In California, the Attorney General oversees charitable trusts.  This responsibility includes bringing legal actions against trustees who breach their fiduciary duties.  Government Code section 12598 provides that the Attorney General is entitled to recover from a defendant all reasonable attorney’s fees and actual costs incurred in an action to enforce a charitable trust.  But what happens when the Attorney General is only partially successful in its case against the defending trustee of a charitable trust?

People ex rel. Becerra v. Shine (2020) ____ Cal.App.5th ____ provides the answer.  The Government Code does not require a stringent analysis of whether the Attorney General has achieved all of its litigation goals or has been completely successful on every claim.  Further, the Attorney General is entitled to attorney’s fees when it has generally accomplished what it set out to do, which in People v. Shine was to prove that Shine had breached his fiduciary duties and to recover funds for the trust.

William Shine Serves as Trustee and the Attorney General Sues Him

From 2004 to 2013, William Shine served as trustee of a trust which required that almost$20 million in trust assets be used to create a charitable foundation, with the settlor (i.e., trust creator) having expressed a preference to benefit certain charities in Marin County.  During his time as trustee, Shine allowed improper trust tax returns to be filed, allowed a Subchapter S corporation status to be lost by failing to follow prudent legal advice,  and used trust funds to make loans to his friends.

Shine’s conduct eventually led the Attorney General to sue him for breach of fiduciary duty and an accounting, and to seek Shine’s removal as trustee.  A few months later, Shine temporarily stepped down and an interim trustee was appointed.

Shine Not Entitled to Use Trust Assets to Defend Himself

As the litigation progressed, Shine petitioned the court to instruct the new trustee to pay for his legal defense.  Shine contended that Probate Code sections 15684, 16243 and 16247, as well as the trust’s indemnity provision, required that the trust cover the costs of his defense.  The Marin County Superior Court granted his request, but the Attorney General appealed, arguing that the trust was only required to pay for the successful defense of the trustee and that the claims against Shine were based not on his good faith administration of the trust, but on his malfeasance.

In People v. Shine (2017) 16 Cal.App.5th 524, the appellate court agreed with the Attorney General and held that while the costs of a successful defense of a trustee’s actions are generally chargeable to the trust, a trustee is not entitled to payment for legal fees incurred in an unsuccessful defense absent an additional showing that the expense was necessary or appropriate to carry out the purpose of the trust and that belief was objectively reasonable.  Moreover, because the case was ongoing, Shine had not yet succeeded on his defense.

The court explained that when a trust instrument is silent on whether the costs of defending a trustee should be paid by the trust while the case was ongoing, the court must first assess the likelihood the trustee will prevail in its defense and then balance the relative harms to all interests involved in the litigation.  The appellate court reversed the trial court and sent Shine’s petition back to the trial judge for further review.

The Attorney General Prevails at Trial and Requests Attorney’s Fees

The case then went to trial and the court issued a judgment of over $1.4 million judgment Shine, finding that he had “violated most, if not all of his fiduciary responsibilities and duties.”  However, when entering judgment, the judge ruled in Shine’s favor on 12 of the 19 alleged breaches of fiduciary duty.

Government Code section 12598 states that the Attorney General shall be entitled to recover from defendants named in a charitable trust enforcement action all reasonable attorney’s fees and actual costs incurred in conducting that action.  Thus, after obtaining the initial judgment against Shine, the Attorney General requested that the court award an additional $1.9 million in attorney’s fees against him.  The judge granted most of the Attorney General’s fee request but reduced it by $275,000.

While Shine conceded that the award of attorney’s fees to the Attorney General was mandatory under the Government Code, he argued on appeal that the court was required to consider the Attorney General’s goals and results in the litigation as part of determining whether the fee requested was reasonable.  To this point, Shine argued that because he disproved a number of the allegations against him the fee award to the Attorney General should be reduced accordingly.

In analyzing this argument, the Court of Appeal first noted that while the original version of Government Code section 12598 enacted in 1987 explicitly required that the court consider the effectiveness of the Attorney General in awarding fees, this language was removed from the statute in 2003 when it was amended.  The court explained that it assumed the Legislature amended the statute for a reason, and that in its view, the deletion of this language indicated the Legislature’s intent to provide the courts with greater flexibility when making attorney’s fee awards.  The court thus affirmed that the trial judge was not required to perform a strict analysis of whether the Attorney General’s goals were achieved in awarding attorney’s fees.

Further, the Court of Appeal found that the Attorney General had in fact been successful in achieving its goals.  While the Attorney General only prevailed on 7 of the 19 examples of breach of fiduciary duty, the Attorney General accomplished its goal of removing Shine as trustee of the trust and proving that Shine’s conduct was grossly negligent and intentionally improper.  As a result of the Attorney General’s actions, Shine was required to reimburse the trust in an amount well over one million dollars.  Thus, the Attorney General’s success was not hollow or technical victory, and attorney’s fees were therefore appropriately awarded.

The Takeaway

At the end of this long-running litigation, Shine was required to foot the bill for his legal defense, pay the trust over $1.1 million in damages (after the Court of Appeal in an unpublished opinion reduced the judgment by nearly $300,000), and cover over $1.6 million of the Attorney General’s legal bill.

People v. Shine thus shows that trustees of charitable trusts who defend against an action by the Attorney General face significant risks.  The trustee may be unable to draw on trust funds to defend against the claims and even if the trustee is partially victorious he or she may end up having to pay damages for breach of trust along with some or all of the Attorney General’s fees and expenses.