Before filing an appeal on behalf of a trustee, carefully consider the state's law on this issue. In Kentucky, such an appeal might be a fine idea. The recent decision in Estate of DeMoisey v. River Downs Inv. Co., 231 S.W.3d 785 (Ky. App. Aug. 10, 2007) shows Kentucky law can be quite liberal in allowing trustees to be reimbursed for litigation against claims against an estate. But in places like Illinois, even a successful trustee might get stuck with the bill for attorneys' fees.
In Kentucky, about two weeks before Jean C. "Fox" DeMoisey died on Dec. 27, 1998, he signed a promissory note of $34,510.80 in favor of River Downs Investment Company. Fox signed the note to cover gambling losses incurred using a telephone betting account. Fox's son was appointed executor of his estate, and in March of 1999, River Downs sent a written claim to the estate seeking recovery under the note. The executor took no action on the claim other than to request further information.
Not until October 2002, did the executor notify River Downs that it was disallowing the claim as void pursuant to Kentucky Revised Statute Section 372.010, which declares any claim for gambling debts void as against public policy.
A full nine months later, in June of 2003, the estate requested the court's permission to disallow the claim. The court denied the request, finding that the executor had not satisfactorily explained its failure to file a timely notice of disallowance for a period of more than three years. The executor appealed. In a surprising ruling, the appellate court affirmed the lower court's decision, holding that the gambling debt that was void and a legal nullity by statute became a valid and enforceable debt when the executor failed to disallow it within 60 days, as required by Kentucky Revised Statute Section 396.055(1).
Sometime thereafter, the executor filed a motion in the lower court seeking payment of costs and attorneys' fees incurred in prosecuting the appeal. River Downs contested the motion, arguing that the estate derived no benefit from the executor's appeal and the payment of attorneys' fees would deplete the estate to such an extent that it could not pay River Down's original claim. The lower court agreed with River Downs, and the executor appealed, again.
On appeal, the executor argued that he had a fiduciary duty to defend against River Downs' claim because, as a gambling debt, the claim was void under Kentucky law and therefore, the costs and attorneys' fees incurred by the appeal were justified. In response, River Downs argued that the lower court correctly found that the executor had no excuse for failing to disallow the claim in a timely manner, thus the appeal was not supported by the law and did not support an award of attorneys' fees.
This time, the Kentucky appellate court reversed the lower court's ruling. The appellate court first stated that Kentucky cases have established a very low threshold for distinguishing between legitimate estate actions meriting attorneys' fees and illegitimate actions not meriting fees. To entitle himself to attorneys' fees, the executor does not need to show that the estate benefited from the action. But, when there is no benefit to the estate, the executor must show "some good reason" for prosecuting the action. The appellate court concluded that the executor did possess "some good reason" for pursuing the appeal and defending against a claim void against Kentucky law, even if that defense was not timely.
Furthermore, the court found, the issue of whether a void claim could be transformed into an enforceable action because of the executor's inaction was an issue of first impression in Kentucky, and resolution of this novel question of law constituted "some good reason." If the appellate court had sided with the executor that the claim remained void, this conclusion would surely have benefited the estate, which would have been relieved of its obligation to pay the claim.
Contrast Kentucky's holding with the law of Illinois. The Illinois Supreme Court has held that should a trustee feel the need to litigate beyond the court of original jurisdiction, he must do so at his own risk and costs. NC Illinois Trust Co. v. Madigan, 812 N.E.2d 1038 (4th Dist. 2004) (citing Glaser v. Chicago Title & Trust Co., 82 N.E.2d 446, 448-449 (1948)). The NC Illinois Trust Co. court held that "[w]hen a trustee . . . brings a reasonable but unsuccessful appeal, we see no reason why the cost of that appeal should be allocated to the estate instead of to the trustee." 812 N.E.2d at 1042.
That holding would seem to thin out the crowd of trustees willing to roll the dice on an appeal of a trial court's decision. But lest there still remain some feisty fiduciaries willing to take their chances, we refer them to the underlying holding in Glaser -- which denied attorneys' fees even for a successful appeal.