Congratulations to Roy McCandless on his big win for the trustee in Randall v. Mahan, a case in which Judge Gary R. Cassavechia acting as Judicial Referee carefully analyzes reliance on counsel as a defense to breach of fiduciary duty claims. The Order is important reading for counsel representing trustees or beneficiaries. Circuit Judge Michael L. Alfano adopted Judge Cassavechia’s Referee recommendations in full.
As a fiduciary, a trustee has the highest duties in law and significant liability exposure. Required to honor the terms of the governing instruments and her duties of loyalty, care, reporting, impartiality, and asset segregation, the trustee is entitled and in the exercise of due care may be required to engage counsel at trust expense to provide guidance as to the proper administration of her responsibilities. When the trustee’s conduct is contested, she may be able to defend the claims by asserting that, regardless of whether her conduct was advantageous to the beneficiaries, she exercised due care by engaging and relying on the guidance of competent counsel. Reliance on counsel is a defense that can raise difficult attorney-client privilege, expert witness, and conflict issues. With thoughtful scholarship, Judge Cassavechia in Randall pens an important Probate Court on the defense. Along with Judge King’s Order in In re: Mongan Revocable Trust of 2004 (post coming), it is important reading for counsel.
In Randall, a residuary beneficiary sought surcharge and removal of her brother as the trustee, contending that he had breached his fiduciary duties by failing, inter alia, to timely provide accounts and exercise due care in the liquidation of real estate. As often happens in cases such as this, the Court found that “the management and liquidation of the Trust’s assets… were greatly hampered by deep family dysfunction that preceded creation of the Trust and continued through trial. Simply put, the Randall/Mahan families suffer from deep distrust and animosity that has affected not only their relationships with each other, but, as relevant here, the administration, management and distribution of the Trust’s assets.” Order, p. 3.
Before deciding the merits of the claims, the Court considered whether the exculpatory provision in the trust which stated that “[n]o successor trustee shall be held liable for his actions as trustee or successor trustee except for gross negligence or fraud” applied to the current trustee who was not a successor trustee. Order, p. 12. The Court considered relevant extrinsic evidence, including the circumstances of the trust’s preparation and concluded that the settlor in fact intended this protection to cover the current trustee and the inclusion of the term “successor” in this clause was a scrivener’s error. Order, pp. 14-15. The trustee, therefore, had the benefit of the exculpatory language.
The Court found the advice of counsel defense to arise under RSA 564-B:8-816(a)(27) as construed in light of longstanding common law principles. The statute empowers a trustee to “employ persons, including attorneys…, even if they are associated with the trustee, to advise or assist the trustee in the performance of the trustee’s administrative duties and and to act without independent investigation upon their recommendations….” (Emphasis added.) Citing the common law, the Court held that the phrase “without independent investigation” does not license a trustee to blindly follow the guidance of counsel without exercising independent judgment; rather, “it is appropriate… to evaluate ‘all circumstances of the [alleged] breach and of the trustee, such as: what is reasonable to expect of the particular trustee; the sincerity of the trustee’s efforts to understand and perform the responsibilities in question; and whether the trustee reasonably relied on guidance from legal or other advisers….'” Order, p. 17 (quoting Restatement (Third) of Trusts sec. 95, comment d (2012))(emphasis added). The Court also cited Dodge v. Stickney, 62 N.H. 330, 337 (1882), which similarly framed the principle, “If it is reasonably necessary for a trustee to employ agents or attorneys, and if he uses ordinary care in their selection, and a proper supervision over the business entrusted to them, he cannot be held liable for their indiscretion resulting without fault on his part.”
In applying this law, the Court first considered whether the trustee exercised due care in his selection of counsel (Attorney Daly in New York and our firm in New Hampshire). Given the trustee’s lack of sophistication in trust administration matters and the lack of any allegation that counsel was not qualified to provide competent representation, the Court found the engagements to have been within the bounds of due care. In regard to the engagement of our firm, the Court stated:
Indeed, even assuming the Court found a breach, the Trustee can find shelter as he properly retained and relied on the counsel of well-trained and experienced attorneys. See Estate of Stetson, 345 A.2d at 688 (Pa. 1975)(collecting cases); see generally, Dodge v. Stickney, 62 N.H. at 337. The Petitioner has not alleged that the McLane Firm is not capable of providing competent trust and estate counsel. The Trustee chose that firm on the recommendation of Attorney Aronson, and it was prudent for him to seek, and rely on, their advice. When he hired McLane in 2009, the Trustee, a farmer living in Washington State, did not possess the skill to manage an estate and trust with assets in multiple states and a potential challenge to its efficacy. He possessed the valid authority under RSA 564-B:8-816(a)(27) to employ counsel and “to act without independent investigation upon their recommendation.” There was no evidence presented that would indicate that his choice of counsel was imprudent or was impermissibly motivated by “shopping for advice” that would negate the advice of counsel liability shield. See RESTATEMENT (THIRD) OF TRUSTS §95, comment d (2012). Consequently, he is not found responsible for his reasonable reliance on their counsel.
Order, p. 29 (emphasis added).
The Court then considered whether the trustee had appropriately supervised counsel. With regard to McLane, the beneficiary’s objections related principally to the attorneys’ fees the trustee advanced. The Court upheld the trustee’s conduct:
As discussed supra, the Court has determined that the Trustee reasonably retained the McLane firm to assist with administration of the Trust. At trial, Margrethe questioned the Trustee whether he was justified in retaining McLane attorneys based upon their billing rates. In that regard, the Court finds that although on the high end of the hourly-rate spectrum, rates charged by the McLane attorneys were not greatly dissimilar from those of other firms having attorneys with the experience, reputation and ability to provide like legal services. See generally, Cir. Ct. Probate Div. R. 88; In re Estate of Rolfe, 136 N.H. 294, 298 (1992). Indeed, given the level of discord, threat of litigation, and detailed questioning by Margrethe concerning the accountings, it was in the best interest of the Trust that the Trustee retain experienced, competent, counsel. See RESTATEMENT (THIRD) OF TRUSTS § 77, comment b(2) (Taking advice of legal counsel on complicated matters “evidences prudence on the part of the trustee”).
Order, p. 30 (emphasis added).
The beneficiary “implicitly argued” that the trustee had breached his duties by engaging and relying on New York counsel to pursue an “eviction/ejectment/quiet title process [that] was unusually long, difficult, and costly.” Order, p. 30. Again, the Court held that the trustee had acted reasonably:
As noted supra, a Trustee is authorized to rely on the advice of counsel. The Court is of the view that the Trustee acted reasonably in retaining Attorney Daly to assist in removing the recalcitrant beneficiaries from the Old Field Property and to assist in negotiating and bringing about its sale. He hired Attorney Daly on the advice of Leslie Delboy…. Attorney Daly testified, and it is not disputed, that he had participated in negotiating over 1,000 real estate purchase and sale agreements. He also practices litigation and has experience as a designated court-appointed referee and receiver.
Although the eviction action was not successful, and Margrethe was granted summary judgment dismissing her from the ejectment/quiet title action, the Court finds that the Trustee cannot be found in breach. As stated supra, if
a trustee has selected an adviser prudently and in good faith, has provided the adviser with relevant information, and has relied on plausible advice on a matter within the adviser’s competence, this conduct provides significant evidence of the prudence of the trustee’s action or inaction in the matter at issue.
RESTATEMENT (THIRD) OF TRUSTS § 93, comment c (2012). Indeed, as long as the Trustee prudently selects and supervises an attorney, he or she cannot be “charged with errors made by legal counsel. This is particularly true in situations where the fiduciary is a non-lawyer and the attorney’s error was purely a legal matter.” Estate of Heller, 401 N.W.2d at 610 (citations omitted)(relying in part on New Hampshire common law). Margrethe does not contend, nor is there sufficient evidence to support, that the Trustee failed to properly supervise or communicate with Attorney Daly. She only implicitly asserted that Attorney Daly did not act competently and that the Trustee should be held responsible. Accordingly, even assuming the attorney’s judgment or advice to pursue eviction was indeed deficient, her attempt to use such allegations to support an imposed sanction for a breach of duty is without merit.
Order, pp. 30-31 (emphasis added).
Randall is important reading for counsel representing a party in a New Hampshire trustee liability action in which the trustee asserts that her reliance on counsel as a defense to the claim.