Wills, Trusts & Estates Prof Blog

Ohio Supreme Court Upholds Strict Privity Requirement

The following posting is provide through the courtesy of Prof. Paul Caron's TaxProf Blog:

The Ohio Supreme Court on Wednesday unanimously held that children could not sue their deceased mother's attorney for negligence in the preparation of a deed during her life that resulted in adverse estate tax conseqences under § 2036.  Shoemaker v. Gindlesberger, Slip Op. No. 2008-Ohio-2012 (Ohio 5/7/08).

The appellants’ argument rests on two public policy grounds. They advocate for a change in what some refer to as Ohio’s antiquated rule on privity, arguing that Ohio law should grant beneficiaries standing to sue an attorney who allegedly was negligent in providing services to a decedent. In support of their position, they present a survey of several jurisdictions that allow beneficiaries to bring malpractice claims. It is true that Ohio is in the minority of states retaining a strict privity rule, but Ohio was also in the minority of states when Zipperstein was decided over 20 years ago.

Appellants’ second reason for asking for an exception to the privity rule is the need to have attorney accountability in the area of estate planning and wealth transfer. Because any mistakes that an attorney makes in drafting a will or giving advice about an estate plan generally do not arise until after the death of the client, the harm from an attorney’s errors will most likely befall the intended beneficiaries. The appellants argue that an attorney who drafts a will for a client is aware that his or her professional competence affects not only the client but also those whom the client intends to benefit from the will. They argue, consequently, that they should be permitted to maintain a suit against an attorney who negligently drafts or supervises the preparation of a will, to hold the attorney accountable for negligence.

Public policy justifies adherence to the rule, as stated by courts in jurisdictions that apply the strict privity requirement. ... We decline the appellants’ invitation to relax our strict privity rule. ... While recognizing that public policy reasons exist on both sides of the issue, we conclude that the bright-line rule of privity remains beneficial.

Three of the seven Justices filed a separate concurring opinion stating that "in a case with different facts, there would be compelling reasons for adopting the exception we rejected in Zipperstein."

Distribution standard including the term “welfare” does not create an ascertainable standard.

The beneficiaries of a testamentary trust who could remove the trustee and appoint themselves sued the lawyers who drafted the will alleging that not limiting the trustee’s invasion power by an ascertainable standard was malpractice.

Before the suit was filed, the lawyers obtained a reformation of the trust which struck the word “welfare” from the language governing the invasion power.

In Carlson v. Sweeney, Dabagia, Donoghue, Thorne, Janes & Pagos, 868 N.E.2d 4 (Ind. Ct. App. 2007), the court held that a power to invade for the beneficiaries’ “medical care, comfortable maintenance and welfare” is not limited by an ascertainable standard; that the use of the word “welfare” was mistake of law that does not warrant reformation; and that the malpractice suit could proceed although the adverse tax effects of the language would not occur until the beneficiaries’ deaths.

Malpractice

Earlier on this blog, I discussed the case of Belt v. Oppenheimer, Blend, Harrison & Tate, Inc., ___ S.W.3d ___ (Tex. 2006), in which Executors sued Attorneys who prepared Testator’s will asserting that Attorneys provided negligent advise and drafting services.  Executors believed that Testator’s estate incurred over $1.5 million in unnecessary federal estate taxes because of the malpractice.  Both the trial and appellate courts agreed that Executors had no standing to pursue the claim because of lack of privity.  Belt v. Oppenheimer, Blend, Harrison & Tate, Inc., 141 S.W.3d 706 (Tex. App.—San Antonio 2004).  The appellate court explained that privity was mandated by Barcelo v. Elliott, 923 S.W.2d 575 (Tex. 1996), and thus the court had no choice but to affirm the trial court’s grant of a summary judgment in favor of Attorneys.  The Supreme Court of Texas reversed and held that “there is no legal bar preventing an estate’s personal representative from maintaining a legal malpractice claim on behalf of the estate against the decedent’s estate planners.”  The court did not express an opinion as to whether Attorney’s conduct actually amounted to malpractice.

For additional discussion of this landmark case, see Martha Neil, Texas Opens Door a Crack to Estate Planner Suits, ABA J. e-Report, May 19, 2006.

Ethics & Malpractice

The American Bar Association Section of Real Property, Probate and Trust Law, the ABA Center for Professional Responsibility and the ABA Center for Continuing Legal Education is sponsoring a teleconference and live audio webcast CLE program on June 13, 2006 entitled Ethical Issues in Estate Planning and Administration -- Avoiding Ethics Violations and Malpractice.  Here is the description of this program:

This month , the American College of Trust and Estate Counsel released the fourth edition of the ACTEC Commentaries on the Model Rules of Professional Conduct.  The update provides stronger guidance on ethical issues and standards that estate planners and administrators must address to avoid ethics violations and malpractice.  The clarifications and additions included in the revisions illuminate new and evolving ethical issues that all attorneys involved in estate planning and administration should consider in everyday practice.

Join our experts to analyze the revised commentary and learn how the new revisions affect your estate planning practice. Specifically, the panelists will cover:

• How estate lawyers can violate their duty of confidentiality when representing spouses and other family members in estate planning.
• When a client has “diminished capacity” and how to avoid being the lawyer with “diminished skill.”
• How to assist clients in neighboring states without being charged by local lawyers with the unauthorized practice of law.
• How to avoid disqualification in estate litigation when interviewing a prospective client (also known as the “prospective defendant”).
• Why the ABA Model Rule was revised from “consent after consultation” in favor of “informed consent.”

Survival of Estate Planning Malpractice Action

Belt v. Oppenheimer, Blend, Harrison & Tate, Inc., ___ S.W.3d ___ (Tex. 2006).

Executors sued Attorneys who prepared Testator’s will asserting that Attorneys provided negligent advise and drafting services.  Executors believed that Testator’s estate incurred over $1.5 million in unnecessary federal estate taxes because of the malpractice.  Both the trial and appellate courts agreed that Executors had no standing to pursue the claim because of lack of privity.  Belt v. Oppenheimer, Blend, Harrison & Tate, Inc., 141 S.W.3d 706 (Tex. App.—San Antonio 2004).  The appellate court explained that privity was mandated by Barcelo v. Elliott, 923 S.W.2d 575 (Tex. 1996), and thus the court had no choice but to affirm the trial court’s grant of a summary judgment in favor of Attorneys.  The Supreme Court of Texas reversed and held that “there is no legal bar preventing an estate’s personal representative from maintaining a legal malpractice claim on behalf of the estate against the decedent’s estate planners.”  The court did not express an opinion as to whether Attorney’s conduct actually amounted to malpractice.

Below are some of the key points made by the court:

·         Barcelo remains good law.  The court did not overturn Barcelo.  The court explained that an attorney owes no duty to a non-client, such as a will beneficiary or an intended will beneficiary, even if the individual is damaged by the attorney’s malpractice.  The court reiterated the policy considerations supporting Barcelo:

[T]he threat of suits by disappointed heirs after a client’s death could create conflicts during the estate-planning process and divide the attorney’s loyalty between the client and potential beneficiaries, generally compromising the quality of the attorney’s representation.  * * * [S]uits brought by bickering beneficiaries would necessarily require extrinsic evidence to prove how a decedent intended to distribute the estate, creating a “host of difficulties.”  * * * [B]arring a cause of action for estate-planning malpractice by beneficiaries would help ensure that estate planners “zealously represent[ed]” their clients.

·         Policies are different regarding suits by personal representatives.  The policy considerations discussed above do not apply to suits by personal representatives.  The court explained that unlike cases “when disappointed heirs seek to dispute the size of their bequest or their omission from an estate plan,” these policy considerations do not apply “when an estate’s personal representative seeks to recover damages incurred by the estate itself.”  The court also pointed out that “while the interests of the decedent and a potential beneficiary may conflict, a decedent’s interests should mirror those of his estate.”  The court wrapped up its opinion by concluding that “[l]imiting estate-planning malpractice suits to those brought by either the client or the client’s personal representative strikes the appropriate balance between providing accountability for attorney negligence and protecting the sanctity of the attorney-client relationship.”

·         Possible “recasting” is possible.  The court recognized the problem which may arise because beneficiaries often are appointed as the estate’s personal representative.  The court’s holding creates “an opportunity for some disappointed beneficiaries to recast a malpractice claim for their own ‘lost’ inheritance, which would be barred by Barcelo, as a claim brought on behalf of the estate.”  The court minimized this possibility by stating that “[t]he temptation to bring such claims will likely be tempered, however, by the fact that a personal representative who mismanages the performance of his or her duties may be removed from the position.”  The court also pointed out that any recovery goes to the estate, not the beneficiary, unless recovery flows through to the beneficiary under the terms of the will.

·         The decedent’s personal representative has capacity and standing.  The court explained that it is well-accepted law that a decedent’s personal representative has the capacity to bring a survival action on behalf of the decedent’s estate.  The court then had to address an issue of first impression in Texas, that is, does a legal malpractice claim in the estate-planning context survive a deceased client.  The court explained that the common law allowed causes of action for acts affecting property rights to survive and that estate-planning negligence that results in “the improper depletion of a client’s estate involves injury to the decedent’s property.”  Thus, the court held that “legal malpractice claims alleging pure economic loss survive in favor of a deceased client’s estate.”  Consequently, Executors had standing to bring the malpractice claim.

·         Malpractice claim accrues during the decedent’s lifetime.  The court explained that the alleged malpractice occurred during the testator’s lifetime even though the alleged damage (increased estate tax liability) did not occur until after the decedent’s death.  Thus, the court disapproved a contrary holding in the lower court case of Estate of Arlitt v. Patterson, 995 S.W.2d 713, 720 (Tex. App.—San Antonio 1999, pet. denied).  The court pointed out that the testator could have brought the claim himself if he had discovered the malpractice prior to his death and recovered his attorney’s fees and the costs incurred to restructure his estate plan.

·         Discovery rule applies running of statute of limitations.  In a footnote, the court addressed the issue of when the statute of limitations begins to run.  The court stated that

while an injury occurred during the decedent’s lifetime for purposes of determining survival, the statute of limitations for such a malpractice action does not begin to run until the claimant “discovers or should have discovered through the exercise of reasonable care and diligence the facts establishing the elements of [the] cause of action.”  * * * In this case, the “claimant” may be either the decedent or the personal representative of the decedent’s estate.

Tax Malpractice

Jacob L. Todres (Professor of Law, St. John's University - School of Law) has recently posted on SSRN his article entitled Recent Tax Malpractice Development in the Estate and Gift Tax Area.  Here is the abstract of his article:

In this article the author reviews developments of approximately the past five to six years in tax malpractice litigation in the estate and gift area. After a brief review of the basic elements of the malpractice cause of action, the author examines the recent cases by category: tax return preparation/filing, planning errors, drafting errors, disclaimers and valuation. The author concludes that a relatively large number of cases are brought in this area and that it likely is the leading area for malpractice suits during the time period involved. The author also notes that tax practitioners frequently avoid liability on statute of limitations grounds, various privity-related arguments and various other procedural reasons. Careful, preventive lawyering is especially important in this area.

Estate Planning for Husband and Wife Leads to $3 Million Judgment

On January 17, 2006, a Comal County, Texas jury award Robert Maxwell (hereinafter Husband) $3 million in damages for actions taken in respect to his estate plan.  The verdict consisted of $1 million for breach of fiduciary duty, $1.5 million in punitive damages against attorney John Dierksen, and $500,000 in punitive damages against the attorney's law firm.

Here are the key facts:

• Attorney David Lamon wrote wills for Husband and Wife which named each other as the primary beneficiary.
• Wife's Mother contacted attorney Dierksen from the same firm as Lamon to write a new will for Wife (her daughter) which leaves everything to her, rather than to Husband (her son-in-law).
• Dierksen wrote the will.
• Wife signed the will.
• Wife died.
• Husband did not learn about the new will until after Wife died.

Husband's attorney explained the situation as follows:

Dierksen did not communicate with [Wife] about the requested new will, or discuss with her the tax or other implications of the will.  Because of his attorney-client relationship with [Husband] and the other plaintiffs, Dierksen knew that this undertaking was a substantial conflict of interest for himself and [his law firm]. Dierksen also knew that the will would cause his clients, including [Husband] and his business interests, as well as [Wife's] eventual estate, substantial harm to the benefit of [Wife's mother].  The new will was in contravention of the planning previously done by Lamon.  In fact, the will drafted by Dierksen resulted in the obliteration of Lamon’s previous efforts and the legal expenses paid by [Husband] and [Wife].

See Ron Maloney, Law firm hit with $3 million judgment, Herald-Zeitung [New Braunfels, Texas], Jan. 19, 2006

Special thanks to Michael Sierra for bringing this case to my attention.

Privity Rules in Nebraska

In her note, Privity, Duty, and Loss: in Swanson v. Ptak, the Nebraska Supreme Court again Endorses Privity in Legal Malpractice Actions, 84 Neb. L. Rev. 369 (2005), Tracy M. Mason discusses the case of Swanson v. Ptak, 268 Neb. 265, 682 N.W.2d 225 (2004).

Here is the conclusion to her article:

Teresa Stanton Collett observes that although "in many jurisdictions only the 'client' has standing to sue for injuries resulting from an attorney's negligence," many "estate planners and elder law specialists regularly counsel individuals who expect the lawyer to consider the interests of others - spouses, children, parents, or other family members." Although these expectations are different from those at issue in Swanson, in which the attorney was not retained by the decedent's family for estate planning purposes, Collett's observation goes to perhaps the best justification for abrogating the privity requirement - the fact that many decedents work from the assumption that the attorney is not just working for them, but for their families. Leota Swanson may not have had a successful claim even if Nebraska's strict privity requirement was eliminated. But in order to provide Nebraskans with the opportunity to have their day in court, the Nebraska Supreme Court should, at the very least, subject the privity requirement to a methodical reconsideration. The potential of an expanded Kurtenbach approach, one which includes a more generous sweep of potential malpractice plaintiffs than merely those with pre-existing attorney-client relationships, is to provide recovery for otherwise innocent plaintiffs who have experienced a loss due to an attorney's negligence, while still maintaining limits on attorney liability to third parties.