A recent published decision from the Kentucky Court of Appeals ruled on several issues in a long-running dispute between the corporate Trustee of a Trust and a minority of the Trust beneficiaries. The opinion noted that the beneficiaries had filed no less than four (4) lawsuits in Federal and Kentucky Courts since the dispute originally arose in 1998. In this case, the minority beneficiaries lost again. However, the lower court’s award of approximately $2.7 million dollars in attorney fees and costs to the Trustee was set aside pending further review by the trial court of the legal bills incurred by the Trustee.
According to the opinion, the Plaintiffs, the Vander Boegh family, were beneficiaries holding approximately a 3/16ths interest in two (2) trusts which, in turn, owned a limestone quarry subject to a 99 year lease agreement with Martin Marietta Materials. The Vander Boeghs contended that Martin Marietta had shorted the Trust by $104,000 of royalties due. The Plaintiffs also pressed the Trustee not to accept royalty payments from Martin Marietta while the dispute over the back royalties was unresolved. When the Trustee did refuse royalty payments for a few months, the 13/16ths majority beneficiaries of the Trust requested that the Trustee resume accepting royalty payments and continue refraining from issuing a Notice of Default to Martin Marietta. The prior cases had largely upheld the decisions and conduct of the Trustee.
In this case, after a lengthy bench trial, the trial court granted summary judgment to the Trustee on the Plaintiffs’ counterclaims against the Trustee alleging breach of its fiduciary and contractual duties to the Vander Boeghs and negligence by the Trustee. Some of the counterclaims alleged that the Trustee had failed to comply with the obligations it had agreed to undertake in a letter of understanding executed by the Trustee prior to being so appointed. The Court of Appeals found that the counterclaims filed by the Vander Boeghs involved the same core issues that had been previously litigated and resolved, with only amplified factual allegations. The Court also found that the breach of contract claim based on the letter given by the Trustee to the beneficiaries before assuming its Trustee duties could not succeed. The Court of Appeals first noted that claims for breach of contract are actions at law, and a beneficiary’s rights against a trustee are generally purely equitable. Moreover, the letter setting forth the obligations which the Trustee agreed to undertake or perform once it became Trusteewere simply duties of trust administration, and not something separate, according to the opinion. As such, the Court of Appeals affirmed the trial court’s dismissal of the breach of contract claims.
The Court of Appeals also rejected the beneficiaries’ attempt to raise negligence claims against the Trustee. Citing various precedents, the Court held that no common law action in negligence is available to beneficiaries of a Trust; at most, negligence is an element in a breach of fiduciary duty claim.
The Court’s opinion did address the Trustee’s claim for attorney fees in some depth. The statute authorizing a court to award attorney fees in trust litigation was enacted in July 2014 during the pendency of these proceedings. The attorney fees statute’s effective date provision indicated that it should apply to cases already pending before enactment, unless the court found that application of that particular provision or its chapter would substantially interfere with the effective conduct of the judicial proceedings or prejudice the rights of the parties. Here, the Court found that the Plaintiffs had notice of the statute and chose to proceed further with the litigation, notwithstanding the risks that the trial court could award attorney fees to the Trustee.
However, the trial court’s award of over $2.7 million in attorney fees and costs was vacated and remanded. The reason was that the legal bills to the Trustee had been redacted so extensively by the submitting law firm based on the claim of attorney-client privilege, that the Court found that there was insufficient information for the trial court to make a specific attorney fee award. Nor did the fact that the Trustee filed a privilege log with the trial court salvage their multimillion dollar attorneys’ fee award. According to the Court of Appeals, the Trustee’s privilege log was so generic and terse the trial court could only speculate as to whether the attorney-client privilege even applied. “Simply saying an attorney had a conversation about a general topic, such as litigation strategy, and then asserting it is privileged and writing no additional details is insufficient.” Slip Op. at 28. The Court therefore found that the trial court had abused its discretion in making a specific attorney fee award without sufficient information.
The Court of Appeals remanded the case for the trial judge to review in camera unredacted copies of the legal fee invoices. The Court of Appeals authorized the trial court to enter an attorney fee award after performing this in camera review and being properly informed. The Court also declined to require an evidentiary hearing on the fee issue, leaving that decision to the trial court’s discretion.
With the Court of Appeals remanding the case to the trial court for further proceedings regarding the Trustee’s attorney fees, this case will continue into the future. With a 21 year history of litigation already behind them, and more litigation yet in front of them, the Trust and the parties all would appear to lose considerably. Vander Boegh v. Bank of Oklahoma.