For trust and estate litigators, the federal court experience invariably begins – and sometimes ends — with an analysis of the probate exception to federal diversity jurisdiction.  Two recent Southern District cases examine the probate exception.  Part 1 of this blog series introduces the probate exception and discusses an “easy” case; Woitovichv. Schoenfeld.  Part 2 of this series, coming soon (hopefully), examines the tougher case of Bulgariv. Bulgari. 

The Probate Exception

Theprobate exception proscribes federal courts from hearing “probate matters” even if subject matter jurisdiction would otherwise lie. It “reserves to state probate courts the probate or annulment of a will and the administration of a decedent’s estate [, and] also precludes federal courts from endeavoring to dispose of property that is in the custody of a state probate court.”   In the Second Circuit, the widely cited Lefkowitz v. Bank of N.Y., and the more recent unpublished opinion, Mercer v. Bank of N.Y. Mellon, N.A.,  provide a two-part test for whether the probate exception applies: 1) does the plaintiff ask that “the federal court administer a probate matter?” and, 2) if not, would the federal court nevertheless still be “exercis[ing] control over a res in the custody of a state court.”  The application of that two-part test has sometimes proven difficult.   

Woitovich

In December 2022, the United States District Court for the Southern District of New York examined and applied the probate exception under relatively straightforward facts in Woitovich. The opinion provides a good starting point for understanding the exception.  Woitovich arose out of a testamentary trust (a credit shelter trust) created under the will of a decedent probated in the Surrogate’s Court in 2016.  The Surrogate’s Court issued letters of trusteeship to the plaintiff and defendant, and they administered the trust until the lifetime beneficiary’s death in 2020.  A dispute then arose as to the proper disposition of the trust remainder. Plaintiff urged a construction of the will that would result in her receiving the entire corpus of the trust, and the defendant disputed the plaintiff’s construction.  Plaintiff thus asked the federal court to construe the will in accordance with her interpretation and order distribution of the entire trust corpus to her, to compel the defendant to account, to monitor the continuing administration of the trust, and to award damages against the defendant for mismanaging the trust assets and violating the will’s terms.  Defendant moved to dismiss on the grounds that the probate exception divested the court of subject matter jurisdiction over plaintiff’s claims.

The court first dispensed with the plaintiff’s contention that the probate exception does not apply to trusts, and that the probate exception only divests the federal court of jurisdiction over claims within the Surrogate’s Court’s exclusive jurisdiction. 

The court then applied the two-part probate exception “test” to each of Plaintiff’s claims and dismissed most of them.  The court dismissed plaintiff’s request that the court monitor the co-trustee’s administration of the trust, finding that it sought to have the court to do precisely what the probate exception prohibits, to wit, to “step into the shoes of the probate court and administer the Trust.”

Plaintiff’s request that the court construe the will, order the co-trustees to distribute the trust assets in accordance with her preferred construction, and compel the defendant to account, fared no better.  The court held that it could not grant that relief without directly interfering in the administration of the trust and exercising jurisdiction over the trust property in the custody of the Surrogate’s Court.  In doing so, the court rejected plaintiff’s argument that the Surrogate’s Court’s probate of the will and appointment of the co-trustees in 2016, without further or pending Surrogate’s Court proceedings, meant that the trust was no longer in the “custody” or under the jurisdiction of the Surrogate’s Court.  The court embraced a full understanding of the Surrogate’s Court and its jurisdiction, explaining as follows:

Woitovich argues otherwise on the ground that the Trust is no longer in the Surrogate’s Court’s “custody.” “The only action that the . . . Surrogate’s Court has taken regarding the [Trust],” she asserts, “was to appoint the trustees,” and there are no proceedings relating to the Trust currently pending. True, but that does not change the fact that the Trust remains under the Surrogate’s Court’s jurisdiction. See, e.g., Byers v. McAuley, 149 U.S. 608, 615 (1893) (“An administrator appointed by a state court is an officer of that court. His possession of the decedent’s property is a possession taken in obedience to the orders of that court. It is the possession of the court, and it is a possession which cannot be disturbed by any other court.”); accord Groman, 2007 WL 3340922 at, *6. Indeed, “New York law gives Surrogate’s Courts extensive powers over testamentary trusts,” Mercer, 609 F. App’x at 679, even after termination of the trust through final distribution, see, e.g., In re Hug’s Est., 107 N.Y.S.2d 664, 666 (N.Y. Sur. Ct. 1949) (“This court has jurisdiction of all further proceedings in this estate”).

(references omitted).

The court further dismissed plaintiff’s claims for damages arising out of defendant’s breach of the will’s terms and failure to distribute the trust corpus to defendant.  The court held that while plaintiff pleaded these claims as in personam claims, plaintiff was essentially seeking distribution of the trust’s corpus under her preferred construction.  The court held that the claims thus fell with the ambit of the probate exception, as the court would assert control over the trust’s assets under the Surrogate’s Court’s jurisdiction by adjudicating them. 

The court however, declined to dismiss the plaintiff’s claims for damages arising out of defendant’s alleged poor investment decisions which allegedly devalued the trust.  The court labeled those claims “quintessential” in personam claims not barred by the probate exception.  According to the court, and consistent with prevailing authority, those claims did not implicate interference with the trust’s res under the Surrogate’s Court’s jurisdiction.

The line the Woitovich court drew between probate exception barred claims and “in personam” claims follows prevailing authority.  But in many instances, discerning the underlying nature of claims and whether they affect the administration of, and interfere with, an estate under the Surrogate’s Court’s control is a challenge.  For example, many claims for breach of fiduciary duty against an estate fiduciary pleaded as in personam claims might augment or deplete an estate under the Surrogate’s Court jurisdiction or order rights among estate beneficiaries in a manner that could trigger the probate exception.

The foregoing principle becomes clear by analogy to the pro tanto rule applicable in Surrogate’s Court proceedings.  Pursuant to the rule, a beneficiary who does not object to an estate fiduciary’s conduct, cannot share in any recovery by the objecting party.  Thus, a beneficiary who prevails on a claim for damages flowing from a fiduciary’s breach of fiduciary duty will receive the benefit of any damages surcharge against a fiduciary (but only in proportion to his or her interest in the estate); but a non-objecting party will receive nothing.  In such a case, the claim against the fiduciary is in the nature of a pure personal claim for damages.

But the pro tanto rule is generally inapplicable to claims seeking to augment the estate – for example, a claim to recover excessive attorney’s fees paid from the estate, to recover damages for interest and penalties arising from late payment of estate taxes, for omitting an asset from the account (a recoupment of property), or a successful claim that the fiduciary was in possession of monies that belong to the estate that the fiduciary alleged was an inter vivos gift (see Zalaznick). Such claims are more in the nature of representative or derivative claims brought on behalf of the estate and result in a benefit to all those interested in the estate. 

Further, probate exception “line-drawing” can create inefficient and potentially inconsistent piecemeal litigation.  For example, a beneficiary’s claim that a trustee breached his fiduciary duty by imprudently managing a trust-owned business, resulting in a diminution of the business’s value or performance, would likely be viewed as an in personam claim falling outside the probate exception.  But a claim that the trustee improperly arrogated the trust’s interest in the business by way of a self-dealing buy-sell and seeking to set aside that transaction and restore the trust’s interest in the business would likely fall within the probate exception as it would seek to have the federal court undo a specific action taken by the trustee. Where both claims exist, a federal action could proceed on the former but not on the latter, with the Surrogate’s Court adjudicating the latter.  Thus, the Surrogate’s Court and the federal court would make findings of fact and legal conclusions that could conflict and vary substantially.

A discovery proceeding pursuant to SCPA 2103 may be commenced by any legal representative of the estate, including a preliminary executor or a temporary administrator. An estate fiduciary has a duty to collect and preserve estate assets for the benefit of the beneficiaries of an estate.  To this extent, when the fiduciary knows, or has reason to believe that assets of the estate have been misappropriated, or that someone has information about, or has a disputed claim to estate assets, a 2103 proceeding should be considered.

A SCPA 2103 proceeding has two phases.  The first phase is the inquisitorial phase, which is the discovery portion of the proceeding.  In essence the fiduciary is asking the Court for permission to examine, under oath, an individual, for the purposes of determining whether or not that individual has information relating to the existence or whereabouts of estate assets. If the court finds reasonable grounds for the examination, it will order that a respondent, or respondents, appear and subject themselves to examinations.  In this regard SCPA 2103 is very broad in scope and has been likened to a licensed fishing expedition as a fiduciary need not have concrete evidence to commence the 2103 proceeding. Indeed, the proceeding may be instituted against any person having “possession or control” or “knowledge or information” about any property, or the proceeds or value thereof, which should be paid to the fiduciary. [SCPA 2103 (1)].

SCPA 2103 provides that a fiduciary may present to the court:

 a petition showing on knowledge or information and belief that any property as defined in 103 or the proceeds or value thereof which should be paid or delivered to him is (a) in the possession or control of a person who withholds it from him, whether possession or control was obtained prior to creation of the estate or subsequent thereto, or (b) within the knowledge or information of a person who refuses to impart knowledge or information he may have concerning it or to disclose any other fact which will aid the petitioner in making discovery of the property, or (c) he has reason to believe, in the possession or control of a person described in subparagraph (a) of this subdivision or within the knowledge or information of a person described in subparagraph (b) of this subdivision and praying that an inquiry be had respecting it and that the respondent be ordered to attend and be examined accordingly and to deliver the property if in his control.

However, despite the broad latitude and liberal standards set forth by the statute, there are limits to a fiduciary’s inquiry.  New York courts have made clear that they will not grant a fiduciary unfettered power in commencing a discovery proceeding.  Significantly, there are a number of decisions holding 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.

However, this was not always the case.  Indeed, in years past, courts had a much more expansive view of the threshold requirements for commencement of an SCPA 2103 proceeding. For example, in Matter of Mantia, 1997 WL 34851768 (Sur Ct, Nassau County), former Surrogate Radigan, described the scope of a SCPA 2103 examination as “quite broad”, explaining that because “the believed owner of the assets is deceased and cannot be called upon to provide aid in establishing his estate’s right to possession of these assets, the courts tend to give broader inquiry than what might be allowed in other kinds of proceedings brought in the Surrogate’s Court.  Surrogate Radigan, quoting Matter of Rosencrantz, 5 Misc 2d 308 (Sur Ct, Kings County 1956), described the allowable area of inquiry as a “fishing expedition,” a term identifying a type of inquiry that is usually unnecessarily intrusive.”

Similarly, in Matter of Fialkoff, 45 Misc.3d 1205(A) (Sur Ct, Queens County 2014), Surrogate Kelly, in describing a 2103 discovery proceeding, held that “the inquisitorial stage anticipates that the pleadings will be non-specific and the petitioner is not required to set forth allegations sufficient to sustain a cause of action but only those that justify an inquiry.  The petitioner should be allowed the broadest latitude in deposing a respondent to obtain information to aid the fiduciary in administering the estate and determining whether recovery of assets should be pursued.”   Surrogate Kelly added that the petition may be stated upon information and belief and that the allegations only need show that any property or the proceeds or value thereof which should be paid or delivered to the fiduciary are in the possession or control of a person who is withholding it or within the knowledge or information of a person who refuses to tell the fiduciary where it is.

In Matter of Boccia, 2001 NY Misc LEXIS 1367 (Sur Ct, Nassau County), the court noted that the inquisitorial stage of a discovery proceeding is a licensed fishing expedition by the executor and that at that stage the fiduciary is not required to set forth allegations to sustain a cause of action, only those which justify an inquiry.  This is because a fiduciary who may know little or nothing about the decedent’s affairs should have an opportunity to assist in the recovery of estate assets or to administer the estate. The courts tend to entertain this proceeding liberally when the information sought relates to estate assets or their value because it helps the fiduciary perform his/her duty to marshal assets.

The foregoing cases, along with many others like them, set a dangerous precedent of permitting fiduciaries to engage in licensed fishing expeditions based solely on pure conjecture that a decedent may have maintained an ownership interest in property that may be in possession of a respondent.

Within this context, the Appellate Division First Department, in Matter of Perelman, 123 AD3d 436 (1st Dep’t 2014) addressed the parameters of a SCPA 2103 discovery proceeding.  In Perelman, the executor commenced a proceeding seeking information and the turnover of the decedent’s interest in various family businesses that were allegedly misappropriated prior to her death.   The respondents moved to dismiss the petition arguing that the petitioner’s claims were barred by documentary evidence, and on the basis of the statute of limitations, res judicata, and collateral estoppel.   Petitioner maintained that he had a fiduciary duty to pursue the claim and that SCPA 2103 has been broadly construed as to allow a “fishing expedition” in order to assist the fiduciary in recovering property or administering an estate.  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.

In an opinion and Order, dated February 15, 2015, the Surrogate’s Court denied the motion to dismiss.  On appeal, the Appellate Division First Department unanimously reversed the order of the Surrogate’s Court and granted respondents’ motion.  Critically, the Court held that the petitioner “failed to demonstrate the existence of any specific personal property or money which belongs to the estate, or even a reasonable likelihood that such specific property or money might exist.”  In doing so, the Court dismissed the notion that a fiduciary seeking discovery has the authority to engage in an unfettered fishing expedition.

Despite the fact that SCPA 2103 discovery proceedings are often referred to as licensed fishing expeditions, it is clear from the First Department’s decision in Matter of Perelman, that unless a SCPA 2103 petition lists specific property that is in the possession or knowledge of a respondent, or the petitioner reasonably believes is in the possession or control or within the knowledge or information of a respondent, the proceeding may be subject to dismissal.

 

 

This article appears in a forthcoming issue of the Trust and Estates Law Section Journal, a publication of the New York State Bar Association. To learn more about the Trusts and Estates Law Section, please visit NYSBA.ORG/TRUSTS.

The recent opinion by the Appellate Division, Third Department, in In re Strom Irrevocable Trust III, 2022 NY Slip Op 01356, provides a cautionary tale to estate litigators who conduct SCPA 1404 examinations in the face of a trust instrument’s in terrorem clause. While in terrorem clauses are strictly construed, the Appellate Division found that the subject clause had been triggered as a result of conduct engaged in by the respondent during the course of a probate proceeding regarding the grantor’s will.

Before the Court was an appeal from an Order of the Surrogate’s Court, Warren County, which granted petitioner’s motion determining that the respondent triggered the in terrorem clause of an irrevocable trust of which she was a beneficiary.

The record revealed that the subject trust was created by the grantor/decedent for the benefit of her two daughters. Shortly before her death, she transferred her home in New Jersey to the trust and the proceeds from the sale of the house were subsequently deposited into the trust. The trust agreement contained an in terrorem clause whereby any beneficiary who challenged any of the terms of the trust forfeited her interest thereunder. Notably, the clause specifically exempted from its scope the provisions for discovery set forth in EPTL 3-3.5 and SCPA 1404, but also stated that any attempt to expand the discovery beyond what was typically authorized by the provisions would result in a forfeiture. The trustee subsequently filed an order to show cause seeking a determination that the respondent had violated the clause based upon, inter alia, conduct she engaged in during the course of SCPA 1404 examinations regarding the decedent’s will. The Surrogate’s Court granted the trustee’s order to show cause in its entirety, finding that the respondent violated the clause.

In affirming the order of the Surrogate’s Court, the Appellate Division observed that while engaging in SCPA 1404 discovery, the respondent filed affidavits in which she questioned whether the grantor’s home had been lawfully and properly transferred to the trust, and therefore whether the trust may fail due to being unfunded. She also engaged in discovery and depositions of numerous individuals who were involved in the sale of the home, which had no connection to the probate of the will, and was thus found to be in violation of the grantor’s intent as expressed in the no contest clause. Specifically, the Court was troubled by the respondent’s conduct questioning the deposit of the sale proceeds into the trust rather than the grantor’s estate, when the house was the primary asset of the trust.

Accordingly, the Court held that the Surrogate’s Court had correctly determined that the respondent triggered the in terrorem clause and forfeited any disposition to her under the trust.

While the removal of a fiduciary has long been the subject of Surrogate’s Court opinions, it is not often that the Appellate Division weighs in on the issue. However, in Matter of Epstein, 2022 NY Slip Op 00658 (2d Dep’t 2022), the Second Department did just that. The opinion is an important guidepost for the kind of conduct that warrants a fiduciary’s removal.

In Matter of Epstein, the Appellate Division, Second Department, reversed a decree of the Surrogate’s Court, Suffolk County which, after a nonjury trial, inter alia, denied the petitioner’s request to revoke the letters testamentary issued to her co-fiduciary, and modified the decree of the same court, which denied the petitioner’s request to revoke the letters of trusteeship issued to her co-trustee, and substituted therefor a provision that the application be granted.

The decedent died, testate, on August 17, 2008, survived by two daughters (the petitioner and the respondent, respectively), and three grandchildren. Pursuant to the pertinent provisions of his will, the decedent created generation skipping trusts (GST) for the benefit of his grandchildren and devised and bequeathed the residue of his estate in equal shares to his daughters. Upon admission of the decedent’s will to probate, letters testamentary and of trusteeship issued to the petitioner and the respondent, as the nominated executors and trustees thereunder.

Among the decedent’s assets at death were two LLC’s. Within a year after his death, a 10% interest in the entities was distributed to the petitioner and respondent, as beneficiaries, and $150,000 was deposited into each of the GST trusts in partial satisfaction of the bequests to the grandchildren. Thereafter, disagreements arose between the co-fiduciaries regarding distribution of the estate, which resulted in a July, 2011 agreement signed by all the beneficiaries, and the co-fiduciaries in their roles as trustees.

Nevertheless, the disputes between the co-fiduciaries continued. A little over a year after the agreement was signed, one of the LLCs sold its primary asset, and the petitioner, over objection by the respondent, instructed the managing member to allocate and distribute the estate’s shares in the company in accordance with the agreement. Further, the respondent refused to make distributions from the GST trusts to the grandchildren, and to create additional GST trust accounts for the grandchildren in order to comport with the FDIC limit. Additionally, the co-fiduciaries disagreed with respect to the filing of the estate tax return and payment of estate taxes, causing the petitioner to seek an order of the court to permit the payment of taxes.

Thereafter, proceedings were instituted by the petitioner to revoke the letters testamentary and of trusteeship issued to the respondent, amongst other things, and the respondent filed proceedings seeking petitioner’s removal, as well as an order compelling the grandchildren to return estate assets representing alleged overfunding of the respective GST trusts and excess cash distributions. The Surrogate’s Court denied both petitions, and the petitioner appealed.

The Court opined that the removal of a fiduciary pursuant to SCPA 711 and 719 must be exercised sparingly, and only where the record demonstrates a danger to the estate or trust administration. To this extent, removal will be ordered when conflict and hostility between co-fiduciaries impedes their stewardship.

The Court noted that the respondent repeatedly refused to countersign the estate tax return and checks in order to avoid penalties and interest being incurred by the decedent’s estate, claiming that the taxes were improperly calculated. To this end, she threatened to sue the estate’s bank for honoring checks for tax payments written by the petitioner, prompting the bank to freeze the estate accounts, and causing the petitioner to seek a court order to have the funds released in an amount sufficient to cover the estate’s tax liabilities.

The Court found that irrespective of her claims that the GST trusts were overfunded, the respondent’s conduct endangered the assets of the estate, and directed her removal as executor.

Further, with respect to her role as co-trustee, the Court found that the respondent placed her own interest above her fiduciary duty to act in the best interests of the GST trusts and their beneficiaries. Indeed, even accepting the respondent’s protestation that her only goal was to fund the trusts properly, the Court concluded that she was required to pursue this goal consistent with her stewardship by distributing funds to the grandchildren, and acceding to the creation of accounts to insure balances were less than the FDIC limits. In view thereof, the Court concluded that the respondent’s conduct thwarted the administration of the trusts, and held that the Surrogate’s Court improvidently exercised its discretion in denying petitioner’s application for her removal.

Some of the most interesting estate litigation issues arise in proceedings to determine a surviving spouse’s entitlement to an elective share, particularly when there are claims of abandonment.  Under EPTL § 5-1.1-A(a), “a personal right of election is given to the surviving spouse to take a share of [a] decedent’s estate.”  Section 5-1.2(a) provides that a husband or wife is a “surviving spouse,” within the ambit of EPTL § 5-1.1-A, “unless it is established satisfactorily to the court having jurisdiction of the action or proceeding that . . . [the] spouse abandoned the deceased spouse, and such abandonment continued until the time of death” (EPTL § 5-1.2[a][5]).

To establish abandonment, the departure of a spouse from the marital home must be unjustified and without the consent of the now deceased spouse (Matter of Maiden, 284 NY 429, 432 [1940]). The question of abandonment is one of fact, and often a close one (In re Estate of Riefberg, 58 NY2d 134, 136 [1983]).

Establishing facts in an abandonment proceeding is often difficult due to CPLR 4519, also known as the Dead Man’s Statute. To greatly oversimplify CPLR 4519, an interested party is barred from testifying regarding transactions and communications with a deceased person.  Therefore, disinterested witnesses are often critical in determining whether the surviving spouse abandoned the deceased spouse.

Most marriages are very private, so it can be difficult to find disinterested witnesses who can competently testify regarding the marriage. While there may be a friend or neighbor that can testify that the remaining spouse consented to the departure of their spouse from the marital home, this very personal information is often not widely shared, or perhaps even accurate.  One can certainly imagine a scenario where a husband does not consent to his wife’s departure from the marital home. However, to save face the husband tells a friend that he consented to his wife’s departure, or even told his wife to leave, causing huge issues for our hypothetical husband in an abandonment proceeding.

Ruff v Ruff, 91 AD2d 814 [3d Dept 1982] notes the difficulty presented by the Dead Man’s Statute: “[t]he issues raised in such a determination are difficult enough to resolve between living spouses, but almost impossible to objectively establish where, as here, the testate partner is dead and the survivor is in most respects incompetent to testify to ‘transactions’ involving the decedent”.  In Ruff, the departing spouse was found to have had the consent of the remaining spouse due to the testimony of various witnesses demonstrating that the marriage was disharmonious and that while the departing spouse frequently left home without explanation prior to the couple’s permanent separation in 1963, those departures from the marital home were never over decedent’s objection.

Another interesting issue arising in abandonment proceedings is the admissibility of pleadings and testimony from a divorce proceeding when the decedent dies during the pendency of the divorce proceeding.

Generally, under Domestic Relations Law 235 public inspection of pleadings and testimony in a divorce proceeding is prohibited, unless authorized by Court Order. “However, those protections do not extend where the party requesting disclosure of the divorce proceeding can ‘articulate and particularize the relevance of information sought to an important pending matter’” (Estate of Sharon Centner, 2019 NYLJ LEXIS 982, *5 [Sur Ct, Richmond County 2019] [citations omitted]). The Centner Court cited Janecka v Casey, 121 AD2d 28 [1st Dept 1986] where matrimonial records were unsealed because the decedent committed suicide and her plaintiff husband commenced litigation against his wife’s former physician and hospital.

In Centner the surviving husband moved for, among other things, a protective order barring his daughter from using documents from a divorce proceeding between the surviving husband and his late wife.  Surrogate Titone held that the shield of Domestic Relations Law 235 should yield because “it would seem contradictory and unjust not to allow discovery and possible admissibility of the divorce proceeding as evidence for or against [the claims of abandonment] [Id.]).

The Surrogate Titone further noted that:

It would be supremely ironic to allow a spouse, who, by seeking a divorce under the no fault statute, has implicitly represented under oath that neither party was at fault for the irretrievable breakdown of the marriage, to later claim that his/her departure from the marital residence was justified by the misconduct or fault of the other spouse because a change of circumstances (i.e., the death of the other spouse) renders it financially beneficial for him/her to do so (Id.).

These are just some of the many interesting issues that arise in abandonment proceedings. My colleagues Eric W. Penzer and Spencer L. Reames also discuss abandonment in prior posts.

Courts greatly appreciate when parties settle their disputes by agreement.  Settlements alleviate the courts of the burden of overwhelming caseloads, and further the public policy of encouraging parties to order their affairs by contract rather than relying on statute and common law.  As the Surrogate’s Court recently reiterated in Matter of Eckert, “stipulations of settlement are judicially favored, will not lightly be set aside, and are to be enforced with rigor and without a searching examination into their substance as long as they are clear, final and the product of mutual accord.”

Settling an estate litigation is especially difficult.  With estate litigation, parties often find it difficult to reconcile their personal view of what is right and just with the constraints of the law and our imperfect justice system.  As this experiment tends to show, it can be hard to take.  Nevertheless, settlements often save litigants from the risk and cost of continuing litigation.

What makes a binding settlement?  As explained and examined in detail by my colleague, a settlement requires that the parties make an expression of mutual assent on all material terms, and it cannot be conditioned on further events.  A classic example of an agreement conditioned on further events is the unenforceable “agreement to agree.”  Further, under New York’s Civil Practice Laws and Rules (applicable in the Surrogate’s Court), a settlement “must be in writing and subscribed by the party or the party’s attorney against whom enforcement is sought.”  Parties and counsel should understand that the courts so favor settlement that they will find an enforceable settlement agreement among written exchanges that may not have been intended to serve as a settlement agreement.  Matter of Eckert illustrates this point.

Eckert involved a fight between the decedent’s surviving spouse and his daughter.  Decedent died without a will, and his daughter and surviving spouse filed competing petitions for letters of administration.  Decedent’s daughter challenged the validity of the decedent and his surviving spouse’s marriage.  Decedent’s surviving spouse alleged that his daughter converted proceeds of certain retirement accounts.  With several proceedings and the promise of bitter litigation, the Surrogate referred the parties for alternative dispute resolution, and the parties mediated their dispute shortly thereafter. The mediation produced a verbal agreement, and the surviving spouse’s counsel e-mailed the daughter’s counsel the next day as follows:

Pursuant to the settlement reached, we will incorporate the following terms:

1) $515,000.00 payment within 20 days of fully signed agreement/stipulations of discontinuance being provided. Payment to be made by certified check made payable to [daughter] and delivered to [counsel];

2) Stipulation of discontinuance with prejudice as to petitions in Surrogate’s Court;

3) Stipulation of discontinuance with prejudice as to Sup. Ct. action;

4) Non-disparagement provision;

5) Confidentiality provision;

6) Mutual general releases;

7) Affirmation that [daughter] and [surviving spouse] have or will destroy any medical records in their possession.

If there is anything I missed, please let me know. Also, as we discussed yesterday, to the extent we need to be flexible on payment dates to minimize tax implications, we are willing to work in good faith to ensure that tax treatment is minimized by timing.

(emphasis added).

The daughter’s counsel replied as follows:

Leave the timing of payment open until we have more information. There should also be an indemnification for [the daughter] and, in addition to destroying records in her possession, a representation that [the surviving spouse] has not provided copies of medical records to any other person. We will provide any other comments we may have when we review the draft agreement.

(emphasis added)

The daughter’s counsel sent a draft written settlement agreement for the surviving spouse’s counsel’s review a few days later.  After about a month, the surviving spouse’s counsel replied they had researched the tax implications of the settlement.  Counsel advised that they had concluded that the settlement would impose “enormous” tax liability on the surviving spouse regardless of the timing of settlement payments, and that as a result the settlement could not be consummated.

The Surrogate’s Court however, enforced the e-mails as a binding settlement.  It rejected the surviving spouse’s contention that the settlement was conditioned on confirming its tax implications.  According to the court, “if the [surviving spouse] wished to make the settlement contingent upon a review of her tax consequences, it was incumbent on her and/or her counsel to make the term material by explicitly communicating to [the daughter] and/or her counsel that such review was a prerequisite to her full assent to this agreement. These are not casual email communications. A party is entitled to rely upon the communications made by opposing counsel on behalf of the other party with respect to settlement, whatever the mode of communication.”

The lesson here might be for lawyers.  The courts might scrutinize and construe an e-mail intended to confirm a conditional commitment as an enforceable agreement. Even in e-mails meant to further open and fruitful settlement discussions, precision is key.   Further, a statement reserving all rights when communicating and negotiating with counterparts might be warranted, even if such a statement makes all of the “noises” that one might expect from a lawyer.

In January 2021, I wrote about Broome County Surrogate David H. Guy’s decision in Matter of Ryan, in which Surrogate Guy addressed the admission of a remotely witnessed will to probate in New York State.  Recently, in Matter of Holmgren, Queens County Surrogate Peter J. Kelly wrote a decision addressing the information that a self-proving affidavit must contain in order to prove the validity of a remotely executed will.  I now write about Surrogate Kelly’s decision in Holmgren, as a follow up to my prior post concerning Ryan.

From April 7, 2020 to June 25, 2021, New York Executive Order 202.14 (the “Executive Order”) authorized “the remote execution of wills” in this State (see Matter of Holmgren, File No. 2021-4954, 2022 NY Slip Op 22049 [Sur Ct, Queens County Feb. 23, 2022]).  The Executive Order – which the then-Governor implemented in response to the COVID-19 pandemic – permitted “the use of audio-visual technology to satisfy the ‘presence’ requirements contained in” Estates, Powers and Trusts Law § 3-2.1 (which governs the due execution of wills) (see id.).

Under the Executive Order, “the ‘presence’ requirements incident to the act of witnessing [a will] can be ‘virtually’ satisfied provided [that] the following conditions are met”: (a) “the testator has to be either personally known to the attesting witnesses or must present valid photo identification to the witnesses during the video conference”; (b) “the video conference must allow for direct interaction between the testator, witnesses, and if applicable, the supervising attorney (no-prerecorded videos)”; and (c) “the witnesses must receive a legible copy of the signature page(s) the same day the papers are signed” (see id.).  The Executive Order also “includes provisions whereby the attesting witnesses may sign the transmitted copy of the signature page(s) and transmit them back to the testator and further provides that the witnesses may repeat the witnessing of the original signature page(s) as of the date of execution provided [that] they are presented with the original signature pages and the electronically witnessed copies within 30 days of the remote execution ceremony” (see id.).

To ensure that the validity of a will, whether executed in-person or by virtual means, can be proved, “best practice” dictates that the attesting witnesses sign a self-proving affidavit (see id.).  In the self-proving affidavit, the attesting witnesses “swear to ‘such facts as would . . . establish the genuineness of the will, [and] the validity of its execution,” among other things (see id.).

In Holmgren, the petitioner offered a remotely executed will for probate, submitting (a) a waiver and consent signed by the testator’s sole distributee, and (b) a self-proving affidavit signed by the attesting witnesses to the propounded instrument’s execution (see id.).  Surrogate Kelly declined to admit the propounded instrument to probate based upon the self-proving affidavit that the petitioner submitted (see id.).  The Surrogate explained that the affidavit failed to establish compliance with the Executive Order’s requirements that: (a) the testator was personally known to the attesting witnesses, or had presented valid photo identification to them, during the execution ceremony; (b) the audio-visual technology used during the execution ceremony “was in working order and allowed for direct interaction between the testator and the witnesses in real time”; and (c) “a legible copy of the signature page was transmitted to the witnesses on the same day that the witnesses observed the signing” of the propounded instrument (see id.).

Surrogate Kelly also noted that the petitioner had submitted to the court “an original instrument bearing the original signatures of the testator and both attesting witnesses,” meaning that “the witnesses were, at some point, apparently presented with the original instrument” (see id.).  This was noteworthy because, while the Executive Order does not require the attesting witnesses of a remotely executed will to sign both the transmitted copies of the signature pages and the original signature pages, it does mandate that, when the attesting witnesses do so, they must be “presented with the original signature pages and the electronically witnessed copies within 30 days of the remote execution ceremony” (see id.).  As a result, the Surrogate concluded that the self-proving affidavit on file with the Court had to establish “the presentation to the witnesses of both the original signature pages and the electronically witnessed copies within 30 days of the remote execution ceremony” – which the affidavit failed to do (see id.).

Finally, Surrogate Kelly referenced “other facts” suggesting that “there are counterparts of the [propounded] instrument that have not been filed with the Court” (see id.).  Such “other facts” required the petitioner to present all duplicate originals of the propounded will, “to provide assurance that the instrument was not revoked” (see id.).

Although Surrogate Kelly did not deny probate to the propounded will in Holmgren, the Surrogate did require the petitioner to provide a new self-proving affidavit establishing compliance with the Executive Order’s requirements (see id.).  Holmgren demonstrates that, to the extent that a testator relied upon the Executive Order in remotely executing a will, the self-proving affidavit filed to establish the instrument’s validity must show that the remote execution process complied with the Executive Order’s requirements.  Absent such a showing in a self-proving affidavit, a remotely executed will may not be admitted to probate, even in an uncontested proceeding.

The COVID-19 pandemic has forced litigants to wrestle with the dilemma of waiting for a jury trial or moving forward more expeditiously by way of a bench trial.  Recently, the Appellate Division, Fourth Department, and the Court of Appeals passed on the issue of undue influence arising out of a Surrogate’s Court bench trial.

In Matter of Kotsones, following a non-jury trial, the Surrogate’s Court denied a decedent’s will probate, and granted a petition to invalidate the decedent’s lifetime trust and certain lifetime real estate transactions.  The Surrogate’s Court determined that the will, trust, and real estate transactions, all part of the decedent’s estate plan, were the product of undue influence.  The Appellate Division reversed and the Court of Appeals affirmed.  The case provides a helpful summary of the law applicable to claims of undue influence, and New York appeals courts’ power on appeals from non-jury trials.

The case turned in large part on the issue of whether the alleged undue influencers were in a confidential relationship with the decedent.  The Appellate Division reiterated the well-settled rule that where a confidential relationship exists between the beneficiary and the decedent, an inference of undue influence will arise, and require the beneficiary to come forward with an explanation of the circumstances of the transaction, to demonstrate that it was fair and free from undue influence.

The Surrogate’s Court held that the petitioner alleging undue influence had met his initial burden of establishing the existence of the confidential relationship between the alleged undue influencers and the decedent.  The Appellate Division disagreed, observing that the hallmark of a confidential relationship is inequality in power and dealing.  The Appellate Division found that while the record established that the alleged undue influencers held a position of trust with decedent, and assisted the decedent with her finances, that decedent was actively and personally involved in managing her own financial affairs, and plainly stated her motives for her actions.  The Court held that under these circumstances, the petitioner failed to meet his initial burden of establishing that the relationship of the alleged undue influencers with the decedent was of such an unequal or controlling nature as to give rise to an inference of undue influence.

With no inference of undue influence, the Appellate Division reiterated that the heavy burden of proving undue influence requires a showing of the exercise of a moral coercion, which restrained independent action and destroyed free agency, or which, by importunity that could not be resisted, constrained the testator to do that which was against his or her free will.  The Appellate Division agreed with the trial court in finding that the alleged undue influencers wanted to benefit from decedent’s estate, and that one of them assisted decedent in preparing the estate plan and effectuating the transactions in question.  The Appellate Division held that “the relevant inquiry, however, is not what [the alleged undue influencers] may have wanted, asked for, or facilitated, but rather whether decedent’s free will, independent action, and self-agency were overcome by their conduct.”

According to the Appellate Division, the petitioner simply did not carry the heavy lift of his burden to prove undue influence.   The Appellate Division found that the record reflected that the decedent played an affirmative role in effecting the disputed transactions based on her stated personal motives, and that there was no indication that she, at any relevant time, lost her free will or agency.  Among the facts that the Appellate Division found compelling in reaching its conclusion was that the decedent had direct conversations with her attorney, instructing him to revise her estate plan, and explaining her motives for her desired changes.  The court also found it relevant that numerous non-beneficiaries established the decedent’s capacity and the decedent’s active management of her own affairs during the relevant time frame (albeit with the assistance of one of the alleged undue influencers).

The Court of Appeals affirmed the Appellate Division.  However, the Hon. Jenny Rivera dissented.  According to the dissent, the Appellate Division’s decision was predicated largely on trial testimony that the decedent participated in the contested transactions and revisions to her estate plan.  But the dissent looked at other testimony in the record, which suggested that the decedent’s participation was merely the result of the alleged undue influencers’ coercive influence.  The dissent’s view was that the Surrogate, who observed the trial testimony first hand and had the opportunity to see and hear the witnesses and assess their demeanor, was in a better position to assess credibility.

While it is impossible to know how the case would have been decided if it were tried before a jury, the standard of review would have been different on appeal.   Where the Appellate Division concludes that jury has made erroneous factual findings, the Appellate Division must order new trial, since it does not have power to make new findings of fact in an appeal arising from a jury verdict.  In non-jury cases, however, the Appellate Division does have power to make new findings of fact and change the verdict. Litigants should, of course, consider this among many other factors when deciding whether to wait or to proceed to a bench trial under the current circumstances.

Following up on the question posed in a post from a few years ago: when clients ask whether they can “sue for legal fees,” the courts continue to reiterate that the answer is almost always no; that the American Rule still controls.  Recent decisions in the contexts of trusts and estates litigation and guardianship litigation speak to fee shifting and exceptions to the American Rule.

Article 81 Guardianship Proceeding

In Matter of Milton R., the Appellate Division, Second Department, reversed the Nassau County Supreme Court’s (Daniel R. Palmieri, J.S.C.) orders and judgments awarding the petitioner legal fees under a fee shifting agreement on the law and the facts.  The case was decided in the context of a Mental Hygiene Law Article 81 Guardianship application where the petitioner sought twice to remove his brother as his father’s attorney-in-fact and health care agent, and twice failed in achieving this goal.

The initial guardianship proceeding settled by way of an agreement, whereby the respondent’s role as attorney-in-fact and health care agent was undisturbed.  The agreement contained a mandatory mediation provision, and also provided that the “prevailing party” in any litigation arising out of the agreement would be entitled to recover attorney’s fees from the defaulting party.   It was not long before the petitioner took his next shot to remove the respondent as his father’s attorney-in-fact and health care agent, alleging that the respondent breached the settlement agreement by, among other things, failing to provide home health care aides for his father as required under the agreement, and refusing to mediate under the settlement agreement’s alternative dispute resolution provisions.  Petitioner sought an award of attorney’s fees pursuant to the settlement agreement’s fee shifting provisions.

The court denied the petitioner’s request to remove respondent as his father’s attorney-in-fact and health care agent.  This was no surprise, because the courts ought to afford respect and deference to a person’s advance directives in the absence of any genuine and material defalcation.  However, the court ruled that the respondent breached the settlement agreement by refusing to mediate in accordance with the terms of the settlement agreement, and as a remedy for this breach, awarded attorney’s fees to petitioner pursuant to the settlement agreement’s fee shifting provision.  Thereafter, the court conducted an inquest to determine the amount of attorney’s fees to be awarded. Following the inquest, the court, inter alia, issued money judgments to the tune of approximately $175,000.

Without much discussion, the Appellate Division, Second Department corrected the motion court’s stark deviation from applicable law.  It applied the familiar rule that where an agreement provides for fee-shifting to a prevailing party, a party will only be determined a prevailing party if it is successful with respect to the central relief sought.  This determination requires consideration of the true scope of the dispute litigated, followed by a comparison of what was achieved within that scope.  The Appellate Division Second Department determined that the petitioner achieved nothing, or at least nothing that could warrant shifting his investment of $175,000 into the litigation.  While the case is generally unremarkable, the takeaway might be that the Appellate Division did not find anything inherent in Article 81 guardianship proceedings that can justify deviation from the American Rule absent the explicit statutory exceptions in the Mental Hygiene Law or contract. The wide discretion granted to the trial courts in Article 81 Guardianship proceedings has its limits.

Trusts and Estates Litigation

Surrogate’s Court litigation often presents exceptions to the American Rule, and the Nassau County Surrogate’s recent order in the tortured estate of Oleg Cassini illustrates as much. The exceptions to the American Rule in estate litigation arise naturally because many claims against estate fiduciaries are derivative of the beneficiaries’ interests in the estate.

In Cassini, the Nassau County Surrogate cited the American Rule, but explained that in trusts and estates litigation there are circumstances where fees incurred by a beneficiary will be paid as an estate expense (as opposed to being borne by the beneficiary alone).  In certain cases, an attorney litigating on behalf of a beneficiary who has benefitted the entire estate through his or her services may be compensated from estate assets by order of the Surrogate.  This is by virtue of statutory authority, namely, Surrogate’s Court Procedure Act § 2110, which provides in subparagraphs (1) and (2), in relevant part:

At any time during the administration of an estate and irrespective of the pendency of a particular proceeding, the court is authorized to fix and determine the compensation of an attorney for services rendered to a fiduciary or to a devisee, legatee, distributee or any person interested … The court may direct payment therefor from the estate generally or from the funds in the hands of the fiduciary belonging to any legatee, devisee, distributee or person interested.

In Cassini, the Court allocated legal fees incurred by counsel on behalf of estate beneficiaries against the general estate on the grounds that it benefited the estate as a whole.  The Surrogate’s Courts have consistently followed this approach (and sniffed out and denied reimbursement of legal fees to beneficiaries who were acting for their own benefit), which can be considered an exception to the American Rule.

Further, as previously discussed by my colleagues, the Court of Appeals decision in Matter of Hyde has made it clear that the courts have great discretion to allocate legal fees in Surrogate’s Court litigation, as Surrogate’s Court Procedure Act § 2110 can be used as a fee shifting mechanism among warring parties to an estate litigation.  The Surrogate’s Courts have not been shy about exercising that discretion as illustrated by decisions that have issued since Hyde.

In the recent case Matter of Lee, New York County Surrogate’s Court granted a motion for summary determination that decedent’s father was disqualified as a distributee and beneficiary for failure to support decedent pursuant to EPTL 4-1.4 (a)(1) (Matter of Estate of Lee | NYLJ, Apr. 2, 2021, p.22, col 3 [Sur Ct, NY County 2021])

The court noted the tragic underlying facts. Decedent died at age 14, survived by his divorced parents. Decedent’s mother, who was the custodial parent and administrator of the estate, petitioned for the father’s disqualification and moved for summary judgment.

EPTL 4-1.4 (a)(1) provides two separate grounds for disqualification. A parent is denied a distributive share if he or she (1) fails to support, or (2) abandons the child while the child is under the age of 21, “unless the parental relationship and duties are subsequently resumed and continue until the death of the child” (id.).

The issue in Lee was not abandonment, but failure to support. Notably, a parent’s ability to pay support is essential to the calculus in determining disqualification on this ground pursuant to the statute.

The Surrogate’s decision relied on the Family Court’s 2008 determination of respondent’s support obligations after a hearing at which movant and respondent could present evidence and testify. The same Family Court decision held that respondent had willfully refused to pay child support and disallowed any downward modification of his support obligations. Movant showed that respondent owed a total child support arrears in the sum $74,294.49, and had paid only $3,955 for child support during the last five years of decedent’s life.

The court found that movant satisfied her burden that respondent not only failed to support decedent because he was unwilling, but never resumed payment to the extent of his ability prior to decedent’s death.

In opposing the motion, respondent contended that: (1) his support obligation fixed by the Family Court was inaccurate because it neglected the fact that he had no income during his incarceration in Afghanistan before his release in 2006; (2) movant sought to alienate him from decedent; and (3) the Family Court was biased against him based on his sexual orientation.

Applying the doctrine of res judicata, the court declined to take a second look at the propriety of respondent’s support obligations. However, it stated that the doctrine, which should not be mechanically applied, may allow a court to subsequently “examine a variety of non-exclusive factors to determine the preclusive effect, if any, of a prior judgment,” such as a significant change in law.

The “significant change in law” was the 2010 amendment to the Family Court Act § 451(3)(a) which allows modification of a child support order “upon a showing of a substantial change in circumstances.” Specifically, the amended law provided the following:

Incarceration shall not be considered voluntary unemployment and shall not be a bar to finding a substantial change in circumstances provided that such incarceration is not the result of non-payment of a child support order, or an offense against the custodial parent or child who is the subject of the order of judgment (Matter of Lee, supra).

Although this provision can be applied “retroactively [] to the date of filing of the petition to modify” (id.), the Surrogate found that respondent never followed through his petitions to modify the 2008 support determinations, and therefore, the court was restrained to find respondent’s claim barred by res judicata.

The Surrogate rejected respondent’s remaining arguments, finding that the alleged bias and alienation could have been raised in the Family Court or in an appeal. The court further found that the Family Court’s determination dispensed with the need for a hearing to determine respondent’s ability to pay, and movant’s ability to provide for decedent was no defense against respondent’s failure to support. Accordingly, the court held that respondent failed to resist the motion.