In a recent case, a New York County Surrogate denied a motion for summary judgment, holding that a trial was necessary to determine whether the founder of the Benihana restaurant chain, Rocki Aoki, was the victim of constructive fraud perpetrated by his conflicted lawyers. The issue in Estate of Aoki, 5/17/2010 NYLJ 18 (col 3), was the enforcement of releases to a testamentary power of appointment, which, if valid, would deny Mr. Aoiki’s surviving spouse any interest in the Benihana restaurant empire. The movants were two of Mr. Aoki’s children, Devon and Steven.
Mr. Aoki died in 2008 at age 69, survived by his third wife, Keiko, and six children from various relationships. Not bad for a guy who gained notoriety by flipping shrimp tails into his hat and shirt pockets.
Given his less than traditional family tree, it is hardly surprising that Mr. Aoki’s heirs are now litigants in the Surrogate’s Court.
The power of appointment in issue pertained to the Benihana Protective Trust (“BPT”), to which Mr. Aoki transferred all of his rights in Benihana of Tokyo, Inc., a publicly traded company of which he was the sole owner. The trust instrument named Mr. Aoki and his children as discretionary beneficiaries, and provided him with an unlimited testamentary power of appointment over the corpus. Trust and estates attorney Norman Shaw drafted the agreement. He was retained by, and received instructions from, Darwin C. Dornbush, Mr. Aoki’s personal lawyer for 30 years. Mr. Shaw had never met Mr. Aoki.
Mr. Aoki married Keiko in July 2002, four years after the BPT was created. Not surprisingly, Mr. Aoki’s children were concerned that his new wife might influence him to deprive them of some or all of the inheritance they expected. Two of them — Kevin and Kana — discussed their concerns, including the lack of a pre-nuptial agreement, with Dornbush. They then proposed to Keiko that she and the decedent sign a postnuptial agreement, apparently acting on Dornbush’s advice. Mr. Aoki did not participate in the conversation, and Keiko refused the request. Kevin and Kana then approached Dornbush and Shaw about protecting their interests as potential beneficiaries of the BPT.
Following a meeting at Dornbush’s office attended by the decedent, Kana and Kevin, the four met again, on September 24, 2002, for Mr. Aoki to sign a codicil to his will and an unrelated consent to an amendment of the BPT. During that brief meeting, Shaw arrived and presented the decedent with a one-page document entitled “Partial Release of Power of Appointment Under New York Estates, Powers & Trust Law §10-9.2.” By signing that document, the decedent “irrevocably” limited his power of appointment to permit him to appoint only his descendants.
Nobody advised the decedent that the release was irrevocable, nor did anyone advise him of the substantial tax consequences of foregoing the marital deduction.
A few months later, the decedent signed another release document, eliminating as potential donees those descendants who were non-resident aliens. Shaw, again the attorney drafter, testified that the sole basis for this release was for tax purposes, although no evidence demonstrated that the legal effect of the document was explained to the decedent, or that he understood it.
It was undisputed that Dornbush and Shaw were the decedent’s attorneys and consequently had a fiduciary obligation to him. It was also not disputed that Kana and Kevin sought Dornbush’s legal advice and assistance for the purpose of limiting or denying the decedent’s ability to provide for his new wife on his death. This, according to the Court, placed Dornbush in an impermissible conflict of interest, of which the decedent was not informed.
In July 2003, the decedent retained a new attorney, Joseph Manson, who advised Dornbush that the decedent had executed a codicil to his will, changing beneficiaries and removing Dornbush as Executor. Manson requested a meeting with Dornbush to discuss the will and other matters affecting the Aokis. In preparation for that meeting, Shaw drafted a memo raising additional questions, reiterating the conflicts he, Dornbush and the Dornbush firm had, and continued to have, in their ongoing representation of the decedent.
At the meeting with Dornbush, Manson requested a legal opinion as to the changes in Mr. Aoki’s estate plan as reflected in the most recent codicil, based on Dornbush’s drafting of the original will. Immediately thereafter, Dornbush wrote another memo, stating that he “questioned Manson as to why Rocky was asking our firm to express an opinion as to the validity of the codicil”. He went on to write, “[m]y guess is that Kevin, in discussions with his dad, made mention of the fact that Rocky has signed ‘some paper’ when in [Dornbush’s] office, giving up his right to leave assets of the Benihana Protective Trust to anyone other than his children and their descendants.” He continued, “Undoubtedly, the fur will fly when Manson and his clients, Keiko and Rocky, discover the existence of the executed Partial Release.”
Shaw subsequently informed Mason that Mr. Aoki was still a client of his firm, and stated that the firm would provide a legal opinion, which it did in by letter dated September 8, 2003. It opined that the codicil the decedent executed, in which he appointed 25 % of the BPT corpus outright to Keiko, was invalid because of the release documents.
Keiko claimed that this was the first time that the releases were brought to the decedent’s attention and to the attention of his new counsel. The decedent stated, in a roughly contemporaneous affidavit, this was the first time he realized he had executed irrevocable releases, and that he had never had any intention of doing so.
Keiko asserted various defenses to the motion to enforce the releases. The court opined that the core question was “whether, when signing the September and December Releases, Rocky knew that he was irrevocably limiting the persons to whom he could leave the stock in the BPT.” Keiko relied on the decedent’s statement that he did not, and argued that he had been the subject of fraud by his attorneys, on behalf of his children, because of their conflict of interest.
In furtherance of their motion, Devon and Steven Aoki cited the general rule of law that an individual who has failed to read an instrument prior to signing will not be heard to complain that the terms of the instrument were misrepresented. But the court noted that the rule does not apply “where a fiduciary relationship exists between parties to the transaction such that it is reasonable for the weaker party to rely upon representations made by the party in whom he reposed trust and confidence. . . .” Indeed, when a fiduciary relationship exists, the element of scienter, necessary in ordinary fraud cases, need not be proved. Instead, the issue becomes one of constructive (as opposed to actual) fraud, and the burden shifts to the party alleged to have taken unfair advantage of “trust justifiably reposed.”
The court went on to explain that constructive fraud is the theory by which “the law seeks to protect a party who, by virtue of an unequal relationship, places his trust and confidence in another and thereby ‘relax[es] the care and vigilance he would ordinarily exercise in the circumstances’” [citation omitted]). The court deemed this theory potentially applicable to the relationship among the decedent and his conflicted attorneys.
Accordingly, the court concluded that triable issues of fact existed regarding (1) whether the decedent was unaware that he was irrevocably giving up his power to assign his interest in the BPT to anyone (including his wife Keiko) other than certain of his descendants and, (2) if he was unaware, whether the proponents of the releases can meet their burden of showing that his signature was nevertheless voluntary and not the result of misrepresentation or omission by his counsel and fiduciaries, Dornbush and Shaw. The motion for summary judgment was denied.