By:  John J. Bennett

Have you accepted the honor and privilege of acting as trustee for a family or company trust?  If so, you are likely aware of the many duties attendant to your role as trustee and the powers which enable you to carry out those duties.  Specifically, as a trustee you are the protector of the trust assets and entrusted to carry out the intent of the settlor, whatever that may be.  As such, you will likely be called upon to carry out tasks which are outside the scope of your own knowledge and expertise, requiring you to hire expert professionals – including attorneys.  Generally, a trustee is empowered by Florida law (or directly by the trust instrument) to use trust assets to pay the costs and fees generated by hiring attorneys who render services to the trustee on behalf of the trust.  Questions arise, however, when that attorney has been hired to defend against allegations brought against the trustee by beneficiaries of the trust.  Naturally, a conflict presents itself when a beneficiary has alleged wrongdoing against a trustee but which such trustee is empowered to use some portion of that beneficiaries’ interest in the trust assets to defend against the beneficiaries’ allegations.

Florida law, however, has long recognized this conflict and has attempted to reconcile the trustee’s inherent power to utilize trust assets with beneficiaries’ right to be protected against malicious or negligent trustees.  Along the way, Florida enacted Florida Statutes, § 736.0802(10), controlling a trustee’s ability to use trust assets to pay the attorney’s fees incurred by the trustee.  Since 2008, § 736.0802(10), entitled Duty of Loyalty, has provided guidance regarding a trustee’s payment of attorney’s fees and costs associated with legal proceedings.  Specifically, that section codified and reaffirmed a trustee’s authority to pay its attorney’s fees from assets of the trust without approval of any person and without court authorization, as provided in §§ 736.0816(20) & 736.1007(1), Fla. Stat., with the exception that a notice to beneficiaries was required when a claim for defense based on a breach of trust is made against the trustee in a proceeding.  These statutes reflect a clear preference in the law for trustees to be unencumbered in their use of trust assets for trust purposes.  Notwithstanding, public policy, common sense and Florida law should not enable a malevolent trustee to consume trust assets in defense of trustee’s own wrong-doing.  Thus, § 736.0802(10)(b) empowered a party wishing to prevent (or reverse) the payment of fees to obtain a court order prohibiting (or disgorging) payment upon a showing of a reasonable basis for the court to conclude there had been a breach of trust.

On, July 1, 2016, Florida’s substantially revised version of Florida Statutes, § 736.0802(10), controlling a trustee’s ability to use trust assets to pay certain trust expenses, went into effect.  § 736.0802(10), as amended, retains its principal notice and prohibition purposes, but the statute was rewritten entirely.   There are, however, two items this blog entry notes for consideration.  First, if an interested party successfully demonstrates a reasonable basis to conclude that there has been a breach of trust, who is on the hook for fees which have already been paid?  Under the old statute the answer was clear.  § 736.0802(10)(a) (2014), provided, in pertinent part:  “If a trustee is served with a motion for an order prohibiting the trustee from paying attorney’s fees or costs in the proceeding and the trustee pays attorney’s fees or costs before an order is entered on the motion, the trustee and the trustee’s attorneys who have been paid attorney’s fees or costs from the trust assets to defend against the claim or defense are subject to the remedies in paragraphs (b) and (c) [including disgorgement, refund and prohibition].”  This language is unequivocal.  If you are an attorney who is paid fees in connection with defending a trustee against a claim or defense involving a breach of trust, from that trust’s assets, you may be ordered to refund those earned fees.  While this remedy may have been hard to swallow by attorney’s – and is a clear disincentive to represent trustees – there was at least some clarity.  Under the new version it is much less clear.

Specifically, § 736.0802(10) now provides that if a court finds a reasonable basis to conclude that there has been a breach of trust the court “may enter an order compelling the return of the attorney fees and costs to the trust…,” § 736.0802(10)(e) (2016) –  but from whom?  Language substantially similar to the language just quoted is found in five locations in the new statute but not one such location specifies whether the court may order the attorney to return those funds to the trust or whether the trustee must return those funds from the trustee’s institutional or personal funds.

Although it is uncertain how the court will apply the new language, it seems that, in the Fourth District Court of Appeals at least, a request for disgorgement by an interested party under the new statute may not be able to reach the attorney for the trustee.  In Simmons v. Estate of Baranowitz, 189 So. 3d 819, 2015 Fla. App. LEXIS 6733 (Fla. 4th DCA 2015), for example, the Court held that a petition for disgorgement of excessive fees paid to a personal representative and that personal representative’s attorney could not reach the personal representative’s attorney for lack of personal jurisdiction.  Specifically, the attorney was not subject to the court’s jurisdiction because “counsel never was served with initial process by a summons or formal notice.”  Id. at LEXIS 3.  It is admittedly a strange result considering the court went on to recognize its own authority to “to review the propriety of any compensation paid to a personal representative’s employee and, if that employee has received excessive compensation, to order that employee to make appropriate refunds under §§ 733.6175(1) & (3), Fla. Stat. (2010).”  The legislature’s removal of the explicit language subjecting trustee’s attorneys to the refund remedies in the statute certainly implies that they do not intend for these remedies to apply to counsel for those trustee’s subject to an order for refund.  The Simmons case, while it proceeds the enactment of the new statute, certainly provides fodder for future litigants to argue that the persons subject to the refund remedies in § 736.0802(10) (2016) have been limited.

Second, the new statute has provided some clarity with regard to the circumstances which trigger the statute’s mitigation of a trustee’s broad authority to pay its attorneys.  § 736.0802(10)(a)-(b), provides:

(a) As used in this subsection, the term “pleading” means a pleading as defined in Rule 1.100 of the Florida Rules of Civil Procedure.

(b) If a trustee incurs attorney fees or costs in connection with a claim or defense of breach of trust which is made in a filed pleading, the trustee may pay such attorney fees or costs from trust assets without the approval of any person and without any court authorization. However, the trustee must serve a written notice of intent upon each qualified beneficiary of the trust whose share of the trust may be affected by the payment before such payment is made. The notice of intent does not need to be served upon a qualified beneficiary whose identity or location is unknown to, and not reasonably ascertainable by, the trustee.

The decision to constrain statute-triggering “claims or defenses” to only those “in a filed pleading” seems to indicate the legislature’s intent to distinguish between a mere factual allegation which could be construed to represent a breach of trust, on the one hand, and a properly brought claim or defense for breach of trust, on the other hand.  As stated by the Supreme Court of Florida in Boca Burger, Inc. v. Forum, 912 So. 2d 561,567 (Fla. 2005), such a claim or defense could plainly not be asserted by motion and would have to arise as part of the Complaint, Answer, Third-Party Complaint, etc.  Thus providing more advanced notice to the trustee and the trustee’s attorney as to the risk of losing access to trust assets in defense of the trustee. This has the added effect of disabusing trustees from being subjected to a mini-trial, threatening the trustee’s access to funds, any time a clever but irksome beneficiary is able convince a trial judge that some allegation directed at the trustee in a court filing amounts to a “reasonable basis to conclude there has been a breach of trust.”

Under those circumstances, the trustee would then be required to defend the lawsuit but would presumably have to pay counsel out of the trustee’s pocket or resign as trustee.  This would have far reaching consequences in those proceedings brought by a trust with a beneficiary who has no affection for the trustee and wishes to improperly discourage the trustee from bringing an action or defending against an action.

It is impossible to know just yet how the changes to § 736.0802(10) will be construed by the courts of Florida.  I suspect, however, that the reduced certainty as to the prospect an attorney will be compensated for his or her efforts will no doubt provide fertile ground for litigation.