In a recent case, a New York County Surrogate denied a motion for summary judgment, holding that a trial was necessary to determine whether the founder of the Benihana restaurant chain, Rocki Aoki, was the victim of constructive fraud perpetrated by his conflicted lawyers. The issue in Estate of Aoki, 5/17/2010 NYLJ 18 (col 3), was the enforcement of releases to a testamentary power of appointment, which, if valid, would deny Mr. Aoiki’s surviving spouse any interest in the Benihana restaurant empire. The movants were two of Mr. Aoki’s children, Devon and Steven.
Mr. Aoki died in 2008 at age 69, survived by his third wife, Keiko, and six children from various relationships. Not bad for a guy who gained notoriety by flipping shrimp tails into his hat and shirt pockets.
Given his less than traditional family tree, it is hardly surprising that Mr. Aoki’s heirs are now litigants in the Surrogate’s Court.
The power of appointment in issue pertained to the Benihana Protective Trust (“BPT”), to which Mr. Aoki transferred all of his rights in Benihana of Tokyo, Inc., a publicly traded company of which he was the sole owner. The trust instrument named Mr. Aoki and his children as discretionary beneficiaries, and provided him with an unlimited testamentary power of appointment over the corpus. Trust and estates attorney Norman Shaw drafted the agreement. He was retained by, and received instructions from, Darwin C. Dornbush, Mr. Aoki’s personal lawyer for 30 years. Mr. Shaw had never met Mr. Aoki.
Mr. Aoki married Keiko in July 2002, four years after the BPT was created. Not surprisingly, Mr. Aoki’s children were concerned that his new wife might influence him to deprive them of some or all of the inheritance they expected. Two of them -- Kevin and Kana -- discussed their concerns, including the lack of a pre-nuptial agreement, with Dornbush. They then proposed to Keiko that she and the decedent sign a postnuptial agreement, apparently acting on Dornbush’s advice. Mr. Aoki did not participate in the conversation, and Keiko refused the request. Kevin and Kana then approached Dornbush and Shaw about protecting their interests as potential beneficiaries of the BPT.
Following a meeting at Dornbush’s office attended by the decedent, Kana and Kevin, the four met again, on September 24, 2002, for Mr. Aoki to sign a codicil to his will and an unrelated consent to an amendment of the BPT. During that brief meeting, Shaw arrived and presented the decedent with a one-page document entitled “Partial Release of Power of Appointment Under New York Estates, Powers & Trust Law §10-9.2.” By signing that document, the decedent “irrevocably” limited his power of appointment to permit him to appoint only his descendants.
Nobody advised the decedent that the release was irrevocable, nor did anyone advise him of the substantial tax consequences of foregoing the marital deduction.
A few months later, the decedent signed another release document, eliminating as potential donees those descendants who were non-resident aliens. Shaw, again the attorney drafter, testified that the sole basis for this release was for tax purposes, although no evidence demonstrated that the legal effect of the document was explained to the decedent, or that he understood it.
It was undisputed that Dornbush and Shaw were the decedent’s attorneys and consequently had a fiduciary obligation to him. It was also not disputed that Kana and Kevin sought Dornbush’s legal advice and assistance for the purpose of limiting or denying the decedent’s ability to provide for his new wife on his death. This, according to the Court, placed Dornbush in an impermissible conflict of interest, of which the decedent was not informed.
In July 2003, the decedent retained a new attorney, Joseph Manson, who advised Dornbush that the decedent had executed a codicil to his will, changing beneficiaries and removing Dornbush as Executor. Manson requested a meeting with Dornbush to discuss the will and other matters affecting the Aokis. In preparation for that meeting, Shaw drafted a memo raising additional questions, reiterating the conflicts he, Dornbush and the Dornbush firm had, and continued to have, in their ongoing representation of the decedent.
At the meeting with Dornbush, Manson requested a legal opinion as to the changes in Mr. Aoki’s estate plan as reflected in the most recent codicil, based on Dornbush’s drafting of the original will. Immediately thereafter, Dornbush wrote another memo, stating that he “questioned Manson as to why Rocky was asking our firm to express an opinion as to the validity of the codicil”. He went on to write, “[m]y guess is that Kevin, in discussions with his dad, made mention of the fact that Rocky has signed ‘some paper’ when in [Dornbush's] office, giving up his right to leave assets of the Benihana Protective Trust to anyone other than his children and their descendants.” He continued, “Undoubtedly, the fur will fly when Manson and his clients, Keiko and Rocky, discover the existence of the executed Partial Release.”
Shaw subsequently informed Mason that Mr. Aoki was still a client of his firm, and stated that the firm would provide a legal opinion, which it did in by letter dated September 8, 2003. It opined that the codicil the decedent executed, in which he appointed 25 % of the BPT corpus outright to Keiko, was invalid because of the release documents.
Keiko claimed that this was the first time that the releases were brought to the decedent’s attention and to the attention of his new counsel. The decedent stated, in a roughly contemporaneous affidavit, this was the first time he realized he had executed irrevocable releases, and that he had never had any intention of doing so.
Keiko asserted various defenses to the motion to enforce the releases. The court opined that the core question was “whether, when signing the September and December Releases, Rocky knew that he was irrevocably limiting the persons to whom he could leave the stock in the BPT.” Keiko relied on the decedent’s statement that he did not, and argued that he had been the subject of fraud by his attorneys, on behalf of his children, because of their conflict of interest.
In furtherance of their motion, Devon and Steven Aoki cited the general rule of law that an individual who has failed to read an instrument prior to signing will not be heard to complain that the terms of the instrument were misrepresented. But the court noted that the rule does not apply “where a fiduciary relationship exists between parties to the transaction such that it is reasonable for the weaker party to rely upon representations made by the party in whom he reposed trust and confidence. . . .” Indeed, when a fiduciary relationship exists, the element of scienter, necessary in ordinary fraud cases, need not be proved. Instead, the issue becomes one of constructive (as opposed to actual) fraud, and the burden shifts to the party alleged to have taken unfair advantage of “trust justifiably reposed.”
The court went on to explain that constructive fraud is the theory by which “the law seeks to protect a party who, by virtue of an unequal relationship, places his trust and confidence in another and thereby ‘relax[es] the care and vigilance he would ordinarily exercise in the circumstances’” [citation omitted]). The court deemed this theory potentially applicable to the relationship among the decedent and his conflicted attorneys.
Accordingly, the court concluded that triable issues of fact existed regarding (1) whether the decedent was unaware that he was irrevocably giving up his power to assign his interest in the BPT to anyone (including his wife Keiko) other than certain of his descendants and, (2) if he was unaware, whether the proponents of the releases can meet their burden of showing that his signature was nevertheless voluntary and not the result of misrepresentation or omission by his counsel and fiduciaries, Dornbush and Shaw. The motion for summary judgment was denied.
Trusts and estates practitioners often provide joint representation to married couples as they create their estate plans. Questions as to the existence of joint representation may arise if husband and wife retain the same estate planning attorney, but do not meet or communicate with counsel together; instead, creating their own separate estate plans. These were the circumstances in the recent case of Leff v Fulbright & Jaworski, LLP, et. al. (Sup Ct, New York County 2009), in which a widow brought a legal malpractice action against her estate planning attorneys in the context of their actions as counsel to her late husband. The result is food for thought, and perhaps may encourage attorneys and their married clients to assume more clearly defined roles.
Joel B. Leff (“Decedent”) died in 2002 with an estate valued at approximately $90 million. In 1974, the Decedent entered into a Separation Agreement as part of a divorce settlement with his first wife, with whom he had a son. Said Agreement provided that the Decedent would bequeath to his son by Will no less than one-half of his probate estate, assuming his first wife remarried. Years later, the Decedent retained an estate planning attorney, who had no involvement in the drafting of the Separation Agreement. A copy of the Separation Agreement was given to the attorney, and remained in his file throughout his representation of the Decedent.
In 1998, the Decedent married Plaintiff. Prior to their marriage, they entered into a prenuptial agreement providing that each spouse “would have the right to dispose of his or her property . . . as each party sees fit,” but further stated that the Decedent would bequeath the marital residence and devise a specific amount to Plaintiff (id. at 2). Thereafter, the Decedent, represented by Defendants, executed a number of Wills and Codicils. At no time in the drafting of these instruments were the terms of the Separation Agreement considered by Decedent or his attorneys.
The Decedent’s testamentary instruments were drafted without his wife’s knowledge or involvement, with the exception of two instruments: (1) a codicil in anticipation of the couple’s trip to Cambodia, which, by its terms, expired upon their return; and (2) an unsigned Will bequeathing to Plaintiff one-half of his adjusted gross estate, which the Decedent gave to Plaintiff as an anniversary present. At the time of this gift, the Decedent reassured Plaintiff, by letter, that she would be informed if he were to execute a new Will that reduced her interest in his estate. Throughout this period, Plaintiff was also represented by Defendants in connection with her own estate plans, and jointly with her husband in connection with the purchase of an apartment.
It was only after the Decedent’s death that the Separation Agreement surfaced in Defendants’ file, in response to a claim by his son for one-half of the probate estate. The estate settled with the Decedent’s son, as a creditor of the estate, for approximately $20 million. Plaintiff subsequently sued Defendants for legal malpractice, claiming a loss of approximately $9 million due to their failure to inform Decedent about the existence of the Separation Agreement; she alleged that the Agreement should have been considered, resulting in alternative planning options to allow the Decedent to fulfill his intent as expressed in his Will. Defendants moved to dismiss, contending that they owed no duty to Plaintiff with regard to Decedent’s estate planning, as they never represented the couple jointly in this capacity. The Court agreed.
Despite Plaintiff’s contentions that she and the Decedent were represented jointly by Defendants, the Court explained that “[a] party’s ‘subjective belief as to the existence of an attorney-client relationship is not dispositive’” (id., quoting Weadick v Herlihy, 16 AD3d 223, 224 [1st Dept 2005]). Moreover, the Court rejected Plaintiff’s reliance on Prudential Ins. Co. of America v Dewey, Ballantine, Bushby, Palmer & Wood, 80 NY2d 377 (1992), in which it was recognized that the concept of privity was expanded to encompass the relationship between an attorney and a third party. In distinguishing Prudential, the Court explained that Plaintiff could not overcome the law that “a beneficiary has no cause of action against the attorney who negligently drafted a will” (Leff v Fulbright & Jaworski, LLP, et. al., citing Spivey v Pulley, 138 AD2d 563 [2d Dept 1988]).
In its decision, the Court relied upon Mali v De Forest & Duer, 160 AD2d 297 (1st Dept 1990). There, it was held that estate planning attorneys had no duty to a decedent’s son, a beneficiary of his father’s Will, despite the fact that the attorneys advised the son as to his own estate planning and were longtime advisors to the family (id., citing Mali v De Forest & Duer, 160 AD2d 297, 298). The Court also rejected Plaintiff’s arguments that “near privity” was created between her and Defendants with respect to the Decedent’s estate planning because the Defendants explained to her the import of one of the Decedent’s Wills, and occasionally updated her about the amount of her legacy upon her husband’s death. This relationship with respect to the Decedent’s estate plan was interpreted by the Court to be merely “fleeting contacts” (Leff v Fulbright & Jaworski, LLP, et. al. at 15).
Additionally noteworthy is that, in a footnote, the Court refused to embrace the discussions by the American College of Trust and Estate Counsel and the American Bar Association that “in the absence of an agreement to the contrary’ a husband and wife represented by the same counsel be presumed as joint clients” (id. at 15, fn 2). Thus, it was held that Defendants could not be liable to Plaintiff for any mistakes that they may have committed in their representation of the Decedent.
Notwithstanding the lack of privity, the Court further determined that “[Plaintiff’s] case falters inexorably on the issue of causation, simply because Plaintiff cannot prove that she would have received more money from [Decedent] ‘but for’ Defendants’ failure to inform [Decedent] of the existence and import of the Separation Agreement” (id. at 16)
Query, if the Court had determined that an attorney-client relationship had existed, permitting Plaintiff’s claim of legal malpractice, should the Court have so quickly dismissed her case on the issue of causation? Perhaps a hearing would have been beneficial prior to making such a determination. Plaintiff may have had adequate evidence to demonstrate alternative actions that could have been taken by Defendants, i.e., writings demonstrating that lifetime gifts to the Decedent’s son were advancements, or maybe the creation of trusts. It is a moot point here, but something to be considered for future cases.