West v. Chrisman, Slip Copy, 2014 WL 4683182 (M.D.Fla. September 19, 2014)

swimmingIf there’s anyone out there that still believes F.S. 733.6171 (the probate code’s attorney’s fee statute) or its trust-code equivalent (F.S. 736.1007) establishes a fee that’s “set” or otherwise “blessed” by Florida law, this case is going to be a rude awakening. Not only did billing in accordance with the statutory fee schedule not shield a probate attorney from getting his fees cut by 90%!, a bankruptcy court’s ruled he was guilty of defalcation for doing so.

How bad is a finding of “defalcation”? Pretty bad.

In Bullock v. BankChampaign, N.A., 133 S.Ct. 1754 (2013), the Supreme Court recently held that a finding of “defalcation” requires evidence of either “an intentional wrong” or “reckless conduct of the kind set forth in the Model Penal Code.” According to the Supreme Court, a person accused of defalcation satisfies the required state of mind when he or she acts with a conscious disregard of a substantial and unjustifiable risk that his or her conduct will violate a fiduciary duty. A “substantial and unjustifiable risk” is one that, “considering the nature and purpose of the actor’s conduct and the circumstances known to him, its disregard involves a gross deviation from the standard of conduct that a law-abiding person would observe in the actor’s situation.” Id. at 1760.

How could billing in accordance with Florida’s statutory fee schedule result in a court finding that you’ve acted in gross deviation from the standard of conduct a law-abiding person would observe? Read on . . .

Case Study:

This case involves a $23 million estate and a fee dispute between the decedent’s former estate planning/probate attorney (“West”), and the decedent’s daughter (“Aleta”). After her father’s death Aleta signed West’s fee agreement, which proposed that his legal fees be “calculated pursuant to the provisions of Florida Statutes § 733.6171 and § [F.S. 736.1007],” but included no calculation of the fees. In other words, the fee would be based on a percentage value of the estate, instead of West’s billable hourly rate. When the fee agreement was signed West was also serving as co-trustee of the decedent’s trust, a fact which plays a big part in the bankruptcy court’s ruling. (Anytime an estate planner writes himself into his client’s trust agreement as a trustee, it’s an ethical red flag, see here.)

Applying the fee schedule contained in F.S. 733.6171, West estimated his firm’s fees would be $355,887, based on a percentage value of the 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. West and his paralegal both deny ever having said any such thing. Anyway, Aleta made two payments (totaling $237,258) before falling out with West, ultimately suing him in state court seeking a return of the fees already paid.

While the state case against him was pending, West filed a voluntary petition for Chapter 7 bankruptcy. Aleta sued West in the bankruptcy proceeding, alleging that he “had abused his fiduciary position as Co–Trustee of the Trust to fraudulently enter into a fee arrangement with the Estate and the Trust.” Aleta sought a determination that West therefore owed a debt equaling the fees already paid him under the arrangement, that would not be dischargeable by his bankruptcy petition.  Under 11 U.S.C. 523(a)(4), debts “for fraud or defalcation while acting in a fiduciary capacity” are not dischargeable under the bankruptcy code (as I’ve previously reported here, here).

To say West got clobbered in his bankruptcy trial is putting it mildly. First, the bankruptcy court concluded that our probate code’s percentage-based approach to compensation does not apply in this case “because clearly that would lead to an unreasonable fee.” Next, using the lodestar method the court determined a reasonable fee of only $24,780, which, when subtracted from the $237,258 in fees actually paid to West, resulted in a total debt of $212,478. Finally, the bankruptcy court concluded that West had falsely represented to Aleta that the fee was set by Florida law and that Aleta had justifiably relied upon that statement in entering into his fee agreement. The bankruptcy court thus concluded that West had made fraudulent representations in violation of his fiduciary duties, and that any fees West owed to Aleta would not be dischargeable pursuant to 11 U.S.C. §§ 523(a)(2)(A) and (a)(4).

For our purposes, the key ruling on appeal affirming the bankruptcy court’s defalcation ruling against West is the following:

Here, West was Co–Trustee before he entered into the Fee Agreement with Aleta. Accordingly, as the Bankruptcy Court held, he had the duty to do more than simply not to act unreasonably. He had the duty to “administer the trust in good faith, in accordance with … the interests of the beneficiaries,” and to “administer the trust solely in the interests of the beneficiaries.” Fla. Stat. §§ 736.0801 and 736.0802 (emphases added). And he had “[the] obligation to make full disclosure to the beneficiary of all material facts.” First Union Nat’l Bank v. Turney, 824 So.2d 172, 188 (Fla. 1 st DCA 2001).

By entering into the Fee Agreement without affirmatively advising Aleta that such a fee was not mandatory or explaining any alternatives to her, West acted in reckless disregard of these duties. West is an experienced attorney who has practiced law for many years. He admits that he knew that the provisions of Florida Statutes §§ 733.6171 and [F.S. 736.1007] were not mandatory,[FN3] and that he had a duty to minimize attorneys’ fees, see Doc. 1–125 at 103. Despite having this knowledge and experience, however, instead of advising Aleta of her options, West pushed Aleta to sign the fee agreement, even going so far as to tell her that it was “required” by Florida law. At the very least, West acted in reckless disregard of his duties of loyalty and candor, and grossly and egregiously deviated from the standard of conduct that a law-abiding fiduciary would observe. Accordingly, the Court will affirm the Bankruptcy Court’s finding that West committed a defalcation while acting as a fiduciary, in violation of 11 U.S.C. § 523(a)(4).

FN3. Indeed, West makes much of the fact that Paragraph 3 of the Fee Agreement uses the word “propose,” Doc. 15 at 39–42, and Wigglesworth testified that West sometimes charged flat fees, Doc. 1–77 at 192.

Lesson learned?

We can all agree hourly billing is a terrible way to do business. So what’s to be done? Don’t wait for a top-down solution. Legislating a one-size-fits-all fix doesn’t work (as the tortured history of F.S. 733.6171 makes abundantly clear, see below). The only thing we can do is work the problem from the bottom up, one client at a time, adjusting to the particular facts of each case. For example, if your engagement agreement provides for billing in accordance with Florida’s statutory fee schedule found in F.S. 733.6171, you’ll want this same agreement to contain text affirmatively advising the client that such a fee is not mandatory and explaining possible hourly-billing alternatives. According to the bankruptcy judge in this case, this omission lead directly to the defalcation ruling.

For an excellent discussion of how we can use the latest in behavioral finance to inform our billing practices, you’ll want to read a white paper by Chicago estate planner Louis Harrison entitled Billing in a Pareto Optimal World, which he states “is a result of ten years of analysis and research, and reliance on the principles of behavioral finance to explain irrational client behavior.” I think Harrison’s one of the best speakers in our field. Anyway, here’s his “macro takeaway” as applied to hourly billing:

How interesting behavioral finance is to what we do on a day to day basis. We would theorize that focus on this area could be the single greatest untapped value to us as practitioners. But it does require thought and focus, and effort for which no hourly payment is immediately made. Creativity on bonus structures is perhaps our greatest missed opportunity. As the tired metaphor goes, “we can’t catch any fish if our pole is not in the billing lake to begin with.” We sometimes become so focused on short term results associated with hourly billing that we miss the retirement forest for the billing trees.

I couldn’t agree more. Now if only I could use some behavioral finance magic to get myself to follow his good advice!?

How did we get here?

According to the Florida Bar’s pamphlet on attorney’s fees, there “are more than 200 Florida Statutes which allow for an award of attorney’s fees in certain legal actions.” I’m sure each one of those fee statutes has its own back story, and F.S. 733.6171 is no exception. The spark that lead to the current iteration of the statute was the Florida supreme court’s ruling in In re Estate of Platt, 586 So.2d 328 (Fla. 1991), which concluded that probate courts could not — as a matter of law — approve attorney’s fees based solely on a fixed percentage of the value of the estate. Instead, probate courts are required — as a matter of law — to evaluate contested fees by using the lodestar method (which is all about hourly billing, see here).

After Platt the Bar swung into action, coming up with a series of legislative changes responding to the court’s adoption of the lodestar method and also mounting public dissatisfaction with the then existing probate system (as captured in this 1994 Pulitzer Prize winning series of editorial reports). The statute we have today was passed in 1995. Although it says nothing about “billable hours,” when challenged, courts will (because as a matter of law, they must) apply the lodestar method, which means that in the absence of agreement we’re stuck with the tyranny of the billable hour. For an entertaining blow-by-blow history of the legislative process leading up to our current fee statute, you’ll want to read Paying for Personal Representatives and their Attorneys May Cost You an Arm and a Leg, a 1994 article published in the UM Law Review.