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

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

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

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

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

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

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

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

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

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

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

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

Award of Legal Fees Pursuant to Contract

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

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

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

Award of Legal Fees Pursuant to Statute

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

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

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

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

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

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