Dardovitch v. Haltzman

Opinions of the United

1999 Decisions States Court of Appeals

for the Third Circuit

9-7-1999

Dardovitch v. Haltzman

Precedential or Non-Precedential:

Docket 98-1421, 98-1422, 98-1452

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Recommended Citation

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Filed September 7, 1999

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

NOS. 98-1421, 98-1422, and 98-1452

NICK DARDOVITCH

v.

MARK S. HALTZMAN, ESQUIRE; CATHERINE A. BACKOS,

as trustees of GLENN EAGLE SQUARE EQUITY ASSOC.

TRUST; GLENN EAGLE SQUARE EQUITY

ASSOCIATES, INC.

Mark S. Haltzman,

Appellant in No. 98-1421

NICK DARDOVITCH

v.

MARK S. HALTZMAN, ESQUIRE; CATHERINE A. BACKOS,

as trustees of GLENN EAGLE SQUARE EQUITY ASSOC.

TRUST; GLENN EAGLE SQUARE EQUITY

ASSOCIATES, INC.

Mark S. Haltzman,

Appellant in No. 98-1422

NICK DARDOVITCH

Appellant in No. 98-1452

v.

MARK S. HALTZMAN, ESQUIRE; CATHERINE A. BACKOS,

as trustees of GLENN EAGLE SQUARE EQUITY ASSOC.

TRUST; GLENN EAGLE SQUARE EQUITY

ASSOCIATES, INC.

On Appeal From the United States District Court

For the Eastern District of Pennsylvania

(D.C. Civ. No. 97-cv-00052)

District Judge: Honorable Stewart Dalzell

Argued: January 28, 1999

Before: BECKER, Chief Judge, SCIRICA and ROSENN

Circuit Judges.

(Filed: September 7, 1999)

JOSEPH M. DONLEY, ESQUIRE

(ARGUED)

PATRICK W. KITTREDGE, ESQUIRE

GLENN E. DAVIS, ESQUIRE

Kittredge, Donley, Elson, Fullem

& Embrick

421 Chestnut Street, 5th Floor

Philadelphia, PA 19106

Counsel for Mark S. Haltzman

CLETUS P. LYMAN, ESQUIRE

(ARGUED)

MICHAEL S. FETTNER, ESQUIRE

Lyman & Ash

1612 Latimer Street

Philadelphia, PA 19103

Counsel for Nick Dardovitch

2

STEVEN R. SPARKS, ESQUIRE

(ARGUED)

Eckell, Sparks, Levy, Auerbach

& Monte

A Professional Corporation

344 West Front Street

Media, PA 19063

Counsel for Catherine A. Backos, as

trustees of Glenn Eagle Square

Equity Associates Trust and Glenn

Eagle Square Equity Associates, Inc.

OPINION OF THE COURT

BECKER, Chief Judge.

These cross-appeals present interesting questions

concerning the amount-in-controversy requirement for

diversity jurisdiction, the extent to which an attorney

holding a contingent-fee agreement may charge additional

fees for collecting the proceeds of a settlement or judgment,

and the proper administration of trusts by trustees and the

beneficiaries' remedies for errors therein under

Pennsylvania law. The principal appellant is defendant

Mark S. Haltzman, a member of the Pennsylvania bar and

a trustee of the Glen Eagle Square Equity Associates Trust

(the "Trust"). Haltzman successfully represented Catherine

A. Backos, a codefendant and co trustee, in a separate civil

RICO claim brought by her and Glen Eagle Square Equity

Associates ("GESEA"), in which she was a major

shareholder, on a contingent fee basis. In order to

administer and distribute the proceeds of settlement of the

RICO claim, Haltzman and Backos established the Trust,

naming themselves as trustees. There were numerous

beneficiaries, including two shareholders and creditors of

GESEA -- Nick Dardovitch, the plaintiff and cross-

appellant, and Backos -- and also Haltzman himself, whose

interest sprang from his contingent fee. As part of his

efforts in administering the Trust, Haltzman took steps to

collect on the notes that constituted the trust corpus. He

paid himself an attorney's fee for this action out of the

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Trust's funds, and this case centers on the propriety of

Haltzman's acceptance of these additional fees.

As always, the threshold question is one of jurisdiction.

Dardovitch alleged, and the District Court found, that his

claim fell within the District Court's diversity jurisdiction.

Haltzman argues that this subject-matter jurisdiction is

lacking because Dardovitch's claim fails to meet the

amount-in-controversy requirement. Haltzman contends

that the amount in controversy is determined by payments

presently due. That is ordinarily the case. But where, as

here, the plaintiff had good cause to believe that he needed

to bring suit to establish his right to receive any funds

under the trust, the entire amount of the plaintiff 's interest

in the trust can become the amount in controversy. Since

this amount substantially exceeded the jurisdictional

amount, the District Court had subject-matter jurisdiction.

Both Haltzman and Dardovitch raise numerous issues

relating to the District Court's decision on the merits. The

central issue is whether an attorney who enters into a

contingent-fee agreement that is not specific on the point is

entitled to additional fees for collecting the proceeds of the

settlement or judgment. The District Court concluded that

Haltzman's fee under the original contingent fee agreement

included both his actions in securing a settlement and any

steps necessary to collect the proceeds of the settlement,

and that he was therefore not entitled to additional fees for

the collection actions. The District Court thus held that

Haltzman had breached his fiduciary duty to the Trust by

accepting legal fees for collecting on the notes that were the

Trust's sole assets.

Haltzman challenges this reading of the Trust and

contingent fee agreement, arguing that they were limited to

his prosecution of the action to judgment, and did not

include his collection efforts. In analyzing the fee

agreement, the District Court looked at a variety of factors,

including the fact that Haltzman himself drafted the

agreement; the terms of the agreement; and the general

understanding of contingent-fee agreements. It also

considered, but rejected as self-serving, Backos's testimony

concerning her intent in entering into the agreement. We

conclude that the District Court's findings of fact and

4

conclusions of law as to the meaning of the retainer

agreement and the Trust must be upheld.

Haltzman also challenges the District Court's award of

attorney's fees to Dardovitch. The court ordered Haltzman

to pay part of Dardovitch's attorney's fees based on general

equitable principles applicable in trust cases. Without

holding a hearing, the court ordered Haltzman to pay most

of Dardovitch's accrued fees from the beginning of the suit

until the court granted Dardovitch partial summary

judgment and ordered an accounting. This award was

based on the conclusion that most of this work was

necessitated by Haltzman's continued refusal to admit that

Dardovitch was a beneficiary of the Trust. The court also

ordered Haltzman to pay one-quarter of the fees Dardovitch

had paid for his attorneys' work subsequent to the

accounting. This latter award was based on the fact that

some of Dardovitch's objections to Haltzman and Backos's

accounting were sustained, although many were not.

We agree with the general propriety of directing Haltzman

to pay Dardovitch's fees. However, because the District

Court held no hearing, did not adequately explain the basis

of its fee calculation, and in particular did not sufficiently

tie the award to the factors warranting the award, we will

vacate the district court's order and remand with

instructions to hold a hearing to recalculate the attorney's

fee award based on the reasonableness of the claimed fees.

On remand, the court should examine the claims carefully

to ensure that the claimed fees are sufficiently related to

the justifications for the fee award.

In his cross-appeal, Dardovitch challenges the District

Court's conclusion that Backos should not be jointly liable

for Haltzman's breach of his fiduciary duty. The District

Court relieved Backos of liability because it concluded that

she relied on Haltzman to such an extent in legal matters

that his breach cannot fairly be attributed to her. Under

Pennsylvania law, a trustee is obligated to exercise

reasonable care to ensure that her co-trustees do not

breach their fiduciary duties. A trustee who breaches this

duty may become jointly liable for the breaches of the co-

trustee. Furthermore, reliance on the advice of counsel is

only one factor to be considered in determining whether a

5

trustee acted reasonably, and even then the reliance itself

must be reasonable. The Court's decision, which seems to

have applied at most a subjective reasonableness standard,

appears to be contrary to the objective reasonableness

standard of Pennsylvania law. Accordingly, we will vacate

the District Court's order and remand Dardovitch's claim

against Backos so that the court can evaluate her liability

under the correct standard, i.e., whether she exercised

reasonable care to ensure that Haltzman did not breach his

fiduciary duty. The orders of the District Court will thus be

affirmed in part and vacated in part, and the case

remanded for further proceedings consistent with this

opinion.

I. Facts and Procedural History

This case originated in the settlement of a civil RICO suit

brought by Backos and GESEA. GESEA was organized to

purchase and operate a shopping center. Its shareholders

included Backos (55%), Dardovitch (15%) and two of

Backos's siblings (15% each). GESEA obtained

commitments from various financing companies, but these

firms backed away from their commitments. As a result,

the shopping center was sold to another entity, and in 1993

Backos and GESEA filed a civil RICO suit against the

various financing companies. This suit was the sole

business of GESEA at that time and subsequently. Backos

retained Haltzman to represent her and GESEA. Haltzman

initially proposed that he would do the work for a 30%

contingent fee plus expenses to be paid promptly, with a

retainer which was paid up front. See App. at 1774-77. In

May 1993, GESEA adopted a shareholder resolution

providing that Haltzman's fee, including expenses, would be

capped at 30% of the recovery. See App. at 1530-34. This

shareholder resolution was subsequently amended in

August 1993 to reflect that the fee was to be a 30%

contingent fee, not including expenses.

In January 1994, when Backos was unable to keep

current with her payments to Haltzman for litigation

expenses, the representation agreement was again amended

to provide a priority for Haltzman in the proceeds of the

litigation. See App. at 1778-79. Under the amended

6

agreement, Haltzman was to receive the entire first

$150,000 of any sums received as a result of the litigation;

Backos and GESEA were to receive the next $150,000; and

Haltzman was to be entitled to 30% of the next $1.7 million

and 15% of any recovery over $2 million. Shortly thereafter,

the suit settled for $994,000. The settlement agreement

provided that Backos and GESEA would be paid via long-

term, non-interest-bearing notes in this amount.

Apparently out of concern that GESEA's creditors would

immediately claim all of the money, Backos and GESEA set

up a trust -- the GESEA Trust -- for the receipt and

distribution of the proceeds of the settlement. Haltzman

and Backos were named trustees. The proceeds were to be

distributed in accordance with the representation

agreement, along with certain payments to GESEA's

creditors. The remaining money due GESEA was to be

distributed to the shareholders in proportion to their

interests. See App. at 1574-79. Dardovitch's share of the

$994,000 settlement was $104,000, although it was only

due and payable as the Trust received it. Prior to the filing

of the complaint in this case, Haltzman informed

Dardovitch by letter that only about $30,000 was due to

him at that time.

It became clear after the settlement that it would be

difficult to collect on the notes. Accordingly, Haltzman took

legal measures. See, e.g., Glen Eagle Square Equity Assocs.

Trust v. DSL Capital Corp., No. CIV. A. 95-7939, 1996 WL

689113 (E.D. Pa. Nov. 26, 1996) (entering judgment in

favor of plaintiff on action confessing judgment on one of

the aforementioned promissory notes). Ultimately, Haltzman

conducted work for which he billed the Trust approximately

$63,000 on an hourly basis. As of May 1997, the Trust had

received $335,000, of which $172,000 was paid out as legal

fees and $44,000 as litigation costs, to Haltzman. Thus,

64.5% of the money thus far received has gone to pay legal

fees and costs.

Although Dardovitch was informed of the creation of the

Trust and received a copy of the distribution schedule of

funds from it, he received little additional information from

Haltzman or Backos concerning the status or nature of the

Trust. Accordingly, he asked them about the income and

7

expenditures of the Trust in order to determine whether

they were managing it properly, and whether any money

was due him. Haltzman and Backos, however, gave him no

information; indeed, by August 1996, Dardovitch still had

not received any information on or money from the Trust.

Although Backos subsequently provided him with some

information, it was incomplete and inaccurate, and

Dardovitch again requested information from Haltzman.

Haltzman finally responded on December 10, 1996, by

sending a letter containing the following language to

Dardovitch's lawyer:

Please be advised that Nick Dardovitch is not a

beneficiary of the Trust Agreement, as the beneficiaries

of the Trust are Glen Eagle Square Equity Associates,

Inc. and Catherine Backos. Accordingly, even if the

information you requested in your letter was

appropriate (which it is not), he is not entitled to an

accounting. Further, the Trust document itself does

not require that the Trustee provide an accounting to

the beneficiaries.

Please also be advised that Mr. Dardovitch has, in

the past, acted detrimentally to the best interests of

Glen Eagle Square Equity Associates, Inc. I suggest

that Mr. Dardovitch consider his prior action and his

possible liability as to same before he elects to take

actions which will expose himself to potential liability.

Please be further advised that to the extent that your

office decides to bring litigation, which would be

improper based on the fact that Mr. Dardovitch is not

a beneficiary of the Trust, the Trust will seek to hold

your firm, as well as Mr. Dardovitch, liable for all of its

costs and expenses and will seek damages for

malicious prosecution and abuse of process. Your letter

is apparently a continuation of Mr. Dardovitch's past

guerilla tactics in attempting to extort money to which

he was not entitled.

App. at 58 (emphasis added).

On January 6, 1997, Dardovitch filed suit against

Haltzman, Backos, and the Trust for amounts due him and

8

for an accounting. Haltzman and Backos defended by

challenging jurisdiction and denying that Dardovitch was a

beneficiary of the Trust. The District Court initially

determined that it had subject-matter jurisdiction, see App.

at 84-85, and that Haltzman was not entitled to a jury trial,

see App. at 820. It then granted partial summary judgment

in favor of Dardovitch, concluding that he was clearly a

beneficiary, and ordered an accounting. See Dist. Ct. Order,

App. at 812-19.

Dardovitch then challenged certain aspects of the

accounting, and the Court held a hearing. See Dardovitch v.

Haltzman, Civ. A. No. 97-52, 1998 WL 13271 (E.D. Pa. Jan.

13, 1998). The Court concluded that Dardovitch could not

challenge pre-Trust transactions, see 1998 WL 13271, at

*2-*3, and that Backos had not breached her fiduciary

duty, see 1998 WL 13271, at *8 n.28. It also found that

Haltzman had breached his fiduciary duty by claiming

attorney's fees for the collection costs, and ordered him to

refund the fees to the Trust. See 1998 WL 13271, at *4-*7.

Because of certain setoffs, however, the Court ultimately

found that Haltzman had to pay about $14,000 back to the

Trust. See Appellant's Brf. App. 2, at 6-7. The District

Court also ordered Haltzman to pay most of Dardovitch's

attorney's fees from before the accounting, as well as one-

quarter of his post-Accounting fees, for a total of

approximately $64,000. See Appellant's Brf. App. 1.

Haltzman appeals from the District Court's orders

making a variety of challenges, some of which we dispose of

summarily in the margin. In particular, he challenges the

District Court's decisions finding subject-matter

jurisdiction, denying his request for a jury trial; 1 imposition

_________________________________________________________________

1. We agree with the District Court that Haltzman was not entitled to a

jury trial with respect to the accounting. A party ordinarily does not

have

a right to a jury trial in an equitable proceeding. The Supreme Court has

recognized that an accounting must be tried to a jury in certain

circumstances, i.e., where the accounting is sought merely because of

the complicated nature of the accounts, or where the accounting is

ancillary to an equitable claim and is in essence a claim for repayment

of a debt. See Dairy Queen, Inc. v. Wood, 369 U.S. 469 (1962) (holding

that an accounting must be tried to a jury where it is in actuality a

claim

9

of a surcharge on him;2 and awarding Dardovitch attorney's

fees. Dardovitch cross-appeals, challenging the District

Court's denial of his claims regarding pre-Trust transactions,3

_________________________________________________________________

for repayment of a debt); 9 Charles Alan Wright & Arthur R. Miller,

Federal Practice & Procedure S 2310, at 87-91 (2d ed. 1994). Where the

duty to account is itself equitable, however, no right to a jury trial

arises.

See United States v. Louisiana, 339 U.S. 699, 706 (1950) ("The Seventh

Amendment . . . [is] applicable only to actions at law," not "an equity

action for an injunction and accounting." (citation and footnote

omitted));

9 Wright & Miller, supra, S 2310, at 90. An action for an accounting of

a trust is quintessentially equitable. See Restatement (Second) of Trusts

S 197 (all remedies of a beneficiary against a trustee are equitable,

except

for a claim for money immediately and unconditionally due to the

beneficiary or a claim to transfer chattel that the trustee is under an

immediate and unconditional duty to transfer to the beneficiary).

Accordingly, a party to a trust accounting has no right to a jury trial;

that is the situation here.

2. Haltzman challenges several aspects of the District Court's calculation

of the amount of the surcharge he had to pay, in addition to his

challenge to the District Court's conclusion that he was not entitled to

additional hourly fees for the collection actions. We find no error in the

District Court's reasoning rejecting these claims. See Dist. Ct. Order,

Appellant's Brf. App. 2, at 4 n.2, 5 & n.3.

Dardovitch challenges different aspects of the District Court's

calculation of the surcharge. He argues that the District Court erred in

allowing Haltzman to receive attorney's fees from the Trust for litigation

against the Hanaway group of creditors. In particular, he contends that

Haltzman should not be permitted to recover these fees from the Trust

because his actions in defense of the Hanaway's claims were in breach

of his fiduciary duty to the Trust. The District Court rejected

Dardovitch's objection to this payment, concluding that Haltzman's work

was, in this case, not covered by the contingent fee agreement and

resulted in a benefit to the Trust. See App. at 1398-99; Appellant's Brf.

App. 2, at 5-6. We see no clear error in the District Court's conclusion,

and will affirm its order on this point.

3. In his cross-appeal, Dardovitch disputes inter alia the District

Court's

conclusion that he has no standing to challenge certain actions Backos

and Haltzman took before the Trust was executed and, in any case, that

the challenge was barred by laches. Dardovitch contends that Backos

and Haltzman breached their duties to the other shareholders of GESEA

by entering into the contingent-fee agreement. The District Court held

that Dardovitch lacked standing as either a shareholder -- since he did

10

and Backos's own conduct and potential liability for the

surcharge. Since this is a diversity case arising in the

Commonwealth of Pennsylvania, we apply Pennsylvania

law.

II. Subject-Matter Jurisdiction

Dardovitch brought his claim under the District Court's

diversity jurisdiction. See 28 U.S.C. S 1332.4 Dardovitch

_________________________________________________________________

not bring a proper shareholder derivative suit -- or a beneficiary of the

Trust -- since the Trust had not yet taken effect. Dardovitch now argues

that he has standing to challenge the pre-Trust transactions as a

creditor of GESEA under either the "trust fund doctrine" or the

Pennsylvania Uniform Fraudulent Transfer Act, 12 Pa. Cons. Stat.

SS 5101-10 (1998 Supp.) (applicable to transactions after February 1,

1994), and the Pennsylvania Uniform Fraudulent Transfer Act, 39 Pa.

Cons. Stat. SS 351-63 (repealed 1993) (applicable to transactions before

that date) [hereinafter collectively "PUFT/CA"]. Neither of these applies

to

this case, however. The "trust fund doctrine" makes the creditors of a

corporation the beneficiaries of a trust consisting of the corporate

assets,

but only after a court order creating the trust, which did not occur in

this case. PUFT/CA only applies to certain kinds of transactions, and

only prohibits them if they are not for fair consideration and will render

the corporation insolvent. See 12 Pa. Cons. Stat. SS 5101, 5105. Since

the transactions that Dardovitch challenges do not meet some or all of

these requirements, he cannot challenge them under PUFT/CA either.

Accordingly, we will affirm the District Court's rejection of Dardovitch's

objections to pre-Trust transactions. We need not and do not decide

whether the District Court erred in concluding that Dardovitch was

barred from asserting these challenges by laches.

4. "The district courts shall have original jurisdiction of all civil

actions

where the matter in controversy exceeds the sum of $50,000, exclusive

of interest and costs, and is between citizens of different States."

S 1332(a)(1). Section 1332(a) was amended in 1996 to require that the

amount in controversy exceed $75,000. See Pub. L. No. 104-317,

S 205(a)(1), 110 Stat. 3850 (1996). This amendment took effect on

January 14, 1997. See S 295(b). Accordingly, since Dardovitch filed suit

on January 6, 1997, the required amount in controversy was $50,000,

as Dardovitch alleged in his complaint. The precise amount-in-

controversy requirement is not terribly important in this case, however,

since it either exceeded $75,000 or was less than $50,000. The District

Court purported to apply the new $75,000 requirement. See Dardovitch,

1998 WL 13271, at *1 n.1.

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alleged, and Backos and Haltzman did not contest, that he

is a citizen of Florida and that they were citizens of

Pennsylvania. The only question before us is, whether the

amount in controversy exceeds $50,000. At the time he

filed the complaint, Dardovitch was only due about $34,000

from the Trust. His entire interest in the Trust, however,

was $104,000. We must determine which of these two

sums represents the amount in controversy.

The amount in controversy is determined from the good

faith allegations in the complaint. See Spectacor Mgt. Group

v. Brown, 131 F.3d 120, 122 (3d Cir. 1997), cert. denied,

118 S. Ct. 1799 (1998). "The sum claimed by the plaintiff

controls if the claim is apparently made in good faith. It

must appear to a legal certainty that the claim is really for

less than the jurisdictional amount to justify dismissal." St.

Paul Mercury Indem. Co. v. Red Cab Co., 303 U.S. 283, 288-

89 (1938). Where a plaintiff brings a suit for payment of

money as part of an ongoing and continually accruing

obligation, such as an installment contract, the amount in

controversy is generally limited to the amount then due and

owing, even if a judgment would have collateral estoppel

effects on liability for future payments. See Aetna Cas. &

Sur. Co. v. Flowers, 330 U.S. 464, 467 (1947) ("If this case

were one where judgment could be entered only for the

installments due at the time of the commencement of the

suit, future installments could not be considered in

determining whether the jurisdictional amount was

involved, even though the judgment would be determinative

of liability for future installments as they accrued."). Where,

by contrast, a suit is brought to establish directly the right

to receive any payments because the putative defendant

has repudiated that right entirely, and not just with respect

to current payments, the amount in controversy is the

entire amount that may ever come due. See Aetna , 330 U.S.

at 469 (finding jurisdiction where a statute permitted a

single action to establish the right to workers'

compensation insurance installment payments, even

though currently due payments did not exceed the

jurisdictional amount; amount in controversy included

future payments where the right to all the payments was in

issue).

12

Haltzman submits that Dardovitch's complaint only put

the currently due and owing payments in issue.

643<!>Specifically, Haltzman notes that, in his complaint,

Dardovitch only requests payment of amounts presently

due, not a determination of amounts that might come due

in the future. See App. at 22. At the time he filed his

complaint, Dardovitch had been informed that the amount

then due would be at most slightly more than $30,000. See

App. at 1805-14. Accordingly, Haltzman submits that

Dardovitch could not allege in good faith that the amount

in controversy exceeded $50,000.

We disagree. The District Court correctly concluded that

the entire amount to which Dardovitch would ever be

entitled under the Trust was in controversy, because one of

the issues in this case -- one that was in fact heavily

contested -- was whether Dardovitch was a beneficiary of

the Trust. See Restatement (Second) of Trusts S 3(4) ("The

person for whose benefit property is held in trust is the

beneficiary."). An allegation or claim that a person is not a

beneficiary of a trust is an allegation or claim that the

person is not entitled to receive any of the proceeds of the

trust. Accordingly, a suit to establish one's status as a

beneficiary puts the entire amount of one's alleged interest

in the trust in controversy.

Haltzman concedes that he denied that Dardovitch was a

beneficiary. He attempts to justify this by saying this he

intended only to deny that Dardovitch was entitled to

demand an accounting or any other information concerning

the Trust. The evidence in the record supports this

contention. See App. at 56 (December 10, 1996 letter). This

does not, however, imply that Dardovitch did not

reasonably and in good faith believe that he needed to bring

suit to establish his right as a beneficiary to receive his

share of the proceeds of the Trust. To the contrary, an

examination of the evidence, including that set forth in the

margin,5 shows that it was eminently reasonable for

_________________________________________________________________

5. Haltzman has consistently denied that Dardovitch was a beneficiary of

the Trust. Haltzman begins the December 10, 1996, letter by asserting

that "Nick Dardovitch is not a beneficiary of the Trust Agreement." App.

at 56. In his answer to the complaint, Haltzman again denied that

Dardovitch "is a named `beneficiary' of the trust as the named

beneficiaries are Catherine Backos and Glen Eagle Square Equity

Associates, Inc." App. at 99.

13

Dardovitch to think that he needed to do so. Furthermore,

Haltzman litigated the issue of Dardovitch's status as a

beneficiary extensively, and perhaps even excessively.6

Based on the foregoing facts, Dardovitch had good cause

to believe that Haltzman had no intention of ever paying

him any money out of the Trust; Haltzman's own

statements apparently to that effect provide a strong basis

for such a belief. Furthermore, it appears that Dardovitch

in fact believed at the time he filed the complaint that he

needed to bring suit to establish his right to receive any

money from the Trust.7 In sum, Dardovitch alleged in good

faith -- based on Haltzman's repeated statements to that

effect -- that Haltzman had repudiated any obligation he

had as a trustee to pay the proceeds of the Trust to

Dardovitch as a beneficiary. Since it is not disputed here

that Dardovitch's interest in the Trust was approximately

$104,000, and this amount exceeds the jurisdictional

_________________________________________________________________

6. See Dardovitch, 1998 WL 12371, at *7 ("Backos and Haltzman spent

the better part of this long, acrimonious litigation resisting

Dardovitch's

demand to provide an account or even a copy of the Trust instrument,

insisting from the beginning that he was not a beneficiary of the

Trust.").

Even after the District Court granted Dardovitch's motion for partial

summary judgment and ordered an accounting on the sole ground that

Dardovitch was, in fact, a beneficiary of the Trust, Haltzman continued

to deny it. See 1998 WL 12371, at *7; see also App. at 899, 955.

Although Haltzman now concedes that Dardovitch is a beneficiary of the

Trust, and does not challenge the District Court's conclusion to that

effect on appeal, this late concession cannot change the result.

7. Dardovitch alleged in his complaint that Haltzman denied that

Dardovitch was a beneficiary of the Trust, and further alleged that as a

beneficiary he was entitled to receive distributions from the Trust. See

App. at 21-22. In his response to Haltzman's motion to dismiss for lack

of subject-matter jurisdiction, Dardovitch again referred to Haltzman's

December 10, 1996, letter -- as well as Backos's answer to the

complaint and Haltzman's affidavit in support of his motion to dismiss

-- denying that Dardovitch was a beneficiary of the Trust. He specifically

stated: "Whether plaintiff was entitled to distribution in excess of

$50,000 on January 6, 1997, is immaterial, because Mr. Haltzman

absolutely repudiated Mr. Dardovitch's entire claimed interests in the

trust on December 10, 1996." App. at 64.

14

requirement under S 1332, the District Court properly

concluded it had subject-matter jurisdiction.8

III. Haltzman Acceptance of Attorney's Fees for the

Collection Actions

A. Background

Haltzman next argues that the District Court erred in

concluding that he breached his fiduciary duty to the Trust.

The District Court reasoned that by paying himself fees for

collecting on the notes held by the Trust, Haltzman did so

because his fees for the prior litigation included fees for the

collection actions. Haltzman submits that he was legally

entitled to such fees.

Dardovitch contends that the Trust and the retainer

agreement provided that Haltzman's fees for undertaking

the RICO litigation would also cover any steps he took to

collect on the notes received in settlement of the litigation.

He notes that the Trust provided for two categories of

payments to Haltzman. First, it directed that expenses

incurred by Haltzman in connection with the prosecution of

the RICO litigation be paid out of the Trust. Second, it

directed that the legal fees owed to Haltzman be paid "in

strict accordance with the engagement agreement entered

into" between Haltzman, Backos and GESEA. App. at 1766.

Since the Trust incorporates the retainer agreement by

reference, we must consider the language of the

representation agreement itself.

Initially, in his proposal for representation, Haltzman

agreed to the representation "on a contingency fee basis of

30% of any amount recovered . . . . [M]ajor out-of-pocket

expenses for such things as deposition transcripts and

filing fees will be payable currently on a 30 day basis." App.

_________________________________________________________________

8. Dardovitch claimed, and the District Court appears to have agreed,

that he met the jurisdictional amount requirement by an alternative

method: in a claim for an accounting, the amount in controversy is the

claimants' entire interest in the trust. Since we conclude that the

amount-in-controversy requirement was otherwise met, we need not

decide this question.

15

at 1775. Thereafter, GESEA adopted a shareholder

agreement providing that "[t]he total of litigation fees and

expenses (including reimbursements of shareholders) shall

not exceed thirty percent (30%) of any recovery." App. at

1530-31. This agreement was subsequently amended to

permit payment of expenses in addition to the fee of thirty

percent of any recovery. App. at 1094. Still later, the

representation agreement was amended, in a document

signed by Haltzman and Backos, to provide that in addition

to payment of expenses, "Mark S. Haltzman will receive, as

a fee, the first $150,000 of any recovery received in the

lawsuit," along with thirty percent of any recovery in excess

of $300,000. App. at 1778. Dardovitch contends that this

language covers not only the RICO litigation itself, but also

any collateral steps taken to collect on the judgment.

Haltzman contends, however, that a different provision of

the Trust governs the payment of attorney's fees for

collecting on the notes:

In the administration of the Trust, the Trustees shall

have the following powers, all of which shall be

exercised in a fiduciary capacity, primarily in the

interest of the Glen Eagle Square Equity Associates,

Inc. and Catherine Backos;

. . . .

. . . . [T]o enforce any Notes, bonds, mortgages,

security agreements, or other obligations; . . . .

To incur and pay the ordinary and necessary

expenses of administration including (but not by way of

limitation) reasonable attorneys' fees, accountants'

fees, investment counsel fees, and the like.

App. at 1767-68. Haltzman submits that, pursuant to this

provision, he had the power to undertake actions to enforce

and collect on the notes, and further to pay himself

attorney's fees for those actions if he chose to use his own

professional services for such purposes. Also, as set forth in

the margin, Backos testified that it was her intent that

16

Haltzman would be paid additional fees out of the Trust for

his professional services in collecting on the notes.9

The District Court determined that Haltzman should not

have accepted payments separate from those he received

under the retainer agreement for work he undertook in

collecting on the notes when the payors went into default,

because the agreement, as incorporated into the Trust,

already required him to do this work. The court based this

conclusion on several grounds, including that ordinary

rules of contract construction and interpretation dictated

this reading of the retainer agreement, and that contingent

fee agreements generally require the attorney to undertake

efforts to collect the proceeds of the suit. We will discuss

these factors in turn.10

_________________________________________________________________

9. Backos testified as follows:

Q: My first question to you is: What was your understanding in

connection with the Fee Agreement you had with Mark S. Haltzman

Associates, as to whether that firm was obligated to go out and

collect the judgment that they were going to try to get for you in

the

litigation?

A: My understanding was that the collection process, if we had to

undertake that, was a separate matter, it was a separate

litigation.

App. at 1255-56.

Q: O.K. Now, with respect to the collection, it's your testimony

that you have an understanding with Mr. Haltzman that his efforts

in that direction are on top of what he has already received?

A. Yes.

App. at 1295-96.

10. Some of the factors on which the District Court relied, however, do

not support its conclusion that the fee agreement did not permit

Haltzman to take additional fees for his work in the collection actions.

First, the District Court concluded that Haltzman's interpretation should

be rejected because it would amount to impermissible self-dealing by a

trustee. The court noted that trust law prohibits a trustee from engaging

in transactions between the trust property and himself individually, and

concluded that Haltzman's paying himself for the collection actions out

of the Trust's funds violated this prohibition. The prohibition on self-

dealing, however, is limited to transactions in property. See Restatement

(Second) of Trusts S 170 cmts. b-n; see also 2A Austin Wakeman Scott &

17

Before we may do so, however, we must determine the

proper nature and scope of our review. This question turns

on whether the District Court's interpretation of the

agreement turned on findings of fact, or rather was a

construction of the contract as a matter of law. We believe

that the former is true. At the outset of its opinion and

order, the court stated that it had held a hearing and was

making "findings of fact and conclusions of law under Fed.

R. Civ. P. 52(a)." See Dardovitch, 1998 WL 13271, at *1.

Furthermore, in interpreting the agreement, the court

weighed evidence and reached conclusions based on

witness's credibility. See, e.g., Dardovitch, 1998 WL 13271,

at *4 n.15. Finally, the court considered factors, such as

Backos's testimony as to her own intent, that would only be

relevant in the context of fact-finding as to the meaning of

the contract, not in construing it as a matter of law.11

_________________________________________________________________

William Franklin Fratcher, The Law of TrustsSS 170.2-.13, at 320-64 (4th

ed. 1987). The per se prohibition against self-dealing does not apply to

transactions in services. A trustee's choice to use his own special

services -- beyond those usually rendered by a trustee -- where the

trust requires them ordinarily does not violate the prohibition on self-

dealing. See 3 Scott & Fratcher,supra, S 242.2, at 281-87; see also

Restatement (Second) of Trusts S 242 cmt. d. The only limits on such

transactions are the trustee's fiduciary duties of good faith and

reasonable care. See id.; 3 Scott & Fratcher, supra, S 242.2, at 286.

Accordingly, Haltzman's acceptance of additional fees did not violate the

rule against self-dealing by a trustee.

The District Court also decided that, if the agreement were construed

as Haltzman proposed, then his acceptance of the additional fees would

have violated his duties under the Pennsylvania Rules of Professional

Conduct. In particular, the court determined that Haltzman would have

violated the rule requiring that contingent-fee agreements be in writing

and that attorneys provide written statements concerning the outcome of

such representation. See Pa. R. Prof. Conduct 1.5(c). Haltzman raises

serious objections to both of the District Court's premises, i.e., whether

his conduct would have violated the Rules of Professional Conduct and

whether such a potential violation should guide the interpretation of a

contract. Since we need not decide this difficult issue, we will not rely

on

this aspect of the District Court's reasoning in affirming its judgment.

Even leaving this point aside, we think there is ample support in the

record for the District Court's conclusion.

11. Admittedly, several other factors the court considered do fall within

the ambit of legal construction of a contract, including the contra

18

Although it is a close question, we believe that the court's

interpretation of the retainer agreement, as well as the

Trust, rested on its findings of fact, and were not

conclusions of law.

Furthermore, we think that fact-finding concerning the

meaning of the agreement was appropriate and necessary,

as the agreement was ambiguous on its face. Where a

contract is ambiguous, the trier of fact must makefindings

as to the parties' intent and the meaning of the contact. See

In re Tutu Wells Contamination Litig., 120 F.3d 368, 389-90

(3d Cir. 1997). "A contract is ambiguous if it is reasonably

susceptible of different constructions and capable of being

understood in more than one sense." Hutchison v. Sunbeam

Coal Corp., 519 A.2d 385, 390 (Pa. 1990). Here, the

agreement made no mention of how the proceeds of any

judgment or settlement would be collected; it mentioned at

most the contingent-fee percentage and the payment

method for litigation expenses. It would be reasonable to

conclude either that the contingent fee included work done

collecting on the settlement or judgment, or that it did not

include such work. Accordingly, presently before us are the

District Court's finding of facts interpreting the contract,

which we review for clear error only.12

_________________________________________________________________

preferentem principle (that a document should be interpreted against its

drafter), whether the agreement violated the Rules of Professional

Conduct, and the rule against self-dealing. But these factors can also be

important in the factual interpretation of a contract. See, e.g.,

Restatement (Second) of Contracts S 203 cmt. a ("The rules of this

section [concerning interpretation of contracts] . . . apply only in

choosing among reasonable interpretations."); id. S 206 cmt. a ("[The rule

of contra preferentem] is in strictness a rule of legal effect . . . as

well as

interpretation.").

12. See In re Tutu Wells Contamination Litig. , 120 F.3d 368, 389-90 (3d

Cir. 1997). "In order to reject a district court's findings of fact, the

reviewing court, after examining all the evidence, must be left with a

definite and firm conviction that a mistake has been committed." Durham

Life Ins. Co. v. Evans, 166 F.3d 139, 147 (3d Cir. 1999).

19

B. Factors Considered by the District Court

1. Contract Interpretation

The District Court first concluded that, since Haltzman

had drafted the representation agreement, ambiguities

therein should be construed against him. Second, although

it recognized the principle that contracts (as well as trusts)

should be construed in accord with the intent of the parties

(or the settlor), it rejected as self-serving Backos's testimony

that she intended that Haltzman would be entitled to

additional fees for collecting on the notes. We address the

latter issue first, as it is the one upon which Haltzman

primarily focuses.

a. Parties'/Settlor's Intent: It is beyond cavil that the

touchstone of contract interpretation is the intent of the

parties. See Brokers Title Co., Inc. v. St. Paul Fire & Marine

Ins. Co., 610 F.2d 1174, 1181 (3d Cir. 1979). Likewise, the

settlor's intent is the primary guide to interpreting a trust

instrument. See Estate of Wolters, 59 A.2d 147, 149 (Pa.

1948); In re Benson, 615 A.2d 792, 794-95 (Pa. Super. Ct.

1992) ("The polestar in every trust is the settlor's intent and

that intent must prevail." (citation omitted)). Haltzman

therefore argues that, since Backos -- a party to the

retainer agreement and the settlor of the Trust-- testified

to her intent to permit Haltzman additional fees, the

District Court had no choice but to accept her testimony

and interpret the Trust and representation agreement in

accord therewith. We disagree.

A party's testimony as to her intent concerning the

meaning and effect of a contract can, of course, be

significant evidence of the meaning of the contract. It is not,

however, conclusive evidence to that effect. Often, a writing

itself is the best evidence of the parties' or settlor's intent.

Delaware County v. Delaware County Prison Employees

Indep. Union, 713 A.2d 1135, 1137 (Pa. 1998) ("The intent

of the parties to a written contract is deemed to be

embodied in the writing itself . . . ."); Volunteer Firemen's

Ins. Services, Inc. v. CIGNA Prop. & Cas. Ins. Agency, 693

A.2d 1330, 1339 (Pa. Super. Ct. 1997) ("To determine the

intent of contracting parties, we look to language contained

20

in the written contract."); Benson, 615 A.2d at 795 ("[T]he

writing itself must be considered to be the best and

controlling evidence of the settlor's intent." (quoting In re

Girard Trust Corn Exch. Bank, 208 A.2d 857, 859 (Pa.

1965))). Both the testimony of the parties or settlor and the

writing itself are evidence of the meaning of the contract;

the weight due each depends on the usual factors,

including credibility.

The District Court considered Backos's testimony

concerning her intent in entering into the fee agreement

and settling the Trust, but rejected it on credibility

grounds. Backos testified before the District Court

concerning her intent in entering into the representation

agreement and settling the Trust. As noted previously, she

testified that she intended that Haltzman would be paid

additional fees out of the Trust for collecting on the notes.

The District Court found that Backos's testimony was

simply not credible:

Although defendant Backos testified at length

regarding her understanding of the agreements made

between GESEA and Haltzman, we do not accord that

aspect of her testimony much weight. We do not

question Ms. Backos's level of sophistication in

business affairs -- quite to the contrary, her testimony

showed her to be an intelligent and very capable

businesswoman -- but it is evident from these

proceedings that in legal matters she relied exclusively

on Haltzman and his firm. Indeed, Haltzman's firm

represented her even in this litigation. Thus, it is

perhaps not surprising that Ms. Backos's testimony

proceeded in virtual lockstep to support defendant

Haltzman's various arguments before us.

Furthermore, to the extent that Ms. Backos's

testimony is derived from her own understanding--

rather than Haltzman's influence on that

understanding of legal matters -- we also reject it as

self-serving. At the time that Ms. Backos entered into

representation agreements with Haltzman, she was

most influenced by financial pressures which

eventually forced her to file bankruptcy. Accordingly,

we find that her construction of these agreements

21

arose almost wholly out of her own individual financial

interests, and improperly ignored the interests of

GESEA, which she as majority shareholder is required

to consider.

Dardovitch, 1998 WL 13271, at *4 n.15.

The credibility of witnesses is quintessentially the

province of the trial court, not the appellate court.

"Credibility determinations are the unique province of a fact

finder, be it a jury, or a judge sitting without a jury." United

States v. Kole, 164 F.3d 164, 177 (3d Cir. 1998), cert.

denied, 119 S. Ct. 1484 (1999); see also Anderson v. City of

Bessemer City, 470 U.S. 564, 575 (1985); Newark Branch,

NAACP v. City of Bayonne, 134 F.3d 113, 120 (3d Cir.

1998) ("[Clearly erroneous] review is more deferential with

respect to determinations about the credibility of witnesses

. . . ." (citation omitted)). Accordingly, we may only reject a

District Court's finding concerning a witness's credibility in

rare circumstances. Such circumstances are not present

here, as the record, as well as common sense, amply

supports the District Court's conclusion as to the weight to

be accorded to Backos's testimony.

The District Court observed that Backos's testimony was

undoubtedly influenced by her close relationship with

Haltzman, who had represented her throughout the

underlying RICO litigation and through much of the present

case. Accordingly, the court's conclusion that Backos's

testimony can be discounted because of Haltzman's

influence over it is reasonable. More importantly, we think

that the District Court had good reason to believe that

Backos's testimony was influenced by her own biases. The

court noted that Backos was subject to financial pressures

that influenced her actions and her testimony. Additionally,

Backos's testimony was not only helpful to Haltzman, but,

at least from an ex ante perspective, was directly beneficial

to Backos herself. Backos was no doubt aware at the time

she testified that she herself could be held liable for her co-

trustee's breach in taking fees from the Trust to pay for the

collection actions. Thus, at least until the District Court

excused her from liability for Haltzman's breach, Backos

had her own reason for testifying that Haltzman's actions

were in accord with her intent in entering into the retainer

22

agreement and settling the Trust. In sum, we perceive no

clear error in the District Court's decision not to credit

Backos's testimony.

b. Contra Preferentem: In addition to disc ounting

Backos's testimony as to her intent, the District Court also

found it significant, for the purpose of interpreting the

Trust and retainer agreement, that both documents were

drafted by Haltzman. It cannot be doubted that "[i]n

choosing among the reasonable meanings of a promise or

agreement or a term thereof, that meaning is generally

preferred which operates against the party who supplies the

words or from whom a writing otherwise proceeds."

Restatement (Second) of Contracts S 206. The District Court

concluded that this traditional canon of contractual

interpretation supported Dardovitch's reading of the

retainer agreement and Trust:

Among other things which Haltzman omitted from his

contingent fee agreement with GESEA is an explicit

statement of the scope of the representation that the

fee agreement embraces. As a matter of contract law,

Haltzman's status as drafter of the document requires

that all ambiguities be construed against him. All-Pak,

Inc. v. Johnson, 694 A.2d 347, 351 n.7 (Pa. Super. Ct.

1997) (citing Gallagher v. Fidelcor, Inc., 657 A.2d 31

(Pa. Super. Ct. 1995)).

Dardovitch, 1998 WL 13271, at * 4. The court was correct

that -- if it applied -- this canon suggests that Haltzman's

interpretation of the contract should not be adopted.

Haltzman urges that we not apply this canon in favor of

Dardovitch because Dardovitch was not a party to the fee

agreement. In particular, he notes that the retainer

agreement at most was between Haltzman and Backos and

GESEA, and that GESEA and Backos were the settlors of

the Trust. Although this is technically true, we think that

Dardovitch's involvement with the contracts-- as a

shareholder of GESEA and a beneficiary of the trust -- was

sufficient that the District Court did not err in relying on

the fact that Haltzman drafted the agreement and the Trust

in determining the appropriate interpretation thereof.

Furthermore, the rule of contra preferentem is based

23

primarily on the idea that the party drafting an agreement

should bear responsibility for any ambiguities in it, as "he

is likely to provide more carefully for the protection of his

own interests than for those of the other party." See

Restatement (Second) of Contracts S 206 cmt. a. Given this

focus, it was permissible to focus on Haltzman's position as

drafter in declining to interpret the agreement in his favor.

Accordingly, we think that the District Court did not err in

considering the fact that Haltzman drafted the retainer

agreement in interpreting it.

2. The Meaning of Contingent Fee Agreements

The other basis on which the District Court rested its

interpretation of the retainer agreement was its

understanding of contingent fee agreements of the sort

entered into here. Relying on common-sense and

straightforward reasoning about lawyers' incentives, as well

as the language of the retainer agreement, the court

concluded that the most reasonable reading of the

agreement was one that permitted no additional payment to

Haltzman for the collection actions.

[A]s a matter of common sense the contingent fee

cannot be read to exclude collection of the settlement

proceeds. We suspect that few lawyers would rest with

the hope of 30% of a paper settlement, but not

promptly seek collection of the real money that will

turn that paper into cash. Indeed, the documents upon

which Haltzman seeks to rely notably confirm our

suspicion, stating that Haltzman is to receive his fees

only on moneys actually "recovered" or "received."

Dardovitch, 1998 WL 13271, at *5. Based on our review of

the general law governing the responsibilities of contingent

fee representation, we agree with the District Court.

While the extant case law in this area supports the

proposition that a contingent-fee attorney is not entitled to

additional fees for collecting on a judgment, absent

substantial indications to the contrary, it is sparse.13 This

_________________________________________________________________

13. The case law on a related issue -- the responsibility of a contingent-

fee attorney with respect to services to be rendered on appeal -- is much

24

issue is most extensively discussed in L.A. Bradshaw,

Annotation, Construction of Contingent Fee Contract as

Regards Compensation for Services After Judgment or on

Appeal, 13 A.L.R.3d 673 (1968). This annotation discusses

a number of cases in which attorneys have attempted to

recover additional fees beyond an established contingent fee

for collection efforts. These cases establish that, absent

some significant evidence that the collection efforts were

not within the contemplation of the parties at the time they

entered into the contingent fee agreement, no additional

fees will be permitted.

Those cases in which additional fees have been permitted

have involved collection efforts far beyond those which the

parties anticipated at the time the representation began. In

Barcus v. Gates, 130 F. 364 (E.D. Va.), affd., 136 F. 184

(4th Cir. 1904), for example, parol evidence established

that, when the parties entered into a ten-percent contingent

fee agreement, they expected the case to settle quickly

without even filing a suit. When instead a highly contested

suit was required, and the attorney was required to spend

an additional month after trial determining what, if

anything, could be recovered from the various defendants,

the court concluded that the attorney should be entitled to

additional fees for these collection efforts. See Barcus, 130

F. at 369-70; see also Serat v. Smith, 15 N.Y.S. 330 (Sup.

Ct. 1891) (additional fee permitted where parties did not

contemplate that collection would be difficult). Similarly, in

Judah v. Trustees of Vincennes Univ., 16 Ind. 56 (1861),

discussed in 13 A.L.R.3d at _____, the court permitted

_________________________________________________________________

more developed. See, e.g., Quarture v. Allegheny County, 14 A.2d 575

(Pa. Super. Ct. 1940) (attorney working for contingent fee was not

entitled to additional fee for prosecuting appeal, even where attorney

believed that appeal was unlikely to result in an increased damages

award). Other courts have cited this case law without analysis in support

of the proposition that contingent fee attorneys may not recover

additional fees for collection actions. See, e.g., Goldstein & Price v.

Tonkin

& Mondl, 974 S.W.2d 543, 548 (Mo. Ct. App. 1998); Mrozinski v.

Marinello, 260 N.Y.S.2d 199 (Sup. Ct. 1965). Although it provides some

support for the result we reach, we do not find the analogy to Quarture

terribly convincing, as prosecuting an appeal involves the same course of

representation as the underlying litigation in a more obvious sense than

an action to collect on the proceeds of a settlement or judgment.

25

additional fees for collection where the attorney's efforts

involved lobbying the state legislature to release funds to

pay the judgment. In contrast, where the record reveals

that the parties had no reason to believe that collection

would require more than minimal effort, attorneys have

been permitted no additional fee for collection actions. See,

e.g., Mrozinski v. Marinello, 260 N.Y.S.2d 199 (Sup. Ct.

1965); Ellis v. Mitchell, 85 N.Y.S.2d 398 (Sup. Ct. 1948),

affd., 88 N.Y.S.2d 903 (Sup. Ct. App. Div. 1949); Emil

Nathan & Co. v Halsell, 45 So. 856 (Miss. 1908).

This understanding of the responsibility of attorneys in

contingent fee cases is, as the District Court pointed out,

consonant with the incentives confronting such an

attorney. "We suspect that few lawyers would rest with the

hope of 30% of a paper settlement, but not promptly seek

collection of real money that will turn that paper into cash."

Dardovitch, 1998 WL 13271, at *5. The attorney has just as

much of an interest in collecting on the judgment as the

client, and thus should need no extra incentive in the form

of additional fees for doing so. We believe that this reading

comports with the general understanding of the community

of attorneys.

This conclusion is also supported by the reasoning of the

court in Goldstein & Price v. Tonkin & Mondl, 974 S.W.2d

543 (Mo. Ct. App. 1998). In that case, the court concluded

that, since the fee agreement permitted a fee of"1/3 of all

monies recovered by judgment or settlement," Goldstein &

Price, 974 S.W.2d at 546 -- as opposed to"1/3 of any

recovery of judgment or settlement" -- the attorney was

only entitled to a contingent fee from money actually

received. See 974 S.W.2d at 548. The language of the fee

agreement in the present case is similar: the original

agreement permitted Haltzman a fee of "30% of any amount

recovered," and later versions permitted a fee out of "any

recovery received" or "any amount received." We believe

that if an attorney wishes to protect himself, and provide

for attorney's fees in the event additional collection efforts

are necessary, he should do so explicitly in the retainer

agreement. We agree with the District Court that this

is the common-sense understanding of contingent-fee

agreements.

26

The two pieces of record evidence that Haltzman cites to

support his contention that collection efforts were not

contemplated as part of the retainer agreement do not alter

our conclusion. First, he contends that, at the time of

settlement, he did not think that collection efforts would be

difficult, as reflected by the fact that he was willing to

accept notes from the defendants. But he testified that he

accepted notes because the defendants did not have a lot of

money; given this concern, one might expect that they

would have difficulty paying off the notes as well, and that

collection efforts might be necessary. Second, Haltzman

points out that Backos wrote to Dardovitch after the

settlement indicating that collection efforts might be

necessary and that Haltzman would be paid additional fees

for them. Both of these submissions share an additional

fundamental flaw: they say nothing about what the parties

contemplated at the time they entered into the retainer

agreement. There is simply no evidence in the record that

the parties had any reason to think, or actually did think,

that collection efforts following judgment in the RICO

litigation would be minimal. Accordingly, we conclude the

District Court was correct to conclude that the retainer

agreement in this case, as with most contingent fee

agreements, permitted no additional fee for collateral

collection activities.

C. Summary

The District Court identified several reasons why the

retainer agreement should be interpreted to cover

Haltzman's efforts to collect on the notes, thereby

preventing him from collecting additional fees for these

efforts from the Trust. In particular, the District Court was

correct to note that ordinary rules of contract

interpretation, as well as a common-sense understanding of

the typical duties of an attorney working for a contingent

fee, support this reading. Although Haltzman has raised

some questions about some other aspects of the court's

reasoning, see supra note 10, we are not,"after examining

all the evidence, . . . left with a definite andfirm conviction

that a mistake has been committed" in interpreting the

retainer agreement, Durham Life, 166 F.3d at 147, and thus

27

do not believe that the District Court's conclusion was

clearly erroneous. Accordingly, we will affirm the District

Court's order to the extent that it found that Haltzman

breached his fiduciary duty by accepting the additional fees

from the Trust.

IV. Haltzman's Liability for Attorney's Fees

A. District Court Decision

Haltzman also appeals from the District Court's decision

to require him to pay Dardovitch's attorney's fees in this

litigation. The court ordered Haltzman to pay $59,000 in

attorney's fees to Dardovitch, as well as $4,735.52 in costs.

The District Court based its decision to award attorney's

fees primarily on Haltzman's actions in refusing to provide

Dardovitch with an accounting of the Trust's funds. See

Dardovitch, 1998 WL 13271, at *7. It noted that"Backos

and Haltzman spent the better part of this long,

acrimonious litigation resisting Dardovitch's demand to

provide an account or even a copy of the Trust instrument,

insisting from the beginning that he was not a beneficiary

of the Trust." 1998 WL 13271, at *7. It also observed that

the defendants continued to deny that Dardovitch was a

beneficiary of the Trust entitled to an accounting even after

the court granted Dardovitch summary judgment on the

ground that it was incontrovertible that he was a

beneficiary. See 1998 WL 13271, at *7. Concluding that

"the trustees' failure to recognize basic principles of trust

law [wa]s a breach of fiduciary duty that can only have

resulted from bad faith or, at a minimum, gross

negligence," the court found Haltzman liable for

Dardovitch's attorney's fees. 1998 WL 13271, at *7. The

court also noted, however, that Haltzman should be liable

for Dardovitch's fees because he blatantly breached his

fiduciary duty in accepting additional fees from the Trust

for the collection actions.

In calculating the fees owed, the District Court divided

the litigation into two phases, before and after the

accounting. The pre-Accounting litigation revolved primarily

around determining whether Dardovitch was in fact a

28

beneficiary entitled to demand an accounting, although it

included some other matters, such as discovery disputes

and litigation of subject-matter jurisdiction and Haltzman's

right to demand a jury trial. After the District Court granted

Dardovitch's motion for partial summary judgment and

Backos and Haltzman provided an accounting, the parties

litigated and held a hearing concerning a number of

substantive issues. This post-Accounting litigation focused

on resolving Dardovitch's objections to the accounting itself,

along with his more general claims against Haltzman and

Backos, but it also included collateral matters, such as the

determination of the attorney's fee award.

The court took Dardovitch's request for approximately

$60,000 in pre-Accounting fees, and reduced it to $50,000

"to (1) account for activity unrelated to the trustees'

malfeasances and (2) reflect more accurately the value

conferred to the Trust as a result of the account."

Appellant's Brf. App. 1, at 7. With respect to the post-

Accounting fees, the District Court substantially reduced

these from the amount Dardovitch requested. In so doing,

it noted that he had not prevailed on his non-trust claims,

as well as on a majority of his objections and exceptions to

the accounting. On the other hand, it recognized that he

did prevail in significant part in his objections to the

accounting, which resulted in the return of substantial

funds to the Trust corpus. Accordingly, it awarded him

about 25% of the amount he had requested, or $9,000. In

addition, the court awarded Dardovitch his costs in full.

B. Is Haltzman Liable for Dardovitch's Attorney's Fees?

Haltzman contends that the District Court had no power

to direct him to pay Dardovitch's attorney's fees at all.

Dardovitch responds that the court has the power under

trust law to award attorney's fees. In particular, a court

deciding a trust case can grant a beneficiary attorney's fees

from the trustee where the beneficiary's legal action results

in the creation or preservation of the trust in general, and

where the trustee breaches his fiduciary duty with more

than ordinary fault. We begin by explicating these general

principles in greater detail; we then apply them to analyze

29

the District Court's attorney's fee awards for the two phases

of the litigation.

1. General Principles Governing Award of Attorney's Fees

Awards in Trust Actions

Although Dardovitch suggested a number of bases for the

award of attorney's fees, the District Court relied on general

common-law equity principles in granting the request.

Pennsylvania follows the so-called American Rule regarding

the award of attorney's fees: "[T]here can be no recovery for

counsel fees from the adverse party to a cause, in the

absence of express statutory allowance of the same, or clear

agreement by the parties, or some other established

exception." First State Underwriters Agency of New England

Reins. Co. v. Travelers Ins. Co., 803 F.2d 1308, 1318 (3d

Cir. 1986).14 One of the more common exceptions to the

American Rule is that attorney's fees are available at the

discretion of the court in cases involving trusts. See Estate

of Tose, 393 A.2d 629 (Pa. 1978).

A prominent treatise best summarizes the principles

behind this exception:

In suits to enforce the rights of trust beneficiaries the

court exercises its discretion as to the allowance of

attorney fees and costs, either from the trust estate or

from other sources. . . .

In exercising its discretion in these matters the court

will consider whether the plaintiff or other party was

successful in obtaining the relief requested or in

defending or conserving the trust estate, for example,

by protecting the trust against an unjust claim. The

court may also consider whether the successful party

benefitted or enhanced the trust estate in deciding

whether his attorneys' fees should be awarded from the

trust estate. These considerations are sometimes

expressed as the common fund doctrine or the

_________________________________________________________________

14. Because this is a diversity case, the relevant state law concerning

attorney's fees applies. See Security Mut. Life Ins. Co. v. Contemporary

Real Estate Assocs., 979 F.2d 329, 331-32 (3d Cir. 1992).

30

substantial benefit rule, either of which allows the

successful party reasonable attorneys' fees.

In exercising its discretion the court may consider

other factors such as the nature and extent of the

defendant's wrongful conduct, and whether there was

good faith on the part of the defendant.

A further question relates to the source from which

the costs and fees should be paid. In some cases the

courts have held that the fees of the successful plaintiff

should be paid from the principal of the trust estate

because the trust had been protected or enhanced. In

other cases the trustee or other party defendant has

been held personally liable for the plaintiff 's costs and

fees.

16 George Gleason Bogert et al., The Law of Trusts and

Trustees S 871, at 184-97 (rev. 2d ed. 1998) (footnotes

omitted); see also Annotation, Allowance of Attorneys' Fees

in, or Other Costs of, Litigation by Beneficiary Respecting

Trust, 9 A.L.R.2d 1132 (1950). Pennsylvania courts have

adopted these principles. See Estate of Trimble , 140 A.2d

609 (Pa. 1958) (beneficiary may be entitled to a fee award

where action results in preservation of funds of trust);

Estate of Kline, 124 A. 280 (Pa. 1924) (trustee may be

required to pay fees incurred as a result of his actions);

Estate of Wescott, 72 Pa. D. & C. 519 (Orph. Ct. 1951)

(beneficiary may be entitled to a fee award in an action

brought to establish the validity of a trust).

Most importantly for our review, the District Court's

discretion in deciding whether to grant attorney's fees in an

equity case is exceedingly broad. "The allowance of counsel

fees, where recoverable, rests largely in the discretion of the

trial court which heard the principal action." Williams v.

Williams, 540 A.2d 563, 572 (Pa. Super. Ct. 1988) (citing

Estate of Ward, 38 A.2d 50, 52 (Pa. 1944))." `The allowance

or disallowance of counsel fees rests generally in the

judgment of the court of the first instance and its decision

will not be interfered with except for palpable error.' "

Trimble, 140 A.2d at 615 (quoting Ward)."The

determination of the award of attorneys' fees is within the

sound discretion of the trial judge, and will not be

31

overturned absent an abuse of discretion." Security Mut.

Life Ins. Co. v. Contemporary Real Estate Assocs. , 979 F.2d

329, 331-32 (3d Cir. 1992). Accordingly, we must determine

whether the District Court abused its discretion in

determining that Haltzman should be liable for some of

Dardovitch's attorney's fees. "An abuse of discretion may be

found when the district court's decision rests upon a clearly

erroneous finding of fact, an errant conclusion of law or an

improper application of law to fact." Reform Party v.

Allegheny County Dept. of Elections, 174 F.3d 305, 311 (3d

Cir. 1999) (en banc).

2. Fees for Pre-Accounting Litigation

The District Court awarded Dardovitch most of the

requested fees for litigation during the period prior to the

court's decision requiring the trustees to account. It based

this decision on Haltzman's continued refusal -- both when

Dardovitch requested such information and after this

litigation was instituted -- to recognize Dardovitch's status

as a beneficiary entitled to information about the Trust,

particularly given that he was specifically named in the

Trust as someone entitled to receive funds. The court

concluded that the only possible explanation for this

conduct was bad faith, and accordingly ordered Haltzman

to pay most of Dardovitch's attorney's fees expended in

establishing his right to demand an accounting. We

perceive no abuse of discretion in the District Court's

decision.

As noted above, a trustee may be found liable for a

beneficiary's attorney's fees when the trustee has acted

wrongfully, especially where the litigation itself is made

necessary by the trustee's defalcation. See Kline. For

example, in In re Catell's Estate, 38 A.2d 466 (Del. Ch. Ct.

1944), the trustee failed to give a bond as required by the

settlor. The beneficiaries of the trust brought an action to

have the trustee removed, but the court refused to remove

the trustee because he gave the bond after the suit was

filed and the trust suffered no loss. In spite of the fact that

the beneficiaries did not receive the relief they sought, the

court ordered the trustee to pay their attorney's fees as the

suit was made necessary only because of the trustee's

32

failure to observe the clear terms of the trust. See also

Tucker v. Brown, 150 P.2d 604 (Wisc. 1944) (where a

trustee repudiated the trust and refused to account, a

beneficiary who successfully sues him to enforce the trust

is entitled to costs from the personal funds of the trustee).

We think it clear that the lengthy pre-Accounting

litigation was necessitated by Haltzman's persistent refusal

to provide Dardovitch with an accounting. This refusal

began in letters sent to Dardovitch denying him any

information about the Trust and threatening him with

litigation. It continued through the lengthy proceedings

before the District Court granted Dardovitch's motion for

partial summary judgment. The District Court also noted

that, even after it determined as a matter of law that

Dardovitch was a beneficiary entitled to an accounting,

Haltzman continued to deny that Dardovitch was a

beneficiary of the Trust. See Dardovitch, 1998 WL 13271, at

*7 ("Moreover, to this day the trustees continue to deny

that plaintiff is entitled to an accounting . . . despite our

Order . . . in which we stated that `[i]t would be hard to

imagine a clearer example' of a trust beneficiary than one

in plaintiff 's position.").

Furthermore, the litigation provided a benefit to the

Trust, as it brought about an accounting of the Trust that

exposed breaches of fiduciary duty. Under the trustees'

apparent understanding of the term "beneficiary," no one

was entitled to seek an accounting. Thus, by bringing the

litigation, Dardovitch forced the trustees to give an account

for their actions, which they otherwise would not have

done. This was undoubtedly of benefit to the Trust. In

addition, aside from the intrinsic benefit of having an

accounting performed, the accounting here exposed the

breach of fiduciary duty discussed above. As a result of this

exposure, a substantial amount of funds will be preserved

for the beneficiaries. Accordingly, we do not believe that the

District Court abused its discretion in awarding Dardovitch

attorney's fees for the pre-Accounting litigation to be paid

by Haltzman.

3. Fees for Post-Accounting Litigation

The District Court also awarded Dardovitch a portion of

the attorney's fees he requested for work done after the

33

court called the trustees to account. It based this award on

the fact that Dardovitch's litigation of his objections to the

accounting resulted in a benefit to the Trust to the extent

that it resulted in the return of funds to the Trust, as well

as a reduction in the potential liabilities of the Trust, i.e.,

it would not in the future need to pay Haltzman for

collecting on the notes. In addition, it required Haltzman to

pay these fees because it found he breached hisfiduciary

duty in a way that resulted in a direct benefit to himself,

i.e., the additional fees themselves.

The District Court did not abuse its discretion here

either. One of the situations in which a court may award

attorney's fees is where the litigation results in a benefit to

the trust as whole. See Trimble. Here, as a result of

Dardovitch's objections to the account, Haltzman was

ordered to return certain fees to the Trust, and will not be

permitted in the future to withdraw additional fees.

Furthermore, the District Court appropriately ordered the

trustee himself, as opposed to the Trust, to pay the fees. By

accepting the additional fees for the collection actions,

Haltzman, an attorney, not only breached his fiduciary

duty, but did so in a way that resulted in a direct benefit

to himself. This case is thus unlike those in which a trustee

breaches his duty by making an improper investment,

which causes a loss to the trust estate but no

corresponding gain to the trustee. Although, as discussed

above, Haltzman did not engage in per se impermissible

self-dealing, his breach of trust resulting in a direct profit

to him justifies the District Court's award of attorney's fees

in favor Dardovitch to be paid by Haltzman. Accordingly, we

will affirm the District Court's decision that Haltzman

should be liable for Dardovitch's attorney's fees, at least in

part.

C. Calculation of the Fee Award Amount

Although we will affirm the District Court's decision to

award attorney's fees, we will vacate the order and remand

the matter because the District Court did not properly

determine the amount of attorney's fees to be awarded.

Dardovitch requested $60,712.78 in pre-Accounting fees,

and $35,649 in post-Accounting fees. Without holding a

34

hearing, the District Court found that the hourly rates were

reasonable, but reduced the awards to $50,000 and $9,000

respectively. It calculated these amounts as follows: the

$50,000 pre-Accounting award was reduced from the

$60,000 Dardovitch requested based on the fact that

Dardovitch's attorneys had performed some work before the

accounting unrelated to establishing Dardovitch's status as

a beneficiary, and so as to reflect more accurately the value

conferred on the Trust by the accounting. It based the

$9,000 post-Accounting award on a roughly 75% reduction

of the requested fee, which it derived from Dardovitch's lack

of success on his pre-Trust claims and several of his

objections to the accounting, along with his substantial

success on a major objection to the accounting.

We think that our recent decision in Security Mutual Life

Insurance Co. of New York v. Contemporary Real Estate

Associates, 979 F.2d 329 (3d Cir. 1992), controls. There, in

an action for collection on a mortgage note that included a

provision for attorney's fees, the district court ordered the

debtor to pay the lender's attorney's fees without holding a

hearing, making a finding as to the reasonableness of the

fees, and without explaining the rationale for the award. We

vacated the award:

Defendant requested discovery regarding attorney's

fees. The district court implicitly denied this request by

approving the second proposed form of judgment

submitted by Security Mutual. . . . [I]t conducted no

hearing and made no findings of fact as to the

reasonableness of the fees requested and gave no

statement as to the standard governing its award.

Thus, we cannot adequately review the reasonableness

of the action of the district court in awarding counsel

fees under the circumstances. We conclude that its

action was not consistent with a sound exercise of

discretion under Pennsylvania law.

Security Mut., 979 F.2d at 332; see also Estate of

Brockerman, 480 A.2d 1199, 1204 (Pa. Super. Ct. 1984)

(remanding fee award where record did not indicate"what

hourly rate the firm charged, what the prevailing rate in the

general area was at the time, what services were performed,

or how much time those services consumed"); cf. Estate of

35

Baker, 401 A.2d 737 (Pa. 1979) (no remand necessary

where trial court heard lengthy testimony and made

extensive findings regarding the services rendered by the

attorney, the difficulty of the actions undertaken, and the

reasonableness of the fee request as a whole); Sewak v.

Lockhart, 699 A.2d 755 (Pa. Super. Ct. 1997).

The District Court's fee award in this case is like that in

Security Mutual. In determining the fee award, the District

Court relied only upon Dardovitch's submission, which

included statements from the attorneys and their time

records. The court held no hearing on this issue, and

Haltzman had no opportunity to challenge on a factual

basis the fee requested. Haltzman in fact identifies several

contested factual issues concerning the attorney's fee

award, including whether the fees were incurred in

response to abusive conduct, whether Dardovitch presented

adequate documentation for the fees, and whether

Dardovitch is entitled to fees for preparation of the fee

petition.15

Furthermore, the reasoning supporting the District

Court's decision to reduce the fee awarded below that

requested is sketchy. For instance, the court reduced the

fee award for pre-Accounting litigation by $10,000"to

account for activity unrelated to the trustees' malfeasances

and [to] reflect more accurately the value conferred to the

Trust as a result of the account." We cannot determine

from the record whether this reduction was supported.

Likewise, the District Court awarded Dardovitch only 25%

of his request for post-Accounting fees, because many of

his objections to the account failed. But we cannot

determine from the record whether the 25% figure

accurately represents the amount of work expended on the

successful claim. The District Court was fully familiar with

the record and perhaps instinctively reached the correct

result; because it did not hold a hearing and set forth an

adequate explanation of its calculations, however, we

cannot be sure that its award of attorney's fees was

_________________________________________________________________

15. In identifying these issues, we express no opinion whether and the

extent to which they are significant in the determination of attorney's

fees.

36

consistent with the exercise of sound discretion.

Accordingly, we will vacate the attorney's fee award and

remand this matter to the District Court for further

proceedings.

V. Backos's Liability

Dardovitch cross-appeals from the District Court's order

excusing Backos from liability for the repayment of the

attorney's fees improperly paid to Haltzman for the

collection actions. He contends that Backos was negligent

in failing to prevent Haltzman from breaching the Trust,

and therefore should be jointly liable with Haltzman.

Dardovitch further submits that Backos should not be

excused from liability because she relied on the advice of

her attorney, i.e., Haltzman.

The District Court's holding concerning Backos's liability

is somewhat murky. Its discussion of the issue occurs

mainly in the context of liability for Dardovitch's attorney's

fees. During its explanation of why Backos would not be

jointly liable with Haltzman for Dardovitch's attorney's fees,

the court inserted a footnote stating that it would not hold

Backos liable for the underlying breach of fiduciary duty.

"While there is ample evidence of Ms. Backos's neglect as

trustee which might be construed to support [a claim

against her for imputed breach of fiduciary duty], for the

reasons stated supra . . . we think that her co-trustee's

malfeasance should not be imputed to Ms. Backos."

Dardovitch, 1998 WL 13271, at *8 n.28. In the referenced

portion of the opinion, the court stated as follows:

We do not question Ms. Backos's level of sophistication

in business affairs -- quite to the contrary, her

testimony showed her to be an intelligent and very

capable businesswoman -- but it is evident from these

proceedings that in legal matters she relied exclusively

on Haltzman and his firm. Indeed, Haltzman's firm

represented her even in this litigation.

1998 WL 13271, at *4 n.15. Because of Backos's reliance

37

on counsel, and Haltzman in particular, the District Court

excused her from liability.16

A trustee must exercise reasonable care to ensure that

his or her co-trustees do not breach their fiduciary duties.

In general, of course, "[a] trustee is not liable to the

beneficiary for a breach of trust committed by a co-trustee."

Herr v. United States Cas. Co., 31 A.2d 533, 534 (Pa. 1943)

(quoting Restatement (First) of Trusts S 224(1)); see also

Restatement (Second) of Trusts S 224(1); 3 Scott & Fratcher,

supra, S 224, at 401. This is not an absolute rule, however:

A trustee is liable to the beneficiary, if he (a)

participates in a breach of trust committed by his co-

trustee; or (b) improperly delegates the administration

of the trust to his co-trustee; or (c) approves or

acquiesces in or conceals a breach of trust committed

by his co-trustee; or (d) by his failure to exercise

reasonable care in the administration of the trust has

enabled his co-trustee to commit a breach of trust; or

(e) neglects to take proper steps to compel his co-

trustee to redress a breach of trust.

Restatement (Second) of Trusts S 224(2); accord 3 Scott &

Fratcher, supra, S 224, at 401 (same); see also Herr, 31

A.2d at 534 (quoting in part Restatement (First) of Trusts

S 224(2)).

These exceptions flow out of the general duty of each co-

trustee with respect to the action of his or her fellows. "If

there are several trustees, each trustee is under a duty to

the beneficiary to participate in the administration of the

trust and to use reasonable care to prevent a co-trustee

from committing a breach of trust or to compel a co-trustee

to redress a breach of trust." Restatement (Second) of

Trusts S 184. "A fiduciary is required to use such common

skill, prudence and caution as a prudent man, under

similar circumstances, would exercise in connection with

_________________________________________________________________

16. We apply plenary review to this question, since it concerns whether

the District Court applied the proper legal standard-- subjective

reasonableness in relying on advice of counsel versus objective

reasonableness. See In re Assets of Martin, 1 F.3d 1351, 1357 (3d Cir.

1993).

38

the management of his own estate." Estate of Lohm, 269

A.2d 451, 454 (Pa. 1970); see also Estate of Lerch, 159 A.2d

506, 509 (Pa. 1960). This duty of care is not reduced even

if the specific trustee lacks skill in some respects. See

Restatement (Second) of Trusts S 174 cmt. a ("A trustee is

liable for a loss resulting from his failure to use the care

and skill of a man of ordinary prudence, although he may

have exercised all the care and skill of which he was

capable.").

Pennsylvania case law demonstrates the extent to which

simple, passive negligence can give rise to liability for the

breaches of a co-trustee. In Estate of Adams, 70 A. 436 (Pa.

1908), the court held a trustee liable for his negligent

failure to prevent a breach by a co-trustee, even where he

had previously taken some steps to present such a breach.

The trust corpus in Adams included some bonds that were

held in a safe deposit box that the trustees had agreed they

would not open unless both were present. One trustee, who

was aware that the other was in financial distress,

discovered that the bonds were missing in 1896. He then

confronted the other trustee, who returned the bonds and

agreed not to open the box in the first's absence. The first

trustee did not inform the bank of this arrangement. He

became an invalid in 1904, shortly after the trustees' last

joint visit to the safety deposit box. The second trustee died

in 1906, at which time it was discovered that the bonds

were missing. The court in Adams affirmed the Orphan's

Court's conclusion that the first trustee had acted

negligently and should be held liable for the missing bonds.

In Estate of Reyburn, 43 Pa. D. & C. 85 (Orph. Ct. 1942),

the court held a trustee liable for the breach of his co-

trustee where he relied on his co-trustee's expertise to the

trust's detriment. The co-trustee in Reyburn, a trust

company, invested certain trust funds in assets in which

the settlor had indicated trust funds could not be invested.

The individual trustee knew nothing about the terms of the

will limiting the possible investments, nor was he aware of

those facts that indicated that the assets were not proper

investments. He simply assumed that they were appropriate

because he presumed that the trust company would not

have purchased them if they were not appropriate. The

39

court found that the individual trustee was liable for the

trust company's breach because he was negligent in failing

to oversee the company's actions. Furthermore, since the

trust company had not actively misstated material facts

relating to the investment, he was not excused from liability

for relying on its expertise. In particular, the court stated

that "there is no presumption of greater competence in a

trust company than in an individual." 43 Pa. D. &. C. at

90.

Furthermore, advice of counsel is not an absolute defense

to liability for a breach of fiduciary duty, including liability

for the defalcation of a co-trustee. "Although the court will

consider that the executor acted upon the advice of counsel

in determining whether he acted in good faith, this does not

provide the executor with complete immunity to a

surcharge." Estate of Geniviva, 675 A.2d 306, 310 (Pa.

Super. Ct. 1996) (citing Lohm, 269 A.2d at 455); see also

Lohm, 269 A.2d at 455 ("Where a fiduciary acts upon the

advice of counsel, such fact is a factor to be considered in

determining good faith, but is not a blanket of immunity in

all circumstances." (citations and quotations omitted)). "The

initial choice of counsel must have been prudent under all

the circumstances then existing, and the subsequent

decision to rely upon this counsel must also have been a

reasonably wise and prudent choice." Lohm, 269 A.2d at

455; see also Geniviva, 675 A.2d at 310.

The District Court did not analyze Backos's liability

under the principles set forth above. Essentially, the court

required of Backos only subjective good faith; it excused

Backos from liability solely because she relied on

Haltzman's advice and counsel in performing her duties as

trustee. But, as is clear from the preceding discussion,

subjective good faith is only the beginning of the inquiry. If

Backos relied on counsel, she must have done so

reasonably, i.e., making a prudent choice of counsel and

taking reasonable care to ensure that counsel performed

effectively. Furthermore, even if she relied reasonably on

counsel, Backos must have acted reasonably in performing

her duties as a whole in order to avoid liability. The District

Court reached none of these issues; hence, we will vacate

the District Court's order to the extent it relieved Backos

40

from liability for Haltzman's breach, and remand for further

proceedings in this regard.17

VI.

For the foregoing reasons, the orders of the District Court

will be affirmed in part and vacated in part, and the case

remanded for further proceedings consistent with this

opinion. The parties will bear their own costs.

A True Copy:

Teste:

Clerk of the United States Court of Appeals

for the Third Circuit

_________________________________________________________________

17. We note that this does not necessarily leave Backos potentially liable

for the entire amount of the surcharge, because rights of indemnity and

contribution exist in trust cases. See Restatement (Second) of Trusts

S 258(1). Furthermore, although the District Court erred in excusing

Backos without additional inquiry from liability for the breach of trust

itself, we do not think it erred in placing the burden of paying

Dardovitch's attorney's fees solely on Haltzman. Unlike liability for a

breach of trust, which is based only on a reasonable care test, an award

of attorney's fees against a trustee, as discussed above, turns on the

defendant's active culpability. The District Court found that Backos's

conduct arose from "excusable neglect," and not bad faith, especially in

comparison with Haltzman, Dardovitch, 1998 WL 13271, at *8, and

excused her from liability for the attorney's fees. We find no error in

this

conclusion.

41