Beneficiary Participation Irrelevant to Allocation of Trustees' Litigation Costs
Beneficiaries often question the circumstances under which a trustee or executor’s legal fees are chargeable against their inheritance, especially when those fees are incurred in defending the fiduciary’s alleged misconduct.
The law provides that fiduciaries who are guilty of a breach often remain entitled to have their litigation costs covered by the estate or trust for which they serve (see Estate of Casey, 6/21/93 NYLJ 33 [col 6][Sur Ct, Westchester County]; Matter of Kettle, 73 AD2d 786 [4th Dept 1979]). Although Surrogate’s Courts have the discretion to charge legal fees against the fiduciary personally “as an expense caused by their wrong”, these determinations are generally limited to cases where the court finds an act of bad faith (see Matter of Hidden, 243 NY 499 [1926]). It is therefore logical that the legal fees of a fiduciary who is not guilty of any misconduct are chargeable to the estate or trust. This was the case in Matter of Hyde, 2009 N.Y. Slip Op 02491(3d Dept 2009). There, however, the beneficiaries who had not contested the trustees’ accounting sought to have the trustees’ litigation costs borne solely by the shares of the objecting parties.
Matter of Hyde dealt with two trusts, the Hyde Trust and the Cunningham Trust, of which two families, the Renz family and the Whitney family, were beneficiaries. Specifically, the Hyde Trust provided that the Hyde grandchildren, Louis Whitney (“Whitney”) and Mary W. Renz (“Renz”), were each to receive equal shares of trust income during their respective lifetimes. Upon the death of either beneficiary, the principal of the deceased beneficiary’s share was to be distributed to each of Hyde’s great-grandchildren. Whitney died in January 2008, providing each of Hyde’s five great-grandchildren with a one-fifth interest in the remaining principal of Whitney’s half.
The Cunningham Trust also provided income for Whitney and Renz, each receiving a one-sixth interest therein, with a contingent remainder of one-sixth of the principal upon termination of the trust if the beneficiary were still living.In 2001, the trustees of the Hyde Trust commenced a proceeding for an intermediate accounting. Thereafter, in 2003, the trustees of the Cunningham Trust commenced a proceeding to settle their intermediate accounts. The Whitney children filed objections to each accounting, seeking to deny trustees’ commissions and to surcharge for failure to diversify investments. The Warren County Surrogate’s Court dismissed the objections, and said dismissal was affirmed on appeal.
Because the objections and subsequent trial were pursued solely by the Whitney children, the Renz children sought to charge only the Whitney portion of the trust with legal fees in connection with the defense of said objections. The Surrogate denied the motion, and charged each of the trusts as a whole with all litigation expenses.
SCPA 2110[1] authorizes the Surrogate to fix litigation costs in connection with legal services provided to a fiduciary. In addition, pursuant to SCPA 2110[2], the Surrogate may “direct payment therefor from the estate generally or from the funds in the hands of the fiduciary belonging to any legatee, devisee or person interested.” Here, the Surrogate charged the trusts as a whole with the attorneys’ fees incurred defending in both accounting proceedings, despite the nonparticipation of the Renz beneficiaries. The Third Department affirmed.
In upholding the Warren County Surrogate’s decision, the Appellate Division relied on both SCPA 2110, and the Court of Appeals holding in Matter of Dillon, 28 NY2d 597 (1971). Dillon provides that “SCPA 2110 does not authorize payment for legal services rendered a party to be charged against the share of other individual parties” (see Matter of Dillon, 28 NY2d 597, 599). The Renz beneficiaries’ attempt to distinguish Dillon was without avail.
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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