Friday, February 26, 2010
Court of Appeal Tosses Out Fee Awards of $5 Million to Trustee
By SHERRI M. OKAMOTO, Staff Writer
The Fourth District Court of Appeal has thrown out two awards totaling over $5 million for attorney fees a former trustee incurred defending against a beneficiary’s allegations of self-dealing and conflict of interest.
Noting that the trustee was represented by eight lawyers from three major law firms, with multiple attorneys appearing simultaneously at the 14-day court trial, Div. Three queried Wednesday whether he had demanded “a Rolls Royce defense when a prudent trustee could have arrived at the same destination in a Buick, Chrysler or Taurus.”
The trustee, Patrick Donahue, oversaw an irrevocable inter vivos trust his deceased brother established which named the brother’s wife, Michelle Donahue, as a life income beneficiary.
Patrick Donahue resigned as trustee in 2004 and initiated a Probate Code Sec. 17200 action to secure court confirmation and approval of a final accounting and compensation for services to the trust. Michelle Donahue objected, claiming her brother-in-law imprudently sold approximately 40 percent of the trust’s real estate interests below fair-market value, losing about $20 million in potential appreciation.
Trial took place in the fall of 2007 before Orange Superior Court Judge Robert J. Moss. Patrick Donahue was represented by four attorneys and a paralegal from Loeb & Loeb and Jones Day, as well as two attorneys the successor trustees retained to represent the trust.
In a decision upheld on appeal earlier this month, Moss approved the accounting and overruled Michelle Donahue’s objections.
Patrick Donahue then petitioned in November 2007 for more than $5 million in attorney and trustee fees he incurred “to defend himself against unmeritorious allegations that virtually every act undertaken by him as trustee was a breach of trust.” He requested reimbursement from the trust for incurring $4.85 million in attorney fees through trial and $155,375 for personal compensation.
Moss issued a minute order in April 2008 directing the successor trustees to reimburse Patrick Donahue the amount “prayed for in the petition with [several specified] exceptions,” resulting in a deduction of about $42,000 in costs.
While Michelle Donahue’s appeal from this ruling and her prior appeal were still pending, Patrick Donahue applied to the court for an additional $300,000 in past attorney fees and trustee fees from the close of trial in October 2007 through May 2008, and for an order requiring the successor trustees to pay his future appellate fees.
On Nov. 21, 2008, Moss ordered the successor trustees to reimburse Patrick Donahue over $175,000 in attorney fees and $2,500 in trustee fees. He also granted Patrick Donahue’s request for future attorney fees, but Justice Richard M. Aronson, writing for the appellate court, said Moss had abused his discretion.
Aronson explained that trustees have a duty to administer a trust solely in the interest of the beneficiaries. Although attorneys hired by a trustee to aid in administering the trust are entitled to reasonable attorney fees paid from the trust assets, the justice emphasized, probate courts “should make clear the basis for fee awards and thereby facilitate meaningful appellate review.”
He opined that the April 2008 order granting attorney fees to Patrick Donahue was “notable for what it does not say,” since it lacked any explanation why Moss found Patrick Donahue reasonably incurred the attorney fees he sought, as well as the exact amount of the fee award.
“In the particular circumstances here, the trial court’s generic order undermines the process of appellate review,” Aronson said. “Comparing the court’s pithy explanation to the size and complexity of the fee request, with the full billing records consuming more than 800 pages of the record on appeal, we cannot tell whether the court exercised its discretion to carefully review the attorney documentation and determine their reasonableness and necessity, particularly in relationship to the trust’s interest and purposes.”
‘Overly Deferential Approach’
Aronson also expressed concern that the lack of detail and explanation in the order suggested that Moss had “utilized an overly deferential approach” to Patrick Donahue’s fee requests.
“A trial court may not rubber stamp a request for attorney fees, but must determine the number of hours reasonably expended,” the justice said.
He posited that “simultaneous representation by multiple law firms posed substantial risks of task padding, over-conferencing, attorney stacking (multiple attendance by attorneys at the same court functions), and excessive research,” and that Patrick Donahue’s “spare-no-expense strategy” called for close scrutiny on questions of reasonableness, proportionality and trust benefit.
“Although the veteran jurist here may have had these principles in mind, we find nothing in the fee orders of April and November 2008 to assure us the trial court analyzed these factors,” Aronson concluded, and directed Moss to revisit Michelle Donahue’s request to engage in limited discovery on the amount of attorney fees reasonably and prudently incurred for the benefit of the trust on remand.
Justices William F. Rylaarsdam and Raymond J. Ikola joined Aronson in his decision.
The case is Donahue v. Donahue, 10 S.O.S. 698.
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