Who is a Necessary Party?

The term “necessary party” has been defined in a variety of ways, but generally most litigators will agree that a “necessary party” is:

(1) as a party whose rights and interests are to be affected by a court order; and (2) whose actions with reference to the subject matter of litigation are to be controlled by the court order; or (3) a person without whose joinder as a party an effective court order or judgment cannot be rendered in the plaintiff’s favor; or (4) A person who is materially interested in the subject matter of a suit and who will be directly affected by an adjudication of the controversy.

Whatever definition one uses, it is undisputed and well-settled law that if a necessary party hasn’t been named in any kind of lawsuit, then court cannot proceed until that person is joined.

Who is an Indispensable Party?

An indispensable party is “one who not only has an interest in the controversy but also an interest of such a nature that a final decree cannot be made without either affecting that interest or leaving the controversy in such a condition that its final termination may be wholly inconsistent with equity and good conscience. Thus, an indispensable party is one whose interest will be substantially and directly affected by the outcome of the case and whose interest in the subject matter of the action is such that if he or she is not joined, a complete and efficient determination of the equities, rights and liabilities of the other parties is not possible. Like a necessary party, unless such a person is made a party, the court will not proceed to a final determination.

Trust and Estate Lawsuits

Generally, a trustee is an indispensable party in any proceeding affecting the trust estate. The trustee is the person or entity vested with the authority to prosecute actions during the winding up period following the termination of a trust. It is also well-settled law in Florida that where it is sought to have a trust by operation of law declared, the person holding the property and sought to be held as trustee is a necessary party to the suit, as is any other person against whom relief is sought. The general rule that a trustee is an indispensable party in any proceeding affecting the trust estate does not apply, however, where the trust is a mere passive or inactive trust.

Are Beneficiaries Necessary and Indispensable Parties in a Trust Lawsuit?

Generally, beneficiaries are necessary parties to a suit by or against a trustee relating to the trust or its property. In those cases where the issue is whether or not the trust instrument is valid, the law is clear in Florida that the beneficiaries are proper and necessary parties. Similarly, in a lawsuit to terminate a trust, the beneficiaries of the trust are necessary parties. An action or proceeding to enforce a trust, or to enforce the liability of a trustee for breach of trust, can and, in fact, must be brought by one with a beneficial interest in the subject matter of the suit, or a representative of such a person.  

Second District Clarifies Rule

These general rules were recently examined in Crescenze v. Bothe, et al, 34 Fla.L.Weekly D284a (Fla.2nd DCA Case 2D08-2202, February 4, 2009:

“Crescenze was one of several beneficiaries of the Bothe Family Revocable Trust Agreement, executed by Andreas Bothe (the decedent) and his wife, Pamela Hansen, during their marriage. Both the decedent and Hansen were named as trustees of the trust. The decedent also executed a will during their marriage, which named Hansen as the sole heir and included a pour-over clause bequeathing all of the decedent’s estate to the trust in the event that Pamela Hansen predeceased the decedent. The decedent and Hansen subsequently divorced, and the decedent died seven days later on March 22, 2006, making the bequest to Hansen in the will void pursuant to section 732.507(2), Florida Statutes (2005).”

The decedent’s mother, E. Marie Bothe, filed suit to terminate or revoke the trust, naming Hansen as the only defendant. Crescenze and the other beneficiaries were not joined in or provided notice of the suit to terminate or revoke the trust. The probate court consolidated the suit to terminate or revoke the trust with the probate proceeding.

Thereafter, the probate court entered an order granting partial summary judgment in favor of Bothe terminating the trust. As a response, Crescenze filed a motion to intervene, which was denied by the probate court, who then entered final summary judgment in favor of Bothe terminating the trust. Crescenze filed an appeal and the case worked its way up to the Florida 2nd District Court of appeals. On appeal, Crecenze asserted that the probate court committed an error of law in refusing to allow her to intervene as a necessary and indispensable party. The Court of appeals applied the general rules to the trust dispute and agreed with Cresenze:

“Crescenze is a beneficiary of the trust, and “Florida has long followed the rule that the beneficiaries of a trust are indispensable parties to a suit having the termination of the beneficiaries’ interest as its ultimate goal.” Fulmer v. N. Cent. Bank, 386 So. 2d 856, 858 (Fla. 2d DCA 1980) (citing Byers v. Beddow, 142 So. 894, 896 (Fla. 1932), which held that a court called upon “to dissolve or terminate a trust . . . must decline to act when there are, or may be, persons interested in the trust who are not before the court”). “Indispensable parties are necessary parties so essential to a suit that no final decision can be rendered without their joinder.” Sudhoff v. Fed. Nat’l Mortgage Ass’n, 942 So. 2d 425, 427 (Fla. 5th DCA 2006)…Because Crescenze is a beneficiary of the trust and therefore an indispensable party to the action seeking to terminate or revoke the trust, we reverse the circuit court’s order denying Crescenze’s motion to intervene and remand for further proceedings consistent with this opinion.”

The ruling of the Second District confirms the general rule, as reflected in Florida decisional case law and in the new trust code, that beneficiaries are almost always necessary and indispensable parties to an action involving the validity of a trust.

The doctrine of de facto trustee is gaining popularity in its recognition by state court’s and trust and estate jurisprudence. A person is a de facto trustee where the person (1) assumed the office of trustee under a color of right or title and (2) exercised the duties of the office. A person assumes the position of trustee under color of right or title where the person asserts “an authority that was derived from an election or appointment, no matter how irregular the election or appointment might be.” A de facto trustee’s good-faith actions are binding on third persons. Because the purported successor trustee in Allen Trust acted as trustee and assumed its office through an appointment it reasonably believed to be effective, it was a de facto trustee and was entitled to compensation for its services. Washington recently joined the growing number of jurisdictions using the de facto trustee concept (Alabama, New York, Oklahoma, and Oregon all recognize the concept.)

In the Matter of the Irrevocable Trust of Michael McKean 183 P.3d 317, 2008 Wash.App.LEXIS 1062 (2008) the court dealt with the following factual scenario. Michael A. McKean has two daughters, Michelle McKean, born in 1989, and Morgan McKean, born in 1996. Laura McKean, Michael’s second wife, is Michelle’s mother; Connie McKean, Michael’s third wife, is Morgan’s mother.

In 1992, Michael created the Trust for the benefit of Michelle and his future children. Michael funded the Trust in part with shares of stock in a corporation Michael had incorporated in 1988. Michael also transferred to the Trust 20 percent of his “then owned” equity in 66 limited partnerships, which he valued at $275,000. The Trust contained a subtrust for the sole benefit of Michelle, Michael’s only child at the time he settled the trust. Michael funded the subtrust with real property managed as a rental.

The evidence elicited in the case revealed that Michael named his close friend, Gale Dahlstrom, as the Trust’s trustee. Although Dahlstrom signed the Trust documents as trustee, Michael led Dahlstrom to believe that he would have no active management responsibilities unless Michael passed away or was unable to manage the assets himself. Neither Michael nor Dahlstrom followed the formalities of trust management and administration after Michael created the Trust. Nobody filed trust tax returns, for the years 1993 through 1997, different tax identification, numbers were used for the Trust, and Michael commingled trust assets with non trust assets.

The court also found that in 1996, the federal government named Michael as a defendant in a civil lawsuit and began a criminal investigation of his activities related to the limited partnerships. When Michael learned of the lawsuit and the investigation, he began to transfer assets out of his name for the purpose of hiding them from the federal government. This included transferring additional assets to the Trust. Michael filed for divorce from Connie which was granted by the domestic relations court in November 2000. The domestic relations court found that both Michael and Connie had abused the Trust, that Michael controlled the trustees, and that it should appoint a corporate trustee for the Trust. Michael appealed the order of the divorce court through the appellate court process.

Later, the evidence showed that in early 2000, Michael opened a bank account for the subtrust and Dahlstrom began receiving account statements as the trustee. Dahlstrom became concerned and, in August 2000, he signed a resignation of trustee, which he personally delivered to Michael. Michael did not inform Connie or the bank of Dahlstrom’s resignation. In March 2002, Michael’s sister, Shannon Keene, filed tax returns for the Trust for the years 1998 through 2000, signing the returns as the trustee. Subsequently, in December 2001, while the appeal of the divorce decree was pending, the divorce court appointed Commencement Bay, a certified professional guardianship agency, as trustee of the Trust. Thereafter, Commencement Bay filed an action, the equivalent of which in Florida would amount to a Declaratory Judgment action. The court thereafter directed Commencement Bay to file a lawsuit against Michael, Connie, Dahlstrom, and Keene under the state trust and probate statutes.

The appeal from the divorce court order appointing Commencement Bay as trustee was then overturned since, according to the appellate court, the divorce court did not have any personal jurisdiction over the trustees. Commencement Bay then asked the court for an order appointing it as trustee (again) or dismissing the lawsuit it had filed and relieving Commencement Bay of its responsibilities. Commencement Bay asserted that another order appointing it as trustee was necessary to protect the children’s assets.  The trial court agreed and appointed Commencement Bay trustee of the Trust to preserve the children’s assets and to protect them from waste, theft, and fraud. After a trial, the court found that Michael had disavowed his gift of 100 shares of Northwest Community Housing stock to the Trust to prevent Commencement Bay from managing funds that would be distributed to the Trust from Michael’s corporation.

Michael appealed and argued that the trial court lacked jurisdiction over the action because, once the appellate court reversed the divorce court’s order requiring appointment of a corporate trustee, the divorce court’s appointment of Commencement Bay became void and Commencement Bay did not have standing to bring the lawsuit to protect the children’s interest.

Commencement Bay advanced several theories in support of the trial court’s authority to make the appointment, including that because Commencement Bay assumed the position of trustee under color of right and exercised a trustee’s duties in good faith, it became the “de facto trustee.” The appellate court agreed and Washington now joins this growing crowed recognizing the concept of de facto trustees: “Although no Washington court has recognized the authority of a de facto trustee in a trust proceeding, the Oregon Court of Appeals recently adopted the de facto trustee concept in a similar setting. In that case, a person believing herself to be trustee appointed a successor trustee, but the trial court later invalidated the appointing trustee’s status as trustee, thereby removing her authority to appoint a successor. A person is a de facto trustee where the person (1) assumed the office of trustee under a color of right or title and (2) exercised the duties of the office. A person assumes the position of trustee under color of right or title where the person asserts “an authority that was derived from an election or appointment, no matter how irregular the election or appointment might be.” A de facto trustee’s good faith actions are binding on third persons.” [citations omitted]

The Court pointed out the facts germane to its conclusion to adopt the concept of de facto trustees: Commencement Bay assumed the office of trustee under color of right when the divorce court appointed it trustee, and Commencement Bay in fact acted as the trustee, marshalling and protecting the Trust’s assets. Commencement Bay reasonably believed it was the trustee and acted in good faith. The irregularity in the dissolution court’s appointment did not invalidate Commencement Bay’s de facto trustee status. Therefore, the Court held that as de facto trustee, Commencement Bay had standing to bring the lawsuit to protect the interests of the children.

I’m always delighted to see a court have the courage to expand estate and trust law to come to the right result, which in this case, was to find the result which was in the best interest of the children.

What is the legal duty of a fiduciary?

The answer from Justice Cardozo is still quoted today:  “A trustee is held to something stricter than the morals of the market place.  Not honesty alone, but the punctillo of an honor most sensitive, is then the standard of behavior.”

Meinhardt v. Salmon, 249 N.Y. 458, 464, 164 N.E. 545, 546 (1928).

Cecilia Reid was Edgar Sonder’s nurse for several years.  Being a responsible man, Edgar Sonder created a “pour over” trust in May 2000, naming himself as trustee.  (A “pour over” trust is a trust that is funded by assets “pouring over” from an estate, and is a common vehicle used in estate planning.)

Later, Mr. Sonder amended the trust, naming Nurse Reid as its sole successor trustee.  The trust in its final version (Edgar Sonder amended the document twice before he died) included instructions on how his assets were to be distributed; several gifts were itemized.

First, $31,000 was to be distributed among ten different charities (Art. II, section 1); second, and importantly, after the first gifts were completed, $125,000 was to be given to the Hebrew Union College Jewish Institute of Religion (Art. II, section 2); and third, again after the prior gifts were given, various assets were to be distributed as gifts to certain, named individuals (Art. II, section 3).  Among those listed in this third round of gifts was nurse Cecilia Reid, with the trust dictating that Nurse Reid was to receive $25,000 and the apartment Mr. Sonder resided in at the time of his death, together with its furnishings.  The residue of his estate was likewise given to Cecilia Reid.

Edgar Sonder died on May 12, 2005.  His will was admitted to probate, and Cecilia Reid was accordingly appointed personal representative.  An inventory revealed that there were not sufficient assets within the estate to complete the gifting desires of Mr. Sonder, as described in the three sections of Article II of the pourover trust.

Cecilia Goes to Court

So, Cecilia Reid went to court and asked that these enumerated, financial gifts be abated proportionately and that the apartment itself be legally deemed as a devise, and not subject to abatement at all.  She was unsuccessful; the lower court denied her motion for abatement and the appellate court affirmed that decision in Reid v. Hebrew Union College-Jewish Institute of Religion, 947 So. 2d 1178 (Fla. 3d DCA 2007).

Cecilia Goes to Court, Again

Cecilia Reid’s next step was to approach the court in her role as sole trustee, petitioning for the trust to be reformed and arguing that the trust instrument did not evidence Edgar Sonder’s intent, which was to give his apartment to his nurse, Cecilia Reid, and not have it be subject to abatement.

The Same Attorney for the Settlor in Drafting and the Trustee in Court: a Man with Many Hats

To bolster her argument, Nurse Reid attached handwritten notes that Edgar Sonder had given his estate planning attorney describing how he wanted his assets distributed after his death.  Reid also filed the sworn affidavit of the attorney who had prepared both the trust and its two amendments for Edgar Sonder.

There, the estate planning attorney swore that Edgar Sonder intended to devise as a specific gift, not subject to any priorities, the apartment and its contents to his nurse, Cecilia Reid.  He also swore that the court’s decision to convert the apartment, and its contents, to a general gift subject to abatement violated the intent of Edgar Sonder due to the error of the scrivener.

Interestingly, this same attorney, William Palmer, was also representing Cecilia Reid as she made her arguments before the court.  The fact that Mr. Palmer was a man wearing many hats was a situation that did not go unrecognized by Reid’s opponents.

The Nurse is Challenged by Fellow Beneficiaries – and so is her Attorney

Two beneficiaries of Mr.Sonder’s benevolence, the Temple Judea (Art. II, section 1) and Hebrew Union College (Art. II, section 2), vigorously challenged Cecilia Reed and William Palmer.

First, they fought to remove Attorney Palmer from the proceedings, moving the court to disqualify him because he had been the attorney who prepared the underlying documents.  The trial court denied their request.

Second, they argued that Trustee Cecilia Reid lacked standing to bring a lawsuit seeking to reform the trust, because (1) she was “not an ‘interested person,’ instead she was a volunteer and stakeholder in the Trust, having no personal stake in the outcome;” (2) as trustee, she owed a fiduciary duty of loyalty to all the beneficiaries to act impartially; and finally, (3) that the appellate court had already affirmed the decisions of the lower court on how the trust’s distribution provisions (Article II, sections 1, 2, 3) were to be read and carried out.  The trial court agreed with this argument, and dismissed Reid’s suit because she lacked legal standing to bring it.

So, Reid appealed again.

With Edgar Sonder’s trust again before the Florida appellate court, the reviewing court held that Cecilia Reid did have standing to petition the court to reform the trust. The trial court’s decision was reversed, and the case remanded for further proceedings.

The basis of their decision was not only the law in place at the time Mr. Souder signed the trust documents and its amendments, but current statutes and precedent, as well as that incorporated into the trust by its own language. (The Edgar Sonder Trust expressly states, “the Trustee has the powers now or hereafter provided by law.”)

Equitably, Cecilia Reid has standing because a trustee has standing to seek reformation of a trust as part of the trustee’s general obligations to follow the settlor’s true intent and purposes in discharging his/her duties in managing the trust. Here, the trustee acts as an indispensable party in all proceedings affecting the estate, and “clearly has standing to seek reformation.”

Statutorily, Cecilia Reid has standing because Florida statutory law has consistently allowed a trustee to change or modify the terms of a trust when complying with the trust’s existing terms will frustrate the settlor’s purpose.  The rationale behind this power to modify necessarily encompasses the power to reform, the appellate court held, and in support of its opinion quoted the legislative history of § 736.0415, Fla. Stat. (2007).

Bottom line, the appellate court held that the trustee had legal standing to seek reformation of a trust either before or after enactment of section 736.0415, and Cecilia Reid has been given the right to proceed in the lower court in her attempts to prove that the true intent of Edgar Sonder was to give her his apartment, and its furnishings, outright.

Practitioner Point: This case is far from over – and curious by its absence is any discussion by the appellate court on the argument to disqualify the attorney who is effectively in the courtroom advancing his own affidavit as key evidence to prove his position.  This is a textbook example of why our firm acts as experienced probate litigation co-counsel with probate practitioners across the state.

Real World Point: Even though your trust is an official document which legally controls, those notes and memoranda that you write, detailing your intent and wishes regarding your assets and estate, can be very important.   They can be truly invaluable to a probate litigator if what you really wanted to happen with your estate even comes into question.

Cecilia Reid, as Trustee of the Edgar Sonder Trust, Appellant, vs. Temple Judea and Hebrew Union College Jewish Institute of Religion, Appellees, 33 Fla. L. Weekly D 1546 (June 11, 2008) Appeal from Miami-Dade County Circuit Court Judge Arthur L. Rothenberg, to the Third District Court of Appeals (Opn: Justice Wells, joined by Justices Rothenberg and Salter)