Category: Accountings

What is a constructive trust?

Parties often request a constructive trust during estate litigation and family disputes over real property and other assets. This claim generally seeks to recover property from someone who has obtained it unfairly. 

A constructive trust is an equitable remedy “erected whenever necessary to satisfy the demands of justice” (Latham v Father Divine, 299 NY 22, 27 [1949]; see also Beatty v Guggenheim Exploration Co., 225 NY 380 [1919, Cardozo, J.]).  It may be imposed “‘[w]hen property has been acquired in such circumstances that the holder of the legal title may not in good conscience retain the beneficial interest’” (Sharp v Kosmalski, 40 NY2d 119, 121 [1976], quoting Beatty, 225 NY at 386).

There are four elements of a constructive trust: (1) a confidential or fiduciary relationship; (2) a promise; (3) a transfer in reliance of such promise; and (4) unjust enrichment (Sharp, 40 NY2d at 121).  However, these elements have been referred to as merely “factors” (Simonds v Simonds, 45 NY2d 233, 241 [1978]).

In a proper case, the court may impose a constructive trust even if all the elements are not established (see id.; Rowe v Kingston, 94 AD3d 852, 853 [2d Dept 2012]; Cruz v McAneney, 31 AD3d 54, 59 [2d Dept 2006]).  The flexibility of the claim “is limited only by the inventiveness of men [and women] who find new ways to enrich themselves unjustly by grasping what should not belong to them” (Simonds, 45 NY2d at 241 [internal quotation marks and citations omitted]).

What is the fiduciary tolling rule?

In Estate of Mathai Kolath George, the Appellate Division, Third Department applied the fiduciary tolling rule to a constructive trust claim in a case involving a fiduciary’s misconduct and her removal.  There, after the decedent passed away, the estate’s fiduciary terminated the decedent’s contract for the purchase of a mansion and entered into a new contract to purchase the property on behalf of an LLC, an entity in which she was the managing member, for the remaining purchase price left on the decedent’s contract.  The then-fiduciary also allegedly used estate funds to pay the remainder of the purchase price left on the contract.    

Several years later, following a trial, Surrogate’s Court removed the fiduciary from her position as executrix and revoked her letters testamentary, finding that she violated her fiduciary duty to the estate by, among other things, failing to identify or account for the estate’s assets, engaging in self-dealing, and commingling the estate’s assets with her personal assets.

A petition was later filed in the estate seeking, among other things, the imposition of a constructive trust on the mansion.   The LLC and another entity filed motions seeking to dismiss the case based on the statute of limitations defense. 

The court concluded that a constructive trust is subject to a six-year statute of limitations and accrued on the date on which the former fiduciary cancelled the decedent’s contract and entered into the contract to purchase the property on behalf of the LLC.

The Court held as follows:

“Under the fiduciary tolling rule, a claim alleging wrongful conduct by an individual in his or her fiduciary capacity does not accrue until there is an open repudiation of the fiduciary obligation or a judicial settlement of the fiduciary’s account ….  This rule tolls the statute of limitations for all misconduct committed by the fiduciary prior to repudiation of its obligation or termination of the fiduciary relationship ….  since, absent either repudiation or removal, the aggrieved parties were entitled to assume that the fiduciary would perform his or her fiduciary responsibilities …, and it is highly unlikely that a sitting fiduciary would assert a constructive trust claim against himself or herself” (internal punctuation marks omitted).

Under this rule, the toll continued until a successor fiduciary was appointed.  The Court found that the statute of limitations was tolled from the date the fiduciary received letters testamentary, until her removal and continuing until letters were granted to a successor fiduciary for the estate, a total toll of four years, five months and 14 days.  Taking this tolling into account, the Court concluded that Surrogate’s Court should not have dismissed the claim based on the statute of limitations defense.

Does SCPA 2110 Authorize Payment of a Beneficiary’s Legal Fees from the Estate?

“Under the general rule, attorneys’ fees and disbursements are incidents of litigation and the prevailing party may not collect them from the loser unless an award is authorized by agreement between the parties or by statute or court rule” (A. G. Ship Maintenance Corp. v Lezak, 69 NY2d 1, 5 [1986]).  This rule limits this court’s discretion and authority to award fees to a beneficiary payable from an estate (see Matter of Urbach, 252 AD2d 318, 321 [3d Dept 1999] [“all parties to a controversy, the victors and the vanquished, [must] pay their own counsel fees”]; see also Matter of Rodken, 2 AD3d 1008, 1009 [3d Dept 2003] [“An attorney may be compensated from estate funds only for services that benefit the estate”]; Matter of Baxter [Gaynor], 196 AD2d 186, 190 [4th Dept 1994]).  

To be compensated for legal fees from an estate, the “legal services [must] have been rendered for the benefit of the estate as a whole, resulting in the enlargement of all the shares of all the estate beneficiaries” (Matter of Burns, 126 AD2d 809, 812 [3d Dept 1987]; Matter of Wallace, 68 AD3d 679, 680 [1st Dept 2009]; Matter of Baxter [Gaynor], 196 AD2d at 190; see also Matter of Kinzler, 195 AD2d 464, 465 [1st Dept 1993]; Matter of Carver, 19 Misc 3d 1110[A], 1110A, 2008 NY Slip Op 50632[U], *3 [Sur Ct, Essex County 2008] [citing cases]).

On the other hand, “where the legal services rendered did not benefit the estate but benefitted only the individuals whom the attorney represented, the attorney must seek compensation from the clients individually” (Matter of Wallace, 68 AD3d at 680; see also Matter of Rodken, 2 AD3d at 1008; Matter of Baxter [Gaynor], 196 AD2d at 190).

Appellate Court Victory: Matter of Gordon

In a 3-2 split decision, the Appellate Division, Third Department reversed an order of the Surrogate’s Court of Albany County (Maney, S.), which had denied our motion seeking to disqualify the other side’s counsel. 

The appellate court agreed that opposing counsel was disqualified from representing the other side in the case based on opposing counsel’s prior participation in the same estate as a former judge.  The full decision is available at, http://decisions.courts.state.ny.us/ad3/Decisions/2021/529943.pdf

Summary Judgment in a Contested Accounting Proceeding- Part II

As explained in our prior post from May, “Summary Judgment in a Contested Accounting Proceeding – Disposing of Meritless Objections“, the high standard imposed on a fiduciary creates a low burden for a party to contest the fiduciary’s accounting. Thankfully, the fiduciary may move for summary judgment to dismiss objections that ultimately turn out to be meritless.

But what happens when the opposing party questions the reasonableness of a fiduciary’s conduct. Is the appropriate exercise of the fiduciary’s discretionary power always a question of fact necessitating a hearing? The simple answer is no.

The general rule in New York is that a court will not interfere with the exercise of a trustee’s discretion except in limited circumstances (see e.g. Matter of Hilton, 174 App Div 193 [1st Dept 1916]; Matter of Mitchell’s Will, 30 Misc 2d 781 [Sur Ct, Kings County 1961]; Matter of Irrevocable, 2005 NY Misc LEXIS 3899 [Sur Ct, New York County Dec. 14, 2005]). A party therefore may generally not advocate that the court should substitute its judgment for that of the Trustee’s. This is not the appropriate standard (see Matter of Hilton, 174 App Div at 193; Restatement [Third] of Trusts § 50). Rather, the party opposing summary judgment should tender evidence of fraud, bad faith, or an abuse of discretion to justify a hearing (see e.g. Matter of Hilton, 174 App Div 193 [1st Dept 1916]; Matter of Mitchell’s Will, 30 Misc 2d 781 [Sur Ct, Kings County 1961]; Matter of Irrevocable, 2005 NY Misc LEXIS 3899 [Sur Ct, New York County Dec. 14, 2005]).

In Matter of Hilton, 174 App Div 193 (1st Dept 1916), for example, the appellate court reversed an order of the court below for an increase in annual trust payments to the beneficiary, based on the lack of any evidence demonstrating an abuse of discretion (see also Matter of Irrevocable, 2005 NY Misc LEXIS 3899 [Sur Ct, New York County Dec. 14, 2005]; Restatement [Third] of Trusts § 50). Similarly, Matter of Mitchell’s Will, 30 Misc 2d 781 (Sur Ct, Kings County 1961), the court declined to set the matter down for a hearing unless the Objectant submitted proof that “the trustees’ action amounts to an abuse of discretion, bad faith, arbitrary action or fraud.”

In short, there are numerous cases granting summary judgment in favor of the fiduciary in accounting proceedings. This is especially true where the trust agreement provides the Trustee with discretion and there is no evidence of any abuse of that discretion.

Summary Judgment in a Contested Accounting Proceeding – Disposing of Meritless Objections.

Courts often use the term “punctilio of honor” to describe the high level of care and attention required of a fiduciary. The fiduciary must always act cautiously and carefully. But even the most careful fiduciary may still encounter an objection to her actions. There may be a disgruntled family member looking to harass the fiduciary or a party looking to squeeze the estate for some extra cash. Whatever the motive behind the objection, the “punctilio of honor” standard creates a low burden for a party to contest the account. Thankfully, the fiduciary may move for summary judgment to dismiss meritless objections in a contested accounting proceeding.

The summary judgment standard is the same as in any other case. The standard is found in CPLR 3212 and outlined in Zuckerman. First, the fiduciary must establish her defense sufficiently to warrant the court as a matter of law to direct judgment in her favor, and she must do so by tendering evidentiary proof in admissible form (see CPLR 3212 [b]; Zuckerman v City of New York, 49 NY2d 557, 562 [1980]). If the fiduciary meets this burden, the burden shifts to the opposing party to show facts sufficient to require a trial of any issue of fact (see CPLR 3212 [b]; see Zuckerman, 49 NY2d at 562).

In terms of practice, the fiduciary satisfies her initial burden by showing that the account is complete and accurate (see Matter of Assimakopoulos, 2017 NY Slip Op 32821[U] [Sur Ct, New York County 2017]). This is often done by submitting the account with an affidavit attesting to its accuracy (id.; see Estate of Curtis, 16 AD3d 725 [3d Dept 2005]). The fiduciary should therefore submit the pleadings, the account, and the affidavit in support of the account. To avoid any doubt, the fiduciary should also submit additional affidavits addressing each specific objection to the account and tender sworn testimony and other exhibits in support of her position. This will provide the fiduciary with the best chance of success on the motion.

If the fiduciary meets her initial burden, the objectant will have to tender admissible evidence to establish that the amounts set forth in the account are inaccurate or incomplete (Estate of Curtis, 16 AD3d at 726; Matter of Assimakopoulos, 2017 NY Slip Op 32821[U] [Sur Ct, New York County 2017]). This procedure smokes out the weak objections from the strong ones and requires the objectant to prove that each objection is strong enough to justify conducting a trial.

As part of the motion strategy, the fiduciary should always serve the motion with enough notice to permit her to demand that answering papers be served at least a week before the return date. This will provide the fiduciary with a chance to review the answering papers and provide a reply. The fiduciary’s reply should highlight the lack of evidentiary support behind the objections and the golden rule set forth in CPLR 3212 and Zuckerman that “mere conclusions, expressions of hope or unsubstantiated allegations or assertions are insufficient” for an objectant to withstand dismissal (Zuckerman v City of New York, 49 NY 2d at 562).

Goodbye, objections. Goodbye.

What is the Statute of Limitations for a Turnover Proceeding Under SCPA

A SCPA Article 21 proceeding may be used to recover the assets of the decedent when they are wrongfully transferred during the decedent’s lifetime. The issue becomes difficult when you ask when the proceeding should be commenced.

The answer to this question depends on the nature of the underlying wrongdoing. Generally, the applicable statute of limitations is three years, accruing on the date when the property was taken. This is based on equating the proceeding to actions in replevin or conversion.

The applicable period, however, may be much longer. Where actual fraud is alleged, for example, the statute of limitations is generally the later of six years from the fraud or two years from its discovery. Similarly, where a constructive trust is sought or the claim involves allegations of the abuse of a power of attorney, the limitations period is generally six years.

The time period to sue may also be extended even further based on when the claim accrues. For example, a claim involving the abuse of a power of attorney may not begin to run until the fiduciary relationship has been terminated.

Learning from Sumner Redstone: A Warning to Estate Planners and Other Professionals

So, the legal drama involving Sumner Redstone and his live-in companion, Ms. Herzer, has settled. But is this the end?

Not exactly. It is reported that Mr. Redstone’s estate planning counsel remains a defendant in another action brought against her by Ms. Herzer.

In the pursuit of money, the new frontier is pursuit of the professionals involved in an individual’s planning. The trend is to bring claims against lawyers and accountants and other professionals – why – because they ordinarily have insurance! There is a growing and obvious alarming trend to bring these cases against professionals, with thin, little or no merit with the intent to scare up a quick settlement. Many attorneys who take these cases take them on a contingency fee arrangement. Often the cases turn out poorly for the claimant plaintiff.

We advise professionals to reject these extortion style attacks. In our experience, the cases often are poorly thought through and designed and often seek to apply a cheap front-end bully attempt that often ends in a fold up and blow away outcome.

The other consequence of this type of litigation is further satellite litigation spawned by these cases. When attorneys are sued, they often consider impleading accountants and other professionals into the case. The thinking is to bring them into the case because they have insurance.

Apparently in the Redstone case $75 million was not quite enough for one litigant.

Sumner Redstone – The End?

With under a week left before trial, the case with his live-in companion has become settled. In the end, Manuela Herzer will pay back $3.25 million of the reportedly $75 million he bestowed on her. Sydney Holland, another female companion who reportedly received $75 million, had her own lawsuit and that case settled last year.

This has gone on since 2015. Ms. Herzer’s case alleged federal Rico claims against Redstone’s daughter where she argued that there was a conspiracy between daughter and father to remove her from the mansion and cut her out of his will. Most of that case was dismissed last year.

This is a big settlement, with big numbers and significant potential future ramifications. Control of a media empire is at issue. Ms. Herzer will no longer remain in his will. All the appeals will be discontinued. Which leads to a few questions.

How much does a matter like this cost?

Her haul is reported to be a lot of gifts, including $45 million in stock options, a home worth about a cool $2 million, almost $10 million in home repairs, and items purchased while shopping. She was in for about $70 million or so after 3 1/2 years of litigation. If her lawyers took the case on a contingency, she may have netted 2/3rds, after expenses. That would be about $47 million to her, and $23 million to her counsel.

That seems like a high fee for three and a half years of work. If a lawyer worked full time on the case for a year at $800 per hour, the annual billing before paying overhead could be $1.6 million. For 3 1/2 years that would be $5.6 million in gross fees, assuming full time work on the case all day, every day. The contingency arrangement looks pretty good for the lawyer here. Clearly there was risk in the case and the certainty of a stiff fight among a lot of family members and others.

The reported terms of the settlement are that each side pays their own respective legal fees. A source for the media (unnamed but reportedly close to the case) has stated that the legal fees are ten to twelve million dollars – for each side in the case. Is that reasonable?

In New York that is the standard – is the fee reasonable? In much estate and trust litigation in New York, the fees are subject to the review of the court if they are paid from the estate or trust. The court’s authority is ordinarily modernly derived from Matter of Stortecky v. Mazzone, 85 NY2d 518 (1995). That case stands for the proposition that the judge most always has the power and authority to review the fees.

Another leading case in New York is Matter of Potts, 213 AD 59 (4th Dept. 1925). These two long standing and often cited cases essentially distill down to several factors: the time spent, the difficulties involved in the matters in which the services were rendered, the nature of the services, the amount involved, the professional standing of the counsel, and the results obtained.
In this case, the factors could probably be satisfied.

These types of cases are often costly based on the factual detail and nuances involved in the proof of the transactions that are the subject of the case. The cases are also often costly because they require the testimony of expert witnesses. For example, doctors charge by the hour to review the medical records, offer opinions, provide their time consulting on the case and ultimately, giving up a day practicing medicine to testify in a court room. They charge for the lost opportunity. A day in court with a credible doctor in New York can cost $10,000, for the day. Most require payment of all expenses and the payments are often required to be made up front with a non-refundable policy.

Economists, and accountants are often called as witnesses as well.

Do You Trust Your Brother?

The names are different, but the facts are often the same. Unfortunately, more often than not, the outcome is also the same. The outcome does not have to be the same in every case. The maxim: an ounce of prevention is worth a pound of the cure is sadly most fitting.

Illness / Rely on family

Floyd W. Fisher was diagnosed with stage IV lung cancer in July 2015. Shortly after his diagnosis Floyd named his brother Larry Duane Fisher as his agent under a durable power of attorney. This document, which is very common, gave Larry complete control over his brother’s affairs. Presumably this was a sound decision. Larry had been a deputy for the Kit Carson Sheriff’s office. Larry told Floyd’s daughter not to worry and promised her that when her father died, he would handle the estate and file a probate case with the court. Certainly, the family was relieved that Floyd’s affairs would be handled in a competent trustworthy manner by a family member with a law enforcement background.

Death / Suspicion

Later that year in December, Floyd died. With no probate having been filed by Larry, Floyd’s daughter petitioned the court to handle his estate. After her appointment she found out the truth.

The truth

Larry stole from his deceased brother’s estate. He drained a bank account with more than $200,000, established for his brother’s care and treatment, down to $13.59.

He sold a piece of real property that had been in his brother’s wife’s family for generations to obtain funds for Floyd’s care. Almost $200,000 from that sale was earmarked for “the sole purpose of Floyd’s care and benefit and to pay his medical bills”. Larry changed the address on the account to his home and began to transfer the funds to several different accounts, including one for his teenage son.

Larry bought a Toyota truck for about $45,000 and purchased multiple guns with his brother’s money.

The outcome

In the end, the total amount spent from the account on Floyd’s care was $13,192.15, which included the cost of his funeral, $4,870.

In May 2017, Floyd’s daughter filed a criminal complaint against her uncle Larry. On December 6, 2018, Larry was found guilty by a jury in Denver Colorado of felony theft.

While the outcome may be just, it is unfair to the victims and leaves the family of the decedent with no real remedy if they cannot cover the assets.

What can be done to prevent this?

Prevention

The outlook and suggestions presented on prevention is based upon experience in litigation of this nature.

Retain a respected and experienced lawyer knowledgeable in the planning practice area. Great resources for referrals to those professionals are other lawyers, CPA’s, bankers and asset or investment advisors.

Do not make the decision to grant a power of attorney to anyone lightly – including family and particularly, “friends”. In many instances, friends and family are unsuitable agents due to conflicts, family animosity, jealousy and insatiable temptation. Professional advice concerning suitability of the intended agent is highly beneficial and can prevent a bad outcome. Using a professional can allow for a background check, credit check or other appropriate inquiry into the proposed agent – before the documents are signed.

Consider appointment of a disinterested person. Family members often are willing to serve for free. Why? Indeed, in many instances the principal does get what he pays for. When family members or friends offer to serve for free the professed altruism must be critically assessed. An agent can be compensated by the principal. Fair, but nevertheless relatively modest compensation has the potential to expand the class of persons suitable to serve as an agent.

Consider utilizing more than one person. New York law allows for more than one agent to be nominated and for the principal to decline to allow them to act separately. At the outset two individuals may be appointed to act together. Consider checks and balances and perhaps a monitor to review and supervise the actions of the agent. Any agent suitable for consideration for appointment must be a person absolutely trusted.

Split the duties among a small number of trusted people or create some redundancy so that more than one person has knowledge of the finances and the transactions as they occur. An easy measure that affords a lot of potential protection is requiring that more than one account statement be issued each month and that they be mailed to different persons. For example, the agent and the principal’s accountant.

Do not appoint a person susceptible to creditors, predators, greed or temptation.

Avoid new “friends” who are merely acquaintances. For example, a new home health aide, handyperson or other similar service provider or helper.

Involve professionals. Consider utilization of a banker, lawyer, CPA or other similar professionals who are regulated, supervised or licensed, and often insured.

Another option to consider is a springing power of attorney instead of a present grant of total control. The benefit of this technique is that the power is not granted to the agent until the happening of an event – often a medical or capacity related decline.

Conclusion

With counsel, Floyd might have been better advised to establish a trust. There was no indication that he lacked the capacity to do so. He certainly had sufficient assets to justify the effort and the work. A trust for his benefit during his life might well have prevented all of the harm. He could have nominated a local bank to act as the trustee during his life. This approach would have almost certainly prevented the outcome here.