A probate and trust attorney charges his client the fee set forth by the Florida Probate Code and the Florida Trust Code. Not only does the court reject the fee, the court holds that charging the fee was a breach of the lawyer’s fiduciary duty. Not only does the attorney have to pay back the fee, the court rules that the amount to be refunded is not dischargeable in bankruptcy.
, (M.D.Fla. 2014), concerned the unusual situation of a Federal bankruptcy court’s review of the attorney fees charged in a Florida trust and estate matter. The attorney, West, had included himself as co-trustee of his client’s revocable trust, to take effect on his client’s death. The client dies shortly thereafter, and the attorney takes over as co-trustee. As co-trustee, West and the other co-trustee hire West in his capacity as attorney to help administer the estate and trust.
“Reasonable Fees Under Florida Trust Code”
The attorney has the other co-trustee sign an engagement letter pursuant to which attorney fees would be charged under the Florida Probate Code and the Florida Trust Code. Those laws set forth presumptively reasonable fees. The estate was worth about $23 million, and West charged the estate $355,887, based on the percentage fee schedule set forth in the Florida Probate Code. After a falling out between West and the family of the deceased (mainly over the size of the fee), West filed for bankruptcy. The family then sued West in bankruptcy court for the return of the fee paid, and also asked the court to rule that “West had abused his fiduciary position as Co-Trustee of the Trust to fraudulently enter into a fee arrangement with the Estate and the Trust.” The Bankruptcy Court and the District Court agreed.
The Fee Agreement Was Not An Enforceable Agreement.
West argued that he had a valid and binding attorney fee agreement with the estate and trust and that his fees were therefore lawfully charged. The fee agreement was of the type and form commonly used by trust and estate attorneys in Florida and stated that fees would be calculated pursuant to the attorney fee provisions of the Florida Probate Code and the Florida Trust Code (Sections 733.6171 and 737.2041). Those statutes set forth a percentage based on a sliding scale, but state that the amount can be modifed by agreement of the parties or by the court’s consideration of a list of factors, such as complexity, difficulty, and diligence. The Court explained that the ambigous amount of fees to be charged as set forth in the agreement rendered the entire agreement a nullity.
Without any showing of the actual calculation of fees, however, this term, as it appeared in the June 2 version of the Fee Agreement, was open and ambiguous. Indeed, although the “Amount of Fees” purports to be calculated pursuant to Florida Statutes §§ 733.6171 and 737.2041, these sections do not set forth a “definite proposition” as to the fees. Rather, both sections provide that the parties “may agree to compensation determined in a different manner than provided in this section.” See Fla. Stat. §§ 733.6171(2), 736.1007(2). Further, although these sections include a fee schedule that is “presumed to be reasonable,” the “Amount of Fee” provision does not clearly and unambiguously state that the fees are to be calculated according to this particular schedule. The provision’s vague reference that fees are to be “based on the value of the inventory assets of the probate estate, including the value of any homestead property, and any assets held in trust,” does not resolve this ambiguity. It is entirely plausible that the parties could have agreed to a fee calculated according to the value of the estate but that differs from the “presumptively reasonable” schedule set forth in Florida Statutes §§ 733.6171 and 737.2041. The fee calculation in the appendix was the provision that actually set the fee amount, and was not merely “a numerical expression of what the fee agreement language provides.” Because an essential term in the June 2 version of the Fee Agreement was open, ambiguous, and subject to future negotiation, no enforceable contract could have been entered into on that day.
Attorney Fees Charged Pursuant to Florida Statute Were Not Reasonable.
West argued that he cannot be guilty of defalcation because the fees he sought to charge the estate comported with Florida law. (Defalcation is a type of fraud which would make any liability owed by West to be non-dischargeable in bankruptcy – a VERY big deal.) The Court rejected that argument.
West’s argument is unavailing. To begin with, the fact that a fee is “presumptively reasonable” does not mean that it is actually reasonable. Indeed, the Bankruptcy Court found that such a fee would not be reasonable in this case. Moreover, neither case stands for the proposition that charging a presumptively reasonable fee necessarily precludes a finding of a breach of fiduciary duty.
Failure to Fully Disclose How Attorney Fees Can be Charged Is Breach of Fiduciary Duty.
Here, West was Co-Trustee before he entered into the Fee Agreement with Aleta. Accordingly, as the Bankruptcy Court held, he had the duty to do more than simply not act unreasonably. He had the duty to “administer the trust in good faith, in accordance with . . . the interests of the beneficiaries,” and to “administer the trust solely in the interests of the beneficiaries.” Fla. Stat. §§ 736.0801 and 736.0802 (emphasis added). And he had “[the] obligation to make full disclosure to the beneficiary of all material facts.” By entering into the Fee Agreement without affirmatively advising Aleta that such a fee was not mandatory or explaining any alternatives to her, West acted in reckless disregard of these duties. West is an experienced attorney who has practiced law for many years. He admits that he knew that the provisions of Florida Statutes §§ 733.6171 and 737.2041 were not mandatory, and that he had a duty to minimize attorneys’ fees. Despite having this knowledge and experience, however, instead of advising Aleta of her options, West pushed Aleta to sign the fee agreement, even going so far as to tell her that it was “required” by Florida law. At the very least, West acted in reckless disregard of his duties of loyalty and candor, and grossly and egregiously deviated from the standard of conduct that a law-abiding fiduciary would observe.
Breach of Fiduciary Duty Equals Nondischargeable Debt in Bankruptcy.
If a debt is the result of what is known as defalcation under the Bankruptcy Code, the debt will not be discharged in bankruptcy. The Court found defalcation here because of the breach of fiduciary duty and other misconduct of the attorney.
11 U.S.C. § 523(a)(2)(A) precludes the discharge of a debt for money obtained by “false pretenses, a false representation, or actual fraud.” Courts have generally interpreted this section to require the traditional elements of common law fraud. Accordingly, a creditor must prove that: “(1) the debtor made a false representation to deceive the creditor, (2) the creditor relied on the misrepresentation, (3) the reliance was justified, and (4) the creditor sustained a loss as a result of the misrepresentation.”
Here, Aleta was entitled to rely, and did justifiably rely, on West’s statement because he was a fiduciary. Indeed, as a college-educated woman, she had the capacity and knowledge to recognize that she should be able to rely on him, as Co-Trustee, to act in good faith, to affirmatively disclose all material facts, and to act solely in the interest of the beneficiaries. See In re Vann, 67 F.3d 277, 281, 283 (11th Cir. 1995) (“Justifiable reliance . . . is gauged by an individual standard of the plaintiff’s own capacity and the knowledge which [she] has, or which may fairly be charged against [her] from the facts within [her] observation in the light of [her] individual case.”) The Court will therefore affirm the Bankruptcy Court’s finding that West made a false representation upon which Aleta justifiably relied to her detriment, in violation of 11 U.S.C. § 523(a)(2)(A).