Wearing the Right Hat

As demonstrated in our Gold Medal Bakery case, with corporate fiduciary claims, there can be thought-provoking challenges and issues presented by the question of whether a claim is direct or derivative. Probate and trust matters sometimes present analogous fiduciary issues with significant consequences—namely whether a litigant can get his or her fees paid. In these cases, however, the potential complexity has less to do with the nature of the claims and more to do with the capacity in which and for whose benefit the litigant or litigants act. Because litigants in probate and trust matters can play many different roles—including beneficiary, personal representative, trustee, and/or a shareholder or officer of an entity held in an estate—determining whether someone will have their fees paid by an estate or trust can get complicated.

Two cases illustrate this potential complexity. In In Re: the Trust of the Arnold B.A. Schauer and Yvonne B. Schauer Family Irrevocable Trust, No. A18-0969, 2019 WL 1510698 (Minn. Ct. App. Apr. 8, 2019), the Minnesota Court of Appeals examined an award of attorney fees to David Schauer, who was a beneficiary of the family trust and a shareholder of the principal asset of the trust—a family business. Schauer initiated litigation regarding the valuation of corporate stock for the business held in the family trust and mediated the dispute with an independent trustee. Schauer’s sister, who was a beneficiary but not a shareholder of the company held in trust, objected to the mediated purchase price and objected to the payment of fees for Schauer.

The district court in Minnesota approved fees for Schauer in the amount of $188,566.46. The Minnesota Court of Appeals reversed, and its reasoning is telling. It held that:

“[t]he district court awarded the majority of Schauer’s attorney fees. In doing so, it reasoned that justice and equity entitled Schauer to the award of attorney fees as a beneficiary of the trust in working to settle trust disputes. But Schauer was not acting in the role of beneficiary in contesting the value of the stock held by the trust; he was acting in his role as a shareholder of the family’s farming company. And as the shareholder purchasing the stock, Schauer’s interests were precisely contrary to the interests of the trust. Schauer’s attorney fees incurred in contesting the value of the stock, therefore, cannot be based solely upon his role as a beneficiary of the trust. The award of these attorney fees to Schauer solely on the basis of his status as a beneficiary of trust was error as a matter of law.”

Id. at *5. In this case, what mattered most was whether the individual in question was acting in a role for the benefit of the estate as opposed to other capacities such as shareholder and beneficiary. The role was less than magnanimous, and instead benefited Schauer himself as a shareholder and beneficiary, and therefore attorney fees were inappropriate.

In another recent case, In Re: the Estate of Sylvia Ann Mourning, No. A21-1241, 2022 WL 1132230 (Minn. Ct. App. Apr. 18, 2022), two siblings disputed the disposition of their deceased mother’s home. The daughter Elizabeth had lived with the mother for many years and had owned the home until she defaulted on the mortgage and the mother stepped in and bought the home from the bank. After her mother repurchased the home, Elizabeth continued to live there until her mother passed away. Elizabeth’s brother Michael was appointed personal representative of their mother’s estate. The protracted negotiations (and ultimately, litigation) between the two siblings continued for some time, at times implicating a third sibling and at least one friend of Elizabeth who offered to purchase the house on Elizabeth’s behalf on discounted terms. After nearly two-and-one-half years of litigation between the two, Michael sought a final accounting, including fees by the firm that assisted with the estate administration. Elizabeth objected based on the argument that the fees were not incurred in good faith and instead out of Michael’s self-interest in his dispute with his sister. The district court found that Michael acted for his own personal benefit regarding the dispute over the home and made decisions that did not benefit the estate, particularly by not compromising with Elizabeth.

On appeal, the Minnesota Court of Appeals reversed and noted that:

“The district court misapplied section 524.3-720 by requiring Michael to show that his actions actually benefitted the estate. Michael, in his capacity as personal representative, sought reimbursement for attorney fees under the first sentence of section 524.3-720. Under the first sentence of section 524.3-720, ‘Any personal representative ... who defends or prosecutes any proceeding in good faith, whether successful or not ... is entitled to receive from the estate necessary expenses and disbursements including reasonable attorneys’ fees incurred.’ A personal representative is not required to show that his actions actually benefitted the estate to recover attorney fees under the first sentence of section 524.3-720.” In re Est. of Evenson, 505 N.W.2d 90, 92 (Minn. App. 1993).

Mourning, 2022 WL 1132230, at *3. In this case, the hat that he was wearing gave Michael some deference and effectively shifted a burden to Elizabeth even if Michael may arguably have personally benefited from the work that he did as personal representative.

Beyond the always intriguing human drama, these two cases are instructive for several reasons, including:

• Minnesota has adopted versions of the Uniform Codes for Probate and Trust, and so the general standards articulated in these cases, while not necessarily precedential, may provide good guidance to individuals serving in these capacities and their counsel.

• Where people inhabit multiple roles, particularly a fiduciary role and an additional role such as a beneficiary or a shareholder, blurred lines can have monetary implications.

• As these cases illustrate by example, real or perceived conflict as to an individual’s role and motivation can increase litigation costs and extend litigation.

Overall and most importantly, maintaining objectivity can prove difficult when you are navigating a situation where you are wearing multiple hats. Find objective counsel to help you navigate these roles and do the right thing while wearing the right hat, and particularly for fiduciaries with the best of intentions, avoid unexpected financial consequences in the form of unapproved attorney fees.