In this update several cases of interest to corporate fiduciaries are examined:
- JP Morgan Chase Bank v. Longmeyer – The Kentucky Supreme Court entered judgment in favor of corporate predecessor to JP Morgan, dismissing $1.875 million claim of breach of fiduciary duty as trustee for informing named charitable remainder beneficiaries of revocable trust that the trust had been amended to remove the beneficiaries and remove the bank as trustee under suspicious circumstances suggesting undue influence.
- Estate of Lewis Elkin – The Philadelphia Court of Common Pleas rejected Wachovia Bank’s claim for $1.25 million in additional trustee compensation for 56 year period of charitable trust administration, and imposed a surcharge of $170,000 for failing to comply with distribution requirements incident to the trust’s tax status as a private foundation and for failure to provide adequate proof of expenditures and attorneys’ fees in accounting action.
- McLean v. Davis – In a case of first impression concerning trust protectors in Missouri, the Missouri Court of Appeals reverses summary judgment in favor of a trust protector on claims that the trust protector breached its fiduciary duty by failing to remove delinquent trustees.
- Estate of Donna Miller – New York Surrogate’s Court denies JP Morgan summary judgment on objections to its accounting as Executor based on the costs of appraisals for estate tax purposes, failure to liquidate specifically bequeathed stock, and demanding releases prior to making distributions.
- In re Trust under the Will of Emanuel Cunha – Hawaii Court of Appeals affirms summary judgment in favor of the Bank of Hawaii on claims by trust beneficiaries that trustee should not have received income commissions on real estate taxes paid by tenant on hotel property held as trust asset.
- Matthews v. Righetti – California Court of Appeals rejects technical challenges to trial court’s award of attorneys fees against trustees where the trial court found multiple breaches of fiduciary duties including self-dealing, failing to account or provide beneficiaries with information, bad faith in the resignation and appointment of trustees, and taking improper fees.
- Zisman v. Leshner – Florida federal district court requires trust beneficiary to arbitrate claims filed by beneficiary against investment agent hired by trustee, where the agreement between the agent and the trustee provided for arbitration.
- Cohen v. Burger – California Court of Appeals holds that arbitration clause in mediation agreement settling multiple trust disputes grants the arbitrator the power to invalidate the settlement where there is no meeting of the minds on the estate tax aspects of the settlement.
- In re Stuart David Fiel Testamentary Trust – The Philadelphia Court of Common Pleas awards the executor payment of attorneys’ fees and costs incurred in the successful defense against a surcharge claim where the majority of the fees were the result of the aggressive discovery and pre-litigation information requests of the beneficiaries bringing the surcharge action.
In 1984, Ms. Ollie Skonberg hired an attorney to prepare a will and revocable trust, and engaged the same attorney 3 years later to revise her estate plan to establish a large trust for several charities and name Bank One, a corporate predecessor to JP Morgan Chase Bank as trustee. She paid the attorney $100 for preparing this multi-million dollar estate plan.
Ten years later when Ms. Skonberg was 93, bedridden, and needing full-time home care, Ms. Skonberg’s caretaker, Vicki Smothers, contacted a different attorney, John Longmeyer, to revise the estate plan. Longmeyer met with Ms. Skonberg and the caretaker, and prepared a drastically different new estate plan for Ms. Skonberg based on a handwritten outline provided by the caretaker. The new estate plan removed all of the charitable beneficiaries, increased the bequest to the caretaker from $20,000 to $500,000, removed Bank One as trustee, and installed Longmeyer as trustee. As trustee, Longmeyer received annual compensation of $100,000. For drafting the new estate plan, the caretaker paid Longmeyer $25,000 even though he delegated the actual drafting to his son-in-law who was an out-of-state attorney not licensed to practice law in Kentucky. During the time of the drafting of the new estate plan, the only doctor to see Ms. Skonberg was Longmeyer’s brother-in-law. The witnesses to the signing of the new estate plan were Longmeyer, his wife, and his secretary.
Upon being informed of its removal as trustee, Bank One entered into an investment agency agreement with Longmeyer as successor trustee by which Longmeyer delegated the investment management of the trust to Bank One. Ms. Skonberg died 6 weeks later, and Longmeyer terminated the agency agreement one month later.
Shortly thereafter, Bank One, on the advice of outside counsel, informed the charities that were beneficiaries under Ms. Skonberg’s prior revocable trust that they had been removed as beneficiaries (unknown to Bank One, one of the charities had already learned of this). The charities brought a contest to the new estate plan against Longmeyer as executor, which Longmeyer settled on the eve of trial, paying $1.875 million to the charities.
Longmeyer then sued Bank One to recover the $1.875 million the estate paid in the settlement on the basis that Bank One breached its duty by disclosing information to the former beneficiaries. The circuit court granted summary judgment in favor of Bank One, the Court of Appeals reversed and remanded, and the Kentucky Supreme Court granted a discretionary appeal.
On appeal, the Kentucky Supreme Court (with one dissent) held that the Kentucky trust statutes impose a duty to keep beneficiaries reasonably informed of the material facts affecting their interests, and do not limit those duties only to irrevocable trusts. The court noted that its statutes may be inconsistent with modern trust law in other jurisdictions with respect to only owing duties to the settler of a revocable trust, but stated that it was not the task of the Court to rewrite the statutes. The Supreme Court rejected Longmeyer’s argument that Bank One’s delay in giving notice was bad faith where notice was given only after Longmeyer removed the assets from the bank (which the Supreme Court called mere “sour grapes”). Ultimately, the Court concluded that Bank One was obligated to give the charities the information. In a lengthy footnote, the Court brushed aside the common law of trust principle that while a settler is competent and has the power to revoke, the trustee owes its duties solely to the settlor.
The Supreme Court reversed the Court of Appeals, rejecting its position that because Bank One accepted its removal and surrendered the trust assets, it had forfeited the right to challenge the revocation or inform the beneficiaries. The Court also rejected Longmeyer’s argument that Bank One owed duties under the agency agreement. The Court reinstated the final judgment of the trial court in favor of Bank One.
Lewis Elkin died in 1901. Under his will, Mr. Elkin established a perpetual charitable trust for the benefit of five Philadelphia area charities. Wachovia Bank (or its corporate predecessor) has served as trustee of the trust at least since 1949.
In the present action, the trustee filed an accounting for the time period from 1949 until 2005 as the basis for filing a claim for additional compensation for ordinary trustee services for that 56 year period in a total amount of $1.25 million. (None of the trustee’s corporate predecessors received commissions on trust principal during that time period). The trustee also sought to remove the investment restrictions under the will. Objections to the accounting and the request for additional back compensation were filed by the charities and the Pennsylvania Attorney General.
At the trial, the trustee offered the testimony of two trust officers and introduced minimal documentary evidence in support of its claim, and did not introduce copies of statements, fee schedules, or proof of market rates for fiduciary compensation. The charities put on testimony and extensive documentary evidence into the record.
The trial court reviewed the entire history of Pennsylvania law on fiduciary compensation from 1864 to the present, and rejected the trustee’s theory of certain deemed unitrust elections under state law because the trustee was asserting the deemed elections for the sole purpose of justifying additional compensation, the elections had not actually been made, and the unitrust under the election would be incompatible with the payout requirements for the trust which is treated as a private foundation for federal income tax purposes.
In their objections to the accounting, the charities charged the trustee with breach of fiduciary duty with respect to distributions required due to the trust’s status as a private foundation. Because one of the charitable beneficiaries was itself characterized as a private foundation for tax purposes, under federal tax rules the distributions from the trust to that charity, the Merchants Fund, are not counted in determining whether the trust met its required annual payout under the private foundation rules (roughly equal to a 5 percent unitrust amount) unless the Merchants Fund makes certain uses of the distributions within 2 years of each distributions. If the Merchant Fund does not use the distributions as required, the trust must make additional qualifying distributions to the other charities (which are public charities) to avoid escalating and very significant federal taxes and penalties.
The testimony at trial was that the under-distributions amounted to approximately $1.6 million. The trustee asserted the position at trial that the responsibility to use the distributed funds and provide information to the trustee was the Merchants Fund’s. Prior to the trial the trustee had made the additional distribution to the other charities after the issue was raised with the trustee by counsel for one of the charities. The evidence at trial was that although the trustee (and its corporate predecessors) knew the Merchants Fund was a private foundation, the tax returns for the Fund for the more recent years incorrectly identifies the Fund as a public charity. When a new trust officer took over the account in 2000, the trust officer did not contact the trustee’s tax department or the Fund to confirm the tax status of the Fund. Documentary evidence presented by the charities included a 1978 letter from a trust officer to the Fund seeking information so that it could meets its tax obligations, a 1986 letter from the IRS to the trustee warning of the imposition of taxes if the trust fails to meet is reporting requirements concerning the Fund, an internal memo reminding an employee to contact the Fund to obtain the information necessary to meet the reporting requirements and avoid penalties, and a 1995 letter from the trustee to the Fund requesting information.
Noting the higher standard of care for corporate fiduciaries, the Philadelphia Court of Common Pleas found that due to the under-distribution, the trustee breached its fiduciary duty continuously for 34 years and exposed the trust to a risk of high taxes and penalties and that the breach deprived the public charity beneficiaries of the use of funds for 34 years.
The court denied the trustee’s request for significant additional compensation on the basis of the breach of duty and also due to a lack of an adequate factual record supporting the claim. The court refused to surcharge the trustee with the beneficiaries’ attorneys’ fees and refused to award the charities interest on the under-distribution due to the lack of proof of the amount of the interest. The court did surcharge the trustee for its own attorneys fees for lack of proof of the validity of the fees (in part because the documentation of the fees was not timely produced in discovery) and surcharged the trustee for tax service fees and certain other items on the accounting for lack of proof of the validity of the charges, in a total amount of approximately $170,000.
Due to the objections of the beneficiaries, the court also refused to lift the investment restrictions under the will, and rejected the trustee’s argument that the trust investments should be brought in line with its internal policies including total return investing and diversification.
In 1996, Robert McLean was injured in a car accident that left him a quadriplegic. Robert hired J. Michael Ponder to represent him in the personal injury suit, and the case settled for a large sum of money. Robert’s grandmother set up a special needs trust (a trust designed to supplement governmental assistance benefits) and the trust received the settlement proceeds. Merrill Lynch Trust Company and David Potashnick were named as initial trustees.
Ponder was named as trust protector of the trust, with the powers in a fiduciary capacity to remove trustees, appoint successor trustees, release the powers, resign as trust protector, and appoint a successor trust protector. The trust terms provide that the trust protector would not be liable for actions taken in good faith.
When the original trustees resigned, Ponder exercised his power as trust protector to name as successor trustees the lawyers that had referred the personal injury case to Ponder (the “Davis Trustees”). The Davis Trustees allegedly referred numerous matters to Ponder previously and had shared in the fees. In 2000, Robert informed Ponder that the Davis Trustees were wasting trust funds. Thereafter, the Davis Trustees resigned and Ponder resigned as trust protector, but not before naming another successor trustee and a successor trust protector. The next year, that successor trustee also resigned and Robert’s mother was appointed as trustee. Robert’s mother as trustee then sued the Davis Trustees and Ponder and his successor in their capacities as trust protectors.
Robert’s mother claimed that Ponder had breached his fiduciary duty and shown bad faith by failing to monitor the actions of the David Trustees, failing to act when the Davis Trustees were acting against Robert’s interests as beneficiary, and giving his loyalty to the Davis Trustees rather than to Robert as beneficiary of the trust.
The trial court granted summary judgment in Ponder’s favor and dismissed all claims against Ponder on the basis of its conclusion that Ponder as trust protector had no duty to supervise the trustees. All of the other defendants settled their claims. Robert’s mother appealed the summary judgment dismissing the claims against Ponder.
On appeal, Ponder asserted that summary judgment was proper because Robert’s mother could not establish two required elements of her claim – causation and duty.
Ponder asserted that causation could not be established because Robert had the right to sue the trustees directly. The Court of Appeals held that Ponder had failed to supply biding legal authority or uncontroverted facts in support of his position, and had therefore failed to carry his burden on this element.
With respect to duty, Ponder argued that Missouri law (Missouri has adopted a version of the Uniform Trust Code) does not impose any specific duties on trust protectors, he only had those duties specifically set forth in the trust agreement, and the trust agreement did not impose upon him a duty to supervise or direct the actions of the trustees.
The Court of Appeals held that since the trust agreement granted authority to the trust protector in a fiduciary capacity, the trust protector owed at least the basis fiduciary duties of undivided loyalty and confidentiality. Also, the Court of Appeals held that the limitation of liability in the trust agreement implies the existence of a duty of care and liability for actions taken in bad faith. The Court of Appeals held that summary judgment was not appropriate because there were several questions of material fact – whether the trust protector’s duties are owed to the beneficiary or to the trust itself, whether the trust protector has a duty to protect the trust from foreseeable injury, whether the grantor intended the trust protector to exercise supervisory authority over the trustees. Because the construction of the trust agreement and the grantor’s intend are significant contested issues of material fact, the Court of Appeals reversed the summary judgment.
Two judges issued concurring opinions, one registering his desire to discourage the use of trust protectors and the other to object to the majority creating legal duties for trust protectors “out of whole cloth” rather than as deciding the case strictly as a matter of construing the trust instrument.
Donna Miller, a vice president of JP Morgan Chase, died in 2000 survived by a spouse and three sons. Her will was admitted to probate and JP Morgan Chase qualified as executor (the Executor) and as trustee of one of the trusts under the will. Barbara Filner and Harry Rosenberg qualified as co-trustees of the other trust (the Article Fifth Trust) under the will.
Under her will, Ms. Miller gave a Waterhouse Securities account and her jewelry to her sons, tangible personal property to her spouse, JP Morgan stock and stock options to the Article Fifth Trust for her sons, and the remainder in trust for her husband.
The family petitioned the surrogate’s court to compel the Executor to file an accounting, and the Executor filed the accounting. The family and the Article Fifth Trustees filed numerous objections to the accounting, including claims that the Executor (1) failed to marshal assets, (2) failed to timely liquidate, distribute, and diversify assets, (3) violated the prudent investor rule, (4) improperly demanded releases prior to making distributions, (5) incurred excessive legal and expert fees, and (6) committed self-dealing. The objections also sought denial of fees, certain apportionment of taxes, removal and surcharge of the Executor, and other relief.
Following partial discovery, the Executor moved for summary judgment or in the alternative for leave to file cross-objections against the Article Fifth Trustees. Certain of the objections to the accounting were dismissed at an earlier hearing. The family responded by moving to compel compliance with discovery requests and for denial of the motion for summary judgment. The Article Fifth Trustees moved for summary judgment on their objections to the Executor’s accountings, for denial of the motion for summary judgment, and for denial of the motion to file cross-objections.
In one of its objections to the Executor’s accountings, the family objected to the payment of $7,500 to a valuation firm to value the JP Morgan stock and stock options in the estate. The Executor moved for summary judgment on the basis of the terms of the will and also the Treasury regulations requiring the appraisal of the assets for estate tax purposes and the risk of interest and penalty charges for improper valuation of the assets. The Surrogate’s Court acknowledged the right to obtain the valuation, but refused to grant the Executor summary judgment on the basis that the fee charged for the valuation is a fact matter best reserved for trial.
The Executor moved for summary judgment on the objections to the investment of $275,000 in its own money market account on the basis that the terms of the Will and state law support the Executor’s authority to invest in its own fund. The Surrogate’s Court denied summary judgment on the basis that the family’s objection was to the rate of interest paid on the account, and the prudence of maintaining a large balance in that account if it was underperforming, which are issues of fact.
The most significant objection to the Executor’s account was based on the drop in value of the JP Morgan stock and stock options between the date of death and the date of the accounting in an amount of $290,000. The Executor moved for summary judgment on the basis that the stock and stock options were specifically bequeathed to the Article Fifth Trust and therefore the Executor did not have ownership of these assets and the prudent investor rules do not apply. The Article Fifth Trustees had requested funding of the Article Fifth Trust in February of 2001. Counsel for the Executor stated in response that the Executor would make a partial distribution to fund the Article Fifth Trust upon the trustees signing a receipt, release, refunding, and indemnification agreement and waiver of citation for partial distribution. Counsel for the trustees raised concerns about the very broad language of the release drafted by counsel for the Executor, and the fact that the trustees were being asked to grant a release without the Executor providing any accounting, even an informal one. The Surrogate’s Court found the trustees concerns well-founded and their refusal to sign the release to be “beyond reproach”, and noted that with prior partial funding the Executor had requested a much more narrowly tailored release. Accordingly, the Surrogate’s Court denied the Executor’s motion for summary judgment.
The Surrogate’s Court granted the family’s motion to compel the Executor to respond to discovery, including compelling the Executor to produce all records related to the invest of all cash assets, all records of discussions or memorandum related to whether or not to liquidate or distribute the JP Morgan stock and stock options, and disclosure of the highest net investment returns of all of those trust funds managed by JP Morgan.
The Article Fifth Trustees moved for summary judgment against the Executor on its objection that the Executor violated its fiduciary duty by conditioning the distribution of the JP Morgan stock and stock options on the signing of the receipt, release, and refunding agreement. The Surrogate’s Court denied summary judgment finding that the Executor raised legitimate factual questions concerning the need to provide for the payment of administration expenses and taxes, and unresolved issues of apportionment of estate expenses.
The beneficiaries of the trust created under the Will of Emanuel S. Cunha filed numerous claims against the trustee, Bank of Hawaii (and its corporate predecessors), based on its fiduciary fees. The beneficiaries sought to compel the trustee to (1) reimburse the trust income account $400,000, plus interest, for income commissions derived from running real property tax receipts through its books, (2) lower the value of the hotel land for commission purposes and reimburse the trust $400,000 for principal fees based on the higher value of the hotel land used by the trustee, (3) pay its own attorneys’ fees and (4) pay the beneficiaries’ attorneys’ fees.
The trial court concluded that regardless of whether or not real property taxes are paid through the trustee or directly from the lessee to the government, the taxes would be income constructively received by the trust on which the trustee is entitled to income commissions, and the trustee did not breach its fiduciary duty by failing to set up a system for direct payment of the taxes to the government.
On appeal, the Hawaii Intermediate Court of Appeals affirmed the summary judgment in favor of the trustee.
Paul Righetti (Paul), Paula Pyche (Paula), and Anita (Anita) Matthews were siblings and the primary beneficiaries of a trust created by their father. Paul and Paula were co-trustees of the trust, which held as its main assets a 25 percent undivided interest in a 5,600 acre ranch. Paul and his family live and conduct business on the ranch, and annually paid the trust a minimal rent of $6 per acre for the use of the ranch. The income from the business was not shares with the other family members.
In 1999 and 2000, Anita and other beneficiaries asked that Paul sign a lease with higher rent for the use of the ranch. Paul refused. In 2001, Paula become incompetent and Paul took over her financial affairs by power of attorney. Paul, however, did not remove Paula as co-trustee and continued to pay her a trustee fee.
In 2003, Paul and Paula sued to partition the ranch in kind. Anita was initially dismissed from the suit with her consent, but later moved to intervene and was denied upon objections by Paul and Paula. The trial court ordered partition of the ranch by sale and division of the proceeds, which was affirmed on a prior appeal.
In 2004, Anita began repeatedly asking Paul for an accounting, and Paul refused. In February of 2005, Anita sued to compel an accounting, remove Paul and Paula as trustees, and for surcharge. Less than a month later, Paul told Anita for the first time that Paula had resigned and that Paul had appointed his own adult daughter as successor trustee.
At the end of the first day of trial, the court ordered the parties to mediation, which was unsuccessful. On the second day of the hearing, Paul gave notice of resignation as trustee and appointment of his own son to serve as successor trustee (to serve with his daughter), and asked the court to dismiss the suit against him as moot. The court found this tactic to be in bad faith, refused to allow Paul’s resignation, and ordered Paul to file an accounting. Paul filed an accounting and Anita filed objections and requested attorneys’ fees.
The trial court removed Paul as trustee, finding that he had breached his fiduciary duties by operating the ranch as if he personally owned it, paying inadequate rent, failing to account, failing to share trust income with Anita, failing to inform Anita of Paula’s resignation as trustee, attempting to resign in bad faith, appointing his children as trustees, paying fees to Paula after her resignation, and using trust funds to finance the partition action. The trial court also removed Paula as trustee and appointed Anita has her successor, and found that Paula also breached her fiduciary duties for receiving fees without performing duties, for failing to provide records upon request, and failing to provide notice of her resignation.
Ultimately, the trial court surcharged Paul and Paula in the amount of $44,000 payable to Anita, another $5,700 payable to the trust, and ordered Paul and Paula to pay Anita $51,000 for attorneys fees incurred in the partition lawsuit and the trust litigation. Paul and Paula appealed only the award of attorneys’ fees on the basis that there was no finding of bad faith in the partition action and therefore fees could not be awarded for that action.
On appeal, the California Court of Appeals concluded that the reference to the partition action was a clerical error and that the trial court intended to award the fees solely for the trust action, rejected other basis for the appeal because they were not raised at the trial court and were therefore waived, and affirmed the award of attorney fees and awarded Anita her costs for the appeal.
Sylvia Zisman (Sylvia) created two revocable trusts, and as trustee of her revocable trusts opened an account for each trust at LPL Financial Corporation (LPL). Global Planning, Inc. (Global) was an investment advisor, owned by Kathryn Busch (Busch) that services clients for LPL. The account agreements contained terms requiring arbitration of disputes. Eventually, David Leshner took over as trustee (the Trustee) of the trusts and signed new account agreements that also required arbitration.
Sylvia’s daughter predeceased her (Leshner also qualified as the personal representative of the daughter’s estate). After Sylvia’s death, a dispute arose between her son Leonard Zisman (through an attorney-in-fact) and Leshner about whether Leonard or his sister’s estate was entitled to certain insurance proceeds. Eventually, Leonard sued the Leshner as Trustee in state court seeking his removal, an accounting, and a surcharge for attorneys’ fees and costs incurred by the trusts. The son thereafter filed an amended suit adding claims against LPL, Global, and Busch for negligence and breach of fiduciary duties for improper investment of the assets of the trusts, and a claim of conspiracy against Busch with respect to the disputed insurance proceeds.
LPL, Global, and Busch (collectively referred to as the LPL Defendants) removed the case to the federal district court in Orlando, Florida on the basis of diversity jurisdiction, and moved to compel arbitration under the terms of the account contract.
The court observed that Leonard was not a party to the account agreements, and was therefore not directly bound by the arbitration provision. The court, however, noted that there are three exceptions under which a nonsignatory to an arbitration agreement may be bound to the arbitration: equitable estoppel, certain agency or other close relationships to the signatory, and a third party beneficiary basis.
The court held that Leonard was required to arbitrate the dispute with the LPL Defendants under equitable estoppel, on the basis that any rights he has against the LPL Defendants arise out of or are a consequence of the account agreements between the trusts and LPL. As a result, the court held that Leonard is bound to the account agreements just the trustee would have been had the trustee chosen to bring the claims against the LPL Defendants.
This litigation is still ongoing. Leonard moved and was granted leave to amend his suit to add parties, and the residence of one of the added parties may adversely affect the diversity jurisdiction of the federal court. See later proceedings at 2008 E.S. Dist. LEXIS 88433; 2008 U.S. Dist. LEXIS 104718.
In 1975, Sam and Tamara Wells created a joint trust with themselves as trustees, and restated the trust in 1983. Sam died in 1988, and under its terms the trust was divided into three subtrusts with Tamara as trustee. Eventually, Seymour S. Matthew (Seymour) took over as trustee of one of the trusts, and Dolores Burger (Dolores) and Marlene Cohen (Marlene) took over as trustees of the other two trusts.
A flurry of claims were filed concerning the trusts, including claims seeking instructions on the sale of real property, multiple claims concerning violation of the no-contest clause, and claims for removal of trustees, accountings, surcharge, and malicious prosecution.
The parties mediated their despites before a retired judge and settled the claims, and signed a global settlement agreement. The settlement agreement provided that any disputes in the interpretation of the settlement agreement would be submitted to the retired judge for binding non-appealable arbitration. The settlement agreement was approved by the probate court, and the probate court ruled that it would dismiss all of the claims upon the filing of a proposed order setting forth the settlement terms.
The parties failed to agree on the language of the order (apparently the parties had failed to resolve estate tax issues in connection with the settlement), and Marlene sought arbitration of the dispute under the terms of the settlement agreement. Thereafter, Marlene’s counsel wrote to the retired judge suggesting that there may have been a failure of the meeting of the minds such that there may not be a binding settlement. Marlene pressed this argument in the arbitration, and Dolores maintained there was a binding settlement.
Eventually, the retired judge ruled in the arbitration that there was no meeting of the minds and signed an order setting aside the settlement. Marlene filed a petition to enforce the arbitration order, and Dolores filed a petition to enforce the settlement. The trial court ruled in Dolores’s favor that the retired judge exceeded his authority, and remanded the matter back to the retired judge to arbitrate the estate tax issues under the settlement agreement. The trial court also awarded Dolores attorneys’ fees in the amount of $38,500. Marlene and other parties appealed on the issue of whether the retired judge had the authority under the arbitration clause of the settlement agreement to set aside the settlement agreement.
On appeal, the California Court of Appeals reversed the trial court and held that the arbitration clause was sevarable from the rest of the settlement agreement and held that the retired judge’s power to “interpret” the settlement agreement should be construed to include the power to invalidate the settlement agreement if the retired judge determined that there was a lack of meeting of the minds on an essential settlement term. Because the Court of Appeals concluded that Dolores’s motion should not have been granted, the Court of Appeals also reversed the award of attorneys’ fees to Dolores. The Court of Appeals remanded the case back to the trial court for litigation of the disputes concerning the trusts.
Stuart David Fiel died in 2000. He was the sole shareholder of a personal injury law firm. Mr. Fiel named his accountant, Alvin Elfand, as his Executor. Mr. Fiel’s parents, brother, and sister filed objections to the Executor’s accountings alleging negligence in the Executor’s administration of Mr. Fiel’s law firm after his death. In 2007, following extensive pre-litigation and litigation related discovery and trial, the Philadelphia Court of Common Pleas concluded that the Executor should not be surcharged, finding that the Executor was guided by the terms of the Will and by ethical concerns for the welfare and confidentiality of the firm’s clients. The court also approved the Executor’s full fee in the amount of $275,000.
The Executor then sought to recover $400,000 in attorneys’ fees and expenses incurred in defending against the surcharge claims, and also $43,000 for his time spent working with his attorneys on the surcharge action.
The court acknowledged the Executor’s right where, there is an unsuccessful attempt to surcharge, to an allowance out of the estate for the necessary fees and costs of the defense, with the reasonableness of the fees to be determined in light of the amount of work, the character of the services, the difficulty of the issues, the amount at issue, the skill and standing of the attorney, the results obtained, and other factors.
The Philadelphia Court of Common Pleas repeatedly observed that the beneficiaries subjected the Executor to extensive, aggressive, and repeating demands for information prior to the litigation, and extensive discovery in the litigation (which the court deemed “massive”), and that the handling of all of the discovery requests was essential to the successful defense of the Executor against surcharge. The Executor’s counsel expended great effort in protecting against any violation of the confidences of the clients of the decedent’s law firm.
Upon consideration of all of the factors, the court awarded payment of almost all of the Executor’s attorneys’ fees and costs. The court disallowed a small amount of attorneys’ fees and expert fees that were more directly related to the estate administration rather than the surcharge action, and rejected the Executor’s claim for $43,000 in fees (billed at his rate as an accountant) for time spent on the litigation due to lack of precedent for the payment of the costs.
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