Corporate Fiduciary Surcharge Litigation
| Publication year | 1987 |
| Pages | 983 |
1987, June, Pg. 983. Corporate Fiduciary Surcharge Litigation
Surcharge suits against individual and professional fiduciaries have increased dramatically in recent years. Recoveries, which used to be uncommon, now are frequently reported in the six- or seven-figure range. The "deep pocket" theory of contemporary litigation seeks a defendant who has the financial ability to pay for mistakes. Banks are natural prey for these "fishing" expeditions. Lawyers may be asked to represent a disgruntled trust beneficiary or may be on the other side of the case as special counsel for a hapless bank that has been "sued to the nines." Since corporate counsel of a bank may have representational conflicts, outside counsel often is called in to take part in the defense of these suits.
A lawyer who is not general counsel for the corporate fiduciary may be considered to represent the particular estate or trust only. However, that lawyer may have formal or informal relationships with, or representations of, parties who have an interest in the outcome of a case. For example, the lawyer may have been recommended by the bank to the testator to write the will, may be counsel for the family beneficiaries or may have represented the business which will constitute a major portion of the estate.
The Code of Professional Responsibility contains a general per se prohibition against an attorney representing conflicting interests.(fn1) An exception to the general rule states that a lawyer may represent multiple clients if it is obvious that the interests of each can be represented adequately and the clients consent to dual representation after full disclosure.(fn2) However, what does "obvious" mean? Is the test meant only to be subjective? Moreover, what if things change during the course of administration of the estate or litigation? Disciplinary Rule ("DR") 5-105 imports that even interests that are only potentially different must be considered; the lawyer must resolve any doubts against the propriety of undertaking the representation.
If the ethical considerations have been met and the lawyer decides to accept the case, what issues are likely to be faced? This article focuses on two principal areas of developing case law: the so-called "Prudent Man Rule" and conflict of interest or self-dealing problems among various bank departments.
The "Prudent Man Rule" was born in Harvard College v. Amory, where the court stated that a trustee must "conduct himself faithfully and exercise sound discretion as other men of prudence, discretion and intelligence manage their own affairs with regard not to speculation, but to the permanent disposition of their funds."(fn3)
The vast majority of American states which have adopted the rule, by court opinion or by statute, embrace it as a rule of conduct which measures the care and attention that a fiduciary must devote to selecting or retaining investments for the estate or trust. The rule requires that the portfolio be monitored and each asset be meticulously reviewed, and that a balance be achieved between the interests of the life tenant and remaindermen. The general rule in most states is that prudence requires diversification among investments.
For many years, professional fiduciaries have reacted conservatively to the restrictions placed upon them by the rule; that is, they sell off the decedent's highly prized stocks and reinvest the proceeds in U.S. government bonds. In reality, professional fiduciaries today often are in direct competition with other competent investment managers who see their job as preserving the real value of the family assets
To continue reading
Request your trial