Posts Tagged ‘conflict of interest’

Trustee Has Duty to Monitor His Lawyer’s Behavior

AUGUST 29, 2016 VOLUME 23 NUMBER 32
Are you a trustee, or named as successor trustee for a family member or friend? We regularly advise people in your circumstance that they should get good legal advice. Once you’ve done that, however, you are not absolved from any liability if things go wrong.

A trustee is generally permitted to delegate some duties to others — especially to professionals. So it makes sense, and might even be required, for a trustee to hire a stockbroker, or an accountant, or a lawyer. But the ability to delegate is coupled with a duty to monitor the professional.

At least that’s the law in Arizona, and probably also the law in any state that has adopted the Uniform Trust Code. It’s also the law in California, as it turns out — even though California has not adopted the Uniform Trust Code. How do we know? Because of Terry Delgado (though we’ve changed his name for this narrative).

Terry was named as successor trustee on his mother’s trust. After her death late in 2011, he took over, and began managing her trust property. That included two pieces of real estate in the San Francisco area, several bank accounts and some personal property items. Her trust directed that it should be distributed equally between Terry and his two sisters.

When they hadn’t gotten any information about the trust after two years, Terry’s sisters wrote to the lawyer who had been handling the trust administration. They asked for an accounting, distribution of some of the trust’s holdings, and information about what would happen to the real estate. They got nothing back in response. They did, though, get a notice from Terry’s lawyer that one of the properties was being listed for sale. They wrote back saying that they thought the property needed work done before it was sold, and demanding that they get information about what had happened and what might be proposed.

A court hearing was set for six weeks later. Three days prior to that hearing, Terry’s lawyer filed a motion to continue the hearing, claiming that he (the lawyer) had been ill and needed to be involved in the preparation of any accounting. The probate judge conducted a hearing anyway, and decided Terry’s power as trustee needed to be suspended. The judge appointed a professional trustee to take charge temporarily, and ordered Terry to file a complete accounting with the court within six weeks from that hearing date.

Instead, Terry’s lawyer filed a motion to reconsider the order suspending Terry’s powers as trustee. The lawyer claimed that, because of his illness, he had been sleep-deprived and unable to complete the accounting. He had also been working on an accounting in connection with the related estate of Terry’s mother’s late husband. Furthermore, Terry himself had been unable to complete the accounting because of his work schedule and his lawyer’s illness.

At the same time, Terry’s lawyer filed an entirely separate pleading on behalf of the real estate agent who had been hired to list the property. That pleading objected to any change in trustee, and noted that the real estate agent’s company might file a claim against the estate if the listing were to be canceled.

On the last day set by the probate judge, Terry’s lawyer filed an accounting on his behalf — on the wrong forms. The accounting revealed that up to that point, Terry’s lawyer had charged the trust something more than $320,000 in fees — $350 per hour for 916.15 hours.

The probate court received the accounting and set a hearing to review it for two months later. During the delay, Terry’s lawyer filed his own declaration. It apologized to the probate judge for the delays, acknowledged that he had filed the wrong kind of accounting, described his health problems and promised to get the proper accounting filed before the new hearing date already set.

At that hearing, the probate court permanently removed Terry as trustee. It appointed the neutral fiduciary who had been acting temporarily, and noted that no acceptable accounting had yet been filed. At a later hearing on Terry’s lawyer’s request for a reconsideration, the probate judge reaffirmed the same orders.

Terry appealed to the California Court of Appeal. That court upheld the removal and the appointment of a new fiduciary. The appellate judges noted that Terry had every right to hire an attorney to represent him as trustee, but that he had an obligation to monitor his attorney and to see to it that his duties were properly discharged.

Terry’s attorney had created a serious conflict of interest by appearing in the same proceeding on behalf of someone who asserted a claim against the trust, ruled the appellate court. The attorney’s assertion that there was no “actual” conflict of interest in the dual representation did not relieve Terry of his duty.

It is perfectly permissible, ruled the appellate court, for a trustee to hire a professional — like an attorney — to handle trust business and to delegate authority to that professional. The trustee, though, is still required to monitor the professional, and to hire a more suitable alternate if the attorney is unable to handle the assignment — whether that is because of illness, unfamiliarity with trust administration procedures, or otherwise. Desbiens v. Delgman, August 10, 2016.

Lawyer’s Move From Representing Widow to Estate is Problematic

OCTOBER 31, 2011 VOLUME 18 NUMBER 37
Floyd Spence, a Republican Congressman from South Carolina, was a long-time survivor of a heart-lung transplant and a (separate) kidney transplant when he died in 2001, at the age of 73. He was survived by his second wife, Deborah Spence, and four adult sons from his first marriage (his first wife had died in 1978).

As Congressman Spence lay dying in a Mississippi hospital, Mrs. Spence realized that she might need legal counsel to sort out what she would receive from his estate and his congressional life insurance policy. She consulted Kenneth B. Wingate, a prominent lawyer in Columbia, South Carolina. They discussed the fact that she had signed a prenuptial agreement prior to marrying Congressman Spence, that he had initially named her as one of five beneficiaries (along with her stepsons) on his $500,000 life insurance policy, and that she believed he had changed the beneficiary designation to name her alone.

Mr. Wingate advised Mrs. Spence that she should consider entering into an agreement with her stepsons about how the estate would be divided upon Congressman Spence’s death, since there were uncertainties arising from his two different wills, the beneficiary designation and her possible rights under South Carolina law. She agreed, and a settlement of any possible dispute was quickly negotiated and signed. Congressman Spence died, as it happened, the day after the settlement was finalized. The settlement provided for a trust, to be funded with one-third of Congressman Spence’s probate assets and paying its income to her for the rest of her life.

About two weeks later, Mr. Wingate visited Mrs. Spence and informed her that he had been retained to represent the Estate of her late husband. He did not tell her that there might be a conflict of interest in that representation, and he did not ask her to acknowledge any conflict or sign a waiver. In fact, he told her that she would no longer need separate counsel, since the possible conflicts had all been resolved.

Over the next few months Mrs. Spence began to think that she had made a bad bargain. She became convinced that she would have received more from either her husband’s last will or South Carolina’s laws providing for surviving spouses. At a family meeting with her four stepsons and Mr. Wingate, however, her former attorney suggested that she should forgo her right to receive the entire life insurance policy in order to make the boys “whole again.” She did not want to agree, arguing that they should not alter her late husband’s wishes.

After the family meeting Mrs. Spence called Mr. Wingate and asked him to put his hat back on as her attorney and counsel her about the life insurance proceeds. He declined but, according to her, he did not tell her that she ought to seek new counsel or take any steps to protect her interest in the life insurance.

About a year after the Congressman’s death, Mrs. Spence filed a lawsuit seeking to set aside the agreement Mr. Wingate had negotiated for her. He promptly withdrew from representation of the Estate. Eventually the court set aside the agreement.

Mrs. Spence then sued Mr. Wingate, arguing (among other things) that he had breached his fiduciary duty to her as a former client by taking on a new client with an adversarial position. Particularly she argued that Mr. Wingate breached his duties to her in connection with the life insurance policy.

The trial judge dismissed that part of her complaint. Since the estate did not have any interest in or right to the insurance proceeds, the judge decided, Mr. Wingate could not breach any duty to her with regard to the policy. The South Carolina Court of Appeals, however, disagreed. The possibility of a breach of fiduciary duty would depend on the evidence at trial, ruled the appellate judges. The case should be returned to the trial court for further proceedings to determine whether there was in fact a breach of duty.

The South Carolina Supreme Court has now rendered its opinion on Mr. Wingate’s duties to Mrs. Spence. The state’s high court agreed with the Court of Appeals that more facts are needed, but made clear that the existence (or non-existence) of a fiduciary duty is a question of law for the trial judge to decide. In other words, the dispute was returned to the trial court for further hearings, and with an instruction to the trial judge to make a finding about whether Mr. Wingate owed a fiduciary duty to Mrs. Spence with regard to the insurance proceeds. If the judge decides that a duty has been shown, then a jury can determine whether Mr. Wingate breached that duty. Spence v. Wingate, October 17, 2011.

The decision of the Supreme Court was not unanimous, incidentally. Two of the five justices would have found that no fiduciary duty existed with regard to the insurance policy, and would therefore have upheld the partial summary judgment originally granted by the trial judge.

Is there a broader lesson in this story? Let us guess that Mr. Wingate today wishes he had declined to take on representation of the Spence estate, and stayed available to counsel Mrs. Spence as to her rights and her agreement. He may ultimately be vindicated, but that will be a less desirable outcome than never having been accused of breaching his duty in the first instance.

©2017 Fleming & Curti, PLC