What's fair is fair - or at least that's the concept behind the pro tanto rule wherein a surcharge against a fiduciary is limited to the interest of the objecting party and not the other beneficiaries who stood by and failed to act in their own interest. In the absence of an objection, the account is established pro confesso as correct and proper, thus a beneficiary should not be permitted to do nothing and benefit from the fruits of another's time, effort and expended legal fees.
Central to this discussion is the question of which beneficiaries should share in any awarded surcharge from a successful objection. Under settled New York common law, if a beneficiary does not object (or affirmatively consents) to the fiduciary's improper conduct, such beneficiary will not benefit from the surcharge. Similarly, a beneficiary who successfully objects only receives the surcharge in proportion to his interest in the estate or trust.
The rule is applied equitably on a case by case basis to limit a fiduciary's liability for negligent, but not egregious conduct. However, a fiduciary engaged in self-dealing or other fiduciary breaches will generally be ineligible for the rule's protections. For example, in Matter of Lunin, N.Y.L.J., Oct. 18, 2012 (Glen, J.) the fiduciary sought to favor herself over other beneficiaries by making unequal advance distributions. In that instance, former Surrogate Glen found that pro tanto liability was not warranted and all residuary beneficiaries should share in the surcharge for such overreaching by the fiduciary. Many cases provide that the rule should also not be applied when a fiduciary has failed to include an asset which should have been reflected in the account. Matter of Zalaznick, 90 Misc. 2d 113, 394 N.Y.S.2d 347 (Sur. Ct. Bronx County 1977) [enhanced version available to lexis.com subscribers].
As a cautionary tale, however, a beneficiary who brings an unsuccessful objection can be held responsible for the litigation expenses incurred by the fiduciary. See Matter of Hyde, 15 N.Y.3d 179, 906 N.Y.S.2d 796, 933 N.E.2d 194 (2010) [enhanced version available to lexis.com subscribers]. While the pro tanto rule determines whether a beneficiary can share in a successful recovery, the Hyde rule determines whether a beneficiary must bear the legal cost of any unsuccessful objections in an effort to discourage frivolous litigation.
Before taking such a drastic action, the Court looks to seven factors enumerated in Hyde including (1) whether the objecting beneficiary acted solely in his or her own interest or in the common interest of the estate; (2) the possible benefits to individual beneficiaries from the outcome of the underlying proceeding; (3) the extent of an individual beneficiary's participation in the proceeding; (4) the good or bad faith of the objecting beneficiary; (5) whether there was justifiable doubt regarding the fiduciary's conduct; (6) the portions of interest in the estate held by the non-objecting beneficiaries relative to the objecting beneficiaries; and (7) the future interests that could be affected by reallocation of fees to individual beneficiaries instead of to the corpus of the estate generally.
The pro tanto rule has often been referred to as both a sword and a shield. See Peter C. Valente and Herbert Bockstein, Pro Tanto Rule: Sword or Shield, N.Y.L.J., July 2, 2010 [enhanced version available to lexis.com subscribers]. Estate practitioners should carefully consider and balance both aspects before determining whether to file objections or not.
Jennifer F. Hillman is an attorney at Ruskin, Moscou Faltischek, P.C., Uniondale, New York where her practice focuses in the area of trust and estate litigation. She can be reached at firstname.lastname@example.org
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