Posts Tagged ‘Attorney’s fees’

Deceased Trustee Not Liable for Punitive Damages in Kansas Case

NOVEMBER 21, 2016 VOLUME 23 NUMBER 44
When Alain Ellis died in 2007, she left about $2 million dollars in a trust. Her husband Harvey was the trustee of the trust, and entitled to receive all of the trust’s income. Upon his death the remaining trust assets would be distributed among her two sons and her granddaughter. That’s not how it turned out, however.

After Alain’s death Harvey removed almost all of the trust’s assets and put them into his own trust. He hired a new attorney in his hometown of Wichita, Kansas; with the help of that new attorney, he modified his trust four more times. When he died in 2011, he was worth about $10 million, and his trust distributed to religious and educational charities.

A court-ordered investigation into the history of the two trusts quickly led to a transfer of assets from Harvey’s trust back into his late wife’s trust. The successor trustees agreed that Harvey had improperly taken at least $1,431,143,45 from Alain’s trust, and that amount was returned.

The remainder beneficiaries of Alain’s trust then filed a lawsuit against Harvey’s estate, his trust, his successor trustee and the attorney who helped him set up his estate plan. The lawsuit claimed that Harvey’s behavior had been particularly egregious, that his attorney had helped him in his scheme to convert assets, and that the trust had been mismanaged after Alain’s death.

Alain’s heirs sought an imposition of double damages against Harvey (and his trust), citing Kansas law permitting the extra penalty. The trial judge, though, ruled that the claim was essentially one for “punitive damages,” and that a punitive damages claim could not be asserted against a dead man.

At trial, a jury awarded an additional $126,820.94 against Harvey’s estate and trust. The jurors decided that Harvey’s lawyer (while acting as successor trustee of Alain’s trust) had also committed breaches of her fiduciary duty, but they did not award any damages against her. The jurors exonerated Harvey’s successor trustee, a local bank. Alain’s heirs appealed, arguing that they should have been able to assert the claim for double damages, and that Harvey’s outrageous behavior should be punished.

The Kansas Court of Appeals upheld the trial court. In their opinion, the appellate judges acknowledged that “there is no doubt” that Harvey “acted toward plaintiffs with willful conduct and fraud that would have supported a claim against him for punitive damages had he still been alive at the time of the litigation.” Still, they reasoned, there is no real benefit to society permitting punishment of a deceased defendant. The Court of Appeals did uphold the trial courts award of attorneys fees against Harvey’s trust (although one claimant’s fees were ordered to be paid from Alain’s trust).

In reaching its conclusion that punitive damages could not be levied against a deceased defendant, the Kansas court discussed the holdings in other jurisdictions on similar questions. Most states addressing the question have agreed with the holding in Harvey’s case, according to a 2016 Akron Law Review article extensively cited in the opinion. A substantial minority of states (including at least thirteen states and the District of Columbia) would allow the claim to proceed against the estate of a deceased tortfeasor. Alain Ellis Living Trust v. Harvey D. Ellis Living Trust, November 18, 2016.

Does a claim for punitive damages survive against a deceased defendant in Arizona? Generally, yes. Arizona would likely reach the opposite conclusion in similar circumstances, though the principal Arizona appellate decision (Haralson v. Fisher Engineering, a 2011 Supreme Court opinion) is based on very different facts. In that case, the estate of a driver who behaved egregiously was liable for punitive damages claimed by an accident victim — despite the fact that the driver died in the accident.

Arizona law on attorney’s fees might also lead to a different result in similar facts. Recall that Harvey’s trust paid most of the fees of the various attorneys (though not those of one of the heirs — his fees were paid by his mother’s trust instead). In Arizona it might actually be more difficult to secure payment of those fees from the tortfeasor’s trust — even though the punitive damages claim might be easier to assert. In other words, the classic legal principle applies: facts matter, and so does the jurisdiction where the facts are litigated.

Special Needs Trust Pays Substantial Legal Fees in Dispute

SEPTEMBER 26, 2016 VOLUME 23 NUMBER 36
Questions often arise about what kinds of payments may, or should, be made from a trust. When the trust is a “special needs” trust, the questions sometimes can be even more pointed — the purpose of a special needs trust, after all, is usually to provide for supplemental needs not available from other sources. As in almost every trust case, there are questions about whether trust expenditures improperly favor one beneficiary over the interests of others; in many special needs trusts, the question is compounded by trying to assess the protection due to the state Medicaid agency, since it is often entitled to repayment from the trust on the death of the primary beneficiary.

All of that, though, is hard to analyze — until a specific trust distribution is at issue. To help review the considerations we might look at a recent case out of South Carolina, in which a special needs trustee’s payment of legal fees has come into question.

Alexis Davis (not her real name) presents a tragic story. In 2006 she delivered triplets (after she and her husband had tried to have children for several years). During the delivery, however, she was catastrophically injured; she remains unable to move or speak, and communicates primarily by blinking.

Alexis’ husband and parents cooperated in filing a lawsuit against the hospital where she was treated, and a settlement was negotiated. A special needs trust was established to handle the settlement proceeds, and it was funded with an initial amount of almost $1 million, plus monthly income payments of over $30,000. Alexis’ mother and father were named as trustees of her special needs trust, and as guardians of her person and conservators of her estate.

After the settlement, Alexis’ husband announced that he wanted to pursue a divorce. In response, her parents filed a divorce proceeding on her behalf, and sought visitation between her and her triplets.

All of the legal proceedings took place in California, where the couple had lived together and the triplets were born. For a time, Alexis’ parents moved to California to help take care of her, and to have her remain close to her family. As the divorce proceeded, however, they moved her back to South Carolina to take care of her at home.

Over almost a decade, legal battles proceeded over the visitation issue. Alexis’ legal position was directed by her parents, acting as co-trustees and as co-guardians. The legal costs were paid from her trust.

Meanwhile, legal fees mounted. Alexis’ ex-husband eventually filed an action in South Carolina to try to prevent Alexis’ parents from paying those costs from her trust. He brought his action against them as trustees but did not name Alexis herself as a party. His request was made on behalf of the triplets, arguing that their interests in the trust were being compromised by the legal expenses.

In response Alexis’ parents asked the South Carolina court to expressly approve legal fees they had paid totaling $495,326.75. They also asked that the trust be modified to make it clear that they could pay legal fees without prior court approval. The court appointed a guardian ad litem (a local lawyer) to represent the triplets’ interests in the trust. The court also appointed another local attorney to act as Alexis’ guardian ad litem, and a third as attorney for Alexis.

Midway through the court proceedings (after several days of trial and after Alexis’ ex-husband finished his presentation) the judge formally amended the petitions to make clear that Alexis herself was a party. Because the allotted time was up, the court continued the whole proceeding for a new date; it was set to start up again several months later. Meanwhile, the judge who had heard the first part of the proceedings lost her reelection bid, and Alexis’ ex-husband appealed the order adding her as a party.

Meanwhile, the first appeal resulted in an order denying Alexis’ ex-husband’s objections, and he appealed to the next level of court — South Carolina’s Court of Appeals. That appellate court agreed with both of the lower courts which had considered the questions, approving the addition of Alexis as a party, the appointment of a guardian ad litem and an attorney to represent her, and the course of the litigation up to that point. Dorn v. Cohen, August 3, 2016.

Are you confused yet? We know we are — and we speak the arcane language of appeals and legalisms regarding trusts and guardianship. But that’s not really our point. Instead, we think that Alexis’ case illustrates an important issue.

The key dispute involved here centers around legal fees of almost $500,000. Since that bill was incurred, the dispute moved to another state, three different attorneys have been appointed to be involved in the case, and a multi-day trial has been conducted — and yet the issues are far from resolved. With the change of judge, it seems safe to suggest that there will eventually be several more days of court proceedings, and more legal wrangling just to get to that point. Meanwhile, the underlying fight — over visitation between Alexis and the triplets — was actually resolved (according to news reports) five years ago. The resolution sounds imminently sensible, and it may even be going well.

Our point is that legal proceedings can sometimes lose their connection to reasonable grounding. From Alexis’ parents’ perspective, they have by this time incurred legal fees that are probably two or three times the original reported bill — and they could conceivably be instructed to pay those fees from their own pockets. On the other side, unknown fees and costs have been incurred by Alexis’ ex-husband. Presumably, all the legal costs will eventually be borne by the triplets, since their inheritances (from their father, their mother’s trust and even their grandparents) will have been significantly reduced.

Does this mean that it is dangerous to even act as trustee of a special needs trust (or, for that matter, of any trust)? No. This level of dispute is extremely unusual. But the story is still a cautionary one.

 

Lawyers Continue Battle After Guardianship Dismissal

MAY 23, 2016 VOLUME 23 NUMBER 20
It will come as no surprise to anyone who has been involved in guardianship and conservatorship proceedings: the legal fees and related costs can often spiral out of control. Though most guardianship proceedings do not cost tens of thousands of dollars, some do. In fact, the battle can sometimes be about the attorneys’ fees, rather than the need for a guardianship.

A recent case in North Carolina illustrated this problem. It involved a woman we’re going to refer to as Connie, who was estranged from her brother Fred, her closest relative.

Connie knew that she was slipping, and that she was losing her ability to handle her own finances and personal decisions. She consulted a long-time friend, Harriet Hopkins. Ms. Hopkins was a lawyer practicing in the community, and she prepared the documents Connie needed — including a durable financial power of attorney. Because she had no one else to name, Connie chose to make Ms. Hopkins the agent under her power of attorney.

Some time later brother Fred learned that his sister was failing, that her attorney was managing her affairs and (most concerning to Fred) that the power of attorney included a provision that would have allowed Ms. Hopkins to make gifts to herself from Connie’s assets and income. Fred decided that he needed to file a court proceeding to get himself — or someone independent — appointed to take care of Connie’s finances and medical decisions. He hired lawyer James West to pursue the guardianship for him.

As in some other states, in North Carolina initiation of a guardianship automatically results in appointment of a lawyer as “guardian ad litem” for the subject of the proceedings. A local lawyer, Lynn Andrews, was appointed; she immediately reported that she was close friends with Ms. Hopkins and should not be appointed. The local court appointed another attorney as Connie’s guardian ad litem, and Fred’s lawyer began to discuss the case with her.

Very shortly after the case began, however, attorney Andrews let the other two lawyers know that Connie had hired Ms. Andrews as her personal lawyer. She vigorously objected to the proceedings on Connie’s behalf, and filed a motion to dismiss the guardianship altogether. Her argument: there was no doubt that Connie’s capacity was in decline, but no guardian was necessary because Connie had taken appropriate steps to assure her care was supervised and her finances taken care of.

In the course of the controversy, and in order to make sure there were no concerns, Connie signed a new power of attorney. The new document still named Ms. Hopkins as her agent, but removed the authority to make gifts. Everyone agreed that no gifts had actually been made while Ms. Hopkins held that power.

Fred’s petition for guardianship was dismissed within about a month of its initial filing. There were some further skirmishes about the precise terms of the dismissal, but Connie was no longer at any risk of having the court appoint a guardian — Fred or anyone else. And that might have been the end of things.

After the dismissal was finalized, Ms. Andrews filed a new petition with the guardianship court. She alleged that Fred and Mr. West, his lawyer, had behaved improperly by filing a guardianship petition without any basis. She sought an order requiring, as a penalty, payment of Connie’s legal fees by both Fred and his lawyer.

Mr. West responded by filing a petition against Ms. Andrews, asking that she be sanctioned, and ordered to pay his attorney’s fees and costs. His argument: by filing the request for personal sanctions against him (and his client) for allegedly abusive legal proceedings, Ms. Andrews had herself abused the legal system.

After a three-day hearing (which, it is worth repeating, was not about Connie’s capacity or her possible need for a guardian), the trial judge decided that sanctions against Ms. Andrews were appropriate. He first ordered that she would be personally responsible for Fred’s legal fees; later, the judge found that the total fees and costs of $122,987.72 should be assessed against her.

The North Carolina Court of Appeals considered the judge’s order, and decided (by a 2-1 vote, incidentally) that the case did not warrant any punishment against Ms. Andrews. The attorney’s fee award was reversed, and each side ended up paying their own legal fees (though Fred was ordered to pay the cost of a multidisciplinary evaluation of Connie that had been conducted for the proceedings below). Matter of Cranor, May 17, 2016.

What does Connie’s case tell us about guardianship and conservatorship in Arizona? While the proceedings can be different from state to state, some rules do apply across most states. One of those is that the parties — and their lawyers — have a duty not to let the proceedings run up giant legal bills.

A leading Arizona case addresses somewhat similar facts, but with a slightly different result. In the Arizona case, our Court of Appeals ultimately ruled that the lawyer for a guardian and conservator has a duty to constantly recalibrate one question: is the legal representation justifiable considering the cost and possible benefit to the ward?

When You Need to Talk With a Lawyer

OCTOBER 5, 2015 VOLUME 22 NUMBER 36

So often we field questions (on this website and in our practice) about whether people need to consult a lawyer. Unsurprisingly, perhaps, there is a terrific resistance to seeking legal advice. We lawyers don’t always help — our fees can be substantial, and unpredictable. We speak a language that sounds vaguely familiar but seems foreign to most people, and we often fail to translate — or even to recognize that our clients may not speak that language.

Too often lawyers treat the question dismissively. “Would you perform brain surgery on yourself?” we often ask. “Then why would you try to handle your own legal matter?”

That’s an unfair characterization. Legal help is seldom much like brain surgery. There are, of course, two big differences: brain surgery pretty much requires a patient who has been anesthetized, and it involves technical skills that are also unknown to most people, but also highly dangerous.

You can, in fact, handle most of your legal issues yourself. You are likely to do fairly well if you do, provided that you do plenty of research and have a basic understanding of the law before you start.

We don’t think most people should try to take care of their own legal matters, of course, and we’re not advocating it here. We just don’t want to terrorize you into hiring us. Instead, we want to convince you that legal representation is an expense worth incurring.

A better comparison might be with auto mechanics, or even plumbers. Can you change your own oil, or fix a leaky faucet? Of course you can. You will likely do just fine with either task. Similarly, you can probably find a health care power of attorney form online, fill it out and get it signed and witnessed. But there are some tasks — with your auto, with your plumbing, and with your legal affairs — better left to professionals.

So when do you need a lawyer? Of course it depends on your comfort level and time availability. I know how to change my car’s oil (it’s actually an electric car, but that’s a different story) but I choose not to do it. Why? Because I’d rather have it done professionally, and spend the extra time with my grandchildren, or finishing up the work I get paid for, or just raise a glass of wine instead. You might feel the same way about legal jobs — or you might not.

Before we leave the metaphor, let us make another observation: sometimes people who undertake their own auto maintenance (or plumbing, or legal work) mess it up. When that happens, the cost of fixing the problem may be well in excess of what it would have cost to turn the problem over to the professionals in the first place.

Some people take great pleasure in mastering disparate tasks for themselves. Others prefer to delegate when it makes good sense. When does it make sense in the legal world?

Complicated legal issues

Some things are harder to handle on your own, of course. You can figure out how to create a health care power of attorney, but are you as comfortable about your ability to create a living trust? Are you even sure you know whether you need a trust? How about funding of the trust? These issues are more complex than most simple documents.

High stakes

Your estate might be modest. Perhaps you own your house and a single bank account. Do you plan on leaving everything to your spouse, or to your only child? It’s hard to see how you will go very wrong by preparing your own will (though of course we have seen people who manage to do that). But if your estate is larger, or your family situation more complicated, you might benefit from getting legal advice.

Unusual legal problems

Do you need a guardianship or conservatorship for a family member who has become incapacitated? That’s a little out of the ordinary, and you will have a harder time finding help online or among your non-lawyer friends. Talk with a lawyer. Incidentally, the first thing the lawyer will probably do will be to explore alternatives to save you expense and legal complications. But that’s a point to be made later.

Why not hire a lawyer?

Most people are concerned about the likely cost of legal advice. Start your interview with a new lawyer by discussing fees. Will fees be flat or fixed? Or will they be hourly? If the latter, you have a harder time predicting the total fees (though they may ultimately be lower than flat fees). Ask the lawyer to honestly assess the likely total cost. Explore the possibility of setting a maximum fee, or terminating the representation if costs begin to escalate.

Interview more than one lawyer, but do it quickly. Make your first lawyer appointment and then immediately schedule a second (and maybe a third). Figure out which lawyer seems most responsive to your concerns, and most able to handle your legal problem. Ask friends and colleagues for their suggestions and for any experience they might have with your chosen lawyers.

Are you comfortable?

You might be talking with the best, the smartest, the most reasonably-priced lawyer in town. But if you don’t feel comfortable, the experience is not going to be positive. You should insist on getting calming assistance, and peace of mind — that’s a lawyer’s stock in trade.

[Next week: we’ll tackle which kinds of legal problems we most often see people foolishly trying to handle on their own.]

Attorney’s Fees in Probate Proceeding Challenged, Approved

SEPTEMBER 7, 2015 VOLUME 22 NUMBER 32

How much can an attorney charge in a probate proceeding? In Arizona, at least, the principal rule is one that is difficult to determine: attorney’s fees must be “reasonable”. But what does that actually mean?

A recent Arizona Court of Appeals decision approving the fees charged by the attorney for an estate’s personal representative may give the answer for that case, but may leave lawyers (and heirs) scratching their heads. It involved a relatively small estate, and what looks at first glance like an unremarkable set of legal issues.

Angela Teran (not her real name) died in 2010. Her will was easily admitted to the probate process in Maricopa County (Phoenix) courts. A personal representative was appointed, and she hired Phoenix-area attorney Robert Kelly Gorman to represent her.

Angela’s will directed that $2,000 should be given to her church, and the rest of her estate divided among four named individuals. It was not clear from the will whether the division of the remainder should be in equal shares or by some other arrangement. Her estate consisted of a single $35,000 bank account and another $3,000 in trust.

Once the probate was filed, the attorney began communicating with the four beneficiaries to figure out how to make the distribution. He proposed that the remaining estate balance should be divided equally, and he prepared an agreement to that effect for all the beneficiaries to sign.

Two beneficiaries quickly signed, but the other two did not. For two years nothing developed, though there were apparently numerous contacts among the attorney, the personal representative and one of the beneficiaries about how to treat all four beneficiaries fairly. Finally, the beneficiary who disagreed with the proposed distribution filed a request with the court to remove the personal representative.

At a hearing in 2012, the court directed attorney Gorman to prepare a proposed plan for distribution of the estate and a petition for approval of his fees incurred in representing the personal representative. He did just that, proposing to give the church its $2,000 and just $1,000 to each of the four other beneficiaries. He claimed fees and costs totaling $33,620.90, of which $22,650 had already been paid.

At about this time, the personal representative herself died, and the contesting beneficiary was next in line to administer the estate. Upon her appointment she objected to the proposed (and already collected) attorney’s fees, alleging that they were unreasonable. After a hearing, the probate court denied approval for Gorman to collect any additional fees, but did not order him to return any of the $22,650 he had already received. The new personal representative appealed, urging the court to order him to return some or all of his fees.

The Court of Appeals, in a split opinion, approved the probate court’s determination on the reasonableness of Gorman’s fees. While the two judges voting to uphold the fee award found it “concerning that the amount of fees awarded is very large given the size of the Estate,” they did not find any basis on which to reverse the probate judge’s determination. Of particular note to the majority judges was the fact that the contesting heir did not point to particular items on Gorman’s bills that should be disallowed, but instead relied on her assertions that he treated her unfairly and that his fees deprived the beneficiaries of their inheritances. That, said the judges, was not enough of a challenge to force reduction of his fees. Kurowski v. Gorman, August 25, 2015.

The one dissenting judge wrote a strongly-worded opinion. He noted that the approved fees ended up being 59% of the entire estate — an amount he called “strikingly unreasonable.” While the lawyer’s early actions were unobjectionable, wrote the dissenting judge, he should have moved the dispute to the court for resolution much more quickly; had he done so, far less time (and money) would have been spent to “field communications that were completely unproductive.”

Under earlier Arizona appellate decisions, lawyers involved in probate, guardianship, conservatorship and trust disputes are required to make an analysis of the cost and benefit of legal actions, and to balance those considerations when determining fees. The probate court, argued the dissenting judge, should have undertaken that same analysis when reviewing the fees — including those already collected.

What does the Kurowski opinion mean for attorney’s fees in other cases? Not much, actually. The opinion is a “memorandum” decision, which means it is not supposed to be used as precedent in other cases. The fact that it is a divided decision also calls into question its value for other cases. But it does demonstrate that one probate judge, and two appellate judges, were persuaded that, at least in a single case with difficult beneficiaries and its own peculiar facts, a fee of almost two-thirds of the estate could be justified.

Attorney Representing Incapacitated Adult Ordered to Refund Fees

JUNE 22, 2015 VOLUME 22 NUMBER 23

How much does it cost to establish a guardianship or conservatorship? Is there any limit on the possible legal costs? These are questions that we deal with on a regular basis.

The short answer, at least in Arizona, is that the attorneys and other professionals in a guardianship/conservatorship proceeding can only charge a “reasonable” fee, and that the Court almost always has the authority to review — and, in appropriate cases, reduce — the fees charged. But that doesn’t help identify what a “reasonable” fee might be.

A recent case from the Washington Court of Appeals sheds a little light on attorneys’ fees in guardianship cases. It also helps make clear that the court’s review includes fees incurred — and paid — before any finding of incapacity was entered.

Kamiko Davis (not her real name) came to the attention of state officials because she had apparently been the victim of financial exploitation. She was an elderly woman who had, years before, immigrated from Japan, and she was more comfortable speaking Japanese. She was suspicious and uncooperative with authorities, and, after the financial exploitation she had suffered, she had an estate of about $700,000. When the investigating agency filed a petition asking for appointment of a guardian (of the person and the estate — what we would call guardianship and conservatorship in Arizona), it was evident that she would benefit from having a lawyer who spoke at least some Japanese, and who would be familiar with Japanese culture and traditions.

That’s how attorney Daniel Quick was appointed as Kamiko’s attorney. In the initial appointment the judge ordered that Mr. Quick’s fees should be limited to $250/hour for a maximum of 10 hours — or about $2,500. Over the next few months, as it became apparent that Kamiko would strenuously object to the legal proceedings at every turn, the court increased the maximum number of hours that could be billed — to a total of 50 hours.

Kamiko signed a durable power of attorney naming her attorney as her agent (for both medical and financial purposes), and a fee agreement with no limitation on the number of hours which might be billed. At some point the probate court decided that Kamiko had not had the capacity to sign the power of attorney, and eventually a limited guardian (of Kamiko’s person and of her estate) was appointed.

The attorney then filed his request for approval of fees charged for his representation. The application showed that he had received $118,110.65 already, and requested an additional $17,137.50 in fees and costs.

The probate court declined to approve Mr. Quick’s additional fees, and ordered that he return all but $30,000 of the fees he had already collected. The judge’s reasoning: whether or not Mr. Quick legitimately put in all the time he claimed, the total amount of fees was simply unreasonable. The $30,000 approved worked out to about 120 hours of legal work (assuming the same $250/hour), and the judge was critical of the attorney’s failure to limit litigation costs, even if his client was difficult to deal with and required special attention.

The Washington Court of Appeals upheld the limitation on attorney’s fees. Even though Kamiko had not been adjudged incapacitated at the time she signed a fee agreement, she was ultimately found to need a limited guardian — and a finding of incapacity was entered at that time. Besides, the appellate court noted, Mr. Quick had been ordered to limit his hours in earlier court rulings, and the amount ultimately approved actually exceeded those limitations.

The bottom line, according to the Court of Appeals: “The court, in overseeing guardianships, must weigh the competing concerns of individual autonomy and protection of incapacitated persons.” That meant that the reduction in allowed fees, and the order for return of over $80,000 in fees already collected, were appropriate in the circumstances. Guardianship of Decker, June 16, 2015.

Would the same result be reached in an Arizona proceeding? Very likely (although, of course, very small changes in the fact pattern might yield very different results). Arizona’s statutes expressly give the probate court the authority to review fees — for attorneys and for other professionals — in guardianship and conservatorship proceedings (Washington’s statutes were held to give that authority, too, but not as clearly or explicitly as Arizona’s laws).

Arizona also has an existing appellate decision which clearly enunciates some of what the Washington Court of Appeals articulated. In 2010, in Sleeth v. Sleeth, the Arizona Court of Appeals ruled that the litigants in guardianship and conservatorship proceedings must pay attention to whether legal fees are ultimately in proportion to the benefit enjoyed by the estate. The underlying facts are strikingly similar: the Arizona case involved assets of slightly more than those in the new Washington case, and legal fees that were larger by a similar proportion. One important difference: the lawyers whose fees were challenged in Arizona represented the guardian/conservator, not the subject of the proceeding.

 

Agent On Power of Attorney is Personally Liable for Legal Fees

MARCH 3, 2014 VOLUME 21 NUMBER 9

Let’s say that Billy signs a power of attorney, naming his friend Joyce as his agent. Later Billy becomes incapacitated, and his agent needs legal advice about her rights and responsibilities. Who will pay for their legal advice?

Generally speaking, you are not supposed to have to spend your own money for things you need to do while acting under a power of attorney, and that includes getting legal advice. But the real world can sometimes get in the way — Billy’s assets may be insufficient to pay legal fees, there may be a dispute about whether his agents are acting in his best interests, or there may be personal interests that they are simultaneously promoting.

This concern is not academic, at least for the people involved in a recent Arizona Court of Appeals decision. “Billy” in that case was Billy Preston, who was sometimes tagged as “the fifth Beatle.” He became seriously ill in 2005, and was admitted to a hospital in Phoenix; he died in June, 2006, after months in a coma.

Billy had signed a medical power of attorney in 2004, naming his friend Joyce Moore as health care agent. Joyce was already his agent — she had represented him as a musician for some years before he signed the health care power of attorney. In March, 2006, while Billy was comatose, his half-sister petitioned the Arizona probate court to be named Billy’s conservator. Although Joyce’s power of attorney put her in charge of medical, not financial, decisions, she felt that she needed legal advice. Joyce hired a Phoenix law firm to represent her; she signed a retainer agreement on March 30, 2006.

Apparently, Joyce and her lawyers did not have the same understanding of their relationship. While Joyce later testified that she thought her lawyers represented her only as health care agent for Billy, her lawyers insisted that they represented her as an individual because of her financial dealings with Billy.

Joyce insisted that her lawyers should submit their bill to Billy’s estate; whether or not that made sense, it was an impractical way to secure payment since the Billy Preston estate had declared bankruptcy. In fact, the estate sought (and recovered) some of the retainer fee Joyce had given to her lawyers, since it had come from Billy’s estate and had not been approved by the bankruptcy court.

Three years after Billy Preston’s death, Joyce’s attorneys sued her personally for about $30,000 in legal fees. Joyce argued that she was not personally liable for the bill; a fee arbitration process found otherwise, and awarded $13,550.86 in legal fees and costs to the law firm. Joyce appealed and set the dispute for trial.

After a three-day trial, an Arizona jury ruled that Joyce personally owed her lawyers $20,000. Joyce appealed the judgment. Last week the Arizona Court of Appeals upheld the award of fees and costs to Joyce’s lawyers, finding that she had not produced sufficient arguments to overcome the jury’s award. Burch & Cracchiolo, P.A. v. Moore, February 27, 2014.

The ruling itself is not actually all that revealing. Joyce represented herself for the appeal, and did not submit transcripts of the trial proceeding; in the absence of those transcripts, the appellate court ruled that she could not show that there had been mistakes in the trial court. The real value of the case, for our purposes, is a chance to explore the authority of agents under powers of attorney to hire lawyers (and other professionals).

There is little doubt that an agent can hire an attorney, accountant, physician or other professional as may be needed in order to discharge their obligations as agent. So, for instance, it would be easy to imagine a circumstance in which there were legitimate legal questions about the agent’s authority, or powers, or duties, and hiring a lawyer might well be necessary and appropriate to help figure out the answers to those questions. That lawyer’s fees would ordinarily be charged against the estate of the principal (the person who signed the power of attorney).

Similarly, it would be easy to imagine that a financial agent might need to hire an accountant to prepare tax returns or accountings, or to investigate past transactions. Those charges should be paid by the estate in most cases, too. Same thing for hiring a doctor, or a social worker, or a case manager, to help oversee care of a person who has signed a health care power of attorney.

Problems can and do arise when the agent also has business dealings with the principal before the power of attorney is signed or used — and such circumstances do happen. After all, it often makes sense to name your business associate to manage your own finances — typically they might know more about your finances than others, even family members. But that can complicate the responsibility to figure out what the attorney (or accountant, or medical professional) is doing for the agent as agent, and what is being done for the agent as an individual.

It’s hard to tease out how much of that might have been going on in Billy’s case, since the appellate record is sparse. But confusion between the lawyers’ view of their role and the client/agent’s view is not that uncommon; it’s why a fee agreement should spell out the precise relationship and who will be responsible for payment.

Typically, a lawyer’s fee agreement might provide that bills will be submitted to the principal’s estate. If they are not paid for any reason (even though that failure or refusal of payment might be challenged), the fee agreement often will provide that the agent is responsible for payment and for seeking reimbursement from the estate. Such a provision might have been in Joyce’s attorney’s fee agreement, but the appellate court did not mention it.

Does all that mean that you should refuse to act as agent because  you might incur personal expenses if things go awry? If you are very skittish about the possibility, you should consider whether it is important enough for you to decline. In the real world, however, disputes like this are rare — and your loved ones need someone to step up and take responsibility for their care if and when they are unable to do it themselves.

Trust for Surviving Spouse Leads to Dispute With Stepchildren

FEBRUARY 17, 2014 VOLUME 21 NUMBER 7

When Albert Findlay (not his real name) died in 2002, he left a trust for the benefit of his wife Sharon. Sharon was named as trustee, and the trust document directed that she was to receive “the entire net income” from the trust for the rest of her life. Albert specifically directed that, as trustee, Sharon would not have any right to take principal out of the trust, but he left at least a half million dollars of investable assets in the trust, so it could be expected to produce some income for Sharon. In addition, the trust included several pieces of investment property — Albert appears to have been a moderately wealthy and successful man.

Albert also had three daughters from his first marriage (that is, they were not Sharon’s children). One of the significant assets in the trust was a 20.28% interest in an apartment building in downtown Prescott, Arizona. Albert’s daughters owned the remaining interest and managed the building.

Already the description of Albert’s estate plan should give some clues about what ended up going wrong. In our experience, clients have a hard time imagining what the family dynamics will actually look like after their deaths. We can guess that Albert might have had such a failure of vision. Would Sharon handle the trust properly? Would she get along with her step-daughters? Would any of them, financially enmeshed as they were, seek to take advantage of the others? Would all of them understand their obligations to one another, providing information and responding reasonably when asked?

It is not clear from the court record (you predicted that there would be a court proceeding, didn’t you?) who acted first, but in the few years after Albert’s death several things happened:

  1. Two of his daughters, as managers of the apartment complex, took out a loan against the building. They did not put the proceeds into the limited liability company running the rental building. The building did not generate sufficient income to make the loan payments, and the property was ultimately lost to a foreclosure.
  2. Sharon began automatically transferring $3,000 per month from the trust to her personal checking account, regardless of how much income the trust produced. The value of the stocks held in the trust began to decline.
  3. Albert’s daughters requested accounting information for the trust, but Sharon did not comply for months. In fact, she did not provide any detailed account information until court proceedings had been filed.
  4. The daughters attempted to sell one of the other assets held jointly among them and Sharon’s trust; Sharon objected to some of the terms of the proposed sale and it did not go through. The daughters then formed a new limited liability company and transferred their share of that asset to the new LLC. Meanwhile, they received an offer on the struggling apartment building (before the foreclosure) but rejected it without consulting Sharon.
  5. Once litigation began, Sharon hired an attorney and paid about $70,000 in legal fees from the trust. She actually initiated the lawsuit, seeking damages for her stepdaughters’ handling of the apartment building. They countersued, asking that she be removed as trustee, ordered to account and ordered to return money she should not have taken from the trust.
  6. Meanwhile, Sharon was receiving trust checks for rental payments on another trust asset, a commercial rental building. She deposited those checks into her personal account directly, and reported the income on her own income tax return rather than showing it as trust income. In fact, Sharon didn’t even have a trust checking account set up for most of the time she acted as trustee.

The trial court heard testimony from the warring parties, and ended up removing Sharon as trustee (a non-family member took over after her removal), ordering her to return trust money she should not have received, and directing her attorney to return $70,000 in legal fees paid by the trust. Sharon appealed.

The Arizona Court of Appeals affirmed most of the trial judge’s findings, but disagreed about how much Sharon should have been entitled to receive from the trust. The trial judge had ordered Sharon to return everything she had received above the “distributable net income” (DNI) of the trust — that calculation was wrong, said the appellate court. DNI is a tax-related calculation — it is the maximum amount of the income tax deduction available to a trust for distributions to an income beneficiary — and “income” for trust accounting purposes is a different (and often somewhat larger) number, according to the Court of Appeals.

The appellate court sent the dispute back to the trial judge for further hearings to calculate the amount that Sharon owes back to the trust. It also directed the trial judge to conduct proceedings to determine whether Albert would have wanted his trust used to pay for administrative items like legal fees. In the first hearing, the judge had refused to allow Albert’s lawyer to testify about what he might have intended in that regard.

Two other holdings by the Court of Appeals are worth mentioning. First, the appellate judges noted that Sharon’s decision to sell the stocks held in the trust when she took over is not, by itself, evidence of any wrongdoing. Even though the value of the stock holdings had apparently gone down during her administration, that is not necessarily actionable. A trustee is not an insurer, but has a duty to manage trust assets prudently. The trial judge will need to inquire further into the kinds of changes made before deciding to order Sharon to return funds.

Finally, the appellate court noted that there is not necessarily any problem with naming a trustee who has an interest in the trust’s administration. In fact, it is common to name beneficiaries as trustees — they then have a duty to the other beneficiaries, but that does not mean that someone in Sharon’s position is precluded from seeking to assert her own interests in the trust. The trial court will need to review the earlier ruling to make sure that the “conflict of interest” analysis was not too sweeping in its application. Favour v. Favour, February 11, 2014.

It is a challenge to describe a court opinion like the Favour holding without dropping into technical jargon. But perhaps it is more useful and interesting to think about how the litigation — and the outcome — might have been avoided in the first instance. We have a few ideas to suggest — though we are quick to note that we never discussed Albert’s wishes with him, and he might have rejected any or all of these:

  1. Naming a beneficiary as trustee is not at all objectionable, and (as the appellate court notes) it is commonly done. But if the trust’s author intends that everyone be treated scrupulously fairly, it might make more sense to name a disinterested person (or organization) — even a professional — as trustee.
  2. It is uncommon to see modern trusts that require distribution of all income but preclude distribution of any principal. That is an invitation to this kind of dispute, since the characterization of income and principal can be subject to interpretation. It also puts the income and remainder beneficiaries at odds — income beneficiaries are not interested in growth of investment value, and remainder beneficiaries would rather skip current income in favor of that growth.
  3. Putting fractional shares of investment assets into the trust is another way to encourage disagreement — particularly when other trust beneficiaries have management authority over the fractional interests.
  4. Once any level of conflict arose, it might have been appropriate for Sharon to consider application of Arizona’s “total return unitrust” statutory authority. Using that approach, she might have set a presumptive rate of distribution from the trust regardless of the actual income — and reduced the possibilities of disagreement between herself and her stepdaughters.
  5. Including some sort of dispute resolution mechanism in a trust — especially a trust like this one, involving a surviving spouse and stepchildren from an earlier marriage — might make sense as a way of minimizing conflict, avoiding court proceedings and reducing legal expenses.
  6. A trustee has a duty to report to remainder beneficiaries. Someone should have explained that to Sharon early, and pushed her toward satisfying that obligation. Delaying or avoiding her duty did not work to her benefit in the long run.

With remand to the trial court, it may not be too late for Sharon and her stepdaughters to work out some less-costly resolution of their dispute. But some part of the cost (and the breakdown in the interpersonal dynamics) has to be laid at Albert’s door — he could have reduced the conflicts and helped his family avoid disputes by a little more careful thought about the drafting, funding and future of his trust plans.

 

Court Reviews Fees Charged by Fiduciary and Attorney

SEPTEMBER 9, 2013 VOLUME 20 NUMBER 34

There is a lot going on in Arizona with regard to the fees charged by guardians, conservators, trustees, personal representatives — and their attorneys. There has been quite a bit of controversy in news articles (particularly, but not exclusively, in the Phoenix area) and online. Professional fiduciaries have been subjected to close scrutiny, and stories have circulated about estates being emptied by legal and fiduciary fees.

Courts have reacted to the impression created by those stories. Much more attention is paid today to court proceedings seeking approval of fees, and the complexity and cost of accounting has risen. Occasionally, courts simply mandate lower fees because, well, the proposed fee seems high.

A recent Arizona Court of Appeals case indicates that probate court judges will need to be more thoughtful before imposing fee reductions. The case involves a Phoenix-area judge who ordered a 50% reduction in the fees charged by a fiduciary and its attorney.

In the Conservatorship of Helen Maxwell (not her real name), the court-appointed fiduciary had requested fees of $96,859.60 and its lawyer filed a bill for $28,501.64. Noting that the work had (“for the most part”) been “reasonable, necessary and in the best interests of” Helen, the probate judge in Phoenix nonetheless halved the fees of both applicants.

The reason? Helen’s estate was only worth about $800,000, with most of that in illiquid real estate. Helen simply could not afford the fees and costs, said the probate judge. It would not be in Helen’s best interests to approve the total amount of fees requested, “even though they were rightfully earned.”

The Court of Appeals reversed the probate judge’s ruling and sent the matter back for more consideration. Noting that they had recently given some guidance in how to judge fiduciary and legal fees, the appellate judges ordered the probate judge to weigh the costs against the benefits obtained by the fiduciary and its lawyers, and to consider a set of factors spelled out in recently-adopted court rules before ruling on the fee request.

What factors should the considered when the probate judge takes the matter up again? In addition to balancing the cost against the benefit, the court should look to:

  1. The result obtained by the fiduciary and its attorney
  2. The disclosure by the fiduciary, in advance, of the likelihood of high costs
  3. The fiduciary’s (and the attorney’s) skill and expertise
  4. The kind of work done, and the skill level required to accomplish it
  5. The actual work done, and the time spent doing it
  6. The fees charged by others in the business and in the community
  7. The risks and responsibilities undertaken by the fiduciary

In the Matter of the Conservatorship of Mallet, August 22, 2013.

It is unclear what will happen next. The fiduciary whose fees were challenged has left the business, and Helen herself died while this appeal was pending. We’ll update you if we learn of a follow-up outcome.

New York Judge Takes Bank, Lawyer to Task Over Special Needs Trust

MARCH 9, 2013 VOLUME 20 NUMBER 10
We don’t very often focus on trial court decisions, and especially not in cases from outside Arizona. Trial judges are often very dedicated and bright, and their opinions may be eloquent and well-reasoned, but they do not establish precedent we can describe for our readers. Once in a while we come across a trial court opinion that speaks to our area of law practice, however, and we want to share it with you.

Such a case comes to us from now-retired New York Surrogate’s Court Judge Kristin Booth Glen. Surrogate’s Court is similar to Arizona’s probate court — it is where trusts, estates and guardianships are handled. Judge Glen handled a particularly challenging estate and trust, and wrote an opinion detailing the history of the case on her last day in office.

The case involved a guardianship of a profoundly developmentally disabled adult named Mark (his full name is not given in the judge’s opinion). Mark was 16 when his adoptive mother Marie died in 2005. Mark was then living in a group home, where Marie had placed him after she learned that she was terminally ill.

Marie’s living trust (which, as an aside, was apparently never funded) divided her assets between Mark and his brother. Mark’s share was to be held in a special needs trust, with JP Morgan Chase Bank and Marie’s lawyer acting as co-trustees. Her pour-over will left everything to the trust; in the probate proceeding initiated after her death, the total estate was described as just short of $12 million. Probate-related costs and expenses reduced that by almost a million dollars, and another $3.5 million was paid in estate taxes. Inexplicably, Mark’s one-half share of the remaining $8 million was reported as $1,420,343.29.

A year after Marie’s death, her lawyer sought appointment as Mark’s guardian. For reasons not explained in the written decision, no hearing was held for almost a year. When the attorney appeared before the judge, he told her that he was fulfilling a death-bed promise he had made to his former client, but that he had not actually seen Mark in more than ten years. He had not visited the facility where Mark was living, and he had not asked the staff whether Mark had any unmet needs. In the almost three years he had been co-trustee of the trust for Mark, not a penny had been spent on him.

Judge Glen ordered the lawyer and the bank to explain themselves — to file an accounting in the trust detailing income and expenditures. She also suggested that they ought to find someone to evaluate Mark and his needs, and to figure out whether there were things the trust could provide for his benefit. A professional care manager was eventually hired (though it inexplicably took a year before she was sent to visit Mark), and a program of providing for Mark’s needs finally began. Meanwhile, Marie’s considerable estate had sat idly, paying only administrative expenses, for almost five years after her death.

The judge’s written opinion details all that history, and the gradual improvement in Mark’s life and care over the two-year period since the care manager began visits and recommendations. It also leaves little doubt about the judge’s frustration at not getting sufficient information to determine how the estate shrank from $12 million to the $1.5 million (or so) in Mark’s trust, or how much had been paid to the bank or the lawyer in probate fees and trust administration fees. It laid out a few next steps to guide her successor after her own retirement. It did not resolve any potential or actual challenges to the fees charged by the bank or lawyer, but it clearly signaled her likely intention to reduce fees and potentially order return of some fees already collected. In the Matter of the Accounting by JP Morgan Chase Bank, N.A., v. Marie H., December 31, 2012.

Though this written opinion is from a trial court rather than a court of appeals, it is worth looking at and considering. Though it is a New York case, it speaks to judges, trustees, beneficiaries and families in other states, as well. It lays out a disturbing history of inattention to the needs of a severely disabled man even though there apparently were funds available for his benefit. It tells trustees that:

  • inaction can be as bad as affirmative misbehavior.
  • it can be helpful to bring in a professional care manager to assess needs and make recommendations.
  • the courts can initiate reviews on their own, even if no complaint has been filed, when it becomes apparent that oversight is needed.
  • beneficiaries who are unable to protect themselves need special protection.

What happens next? We really don’t know — though the three months the judge gave for a more detailed accounting and action plan will expire at the end of this month. It will be interesting to see what Judge Glen’s successor does with this case, and how her written decision affects professional trustees and lawyers in New York and elsewhere. We’ll let you know as we see updated information.

Meanwhile, we hope that Mark continues to see benefits from his mother’s trust. It sounds like he has made a lot of progress with a little protection, oversight and professional care recommendations.

 

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