PRESENT: All the Justices
JON C. CARLSON, ET AL.
OPINION BY
v. Record No. 092076 JUSTICE WILLIAM C. MIMS
January 13, 2011
VALERIE A. WELLS, ET AL.
FROM THE CIRCUIT COURT OF THE CITY OF VIRGINIA BEACH
Frederick B. Lowe, Judge
In this appeal, we consider the duty of care owed by the
custodian of a Virginia Uniform Transfers to Minors Act
(“UTMA”) account and whether the appellants in this case
breached that duty. We also review the tracing of commingled
funds and the award of attorneys’ fees.
I. BACKGROUND AND MATERIAL PROCEEDINGS BELOW
Jon C. Carlson (“Jon”) and Valerie A. Wells (“Wells”) were
married from 1984 to 2000. They had three children during the
marriage: Eric Carlson (“Eric”), Scott Carlson (“Scott”), and
Ariel Carlson (“Ariel”) (collectively, “the Children”). During
the marriage, Jon and Wells established several accounts for
the Children under the UTMA, Code §§ 31-37 to –59. 1 Jon was the
custodian of the majority of these accounts but Jon’s brother,
1
Specifically, Eric, Scott, and Ariel each had a Vanguard
money market account (account numbers ending in 826, 839, and
128, respectively), a Vanguard brokerage account, and Vanguard
Health Care and Primecap mutual fund accounts. Eric and Scott
each had an additional Vanguard money market account (account
numbers ending in 595 and 980, respectively). Each child also
had an American Century account.
James Carlson (“James”), 2 was the custodian of the money market
accounts with account numbers ending in 595 and 980, which held
the bulk of the UTMA funds for Eric and Scott.
In December 2003, while Eric was in high school and
deciding where to apply to college, he and Jon discussed the
financial resources available to fund Eric’s education. Jon
told Eric that the money that had been saved for the Children’s
education might not be available. Eric then accessed the UTMA
accounts online and discovered that the funds had been
withdrawn. He asked the Carlsons and Jon’s attorney to see the
financial records for the UTMA accounts but they did not
respond.
Wells, together with Eric in his own right and Scott and
Ariel through Wells as their next friend, 3 subsequently filed a
complaint in the circuit court seeking removal of the Carlsons
as custodians of the UTMA accounts, a full accounting,
compensatory damages, punitive damages, attorneys’ fees, and
costs. In May 2004, Jon paid the Plaintiffs $190,571.40, which
he contended represented the balance of the UTMA funds in the
Carlsons’ custody, and effectively resigned as custodian. In
March 2005, Jon also provided what he contended was a full
accounting of the UTMA funds.
2
We refer to Jon and James collectively as “the Carlsons.”
3
We refer to these parties collectively as “the
Plaintiffs.”
2
Jon’s accounting showed that he had closed most of the
Children’s individual accounts in 2002 and transferred their
balances to a single Bank of America savings account opened in
his and all of the Children’s names (the “BOA 866 account”). 4
Jon had made several withdrawals from the BOA 866 account,
ostensibly to reimburse himself for expenses he incurred on the
Children’s behalf and to make further investments for them.
These investments included transferring funds to his personal
Vanguard Health Care mutual fund and Fidelity Investments
accounts. He also used his own money and $40,000 of the
Children’s UTMA funds to purchase US Airways stock shortly
before the company sought bankruptcy protection in 2002,
thereby rendering the stock worthless.
In April 2005, the court referred proceedings on the
Plaintiffs’ complaint to a commissioner in chancery. In April
2009, following six days of testimony taken in the spring of
2006, the commissioner reported his findings. In his report,
the Commissioner found that the Plaintiffs had received a full
accounting in March 2005; that, despite having commingled UTMA
funds with his own property, Jon had breached his custodial
duties only by failing to permit the Plaintiffs to make an
4
The Children’s American Century accounts were not closed
and the funds in them were undisturbed at the time of the
accounting. Money market accounts 595 and 980 were not closed
but held only nominal balances at the time of the accounting.
3
inspection of the UTMA records when they sought to do so in
2003 and 2004; that James had not breached his custodial
duties; that the Carlsons had not breached any common law
fiduciary duty; that, prior to the hearings, the Carlsons had
resigned as custodians, rendering their removal moot; that the
Children were entitled to $3600 in compensatory damages; that
the Children were not entitled to punitive damages; that the
Plaintiffs were entitled to recover attorneys’ fees incurred
only through the date they received the full accounting in
March 2005; and that the Plaintiffs bore the costs of the
commissioner’s hearing.
Jon filed exceptions to the commissioner’s report
challenging the award of $3600 in compensatory damages, the
award of any attorneys’ fees to the Plaintiffs, and the failure
to award him attorneys’ fees. The Plaintiffs filed exceptions
to the report challenging the failure to find that the UTMA
funds did not significantly diminish while in the Carlsons’
custody, the failure to find that Jon breached his custodial
duty to maintain records, the failure to find that James
breached his custodial duties, the failure to find any breach
of common law fiduciary duty, the finding of only $3600 in
compensatory damages, the failure to find punitive damages, the
failure to award them attorneys’ fees incurred after March
4
2005, and the failure to award them the costs of the
commissioner’s hearing.
Reviewing the commissioner’s report, the evidence, and the
exceptions filed by the parties, the circuit court found that
the Carlsons had breached their duties to the Children.
Specifically, the court found that James had abdicated his
custodial responsibility; that Jon had violated his custodial
duties by failing to keep proper records, resulting in his
inability to account for $19,910.88 in UTMA funds; and that Jon
had violated the applicable standard of care by speculating in
US Airways stock when he knew the company was on the verge of
bankruptcy, resulting in a loss of $40,000 in UTMA funds.
Accordingly, the court awarded the Children $31,767.36 in
damages from James and $28,143.52 in damages from Jon, in
proportion to the amounts in their custody, as well as awarding
the Plaintiffs $20,000 in attorneys’ fees, $10,500 in
commissioner’s fees, and $2,602.03 in costs from the Carlsons
jointly and severally. We awarded the Carlsons this appeal.
II. ANALYSIS
“When a [circuit court] has disapproved a commissioner in
chancery’s report, we must determine whether, under a correct
application of the law, the evidence supports the findings of
the commissioner or the conclusions of the [court].” Jampol v.
Farmer, 259 Va. 53, 58, 524 S.E.2d 436, 439 (2000). To do so,
5
we review the evidence to determine which set of findings it
supports. Parkes v. Gunter, 168 Va. 94, 98, 190 S.E. 159, 160
(1937). We review the legal holdings de novo. E.g., Ladysmith
Rescue Squad, Inc. v. Newlin, 280 Va. 195, 200, 694 S.E.2d 604,
607 (2010).
We granted the Carlsons an appeal on seven assignments of
error. Four present the questions of what duty a custodian of
a UTMA account owes to its beneficiary, whether the Carlsons
breached that duty, and, if so, what damages should be awarded.
Another assignment presents the question of whether the circuit
court erred in finding that the Carlsons did not properly trace
the UTMA funds in their custody. The remaining assignments
present the question of who, if anyone, is entitled to an award
of attorneys’ fees. 5
A. STANDARD OF CARE FOR UTMA CUSTODIANS
The Carlsons do not assign error to the circuit court’s
factual finding that Jon’s 2002 investment in US Airways was
speculative because “he knew [the company] was in financial
trouble, and was gambling on ‘buy low-sell high’ success.”
Rather, they merely contend that the standard of care for UTMA
custodians permitted such speculation.
5
The Carlsons have not assigned error to the part of the
circuit court’s judgment awarding the Plaintiffs costs and
commissioner’s fees and those awards therefore are final. Rule
5:17(c).
6
At the time relevant to this case, Code § 31-48(B)
provided that
[i]n dealing with custodial property, a
custodian shall observe the standard of care
that would be observed by a prudent person
dealing with such person’s own property and is
not limited by any other statute restricting
investments by fiduciaries. If a custodian has
a special skill or expertise or is named
custodian on the basis of representations of a
special skill or expertise, the custodian shall
use that skill or expertise. However, a
custodian, in the custodian’s discretion and
without liability to the minor or the minor’s
estate, may retain any custodial property
received from a transferor.
Former Code § 31-48 (2001). 6
Analyzing the statute, the circuit court found that its
language mirrored the common law standard of care for
fiduciaries prior to the 1956 enactment of a statutory standard
in former Code § 26-45.1. 7 While the court considered several
6
The General Assembly amended the statute in 2007 to
incorporate the Uniform Prudent Investor Act, Code §§ 26-45.3
to –45.14 (the “UPIA”). 2007 Acts ch. 517.
7
See also Hoffman v. First Virginia Bank of Tidewater, 220
Va. 834, 263 S.E.2d 402 (1980). The statutory standard
provided that, except with regard to specific investments
subject to statutory safe harbors created by other sections of
the Code,
an executor, administrator, trustee, or other
fiduciary . . . shall exercise the judgment of
care under the circumstances then prevailing,
which men of prudence, discretion and
intelligence exercise in the management of their
own affairs, not in regard to speculation but in
regard to the permanent disposition of their
7
of our precedents applying the common law standard, it
distinguished them on the ground that they arose from suits for
waste brought against fiduciaries by beneficiaries whose assets
had been lost when investments had not been liquidated or bank
deposits had not been withdrawn.
Seeking further guidance, the court then turned to Buder
v. Sartore, 774 P.2d 1383 (Colo. 1989), a Colorado case
analyzing that state’s standards for custodians under its
Uniform Gifts to Minors Act and the UTMA. Applying Buder, the
circuit court found that the Carlsons had a duty to preserve
the principal of the UTMA funds and that Jon’s speculative
investment in US Airways stock violated that duty. The court
reasoned that, under the common law standard, a fiduciary is
liable for breaches concerning specific investments regardless
of the performance of the portfolio as a whole. Consequently,
the Carlsons were liable to the Children for the $40,000 lost
in the US Airways investment.
funds, considering the probable income as well
as the probable safety of their capital.
1956 Acts ch. 660. Although Code § 26-45.1 was subsequently
amended, we determined that its original terms “merely
incorporated the principle long established by our case law
that, unless a trust instrument provides otherwise, the
‘prudent [person] rule’ will be applied to the management of
assets by a fiduciary.” Hoffman, 220 Va. at 840, 263 S.E.2d at
406.
8
On appeal, the Carlsons argue that because Code § 8.01-2
does not list UTMA custodians as fiduciaries the only standard
applicable to UTMA custodians is the one set forth in former
Code § 31-48(B). Emphasizing the phrase “a custodian shall
observe the standard of care that would be observed by a
prudent person dealing with such person’s own property,” they
assert that Jon’s 2002 investment was reasonable and comported
with the standard both because Jon made a similar, profitable
investment in the 1990s and because he invested his own funds
with the Children’s UTMA funds in 2002. We disagree.
The phrase “a prudent person dealing with such person’s
own property” is a term of art invoking the common law Prudent
Person Rule and effectively imposing the common law duties of
trustees on UTMA custodians. The Prudent Person Rule is stated
in Restatement (Second) of Trusts § 174 as a duty “to exercise
such care and skill as a [person] of ordinary prudence would
exercise in dealing with his own property; and if the trustee
has or procures his appointment as trustee by representing that
he has greater skill than that of a [person] of ordinary
prudence, he is under a duty to exercise such skill.” It is
clear that the Prudent Person Rule embodied in the Restatement
is consistent with Virginia’s common law prior to the enactment
of any statutory standard. See Harris v. Citizens Bank & Trust
Co., 172 Va. 111, 125, 200 S.E. 652, 657 (1939) (“[T]rustees,
9
executors and other fiduciaries . . . are required to do those
things which a [person] of reasonable intelligence and prudence
would be expected to do in the management of his own affairs .
. . .”); accord Commercial & Savings Bank of Winchester v.
Burton, 183 Va. 133, 150, 31 S.E.2d 289, 296 (1944); Parsons v.
Wysor, 180 Va. 84, 89, 21 S.E.2d 753, 755 (1942); Powers v.
Powers, 174 Va. 164, 171, 3 S.E.2d 162, 165 (1939).
As constrained by the Prudent Person Rule, the Carlsons
had “a duty to the [Children] to use reasonable care and skill
to preserve” the UTMA funds. Restatement (Second) of Trusts
§ 176. Accordingly, Jon had a duty to make “only such
investments as a prudent [person] would make of his own
property having in view the preservation of the estate.”
Restatement (Second) of Trusts § 227(a). However that standard
is not met whenever a fiduciary to whom the Rule applies
invests his beneficiary’s money however he invests his own.
Rather, the Restatement clarifies that while “a [person] of
intelligence may make a disposition which is speculative in
character with a view to increasing his property instead of
merely preserving it[, s]uch a disposition is not a proper
trust investment, because it is not a disposition which makes
the preservation of the fund a primary consideration.”
Restatement (Second) of Trusts § 227, cmt. e; see also Stewart
E. Sterk, Rethinking Trust Law Reform: How Prudent is Modern
10
Prudent Investor Doctrine?, 95 Cornell L. Rev. 851, 853 (2010)
(Under the Prudent Person Rule, “trustees were not to make
‘speculative’ investments.”); C. Boone Schwartzel, Is the
Prudent Investor Rule Good for Texas?, 54 Baylor L. Rev. 701,
705 (2002) (The Prudent Person Rule emphasizes “safety,
preservation of the trust corpus, and income productivity.”);
Paul G. Haskell, The Prudent Person Rule for Trustee Investment
and Modern Portfolio Theory, 69 N.C. L. Rev. 87, 94 (1990)
(“Under the prudent person rule, any speculative investment is
a breach of trust.”)
Thus, the standard imposed by former Code § 31-48(B) is
not met merely because Jon’s previous investments in US Airways
had been profitable or because Jon invested his own money with
the Children’s UTMA funds in 2002. The evidence presented to
the commissioner, considered by the circuit court, and
unchallenged on appeal establishes that Jon knew at the time he
used the Children’s UTMA funds to purchase US Airways stock
that the company was on the brink of bankruptcy. Consequently
the circuit court found the investment to be speculative. It
therefore violated the Prudent Person Rule’s standard of care
as imposed by former Code § 31-48(B).
The Carlsons next assert that the overall return on the
UTMA funds while in their custody offsets the loss of value in
US Airways stock and that former Code § 26-45.1 required the
11
circuit court to evaluate their overall performance rather than
consider the US Airways investment in isolation. We again
disagree. 8
The conduct of fiduciaries held to the Prudent Person Rule
is evaluated with respect to each individual investment. The
performance of an investment portfolio as a whole is not
considered. Haskell, 69 N.C. L. Rev. at 93 (Under the Prudent
Person Rule, “the standard of prudence is applied to each
investment in isolation. Each investment is either in
compliance or it is not, without regard to its relationship to
other investments in the portfolio. The trustee is liable for
loss in value of any improper investment, without regard to the
performance of any other investment, proper or improper, or to
the performance of the portfolio as a whole.”); see also
Restatement (Second) of Trusts § 213 (“A trustee who is liable
for a loss occasioned by one breach of trust cannot reduce the
amount of his liability by deducting the amount of a gain which
has accrued through another and distinct breach of trust.”).
In both respects – the prohibition on speculation and the
evaluation of each investment in isolation – the Prudent Person
Rule admittedly is anachronistic. The divergence between
outdated capital-preservation investment strategies and modern
8
We note that former Code § 26-45.1 was repealed in 1999
and had no effect at the time Jon purchased the US Airways
stock. 1999 Acts ch. 772.
12
portfolio management is the motivating force behind states’
replacement of the Prudent Person Rule with the Prudent
Investor Rule. This especially was true as inflationary
pressures from the 1970s to mid-1990s had an erosive effect on
trust corpuses locked in relatively low-return investments. By
contrast, the Prudent Investor Rule permits fiduciaries to
engage in reasonable speculation to benefit from the higher
returns of modestly riskier investments, while concomitantly
shifting the focus of evaluating the fiduciary’s conduct from
the performance of individual investments to the portfolio as a
whole. Sterk, 95 Cornell L. Rev. at 853-54 (noting that the
prudent investor rule accommodates modern investment portfolio
management theory); Schwartzel, 54 Baylor L. Rev. at 713-14
(same); Haskell, 69 N.C. L. Rev. at 93-94 (same).
The Prudent Investor Rule does not apply to this case,
however. Though the General Assembly enacted the UPIA in 1999,
see 1999 Acts ch. 772, it did not then apply the new standard
to custodians of UTMA accounts. The Prudent Person Rule
continued to apply through Code § 31-48(B) until 2007, when
that section was amended to incorporate the UPIA. 2007 Va.
acts ch. 517. At the same time, the legislature amended Code
§ 26-45.13 to include UTMA custodians among the fiduciaries
covered by the UPIA. Id. Consequently, the Prudent Person
Rule applied to the Carlsons at the time Jon made the
13
speculative investment in US Airways. Thus, that investment
breached his duty of care and we affirm the circuit court’s
ruling that the Carlsons are liable to the Children for the
UTMA funds lost as a result.
B. TRACING THE COMMINGLED UTMA FUNDS
The Carlsons argue that the circuit court failed to defer
to the commissioner’s factual finding that the UTMA funds were
accounted for and erroneously substituted its own
interpretation of the evidence. We disagree.
The commissioner found that all UTMA funds were traceable
but that $3600 was used for improper purposes. However, the
commissioner’s report failed to address whether the Plaintiffs
bore the burden of proving that UTMA funds were missing or
whether the Carlsons bore the burden of proving that all funds
were accounted for, and failed to state what evidence the
commissioner considered in evaluating whether that burden had
been met by the appropriate party. By contrast, the circuit
court began its examination of the UTMA funds with an analysis
of the applicable burden of proof.
The circuit court first noted that Code § 31-48(E)
requires a UTMA custodian to “keep records of all transactions
with respect to custodial property.” It then found that the
Carlsons and their expert could not account for all funds that
had been removed from the various individual UTMA accounts,
14
commingled in the BOA 866 account, and then transferred to
several of Jon’s personal accounts, ostensibly for the
Children’s benefit.
Finding no cases specifically dealing with the burden of
proof for an accounting of UTMA funds, the circuit court turned
to our decision in Tauber v. Commonwealth, 263 Va. 520, 562
S.E.2d 118 (2002). In that case we determined that when
trustees commingle their property with trust property and
subsequently seek to separate their own property from the
assets of the trust, they bear “the burden of proving how much
of the commingled funds they owned personally.” Id. at 541,
562 S.E.2d at 129. The burden lies on the trustees because
they are required to account for the trust assets, and if they
“conduct their affairs in a manner that prevents a precise
accounting of trust assets, the trustees, rather than the
trust, must suffer the consequences.” Id. The circuit court
also considered Vaiden v. Stubblefield, 69 Va. (28 Gratt.) 153,
162 (1877), and Bain v. Pulley, 201 Va. 398, 403, 111 S.E.2d
287, 291 (1959), in which we applied the same burden to the
executor of an estate and an agent for property entrusted to
him by a principal, respectively.
Because Jon admitted to commingling the UTMA funds in the
BOA 866 account and then transferring them into his personal
accounts, the circuit court held that Jon
15
has the burden of proving that the funds
committed to his care were properly used by him.
Attempts to follow the children’s funds are made
more difficult as they were transferred into
three or four accounts in Jon’s name, and there
were additional transfers back and forth between
those accounts. This conduct “prevents a
precise accounting” and therefore Jon should
bear the burden of untangling matters.
We find the circuit court’s reasoning sound. The
custodian of a UTMA account has a statutory duty to keep
records of the custodial funds. When the custodian commingles
his own funds with the custodial funds, he does so at his
peril. Any failure to maintain clear and accurate records
distinguishing his funds from the custodial funds places the
custodian’s funds in jeopardy. This approach is pragmatic and
sensible, for it is the custodian who chooses to commingle the
funds and it is the custodian who knows to what purpose he has
used them. It is far simpler for him to record his
transactions as he makes them than for the beneficiary to
attempt to reconstruct the transactions after the fact.
Accordingly, the Carlsons bore the burden of establishing that
each transfer from the BOA 866 account was used for a proper
purpose.
The circuit court found that the Carlsons had not met this
burden. The court then attempted to trace the transactions
questioned by the Plaintiffs. Of $177,006.81 in questioned
transactions, the court found that $19,910.88 could not be
16
traced to a proper purpose. 9 The Carlsons contend that the
commissioner’s factual finding that only $3600 was untraceable
to proper purposes is the only finding supported by the
evidence. We disagree.
After reviewing the accounting submitted by the Carlsons
and the testimony of their expert, we find that the circuit
court correctly determined that $3,910.88 was not properly
traced to proper purposes. Two transactions found to be
untraceable by the circuit court, a $5000 transfer in June 2003
and a $11,000 transfer in October 2003, are traceable to
deposits into the BOA 866 account. Accordingly, the circuit
court erroneously determined that $16,000 was untraceable and
we will reverse that portion of its judgment.
C. ATTORNEYS’ FEES
The Carlsons assign error to the circuit court’s failure
to award them attorneys’ fees and its award of fees to the
Plaintiffs. The principal ground for their challenge is that
the Carlsons substantially prevailed below and the Plaintiffs
did not. We disagree.
We note that both the commissioner and the circuit court
found that James abdicated his statutory duties as a custodian.
The Carlsons have not assigned error to these findings and
9
The Plaintiffs have not assigned cross-error to the
circuit court’s determination that the remaining $157,095.93
was properly traced.
17
appear to shrug off this condemnation. Their position reflects
disrespect for the gravity of the responsibilities assumed by
one who agrees to serve as a custodian under the UTMA. We
believe the General Assembly acted purposefully when it imposed
the obligations found in the statutes. Those obligations may
not be treated casually or with cavalier disregard.
Similarly, Jon admitted to commingling UTMA funds into a
single account for all the Children, despite the requirement in
Code § 31-48(D) that a custodian “at all times shall keep
custodial property separate and distinct from all other
property in a manner sufficient to identify it clearly as
custodial property of the minor” for whose benefit it is held.
He likewise admittedly failed to permit an inspection of the
records of the UTMA accounts between December 2003, when Eric
first demanded an inspection, and May 2005, despite Code § 31-
48(E)’s requirement that a custodian make such records
available “for inspection at reasonable intervals by a parent
or legal representative of the minor or by the minor if the
minor has attained the age of fourteen years.” His ignorance
of or indifference to his statutory obligations is perhaps
explained, though in no way excused, by his continuing
misapprehension that he was “a father who at all times . . .
was investing his own money for his children” rather than the
18
mere custodian of property owned by the Children and entrusted
to his care. (Emphasis added.)
In short, the Carlsons appear never to have grasped the
import of their roles as custodians. This was a grave
misunderstanding on their part as it led them to breach their
statutory obligations to the detriment of the Children and the
diminution of the funds entrusted to the Carlsons’ care. In
light of the circuit court’s findings, there can be no
plausible contention that the Carlsons substantially prevailed
below. Although the Carlsons argue that their attorneys’ fees
are a reasonable expenditure for which they are entitled to
reimbursement under Code § 31-51 – because the costs of
litigation would not have been incurred had the Plaintiffs not
brought and maintained this action – it is clear that the
Plaintiffs were justified in bringing the action to compel the
accounting and recovery of the untraceable or misused funds.
Accordingly, the Carlsons’ assertion that the circuit court
erred in failing to award them attorneys’ fees is without
merit.
The Carlsons also contend the circuit court erred in
awarding the Plaintiffs attorneys’ fees because the Plaintiffs
did not substantially prevail below. We may dispose of this
argument swiftly.
19
In their complaint, the Plaintiffs sought an accounting of
the UTMA funds. They received an accounting more than a year
after the complaint was filed. They also sought removal of the
Carlsons as custodians. Though James had long before abandoned
his role and left management of the two UTMA accounts entrusted
to his care to Jon, Jon resigned and surrendered the UTMA funds
to the Plaintiffs after the complaint was filed. The
Plaintiffs also sought compensatory damages. Both the
commissioner and the circuit court found the Children were
entitled to compensatory damages. The only relief the
Plaintiffs sought which they did not receive as a result of
filing the complaint was an award of punitive damages. 10 We
therefore find that the Plaintiffs were the prevailing parties
below.
Nevertheless, “[t]he general rule in this Commonwealth is
that in the absence of a statute or contract to the contrary, a
court may not award attorney's fees to the prevailing party.”
Prospect Dev. Co. v. Bershader, 258 Va. 75, 92, 515 S.E.2d 291,
300 (1999). In Prospect Development, we noted several
exceptions to the rule:
For example, we have permitted a prevailing
party, who prosecuted a cause of action for
malicious prosecution or false imprisonment, to
recover attorney's fees. Burruss v. Hines, 94
10
The Plaintiffs have not assigned cross-error to the
circuit court’s denial of punitive damages.
20
Va. 413, 420, 26 S.E. 875, 878 (1897); Bolton v.
Vellines, 94 Va. 393, 404, 26 S.E. 847, 850
(1897).
We have held that "where a breach of
contract has forced the plaintiff to maintain or
defend a suit with a third person, he may
recover the counsel fees incurred by him in the
former suit provided they are reasonable in
amount and reasonably incurred." Owen v.
Shelton, 221 Va. 1051, 1055-56, 277 S.E.2d 189,
192 (1981); accord Fidelity Nat. Title Ins. Co.
v. Southern Heritage Title Ins. Agency, Inc.,
257 Va. 246, 253-54, 512 S.E.2d 553, 557-58
(1999); Hiss v. Friedberg, 201 Va. 572, 577-78,
112 S.E.2d 871, 875-76 (1960). We have permitted
a trustee, who defended his trust in good faith,
to recover attorney's fees from the estate,
Cooper v. Brodie, 253 Va. 38, 44, 480 S.E.2d
101, 104 (1997), and we have approved an award
of attorney's fees in certain cases involving
alimony and support disputes even though such
awards of attorney's fees were neither
authorized by statute nor by contract. See
Carswell v. Masterson, 224 Va. 329, 331-32, 295
S.E.2d 899, 900-01 (1982); Alig v. Alig, 220 Va.
80, 86, 255 S.E.2d 494, 498 (1979); McKeel v.
McKeel, 185 Va. 108, 116-17, 37 S.E.2d 746, 750-
51 (1946); McClaugherty v. McClaugherty, 180 Va.
51, 69, 21 S.E.2d 761, 768 (1942); Heflin v.
Heflin, 177 Va. 385, 399-400, 14 S.E.2d 317, 322
(1941).
Id. at 92, 515 S.E.2d at 300-301. We concluded that “in a
fraud suit, a chancellor, in the exercise of his discretion,
may award attorney's fees to a defrauded party.” Id. at 92,
515 S.E.2d at 301. In addition, in Tauber, we opined that “a
longstanding course of self-dealing . . . would have supported
an award of attorneys' fees” but declined to reverse a circuit
21
court’s denial of such fees as an abuse of discretion. 263 Va.
at 547, 562 S.E.2d at 133.
The Carlsons argue that there was no evidence that they
“engaged in callous, deliberate, deceitful acts,” id. at 546,
562 S.E.2d at 133 (quoting Prospect Development, 258 Va. at 92,
515 S.E.2d at 301), and there was no finding of intentional
wrongdoing, fraud, or self-dealing. We disagree.
The Carlsons callously disregarded their custodial
obligations under the UTMA. They deliberately withheld the
records of the UTMA accounts from the Plaintiffs for more than
a year. Those records, once produced and examined by the
commissioner and the circuit court, revealed that Jon had
commingled the UTMA funds from the Children’s various
individual accounts into a single account, in violation of Code
§ 31-48(E). Thereafter, he used a charitable contribution made
from UTMA funds to the Children’s school as a charitable
deduction on his personal income tax return and used UTMA funds
to reimburse himself for a child support payment he made to
Wells, in violation of Code § 31-50. In this case, these facts
are sufficient to establish a “pattern of misconduct,” Prospect
Development, 258 Va. at 92-93, 515 S.E.2d at 301, specifically
a pervasive, wanton dereliction of the duties imposed by the
General Assembly on UTMA custodians. Accordingly, we find no
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error in the circuit court’s award of attorneys’ fees to the
Plaintiffs.
III. CONCLUSION
We will affirm the circuit court’s judgment with respect
to its finding that Jon violated the custodial standard of care
provided in former Code § 31-48(B) by speculatively investing
$40,000 in US Airways stock. We will affirm the circuit
court’s judgment with regard to allocating the burden of proof
to the custodians after finding that the Carlsons had
impermissibly commingled UTMA funds, but we will reverse its
finding that $16,000 in UTMA funds was untraceable or misused.
We will affirm the circuit court’s judgment as to the award of
attorneys’ fees to the Plaintiffs and the denial of such fees
to the Carlsons.
In assessing the respective liability of Jon and James for
the losses in UTMA funds, the circuit court ruled that James
was liable for 83% of the losses to the UTMA funds owned by
Eric and Scott as a result of his custodianship of the 595 and
980 money market accounts, that Jon was liable for 17% of Eric
and Scott’s losses as a result of his custodianship of the
other accounts held for their benefit, and that Jon was liable
for 100% of Ariel’s losses. The court also allocated Scott
$5000 less than Eric or Ariel for the $40,000 loss attributable
to the US Airways investment. No party has assigned error to
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these allocations by the circuit court. We therefore will rely
on them for the entry of final judgment.
We will enter final judgment of $16,303.63 in compensatory
damages to Eric, $11,303.62 to Scott, and $16,303.63 to Ariel,
of which James is liable for $22,914.02 and Jon is liable for
$20,996.86. We also will enter final judgment of $33,102.03 in
attorneys’ fees, commissioner’s fees, and costs to the
Plaintiffs for which James and Jon are jointly and severally
liable.
Affirmed in part,
reversed in part,
and final judgment.
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