Ethical Dilemmas Inherent in a Trusts and Estates Practice

ETHICAL DILEMMAS INHERENT IN A TRUSTS AND ESTATES PRACTICE

VICTORIA L. D'ANGELO, ESQ.

BARCLAY DAMON, LLP Clarence, NY

363 364 ETHICAL DILEMMAS INHERENT IN A

TRUSTS AND ESTATES PRACTICE

I. BRIEF INTRODUCTION

A. STANDARD OF CARE

1. The New York Rules of Professional Conduct, effective April 1, 2009, were a combination of the ABA Model Rules and the New York “prior” Lawyer’s Code of Professional Responsibility. The new rules have been amended several times since then, the last time on March 28, 2015.

2. New York State Bar Association Committee on Professional Ethics renders opinions periodically.

3. Various Courts render ethics decisions.

II. FIDUCIARY-CLIENT RELATIONSHIP

A. WHOM DO YOU REPRESENT?

1. Fiduciaries of the estate vs. the estate

An attorney may say he or she represents the estate, but what he or she really means is he or she represents the fiduciaries of the estate. An estate cannot retain an attorney or make decisions for itself, only the fiduciaries of the estate can. (Ordover and Gibbs, Fiduciaries, Attorneys and Duty to Beneficiaries, N.Y. L. J., Feb. 25, 1999, p.3.)

2. Conflicts of interest

There is no rule, ethical or otherwise that prevents a lawyer from representing an executor who has a potentially adverse individual interest against the estate.

In re Dix, 11 A.D.2d 555, 199 N.Y.S.2d 958 (3d Dep't 1960): Appellate Division, Third Department, denied a motion to disqualify an attorney based on the potential of a conflict of interest.

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Representation when there is an actual conflict of interest is not advisable, or ethical, without full disclosure and a waiver.

A client can waive his or her right to conflict-free representation in writing after full disclosure of the risks and benefits.

Conflicts extends to partners and associates of the primary attorney.

Avoid any appearance of “turncoat representation” (representing the other side - other executor or beneficiary.)

A lawyer should avoid even the appearance of impropriety

B. FIDUCIARY EXCEPTION TO THE ATTORNEY/CLIENT PRIVILEGE

1. Attorney client privilege, under CPLR §4503, deems communications between an attorney and his or her client as confidential unless it falls under very specific exceptions. These exceptions include communications made in the presence of a third party, communications that do not pertain to legal representation, the underlying factual situation, the existence of a retainer agreement or any communications in which privilege has been waived.

2. In 2002, CPLR §4503 was amended to add that a beneficiary shall not be treated as a client of the attorney for the fiduciary solely by reason of his or her status as a beneficiary. It also was amended to provide that there is no waiver of the privilege for confidential communications between the attorney and fiduciary.

3. Under CPLR §4503 (b), in a probate action, an attorney shall disclose information as to preparation, execution and revocation of any Will, but not privileged information that would disgrace the memory of the decedent.

4. The fiduciary exception to an attorney client privilege allows communications by a fiduciary to his or her attorney which are sought by a beneficiary. This exception has been enforced because of the fiduciary's obligation to disclose information about the administration of an estate or trust.

5. Rule 1.6(a) further protects the attorney-client privilege by prohibiting the revelation of client confidence or the use of that confidence against the client unless the client has given consent after full disclosure or unless the attorney is bound by law, court order or professional code. This includes confidences related to a client's intent to commit a crime (Matter of King,

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NYLJ, 9/25/97 at 33, col 6 [Surr. Ct. Westchester Co.]) or perpetrate a fraud or confidences necessary to exonerate an attorney from accusations of wrongdoing or to collect attorney's fees.

A lawyer may reveal:

(a) Confidences or secrets with the consent of the client or clients affected, but only after full disclosure to them.

(b) Confidences or secrets when permitted under Disciplinary Rules or required by law or court.

(d) Confidences and secrets necessary to establish or collect the lawyer's fee or to defend the lawyer or his or her employees or associates against an accusation of wrongful conduct.

6. In relation to our chosen field, privilege survives our clients and not even an Executor can waive it unless the confidences can effectuate the decedent's intentions. No disclosure should be made which would “disgrace the memory of the decedent”.

C. DISPOSITION OF ORIGINAL WILLS ON DEATH, DISABILITY OR RETIREMENT OF THE ATTORNEY

1. Status quo

Currently, there is no universal standard of care for the disposition of original wills maintained by attorneys who are, for one reason or another, no longer in practice. Some are handled with care and passed on to another attorney to be kept safe from fire and mildew. Others are pitched into a dark, damp basement to be forgotten for years. A proceeding to admit a lost Will to probate should be avoided since it is not only costly and an embarrassment to the attorney, but has unethical trappings.

2. Proposed suggestions

At the top of the list was the suggestion to amend the Rules of Professional Conduct to require all attorneys who possess the original wills of clients to make provisions for those documents after they discontinue their practice.

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Also suggested was passing a statute or issuing a court order to require the fiduciary of a deceased lawyer's estate to make a reasonable effort to return any original wills in the estate's possession to the clients.

The Executive Committee has suggested depositing the remaining wills with the Surrogate's Court in the county in which the attorney maintained his or her practice. This of course, is to be avoided as a primary option to prevent an overflow of wills being filed for safekeeping. Many counties are already running out of room and some charge for such storage.

III. MULTIPLE FIDUCIARIES

A. ADVANTAGES OF MULTIPLE REPRESENTATION

1. The estate and the beneficiaries are frequently part of a single family and have common goals and priorities.

2. Financially, the estate is only responsible for one reasonable legal fee and using a single attorney may help lessen the estate expenses.

B. ATTORNEY MUST HAVE UNDIVIDED LOYALTY

1. Rule 1.7 provides that a lawyer shall not represent a client if “the representation will involve the lawyer in representing differing interests” or if there is a “significant risk that the lawyer’s professional judgment on behalf of a client will be adversely affected by the lawyer’s own financial, business, property or other personal interests.” The lawyer may represent a client if he or she will be able to “provide competent and diligent representation to each affected client,” or the clients have given informed written consent.

2. Aim for conflict-free representation to insure loyalty and if each fiduciary wants or needs his or her own attorney, that is fine.

C. ATTORNEY AS INTERMEDIARY

1. Clients with potentially conflicting interests in an estate may seek an attorney to act as an intermediary to preserve their more important common goals.

2. According to the American College of Trust and Estate Counsel, “A lawyer may act as an intermediary between clients if (1) the lawyer consults with each client concerning the implications of the common representation, including the advantages and risks involved, and obtains

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each client's consent to the common representation (2) the lawyer reasonably believes that the matter can be resolved on terms compatible with the clients' best interests, that each client will be able to make adequately informed decisions in the matter and that there is little risk of material prejudice to the interests of any of the clients if the contemplated resolution is unsuccessful (3) the lawyer reasonably believes that the common representation can be undertaken impartially and without improper effect on other responsibilities the lawyer has to any of the clients.”

3. As the acting intermediary, the lawyer has a responsibility to consult with each client regarding the decisions to be made to prevent uninformed decisions.

D. MATTER OF SACKLER

1. In re Sackler, N.Y.L.J., May 16, 1989 (Sur. Ct. Nassau Co.) - In his last will and testament, Dr. Arthur M. Sackler named his third wife, his four children, his first wife and his attorney as co-executors. Each had their own attorney and the group decided to retain a “general counsel” to represent them all. The firm of the general counsel had each executor sign a written agreement that the firm would not face a conflict in defending the estate's position and representing other executors in any claim a co-executor brought against the estate in an individual capacity.

2. Clients may waive their right to conflict-free representation upon full disclosure.

3. A firm may apply to the Surrogate for advice and direction

E. FORCED WITHDRAWAL

1. A lawyer should withdraw if any of the clients request it or if he or she cannot carry out his or her legal duty. Upon such withdrawal, the lawyer should not continue to represent any involved client in relation to the matter at hand.

F. REFERENCE ARTICLES

1. Two excellent articles titled “Estates with Multiple Fiduciaries Pose Ethical and Practical Issues For Attorneys and Clients Alike” and “Early Detection of Possible Pitfalls In Fiduciary Obligations Can Prevent Later Problems” were written by John R. Morken and Gary B. Freidman and published in the Trusts and Estates Journal November/December 2001 and January 2002.

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IV. ETHICAL CONFLICTS IN PLANNING AND MANAGING ESTATES

A. SELF-DEALING

1. The rule against fiduciary self-dealing has been extended to the attorney of the fiduciary. If self-dealing is discovered and there is no exonerating clause in the will and no consent by those effected, the courts will apply a “no further inquiry” rule, which could lead to the courts finding the transaction void and making the self-dealer liable for damages and lost profits without considering whether the deal was fair or the price adequate or if there was an actual gain acquired.

2. In re Kelloq, N.Y.L.J., Dec 30, 1999, p. 25, col. 4, (Sur. Ct., NY Co), Surrogate Preminger of New York County decided a case impacting the ever-present ethical questions about self-dealing. Mercy P. Kellog passed away and left a townhouse in Greenwich Village as the primary asset of her estate. The attorney chosen by the Administrator C.T.A., who is also the plaintiff in this matter, is also the owner of a real estate agency located in eastern Long Island. The attorney and his client entered into an agreement in which the real estate agency owned by the attorney was granted exclusive listing rights. The attorney used his connections and brokered a deal substantially above the appraised value of the townhouse. After the attorney collected his standard six percent fee, the Administrator C.T.A. argued that the attorney engaged in an impermissible conflict of interest by acting as both the broker and the attorney in the sale of the townhouse. Surrogate Preminger sided with the plaintiff stating “The conflict of interest is plain. Petitioner had an obligation to sell the property within a reasonable period of time at the highest possible price. It was not in the attorney's interest for the sale to be made to any purchaser but his own, at any price.” The attorney/broker was ordered to refund the $160,500 commission he received on the sale.

3. If you are unsure about the ethical nature of a transaction, apply for an advice and direction proceeding with the Surrogate.

4. In re Rothko, 43 N.Y.2d 305, 401 N.Y.S.2d 449 (1977) 798 Paintings created and owned by the deceased, expressionist painter Mark Rothko, were the subject of judicial scrutiny. The daughter of the late painter brought suit against the three executors of the estate, the financial advisor to her father and various others affiliated with the gallery. One of the executors was an employee of the art gallery and helped to broker a deal in which 100 of the paintings, worth millions of dollars were sold to the gallery for a mere $1.8 million and the remaining 698 were sold to the gallery at a 50% commission to the

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executors. The petition charged them of entering into a conspiracy with the art gallery and its affiliates in order to defraud the estate, waste its assets and earn a profit. One of the executors was accused of acting with a conflict of interest because of his employment at the art gallery. After months of dispute, the New York State Attorney General was added to the lawsuit as a representative of the public as “the ultimate beneficiaries of the Mark Rothko Foundation”. For seven months, seven sets of lawyers argued before the New York Surrogate's Court. Surrogate Millard Midonick, in an eighty-seven page decision, removed all three of the executors from the estate and canceled the contract with the art gallery, making the defendants liable for the $7.3 million for the present value of the paintings. The Justice stated that a self-serving breach of loyalty was exhibited.

5. A decedent may authorize self-dealing with express language in the instrument but extreme caution must be followed and the fiduciary must still act in good faith.

B. BENEFICIARY/FIDUCIARY/LAWYER

1. Attorney as a Beneficiary

An attorney should not influence a client to name him or her as a beneficiary. That does not mean you cannot accept a gift from a client, but with acceptance of the gift, the lawyer must be aware of the strong inference of overreaching. If a client is insistent on the gift, you should be insistent upon another attorney to prepare the will.

In Matter of Putnam, 257 N.Y. 140 at (1931) the court ruled that a bequest to an attorney gives rise to the inference of undue influence and advised that such a client would be better off having their will drafted by another attorney.

In Matter of Eckert, 93 Misc. 2d 677 (1978), the attorney/beneficiary's testimony alone was not strong enough to overcome undue influence.

In Estate of Lawson, 75 A.D. 2d 20 (1980), the court acknowledged the inadequacy of the evidence of the attorney/draftsman/ beneficiary in defense to charges of undue influence.

2. Attorney as a Fiduciary

A lawyer should not consciously influence a client to name the lawyer as executor, trustee, or lawyer in an instrument. In those

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cases where a client wishes to name the lawyer as such, care should be taken by the lawyer to avoid even the appearance of impropriety. This includes comments that attorneys usually or often serve as executors or fiduciaries. Avoid any activity that would cause a client to name you as the executor of their estate.

If you do prepare a will in which you are designated the executor, you should be careful to avoid any appearance of impropriety. This includes compliance with SCPA § 2307-a, informing the testator that the executor does not need to be an attorney, will be entitled to executor’s commissions according to statute and will be entitled to legal fees as well. Have this disclosure available in writing and signed by the testator.

For wills executed prior to January 1, 1996, one can ask the court to waive the requirements or show substantial compliance. In Estate of Weinstock, 40 N.Y. 2d 1 (1976) the court held that upon evidence of overreaching on the part of an attorney who was named as the executor, letters testamentary can be denied and the nomination can be expunged. This rule can be invoked at any time during probate or at the accounting stage, as was proven in Matter of Harris, 123 Misc. 2d 247, 473 N.Y.S. 2d 125 (Surr. Ct. Nassau Co. 1984), where the attorney did not fully disclose the statute pertaining to entitlement to commissions.

3. Attorney's Fees and Commissions

Rule 1.5 prohibits an attorney entering into an agreement to charge or collect an excessive fee.

Rule 1.5(a) lists the factors to be considered in determining the reasonableness of a fee, such as:

(a) the time, labor, difficulty and skill involved

(b) the likelihood that the employment will preclude other employment

(d) the amount involved and the results

(e) the time limitations imposed

(f) the length and nature of the relationship with the client

(g) the experience, reputation and ability of the lawyer

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(h) whether the fee is fixed or contingent

In Matter of Freeman, 34 N.Y. 2d 1, 355 N.Y.S. 2d 336 (1974), the Court affirmed an attorney's fee award where the Surrogate made an independent evaluation of the value of the services rendered.

In Matter of Potts, 213 A.D. 59, 209 N.Y.S. 655 (1925), the Court affirmed an attorney's fee award in an estate involving numerous complications.

An attorney who is also a fiduciary must obtain court approval to receive advance legal fees or fiduciary commissions. See SCPA §2110.

(a) Violation of such court approval constitutes serious professional misconduct. Matter of Embser, 639 N.Y.S. 2d 240.

(b) Unapproved advances cannot be “authorized” pursuant to discretionary powers in the will. Matter of Guy, 91 A.D. 2d 266.

An attorney who is also a fiduciary must place estate funds in a separate estate account. These funds may not be commingled with funds of other clients in an attorney's trust or IOLA account. See EPTL §11-1.6, DR 9-102 (A), and Matter of Prounis, 680 N.Y.S. 2d 505.

SCPA § 2307 - provides that an attorney who prepares a Will which names him or her as Executor, shall inform the testator that the Executor does not need to be an attorney, and the attorney is also entitled to commissions, etc. If the testator signs such an acknowledgment, the attorney may receive full commissions (and not half the statutory amount).

C. PRIVITY/MALPRACTICE

1. Privity standards have been lowered to provide remedy to the victims, to hold the offending attorney accountable and to deter future malpractice.

2. Many state courts now allow parties not in privity to sue in tort on legal malpractice claims. “The vast majority of modern decisions have favored expanding privity beyond the confines of the attorney-client relationship”

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3. In Viscardi v. Lerner, 125 A.D. 2d 662, (1986) the brothers of the testator of the will in question sued the attorney/draftsman for negligence for allegedly creating a will that they felt did not reflect their dead brother's wishes. They claimed the will drafted by the plaintiff gave too much money to the decedent's wife. The New York State Appellate Division followed the privity rule strictly and continued to do so in several subsequent actions, making it among the minority of states that strictly adhered to the privity law as it stands.

4. In Estate of Schneider v. Finmann, 15 N.Y. 3d 306 (2010), the decedent had transferred ownership of a $1 million life insurance policy from a family limited partnership to himself. When he died, the insurance proceeds were subject to estate tax. The decedent’s estate filed a malpractice action against the estate planning attorney and alleged he negligently advised the decedent to make the transfer or failed to properly advise the decedent of the potential estate tax consequences. After several lower decisions, the Court of Appeals decided that privity exists between the Executor and the estate planning attorney and allowed the claim. It stated “the estate essentially stands in the shoes of the decedent” and could maintain the claim. But strict privity still stands and is a bar as against beneficiaries’ malpractice claims.

5. If you are found guilty of legal malpractice as an attorney, you may face a hefty fine, suspension, disbarment, and an increase in malpractice insurance premiums depending on the severity of the infraction.

D. JOINT REPRESENTATION

1. We often represent spouses (or others) in their estate planning needs and must be clear about the joint representation and possible conflicts.

2. Clients should be advised that they have a unity of interest or goals and should acknowledge that they do not see a conflict of interest in having the same attorney represent both of them.

3. The attorney should specify that the clients are waiving any rights to confidentiality as between them.

4. If either client becomes adverse to the other, either the lawyer or one of the clients may terminate the representation and the attorney may then represent the other client.

5. All of the above should be included in the Engagement/Retainer letter that the clients sign in the beginning.

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374 V. ATTORNEY GRIEVANCE COMMITTEE

A. EXAMPLES OF COMMON MISTAKES

1. Misappropriation of client funds from trust account

2. Attorney paid unauthorized expense

3. Commingling of attorney funds with trust funds

4. Withdrawal of client funds from trust account to pay disputed attorney fees

5. Conversion of client funds

6. Failure to maintain required bank records for client's funds

7. Failure to re-register as an attorney every 2 years, as required

8. Forging of prescriptions for personal use

9. Failure to notify clients of suspended status

B. EXPLANATION OF PROCESS

1. “The Attorney Grievance Committee of the Fourth Judicial Department of the State of New York was formed to investigate and prosecute complaints of misconduct against lawyers” (Attorney Grievance Committees Fourth Judicial Department, Fifth, Seventh and Eighth Judicial Districts, “How Complaints Against Attorneys are Processed”)

2. Process is confidential pursuant to law. (Judiciary Law §90(10))

3. The Grievance Committee does not hear fee-dispute cases. The complaint must be a violation of the New York Rules of Professional Conduct and evidence of this violation must be supplied.

4. A client complaint must be written and sent in to the appropriate Grievance Committee. There is no charge for the filing of a grievance. Upon receipt of the complaint, a staff member will review it to see if it is a misunderstanding or a possible breach of ethics. If it is a simple misunderstanding, the Committee will not review it. If the complaint is a fee dispute or other minor matter, the Committee will refer the complaint to the local bar association to be resolved. If it is indeed an ethical question, a copy of the complaint will be sent to the accused attorney for his or her response. A copy of that response will then be sent to the complainant. If this response does not resolve the matter, further action

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will be taken. The Committee may also initiate a sua sponte (its own) investigation.

5. An investigation will be initiated for all complaints that reach this stage. “Full and forthright cooperation with the Committee is the lawyer's obligation.” (Matter of Fraser, 515 N.Y.S.2d 361 (4th); NYSBA Op. #348.) After the investigation is completed, the Grievance Committee will review the facts and determine the appropriate action.

6. The Committee has the power to dismiss the complaint, issue a letter of caution or admonition to the attorney, or refer the complaint to the Appellate Division of the Supreme Court of New York for a formal disciplinary proceeding. The Appellate Division has the ultimate authority in this state and has the power to impose such disciplines as disbarment, public censure, or suspension.

7. Disbarment is not permanent in New York State. After 7 years; the attorney is allowed to apply for reinstatement, which is a rare occurrence.

C. REPORTED LOSSES

1. The reported losses in New York State are usually mostly in the following areas:

Real Property Escrow

Investments

Estates and Trusts

Settlements

2. The Lawyers Fund for Client Protection

handles the reimbursement to clients and pays millions of dollars to claimants each year.

is funded by New York Attorneys who are required to pay a biennial registration fee in order to practice

D. HOT TIPS FOR AVOIDING CLIENT GRIEVANCES

1. Nip a fee dispute in the bud with a written agreement

Entering into a written agreement with client is advisable for set fees and compulsory for contingent fees.

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According to the Fee Dispute Resolution Program New Part 137 of the Rules of the Chief Administrator, in any civil matter after June 1, 2001, if a client requests a fee arbitration, it will be mandatory for the attorney.

Effective March 4, 2002, lawyers are required to provide many clients with a “letter of engagement” if the fees are expected to be $3,000 or more.

In the trusts and estates area, I would recommend a written letter of engagement regardless of the amount of expected fees.

2. Avoid commingling funds

ABA Standards for Imposing Lawyer Sanctions §4.12 (commentary): “Lawyers who commingle clients' funds with their own subject the clients' funds to the claims of creditors, commingling is a serious violation... even when the client does not suffer a loss.”

Rule 1.15(a) states that “a lawyer in possession of any funds or other property belonging to another person, where such possession is incident to his or her practice of law, is a fiduciary, and must not misappropriate such funds or property or commingle such funds or property with his or her own.”

3. Communicate with your client

Rule 1.4(a)(1)(3) states that an attorney should “keep the client reasonably informed about the status of the matter.”

Rule 1.4(b) states that a lawyer should explain a matter to a client as “reasonably necessary to permit the client to make informed decisions.”

Proper communication includes returning the phone calls of the client. (Matter of Stenstrom, 605 N.Y.S. 2d 603 and NYSE Op.#396)

4. Get things done!

Rule 1.3(b): “A lawyer shall not neglect a legal matter entrusted to the lawyer”

22 NYCRR § 1022.8 specifically obligates an attorney to expedite court cases.

5. Avoid a conflict of interest

When representing a couple in their estate planning matters, discuss the possibility of conflict and how estate planning for one may affect the other one. See Rule 1.7 Conflict Rules –

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(a) Determine if a conflict exists, if lawyer’s judgment is adversely affected by representing other client.

(b) Possible waiver – determine whether the conflict may be waived by both clients. If after full disclosure, the attorney feels he or she can still adequately represent the client, a waiver is the answer.

(c) Representing multiple clients with potential conflicts of interest is a common thread in estate and trust planning. All engagement letters should contain a discussion and possible waiving of said conflict if applicable.

An attorney must avoid even the appearance of a conflict, not just the actual conflict.

6. Be mindful that your attorney-client relationship does not terminate with the case.

Rule 1.9: “A lawyer who has formerly represented a client in a matter shall not thereafter represent another person in the same or a substantially related matter in which that person’s interests are materially adverse….”

“An attorney may not accept employment relating to matters that adversely affect a former client if he previously represented that client in a matter related to the subject of the new employment.” (Strianese v. Amalgamated Cordage Corp., 607 N.Y.S.2d 834, 835 (4th; NYSBA Op.# 628)

7. Keep your confidences

Remember to refrain from disclosing even a client's name without prior consent.

Even with a prior written consent, caution should be used for any information disclosed to others.

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