What should be the effect of an exculpatory provision within an instrument that names to a fiduciary position a lawyer, the lawyer’s firm or an institution with which the lawyer works? Professor Louise Lark Hill poses this question and calls for the Uniform Probate Code (UPC) to join the Uniform Trust Code (UTC) and Restatements of Trusts with specific standards for enforceability that can’t be waived in the governing instrument.
Early in the 20th century, exculpatory clauses were often construed narrowly or ignored. The article notes a 1936 New York statute that invalidated, on public policy grounds, any attempt to grant immunity from liability to either an executor or a trustee for failure to exercise reasonable care, diligence and prudence, yet a 1909 Massachusetts case, Warren v. Pazolt, upheld a clause exculpating trustees unless they were guilty of “willful neglect or default.”
Over time, the clauses came to be used routinely, so much so that Section 222 of the Restatement (Second) of Trusts, adopted in 1959, generally approved their use, as did the later UTC and the Restatement (Third) of Trusts. Despite some differences in language among the three authorities, they generally provide that a trustee may not be insulated from liability for bad faith, intentional misconduct or reckless indifference to the purposes of the trust or the interests of the beneficiaries. For those interested in the important subject of what trust terms may be modified by a settlor when creating a trust and which are mandatory and may not be modified, the article provides a concise discussion of the philosophical underpinnings of “default rules,” which a settlor may modify and “immutable majoritarian rules,” which a settlor may not.
The article goes on with an interesting analysis of the particular case in which a lawyer, who will be a fiduciary, inserts an exculpatory clause. An analogy may be made to the Restatement and UTC provisions that invalidate an exculpatory clause inserted in a trust as a result of an abuse by the trustee of the fiduciary relationship. In making the determination, an important factor is whether the trustee drafted the trust instrument. Indeed, Restatement (Third) Tentative Draft No. 5 creates a rebuttable presumption that an exculpatory clause is invalid if the trustee drafted the instrument or caused the clause to be included (comment d).
Legal ethics rules have become more lenient since the Model Code of Professional Responsibility stated that a lawyer ought not “consciously influence” a client to name the lawyer as fiduciary. The Ethics 2000 revisions to the Model Rules stated specifically in comment 8 to Rule 1.8 that “there is nothing improper about a lawyer suggesting to a client that he, or someone in his firm, be named to a lucrative fiduciary position.” However, as with any conflict of interest, the client may waive only with disclosure and informed consent. The comment goes on to note that the lawyer must advise the client concerning the nature and extent of the lawyer’s financial interest in the appointment and the availability of alternative candidates. Earlier ABA Formal Opinion 02-426 (May 31, 2002) required a frank discussion of fiduciary options with the client, including the benefits and detriments of each. Perhaps an open question is whether an exculpatory clause is part of the “financial interest” that must be disclosed, but the author’s likely answer is yes.
The author is equally concerned when a lawyer who reasonably expects to represent a professional fiduciary as executor or trustee of a client’s estate or trust inserts an exculpatory clause and suggests that the same standard of disclosure and informed consent ought to apply as when the lawyer is named fiduciary. The author also questions whether exculpatory clauses are appropriate at all when professional fiduciaries, rather than relatives or friends, are serving.
Existing law well covers exculpatory clauses in trusts and limits a settlor’s ability to insulate a trustee from all liability, but the UPC and other laws regulating executors allow more insulation, albeit within vague standards. The author believes similar standards should apply to executors and trustees.