The fiduciary who thinks a receipt and release is the answer to all future claims for an accounting and liability may have a surprise in store. Over the past several months, Surrogates have explored the issue of receipts and releases, and have provided insight into just how far they will go to “save the day.” The decision in Matter of Ingraham, NYLJ, June 16, 2017, at p. 28 (Sur. Ct., New York County) is a case in point.

Before the Surrogate’s Court, New York County, was a petition by the successor trustee of two separate inter vivos trusts to compel two former trustees of the trusts to account. One of the trustees, who had been removed by the Grantor, filed his accountings; the other trustee, who had resigned, objected to the petitions relying on language in the trust instruments, which she claimed relieved her of any duty to account, as well as releases executed by the Grantor and the other trustee.

At the time the objectant resigned, the Grantor executed instruments by which the objectant was released from any and all claims related in any way to her role as trustee, with the exception of claims arising from fraud or willful misconduct. The release further acknowledged that the Grantor desired to forego a formal account. The accounting trustee signed a similar release, and assented to any account (former or informal) rendered by the objectant. Further, it appeared that the terms of each trust instrument dispensed with the need for the trustees to file periodic judicial accountings.

The court held that the objectant’s reliance on the releases to insulate her from her duty to account was misplaced, inasmuch as the instruments reserved the releasors’ rights to seek relief for any fraud or willful misconduct. Further, the court rejected any claim by the objectant that the releases relieved her of her duty to account, a responsibility that was incidental to the trustee’s duty and fundamental to any fiduciary relationship. Indeed, the court found that while the release executed by the Grantor may have arguably consisted of a waiver of the Grantor’s right to an accounting, the court found that it did not constitute a clear and unambiguous waiver of an accounting by the other trustee and trust beneficiaries.

Additionally, the court held that the provisions of the trust instruments only exempted the objectant from filing periodic accountings, but did not relate to the final accounting sought by the proceedings. Finally, the court observed that where a former trustee has failed to account within a reasonable time and full releases do not relieve her of the duty to account, the court may sua sponte direct an accounting pursuant to SCPA 2205.

Accordingly, the objectant was directed to account with respect to each of the subject trusts.

Based on the foregoing, counsel should take heed that a release may not, despite its intended purpose, always serve to insure the complete and final discharge of a fiduciary. As Ingraham instructs, a release should, at the very least, be comprehensive in its terms and clear and unambiguous as to the scope of its application, most especially if it is designed to constitute a waiver of an accounting. But of course, it should always be borne in mind that regardless of the language of the instrument, the court may invoke the provisions of SCPA 2205, and direct an accounting on its own motion — if it deems it to be in the best interests of the estate to do so.

Although exoneration clauses in a testamentary trust will not, as a matter of public policy, absolve a trustee of liability for failure to exercise reasonable care, diligence and prudence (EPTL §11-1.7(a)(1)), there is no comparable statutory provision with respect to exoneration clauses in lifetime trusts. Nevertheless, the court, in Matter of Accounting of Tydings, NYLJ, July 7, 2011, at p. 26 (Sur Ct, Bronx County), found reason, despite the exoneration clause in the inter vivos trust instrument, to hold the trustee liable.

In Tydings, the court had the opportunity to opine on the effect of the exoneration clause in the subject trust, commissions, and the legal fees incurred by the petitioner and objectant. The objectant in the proceeding was the grantor and income beneficiary of the trust, with a discretionary interest in the principal. The ultimate remainderman of the trust was the grantor’s infant son.

With regard to the issue of the exoneration clause, the trust instrument authorized, inter alia, the trustee to retain an original investment for any length of time without liability for such retention, and to act on behalf of the trust and herself or another entity with regard to any transaction in which the trustee and the trust or the other entity had an interest. The trust also provided that the trustee would not be responsible for any loss to the trust unless such loss resulted from bad faith or fraud on the part of the trustee, and that the trustee would not be disqualified from acting because the trustee held an interest in any property or entity in which the trust also held an interest. The court noted that several of the objections raised in the proceeding hinged, inter alia, on the enforceability of this exoneration clause.

To this extent, the court opined that despite the absence of a statute applicable to exoneration clauses contained in lifetime trusts (cf. EPTL 11-1.7(a)(1)), the enforceability of such clauses were nevertheless subject to certain defined limitations. For instance, the court observed that a trustee of a lifetime trust who is guilty of wrongful negligence, impermissible self-dealing, bad faith or reckless indifference to the interests of the beneficiaries will not be shielded from liability by an exoneration clause. Moreover, when an attorney, named as trustee, is the draftsperson of the instrument containing an exoneration clause, the clause limiting the trustee’s liability to bad faith acts is void as against public policy. Further, the court noted that while improper self-dealing will not come under the umbrella of an exoneration clause, the rule of undivided loyalty due from a trustee may be relaxed by appropriate language in the trust instrument which directly or indirectly recognizes the trustee may be in a position of conflict with the trust.

Within this context, the court held that the petitioner would not be liable with respect to an interest-free loan that pre-existed the creation of the trust and that had been transferred into the trust by the grantor. On the other hand, the court found the petitioner liable for interest-free loans made by the trust subsequent to the inception of her stewardship. To this extent, the court concluded that petitioner’s conduct exhibited a complete indifference to the best interests of the objectant, mandating that she be surcharged for the income lost on the loan transactions.

Additionally, the court found that the exoneration clause in the instrument did not bar the objectant from recovering lost profits from the trustee attributable to her use of trust funds, without consideration, to benefit an entity in which she was personally interested.

As to the balance of the objections, the court concluded that the objectant was either estopped from raising the issues, or did not warrant the imposition of a surcharge.

With respect to the issue of commissions, the court opined that while not every surcharge warrants a denial of commissions, when the fiduciary has engaged in conduct evidencing bad faith, a complete indifference to his/her duties and responsibilities, or some act of malfeasance or misfeasance, commissions will be denied. Based on the record, the court found that the petitioner was lax with regard to managing the financial aspects of the trust. Indeed, although the court concluded that the petitioner had not acted in bad faith, it, nevertheless, held, particularly based on the interest-free loans that had been made, that she had exhibited indifference to her duties, and, accordingly, sufficient misfeasance to warrant a denial of commissions. Further, the court denied the petitioner annual commissions on the grounds that she had failed to establish that she had furnished the objectant with an annual statement pursuant to the provisions of SCPA 2309, that the objectant had waived her right to receive the statement, or that there was sufficient income retained by the trust in any particular year from which she could pay herself income commissions.

Finally, with regard to the issue of legal fees, the court held, in the exercise of discretion, that the petitioner and the objectant should each, individually, bear responsibility for their legal fees and expenses. The court observed that while many of the objections to the petitioner’s account had not been sustained, the petitioner could not seek payment of fees from the trust for defending objections for which she was surcharged. Moreover, the court opined that a strong case could be made for holding the petitioner responsible for the expert witness fees incurred by the objectant in proving petitioner’s liability in connection with the transactions for which she was surcharged. On the other hand, the court noted that the objectant vigorously pursued, and caused the petitioner to defend, numerous objections of which she was aware and had approved prior to their occurrence. Accordingly, under all the circumstances, the court determined it would be most equitable to have the petitioner and the objectant to personally satisfy their own legal fees in connection with the proceeding.

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.

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.