Representing Clients in: San Francisco  Los Angeles  Oakland  San Jose  Sacramento  San Diego  415-296-8880

Malpractice claim arising out of negligently handled probate and trust administration. Involved two separate acts of legal malpractice.

This case had two separate acts of legal malpractice involving a probate and trust administration. One claim was settled prior to trial. The other claim went to trial, resulted in a hung jury and then settled shortly after the trial.

This case arises out of a large ($15-20,000,000) estate, the main asset of which was a large piece of property located in Marin County, California, which for over 30 years had been owned by a husband and wife through a trust they created in 1990. Following their deaths, the control and administration of the trust was taken over by two co-trustees, two elderly women (both of whom were related to the original owners). Neither of them had any experience managing trusts or assets such as were in this Estate. They were very much guided in all of their Trustee decisions by the negligent attorney, (fictitiously named herein as Joe Smith), who had drafted the trust and had been the long-time personal and business attorney for the original owners. Attorney Smith and his wife were partners in a small law firm, which specialized in trust and estate practice and taxation.  It is now out of business.

Attorney Smith represented the co-trustees until his death. The co-trustees then hired a new probate and estate attorney who was the one who discovered the incidents of legal malpractice and contacted us.

Legal Malpractice Claim for the Late Filing of the Estate Tax Return and Tax Penalty:

One of the legal malpractice claims involved the late filing of the Estate Tax Return for the Estate. The required Federal Estate Tax return (Form 706) was filed by Attorney Smith about one month late. Because of the large amount of taxes due, the late filing resulted in a penalty of approximately $500,000, which with interest, grew to about $600,000 by the time of settlement.

Even though the legal malpractice seemed clear, the defense claimed that it wasn’t the lawyers who were responsible for the delay, but the estate’s accountants, who had failed to provide needed information to the lawyers. The defense also claimed plaintiffs had failed to mitigate damages by not filing for a refund from the IRS for the penalty paid.

Note: As a result of the bankruptcy of Attorney Smith’s legal malpractice insurance carrier, this particular claim was handled by CAIGA, California’s quasi state agency, which under law cannot be held liable for any bad-faith (which can create problems in settling legal malpractice cases). CAIGA ’s responsibility was equal to the limits of the underlying insurance policy (which in this case was $500,000, with “wasting limits”, meaning the amount of coverage was reduced by the defense costs expended.

Defendants’ claim that the plaintiff co-trustees had failed to mitigate damages drove an interesting and cooperative compromise in which the Estate agreed to accept the then remaining policy limits of $375,000 as a guarantee, and agreed to allow CAIGA to seek a refund from the IRS of the nearly $600,000 penalty paid by the estate. Under the settlement, if CAIGA was successful, it would first recoup the $375,000 paid to the Estate, and the parties would share equally anything beyond $375,000. CAIGA would pay all attorneys fees in pursuing the refund claim.

Legal Malpractice Claim: Recommending an Unreasonable Settlement

The Defendant’s second act of legal negligence involved a claim that Attorney Smith had negligently recommended (actually forced) the co-trustees to settle a claim brought by a foreign beneficiary of the estate who claimed the distribution of the estate was delayed. This beneficiary, a distant relative (fictitiously named here as Joseph), was entitled to a 10% distribution of the estate on his own, but also would have been entitled to an additional 8.75% interest if his elderly aunt  “survived distribution”. She did not. She lived only 17 months after the estate was opened and pursuant to the express terms of the trust, her 8.75% interest was to go to one of the co-trustees.

Joseph claimed that the co-trustee who was to get the deceased aunt’s interest, had purposely delayed the distribution so she could get the aunt’s share when the aunt died. Defendant, Attorney Smith represented the estate and fought Joseph’s delay claim aggressively but after years of litigating, ended up recommending that the co-trustees pay Joseph $2,000,000. The co-trustees agreed and Joseph was paid an immediate, tax-free $2,000,000 distribution which resolved both his own interest and the claim of the aunt.

Attorney Smith passed away about seven months later. After he passed away and new counsel came in to represent the estate, he raised the issue that the payment to Joseph may have been excessive and improper.

It was determined through discovery in the malpractice case that Attorney Smith, (for reasons never fully known) had failed to fully and properly disclose a significant estate asset in accountings and other documents he filed with the court. The asset, an approximate $2,000,000 piece of property, had been quietly sitting in a bypass trust. The existence of the asset was clearly known to Attorney Smith, but never fully disclosed or valued. The discovery of the omitted asset was finally made to Joseph’s attorneys about two months prior to a scheduled mediation. The omitted asset (which the plaintiff co-trustees claimed they never knew had not been disclosed) became the basis of an aggressive attack by Joseph’s attorneys against the co-trustees and Attorney Smith. These included charges of trustee fraud, breach of fiduciary duty and trustee malfeasance (mostly made in confidential mediation briefs). At the mediation, Attorney Smith strongly recommended the trustees pay the $2,000,000 demanded by Joseph. The co-trustees claimed they felt they had “no choice” but to settle, and were frightened at the level of aggressiveness and threats being made by Joseph’s attorneys, and Attorney Smith’s failure to present any defense.

We contended that the $2,000,000 paid to Joseph was significantly beyond anything Joseph’s “unreasonable delay” claim was worth. We claimed that Attorney Smith pushed this excessive settlement to avoid the publicity, disclosure, and possible liability he faced for failing to disclose the “hidden asset”.

Plaintiffs additionally claimed that Attorney Smith had breached his fiduciary duty by not disclosing to them his own wrongdoing and his own possible exposure for any damages the estate faced. The co-trustee who was to get the Aunt’s interest (in her individual capacity) claimed that Attorney Smith had failed to advise her of the various conflicts of interest that existed as a result of Attorney Smith’s representation of both co-trustees and her individually.

At the trial of this case, Plaintiffs showed that under a true valuation of the estate’s assets, Joseph would have been entitled to approximately $1,200,000 for his actual 10% interest. We therefore claimed that Joseph had been overpaid $800,000 in the settlement, an amount which would have gone to the co-trustee receiving the aunt’s share. Expert witnesses established that Joseph’s claim of “unreasonable delay” lacked merit, that the co-trustees had done nothing to delay distribution and that had Joseph’s claim gone to trial, he would not have prevailed.

Defendants claimed that Joseph’s claim of “unreasonable delay” was not frivolous, had at least some merit, that Attorney Smith had properly represented the trustees without conflict. The defense contended that the $2,000,000 paid to Joseph was within the “realm of reason”, that settling cases is not an exact science, and that many other factors went into the decision of paying Joseph $2,000,000. They claimed that in any event, Plaintiffs entered into the settlement willingly and knowingly, had been prepared to pay Joseph $1,500,000 even before the mediation and that Plaintiffs complaint of an excessive and unreasonable settlement was nothing but hindsight.

The jury was presented the case on a special verdict form which had a series of questions, the first of which was whether the Defendants were negligent or had otherwise breached their fiduciary duty to plaintiffs. The jury voted 9-3 in favor of Plaintiffs on this question. The second question, the proximate causation issue, essentially asked if the settlement was reasonable notwithstanding the wrongdoing of the defendants. On this question, one of the nine jurors finding in favor of Plaintiffs on the liability issue decided that the settlement was nevertheless reasonable. Two days of jury deliberations failed to break the deadlock. The jury hung 8-4 for Plaintiffs on proximate causation. They never got to the damages issue.

The excessive settlement claim was settled for $407,500 about three weeks after the mistrial.

The tax penalty claim resulted in an interesting cooperative settlement.  Defense counsel claimed that the estate might be able to mitigate damages by pursuing a tax refund claim for the penalty using their own client’s negligence (that is, Attorney Smith) as the basis for the refund. The parties agreed to a settlement in which the carrier paid $375,000, (then the policy limit) but took on the responsibility of applying for a refund of the penalty (which had been paid by the estate). The carrier’s attorney was successful on the refund claim and received $515,000 of the penalty paid, thus recouping the $375,000 it had paid. The parties shared, on a 50/50 basis, the amount over $375,000 recovered. The carrier paid all the attorneys fees in pursuing the refund claim.

As part of the overall settlement, Plaintiffs were relieved of a $125,000 fee claim being made by the Attorney Smith firm.

Total recovery to the clients was $907,500.00