Court Considers Estate Planning Documents In Deciding Corporate Dispute
This post concerns a decision issued by a Supreme Court Justice in a complex corporate dissolution proceeding. It highlights the importance of familiarity with estate practice, even if you never plan to step foot into a Surrogate’s Court.
In Matter of Pappas v Corifan Enterprises Ltd., NYLJ 2/19/09 (Sup. Ct. Kings County 2009), the issue was whether the Petitioner -- the surviving spouse of the decedent -- had standing to petition for dissolution of two closely held corporations. Respondent argued that the decedent -- and, thus, the Petitioner -- lacked the requisite 20 percent ownership interest in the corporations. He argued that he was the sole owner of the corporations. After a hearing limited to the issue of standing, at which the court heard 14 witnesses testify over eight days and admitted 48 documents into evidence, the court determined that the Petitioner met her burden of demonstrating an ownership interest in one corporation, but not the other.
The substantive legal aspects of the decision are beyond the scope of this post (although an article published by my colleague, Peter Mahler, on his New York Business Divorce blog, contains an excellent discussion of the same). What should be of interest to the trust and estate litigator is the evidence the court analyzed in reaching its determination.
First, the court started by addressing the evidentiary value of admissions made by the fiduciary of an estate:
Where, as here, one of the principals is deceased, “the admissions or declarations of administrators and executors may be evidence - where they are made while engaged in the performance of a duty pertaining to the estate in a representative capacity, in which the declaration is pertinent and accompanies the act so as to constitute a part of the res gestae.” Estate tax returns and certifications can, therefore, constitute admissions of the deceased. The probative value of the statement is to be assessed in the light of the personal knowledge of the representative, and, in any event, the statement is not conclusive, but constitutes “some evidence” (citations omitted).
Indeed, the court considered evidence of the Petitioner’s knowledge of her husband’s business interests. Curiously, the court made no mention in the decision of New York’s “Dead Man’s Statute” (CPLR 4519), which makes testimony by an interested witness “concerning a personal transaction or communication between the witness and [a] deceased person or mentally ill person” excludable “[u]pon the trial of an action or the hearing upon the merits of a special proceeding[.]” The surviving spouse is certainly an “interested witness”, notwithstanding that she is the fiduciary of the estate. Perhaps the court did not consider the “standing” hearing to be a trial or hearing “on the merits” of the proceeding. Or perhaps the court considered applicable the “fiduciary” exception to the rule (see John M. Greenfield, A Treatise of Testimony Under § 347, Civil Practice Act § 120 [1923] [“Where executors or administrators sue or are sued as representatives of the estate, and the adverse party is not a personal representative, the general rule is that the testimony of an executor or administrator in behalf of the estate is not considered to be in his own behalf or interest even though he has a personal interest in the estate as legatee or heir and to that extent might be said to be testifying in his own interest.]).
Second, the court considered documents prepared by the attorney who assisted the decedent with his estate planning. Specifically, the court considered an “Asset Questionnaire” that the attorney prepared using information provided by the decedent. The questionnaire was prepared approximately four months before the decedent’s death. The page in the questionnaire headed “Stocks” and the page headed “Interest in Corporation, Partnership and Limited Partnership” were both blank. The attorney testified that the decedent mentioned no businesses or properties in which he had an interest. But the attorney also testified that:
[T]here came a time when I started the information for the assets questionnaire and . . . I mentioned something about the fact that I understood that he was an employee of Mr. Fotinos. . . He stopped me immediately and said no, no not employee. Business partner. Business associates. Not employee.
Since the attorney was never asked, and did not explain, the apparent inconsistency between the decedent’s statement and the absence of information in the questionnaire, the court determined that the questionnaire was ambiguous at best.
The court also considered the probate petition and estate tax certification signed by the executor of the decedent’s estate. The petition, prepared by the same attorney discussed above, showed the value of personal property as zero, and the tax certification showed the value of stocks and bonds as zero. Those values, according to the court, were evidence as to the executor’s understanding of the decedent’s business interests. The court determined, however, that the probative value of the evidence was undermined by the ambiguous Asset Questionnaire in preparing the petition and tax certification.
In the end, the court determined that the decedent had an ownership interest in one corporation, but not the other. Again, how and why the court reached that determination -- which seems a lot like King Solomon’s threat to “split the baby” -- is not the focus of this article (again, Mr. Mahler’s article provides a detailed analysis of the merits of the case). But the fact that the court considered the estate planning documents significant should not be overlooked. Would a commercial litigator necessarily think to subpoena a decedent’s estate planning file in attempting to gather evidence of the decedent’s stock ownership? Probably not. But this case stands as an example of how “non-corporate” documents -- estate documents in particular -- can be useful in a corporate dispute.
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Inter Vivos Gifts, Summary Judgment, and the Dead Man's Statute
It might well be an understatement to characterize New York’s Dead Man’s Statute (CPLR 4519) as somewhat “enigmatic,” at least to those practitioners who do not often encounter it. Indeed, the leading treatise on the statute is over three-quarters of a century old (see Greenfield on Testimony under Sec. 347 (CPA) § 61 [1923]).
This article contains a brief overview of the statute and more thorough discussion of its application to motions for summary judgment.
Generally -- and perhaps overly simplistically -- the Dead Man’s Statute renders an interested person incompetent to testify concerning a personal transaction (including a communication) with a deceased or mentally ill person. Such evidence is freely discoverable, however, and may be the subject of testimony at a deposition. Indeed, the rule applies only “upon the trial of an action or the hearing upon the merits of a special proceeding” (CPLR 4519).
But what about a motion for summary judgment, which is the procedural equivalent of a trial on the merits? It has long been the rule in New York that evidence excludable under the Dead Man’s Statute may not be used in support of a motion for summary judgment, although it may be offered in opposition to such a motion, to raise an issue of fact for trial. In Phillips v. Joseph Kantor & Co., 31 NY2d 307 (1972), the New York Court of Appeals held that the general rule permitting the use of such evidence in opposition to summary judgment motions is premised on the rationale that it would be difficult to predict with certainty whether such evidence might be rendered admissible at trial by virtue of a waiver -- intentional or inadvertent -- of the protection of the statute.
However, the Court opened the door slightly to granting summary judgment in a case where the only evidence offered in opposition to the motion would be subject to exclusion under the statute. The Court stated that, “[a]dmittedly, a trial would seem unnecessary if it were certain, in an absolute rather than a pragmatic sense of the term, that there would be no waiver of the statute and that all the proof would be excludable” (id. at 314).
Such was the case in Estate of Steger, NYLJ 11/17/08 (Sur Ct Nassau County Nov. 5, 2008), recently decided by the Surrogate’s Court, Nassau County.
In Steger, a contested accounting proceeding, the objectant -- John -- sought leave to reargue a prior decision of the Court denying his motion for summary judgment. He had asked the Court, among other things, to set aside transfers made by the decedent during her lifetime. John was one of the decedent’s four sons. The transfers weres made to another of the sons, Mark, who was also the executor of the decedent’s estate. Not only were the transfers made to Mark, they were made by Mark. He had the decedent’s power of attorney and utilized it, among other things, to transfer assets from the decedent’s individual accounts to an account held jointly, with right of survivorship, by them both. In opposition to the motion, Mark maintained that this was done at the direction of the decedent. John sought to set aside those transfers.
The Court began its analysis by stating the elements of a gift; the donee of a gift has the burden of proving, by clear and convincing evidence, that there was delivery of the property and acceptance by the donee. In addition, the recipient must also prove the decedent’s donative intent. It was this final element, according to John, that Mark could not satisfy. John argued that the sole evidence offered in connection with that element was Mark’s own testimony concerning the decedent’s intent.
The Court agreed, noting that the sole proof offered by Mark in support of his position was his own statements contained in his affidavit that, “for her own reasons, my mother directed me to make these transfers.”
Discussing the Phillips case, the Court noted that, generally speaking, evidence otherwise precluded by the Dead Man’s Statute can be utilized by a party seeking to oppose a motion for summary judgment. However, it further noted that such proof is deemed insufficient where it is the sole proof submitted in support of the opposing party’s claim. Moreover, the Court noted that John, in his motion papers, repeatedly cited the Dead Man’s Statute, “thus indicating his intent to invoke the statute to exclude the statements at trial.” The Court granted reargument regarding the pre-death transfers, and upon reargument, granted John’s motion for summary judgment.
This decision should serve as a warning to practitioners advising clients with respect to gifts: Think about evidentiary hurdles that might be encountered down the road. Take care to properly document the gift (through writings, gift tax returns, etc.). And, of course, be particularly cautious in advising a client with respect to the use of a power of attorney to make a gift (see generally Matter of Ferrara, 7 NY3d 244 [2006] [gifts made pursuant to a power of attorney must be in the best interest of the principal, including minimization of income, estate, inheritance, generation-skipping transfer or gift taxes]).
