Fisher Mediation
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Recent Dramatic Cases Provide Valuable Practice Tools

by Paul Fisher, Edited by Judith Stalk


Recent dramatic cases provide valuable estate planning and litigation practice tools: how courts react to trusts run in secrecy; when non-estate litigation counsel chase “the pot of gold”; privileged communications between trustee and counsel; seismic fault lines between the court and the duty of a trustee to disclose in an undue influence case; and when courts protect beneficiaries from self-interested trustees.

What follows is a brief summary of important estate planning and litigation cases highlighted in the ABA’s July 14, 2010, Litigation, Ethics, and Malpractice Group teleconference presented by Dana G. Fitzsimons, Jr., McGuire Woods LLP, Richmond, Virginia.

Trustee Disclosure:

Wilson v. Wilson 2010 N.C. App. LEXIS 501 (March 16, 2010) illustrates how strongly judges do not like secrecy in trusts. Beneficiaries of a trust sought an accounting by trustee who refused, claiming the trust documents did not require the filing of accountings with any court or beneficiary. The trial court dismissed the beneficiaries claims under North Carolina’s version of the Uniform Trust Code, that the settlor of a trust may override the requirement that trustee disclose information to beneficiaries. The North Carolina Court of Appeal reversed, stating the NC Uniform Trust Code imposed a mandatory duty on the trustee to act in good faith. It also ruled that the trust terms cannot prevail over the power of the court to act in the interests of justice, including the power to compel discovery in order to enforce the beneficiary’s rights under the trust or to prevent breach of trust, regardless of the terms of the trust.

JP Morgan Chase Bank v. Longmeyer, 205 SC 00313 DG (Kentucky Supreme Court 2009) explores seismic fault lines between the court and duty of trustee to disclose in an undue influence case. Skonberg’s attorney prepared revocable trust naming several charities as beneficiaries and JP Morgan as trustee. Ten years later Skonberg’s care taker, Smothers, provided her notes of a new estate plan to Longmeyer. The new plan removed the bank as trustee, named Longmeyer as trustee at fee of $100K per year, removed the charities and increased the bequest to Smothers from $20K to $500K. During the time of the drafting the only doctor to see Skonberg was Longmeyer’s brother-in-law. Skonberg died six weeks after the plan was created. JP Morgan notified the charities of the change in the estate plan. Charities brought suit against Longmeyer, as executor, contesting the revised estate plan. Longmeyer settled with the charities for $1.875M and then sued JP Morgan to recover the $1.875M on the basis that the bank breached its duty by disclosing information to the former beneficiaries. The Supreme Court held the Kentucky trust statutes impose a duty to keep beneficiaries reasonably informed of material facts affecting their interests and concluded the bank was obligated to give the charities the information. Again, the court did not like secret dealings of the trustee, among other wrongdoings.

The message in these two cases: Beware, courts do not like trusts run in secrecy.

N.K.S. Distributors, Inc v. Tigani, 2010 Del.Ch.LEXIS 104 (May 7, 2010) addresses the tensions in the gray area of when trustee’s communications with counsel are and are not privileged when sought by a beneficiary. Bob was the trustee of a trust for his lifetime benefit and exercised his power to appoint a successor beneficiary by designating one of his sons, Chris. The trust was the majority shareholder of N.K.S. Distributors. In litigation between Chris and N.K.S., Chris moved to compel production of trust related communications between Bob and his counsel. He argued that a beneficiary must have access to all communications containing legal advice pertaining to the trust or to the trustee’s performance of his duties. Bob’s counsel refused, claiming attorney client privilege since counsel’s communications were provided in connection with issues between N.K.S. and Chris. The court concluded that since the communications in question were not for the beneficiary’s benefit, Bob’s attorneys were not compelled to provide the information sought by Chris. The documents sought were, in the Court’s opinion, prepared on behalf of the trustee in preparation for litigation between a successor beneficiary and the trustee.

Surcharge Litigation:

Trent v. National City Bank, 918 N.E. 2nd 646 (Indiana Court of Appeals, Dec. 22, 2009), illustrates the challenge and how critically important it is to educate non-trust and estate litigation counsel about nuances of trust law. Decedent’s grandson Robert, beneficiary of 8.34% under decedent’s trust, claimed the bank trustee failed to verify decedent’s capacity when trust documents were signed, and had unduly influenced decedent in signing the trust document. Robert also claimed that decedent lacked capacity, and that bank had a duty to prevent Robert’s brother (the brother and his family received 75%) from exercising undue influence over decedent. The trust was valued in excess of $8 million. The trial court found no evidence to support any of Robert’s claims and rejected all of them. Confirmed on appeal. I have seen many of these claims in mediation.

Wells Fargo Bank, N.A. v. Crocker, 2009 Tex. App. LEXIS 9791 (December 29, 2009) demonstrates the importance of full disclosure by trustee to beneficiaries. A year before his death decedent spoke with a bank trust administrator about opening a new account in the name of decedent and second wife with right of survivorship. Decedent never returned the signature card. There were other irregularities involving the account set up. After decedent died, Wells Fargo distributed the funds in the joint account to the second wife and shortly thereafter informed the daughters by the first marriage of the distribution but was not forthcoming about the irregularities. Daughters claimed bank wrongfully distributed funds in the account to decedent’s second wife when the account did not have right of survivorship and that Wells Fargo failed to disclose the irregularities. The jury awarded the daughters $230K that Wells Fargo had distributed to the second wife plus punitive damages against the bank of $30M. The court of appeals concluded the evidence at trial was insufficient to prove the breach of duty caused injury to the daughters and reversed all damages. Lesson: if there are potential conflicting claims between beneficiaries get them on the table quickly and find a way that beneficiary issues do not become trustee issues. Here the trustee was not forthcoming causing suspicion and this drove the potential beneficiaries crazy.

Trustee Compensation and Fees

Salmon v. Old National Bank, 2010 U.S. Dist. LEXIS 16313 (February 24, 2010 and April 8, 2010) Trustee counsel: caution. The court will protect beneficiaries from self-interested trustees.

Beneficiaries of a trust moved for preliminary injunction to prevent the trustee from using trust assets to pay attorney fees and costs in the course of litigation, arguing trustee must wait until the end of the litigation and only get reimbursement if trustee was successful and fees were approved by the court. Trustee opposed and petitioned for approval of sale of real estate held in the trust to pay for immediate care of elderly beneficiary and claiming there were no liquid assets. Trial court granted the injunction on the basis that (1) beneficiaries could show a likelihood of success on the merits that courts generally do not approve payment of attorney fees unless the trustee prevails and the fees are reasonable; (2) trustee petitioned to sell real estate and beneficiaries proved irreparable harm in the absence of an injunction; (3) there would be relatively little hardship to the trustee in having to wait until it prevails in its defense to be reimbursed for its fees; and (4) the public interest weighs in favor of protecting beneficiaries from self-interested trustees. The court ordered the trustee to reimburse the trust for the $100,000 already paid to its attorneys, and denied the trustee’s petition for power to sell the land because it was no longer necessary.