TWENTY SEVENTH ANNUAL NORTHEAST SURETY AND FIDELITY CLAIMS CONFERENCE

TWENTY SEVENTH ANNUAL NORTHEAST SURETY AND FIDELITY CLAIMS CONFERENCE SEPTEMBER 22nd - 23rd, 2016 PRACTICAL DEFENSES TO PROBATE BOND CLAIMS PRESENTED BY: JEFFREY M. FRANK, ESQUIRE Alber Crafton 2301 W. Big Beaver Road, Suite 300 Troy, Michigan 48084 DENNIS E. McDONNELL, ESQUIRE Old Republic Surety Company 445 S. Moorland Road, Suite 200 Brookfield, WI 53005

Introduction Defending claims on probate bonds often requires local knowledge and a great deal of creativity. Issues range from improper notice of the claim to the surety to blanket requests for a surcharge in the penal sum of the bond without any formal proofs. In order to defend these claims, it is important to understand the background of the court file along with all current, relevant facts. While the principal would generally be extremely helpful in defending these claims, he or she often disappears by the time a claim arises or is often unwilling to cooperate with the surety. This paper will help both in-house claims professionals and outside counsel spot potential defenses that are both legal and equitable in nature. Because these defenses often depend on state or local law and customs, the paper will serve to point out potential defenses with citations to a case or statute that contain examples of those defenses. The research is not exhaustive, and claim handlers and local counsel are encouraged to research the law in their local jurisdiction prior to utilizing any of the defenses contained herein. Potential Defenses Standing As soon as the surety receives a claim on a probate bond, it is important to determine if the individual has standing to bring the claim. Standing refers to whether a party has a sufficient stake in an otherwise justiciable controversy such that he or she may properly seek adjudication of the matter. 1 Generally, claims can be brought by a successor fiduciary, devisee/beneficiary/heir, the ward, a creditor of the estate, or a third party with a contact/relationship with the ward and/or the estate. The Uniform Probate Code ( UPC ) includes an exhaustive list of interested persons 2 who are all potential claimaints on the bond. Successor fiduciaries are often appointed by the court when the principal has failed to properly administer the estate. Improper administration could be as simple as failing to file an Inventory or Accounting or it could be more serious if the principal has been accused of misappropriating funds. The successor fiduciary is generally charged with cleaning up the estate. A devisee/beneficiary/heir of the estate has standing to bring a claim, especially when his or her interest in the estate is adversely affected. This could take place when the fiduciary of a decedent s estate misappropriates funds so that there are no funds remaining for the heirs to inherit. The ward can bring a claim against a guardianship or conservatorship bond under certain circumstances as well. When a minor reaches the age of 18, he or she has the ability to pursue a claim against the principal for actions that took place during the ward s minority 1 Sierra Club v. Morton, 405 U.S. 727, 92 S.Ct. 1361, 31 L.Ed.2d 636 (1972) 2 Unif. Probate Code 1.201(23) (2010) 1

period. Similarly, if an adult is deemed incompetent and then restored to competency, that individual could pursue a claim against the former fiduciary and the surety as well. A creditor of an estate can pursue a claim against a fiduciary if the fiduciary fails to pay the creditor prior to making a distribution to heirs or if a fiduciary treats creditors unequally and satisfies one while failing to satisfy another. Similarly, an individual who has a contractual relationship with the ward or the estate can pursue a surcharge if that contract is breached by the fiduciary. Creditors of an insolvent estate do not have standing to pursue a claim simply because there is a bond in place. If a fiduciary properly administers the estate, and, for example, appropriately pays allowances to family members and creditors on a pro rata basis, creditors who are not entirely satisfied cannot pursue a claim against the surety simply because there was not enough money to satisfy the claim. Statute of Limitations The statute of limitations for pursuing a claim against a probate bond surety differs substantially from state to state. It is important to determine the applicable limitations period in the jurisdiction where the claim is pending. Practitioners should first look to the state probate code to see if there is a specific statute of limitations for claims on probate bonds. 3 If there is not a specific statute of limitation for claims on probate bonds, one can look to the statute of limitations for a general contract claim. 4 If there is no applicable statute of limitations there, when defending a claim one can seek to determine the statute of limitations for the liability of the principal under the bond. Many state probate codes limit the time a claimant can bring a claim against a fiduciary or former fiduciary of the estate. To the extent the claim against the principal is barred, then the claim against the surety should be barred as well. 5 Finally, if there is no other applicable statute of limitations, one should review the statute of limitations for general liability or the tort catch-all statute of limitation. After determining the applicable statute of limitations for a claim on a bond in a specific jurisdiction, one must then determine the trigger that starts the statute of limitations from running. That trigger can also vary from state to state. It can range from an order discharging the bond 6 to an unsatisfied judgment regarding the liability of the principal 7, to the death or removal of the principal, or to the ward reaching the age of majority or being restored to competency. After that analysis, one must determine if the statute of limitations has been tolled based on fraud by the principal. In addition, the statute of limitations may be tolled until the existence of the claim is actually discovered. 8 Finally, the claimant s legal disability (if the claimant is the ward) could also toll the statute of limitations. 3 See, e.g. Ala. Code 6-2-34(7) (1975); NEB.REV.STAT 25-210 (1929) 4 See, e.g. Mass.Gen.Laws ch. 260 1 (1970); R.I.Stat 9-1-17 (1965) 5 See, e.g. Mich. Comp. Laws 700.5411(2) (2001) 6 Mich. Comp. Laws 600.5807(1) (1967) 7 Robertson v Gillenmates 7 SE 371 (Va. 1888) 8 See Montgomery v First Nat l Bank, 414 S.W.2d 109 (Ark. 1967) 2

Laches Laches applies when there has been a passage of time between the potential breach of fiduciary duty and the filing of the claim against the principal and the surety. 9 That passage of time prejudices the surety and makes it difficult, if not impossible, to defend the claim. 10 For example, if a claim is brought against a fiduciary for failing to file accounts for a 10- year period, it may be difficult, if not impossible, for a surety to obtain records from a financial institution where estate funds were held, especially if that financial institution has a record retention period of only seven years. Estoppel Estoppel is an equitable remedy that precludes the assertion or denial of a fact by a party s action, inaction or representation. 11 In order for a surety to rely on the defense of estoppel, it must show that it relied on the action, inaction or representation of the party to the surety s detriment. 12 While the defense is rarely accepted by courts, the probate context serves as an appropriate place to utilize it. When a party approves an action by the fiduciary or waits a substantial amount of time before bringing the claim, it can prejudice the surety and bar a claim against the bond. 13 Res Judicata Res judicata applies when the issue is previously adjudicated (to a final judgment) in a court of competent jurisdiction, on the merits. 14 While practitioners may be familiar with res judicata in the general litigation context, there are two areas to specifically review in defending a probate bond claim. First, in defending the claim, one should look at prior orders granted within the probate estate. For example, if a party is objecting to a certain expenditure by the fiduciary and is seeking a surcharge for that amount, the surety should determine if that expense was previously authorized by the court. Similarly, the allowance of accountings by a fiduciary can have a preclusive effect on a claim as well. When a fiduciary files his or her annual account on an annual basis, it will contain specific one-time expenditures made by the fiduciary along with recurring, typical expenses used for support of the ward. If the court routinely allows accounts on an annual basis, a surety may defend a surcharge claim if a party starts objecting to expenses that were allowed in prior years. In addition, the allowance of the account not only bars claims on objections that were brought against the principal, but also bars claims that could have been raised. 15 9 E.g. Crumrine v Dizdar, 140 P.2d 101 (Cal. Ct. Ap. 1943); Sweet v. Lowrey, 142 N.W. 882 (Minn. 1913). 10 E.g., Neal v. Hodges, 13 F. Supp 916 (N.D. Okla. 1935); Lyerly v. Yeadon, 19 S.E.2d 648 (S.C. 1942) 11 28 Am.Jur.2d Estoppel & Waiver 1 at 429. 12 Id at 430. 13 See State Trust & Sav. Bank v. Otero, 252 P. 167 (N.M. 1926); Graham v. Maloney, 307 S.W.2d 916 (Ky. 1957). 14 Black s Law Dictionary, 1305 (6 th Edition 1990) 15 In re Mild s Estate, 136 A.2d 875 (N.J. 1957). 3

Failure to Mitigate Damages In the probate bond context, as with any other contractual claim, the claimant has an obligation to avoid or minimize the loss. The failure to do so can void a claim. 16 In probate estates, this often happens in one of two ways. First, the claimant (who is often a successor fiduciary) has an obligation to marshal assets that are remaining in the estate. This includes those assets that might be still titled in the name of the estate with the principal as the fiduciary. In addition, to the extent the claimant is pursuing a claim for assets that have escheated to the state, the claimant has an obligation to attempt to take possession of those escheated assets so they can be returned to the estate. Waiver/Consent There are a number of kinds of waivers and consents in the probate context. First, because these claims often deal with individuals who are related, there are situations where a claimant simply chooses not to pursue a claim against a relative. That claimant may choose to waive the claim once he or she realizes that a claim against the surety is not a typical insurance claim because of the principal s indemnity obligation to the surety. A second type of waiver in the probate bond context is a signed Waiver or Waiver and Consent form. In many jurisdictions the court permits interested parties to sign a Waiver and Consent as they relate to specific pleadings. For example, a fiduciary may file an annual Accounting. To the extent the interested parties agree with the items set forth in the Accounting, they may sign a Waiver in which they consent to the allowance of the Account and waive notice of the hearing on the Account. The individuals who sign these Waivers and Consents cannot later come back and make a claim for the same expenditures. 17 Third, in a decedent estate, to the extent that a claimant has consented to an action during the ward s lifetime, that claimant cannot subsequently make a claim related to the same action once the ward is deceased. The Principal s Reliance on Professionals The probate process is a difficult process. Individuals often retain attorneys, accountants, and financial advisors to assist with their duties while administering a probate estate. The retention of professionals is generally authorized by the probate code. 18 When a professional does something wrong, either negligently or intentionally, and that wrong act causes damages to the estate, it can lead to a claim against the principal and the surety. 16 Kotsias v. Cont l Bank, N.A. 601 N.E.2d 1185 (Ill. App Ct. 1992) 17 See Estate of Bartlett, 680 P.2d. 369 (Okla. 1984); Ct. of Probate v. Eddy, 8 R.I. 508 (1867) 18 See, e.g. Unif. Probate Code 5-546 (2010) 4

Attorneys It is reasonable to retain professionals to assist in estate administration as long as the principal does not simply give up control of the estate and permit the professionals to administer it without input from the principal. States have different views on the principal s (and the surety s) liability for acts by their attorneys. Some jurisdictions hold that bad acts by an attorney are not the principal s responsibility if the principal acted reasonably in selecting the attorney and reasonably relied on the attorney. 19 Other jurisdictions hold that the attorney is acting as an agent of the principal and that, therefore, the principal and the surety are liable for the actions of that attorney. 20 Similarly, courts have held that a fiduciary cannot simply relinquish control of an estate to his or her attorney. 21 Financial Advisors The Uniform Probate Code indicates that fiduciaries can seek input and advice regarding financial decisions from financial advisors. 22 The principal cannot, however, simply leave all investment decisions to the professionals. The investments must be appropriate under the circumstances. For example, an elderly ward who has had a conservator appointed for her should not have her assets invested in long-term investments that will not be accessible in the short term. Accountants Again, reasonable reliance on accountants is acceptable, just like reliance on other professionals. Traditionally, if an accountant is negligent in preparing tax returns or other matters, that accountant may only be liable for interest and penalties on the unpaid taxes. If the estate had an obligation to pay the taxes, and the accountant simply failed to prepare the returns or made mistakes in preparing the returns, it does not alleviate the estate s responsibility to pay the taxes. Pre-Bond Acts or Omissions It is extremely critical to review the language in the bond and know the law in the state where the claim is pending. Authority is split regarding liability for pre-bond acts. Some states find only prospective liability and have determined that the surety is only liable for acts or omissions that take place after the bond was issued 23 while others impose retroactive liability and find that the surety can be liable for acts prior to the time the bond was issued 24. This is based, in part, on the principal s duty to marshal assets included in their faithful performance of 19 In the Matter of the Estate of Barbikas, 341 P.2d 32 (Cal. Ct. App. 1959); In re: Hoffman Estate 64 Pa. D.&C. 575 (1948). 20 See, e.g. Fireman s Ins. Co. of Newark, N.J. v. Pugh 686 So.2d 281 (Ala. Civ. App. 1996). 21 Laramore v. Laramore 64 So.2d 662 (Fla. 1953). 22 Unif. Probate Code 5-426 (2010) 23 See e.g. Estate of Slack v Ohio Cas. Ins. Co. 509 N.W. 2d 861 (Mich. Ct. App 1993); Gilliam v Hopkins 472 S.W.2d. 436 (Mo. Ct. App. 1971) 24 See e.g. Wood v Tuohy 854 N.E.2d. 96 (2006); Hartford Fin. Services Group, Inc. v Hand 30 A.3d 180 (D.C. App. Ct. 2011) 5

duties. In still other states, there are specific statutes that hold a probate bond surety responsible for the acts of the principal prior to the time the bond was issued. 25 Exhaustion Penal Sum of the Bond The surety s liability is generally capped at the penal sum of the bond. 26 The Uniform Probate Code states that there can be multiple surcharges against the surety up to the penal sum of the bond 27 There are, however, situations where claimants seek to obtain damages in excess of the penal sum of the bond, the most common of which are claims for interest and for attorney fees. Claimants may seek pre or post judgment interest against the surety which generally can exceed the penal sum of the bond. 28 Claimants commonly seek attorney fees from the surety. While most states follow the American Rule which states that each side bears the own attorney fees and costs absent a contractual clause, statute, or common law provision authorizing attorney fees 29, there are states that specifically award attorney fees to claimants who bring claims on probate bonds 30. In defending a bond claim it is common to argue that the attorney fees are simply an element of damages to the estate and not a sanction against the surety so that, even if attorney fees are assessed, they are characterized as damages, and the claim, with attorney fees, cannot exceed the penal sum of the bond. Appropriate Notice to the Surety Claims on probate bonds are not common in most jurisdictions. Many courts and practitioners are simply not familiar with the surcharge process. They do not understand that there is a need to serve the surety as a separate party as the surety does not function as an insurer where the insured would simply receive a claim and turn it over to his or her carrier for defense. Also, in many jurisdictions, the surety is an interested party and is entitled to notice of petitions within the probate estate, including Petitions to Surcharge. If a surety does not receive notice of a claim against its principal, and the principal fails to defend the claim (or does so inadequately), the surety may be faced with a judgment or order finding its principal responsible. Depending on the jurisdiction, the surety may be faced 25 See e.g. GA. Code. Ann. 53-7-10 (1996) 26 See e.g. Bill Curphy Co. v. Elliott, 207 F.2d 103 (5 th Cir. 1953); Bevard v. New Amsterdam Cas. Co., 132 A.2d 157 (D.C. 1957) 27 Unif. Probate Code 3-606(a)(5) (2010) The bond of the personal representative is not void after the first recovery but may be proceeded against from time to time until the whole penalty is exhausted. 28 Burchfield v. Haffey, 34 Kan. 42 (1885). But see Moseley v. Johnson 56 S.E. 922 (N.C. 1907) which capped damages, including interest, to the penal sum of the bond. 29 See e.g., ACMAT Corp v. Greater N.Y. Mut. Ins. Co., 923 A.2d 697 (Conn. 2007); Biomass One, L.P. v. S-P Const., 799 P.2d 152 (Or. Ct. App. 1990) 30 Tex. Probate Code Ann. 245 (2010). 6

with a rebuttable presumption of its own liability 31, or may be bound by the finding because a fiduciary bond surety is in privy with its principal 32. This defense can delay the resolution of the claim but generally does not serve as a complete defense to the claim. Offsets To Damages To the extent that a claimant has a legitimate claim against the principal and surety, and can prove liability, the surety can seek to offset the actual damages in order to decrease the amount of the loss. The surety can obtain records and prepare an accounting on behalf of its principal in an effort to determine the extent to which assets were properly utilized during the administration of the estate. To the extent that funds for which the principal had failed to account were properly utilized, they should offset any surcharge the claimant seeks to assess. 33 Also, because these files often deal with family members, the principal might be an heir, beneficiary, or creditor of the estate. To the extent that there is an inheritance that would be paid to the principal, that inheritance should offset any surcharge. Similarly, to the extent the principal is owed fees for services as a fiduciary, those fees should be deducted from the surcharge as well. Action by the Obligee Prejudices the Surety In probate bond cases, the court is often the obligee. In some situations the court has failed to properly monitor the file and may have failed to send notices to the principal and surety when accountings or other filings are late. Further, the court may fail to suspend or remove the principal when it is appropriate to do so. To the extent that the court permits the fiduciary to continue to serve while that fiduciary continually violates his or her duties, the surety is prejudiced 34. This defense is common in contract surety situations 35 and is somewhat novel in probate bond cases. As a practitioner, it is difficult to stand in front of a judge (the obligee) and tell him or her that had he or she done his or her job properly that this claim would not exist. Nonetheless, it is a defense that should not be overlooked, especially when there have been repeated omissions by the court. 31 See e.g. Patterson v Travelers Cas. & Sur. Co., 936 A.2d 241 (Conn. App. Ct. 2007) 32 See e.g. Deobold v. Oppermann, 19 N.E. 94 (N.Y. 1888); In re Geraerdts Estate, 231 N.Y.S.2d 692 (N.Y. Sur. Ct. 1962); In re Estate of Holman, 250 N.W. 498 (Iowa 1933) 33 First Nat l Bank & Trust Co. v. McCoy, 198 A. 183 (Conn. 1938); In re: Guardianship of Deming v United States Fid. & Guar. Co., 73 P.2d 764 (Wash. 1937) 34 Restatement of Suretyship and Guaranty 21 [i]f the obligee acts to increase the secondary obligor's risk of loss by increasing its potential cost of performance or decreasing its potential ability to cause the principal obligor to bear the cost of performance, the secondary obligor is discharged. 35 See e.g. Will H. Hall & Son, Inc. v. Capitol Indem. Corp., 260 Mich. App. 222 (Mich. 2003) 7

Failure to Monitor by the Veterans Administration Some wards in guardianships or conservatorships receive benefits from the Veterans Administration ( VA ) as all or part of their income. In the event that a bonded fiduciary misappropriates funds from one of these estates, there is potential for recovery from both the surety and the VA. This paper has already addressed recovery from the surety in the event of its principal s breach of fiduciary duty. Interestingly, if the VA fails to monitor a fiduciary who is receiving benefits from the VA by failing to review the fiduciary s accounting in a timely manner, the VA may be required to pay to the beneficiary or the beneficiary s successor fiduciary an amount equal to the amount of benefits that were so misused. 36 Even if a surety initially pays such a claim, it will be subrogated to the claimant s rights and should consider seeking reimbursement from the VA. Conclusion Claims on probate bonds are not as cut and dry as claimants may think. Many defenses depend on the law in the jurisdiction where the claim is pending which makes it extremely important to be familiar with that area. If the surety does not regularly see claims in the geographic area where the claim is pending, it is helpful to have local counsel to learn the local rules and customs in order to minimize the loss. 36 38 USC 6107 (2004) 8

Biographies of the Authors/Presenters Jeffrey M. Frank Alber Crafton 2301 W. Big Beaver Road, Suite 300 Troy, MI 48084 Phone: (248) 822-6190 Facsimile: (248) 282-8110 E-Mail: jfrank@albercrafton.com Jeffrey M. Frank is a founding shareholder and the managing partner of Alber Crafton, a fidelity and surety law firm, practicing in Troy, Michigan. He is licensed to practice in Michigan, and is also admitted to the United States District Court, Eastern and Western Districts of Michigan and the Sixth Circuit Court of Appeals. Jeff graduated from the University of Michigan, Cum Laude, in 1989 with a degree in Organizational Management and from the Boston University School of Law in 1992. He concentrates his practice primarily in the area of Fidelity and Surety Law as well as Commercial and Probate litigation. He is a member of the American Bar Association, Forum Committee on Construction Law and Tort and Insurance Practice Section, Fidelity & Surety Law Committee where he is currently a Vice-Chair. Jeff is editor of The Law of Probate Bonds, first edition and The Law of Probate Bonds, second edition that was released in January of 2015. Jeff is a member of the Fidelity and Surety Steering Committee of the Defense Research Institute and is also a member of the National Bond Claims Association, the Surety Association of Michigan, the Northeast Surety and Fidelity Claims Association, and is one of eight attorneys invited to serve on the inaugural Attorney Advisory Committee of the National Association of Surety Bond Producers. He is a Martindale Hubbell AV Peer Review Rated attorney. Dennis E. McDonnell Old Republic Surety Company 445 S. Moorland Road, Suite 200 Brookfield, WI 53005 Phone: (262) 797-2644 Facsimile: (262) 797-9495 E-Mail: dmcdonnell@orsurety.com Dennis McDonnell is the Vice President of Claims at Old Republic Surety Company in Brookfield, Wisconsin. Mr. McDonnell began his surety career in 1999 with Capitol Indemnity Corporation in Madison, Wisconsin. In 2004, he joined Travelers Bond & Financial Products and held various roles and responsibilities until 2013 when he assumed his current role at Old Republic Surety Company. He is also a graduate of the University of Wisconsin - Stevens Point (B.S. 1993) and University of Denver College of Law (J.D. 1997). 9