Summary Judgment in a Contested Accounting Proceeding- Part II

As explained in our prior post from May, 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.

Can a Felon Serve As A Fiduciary?

SCPA § 707 sets forth a list of ineligibles – those persons automatically disqualified from serving as a fiduciary in Surrogate’s Court. The statute is clear: felons cannot serve. It does not matter when the felony occurred, the age of the offender at the time, or the type of crime committed. All felons have been branded as unsuitable to manage the affairs of others in Surrogate’s Court.

Notwithstanding the prohibition, felons have argued that exceptions exist and that a certificate of relief from disabilities renders them eligible. This is based on language in the Correction Law providing that a certificate may relieve a felon from “any forfeiture or disability … automatically imposed by law by reason of [the] conviction” (Correction Law § 701 [1]). This statute generally trumps “any other provision of law” to prevent the “automatic forfeiture of any license…, permit, employment, or franchise, including the right to register for or vote at an election, or automatic forfeiture of any other right or privilege” (Correction Law § 701 [1]).

Despite this language, the Surrogate in Matter of McNair was not convinced. There, the court concluded that a certificate does not alter the mandate of SCPA 707. According to the court, the Correction Law “merely affords [a felon] the privilege of obtaining gainful employment” and that a felon “remains ineligible to hold public office, a position for which society’s trust is rightfully expected” (Matter of McNair, 16 Misc 3d 1102[A], 2007 NY Slip Op 51223[U] [Sur Ct, Dutchess County 2007]).

The conclusion reached in the McNair case appears to be a minority view. In Matter of Pullman, for example, the Second Department held that the certificate indeed removes the automatic disqualification (89 AD2d 608 [1982]; Matter of Bashwinger, 92 Misc 2d 716 [Sur Ct, Albany County 1978]; see also Matter of Smith, 14 Misc 3d 1232[A] [Sur Ct, Bronx County 2007]).

Even these cases, however, recognize that a court may still deny the appointment of a felon in its discretion, and that a certificate does not preclude the court from denying the appointment under SCPA 707 (1) (e), which renders persons ineligible for other reasons, including dishonesty (see Matter of Pullman, 89 AD2d at 608; see also Correction Law § 701 [3] [permitting any judicial authority from relying upon the conviction as the basis for the exercise of its discretionary power to suspend, revoke, refuse to issue or refuse to renew any license, permit or other authority or privilege]).

The Surrogate in the McNair case, for example, relied on SCPA 707 (1) (e) as an alternative basis for its decision. There, the felon was a former attorney who had been convicted of grand larceny in the third degree and disbarred. The court found persuasive that at least two prior estates had allegedly suffered financial losses as a result of the felon’s dishonesty.
Similarly, in the Pullman case, the court concluded that the felon was ineligible as a “dishonest” person despite the certificate. He was indebted to the estate, had exercised undue influence over the decedent and commingled trust funds in another case, and had no less than 13 unsatisfied judgments against him.

So, to answer the question posed above – yes, convicted felons may serve as fiduciaries, but only the honest ones.

How the Safe Act Impacts the Transfer of Firearms In an Estate

Inheriting a firearm can be a complicated process. A fiduciary of an estate cannot just give the firearm directly to an heir without the risk for potential criminal liability. Unlike other personal property, passing firearms on to a loved one after the death of the owner has its own unique rules and can be a challenge to the estate’s fiduciary if not specifically addressed during the estate planning stage.

New York’s Secure Ammunition and Firearms Enforcement Act, better known as the SAFE Act, can create the risk of criminal liability for executors and administrators as well as for the estate’s heirs where the parties are unaware of the rules.

Pursuant to the SAFE Act, a fiduciary must lawfully dispose of the firearm within fifteen days after the death of the owner. If the fiduciary is unable to transfer the firearm to the heir within fifteen days, the firearm must be surrendered to a law enforcement agency. The law enforcement agency will hold the firearm until the heir is licensed or otherwise permitted to take possession. However, if the agency does not receive a request to deliver the firearm within one year of the delivery, the firearm will be deemed a nuisance and destroyed (NY Penal Law § 400.05[6]). Fifteen days is a relatively short amount of time in which to make the transfer because a fiduciary cannot lawfully transfer or dispose of a firearm until he has been appointed by the Court.

Before the firearm can be given to the heir, the fiduciary must (1) know that the decedent legally owned the guns; (2) know that the specific beneficiary of the guns may legally own a gun and (3) adhere to proper transfer procedures. The heir receiving the decedent’s firearm must hold a valid New York State gun permit. Illegal possession of a decedent’s registered firearm without following the statutory protocol for estate transfer to an heir is a misdemeanor, specifically, criminal possession of a weapon in the fourth degree (NY Penal Law § 265.01).

In addition to a state firearm permit, a federal background check is required for a firearm to be transferred. But there is an exception to his rule when it comes to transfers between immediate family members such as spouses, domestic partners, children and step-children (General Business Law § 898).

Contributed by Jacque K. Vincent, J.D.

Do I Need to Pay a Bequest if the Beneficiary Owes the Estate Money?

A fiduciary has a legal obligation to make distributions to the beneficiaries of the estate. But what happens when a beneficiary owes the estate money? Does the law permit the fiduciary to offset the bequest with the debt? Or does the fiduciary have to first make a distribution and then sue the same beneficiary to recover the funds to pay the debt?

As a practical matter, one would assume that an offset is permitted. However, at first blush, the EPTL and SCPA do not appear to address the issue. They provide a beneficiary with the right to compel payment. But they do not expressly provide that a fiduciary may assert defenses to payment (see EPTL § 11-1.5; SCPA § 2102 [4] [“A proceeding may be commenced to require a fiduciary … to deliver a specific bequest or property to a person entitled thereto or to pay a legacy…”]). The only defense in the statute appears to be the timing of the payment: under EPTL § 11-1.5(c), a beneficiary generally must wait at least seven months from a fiduciary’s appointment before demanding payment.

The procedural rules of the SCPA and CPLR nevertheless permit a fiduciary to file an answer and assert defenses when the beneficiary commences a proceeding to compel payment. The fiduciary therefore has an opportunity to explain to the court why the legacy a or distributive share should not be paid in whole or in part (see 6 Warren’s Heaton on Surrogate’s Court Practice § 75.03 [LexisNexis 2019]).

In the answer, the fiduciary should therefore explain that the beneficiary owes the debt and assert this as a defense to payment. This is often referred to as the right to equitable retainer and lien (see Matter of Van Nostrand, 177 Misc 1, 7 [Sur Ct, Kings County 1941] [placing equitable lien upon the beneficial interest of a trustee/beneficiary who had embezzled trust property]; Matter of James, 149 Misc 135, 135-138 [Sur Ct, Kings County 1933]).

This defense is well settled under the case law and rests on sound principles of equity (see Matter of Eaton, 282 App Div 32, 34 [3d Dept 1953]). It is based on “a fundamental equitable principle of surrogate law that no beneficiary may claim any distributive rights from an estate until he has satisfied all of his obligations to it” (Matter of Van Nostrand, 177 Misc at 7; Matter of James, 149 Misc at 135-138 [Sur Ct, Kings County 1933]; Matter of Flint, 120 Misc 230, 232 [Sur Ct, Westchester County 1923], affd 206 App Div 778 [2d Dept 1923]; Matter of Foster, 15 Misc 175, 177 [Sur Ct, Orange County 1895] [holding that a debt is considered an asset of the estate in the hands of the legatee and a satisfaction of the legacy to the extent of the debt]).

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.

Sumner Redstone’s “Guardian”?

The WSJ headline this week read: Court to Appoint Guardian for Sumner Redstone. The headline on its face is clear in its implication that the controlling shareholder of CBS Corp., and Viacom Inc., will no longer be in control of his own affairs. The upshot is that he has lost it and lost control of his affairs. Could this be true? He is seeing little green men?

When a guardian is appointed, is all lost for the person?

There is much more to the story than the WSJ headline. There are more details relating to the recent outcome of the matter than suggested by the sensational headline.

The development of the appointment is part of a much larger legal dispute, a legal war, that has its genesis in Mr. Redstone’s past relationship with an old girlfriend who is in her early 50s. He is 95 years old. Her efforts have been a well-documented legal drama stemming from her having been removed from Mr. Redstone’s mansion in Beverly Hills. She contends, by direction of his daughter, who seized on his waning capacity to usurp control. The girlfriend was at one time his health care proxy and by accounts, she was included and provided for in his estate. After their relationship soured, she has persistently fought against his decisions by claiming that he lacked the mental capacity to make the decisions terminating her roles.

There is a significant amount at stake, and Mr. Redstone filed a subsequent lawsuit against her to recover $75 million in gifts that he gave her. His wealth is estimated to be $5 Billion. That trial will be next year, and she is pressing it. Adding to the proceedings are claims by Mr. Redstone’s daughter Shari Redstone and his grandson who will control his trust – when he is determined to be incompetent or on his death. Mr. Redstone was known to have spent the bulk of his adult life legally and generally feuding with his daughter and stated openly that he did not want her to be involved in corporate leadership. In an e-mail to her son she once said, “Your grandfather says I will be chair over his dead body”. The trust controls CBS and Viacom. His family contends that he has capacity.

This is all about money and control. They are common pursuits. But the legal wrangling is interesting and less common as the strategies are assessed and the case evolves.

Certainly, the attorneys for Mr. Redstone adopted the same defensive position present in virtually all these types of cases, where the guardianship is resisted: “he is fine”. That position can be very effective and persuasive where the individual is strong. But here, like in many cases Mr. Redstone was known to be failing and he was of advanced age. His public appearances were growing limited and his visible confidence seemed to diminish. Candor with the court in these circumstances becomes paramount and often a shifting strategy must be considered. Running a bluff, with a hope of settlement is typically a losing strategy. Practical concerns abound in that third parties who interact with the person may offer non-corroborating opinions. In fact, their recounts of interactions may contradict the position that he is fine. In some instances, depositions can blow the case wide open. Worse yet, if medical information is not managed correctly it can be very effectively used despite efforts to keep that proof out of the case. The court knows what inevitably happens to people when they age. It can be a mistake to stake out an impossible position on the proof when your client is declining. Competent counsel effectively identifies and assesses risks. Settlement may be impossible. The trial risk relative to an adverse finding, disclosures of highly sensitive personal and business information. Like in Redstone, an adviser finding can trigger collateral consequence relative to trust and estate planning. Often the finding of lack of capacity can be permanent. In the Redstone case there is plenty at risk at present and into the future.

Mr. Redstone’s lawyers, for many years adhered to the “he is fine” mantra. It staved off the appointment of a guardian and seemed quite effective. The adverse consequences of going forward were averted. However, the recent ruling while on its face may appear to be a big loss, may turn out to be a sizeable win for Mr. Redstone.

Of recent, Mr. Redstone’s attorneys appear to have softened on the “he was fine” position. Instead they shifted to a position of “deteriorating health conditions”. Was that a complete capitulation? Why? But is that enough for appointment of a guardian? It appears that Mr. Redstone’s girlfriend’s attorney thought so – as they have asserted this vindicates her position and further, shows that Mr. Redstone had no capacity when he sued her.

But not so fast. A closer look reveals that the shifting position may well have worked well. Although the headline suggests a whopper of a loss the result is not a complete wipe out for Mr. Redstone.

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.