Executors and trustees have a difficult task. The assets entrusted to these fiduciaries must be administered solely for the benefit and in the best interest of the estate and the beneficiaries, without any personal advantage or self-interest and subject to the highest standards of loyalty, honesty and integrity. Routinely they are called upon to make difficult decisions concerning investments, tax consequences and distributions and, unsurprisingly, those decisions may be challenged by the beneficiaries. Such challenges often surface as objections to accountings, but may also arise, for example, in removal proceedings or in other actions alleging breach of fiduciary duty. In virtually all instances, the fiduciary will employ counsel, sometimes at substantial cost, to defend him and, provided there has been no fiduciary misconduct and the representation is strictly in connection with his role as a fiduciary (as opposed to representation of him in his personal capacity), the assets of the estate or trust may be charged.

In many cases, then, the question is not whether the expenses of litigation may be charged, but rather how these are to be charged. Not all controversies implicate the interests of all beneficiaries, and at times fewer than all beneficiaries will raise objections to the fiduciary’s actions or inactions. The thorny question is how to equitably reconcile the interests of those who object with those who do not. The Pro Tanto Rule1 generally prevents those who do not object from sharing in the benefits of a successful challenge; the logical corollary is that where the challenge is unsuccessful, those with no stake in the outcome or who could have but did not participate in the controversy should not unfairly bear the expense of that challenge.

Section 2110(2) of New York’s Surrogate’s Court Procedure Act (SCPA) provides that the court “may direct payment” for legal services rendered to a fiduciary in connection with the fiduciary’s performance of its duties “from the estate generally or from the funds in the hands of the fiduciary belonging to any legatee, devisee, distributee or person interested.” A plain reading of SCPA §2110(2) suggests that the court is to decide whether a fiduciary’s attorney fees are to be paid from the estate generally, or instead charged to a particular beneficiary’s share or interest. The potential for this charge against a beneficiary’s interest is credited with deterring some beneficiaries from bringing vexatious or unwarranted litigation against the fiduciary, particularly where they do not have much at stake in the outcome.

However, a problematic 1971 Court of Appeals case, In re Dillon, 28 NY2d 597, 319 NYS2d 850, stymied courts willing to allocate to an unsuccessful beneficiary’s share, rather than to the estate as a whole, the expenses the fiduciary incurred defending against that beneficiary’s challenge. Ignoring a line of prior cases that allowed courts to consider the facts of each case and exercise their equitable jurisdiction in this regard,2 the Dillon court perfunctorily held that SCPA §2110 did not authorize payment for legal services rendered to a fiduciary to be charged against the share of an individual party. In that case, an executor incurred legal fees in defending probate of a will, and the Court of Appeals refused to allow the share of a legatee who lost her challenge (and sought to have an alleged prior will stand instead) to be charged with those legal expenses; the Court of Appeals insisted that SCPA §2110 required that the estate as a whole be charged. Thankfully, the Court of Appeals in Matter of Hyde summarily overruled the Dillon case and restored SCPA §2110(2) to vigor and plain meaning, pronouncing that “discretion [is] in the hands of the trial courts to allocate expenses when ordering that fiduciaries be indemnified by an estate for attorney’s fees.”3

Two Families of Beneficiaries

The Hyde case involved a joint trial concerning the intermediate accountings of two related trusts, referred to as the Hyde Trust and the Cunningham Trust, which were each invested almost exclusively in the stock of Finch Pruyn Paper Company Inc., a closely held business.4 Initially, the two families of beneficiaries interested in the trusts, the Whitneys and the Renzes, objected to the accountings. Later, after discovery was completed and before trial, the Renzes withdrew their objections and signed a statement consistent with the Pro Tanto Rule, namely, that if the Whitney family was successful in surcharging the trustees, they would not share in the benefit of any surcharge against the trustees. They also cross-moved, opposing the Whitney family’s objections and requesting that all future trustees’ legal fees be paid from the Whitney family’s share of the trusts.

The Renzes also sought to reserve the right to seek reallocation of and reimbursement of the Hyde Trust for all counsel fees that previously had been advanced from the Renzes’ interests in the Hyde Trust. The Whitney family pursued their objections to the Hyde and Cunningham Trust accountings, seeking to deny the trustees’ commissions and alleging, among other things, that the trusts had lost tens of millions of dollars due to the trustees’ negligent failure to diversify. The Surrogate’s Court denied the Renz family’s motion as premature and granted partial summary judgment to the objectant Whitneys, holding that the trusts in fact were not diversified and nothing in the trust instruments precluded diversification.

After a lengthy trial, the Surrogate’s Court dismissed the objections, finding that the nature of the trusts’ holdings precluded a sale and diversification.5 The Renz family renewed their motion to require that legal expenses be paid from the Whitneys’ trust shares. The Surrogate’s Court stated that while it appeared fair to charge the legal expenses incurred by the trustees in defense of the litigation to the Whitneys, it felt compelled, based on Dillon, to charge the whole estate of each trust—effectively spreading the burden of what was a Whitney family litigation to the Renz family’s interests in each trust.

The Appellate Division affirmed and the Court of Appeals, in addition to overruling Dillon and specifically finding that the trial court had discretion to determine and allocate fees and expenses to the estate as a whole or to the shares of individual beneficiaries, enunciated several factors the Surrogate’s Court should assess to determine the sources from which the trustees’ legal fees should be paid, once a determination has been made that a fiduciary is to be granted counsel fees under SCPA 2110(2). None of the factors is determinative and the list is not exhaustive:

(1) whether the objecting beneficiary acted solely in his or her interest or in the common interest of the estate, (2) the possible benefits to the individual beneficiaries from the outcome of the underlying proceeding,(3)the extent of an individual beneficiary’s participation in the proceeding, (4) the good or bad faith of the objecting beneficiary,(5) whether there was justifiable doubt regarding the fiduciary’s conduct, (6) the portion of interest in the estate held by the non-objecting beneficiaries relative to the objecting beneficiaries and (7) the future interests that could be affected by reallocation of fees to individual beneficiaries instead of to the corpus of the estate generally.6

Remanded Case

On remand last year, the Warren County Surrogate’s Court (Matter of Hyde, 929 NYS2d 650) applied the factors listed above, noted some additional factors unique to the joint trial, and ultimately allocated the fees guided by principles of fairness. With respect to the Hyde Trust, the Surrogate’s Court held that all litigation expenses incurred prior to the Renz family’s withdrawal were to be paid from the trust corpus: this is eminently reasonable as until that point, both families were participating in the objections to the accountings and all beneficiaries should suffer a diminution of their interests. However, with respect to those litigation expenses incurred subsequent to the Renzes’ withdrawal, the Surrogate’s Court held that one-half of the fees should be paid from the Whitneys’ share and the other half should be paid from trust corpus.

Thus, the court found that the post-withdrawal attorney fees of the trustees should be borne primarily but not exclusively by the Whitneys, as the remaining objectants. Several factors seemed to weigh most heavily with the court. Subsequent to the trial, the company’s shareholders approved its sale and the trusts’ portfolios were liquidated and then diversified. Therefore, the Surrogate’s Court reasoned, while it could not be ascertained whether this diversification would have occurred in the absence of the litigation, “this development cannot be ignored as the trustees managed the trusts without diversifying the assets for decades.”7 Although the Renzes withdrew their objections, they still benefited from that liquidation. The court also found that the Whitneys did not raise the objections in bad faith. In contrast, the Whitneys “consulted experienced counsel…and had a good faith belief in the necessity and validity of their proposed litigation.”8 In other words, this was not vexatious and unwarranted litigation.

The court further noted that if litigation fees of the Hyde Trust trustees were paid from the trust corpus and not reallocated to the Whitney share, Mary Renz’s children, who collectively owned a three-fifths remainder interest in the principal, would bear a greater share of the expense than the Whitney family objectants even though they did not object and did not participate in the trial.

As for the Cunningham trust, the litigation expenses of the accounting were assessed against the trust principal without reallocation. Here, the analysis was a bit more amorphous, but essentially the court was unwilling to penalize the Whitney family. Neither the Whitney family remaindermen nor the Renz family remaindermen had objected to the Cunningham accounting: only Louis Whitney, the income beneficiary, had filed objections. The court looked to the Court of Appeals’ “decision in this matter [that] reiterates that parties who do not object to an accounting should not be required to bear [the] costs of the litigation.” 929 NYS2d at 658.

In accordance with Matter of Ungrich, supra, the objecting income beneficiary, who instituted an action for his own benefit, rather than non-objecting remaindermen, should bear the expense of his objections. In that case, however, the income beneficiary objectants commenced litigation that was unwarranted, which was not the case here, and the court declined to find that it was bound to allocate expenses to the income beneficiary. The court then found that in balancing the equities, it could not treat the Whitney remaindermen differently from the Renz remaindermen, and that the extra burden on the Renz family was de minimus.

The Court of Appeals decision in Hyde turns back the clock to some extent and superimposes case law that predates Dillon and even SCPA 2110(2), with a focus on fairness. It restores to the trial court the discretion it should have, with guiding principles rather than bright-line tests. As the remanded case makes clear, allocation of attorney fees incurred on behalf of the fiduciary among the different interests in an estate or trust, rather than an “off the top” allocation to the estate itself, is no easy feat. The factual nature of the inquiry may make it difficult in many instances to do a risk/reward analysis in assessing courses of action in a litigation.

On the other hand, it is often rather difficult to fit any particular trust or estate litigation into a category, and to articulate blanket, inexorable rules regarding fiduciaries’ legal fee allocations, as the Dillon court did (undoubtedly with great damage to the equities in many cases), would serve neither justice nor the totality of litigants in these matters. Only time will tell whether the multi-factored analysis will favor the fiduciary at the expense of the meritorious but non-affluent beneficiary, or if it will embolden the beneficiary with a questionable but non-frivolous claim to roll the dice with some measure of confidence that she may not solely bear the burden.

Peter C. Valente and Susan P. Witkin are members of the private client group at Blank Rome.

Endnotes:

1. Matter of Hyde, 15 NY3d 179, 183, 906 NYS 2d 798, 799 (2010), citing Matter of Garvin, 256 NY 518, 177 NE 24 (1931).

2. Most notable of these was Matter of Ungrich, 201 NY 415 (1911), which predates the enactment of SCPA 2110′s predecessor, Surrogate’s Court Act §231-a, in 1923, and which the Hyde Court credits with setting forth the common law rule permitting the court to have “discretion to disburse fees from the estate generally or from individual shares, depending on the circumstances of each case.” Matter of Hyde, 15 NY3d at 186.

3. 15 NY3d at 186, 906 NYS 2d at 801. The court notes in its footnote 4 that “[t]his holding does not involve or affect SCPA 2301(4), which provides for costs and allowances that may be made payable by any party personally.” Id. (emphasis in original). See also note 6, infra. The court also attempted to rationalize the Dillon holding to have been based on the “American Rule,” which directs each litigating party to pay his, her or its own litigation costs, regardless of winning or losing. Apparently, the Dillon court viewed a charge of a fiduciary’s legal fees to the “losing” legatee as impermissibly requiring her to pay more than her own legal fees, notwithstanding the plain language of the statute and settled common law allowing the Surrogate’s Court to take into account the equities.

4. The Hyde Trust was in fact two shares of a testamentary trust established under the will of Charlotte Hyde, and the Cunningham Trust was an inter vivos trust created in 1935 by Nell Pruyn Cunningham. Charlotte and Nell were descendants of one of the founders of the company, which was once a large paper-manufacturing company located in Glens Falls, N.Y. The paper industry experienced a downturn the 1990s and the company lost much of its value. The failure of the trustees to diversify their holdings, which consisted almost exclusively of company stock, drove the litigation in this case. Charlotte’s grandchildren, Mary Renz and her brother Louis Whitney, were each the life income beneficiary of a separate share of the Hyde Trust. Mary Renz’s three children and Louis Whitney’s two children were the presumptive remaindermen of both Mary’s share and Louis’ share. When Louis died during the course of the litigation in 2008, each of the Renz children and the Whitney children received a one-fifth interest in the principal of Louis’ share. In addition, Mary and Louis were each the income beneficiary of a one-sixth share of the Cunningham Trust; when Louis died, his children succeeded to their father’s income interest and became the presumptive remaindermen of that one-sixth share.

5. The trustees had alleged that the company had a unique capital structure that, together with the adverse tax consequences of sale, precluded a sale of the stock, and the Surrogate’s Court agreed.

6. Matter of Hyde, 15 NY3d at 187, 906 NYS 2d at 801. The last of these factors harkens to an earlier Court of Appeals case that did not involve fiduciary’s attorney fees but rather the allocation of a beneficiary’s attorney fees, which is a related but essentially different subject. Matter of Greatsinger, 67 NY2d 177 (1986). Greatsinger involved a construction proceeding which was governed by SCPA §§2301 and 2302, which make clear that counsel fees in a construction proceeding constitute an allowance and that an allowance may be made payable by any party personally or out of the assets of the estate.

7. 929 NYS2d at 656.

8. Matter of Hyde, 929 NYS2d at 656.