Law Tips: Estate & Trust Admin. Tune-up, Part 1: When Good Fiduciaries Go Bad

Late summer’s the perfect time for a tune-up on Estate and Trust Administration.  Our Law Tips faculty participant, Kristin Steckbeck Bilinski, Longsworth Law LLC, Fort Wayne, Indiana, has agreed to navigate you through some bumps, curves and detours along the probate road.  Thanks to Kristin we’re warming up this latest series with pointers on keeping a fiduciary from making a wrong turn: 

Being a personal representative or a trustee is a great deal of responsibility, frequently with respect to large sums of money. Unfortunately, it is all too common that temptation gets the better of a fiduciary and he starts using estate or trust funds as his own personal piggy bank. In such situations, what is the fiduciary’s lawyer’s responsibility and ethical duty?

This discussion must necessarily start with a discussion of the Estate of Lee v. Colussi 1 case and its progeny, Indiana House Bill 1056. In February 2009, the estate of Dora Lee sued Colussi, the attorney formerly handling the estate administration, because one of the personal representatives had stolen nearly a quarter of a million dollars of estate funds. The estate alleged that Colussi had a duty to monitor the estate checking account. Colussi moved for summary judgment on the basis that the lawyer’s duty did not include the duty to monitor the checking account. The trial court granted summary judgment in Colussi’s favor, but on September 23, 2011 the Indiana Court of  Appeals reversed the grant of summary judgment and remanded the case to the trial court.

Colussi therefore created a great deal of concern among Indiana lawyers, among whom the common practice was not always to maintain or even closely monitor the estate checking account. Because of this concern, the Indiana General Assembly’s Probate Code Study Commission recommended legislation to clarify a lawyer’s duty  of care vis-a-vis estate assets.

This bill, now passed into law as IC § 29-1-10-20 and effective as of July 1, 2013, states that (unless otherwise agreed upon by the estate lawyer and an interested person) the estate lawyer:

(2) does not have a duty to collect, possess, manage, maintain, monitor, or account for estate assets, unless otherwise required by a specific order of the court; and

(3) is not liable for any loss suffered by the estate, except to the extent the loss was caused by the estate lawyer’s breach of a duty owed to the personal representative.

It is not clear exactly what the application is of § 29-1-10-20 (if any) in the trust context. It is not beyond the realm of possibility that an aggressive trust beneficiary might try to use the Colussi holding to pursue the lawyer who represents a misbehaving trustee. Even with the liability protection afforded by IC § 29-1-10-20, a lawyer representing a fiduciary may face an ethical dilemma if she finds out that a fiduciary is inappropriately using estate or trust funds.

Pursuant to the Indiana Rules of Professional Conduct, Rule 1.2, a “lawyer shall not counsel a client to engage, or assist a client, in conduct the lawyer knows is criminal or fraudulent.” However, if a fiduciary is contemplating a course of action that the lawyer believes may be criminal or fraudulent, Comment [9] to Rule 1.2 states that the lawyer may “give an honest opinion about the actual consequences that appear likely to result from a client’s conduct”  without being deemed to have assisted the client in committing a crime or fraud.

If a fiduciary is contemplating illegal action, is a lawyer obligated to withdraw? Rule 1.16 gives the grounds under which a lawyer “shall” or “may” withdraw from representation. Comment [2] to Rule 1.16 states that a lawyer “must” withdraw from representation if a fiduciary client insists or “demands” that the lawyer engage in illegal conduct.  The lawyer is not automatically “obliged to decline or withdraw simply because the client suggests such a course of conduct.” However, according to Comment [2], if after receiving contrary advice from the lawyer, a client still “persists in a course of action involving the lawyer’s services that the lawyer reasonably believes is criminal or fraudulent,” the lawyer has discretionary grounds for withdrawal from representation.

But what about a lawyer who only becomes aware of a fiduciary client’s bad behavior after the fact? Comment [10] to Rule 1.2 states that “[a] lawyer may not continue assisting a client in conduct that the lawyer originally supposed was legally proper but then discovers is criminal or fraudulent.  The lawyer must, therefore, withdraw from the representation of the client in the matter.”

In fact, under Rule 4.1, withdrawal may even need to be ‘noisy, making beneficiaries and other interested parties aware of the fiduciary’s misconduct, because a lawyer may not “fail to disclose a material fact to a third person when disclosure is necessary to avoid assisting in a criminal or fraudulent act by a client.” This can be a very difficult situation for a lawyer, and a very difficult decision to make. Comment [3] to Rule 4.1 provides a bit more guidance:

Sometimes it may be necessary for the lawyer to give notice of the fact of withdrawal and to disaffirm an opinion, document, affirmation or the like. In extreme cases, substantive law may require a lawyer to disclose information relating to the representation to avoid being deemed to have assisted the client’s crime or fraud. If the lawyer can avoid assisting a client’s crime or fraud only by disclosing this information, then under paragraph (b) the lawyer is required to do so, unless the disclosure is prohibited by Rule 1.6.

As with all other ethical matters involving the Rules, whether or not a lawyer ‘shall’ or ‘may’ make a noisy withdrawal from representation is highly subjective, requiring a great deal of insight and factual analysis of the particular situation.

Hopefully, an issue with a fiduciary down that bumpy probate road will be more navigable as a result of Kristin Steckbeck Bilinski’s review here on Law Tips.  This series on Estate and Trust Administration continues next week looking into dealing with beneficiaries.

To learn more from Ms. Bilinski’s entire CLE presentation as well as other estate experts, you will find Estate & Trust Administration: Bumps, Curves & Detours Along the Probate Road  in several locations around the state on our video replay calendar. Click Here for more info.

1 In re: Estate of Lee v. Colussi and the Colussi Law Office, 954 N.E.2d I 042 (Ind. Ct. App. 2011). Transfer was later denied on May 3, 2012 by the Indiana Supreme Court. In re: Estate of Lee v. Colussi and the Colussi Law Office, 967 N.E.2d 1034 (Ind. 2012).


Our Law Tips Faculty Participant:
Kristin Steckbeck Bilinski joined Longsworth Law LLC, Fort Wayne, Indiana, in 2011 as an associate. Prior to joining Longsworth Law LLC, Kristin practiced in the areas of estate planning, estate administration, and general civil litigation. She was admitted to practice in Indiana in 2007 after graduating cum laude from Indiana University Maurer School of Law. Kristin’s community service includes the Juvenile Diabetes Research Foundation, Northern Indiana Family Mentor Coordinator and Fort Wayne Business People.

About our Law Tips blogger:
Nancy Hurley, Law Tips blogger, has long-standing connections with Indiana lawyers. She was formerly a member of the ISBA and IBF staffs for over 30 years. Nancy’s latest lifestyle venture is with ICLEF. We are utilizing her exceptional writing and interviewing skills while exploring how her Indiana-lawyer background fits with ICLEF’s needs. When she isn’t ferreting out new topics for Law Tips, her work can be found in our Speaker Spotlight blogs, postings on the ICLEF Facebook and Twitter pages, and other places her legal experience lends itself.

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