2001 Legislation:
Commentary
on HB 19 -- Requiring Attorney Disclosure
of Executor Breaches, Permitting Beneficiaries to Sue Attorneys
Under this chapter, attorneys representing the personal representatives of decedents' estates would be required to disclose to estate beneficiaries and the court (1) "any action taken or omission made by the personal representative with respect to estate property that constitutes a breach of the personal representative's fiduciary duty, including the misuse, misappropriation, or unlawful conversion of estate property; and (2) any material misrepresentation made by the personal representative to the court with respect to estate property that adversely affects or has the potential to adversely affect the value of the estate."
The disclosure obligation would not apply to an attorney who is retained to defend the personal representative after the breach of fiduciary duty is alleged to have occurred. However, the attorney defending a personal representative would be prohibited from accepting payment from the decedent's estate for such representation unless the court determines at a preliminary hearing that the personal representative is "likely to prevail" and the personal representative posts a bond in an amount the court determines is sufficient to pay the attorneys fees.
If an attorney fails to disclose a breach or misrepresentation, an heir or beneficiary of the decedent would be permitted to sue the attorney. A four-year statute of limitations would apply. In the suit, the personal representative would be prohibited from asserting the attorney-client privilege. In fact, the bill provides that it trumps other law, including the rules of evidence and disciplinary conduct, and that the Texas Supreme Court may not adopt rules in conflict with the chapter. The heir or beneficiary would be entitled to actual damages and exemplary damages, including attorneys' fees. Actual damages include the attorneys' fees paid by the personal representative to its attorney and the "amount by which the value of the estate property was depleted as a result of the personal representative's breach of fiduciary duty or misrepresentation" and the attorney's violation of this statute.
The bill also would amend Sections 221 and 222 of the Texas Probate Code to prohibit a resigning or removed personal representative from selling, distributing or otherwise disposing of estate assets except as ordered by the court.
HB 19 would be effective September 1, 2001, and would not apply to attorneys retained by personal representatives prior to then.
Rep. Corte's bill is the polar opposite of the recent strong Texas Supreme Court cases upholding the attorney-client privilege in estate planning and fiduciary cases. In Huie v. DeShazo, 922 S. W. 2d 920 (Tex. 1996), the court held that the attorney-client privilege applied, notwithstanding a trustee's fiduciary duty to disclose material information to beneficiaries, and that the attorney represented the trustee, not the trust. In Barcelo v. Elliott, 923 S. W. 2d 575 (Tex. 1996), the court held that an attorney representing a testator owed his duties to the testator and not to the estate beneficiaries, so a suit for malpractice by the estate beneficiaries against the attorney after the testator's death was barred due to the privity defense. In both of these opinions by Chief Justice Phillips, the court points out the importance of permitting confidentiality between a client and his or her attorney without the possible interference of trust or estate beneficiaries.
There are court-created chinks in the Huie and Barcelo armor, however. In Vinson & Elkins v. Moran, 946 S. W. 2d 381 (Tex. App. -- Houston [14th Dist.] 1997, writ dismissed by agreement), estate beneficiaries were able to show the existence of an attorney-client relationship between the executor’s attorney and themselves based on meetings with and correspondence to beneficiaries. So, estate beneficiaries may be able to sue the attorney representing the personal representative by asserting that somehow the attorney also is representing them. Letters and pleadings in which the attorney states that he or she is "attorney for the estate" do not help the attorney in this context. See Querner v. Rindfuss, 966 S. W. 2d 661 (Tex. App. — San Antonio 1998, no writ).
In McCamish, Martin, Brown & Loeffler v. F. E. Appling Interests, 991 S. W. 2d 787 (Tex. 1999), the Texas Supreme Court affirmed the existence of a separate claim which non-clients may bring against attorneys in some cases -- a negligent misrepresentation claim. As the court states in McCamish:
[A] negligent misrepresentation claim is not equivalent to a legal malpractice claim. . . . Under the tort of negligent misrepresentation, liability is not based on the breach of duty a professional owes his or her clients or others in privity, but on an independent duty to the nonclient based on the professional’s manifest awareness of the nonclient’s reliance on the misrepresentation and the professional’s intention that the nonclient so rely. . . . Therefore, an attorney can be subject to a negligent misrepresentation claim in a case in which she is not subject to a legal malpractice claim.
991 S. W. 2d at 792. The negligent misrepresentation cause of action was recognized in a estate context in Estate of Arlitt v. Paterson, 995 S. W. 2d 713 (Tex. App. -- San Antonio 1999, review denied).
HB 19 would move the obligation on attorneys far beyond the emerging negligent misrepresentation concept. It would impose an affirmative duty of disclosure on attorneys, not merely an obligation not to mislead. In addition, it would impose strict liability on the attorney for any nondisclosure. The statute requires the disclosure of any breach of fiduciary duties, not just material or significant ones.
Note that two of the recent cases in this area -- Querner and Arlitt -- are San Antonio cases and that Rep. Corte is from San Antonio. Perhaps this is a so-called constituent bill, where a constituent of Rep. Corte's was unhappy with the result achieved in one of those cases and now seeks legislative redress.
In 1999, Rep. Corte introduced HB 3580, which would have established an attorney-client relationship between an executor's or administrator's attorney and the estate beneficiaries. HB 3580 was referred to the House Judicial Affairs Committee, where it died.
Whatever the motivation, HB 19 clearly goes too far, making it virtually impossible to represent a personal representative. The risks associated with this bill, if it passes, will drive a lot of people to refuse to serve as personal representatives, and it will drive the cost of representing personal representative sky-high, since lawyers will not be willing to represent them without being compensated for the risk.
On the bright side, at least the bill only affects decedents' estates. It does not apply to guardianships or trusts. [12/03/00].
These comments are those of Glenn M. Karisch and do not reflect the opinions or positions of any group.