February 27, 2019

Substantial Benefit Doctrine

A trust typically has multiple beneficiaries. For example, parents will often evenly divide their estate amongst their children. Now assume that after both parents have died, only one child out of five is selected as the successor trustee. This child has great difficulty in administering, principally because he has an addiction to classic Nintendo video games such as Gun Smoke, Tecmo Bowl, Contra and Castlevania. This addiction causes the child to neglect his duties as trustee. The trust's rental property falls into disrepair and the tenants refuse to pay rent given the property's condition. 

The other children soon become disgruntled with his mismanagement but only of them is sufficiently disgruntled to retain an attorney to file suit against the trustee. 

The disgruntled child ultimately obtains a favorable judgment against the inept trustee that equally benefits the other beneficiaries. That is, the inept trustee is removed and is surcharged for the damages incurred. The disgruntled child's attorney moves to have their attorney fees reimbursed from the trust. The other children object to having to pay the attorney fees for the disgruntled child.

The general rule is that a trust beneficiary "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. 

However, "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., (2010) 180 Cal.App.4th 1542, 1547.

In this case, the disgruntled child may be reimbursed for their attorney fees from the trust. The rationale for this is straight-forward. The disgruntled child expended their own money to benefit not only themselves but their siblings as well. To allow them then to piggy-back off the work of the disgruntled child would be improper. They would essentially be free-riders, i.e. they obtained a benefit without paying for it. Or to paraphrase a certain song, "everybody had their cup, but they did not chip in." If you know the name of that song, I commend you.

The substantial benefit doctrine was recently referenced in the appellate case Smith v. Szeyller, (2019) ____ Cal.App.4th ______.