Court of Appeals: Fiduciary's Legal Fees to be Equitably Allocated among Beneficiaries
In Matter of Hyde, 2010 NY Slip Op 05676, decided June 29, 2010, the Court of Appeals held that SCPA 2110 gives Surrogate’s Courts discretion to determine the allocation of attorneys fees paid from the trust or estate to the fiduciary in defending against objections, assuming the fiduciary’s conduct was not deemed so egregious as to require him to be individually responsible for payment.
The facts in Hyde are summarized in detail in a prior post that addressed the Appellate Division’s decision, which has now been modified by the high court. In short, the beneficiaries who decided not to interpose objections to the trustees’ accountings sought an order directing that the trustees’ legal fees in defending against the objections be deducted solely from the objecting beneficiaries’ shares – not from the trust estates generally. That way, the beneficiaries who did not object would not have their inheritance diminished by litigation in which they decided not to participate, and from which they would not benefit.
Although the Surrogate’s Court dismissed all objections to the accountings, it relied on the Court of Appeals’ earlier holding in Matter of Dillon, 28 NY2d 597 (1971), and held that the trustees’ legal fees were to be paid from the trusts generally, and not simply from the objecting beneficiaries’ shares. The Appellate Division affirmed.
Surprisingly, the Court of Appeals did not simply distinguish Dillon from the case before it; the Court reconsidered Dillon. It opined that its decision in Dillon, where it held that SCPA 2110 mandated that the entire estate or trust be charged with the fiduciary’s legal fees, apparently ignored the plain meaning of the statute.
SCPA 2110[2] provides that “ . . . [t]he court may direct payment for [a fiduciary’s legal fees] from the estate generally or from the funds in the hands of the fiduciary belonging to any legatee, devisee, distributee, or person interested.” Noting that legislative intent should be ascertained from the plain meaning of the statute, the Court explained that there exists a presumption against legislative intent for an unjust or unreasonable result. It further stated that its decision in Matter of Ungrich, 201 NY 415 [1911], rather than Dillon, should be used as a guide. Matter of Ungrich, like the Court’s holding in Hyde, focused on fairness. There, it was held that courts should have the discretion to direct whether a fiduciary’s legal fees should be paid by him individually, from the estate generally, or from individual beneficiaries’ shares.
In deferring to the plain meaning of the statute, the Hyde Court directed that Surrogates should assess the sources from which fees are to be paid, considering various factors such as:
(1) whether the objecting beneficiary acted solely in his or her interest or in the common interest of the estate; (2) the possible benefits to individual beneficiaries from the outcome of the underlying proceeding; (3) the extent of an individual beneficiary’s participation in the proceeding; (4) the good or bad faith of the objecting beneficiary; (5) whether there was justifiable doubt regarding the fiduciary’s conduct; (6) the portions of interest in the estate held by the non-objecting beneficiaries relative to the objecting beneficiaries; and (7) the future interests that could be affected by reallocation of fees to individual beneficiaries instead of to the corpus of the estate generally.
According to the Court, none of the above factors are determinative.
In view of the foregoing, the Court of Appeals remanded Hyde to the trial court for an analysis in accordance with its newly established guidelines, and an ultimate determination as to who would bear the cost of the trustees’ legal fees in defending their accountings.
This decision has clearly implemented a process that should result in more equitable allocations of a fiduciary’s legal expenses where applicable. But it may also have the effect of causing potential objectants to weigh the pros and cons of litigation even more carefully, especially when all beneficiaries are not on board with the decision.
Beneficiary Participation Irrelevant to Allocation of Trustees' Litigation Costs
Beneficiaries often question the circumstances under which a trustee or executor’s legal fees are chargeable against their inheritance, especially when those fees are incurred in defending the fiduciary’s alleged misconduct.
The law provides that fiduciaries who are guilty of a breach often remain entitled to have their litigation costs covered by the estate or trust for which they serve (see Estate of Casey, 6/21/93 NYLJ 33 [col 6][Sur Ct, Westchester County]; Matter of Kettle, 73 AD2d 786 [4th Dept 1979]). Although Surrogate’s Courts have the discretion to charge legal fees against the fiduciary personally “as an expense caused by their wrong”, these determinations are generally limited to cases where the court finds an act of bad faith (see Matter of Hidden, 243 NY 499 [1926]). It is therefore logical that the legal fees of a fiduciary who is not guilty of any misconduct are chargeable to the estate or trust. This was the case in Matter of Hyde, 2009 N.Y. Slip Op 02491(3d Dept 2009). There, however, the beneficiaries who had not contested the trustees’ accounting sought to have the trustees’ litigation costs borne solely by the shares of the objecting parties.
Matter of Hyde dealt with two trusts, the Hyde Trust and the Cunningham Trust, of which two families, the Renz family and the Whitney family, were beneficiaries. Specifically, the Hyde Trust provided that the Hyde grandchildren, Louis Whitney (“Whitney”) and Mary W. Renz (“Renz”), were each to receive equal shares of trust income during their respective lifetimes. Upon the death of either beneficiary, the principal of the deceased beneficiary’s share was to be distributed to each of Hyde’s great-grandchildren. Whitney died in January 2008, providing each of Hyde’s five great-grandchildren with a one-fifth interest in the remaining principal of Whitney’s half.
The Cunningham Trust also provided income for Whitney and Renz, each receiving a one-sixth interest therein, with a contingent remainder of one-sixth of the principal upon termination of the trust if the beneficiary were still living.In 2001, the trustees of the Hyde Trust commenced a proceeding for an intermediate accounting. Thereafter, in 2003, the trustees of the Cunningham Trust commenced a proceeding to settle their intermediate accounts. The Whitney children filed objections to each accounting, seeking to deny trustees’ commissions and to surcharge for failure to diversify investments. The Warren County Surrogate’s Court dismissed the objections, and said dismissal was affirmed on appeal.
Because the objections and subsequent trial were pursued solely by the Whitney children, the Renz children sought to charge only the Whitney portion of the trust with legal fees in connection with the defense of said objections. The Surrogate denied the motion, and charged each of the trusts as a whole with all litigation expenses.
SCPA 2110[1] authorizes the Surrogate to fix litigation costs in connection with legal services provided to a fiduciary. In addition, pursuant to SCPA 2110[2], the Surrogate may “direct payment therefor from the estate generally or from the funds in the hands of the fiduciary belonging to any legatee, devisee or person interested.” Here, the Surrogate charged the trusts as a whole with the attorneys’ fees incurred defending in both accounting proceedings, despite the nonparticipation of the Renz beneficiaries. The Third Department affirmed.
In upholding the Warren County Surrogate’s decision, the Appellate Division relied on both SCPA 2110, and the Court of Appeals holding in Matter of Dillon, 28 NY2d 597 (1971). Dillon provides that “SCPA 2110 does not authorize payment for legal services rendered a party to be charged against the share of other individual parties” (see Matter of Dillon, 28 NY2d 597, 599). The Renz beneficiaries’ attempt to distinguish Dillon was without avail.
