Hidden in Plain Sight: Avoiding Conflicts of Interest in Trust Litigation
A question that commonly arises in trust litigation is whether a trustee can use trust assets to pay the legal fees associated with prosecuting or defending a litigation. This is particularly so when the claim or defense centers on an alleged breach of trust on the part of the trustee. Prior to the enactment of the 2008 amendment to F.S. §736.0802(10),1 caselaw held — consistent with Florida’s then-existing versions of the trust code — that a trustee could not use trust funds to pay legal fees incurred without court approval because the trustee was perceived to be in a conflict position.2 Once a conflict was deemed to exist, court authorization was necessary before attorneys’ fees could be paid out of trust assets — a result that often placed even the most well-heeled trustees in a financial bind, at least in the short term.3
A 2008 amendment to Florida’s Trust Code changed things for trustees. Under that amendment, a trustee can use trust funds to pay legal fees incurred in defending a breach of trust litigation without prior court approval so long as the trustee first provides notice of his or her intent to do so. Section 736.0802(10)(a) states: “If a claim or defense based upon a breach of trust is made against a trustee in a proceeding,” the trustee is required to provide written notice to any qualified beneficiary whose share might be affected by the payment of fees and costs and inform that beneficiary of the trustee’s intent to pay the fees and costs out of trust assets. Notice must be provided prior to making payment and must inform the beneficiary that he or she has “the right to apply to the court for an order prohibiting the trustee from paying attorney’s fees or costs from trust assets.”4 Thus, the trustee’s provision of notice to qualified beneficiaries has replaced the requirement of prior court authorization.
If the beneficiary moves to prevent the trustee from paying attorneys’ costs and fees from trust assets, and ultimately proffers sufficient evidence to establish a “reasonable basis for the court to conclude that there has been a breach of trust,” §736.0802(10)(b) provides that the court must enter an order prohibiting further payment and order a refund of any fees already paid, unless the court finds good cause not to do so.5
In the event that the court requires a refund, who pays? Is it the lawyer, or is it the trustee from his or her personal funds? The statute is silent, and it is for that very reason that it presents an ethical minefield for the lawyers who represent trustees in such circumstances. For example, suppose Laura the lawyer represents Thomas the trustee in an action to approve a trust accounting. Thomas pays Laura from trust assets without court authorization, as permitted by §§736.0802(10) and 736.0816(20). Just when the action seems to be smoothly moving along, suppose Benjamin the beneficiary asserts a breach of trust claim against Thomas. Laura drafts an answer on behalf of Thomas as trustee and later bills Thomas in that capacity for her time. Adhering to §736.0802(10), Thomas dutifully notifies Benjamin and the other affected beneficiaries of Thomas’ intent to pay Laura’s fees with the trust assets. Benjamin, determined to prevent such payment, moves for an order prohibiting Thomas from paying the fees that Laura incurs in defending such a claim with trust assets. Unfortunately for Thomas, suppose the court finds a reasonable basis to determine that Thomas committed a breach of trust and does not find any good cause that would otherwise allow Thomas to continue to use trust assets to pay Laura. It, therefore, enters an order prohibiting Thomas from paying any more attorneys’ fees from the trust and, most importantly for purposes of our hypothetical, requiring that the fees already paid to Laura be refunded to the trust.
With the issuance of such a ruling, has a conflict arisen in Laura’s representation of Thomas? Given that §736.0802(10) does not specify who must provide the refund (i.e., trustee or lawyer), presumably the court has the ability to order either Thomas or Laura to refund those fees. For obvious reasons, Laura would rather Thomas be the one to provide the refund. After all, Laura never agreed to take on the representation when her ability to be compensated was essentially tantamount to a contingent fee arrangement with no real upside. But how can she take that position without being in conflict with Thomas? Technically, by taking this stance, Laura is telling the court that her client is responsible, not her. Thomas, for his part, never thought for a moment that assuming the duties of a trustee could ultimately require him to personally pay substantial legal fees out of his own pocket. In other words, he never signed up for that.
Turning back to Laura, is she somehow precluded from helping her own cause under these circumstances? Stated differently, are her hands now tied such that she cannot ethically argue, or even suggest, that Thomas should be the one required to refund those fees? Rul. Reg. Fla. Bar 4-1.7(a) forbids a lawyer from representing a client if, “(1) the representation of [one] client will be directly adverse to another client; or (2) there is a substantial risk that the representation of [one] or more clients will be materially limited by…a personal interest of the lawyer.” Rule 4-1.7(b) further provides that the lawyer can represent the client, conflict notwithstanding, if:
(1) the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client; (2) the representation is not prohibited by law; (3) the representation does not involve the assertion of a position adverse to another client when the lawyer represents both clients in the same proceeding before a tribunal; and (4) each affected client gives informed consent, confirmed in writing or clearly stated on the record at a hearing.
The comment to the rule notes that “[l]oyalty to a client is…impaired when a lawyer cannot consider, recommend, or carry out an appropriate course of action for the client because of the lawyer’s other responsibilities or interests.” In Laura’s case, her loyalty to Thomas will plainly be questioned if she argues that he should be responsible for refunding the attorneys’ fees to the trust.
Indeed, under our facts, subsection (b)(3) of the rule may well bar the representation in that phase of the litigation if Laura has any intention of suggesting that Thomas should personally pay the fees. Laura, representing herself, cannot take a position that hurts Thomas, who is also her client in such a setting. It is likewise difficult to imagine how Laura could comply with Rule 4-1.7(b)(1). Unless she readily refunds the fees herself, how can she “provide competent and diligent representation” to Thomas while simultaneously asserting that he should be responsible for the refund?
When presented with similar issues, the Florida Supreme Court has not looked kindly upon lawyers who allowed their personal interests to affect their representation of a client.6 Moreover, “when an attorney acts in his own interest and not on behalf of a client, the court may use its inherent power to enter an attorneys’ fees award against such an attorney to recover for the effort involved in undoing or correcting the results of the unauthorized acts.”7
The conflict that can emerge in this setting is not unlike the conflict that can arise under Fed. R. Civ. P. 11 and F.S. §57.105. The former allows the court to impose monetary sanctions, including attorneys’ fees, on an attorney or party who is responsible for presenting an unwarranted, unsupported, or improper pleading or motion. The comment to Rule 11 directs that the sanction “be imposed on the persons — whether attorneys, law firms, or parties — who have violated the rule or who may be determined to be responsible for the violation” and notes that “the court should have the discretion to impose sanctions on either the attorney, the party the signing attorney represents, or both[.]” In apparent recognition of the potential for conflict, the comment cautions that Rule 11 motions should not be made “to create a conflict of interest between attorney and client[.]” The comment also notes that the court:
may defer its ruling (or its decision as to the identity of the persons to be sanctioned) until final resolution of the case in order to avoid immediate conflicts of interest and to reduce the disruption created if a disclosure of attorney-client communications is needed to determine whether a violation occurred or to identify the person responsible for the violation.
Courts have observed that an obvious conflict of interest arises when a Rule 11 motion is directed toward both counsel and client.8 Is there a fix in a Rule 11 setting that could solve the dilemma posed by §736.0802(10)? Currently, it appears that the answer is “no.” Indeed, commentators discussing Rule 11 have suggested that “[t]o avoid a conflict of interest, an attorney who argues that his or her client is responsible for the sanctions imposed under Rule 11 should withdraw as the client’s attorney, obtain his or her own counsel, and see that the client is adequately represented.”9
The potential for conflict is also apparent under F.S. §57.105. The statute allows for an award of attorneys’ fees:
to be paid to the prevailing party in equal amounts by the losing party and the losing party’s attorney on any claim or defense at any time during a civil proceeding or action in which the court finds that the losing party or the losing party’s attorney knew or should have known that a claim or defense when initially presented to the court or at any time before trial: (a) [w]as not supported by the material facts necessary to establish the claim or defense; or (b) [w]ould not be supported by the application of then-existing law to those material facts.10
In contrast to §736.0802(10), a lawyer and client ordered to pay fees under §57.105 need not wonder who is responsible for what portion of fees; the statute mandates that the fees be equally split between lawyer and client. However, §57.105(3)(b) provides an important exception to its equal-amount rule: Sanctions cannot be awarded “against the losing party’s attorney if he or she has acted in good faith, based on the representations of his or her client as to the existence of those material facts.” As with Rule 11, courts have recognized that a clear conflict of interest can arise when an attorney is defending a sanctions motion, urging “the attorney facing a 57.105 proceeding to apprise the client of the conflict and consequences of continued representation once the attorney has formed a reasonable belief that such representation will not be adversely affected.”11 Once aware of the conflict, the client may choose to waive it.12
When faced with an order to refund attorneys’ fees back to a trust, the trustee’s attorney faces a conflict of interest similar to those posed by sanctions disputes under Rule 11 and §57.105. If, however, the conflict cannot be waived, how can lawyers ethically represent trustees, knowing that the possibility of an ethical violation lurks in the depths of every trust dispute? Before undertaking the representation of a trustee, the lawyer could simply ask that the trustee agree to pay any fees incurred in defending a breach of trust claim out of his own assets. Obviously, this is not a palatable solution for most trustees. Alternatively, the settlor himself could seek to override the hurdles set forth in §736.0802(10) by expressly providing in the trust instrument that a trustee is not precluded from using trust assets to defend a breach of trust litigation.13 Or perhaps a solution lies in the freedom of contract. The lawyer could explain the conflict that might arise should a beneficiary assert a breach of trust claim and require that, as a condition of the representation, the trustee agree that he is responsible for any refund of attorneys’ fees later ordered by the court. If the trustee makes a fully informed decision to do so, the lawyer can undertake the representation knowing that it is likely that no ethical dilemma will arise. If the trustee refuses, the lawyer would have to either decline the representation because of the potential for an unwaivable conflict or agree to bear the risk of responsibility for a refund. It is important to distinguish between this type of contractual agreement and the waiver contemplated by Rule 4-1.7(a)(2). Under the proposed agreement, the conflict never actually arises, thus, there is nothing for the client to waive. Instead, he or she simply agrees at the outset to be responsible for any refund of attorneys’ fees that is later ordered.
One thing is certain: Failing to address this potential conflict at the outset of the representation could give rise to serious problems.14 Indeed, the ethical quandary posed by §736.0802(10) highlights the importance of clear, open communication with trustee clients long before a refund is threatened.
1 Unless otherwise specifically provided, all statutory references shall be to the Florida statutes.
2 See Shriner v. Dyer, 462 So. 2d 1122, 1124 (Fla. 4th DCA 1984); Brigham v. Brigham, 934 So. 2d 544, 547 (Fla. 3d DCA 2006).
3 See Peter Sachs, Tom Karr, Harris Bonnette & John Cole, White Paper on Payment of Trustee’s Fees in Suits Involving Breach of Trust Allegation, Probate and Trust Litigation Committee, The Florida Bar (2007).
4 Fla. Stat. §736.0802(10)(a) (2015).
5 The trustee is permitted to proffer rebuttal evidence.
6 See, e.g., The Florida Bar v. Rotstein, 835 So. 2d 241 (Fla. 2002) (suspending a lawyer for one year when evidence showed that he allowed his professional judgment to be affected by his personal financial interests).
7 Goldfarb v. Daitch, 696 So. 2d 1199, 1205 (Fla. 3d DCA 1997).
8 See, e.g., Healey v. Chelsea Res., Ltd., 947 F.2d 611, 623 (2d Cir. 1991) (“A potential for conflict is inherent in a sanctions motion that is directed against both a client and a lawyer, even when, as here, the two agree that an action was fully warranted in fact and law…. A sanctions motion attacking the factual basis for the suit will almost inevitably put the two in conflict, placing in question the attorney’s right to rely on his client’s representations and the client’s right to rely on his lawyer’s advice.”).
9 27A Fed. Proc. L. Ed. §62:789. See also 47 Am. Jur. Trials §521 (“A conflict of interest may necessitate the retention of independent counsel on behalf of the client for purposes of responding to the Rule 11 motion. In particularly egregious cases, such as an ongoing fraud, the conflict may be serious enough to require that the attorney withdraw from the representation of the client altogether. Indeed, the attorney may desire or need to consult with his or her own counsel for guidance on how to proceed.”).
10 Emphasis added.
11 Khoury v. Estate of Kashey, 533 So. 2d 908, 909 (Fla. 3d DCA 1988).
12 Id.; see also Faddis v. City of Homestead, 157 So. 3d 447, 453 n.3 (Fla. 3d DCA 2015) rev. dismissed, 163 So. 3d 508 (Fla. 2015). It appears that the client may waive the conflict only if the lawyer will be arguing that he himself should not be sanctioned. If the lawyer is faced with a situation where he must argue that the client, rather than himself, should be sanctioned, the conflict presumably can no longer be waived under Rul. Reg. Fla. Bar 4-1.7(b)(3). A lawyer who argues that he acted in good faith and that only his client should be responsible for the fees finds himself in an ethical dilemma comparable to Laura’s.
13 Fla. Stat. §736.0105(2) provides that the terms of a trust prevail over any provision of the trust code, with certain exceptions inapplicable to these circumstances.
14 A proposed amendment to the statute would clarify several aspects of the current procedure. See 2016 S.B. 540, Florida 118th Regular Session. The amendment would not, however, resolve Laura’s dilemma. S.B. 540 would allow a qualified beneficiary to move for an order compelling the return of attorneys’ fees paid out of the trust when the trustee was defending against a breach of trust claim. As with the current statute, S.B. 540 does not specify who would be responsible for providing the return of fees — attorney or trustee. For a detailed analysis of S.B. 540 and the ways in which it would clarify the current statute, see W. Fletch Belcher, Matthew Triggs, & Jonathan A. Galler, White Paper Regarding a Trustee’s Use of Trust Assets to Pay Attorney’s Fees and Costs in Connection with Claim or Defense of Breach of Trust, Probate and Trust Litigation Committee, The Florida Bar (2015).
Matthew Triggs is a partner in the litigation department of Proskauer Rose, LLP, and the head of the department in Boca Raton. He concentrates his practice in commercial and probate litigation.
Jessica D. Zietz is an associate in the litigation department of Proskauer Rose, LLP, in Boca Raton. She concentrates her practice in probate and commercial litigation.
This column is submitted on behalf of the Real Property, Probate and Trust Law Section, Michael J. Gelfand, chair, and Jeff Goethe and Doug Christy, editors.
