Opinion ID: 3010967
Heading Depth: 1
Heading Rank: 3

Heading: Haltzman's Liability for Attorney's Fees

Text: Haltzman also appeals from the District Court's decision to require him to pay Dardovitch's attorney's fees in this litigation. The court ordered Haltzman to pay $59,000 in attorney's fees to Dardovitch, as well as $4,735.52 in costs. The District Court based its decision to award attorney's fees primarily on Haltzman's actions in refusing to provide Dardovitch with an accounting of the Trust's funds. See Dardovitch, 1998 WL 13271, at . It noted thatBackos and Haltzman spent the better part of this long, acrimonious litigation resisting Dardovitch's demand to provide an account or even a copy of the Trust instrument, insisting from the beginning that he was not a beneficiary of the Trust. 1998 WL 13271, at . It also observed that the defendants continued to deny that Dardovitch was a beneficiary of the Trust entitled to an accounting even after the court granted Dardovitch summary judgment on the ground that it was incontrovertible that he was a beneficiary. See 1998 WL 13271, at . Concluding that the trustees' failure to recognize basic principles of trust law [wa]s a breach of fiduciary duty that can only have resulted from bad faith or, at a minimum, gross negligence, the court found Haltzman liable for Dardovitch's attorney's fees. 1998 WL 13271, at . The court also noted, however, that Haltzman should be liable for Dardovitch's fees because he blatantly breached his fiduciary duty in accepting additional fees from the Trust for the collection actions. In calculating the fees owed, the District Court divided the litigation into two phases, before and after the accounting. The pre-Accounting litigation revolved primarily around determining whether Dardovitch was in fact a 28 beneficiary entitled to demand an accounting, although it included some other matters, such as discovery disputes and litigation of subject-matter jurisdiction and Haltzman's right to demand a jury trial. After the District Court granted Dardovitch's motion for partial summary judgment and Backos and Haltzman provided an accounting, the parties litigated and held a hearing concerning a number of substantive issues. This post-Accounting litigation focused on resolving Dardovitch's objections to the accounting itself, along with his more general claims against Haltzman and Backos, but it also included collateral matters, such as the determination of the attorney's fee award. The court took Dardovitch's request for approximately $60,000 in pre-Accounting fees, and reduced it to $50,000 to (1) account for activity unrelated to the trustees' malfeasances and (2) reflect more accurately the value conferred to the Trust as a result of the account. Appellant's Brf. App. 1, at 7. With respect to the postAccounting fees, the District Court substantially reduced these from the amount Dardovitch requested. In so doing, it noted that he had not prevailed on his non-trust claims, as well as on a majority of his objections and exceptions to the accounting. On the other hand, it recognized that he did prevail in significant part in his objections to the accounting, which resulted in the return of substantial funds to the Trust corpus. Accordingly, it awarded him about 25% of the amount he had requested, or $9,000. In addition, the court awarded Dardovitch his costs in full. B. Is Haltzman Liable for Dardovitch's Attorney's Fees? Haltzman contends that the District Court had no power to direct him to pay Dardovitch's attorney's fees at all. Dardovitch responds that the court has the power under trust law to award attorney's fees. In particular, a court deciding a trust case can grant a beneficiary attorney's fees from the trustee where the beneficiary's legal action results in the creation or preservation of the trust in general, and where the trustee breaches his fiduciary duty with more than ordinary fault. We begin by explicating these general principles in greater detail; we then apply them to analyze 29 the District Court's attorney's fee awards for the two phases of the litigation. 1. General Principles Governing Award of Attorney's Fees Awards in Trust Actions Although Dardovitch suggested a number of bases for the award of attorney's fees, the District Court relied on general common-law equity principles in granting the request. Pennsylvania follows the so-called American Rule regarding the award of attorney's fees: [T]here can be no recovery for counsel fees from the adverse party to a cause, in the absence of express statutory allowance of the same, or clear agreement by the parties, or some other established exception. First State Underwriters Agency of New England Reins. Co. v. Travelers Ins. Co., 803 F.2d 1308, 1318 (3d Cir. 1986).14 One of the more common exceptions to the American Rule is that attorney's fees are available at the discretion of the court in cases involving trusts. See Estate of Tose, 393 A.2d 629 (Pa. 1978). A prominent treatise best summarizes the principles behind this exception: In suits to enforce the rights of trust beneficiaries the court exercises its discretion as to the allowance of attorney fees and costs, either from the trust estate or from other sources. . . . In exercising its discretion in these matters the court will consider whether the plaintiff or other party was successful in obtaining the relief requested or in defending or conserving the trust estate, for example, by protecting the trust against an unjust claim. The court may also consider whether the successful party benefitted or enhanced the trust estate in deciding whether his attorneys' fees should be awarded from the trust estate. These considerations are sometimes expressed as the common fund doctrine or the _________________________________________________________________ 14. Because this is a diversity case, the relevant state law concerning attorney's fees applies. See Security Mut. Life Ins. Co. v. Contemporary Real Estate Assocs., 979 F.2d 329, 331-32 (3d Cir. 1992). 30 substantial benefit rule, either of which allows the successful party reasonable attorneys' fees. In exercising its discretion the court may consider other factors such as the nature and extent of the defendant's wrongful conduct, and whether there was good faith on the part of the defendant. A further question relates to the source from which the costs and fees should be paid. In some cases the courts have held that the fees of the successful plaintiff should be paid from the principal of the trust estate because the trust had been protected or enhanced. In other cases the trustee or other party defendant has been held personally liable for the plaintiff 's costs and fees. 16 George Gleason Bogert et al., The Law of Trusts and Trustees S 871, at 184-97 (rev. 2d ed. 1998) (footnotes omitted); see also Annotation, Allowance of Attorneys' Fees in, or Other Costs of, Litigation by Beneficiary Respecting Trust, 9 A.L.R.2d 1132 (1950). Pennsylvania courts have adopted these principles. See Estate of Trimble , 140 A.2d 609 (Pa. 1958) (beneficiary may be entitled to a fee award where action results in preservation of funds of trust); Estate of Kline, 124 A. 280 (Pa. 1924) (trustee may be required to pay fees incurred as a result of his actions); Estate of Wescott, 72 Pa. D. & C. 519 (Orph. Ct. 1951) (beneficiary may be entitled to a fee award in an action brought to establish the validity of a trust). Most importantly for our review, the District Court's discretion in deciding whether to grant attorney's fees in an equity case is exceedingly broad. The allowance of counsel fees, where recoverable, rests largely in the discretion of the trial court which heard the principal action. Williams v. Williams, 540 A.2d 563, 572 (Pa. Super. Ct. 1988) (citing Estate of Ward, 38 A.2d 50, 52 (Pa. 1944)). `The allowance or disallowance of counsel fees rests generally in the judgment of the court of the first instance and its decision will not be interfered with except for palpable error.'  Trimble, 140 A.2d at 615 (quoting Ward).The determination of the award of attorneys' fees is within the sound discretion of the trial judge, and will not be 31 overturned absent an abuse of discretion. Security Mut. Life Ins. Co. v. Contemporary Real Estate Assocs. , 979 F.2d 329, 331-32 (3d Cir. 1992). Accordingly, we must determine whether the District Court abused its discretion in determining that Haltzman should be liable for some of Dardovitch's attorney's fees. An abuse of discretion may be found when the district court's decision rests upon a clearly erroneous finding of fact, an errant conclusion of law or an improper application of law to fact. Reform Party v. Allegheny County Dept. of Elections, 174 F.3d 305, 311 (3d Cir. 1999) (en banc). 2. Fees for Pre-Accounting Litigation The District Court awarded Dardovitch most of the requested fees for litigation during the period prior to the court's decision requiring the trustees to account. It based this decision on Haltzman's continued refusal -- both when Dardovitch requested such information and after this litigation was instituted -- to recognize Dardovitch's status as a beneficiary entitled to information about the Trust, particularly given that he was specifically named in the Trust as someone entitled to receive funds. The court concluded that the only possible explanation for this conduct was bad faith, and accordingly ordered Haltzman to pay most of Dardovitch's attorney's fees expended in establishing his right to demand an accounting. We perceive no abuse of discretion in the District Court's decision. As noted above, a trustee may be found liable for a beneficiary's attorney's fees when the trustee has acted wrongfully, especially where the litigation itself is made necessary by the trustee's defalcation. See Kline. For example, in In re Catell's Estate, 38 A.2d 466 (Del. Ch. Ct. 1944), the trustee failed to give a bond as required by the settlor. The beneficiaries of the trust brought an action to have the trustee removed, but the court refused to remove the trustee because he gave the bond after the suit was filed and the trust suffered no loss. In spite of the fact that the beneficiaries did not receive the relief they sought, the court ordered the trustee to pay their attorney's fees as the suit was made necessary only because of the trustee's 32 failure to observe the clear terms of the trust. See also Tucker v. Brown, 150 P.2d 604 (Wisc. 1944) (where a trustee repudiated the trust and refused to account, a beneficiary who successfully sues him to enforce the trust is entitled to costs from the personal funds of the trustee). We think it clear that the lengthy pre-Accounting litigation was necessitated by Haltzman's persistent refusal to provide Dardovitch with an accounting. This refusal began in letters sent to Dardovitch denying him any information about the Trust and threatening him with litigation. It continued through the lengthy proceedings before the District Court granted Dardovitch's motion for partial summary judgment. The District Court also noted that, even after it determined as a matter of law that Dardovitch was a beneficiary entitled to an accounting, Haltzman continued to deny that Dardovitch was a beneficiary of the Trust. See Dardovitch, 1998 WL 13271, at  (Moreover, to this day the trustees continue to deny that plaintiff is entitled to an accounting . . . despite our Order . . . in which we stated that `[i]t would be hard to imagine a clearer example' of a trust beneficiary than one in plaintiff 's position.). Furthermore, the litigation provided a benefit to the Trust, as it brought about an accounting of the Trust that exposed breaches of fiduciary duty. Under the trustees' apparent understanding of the term beneficiary, no one was entitled to seek an accounting. Thus, by bringing the litigation, Dardovitch forced the trustees to give an account for their actions, which they otherwise would not have done. This was undoubtedly of benefit to the Trust. In addition, aside from the intrinsic benefit of having an accounting performed, the accounting here exposed the breach of fiduciary duty discussed above. As a result of this exposure, a substantial amount of funds will be preserved for the beneficiaries. Accordingly, we do not believe that the District Court abused its discretion in awarding Dardovitch attorney's fees for the pre-Accounting litigation to be paid by Haltzman. 3. Fees for Post-Accounting Litigation The District Court also awarded Dardovitch a portion of the attorney's fees he requested for work done after the 33 court called the trustees to account. It based this award on the fact that Dardovitch's litigation of his objections to the accounting resulted in a benefit to the Trust to the extent that it resulted in the return of funds to the Trust, as well as a reduction in the potential liabilities of the Trust, i.e., it would not in the future need to pay Haltzman for collecting on the notes. In addition, it required Haltzman to pay these fees because it found he breached hisfiduciary duty in a way that resulted in a direct benefit to himself,
The District Court did not abuse its discretion here either. One of the situations in which a court may award attorney's fees is where the litigation results in a benefit to the trust as whole. See Trimble. Here, as a result of Dardovitch's objections to the account, Haltzman was ordered to return certain fees to the Trust, and will not be permitted in the future to withdraw additional fees. Furthermore, the District Court appropriately ordered the trustee himself, as opposed to the Trust, to pay the fees. By accepting the additional fees for the collection actions, Haltzman, an attorney, not only breached his fiduciary duty, but did so in a way that resulted in a direct benefit to himself. This case is thus unlike those in which a trustee breaches his duty by making an improper investment, which causes a loss to the trust estate but no corresponding gain to the trustee. Although, as discussed above, Haltzman did not engage in per se impermissible self-dealing, his breach of trust resulting in a direct profit to him justifies the District Court's award of attorney's fees in favor Dardovitch to be paid by Haltzman. Accordingly, we will affirm the District Court's decision that Haltzman should be liable for Dardovitch's attorney's fees, at least in part. C. Calculation of the Fee Award Amount Although we will affirm the District Court's decision to award attorney's fees, we will vacate the order and remand the matter because the District Court did not properly determine the amount of attorney's fees to be awarded. Dardovitch requested $60,712.78 in pre-Accounting fees, and $35,649 in post-Accounting fees. Without holding a 34 hearing, the District Court found that the hourly rates were reasonable, but reduced the awards to $50,000 and $9,000 respectively. It calculated these amounts as follows: the $50,000 pre-Accounting award was reduced from the $60,000 Dardovitch requested based on the fact that Dardovitch's attorneys had performed some work before the accounting unrelated to establishing Dardovitch's status as a beneficiary, and so as to reflect more accurately the value conferred on the Trust by the accounting. It based the $9,000 post-Accounting award on a roughly 75% reduction of the requested fee, which it derived from Dardovitch's lack of success on his pre-Trust claims and several of his objections to the accounting, along with his substantial success on a major objection to the accounting. We think that our recent decision in Security Mutual Life Insurance Co. of New York v. Contemporary Real Estate Associates, 979 F.2d 329 (3d Cir. 1992), controls. There, in an action for collection on a mortgage note that included a provision for attorney's fees, the district court ordered the debtor to pay the lender's attorney's fees without holding a hearing, making a finding as to the reasonableness of the fees, and without explaining the rationale for the award. We vacated the award: Defendant requested discovery regarding attorney's fees. The district court implicitly denied this request by approving the second proposed form of judgment submitted by Security Mutual. . . . [I]t conducted no hearing and made no findings of fact as to the reasonableness of the fees requested and gave no statement as to the standard governing its award. Thus, we cannot adequately review the reasonableness of the action of the district court in awarding counsel fees under the circumstances. We conclude that its action was not consistent with a sound exercise of discretion under Pennsylvania law. Security Mut., 979 F.2d at 332; see also Estate of Brockerman, 480 A.2d 1199, 1204 (Pa. Super. Ct. 1984) (remanding fee award where record did not indicatewhat hourly rate the firm charged, what the prevailing rate in the general area was at the time, what services were performed, or how much time those services consumed); cf. Estate of 35 Baker, 401 A.2d 737 (Pa. 1979) (no remand necessary where trial court heard lengthy testimony and made extensive findings regarding the services rendered by the attorney, the difficulty of the actions undertaken, and the reasonableness of the fee request as a whole); Sewak v. Lockhart, 699 A.2d 755 (Pa. Super. Ct. 1997). The District Court's fee award in this case is like that in Security Mutual. In determining the fee award, the District Court relied only upon Dardovitch's submission, which included statements from the attorneys and their time records. The court held no hearing on this issue, and Haltzman had no opportunity to challenge on a factual basis the fee requested. Haltzman in fact identifies several contested factual issues concerning the attorney's fee award, including whether the fees were incurred in response to abusive conduct, whether Dardovitch presented adequate documentation for the fees, and whether Dardovitch is entitled to fees for preparation of the fee petition.15 Furthermore, the reasoning supporting the District Court's decision to reduce the fee awarded below that requested is sketchy. For instance, the court reduced the fee award for pre-Accounting litigation by $10,000to account for activity unrelated to the trustees' malfeasances and [to] reflect more accurately the value conferred to the Trust as a result of the account. We cannot determine from the record whether this reduction was supported. Likewise, the District Court awarded Dardovitch only 25% of his request for post-Accounting fees, because many of his objections to the account failed. But we cannot determine from the record whether the 25% figure accurately represents the amount of work expended on the successful claim. The District Court was fully familiar with the record and perhaps instinctively reached the correct result; because it did not hold a hearing and set forth an adequate explanation of its calculations, however, we cannot be sure that its award of attorney's fees was _________________________________________________________________ 15. In identifying these issues, we express no opinion whether and the extent to which they are significant in the determination of attorney's fees. 36 consistent with the exercise of sound discretion. Accordingly, we will vacate the attorney's fee award and remand this matter to the District Court for further proceedings.