Yellow Light: Trustee May Follow Authorization to Defend Contested Amendment Until Enjoined by Probate Judge

• Jurisdiction: California,United States
• Author: By Jeffrey S. Galvin, Esq.
• Publication year: 2015
• Citation: Vol. 21 No. 4

YELLOW LIGHT: TRUSTEE MAY FOLLOW AUTHORIZATION TO DEFEND CONTESTED AMENDMENT UNTIL ENJOINED BY PROBATE JUDGE

By Jeffrey S. Galvin, Esq.^*

I. INTRODUCTION

A key issue in many California trust contests is whether the trustee can defend the action at the expense of the trust. As the holder of the checkbook, the trustee as a practical matter can hire and pay for counsel at the expense of the trust, subject only to downstream review by a probate judge. Hence, the trustee can (and often does) draw on the trust estate to fight off a contest initiated by a would-be beneficiary, to the advantage of those who stand to gain under the contested instrument.

The contestant, on the other hand, must fund the litigation out of personal resources. Prosecuting a contest is generally an uphill battle as a matter of the burden of proof.¹ Gathering and presenting evidence of mental incapacity and/or undue influence typically requires written discovery to the proponent, subpoenas for documents to the drafting attorney and medical providers, witness interviews, deposition testimony, and consultation with one or more experts. Preparing and trying a contest can cost hundreds of thousands of dollars.

In addition to paying his or her own legal expenses, the successful contestant may bear the double whammy of the unsuccessful trustee's defense costs, leaving much less or even nothing in the trust estate for the contestant to enjoy. While the trustee might be surcharged at some point for improper expenditures, the trustee may lack the resources to pay the surcharge.

Very often the fight arises in the context of a trust amendment that alters the distributive provisions in a way that substantially disfavors the future contestant. Under two cases decided a decade ago, the courts held that a trustee should not use trust resources to defend a contest over an amendment if the trust would remain intact regardless of the outcome.² These decisions, however, did not address the enforceability of trust instrument language expressly authorizing the trustee to defend a contest at the expense of the trust. Such language appears in many trusts, whether by customized design or as a matter of boilerplate.

This set the stage for the Court of Appeal's recent decision in Doolittle v. Exchange Bank,³ which provides a new, albeit incomplete, road map for probate judges and attorneys to follow when evaluating whether a trustee can use trust funds to defend a contested trust amendment or restatement. It also is a key case for planners given that a successor trustee's ability to defend a contest may turn on whether the planner has included an express authorization to defend. Indeed, such an authorization may be far more effective in deterring and defeating an attack on a trust amendment than a no contest clause, which requires the settlor to make a gift sufficiently large to discourage the contestant and which in any event is unenforceable if probable cause supports the filing of the contest.⁴

This article will explore the legal principles that apply to the use of trust funds to defend contested amendments/restatements, and more specifically discuss the ramifications of Doolittle. In a nutshell, express authorization to defend language may allow the trustee to use trust assets as a war chest⁵ to defend the trust; however, the contestant may persuade the probate judge to lock up the war chest such that the interested parties will have to fund their efforts out of their own pockets or through alternative arrangements.

II. CORE PRINCIPLES REGARDING TRUSTEE'S PAYMENT OF LEGAL EXPENSES FROM TRUST ASSETS

Most trust instruments contain language expressly authorizing the trustee to hire and pay for attorneys and other agents at the trust's expense, which generally empowers the trustee to do so.⁶ Reinforcing such provisions, and filling the void if they are absent or incomplete, "the Probate Code is studded with provisions authorizing the trustee to hire and pay (or seek reimbursement for having paid) attorneys to assist in trust administration."⁷

Yet the overarching fiduciary duties of a trustee check his or her use of trust assets to pay for counsel. As the Probate Code cautions:

The grant of a power to a trustee, whether by the trust instrument, by statute, or by the court, does not in itself require or permit the exercise of the power. The exercise of a power by a trustee is subject to the trustee's fiduciary duties.⁸

Any attorney embarking on litigation for a trustee should be well familiar with the cautionary language in Donahue v. Donahue that directs trial courts to examine fee requests.⁹ The court vacated a fee award of about $5 million in past and ongoing legal fees following the trustee's successful defense against a beneficiary's allegations of self-dealing and other breaches of trust.¹⁰ Warning against an "overly deferential" approach, the Court of Appeal explained: "A trial court may not rubber stamp a request for attorney fees, but must determine the number of hours reasonably expended."¹¹ Scrutiny is warranted because "[p]robate courts have a special responsibility to ensure that fee awards are reasonable, given their supervisory responsibilities over trusts."¹² Although the abuse of discretion standard applies to a trial court's ruling on a fee request, the record affirmatively must show that the fee award was consistent with applicable legal principles, i.e., the award "must be able to be rationalized to be affirmed on appeal."¹³

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As to when litigation expenses may be charged to a trust, the Donahue court stated:

Long-established principles of trust law impose a double-barreled reasonableness requirement: the fee award must be reasonable in amount and reasonably necessary to the conduct of the litigation, but it also must be reasonable and appropriate for the benefit of the trust.¹⁴

While the Donahue court did not specify an order for application of these "dual criteria," it would seem that the second one in the court's formulation should be taken up first. As a threshold inquiry, the trial court should consider whether the trustee appropriately entered and then continued to participate in the litigation, guided by the "underlying principle" that the litigation must be a "benefit and service to the trust."¹⁵ If and to the extent that the question is answered affirmatively, the court should review the trustee's expenditures in the fight and evaluate whether the trustee purchased "a Rolls Royce defense when a prudent trustee could have arrived at the same destination in a Buick, Chrysler or Taurus."¹⁶ In other words, no matter how efficiently the trustee conducted the litigation, there is no entitlement to reimbursement if he or she improperly acted as a combatant.

The application of the "double-barreled reasonableness" requirement in Donahue is rather hazy. Given the trustee's successful defense of the beneficiary's allegations as to how he administered the trust, it would seem that the real issue was whether the hefty fees and costs he sought to charge were objectively reasonable. The appellate court, indeed, seemed most troubled by the number of law firms and attorneys that worked for the trustee, and the potential for duplication or other inefficiencies.¹⁷ Yet the court remanded for further consideration of whether the expenses were incurred for the trustee's personal benefit or for the benefit of the trust, as well as an evaluation of the amount of the fees, telling the trial court to amplify its explanation in both areas.¹⁸ Since the ruling was based on a deficient trial court explanation, the appellate court did not have to have to compartmentalize its analysis of whether versus how much.

III. WHITTLESEY AND TERRY HOLD THAT TRUSTEE MAY NOT USE TRUST ASSETS TO DEFEND CONTESTED AMENDMENT

In two cases with similar fact patterns decided over a decade ago, California appellate courts disapproved of a trustee's use of trust funds to defend contested amendments.

A. Whittlesey v. Aiello

In Whittlesey,¹⁹ settlors James and Anna created a revocable trust and named their niece, Joyce, as the trustee and primary beneficiary. After Anna died, James married Margaret and amended the trust to include a $100,000 distribution to her. Then, shortly before his death James amended the trust again to name Margaret as the trustee and to designate Margaret and her son, Thomas, as the primary beneficiaries.²⁰

When James died, Joyce contested the second amendment. A few months later, Margaret died and successor trustee Aiello, not a primary beneficiary, defended Joyce's contest. The trial judge found the second amendment void as the product of undue influence on the part of Margaret and Thomas, and the Court of Appeal affirmed in an unpublished opinion.²¹

The trial court then denied trustee Aiello's request for legal expenses incurred in unsuccessfully defending Joyce's contest. The parties entered into a settlement to resolve all claims, carving out any claim by Aiello's attorney (Stearns) for unpaid legal expenses.²²

Affirming the lower court, the Court of Appeal rejected Stearns' argument that he should be paid from trust funds for his defense of the second amendment. The court observed:

The essence of the underlying action was not a challenge to the existence of the trust; it was a dispute over who would control and benefit from it. Whether or not the contest prevailed, the trust would remain intact.²³

The court reasoned that it would be inequitable to saddle Joyce with her own litigation expenses and those of the trustee despite the fact that Joyce had prevailed. Rejecting Stearns' argument that Aiello's defense was objectively reasonable, the court stated that:

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there was no basis for the trustee to have taken other than a neutral position in the contest. As indicated previously, the parties primarily interested in the outcome of the litigation were [Joyce] on the one hand and Margaret, and later Thomas on the other. To the extent Stearns defended the amendment, he

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