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1 PROBATE & TRUST LITIGATION COMMITTEE MEETING Friday, September 28, 2006 I. Call Meeting to Order 10:00 a.m. to Noon Kissimmee, Florida AGENDA (ITEM 1) II. Administrative Matters and Announcements A. Introduction of Persons Present B. Approval of Minutes of August, 2006, meeting at Palm Beach, Florida [ITEM 2] C. Time and Place of Next Meeting: February 2007, Hutchinson Island D. Thanks to US Trust Company of Florida and Trent Kiziah: First Annual Sponsor of Committee Meetings III. Subcommittee Reports A Trust & Estate Symposium Chair, Jack A. Falk, Jr. B. Status of Committee legislation, Chair 1. Fiduciary Lawyer-Client Privilege [ITEM 3]. 2. Arbitration clause in a will or trust is enforceable [ITEM 4]. 3. Exculpatory clause in a will [ITEM 5].
5 Adrienne F. Promoff, Miami Ronald H. Roby, Winter Park Deborah L. Russell, Naples Jon Scuderi, Naples Joel H. Sharp, Jr., Orlando William E. Sherman, Deland Michael D. Simon, West Palm Beach Barry F. Spivey, Sarasota Laura P. Stephenson, Miami Laura K. Sundberg, Orlando J. Eric Virgil, Coral Gables Dennis R. White, Naples Charles Wohlust, Winter Park Gwynne A. Young, Tampa The Honorable Winifred J. Sharp, Windermere Call to Order. The meeting of the Committee was called to order at approximately 10:30 a.m.
8 Florida Senate SB Section 1. Section , Florida Statutes, is 14 created to read: Fiduciary lawyer-client privilege (1) For the purpose of this section, a client acts as 17 a fiduciary when serving as a personal representative or a 18 trustee as defined in s , an administrator ad litem as 19 described in s , a curator as described in s , 20 a guardian or guardian ad litem as defined in s , a 21 conservator as defined in s , or an attorney in fact 22 as described in chapter (2) A communication between a lawyer and a client 24 acting as a fiduciary is privileged and protected from 25 disclosure under s to the same extent as if the client 26 were not acting as a fiduciary. In applying s to a 27 communication under this section, only the person or entity 28 acting as a fiduciary is considered a client of the lawyer.
21 indemnification and directs payment from the trust of certain trust expenses. This section, like the cases found in the authors survey, assumes that the trustee initially will pay the expenses incurred in lawsuits or in anticipation of litigation involving allegations of breach of trust. With respect to such cases, this section of the Restatement speaks only to indemnification. The two sections that follow set forth the competing arguments for and against requiring a trustee to first seek judicial authorization before utilizing trust assets to pay litigation defense fees and costs. For analytical purposes, the focus of the following sections is on trustee liability cases because the authors concluded that this threshold issue must first be determined in that context before attempting to apply the analysis to the more subtle and more difficult question of trustee affected cases. Within each of the following two sections is a suggestion for the procedure to be utilized in seeking the court s decision (whether the decision be on a petition to authorize or a petition to prohibit). The procedures are intended to be parallel, but complimentary of and consistent with each section s thesis i.e., whether the trustee should be required initially to seek judicial authorization to use trust funds to pay litigation defense fees and costs.
22 3. The Case for Prohibiting Trustee Access to Trust Funds to Pay Defense Costs. A trustee sued for breach of fiduciary duty is just like any other litigant defending itself. Under the American Rule, parties to litigation bear their own attorneys fees and costs during litigation and, unless one party prevails and demonstrates a legal basis for recovering fees from the other side (i.e., pursuant to contract or statute), neither party recovers attorneys fees from the other. See Frymer v. Brettschneider, 710 So. 2d 10 (Fla. 4 th DCA 1998). Accordingly, a trustee accused of breach of fiduciary duty in a legal proceeding should not pay its attorneys fees and litigation costs incurred defending itself out of trust assets unless and until the trustee first obtains court authorization. Under (2), Fla. Stat. (2005), trustees presently enjoy a favored position among litigants in the Florida judicial system because they have the right to seek authorization to pay their attorneys fees and costs out of the trust assets during the litigation. No other litigants enjoy this luxury. In contrast to judicial proceedings involving matters of trust administration, no compelling reason exists for favoring trustees over other litigants by allowing a trustee to use the assets in a trust to fund the trustee s personal litigation defense.
23 Legislation was needed in Florida due to Shriner v. Dyer, 462 So. 2d 1122, (Fla. 4th DCA 1984). Shriner is a unique case, decided on fairly specific facts, and, although it appears to attempt to articulate the historical common law rule, it applies the rule in an illogical and arguably unfair way. The current version of (2), Fla. Stat. (2005) clarifies and/or corrects Shriner. Specifically, the statute makes it clear that upon the successful conclusion of litigation (i.e., by settlement or dismissal), the trustee is entitled to be reimbursed out of the trust. In the absence of statutory guidance, whether it is in the form of the current version of (2) or in the form of new legislation, the Shriner case would remain the rule in Florida and perpetuate uncertainty among practitioners and courts. It is, in fact, a conflict of interest for a fiduciary to use trust assets to defend itself against allegations of breach of fiduciary duty. The heightened responsibility a fiduciary owes to the trust and its beneficiaries does not end when litigation begins. More specifically, the fact of litigation does not alter the fiduciary s fundamental duty to avoid conflicts of interest. Indeed, other conflicts of interest that arise in the course of a trust administration are not tolerated and almost always give rise to liability if maintained without express authorization in the trust, the informed consent of the beneficiaries, or court permission.
25 those trust funds utilized to fund the unsuccessful defense may never be recoverable by the prevailing beneficiary or repaid to the trust. Of course, this is more a problem for individual fiduciaries than for most corporate trustees. At the same time, however, concerns with the requirement that a fiduciary must first seek court approval seem focused more on the individual fiduciary since corporate fiduciaries can more often afford to fund their own litigation defense if required to do so. Whether due to the fact of a corporate fiduciary s individual resources, access to information about the trust. or the availability of trust funds at the end of the case to reimburse the fiduciary for litigation expenses, the reality is that a trustee has a distinct advantage in litigation over beneficiaries. Therefore, there is no justification for allowing a fiduciary to engage in a conflict of interest without supervision from the court. The assumption that the settlor was justified in trusting the fiduciary and, therefore, the fiduciary should be unconstrained in looking to trust funds to defend itself against allegations of breach, is often unwarranted. Many cases involve the settlor s chosen fiduciary engaging in wrongful conduct, including some cases where the fiduciary s role in the drafting of the very document in question or the fiduciary s appointment in the first instance are called into question.
27 case may be unnecessary. By definition, each situation should be judged on its own facts and each petition for authorization should be assessed on its own merits. Among other things, courts would logically consider the relative resources of the beneficiary, the trustee, and the trust itself. Courts should also consider the relative merits of the parties positions as they appear on the record at that time, and the breadth of the powers granted to the trustee under the trust, including exculpatory language. Courts should consider relevant extrinsic evidence. Compare (1), Fla. Stat. (2005) ( In exercising its discretion to order a modification of a trust under this section, the court shall consider the terms and purposes of the trust, the facts and circumstances surrounding the creation of the trust, and extrinsic evidence relevant to the proposed modification. ). One potential enhancement to the current version of (2) would be the addition of express authorization to the court to consider relevant extrinsic evidence in the same manner as permitted under (1). Finally, courts should be free to impose additional conditions (such as a bond) in connection with authorization to pay the fiduciary s defense costs out of the trust. There is no evidence, anecdotal or otherwise, that suggests competent fiduciaries are declining to serve in light of the requirements of (2).
33 being forced into a harsh result notwithstanding the unique facts of a case. Also, as additional facts come to light during discovery, a trustee who is unsuccessful in securing an order permitting it to use trust assets to pay fees can make one or more subsequent requests to the court seeking access to trust assets. Conversely, a beneficiary who is unsuccessful in defeating a trustee s application for use of trust funds to defend itself can ask the court to revisit the matter as additional facts come to light.
37 compensation, or to preclude the service of others, such as unrelated third parties or difficult family members. A common situation is where a settlor appoints a spouse to succeed the settlor upon his or her death. Often we see a second or third spouse appointed to administer a trust that ultimately benefits children from a settlor s prior marriage. It would frustrate the settlor s intention if the surviving spouse refrains from serving for fear of financial strain under the weight of prospective trust litigation. It is also after a trustee accepts the position of fiduciary that the prospect of unforeseen litigation can serve to frustrate the settlor s intentions. A trustee that finds himself or herself in litigation, even for wrongs not committed, may choose to resign rather than incur the personal expense of litigation. In the event the trustee chooses to fight the litigation, the strain on the trustee s personal resources may affect his or her judgment thereby placing that trustee in a conflict of interest. For example, an aggressive defense may serve the interests of the beneficiaries, but a trustee that is paying for litigation expenses from his or her own funds may be reluctant or unable to take a more aggressive tack. Indeed, a non-institutional trustee may have very little personal resources to pay the attorneys fees necessary to defend against even a baseless charge of breach of fiduciary duty.
38 A reasonable contrary position is that a trustee should be treated no differently than any other defendant regarding defense costs, and, further, the trustee may have committed wrongdoing as alleged in the plaintiff s complaint. The allegations of wrongdoing should not, however, be taken at face value in light of the settlor s clear expression of intent regarding the selection of the trustee. Situations also arise where the settlor is not deceased and is serving as the trustee. In those cases, of course, there is no less compelling reason to defer to the settlor s intent regarding his or her selection of trustee. Procedure for Obtaining Court Order Prohibiting Trustee Access. Notwithstanding the policy reasons for permitting a trustee to use trust funds to defend litigation in which a breach of trust is alleged, a serving trustee should not be given a blank check to use trust funds as he or she deems fit to defend possibly improper conduct. In most cases, however, mechanisms are available to the court to protect the beneficiaries in the event a trustee is ultimately determined to be liable for a breach of fiduciary duty. The court could, for example, prohibit the payment of distributions to beneficiaries or commissions to trustees pending the resolution of the litigation to preserve a fund for use in reimbursing the trust. See , Fla. Stat.
40 or proffered by the plaintiff which would provide a basis for recovery of punitive damages. Such evidence can include correspondence, depositions, and affidavits. Once the court is satisfied that the proffer of evidence is sufficient to establish a punitive damage claim, the plaintiff may then amend its pleadings to raise the claim. In this procedure, the defendant is not permitted to offer evidence to mitigate the claim. In fact, no formal evidentiary hearing is necessary. See Int l Ship Repair & Marine Servs., Inc. v. St. Paul Fire & Marine Ins. Co., 944 F. Supp. 886, 895, 897 (M.D. Fla. 1996); and Solis v. Calvo, 689 So. 2d 366, 369 n. 2 (Fla. 3d DCA 1997). A similar procedure should be employed in breach of trust cases. If a beneficiary in such a case believes there was a breach of trust, the beneficiary can file an appropriate pleading to prohibit the trustee from paying attorneys fees and costs with trust assets. Attached to the pleading would be the evidence that led the beneficiary to believe there was a breach. In addition, discovery could be employed by the beneficiary to generate additional evidence to support the claim. As long as the proffered evidence is sufficient to establish to the court a reasonable basis for the claim that a breach of trust was committed by the trustee, the court may then consider prohibiting the trustee from paying its attorneys fees and costs from the trust.
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(c) In the construction of these rules, the rules governing the construction of statutes shall apply.

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