Exception to the American Rule: Shifting Objectants' Legal Fees to the Surcharged Fiduciary
Jurisdictions within the United States have generally rejected the British concept of the prevailing party’s shifting the burden of litigation expenses to the losing party. Instead, we follow what is commonly known as the American Rule, under which each party typically bears the burden of his own legal fees, win or lose. However, like most other rules we face in the legal profession, certain circumstances are considered exceptions. Surrogate Glen of New York County recently addressed the question of whether a particular situation rose to the level of such an exception in Matter of Lasdon, 11/19/10 NYLJ 25 (Sur Ct, New York County).
In Lasdon, objectants to two trust accountings sought leave to reargue three of the Court’s rulings in its June decision that addressed the conduct of one of the co-trustees, and resulted in a surcharge. At the core of the contested accounting was the co-trustee’s delay in making the final distribution upon each trust’s termination, which resulted in trust assets declining in value. His delay was intentional, attributable to his desire to resolve certain issues pertaining to other family trusts with his sister and co-trustee, prior to making the distribution.
In seeking reargument, objectants contended that the Court erred in denying their requests that (1) the co-trustee be barred from receiving his attorneys’ fees from the trust; (2) that the co-trustee be disallowed commissions; and (3) that the co-trustee be directed to absorb the objectants’ legal fees. Addressing the objectants’ motion, the Court explained that it did not misapprehend the law or overlook the facts in determining that the surcharged co-trustee is entitled to annual commissions and to have his legal fees and costs paid by the trusts. Nonetheless, Surrogate Glen noted that the issue that objectants raised in connection with the co-trustee’s payment of their legal fees warranted further discussion.
Although New York courts generally follow the American Rule, Surrogate Glen explained there are some exceptions. Hence, a prevailing party’s litigation costs may be shifted to the loser in situations where there is a statutory or contractual provision that when strictly construed, supports such a shift. Further, and most relevant here, a prevailing party’s legal expenses may be shifted when the losing party is a fiduciary who has been surcharged for causing harm to his estate or trust (Matter of Lasdon, 11/19/10 NYLJ 25 [Sur Ct, New York County], citing Matter of Garvin, 256 NY 518 [1931]; Matter of Hidden, 243 NY 499 [1926]; Matter of Marsh, 265 AD2d 253 [1st Dept 1999]).
The court referred to the Court of Appeals’ holding in the seminal case of Matter of Hidden, supra, as instructive. There, it was determined that the estate of an incompetent suffered a loss as “direct results of wrong found” on the part of her committee. Accordingly, the Court held that the expenses of litigating to protect the estate’s interests were “amounts ‘for which the delinquent fiduciary may be held accountable’” (Matter of Lasdon, supra, at *5 quoting Matter of Hidden, 243 NY 499 [1926]).
The Surrogate went on to explain that the Hidden decision itself gave no indication that every surcharged fiduciary should pay the legal expenses of every objectant, nor have the cases that followed it. Rather, Surrogate Glen interpreted Hidden and its descendant line of cases as warranting exceptions to the American Rule when fiduciaries enrich themselves “at the expense of the funds with which they have been entrusted” (id. at *6), or, in at least one case that did not involve bad faith, where the fiduciary’s actions caused “manifest . . . deficiencies in the administration of the estate” (id. quoting Matter of Campbell, 134 Misc 2d 960 [Sur Ct, Columbia County 1987], aff’d 138 AD2d 827 [3d Dept 1988]).
Applying the foregoing rationale to Lasdon, the court noted that while the co-trustee had been surcharged for his misconduct, there had been no self-dealing. Further, applying the reasoning of Campbell, the court stated that the Lasdon co-trustee’s delaying in the final distribution “[did] not unequivocally bespeak a malign or self-serving purpose” (Matter of Lasdon at *8). Consequently, it held that the facts did not warrant the imposition of the objectants’ litigation expenses upon the surcharged co-trustee.
It appears that the rationale for applying the exception to the American Rule in fiduciary situations is extremely similar to that applied when analyzing whether a fiduciary’s misconduct is so egregious as to result in his individual responsibility for his own legal fees. Indeed, if a fiduciary’s malfeasance rises to the level contemplated by Hidden and he must individually compensate the prevailing party for his litigation expenses, why should the cost of defending his improper actions be borne by the trust or estate that he was entrusted to serve? I would submit that in the vast majority of cases it should not. Thus, litigators should keep this exception to the American Rule in mind. Perhaps requests that a fiduciary be individually charged with his legal expenses when appropriate should routinely be coupled with requests to shift to the fiduciary the litigation costs of the prevailing objectant as well.
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.
