FEBRUARY 27, 2017 VOLUME 24 NUMBER 9
General rule: a trust lawyer’s fees can be charged to the trust, at least where the trustee has not misbehaved. Significant exception: courts can reduce fees for a variety of reasons, and “misbehaved” may have different meanings.
Patricia Campbell was trustee of a special needs trust for the benefit of Lance Smith (not his real name). Lance suffered profound injuries during a surgical proceeding when he was six. The trust held the proceeds of a personal injury action, and was the beneficiary of a $5,000 monthly annuity payment as a result of the lawsuit.
Lance’s parents wanted a residence where the entire family could live and care for Lance. They urged the trustee to help them with a creative solution: they wanted to buy out Lance’s grandfather’s interest in a five-bedroom, four-bath house next to a golf course in California. The grandfather had paid $590,000 a few years earlier. The family insisted that the trust pay $606,000 for the home, by signing a note to the grandfather and taking over the existing mortgage payments.
When the trustee filed her annual account with the court, the purchase of such a large home raised some concerns. The judge appointed an attorney to investigate the use of the trust money. That attorney reported a number of concerns. One stood out: the home purchase had occurred in 2008, just after a dramatic decline in real estate values, and the trust had paid almost three times what the house was then worth.
The court proceedings
The court-appointed attorney was authorized to file a lawsuit against the trustee, and he did. His lawsuit sought damages, unwinding of the real estate sale, and removal of Ms. Campbell as trustee. By this time the trustee had hired Oakland, California attorney Eugene Schneider as her own attorney. Presumably she expected that the trust would bear the cost of her legal representation, as is usually (but not always) the case.
Mr. Schneider argued that the trustee had not been told she could not purchase real estate without prior court approval. Like Arizona, California courts have a fiduciary licensure system; Ms. Campbell had not completed the process by the time she took over Lance’s trust and made the home purchase. By the time she filed the court accounting which disclosed the purchase, she had become licensed, and presumably had learned that state and local rules required prior court approval for this purchase. [As an aside, Ms. Campbell’s California fiduciary license has apparently since lapsed, though the program’s website does not explain why.]
The probate judge authorized the court-appointed attorney to file a lawsuit, and he did. He charged Ms. Campbell with breaching her duties as trustee, and sought to set aside the real estate purchase, surcharge Ms. Campbell and remove her as trustee.
Ultimately the parties entered into an agreement. Ms. Campbell resigned as trustee, and no one would pursue her for any further damages. Most importantly, the agreement called for reversal of the home purchase. The new trustee would have the power to decide whether to challenge any of the fees incurred.
The legal fees
After the settlement, attorney Schneider filed his request for payment of attorney’s fees. His bill: $130,118.39. The new trustee objected, and the probate judge considered the fee request.
One problem for Mr. Schneider was that he had also filed a lawsuit on behalf of his trustee client against the lawyers who had represented her during the first years of the trust. That lawsuit had resulted in a settlement, but apparently nothing had come back to the trust as a result. The probate court reviewed the billings and determined that only $17,992 was legitimately chargeable against the trust. The judge reduced his approved fees to that amount.
Mr. Schneider appealed. Notably, he appealed on his own behalf, and not in his client’s name. The California Court of Appeal considered his arguments — and ruled against him.
According to the appellate court Mr. Schneider did have standing to appeal, but his points were not well-taken. The probate court had found that most of his work benefited Ms. Campbell individually, and not the trust. The Court of Appeals agreed.
Mr. Schneider had also objected to fees charged by the court-appointed attorney and by the new trustee. His argument: if his fees were approved, then the trust would be unable to pay everyone. The Court of Appeals decided that while he did have standing to challenge denial of his own fees, he did not have standing to object to fees charged by the others. Campbell v. Patterson, February 22, 2017.
What about Arizona?
Would the California court holding be the same if the case had been in Arizona? Would an Arizona trust lawyer’s fees have been reduced on similar facts? Probably, though on a different legal basis.
First, the California rules apparently prohibit a court-monitored special needs trustee from purchasing real property without prior court approval. Arizona courts do not impose that restriction — though it is common for trustees to seek court approval in advance.
Even though the trustee could have made the purchase, however, it would be equally imprudent under Arizona law to overpay for a residence — even if family members were insistent. Furthermore, the trustee’s tendency to accede to family demands would be troublesome in Arizona courts, as well.
The rules governing trustees are complicated, and often subject to interpretation. It can be a challenge to navigate the process, and trustees should always seek competent legal advice.