Navigating Unique Issues in the Settlement of Trust and Estate Disputes

“Navigating Unique Issues in the Settlement of Trust and Estate Disputes,” that’s the subject of today’s ACTEC Trust and Estate Talk.

Transcript/Show Notes

This is Travis Hayes, ACTEC Fellow from Naples, Florida. Trust and estate controversies often involve multiple parties. Today, we are going to talk about the minefield of issues presented when one or more of the parties are unrepresented by counsel or are appearing pro se. Unrepresented parties can present roadblocks to a settlement in a myriad of ways. ACTEC Fellow Lizzy Garlovsky of Chicago, Illinois, joins us to discuss this topic. Welcome, Lizzy.

Elizabeth Garlovsky: Thank you, Travis. I spoke about this topic a couple of weeks ago on a panel. And because I was the last speaker on the panel, I was designated as the cleanup batter, which was so appropriate because it occurred right in the middle of the World Series. Congratulations to all you Rangers fans out there! But, cleanup is really so appropriate when we are talking about fiduciary litigation and particularly the settlement of complicated trust and estate matters because it’s a good analogy for the settlement process.

Unrepresented Parties in Trust and Estate Controversies

We are always cleaning things up or at least trying to clean things up. You might be preparing a harmless nonjudicial settlement agreement to try to clean up an old estate plan that simply doesn’t fit the family anymore, or maybe it’s in response to a divorce proceeding. You also might be trying to clean up a big mess that has been left behind by someone’s passing as a result of no estate plan, mistakes or misinterpretations of an estate plan, or maybe even the work of bad actors.

When you are presented with a messy case, settling is usually a good thing, but of course, only if the agreement is binding. Whether a settlement agreement is binding on all parties can depend on whether the attorney clearly defines the representation of the parties and, in the end, whether the parties each have their own representation.

Importance of Clearly Defined Representation

So first, in compliance with Model Rule of Professional Conduct, Rule 1.7, it is extremely important to define who your client is at the outset of the representation. It’s important to remember that not all states take the same approach in viewing who the lawyer represents during trust and estate matters. The lawyer must therefore ascertain who is the client to understand who may be considered an unrepresented party in the proceedings. This is particularly important because some states extend the representation of the fiduciary to also include duties owed to the heirs or beneficiaries of the estate or the trust.

So, what does this mean? This means as soon as the client walks in the door or, more realistically, after you get that first email and have the first Zoom call, get a detailed engagement letter that not only says whom you represent and in what capacity, but also makes it clear who you do not represent.

Ethical Framework for Unrepresented Parties

Once you’ve clearly established who you represent and to whom your duty as an attorney is owed, it is then time to turn your attention to Model Rule 4.3 for the ethical framework to deal with parties involved in the matter who may be unrepresented. It may be that you represent one of the decedent’s three children who was named as trustee, and the other two, who do not have attorneys, want to join all of your calls and get copied on all of your emails because, of course, they all get along and they all agree on everything.

It may be that there are 10 qualified beneficiaries of a trust, 3 of which are very loud and demanding, and the rest just stay quiet. And all of this sounds great. And you can carry on with preparing the most perfect settlement agreement. But then, when it’s time to sign on the dotted line suddenly everyone isn’t so quiet anymore. And then, suddenly that perfect document finds its way to the proverbial circular file as you find yourself preparing to file a response to a lawsuit that will drag on for years and leave all the beneficiaries ultimately very unhappy.

So, what does Model Rule 4.3 say? Model Rule 4.3 states:

in dealing on behalf of a client with a person who is not represented by counsel, a lawyer shall not state or imply that the lawyer is disinterested. When the lawyer knows or reasonably should know that the unrepresented person misunderstands the lawyer’s role in the matter, the lawyer shall make reasonable efforts to correct the misunderstanding. The lawyer shall not give legal advice to an unrepresented person other than the advice to secure counsel if the lawyer knows, or reasonably should know, that the interests of such a person are or have a reasonable possibility of being in conflict with the interests of the client.

So, when are we confronted with this Rule? Sometimes it’s when we are rounding third and headed for home.

Technical Challenges in Settlements

We’ve identified a technical issue with a document drafted in 1985, or we’ve discovered that the 1985 document can be made better by a technical tool that wasn’t available until 2020. We can fix this. Except, now we have two or more generations alive who are affected by the change and have to consent or sign the agreement.

I would say the majority of the time, other than the trustee and maybe a controlling member of the family, these parties are not represented by counsel. What Rule 4.3 tells us is not to mislead these parties into believing that your advice is somehow helping them or that they don’t need a lawyer. In fact, 4.3 suggests that encouraging them very directly to get an attorney is the best course of action, notwithstanding your client is going to complain about it. And when the unrepresented take your suggestion and they want to hire a lawyer, it’s often met with resistance. Why? Because the family member who is inevitably acting as trustee and automatically gets a lawyer paid for, gets offended and doesn’t want to spend the money.

But here’s where you can come in as the attorney and say, oh, your sister asked for a lawyer? That’s great! The trust can’t pay for her lawyer, but you can and should make a distribution from the trust so that she can pay for one. This way, you will be sure that when she signs the agreement, she’s been advised, and she can be held to its terms. Not only that, without counsel, your sister might not sign it at all. If the fees are the only thing getting in the way of the unrepresented party getting representation and the funds are there, you should encourage your client, within reasonable limits of course, to help them get a lawyer.

Real Controversies and Legal Actions

But what about the real controversies? You know, the kind that will actually get to a courtroom or where the foundation is at least laid to get there. For example, a parent passes away and his or her kids hate each other. They always have and now is a good time to air out all the family grievances. And you’re in luck because you represent the trustee of the parent’s trust and, well, let’s just say it has a few holes and the gloves come off. Everyone is holding on very tightly to their positions and the trustee is in a no-win situation.

So, you go ahead and do the right thing to not only protect the trustee, but to move the matter forward, and you file a petition for construction of trust. This is, of course, intended to be a non-adversarial act where you ask the court to examine the language of the trust to help the trustee clear up a real or perceived ambiguity and support the grantor’s intent. Some might call this a “replay review.”

The trustee may be in the middle of beneficiaries whose interests are clearly not aligned and who benefit from one interpretation or the other. The trustee cannot pick sides and needs the court’s help. Let’s say you represent the trustee and there are seven qualified beneficiaries. You serve them all with your petition. Three of them have attorneys. Two appear pro se. Two don’t appear at all and are defaulted by the court. You are getting pressure to settle, but no one is compromising on anything or willing to release the trustee. You are caught in a rundown, also known as “no man’s land,” also known as a “pickle,” between the bases, with one being letting the court process play out and the other going down the settlement path.

Balancing Court Process and Settlement

On the one hand, as we know, a great majority of cases are resolved out of court. And there are benefits to staying out of court. Staying out of court can be less costly. It can maintain privacy for the family and maybe, most importantly, can help the parties preserve or maybe salvage their relationships. Of course, the settlement process is usually more efficient from a time perspective as well, which helps the parties move on with their lives. Translation: helps them get their hands on their money faster.

However, how can you ensure that an agreement is really an agreement when some parties are represented and others are not? What if some don’t participate at all? How do you also know that everyone is signing in their appropriate capacities? Do you have an obligation to verify or determine that every one that is signing is competent? You may never even meet some of these individuals in person.

Recent Cases Influencing Settlement Approaches

There are some recent cases out there that may cause you to more carefully analyze how you approach the settlement process with unrepresented parties and may cause you to rethink whether it’s better to let the court process play out or whether to, at a minimum, have the settlement process play out in court or with the court’s help. And I’d like to highlight a few of these cases.

One is Horn v. Hehra, which is a case out of Michigan, where an heir was bound by the terms of a settlement agreement that was the product of court-ordered mediation, even though the heir chose not to participate. All of the heirs received proper notice of the mediation and the hearing to approve the settlement.

Another case is Breslin v. Breslin out of California. This is another case where an interested party who received notice of court-ordered mediation, and did not participate, was bound by the results.

Then there’s the Maxwell v. Edwards case out of Florida. In this case, an heir objected to the settlement, and the court found the heir was not bound by it because the court never entered a default against the beneficiary.

Advisability of Involving the Court

In my experience, the court is usually quite sympathetic to unrepresented parties and will give them ample opportunity to get representation. So, it is probably advisable in a lot of these situations to let the court help you.

When the court is calling the shots, it takes you as the attorney out of the pickle and may ultimately avoid the dreaded correspondence from your state disciplinary board when the disgruntled beneficiary, or maybe even your client, tries to find a way to point the finger at you because they don’t like the result of the settlement. I guess we would call that a strikeout.

Thank you for having me on your podcast today and I hope you have enjoyed my presentation. And because I’m from Chicago and a lifelong fan, I will take this opportunity to say: Go Cubs!

Travis Hayes:  Thank you, Lizzy, for discussing how practitioners can navigate unique issues in the settlement of trust and estate disputes. Go Braves!

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