Background
The late jeweler Nicola Bulgari — of the famed Italian luxury house — created a family trust to benefit his wife Anna and, upon her death, their three daughters: Veronica, Ilaria, and Natalia. After Anna died, Veronica became trustee of the Family Trust and was responsible for distributing its assets into three separate trusts, one for each daughter. Disputes over Veronica’s administration of the trust followed.
In a federal action in the Southern District of New York, Ilaria alleges that Veronica breached her fiduciary duties as trustee of the Family Trust. Ilaria’s claims include a request for a declaratory judgment that Veronica is not entitled to reimbursement from the Family Trust for attorneys’ fees she incurred defending the federal litigation — on the theory that a trustee who committed misconduct cannot properly charge the trust for the cost of defending against charges of that misconduct. The federal court denied Veronica’s summary judgment motion on some of those claims, leaving the fiduciary-duty question for trial.
While the federal action was pending, Veronica commenced a Surrogate’s Court proceeding in New York County seeking to be reimbursed ,050,000 from the Family Trust for attorneys’ fees she had incurred. Surrogate’s Court granted Veronica’s petition and directed Ilaria’s trust to fund the repayment. Ilaria appealed.
The Court’s Holding
The First Department reversed, vacated the Surrogate’s Court order, and held the petition in abeyance pending the conclusion of the federal action. The core principle is well-established in New York trust law: attorneys’ fees arising from a trustee’s misconduct are not a proper charge against the trust (see Matter of Hyde, 15 NY3d 179 [2010]). If the federal trial establishes that Veronica breached her fiduciary duties, then the attorneys’ fees she incurred defending against those breach claims would not properly be chargeable to the Family Trust that she managed — and Ilaria’s trust would be entitled not to fund them.
The court held that the Surrogate’s Court erred by ordering Ilaria’s trust to pay ,050,000 to the Family Trust before the federal action resolved the antecedent question of whether Veronica committed misconduct. Ordering payment now effectively prejudges that issue. Although Ilaria had not raised this argument below, the First Department accepted it for the first time on appeal because it was a purely legal argument that could not have been avoided by timely objection at the Surrogate’s Court level. The court also directed that when the matter is taken up again, Ilaria must have an opportunity to challenge the reasonableness of the requested fees, and the Surrogate’s Court should clarify whether it relied on the billing submissions of Gibson Dunn, Katten Muchin, or both.
Key Takeaways
- A Surrogate’s Court should not order a trust to reimburse a trustee’s litigation defense fees while a parallel federal action is pending that will determine whether the trustee committed the very misconduct that prompted the litigation.
- Under Matter of Hyde, attorneys’ fees incurred in defending against breach-of-fiduciary-duty claims are not chargeable to the trust if the trustee is ultimately found to have breached those duties.
- The beneficiary challenging fee reimbursement must be given an opportunity to contest the reasonableness of the requested amounts before any payment is ordered.
- A purely legal argument that could not have been avoided by earlier objection may be raised for the first time on appeal, even if it was not presented to the lower court.
Why It Matters
This decision reinforces an important protection for trust beneficiaries in New York: when a trustee’s right to reimbursement for litigation expenses depends on whether she committed misconduct, that question must be resolved before the trust funds change hands. Surrogate’s Courts handling fee-reimbursement petitions where parallel proceedings are adjudicating the trustee’s conduct should stay or hold in abeyance the fees issue pending the outcome of those proceedings.
For trust and estates counsel in New York, the ruling is also a reminder about process: when trust litigation implicates a trustee’s alleged misconduct, challengers should be given a full opportunity to contest both the predicate (misconduct) and the amount (fee reasonableness). Courts should not conflate the two inquiries or shortcut them by deferring to the trustee’s counsel’s own billing submissions without adversarial scrutiny.