October 10, 2011
Authored by: Luke Lantta
Somewhere Kirby E. Cole sits in prison, having plead guilty to mail fraud. As trustee for the Phillips Foundation, Cole breached his fiduciary duties to the Foundation by fraudulently transferring Foundation property and mineral rights for free to himself. So, Cole did what any imprisoned former trustee would do – he sued his lawyer.In Cole v. Mitchell, Cole sued his former lawyer, C. Gary Mitchell, for legal malpractice. Cole claimed that if only Mitchell had advised him against self-dealing as the Phillips Foundation trustee, Cole never would have transferred Foundation property to himself.
Mitchell had prepared a document, which Cole signed as trustee, in which the Foundation granted Cole unlimited authority to buy and sell property on behalf of the Foundation. On the same day as he executed the authorization, Cole (the trustee) sold Cole (the individual) 37 acres of property. Mitchell prepared and witnessed the deed. One small hiccup – Cole (the individual) never bothered to pay for the property. Cole (the individual) then flipped the 37 acres for over three times the ‘purchase’ price. Cole kept all the proceeds from that sale and reserved the mineral rights to himself and his wife. Cole also entered into several other criminal transactions concerning Foundation property, the underlying documents of which were all allegedly prepared by Mitchell.
Cole was ultimately prosecuted for his wrongdoing and, at a hearing in which he plead guilty, Cole explicitly admitted that the government had enough evidence to prove that he had the specific intent to defraud with respect to the transactions.
Because Cole admitted during his criminal proceedings that he had the intent to commit fraud, he was prevented from arguing in his malpractice lawsuit against Mitchell that his attorney’s advice, whatever it may have been, caused any of his troubles. Nevertheless, the Louisiana Court of Appeals analyzed Cole’s underlying argument about Mitchell’s advice.
The Louisiana Trust Code provides three exceptions to a trustee’s duty of loyalty: (1) transactions authorized by the settlor or trust instrument, (2) transactions agreed to by the beneficiary, and (3) transactions approved by a proper court. Cole relied on the document, prepared by Mitchell, as authority to self-deal under this section of the Trust Code.
Cole’s argument, however, ignored the Louisiana Trust Code provision that provides that a trust instrument cannot relieve a trustee from liability (1) for breach of the duty of loyalty to a beneficiary or for a breach of trust committed in bad faith; or (2) if the provision relied upon is inserted as a result of an abuse by the trustee of a fiduciary or confidential relationship to the settlor.
In the Court’s words, regardless of whether Mitchell prepared the documents for Cole to execute and/or failed to advise him against self-dealing, there were no grounds for Cole to argue that these transactions would be advantageous to the Foundation. The Foundation did not profit one dime from the transactions, but Cole personally profited $1,250,000 on one transaction alone. This act was in bad faith and not the result fo Mitchell failing to advise Cole of prohibitions against self-dealing.