J.P. Morgan Trust Co., N.A. v. Siegel, — So.2d —-, 2007 WL 2710957 (Fla. 4th DCA Sep 19, 2007)
Anytime trust beneficiaries object to a trust accounting or any aspect of a trust’s administration the trustee is potentially subject to claims for damages. This theoretical risk of damages arguably places the trustee’s individual interests in conflict with those of the trust’s beneficiaries, thus requiring the trustee to seek court approval under F.S. § 736.0802(10) prior to using trust funds to pay its attorney’s fees. Here’s the text of the statute:
(10) Payment of costs or attorney’s fees incurred in any trust proceeding from the assets of the trust may be made by the trustee without the approval of any person and without court authorization, except that court authorization shall be required if an action has been filed or defense asserted against the trustee based upon a breach of trust. Court authorization is not required if the action or defense is later withdrawn or dismissed by the party that is alleging a breach of trust or resolved without a determination by the court that the trustee has committed a breach of trust.
I recently wrote about this rule in the context of a 2006 case out of the 3d DCA [click here].
But how clear must the conflict of interest be before the trustee’s obligation to seek court approval prior to paying legal fees is triggered? In the linked-to case the trial court determined that answers to interrogatories filed by trust beneficiaries in the context of an accounting proceeding hinting at possible future breach-of-trust claims were enough. The corporate trustee in this case, J.P. Morgan, cried foul, arguing that in the absence of a breach-of-trust action being filed, it shouldn’t be obligated to seek court approval prior to paying its legal fees with trust funds. The 4th DCA saw it differently, and upheld the trial court’s ruling:
J.P. Morgan argues that under the trial court’s ruling all trustees are placed in a position of uncertainty as to when to seek court approval before paying attorneys’ fees from trust assets. However, we hold that in this case J.P. Morgan should have known from the Siegels’ answers to interrogatories in the 2003 action that it would face an action based on the alleged breaches of fiduciary duty and trust mismanagement. At the very least, J.P. Morgan should have realized it was in a position of conflict at that point. Based on the foregoing, we affirm.
What’s most important about the linked-to case is that it’s a prime example of the type of ambiguity the legislature was seeking to avoid when it amended F.S. 737.403(2)(e) in 2005 (this was the predecessor statute incorporated verbatim into new F.S. § 736.0802(10)). Here’s how the new legislation was addressed in the linked-to case:
Section 737.403(2), Florida Statutes, was amended effective July 1, 2005. Section 737.403(2)(e) now provides, in pertinent part:
(2) If the duty of the trustee and the trustee’s individual interest or his or her interest as trustee of another trust conflict in the exercise of a trust power, the power may be exercised only by court authorization…. Court authorization is not required for any of the following:
(e) Payment of costs or attorney’s fees incurred in any trust proceeding from the assets of the trust unless an action has been filed or defense asserted against the trustee based upon a breach of trust. Court authorization is not required if the action or defense is later withdrawn or dismissed by the party that is alleging a breach of trust or resolved without a determination by the court that the trustee has committed a breach of trust.
§ 737.403(2)(e), Fla. Stat. (2005) (emphasis supplied).
The legislature has resolved the issue in favor of the interpretation urged by J.P. Morgan that requires a pleading be filed. However, as J.P. Morgan acknowledges, the new statute was not in effect for the vast majority of the time period at issue.[FN1]
[FN1.] The Siegels’ 2006 lawsuit against J.P. Morgan and Judith Novak asserted various causes of action relating to the time period of January 1, 2003 through September 1, 2005.