Lawyer serving as trustee surcharged for distributing assets pursuant to trust amendments that affected partial revocation requiring consent of co-trustees, and double damages awarded for bad faith in allowing amendments in order to extract payment of lawyer’s fees out of the trust assets.
Neil Papiano, a lawyer, served as co-trustee, along with Wells Fargo, of two trusts created by Scott Nederlander for the benefit of Scott’s minor daughters. Scott retained the power to revoke each trust so long as the independent trustee consented to the revocation. The trust terms also permitted Scott to amend each trust, but the amendment provision did not explicitly require the consent of the independent trustee.
Over the course of several years, Scott amended the trusts eight times to allow him to withdraw cash from the trusts. Scott’s aggregate withdrawals over a three year period totaled $1,770,000. The withdrawals were deposited into a separate irrevocable trust with Scott as beneficiary and Neil as trustee. Neil, acting as co-trustee of the daughter’s trusts, conditioned Scott’s withdrawals from the trusts on Scott paying legal bills owed to Neil’s law firm totaling $240,000.
Scott’s daughters sued Scott, Wells Fargo, and Neil in connection with the withdrawals from the trusts for their benefit. Scott and Wells Fargo settled leaving only Neil’s liability to the trusts at issue.
The trial court determined that since the daughters’ trusts could only be amended with the consent of the trustees, Neil owed a fiduciary duty to the daughters that he breached by allowing the trust amendments. The court offset the damages owed by Neil by the settlement payments made by Scott and Wells Fargo, and assessed damages against Neil in the amount of $191,500 for each trust. The court also held that Neil acted in bad faith by allowing funds from the daughters’ trusts to be distributed for Scott’s personal legal fees that were not a benefit to the daughters’ trusts and assessed an additional $100,000 in damages against Neil for each trust.
On appeal, the California Appellate Court affirmed the trial court on the grounds that: (1) the amendments affected partial revocations that required the trustees’ consent; (2) conditioning Scott’s revocation of the trusts on the consent of the trustees granted present rights to the daughters as trust beneficiaries; (3) the trustee was obligated to protect the beneficiaries’ rights; (4) Neil breached his fiduciary duties to the beneficiaries by permitting Scott to make the withdrawals from the trusts for the benefit of Scott and Neil’s law firm; (4) Neil acted in bad faith by injecting “his own personal interest ahead of the interests of the beneficiaries by conditioning the withdrawal of funds on Scott’s payment of legal fees” to Neil’s firm; and (5) by California statute, an award for bad faith requires double damages and therefore the court doubled the damage award against Neil.