In re Estate of Fogleman

• Decision Date: 02 March 2000
• Docket Number: No. 1 CA-CV 98-0610.,1 CA-CV 98-0610.
• Citation: In re Estate of Fogleman, 197 Ariz. 252, 3 P.3d 1172 (Ariz. App. 2000)
• Parties: In the Matter of the ESTATE OF John R. FOGLEMAN, Deceased. Snell & Wilmer L.L.P.; Richard W. Sheffield, individually and as former Personal Representative of the Estate of John R. Fogleman, Deceased; and Roger Curley and Kevin J. Parker, individually and as attorneys for the former Personal Representative, Petitioners-Appellants, Cross Appellees, v. Karen J. (Hurd) FEGEN, Personal Representative, and as conservator for Katie Marie Fogleman, minor child of the Decedent, Respondent-Appellee, Cross Appellant, Pilar Rivero, Appellee.
• Court: Arizona Court of Appeals

3 P.3d 1172

197 Ariz. 252

In the Matter of the ESTATE OF John R. FOGLEMAN, Deceased.

Snell & Wilmer L.L.P.; Richard W. Sheffield, individually and as former Personal Representative of the Estate of John R. Fogleman, Deceased; and Roger Curley and Kevin J. Parker, individually and as attorneys for the former Personal Representative, Petitioners-Appellants, Cross Appellees, v. Karen J. (Hurd) FEGEN, Personal Representative, and as conservator for Katie Marie Fogleman, minor child of the Decedent, Respondent-Appellee, Cross Appellant, Pilar Rivero, Appellee.

No. -0610.

Court of Appeals of Arizona, Division 1, Department A.

March 2, 2000.

Fennemore Craig by Kenneth J. Sherk and Timothy J. Burke, Phoenix, for Petitioners-Appellants Snell & Wilmer L.L.P., Richard W. Sheffield, and Kevin J. Parker.

Bryan Cave by Mark I. Harrison, Phoenix, for Petitioner-Appellant Roger D. Curley.

Sacks Tierney P.A. by Randall S. Yavitz, James W. Armstrong, Candess J. Hunter, Phoenix, for Respondent-Appellee Karen J. (Hurd) Fegen.

John R. Coll, Ronald G. Cooley, Phoenix, for Respondent-Appellee Pilar Rivero.

OPINION

BERCH, Judge.

¶ 1 Appellants ask that we review the trial court's determination that they breached their fiduciary duty, violated Ethical Rules 1.7 and 2.2, and committed bad faith in connection with their handling of the Fogelman Estate. For the following reasons, we affirm in part, reverse in part, and remand for further proceedings.

BACKGROUND

¶ 2 John Fogelman ("Decedent") died on March 10, 1997, leaving behind a will naming several beneficiaries. In addition to the assets disposed of in the will, Decedent owned a $1.5 million life insurance policy. The beneficiaries of the life insurance policy were Decedent's mother, Lu Fogelman; his four children: David, Mandy, Marcy, and Katie-Marie Fogelman; Sharon Peters; Appellee Pilar Rivero; and four creditors: Jerry Middleman, Bank of America, Citibank, and Appellee Karen Fegen,¹ a former wife.² Decedent's will directed the personal representative to pay from the residuary estate any inheritance and estate taxes imposed with respect to property passing both under and outside the will. In a separate provision, the will also instructed the personal representative not to seek reimbursement from beneficiaries of the life insurance for the taxes generated by the life insurance policy.

¶ 3 Upon Decedent's death, pursuant to the terms of the will, Appellant Richard Sheffield was appointed personal representative of the estate. Sheffield was and still is a partner in the Snell & Wilmer law firm, an appellant in this case. Sheffield hired Appellant Roger Curley, then a Snell & Wilmer attorney, to represent him in his capacity as personal representative.

¶ 4 While settling Decedent's affairs, Sheffield determined that, after paying the estate's creditors, the residuary estate did not contain sufficient assets to honor Decedent's request to pay the taxes generated by the insurance policy. In fact, the estate was insolvent and the assets were insufficient to pay all of the estate debts. Accordingly, Sheffield attempted to apportion the taxes among the insurance beneficiaries. Although all of the life insurance beneficiaries initially agreed to have a portion of the insurance benefits "held back" to pay the taxes, they later withdrew their consent. In June 1997, they asked Sheffield to resign his position as personal representative because of the dispute over the payment of taxes.

¶ 5 After trying for four more months to resolve matters, Sheffield filed a petition for instructions with the probate court seeking guidance on the tax-payment issue. In an order dated December 2, 1997, the court concluded that the provisions of the will implemented 26 U.S.C. § 2206 (1994), which requires collection of estate taxes from insurance beneficiaries "[u]nless the decedent directs otherwise in his will." Because Decedent's will did contain a tax-shifting provision, the court ordered that Sheffield "not seek contribution for the taxes from the life insurance beneficiaries" and that he pay the claims against the estate, including the taxes generated by the insurance policy, pursuant to the priority of claims statute, Arizona Revised Statutes Annotated ("A.R.S.") section 14-3805 (1995).

¶ 6 The court further ordered Sheffield to file a petition for approval of his fees and his attorneys' fees. The insurance beneficiaries objected to the fees requested, claiming that Sheffield's hourly rate of $220 was excessive for his work as personal representative and that Sheffield and Snell & Wilmer had a conflict of interest because they failed to disclose that Snell & Wilmer represents many of the estate's creditors. No one disputed that the claims of the creditors were valid, however. The insurance beneficiaries also requested that the court remove Sheffield as personal representative for failing to "defend and uphold" the will and failing to disclose the conflict of interest.

¶ 7 The court found that Sheffield and Snell & Wilmer had a conflict of interest and that they violated Ethical Rules 1.7 and 2.2 and A.R.S. section 14-3703(A) (Supp.1998-1999),³ which imposes a fiduciary duty upon a personal representative and the personal representative's attorneys. The court removed Sheffield as personal representative and appointed Appellee Fegen to replace him. The court also disqualified Snell & Wilmer from further participation in the case. On the issue of fees, the court found that Sheffield and Snell & Wilmer generated a large percentage of their fees by taking "positions adverse to the interests of the successors ... to minimize the amount of money paid from the estate for taxes so that money could be paid to [the] firm's other clients." The court also found that Sheffield and Snell & Wilmer acted in bad faith by failing to disclose their conflict of interest. For these reasons, it reduced their fees from $110,000 to approximately $22,500. Appellants moved for a new trial on the ethical violations and bad faith determinations, but the court denied the motion.

ISSUES

¶ 8 Appellants raise three issues on appeal: (1) Did the trial court err in finding that Appellants violated Ethical Rules 1.7 and 2.2; (2) did the trial court err in finding that Appellants violated their fiduciary duty imposed by A.R.S. section 14-3703(A); and (3) did the trial court err in finding that Appellants acted in bad faith?⁴

DISCUSSION

I. Ethical Violations

¶ 9 The trial court found that Sheffield and Snell & Wilmer violated Ethical Rules 1.7 and 2.2 because the interests of the unsecured creditors, some of whom were Snell & Wilmer clients, were adverse to the interests of the insurance beneficiaries, some of whom were successors⁵ to the estate. Ethical Rule 1.7 explains an attorney's duty to a client in a conflict of interest situation.⁶ 17 A.R.S. R. Sup.Ct., Rules of Professional Conduct, Rule 42 ("Ethical Rules"). Ethical Rule 2.2 provides guidance for those situations in which a lawyer serves as an intermediary between clients.⁷ Although, the trial court made no specific finding and offered no legal support for its suggestion that the successors to the estate were clients of the personal representative or the personal representative's attorneys, the trial court clearly considered them to be clients of Sheffield and the attorneys who were representing him. On appeal, Appellee Rivero implicitly concedes that no attorney-client relationship exists between a personal representative and a successor to an estate, while Appellee Fegen fails to address the issue.

¶ 10 In In re Estate of Shano, 177 Ariz. 550, 869 P.2d 1203 (App.1993), we addressed, albeit indirectly, whether beneficiaries of an estate are the personal representative's clients. There we held that a personal representative owes a duty of fairness and impartiality to all beneficiaries. See id. at 556, 869 P.2d at 1209. We noted, however, that an attorney owes a client "a duty of undeviating and single allegiance." Id. (citing Parsons v. Continental Nat'l Am. Group, 113 Ariz. 223, 227, 550 P.2d 94, 98 (1976) (discussing duty of insured's attorney who is compensated by insurer)). That a personal representative owes a beneficiary the lesser duty of fairness, rather than the duty of undivided loyalty, demonstrates that the beneficiary is not the personal representative's client.

¶ 11 By holding that the personal representative's attorney also owed the beneficiary the lesser duty of fairness and impartiality, we implied that the beneficiary similarly was not a client of the personal representative's attorney. See id. at 558, 869 P.2d at 1211. We believe the Shano court's analysis is correct and we follow it here. Thus, the successors to the estate were not the personal representative's or the personal representative's lawyers' clients to whom a duty of undivided loyalty was owed.

¶ 12 Any other interpretation would create conflicts among a personal representative's statutory duties. By statute, a personal representative owes a fiduciary duty of fairness and impartiality to all "interested persons," see A.R.S. § 14-3712 (1995); Shano, 177 Ariz. at 555, 869 P.2d at 1208, a term that includes "any heir, devisee, child, spouse, creditor, [or] beneficiary...." See A.R.S. § 14-1201(26) (1995). Thus, if the successors⁸ to an estate—who are interested persons to whom a fiduciary duty is owed—are also "clients" of the personal representative to whom the personal representative owes a duty of undivided loyalty, then the personal representative would be unable in handling any estate to fulfill its fiduciary duty of fairness and impartiality to all interested parties; for in any estate, there are competing demands from beneficiaries, successors, and creditors. The personal representative would not be able to give undivided loyalty to some while at the same time being truly impartial and fair to others, for money or assets paid to one are unavailable to the others. The...