December 12, 2014

Common Fund Doctrine - Recovering Attorney Fees for a Beneficiary

If a beneficiary sues a trustee and is successful, they are generally not able to recover their attorney fees from the trust. Hence, the beneficiary will have to personally bear the out-of-pocket costs. 

However, an exception to this rule is when a beneficiary sues a trustee on behalf of themselves and other beneficiaries which recovers or preserves a common fund for their benefit. In such a case, the probate court has the discretion to award attorney fees from the trust to the moving beneficiary. See Estate of Gump (1982) 128 CA3d 111. This is known as the "common fund doctrine."

One reason for the common fund doctrine is to prevent the free rider program. If one beneficiary successfully sues, invariably they will expend a large sum of money on attorney fees. Yes, attorneys do not come cheap. In turn, it is quite possible that the moving party will expend all of their inheritance on attorney fees just so they can get what is arguably theirs. Conversely, the other beneficiaries, assuming they are co-equals, reap the benefits of the moving party's litigation efforts. However, they did not have to expend any funds to reap the benefit. Thereby, they can be considered "free riders" or roughly speaking a "mooch."  The common fund doctrine can thus ensure that a moving beneficiary is not unfairly punished for doing a good deed.  

In theory this sounds complicated, but is easier to grasp with a little explanation.

Assume that a rich uncle leaves behind a large estate that is to equally benefit 10 of his nieces and nephews for their lifetime. The uncle names his brother as the trustee. The principal asset of the trust is a shopping complex located in Los Gatos, CA.

The brother initially does a competent job in executing his fiduciary duties but quickly becomes overwhelmed by the responsibilities of commercial leasing. The brother becomes derelict in his duties by not enforcing lease agreements, collecting rent late and inadequately maintaining the property. This causes a substantial reduction in the amount of profit the trust reaps. This decreased profit trickles down to the nieces and nephews in the form of reduced distributions.

One nephew then decides that it would be prudent to have the trustee removed for breach of fiduciary duty and replace them with a professional fiduciary. This nephew is the only beneficiary who is wealthy enough to fund a trustee removal petition.

He hires a local probate litigation attorney and has the brother removed as trustee, albeit at the cost of $50,000. The nephew asks for reimbursement of his attorney fees, citing the benefit to the other beneficiaries. In particular, the professional fiduciary will be able to increase the amount of rent collected from the property which will equally benefit all the nieces and nephews through larger distributions.

In such a case, the nephew may receive reimbursement from the trust for their attorney fees. Although, it should be noted that this remedy is discretionary. Simply because a beneficiary petitions for it and the facts indicate that a common benefit has been achieved for the beneficiaries, such does not obligate the probate judge to award it. The probate judge has discretion to do so or not.