Playing the Sanctions Game in Probate Court

The Court of Appeals recently issued an unpublished opinion in three combined appeals all relating to the Estate of Robert Winfield Cederquist (click here to read the opinion).  The case provides a good launching spot from which to review the rules related to sanctions for frivolous pleadings and wasteful litigation in the course of probate matter.

The opinion ominously introduces the case as follows: “The now-decimated estate at the heart of this suit has been the subject of extensive litigation in the probate court…” And the COA goes on to explain that the total value of this estate when the litigation started was about $500,000, while the appellant is seeking to recover legal fees and costs in excess of $600,000.  That’s right – more legal fees than assets in the entire estate – and those are the fees of just one of the parties.

The party that prevailed in the trial court (the appellant) sought to recover the fees they spent on the case by having the trial court determine that this case was frivolous, and therefore that the losing party was obligated by statute to pay their legal fees. The trial court did not award the fees, and the aggrieved party appealed. The COA affirmed the trial court.

Very importantly, the appellant sought sanctions only under the statute (not the court rule, as discussed below) and under only one prong of the statute. The statute is MCL 600.2591(click here to read the entire statute).  This statute mandates that a trial court sanction the losing party (and their attorney) in any case in which the court finds that the action was “frivolous.”  The statute then defines “frivolous” as one of the following:

(i) The party’s primary purpose in initiating the action or asserting the defense was to harass, embarrass, or injure the prevailing party.

(ii) The party had no reasonable basis to believe that the facts underlying that party’s legal position were in fact true.

(iii) The party’s legal position was devoid of arguable legal merit.

This appellant sought relief only under the first of those prongs. The trial court found, and the COA affirmed, that appellant failed to establish that at the time the original pleadings were filed the primary purpose was to harass, embarrass or injure the respondent.

Abusive Discovery. The case includes a discussion of wasteful and excessive discovery in the course of litigation and the relevance of such conduct in determining whether such sanctions apply. My shorthand characterization of their conclusion is that:  While abusive discovery may be evidence of a bad intent, if is not determinative.  Further, the COA looks at the “defense” that a party cannot assert that the discovery was unnecessary (and therefore evidence of a frivolous action) when that party did not move to have the discovery stricken (i.e., seek protective orders) during the course of discovery.  The COA rejects that defense, and says that abusive discovery can be evidence, but that wasteful discovery alone does not mean that the “primary purpose” at the time the case was started was to harass, injure or embarrass.

The Court Rule Option. The COA notes that the case is limited to the issue raised: the application of MCL 600.2591(3)(a)(1); and that appellant did not assert on appeal that the action, when filed, was without any factual basis or legal merit (the other two options available under the statute), nor did appellant pursue sanctions under the court rule, MCR 2.114.

The relevant provisions of MCR 2.114 are:

(C) Signature.

(1) Requirement. Every document of a party represented by an attorney shall be signed by at least one attorney of record. A party who is not represented by an attorney must sign the document.

(2) Failure to Sign. If a document is not signed, it shall be stricken unless it is signed promptly after the omission is called to the attention of the party.

(3) An electronic signature is acceptable provided it complies with MCR 1.109(D).

(D) Effect of Signature. The signature of an attorney or party, whether or not the party is represented by an attorney, constitutes a certification by the signer that

(1) he or she has read the document;

(2) to the best of his or her knowledge, information, and belief formed after reasonable inquiry, the document is well grounded in fact and is warranted by existing law or a good-faith argument for the extension, modification, or reversal of existing law; and

(3) the document is not interposed for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation.

(E) Sanctions for Violation. If a document is signed in violation of this rule, the court, on the motion of a party or on its own initiative, shall impose upon the person who signed it, a represented party, or both, an appropriate sanction, which may include an order to pay to the other party or parties the amount of the reasonable expenses incurred because of the filing of the document, including reasonable attorney fees. The court may not assess punitive damages.

(F) Sanctions for Frivolous Claims and Defenses. In addition to sanctions under this rule, a party pleading a frivolous claim or defense is subject to costs as provided in MCR 2.625(A)(2). The court may not assess punitive damages.

Click here to read MCR 2.114 in its entirety.

As this case demonstrates, it is important to appreciate the differences between the statute and court rule in the context of sanctions. For one thing, while sanctions are mandatory for violation of either the court rule or statute, the mandatory sanctions under the statute are the costs and fees of the prevailing party.  Under the court rule the sanction is “an appropriate sanction” which may include legal fees and costs.  The court rule applies separately to each and every document filed (and signed) with the court.  The statute only applies to the pleading that initiated the case: the initial petition or complaint.

Conclusion

Clients always want to recover their fees in cases they win, or where assertions are made without any reasonable basis in fact or law. Michigan law allows for that result in many of those situations. But what clients think is frivolous or wasteful is much different from how the law defines it. [I have written before about managing client expectations on this point.  Click here to read “I love you but…” ]  What this case helps us understand is that when parties seek to recover costs and fees as sanctions, they must be mindful of the very precise language of the statutes and court rules that apply, and must carefully tailor their pleadings accordingly.

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Decanting Made Easy

decanting 2

It’s been four years since Michigan’s decanting laws took effect. Those of us at CT have found ourselves decanting more and more lately. It has provided magnificent results in several cases.  I think the reason it took us so long to get on the bandwagon is that the whole concept seemed complicated and intimidating.  But as we’ve worked through these cases, we’ve kept coming to the same conclusion: It works and it’s way easier than we imagined it could be.

Decanting is taking a beneficiary’s interest in an irrevocable trust and creating a new trust for that beneficiary, with, in most cases, new terms. The term “decanting” comes from the concept of taking a bottle of old wine and pouring it into a new bottle or skin.

Now Michigan’s decanting laws (written and advanced by our good friend and that outstanding leader in probate law, Jim Spica) come in a variety of flavors (and you should definitely look up Jim’s writings and speaking materials for a more sophisticated understanding of this topic). Decanting can be accomplished, for instance, where a Trustee has been granted a sufficiently broad power of appointment to accomplish the task.  These decanting rules are set out in Michigan’s Power of Appointment Act.  MCL 556.115(a).  And while I am sure there are situations where this is the appropriate tool to accomplish the task, what we’ve found is that, for our purposes, the most fruitful application of Michigan’s decanting laws are those provisions for decanting set forth in Michigan Trust Code, and specifically MCL 700.7820a.

We’ve used decanting for two primary purposes: (1) To fix problem trusts, and (2) To delay a beneficiary from obtaining unfettered access to an interest in trust.

The key to an MTC decanting is discretion. Basically, to the extent a beneficiary’s interest in trust is a discretionary interest, it can be decanted.  For that reason, decanting comes up as an option in a lot of special needs planning cases, where discretion is always in play.  But decanting options have arisen in other types of cases as well.

So first you need to understand what discretion is. And in Michigan, a discretionary interest in Michigan is defined very broadly. See MCL 700.7103(d).  Even the ability to determine when a distribution will be made is sufficient to create a discretionary interest.  What’s more, where the language defining the beneficial interest is confused between discretion and support, our law defaults to discretion. MCL 700.7103(k) (and this type of confusing language appears in a lot of instruments, particularly older special needs trusts).  So this means, to the extent the Trustee exercises any judgment regarding distributions to the beneficiary, that interest is almost always going to be defined by Michigan law as a “discretionary interest” thereby triggering the ability to decant.

[To read more on Michigan’s liberal law on discretion, click here for an article I wrote several years ago on the topic.] https://mielderlaw.com/wp-content/uploads/2013/05/Pages_from_winter2009-2-MPEPJournal-The-power-of-discretion.pdf

Now here’s another point (a real gem) that you need to understand when the objective of decanting is continuing property in trust that the trustee would otherwise be required to be distribute at a date/age certain. While the law says that you cannot use decanting to materially change the terms of the trust, it also says: “An increase in the maximum period during which the vesting of a future interest may be suspended or postponed under applicable law does not constitute a material change in the interest of a beneficiary.” Voila!

So the point of all this is that, the proposition that you can rewrite a trust to get rid of problems in the way it was written, and even rewrite the trust so that a trust beneficiary’s distributions will be put on hold, is not just doable, but relatively easy to accomplish in those cases where you can define the beneficial interest as a discretionary interest.

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Pins and Pictures

map w pins 3

I struck up a conversation with a woman sitting next to me on a bench in a courtroom in Mio Michigan this week. I asked her if she had any photographs of the stories she was telling me.

“Yes” she said “in my mind.”

Ah. The best kind.

From 1940 – 1954 her father was the sheriff of Oscoda County. In those few minutes while we waited for a hearing to start she shared some of those photographs with me.  A picture of her as a child pushing meals through a slot in the jail cell to the prisoners – meals that her mother, the cook and undersheriff, had prepared.  A picture of the hearse picking up people injured in car accidents because the county didn’t have an ambulance.  A picture of a boy weeping uncontrollably after shooting someone in a hunting accident.

I have often felt like photographs are both good and bad. They capture something of an event, but there is more that they don’t capture.  Photos are fixed.  Life is much richer and more dynamic. And often, when you are left with photographs from events, there is a corrupting inclination for the real memory to be absorbed by the fixed image.  I think that, for most things, it is better to have a memory than a photograph.  I suspect I am not alone in this belief. I think the woman I met in Mio shared my bias.

So I have pins, instead of photographs.

It was my first visit to the court in Mio – a big deal to me – it meant I got to put a new pin on my map for Oscoda County. The photo above is of my map. Yellow pins are the counties where I have been in court.  Blue pins are for our offices.  I have been in two counties in the UP, but the map doesn’t show those.

I have been a lawyer for 20+ years. I have managed a firm for most of those years.  I have driven more than 300,000 miles in two Buicks and a Ford, crisscrossing this spectacular State of ours. Michigan.  My home.  I’ve been in court in most of the counties in Michigan.  Not all of them.  Still some new courts to go to.  I’m not done yet – I hope.

But I think that when I am done – when all the cases and conflicts are washed away, when a thousand briefs and business decisions are forgotten, this is what I will hold onto – the pictures in my mind of the things I saw, and the pictures I saw and feelings I felt because they were shared with me from the memories of the people I met. Pins  – and photographs – the very best kind.

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