A New Standard for Forfeiture of Trustee Fees?

In a recent decision, the United States District Court for the District of Minnesota ordered a trustee to disgorge all of the fees he received because of fraudulent conduct on his part. See In re Kiernat.[1]The court’s opinion, however, includes some broad language suggesting that Minnesota law requires that any breach of a fiduciary duty results in total forfeiture of a trustee’s fees. This language is inconsistent with Minnesota Supreme Court decisions holding that an attorney’s breach of a fiduciary duty does not necessarily result in forfeiture of all fees. See Gilchrist v. Perl.[2]

The Kiernat opinion includes cites to Perl I and other older cases holding that “any fiduciary” who “breaches his duty to his client forfeits his right to compensation.” Rice v. Perl.[3]The Minnesota Supreme Court, however, has narrowed the application of its holding in Rice. In Gilchrist the Court held that where an attorney breaches a fiduciary duty, but actual fraud is not established, the amount of the attorney’s fee forfeiture may be adjusted to the degree of misconduct, based on the relevant factors provided in Minn. Stat. Sec. 549.20 subd. 3 (1984). See Gilchrist v. Perl.[4]Therefore, efforts to use the Kiernat decision to argue for complete fee forfeiture in all cases involving a breach of fiduciary duty should be rejected.

Moreover, the broad language in Kiernat was not necessary to the Court’s holding. Minnesota law clearly provides that when a fiduciary engages in actual fraud or bad faith, he is not entitled to any pay for his services. See Gilchrist v. Perl.[5]Such conduct was well-established in the Kiernat case. The trustee admitted that he had fraudulently overbilled the trust, and pled guilty to one count of mail fraud for actions in connection with his duties as trustee. The Court rightly concluded that where there is willful criminal fraud, no analysis is needed to segregate what fees may have been legitimately earned. Accordingly, the overbroad language — that any breach of fiduciary duty results in total fee forfeiture — is neither essential to the holding nor necessarily intended to be as expansive as it would appear. Nonetheless, trustees and attorneys representing them, should be aware of potential efforts to use Kiernat to argue for expanded trustee fee forfeitures.