Smith v. Szeyller: Probate Court Authority for Attorneys' Fee Award Under the Substantial Benefit Doctrine for Successful Beneficiaries

• Publication year: 2020
• Author: By Denise E. Chambliss, Esq. and James R. Cummins, Esq.

SMITH V. SZEYLLER: PROBATE COURT AUTHORITY FOR ATTORNEYS' FEE AWARD UNDER THE SUBSTANTIAL BENEFIT DOCTRINE FOR SUCCESSFUL BENEFICIARIES

By Denise E. Chambliss, Esq.^* and James R. Cummins, Esq.^**

MCLE Article

I. INTRODUCTION

Trusts and estates attorneys are often presented with a familiar scenario: a beneficiary has concerns about a trustee's administration of a trust and seeks counsel to ensure that the trustee is acting consistently with the trustee's fiduciary duties, including the duty to account. In the case of a suspected or discovered breach of trust, the beneficiary's options could be limited to litigation, an uncertain, expensive, and time-consuming endeavor, with the American Fee Rule potentially requiring the beneficiary to bear the financial burden of their legal expenses to obtain redress and recovery through the probate court.

The financial resources available to trustee and beneficiary litigants are inherently unequal.¹ Trustees have the power to retain counsel for advice concerning the administration of the trust.² This power, taken together with the trustee's duty to defend actions brought against the trust, provides the trustee with a defensive "war chest."³ Beneficiaries are at a disadvantage: it may be very expensive for them to ensure that their rights are protected and that the trustee is acting consistent with the trustee's duties. Beneficiaries challenging the trustee's actions usually must pay their own fees personally, and they risk not recovering their fees even if their lawsuit is successful.⁴

The common fund doctrine and the substantial benefit doctrine are two equitable remedies that operate as exceptions to the American Fee Rule, giving beneficiaries a chance at recouping their litigation expenses. The first, the common fund doctrine, has long provided a vehicle for a beneficiary to recover attorneys' fees.⁵ When the petitioning beneficiary is successful and, as a result of its action, has preserved or recovered a fund for the benefit of others, this doctrine authorizes the court to award attorneys' fees to the beneficiary from the fund or property itself, or directly from other beneficiaries enjoying the benefit.⁶

Yet, a petitioning beneficiary may ultimately be successful even when no "common fund" is preserved or no monetary benefit is conferred upon the trust or its beneficiaries. For example, a beneficiary's action could compel or correct an accounting, obtain instructions from the court directing the trustee, remove the trustee, compel the trustee to produce information related to the trust, compel a distribution, or compel other action by the trustee. For these cases, the attorney should consider asserting the substantial benefit doctrine as a basis for an attorneys' fee award to the successful beneficiary.

The case of Smith v. Szeyller is the first published case to address and uphold the use of the "substantial benefit doctrine" as a basis for an attorneys' fee award to a successful beneficiary challenging a trustee's actions.⁷ In addition, the Smith opinion held that such a fee award was proper when the success was a non-monetary benefit to the class, specifically the trustee's compliance with the fiduciary duty to account.⁸

The Smith court confirmed a trial court's application of the substantial benefit doctrine in awarding attorneys' fees to a beneficiary who was successful in challenging the actions of a trustee when no pecuniary benefit was realized as a result of the action. The application of the substantial benefit doctrine has been addressed in unpublished cases, confirming its commonplace usage.⁹ The Smith appellate court itself recognized that application, stating "but [the substantial benefit doctrine] plainly would apply, for example, ... to an action to remove a trustee who has breached the trust or to a petition to compel an accounting."¹⁰

This article analyzes the holding of the Smith opinion and the two equitable fee recovery doctrines for petitioning beneficiaries. In addition, this article addresses two statutory grounds that may allow beneficiaries challenging the actions of a trustee to recover attorneys' fees.

II. FEE AWARDS UNDER THE EQUITABLE DOCTRINES OF THE COMMON FUND AND SUBSTANTIAL BENEFIT A. The American Fee Rule

California probate courts follow the American Fee Rule as embodied in Code of Civil Procedure section 1021¹¹ that each party must bear the cost of their own attorneys, regardless of the outcome of the litigation.¹² Accordingly, trust beneficiaries generally must pay their own attorneys' fees when challenging a trustee's conduct.¹³ However, California courts have developed two equitable doctrines allowing fee awards to a successful litigant who secures a pecuniary or nonpecuniary benefit for a class of persons: the common fund doctrine and the substantial benefit doctrine.

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B. The Common Fund Doctrine

"At least one exception to [the American Fee Rule] has become as well established as the rule itself: that one who expends attorneys' fees in winning a suit which creates a fund from which others derive benefits, may require those passive beneficiaries to bear a fair share of the litigation costs."¹⁴ The common fund doctrine is this longstanding exception.

First approved in California in the early case of Fox v. Hale & Norcross S.M. Co.,¹⁵ the common fund doctrine has since been applied by California courts in a variety of circumstances.¹⁶ It emanates from "the historic power of equity to permit the trustee of a fund or property, or a party preserving or recovering a fund for the benefit of others in addition to himself, to recover his costs, including his attorneys' fees, from the fund or property itself or directly from the other parties enjoying the benefit."¹⁷

The California Supreme Court has held that the common fund doctrine applies in probate litigation. The bases for its application are: (1) the fairness to the successful litigant, who might otherwise receive no benefit because his recovery might be consumed by the expenses; (2) correlative prevention of an unfair advantage to the others who are entitled to share in the fund and who should bear their share of the burden of its recovery; and (3) encouragement of the attorney for the successful litigant, who will be more willing to undertake and diligently prosecute proper litigation for the protection or recovery of the fund if he is assured that he will be promptly and directly compensated should his efforts be successful.¹⁸

In cases awarding attorneys' fees under the common fund doctrine, the activities of the party awarded fees have resulted in the preservation or recovery of a certain or easily calculable sum of money out of which sum or "fund" the fees are to be paid.¹⁹ Where a litigant's efforts have not effected the creation or preservation of an identifiable fund of money out of which they seek to recover their attorneys' fees, the common fund exception does not apply.²⁰

C. The Substantial Benefit Doctrine to Avoid Unjust Enrichment

A derivative of the common fund doctrine is the substantial benefit doctrine. The substantial benefit doctrine permits a litigant to recover fees under certain circumstances even when no monetary benefit has been procured by the litigation.²¹ Specifically, this doctrine applies "when (1) the litigant's efforts have created a substantial, actual, and concrete pecuniary or non-pecuniary benefit; (2) such benefit redounds to members of an ascertainable class; and (3) the court's jurisdiction over the subject matter makes possible an award that spreads the cost proportionately among the members of the benefited class."²²

In such circumstances, the court, in the exercise of its equitable discretion, may find that those receiving the benefit should contribute to the costs of its production.²³ The doctrine rests on concepts of unjust enrichment: those enriched by an economic windfall should bear their fair share of the costs expended to create the benefits obtained.²⁴

The substantial benefit doctrine most often arises in stockholder derivative actions. The seminal case for the doctrine is Fletcher v. A. J. Industries, Inc.²⁵ In Fletcher, plaintiffs obtained an order approving a settlement guaranteeing a beneficial change in corporate management and procedures as well as the arbitration of certain claims of managerial misconduct, with the possibility of future monetary awards. The Court of Appeal, affirming a probate court order awarding attorneys' fees and costs to the plaintiffs, held that although no specific fund had been created out of which such fees could be awarded under the common fund doctrine, the benefit conferred on the corporation and shareholders justified shifting the monetary burden of producing that benefit to all those who would enjoy it.²⁶

While the benefit realized must be actual and concrete,²⁷ the Fletcher court stated, "[i]t will suffice if the court finds, upon proper evidence, that the results of the action 'maintain the health of the corporation and raise the standards of 'fiduciary relationships and of other economic behavior,' or 'prevent[s] an abuse which would be prejudicial to the rights and interests of the corporation or affect the enjoyment or protection of an essential right to the stockholder's interest.'"²⁸

After Fletcher, courts have applied the substantial benefit doctrine in a variety of circumstances. However, until recently, the California courts of appeal had not issued a published opinion addressing whether the substantial benefit doctrine could provide the basis for an award of attorneys' fees where a beneficiary challenging a trustee secures a benefit for a class of beneficiaries. Smith v. Szeyller was the first case to do so expressly.

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III. SMITH V. SZEYLLER: SHIFTING ECONOMIC BENEFIT FROM THE PETITIONING BENEFICIARY TO THE CLASS BENEFITED A. Factual Background: Parties and Trust Provisions

In Smith v. Szeyller,²⁹ one beneficiary carried the financial burden of compelling an accounting and discovering the...