Hidden in plain sight: avoiding conflicts of interest in trust litigation.

• Author: Triggs, Matthew

A question that commonly arises in trust litigation is whether a trustee can use trust assets to pay the legal fees associated with prosecuting or defending a litigation. This is particularly so when the claim or defense centers on an alleged breach of trust on the part of the trustee. Prior to the enactment of the 2008 amendment to F.S. [section]736.0802(10), (1) caselaw held--consistent with Florida's then-existing versions of the trust code--that a trustee could not use trust funds to pay legal fees incurred without court approval because the trustee was perceived to be in a conflict position. (2) Once a conflict was deemed to exist, court authorization was necessary before attorneys' fees could be paid out of trust assets--a result that often placed even the most well-heeled trustees in a financial bind, at least in the short term. (3)

A 2008 amendment to Florida's Trust Code changed things for trustees. Under that amendment, a trustee can use trust funds to pay legal fees incurred in defending a breach of trust litigation without prior court approval so long as the trustee first provides notice of his or her intent to do so. Section 736.0802(10)(a) states: "If a claim or defense based upon a breach of trust is made against a trustee in a proceeding," the trustee is required to provide written notice to any qualified beneficiary whose share might be affected by the payment of fees and costs and inform that beneficiary of the trustee's intent to pay the fees and costs out of trust assets. Notice must be provided prior to making payment and must inform the beneficiary that he or she has "the right to apply to the court for an order prohibiting the trustee from paying attorney's fees or costs from trust assets." (4) Thus, the trustee's provision of notice to qualified beneficiaries has replaced the requirement of prior court authorization.

If the beneficiary moves to prevent the trustee from paying attorneys' costs and fees from trust assets, and ultimately proffers sufficient evidence to establish a "reasonable basis for the court to conclude that there has been a breach of trust," [section]736.0802(10)(b) provides that the court must enter an order prohibiting further payment and order a refund of any fees already paid, unless the court finds good cause not to do so. (5)

In the event that the court requires a refund, who pays? Is it the lawyer, or is it the trustee from his or her personal funds? The statute is silent, and it is for that very reason that it presents an ethical minefield for the lawyers who represent trustees in such circumstances. For example, suppose Laura the lawyer represents Thomas the trustee in an action to approve a trust accounting. Thomas pays Laura from trust assets without court authorization, as permitted by [section][section]736.0802(10) and 736.0816(20). Just when the action seems to be smoothly moving along, suppose Benjamin the beneficiary asserts a breach of trust claim against Thomas. Laura drafts an answer on behalf of Thomas as trustee and later bills Thomas in that capacity for her time. Adhering to [section]736.0802(10), Thomas dutifully notifies Benjamin and the other affected beneficiaries of Thomas' intent to pay Laura's fees with the trust assets. Benjamin, determined to prevent such payment, moves for an order prohibiting Thomas from paying the fees that Laura incurs in defending such a claim with trust assets. Unfortunately for Thomas, suppose the court finds a reasonable basis to determine that Thomas committed a breach of trust and does not find any good cause that would otherwise allow Thomas to continue to use trust assets to pay Laura. It, therefore, enters an order prohibiting Thomas from paying any more...