Jacobson v. Sklaire, — So.3d —-, 2012 WL 1414447 (Fla. 3d DCA April 25, 2012)

Will I personally have to pay the other side’s legal fees if I lose this lawsuit?

That’s a question we usually don’t have to grapple with because Florida, like the rest of the U.S., follows the “American rule“: win or lose, all sides pay their own legal fees unless there’s specific statutory (or contractual) authority saying otherwise. For trustees, the prospect of being personally liable for an opposing party’s legal fees is doubly remote. They usually don’t even have to pay their own legal fees (the trust is usually on the hook for that expense), let alone someone else’s.

Everyone pays their own legal fees, and trustees get to pay their fees from trust assets. That’s the norm, and where you need to start from if you’re representing a trustee in any litigation. But you can’t stop there. From beginning to end, each decision made in any case involves its own distinct litigation risk analysis. And one of the biggest risks trustees will want managed/analyzed in any case is personal liability for legal fees. So if your trustee client is facing the prospect of litigation, he needs to know that NO, trustees don’t always get their legal fees paid from trust assets [click here], and YES, he could be personally liable for a beneficiary’s legal fees if the case is lost. It’s this second risk your trustee clients will probably find most surprising, and it’s also the focus of the 3d DCA opinion linked-to above.

Can a trustee be personally liable for a beneficiary’s legal fees in a breach of trust lawsuit?

It doesn’t happen often, but under F.S. 736.1004 it is possible for a trustee to end up being personally liable for a beneficiary’s legal fees, which is what happened in this case. Here’s how the 3d DCA summed up the operative facts and its ruling in three short paragraphs:

Jacob Sklaire died in 2004. He created the Jacob Sklaire Trust, in which he gifted to his wife, Joyce [the Beneficiary], $475,000. At his death, the Trust contained approximately $636,000. Michelle and Aline, daughters, are Co–Trustees and remainder beneficiaries of the Jacob Sklaire Trust. After Jacob died, the Co–Trustees refused to distribute the gift to the Beneficiary, who then filed a complaint to compel distribution of the gift from the Trust. The Co–Trustees answered, asserting defenses of lack of capacity, undue influence and fraud, and counterclaimed for funds allegedly wrongfully taken by the Beneficiary from trust assets during Jacob’s life. The trial court denied the affirmative defenses and dismissed the counterclaim with prejudice. The Beneficiary prevailed at trial, and the trial court awarded her costs and fees from the Trust. The Co–Trustees appealed the final judgment and this Court affirmed.

The Co–Trustees thereafter agreed to an order taxing the Beneficiary’s costs against the Trust, and agreed to pay the Beneficiary’s attorney’s fees from the Trust. The Co–Trustees had, however, without court approval paid their own attorney’s fees out of the same Trust during the course of the litigation, counterclaim and appeal, leaving less than necessary to pay the Final Judgment and orders on attorney’s fees and costs. The Beneficiary filed motions to compel payment, and moved to hold the Co–Trustees personally liable for the amounts, asserting breach of fiduciary duty. The trial court awarded the Beneficiary’s appellate fees and costs against the Trust and deferred ruling on the Co–Trustees’ individual liability.

The bulk of the money that was improperly diverted from the Trust was ultimately repaid by the Co–Trustees’ original law firm, and by the Co–Trustees themselves. There were, however, insufficient funds left in the Trust to completely satisfy a balance of about $112,000 remaining from the original amounts ordered repaid, i.e., what was improperly removed from the Trust originally, plus attorney’s fees, plus post-judgment interest. Following an evidentiary hearing, the trial court rendered the order on appeal here, which found that the Co–Trustees in this breach of trust action were jointly and severally liable to the Beneficiary for attorney’s fees and costs pursuant to [F.S. 736.1004]. Finding no error, we affirm.

Does there have to be a finding of “bad faith, wrongdoing, or frivolousness” before a court can shift fees under F.S. 736.1004?

The probate code version of F.S. 736.1004 is F.S. 733.106. Most trusts and estates litigators would consider these statutes as being analogous, with the only difference being one applies in trust actions and the other in probate proceedings. Under F.S. 733.106, a probate judge can shift fees against the losing side by directing “from what part of the estate they shall be paid.” As I wrote here, according to the 4th DCA “this section does not give the trial court unbridled discretion to award fees from any part of the estate,” so it’s reversible error to shift legal fees under F.S. 733.106 in the absence of a finding of “bad faith, wrongdoing, or frivolousness.” This precondition doesn’t appear anywhere within the text of the statute, but according to the 4th DCA it’s necessary for the reasons explained in Geary v. Butzel Long, P.C., 13 So.3d 149 (Fla. 4th DCA 2009):

In In re Estate of Lane, 562 So.2d 352 (Fla. 4th DCA 1990), we examined the propriety of a probate court’s order assessing attorney’s fees from a will contest proportionally against the specific beneficiaries as well as the residuary estate. We noted that section 733.106(4), Florida Statutes, permits the court to direct from what part of an estate a fee assessment shall be paid (just as section 733.6175(2) does). However, we explained:

This section does not give the trial court unbridled discretion to award fees from any part of the estate. Before the trial court may assesses fees against a beneficiary’s share of an estate there must be a finding of bad faith or wrongdoing by the beneficiary or other circumstances which would warrant such an assessment.

Id. at 353. Despite our use of “bad faith and wrongdoing,” we relied on and agreed with Cohen v. Schwartz, 538 So.2d 922 (Fla. 3d DCA 1989), in which the court suggested that in trying to close a prolonged estate, the trial court could assess attorney’s fees against a beneficiary’s portion of the estate for frivolous litigation consistent with section 733.106(4). We agree that if the litigation pursued is frivolous, then the court would have the authority under that section to assess fees against a specific beneficiary’s portion of the estate.

We don’t know if the trial court in the Sklaire case predicated its fee-shifting ruling on a finding of “bad faith, wrongdoing, or frivolousness,” nor do we know if the issue was even addressed by the litigants in their appellate briefs. It’s simply not mentioned in the 3d DCA’s opinion. However, given the amount of attention the 4th DCA’s F.S. 733.106 rulings have attracted in certain probate Bar circles (a lot!), I think it’s only a matter of time before someone argues the same precondition should apply to F.S. 736.1004. Unlike the 4th DCA’s critics, I don’t think this is a big deal.

As a practical matter, most trial judges aren’t going to assess legal fees against a losing party unless someone’s really made a mess of things or gone way beyond the bounds of acceptable behavior. So if your trial judge is inclined to assess fees, he or she is probably not in a good mood to begin with, which means it shouldn’t be all that difficult to also get a finding of “bad faith, wrongdoing, or frivolousness” if you ask for it. So why not ask? If your fee order gets appealed, you’ll be glad you did.