Trust Administration

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While institutional trustees may have once slept soundly considering themselves immune from class action lawsuits relating to the purchase or sale of securities on behalf of a trust, the Ninth Circuit’s recent ruling in Banks v. Northern Trust Corp. (9th Cir. 2019) 929 F.3d 1046, sounds a rousing wake up call for every trustee who professionally manages multiple trusts.

Federal law generally prohibits class actions relating to (1) misrepresentations of material fact in connection with the purchase or sale of a security, and (2) the alleged use of any manipulative device in connection with the purchase or sale of a security.  Thus, for the most part, cases involving these types of allegations can only be brought individually.  While institutional trustees have always had to be careful in what representations they make in the purchase or sale of securities, the potential for massive liability from class action litigation has largely been a non-issue.

However, the court in Banks v. Northern Trust Corp. clarified that this general rule does not apply to claims brought against a trustee by beneficiaries of an irrevocable trust.  Therefore, institutional trustees with a large volume of trust administration files, and especially those associated with an institution that provides investment products, should now be on high alert for the potential for class action claims to be brought against them.    

This blog post views a trustee’s fee from the beneficiary’s perspective.  Under California law, a trustee generally can set his or her own fee and collect it without prior disclosure to the beneficiaries.  What can a beneficiary, who sees a hand reaching too greedily in the trust cookie jar, do in response?

We discussed best practices for a trustee when claiming a fee in a prior post and now consider how a beneficiary can monitor, evaluate and object to a trustee’s fee.

Cooks in the Kitchen

Are six sibling co-trustees too many cooks in the kitchen? Many California trust disputes arise from disagreements among sibling co-trustees over how to administer Mom and Dad’s trust after the parents have passed. They all have a strong sense of what Mom and Dad wanted, but they don’t agree on what it was.  Thus, trust and estate litigators can be described as “sibling lawyers.”

A recent appellate opinion illustrates such co-trustee conflict and shows the unpredictability of our judicial process. In Trolan v. Trolan (2019) 31 Cal.App.5th 939, the California Court of Appeal addressed issues of trust interpretation and trustee removal in a situation where five siblings were aligned against the sixth.

American courts (including our California state courts), in contrast to courts in England, do not typically award attorneys’ fees to a lawsuit’s “victor.”  There are, of course, exceptions to this so-called “American Rule.”  Among them is the “common fund” exception, which provides that one who incurs fees winning a lawsuit that creates a fund for others may require those passive beneficiaries to bear a fair share of the litigation costs.  As the word “fund” suggests, the benefit must be a tangible, easily calculable sum of money.  Courts have applied this exception to will and trust disputes where one beneficiary’s litigation causes other beneficiaries to receive a larger inheritance than they otherwise would have received.

But what happens when a trust beneficiary prevails in a lawsuit that doesn’t result in a tangible, monetary benefit but rather one such as removing an incompetent trustee or causing a trustee to prepare an accounting?  May beneficiaries who receive such benefits, but who take no part in the litigation, be required to pay for a portion of the litigating beneficiary’s legal expenses?  Last month the California Court of Appeal, in Smith v. Szeyller (2019) 31 Cal.App.5th 450, answered the question with a tantalizing “very possibly.”

Trust and estate litigation attorneys are “trusted advisors.”  Like estate planning attorneys and other professionals who help clients with wealth management, we are fixers who assist clients with navigating conflict relating to a trust or estate.  While we spar in the probate departments of the Superior Court of California, at the end of the day our main function is to advise clients so they can choose a resolution that fits their needs and is achievable in the situation at hand.

The role of litigator as trusted advisor came to mind last week as I sat at McGeorge School of Law listening to Todd Fithian’s upbeat and insightful presentation on the subject of “Amplifying Your Brand.”  Todd spoke at the Sacramento Estate Planning Council’s annual Estate Planning Forum event which offers outstanding continuing education and serves as a collaboration incubator for professionals in various fields.

What is a reasonable trustee’s fee in California for a family member who acts as trustee?  We see a high degree of conflict over this issue even when the amount of the claimed fee is small compared to value of the trust estate.  Our blog analytics show that our post of a few years ago on the fee issue continues to draw a high number of hits.  If you found this post in a Google search, you are probably grappling with a fee dispute in your family’s trust.

California Probate Code section 15681 generally permits a “reasonable” fee, but the term is hazy in practice.  Most California Superior Courts do not have fee guidelines in their local rules.  While California Rule of Court 7.776 lists factors a court may consider in reviewing trustee compensation, the trustee and the beneficiaries are likely to apply those factors differently.  Accordingly, fee disputes are common in California trust litigation.

Here we’ll discuss best practices for a trustee with respect to claiming a fee.  Let’s use the common situation where Mom and Dad have picked one of their several children to act as successor trustee when they die or become incapacitated.  When Larry becomes the trustee, siblings Moe and Curley may be resentful and thus disinclined to go along with any fee. 

What happens when the settlor (i.e., creator) of a trust imposes a condition precedent on receipt of a distribution from the trust, but the condition cannot be met because the circumstances have changed?  Is the beneficiary out of luck for reasons beyond his or her control?

The First District Court of Appeal took up this issue in Schwan v. Permann (2018) 28 Cal.App.5th 678, finding that the doctrine of impossibility can excuse a condition precedent.  While impossibility comes into play infrequently in California trust and estate disputes, the doctrine allows some flexibility in the terms of trusts and wills so as to achieve an equitable result.

A California trustee can be excused from liability for breaches of trust if a judge determines that it would be equitable to do so.

We see many situations where a family member trustee strays from the requirements of the trust instrument. Still, if the trustee does not favor himself or herself, and the beneficiary is not appreciably harmed, then the trustee may get a pass from the court under California Probate Code section 16440.  That’s the lesson of Orange Catholic Foundation v. Arvizu (2018) 28 Cal.App.5th 283, published last month by the California Court of Appeal.

Private professional fiduciaries in California are entitled to charge a reasonable fee for their services, but their fees for acting as conservators are subject to close court scrutiny.

A recent California Court of Appeal case, In re Conservatorship of Presha (2018) 26 Cal.App.5th 487, shows how closely probate judges and their staffs may examine the billing entries of conservators.  A conservator who cannot justify his or her time entries may leave the courthouse with an unwanted haircut.

When attorneys advise errant trustees, how vulnerable are they to breach of trust claims by injured beneficiaries?  A case published last week by the California Court of Appeal provides a defensive roadmap to attorneys who are sued for such claims, along with an occasion for golf metaphors.

In Cortese v. Sherwood (2018) 26 Cal.App.5th 445, the appellate court ruled that attorney John Sherwood was protected by California Civil Code section 1714.10, which was enacted in 1988 to combat the use of frivolous conspiracy claims brought as a tactical ploy against attorneys and their clients.  Since the plaintiff failed to obtain the court’s approval before suing the attorney, as the statute required, she could not bring her claim against him.  She could not get off the first tee.