to require a personal representative who knows that he or she was not qualified to act at the time of appointment to immediately resign. Courts are also required to remove a personal representative and revoke his or her letters of appointment if he or she was not qualified to act at the time of appointment. A personal representative who was qualified to act at the time of appointment but later becomes ineligible to serve must provide in the notice required under s. 733.3101, F.S., that interested persons have the right to petition for his or her removal. A personal representative who fails to resign if not qualified at the time of appointment or who was qualified at the time of appointment but fails to provide notice of later ineligibility to serve will be personally liable for attorney fees and costs incurred in removal proceedings.

These amendments apply to proceedings filed on or after July 1, 2015.

4. What about changes to the allocation of estate tax liability in probate proceedings?

Our estate-tax apportionment statute is found in F.S. 733.817, and it’s notoriously complex and tricky to apply. This statute hasn’t been substantially revised since 1998, although a number of significant changes have occurred in federal and state tax laws since that time, including the elimination of the federal credit for state death taxes and, by extension, the Florida estate tax. To fill that gap House Bill 343 substantially revises F.S. 733.817 to:

  • update the statute for consistency with changes in federal estate tax laws;
  • codify case law governing estate tax apportionment; and
  • address “gaps” in the current statutory apportionment framework.

If you’re looking for a good place to quickly get your arms around the particularities of these statutory amendments, you’ll want to read the bill’s Legislative Staff Analysis, which is way too long to summarize in this blog post. If you’re willing to wait, you can rest assured legions of tax lawyers will be presenting on these changes over the next year.

4th & 5th DCAs: When does a probate judge have “personal” jurisdiction over a personal representative or trustee?

Posted in Compensation Disputes, Practice & Procedure

jurisdiction-personalSection 731.105 of our Probate Code tells us that all probate matters are “in rem” proceedings. In my last post I wrote about two recent cases testing the outer limits of a probate court’s in rem jurisdictional authority. In this post the focus is on personal (i.e., “in personam”) jurisdiction in contested probate proceedings.

A distinctive feature of most in rem proceedings is that you don’t have to personally serve anyone to get your case up and running. Not surprisingly, because most of their cases are purely in rem proceedings, probate lawyers get used to litigating claims without ever having to go through the trouble of personally serving anyone. Here’s the problem: this mindset can be a trap when a probate case involves someone’s personal assets. Prime example: fee disputes.

If you want a probate judge to order a personal representative or trustee to refund excessive fees paid to himself or his lawyers, what you’re really asking for is a personal judgment against the fiduciary, which means the court must have personal jurisdiction over the fiduciary. And your court’s not going to have that kind of personal authority over your fiduciary until you personally serve him. Miss that procedural step and you may find yourself on the receiving end of a motion to dismiss, which is what happened in the Kozinski case.

Kozinski v. Stabenow, — So.3d —-, 2014 WL 5611595 (Fla. 4th DCA November 05, 2014)

This case revolves around the inheritance a woman identified by the court as “E.W.H.” left to her children. One of her daughters, Kozinski, was appointed personal representative of her mother’s estate and trustee of her trust. Two of E.W.H.’s other daughters contested the amount of fees their sister paid herself as PR/trustee, and also the amount of attorney’s fees she paid with estate assets. To contest these payments the objecting sisters filed a petition pursuant to F.S. 733.6175 and F.S. 736.0206. Both statutes provide that “[a]ny person who is determined to have received excessive compensation [from a trust or estate] for services rendered may be ordered to make appropriate refunds.” The PR/trustee wasn’t personally served with this petition, triggering a motion to dismiss for lack of personal jurisdiction. The trial court didn’t buy this argument, but stayed the case. On appeal, 4th DCA disagreed and reversed:

[W]e hold that a proceeding seeking an order or judgment imposing a refund or surcharge against a fiduciary or a fiduciary’s agent, individually, and the immediate return of money to a trust, probate, or guardianship estate as a result of a breach of fiduciary duty (charging excessive fees) is tantamount to a judgment for damages, requiring personal service on the fiduciary as an individual, and not in any representative capacity.

So how do you personally serve a PR/trustee within the context of an ongoing probate proceeding? Think “formal notice” in accordance with Probate Rule 5.040. Formal notice is the method of service used in contested probate proceedings and, according to F.S. 731.301(2), it’s “sufficient to acquire jurisdiction over the person receiving formal notice to the extent of the person’s interest in the estate.”

We hold that, absent a written waiver, formal notice served on the respondent individually, and not in a representative capacity, is required for a proceeding to surcharge a personal representative, as well as for a petition filed in a probate case pursuant to sections 733.6175 or 736.0206 seeking to require the fiduciary to return to the estate the overpayment of compensation paid to the fiduciary or agent. With regard to notice and procedure in such adversary proceedings, Florida Probate Rule 5.025(d)(1) explicitly states that in adversary proceedings, a “[p]etitioner must serve formal notice.” Fla. Prob. R. 5.025(d)(1) (emphasis added).

Kozinski was not served individually with formal notice of the petition for review of fees, and she did not waive in writing her right to receive such notice. Because personal jurisdiction over Kozinski in her individual capacity was not properly obtained, the trial court’s order denying Kozinski’s motion to dismiss is reversed without prejudice.

Simmons v. Estate of Baranowitz, — So.3d —-, 2015 WL 2089071 (Fla. 4th DCA May 6, 2015)

In this case the issue was whether the fiduciary’s counsel — not just the fiduciary — also has to be served by formal notice in accordance with Probate Rule 5.040 before the court can order the law firm to refund excess legal fees paid. Surprise! The 4th DCA came to the same conclusion it did just a few months earlier in its Kozinski opinion: formal notice = personal jurisdiction. Skip that step and you’re getting reversed. So saith the 4th DCA:

Here, as in Kozinski, the remedy sought in the petition against the personal representative’s counsel was against him individually. Therefore, service by formal notice under the Florida probate rules was required for the court to have personal jurisdiction over him.

The trustee argues that service by formal notice is not required because the Florida probate code gives a court the authority to review the propriety of any compensation paid to a personal representative’s employee and, if that employee has received excessive compensation, to order that employee to make appropriate refunds. . . .

We disagree with the trustee’s argument. We recognize that the Florida probate code gives a court the authority to review the propriety of any compensation paid to a personal representative’s employee and, if that employee has received excessive compensation, to order that employee to make appropriate refunds. See §§ 733.6175(1) & (3), Fla. Stat. (2010). Here, however, the issue is not the court’s authority to act, but the manner by which the court notifies the employee that action may be taken. As we held in Kozinski, service by formal notice is required.

Sowden v. Brea, — So.3d —-, 2010 WL 4135857 (Fla. 5th DCA Oct 22, 2010)

In the Kozinski case the fiduciary challenged the court’s personal jurisdiction over her at the very beginning of the case. She didn’t wait for the litigation to play out then realize somewhere along the way that maybe there was a problem. In the Sowden case the trustee didn’t do that. Instead, after having asked the court to bless a settlement agreement he was a party to, the trustee had second thoughts and took the position that the court didn’t really have personal jurisdiction over him. Here’s the problem with that approach; even if you’re right, if you participate in the case and generally act like a party to the litigation, the court’s going to treat you like a party — which means you’re in by consent. So saith the 5th DCA:

We . . . reject the trustee’s contention that the trial court lacked jurisdiction over the trustee. Personal jurisdiction can be conferred by consent. Bush v. Schiavo, 871 So.2d 1012 (Fla. 2d DCA 2004). By entering into and benefitting from a mediation settlement agreement that (with the trustee’s concurrence) was court-approved in the guardianship proceeding, the trustee submitted to the jurisdiction of the court.

4th DCA: When does a probate judge NOT have jurisdiction over contested property?

Posted in Practice & Procedure, Wrongful Death Claims

jurisdiction-in-remIn contested probate and trust proceedings, if you hear the word “jurisdiction” being used as part of the litigation, it’s probably coming up in one of two contexts. Either your probate judge didn’t have the legal authority to order that certain property be disposed of in a certain way (i.e., the court lacked “in rem” jurisdiction); or your probate judge didn’t have the legal authority to order someone do something personally that they’d really rather not do, such as paying a sanction with personal funds (i.e., the court lacked “in personam” jurisdiction). These jurisdictional arguments are attractive to litigators because you’re contesting a trial court’s interpretation of the law (an argument that’s always viable on appeal) vs. a trial court’s interpretation of contested issues of fact (an argument that’s almost always a loser on appeal).

What follows are two recent cases turning on whether a probate judge had in rem jurisdiction over contested property. In a subsequent post I’ll write about two recent cases turning on whether a probate judge had personal jurisdiction over certain parties. Read these four cases together and you’ll have a good idea of how these esoteric-sounding concepts play themselves out in the very real rough and tumble world of trusts and estates litigation.

Does a probate judge have in rem jurisdiction to decide how the proceeds of a wrongful-death case should be split?

Pitcher v. Waldo, 159 So.3d 422 (Fla. 4th DCA March 25, 2015)

This case involves a dispute between a father and mother over how the proceeds of the wrongful-death lawsuit arising out of their daughter’s death should be divided between the two of them. “Mom”, as PR, prosecuted the lawsuit (only PRs can prosecute wrongful-death suits, see F.S. 768.20). According to “Dad”, he and Mom had agreed to share any award 60/40. Mom apparently remembered things differently after the trial, in which the jury awarded her $1,000,000 and only $100,000 to Dad (i.e., a 91/9 split).

The jury awarded nothing to the deceased daughter’s estate. This last point is key for jurisdictional purposes: because none of the jury’s award was an asset of the probate estate, these were all non-probate funds, which means the probate judge didn’t have in rem jurisdiction over any of it. If Dad wants to litigate any kind of deal he may have had with Mom, he’ll have to do it in a brand new lawsuit, he can’t skip that step by simply filing a petition in the probate proceeding. So saith the 4th DCA:

Appellant sought relief pursuant to section 733.815, Florida Statutes (2012), which provides that interested persons can agree to alter their shares of property from an estate. That statute is inapplicable, because the estate had no assets. Although a wrongful death claim must be brought by the personal representative of the estate of the deceased, the survivor’s claims are for their survivors’ sole benefit and do not become part of the estate. See § 768.21, Fla. Stat. (2012); Hartford Ins. Co. v. Goff, 4 So.3d 770, 773 (Fla. 2d DCA 2009). As the alleged agreement was between the father and mother but not the estate, the trial court correctly concluded that it had no jurisdiction to adjudicate the dispute.

Does a Florida probate judge have in rem jurisdiction to decide how Georgia real estate should be distributed?

Brown v. Brown, — So.3d —-, 2015 WL 4269921 (Fla. 4th DCA July 15, 2015) 

The decedent at the heart of this contested probate proceeding apparently owned property in Florida and Georgia. There was a dispute over how the Georgia property should be divided. A Florida probate judge’s in rem jurisdictional authority over property ends at the borders of our state. If you want a probate court to decide how real estate in Georgia should be divided, you need to go to Georgia and file an ancillary probate proceeding in that state to be adjudicated by a Georgia judge. That didn’t happen here. Instead, the Florida judge entered one order covering all of the decedent’s property — including his Georgia real estate. That may have made sense as a practical matter (a determination that’s bullet proof on appeal), but it doesn’t hold up legally (the ultimate appellate weapon). Bottom line, the party that didn’t like how the Florida judge divided up the Georgia real estate gets a do-over in Georgia. So saith the 4th DCA:

An estate beneficiary appeals from the circuit court’s final order directing the personal representative to divide and distribute “the [decedent’s] Georgia real estate and Florida real estate and other miscellaneous inventory assets of the Estate” amongst several estate beneficiaries. The appellant primarily argues that the circuit court lacked jurisdiction to direct the personal representative to distribute the decedent’s Georgia real estate.

We agree and reverse that portion of the order on appeal. See Polkowski v. Polkowski, 854 So.2d 286, 286 (Fla. 4th DCA 2003) (“Like lines in the sand, state boundaries determine a court’s jurisdiction over real property,” and thus the court lacked in rem jurisdiction to order the partition and sale of foreign property); Pawlik v. Pawlik, 545 So.2d 506, 507 (Fla. 2d DCA 1989) (“In no event could the [circuit] court effect a partition of lands outside this state.”) (citation omitted); In re Roberg’s Estate, 396 So.2d 235, 235–36 (Fla. 2d DCA 1981) (“When a testator executes a will devising lands in two or more states, the courts in each state construe it as to the lands located therein as if devised by separate wills.”) (citations omitted).

Stay tuned for more!

In a subsequent post I’ll write about two recent cases turning on whether a probate judge had personal jurisdiction over certain parties. Read these four cases together and you’ll have a good idea of how these esoteric-sounding concepts play themselves out in the very real rough and tumble world of trusts and estates litigation.

Can you sue a Florida trust protector for breach of fiduciary duty?

Posted in Practice & Procedure, Will and Trust Contests
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If a trust protector acts in a way that’s incompetent, vindictive or self-serving, and the trust’s beneficiaries suffer economic loss due to those actions, can they sue him? Maybe. It all depends on whether or not the trust protector is a fiduciary. And yes, that’s an open question. (Illustration: Matt Collins for Barron’s)

Over the last few years there’s been a trend towards wider use of trust protectors in domestic trusts (see here for why), and last year’s 4th DCA opinion in the Minassian case (which I wrote about here) may go a long way towards accelerating that trend — especially in Florida.

As trust-protector clauses get incorporated into more and more trust agreements, sooner or later we’ll have to figure out what do when one of these trust protectors goes off the rails. So here’s the kind of question we need to start thinking about. If a trust protector acts in a way that’s incompetent, vindictive or self-serving, and the trust’s beneficiaries suffer economic loss due to those actions, can you sue him? For now, the best we can say is “maybe.” It all depends on whether or not the trust protector is considered a fiduciary. And yes, that’s an open question.

When is a trust proctor a fiduciary?

The term “trust protector” is a marketing tool, it’s not actually found in our Trust Code. As explained by the 4th DCA in the Minassian case, the authority for the type of role usually filled by a trust protector is found in section 736.0808 of our Trust Code (powers to direct), which was adopted from section 808 of the Uniform Trust Code. Under F.S. 736.0808(4), a person — other than a beneficiary — who holds a power to direct is presumptively a fiduciary. If a beneficiary’s also a trustee, he’s not exempted from any of the duties usually applicable to any other trustee. So why the different standard for trust protectors? Prof. Ausness asks this same questions in a 2014 article entitled When is a Trust Protector a Fiduciary?

The comment to section 808 of the UTC suggests that this exemption is primarily applicable to self-directed accounts such as employee benefit plans and individual retirement accounts. Clearly, there is no need to impose a fiduciary duty in a case where the sole beneficiary of a trust has the power to direct how the trust assets are invested or distributed. On the other hand, if a trust protector is only one of several beneficiaries, it seems that he should be subject to minimal fiduciary duties just as a trustee or trust advisor would be who was also one of the trust beneficiaries.

Subjecting all trust protectors — no matter who they might be — to “minimal fiduciary duties” makes sense to me unless the power granted is purely personal in nature (such as a general power of appointment that can be exercised for the benefit of the power holder). That’s the position Prof. Ausness argues for in his piece (he would apply a “good faith” duty to all trust protectors). It’s also the view advocated by Alexander A. Bove, Jr., as explained in his 2012 ACTEC article entitled The Case Against the Trust Protector.

In considering whether the protector is a fiduciary, this question may be best answered by asking another question: what was the settlor’s intent and purpose in naming the protector and granting the specific powers? If the answer is to give the protector the enforceable power to carry out certain objectives consistent with and in furtherance of the settlor’s intent and the purposes of the trust, then one must conclude that the settlor expected that person to use his best judgment and exercise the powers in “good faith with regard to the purposes of the trust and the interests of the beneficiaries.” On the other hand, if the answer is clearly no, that the settlor intended the power(s) to be exercised at the sole personal discretion of the protector without regard to the settlor’s intent, the interests of the beneficiaries, or the purposes of the trust, then the power will be a personal one.

So what’s the bottom line?

The safe approach is to assume all trust protectors are fiduciaries until a Florida appellate court says otherwise or our Trust Code’s amended. This approach makes sense to me because it’s what we can reasonably assume most clients actually intended. Here’s how Bove makes this same point by actually stating what’s implied by the no-liability approach to trust protectors:

[S]ay the protector is granted the typical power to remove and replace the trustee, but the power is to be non-fiduciary (assuming that is possible). Would you feel comfortable stating the following in the relevant trust provision?

It is the settlor’s intention that in exercising this power the protector shall not be deemed a fiduciary, shall not be required to monitor the trustee’s performance, and shall not be bound by or required to consider any particular standards of trustee performance. He shall not be required to act upon notice that a trustee is in breach if its fiduciary duty, and in the event of appointment of a successor trustee, the protector shall not be required to consider whether any such successor trustee has any experience in or knowledge of trust administration, or is a suitable person or entity to act as trustee. The protector may exercise or refrain from exercising such power in a capricious or whimsical manner at his total personal discretion, without liability therefor.

Note that the forgoing provision is quite consistent with the legal basis of personal powers. Contrast this with the case, again, where the settlor wants to limit the protector’s liability, but in this case does not want to place the trust and the beneficiaries at unreasonable and unnecessary risk. In such a situation, we (and the settlor) might feel more comfortable with something like this:

It is in the settlor’s intention that in exercising this power the protector shall consider and review on a periodic basis all relevant circumstances, including the trustee’s performance in light of the purposes of the trust and the needs of the beneficiaries, and shall use his best judgment in maintaining a qualified, suitable person or entity to serve as trustee hereof. The protector serving hereunder shall not be liable for any action or inaction except where there is found to be fraud, recklessness or willful misconduct.

I readily acknowledge that the proposed language in the first illustration may appear extreme, but isn’t that what we intend when we make the power personal and attempt to totally exculpate the protector from liability. Unfortunately, we simply can’t have it both ways, so that a protector who removes or replaces a trustee, for instance, with a totally unsuitable successor who proceeds to waste trust assets, has no liability for the loss.

Can we have the best of both worlds?

There’s a place for trust protectors. Trustees — especially corporate trustees — don’t want to be given broad discretion to make decisions that can be second-guessed years later by beneficiaries in a courtroom. At the same time, clients are justifiably fearful that even the threat of litigation may be sufficient to frustrate their carefully crafted testamentary plans. This last concern is especially valid in Florida, given the unpredictability and qualitative limitations inherent to an overworked and underfunded public court system that asks our probate judges to juggle thousands of cases at a time. (In Miami-Dade – on average – each of our probate judges took on 2,848 new cases in FY 2012-13, and in Broward the figure was even higher at 3,105/judge.)

So how can our clients have the best of both worlds? Stick to the basics. The new level of administrative flexibility trust protectors are supposed to deliver with less litigation risk can be had by employing the same old drafting tools estate planners have always used, such as exculpatory clauses and litigation-cost advancement provisions. But sometimes human conflict is unavoidable. No one’s perfect — not even trust protectors! What then?

For those rare cases where a trust protector’s actions (or inaction) cause economic damages, we need to plan for a better dispute resolution “process,” not simply duck the issue entirely by immunizing the trust protector from any accountability. And the best dispute-resolution planning tool we have available to us is the mandatory arbitration clause (which was statutorily blessed in Florida, see here). Arbitration clauses allow our clients to “opt out” of all the problems inherent to an overworked and underfunded public court system, while still ensuring beneficiaries have some recourse against incompetent or self-serving trust protectors.  Bottom line, better process + accountability = smart planning; no dispute-resolution process + no accountability = lazy planning.

5th DCA: Can a trial judge assess over $85,000 in attorneys fees against beneficiaries for suing a trustee who committed “numerous breaches” of fiduciary duty?

Posted in Compensation Disputes, Will and Trust Contests

Harrell v. Badger, — So.3d —-, 2015 WL 3631639 (Fla. 5th DCA June 12, 2015)

littlefield

The trustee’s lawyer (Linda Littlefield) stole trust funds, triggering a lawsuit against the trustee. Things took a turn for the worse when the trial judge assessed over $85,000 in legal fees against the beneficiaries for suing a trustee the 5th DCA said committed “numerous breaches of his fiduciary duty to the Trust.” As reported in the Orlando Sentinel, Linda Littlefield (currently disbarred and serving time) and her former husband, Ross Littlefield, plead guilty to stealing $2.9 million from 26 clients.

The default rule in most civil trials is that win or lose, each side pays its own attorneys fees. Known as the “American rule,” it’s something we all learn about in law school and assume applies most of the time. That assumption can get you in big trouble in trust and estate litigation. Why? Because it simply doesn’t apply. This is a huge risk factor litigators who don’t usually handle these cases can easily overlook. Which can be bad news if a case goes sideways on you and your client’s left holding the bag for the other side’s gazillion dollar legal tab.

Section 736.1004 of our Trust Code authorizes courts to award attorneys fees “as in chancery actions.” (There’s a similar rule in our Probate Code at F.S. 733.106). “The well settled rule in chancery cases is that a court of equity may, as justice requires, order that costs follow the result of the suit, apportion the costs between the parties, or require all costs be paid by the prevailing party.” Estate of Brock, 695 So.2d 714, 716 (Fla. 1st DCA 1996). Under the chancery rule, ordering the losing side to pay the prevailing party’s fees is one option, but not the only one. It all depends on what your particular judge believes is fair or “equitable” under the particular facts of your case. In other words, it’s virtually impossible to predict what might happen in advance with any reasonable degree of certainty. Which means your client better be ready for the worst case scenario, no matter how much of a slam dunk his case might look like going in. This case is a prime example of what a “worst case” scenario might look like.

Case Study:

Everything that could possibly go wrong, did go wrong. The trust’s assets were all transferred to a “pooled trust,” which was intended to preserve trust assets for the beneficiary’s care while not disqualifying him from needs-based government programs. This transfer was a form of “decanting,” which is authorized by F.S. 736.04117. If done right, decanting is a great way to fix tricky trust problems (see here). Unfortunately, it wasn’t done right. First, the remainder beneficiaries of the trust were completely cut out when the trust was decanted. Which is why they should have been notified in advance. That didn’t happen:

 Here, section 736.04117(4) plainly and unambiguously requires a trustee to provide notice to “all qualified beneficiaries” of his intent to invade the principal of a trust at least 60 days prior to the invasion. Appellants are qualified beneficiaries as defined in section 736.0103(16), Florida Statutes (2008), of the Trust because of their interest in the distribution of any principal remaining after Wilson’s death. Badger improperly exercised his power to invade the principal of the Trust by failing to provide any notice to Appellants prior to transferring the entire contents of the Trust to the FFSNT.

Also, if you’re going to decant assets from one trust and send them to another trust, the second trust can only include beneficiaries of the first trust. Again, that didn’t happen:

Additionally, under section 736.04117(1)(a)1., the decantation of trust principal is limited to situations where the beneficiaries of the second trust “include only beneficiaries of the first trust.” Here, the first trust defined Wilson as the primary beneficiary and Appellants as the contingent remainder beneficiaries. The second trust—the FFSNT sub-account—also defined Wilson as the primary beneficiary but provided a contingent remainder interest to beneficiaries of the other FFSNT sub-accounts. The second trust clearly included beneficiaries not contemplated by the original Trust, rendering Badger’s decantation of all assets from the original Trust invalid.

Trustee’s lawyer steals the money:

OK, the decanting was botched, but the problem was still “fixable”. It’s what happened next that brought this case up to a whole new level of disaster. Working with her then husband, the elder law attorney hired by the trustee to make this all happen — stole the money! It turns out she and her now ex-husband stole $2.9 million from 26 clients. Included in that mess was the trust at issue in this case. Here’s how that story was reported by the Orlando Sentinel in Kissimmee couple plead guilty to defrauding elderly clients:

A Kissimmee couple who stole nearly $2.9 million from elderly clients pleaded guilty in federal court Tuesday and could be sentenced to 10 years in prison each. Linda Littlefield, a disbarred attorney also known as Linda Vasquez, and her former husband, Ross Littlefield, stole nearly $2.9 million from elderly clients and used the money to buy real estate and cars and prop up their other businesses. Between 2007 and 2010, the Littlefields took more than $4.7 million from 26 clients, then began transferring money to accounts for their personal use. Their business, with an office in downtown Kissimmee, was called JNN Foundation. Ross Littlefield, 48, sent falsified quarterly statements to clients making it appear as if their balances where greater than they actually were. In many cases, people lost most of their life savings. The money was supposed to become part of a pooled trust designed to shelter assets while maintaining the beneficiaries’ Medicaid eligibility.

For the official version, you’ll want to read the U.S. Attorney’s press release.

Can a trial judge assess over $85,000 in attorneys fees against beneficiaries for suing a trustee who committed “numerous breaches of his fiduciary duty to the Trust”? NO!

If trust money’s stolen, who pays? The trustee (whose job it is to safeguard the trust) or the beneficiaries (whose job it is to oversee their trustee)? That’s what this case should have been about. Instead, it became a scary example of what can go wrong when a fee-shifting statute’s improperly applied.

According to the 5th DCA, the trustee in this case was guilty of “numerous breaches of his fiduciary duty to the Trust.” When the remainder beneficiaries of this trust hired a lawyer to sue the trustee (after learning the money had been stolen), he probably thought: numerous breaches of fiduciary duty = slam dunk case, no problem. Which is why what happened next must have completely taken everyone by surprise. At trial, the judge ruled against the claimants on all grounds and, adding insult to injury, awarded $85,005.50 in attorneys’ fees to the trustee based on a finding that the claimants had “presented absolutely no evidence” of wrongdoing. But for this fee-shifting order, I don’t think this case would have gotten much attention at the 5th DCA. Because of this fee-shifting order, we now have another appellate opinion we can point to when weighing the risks and rewards of trust litigation:

We review a trial court order on a motion for attorneys’ fees in an action challenging the exercise of a trustee’s power for an abuse of discretion. Nalls v. Millender, 721 So.2d 426, 427–28 (Fla. 4th DCA 1998). Section 736.1004, Florida Statutes (2008), requires a trial court to award attorneys’ fees and other costs “as in chancery actions.” Under the chancery rule, a trial court “may apportion the costs between the parties, or require all costs to be paid by the prevailing party.” Nalls, 721 So.2d at 427. Although we find that the equities of the instant case do not favor any award in favor of Badger, the trial court did not specifically base its award on equitable considerations. See generally Tesla Elec., Armature & Mach., Inc. v. JLM Advanced Technical Servs., Inc., 128 So.3d 865, 866 (Fla. 1st DCA 2013). Rather, the trial court based its imposition of attorneys’ fees against Appellants on the finding that they “presented absolutely no evidence” in support of their claims. Because our ruling necessarily invalidates the trial court’s finding as to the sufficiency of Appellants’ evidence, the award of attorneys’ fees in favor of Badger was an abuse of discretion. We remand for a reasonable apportionment of the parties’ attorneys’ fees. See Republic Nat’l Bank v. Araujo, 697 So.2d 164, 166–67 (Fla. 3d DCA 1997).

So what now?

In trust cases, the same person is your law giver and fact finder: the judge. If that judge has made up his mind about how a certain case should turn out, getting reversed doesn’t matter all that much if the case is sent back to the same judge post appeal for a “do over.” At least that won’t happen here. Although the 5th DCA sent the case back to the trial court, the original trial judge has since announced his retirement (see here).

4th DCA says NO to “legal gymnastics” aimed at getting around Florida’s post-divorce automatic will-revocation statute

Posted in Marital Agreements and Spousal Rights

Carroll v. Israelson, — So.3d —-, 2015 WL 3999486 (Fla. 4th DCA July 01, 2015)

mental_gymnastics

4th DCA: “[S]ection 732.507(2) becomes operative on the date of dissolution, so it does not allow for such post-death legal gymnastics to manipulate the issue of whether a will provision “affects” the former spouse.”

In 1951 Florida enacted a statute automatically cutting divorced spouses out of each others’ wills (currently at F.S. 732.507(2)). In 1989 Florida extended this rule to revocable trusts (see F.S. 736.1105). And in 2012 extended it yet again to non-probate transfers such as life insurance policies, annuities, pay-on-death accounts, and retirement planning accounts (see F.S. 732.703, which I wrote about here).

The rationale underlying all these statutes was summed up nicely by the 4th DCA in this case:

“It is an understatement to say that animosities arise in divorce proceedings which are inconsistent with wills executed when everything was rosy in the marriage. Divorce attorneys typically advise clients to revise their estate plans for the post-divorce world. However, with all the stress of divorce litigation, it is not uncommon for people to resist the idea of their own mortality and procrastinate their post-divorce estate planning. And then they die with a will in place that provides for the former spouse.”

This case turns on how broadly the will-revocation statute (and by implication, all of our post-divorce nullification statutes) should be read.

Case Study:

Thomas Carroll was married to Wendy Israelson Carroll for eighteen years. In 2005, when things were good with the marriage, Thomas executed a will whose residuary clause left his entire estate to Wendy’s revocable trust, which benefits Wendy exclusively if she survives Thomas, and her niece and nephew if she predeceases him. The couple divorced in September 2012, and one month later Thomas died, never having changed his 2005 will. Thomas’ mother sued to set aside the residuary clause of her son’s will, arguing that it was nullified by F.S. 732.507(2). As her son’s sole intestate heir, the estate would go to her by default.

Wendy countered that the will’s residuary clause shouldn’t be nullified because her revocable trust (the 100% recipient of the residuary estate) could be administered as if she’d predeceased Thomas (thus benefiting her niece and nephew, but cutting out Thomas’ mom). The only hole in this argument is that Wendy’s still very much alive, so the trusts for her niece and nephew still didn’t exist. No problem said Wendy. She could pretend she was dead, and simply create the trusts after the fact. “Presto!” problem solved. Wendy’s family gets it all, Thomas’ mom gets nothing. This kind of mental gymnastics drives me crazy. But here’s the problem — sometimes it works! According to the 4th DCA:

Exercising vigorous legal gymnastics, the circuit court permitted the placement of the decedent’s residuary assets into twin, newly-created irrevocable trusts for the benefit of the former wife’s niece and nephew.

What’s it mean to be “affected” by an ex-spouse’s will?

Our post-divorce will-revocation statute voids any portion of a will that “affects” an ex-spouse. How broadly or narrowly that word should be read was the crux of this appeal. Ex-wife urged a narrow reading; arguing that she wasn’t “affected” by her ex-husband’s will because she promised not to touch the money (i.e., no direct pecuniary benefit = not being “affected” by the will), and to instead let it all go to two trusts she would create for her niece and nephew. Wrong answer, so says the 4th DCA:

The statute is triggered by the entry of a final judgment of dissolution or annulment. It is broadly written to apply to a provision of a will that “affects” a former spouse. A common definition of “affect” is “to have an effect on.” Webster’s New World Collegiate Dictionary 23 (4th ed.2002). A provision does not need to have a direct pecuniary benefit to “affect” a former spouse within the meaning of the statute. A provision that so “affects” a former spouse “become[s] void” “upon the dissolution.” If a provision is “void,” it is a nullity. Cf. State v. Nelson, 26 So.3d 570, 577 (Fla.2010) ( “A nullity is defined as something that is legally void.”).

Because Article 4 of Thomas’s 2005 will left the residue of his estate to Wendy, she was affected by it. The bequest to the Wendy Family Trust was only to occur if Wendy predeceased Thomas. However, Wendy was very much alive on the date of dissolution and in complete control of the Revocable Trust that created the Wendy Family Trust for her niece and nephew to inherit. As the trustee of the Revocable Trust, Wendy had the authority to “merge any trust held hereunder with any other trusts [she] created” and to alter the terms of the “Wendy Family Trust.” Thus, on the date of the dissolution, Wendy was very much “affected” by Article 4 of the will, so that provision was rendered void by section 732.507(2).

Legal gymnastics = reversal:

Bottom line, courts need to follow the statute.

We reverse the order of the circuit court because it was contrary to section 732.507(2), Florida Statutes (2012). . . . The circuit court used the fiction of Wendy’s death to green light the rewriting of Wendy’s trust documents after Thomas’s death. However, section 732.507(2) becomes operative on the date of dissolution, so it does not allow for such post-death legal gymnastics to manipulate the issue of whether a will provision “affects” the former spouse.

Lesson learned?

When it comes to invalidating a will, never take anything for granted. Judges are conditioned by experience and centuries of common law to enforce wills whenever possible, however possible. Overcoming that kind of institutional bias is never easy — even if you have a statute directly on point supporting nullification. That’s not to say these cases shouldn’t be prosecuted, but it does mean your client’s expectations must be appropriately managed, no matter how much of a “slam dunk” you might think your case is. Remember, it’s all good as long as you don’t over promise.

4th DCA: Can a ward sue the attorney for his former court-appointed guardian for malpractice?

Posted in Contested Guardianship Proceedings, Ethics & Malpractice Claims

Saadeh v. Connors, — So.3d —-, 2015 WL 3875682 (Fla. 4th DCA June 24, 2015) 

risk-management

If you represent a fiduciary in a contested Florida estate, trust or guardianship proceeding and you commit malpractice, you need to assume the possible universe of plaintiffs in a malpractice suit against you includes not just your client (i.e., the guy who hired you and thinks you’re brilliant), but also every third-party beneficiary of the estate, trust or guardianship estate who thought your client was a jerk and blames you personally for every real or imagined injury he may have caused.

The general trend in Florida (especially in the trusts and estates context) is that a third-party beneficiary of your legal services can sue you for malpractice — and it doesn’t matter that the third party was never your client and had zero privity of contract with you. Examples of this trend include cases in which the beneficiaries of a deceased ward’s estate had standing to sue the guardian’s lawyers for malpractice (click here), estate beneficiaries had standing to sue a decedent’s estate planning attorneys for malpractice (click here), and a successor personal representative had standing to sue his predecessor’s attorney for malpractice (click here). This case is yet another example of that trend.

Case Study:

I first wrote about this train-wreck of a guardianship case back in 2012 (see here). Two initial observations: First, this case is yet another example of why the public is clamoring for reform of Florida’s court-administered guardianship system (see here). Second, when a case blows up, there’s going to be collateral damage. And the lawyers involved are often prime targets — no matter whose side they were on. This case is no exception. After unwinding the mess caused by everyone involved in obtaining the underlying “emergency” guardianship appointment, Karim Saadeh (an immigrant and self-made millionaire) got busying suing everyone in sight — including their lawyers. One of his claims was for malpractice against the lawyer for his court-appointed guardian. That’s the claim dealt with in this appeal.

The defendant lawyer argued the claim against her should be dismissed as a matter of law because there was no privity of contract between her and Mr. Saadeh (the ward), and thus she owed no duty directly to Mr. Saadeh. She also argued that Saadeh’s interests were adverse to her client’s interest, the court-appointed guardian. Sound familiar? It should. A version of this same defense was tried in all of the other third-party malpractice claims (see here, here, here). It didn’t work then, and it’s not working now (although the trial court bought it). Everything a guardian (and by extension her lawyer) does is supposed to be for the benefit of the ward. If that guardian’s lawyer commits malpractice, the ward can hold her accountable in a direct malpractice suit . . . so sayeth the 4th DCA:

In a 1996 opinion of former Attorney General Robert Butterworth, the existence of this duty of care is explained:

Under the state’s guardianship statutes, it is clear that the ward is the intended beneficiary of the proceedings. Section 744.108, Florida Statutes, authorizes the payment of attorney’s fees to an attorney who has “rendered services to the ward or to the guardian on the ward’s behalf[.]” Thus, the statute itself recognizes that the services performed by an attorney who is compensated from the ward’s estate are performed on behalf of the ward even though the services are technically provided to the guardian. The relationship between the guardian and the ward is such that the ward must be considered to be the primary or intended beneficiary and cannot be considered an “incidental third-party beneficiary.” . . .

Since the ward is the intended beneficiary of the guardianship, an attorney who represents a guardian of a person adjudicated incapacitated and who is compensated from the ward’s estate for such services owes a duty of care to the ward as well as to the guardian.

Fla. AGO 96–94, 1996 WL 680981.

In its amicus brief that we invited and appreciate, the Real Property Probate & Trust Law Section of the Florida Bar indicates agreement with the Attorney General opinion. The Section reminds us that the lack of privity does not foreclose the possibility of a duty of care to a third party intended to benefit from a lawyer’s services. The Section points out that the reasoning in the Attorney General opinion is supported by section 744.1012, Florida Statutes (2009), in which the Legislature states its willful intent to protect incapacitated persons.

Based on the foregoing analysis, we find that Saadeh and everything associated with his well-being is the very essence i.e. the exact point, of our guardianship statutes. As a matter of law, the ward in situations as this, is both the primary and intended beneficiary of his estate. To tolerate anything less would be nonsensical and would strip the ward of the dignity to which the ward is wholly entitled. Whether there was a breach of the duty which caused damages obviously remains to be determined. But Mr. Saadeh has a viable and legally recognizable cause of action against the guardian’s attorney which is available to Mr. Saadeh and which we direct be immediately reinstated. Accordingly, we remand for further proceedings.

Lesson learned?

Trusts and estates lawyers often represent clients in matters that benefit third parties. Examples include a client’s children in an estate-planning engagement (your client is the testator, but his children are third-party beneficiaries of your work), or the beneficiaries of a trust (your client is the trustee, but the trust’s beneficiaries are third-party beneficiaries of your work), or the beneficiaries of a probate estate (your client is the personal representative, but the estate’s beneficiaries are third-party beneficiaries of your work), or the ward in a guardianship proceeding (your client is the guardian, but the ward is a third-party beneficiary of your work). In all of these cases the attorney has only one client, and our duties of confidentiality and the reciprocal rules protecting our attorney-client communications apply (see here). However, just because the third-party beneficiaries can’t compel you to disclose confidential attorney-client communications, doesn’t mean they can’t sue you for malpractice. That’s the key take-away from this case and others like it, and one that still comes as a surprise to many. By now, it shouldn’t.

If you represent a fiduciary in a contested Florida estate, trust or guardianship proceeding and you commit malpractice, you need to assume the possible universe of plaintiffs in a malpractice suit against you includes not just your client (i.e., the guy who hired you and thinks you’re brilliant), but also every third-party beneficiary of the estate, trust or guardianship estate who thought your client was a jerk and blames you personally for every real or imagined injury he may have caused.

Bonus material:

Bkrtcy. M.D.Fla.: Can winning a “defalcation” ruling in a bankruptcy proceeding against your former probate lawyer end up immunizing his insurance carrier from liability?

Posted in Compensation Disputes, Ethics & Malpractice Claims, Practice & Procedure

In re West, Slip Copy, 2015 WL 2445315 (Bkrtcy. M.D.Fla., May 20, 2015)

rumsfeld2

“There are known knowns; there are things we know we know. We also know there are known unknowns; that is to say, we know there are some things we do not know. But there are also unknown unknowns – the ones we don’t know we don’t know . . . [I]t is the latter category that tend to be the difficult ones.” – Donald Rumsfeld (Illustration by Owen Freeman)

Complex estate litigation usually doesn’t get resolved in a single winner-take-all trial. These cases usually get played out in multiple “mini” trials (sometimes before the same judge, sometimes not) turning on an evolving set of contingencies that no one could have predicted in advance. If you’re smart, it’s these “unknown unknowns” that keep you up at night. Case in point: who knew that winning a “defalcation” ruling in a bankruptcy proceeding against your client’s former probate lawyer could end up immunizing his insurance carrier from liability?

Case Study:

I first wrote about this case here, when a bankruptcy judge ruled that a probate attorney (“West”) had been dishonest and breached his fiduciary duty to his former client (“Aleta”) when he billed her in accordance with Florida’s statutory fee schedule. Applying the fee schedule contained in F.S. 733.6171, West estimated his firm’s fees would be a little over three hundred thousand dollars based on a percentage value of the $23 million estate. Aleta testified that she was “shocked” by that amount, but that West told her that the bill was “set by Florida statute and law,” and that, prior to his passing, her father had known about it. Anyway, Aleta made two payments before falling out with West, ultimately suing him for a return of the fees already paid. The case was moved to the bankruptcy court when West and his wife jointly filed for chapter 7 bankruptcy.

The bankruptcy judge hammered West, ordering him to pay back $212,478 in fees. The judge also concluded that West’s billing-related statements to Aleta were dishonest, intentional and fraudulent. These findings resulted in a “defalcation” ruling, which meant West’s $212,478 debt to Aleta was not dischargeable in bankruptcy. If West actually had the money to pay this debt, this was good news for Aleta. If he didn’t, then the defalcation ruling wasn’t much of a win . . . unless West’s insurance carrier, Florida Lawyers Mutual (“FLM”), was also on the hook. That’s the issue the court grappled with this time around.

Is the insurance carrier “off the hook”? YES

Aleta apparently hoped to collect her $212,478 judgment from FLM, West’s malpractice insurance carrier. FLM had other ideas, arguing that the prior defalcation ruling meant West’s actions fell under his policy’s coverage exclusion for any claim “arising out of a . . . dishonest, intentional . . . or fraudulent act, error or omission.” Aleta argued the policy exclusion was limited to criminal acts, which West’s conduct falls short of. The bankruptcy court wasn’t convinced, concluding that because its prior defalcation ruling was based on a finding that West’s actions had been dishonest, intentional and fraudulent, the coverage exclusion also applied. Bottom line, FLM was “off the hook for West’s liability.” Here’s why:

Florida law requires courts to liberally construe policy exclusions in favor of insureds. This is not to say that courts must always side against insurers. When policy “language is plain and unambiguous, there is no occasion for the Court to construe it.” Instead, courts must simply apply the policy’s plain meaning. The policy exclusion in this case is unmistakably clear: it does not cover dishonest or fraudulent conduct.

A fair look at the facts of this case definitively shows that Aleta’s claim falls within that exclusion. To review, West lied to Aleta by telling her that the he was bound by Florida law to charge a percentage fee. He furthered this fraud when he told Aleta that her father had approved this arrangement. And in a time where he knew she was dependent upon his professional judgment and care, West took advantage of the trust and confidence that Aleta placed within him. This was intentional and dishonest—to say the least. Even the narrowest reading of the policy’s terms would not cut in favor of Aleta’s position. Florida Lawyers Mutual is off the hook for West’s liability. West is not. He remains liable to Aleta for $212,478.

Lesson learned?

In estate litigation it’s the “unknown unknowns” that can convert today’s big win into tomorrow’s bitter set back. The bankruptcy judge’s defalcation ruling against West was clearly a “win” for Aleta, but it also immunized West’s insurance carrier from liability. This may have all been part of a grand strategy, or it could have been an unintended consequence. Either way, we now have one more contingency we can transfer from the “unknown unknown” column to the much easier to handle “things we know we don’t know” column. Will a defalcation ruling always immunize a lawyer’s insurance carrier from liability? We don’t know. But that’s OK, we now know this is a possible risk (it’s a known unknown), and can plan accordingly. And for those of us making a living in the crazy world of civil litigation, that counts as a win.

CHANGE OF VENUE: June 10, 2015 organizational meeting for STEP Miami’s new specialized forum for international trusts and estates litigators will now take place at Northern Trust Bank

Posted in Trust and Estates Litigation In the News

STEP-SIGThe number of registrants far exceeded our expectations for this meeting, so we’ve had to move to a larger venue graciously provided by the folks at Northern Trust.

For those of you who didn’t see the first notice, I’m one of the volunteers working on bringing this exciting new opportunity to Miami. If you are at all interested in this topic, I encourage you to attend this free organizational meeting by clicking the “register now” button below.

REGISTER NOW!

STEP Miami, in conjunction with the STEP Contentious Trusts & Estates Special Interest Group, is hosting an organizational meeting on Wednesday June 10, 2015 from 6:00 PM to 8:00 PM at Northern Trust’s Downtown Miami office located at:

600 Brickell Avenue
Suite 2400
Miami, FL 33131

What’s this all about?

According to a study reported on by the Wall Street Journal, as many as 70% of all families lose a part of their inherited wealth due to some form of estate dispute. There is no professional organization in South Florida today that addresses this serious problem from an international perspective. STEP Miami seeks to fill that gap.

The demand for this specialized forum has long existed in South Florida, but is rising sharply in recent years. The primary factor driving this growth trend is the increasing number of non-U.S. residents owning property or investments in Florida. For example, according to a September 2014 Report prepared by the National Association of Realtors, approximately 25% of all foreign home buyers in the U.S. buy in Florida. And a Miami Downtown Development Authority study found that more than 90% of the demand for new downtown Miami residential units came from foreign buyers; 65% were from South America. South Florida is also a growing hub for ultrahigh-net-worth Latin American families. A recent Knight Frank study found that Miami ranked sixth on a survey list of “most important” cities to UHNW individuals (London was first; New York was second).

About the STEP Contentious Trusts and Estates Special Interest Group

This specialist group serves practitioners who are working with, or have an interest in, trusts and estate practice from a “contentious” angle (that’s polite UK speak for litigation). It provides a forum for sharing international trust and estate jurisprudence and marshaling expertise and best practices in dealing with trust and estate disputes on an international level.

About STEP Miami

Founded in 2000, the STEP Miami Branch is one of the largest and most active in the Americas. Consistent with the objectives of STEP, the Miami branch provides practitioners with access to high level trusts and estates resources for all its members. The branch is run by a committee of 12 directors  and comprises an expanding membership of nearly 200 professionals from across Miami’s accountancy, legal, banking and fiduciary sectors.

THANK YOU TO OUR SPONSOR!

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