Wisconsin Lawyer: Trust and Estate Matters: Identifying the Client:

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  • Wisconsin Lawyer
    July
    01
    2015

    Trust and Estate Matters: Identifying the Client

    Douglas H. Frazer

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    In Wisconsin, the question is unsettled as to whether a lawyer retained to administer a probate estate or a trust represents the fiduciary or the estate. Similarly, the law is unsettled as to the duties the lawyer owes to the beneficiaries. These are important concerns. Here’s why.

    prairie dogsAttorney Smart was not feeling so smart. Years earlier, he did estate planning work for Adam. Adam died. There was a probate estate and a trust. Baker, Adam’s best friend, was named personal representative of the estate and trustee of the trust. Baker asked Smart to handle legal matters both for the probate estate and the trust. Smart’s engagement letter stated that he would undertake to provide legal services for the probate and trust estates. There were several beneficiaries: a surviving spouse, children, and several charitable institutions. (This scenario is based on a true story.)

    Things went smoothly until they didn’t. Several of the individual beneficiaries formed the belief that Baker was stealing from the trust estate and asked Smart to investigate. Certain other beneficiaries suspected that both Smart and Baker were overcharging the estate. The charitable institutions grew concerned because certain positions seemed to favor individual beneficiaries at the institutions’ expense. The concerned beneficiaries filed motions with the circuit court asking for the appointment of a referee to investigate.

    While this was being sorted out, Baker insisted that Smart represent him. Baker also insisted the probate and trust estates continue to pay Smart and Baker.

    Smart called ethics counsel at the State Bar Ethics Hotline but could not get a definitive answer. Why? In Wisconsin, the question is unsettled as to whether – absent express written provisions – the lawyer retained to assist in the administration of a probate estate or a trust represents the fiduciary or the estate. The law is also unsettled concerning whether the lawyer owes special duties to the beneficiaries.

    This article attempts to provide guidance concerning these questions.

    General Principles

    Generally, a lawyer represents the individual who hired him or her to assist in the administration of a probate estate or a trust. Usually the hiring individual is the personal representative or the trustee. Or, the lawyer may “hire” himself: A lawyer may serve as a fiduciary and do the legal work, too.1 In this situation, the lawyer must not give the impression that the lawyer also represents the beneficiaries of the estate.

    Douglas H. Frazercom dhf dewittross Douglas H. Frazer, Northwestern 1985, is a shareholder in the Metro Milwaukee office of DeWitt Ross & Stevens S.C. He focuses his practice on tax litigation and controversy, and estate and trust administration.

    Thus, if the client is the fiduciary only, or if the lawyer is wearing both the fiduciary hat and the lawyer hat, the lawyer should advise the beneficiaries and other interested parties that the lawyer’s only attorney-client relationship is with the fiduciary. If the lawyer fails to give such notice, a person reviewing the matter could conclude the lawyer has undertaken to represent both the fiduciary and the beneficiaries of the estate.

    Be this as it may, lawyers often draw up the engagement or hold themselves out as “representing the estate.” If the estate and a fiduciary or a beneficiary materially disagree on an issue, the existence — and resolution — of a conflict of interest depends on who the lawyer actually represents. In the case of disciplinary complaints or malpractice actions, identifying the “true” client will often determine whether the lawyer has breached any ethical or legal duties. Questions of confidentiality, fees, and duty to withdraw are affected.

    Client Identification

    The first issue after being retained is to determine precisely who the client is. This question can be difficult to answer, and the “default” answer differs from state to state.

    There are three theories regarding the identity of the client when a lawyer handles an estate. The American Bar Association (ABA) Committee on Professional Ethics and Professional Responsibility, in Formal Opinion 94-380 (1994), recognized that the majority view is that the lawyer represents only the fiduciary and not the beneficiaries, either jointly or individually.2 In the context of malpractice litigation, a number of state courts likewise have held that the lawyer’s sole client is the fiduciary.3 However, even though the lawyer might not have a fiduciary relationship with the beneficiaries, most jurisdictions, including Wisconsin, hold that the lawyer has certain duties to the beneficiaries, including the duty not to participate with the fiduciary in breaches of trust and the duty not to permit the beneficiaries to believe the lawyer is representing them as well as the fiduciary.4

    In the case of disciplinary complaints or malpractice actions, identifying the “true” client will often determine whether the lawyer has breached any ethical or legal duties.

    The second approach to client identity holds that the client is the estate. This view is identical to the entity theory of representation when representing businesses and corporations.5 With this approach the estate is the client, the fiduciary is the agent of the entity, and the beneficiaries are derivative clients.6 In these jurisdictions, the lawyer’s ultimate duty of loyalty and confidentiality extends through the estate to the beneficiaries and not to the fiduciary.

    The third view holds that the lawyer represents the fiduciary and the beneficiaries of the estate jointly. This view of estate representation has been most prominently advocated by Geoffrey C. Hazard Jr. and W. William Hodes in The Law of Lawyering.7 This approach is closely akin to that in which an insurance company hires a lawyer to represent one of its insureds. The lawyer represents the interests of both the insurance company and the insured. If a conflict develops, the primary obligation is to the insured.

    It is uncertain whether any jurisdiction has adopted this approach.

    Neither the Wisconsin Rules of Professional Conduct nor Wisconsin case law provides a clear answer as to the presumed identity of the client in estate administration. Although the matter in Wisconsin is unsettled, the Wisconsin Supreme Court has suggested in In re Disciplinary Proceedings Against Roethe8 that lawyers may be able to elect the result by defining the client in the legal-services agreement.

    In Roethe, an interested person filed a grievance concerning Roethe’s handling of several estates — including certain alleged “corner cutting” in the execution of documents. One issue involved the duty Roethe owed to the various participants, and that question turned on the identity of the client. Roethe’s legal-services agreement unequivocally stated that the co-personal representatives were the clients. However, Roethe testified that he believed the estate to be the client. Two independent lawyers offered contradictory opinions on the issue.

    The supreme court determined that the legal-services agreement controlled — although the court acknowledged Roethe clearly and honestly believed the estate was his client, and further, that he had acted reasonably for the benefit of the estate.

    Until Wisconsin unequivocally adopts a “default” approach to the issue of client identity, lawyers should take care to define the client in the legal-services agreement and inform the other affected persons of this fact.

    Duties to Beneficiaries

    If the lawyer is serving in a fiduciary capacity as personal representative or trustee, the lawyer has independent fiduciary duties to the beneficiaries.9

    But what if the lawyer is wearing the attorney-hat only and represents the fiduciary only?

    The ABA Committee on Ethics and Professional Responsibility has stated that “the fact that the fiduciary has obligations to the beneficiary of the trust or estate does not in itself either expand or limit the lawyer’s obligations to the fiduciary client under the model rules, nor impose on the lawyer obligations toward the beneficiaries that the lawyer would not have toward other third parties. Specifically, the lawyer’s obligation to preserve the client’s confidence under Rule 1.6 is not altered by the circumstances that the client is a fiduciary.”10

    This approach is not followed everywhere. Whether by statute, ethics opinion, or case law, in some jurisdictions a lawyer’s obligation to a beneficiary is more expansive than to other nonclients.

    In Massachusetts, a lawyer was permitted to disclose to the beneficiaries or to the court that the trustee had misappropriated trust property and intended to file false tax returns.11 Washington Supreme Court Rule of Professional Conduct 1.6(b)(7) permits an attorney for a fiduciary to disclose to a tribunal a breach of the client’s fiduciary responsibility.

    In several jurisdictions, the lawyer is considered to have a fiduciary duty to the beneficiaries, even though there is no attorney-client relationship with the beneficiaries.12

    The Restatement (Third) of the Law Governing Lawyers, section 51(4) (2000), provides that a lawyer owes a duty of care to a nonclient when the lawyer’s true client is a fiduciary when all of the following are true:

    • The lawyer’s client is a trustee, guardian, executor, or fiduciary acting primarily to perform similar functions for the nonclient.

    • The lawyer knows that appropriate action by the lawyer is necessary with respect to a matter within the scope of the representation to prevent or rectify the breach of a fiduciary duty owed by the client to the nonclient, when 1) the breach is a crime or fraud or 2) the lawyer has assisted or is assisting in the breach.

    • The nonclient is not reasonably able to protect its rights.

    • Such a duty would not significantly impair the performance of the lawyer’s obligations to the client.

    How a Wisconsin court would treat a lawyer’s obligation to nonclient beneficiaries is anyone’s guess. But we have a clue. In Auric v. Continental Casualty Co.,13 a lawyer negligently supervised the execution of a will and the circuit court refused to admit it in probate. A devisee who found himself “out of the money” sued the lawyer for negligence. The lawyer’s defense was lack of privity (that is, the lawyer, working for the testator, owed no duty to the devisee).

    The Wisconsin Supreme Court held on public policy grounds that the absence of privity was not a bar to the action: the lawyer, the court found, owed a duty to the devisee and would be held accountable for the breach.

    The takeaway: treat the beneficiaries as derivative clients even if they are not true clients. It’s much safer that way.

    Strategies for Dealing with Conflicts of Interest

    Dissatisfied beneficiaries sometimes seek the involvement of the circuit court or report the matter to the Office of Lawyer Regulation (OLR). They might ask the court to investigate or intervene. Sometimes they will sue for malpractice. Complaining beneficiaries might think that the fiduciary has taken sides, or has not worked in their best interests, or has been negligent, or that the fiduciary – or the lawyer – has been overpaid.

    The first question, of course, is who the true client is. The engagement letter is the first document to look to for an answer.

    The identity of the true client should also answer questions about the lawyer’s further participation in the matter — and the question of who should be paying whom until matters are decided.

    If the lawyer represents the fiduciary, probably no conflict exists and the lawyer can continue to participate as the lawyer for the fiduciary.

    On the other hand, if the lawyer is serving as the fiduciary and as the lawyer, or solely as the lawyer representing the estate, then a conflict of interest likely exists and the lawyer’s participation would be inappropriate.14

    The potential for the lawyer to be a witness raises an independent problem and concern.15

    When in doubt, consider seeking judicial guidance. Most judges have themselves practiced law, are sensitive to these kinds of issues, and appreciate the opportunity to help sort things out before problems become worse.16

    On the issue of payment to the fiduciary, or the lawyer for the fiduciary, the case law suggests that the best practice is for the fiduciary or the lawyer for the estate, as the subject of the inquiry, to seek court approval for payment or reimbursement of fiduciary fees or attorney fees (his or her own or that of a second lawyer) after the court makes a determination on the merits. If the court finds the questioned conduct was acceptable, or the fees at issue reasonable, there is ample authority for the court to approve the payment or reimbursement of “fees to defend” from the estate.17

    Conclusion

    Smart did the smart thing and brought the matter to the attention of the circuit court.

    Until Wisconsin adopts a default rule concerning client identity in the context of representing a decedent or trust estate, lawyers practicing in this area should be cautious. The best practice is to identify the client in the engagement letter and to inform everyone involved, in writing, of the arrangement. It may not eliminate disagreement later on, but if a problem does arise, the lawyer will have a much better idea what to do.

    For information about managing malpractice risks when estate planning, see “Estate Planning: Beware Unhappy Beneficiaries” at page 47.

    Endnotes

    1 Wis. Stat. § 857.05(3) (“If the personal representative or any law firm with which the personal representative is associated also serves as attorney for the decedent’s estate, the court may allow him or her either executor’s commissions, (including sums for any extraordinary services…) or attorney fees. The court may allow both executor’s commissions and attorney fees, and shall allow both if the will of the decedent authorizes the payments to be made.”).

    See Wis. Stat. § 701.0708(3) (“If the trustee has rendered other services in connection with the administration of the trust, the trustee may receive reasonable compensation for the other services rendered, in addition to reasonable compensation as trustee.”). The fundamental criterion of trustee compensation is reasonableness, determined in light of facts and circumstances of each case. In re Teasdale’s Estate, 261 Wis. 248, 264, 52 N.W.2d 366 (1952).

    2 See also Alabama Ethics Op. 2010-03 (adopting ABA Ethics Opinion approach).

    3 Spinner v. Nutt, 631 N.E.2d 542 (Mass. 1994); Goldberg v. Frye, 217 Cal. App. 3d 1258, 1268 (Ct. App. 1990); Huie v. DeShazo, 922 S.W.2d 290 (Tex. 1996); Estate of Fogelman v. Fergen, 3 P.3d 1172 (Ariz. 2000); In Re Estate of Wagner, 386 N.W.2d 448, 450 (Neb. 1986).

    4 See SCR 20:1.6(c)(2) (circumstances in which lawyer may reveal confidential information); SCR 20:4.1 (truthfulness in statements to others); SCR 20:4.3 (dealing with unrepresented person).

    5 Steinway v. Bolden, 460 N.W.2d 306, 307-08 (Mich. Ct. App. 1990); Grimes v. Saikley, 904 N.E.2d 183 (Ill. Ct. App. 2009).

    6 See Riggs Nat’l Bank v. Zimmer, 355 A.2d 709 (Del. Ch. 1976); Jenkins v. Wheeler, 316 S.E.2d 354 (N.C. Ct. App. 1994); Comegys v. Glassell, 839 F. Supp. 447, 448-49 (E.D. Tex. 1993).

    7 §§ 57.3-57.4 (3d ed. 2005).

    8 2010 WI 19, ¶¶ 46-47, 323 Wis. 2d 611, 780 N.W.2d 139.

    9 SCR 20:1.7 (ABA cmt. [9]).

    10 Formal Opinion 94-380 (1994).

    11 See Mass. State Bar Ass’n, Op. 94-3 (1994).

    12 See In Re Estate of Larson, 694 P.2d 1051 (Wash. 1985); In Re Estate of Gory, 570 So. 2d 1381 (Fla. Dist. Ct. App. 1990); Charleson v. Hardesty, 839 P.2d 1303 (Nev. 1992).

    13 111 Wis. 2d 507, 331 N.W.2d 325 (1983).

    14 See SCR 20:1.7.

    15 SCR 20:3.7.

    16 See Muehlbauer, J., Decision and Order on Conflict of Interest Dispute, Estate of James F. Sheppard, No. 07-IN-80 (Wis. Cir. Ct. Washington Cnty. Oct. 24, 2014).

    17 Estate of Christopherson, 2002 WI App 180, 256 Wis. 2d 969, 650 N.W.2d 52; Estate of Burgess, 214 Wis. 2d 180, 571 N.W.2d 432 (Ct. App. 1997). See also French v. Wachovia Bank, 722 F.3d 1079, 1089 (7th Cir. 2013) (interpreting Wisconsin trust law); Restatement (Third) of Trusts § 88 cmt. d (2007).




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