Robert Rauschenberg Foundation v. Grutman, — So.3d —-, 2016 WL 56456 (Fla. 2d DCA January 06, 2016)

RauschenbergWe can all agree hourly billing is a terrible way to do business. Unfortunately, Florida courts are required— as a matter of law — to evaluate contested attorney’s fees using the “lodestar” method (which is all about hourly billing, see here). And that means that in the absence of agreement we lawyers are stuck with the tyranny of the billable hour. But does the same rule apply to trustees? That was the $24.6 million question the 2d DCA grappled with in this blockbuster case involving the $2 billion estate of Robert Rauschenberg, the most famous American artist you’ve never heard of.

Case Study:

Prior to his death in 2008 Rauschenberg established a revocable trust whose sole remainder beneficiary was the Rauschenberg Foundation. Rauschenberg’s trustees were three long-time friends and business associates. Shortly after Rauschenberg’s death the three trustees and the Foundation became entangled in litigation after the trustees claimed they were entitled to $60 million in fees — a sum that an expert hired by the Foundation maintained was “unconscionable,” amounting to a $40,000-an-hour wage.

Now $60 million may sound like a lot, but it’s less than a rounding error when you consider that during the four years the trustees were in charge of the Rauschenberg collection its value more than tripled, going from a paltry $600 million to slightly over $2 billion. But we’ve all seen cases where an estate’s largest asset is a business or real estate investment that shoots up in value due to market conditions having nothing to do with a trustee’s efforts. Is that what happened in this case? Not according to the trial judge. According to his order (see here), the trustees were actively involved in building the collection’s market value after Rauschenberg’s death.

Upon Rauschcnberg’s death, the Trustees planned, advertised, and managed several exhibitions and memorials. The Trustees developed a strategic plan to withdraw Rauschenberg’s art from the market, in order to prevent a decline in value from speculators or collectors flooding e market with his art. [The Trustees] testified that this decline in value had occurred following the death of other famous artists, such as Andy Warhol. The Trustees contacted all galleries holding art on consignment, and directed that the art be returned. They contacted insurance agents regarding insurance on all assets. The Trustees moved all artwork to the Mount Vernon warehouse in New York for inventory and appraisals. They hired an art advisor. They then interviewed companies regarding a formal appraisal of all artwork, and hired Christie’s to perform the appraisal. The Trustees reviewed the collection to determine which pieces should remain in the Foundation’s permanent collection. The Trustees oversaw security, maintenance and conservation of the art and properties. The Trustees handled litigation of employment and intellectual property issues, and managed authentication requests. The Trustees managed placement of art in museums and galleries for exhibitions when the time was right to re-introduce the art on the market. They interviewed galleries and selected the Gagosian Gallery to hold exhibitions worldwide. The Trustees curated, set prices, negotiated with the galleries and museums, and were involved in all aspects of each exhibition, such as advertisements and catalogs.

Are trustees (like lawyers) condemned to getting paid by the hour if their fees are disputed?

Rauschenberg’s trust didn’t contain a specific fee clause (which is the norm). In the absence of a specific fee schedule written into the trust agreement (which never happens), F.S. 736.0708(1) tells us a trustee’s “entitled to compensation that is reasonable under the circumstances.” One man’s “reasonable” payday could be another’s highway robbery. Which is basically what happened here. By the time the case got to trial the two sides had staked out hugely varying positions. According to the trustees a reasonable fee for the job they’d done was in the range of $51-55 million. According to the Foundation they were only entitled to $375,000.

The reason the competing offers were so far apart is that they reflect two fundamentally different world views: one based on getting paid for the value you create (the trustee’s worldview) and the other based on getting paid a fair hourly wage for the time you spent on the job (the Foundation’s worldview).

Both approaches are defensible economically and as a matter of fiduciary law. So at its core this case boiled down to one legal question: are courts prohibited — as a matter of law — from evaluating contested trustee fees on any basis other than some form of hourly billing? The Foundation said YES, pointing to decades of Florida law applying the lodestar method to contested attorney’s fees. The trustees said NO, pointing to the following 11-factor test adopted by the Florida Supreme Court in West Coast Hospital Ass’n v. Florida National Bank of Jacksonville, 100 So.2d 807 (Fla.1958) for contested trustee fees.

  1. The amount of capital and income received and disbursed by the trustee;
  2. the wages or salary customarily granted to agents or servants for performing like work in the community;
  3. the success or failure of the administration of the trustee;
  4. any unusual skill or experience which the trustee in question may have brought to his work;
  5. the fidelity or disloyalty displayed by the trustee;
  6. the amount of risk and responsibility assumed;
  7. the time consumed in carrying out the trust;
  8. the custom in the community as to allowances to trustees by settlors or courts and as to charges exacted by trust companies and banks;
  9. the character of the work done in the course of administration, whether routine or involving skill and judgment;
  10. any estimate which the trustee has given of the value of his own services; and
  11. payments made by the cestuis to the trustee and intended to be applied toward his compensation.

After hearing testimony from 21 witnesses and admitting over 300 exhibits as evidence, the trial court basically split the difference (which is exactly what you’d expect under the “midpoint rule” discussed below), awarding the trustees about half of their total ask. No matter how warranted this fee award may (or may not) have been on the merits, it was subject to reversal as a matter of law if the 2d DCA bought the Foundation’s legal argument. So did they? NO:

The Foundation argues that the use of the term “reasonable” in section 736.0708(1) without further elucidation suggests a legislative intent to adopt the lodestar method set forth in [Florida Patient’s Compensation Fund v. Rowe, 472 So.2d 1145 (Fla.1985)]. The Foundation asserts that the lodestar method, which the Rowe court applied to calculate attorney’s fees, is equally applicable to trustee’s fees. The Foundation points to the supreme court’s application of the lodestar method in [In re Estate of Platt, 586 So.2d 328, 336 (Fla.1991)] to “reasonable compensation” for attorneys and personal representatives in probate actions.

However, the legislative history of section 736.0708(1) indicates an intent to apply the West Coast factors. Specifically, the Senate Staff Analyses in support of the bill reference section 736.0708(1) and explain, “On the factors to be taken into account in determining a reasonable compensation, see West Coast Hospital Association v. Florida Nat’l Bank of Jacksonville, 100 So.2d 807 (Fla.1958) citing with favor Bogert, Trusts and Trustees, s.976.” Fla. S. Comm. on Banking & Ins., CS for SB 1170 (2006) Staff Analysis 18 n. 258 (Mar. 21, 2006); Fla. S. Comm. on Jud., CS for SB 1170 (2006) Staff Analysis 19 n. 255 (Mar. 10, 2006). And there is no indication of legislative intent to apply the lodestar method in any manner. Thus, we conclude that the lodestar method set forth in Rowe does not apply to trustee’s fees.

Takeaway No. 1: Concrete advice for trustees and the lawyers who advise them

Corporate trustee fees are almost never a mystery: they abide by their published fee schedules (see here). And individual trustees usually opt for payment that is equal to or slightly less than the prevailing corporate trustee rates for their area. So figuring out what’s “reasonable” compensation for most trustees isn’t as difficult as you’d think.

But what if the trust’s unusual? Or the trustees want to make a case for getting paid some kind of extraordinary fee based on an especially challenging assignment or successful business strategy they formulated and executed? In those cases you’ll want to apply the 11 West Coast factors. And the best guidance for how to do that in real life is the example provided by the trial court’s order in this case (see here). It’s a must read for trust lawyers.

Takeaway No. 2: Behold the power of “anchoring”

For me, what’s most interesting about this case is the apparent impact “anchoring” had on the outcome. Anchoring is a cognitive bias that describes the common human tendency to rely too heavily on the first piece of information offered (the “anchor”) when making decisions. Once an anchor is set, other judgments are made by adjusting away from that anchor, and there is a bias toward interpreting other information around the anchor. A corollary to the anchoring bias is the “midpoint rule,” which states that the best predictor of the final deal price in any negotiation is the midpoint between the first semi-reasonable offer and counter offer. At trial the midpoint rule manifests itself this way: your judge or jury splits the difference.

As a starting point, Rauschenberg’s trustees set a high “anchor” with an aggressive fee request in the $51-55 million range that was at least arguably plausible. Based on the 2d DCA’s ruling we now know you can’t use a strict legal argument to block this kind of first-mover advantage. So what’s left? Double down on your negotiation/advocacy efforts by “defusing” the high anchor rather than simply ignoring it. Defusing is a term used in negotiation research for tactics designed to counter aggressive (but plausible) anchors.

The extent to which you can achieve or even surpass the midpoint rule will depend on how effectively you’ve defused the anchor. For a user-friendly introduction to these concepts you’ll want to read Dealmaking: Grappling with Anchors in Negotiation. Here’s an excerpt:

A well-known cognitive bias in negotiation, anchoring is the tendency to give too much weight to the first number put on the table and then inadequately adjust from that starting point. When your counterpart has dropped an anchor, the first and perhaps most important step is to recognize the move, since you can’t defend against something that you don’t see coming. Fortunately, you’ve already identified your counterpart’s maneuver as an attempt to anchor the negotiation in his favor.

Next, you need to defuse the anchor clearly and forcefully: “I’m not trying to play games with you, but we are miles apart on price.” A common mistake is to respond with a counter offer before defusing the other side’s anchor. If someone opens with $100, and you want to counter with $50, before presenting your number you need to make clear that $100 is simply unacceptable. If you don’t defuse the anchor first, you are suggesting that $100 is in the bargaining zone.

. . .

In making your counter offer, be sure to explain your proposal; don’t just throw a number over the fence. It’s particularly important to explain why your counter offer is fair. Also, be aware of the “midpoint rule”: the best predictor of the final deal price is the midpoint of the first semi-reasonable offer and counter offer. The extent to which you can achieve or even surpass the midpoint rule will depend on how effectively you have defused the anchor.