Shelter from the Gathering Storm: Protection for Trustees (and Their Lawyers!) Facing Fiduciary Challenges

Transcription

1 Shelter from the Gathering Storm: Protection for Trustees (and Their Lawyers!) Facing Fiduciary Challenges Eric A. Manterfield I. INTRODUCTION Eric A. Manterfield is a retired partner in the Indianapolis, Indiana law firm of Krieg DeVault LLP, where he concentrated his practice in estate planning, family business succession planning, charitable planning and probate and tax litigation. Eric is an Indiana Board Certified Trust & Estate Lawyer by TESB. Eric served as co-counsel with numerous attorneys on the development of sophisticated succession plans for owners of family businesses and high net worth individuals, advised numerous trust departments on steps to minimize fiduciary liability and served as an expert witness on estate and trust litigation matters. Eric served as an Adjunct Professor of Law at the Indiana University School of Law in Bloomington, where he taught Estate Planning for thirty-one years. Eric serves as an Advisor on Estate Planning to the American Law Institute. He received the Excellence in Estate Planning and Administration Award from the Indianapolis Bar Association in It never was easy to be a trustee and now it seems to be getting harder. Perhaps there was a time when beneficiaries were forgiving of trustees; however, those days are long gone. Beneficiaries today are perfectly willing (and eager) to use hindsight to second guess every decision made by a fiduciary. It seems not to matter whether the trustee is an individual or a corporate fiduciary. It seems not to matter that the beneficiaries are charitable organizations or individuals. The fiduciary duties and obligations of a trustee remain the same, whether the trustee is a corporate fiduciary 1 or an individual and whether the beneficiaries are family members or charitable organizations. But what (if any) liability may the attorney for the trustee have to the beneficiaries if there were a breach of trust? 1 State law may determine that the fiduciary duties are higher for professional corporate fiduciaries or for those who hold themselves out as having fiduciary expertise. ALI CLE Estate Planning Course Materials Journal 5

2 6 ALI CLE Estate Planning Course Materials Journal October 2014 II. IS THE LAWYER RESPONSIBLE FOR ACTS BY THE TRUSTEE? Attorneys occasionally conclude the administration of a probate estate, with the funding of an irrevocable trust created by the decedent. Does the trustee believe that the attorney who represented the personal representative continues to represent that same individual in his or her trustee role? In a similar fashion, attorneys may administer the estate out of a funded revocable trust, which became irrevocable upon the death of the creator of the trust. The successor trustee may work with the lawyer regarding the payment of debts and expenses of administration and, perhaps, the filing of income or death tax returns. When the necessary estate administration work is complete and the trust administration work commences, is it reasonable for the successor trustee to believe that the lawyer continues to represent the fiduciary? If the lawyer enters into a new attorney-client relationship with the trustee (hopefully documented by an engagement letter), it is clear that the lawyer represents the trustee. But what if there is no engagement letter, but the trustee nevertheless believes that the lawyer represents the trustee? If there had been an engagement letter with the successor trustee regarding the estate administration work, does that continue on to the trust administration work? What if the letter is silent on this point? What does the successor trustee reasonably believe about the existence of an attorney-client relationship even after the estate administration work has concluded? There are two problems which confront the attorney who previously handled the estate administration (either in a probate administration or within a revocable trust setting) with assets passing to an irrevocable trust: (i) does the lawyer represent the trustee? and (ii) if so, what duties does the lawyer owe to the trust beneficiaries? Does the lawyer represent the trustee? The answer to the first question may depend upon what the trustee reasonably believes. Does the trustee believe that the lawyer represents the fiduciary? How reasonable is that belief? What, if any, steps has the attorney taken to make it clear to the trustee that the lawyer does not represent the trustee? The Report of the Special Study Committee on Professional Responsibility, Counseling the Fiduciary 2 (hereafter Counseling the Fiduciary), Part IIID, notes that: The comment to Model Rule 1.7 urges the lawyer to make clear to all interested parties which parties the lawyer represents. During [an] estate or trust administration a beneficiary could conclude that the lawyer had been engaged to protect the beneficiary s interests. The beneficiary may observe that the lawyer is protecting the estate from outside claimants and negotiating with the taxing authorities on behalf of the estate. Whenever a beneficiary appears to believe that the lawyer is representing him or her individually, the lawyer must clarify the lawyer s role (emphasis added) Real Prop. Prob. & Trust J. 825, 837 ( ).

3 Fiduciary Challenges 7 Is it reasonable to conclude that the lawyer must make the same clarification when the trustee mistakenly believes that the attorney represents the fiduciary? Restatement (Third) of the Law Governing Lawyers (2000), section 14, Formation of a Client- Lawyer Relationship, Comment (f) states in part as follows: In trusts and estates practice a lawyer may have to clarify with those involved whether a trust, a trustee, its beneficiaries or groupings of some or all of them are clients and similarly whether the client is an executor, an estate or its beneficiaries. In the absence of clarification, the inference to be drawn may depend on the circumstances and on the law of the jurisdiction (emphasis added). It seems reasonable to conclude that, if the lawyer believes he or she does not represent the trustee, the lawyer should send a written letter to the trustee to make that point forcefully. If the lawyer fails to do so, the circumstances and the law of the jurisdiction may impose a lawyer-client relationship. If so, what duties does the lawyer owe to the trust beneficiaries? If there is an actual or an imposed by the circumstances attorney-client relationship with the trustee, what duties does the attorney owe to the beneficiaries of the trust? Model Rules of Professional Responsibility (hereafter MRPC) Rule 4.3 concerns the attorney who deals with an unrepresented person. The Commentaries of the American College of Trust and Estate Counsel (hereafter the ACTEC Commentaries ) to MRPC 4.3 make it clear that the attorney who only represents the trustee must make it very clear to the trust beneficiaries that the attorney does not represent them and that they each have the ability to engage their own counsel. The Reporter s Notes to the original ACTEC Commentaries (not contradicted by Reporter s Notes to subsequent editions) states as follows: Under the majority view, a lawyer who represents a fiduciary generally with respect to a fiduciary estate stands in a lawyer-client relationship with the fiduciary and not with respect to the fiduciary estate or the beneficiaries. *** The lawyer who represents a fiduciary generally is not usually considered also to represent the beneficiaries. However, most courts have concluded that the lawyer owes some duties to them. *** Unfortunately, the duties that the lawyer for a fiduciary owes to the beneficiaries of the fiduciary estate have not been adequately identified, defined, or discussed.

4 8 ALI CLE Estate Planning Course Materials Journal October 2014 While some courts have held that the lawyer for the fiduciary owes unspecified duties to the beneficiaries 3, other have held that the lawyer has no duties to the beneficiaries. 4 The ACTEC Commentaries to MRPC 1.2 make this observation: The nature and extent of the lawyer s duties to the beneficiaries of a fiduciary estate may vary depending according to the circumstances, including the nature and extent of the representation and the terms of any understanding or agreement among the parties (the lawyer, the fiduciary and the beneficiaries). The lawyer for the fiduciary owes some duties to the beneficiaries of the fiduciary estate although he or she does not represent them. The duties, which are largely restrictive in nature, prohibit the lawyer from taking advantage of his or her position to the disadvantage of the fiduciary estate or the beneficiaries. In addition, in some circumstances the lawyer may be obligated to take affirmative action to protect the interests of the beneficiaries. Some courts have characterized the beneficiaries of a fiduciary estate as derivative or secondary clients of the lawyer for the fiduciary. The beneficiaries of a fiduciary estate are generally not characterized as direct clients of the lawyer for the fiduciary merely because the lawyer represents the fiduciary generally with respect to the fiduciary estate. Counseling the Fiduciary, Part IIIC, supra, at 836 notes that the lawyer may not take advantage of his or her position, such as by purchasing assets from or by selling assets to the trustee. The lawyer should not participate in a breach of a fiduciary duty by the fiduciary. Counseling the Fiduciary notes that the lawyer should not help the fiduciary to favor improperly some beneficiaries (including, perhaps, the fiduciary personally) at the expense of other beneficiaries. The lawyer should not participate in unauthorized self-dealing by the fiduciary or in an impermissible delegation of duties. MRPC 1.2(d) states that [a] lawyer shall not counsel a client to engage, or assist a client, in conduct that the lawyer knows is criminal or fraudulent, but a lawyer may discuss the legal consequences of any proposed course of conduct with a client and may counsel or assist a client to make a good faith effort to determine the validity, scope, meaning or application of the law (emphasis added). If the trustee engages in an action which constitutes a breach of trust, it seems unreasonable to believe that the lawyer for the trustee might have liability to the harmed beneficiaries if the lawyer knew nothing of the actions by the trustee until after the fact. How, if at all, did that lawyer counsel or assist the trustee in a fraudulent action? Nevertheless, others might argue that the lawyer assisted in the breach of trust due to his or her failure to educate the trustee on fiduciary duties and to supervise the actions of the trustee. 3 See Estate of Larson, 694 P.2d 1051, 1054 (Wash. 1985), in which the Supreme Court of Washington stated [T]he fiduciary duties of the attorney run not only to the personal representative but also to the heirs. 4 See Goldberg v. Frye, 266 Cal. Rptr. 483 (Cal. Ct. App. 1990); Thompson v. Vinson & Elkins, 859 S.W.2d. 617 (Texas App. 1993).

5 Fiduciary Challenges 9 It is certainly troubling to think that a lawyer may have exposure to a trust s beneficiaries for breaches of trust committed by the trustee at a time when: (i) the lawyer may not believe he or she represented the trustee; or (ii) the lawyer may not have been aware of what the trustee was doing (or not doing). Nevertheless, we live in a litigious world where crazier assertions have been made. The trust beneficiaries may argue that the lawyer aided and abetted the trustee s breach of trust by failing to educate the trustee properly on the trustee s fiduciary duties or by failing to stop the trustee from committing the breach of trust or both. The lawyer may argue in response that: (i) the lawyer did not represent the trustee (however, in the absence of an I do not represent you letter from the lawyer to the trustee, is the trustee acting reasonably if the trustee believes that the lawyer, in fact, does represent the trustee?); or (ii) the lawyer did not know of the breach of trust until after the fact and, therefore, could not have prevented the trustee s breach (however, is ignorance a defense if there is an implied obligation on the lawyer to monitor the trustee s activities?). The reasonableness factor. An interesting Note, entitled An Expectations Approach to Client Identity appeared in 106 Harvard Law Review 687 (1983) and argued for the creation of the reasonable constituent s expectation approach to answer the question of the existence of an attorney-client relationship. Does the attorney for a closely held business only represent the entity or does the representation extend to the shareholders? Was it reasonable for the shareholder to conclude that the attorney represented him or her individually? The author of the Note argued for a reasonableness factor to answer that question. Can the same approach apply to the trustee, who reasonably believes that the attorney represented the fiduciary? While the answer to this question has not been provided by case law, it seems reasonable to believe that the answer may, unfortunately, be yes. You certainly do not want to be the test case! It is undoubtedly unrealistic to urge the development of a bright line rule to determine whether or not a lawyer represents the trustee in every situation. Rather, I suspect each case will turn on its own particular facts and circumstances with the answer, perhaps, depending on the actions (or inactions) of the attorney and the reasonableness of the trustee s belief that there was an attorney-client relationship. What should the lawyer do with respect to the trustee? I recommend that the lawyer make a conscious decision about his or her representation of the trustee and make that decision crystal clear to the fiduciary. Do not remain silent on this critical decision. The lawyer either does or does not represent the trustee. If the lawyer does not wish to represent the trustee, I strongly recommend that he or she send a I do not represent you letter to the trustee at once.