Disputes over estate administration often involve disagreements about how the independent executor manages the estate. There is quite a lot of probate litigation involving these issues. A beneficiary believes the executor is mishandling assets or making improper decisions. The beneficiary files suit to remove the executor. The executor hires attorneys to defend against the removal action and pays those attorneys from estate funds.
The removal action drags on for months or years. Legal fees mount. Eventually the beneficiary dismisses the removal claims. But the beneficiary remains unhappy about the attorney’s fees the executor paid from the estate. The beneficiary argues those fees were excessive, unnecessary, or resulted from bad legal advice. The beneficiary demands that the fees be forfeited or that the executor personally reimburse the estate.
Does a beneficiary have standing to challenge the executor’s attorney’s fees on the ground that the executor’s attorneys provided deficient legal advice? Can a beneficiary seek forfeiture of those fees based on alleged professional negligence or breach of fiduciary duty by the executor’s lawyers? What must be established before an independent executor can use estate funds to pay legal fees incurred defending against removal?
In re Estate of Nunu, 542 S.W.3d 67 (Tex. App.—Houston [14th Dist.] 2017, no pet.) provides an opportunity to consider these issues.
Facts & Procedural History
Paul and his sister Nancy were each beneficiaries of one-third of the estate of their mother Rose. Nancy was the independent executor of the estate. Paul, who is an attorney, previously represented Nancy in that capacity. After Paul accused her of wrongdoing, Nancy instead employed attorneys from the law firm of MacIntyre, McCulloch, Stanfield & Young.
Paul alleged that Nancy breached her fiduciary duties to him and committed acts of negligence, gross negligence, gross mismanagement, gross misconduct, and actual fraud. He asked the court to enforce a forfeiture provision of his mother’s will against Nancy, to remove her as independent executor, and to award him exemplary damages. Paul also alleged that Nancy violated Texas Estates Code Sec. 405.002(b) by insisting on a release as a condition for distribution of estate assets.
On October 26, 2015, Paul filed an application to compel distribution. He asked the trial court to compel distribution of all of the estate’s assets as they existed on March 6, 2014. Nancy responded that the estate had outstanding debts for legal fees and that distribution before resolution of the claims against her would be premature. The trial court found that a necessity for administration existed for the estate and denied Paul’s application.
On the third day of jury trial, Paul announced in open court that he was nonsuiting with prejudice all claims to enforce the will’s forfeiture provision or to remove Nancy as independent executrix. He reserved only his claims to compel distribution and to contest and request forfeiture of the fees charged by Nancy’s attorneys.
After Paul’s nonsuit, he filed an application for attorney fee forfeiture and second application to compel distribution of assets. He argued that all fees claimed by or paid to Nancy’s attorneys should be forfeit or that Nancy should be required to pay the fees herself rather than from estate funds. He asked the trial court to compel distribution of the estate as it existed on the second anniversary of his mother’s death.
The trial court rendered a final judgment recounting Paul’s voluntary nonsuit of his claims against Nancy. The court found that Paul “has no claims or causes of action for forfeiture against the attorneys representing [Nancy], as Independent Executrix of this Estate.” The court denied the application for attorney fee forfeiture. The final judgment neither authorized Nancy to pay attorneys’ fees from the estate nor ordered her to reimburse the estate for attorneys’ fees she already had paid with estate funds. Paul appealed.
What Does Section 404.0037 Say About Independent Executor Attorney’s Fees?
Nancy’s attorneys’ fees were at issue because under Texas Estates Code Section 404.0037, an independent executor who defends an action for the independent executor’s removal in good faith, whether successful or not, shall be allowed out of the estate the independent executor’s necessary expenses and disbursements, including reasonable attorney’s fees, in the removal proceedings.
Nancy had used estate funds to pay at least some of the attorneys’ fees incurred in her defense in this suit. Paul challenged the payment of Nancy’s attorneys’ fees on multiple grounds. He argued that Nancy’s attorneys were professionally negligent and breached fiduciary duties. He sought declaratory judgment that the fees should be forfeit or disallowed. He argued that the requirements of Section 404.0037 for payment of attorneys’ fees from estate funds had not been met.
Can a Beneficiary Seek Forfeiture of Opposing Counsel’s Fees?
Paul contended that by the legal advice Nancy’s attorneys provided to Nancy, the attorneys were professionally negligent and breached fiduciary duties they owed to Nancy and to the estate or its beneficiaries. Paul maintained that as a result of these alleged deficiencies, he was entitled to pursue claims against the attorneys for fee forfeiture under Burrow v. Arce, 997 S.W.2d 229 (Tex. 1999).
In Burrow, the Texas Supreme Court explained that a client can pursue the equitable remedy of fee forfeiture for an attorney’s “clear and serious violation of duty to a client.” The remedy is intended to protect relationships of trust by discouraging agents’ disloyalty or other misconduct. Fee forfeiture accordingly is a remedy only for the breach of a duty arising from the agency relationship. When the agency relationship is that of an attorney and client, concern for the integrity of attorney-client relationships is at the heart of the fee forfeiture remedy.
The court of appeals concluded that Paul’s argument failed for at least two reasons. First, a claim for forfeiture of attorneys’ fees necessarily is a claim against the attorneys. The record contained no pleading in which Paul made Nancy’s attorneys parties to this action.
Second, Paul lacked standing to assert a fee-forfeiture claim against opposing counsel. Paul had not alleged any facts that would give rise to a relationship of trust between himself and opposing counsel. Paul did not contend that he was or ever was the client of Nancy’s attorneys. He had neither alleged nor proved any facts under which Nancy’s attorneys owed Paul any duty with respect to the provision of legal advice. Paul therefore had no cause of action against the attorneys for breach of any duty arising from an attorney-client relationship.
An attorney’s duties that arise from the attorney-client relationship are owed only to the client, not to third persons such as adverse parties. Although Paul asserted that Nancy’s attorneys owe fiduciary duties to the estate or its beneficiaries, he cited no authority in support of that assertion. Paul appeared to assume that different relationships can be combined so that estate beneficiaries stand in the shoes of the attorneys’ client or that the attorneys stand in the shoes of the estate’s executrix. These are separate relationships. The distinction between them cannot be ignored.
Although Paul complained of the legal advice he speculated Nancy’s attorneys provided or failed to provide to Nancy, Paul had neither alleged nor proved facts under which he has standing to assert claims for breach of a duty that opposing counsel owed to their client. The general rule is that persons who are not in privity with the attorney cannot sue the attorney for legal malpractice. Third parties have no standing to sue attorneys on causes of action arising out of their representation of others.
Given the purpose that fee forfeiture is intended to serve, this equitable remedy does not extend to a litigant who is dissatisfied with the legal advice opposing counsel rendered to the litigant’s adversary.
Can a Beneficiary Seek Declaratory Relief About Attorney’s Fees?
Paul argued that as a devisee interested in a decedent’s estate, he could pursue declaratory relief concerning fee forfeiture under Texas Civil Practice and Remedies Code sections 37.005(3) and 37.005(4). These provisions of the Uniform Declaratory Judgments Act allow persons interested in estate administration to seek declarations of rights or legal relations.
The court examined whether these provisions provided an avenue to a declaration that Nancy’s attorneys’ fees should be forfeit. Section 37.005(3) allows a devisee to seek a declaration to determine “any question arising in the administration” of an estate. Although this section does not limit the types of questions that a litigant may ask, it does not remove limitations on the questions that the trial court can answer.
A declaratory judgment requires a justiciable controversy as to the rights and status of parties actually before the court for adjudication. The declaration sought must actually resolve the controversy. A declaration that the attorneys’ fees “should be” forfeit will not actually result in fee forfeiture due to a limitation found in another section of the Uniform Declaratory Judgments Act.
Section 37.006(a) provides that when declaratory relief is sought, all persons who have or claim any interest that would be affected by the declaration must be made parties. A declaration does not prejudice the rights of a person not a party to the proceeding. Nancy’s attorneys were not parties to this action, so they would not be bound by any such declaration. A declaratory judgment that Nancy’s attorneys’ fees “should be” forfeit would be purely advisory. The trial court lacked jurisdiction to render an advisory opinion and properly declined to do so.
Paul also contended he could obtain a declaration under Section 37.005(4), which addresses declarations to determine rights or legal relations of an independent executor regarding fiduciary fees and the settling of accounts. The court examined how “fiduciary” is used in Section 37.005 and concluded that “fiduciary fees” refers to the fees of an estate’s personal representative—not to attorneys’ fees.
The word “fiduciary” is used three times in Section 37.005. The first two times, “fiduciary” refers to the person through whom the plaintiff is interested, such as an executor, administrator, or trustee. When “fiduciary” is used for the third time in the expression “fiduciary fees,” it should be given consistent meaning. Section 37.005(4) would allow Paul to obtain a declaratory judgment to determine rights or legal relations of an independent executor regarding the independent executor’s fiduciary fees. It does not allow him to obtain a declaration that opposing counsel’s attorneys’ fees should be forfeited.
What Must Be Established Before Paying Attorney’s Fees from Estate Funds?
Paul argued that Nancy should not be permitted to pay her attorneys’ fees with estate funds because she did not plead for such relief, she did not defend against the removal action in good faith, and her attorneys’ fees were not reasonable and necessary.
The court concluded that the question of whether Nancy should be permitted to pay her attorneys’ fees with estate funds was properly before the trial court. Nancy responded to Paul’s application by filing an amended answer in which she prayed for reasonable attorney’s fees for legal services rendered. Section 404.0037 states that if the independent executor defended a removal action in good faith, then the reasonable and necessary attorneys’ fees for the defense “shall be allowed out of the estate.” The word “shall” normally imposes a mandatory requirement. Finally, Paul himself repeatedly raised the question of whether the estate should be responsible for the expenses of Nancy’s defense.
As to good faith, an executor acts in good faith when the executor subjectively believes the defense is viable, if that belief is reasonable in light of existing law. Good faith is established as a matter of law if reasonable minds could not differ in concluding from the undisputed facts that the person acted in good faith.
Because it was an incontrovertible fact that Paul nonsuited his removal action against Nancy with prejudice, whether Nancy defended the action in good faith was a question of law. A dismissal or nonsuit with prejudice is tantamount to a judgment on the merits. A party who voluntarily nonsuits claims generally cannot obtain reversal of the order on appeal. Where the party seeking the executor’s removal voluntarily and unilaterally nonsuits all such claims with prejudice on the third day of jury trial, reasonable minds could not differ in concluding that the executor’s efforts caused opponents to yield. When Paul irreversibly conceded his claim for Nancy’s removal, the viability and reasonableness of Nancy’s defense were established as a matter of law.
Paul attempted to resurrect the same grounds on which he sought Nancy’s removal as grounds for challenging Nancy’s good faith in defending the action. Those arguments must fail because his voluntary nonsuit of his removal claims with prejudice constitutes a judgment against him on the merits.
Must the Trial Court Determine Reasonableness of Attorney’s Fees?
The court identified a problem with the trial court’s judgment. Nancy defended the action in good faith and therefore was entitled under Section 404.0037 to pay her reasonable and necessary attorneys’ fees from estate funds. However, the final judgment contained no such authorization. Nancy admitted in her final accounting that she already had paid from estate funds some of the attorneys’ fees incurred in resisting her removal. Although Paul argued in the trial court that these payments were improper and should be repaid to the heirs, the trial court did not rule on that part of Paul’s application.
The trial court’s final judgment neither authorized Nancy to pay any of her legal fees from estate funds nor ordered her to repay any of the estate funds she expended on legal fees without authorization. Nancy appears to have assumed that she could pay her legal fees without first obtaining findings that the fees were both necessary and reasonable. The statute does not authorize such a procedure. The reasonableness and necessity of attorney’s fees generally is a question of fact.
Despite Paul’s challenge to the reasonableness and necessity of Nancy’s attorneys’ fees, the trial court addressed only whether Paul properly asserted a claim under which the attorneys themselves could be required to forfeit their fees. The court failed to determine the amount of Nancy’s necessary expenses, including reasonable attorneys’ fees, to be paid from the estate under Section 404.0037.
The court sustained Paul’s issue in part and remanded to the trial court the determination of the amount to be paid from the estate for Nancy’s necessary expenses and disbursements, including reasonable attorney’s fees, in the removal proceedings. In doing so, the court did not reopen the case for relitigation of issues encompassed within Paul’s voluntary nonsuit with prejudice. Paul’s claims that Nancy violated the Estates Code or breached fiduciary duties had been voluntarily nonsuited with prejudice. They could not be resurrected as grounds for contesting the necessity and reasonableness of her attorneys’ fees. Paul remained free to contest the reasonableness and necessity of Nancy’s attorneys’ fees on grounds not raised in his nonsuited claims against Nancy.
Must Distribution Be Ordered After Nonsuit?
Paul challenged the trial court’s denial of both his first and second applications to compel distribution of the estate. Under the law applicable to this case, a person interested in an estate may petition the court for an accounting and distribution any time after the expiration of two years from the date the court clerk first issued letters. On receipt of the accounting and after notice and hearing, unless the court finds a continued necessity for administration of the estate, the court shall order its distribution by the independent executor to the persons entitled to the property.
The court concluded that the trial court did not abuse its discretion in denying Paul’s first application to compel distribution filed before trial. Until Paul’s claims against Nancy were resolved, it could not be determined whether the estate was to be distributed among three beneficiaries or only two. The parties also could not know the extent to which the trial court would authorize payment of Nancy’s attorneys’ fees from the estate.
However, after Paul nonsuited his claims against Nancy with prejudice, the situation changed. In its final judgment, the trial court did not mention Paul’s second application and did not address whether there was a continued necessity for administration of the estate. The evidence would not support a finding that there was a continued necessity for administration. Nancy stated in her amended accounting that distribution could be completed but for the litigation filed by Paul. To resolve the litigation after Paul nonsuited his claims, the trial court had only to determine and specify the amount of Nancy’s necessary expenditures, including reasonable attorneys’ fees, and to order distribution of estate assets.
Because the trial court did not and could not find a continued necessity for administration of the estate, the trial court was required to order its distribution by the independent executor to the persons entitled to the property. The court sustained Paul’s issue in part, reversed this portion of the judgment, and remanded to order distribution.
The Takeaway
An estate beneficiary lacks standing to seek forfeiture of an independent executor’s attorney’s fees based on alleged deficiencies in the legal advice those attorneys provided to the executor. The equitable remedy of fee forfeiture protects attorney-client relationships and is available only to the client for breach of duties arising from that relationship. A beneficiary who is not in privity with the executor’s attorneys cannot pursue claims against those attorneys for professional negligence or breach of fiduciary duty. Declaratory relief under the Uniform Declaratory Judgments Act does not provide an alternative avenue for a beneficiary to obtain fee forfeiture because any such declaration would not bind the attorneys who are not parties to the action. When an independent executor defends a removal action that the beneficiary later nonsuits with prejudice on the third day of trial, the executor’s good faith defense is established as a matter of law. The Nunu case makes clear that a trial court must make specific findings about the reasonableness and necessity of an independent executor’s attorneys’ fees before authorizing payment from estate funds under Section 404.0037. After a beneficiary nonsuits removal claims with prejudice, the trial court must order distribution of the estate unless it finds a continued necessity for administration.
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