Determining the identity of permissible or necessary parties to an accounting proceeding is often a simple task. But in rare cases, the answer is not always so easy. Most recently, in Matter of Cohen, Nassau County Surrogate Edward W. McCarty III was called upon to determine whether a potential creditor of a trust beneficiary was a “person interested” in a trust accounting proceeding. The Court answered the question in the negative.

Michael S. Cohen, died on March 18, 2002. Under the terms of his will (which was admitted to probate), the decedent directed that a trust be created for the benefit of his adopted son, Kevin Cohen (“Cohen”), the decedent’s only child.  The will further directed that the trust terminate ten years after the decedent’s death, i.e., March 18, 2012, and that all remaining principal and income be distributed to Cohen (or, if he did not survive the termination of the trust, his minor daughters).

Cohen, formerly an attorney, was convicted in 2010 of 37 counts (including second-degree grand larceny, 11 counts of third-degree grand larceny and 10 counts of third-degree forgery) for stealing more than $300,000 from clients who thought he was assisting them in arranging adoptions; but the children did not actually exist. A criminal restitution order under Criminal Procedure Law § 420.10 was entered against him. The Lawyers Fund for Client Protection (the “Fund”)  reimbursed 10 of Cohen’s former clients, all of whom assigned and subrogated their claims against Cohen to the Fund.

In January 2011, the trustee filed an intermediate account with the Surrogate’s Court. The trustee named as an interested party the Nassau County Attorney’s Crime Victims Project, which represented Cohen’s former clients in their claims against him. The County Attorney’s Office represented the interests of the former clients before the Lawyers Fund became involved, and it continued to represent one client who did not seek reimbursement from the Fund.

Both the Fund and the Nassau County Attorney filed objections to the account. The Fund, for its part, maintained that it had an interest in the accounting because of open questions on whether particular estate assets (including an annuity) were part of the trust or owned by Cohen separately.

Wendy H. Sheinberg, Esq., the guardian ad litem for Cohen’s two minor children, moved, inter alia, to amend the petition and account to strike the Nassau County Attorney and the Fund as interested parties, and to dismiss their objections to the account.

The Court began its analysis by noting that the statutory definition of “person interested” specifically excludes creditors. Indeed, SCPA § 103(39) provides that “[a] creditor shall not be deemed a person interested.” The Court then reviewed the cases relied upon by the Fund and the County Attorney, determining them to be distinguishable from the case at bar. Instead, the Court relied upon Matter of Lainez, 79 AD2d 78 (2d Dept 1981), in which the Appellate Division, Second Department, held that a creditor of a beneficiary who is still alive is not a proper party to an account in which the beneficiary has an interest.

The Court also rejected the agencies’ argument that affording them “interested person” status “would be a more efficient way for them to uncover information about Cohen’s assets than if they had to use other discovery methods.” However laudable the goal of efficiency, the Court explained, it “does not give rise to a privilege, right, or status which would otherwise be unavailable.”

Accordingly, the Court determined that as mere potential creditors of a living trust beneficiary, the Fund and the Nassau County Attorney were not persons interested in the decedent’s estate or the accounting. It therefore granted to guardian ad litem’s motion.

The Surrogate’s decision does not leave the two agencies without a remedy, however. The Surrogate’s dismissal of the agencies’ objections was explicitly made without prejudice to their commencing a proceeding pursuant to Executive Law §632-a (6) – the so-called “Son of Sam” law – and seeking the issuance of a preliminary injunction restraining the payment of trust principal to Cohen upon the termination of the trust. The Surrogate also directed that no payments from the trust be made to Cohen for 30 days upon its termination (presumably to give the agencies the opportunity to make an application under the Son of Sam law).

In a recent decision in the Matter of Lally, the Schenectady County Surrogate’s Court decided an issue of standing on a set of particularly interesting facts.

The case involved a charitable trust agreement that directed that “St. Clare’s Hospital of Schenectady, New York Foundation Inc. Schenectady, New York” (along with various other charitable beneficiaries) receive a portion of the remainder of the subject trusts. 

According to the petitioner, St. Clare’s Hospital of Schenectady, N.Y. Foundation, Inc. (the “Foundation”) is a not-for-profit corporation established to support and assist St. Clare’s Hospital of Schenectady (the “Hospital”) in expanding and developing its services to the community. However, in 2008, the New York State “Berger Commission” mandated that the Hospital close its doors. Allegedly, the commission required the Hospital to surrender its license to operate and to execute an Asset Transfer Agreement with Ellis Hospital (“Ellis”), which assumed the sole responsibility of providing hospital and other healthcare services previously provided by the Hospital, and is the sole remaining hospital in Schenectady County. While the Foundation remains in existence as a not-for-profit corporation, and holds significant assets, it no longer supports or assists the inoperative Hospital. 

          

The corporate trustee of the subject trusts, Trustco Bank, brought a cy pres proceeding in the Surrogate’s Court, to determine whether the Hospital’s relinquishment of its license to operate renders the administration of the subject trusts according to their literal terms impractical or impossible. Ellis filed a Notice of Appearance in the proceeding. The Foundation moved to “reject” the Notice of Appearance, in essence asking that the court rule that Ellis had no standing to participate in the proceeding. The Attorney General filed papers in support of the Foundation’s motion, and Ellis, naturally, opposed it. The trustee took no position.

 

By way of background, courts generally entertain cy pres proceedings when the intended recipients of a charitable donation can no longer be identified. In such cases, courts are authorized to release funds for purposes as close as possible to the wishes of the donors. As one court explained,

 

the cy pres doctrine takes its name from the Norman French expression, cy pres comme possible, which means “as near as possible.”  The doctrine originated to save testamentary charitable gifts that would otherwise fail.  Under cy pres, if the testator had a general charitable intent, the court will look for an alternate recipient that will best serve the gift’s original purpose.

                                (Airline Ticket Comm’n. Antitrust Litig. Travel Network, Ltd. v United Air Lines,

                                Inc., 307 F3d 679, 682 [8th Cir 2002]).

 

The court first addressed — and rejected — various procedural arguments. First, it rejected the Attorney General’s argument that it was premature to determine Ellis’ standing prior to the court deciding whether it would exercise its cy pres power in the first place. Second, it rejected the argument that the court should not reach the issue of standing because Ellis neither initiated the proceeding nor was suing to enforce its claim to the subject charitable gift. Having rejected those procedural arguments, the court went on to address the merits of the motion, i.e., the issue of Ellis’ standing to participate in the proceeding.

 

The parties agreed that the court should apply the standing rule enunciated by the Court of Appeals in Alco Gravure v. The Knapp Foundation, 64 NY2d 458 (1985). That case was a declaratory judgment action brought by corporate plaintiffs whose employees were the intended beneficiaries of a charitable foundation.  In deciding the issue of the plaintiffs’ standing to maintain the action, the Court held that one who is merely a possible beneficiary of a charitable trust, or a member of a class of possible beneficiaries, is not entitled to sue for enforcement of the trust. Rather, the Attorney General has the statutory power and duty to represent the beneficiaries of any disposition for charitable purposes. However, the Court also recognized an exception to the general rule, where a particular group of people has a special interest in funds held for a charitable purpose, as when they are entitled to a preference in the distribution of such funds and the class of potential beneficiaries is sharply defined and limited in number (see id. at 465).

 

The Surrogate noted that the facts in Alco Gravure differed from the facts of the case before it because, first, Alco Gravure was not a cy pres proceeding; second, the plaintiffs in Alco Gravure were members of a named class of beneficiaries (i.e., persons employed by the defendant corporation); and, third, the issue in Alco Gravure pertained to the plaintiffs’ standing to sue, not standing to appear and participate as an intervenor as in this case. Nevertheless, the court stated that it would apply the rules enunciated in Alco Gravure, there being no other authority providing any superior guidance.

 

Applying those rules, the court rejected the argument advanced by the Attorney General and the Foundation that Ellis is merely one of an undefined class of hundreds of potential beneficiaries of a cy pres-directed distribution of the trust, with no preferred status in a case. Instead the court determined that Ellis had a unique, contractual relationship with the Hospital that set it apart from all other potential charitable beneficiaries, and that therefore it was entitled to a preference in the distribution. The court based its determination on the facts regarding the Berger Commission’s mandate and the Asset Transfer Agreement between the Hospital and Ellis, by which Ellis acquired the Hospital’s assets and assumed its hospital services.

 

However, the court was careful to emphasize that its ruling should not be interpreted as meaning that in the event it determined to exercise its cy pres power, Ellis would be the likely recipient of the subject charitable disposition.  The court’s ruling only provided Ellis with the status of an interested party, with the right to file a responsive pleading, participate in discovery, make motions, and participate during the trial.

 

Although the importance of the court’s decision in Matter of Lally might not extend much further than the specific facts of that case, it certainly provides further authority for the proposition that the Surrogate’s Courts are, first and foremost, courts of equity.