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Substantial Benefit Doctrine As A Basis For Fees In California Probate

The substantial benefit doctrine permits a California probate court to award attorney’s fees to a party if the party’s efforts in the litigation result in a substantial benefit to other parties.  The benefits do not have to be pecuniary.

The substantial benefit doctrine was applied for the first time in a California probate case in Smith v. Szeyller, a January 2019 opinion from California’s Second District Court of Appeals.

The Facts of Smith v. Szeyller

Don Smith, Jr. and Gladys Smith created a family trust.  Their five children were named as the beneficiaries of the trust.  Don died before Gladys.  After Don’s death, Gladys amended the trust many times to benefit one of their children, Joann.

After Gladys’ death, Joann and her husband became the co-trustees of the trust.  Joann’s brother Don filed a petition demanding an accounting of the trust and alleged several breaches of trust against Joann and her husband.  All of the other siblings were named in the proceedings and given notice of Don’s action, but none of them participated in the probate proceedings.

The litigation settled in the middle of trial.  In the settlement, the trustees agreed, among other things, to pay a sum to Don from Joann’s share of the trust, and to pay Don’s $721,258.28 in attorney’s fees and costs from the trust and its subtrusts (meaning the subtrusts of the nonparticipating beneficiaries bore a portion of this amount).  The settlement agreement was approved by the California probate court.

After the California probate court approved the settlement, one of the other siblings, Donna (who had not participated in the litigation until this point, despite receiving notice), filed post-trial motions asking for a new trial and to vacate the order.  She argued that the fee award to Don was not warranted under the substantial benefit doctrine, and that she was not afforded due process.

The California probate court denied Donna’s motions and the Court of Appeal affirmed the decision.

What Is The Substantial Benefit Doctrine?

The substantial benefit doctrine in California permits a trial court to award fees to be shared by others upon whom a benefit was conferred when a litigant, proceeding in a representative capacity, obtains a decision that results in a substantial benefit.  The substantial benefit can be of a pecuniary or nonpecuniary nature.  The court explained the substantial benefit doctrine as follows:

Trust beneficiaries must generally pay their own attorney’s fees incurred challenging a trustee’s conduct, even if they succeed. (Leader v. Cords (2010) 182 Cal.App.4th 1588, 1595 [107 Cal. Rptr. 3d 505]; Code Civ. Proc., § 1021.) But under the substantial benefit exception, the trial court may exercise its “equitable discretion … [to] determine[] whether the interests of justice require those who received a benefit to contribute to the legal expenses of those who secured the benefit.” (Pipefitters Local No. 636 Defined Benefit Plan v. Oakley, Inc., supra, 180 Cal.App.4th at p. 1547.) The doctrine is an “outgrowth” of the common fund doctrine. (Serrano v. Priest (1977) 20 Cal.3d 25, 38 [141 Cal. Rptr. 315, 569 P.2d 1303].)

We have written about attorney’s fees and costs in California probate cases here.

What Is The Difference Between The Common Fund Doctrine and The Substantial Benefit Doctrine?

In describing the substantial benefit doctrine as an “outgrowth” of the common fund doctrine, the California appeals court explained:

The common fund doctrine applies only to pecuniary benefits; the substantial benefit doctrine applies to both pecuniary and nonpecuniary benefits. (Serrano v. Priest, supra, 20 Cal.3d at p. 38.) It “permits the award of fees when the litigant, proceeding in a representative capacity, obtains a decision resulting in the conferral of a ‘substantial benefit’ of a pecuniary or nonpecuniary nature. In such circumstance[s], the court, in the exercise of its equitable discretion, thereupon may decree that under dictates of justice those receiving the benefit should contribute to the costs of its production.” (Ibid.)

Therefore, the common fund doctrine applies only to pecuniary benefits, while the substantial benefit doctrine applies to both pecuniary and non-pecuniary benefits.

Probate courts have used the common fund doctrine to confer equitable fees awards when litigation creates or preserves a fund from which others benefit. (E.g., Estate of Reade (1948) 31 Cal.2d 669 [191 P.2d 745].) The courts “have applied the ‘substantial benefit’ theory in a wide variety of circumstances” when the benefit is nonpecuniary. (Serrano v. Priest, supra, 20 Cal.3d at p. 38.) No published decision applies the substantial benefit doctrine in the probate context, “but it plainly would apply, for example, … to an action to remove a trustee who has breached the trust or to a petition to compel an accounting.” (Hartog & Kovar, Matthew Bender Practice Guide: Cal. Trust Litigation (2018) § 15.32[2], p. 15-31.)

The Actions Of One Beneficiary Benefited All Of The Beneficiaries

Here, the California probate court had the equitable power to award the agreed upon fees to Don under the “substantial benefit doctrine.”

The court stated:

With respect to Don’s attorney’s fees, the court added its finding on the record that, “this action by Don Smith, Jr., has benefitted all of the beneficiaries of the [family] trust, including himself and [JoAnn and Edward], by acting as a catalyst to the improved preparation of the accountings.”

Failure To Participate After Receiving Notice Is Not A Due Process Violation

Donna also urged that her due process rights in the California probate proceeding were violated by the settlement approved during the trial.  However, Donna had notice of all the proceedings, but she failed to participate in the underlying action.  Donna’s failure to participate meant that she forfeited all of her objections to the fee award.  Because Donna had notice, she was not deprived of due process.  The court had no sympathy for the due process argument:

Donna chose not to participate in the trial and cannot now second-guess the resolution of Don’s objections. The litigating parties resolved disputed facts, and the court was bound by that resolution.

Not every beneficiary wants to become involved in probate litigation.  However, a beneficiary must be mindful that a failure to participate means that they have no say in the outcome.

 

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