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New York Trusts & Estates Litigation

Contingency Fees – Size Matters

Posted in Legal Profession

While the Court of Appeals last year upheld the validity of contingency fee agreements in estate matters, especially in litigation, where it approved contingency fees of over forty million dollars when the actual time spent was a fraction of that value (see Matter of Lawrence 24 NY3d 320 [2014]), a recent New York County Surrogate’s Court case, Estate of Fanny Goldfarb, NYLJ, Oct. 14, 2015, p.22 col.2, confirms that the size of an estate can still be a major factor in determining the reasonableness of a contingent fee, even though the services rendered and the result achieved were exemplary.

In Goldfarb, litigation counsel was retained by the executor to pursue a SCPA 2103 turnover proceeding to recover a co-op apartment that had been transferred to the decedent’s cousin prior to her death.  The fee arrangement was formalized in a written retainer agreement which provided for a contingent fee of one-third of any recovery relating to the transfer of the apartment.  The attorney commenced the proceeding on behalf of executor, and within six months a settlement was reached, whereby the coop apartment was returned to the estate plus $75,000 cash, waiver of a $100,000 bequest, and $6,163 in purported commissions relating to other transfers discovered to have been made to the respondent, which had not yet been brought before the court.

The attorney sought a contingent fee of $251,995, representing one-third of the value of the apartment plus the other monies and waivers recovered. The Attorney General opposed the fee, arguing that it was “extremely excessive.”

Relying primarily on the “size of the estate” criteria enunciated a Matter of Potts, 213 AD 59 (4th Dept 1925), aff’d 241 NY 593 (1925), the court reduced the contingent fee to $115,000, and ordered the attorney to refund the excess without interest.  The court concluded that “such allowance recognizes that the value of respondent’s services outweighs the time he spent in the matter, yet also recognizes that the other factors discussed above do not support a fee that, as the Attorney General notes, would make respondent ‘in effect the major beneficiary of the estate.’”

Fee cases are fact specific. However, contingency fee arrangements are particularly important for smaller estates where a fiduciary may be unable to find counsel who would handle the matter on an hourly basis, and without whom there might be no recovery.

A Real-Life Final Exam Fact Pattern: That Pesky Per Stirpes Statute

Posted in Construction of Wills and Trusts, Trusts

As the year draws to a close, I sometimes recall the stresses of final exam season from my law school days. In the spirit of reminiscence, I’ll pose a quick final-exam-like fact pattern:

Jane owned a parcel of real property in New Hyde Park, title to which she transferred in June 2002 to her irrevocable lifetime trust. Jane listed the New Hyde Park property on Schedule A to the trust agreement, and also executed and recorded a deed transferring the property to her trustees. The trust agreement provides that upon Jane’s death, the remaining corpus of the trust is to be divided among her two children, Nancy and Thomas, in equal shares per stirpes. Nancy and Thomas are specifically named as remainder beneficiaries under the trust agreement.

In February 2013, Thomas predeceased Jane, leaving no spouse or issue, and having no will.

In January 2014, Jane created a will which included a general bequest of all of her real property and her residuary estate to her three grandchildren, Scott, John and Jessica, the children of Nancy.

Jane died in July 2014. At Jane’s death, her irrevocable trust was still in existence and the deed to the New Hyde Park property was still in the name of the trustees of Jane’s trust. Scott sought admission of Jane’s January 2014 will to probate and received preliminary letters testamentary. Assuming admission of Jane’s January 2014 will to probate, who will receive title to the New Hyde Park property?

If you want to cheat, the answer can be found in a recent Nassau County Surrogate’s Court decision, Matter of Wilder (NYLJ, September 3, 2015, p.25, col.6). The crux of the dispute decided by Surrogate McCarty was that both Nancy, as trustee and beneficiary of Jane’s irrevocable trust, and Scott, as preliminary executor and a legatee of Jane’s estate, claimed an interest in the New Hyde Park property.

Nancy asserted that the property was owned solely by the trust and should pass 100% to her. As the trust distribution is to be per stirpes, she referred to EPTL 1-2.14, which provides:

“The property so passing is divided into as many equal shares as there are (i) surviving issue in the generation nearest to the deceased ancestor which contains one or more surviving issue and (ii) deceased issue in the same generation who left surviving issue, if any. Each surviving member in such nearest generation is allocated one share.”

Nancy claimed that the per stirpetal division and distribution should be made at her generation level, as it was the nearest to Jane and contained both surviving and deceased members. Since Thomas did not leave issue, Nancy argued only one share should be created, passing entirely to her as the sole surviving trust beneficiary.

Conversely, Scott asserted that 50% of the New Hyde Park property was owned by Jane at her death and should pass to her grandchildren pursuant to her January 2014 will. Scott claimed that because the trust was irrevocable and the remainder over to Nancy and Thomas was not conditioned upon their survival, a 50% interest in the New Hyde Park property vested immediately and absolutely in Thomas upon transfer of the real property to the trust. When Thomas died, his estate owned that 50% real property interest and it ultimately passed by intestacy to his sole intestate distributee, his mother Jane. Thus, Scott argued, when Jane bequeathed her real estate by her will, this 50% interest in the New Hyde Park property passed to her grandchildren.

Who was right? Neither, party entirely. As with many final exam questions, the fight over interests in the New Hyde Park property was a red herring. The Surrogate clarified that the dispute at issue was properly over a 50% remainder interest in Jane’s trust, not a 50% interest in the New Hyde Park property. Whether Thomas had any interest when he died, it would only have been an interest in the remaining trust property, not the New Hyde Park property transferred to the trust. For example, the New Hyde Park property could have been sold by the trustee and neither Thomas, nor his estate, would have standing to prevent that.

But the question still remained whether Thomas had any remainder interest in Jane’s trust even though he predeceased Jane. Surrogate McCarty noted EPTL 2-1.15 which provides that when the remainder of a trust passes to two or more designated beneficiaries and such remainder provision is ineffective in part, without an alternative disposition, the ineffective portion passes to the remaining designated beneficiaries. Thus, if the trust remainder provision was ineffective as to Thomas, due to his predeceasing Jane, the trust remainder would pass entirely to Nancy as the sole remaining beneficiary. If, however, the trust remainder portion for Thomas vested both immediately and indefeasibly, the trust remainder provision would have been effective despite Thomas’ death, and EPTL 2-1.15 would not apply.

The Surrogate next determined that Thomas’ remainder interest in the trust vested immediately upon the trust’s creation because Thomas was specifically named, and this creates a strong inference of vesting. As for whether the vesting was indefeasible, the words “per stirpes” created a potential condition for defeasance of Thomas’ vested interest, because they indicated Jane’s intent that Thomas’ death might lead to his issue taking his previously vested share. Thus Thomas’ lack of issue became the deciding factor.

The Surrogate rejected Nancy’s interpretation of the per stirpes provision under EPTL 1-2.14. The term per stirpes provides for division among a class of persons, and it is not possible to make a per stirpetal ‘division’ among one person. If Thomas had died with issue, then a class would have existed and a per stirpetal division could have been made. Since Thomas had no issue, the per stirpes provision is not operative. Moreover, the “per stirpes” qualification language in the trust agreement meant that Thomas’ vested interest would only be defeated if Thomas both (1) died before Jane, and (2) died leaving issue surviving him. Since both conditions were not satisfied, Thomas’ previously vested interest in the trust remainder was not defeated by his death. As a result, Thomas’ estate would be entitled to a 50% remainder interest in the trust, which would pass to Jane by intestacy and be disposed of by her will.

How did you score on the exam? More importantly, perhaps, despite the legal logic of the result, do you think this is the result Jane intended? Jane’s property ultimately remained in her family, but would your answer to that final question have been different if Thomas had made a will giving his property to a non-family member? As with most exam-type fact patterns, careful trust drafting could have prevented the dispute.

The Essentials of a Discovery Proceeding

Posted in Uncategorized

This month’s blog post will address a recent decision by the Appellate Division, First Department, entered in In re Perelman, that helps reiterate and define the parameters of discovery proceedings. The case is interesting not only for its facts and the issues they presented, but for its litigants: Ronald Perelman, of Revlon and corporate raider fame, and James Cohen, the President and CEO of Hudson News, and President of Hudson Enterprises.         

The Decedent, Claudia Cohen, a well-known gossip columnist at the time of her death, was the sister of James Cohen, and was Ronald Perelman’s former spouse. She died on June 15, 2007, with an estate amounting to approximately $68 million, survived by her daughter, Samantha, who was her sole surviving heir. Pursuant to the terms of her Will, Claudia, after making some specific bequests, left the residue of her estate to her daughter, in trust, until a stated age, and appointed Mr. Perelman, who was Samantha’s father, as the executor and trustee thereunder.

James and Claudia Cohen were the children of Robert and Harriet Cohen. Robert died several years after Claudia, in 2012, and Harriet is still living. Over the course of his life, Robert amassed a considerable fortune through his ownership and control of a number of family businesses, including Hudson News. James participated in these family businesses for his entire career.

In June 2010, Perelman commenced a discovery proceeding against James Cohen, his two sons, Justin and Robert II, Hudson News Company, and Robert Cohen, seeking information and a turnover of assets allegedly belonging to the Estate of the decedent within the knowledge, possession and/or control of the Respondents. Subsequent to the filing of his initial petition, Perelman amended his pleading in order to, more specifically, assert claims against James Cohen for fraud and undue influence in effectuating transfers of Robert Cohen’s business interests to himself to the detriment of his sister, Claudia, and her estate. The Amended Petition sought, amongst other things, to recover any interest of Claudia in one or more of the various Cohen family businesses, including but not limited to Hudson News, which may have been misappropriated by James.

It is significant that the amended petition failed to identify any specific property that Claudia owned at the time of her death that was being withheld by the Respondents, or any specific property that was converted from her by the Respondents. Rather, it was predicated upon Perelman’s supposition that Claudia owned an interest in the Hudson News group, based upon the allegations against James Cohen, and his desire to test that belief through an examination of the books and records of the company.

It is worth noting that the discovery proceeding came at the heels of multiple proceedings that had been instituted by Perelman in his fiduciary capacity against members of the Cohen family in the New Jersey State and Federal courts, all of which he lost. It is also important to note that in the context of the foregoing litigation, Perelman sought and obtained discovery of more than 2.1 million pages of documents, and conducted 30 depositions. That discovery revealed that the only interest Claudia had owned in the family business during her lifetime was .36% of 1 share of stock of Hudson News, which she sold in 1990.

The Respondents moved to dismiss the Amended Petition arguing that Perelman’s claims were barred by documentary evidence, and on the basis of the statute of limitations, res judicata and collateral estoppel. More specifically, the Respondents claimed that the unequivocal documentary proof established that the Decedent sold her entire interest in Hudson News in 1990, and owned no interest in any other Cohen family business at death. Further, they alleged that SCPA 2103 did not permit an unbridled search for unknown and unidentified assets based on nothing more than a surmise and a possibility that the Decedent may have owned those assets.

Perelman, nevertheless, maintained that he was entitled and duty-bound as fiduciary to determine, amongst other things, whether Claudia transferred her entire interest in Hudson News and was paid in full for that transfer, and whether she held any interest in any of her family’s other businesses. Further, Perelman maintained that SCPA 2103 has been broadly construed so as to allow a “fishing expedition” in order to assist the fiduciary in recovering property or administering an estate.

In an opinion and Order, dated February 15, 2015, the Surrogate’s Court, amongst other things, denied the motion to dismiss finding that the documentary evidence left unresolved questions as to the interest of the Decedent in Hudson News and Hudson Enterprises, that dismissal on the basis of the statute of limitations was premature, since the Amended Petition did not identify a time when any alleged wrong occurred, and that the executor had a responsibility to marshal the decedent’s assets and the right to conduct discovery to satisfy himself and the beneficiaries that he diligently attempted to ascertain the scope of those assets.

Finally, the Court rejected the Respondents’ res judicata and collateral estoppel claims holding that the issues raised by the New Jersey litigation were distinct from those raised in the New York proceedings. An appeal followed.

Although the appeal addressed multiple issues, one of the principal issues was whether SCPA 2103 discovery is tantamount to a fishing expedition, or something more limited in scope.

The Respondents maintained that while discovery pursuant to SCPA 2103 is often labeled a “fishing expedition”, the authorities did not consider it to be a fishing expedition with an unlimited license. Rather, they argued that a discovery proceeding only lies where it is alleged that it relates to specific personal property or money or the value or the proceeds thereof.

On the basis of the foregoing, Respondents claimed that Perelman was simply on a mission to open up the books and records of Hudson News and its related entities rather than pursue estate assets, which he knew did not exist.

Moreover, to this extent, Respondents argued that the documentary evidence (consisting, in part, of the Shareholders Agreement for Hudson News, the decedent’s tax returns, and the balance sheet from her 1993 divorce from Perelman) unequivocally established that the Decedent sold her entire interest consisting of .36% of 1 share in Hudson in 1990, and that she had no other interest at death in the enterprise.

Perelman, on the other hand, argued SCPA 2103 affords a party broad latitude to explore a Decedent’s assets, tantamount to a fishing expedition. Given this scope, it was Perelman’s contention that the burden rested on the Respondent’s to show that regardless of what information might be elicited in discovery, it was inconceivable that the examination could lead to any information that would assist the fiduciary in recovering or administering estate assets.

To this extent, Perelman maintained that the documentary evidence failed to satisfy this burden.

The Appellate Division rejected Perelman’s argument, unanimously reversed the order of the Surrogate, and dismissed Perelman’s claim for discovery.

Notably, on the issue of 2103 discovery, the Court iterated and reminded us all that a fiduciary seeking discovery pursuant to the statute cannot go on an unabridged fishing expedition to search for assets of an undefined nature that he has a hunch belongs to the estate.

Rather, citing the decision in Matter of Castaldo, 180 AD2d 421 (1st Dept. 1992) the Court held that a fiduciary invoking the statute must demonstrate the existence of specific personal property or money which belongs to the estate, or even a reasonable likelihood that such specific property might exist.

Significantly, in this regard, the court held that, in light of the documentary evidence submitted by Respondents, Perelman had failed to satisfy his burden of establishing that the Decedent may have held an interest in the family business after the sale of her stock in 1990. The Court found that Perelman’s contentions that she did hold such an interest were speculative at best.

Perelman made a motion for leave to appeal this result to the Court of Appeals, which application was denied, with costs.

So, at least from the First Department’s perspective, and perhaps the perspective of the Court of Appeals, we are seemingly left with the lesson that unless a petition for SCPA 2103 discovery seeks specific property or money that is in the possession or knowledge of a Respondent, or with reasonable likelihood is in the possession or knowledge of the respondent, the proceeding must be dismissed.

Dishonesty and Improvidence as Grounds for Disqualification of a Fiduciary

Posted in Fiduciaries, Probate, Trusts

A recent decision of the Richmond County Surrogate’s Court addressed a frequently litigated issue in Surrogate’s Court litigation – – whether the proposed or nominated fiduciary should be disqualified from serving in a fiduciary capacity on the grounds of “dishonesty” or “improvidence.” In the Estate of George Mathai a familiar dynamic was in play – – there was a dispute between the decedent’s children from a prior marriage and the decedent’s surviving spouse. The decedent’s two children from a prior marriage objected to the appointment of their step-mother as Administrator of the decedent’s estate. They claimed that she was unfit to serve as fiduciary on the grounds of dishonesty, hostility, and improvidence.

At the outset, the court noted that the decedent’s surviving spouse was first in the order of statutory priority to serve as Administrator under SCPA §1001(a). However, the statute gives parties interested in a decedent’s estate the opportunity to object to the appointment of a fiduciary, where the fiduciary “does not possess the qualifications required of a fiduciary by reason of substance abuse, dishonesty, improvidence, want of understanding, or…is otherwise unfit for the execution of the office.”

With the decedent’s children objecting to the appointment of their step-mother, the question became what, in this context, do the statutory terms “dishonesty,” and “improvidence” mean?

Addressing “dishonesty,” the Surrogate explained that in order to prove that a potential fiduciary is dishonest “it must be shown that the person has a tendency or ‘habit of mind’ toward wrongful action.”   An act of isolated wrongdoing is not enough to disqualify a fiduciary from serving on the basis of “dishonesty.” It must be shown that there was dishonesty in money matters to such an extent that it would lead to a reasonable apprehension that the estate would not be safe.

Addressing “improvidence” the court quoted earlier decisions where it was observed that “the quality of being improvident does not necessarily involve moral turpitude,” and that defined improvident acts as those that “would be likely to render the estate unsafe and liable to be lost or diminished.” The court further explained that misappropriation or mishandling of the decedent’s property falls within the meaning of improvidence.

In the Estate of George Mathai, the decedent’s children could not meet their burden of showing dishonesty or improvidence to disqualify their step-mother. Additionally, while they claimed that their step-mother should not be appointed on the grounds of hostility, the court dismissed their objection, repeating the rule that mere hostility between the fiduciary and the beneficiaries is not grounds for disqualification; hostility will only serve as a basis for disqualification where it jeopardizes the proper administration of the estate.

In this regard, it is worth noting that courts are mindful of beneficiaries or distributees seeking to impose their preference of fiduciary contrary to the testator’s choice of fiduciary (or contrary to the statutory order of priority) through their own misconduct. In this regard, beneficiaries are not permitted to bootstrap their own unreasonableness, hostility, and misconduct into a claim for disqualification or removal on the grounds of friction and hostility. As the New York County Surrogate’s Court has pointed out:

Courts are also loathe to indulge a beneficiary’s wish to dictate, at will or at whim, who the fiduciary should or will be. After all, where there is a clash between beneficiary and fiduciary, it is the latter who faces the potential for liability; it may be presumed therefore that the prospect of a surcharge will chasten the fiduciary to try to do right on an issue as to which the beneficiary him/herself is free to be wrong. As a corollary, a beneficiary should not be allowed to bootstrap his or her way to a new fiduciary by intentionally antagonizing the current fiduciary.

Ademption Results from Attorney-in-Fact’s Sale of Specifically Bequeathed Asset

Posted in Accounting

In Matter of Conklin, 2015 NY Slip Op 25094 (Sur Ct, Nassau County 2015), a contested accounting proceeding, the Nassau County Surrogate’s Court addressed, among other things, whether specifically bequeathed property sold by an attorney-in-fact prior to the decedent’s death, adeemed.  My article entitled Ademption and the Power of Attorney, published in the Fall 2009 New York State Bar Association Trusts & Estates Law Section Newsletter, contains a thorough discussion of the ademption doctrine in the context of conveyances by attorneys-in-fact.  While the article predated revisions to the General Obligations Law intended to curb abuses of power by attorneys-in-fact, this recent decision demonstrates that the law has not evolved significantly on the subject despite such changes.

As explained in my article,

Ademption is the ‘extinction or withholding of some legacy in consequence of some act of the testator which, though not directly a revocation of the bequest, is considered in law as equivalent thereto, or indicative of an intention to revoke.’ A bequest adeems when property that had been specifically devised no longer exists at the time of the testator’s death. (Jaclene D’Agostino, Ademption and the Power of Attorney, NYSBA Trusts & Estates Section Newsletter, at p.7, Vol. 42 [Fall 2009]).

In Conklin, one of the decedent’s two attorneys-in-fact, Lori Conklin (“Lori”) sold his cooperative apartment while he was residing in a nursing or rehabilitation facility. The decedent’s will had specifically devised the apartment to his two children and first wife, with a direction that it be sold after his death and the proceeds divided among the three of them. But a sale prior to death meant that the proceeds would become part of the decedent’s residuary estate, of which Lori’s mother and co-agent, Joan Conklin (“Joan”), was the sole beneficiary.

The attorney who prepared the power of attorney testified at the hearing.  He explained that Lori initially contacted him regarding preparing a power of attorney and doing Medicaid planning for the decedent. Lori and Joan had several meetings with the attorney on the subject– none of which included the decedent. The attorney advised them that the decedent should execute a new power of attorney because the old one (under which Lori and Joan had both been appointed) did not contain a major gifts rider. He further advised that the decedent’s apartment should be sold for purposes of Medicaid planning, and the proceeds thereof be deposited into an account in the decedent’s name.

The decedent executed the new power of attorney on March 24, 2010, at the nursing or rehabilitation facility where he resided.  It named Lori and Joan as co-agents, and contained a major gifts rider, authorizing the agents to make gifts to themselves or others in any amount (see GOL §5-1514).  The attorney met the decedent for the first time on that date, when he supervised the execution of the document. He testified that at that meeting, he discussed with the decedent his recommendation that the apartment be sold.

The attorneys-in-fact subsequently sold the apartment. On the date of the closing, the attorney contacted the decedent to ensure that he was still alive. The agents then deposited the $125,500 proceeds from the sale into an account in the decedent’s name. The decedent died approximately two weeks thereafter.

The proceeds benefitted Joan, as the residuary beneficiary of the estate. Mere days after the decedent’s death, Lori used her power of attorney to close the decedent’s account (a fact that raises its own issues), and utilized the proceeds to pay off Joan’s home equity loan.

Despite the fact that Joan ultimately benefitted from the sale, the court rejected the contention that there had been a breach of fiduciary duty by the attorneys-in-fact in selling the apartment and thus, that the proceeds of the sale should be returned to specific devisees. The court explained the general rule that if a specifically bequeathed item is sold, given away, lost or destroyed during a decedent’s lifetime, then the bequest generally fails, or adeems. “Moreover, ‘it matters not whether [the sale] came to pass because of an intentional or voluntary act of the testator’” (Matter of Conklin, supra at *5 [quoting Matter of Wright, 7 NY2d 365, 367 [1960]). In addition, “once the devise is found to be adeemed, the court is not permitted to substitute something else for it. This includes tracing the proceeds from the sale of the real property” (Matter of Conklin, supra at *6 [relying on Labella v Goodman,198 AD2d 332 [2d Dept 1993]; see also Matter of Wallace, 86 Misc 2d 175, 180 [Sur Ct, Cattaraugus County 1976] [opining proceeds of a sale of specifically bequeathed property “do not constitute the legacy bequeathed,” and thus, “the general rule of ademption applies and the legacy fails”]).

Given counsel’s advice to sell the apartment, and his contacting the decedent on the date of the closing, the court concluded that there had been no breach of fiduciary duty by the attorneys-in-fact, and thus, the foregoing general rules applied to this situation. Consequently, the specific devisees of the apartment were not entitled to the proceeds of the sale. The bequest had adeemed. Although this result might seem less than equitable on its face, it is in accordance with the laws of New York.

Court Enjoins Trustees from Going to Texas for a “Second Bite at the Apple” to Stop Beneficiaries from Inheriting

Posted in Construction of Wills and Trusts

In a March 6, 2015 decision in Levien v Johnson, NYLJ 1202721296511, at *1 (Sur Ct, New York County), the New York County Surrogate’s Court enjoined the trustees of a testamentary trust from proceeding in Texas to challenge the adoptions of two adults, Parvin Johnson, Jr. and Kenneth Ives, by the grandsons of the Decedent, Arnold Levien. As the great-grandsons of the Decedent, Messrs. Johnson and Ives would be members of the class of remainder beneficiaries of the trust entitled to distributions. If this story sounds familiar, it should. This blog’s May 2014 post discussed the Court’s April 4, 2014 decision which dismissed the trustees’ argument that the court should disregard the “unique and unforeseeable” adoptions because they were contrary to the Decedent’s intent and were fraudulently kept secret from the trustees during settlement negotiations that occurred just months before.

In that April 2014 decision, the Court recognized the Texas adoptions, but explicitly stated that it could not opine on their validity, as that was an issue for the Texas Court.  So, following that decision, and despite the dismissal of their claim that the grandsons fraudulently failed to disclose the adoptions, the trustees commenced an action in Texas to void the adoptions of Messrs. Johnson and Ives. However, in their Texas petition, the trustees alleged that the grandsons “committed fraud by failing to disclose their intentions to adopt two adults, Ives and Johnson, while litigating and negotiating the terms of the July 20, 2012 Stipulation of Settlement,” and asked the Texas Court to void the adoptions based on that alleged fraud (id. at *3).  The Surrogate found that that was the very same claim that the trustees had previously made before it, and which was dismissed on the merits in the Court’s April 4, 2014 decision.  Indeed, while the validity of the adoptions was an issue for the Texas Court, the issue of who benefits from the trust, the Surrogate found, was appropriately determined by the Surrogate’s Court, which continued to have jurisdiction.  The Court then determined that because the Texas Court could issue a decision regarding the alleged fraud that conflicts with its April 2014 decision, an injunction was warranted. The Court thus enjoined the trustees from seeking any relief in Texas concerning the July 2012 Stipulation of Settlement with the grandsons, or who benefits under the trust.  Interestingly, the Court “continue[d] to defer to the Texas court on the question of whether the Texas orders of adoption at issue can be vacated or voided based on any theory pled, cognizable, and proved in Texas” (id. at *5).  The Court appears to have left open the possibility that the trustees could challenge the adoptions based on theories not previously advanced in the Surrogate’s Court involving Texas adoption law.

In re Lawrence: What the Court of Appeals Says About Gifts from Client to Lawyer

Posted in Legal Profession

On October 28, 2014, the Court of Appeals rendered its long awaited decision in In re Lawrence, 2014 NY Slip Op 07291, reversing the decision by the Appellate Division in which it was held that (1) a revised retainer agreement, under which the law firm received 40% of the net recovery (i.e. $44 million) was procedurally and substantively unconscionable and that fees should be determined under the original retainer; and (2) the claim to recover gifts made by the client to her attorneys was timely.

In upholding the revised retainer agreement, the Court stated that the most important factor in determining whether it was procedurally unconscionable was whether the client was fully informed upon entering into the agreement, in that the client had “full knowledge of all of the material circumstances known to the attorney” (Slip Op. at 18).  The hearing evidence demonstrated that Mrs. Lawrence, who was involved in every detail of the case, fully understood the revised retainer agreement, and that layperson could comprehend the mathematical calculations used to arrive at the 40% contingency fee. Refusing to engage in a “hindsight analysis” of the revised retainer agreement, the Court concluded that the revised retainer agreement was not substantively unconscionable in light of the risks taken by the attorneys, and the value of their services over two decades of contentious litigation during which there was a lengthy trial and several appeals.

Regarding the gifts, the Court found that the claim was time-barred, and that the statute of limitations was not tolled by the continuous treatment doctrine, which, the Court reiterated, applies only where there is a claim for professional misconduct, and the professional’s ongoing representation directly relates to the specific transaction giving rise to the malpractice claim.  The Court specifically distinguished between a dispute concerning an attorney’s malpractice in rendering services and a dispute over a client’s payment of a bill or making of a gift; a critical distinction for purposes of the policy underlying the continuous representation rule.  The rule exists because “the client should not be burdened with the obligation to identify the professional’s errors in the midst of the representation as the client is hardly in a position to know the intricacies of the practice or whether the necessary steps in the action have been taken” and thus, “cannot be expected to jeopardize his pending case or his relationship with the attorney handling that case during the period that the attorney continues to represent the person” (Slip Op. at 27).   With respect to a gift or fee dispute, however, the Court held that the giving of a gift is “not the subject of any prior or ongoing representation,” and therefore, disputing it would not “force a lay person to undertake actions that he is ill-equipped to carry out” or place the client at risk for interrupting corrective efforts.

Applying those principles to the facts before it, the Court found that the client’s voluntary gifts were unrelated to the lawyers’ provision of any legal services. Importantly, there was no underlying claim of malpractice against the attorneys who received the gifts. Thus, the seminal requirement to apply the continuous representation rule was missing.  The Court further determined that there was no need for the lawyers to have any future representation vis-à-vis the gifts or to take any “corrective action.” It then concluded, “the purpose underlying the continuous representation rule would not be served by its application” (Slip Op. at 29).

In Terrorem Provisions That Violate Public Policy

Posted in Construction of Wills and Trusts

In terrorem clauses generally provide that, where a beneficiary under a testamentary instrument unsuccessfully challenges the instrument’s validity, the beneficiary will forfeit any interests obtained under the instrument.  Testators include in terrorem clauses in their wills in order to dissuade estate beneficiaries from taking action that is contrary to the testators’ wishes, as expressed in their testamentary instruments.  While a paramount objective of the Surrogate’s Court is to act according to testators’ wishes, in terrorem clauses must be narrowly construed, and certain in terrorem provisions are violative of public policy.  This post provides examples of in terrorem clauses that contravene public policy and, thus, are unenforceable under New York law.

Though in terrorem clauses are intended to prevent attacks on the validity of a will, Surrogate’s Courts have recognized that in terrorem provisions which purport to preclude a beneficiary from seeking the removal or suspension of a fiduciary nominated in the governing instrument, based upon the fiduciary’s misconduct, are violative of public policy (Matter of Rimland, 2003 WL 21302910, at *1-2 [Sur Ct, Bronx County 2003]; Matter of Fromartz, NYLJ, Oct. 22, 2005, at 29, col. 1 [Sur Ct, Kings County]).  Indeed, it “is disingenuous for [a party] to contend that [a testator] intended that [a fiduciary acting under a will] serve [as a fiduciary] even if [the fiduciary] violated [his or] her obligations under [the governing instrument] and [his or] her sacred duties of undivided loyalty” (see Rimland, 2003 WL 21302910, at *1-2). 

Former Surrogate Holzman’s decision in Matter of Rimland is highly instructive.  There, the petitioner, the income beneficiary of a testamentary trust, commenced a proceeding for the appointment of a fiduciary to pursue claims against the trustee (see id.).  In response, the trustee argued that the petitioner had triggered the governing will’s in terrorem clause and, therefore, forfeited her interest in the trust (see id.).  Surrogate Holzman was not persuaded by the trustee’s arguments, holding that the trustee’s interpretation of the in terrorem clause was violative of public policy (see id.).

Much like in terrorem clauses which purport to prevent a beneficiary from seeking the removal or suspension of a fiduciary on the basis of the fiduciary’s wrongdoing are violative of public policy, so too are in terrorem clauses which attempt to preclude a beneficiary from questioning the fiduciary’s conduct (see Matter of Egerer, 30 Misc3d 1229[A], at *1-4 [Sur Ct, Suffolk County 2006]).  As Surrogate Czygier has explained, “any attempt by a testator to preclude a beneficiary from questioning the conduct of the fiduciaries, from demanding an accounting from said fiduciaries or from filing objections thereto will result in a finding that the pertinent language is void as contrary to public policy and the applicable statutes of the State of New York” (see id.).

For example, in Matter of Egerer, Surrogate Czygier construed an in terrorem clause which purported to disinherit a beneficiary under the testator’s will who filed “objections to [the] fiduciaries’ conduct, bad faith or for any other basis” (see id.).  The Surrogate found that the in terrorem clause was unenforceable as a matter of public policy, to the extent that it could be interpreted as preventing the beneficiaries from objecting to the fiduciaries’ conduct (see id.).

The lesson to take away from this post is that, while testamentary intentions are entitled to great respect, there are limits to which the Surrogate’s Courts will adhere to the wishes expressed by testators, especially concerning in terrorem clauses.  Practitioners should be mindful of the limitations, including the public-policy based concerns discussed in this article, in advising their clients with respect to in terrorem provisions.

Appellate Division Upholds Equitable Extension of Slayer Rule

Posted in Uncategorized

New York’s “slayer rule” essentially provides that if an individual kills another person, he has automatically forfeited any interest he may have had in his victim’s estate.  The rationale is simple – no one should financially benefit from his own crime. 

As we have explained in prior posts, this longstanding rule was never codified in New York, but is a common law principle emanating from the nineteenth century Court of Appeals decision in Riggs v Palmer, 115 NY 506 (1889). There, a grandson who intentionally killed his grandfather to ensure his inheritance, was barred from profiting from his own wrong. 

Applicability of the rule is generally straightforward, but in certain cases, the lines can become blurred — such as in Matter of Edwards, 2014 NY Slip Op 05873 (2d Dept 2014), where the killer sought to inherit from his victim only indirectly, through the estate of the victim’s post-deceased daughter. 

The facts of Edwards are somewhat complex.  Brandon Palladino pleaded guilty to manslaughter in connection with the death of his mother-in-law, Dianne Edwards.  Brandon’s wife, Deanna, was Dianne’s only child, and the sole beneficiary of her estate.  Less than a year after Dianne’s death, Deanna died, intestate, from an accidental drug overdose.  Brandon was Deanna’s sole distributee.  Accordingly, Brandon stood to inherit his victim’s entire estate indirectly, through his wife’s estate.

In a 2012 decision, Suffolk County Surrogate John M. Czygier, Jr., opined that the slayer rule should be extended upon equitable principles to prohibit Brandon from inheriting in this manner.  Recently, the Appellate Division, Second Department, affirmed. 

Acknowledging that this was a case of first impression, the Second Department was guided largely by its decision in Campbell v Thomas, 73 AD3d 103 (2d Dept 2010).  There, the court held that a surviving spouse forfeited her elective share by her own wrongdoing, having knowingly taken advantage of the decedent in a deathbed marriage for her own pecuniary gain. Although none of the statutory disqualification provisions of EPTL 5-1.2 applied to that situation, the court relied upon principles of equity in making its determination.

The Second Department also relied upon an Illinois case that presented facts analogous to those in Edwards.  In In re Estate of Vallerius, 259 Ill App 3d 350 (5th Dist 1994), the decedent was murdered by two of her grandsons.  Their mother post-deceased mere months later, leaving them as her only heirs.  The Illinois court held that the grandsons could not indirectly benefit from their own crime by inheriting the murdered grandmother’s estate through their mother’s estate, and explained that an intervening estate “should not expurgate the wrong of the murderer or thwart the intent of the legislature that the murderer not profit by his wrong.” 

Notably, in upholding Surrogate Czygier’s extension of the slayer rule, the Second Department rejected arguments that (1) Deanna’s inheritance vested immediately in her upon her mother’s death, allowing her to do what she wished with the property, and (2) extension of the slayer rule would raise “a host of enforceability problems” — for example, if the intervening estate resulted from a death that occurred a decade after the wrongful death or murder. The Court explained that it was unpersuaded by hypothetical scenarios and noted that the rule, as extended, would be applied on a fact-specific basis. 

In sum, the Second Department opined that Edwards was on point with both Campbell and Vallerius in that there was “a clear causal link between the wrongdoing and the benefits sought.”  Accordingly, it affirmed the Surrogate’s Court’s decision to exercise its equitable powers in extending the slayer rule to this case (see SCPA 201[2]).

“Easy” Cases Make Bad Law Too

Posted in Probate

In a decision that could well cause even the most casual trusts and estates practitioners to scratch their proverbial heads in wonder, the Appellate Division, Third Department, in Matter of Buchting, 111 AD3d 1114, 975 NYS2d 794 (3d Dept 2013), recently affirmed the determination of the Surrogate’s Court, Greene County, dismissing a “due execution” objection to probate, notwithstanding that both attesting witnesses invoked their Fifth Amendment rights against self-incrimination and refused to testify at their SCPA 1404 examination concerning the execution of the will, and notwithstanding that the Surrogate determined that summary judgment was improper because of “conflicts in the evidence.”

The petitioner in Buchting was the surviving spouse of decedent, who offered his will for probate shortly after his death.  The respondents were the decedent’s surviving children from a previous marriage. The attorney draftsman of the will (also the attorney who supervised its execution) testified at his SCPA 1404 examination in detail concerning the due execution of the will.  The two attesting witnesses were also called, but upon taking the stand, refused to testify, invoking their Fifth Amendment rights against self-incrimination.

The respondents objected to probate on the grounds of lack of due execution, lack of testamentary capacity, and undue influence.  They moved to dismiss the petition based upon the petitioner’s failure to establish due execution.  The petitioner cross-moved for summary judgment admitting the will to probate.  It appears from the Appellate Division’s decision that the Surrogate denied both motions, determining that summary judgment was improper because of “conflicts in the evidence,” but nevertheless dismissed the respondents’ objections and admitted the will to probate.

On appeal, the Appellate Division first concluded that the Surrogate properly denied the respondents’ motion to dismiss the petition because the petitioner complied with the requirement, imposed by SCPA 1404(1), that she produce the attesting witnesses for examination.  The court rejected the respondents’ argument that an attesting witness who invokes the privilege against self-incrimination and refuses to testify has not been “examined” within the meaning of section 1404.  It relied upon its prior decision in Matter of Hutchinson, 13 AD3d 704 (3d Dept 2004), in which it held that an attesting witness’ invocation of the Fifth Amendment “is akin to a failure to recall the events surrounding a will’s execution” (see id.).  It further noted that a will may be admitted to probate even where no attesting witness recalls it execution.  While the law requires the examination of at least one attesting witness, it imposes no requirements upon the substance of the testimony.

The issue, according to the court, “thus distills to whether there was sufficient other evidence to establish a prima facie case of due execution, and we find that there was.”  In this regard, the court relied exclusively on the testimony of the attorney draftsman and the presumption of due execution that resulted from the attorney’s supervision of the will’s execution.  The court determined that, in light of this presumption, the respondents had the burden to come forward with evidence contradicting the testimony of the supervising attorney.  It further determined that the respondents failed to meet their burden, notwithstanding that they “challenge[d] the veracity of the supervising attorney and argue[d], based upon various minor irregularities in the documents that she drafted, that she was unfamiliar with the necessary procedure. . . .”  Thus, according to the Appellate Division, the Surrogate properly denied the respondent’s motion to dismiss the petition and dismissed the due execution objection. 

Notably, the court stated that “to preclude the probate of a will as a matter of law because both attesting witnesses refuse to testify on constitutional grounds would come perilously close to drawing a prohibited inference from the invocation of the privilege by nonparties” (id.).

The court held that the Surrogate erred, however, in dismissing the remaining objections, grounded in testamentary capacity and undue influence, particularly prior to discovery.

A few thoughts on the Buchting decision. 

First, it seems fundamentally unfair to saddle an objectant with the burden to come forward with evidence to rebut a supervising attorney’s testimony concerning the due execution of a will in order to survive summary judgment where both attesting witnesses — likely the only other persons in the room with the decedent – refuse to testify for fear of self-incrimination.  It is difficult to imagine how an objectant could ever meet that burden.  Forgive me for stating the obvious, but it seems plain that the mere fact that both attesting witnesses have invoked the Fifth Amendment in order to avoid testifying concerning a will’s execution should itself be sufficient to justify further proceedings before admitting the will to probate.  The decision in Buchting essentially ignores that a court is obligated by statute to “inquire particularly into all the facts” in order to satisfy itself “with the genuineness of the will and the validity of its execution” (SCPA 1408).

Second, the court’s decision is grounded in its determination that a witness who has refused to testify concerning the execution of a will for fear of self-incrimination is “akin” to a witness who fails to recall the execution.  However, the decision reveals no substantial authority for that comparison.  The Buchting court cites only Hutchinson as authority — but this is a chain without an anchor, as the Hutchinson court cites no authority (see 13 AD3d at 707 [“In our view, the submission of conflicting affidavits followed by a refusal to testify falls more closely in line with a witness who has ‘forgotten the occurrence’”]).  Another statement of the obvious — failing to recall a will’s execution and refusing to testify concerning the execution for fear of self-incrimination are very different things. 

Third, in order to conclude that the petitioner satisfied SCPA 1405(3) – which requires, as a condition for probate, the “examination” of at least one attesting witness – the court essentially determined that a witness who invokes the privilege against self-incrimination and refuses to testify has nevertheless been “examined.”  However, this seems to be in conflict with the Court of Appeals’ statement in Matter of Collins that, historically, the requirement that a witness be “examined” was “fulfilled when the witnesses took the stand and related what they knew of the circumstances” (60 NY2d 466, 471 n.3 [1983]).  Collins provides no authority for the proposition that a witness who refuses to testify altogether has nevertheless been “examined.”   

Fourth, even assuming a non-testifying witness could be deemed to be “examined” within the ambit of section 1405(3), that section requires actual testimony before a will may be admitted to probate.  It provides that where an attesting witness “has forgotten the occurrence or testifies against the execution of the will” the will may nevertheless be admitted to probate “on the testimony of the other witness and such other facts as would be sufficient to prove the will.”  But where the “other witness” invokes the Fifth Amendment, there is no testimony upon which to admit the will to probate.

Fifth, the court’s determination could well put a petitioner whose witnesses refuse to testify for fear of self-incrimination in a better position that a petitioner whose witnesses actually testify against the will.  A grant of summary judgment admitting a will to probate may be inappropriate where one attesting witness testifies against the will, even where the other witness and the supervising attorney testify favorably (see generally Matter of Jacinto, 172 AD2d 664 [2d Dept 1991]).  Why should the result be different where a witness – indeed, where both witnesses – refuses to testify concerning the execution of the will for fear of self-incrimination? 

Sixth, the presumption of regularity should not permit a court to turn a blind eye to facts calling into question a will’s validity.  A court should not employ a presumption where to do so would “elevate a legal construct above common sense” (People v Giordano, 87 NY2d 441 [1995]).  Even the presumption of legitimacy, “one of the strongest and most persuasive known to the law,” will fail if, in the words of Judge Cardozo, “common sense and reason are outraged by a holding that it abides” (Matter of Findlay, 253 NY 1 [1930]).  Depriving an objectant of a trial on the basis of the presumption of regularity, where both attesting witnesses refuse to testify concerning the execution of the will for fear of self-incrimination, offends both common sense and reason.

Of course, courts should resist the “temptation to overlook or ignore fixed legal principles when they are opposed to persuasive equities” because, as the ancient legal proverb teaches, “hard cases make bad law” (Dodd v Anderson, 197 NY 466, 469 [1910]).  However, “it might also be safely said that the occasional easy case makes law that is even worse” (People v Ramos, 40 NY2d 610, 628 [1976] [Jasen, dissenting]).  By placing undue reliance upon the presumption of regularity in order to deprive an objectant of a trial, in the face of facts calling into question the validity of the will, the court in Buchting made the case too easy, and established a troubling precedent.