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STEPP, et al. v. FOSTER, et al.



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STEPP, et al.

v.

FOSTER, et al.


January 14, 2000

Record No. 990404

GAIL STEPP, et al.

v.

JAMES A FOSTER, et al.

FROM THE CIRCUIT COURT OF FAIRFAX COUNTY

OPINION BY JUSTICE LAWRENCE L. KOONTZ, JR.

Present: All the Justices

Kathleen H. MacKay, Judge


In this appeal, the principal issue we consider
is whether the trustees of a trust who successfully defended an
action by beneficiaries of the trust are entitled to recover an
award of attorney’s fees and expenses from the beneficiaries
rather than from the trust corpus.

BACKGROUND

The Belmont Park Estates subdivision was
created by recorded plat in 1956 and consists of 140 residential
lots located in Fairfax County. Marketing of the subdivision by
the owner/developer included reference to an adjoining 6.8-acre
parcel (hereafter Parcel A) as the site of a future clubhouse,
marina, dock, and other recreational facilities on Belmont Bay in
Occoquan Creek near its outlet into the Potomac River.

A Declaration of Covenants for Belmont Park
Estates was recorded on September 1, 1960. The covenants, which
deal primarily with restrictions on lot use and easements, do not
reference Parcel A or any other common property. No provision for
a community association, either voluntary or mandatory, is
contained in these covenants. Sometime after the covenants were
recorded, the owner/developer abandoned the project leaving the
majority of the lots in the subdivision unsold.

On February 24, 1973, the new owner of Parcel A
transferred it to a trust, naming James A. Foster, Marvin E.
Lear, and Marshall L. Ware, three resident lot owners, as
trustees.
[1] The trust is for the benefit of all lot owners in
Belmont Park Estates. The trust deed recites various powers of
the trustees, but imposes upon them no express duties to enforce
those powers. Among the powers given to the trustees is the power
to appoint successor trustees, to restrict access to Parcel A to
those lot owners in the subdivision who pay "a uniform
charge as determined by the trustees . . . to pay
expenses incurred in the ownership, maintenance and improvement
of the property," and to create a governing board of lot
owners. The deed further provides that the trustees are "to
have no personal liability as a trustee for any act or omission
in connection with said property, except for . . . acts
committed with malice or in bad faith."

Pursuant to the terms of the trust deed
referencing a governing board, the trustees called a meeting of
the lot owners and established Belmont Bay Community Associates
(Associates), an unincorporated association. Gail Stepp, a
resident lot owner, was elected as Associates’ first
president. The minutes and other records of Associates indicate
that it was initially and principally concerned with the
maintenance and improvement of Parcel A, frequently referred to
as "the park," and the imposition of a maintenance fee
for that purpose. Over time, however, Associates expanded the
scope of its activities to include enforcement of the covenants,
sponsoring civic and social functions, involvement in local
planning and land use issues, and cooperation and encouragement
of efforts by Foster and others to market the unsold lots in the
subdivision. The widening scope of the activities of Associates
caused some friction among resident and nonresident lot owners.

In November 1986, Stepp was named a successor
trustee after Ware moved out of the subdivision. The deed in the
record to this effect appears to have been filed on April 23,
1987. On September 29, 1993, apparently related to the growing
discord among lot owners over the role and authority of
Associates, Stepp and Marie Stepp, his wife, submitted a letter
of resignation from Associates.

In 1994, the Belmont Bay Community Association,
Inc. (the Association), a Virginia non-stock corporation, was
chartered and assumed the duties of the governing board called
for in the trust deed. Marie Stepp became treasurer and a board
member of the Association. Associates’ assets were
transferred to the Association on May 22, 1994.

Disputes over the role and authority of the
Association continued and a controversy developed over the
selection of candidates for election to the Association’s
board in 1995. Apparently in connection with this controversy,
some members of the Association asserted that there was no record
of Stepp’s selection as a substitute trustee. Ware was asked
by the Association to submit a letter of resignation as trustee,
which he did on May 31, 1995. A notation in the minutes of the
December 15, 1995 board meeting indicates that "Carol Ann
Wright has accepted the position of Trustee."
[2]

On February 4, 1997, Stepp, both individually
as a lot owner and as a trustee, Marie Stepp as a lot owner, and
Ralph Edwards, both individually as a lot owner and "for the
use and benefit of Belmont Bay Community Associates," and
Patricia Edwards as a lot owner, filed an amended bill of
complaint against the Association, Foster and Lear, both
individually and as trustees, and seven individual lot owners
including Wright and Michael Polifko.
[3]
In essence, the Stepps and the Edwardses sought a declaration
that the Association was not the governing board of the trust
called for by the February 24, 1973 trust deed, and that it
lacked the power to enforce the collection of dues from lot
owners. They further sought a declaration that Wright was
"not a duly appointed Trustee." In addition, they
sought an accounting of the funds collected by the Association
and Associates, the removal of Foster and Lear as trustees, and
damages from Foster and Lear for alleged breaches of their
fiduciary duties
. [4]

Characterized by the chancellor in her final
opinion letter as a "firestorm," the proceedings in the
trial court, culminating in a six and one-half day ore tenus
hearing, reveal the extent to which the dispute over conflicting
interpretations of the trust deed, the duties of the trustees
under that deed, the authority of the community associations, and
the rights of the individual lot owners had devolved into a
bitter and acrimonious community feud. For purposes of our
resolution of this appeal, however, it is unnecessary to recount
the full extent of the accusations and counter-accusations of the
principal parties. It will suffice to say that the Stepps, the
Edwardses, and their supporters opposed the efforts to expand the
role of the Association beyond the maintenance and use of Parcel
A as a "park" and viewed these efforts as intended to
primarily benefit Foster and Lear individually. Foster, Lear, and
their supporters maintained that these efforts were altruistic
and were intended to benefit the entire community.

After the chancellor issued preliminary
findings in their favor, Foster, Lear, and Wright (the trustees)
filed a motion to recover the attorney’s fees and expenses
expended by them in defending the suit. The trustees specifically
sought to recover these fees and expenses personally from the
Stepps and the Edwardses (the beneficiaries).

After receiving briefs from the parties, the
chancellor issued a preliminary ruling. In a letter opinion dated
June 5, 1998, the chancellor recognized that, as an exception to
the "American Rule" that attorney’s fees and costs
generally are not recoverable by a prevailing litigant, a trustee
who is required to defend in his capacity as trustee
"without his own fault" is entitled to be reimbursed
for attorney’s fees and expenses incurred in the litigation.
Willson v. Whitehead, 181 Va. 960, 965, 27 S.E.2d 213, 216
(1943). The chancellor, relying on Willson, accepted the
trustees’ argument that because "there is no trust fund
within the control of the court but, rather, the trust is
non-liquid realty," the burden of reimbursing the trustees
should fall on the cestuis que trust, i.e., the
beneficiaries who sued the trustees, personally.

After receiving briefs and exhibits from the
parties, the chancellor held an ore tenus hearing to
determine the reasonableness of the attorney’s fees and
"expenses" claimed by the trustees. In an opinion
letter dated November 23, 1998, the chancellor found that the
attorney’s fees were reasonable and, after making minor
adjustments to their claim for expenses and rejecting the
beneficiaries’ claim for offset for reimbursement received
by Foster under his homeowner’s liability policy, the
chancellor awarded the trustees $158,343.50 in attorney’s
fees and $14,153.71 in "costs" against the
beneficiaries personally.

Incorporating by reference the opinion letter
dated the same day, a final decree dated November 23, 1998,
confirmed the award of attorney’s fees and
"expenses."
[5] In addition, the
chancellor memorialized the findings of fact and conclusions of
law made earlier in the proceedings. Relevant to this appeal, the
chancellor held that Stepp had been properly named as a
substitute trustee, but had been removed and replaced by Wright,
and that the current trustees are Foster, Wright, and Polifko.
The chancellor further held that no evidence supported a finding
that Foster and Lear had breached their fiduciary duties as
trustees or acted in bad faith. Although the decree makes no
express reference to the request for an accounting, it is clear
by implication that this relief was denied. We awarded the Stepps
this appeal.

DISCUSSION

The parties concentrated the majority of their
argument on brief and the entirety of their oral argument on the
issue whether an award of attorney’s fees and expenses could
be made against an unsuccessful beneficiary/litigant personally.
However, because a judgment in favor of the beneficiaries on the
other assigned errors would necessarily render moot the
trustees’ claim for attorney’s fees and expenses, we
will first address these assigned errors.

The Stepps have assigned error to the
chancellor’s findings that Mr. Stepp is no longer a trustee,
that the trustees were not required to act unanimously, and that
Foster and Lear had not breached their fiduciary duties as
trustees. Additionally, the Stepps assign error to the
chancellor’s failure to order an accounting of Associates
and the Association. Each of these challenges to the
chancellor’s judgment involves and is determined by a
disputed issue of fact. When the chancellor hears evidence ore
tenus
, her decree is entitled to the same weight as a jury
verdict, and we are bound by the chancellor’s findings of
fact unless they are plainly wrong or without evidence to support
them. Rash v. Hilb, Rogal & Hamilton Co., 251 Va. 281,
283, 467 S.E.2d 791, 793 (1996). The record adequately supports
the chancellor’s findings of fact in favor of the trustees
on each of these issues, and, accordingly, we will affirm the
chancellor’s judgment on them.

As framed by the Stepps, the remaining issue to
be resolved is whether "[t]he trial court erred in entering
a personal judgment against the Stepps in the amount of
$172,497.21 as attorney’s fees and costs awarded to Foster,
Lear and Wright." For the reasons that follow, we hold that
the award was proper, but that the chancellor erred in not
assessing that award against the trust.

The trustees’ premise for seeking to have
the chancellor assess the award against the beneficiaries rather
than the trust is that assessing the award against the trust
would require mortgaging or liquidation of the only trust asset,
Parcel A, and, thus cause undue hardship on the other
beneficiaries. Accordingly, they assert that "under the
circumstances of this case, that right and entitlement requires
that the reimbursement come personally from the Stepps." In
support of this assertion, the trustees cite Willson and Cooper
v. Brodie
, 253 Va. 38, 480 S.E.2d 101 (1997). In neither
case, however, was the award to the trustee charged to the
beneficiary/litigant personally. Indeed, we expressly held in Cooper
that "the trial court erred in charging a portion of
Cooper’s attorney’s fees and [expenses] to her
individual interest. . . . [T]hat portion
should be charged to the trust
." 253 Va. at 44, 480
S.E.2d at 104. (Emphasis added).

The trustees contend, however, that because the
corpus of the trust is real property, there is no fund from which
the chancellor could have ordered payment of the attorney’s
fees and expenses. They contend that this is so because the
chancellor is without power to force the termination of the trust
by ordering the sale of the real property as this would frustrate
the purpose of the trust. Accordingly, they conclude that
"the proper source of reimbursement is the Stepps." We
disagree.

Unquestionably, in Willson we recognized
an exception to the "American Rule" that litigants bear
the burden of their own expenses in litigation. However, as we
explained in Ward v. NationsBank, 256 Va. 427, 441, 507
S.E.2d 616, 624 (1998), "[t]he correct application of Willson
is that a trustee, who has the duty to defend the actions
challenged as detrimental to the trust, is entitled to
attorney’s fees when he has been called on to defend himself
against a charge of dereliction of duty and there is neither
substantial evidence that the trustee wasted or mismanaged the
trust nor evidence of any conduct warranting the removal of the
trustee. . . . [W]here a trustee has a good faith
basis for defending a suit challenging his actions as trustee,
attorney’s fees and [expenses] incurred in the defense of
the suit should be charged against the trust."
(Emphasis added.) See also Cooper, 253 Va.
at 44, 480 S.E.2d at 104.

That the corpus of a trust consists of real
property rather than liquid assets does not remove those assets
from the control of the chancellor. Nor is it controlling that an
award of attorney’s fees and expenses to a trustee who has
successfully defended the interests of the trust might result in
diminution of the corpus and thereby frustrate the grantor’s
intention. Nothing in our prior case law suggests such
limitations on the ability of the chancellor to make an award
from the corpus of a trust, charitable or otherwise, reimbursing
a trustee for expenses incurred in representing the trust.
Moreover, in the present case the record does not establish that
making an award of the trustees’ expenses from the trust
corpus would necessarily terminate the trust as the trustees
suggest.

There is no dispute here that because the
trustees had a duty to defend the suit and the chancellor found
no breach of their fiduciary duties, they are entitled to recover
their expenses incurred in the defense of the suit. As we
previously noted in footnote 5, supra, the parties and the
chancellor use the terms "expenses" and
"costs" interchangeably. To the extent that it might
appear we draw no distinction between these terms in this case, a
further discussion of the nature of the chancellor’s
judgment is necessary.

In this case, we are not concerned with an
award of costs as contemplated by Code ? 17.1-601, which
provides, in part, that "the party for whom final judgment
is given in an action or motion shall recover his costs against
the opposite party." Nor are we concerned with the
distinctions we necessarily draw between costs essential for the
prosecution of a suit, such as filing fees or charges for service
of process, and incidental expenses incurred in an
attorney’s representation of clients in the form of expert
witness fees, express mail service, messengers, meals, law clerk
temporaries, computer-based legal research, library research,
photocopies, parking, taxicabs, telephone calls, and transcript
preparation in appropriate cases. See Advanced Marine
Enterprises v. PRC Inc.
, 256 Va. 106, 126, 501 S.E.2d 148,
160 (1998); see also Lansdowne Development Company v.
Xerox Realty Corp.
, 257 Va. 392, 403, 514 S.E.2d 157, 163
(1999)(discussing award of "all litigation expenses"
under contract).

While a portion of the chancellor’s award
in the present case reimburses the trustees for some of the items
of expense listed above that we rejected in Advanced Marine,
here we are not concerned with an award of what are commonly
referred to as "court costs." Rather, we are concerned
with "expenses" of trustees incurred in defending a
suit brought against them by beneficiaries of the trust. In that
context, we apply our holding in Willson as requiring that
the trustees be held financially harmless in that "they
ought not in justice and good conscience to be put to any expense
out of their own moneys . . . [and] if it appears
. . . that they have sustained charges and expenses
beyond the costs of the suit, as between solicitor and client,
the court will order such further expenses properly incurred to
be paid to them." Willson, 181 Va. at 965, 27 S.E.2d
at 216. Accordingly, here we are concerned with any reasonable
expense of the trustees beyond and above their attorney’s
fees, that they may have incurred as a result of being required
to defend this suit. In short, here the chancellor properly
awarded expenses in the unique context of trustees defending a
suit brought by beneficiaries of the trust so as to hold them
financially harmless.
[6]

CONCLUSION

For these reasons, we will reverse that portion
of the chancellor’s judgment making the beneficiaries
personally liable for the attorney’s fees and expenses
awarded to the trustees, modify the judgment to place the
liability for that award on the trust, and enter final judgment
for the trustees.

Affirmed in part, reversed and modified in
part, and final judgment.

 

FOOTNOTES:

[1] When Foster sought to acquire
title to a vacant lot adjoining his home, he learned that Parcel
A and the unsold lots in the subdivision had been acquired by the
new owner some time after the owner/developer had abandoned the
project. Foster and the new owner subsequently entered into a
joint venture to market the unsold lots.

[2] No formal action to record
Wright’s selection as a trustee was taken at this time.
Subsequent to the initiation of the suit from which this appeal
arises, a deed was filed naming Wright as successor trustee
replacing Ware and naming Polifko as successor trustee replacing
Lear.

[3] The original bill of complaint
had been filed on October 3, 1996. The amended bill of complaint
was filed in order to add additional lot owners as respondents in
order to provide adequate notice to the beneficiaries of the
trust.

[4] On April 11, 1997, in a
preliminary hearing, the trial court granted partial summary
judgment to Foster, Lear, and Wright, finding that the trustees
did not have to act unanimously, but could act by majority vote.
The chancellor also found that the trust in question is "a
charitable trust."

[5] Throughout the proceedings the
parties and the chancellor use the terms "expenses" and
"costs" interchangeably. For reasons that we will
subsequently address, the proper term in the context of this case
is "expenses."

[6] Moreover, because the amount of
their expenses is not challenged on appeal, the trustees are
entitled to recover those expenses as awarded by the
chancellor’s judgment. We stress that our affirmance of the
judgment in this case should not be interpreted as permitting an
award of similar incidental expenses in a different litigation
context.

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