SURCHARGE LITIGATION IN NEBRASKA

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1 SURCHARGE LITIGATION IN NEBRASKA MICHAEL L. JOHNSONt Sylvester Brooks had reached the age of seventy without making the professional blunder, the dread of which had darkened his life. The apprehension had started in law school where he learned to identify himself with those bungling practitioners whom his professors, in the meanness of their detachment, were never tired of excoriating: "Of course, this case wouldn't have come up if the testator had hired someone better than a monkey to draw his will," or "This company wouldn't have lost its charter if it had spent a few more bucks on its brand of counsel." Young Brooks, laughing with the others - and he always laughed with the others - nonetheless immediately saw himsezf as that monkey or as the author of that defective bylaw. Yet he managed through law school and indeed, for the first twenty-five years of his professional life, both as an associate and later as a partner of his magnificent older cousin Reginald Tower, to keep his anxiety within reasonable bounds. Hidden away from a large office in his small, closed garden of accountings - accountings of trustees, of guardians, of executors, accountings of anybody accountings for anything - he was immune from the terrible decisions of the courtroom or the corporate board meeting. It was not until he was fifty and collided with a litigious widow who wanted to surcharge the Standard Trust Company for half a million dollars that he lost his nerve and persuaded the client to a bad settlement. It was young Waldron Webb, his assistant, who alerted the senior partner, with the result that the case was promptly taken out of Brooks' hands, the settlement quashed and the widow roundly defeated. The dreaded blunder had not been made; it had been averted. But Sylvester Brooks, who was never to recover his lost nerve, suffered a breakdown which kept him out of the office for a year. * INTRODUCTION A personal representative must properly administer the estate of a decedent for the benefit of interested persons. In any estate, a personal representative deals with a variety of risks and responsibilities. t B.S., University of Nebraska-Lincoln; J.D., cum laude, Creighton University; L.L.M., University of Illinois. Mr. Johnson is a partner in the law firm of Luebs, Dowding, Beltzer, Leininger, Smith & Busick, Grand Island, Nebraska. * L. AUCHINCLOSS, POWERS OF ATTORNEY (1963).

2 CREIGHTON LAW REVIEW [Vol. 22 Interested persons are often critical of the actions of a personal representative in administering an estate. If the performance of the personal representative does not meet their expectations, interested persons may commence a surcharge action against the personal representative. A surcharge action is an action against a personal representative by a person interested in the estate to recover losses for alleged mismanagement of the estate by the personal representative. If the surcharge action is successful, the personal representative is personally liable for any loss to the estate and must reimburse the interested persons for the loss. 1 This Article will undertake to accomplish two objectives. First, it will deal with the procedural and substantive aspects of surcharge litigation. Consequently, this Article is intended for the trial lawyer or probate lawyer actually involved in surcharge litigation. However, the scope of this Article will be limited to an analysis of surcharge actions against a personal representative. 2 Similar considerations exist in surcharge actions against conservators or trustees. Second, this Article suggests considerations to probate lawyers which may help them avoid surcharge litigation or provide a defense if surcharge litigation is commenced. Thus, this Article is also intended to suggest preventive measures against surcharge litigation. A surcharge action in Nebraska, like other estate litigation, arises under the provisions of the Nebraska Probate Code. Thus, an understanding of surcharge litigation begins with an analysis of the applicable provisions of the Nebraska Probate Code. Guidelines regarding surcharge litigation may also be found in applicable case law and statutes other than the Nebraska Probate Code. STATUTORY BACKGROUND The Nebraska Probate Code (the "Code") provides the statutory framework for the substantive aspects of surcharge litigation. 3 The statutory guidelines for the relation and liability of the personal representative to persons interested in the estate are contained in section (a) of the Code. 4 There are five general duties of a 1. See Lombard, Surcharge Litigation and How to Avoid It, 16 REAL PRop. PROB. & TR. J. 715 (1981). 2. Actions on the bonds of personal representatives are beyond the scope of this article. 3. NEB. REV. STAT to 2902 (Reissue 1985). Any analysis of cases decided prior to the effective date of the Nebraska Probate Code should consider the impact of subsequent statutory provisions. 4. NEB. REV. STAT (a) (Reissue 1985). This section provides: A personal representative is a fiduciary who shall observe the standards of

3 1989] SURCHARGE LITIGATION personal representative, each of which can serve as a basis for surcharge litigation: (1) the personal representative is a fiduciary; (2) the personal representative shall observe the standards of care applicable to trustees as described by section of the Code; 5 (3) the personal representative is under a duty to settle and distribute the estate of the decedent in accordance with the terms of any probated and effective will and the Code; (4) the personal representative is under a duty to settle and distribute the estate as expeditiously and efficiently as is consistent with the best interests of the estate; and (5) the personal representative shall use authority conferred upon him by the Code, the terms of any will and any order in proceedings to which he is a party for the best interests of successors to the estate. Under the Code, a personal representative is liable to interested persons for damage or loss resulting from the breach of his fiduciary duty to the same extent as a trustee of an express trust. 6 THEORY OF RECOVERY Once the statutory guidelines for surcharge litigation are understood, the next step in surcharge litigation is to understand the applicable theory of recovery. The theory of recovery in surcharge litigation is founded on the alleged breach of fiduciary duty by the personal representative. The action is frequently based on the failure of the personal representative to administer the estate in an expeditious and efficient manner. For example, a personal representative may fail to adequately safeguard assets or unreasonably delay the sale of depreciating assets. Other reasons for maintaining a Id. care applicable to trustees as described by section A personal representative is under a duty to settle and distribute the estate of the decedent in accordance with the terms of any probated and effective will and this code, and as expeditiously and efficiently as is consistent with the best interests of the estate. He shall use the authority conferred upon him by this code, the terms of the will, if any, and any order in proceedings to which he is party for the best interests of successors to the estate. 5. NEB. REV. STAT (Reissue 1985) provides: Except as otherwise provided by the terms of the trust, the trustee shall observe the standards in dealing with the trust assets that would be observed by a prudent man dealing with the property of another, and if the trustee has special skills, or is named trustee on the basis of representations of special skills or expertise, he is under a duty to use those skills. Id. 6. NEB. REV. STAT (1985). This section states: If the exercise of power concerning the estate is improper, the personal representative is liable to interested persons for damage or loss resulting from breach of his fiduciary duty to the same extent as a trustee of an express trust. Id. See First Natl. Bank v. Gross Real Estate Co., 162 Neb. 343, 75 N.W.2d 704 (1956); Masonic Bldg. Corp. v. Carlsen, 128 Neb. 108, 258 N.W. 44 (1935).

4 CREIGHTON LAW REVIEW [Vol. 22 surcharge action are: a conflict of interest; the payment of excessive fees; the failure to conduct litigation on behalf of the estate; or a variety of other complaints. The following analysis deals with cases involving surcharge litigation decided by the Nebraska Supreme Court and is not exhaustive of all possible theories of recovery. FAILURE TO EXPEDITIOUSLY AND EFFICIENTLY ADMINISTER THE ESTATE One of the leading cases in Nebraska regarding surcharge litigation is In re Estate of Campbell. 7 In Campbell, the decedent's will directed the estate's personal representatives to convert property into cash for purposes of distribution. 8 Among the assets of the estate were shares of stock with a market value of $191,690 at the date of decedent's death. 9 The shares of stock were sold between nine and one-half and twelve months after the death of the decedent for $125, When the personal representatives filed a final accounting, the widow and several of the residuary devisees of the decedent objected and claimed that the stock could have been sold for $202, The objectors sought to surcharge the personal representatives for $77,112, the amount the objectors claimed was lost because of the neglect and delay of the personal representatives in selling the stock. 12 Both the county and district courts held that the personal representatives acted with due care. 13 The Nebraska Supreme Court reversed the district court and held that the personal representatives should be surcharged for unreasonably delaying the sale of the securities. 14 The court noted that the personal representatives were obligated to act in a prudent manner: The executor is not required to liquidate the personal estate at the earliest possible time. He is entitled to sufficient time to consider and consult. Instantaneous action based upon extraordinary foresight is not required... But, if there is an unreasonable delay in complying with the testamentary direction to convert the property into cash, any loss resulting should be charged to the executor.' Neb. 456, 209 N.W.2d 165 (1973). 8. Id. at 457, 209 N.W.2d at Id. at 457, 209 N.W.2d at Id. 11. Id. 12. Id. 13. Id. at 457, 209 N.W.2d at Id. at 460, 209 N.W.2d at Id. at , 209 N.W.2d at 167.

5 1989] SURCHARGE LITIGATION The court concluded that the personal representatives should have sold the shares of stock within six months after the date of their appointment based upon the facts and circumstances of the case. 16 There are two particular considerations which are important to this decision. First, the will of the decedent directed the personal representatives to sell his personal property. 17 The personal representatives argued that section of the Nebraska Revised Statutes excused them from responsibility for any depreciation in the value of the stock.' 8 Section provides that funds received by personal representatives may be kept invested in securities they receive unless the personal representatives are either ordered by the court or directed by the will to change the investment. 19 The Nebraska Supreme Court held that section did not protect the personal representatives: Section , R.R.S. 1943, refers to trust funds that may be kept invested. We are of the opinion it does not apply to securities which the will directs shall be sold. Consequently, the issue here is whether the executors were guilty of neglect or unreasonable delay in selling the stock owned by the deceased. 2 0 The second important consideration in the case was that the securities owned by the decedent were speculative. 2 1 The shares of stock had fluctuated substantially in value over a relatively short period of time. According to the court, "[t]he fact that most of the securities involved in this case were of speculative nature was a circumstance that weighed heavily against any delay in their liquidation. Prompt liquidation of speculative assets is the proper rule. '22 The court noted that a personal representative is expected to avoid loss rather than speculate: The executors argue it was reasonable to expect market conditions to improve and they would have been criticized if the stock had increased in value after it had been liquidated. The difficulty with this argument is that it was not the duty of the executors to hold the stock for appreciation. Their duty was to convert the stock into cash without unreasonable delay. The executors did not seek the instructions of the court or attempt to obtain the consent of the beneficiaries to 16. Id. at 459, 209 N.W.2d at Id. at 457, 209 N.W.2d at Id. at 458, 209 N.W.2d at 167. NEB. REV. STAT to 631 (Reissue 1985) contain guidelines regarding investment of funds by a personal representative. 19. Campbell, 190 Neb. at 458, 209 N.W.2d at Id. at 459, 209 N.W.2d at Id. 22. Id. at 459, 209 N.W.2d at 168.

6 CREIGHTON LAW REVIEW [Vol. 22 a delay in the liquidation of the stock. 23 The relevant consideration for the court was the proper measure of damages for the failure of the personal representatives to sell the shares of stock in a timely manner. The only evidence offered by the objectors was the expert opinion of an economics professor that the sale of each security should have been made at a "logical time." 24 The court opined that the expert opinion was based on hindsight and was not the proper measure of damages. 25 The court stated: We find their account should be surcharged in an amount equal to the difference between the amount which would have been realized if each stock had been sold at the lowest price reached during the 6-month period following their appointment and the price at which the stock was eventually sold, but less the amount of any additional estate and inheritance taxes which would have been payable if the stock had been sold during the 6-month period. 26 As a result of the decision in Campbell, a probate lawyer should consider the sale of securities within six months after the date of appointment of the personal representative. If securities are not sold during the six-month period and subsequently decline in value, a probate lawyer will need to distinguish his situation from the facts and circumstances in Campbell or be subject to surcharge. Several comments should be made about the application of the decision in Campbell to other factual situations. First, the will of the decedent in Campbell directed the personal representative to sell the securities. 27 Absent a direction to sell in the will, a personal representative could argue that section protects a personal representative from any liability for a decline in the value of securities notwithstanding a failure to sell securities within six months from the date of appointment. 28 Second, the shares of stock in Campbell were of a speculative nature. If securities held by a personal representative are not of a speculative nature, a personal representative' may argue that the six-month period for the sale of securities does not apply. Moreover, the six-month period in Campbell may apply only to certain securities and not to other assets. In the case of publiclytraded securities, a registered market exists. Thus, a personal representative has a standing offer for the purchase of the securities based 23. Id. at 459, 209 N.W.2d at Id. at 459, 209 N.W.2d at Id. 26. Id. at , 209 N.W.2d at Id. at 457, 209 N.W.2d at See NEB. REV. STAT (Reissue 1985).

7 1989] SURCHARGE LITIGATION on the market price. The six-month period presumably would not apply to stock in a closely-held corporation where there is no registered market nor to the sale of other types of assets. Consequently, a personal representative would have a reasonable time to identify a potential buyer. This conclusion is supported by the decision in Bryant v. Fingerlos. 29 In Bryant, the Nebraska Supreme Court concluded that a personal representative was not required to sell real property immediately: There is no question that, if a will directs the executor to sell 'as soon as may be after my decease,' he is not required to sell immediately, and it is left to the executor's discretion as to the time of sale, within reasonable limits, if he acts in good faith and without neglect. 30 Thus, the decision in Campbell should be narrowly construed to apply to circumstances under which a will directs the personal representative to immediately sell personal property and such personal property consists of highly speculative securities. CONFLICT OF INTEREST A personal representative may desire to purchase or lease property from the estate. Alternatively, the personal representative may want to enter into some other transaction with the estate which is beneficial to the personal representative. Several cases decided by the Nebraska Supreme Court have dealt with conflicts of interest on the part of the personal representative. In In re Estate of Jurgensmeier, 31 a child of the decedent was appointed personal representative of the estate. Under the decedent's will, the personal representative was authorized to sell certain real property which had been included in the assets of the estate. 32 The "home farm," consisting of 160 acres, was "estimated" by the personal representative on an inventory filed by him to have a value of $16, A "north farm," also consisting of 160 acres, was estimated to have the same value. 34 The personal representative sold the "north farm" for $16, However, the personal representative sold the "home farm" to his wife at public auction for $9, When the personal representative filed his accounting, two other children Neb. 867, 295 N.W. 896 (1941). 30. Id. at , 295 N.W. at Neb. 188, 5 N.W.2d 233 (1942). 32. Id. at , 5 N.W.2d at Id. at 190, 5 N.W.2d at Id. 35. Id. at 191, 5 N.W.2d at Id. at 194, 5 N.W.2d at 236.

8 CREIGHTON LAW REVIEW [Vol. 22 of the decedent and the guardian ad litem of an incompetent son of the decedent filed objections claiming that the "home farm" should have been sold for $16,000. The county and district courts approved the accounting of the personal representative. 3 7 The Nebraska Supreme Court noted that a statute prohibited the personal representative from purchasing real property of the estate and provided that any such sale shall be void. 38 The court concluded that the personal representative participated with his wife to "indirectly" purchase the real property in violation of the statutory prohibition. 3 9 However, instead of seeking to void the sale, the objectors wanted the personal representative to account for the difference between the $16,000 value of the "home farm" reported on the inventory and the $9,680 sale price of the "home farm. '40 The court held that the personal representative could be surcharged for the difference between the inventory value and the sale price: [I]t appearing that the sale by the executor was unlawfully made, that he in fact secured an interest in the property sold by him, and was an indirect purchaser thereof, he is chargeable with, and at the election of the beneficiaries must in his final report account for, the actual value of the property involved which is established by the evidence herein as the sum of $16,000, and not merely with the amount realized at the sale. 4 ' The decision in Jurgensmeier emphasizes the danger of self-dealing by a personal representative. Objectors can elect to surcharge the personal representative rather than void the sale of real property. The damage to the objectors in Jurgensmeier was based on the difference between the "estimated value" of the "home farm" on the inventory filed by the personal representative and the sale price to the wife of the personal representative. The Nebraska Supreme Court presumably had no trouble using the "estimated value" of the "home farm" since the "north farm," also consisting of 160 acres, sold for the same price as the "estimated value" of the "home farm." Section of the Code provides that any transaction which is affected by a substantial conflict of interest on the part of the personal representative is voidable by any interested person who has not consented to the transaction unless: (1) a will or contract of the decedent expressly authorizes the transaction; or (2) the transaction is ap- 37. Id. at 189, 5 N.W.2d at Id. at 194, 5 N.W.2d at 237. Id. at 198, 5 N.W.2d at Id. at , 5 N.W.2d at Id. at 201, 5 N.W.2d at 240.

9 1989] SURCHARGE LITIGATION proved by the court upon notice and hearing.f Based on the decision in Jurgensmeier, a violation of the prohibition against self-dealing by the personal representative would allow an interested person to elect between voiding the sale or surcharging the personal representative. As a result, a probate lawyer should caution a personal representative against entering into transactions prohibited by section of the Code. However, the Nebraska Supreme Court has recognized an exception to the prohibition against self-dealing. In In re Estate of Kennedy, 43 the decedent's surviving spouse was appointed personal representative of the decedent's estate. The decedent had been engaged in a farming operation which the personal representative was authorized to continue. At the time of death, the decedent was indebted to various lenders and the debt exceeded the assets of the estate." When the personal representative filed her final accounting and claimed that she was entitled to payment for the care of cattle, the decedent's father, a creditor of the estate, objected. 45 The county and district courts allowed the personal representative $160,380 for the care of cattle and found that there were no remaining assets to pay the claims of the decedent's father. 46 The father claimed that the personal representative engaged in self-dealing and should not have been allowed the $160,380. The Nebraska Supreme Court stated the general prohibition against self-dealing by the personal representative: "The general rule is that a personal representative cannot deal with the estate's assets for personal profit or gain... Any self-dealing is suspect and subject to close scrutiny by the court. ' 47 However, the court noted an exception to the prohibition against self-dealing: "The only exception to self-dealing is where it is shown that the transaction was in good faith and promotive of the interests of the estate." 48 The court concluded that the transaction between the estate and the personal representative was necessary to protect the assets of the estate. The personal representative had court authority to continue the farming operation and was able to pay the major debts of the estate because of the continued operation of the business. The court opined that the amount allowed the personal representative for the 42. See NEB. REV. STAT (Reissue 1985) Neb. 212, 369 N.W.2d 63 (1985). 44. Id. at , 369 N.W.2d at Id. at 213, 369 N.W.2d at Id. at 213, 369 N.W.2d at Id. at 214, 369 N.W.2d at Id.

10 CREIGHTON LAW REVIEW [Vol. 22 care of cattle was not unconscionable under the circumstances. 49 Thus, if personal representatives can prove that their actions were taken in good faith and promoted the best interests of the estate, they may be able to overcome allegations of self-dealing and conflict of interest. EXCESSIvE FEES An objection to the final accounting of the personal representative may occur if an interested person considers the fees of the personal representative or the attorney to be excessive. The fees of the personal representative and the attorney for the personal representative must be reasonable. There are no specific guidelines regarding what constitutes a reasonable fee for a personal representative. The Code does provide that the fee may be based on factors including the time involved, the difficulty of the administration, the skill required, the customary fee in the locality, the size of the estate, the time limitations involved and other factors.5 Fees may be based on an hourly rate or may represent a percentage of the total estate. The most important factor in the determination of whether a fee is reasonable is a comparison of the proposed fee with the customary fee arrangement in the particular locality. 49. Id. at 215, 369 N.W.2d at See NEB. REV. STAT (Reissue 1985). This statute provides: (1) After notice to all interested persons or on petition of an interested person or on appropriate motion if administration is supervised, the propriety of employment of any person by a personal representative including any attorney, auditor, investment advisor, or other specialized agent or assistant, the reasonableness of the compensation of any person so employed, or the reasonableness of the compensation determined by the personal representative for his or her own services, may be reviewed by the court. Any person who has received excessive compensation from an estate for services rendered may be ordered to make appropriate refunds. (2) Factors to be considered as guides in determining the reasonableness of a fee include the following: (a) The time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the service properly; (b) The likelihood, if apparent to the personal representative, that the acceptance of the particular employment will preclude the person employed from other employment; (c) The fee customarily charged in the locality for similar services; (d) The amount involved and the results obtained; (e) The time limitations imposed by the personal representative or by the circumstances; (f) The nature and length of the relationship between the personal representative and the person performing the services; and (g) The experience, reputation, and ability of the person performing the services.

11 1989] SURCHARGE LITIGATION The Nebraska Supreme Court has previously upheld the reduction of a personal representative's fee. In In re Estate of Snyder, 5 ' a lawyer was appointed personal representative of the estate of a decedent. The estate consisted of cash assets of approximately $150,000, a promissory note, other personal property and a farm in Iowa. 5 2 The county court reduced the personal representative's fee from $12,900 to $9,000 and the district court affirmed. 5 3 The Nebraska Supreme Court affirmed the district court, noting that the estate proceedings took longer than four years to complete and that the maximum suggested time for handling a complicated estate is eighteen months. 54 According to section (1) of the Code, a court may review the compensation of a personal representative and order the personal representative to refund any excessive compensation. 55 An interested person alleging mismanagement under some other theory of recovery, such as conflict of interest or failure to expeditiously and efficiently administer the estate, may also argue that, in addition to paying damages, the personal representative should be deprived of his or her fee. The Nebraska Supreme Court has held that a personal representative will not be deprived of fees because of an unusual delay in the settlement of the estate when there are reasonable grounds for the delay. 56 However, the court has held that a personal representative may be denied fees for services when the personal representative mishandled the estate. 57 DUTY TO SUE A personal representative may have a duty to prosecute a suit for the collection of assets. 5 8 The duty of a personal representative to bring an action on a debt due the estate depends on whether the claim is reasonable, and a personal representative may refuse to sue on a doubtful or controverted claim. 59 In several cases, the Nebraska Supreme Court reviewed situations involving litigation commenced by personal representatives. In In re Estate of Kesting, 60 the decedent's will devised eighty Neb. 356, 348 N.W.2d 136 (1984). 52. Id. at , 348 N.W.2d at Id. at 357, 348 N.W.2d at Id. 55. NEB. REV. STAT (1) (Reissue 1985). 56. In re Kothe, 131 Neb. 785, 270 N.W. 120 (1936). 57. See In re Herman, 138 Neb. 430, 293 N.W. 353 (1940). 58. See NEB. REV. STAT (22) (Reissue 1985). 59. See In re Estate of Brown, 203 Neb. 209, 278 N.W.2d 565 (1979). (considering the payment by the personal representative of claims against the estate) Neb. 524, 371 N.W.2d 107 (1985).

12 CREIGHTON LAW REVIEW [Vol. 22 acres of real property to his son and another eighty acres to his daughter. Before his death, however, the decedent conveyed all of the property to his son. 6 1 The daughter sought to have a special administrator bring an action against the son to set aside the conveyance. 6 2 The special administrator filed a report that such litigation should not be commenced. 63 The daughter objected to the report, claiming that the special administrator should be required to commence litigation against the son.6 4 The county court approved the report but the district court reversed. 65 The Nebraska Supreme Court reversed the district court and held that under section of the Code, the real property conveyed by the decedent was not necessary for the administration of the estate. 6 6 As a result, the special administrator had no duty to attempt to recover the property conveyed by the decedent. The court stated that "[iut seems to us that the probate code should not be construed so as to permit one heir or devisee to finance his or her lawsuit against another heir or devisee out of the funds of the estate, where the property is not needed for 'purposes of administration.' "67 In In re Estate of Brown, 68 at the time of the decedent's death, one son of the decedent was proceeding with an accounting action against another son of the decedent, who was the decedent's guardian. 6 9 The personal representative objected to the accounting and obtained a judgment surcharging the guardian. 70 The personal 61. Id. at 524, 371 N.W.2d at Id. 63. Id. at 525, 371 N.W.2d at Id. 65. Id. at , 371 N.W.2d at Id. at 526, 371 N.W.2d at 109. NEB. REV. STAT (Reissue 1985) provides: Except as otherwise provided by a decedent's will, every personal representative has a right to, and shall take possession or control of, the decedent's property, except that any real property or tangible personal property may be left with or surrendered to the person presumptively entitled thereto unless or until, in the judgment of the personal representative, possession of the property by him will be necessary for purposes of administration. The request by a personal representative for delivery of any property possessed by an heir or devisee is conclusive evidence, in any action against the heir or devisee for possession thereof, that the possession of the property by the personal representative is necessary for purposes of administration. The personal representative shall pay taxes on, and take all steps reasonably necessary for the management, protection and preservation of, the estate in his possession. He may maintain an action to recover possession of property or to determine the title thereto. Id. 67. Kesting, 220 Neb. at 527, 371 N.W.2d at Neb. 209, 278 N.W.2d 565 (1979). 69. Id. at 210, 278 N.W.2d at Id. at N.W.2d at 566.

13 1989] SURCHARGE LITIGATION representative thereafter filed a third party petition against a bank alleging that the bank participated with the guardian in the wrongdoing. 71 The personal representative alleged nine separate causes of action against the bank. Each cause of action was ranked for the likelihood of recovery on a scale from one to ten. It was determined that the settlement value of all the causes of action was $12, The personal representative applied to the county court for approval of the settlement with the bank. Although both sons of the decedent objected, the settlement was approved by both the county and district courts. 7 3 The Nebraska Supreme Court noted that a personal representative has authority to settle claims on behalf of the estate under section (17) of the Code. 7 4 The court also noted that a personal representative may have a duty to "prosecute a suit for the collection of assets," but that the personal representative could "decline to sue on a doubtful or controverted claim."1 75 The court concluded that the personal representative was correct to settle the claims against the bank: To have acceded to the desire of the appellant that he proceed to litigate the claims may well have resulted in a smaller recovery to the estate than the amount tendered in settlement; and in addition, would undoubtedly have necessitated incurring substantial court costs, attorney's fees, and other litigation expense, which may or may not have been recovered. 76.In Brown, the personal representative made a demand upon interested persons to allow the personal representative to negotiate a settlement or indemnify the estate for costs and attorney fees for the litigation. 77 The interested persons did not respond to the demand. 78 The Nebraska Supreme Court indicated that a personal representative has no duty to sue on a controverted claim unless interested persons provide the personal representative with indemnity for costs. 79 As a result, a personal representative may decline to sue if the personal representative makes demand for an indemnity for costs from the interested persons and the interested persons either refuse or fail to respond. 71. Id. at 211, 278 N.W.2d at Id. at , 278 N.W.2d at Id. at 218, 278 N.W.2d at Id. at 219, 278 N.W.2d at Id. at , 278 N.W.2d at Id. at 221, 278 N.W.2d at Id. at 220, 278 N.W.2d at Id. Id. at 220, 278 N.W.2d at 570.

14 CREIGHTON LAW REVIEW [Vol. 22 The decision in Brown provides two important lessons for probate lawyers. First, personal representatives should obtain court approval before settling or abandoning a claim. Second, a personal representative may refuse to sue on a controverted claim unless interested persons agree to indemnify the estate for costs and attorney fees. OTHER ISSUES A personal representative has a duty to inform interested persons of matters regarding the administration of the estate. In In re Estate of Anderson, 80 the Nebraska Supreme Court referred to the duty of a personal representative to disclose material facts to interested persons. 8 ' The court also dealt with objections regarding the payment of claims by the personal representative and the compensation of the personal representative. 8 2 In Anderson, the assets of the estate consisted of cash, personal property and a restaurant. 83 Prior to the decedent's death, the restaurant had been damaged by fire and insurance carriers had paid $2, for the damage. 8 4 The insurance carriers and the decedent had filed suits against third parties for negligence in causing the fire. 8 5 The personal representative of the estate negotiated a settlement of the claims against the third parties for $6, The personal representative proposed to pay $2, of the settlement amount to the insurance carriers under rights of subrogation and the balance to the estate. The personal representative also proposed paying thirty percent of the amount due the estate for attorney's fees' in handling the claim against the third parties. The county court approved both the settlement and the proposed distribution. 8 7 The personal representative offered the restaurant for sale after approval by the county court for an "asking price" of $40, A written offer to purchase the restaurant for $33,500 was accepted by the personal representative and the heirs. 8 9 The real estate agent with which the restaurant was listed agreed to assist the buyer with financing. The real estate agent disclosed this fact to the personal representative, but the personal representative did not communicate Neb. 398, 118 N.W. 2d 339 (1962). 81. Id. at 404, 118 N.W.2d at Id. at , 118 N.W.2d at Id. at , 118 N.W.2d at Id. at 401, 118 N.W.2d at Id. 86. Id. 87. Id. 88. Id. at 403, 118 N.W.2d at Id. at 404, 118 N.W.2d at 343.

15 1989] SURCHARGE LITIGATION the information to the heirs. 9 The county court, over the heirs' objection, approved the personal representative's final accounting. The district court affirmed the county court except as to the payment of attorney's fees for the settlement of the claim against third parties for the fire damage to the restaurant. The Nebraska Supreme Court agreed with the county court and approved the final accounting of the personal representative. 91 The objectors claimed that the personal representative should not have paid the $2, to the insurance carriers under subrogation interests since the insurance carriers did not file claims in the estate. 92 The Nebraska Supreme Court concluded that the personal representative could not be surcharged for the payment to the insurance carriers since the payment was approved by the county court: "This payment was made pursuant to an order of the county court, and the order of the county court is a complete defense so far as any personal liability of the administrator 9 3 s is concerned. The court also concluded that the personal representative had no interest in the portion of the recovery representing the subrogation interest of the insurance carriers and held that the administrator was a trustee for the insurance carrier for that portion of the recovery. 94 The objectors also claimed that the personal representative should not have paid the attorney's fees since the attorney did not file a claim in the estate. 95 The court held, however, that the attorney had a retaining lien on the settlement: The right of lien is not affected by the fact that the client is a personal representative and that the services were rendered and the money received on behalf of an estate... A secured creditor may rely upon his security and is not required to file a claim in the estate proceedings. 96 The objectors further complained about the failure of the personal representatives to disclose to the heirs the personal interest of the real estate agent in the sale of the restaurant. 9 7 The court agreed that the personal representative should have advised the heirs about the transaction: The personal representative of an estate is a fiduciary in his 90. Id. 91. Id. at 409, 118 N.W.2d at Id. at 401, 118 N.W.2d at Id. at , 118 N.W.2d at Id. at 402, 118 N.W.2d at Id. at 402, 118 N.W.2d at Id. at 403, 118 N.W.2d at Id. at 404, 118 N.W.2d at 343.

16 CREIGHTON LAW REVIEW [Vol. 22 relation to the beneficiaries of the estate of the deceased. As such he is required to make a full disclosure of all facts within his knowledge which are material for the beneficiaries of the estate to know to protect their interest. 9 8 The Nebraska Supreme Court does not provide any guidelines in Anderson as to what type of facts might be material to the beneficiaries. However, the court apparently concluded that it was material that the real estate agent had agreed to provide financing to the buyer. The court indicated that the personal representative would be liable to interested persons only if the interested persons could show that damage resulted from the failure of the personal representative to fully disclose the material facts. 99 The court found that the failure of the personal representative to disclose the interest of the real estate agent caused no damage to the heirs. 1 Instead, the evidence suggested that the buyer of the restaurant would not have made the offer of $33,500 unless the real estate agent had offered financial backing. Another potential buyer of the restaurant had offered $33,000 and indicated that he would not increase his bid. 1 1 Finally, the objectors complained about the compensation of the personal representative. The court noted that the personal representative performed extraordinary services and concluded that the compensation was reasonable: "The continuance of the operation of the business of a decedent is not a service required of an administrator in the common course of his duty. It is in the nature of an extraordinary service for which an additional allowance may be made under the statute."' 10 2 The decision in Anderson is important for two reasons. First, a personal representative has a duty of disclosure to the interested persons. A probate lawyer should be careful to advise a personal representative to fully inform interested persons. Second, a personal representative will not be surcharged for acts of administration that are approved by the county court. A probate lawyer should consider application for a court order to protect a personal representative against liability for acts of administration involving risk or controversy. This part of the Article has discussed possible theories of recovery in surcharge litigation. After a theory of recovery is developed by interested persons, the personal representative may undertake to 98. Id. 99. Id Id. at 405, 118 N.W.2d at Id Id. at 408, 118 N.W.2d at 345.

17 1989] SURCHARGE LITIGATION establish an affirmative defense in response to any allegations of mismanagement by the interested persons. POSSIBLE DEFENSES The ultimate defense in surcharge litigation is that the personal representative did not breach any fiduciary duty under the facts and circumstances of the case. However, a personal representative may plead affirmative defenses in surcharge litigation The following analysis deals with defenses considered by the Nebraska Supreme Court or suggested by the Nebraska Probate Code and is not intended to be exhaustive of all possible defenses. AUTHORITY CONFERRED BY THE COURT The best defense in any surcharge action is that the conduct of the personal representative in question was authorized at the time by an order of the county court. In Anderson, i 4 the Nebraska Supreme Court held that an order of the county court is a complete defense for any personal liability of the personal representative. In addition, section (b) of the Code provides that a "personal representative shall not be surcharged for acts of administration or distribution if the conduct in question was authorized at the time STATUTE OF LIMITATIONS OR ADJUDICATION In a typical situation, a personal representative will file a final accounting and seek court approval of the accounting in formal proceedings. Presuming that an interested person has been notified of the proceeding and does not appeal from any order approving the final accounting, the interested person is barred from objecting to the accounting after it is approved in formal proceedings.1 i 6 However, the Nebraska Supreme Court has held that ex parte orders approving an account are interlocutory and not final until final settlement of the estate.' 0 7 A personal representative may also close an estate in an informal proceeding by filing a closing statement. 0 8 A closing statement is an indication by the personal representative that the personal represen See NEB. REV. STAT (Reissue 1985) Neb. 398, 118 N.W.2d 339 (1962) See NEB. REV. STAT (b) (Reissue 1985). This section states: "A personal representative shall not be surcharged for acts of administration or distribution if the conduct in question was authorized at the time." I& 106. See NEB. REV. STAT ,155, -24,116, -24,119 (Reissue 1985) See In re Estate of Whiteside, 159 Neb. 362, 67 N.W.2d 141 (1954) NEB. REV. STAT ,117 (Reissue 1985).

18 CREIGHTON LAW REVIEW [Vol. 22 tative has fully administered the estate and provided a full accounting to distributees. 0 9 Informal proceedings differ from formal proceedings primarily in that, in informal proceedings, the final accounting is not actually filed with and approved by the court. Except in the case of fraud, misrepresentation or inadequate disclosure by the personal representative, an interested person would be barred from objecting unless a proceeding to assert breach of fiduciary duty is commenced within six months after the filing of the closing statement. n0 When an interested person is barred neither by adjudication nor by lapse of time after the filing of a closing statement, a personal representative may generally not set up a statute of limitations defense. The Nebraska Supreme Court has held that a defense based on the statute of limitations is not open to a personal representative in an action for an accounting of the assets of the estate. i ESTOPPEL The personal representative may argue that the conduct in question was confirmed or ratified by the objecting party and that the objecting party is barred by estoppel from complaining about the conduct. In In re Estate of Jurgensmeier,1 i 2 the Nebraska Supreme Court acknowledged estoppel as an affirmative defense but rejected the estoppel argument under the facts and circumstances of that case. The court held that, although some of the heirs had ratified the sale of the "home farm" to the wife of the personal representative the objectors had not. Thus, the objectors were not estopped from objecting to the final accounting: The heirs therefore, or their assignees, have an election to avoid or confirm the sale. And in doing this, they are not bound to act jointly. Each one has an individual election. If the affirmance of the sale by some, and the avoidance of it by others, will produce a great inconvenience in the final settlement of the estate, it will fall, where it ought, upon the administrator, who has violated his trust and by his wrongful act caused the embarrassment. n 3 An estoppel argument would be effective under circumstances in which an objector could be considered to have approved the action of a personal representative by his conduct Id See NEB. REV. STAT ,119 (Reissue 1985) See In re Estate of Statz, 144 Neb. 154, 12 N.W.2d 829 (1944) Neb. 188, 5 N.W.2d 233 (1942) Id. at 198, 5 N.W.2d at 239.

19 1989] SURCHARGE LITIGATION LACHES A personal representative may argue that lapse of time precludes an action for surcharge. In Johnson v. Marsh, 114 the Nebraska Supreme Court held that an action was barred by laches when more than thirteen years expired from the death of the decedent until the filing of an action for accounting. A defense of laches would presumably not apply when the personal representative continues to administer the estate for an excessive amount of time. However, the defense may be applicable when a personal representative distributes assets to interested persons without adjudication of any final accounting or the filing of a closing statement and no action is commenced against the personal representative for an excessive length of time. 115 OTHER DEFENSES The personal representative should always look to authority conferred by a will or the Nebraska Probate Code for possible defenses in a surcharge action. For example, a will may authorize a personal representative to retain investments during administration of the estate. This authority could be used as a defense in a surcharge action for failure to sell assets in a timely manner during administration. A personal representative has authority to enter into various transactions as provided by section of the Code. A personal representative may also rely on the provisions of any probated and effective will. 116 A personal representative may argue that the powers of the personal representative were limited during administration and that the limitation prevented or hindered the administration of the estate. There are several situations in which the representative's powers may be limited, including: (1) a challenge to the appointment of the personal representative; (2) the filing of a formal proceeding after the representative has been appointed in informal proceedings; 117 (3) an appeal from an order appointing a personal representative which acts as a supersedeas in regard to the authority of a representative; 118 and (4) the representative is a special administrator ap Neb. 257, 19 N.W.2d 366 (1945) See NEB. REV. STAT ,115, -24,116, -24,119 (Reissue 1985) See NEB. REV. STAT (a) (Reissue 1985) See NEB. REV. STAT (a) (Reissue 1985). This statute states: "If the proceeding is commenced after appointment, the previously appointed personal representative, after receipt of notice thereof, shall refrain from exercising any power of administration except as necessary to preserve the estate or unless the court orders otherwise." Id See also NEB. REV. STAT (Reissue 1985) See NEB. REV. STAT (Cum. Supp. 1988). That section states: "In appeals in matters arising under the Nebraska Probate Code, the appeal shall be su-

20 CREIGHTON LAW REVIEW [Vol. 22 pointed pending the appointment of a representative A personal representative may rely on the advice of agents in regard to the administration of the estate. For example, a personal representative may rely on a real estate agent for the time and manner of the sale of real estate. According to section (21) of the Code, a personal representative may properly employ persons, such as attorneys, auditors or investment advisors, to advise or assist the personal representative in the performance of his administrative duties The personal representative may act upon their recommendations without independent investigation. As a result, a personal representative may argue that certain actions were taken because the personal representative reasonably relied on the advice of an agent. PROCEDURAL ISSUES An analysis of the theory of recovery and affirmative defenses involves the substantive aspects of surcharge litigation. The initial procedural aspect of surcharge litigation involves the question of jurisdiction. JURISDICTION A surcharge action will most frequently be conducted in the county court. According to the jurisdictional statute, the county court has exclusive original jurisdiction of all matters relating to decedents' estates The Nebraska Supreme Court has held that the county court has jurisdiction to review and discipline a personal representative for breach of fiduciary duties until there has been full compliance with all judgments, orders, and decrees, and until the estate is placed in the hands of the distributees. i 22 A question arises as to whether an objecting party may bring a surcharge action in a court other than the county court. 123 In State persedeas for the matter from which the appeal is specifically taken, but not for any other matter." 119. See NEB. REV. STAT , (Reissue 1985) NEB. REV. STAT (21) (Reissue 1985) See NEB. REV. STAT (1) (Cum. Supp. 1988). See also NEB. REV. STAT (1985) See In re Estate of Sass, 182 Neb. 277, 154 N.W.2d 456 (1967) For a discussion of jurisdictional dilemmas involving state and federal courts, see McComas, Surcharge Litigation Jurisdiction and Procedural Considerations, 16 REAL PROP. PROB. & TR. J. 733 (1981). An objecting party may want to file a surcharge action in state district court rather than county court because a jury may determine issues of fact in the district court. See NEB. REV. STAT (Reissue 1985). Issues of fact and cases arising under the Nebraska Probate Code are tried by a county judge in county court. However, issues of fact in equity cases in district court are tried to the court without a jury. See NEB. REV. STAT (Reissue 1985). An action for an accounting may be considered an action in equity. See Philip G. Johnson