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.

While most decisions rendered by the Surrogate’s Court result from an affirmative request for relief, occasionally the court will address an issue on its own motion when justice or the exercise of its inherent or statutory power requires. One of the better known instances in which the Surrogate’s Court undertook this role was Stortecky v. Mazzone, 85 NY2d 518 (1995), a case that addressed the court’s inherent authority to fix and determine legal fees. This post examines two recent opinions wherein the Surrogate’s Court, again, acted on its own initiative to achieve what it considered the proper result.

SCPA 1408 and the Duty to Admit a Valid Will to Probate

In In re Friedman, NYLJ, Mar. 13, 2017, at 22, the Surrogate’s Court, New York County, was confronted with two petitions requesting the admission to probate of a purported will of the decedent, dated April 5, 2011. The initial petition was filed by the nominated executor under the instrument and objections to probate were filed by the decedent’s daughter. Thereafter, the daughter withdrew her objections to probate, and filed a cross-petition for probate requesting that she, and not the nominated executor, be appointed fiduciary.

Despite the absence of objections to probate, the court noted several deficiencies on the face of the instrument, as well as evidence in the record that created “serious” concerns regarding its execution and the decedent’s testamentary capacity. More specifically, the court observed that the instrument arguably failed to dispose of any testamentary property, that the decedent’s name was misspelled, and that while the instrument contained a detailed listing of over 30 stock holdings and accounts, a year before the execution date, the decedent had been found by an examining psychiatrist to have cognitive limitations, and was unaware of his income.

In view thereof, and in accord with the provisions of SCPA 1408(1), the court scheduled a hearing in order to satisfy itself as to the genuineness of the propounded will and the validity of its execution. Petitioner, who was the only witness to testify, stated that the decedent drafted and typed the instrument, and later executed the document, without the supervision of an attorney, in the presence of two of petitioner’s friends. No explanation was given regarding the discrepancies in the instrument, or to mitigate the court’s concerns about the decedent’s mental capacity. Moreover, no explanation was provided as to the reference in the instrument to a date and event that occurred after the date of its execution, and the existence of the pre-typed names and addresses of the witnesses, despite petitioner’s contention that the decedent had never met them prior to the will being signed.

Accordingly, based on the foregoing, and the record as a whole, the court held that it was not satisfied that the will was valid, and denied the petition and cross-petition for its probate.

Surcharge of Fiduciary, Sua Sponte

Because a fiduciary is presumptively entitled to statutory commissions, an objectant in a contested accounting proceeding generally has the burden of demonstrating that fiduciary commissions should be denied. In In re Colt, NYLJ, Apr. 14, 2017, at 22 (Sur. Ct. New York County), the court seemingly deviated from this rule when it exercised its authority to review sua sponte the fiduciary’s commissions as executor and trustee.

Before the court were contested accountings of the fiduciary as executor of the decedent’s estate and successor trustee of a revocable trust created by the decedent in 2006. Following the dismissal of certain objections and the withdrawal of others, the court held a hearing on the remaining issue of the legal fees payable to the fiduciary’s counsel. The record at the hearing revealed that much of the work performed by counsel related to conflicting claims to the assets of the estate and trust. More specifically, it appeared that in 2004, the decedent had executed a pour over will and revocable trust into which he transferred his condominium and brokerage account. Two years later, he executed the subject 2006 trust, as well as a new will, which, again, contained a direction that his residuary estate pour over into the trust. The 2004 trust and 2006 trust essentially had the same legatees, however, the beneficiaries of the decedent’s residuary estate differed.

Significantly, the draftsperson of both wills and trusts was the fiduciary, who was the decedent’s estate planning attorney. Of equal note was the fiduciary’s acknowledgment that the decedent intended his assets to pass pursuant to the 2006 trust, and his admission that he failed to have the decedent revoke the 2004 trust and fund the 2006 trust with the assets with which the 2006 trust had been funded. Although the controversy regarding the rightful owners of these assets was settled, the court found that the decedent’s estate had a claim against the fiduciary for the legal fees incurred to resolve the trust issues that were created from his failure to properly advise the decedent. Indeed, regardless of whether the statute of limitations on any claim for malpractice had expired, or whether fiduciary had been shielded from claims based upon the privity doctrine, the court concluded that the fiduciary’s duty as executor required that he make the estate whole for the legal fees resulting from his negligence. His failure to fulfill this duty was exacerbated by his affirmative approval of the considerable legal fees incurred, which he apparently made no attempts to control.

In view thereof, the court held that the fiduciary had demonstrated a gross neglect of his duty and a substantial disregard of the rights of the beneficiaries warranting a denial of his commissions both as executor and trustee.

thatIn some will contests, lawyers will speculate that the decedent may have misled people as to his true estate plan, either out of weakness, to keep the peace, to measure reactions, to avoid uncomfortable conversations, and perhaps, sadly, intending to cause pain and disappointment. When this happens, it may be easier, for example, for a son to believe that his sister was responsible for subverting their mother’s wishes than to even approach the idea that his mother was not being truthful when she told him that he would receive “everything.” Bitter litigation is often the result. We can speculate that there may have been a bit of that going on with the parties involved in Gersh v. Nixon Peabody LLP, 2017 NY Slip Op 30363(U), (Sup Ct, New York County 2017), outside of the context of a will contest.

Decedent’s surviving spouse was the Plaintiff in Gersh, suing individually, and as executor of Decedent’s estate, for legal malpractice against Nixon Peabody LLP. She alleged that the firm committed malpractice in rendering planning services to her and to the Decedent, who jointly retained the Nixon firm in 2003. At that time, the Decedent — married for the third time, some forty years after his divorce from his first wife — decided to create a will and amend an existing revocable trust. When he did so, his obligations to the children of his first marriage under a separation agreement were seemingly unaccounted for in his estate plan.

Decedent and his first wife had two children, Laurie and Ellynn. The couple entered into a separation agreement 1963. The agreement provided that if the first wife survived Decedent, and if Laurie and Ellynn had reached the age of 21 at the time of Decedent’s death, then Decedent was obligated to leave 50% of his estate in trust for the first wife, with the remainder passing to Laurie and Ellynn upon their mother’s death. This provision is not a model of clarity. For example – – what are the terms of this “trust”? What is this separation agreement referring to when it refers to Decedent’s “estate”? Is it the Decedent’s probate estate? Or the Decedent’s net estate for estate tax purposes? Or something else?

If the Decedent had wanted his surviving spouse to receive all of his wealth despite the separation agreement, he could have employed trusts, life insurance, beneficiary designations, lifetime transfers and gifts, and other mechanisms to, at the very least, reduce what his first wife and children would receive . Arguably, it was possible to plan around the separation agreement, and for the Decedent to ensure that his surviving spouse received all of his assets, and that his first wife and Laurie and Ellynn received nothing. However, no such planning was done.

The Decedent died in 2014, and it appears that he died with a substantial probate estate. The Decedent’s first wife died shortly thereafter, and their children, Laurie and Ellynn, promptly claimed that they were entitled to 50% of their father’s estate pursuant to the separation agreement. Their claim against the Decedent’s estate ultimately settled for $2.367 million.

After compromising the claim, Plaintiff sued the Nixon firm. She alleged that the Nixon firm was aware that the Decedent had been divorced twice, but nevertheless neglected to perform a proper inquiry and investigation to determine the existence of the separation agreement. She maintained that the Nixon firm committed legal malpractice because it never inquired about or obtained a copy of the agreement, and never informed her and the Decedent that the Decedent’s first wife and children had a potential claim to as much as 50% of his estate. She further alleged that the Nixon firm did not provide her and the Decedent with advice to reduce exposure to such a claim in order to fulfill the Decedent’s wish to leave virtually all of his assets to Plaintiff. She claimed that if the Nixon firm had done so, the Decedent would have taken appropriate steps in planning and that she would have received the $2 million-plus that was paid to Laurie and Ellynn in settlement of their claim.

Examining Plaintiff’s claim on a motion to dismiss, the Court observed that it was undisputed that the Decedent was aware of the separation agreement at all relevant times, and that the Decedent did not inform the Nixon firm of the existence of the separation agreement. Citing well-settled law, the Court held that an attorney cannot be held liable for legal malpractice for failing to disclose facts already known to the client. Moreover, the Court held that even assuming that the Nixon firm had a duty to investigate separation agreements attendant to the Decedent’s prior marriages, and advise as to the effect of same, and was negligent in failing to do so, that Plaintiff could only speculate that this negligence was the proximate cause of her loss in the settlement paid to Laurie and Ellynn. Citing the familiar case of Leff v. Fulbright & Jaworski, LLP, 78 AD3d 531 (1st Dept 2010), the Court held that Plaintiff’s assertions as to what Decedent would have done had he received advice concerning the effect of the separation agreement on his estate plan were speculative and insufficient to support a legal malpractice claim.

In Gersh, it may have been that the Decedent had some sense of obligation to his first wife and Laurie and Ellynn. He may have known full well that his first wife and/or children might make a claim for 50% of his estate when he was working with the Nixon firm on his estate plan. He may have decided that it would be easier to let his first wife and children make a claim against his estate rather than talk to his wife about how he wanted to leave them something out of a sense of obligation. He may have wished to avoid a conversation, or a series of excruciating conversations, with his wife about whether and to what extent his children should receive assets upon his death. On the other hand, perhaps Decedent relished the idea of a fight between his surviving spouse and his first wife and children after his passing and his estate plan was so designed. Even if the Nixon firm had enlightened him as to the effect that the separation agreement would have had on his estate plan, he might have opted to do nothing. We can only speculate.

As parties prepare for trial before the Surrogate’s Court, a question that oftentimes arises is whether the parties have a right to a trial by jury. The right to a jury trial is anything but universal in Surrogate’s Court proceedings, and, in fact, does not exist in a proceeding concerning the removal of a fiduciary. This blog post explains why no right to a jury trial exists in a Surrogate’s Court removal proceeding.

The Surrogate’s Court Procedure Act (“SCPA”) provides that a party is only entitled to a jury trial in a proceeding “in which any controverted question of fact arises as to which [the] party has a constitutional right of trial by a jury, in any proceeding for the probate of a will in which a controverted question of fact arises, and in any proceeding commenced after the death of the creator of a revocable lifetime trust to contest the validity of such trust in which a controverted question of fact exists” (see SCPA § 502[1]). Under Article 1, Section 2 of the Constitution of the State of New York, a constitutional right to a jury trial only exists in those “cases in which it has heretofore been guaranteed by constitutional provisions” (see N.Y. Const. Art. 1, § 2; Matter of Mastro’s Will, 100 Misc2d 866, 867 [Sur Ct, Suffolk County 1979] [citations omitted] [“The result of (that) constitutional provision, enacted in 1938, is that the constitutional guarantee of a jury trial continues only to the degree that such jury trials were authorized prior to the 1938 Constitution”]).

Based upon the foregoing, in Matter of Ruggiero, the Second Department held that a party did not have a right to a jury trial in a removal proceeding (see Matter of Ruggiero, 51 AD2d 969, 969-71 [2d Dep’t 1976]). There, the petitioner sought a trial by jury in the proceeding she commenced to remove the decedent’s sister as the fiduciary of the decedent’s estate (see id.). The Surrogate’s Court and Appellate Division both found that a jury trial was unwarranted, mindful that there is no right to a trial by jury in a removal proceeding under the New York State Constitution or the SCPA (see id.).

In light of the foregoing, a party preparing for trial in a Surrogate’s Court removal proceeding should plan to proceed before the Surrogate. Such a party does not have a right to have its trial heard by a jury.

Powers of attorney and trust instruments have each been the subject of many an estate plan. They each have also been the subject of multiple estate litigations. In combination, the two have served as fodder for controversies surrounding the agent’s authority over the trust and its terms. Pursuant to the provisions of Uniform Trust Code §602(c), a settlor’s agent acting under a power of attorney can revoke  or amend a revocable trust, when authorized by the terms of the trust or the terms of a power of attorney.[1]  New York has no comparable statute under the EPTL or the SCPA, or, for that matter, under the General Obligations Law. Stemming from this silence, came two decisions that addressed the issue, albeit with different results; the first, Matter of Goetz, 8 Misc 3d 200 (Sur Ct, Westchester County 2005), in the context of a revocable trust, and the second, Matter of Perosi v. LiGregi, 98 AD3d 230 (2d Dept 2012) in the context of an irrevocable trust. Both decisions provide valuable instruction for drafters and litigators.

In Goetz, the petitioner, a child of the decedent, contended that the decedent’s spouse lacked authority, as his attorney-in-fact,  to amend a revocable trust created by the decedent, in order to confer upon herself a limited power of appointment over the trust remainder. The subject power of attorney was executed in 1995 and provided the agent with the full authority included in the form at the time.

While the terms of the trust instrument, as originally executed, divided the trust principal equally among the grantor’s four children, the amendment in issue provided the grantor’s spouse with a limited power of appointment over the principal exercisable in favor of any one or more of the children as she determined. Several days after the amendment was drafted, it was signed by the decedent’s spouse, as his agent. Shortly thereafter, the decedent, who was ill at the time, passed away. Two years following the decedent’s death, his spouse passed away leaving a last will and testament expressly disinheriting the petitioner, and exercising the power of appointment in favor of her other three children.

The petitioner maintained that the trust amendment was invalid and exceeded the authority granted the decedent’s spouse under the power of appointment. The respondent, the executor of both the decedent’s and his spouse’s estates, claimed that the trust amendment was consistent with the decedent’s expressed wishes and testamentary plan, and was within the scope of the powers conferred upon the decedent’s spouse as his attorney-in-fact.

The court rejected the respondent’s position, and declared the trust amendment invalid, opining that a grantor’s power of revocation is generally a personal right that terminates upon death, unless otherwise provided in the trust instrument. The subject trust contained no such provision. Moreover, recognizing a revocable trust as the lifetime equivalent of a will, the court was troubled by a ruling that would sustain an agent’s authority to essentially alter a principal’s testamentary plan.

Finally, and most importantly, the court held that neither the trust instrument nor the power of attorney at issue explicitly granted the extent of authority sought to be invoked by the agent in amending the trust (see EPTL §7-1.17(b)), concluding “[i]nstruments must be construed as written by their terms, and courts may not add to or alter their provisions in the guise of interpreting them, nor interpolate into them broad grants of authority not included by the parties.”

In Matter of Perosi, the Second Department took a different view from the court in Goetz on the issue of the agent’s authority, and distinguished the opinion in reaching its result. It is questionable whether the distinctions drawn upon the Court are sound, given the rationale of Goetz, and the rules of construction invoked in Goetz in interpreting the subject trust and power of attorney.

As compared to the trust in Goetz, the trust instrument in Perosi was irrevocable, and was established for the benefit of the creator’s three children, one of whom was his attorney-in-fact. The trustee of the trust was the creator’s brother. The power of attorney executed by the creator granted his agent the authority to act with respect to “all matters”, as well as with respect to “estate transactions.” Additionally, the major gifts rider to the power authorized the agent to establish and fund revocable or irrevocable trusts, transfer assets to a trust, make gifts and act as grantor and trustee.

The attorney-in-fact, with the consent of the beneficiaries, executed an amendment to the trust pursuant to EPTL §7-1.9, which removed the named trustee and his successor, and designated two others, including the son of the attorney-in-fact, in their place. Two weeks thereafter, the creator of the trust died.

A petition was then filed by the new trustee and the attorney-in-fact for an accounting by the predecessor trustee, who moved to set aside the trust amendment on the grounds that the trust was irrevocable. The petitioners opposed, relying upon the provisions of EPTL §7-1.9, which permitted the amendment during the creator’s lifetime, with the beneficiaries’ consent.

The Supreme Court granted the trustee’s motion and denied the petition, finding that the power of attorney did not authorize the amendment of estate planning devices created prior to its execution. Further, the court held that the statutory right to revoke or amend an irrevocable trust was a personal right, which was not expanded by the terms of either the trust instrument or the power of attorney. The Second Department reversed.

The Court found that although the trust was irrevocable, the creator nevertheless possessed the authority to amend or revoke the instrument pursuant to EPTL §7-1.9. In view of the beneficiaries’ consent to the amendment, the Court was confronted with the issue of whether the power of attorney empowered the attorney-in-fact to effectuate the amendment on the creator’s behalf. Notably, despite the authority granted to the agent with respect to “estate transactions” and “all other matters”, the Court concluded that neither the power of attorney nor the General Obligations Law specifically authorized the attorney-in-fact to amend the trust. (cf. Goetz).

Nevertheless, as compared to the analysis in Goetz, this did not end the inquiry for the Court, which went on to observe that an attorney-in-fact is an alter ego of the principal, authorized to act with respect to any and all matters, with the exception of those which by their nature, public policy, or otherwise, require personal performance. The Court noted that these matters would include the execution of a principal’s Will, the execution of a principal’s affidavit upon personal knowledge, or the entrance into a principal’s marriage or divorce.

Finding that the amendment of the trust by the attorney-in-fact did not fall into any one of these categories, the Court concluded that since the trust did not prohibit the creator from amending the trust by way of his attorney-in-fact, “the attorney-in-fact, as the alter ego of the creator”, properly did so.

Notably, in reaching this result, the Court distinguished Goetz on two grounds; the first, to the extent that it relied on the principal that the power of revocation was a personal, not delegable right; and the second, that the Goetz trust specifically reserved to the creator the right to amend or revoke the trust. Nevertheless, despite these purported distinctions, it is difficult to reconcile the results in in Perosi and Goetz.

Indeed, both courts were concerned with the fact that neither the language of the trusts or the powers of attorney at issue authorized the agent to amend or revoke the trust instrument. Moreover, the fact, mentioned by the Perosi court, that the creator in Goetz reserved in the instrument a power to revoke or amend its terms, should not be considered a distinguishing factor that would justify a contrary result, since the trust in Perosi was irrevocable, and thus, would not have given the creator that right. Nevertheless, like the instrument in Goetz, the statute, EPTL §7-1.9, relied upon in Perosi, which authorized the trust amendment, also did not confer that right upon an attorney-in-fact.  However, rather than end the inquiry, as the court did in Goetz, that omission served as a basis for the Perosi court to find that the attorney-in-fact could amend the trust, a result antithetical to the principle enunciated in Goetz, which cautioned against “interpolating instruments into broad grants of authority not included by the parties.”

With the foregoing in mind, it would seem that the more critical distinction between the opinions in Goetz and Perosi is the fact that the former involved a revocable trust- – a testamentary substitute — and, as such, the equivalent of a will, which both the courts in Perosi and Goetz, recognized could not be amended or revoked by an attorney-in-fact.

The distinction aside, the lesson to be learned from both Goetz and Perosi is to insure that the language of a trust and/or power of attorney be specific as to the extent of the agent’s authority to amend or revoke the instrument.

[1] Although not yet adopted in New York, a New York Uniform Trust Code has been the subject of significant analysis by the New York State Bar Association and the New York City Bar Association.

On August 19, 2016, Governor Cuomo signed into law an amendment to CPLR §4503(b) which creates another exception to the attorney-client privilege in the case of revocable trusts. The first such exception, initially enacted pursuant to the provisions of CPA 354 (the predecessor to CPLR §4503[b]), provides that the privilege will not apply “in any action involving the probate, validity or construction of a will” (see CPLR §4503[b]).  The 2016 exception expands CPLR §4503(b) to now include actions, after the grantor’s death, involving revocable trusts.

The purpose of the attorney-client privilege is to promote the use of legal representation by assuring clients that they may freely confide in their counsel without concern that such confidences may be divulged to outsiders (see Matter of Colby, 187 Misc 2d 695 [Sur Ct, New York County 2001], citing Priest v Hennessey, 51 NY2d 62, 67-68 [1980]). Nevertheless, to the extent it shields evidence from disclosure, it obstructs the fact-finding process (see Matter of Colby, 187 Misc 2d 695, 697).

With this balanced approach in mind, the recent bill amending CPLR §4503(b) finds its justification in the pre-existing exception to the attorney-client privilege in the case of probate contests, and the fact that revocable trusts serve as the equivalent of wills.  However, it should be noted that the exception only applies after the death of the grantor, in recognition of the fact that a party, other than the grantor, has no standing to challenge a revocable trust during the grantor’s lifetime (see N.Y.S. Assembly Memorandum in Support of Legislation, citing Matter of Davidson, 177 Misc 2d 928, 930 [Sur Ct, New York County 1998]).

Many estate practitioners are familiar with litigated matters in which a charity interested in the proceeding is cited, as is the Attorney General, and both the Attorney General and private counsel for the charity appear in the proceeding. In such cases, both the Attorney General and the charity’s counsel represent the charity (although as a practical matter, since the charity has private counsel, the Attorney General may take a less pronounced role in the litigation, electing instead to defer to the charity’s chosen counsel).  What happens, however, when the status and identity of the charitable beneficiary is less than certain?  That was precisely the situation facing the New York County Surrogate’s Court in the probate contest involving the much-publicized estate of Huguette Clark.

Huguette Clark died on May 24, 2011, leaving a Last Will and Testament dated April 19, 2005, which disinherited her family.  However, just six weeks earlier, on March 7, 2005, Huguette executed a will naming her family as residuary beneficiaries.

Article FOURTH of the propounded will directed that the nominated executors form a private foundation to be named the Bellosguardo Foundation and “take all necessary steps to organize, operated (sic) and qualify said foundation as an educational organization, as defined by Section 501(c)(3) of the Code, for the primary purpose of fostering and promoting the Arts.”

In June, 2011, a bare two weeks after Huguette died, and notwithstanding that the propounded will had not been admitted to probate, three entities called the Bellosguardo Foundation were formed — one in California, one in Delaware, and one in New York.

Ultimately, members of Huguette Clark’s family, represented by Farrell Fritz, filed objections to probate.  The New York State Attorney General appeared in the now-contested probate proceeding to represent the charitable interests under the will.  In addition, a private law firm filed a Notice of Appearance in the proceeding, purporting to appear on behalf of an entity called the “Bellosguardo Foundation” (there was no indication which foundation — i.e., the California, Delaware, or New York foundations — the law firm purported to represent).

The probate proceeding was scheduled for trial in September 2013.  There were numerous motions submitted by the various parties in the months preceding the trial.  While most of those motions were evidentiary in nature, one, brought by Farrell Fritz on behalf of the Clark family, sought to strike the private law firm’s Notice of Appearance filed on behalf of the so-called “Bellosguardo Foundation.”  The family took the position that the foundation was not the foundation referenced in the will and, therefore, had no standing to participate in the trial.  Farrell Fritz argued on behalf of the family that the propounded will’s direction regarding the formation of a foundation had no legal effect prior to the admission of the will to probate.  Although the propounded will directed that the executors form a foundation, there were no executors prior to the will’s admission to probate, and, thus, the foundation referenced in the propounded will did not, and could not, exist prior to probate.  That a person incorporated an entity with the same name as the foundation to be formed in the event the propounded will were admitted to probate, and then caused that entity to appear in the probate proceeding, did not make the entity the “Bellosguardo Foundation” to be formed under the will.

Nor was it necessary to permit the foundation to participate in the proceeding, as the charitable interest under the propounded will was being adequately represented by the Attorney-General, who “has the statutory power and duty to represent the beneficiaries of any disposition for charitable purposes (EPTL 8-1.1(f); other cites omitted)” (Alco Gravure Inc. et al. v. The Knapp Foundation, 64 NY2d 458, 465 [1985]).  Moreover, while a charitable beneficiary has standing to participate in a litigated proceeding in which it is interested, the Attorney General’s standing to represent a charitable interest is exclusive where the charity’s status is indefinite or uncertain, or, to express it differently, where the charity is “not within a class of potential beneficiaries that is ‘sharply defined and limited in number’ (Alco Gravure, 64 NY2d at 465).”  (Matter of Rosenthal, [Helmsley Charitable Trust], 99 AD3d 573 [1st Dept 2012]).

Both the Public Administrator of New York County and the Attorney General’s office supported the Clark family’s motion. On the eve of the trial, Surrogate Anderson rendered her decision, granting the motion.  The Surrogate noted that, “[t]he Attorney General, who is charged under the Estate’s Powers and Trusts Law § 8-1.4(e)(2) with representing all charitable interests under the subject will, has been demonstratively adequate and diligent in representing the interests of the Bellosguardo Foundation to be formed.  Further, the Attorney General has exclusive standing to represent a beneficiary of a disposition for charitable purposes when such beneficiary is indefinite or uncertain (EPTL §8-1.1(f))” (Estate of Huguette M. Clark, NYLJ 9/27/13, p. 25, col. 1. [Sur Ct, New York County]).

Subsequently, the parties in the litigation were able to settle the contest.  Thereafter, the true Bellosguardo Foundation was formed, as mandated by the Propounded Will as admitted to probate by the Surrogate.

While the Court of Appeals last year upheld the validity of contingency fee agreements in estate matters, especially in litigation, where it approved contingency fees of over forty million dollars when the actual time spent was a fraction of that value (see Matter of Lawrence 24 NY3d 320 [2014]), a recent New York County Surrogate’s Court case, Estate of Fanny Goldfarb, NYLJ, Oct. 14, 2015, p.22 col.2, confirms that the size of an estate can still be a major factor in determining the reasonableness of a contingent fee, even though the services rendered and the result achieved were exemplary.

In Goldfarb, litigation counsel was retained by the executor to pursue a SCPA 2103 turnover proceeding to recover a co-op apartment that had been transferred to the decedent’s cousin prior to her death.  The fee arrangement was formalized in a written retainer agreement which provided for a contingent fee of one-third of any recovery relating to the transfer of the apartment.  The attorney commenced the proceeding on behalf of executor, and within six months a settlement was reached, whereby the coop apartment was returned to the estate plus $75,000 cash, waiver of a $100,000 bequest, and $6,163 in purported commissions relating to other transfers discovered to have been made to the respondent, which had not yet been brought before the court.

The attorney sought a contingent fee of $251,995, representing one-third of the value of the apartment plus the other monies and waivers recovered. The Attorney General opposed the fee, arguing that it was “extremely excessive.”

Relying primarily on the “size of the estate” criteria enunciated a Matter of Potts, 213 AD 59 (4th Dept 1925), aff’d 241 NY 593 (1925), the court reduced the contingent fee to $115,000, and ordered the attorney to refund the excess without interest.  The court concluded that “such allowance recognizes that the value of respondent’s services outweighs the time he spent in the matter, yet also recognizes that the other factors discussed above do not support a fee that, as the Attorney General notes, would make respondent ‘in effect the major beneficiary of the estate.’”

Fee cases are fact specific. However, contingency fee arrangements are particularly important for smaller estates where a fiduciary may be unable to find counsel who would handle the matter on an hourly basis, and without whom there might be no recovery.

On October 28, 2014, the Court of Appeals rendered its long awaited decision in In re Lawrence, 2014 NY Slip Op 07291, reversing the decision by the Appellate Division in which it was held that (1) a revised retainer agreement, under which the law firm received 40% of the net recovery (i.e. $44 million) was procedurally and substantively unconscionable and that fees should be determined under the original retainer; and (2) the claim to recover gifts made by the client to her attorneys was timely.

In upholding the revised retainer agreement, the Court stated that the most important factor in determining whether it was procedurally unconscionable was whether the client was fully informed upon entering into the agreement, in that the client had “full knowledge of all of the material circumstances known to the attorney” (Slip Op. at 18).  The hearing evidence demonstrated that Mrs. Lawrence, who was involved in every detail of the case, fully understood the revised retainer agreement, and that layperson could comprehend the mathematical calculations used to arrive at the 40% contingency fee. Refusing to engage in a “hindsight analysis” of the revised retainer agreement, the Court concluded that the revised retainer agreement was not substantively unconscionable in light of the risks taken by the attorneys, and the value of their services over two decades of contentious litigation during which there was a lengthy trial and several appeals.

Regarding the gifts, the Court found that the claim was time-barred, and that the statute of limitations was not tolled by the continuous treatment doctrine, which, the Court reiterated, applies only where there is a claim for professional misconduct, and the professional’s ongoing representation directly relates to the specific transaction giving rise to the malpractice claim.  The Court specifically distinguished between a dispute concerning an attorney’s malpractice in rendering services and a dispute over a client’s payment of a bill or making of a gift; a critical distinction for purposes of the policy underlying the continuous representation rule.  The rule exists because “the client should not be burdened with the obligation to identify the professional’s errors in the midst of the representation as the client is hardly in a position to know the intricacies of the practice or whether the necessary steps in the action have been taken” and thus, “cannot be expected to jeopardize his pending case or his relationship with the attorney handling that case during the period that the attorney continues to represent the person” (Slip Op. at 27).   With respect to a gift or fee dispute, however, the Court held that the giving of a gift is “not the subject of any prior or ongoing representation,” and therefore, disputing it would not “force a lay person to undertake actions that he is ill-equipped to carry out” or place the client at risk for interrupting corrective efforts.

Applying those principles to the facts before it, the Court found that the client’s voluntary gifts were unrelated to the lawyers’ provision of any legal services. Importantly, there was no underlying claim of malpractice against the attorneys who received the gifts. Thus, the seminal requirement to apply the continuous representation rule was missing.  The Court further determined that there was no need for the lawyers to have any future representation vis-à-vis the gifts or to take any “corrective action.” It then concluded, “the purpose underlying the continuous representation rule would not be served by its application” (Slip Op. at 29).

While attorney’s fees incurred by the fiduciary are generally reimburseable from an estate as a reasonable and necessary expense of administration, this is not the rule with respect to the legal fees incurred by a beneficiary. The different standard that applies was recently examined by Surrogate Mella in In re Frey, NYLJ, July 25, 2013, p. 25 (Sur. Ct. New York County).

Before the court was an application brought by counsel for a beneficiary to have its legal fees fixed for services rendered to the beneficiary in connection with her interest in the estate of her late mother. The executor of the estate did not oppose the application provided that the fees were charged to the beneficiary’s interest in the estate.

           

The record revealed that the services performed by counsel over a two year period resulted in its client in receiving emergency and regular distributions from the estate, loans against her legacy, and personal property that she was unable to obtain previously.  Since completing its work, counsel has not been able to contact its client and has not been paid.

           

The court noted that in a proceeding for the fixation of fees pursuant to SCPA 2110, the court is authorized to direct the source of payment either from the estate generally, or from the funds in the hands of the fiduciary belonging to the legatee. In examining this issue, the court relied on the factors outlined by the Court of Appeals in Matter of Hyde, 15 NY3d 186 (2010), that is: (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.

 

Based on this criteria, the court concluded that in pursuing her claim against the fiduciary, the beneficiary was not seeking to benefit or enlarge the estate, but only to secure her legacy. The court determined that there was no possibility that the other beneficiaries of the estate would benefit from the legal services performed, and thus, that it would be unfair to assess the other beneficiaries with the fees incurred.

Accordingly, the court fixed the fees and disbursements of counsel and directed that they be paid from its client’s share of the estate.