July 3, 2013
Authored by: Luke Lantta
Most fiduciaries can’t do everything alone. That’s why they are usually given authority to hire outside professionals, such as accountants and lawyers. So, what happens to these professionals if, for example, the executor who hired them breaches his fiduciary duties to the estate beneficiaries?
In Stuart v. Freiberg, the Appellate Court of Connecticut ruled that an accountant may be liable to estate beneficiaries who claimed that the accountant presented his financial reports on behalf of an estate as accurate even though he had knowledge that the executor was using estate funds for personal expenses.
The appellate court described “[t]he trail of disputes between the parties, including, at times, collateral actors” as “long and tortuous,” so we won’t recount it here. The very short background is that there was a lawsuit among brothers alleging that one of the brothers exerted undue influence over their father in the creation of a trust, the formation and funding of a limited partnership and related financial activities, and that the father lacked the capacity to understand the transactions. The plaintiffs were largely successful in that suit. The successful brothers then sued the attorney for the unsuccessful brother alleging a number of counts, which were dismissed at summary judgment.
That leads us to the successful brothers’ lawsuit against the unsuccessful brother’s accountant. The suit against the accountant alleged, among other things, that the accountant knew of the mishandling of estate assets, aided in the mismanagement by creating adjusted journal entries and mischaracterizing personal expenses, prepared misleading transaction summaries, and compiled incorrect reports which he provided to the brothers who were estate beneficiaries. It was further alleged that the accountant knew or should have known that the brothers would rely on his representations, which they did to their detriment. The brothers later alleged that the accountant regularly prepared reports on behalf of the estate that he presented as accurately stating the estate’s financial status when he knew that the other brother was using estate funds for personal expenses. The brothers claimed that the accountant reviewed and adjusted entries in the estate’s books that would mischaracterize the other brother’s personal expenses as “commissions earned or loans.”
The accountant sought dismissal of these claims on, among other grounds, that the plaintiffs didn’t rely on his actions and that he did not owe the plaintiffs a duty of care. The appellate court, however, found there were genuine issues of material fact (1) whether the plaintiffs relied on the financial statements and reports the accountant prepared, and (2) whether the accountant owed the plaintiffs a duty of care.
With respect to reliance, there was some evidence that the plaintiffs may have delayed their efforts to remove their other brother as executor because they were relying on the accountant’s reports.
With respect to the duty of care, the court determined that there was some evidence that the plaintiffs were intended beneficiaries of the accountant’s work for the other brother.
In Connecticut, it is therefore possible that a third party professional hired by a fiduciary may owe a duty of care to the beneficiaries sufficient to give rise to a malpractice claim even in the absence of privity with the beneficiaries.