Opinion ID: 3010967
Heading Depth: 1
Heading Rank: 4

Heading: Backos's Liability

Text: Dardovitch cross-appeals from the District Court's order excusing Backos from liability for the repayment of the attorney's fees improperly paid to Haltzman for the collection actions. He contends that Backos was negligent in failing to prevent Haltzman from breaching the Trust, and therefore should be jointly liable with Haltzman. Dardovitch further submits that Backos should not be excused from liability because she relied on the advice of her attorney, i.e., Haltzman. The District Court's holding concerning Backos's liability is somewhat murky. Its discussion of the issue occurs mainly in the context of liability for Dardovitch's attorney's fees. During its explanation of why Backos would not be jointly liable with Haltzman for Dardovitch's attorney's fees, the court inserted a footnote stating that it would not hold Backos liable for the underlying breach of fiduciary duty. While there is ample evidence of Ms. Backos's neglect as trustee which might be construed to support [a claim against her for imputed breach of fiduciary duty], for the reasons stated supra . . . we think that her co-trustee's malfeasance should not be imputed to Ms. Backos. Dardovitch, 1998 WL 13271, at  n.28. In the referenced portion of the opinion, the court stated as follows: We do not question Ms. Backos's level of sophistication in business affairs -- quite to the contrary, her testimony showed her to be an intelligent and very capable businesswoman -- but it is evident from these proceedings that in legal matters she relied exclusively on Haltzman and his firm. Indeed, Haltzman's firm represented her even in this litigation. 1998 WL 13271, at  n.15. Because of Backos's reliance 37 on counsel, and Haltzman in particular, the District Court excused her from liability.16 A trustee must exercise reasonable care to ensure that his or her co-trustees do not breach their fiduciary duties. In general, of course, [a] trustee is not liable to the beneficiary for a breach of trust committed by a co-trustee. Herr v. United States Cas. Co., 31 A.2d 533, 534 (Pa. 1943) (quoting Restatement (First) of Trusts S 224(1)); see also Restatement (Second) of Trusts S 224(1); 3 Scott & Fratcher, supra, S 224, at 401. This is not an absolute rule, however: A trustee is liable to the beneficiary, if he (a) participates in a breach of trust committed by his cotrustee; or (b) improperly delegates the administration of the trust to his co-trustee; or (c) approves or acquiesces in or conceals a breach of trust committed by his co-trustee; or (d) by his failure to exercise reasonable care in the administration of the trust has enabled his co-trustee to commit a breach of trust; or (e) neglects to take proper steps to compel his co- trustee to redress a breach of trust. Restatement (Second) of Trusts S 224(2); accord 3 Scott & Fratcher, supra, S 224, at 401 (same); see also Herr, 31 A.2d at 534 (quoting in part Restatement (First) of Trusts S 224(2)). These exceptions flow out of the general duty of each cotrustee with respect to the action of his or her fellows. If there are several trustees, each trustee is under a duty to the beneficiary to participate in the administration of the trust and to use reasonable care to prevent a co-trustee from committing a breach of trust or to compel a co-trustee to redress a breach of trust. Restatement (Second) of Trusts S 184. A fiduciary is required to use such common skill, prudence and caution as a prudent man, under similar circumstances, would exercise in connection with _________________________________________________________________ 16. We apply plenary review to this question, since it concerns whether the District Court applied the proper legal standard-- subjective reasonableness in relying on advice of counsel versus objective reasonableness. See In re Assets of Martin, 1 F.3d 1351, 1357 (3d Cir. 1993). 38 the management of his own estate. Estate of Lohm, 269 A.2d 451, 454 (Pa. 1970); see also Estate of Lerch, 159 A.2d 506, 509 (Pa. 1960). This duty of care is not reduced even if the specific trustee lacks skill in some respects. See Restatement (Second) of Trusts S 174 cmt. a (A trustee is liable for a loss resulting from his failure to use the care and skill of a man of ordinary prudence, although he may have exercised all the care and skill of which he was capable.). Pennsylvania case law demonstrates the extent to which simple, passive negligence can give rise to liability for the breaches of a co-trustee. In Estate of Adams, 70 A. 436 (Pa. 1908), the court held a trustee liable for his negligent failure to prevent a breach by a co-trustee, even where he had previously taken some steps to present such a breach. The trust corpus in Adams included some bonds that were held in a safe deposit box that the trustees had agreed they would not open unless both were present. One trustee, who was aware that the other was in financial distress, discovered that the bonds were missing in 1896. He then confronted the other trustee, who returned the bonds and agreed not to open the box in the first's absence. The first trustee did not inform the bank of this arrangement. He became an invalid in 1904, shortly after the trustees' last joint visit to the safety deposit box. The second trustee died in 1906, at which time it was discovered that the bonds were missing. The court in Adams affirmed the Orphan's Court's conclusion that the first trustee had acted negligently and should be held liable for the missing bonds. In Estate of Reyburn, 43 Pa. D. & C. 85 (Orph. Ct. 1942), the court held a trustee liable for the breach of his cotrustee where he relied on his co-trustee's expertise to the trust's detriment. The co-trustee in Reyburn, a trust company, invested certain trust funds in assets in which the settlor had indicated trust funds could not be invested. The individual trustee knew nothing about the terms of the will limiting the possible investments, nor was he aware of those facts that indicated that the assets were not proper investments. He simply assumed that they were appropriate because he presumed that the trust company would not have purchased them if they were not appropriate. The 39 court found that the individual trustee was liable for the trust company's breach because he was negligent in failing to oversee the company's actions. Furthermore, since the trust company had not actively misstated material facts relating to the investment, he was not excused from liability for relying on its expertise. In particular, the court stated that there is no presumption of greater competence in a trust company than in an individual. 43 Pa. D. &. C. at 90. Furthermore, advice of counsel is not an absolute defense to liability for a breach of fiduciary duty, including liability for the defalcation of a co-trustee. Although the court will consider that the executor acted upon the advice of counsel in determining whether he acted in good faith, this does not provide the executor with complete immunity to a surcharge. Estate of Geniviva, 675 A.2d 306, 310 (Pa. Super. Ct. 1996) (citing Lohm, 269 A.2d at 455); see also Lohm, 269 A.2d at 455 (Where a fiduciary acts upon the advice of counsel, such fact is a factor to be considered in determining good faith, but is not a blanket of immunity in all circumstances. (citations and quotations omitted)). The initial choice of counsel must have been prudent under all the circumstances then existing, and the subsequent decision to rely upon this counsel must also have been a reasonably wise and prudent choice. Lohm, 269 A.2d at 455; see also Geniviva, 675 A.2d at 310. The District Court did not analyze Backos's liability under the principles set forth above. Essentially, the court required of Backos only subjective good faith; it excused Backos from liability solely because she relied on Haltzman's advice and counsel in performing her duties as trustee. But, as is clear from the preceding discussion, subjective good faith is only the beginning of the inquiry. If Backos relied on counsel, she must have done so reasonably, i.e., making a prudent choice of counsel and taking reasonable care to ensure that counsel performed effectively. Furthermore, even if she relied reasonably on counsel, Backos must have acted reasonably in performing her duties as a whole in order to avoid liability. The District Court reached none of these issues; hence, we will vacate the District Court's order to the extent it relieved Backos 40 from liability for Haltzman's breach, and remand for further proceedings in this regard.17