In a recent unpublished decision, the Colorado Court of Appeals held that a niece who unduly influenced her uncle was not responsible for the payment of the uncle's legal fees, which were required to rectify the undue influence and return the property to the uncle.
Specifically, the niece was accused of unduly influencing her uncle to give her pieces of real estate during his life. A jury found that the niece did unduly influence her uncle and that she breached her fiduciary duty to her uncle. As a result, the court ordered that the real estate be transferred back to the uncle. In addition, the jury awarded $315,000 in legal fees against the niece to make the uncle whole.
On appeal, the niece argued that she should not be responsible for the payment of attorney's fees because Colorado follows the American rule that parties in a dispute must pay their own legal fees. The uncle, through his conservator, argued that an award of legal fees was appropriate in this case under the breach of fiduciary duty/trust exception to the American rule. This exception was first recognized by the Colorado Court of Appeals in 1982. See Heller v. First Nat'l Bank of Denver, 657 P.2d 992 (Colo. App. 1982). The Colorado Supreme Court recognized the exception in 1989. See Buder v. Satore, 774 P.2d 1383 (Colo. 1989).
Despite the recognition of this exception, the Colorado Court of Appeals found that the Colorado Supreme Court has cautioned it against liberally construing any of the exceptions to the American rule.
In finding that the exception did not apply to this case of undue influence, the Colorado Court of Appeals held that the niece's breach of fiduciary duty did not closely resemble a breach of trust. In addition, the Court of Appeals found that the niece breached her duty as an individual, rather than any fiduciary duty to manage property, and that abusing personal influence is not similar to mismanaging property as a fiduciary.
Individuals have a right to give their property to whomever they see fit. However there are certain limitations that the law over time has imposed, typically based upon a public policy theory. One of those is safeguarding the institution of marriage. But isn’t testamentary freedom also a public policy? One interesting case where these two public policies clashed, but a power of appointment allowed the decedent’s intent to be upheld, was In Re Estate of Feinberg, 919 N.E. 2nd 888 (Ill. 2009). Max Feinberg was an Illinois dentist who was very tied to his Jewish heritage and wanted it preserved in his family. His trust contained a beneficiary restriction clause which read as follows::
3.5(e) A descendant of mine, other than a child of mine who marries outside the Jewish faith (unless the spouse of such descendant has converted or converts within one year of the marriage to the Jewish faith) and his or her descendants shall be deemed to be deceased for all purposes of this instrument as of the date of such marriage.
Max’s plan was to give 50% of his estate to his grandchildren in lifetime trusts, but to disinherit any of them who did not marry in the Jewish faith (or whose spouse did not convert to the Jewish faith.) When Max died, none of the grandchildren were married. Would this condition have been void as against public policy because it was a condition subsequent and attempted to restrain marriage? I think that is a distinct possibility. However, the Illinois Supreme Court did not have to address that issue because Max’s wife, Erla, altered his plan in a significant way by exercising a power of appointment give to her by Max in his document. By the time Erla died, four of the five grandchildren had married outside of the Jewish faith. Only one grandson qualified under the beneficiary restriction clause. Erla’s exercise of the power of appointment provided that upon her death, instead of a lifetime trust, $250,000 was to be given to each of her grandchildren who at the time of her death had complied with Max’s beneficiary restriction clause. If a grandchild had not complied, their share was given to their parent instead.
When one of the grandchildren sued, both the trial court and the appellate court held the beneficiary restriction clause was invalid as against public policy and held that the grandchildren who had married outside of the Jewish faith would still receive their interests. The Illinois Supreme Court reversed. The Court stated that it didn’t have to deal with the issue of whether or not Max’s beneficiary restriction clause was a condition subsequent and was trying to control what the children did or didn’t do in the future. The Court only had to deal with Erla’s exercise of the power of appointment which was based upon the marital status of the grandchildren at her death —- either they qualified or they didn’t qualify.
In the last paragraph of the opinion the Court stated, “It is impossible to determine whether Erla’s distribution plan was the product of her own wisdom, good legal advice, or mere fortuity.” The Court went on to hold that “because no grandchild had a vested interest in the trust assets and because the distribution plan adopted by Erla has no prospective application, we hold that the beneficiary restriction clause does not violate public policy.” In essence, Erla’s exercise of the power of appointment in the way she did allowed the beneficiary restriction clause to be upheld.