My colleagues have written on the enforceability of in terrorem clauses, and the courts continue to confront challenges in reconciling the testator’s intent to impose an in terrorem condition with the rights of beneficiaries to challenge the conduct of their fiduciary. The New York County Surrogate’s Court’s recent decision in Matter of Merenstein provides further guidance to practitioners in assessing the kind of conduct that will trigger an in terrorem clause. It illustrates that the courts, in construing broad in terrorem provisions, will draw a distinction between conduct aimed at challenging the conduct of an executor and conduct aimed at nullifying a testator’s choice of executor.

In Merenstein, the decedent bequeathed his estate to his two daughters. His daughter Ilene was favored under the will – – she received 73% of the decedent’s residuary estate and was nominated the sole executor. His daughter Emma received 27% of the decedent’s residuary estate. The in terrorem clause in Merenstein provided as follows:

If any person in any manner, directly or indirectly, challenges the validity or adequacy of any bequest or devise to him or her in this Will, makes any other demand or claim against my estate, becomes a party to any proceeding to set aside, interfere with or modify any provision of this Will or of any trust established by me, or offers any objections to the probate hereof, such person and all of his or her descendants shall be deemed to have predeceased me, and accordingly they shall have no interest in this Will.

Decedent’s will was admitted to probate and Ilene was appointed executor without objection.

Emma brought a proceeding asking the court whether certain contemplated conduct on her part would trigger a forfeiture of her beneficial interest under the in terrorem clause. Her first question was whether a petition to compel the executor to account, and a subsequent petition to remove the executor in the event that the executor disregarded a court order to account, would trigger the in terrorem clause. That was easy. The court held, consistent with well-settled law, that a beneficiary will not trigger an in terrorem clause by demanding an accounting of an executor, by objecting to an executor’s accounting, or by seeking removal of the executor in the event of the executor’s failure to comply with an order to account.

Emma also asked whether she would trigger the in terrorem clause by petitioning for limited letters of administration giving her the authority to conduct an investigation into whether Ilene had fraudulently used the decedent’s credit card during the decedent’s life. This was another easy one. Consistent with well-settled law, the court held that a petition for the issuance of limited letters to pursue an investigation into whether there are assets of the estate in the possession of others, including someone who is also a fiduciary, does not seek to challenge the validity of the will or any of its provisions. The filing of such a petition and even a subsequent discovery or turnover proceeding would not cause the beneficiary to forfeit her benefits under the will.

The court drew a line however, when Emma asked whether filing a petition to suspend Ilene’s letters testamentary during the investigation into the credit card charges would trigger a forfeiture under the in terrorem provision. Emma claimed that such an order of suspension was necessary to prevent Ilene from interfering with her investigation as limited administrator. The court held that such an application would trigger the in terrorem clause. Such conduct, according to the court, would constitute an attack on the decedent’s choice of fiduciary. The court explained:

Seeking the suspension of Ilene’s letters pending any investigation that Emma may pursue and in the absence of any allegation of misconduct by Ilene in her fiduciary capacity is akin to a challenge to the testator’s choice of fiduciary as established under the will. The in terrorem clause in decedent’s will disinherits a beneficiary who commences a proceeding to set aside any of the provisions of the will, and therefore, the filing of this type of petition, which does not fall within the safe harbor provisions of EPTL 3-3.5 (b), would result in forfeiture in this case

Finally, Emma asked the court whether a petition to remove Ilene as executor in the event that Ilene was determined to have engaged in improper conduct with respect to the credit card charges would trigger the in terrorem clause.   The court declined to rule on that question. It did however, point out that the alleged credit card charges occurred while the decedent was still alive, and earlier in the decision, cited to Matter of Cohn, which was affirmed by the Appellate Division, First Department.

In the Cohn estate, the courts confirmed that public policy will bar the application of an in terrorem clause where a beneficiary seeks removal of an executor based on allegations of the executor’s misconduct in their capacity as executor, but will not bar the application of an in terrorem clause where a beneficiary seeks to remove or supplant an executor based on some other ostensible basis that constitutes an attack on the testator’s choice of fiduciary, or on the powers and authority given to the fiduciary by the testator. There, the courts recognized that an attempt to displace the testator’s chosen executors based on the allegation that such executors had failed to fully inform the testator of the compensation that they would receive as executors was simply an attack on the testator’s choice of fiduciary that would trigger an in terrorem clause similar to the in terrorem provision in Merenstein.

The court in Merenstein, like the courts in the Cohn estate, recognized that fidelity to a testator’s intent warrants a fact-sensitive inquiry in enforcing terrorem clauses. Based on Merenstein and Cohn, it is clear that a beneficiary would be hard-pressed to claim that a limited administrator should supplant an executor in representing the estate in a litigation where the executor has no conflict, has not failed to act, and has not engaged in misconduct as executor, without triggering an in terrorem provision like that in Merenstein. Similarly, a beneficiary should understand that petitioning for a limited administrator to perform some estate administration task on the mere allegation that the executor has bias or hostility towards the beneficiary because of some events that occurred between the beneficiary and executor while the decedent was still alive is sure to be considered a challenge to the testator’s choice of fiduciary. Such a challenge will trigger an in terrorem clause like that in Merenstein. When faced with an in terrorem provision like that in Merenstein, a beneficiary must consider whether it is challenging the conduct of the fiduciary, or attacking the decedent’s choice of fiduciary. There is a difference, and it could mean a forfeiture.

Exoneration clauses seek to excuse fiduciaries, most notably executors and trustees, from liability for the failure to exercise reasonable care (cf. Margaret Valentine Turano, Practice Commentary: EPTL § 11-1.7 [2008] [discussing exoneration clauses]; Matter of Knox, 98 AD3d 300, 312-13 [4th Dep’t 2012]). Until recently, Estates, Powers and Trusts Law (“EPTL”) § 11-1.7 provided that exoneration clauses in testamentary instruments (i.e., wills and codicils) were void as against public policy, but did not address whether similar provisions in lifetime trust instruments were enforceable. In late-August 2018, Governor Cuomo signed into law amendments to EPTL § 11-1.7, which my colleague, Ilene S. Cooper, and I drafted as members of the New York State Bar Association’s Trusts and Estates Law Section, and which provide that exoneration clauses in lifetime trust instruments executed after August 24, 2018 are void as against public policy. This blog post discusses EPTL § 11-1.7 and the August 2018 amendments to that statute.

Prior to August 2018, EPTL § 11-1.7 prohibited a testator from exculpating an executor or trustee of a testamentary trust nominated in the testator’s will from liability for failing to “exercise reasonable care, diligence and prudence”. Will provisions that purported to do so were deemed void as against public policy (see Matter of Egerer, 30 Misc3d 1229[A], at *3 [Sur Ct, Suffolk County 2006]). Surrogate’s Court judges have described exoneration clauses in testamentary instruments as “toothless tiger[s]” (see Matter of Lubin, 143 Misc2d 121, 122 [Sur Ct, Bronx County 1989]), and “nothing more than a waste of good white paper” (see Matter of Stralem, 181 Misc2d 715, 719-20 [Sur Ct, Nassau County 1999]).

Although EPTL § 11-1.7 unquestionably applied to exoneration clauses in testamentary instruments before August 2018, the statute was silent as the enforceability of exculpatory provisions in lifetime trust instruments until August 24, 2018. That statutory silence led courts to conclude that exoneration clauses in inter vivos trust instruments generally were enforceable, except to the extent that they sought to excuse a trustee from liability for gross negligence, reckless indifference, self-dealing, or bad faith (see Matter of Tydings, 32 Misc3d 1204[A], at *6 [Sur Ct, Bronx County 2011]; Boles v Lanham, 55 AD3d 647, 648 [2d Dep’t 2008] [opining that a “trustee is liable if he or she commits a breach of trust in bad faith, intentionally, or with reckless indifference to the interests of the beneficiaries”]).

Fortunately, the August 2018 amendments to EPTL § 11-1.7 fill the aforementioned silence in the statute, and make clear that EPTL § 11-1.7 applies to executors, trustees of testamentary trusts, and trustees of lifetime trusts. Going forward, trustees of inter vivos trusts will not be able to rely upon exoneration clauses in order to avoid liability for losses that arise from their negligence, provided that the lifetime trust instruments under which they act are dated on or after August 24, 2018. In short, the August 2018 amendments to EPTL § 11-1.7 provide greater protection to beneficiaries of lifetime trusts who suffer losses as a result of negligence on the part of the trustees who administer their trusts.

It is easy to be cynical about the “pots and pans,” “tchotchkes,” and “junk” – – the property that is often divided in a contentious manner at the bitter end of an estate litigation, or sometimes forgotten after years of litigation. An ongoing dispute in one of my cases led me to reflect on a New York Times piece by Annie Correal, which explores a very personal account of the Great Migration through a discarded item of what estate lawyers might call “personalty” or “tangible personal property” – – a photo album. The photo album belonged to the late Etta Mae Taylor, and through good fortune, it caught the eye of a journalist before it could be collected by DSNY. The story is remarkable. While Etta Mae Taylor’s photo album may not be of tremendous pecuniary value, it is arguably a treasure of a different sort.

 

Etta Mae Taylor’s photo album may cause some reflection about our own personal effects, whether they are of pecuniary value, sentimental value, or both.  Ms. Taylor’s photo album is also an invitation to a mundane but perhaps useful discussion about tangible personal property in the law of trusts and estates.

 

What does “tangible personal property” mean? It depends. It generally means furniture, clothing, household goods, tools, jewelry, antiques, and other like personal effects. However, it can be up for interpretation. Quite often, wills and trusts dispose of personal effects with a general provision similar to the following:

 

I bequeath to Jane Doe all personal effects, household effects, automobiles, and other tangible personal property, whether located as at present at 40 Park Avenue, New York, NY, or elsewhere, at the time of my demise.

 

In an oft-cited case, the Surrogate’s Court held that cash in a safe deposit box did not fall within the definition of a tangible personal property in the face of the foregoing provision. As the Court explained “cash is not ordinarily thought of as ‘tangible personal property’ and here, under the familiar doctrine of ejusdem generis, the words ‘tangible personal property’ should be limited to property of the same or similar character as that described by the preceding words, to wit, personal effects, household effects and automobiles.”

 

What about a valuable stamp collection? Reggie Jackson’s rookie card? Fine art? Etc. . . Sometimes, the testator is detailed – – you will see a provision similar to the following:

 

I bequeath my jewelry, silverware, furs, leather goods, china, and any art to Jane Doe, if she shall survive me, and all my other tangible personal property shall be distributed to my children, in equal shares, or all to the survivor. If none of my children shall survive me or shall not desire any such property, I authorize my Executor to sell such property at such time or times, at such prices and on such terms as he or she shall deem advisable and to distribute the net proceeds of sale thereof as part of my residuary estate. However, my Executor shall be empowered to retain for the benefit of my children and any other family members any item of such property deemed to have a personal, a family or sentimental character such as pictures, memorabilia, keepsakes or the like, and he or she shall distribute such property among my children and any other family members at such time or times and in such proportions as he or she shall, in his or her sole and absolute discretion, deem advisable.

 

A fairly recent, and again, oft-cited and discussed decision of the Bronx County Surrogate’s Court, Estate of Rothschild, illustrates why specificity and clarity might avoid wasteful estate litigation. There, the petitioner received a bequest of tangible personal property pursuant to the following provision:

 

I give all of my tangible personal property (other than currency) including without limitation, wearing apparel, personal effects, jewelry, furniture, furnishings, pictures, paintings and other objects of art, silver, china, glassware and other household effects, books and automobiles to my wife, or if she does not survive me, to [the petitioner]. . .

 

The petitioner maintained that the decedent’s collections of stamps, platinum, gold, and silver coins (worth millions of dollars) passed to her under the foregoing provision as “tangible personal property.” Petitioner relied on a New York case, where the court held that collections of medallions, stamps and coins were “tangible personal property.”

 

The Bronx County Surrogate’s Court ruled against the petitioner, holding that the decedent’s collections were not items of “tangible personal property” that passed to the petitioner, but rather were residuary assets. The Court explained that “tangible personal property” is generally understood and construed “as being limited to tangible property having an intimate relation to the testator and ordinarily used by him.” It distinguished the principal case that petitioner relied upon – – in that case there was a disposition of tangible personal property “of every kind” (expansive language), while the foregoing will provision contained the language “and other household effects” (limiting language). The Court held that the tangible personal property identified in the will did not embrace items beyond the kind of household effects that the decedent used on a daily basis, and that the decedent’s collections were of a different character of property.

 

Notably, the disposition of valuable tangible personal property of the kind encountered in Rothschild could have a drastic effect on estate tax apportionment in a taxable estate. If the will directs against apportionment, and provides that estate tax is to paid from decedent’s residuary estate, and a tremendously valuable tangible item is disposed of as a pre-residuary bequest of “tangible personal property” (perhaps contrary to decedent’s true wishes), the residuary estate could be significantly depleted by estate tax, perhaps even leading to an interrelated computation.   The tax allocation clause can sometimes be a very important provision in a will – – as illustrated in another blog post – – and perhaps in further blog posts.

This is a common question from clients involved in litigation – – especially estate litigation. As a general rule, a party cannot recover attorney’s fees for successfully prosecuting or defending a lawsuit. This is the “American Rule,” and it is engrained in our legal system. New York courts are wary of deviating from the American Rule, and will only do so under certain circumstances, such as (1) where the dispute litigated arises out of a contract, and the contract expressly provides for recovery of attorney’s fees; or, (2) where an applicable statute or rule expressly and unambiguously permits recovery of attorney’s fees.

Award of Legal Fees Pursuant to Contract

Sometimes, parties to a contract will agree that the “prevailing party” to any litigation arising out of the contract may recover legal fees incurred in the litigation. This begs the question – – what does “prevailing party” mean? The courts have defined a “prevailing party” as the party that succeeded on the central relief sought, or prevailed on the central claims advanced and received a substantial remedy.

Once the court identifies the “prevailing party” it will fix the legal fee. The attorneys for the “prevailing party” will apply for an award of fees and the court will permit recovery of a reasonable legal fee after considering several factors. Some courts have held that the most important factor in fixing the reasonable legal fee of a “prevailing party” is the “degree of success obtained.”  It follows that a “prevailing party” who achieved only modest success on its claims advanced and relief sought should not recover the same measure of legal fees as a prevailing party who achieved total victory on all claims advanced and requests for relief.

In deference to the American Rule, the courts narrowly construe contracts that provide for recovery of legal fees. In some cases, attorneys have attempted to recover attorney’s fees for their time and effort in making an application for an award of fees. However, the courts have made it clear that legal fees for time and effort incurred in making a legal fee application will not be awarded absent unmistakably clear language in the contract permitting recovery of same.  

Award of Legal Fees Pursuant to Statute

There are statutes in various contexts that provide for an award of attorney’s fees. Like contractual fee shifting provisions, such statutes have been narrowly construed.

With respect to estates and trusts, the fiduciary stands in a unique position. The fiduciary who incurs legal fees in discharging his or her fiduciary responsibilities may pay such fees from the estate (to the extent that they are reasonable and always subject to court review). For example, a nominated executor generally may pay legal fees incurred in seeking the probate of the decedent’s will from the decedent’s estate. Legal fees incurred by an executor or trustee who files a formal judicial accounting with the court seeking approval and discharge, and litigates over objections in the accounting proceeding, are also generally a proper charge to the estate. The Surrogate’s Court considers the following factors in fixing a fiduciary’s attorney’s fees: (1) the time and labor required; (2) the difficulty of the questions involved, and the skill required to handle the problems presented; (3) the lawyer’s experience, ability and reputation; (4) the amount involved and benefit resulting to the client from the services; (5) the customary fee charged by the Bar for similar services; (6) the contingency or certainty of compensation; (7) the results obtained; and, (8) the responsibility involved.

In certain litigations, where a beneficiary’s attorney brings a benefit to the estate, the Surrogate’s Court may grant an award of fees from the estate.

Moreover, as my colleagues, and others, have observed, in certain instances, the Surrogate’s Court may direct the source of payment of legal fees of the fiduciary to beneficiaries or distributees depending on several factors, namely: (1) whether the objecting beneficiary acted solely in his or her own interest or in the common interest of the estate; (2) the possible benefits to the individual beneficiaries from the outcome of the underlying proceeding; (3) the extent of the individual beneficiary’s participation in the proceeding; (4) the good (or bad) faith of the beneficiary; (5) whether there was justifiable doubt regarding the fiduciary’s conduct; (6) the relative interest of the objecting beneficiary in the estate; and (7) the effect of allocating fees on the interest of the individual beneficiary. Thus, where one beneficiary objects to a fiduciary’s administration of the estate, and those objections are without merit, the legal fees incurred in connection with defending such objections may be charged against the objecting beneficiary’s share of the estate.

Mental Hygiene Law Article 81 governs guardianships, and allows for a petitioner’s legal fees to be paid from the assets of the incapacitated person where the petitioner secures the appointment of a guardian for an incapacitated person or otherwise brings a benefit to the incapacitated person (MHL 81.16 [f]). It further allows reasonable legal fees incurred by a movant who succeeds in removing a guardian for cause (MHL 81.35). Further, it permits charging a petitioner with the attorney’s fees incurred by court-appointed counsel for an alleged incapacitated person where the petition is dismissed or withdrawn (MHL 81.10[f]). Like all statutory provisions that provide for an award of legal fees, these provisions are narrowly construed. For example, MHL 81.10 [f] only allows recovery of legal fees of court-appointed counsel for an alleged incapacitated person; the courts have rejected an expansive view of Mental Hygiene Law 81.10 [f] to allow recovery of the legal fees of an alleged incapacitated person’s retained counsel.

Finally, the courts will sometimes shift attorney’s fees and costs as a sanction for frivolous litigation conduct.  Allegations of frivolous litigation conduct have become common to the point of being meaningless – – it has become the standard practice for some attorneys to seek sanctions against parties and attorneys who disagree in good faith on a point of law, or who dare to adduce evidence in defense of a cause of action that contradicts or refutes the allegations forming the basis of that cause of action. However, the courts will occasionally shift fees for truly frivolous litigation conduct.

Judicial oaths require that judges rule on the law, putting their personal feelings aside.  Indeed, judges’ personal opinions are presumed to be non-factors in judicial decision making as judges are charged to uphold the letter of the law regardless of their personal beliefs. The decision in Matter of the Estate of Durcan is a case in point.

Before the Surrogate’s Court, New York County was a petition by James Durcan (“James”), the administrator of the decedent’s estate, seeking the turnover of certain IRA proceeds.   In Durcan, Joan Durcan (the “Decedent”), was survived by two siblings, her brother James, and her sister Mary Anney Cunney (“Cunney”). Following Decedent’s death, Merrill Lynch & Co., Inc. (“Merrill Lynch”) distributed the proceeds of four IRA accounts (“Accounts”) owned by Decedent to Cunney.   Shortly thereafter, James petitioned for the turnover of the Account proceeds, claiming that they belonged to Decedent’s estate (the “Estate”).

The Accounts were created by the Decedent in 2002, designating Cunney as the sole beneficiary. In 2014, Decedent sought to have the Accounts transferred from Merrill Lynch to Morgan Stanley. To effectuate the transfer Morgan Stanley sent Decedent certain transfer forms, which she completed and sent back, once again designating Cunney as her one hundred (100%) beneficiary.   Shortly thereafter, additional transfer forms were sent to Decedent, including an IRA Adoption Agreement. The Adoption Agreement included a provision for designating a beneficiary for the new accounts. At his deposition, the Decedent’s financial advisor testified that when discussing the forms with the Decedent, she reiterated her desire to designate Cunney as the sole beneficiary. Decedent died unexpectedly a few days later. Critically, the second set of documents sent by Morgan Stanley, including the beneficiary designations contained in the Adoption Agreement, were neither received by Morgan Stanley nor found among Decedent’s papers. Following Decedent’s death, Morgan Stanley transferred the proceeds of the IRAs, valued at approximately $2 million, to Cunney, as Morgan Stanley recognized Cunney as the beneficiary on the basis of the information provided by Decedent.

Relying on EPTL 13-3.2 (e), James argued that Decedent failed to execute a valid beneficiary designation for her IRAs after the new accounts were opened at Morgan Stanley and, therefore, that the proceeds of each of the accounts should be paid to Decedent’s estate to be distributed among her intestate distributees. Section 13-3.2 specifically requires that a beneficiary designation be made in a writing signed by the person making the designation (id.). The Morgan Stanley transfer documents failed to comply with this requirement.  In her own motion and in opposition to James’s motion, Cunney asked the court to apply the equitable doctrine of substantial compliance and determine that Morgan Stanley’s decision to waive its right to require strict compliance with the beneficiary designation provisions of its IRA Plan should not be disturbed (Durcan, at 4). Surrogate Mella ruled in James’s favor, and directed Cunney and Morgan Stanley to turn over to James, as administrator of Decedent’s estate, the proceeds of the IRAs (id. at 8).

The result in Durcan exemplifies the longstanding belief that it is a judge’s duty to set aside one’s personal feelings so that he or she can blindly administer justice according to the letter of the law. Judges take oaths to uphold the law, regardless of personal beliefs. Faced with this onerous burden, Surrogate Mella “reluctantly conclude[d] that compliance with the statutory requirement that a beneficiary designation be in writing and signed by the designator may not be disregarded  As explained by the Court of Appeals in McCarthy, such requirement is critical to serve the essential goal of preventing the courts and parties from speculating regarding the wishes of the deceased” (id. at 7).

 

With a specific statute (Domestic Relations Law §236(3)) mandating that pre-nuptial agreements must be acknowledged, and with a specific statutory form of acknowledgment (Real Property Law §309-a(1)), it is surprising that there has been so much litigation over missing or defective acknowledgements and whether they can be cured after the fact.

In Matter of Koegel, 2018 NY Slip Op 00833 (2d Dept 2018), recently decided by the Appellate Division Second Department, husband died in 2014. Surviving spouse filed a Notice of Spousal Election under EPTL 5-1.1-A.   The estate petitioned to set aside the right of election on the basis of a waiver contained in a pre-nuptial agreement. The spouse moved to dismiss claiming that the acknowledgment on the agreement was invalid in that it omitted the standard language contained in the statutory form to the effect that the signers were known to the respective notaries.

On the motion, each notary submitted an affidavit to the effect the he “did not have to provide me with any identification of who he was because he was well known to me at the time.” The Second Department affirmed the decision of the court below that the defect could be remedied, distinguishing the case from Matisoff v Dobi, 90 NY2d 127 (1997) where the agreement had not been acknowledged at all and Galetta v Galetta, 21 NY3d 186 (2013) where the agreement was acknowledged but defective in the same respect as in this case, but the notary did not know the decedent and although he could describe his usual procedure, could not categorically swear that he took the steps to identify the party acknowledging the agreement in this instance.

A recent post to this blog titled You’ve Got (E-)Mail! Can Your Survivors Access It After Your Death?, discussed New York’s recently-enacted digital assets legislation, and Surrogate Mella’s decision in Matter of Serrano, regarding whether the fiduciary of a decedent’s estate had a statutory right to access his deceased spouse’s Google email, contacts and calendar information in order to ‘be able to inform friends of [the decedent’s] passing’ and ‘close any unfinished business’” (see Serrano, supra).

As readers may recall, Surrogate Mella found that the requested disclosure was warranted and directed Google to make it (see id.). The Surrogate explained that “disclosure of the non-content information is permitted, if not mandated, by Article 13-A of the EPTL and does not violate [the governing federal privacy law]” (see id.). However, Surrogate Mella denied the fiduciary’s request to access the contents of the decedent’s Google email account.

In a recent decision, Surrogate Czygier of Suffolk County addressed this very issue. In Matter of White,10/3/2017 NYLJ p. 25, col. 1, a fiduciary sought access to a decedent’s Google e-mail account, contending the information would identify assets and aide in the administration of the estate. The fiduciary believed that the decedent may have owned a business at the time of his death and that an assessment of the business could not be completed without obtaining access to the information contained in the decedent’s Google account. She indicated that there were no other authorized users to the account and that Google refused to grant her access without a court order. No one appeared in opposition.

The court noted that Article 13-A of EPTL sets forth the grounds for access, as it is applicable to an administrator acting for a decedent who died after the enactment of the statute. The court further noted that although Google “provides an ‘online tool’ to grant access to ‘trusted contacts’ after a period of inactivity, it does not appear that decedent activated this feature; nor did decedent address disclosure of his digital access via a will, trust or other record” (see id.). Petitioner averred that access should be granted as there was no state or federal law prohibiting disclosure of the contents stored in decedent’s account.

Surrogate Czygier disagreed, denying the fiduciary’s request to access the contents of the decedent’s Google account. The Surrogate wrote: “Although no one has appeared in opposition to the requested relief, in this evolving area, the undersigned is concerned that unfettered access to a decedent’s digital assets may result in an unanticipated intrusion into the personal affairs of the decedent or disclosure of sensitive or confidential data, for example, information unrelated to his business or corporation. Thus, the court must balance the fiduciary’s duty to properly administer this estate, while avoiding the possibility of unintended consequences” (see id.).

Consistent with Surrogate Mella’s decision in Matter of Serrano, the Court granted the relief solely to the extent that Google should disclose the contact information stored and associated with the account, noting that to the extent greater access to the account appeared warranted an application may be made to expand the authority. This decision reaffirms Surrogate Mella’s application of Article 13-A in Matter of Serrano. 

 

A person who executes a valid agreement to make a testamentary disposition as to a specific item of property is precluded from making an alternative disposition, either during lifetime or upon death. This blog post discusses Schwartz v Bourque, 2017 NY Slip Op 31621(U) (Sur Ct, Nassau County June 14, 2017), a recent decision involving an agreement to make a testamentary disposition as to a specific parcel of real property, a later agreement between the same parties concerning that property (that was alleged to have superseded the earlier agreement), and a deed transferring that same property which was contrary to the terms of the earlier agreement, but not the later one. In vacating the deed, Surrogate Reilly engaged in a comprehensive analysis of the applicable rules of contract construction, agreements to make testamentary dispositions, the termination of joint tenancies, and the statutory and case law governing fraudulent conveyances.

Schwartz involved three generations of women in one family and a dispute over title to the real property where they all resided together. The property was initially owned by the Decedent alone. The agreements and deeds Decedent executed concerning that property led to the dispute between her daughter, Brenda, and her granddaughter, Christine (Brenda’s daughter), both individually and as executor of Decedent’s estate.[1]

The 1978 Agreement

Brenda claimed Decedent was unable to pay the carrying charges on the residence which led to Brenda assuming responsibility for those expenses. Brenda’s concern that she had no ownership interest or contractual assurance that she could remain living there, despite her financial investment in the property, led to the execution of an agreement with her mother in 1978 (the “1978 Agreement”). The 1978 Agreement provided that Brenda agreed to pay all carrying charges on the property and, in return, she could reside there as long as she desired. The 1978 Agreement contained a provision whereby Decedent agreed to make a will giving the premises to Brenda in fee simple absolute.

The 1984 Agreement and 1984 Deed

Brenda claimed that, as time passed and her financial stake in the property continued to increase, she was concerned that she did not have any current ownership interest in the property. The Decedent and Brenda executed another agreement in 1984 (the “1984 Agreement”) which provided that in consideration of Brenda’s past payment of carrying charges, and her promise to do so in the future, Decedent would convey one-half of her interest in the property to Brenda. A deed from Decedent to Decedent and Brenda, as joint tenants with right of survivorship, was recorded (the “1984 Deed”).

The 2012 Deed

In 2012, Decedent executed a deed by which she purported to convey her remaining one-half interest in the property to her granddaughter Christine, thereby severing the joint tenancy between Decedent and Brenda that was created by the 1984 Deed.

Did the 1984 Agreement Supersede the 1978 Agreement?

A later contract will not supersede an earlier contract unless either: (1) the later contract contains definitive language reflecting the parties’ intent to supersede the earlier contract or (2) the two contracts deal with precisely the same subject matter (Globe Food Services Corp. v Consolidated Edison Co., 184 AD2d 278 [1st Dept 1992]).

As the 1984 Agreement contained no language expressing an intent to supersede the 1978 Agreement, the only issue was whether the two agreements deal with “precisely” the same subject matter. Christine argued that they do, that being what consideration Decedent would provide Brenda in recognition of Brenda’s past payments towards the residence and her promise to continue those payments. Brenda argued that they do not deal with “precisely” the same subject matter because the 1978 Agreement was intended to assure Brenda that the property would be hers upon Decedent’s death, while the 1984 Agreement was intended to provide Brenda with a current interest in the property without affecting the earlier 1978 Agreement.

The court noted, “[b]oth arguments are plausible but only one can prevail.” Although there was no integration and merger clause and while the two agreements appear to address the same general rights, the Court found, “it is clear that there is nothing that would prevent the two agreements from coexisting or working in tandem.” The Court found the 1978 Agreement is clearly a contract to make a testamentary disposition and satisfies all the criteria necessary to establish an enforceable agreement, that is, the agreement is in writing and subscribed by the party to be charged (EPTL § 13-2.1[a]). Moreover, the 1978 Agreement identifies the specific property that is to be the subject of the testamentary disposition, thereby precluding Decedent from making an alternate disposition, either during lifetime or upon death.

The Surrogate then proceeded to analyze Brenda’s arguments in support of her summary judgment motion.

Breach of Contact Claims

As to Brenda’s cause of action for Decedent’s breach of the 1978 Agreement, the Court found the proof established all of the elements, except as to Brenda’s performance. Because Brenda offered no proof in admissible form that she complied with her obligations under that contact (i.e., paying all expenses associated with the upkeep of the premises), the Court denied summary judgment.

As to Brenda’s cause of action for Decedent’s breach of the 1984 Agreement, the Court noted while Decedent transferred 50% of her interest in the property to Brenda under that contract, it is silent regarding Decedent’s other 50% interest. Although the 1984 Deed conveyed the property to Decedent and Brenda “as joint tenants with right of survivorship”, such a conveyance did not constitute a promise not to sever the joint tenancy. The Court noted Real Property Law § 240-c provides to the contrary and allows a joint tenancy to be terminated by a deed that conveys legal title to the severing joint tenant’s interest to a third person. Thus, the Court found if the 2012 Deed to Christine is a breach of contract, it is of the 1978 Agreement, not the 1984 Agreement.

The Fraudulent Conveyance Claims

Brenda alleged Decedent’s making of the 2012 Deed, and Christine’s acceptance of that deed, constituted a breach of the 1978 Agreement and sought the application of Debtor and Creditor Law §§ 275 and 276 to vacate the deed.

Debtor and Creditor Law § 275 provides:

“Every conveyance made and every obligation incurred without fair consideration when the person making the conveyance or entering into the obligation intends or believes that he will incur debts beyond his ability to pay as they mature, is fraudulent as to both present and future creditors.”

The Court noted that where a transfer is made without consideration, as was true of the 2012 Deed, a rebuttable presumption arises of insolvency and a fraudulent transfer, thereby placing the burden on the transferee, Christine, to overcome the presumption.

Debtor and Creditor Law § 276 provides:

“Every conveyance made and every obligation incurred with actual intent, as distinguished from intent presumed in law, to hinder, delay, or defraud either present or future creditors, is fraudulent as to both present and future creditors.”

As to the actual fraudulent intent contemplated by that statute, courts recognize the difficulty of proving actual fraudulent intent and permit the pleader to rely on “badges of fraud” (Wall Street Assoc. v Brodsky, 257 AD2d 526, 529 (1st Dept 1999). Among these “badges of fraud” are: a close relationship between the parties to the transfer; inadequate or no consideration; the transferor’s knowledge of the creditor’s claim; and retention of the property by the transferor after the conveyance (id.).

The Court found Decedent and her granddaughter Christine had a close family relationship; the conveyance was without consideration; the 2012 Deed was executed days after Brenda filed her original complaint evincing that Decedent was aware of Brenda’s claim when the transfer was made; and Decedent continued to reside in the property after the conveyance to Christine. The Surrogate noted that the only explanation given for the transfer is that Decedent had the right to do so. Thus, defendants failed to offer any legitimate explanation for the conveyance, rendering the defendants’ actual fraudulent intent “readily inferable” (Machado v A. Canterpass, LLC, 115 AD3d 652, 654 [2d Dept 2014]).

Significantly, as an exception to the so-called “American Rule” on attorneys’ fees, where intent to defraud under Debtor and Creditor Law § 276 has been established, Debtor Creditor Law § 276-a provides an award of attorneys’ fees to plaintiff against defendants which the Court granted.

Thus, although Brenda did not succeed in vacating the 2012 Deed based upon a breach of the 1978 Agreement to make a testamentary disposition, she succeeded in doing so based upon the fraudulent conveyance causes of action which resulted in her being awarded counsel fees, relief she may not have received based upon the breach of contract claim.

 

[1] Brenda commenced the action in Supreme Court during Decedent’s lifetime and it was transferred to the Surrogate’s Court following Decedent’s death.

In the past, New York Courts have demonstrated a willingness to apply the theory of promissory estoppel, to overcome the legal requirements of the Statute of Frauds. The Restatement (Second) of Contract, Section 139, endorses this principle, providing:

“A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce the action or forbearance is enforceable notwithstanding the Statute of Frauds if injustice can be avoided only by enforcement of the promise”

However, a recent decision from the New York Court of Appeals, limited the purview of applying the theory to overcome the statutory requirements of the Statute of Frauds.

In the Matter of Hennel, the Court of Appeals rendered a decision, reversing an order of the Appellate Division, holding that Petitioners’ claim against the decedent’s estate seeking to enforce an oral promise was barred by the Statute of Frauds. In overturning the Appellate Division, the Court held that the most important factor in overcoming the Statute of Frauds is whether the resulting injustice is in fact unconscionable.

In Hennel, the decedent’s grandsons allegedly reached an oral agreement with the decedent, whereby the parties agreed that the grandsons would ultimately acquire ownership of a parcel of real property in exchange for assuming all management and maintenance duties of the property. The Petitioners further asserted that the parties reach an agreement whereby the mortgage on the property would be satisfied from the estate’s assets.

To effectuate the oral bargain, Petitioners and decedent executed a warranty deed in which decedent granted ownership of the property to Petitioners. At the same meeting, the decedent executed a will which contained terms supporting the alleged oral agreement – namely that any mortgage in existence at the time of the decedent’s death would be paid off from the assets of the decedent’s estate. Following the meeting, the Petitioners assumed all management and maintenance duties in accordance with the agreement with decedent. However, in 2008, the decedent executed a new will, revoking all prior wills and codicils, which omitted all provisions concerning the satisfaction of the mortgage.

Following the decedent’s death, the Petitioners commenced a proceeding, pursuant to SCPA 1809, seeking to determine the validity of their claim against decedent’s estate.   The Respondent objected, asserting that the claim was barred by the Statute of Frauds. However, the Surrogate’s Court ordered the estate to pay off the mortgage and satisfy the claim, reasoning that the claim fell “squarely within that limited class of cases where promissory estoppel should be applied to remedy a potential injustice.” The Appellate Division later affirmed the Surrogate Court’s decision.

However, the Court of Appeals disagreed, reasoning that even assuming the Petitioners were able to satisfy the elements of promissory estoppel, they would not suffer unconscionable injury if the Statute of Frauds were enforced. The Court went on to state:

“The strongly held public policy reflected in New York’s Statute of Frauds would be severely undermined if a party could be estopped from asserting it every time a court found that some unfairness would otherwise result. For this reason, the doctrine of promissory estoppel is properly reserved for that limited class of cases where the circumstances are such as to render it unconscionable to deny the promise upon which the plaintiff has relied”

(Hennel, 2017 WL 2799828 [2017]).

Applying those principals to the facts before it, the Court found the Petitioners’ evidence was insufficient to demonstrate an unconscionable injury to overcome the Statute of Frauds. Importantly, the Petitioners were able to make all mortgage payments entirely from the rental income generated by the property. Moreover, the court noted that the Petitioners had the option of selling the property, satisfying the balance of the mortgage, and claiming the $150,000 of equity remaining in the property.

The Court conceded that the Petitioner’s loss was unfair. However, in overturning the Appellate Court’s decision, the Court reasoned that wherever an oral agreement is rendered void by the statute of frauds, some unfairness will typically result.   The Court concluded that “what is unfair is not always unconscionable.   For these reasons, cases where the party attempting to avoid the statute of frauds will suffer unconscionable injury will be rare” [id.].

Consequently, it is clear that applying the principles of promissory estoppel, to overcome the legal requirements of the Statute of Frauds, is a high standard that places a significant burden on the promisee.   The promisee must demonstrate not merely gross injustice or unfairness but the showing of an unconscionable injury.

The fiduciary who thinks a receipt and release is the answer to all future claims for an accounting and liability may have a surprise in store. Over the past several months, Surrogates have explored the issue of receipts and releases, and have provided insight into just how far they will go to “save the day.” The decision in Matter of Ingraham, NYLJ, June 16, 2017, at p. 28 (Sur. Ct., New York County) is a case in point.

Before the Surrogate’s Court, New York County, was a petition by the successor trustee of two separate inter vivos trusts to compel two former trustees of the trusts to account. One of the trustees, who had been removed by the Grantor, filed his accountings; the other trustee, who had resigned, objected to the petitions relying on language in the trust instruments, which she claimed relieved her of any duty to account, as well as releases executed by the Grantor and the other trustee.

At the time the objectant resigned, the Grantor executed instruments by which the objectant was released from any and all claims related in any way to her role as trustee, with the exception of claims arising from fraud or willful misconduct. The release further acknowledged that the Grantor desired to forego a formal account. The accounting trustee signed a similar release, and assented to any account (former or informal) rendered by the objectant. Further, it appeared that the terms of each trust instrument dispensed with the need for the trustees to file periodic judicial accountings.

The court held that the objectant’s reliance on the releases to insulate her from her duty to account was misplaced, inasmuch as the instruments reserved the releasors’ rights to seek relief for any fraud or willful misconduct. Further, the court rejected any claim by the objectant that the releases relieved her of her duty to account, a responsibility that was incidental to the trustee’s duty and fundamental to any fiduciary relationship. Indeed, the court found that while the release executed by the Grantor may have arguably consisted of a waiver of the Grantor’s right to an accounting, the court found that it did not constitute a clear and unambiguous waiver of an accounting by the other trustee and trust beneficiaries.

Additionally, the court held that the provisions of the trust instruments only exempted the objectant from filing periodic accountings, but did not relate to the final accounting sought by the proceedings. Finally, the court observed that where a former trustee has failed to account within a reasonable time and full releases do not relieve her of the duty to account, the court may sua sponte direct an accounting pursuant to SCPA 2205.

Accordingly, the objectant was directed to account with respect to each of the subject trusts.

Based on the foregoing, counsel should take heed that a release may not, despite its intended purpose, always serve to insure the complete and final discharge of a fiduciary. As Ingraham instructs, a release should, at the very least, be comprehensive in its terms and clear and unambiguous as to the scope of its application, most especially if it is designed to constitute a waiver of an accounting. But of course, it should always be borne in mind that regardless of the language of the instrument, the court may invoke the provisions of SCPA 2205, and direct an accounting on its own motion — if it deems it to be in the best interests of the estate to do so.