Does Kapon authorize unlimited access to a party’s financial records?

In Matter of Kapon v Koch, 23 NY3d 32, 38 (2014), the Court of Appeals concluded that a party seeking disclosure from a nonparty is not required to show “special circumstances”.  Rather, the Court held that the statute “allow[s] for the discovery of any person who possesses material and necessary evidence[.]” 

Does this mean that a litigant is entitled to unlimited access to a party’s financial records?  Not necessarily.

First, the information subpoenaed must be material and necessary, and “the subpoenaing party [must] state, either on the face of the subpoena or in a notice accompanying it, ‘the circumstances or reasons such disclosure is sought or required’” (id. at 39, citing CPLR 3101).  If the subpoena requests irrelevant information, the Court will quash it.  Similarly, if the subpoena served on a nonparty fails to set forth the circumstances or reason for the disclosure, a litigant may argue that the subpoena is non-compliant and should be quashed accordingly.

In addition, there are several related objections that are subparts of the material and necessary standard.  A party for instance may object to a subpoena on grounds that it is overbroad or constitutes a fishing expedition (see e.g. Saratoga Harness Racing v Roemer, 274 AD2d 887, 889 [3d Dept 2000] [improper “demand for … all of defendant’s balance sheets, income statements, cash flow statements, general ledger statements, expense reports and bank account statements for a period of more than three years” (citation omitted)]; Matter of American Express Prop. Cas. Co. v Vinci, 63 AD3d 1055, 1056 [2d Dept 2009]). 

The trial court also has “the authority to impose, in its discretion, appropriate restrictions on demands which are unduly burdensome . . . and to prevent abuse by issuing a protective order where the discovery request may cause unreasonable annoyance, expense, embarrassment, disadvantage, or other prejudice to any person or the courts” (Rawlins v St. Joseph’s Hosp. Health Ctr., 108 AD3d 1191, 1192 [4th Dept 2013] [internal quotation marks and citation omitted]; see CPLR 3103).

A more aggressive litigant may further attempt to argue that the standard is or should be higher in cases involving sensitive information such as tax returns and personal financial records.  The court in Reintsema v Johnson, 2018 NY Slip Op 33612(U) (Sup Ct, Saratoga County 2018), for instance, concluded that “the scope of discovery of personal financial records and specifically income tax returns, is narrow, and such records to be disclosed, must be found indispensable to a party’s claim and unavailable from other sources … [and that] [c]ourts do not allow an adversary to ‘freely roam’ through an opponent’s financial records, except in certain limited circumstances for example when income diversion is alleged and again the relevant information is not available from any other source” (citations omitted).

Can you file a counterclaim in Surrogate’s Court?

NY SCPA 302(1) expressly limits the types of pleadings allowed in Surrogate’s Court.  Unless directed by the court, the only pleadings allowed are a petition, answer, objections, and an account. 

What about a counterclaim?  Do you need permission from the court to file it?

Matter of Eshaghian, 144 AD3d 1155 (2d Dept 2016) briefly addressed this issue.  There, the court held that counterclaims had been properly asserted in the case, citing to the CPLR and SCPA in support of its conclusion.  Essentially, the court impliedly held that SCPA 302 is not specific enough to preclude a counterclaim and that the courts may therefore rely on CPLR 3011 to supplement the definition of an answer, which expressly provides that an answer may include a counterclaim.

Matter of Zalaznick, 84 Misc 2d 715 (Sur Ct, Bronx County 1975) also provides some guidance on this issue.  There, the court considered the issue of whether a cross-petition was permissible.  The court held that “[i]mplicit in a ‘petition’ being a proper pleading is the right of an adverse party to utilize a cross petition … in the same proceeding[.]”  The court was particularly concerned about a contrary holding, which would promote piecemeal litigation in different forums and cause significant delay.

While these cases provide authority for a party to interject a counterclaim in Surrogate’s Court, there is a counterargument to be made.  Among other things, SCPA 302 and CPLR 3011 both describe the types of pleadings permitted.  Insofar as SCPA 302 does not expressly permit answers to contain counterclaims, one could argue that the contrary provision of CPLR 3011 is inconsistent to the procedure set forth by the SCPA and should not be applied.   

Indeed, Matter of Eshaghian may have failed to consider the ramifications of relying on CPLR 3011.  Where counterclaims are included in an answer, that provision expressly requires a reply to a counterclaim.  Allowing respondents to interject counterclaims in a case based on CPLR 3011 would therefore mandate and expand the types of pleadings permitted in Surrogate’s Court so as to include a reply.  This in turn would arguably expand the types of pleadings permitted by SCPA 302(1) and arguably be inconsistent with the procedures set forth in the SCPA.   

Another argument against permitting counterclaims is based on the provisions of SCPA 2402, which sets forth the fees required for parties to file a pleading.  Whereas some petitions may cost up to $1,250 for the filing fee, the filing fee for an answer is only $75.  Arguably, the intent of this provision is to collect as much revenue as possible.  Allowing an answer to interject a counterclaim for only $75 would arguably be inconsistent with the procedures of the SCPA. 

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.

Appellate Court Victory: Matter of James H. Supplemental Needs Trusts

In this Mental Hygiene Law article 81 proceeding, we successfully defended the petitioner/guardian on an appeal.  There, the petitioner was appointed as the guardian of James H.  After extensive litigation, the petitioner applied for and received an order awarding counsel fees and compensation for guardian services pursuant to Mental Hygiene Law § 81.28 (a).  In the same order, the petitioner also received authorization for those amounts to be paid from supplemental needs trusts (SNTs).  James H.’s brother, unsatisfied with the result, appealed. 

On the appeal, the appellate court affirmed.  Among other things, the appellate court concluded that the trial court provided a clear and concise explanation for its award in a written decision with reference to numerous factors, including the time and labor required, the attorney’s experience and ability, the benefit flowing to the incapacitated person as a result of the attorney’s services and the results obtained. 

In addition, the appellate court rejected James H.’s brother’s challenge to the trial court authorizing the payments from the SNTs or, in other words, approving the use of the SNTs for this purpose. The appellate considered the purpose of these trusts and the limitations imposed on them by law.  The appellate court also considered the specific provisions of the SNTs and the services provided by petitioner and her appellate counsel.

The appellate court found that the services benefitted James H. and were the types of services authorized to be paid for by the SNTs.  Among other things, the appellate court concluded that the petitioner’s services as guardian and the legal services provided by petitioner and her appellate counsel successfully resulted in the removal of James’ H.’s brother as trustee of James H.’s SNTs, and that James H.’s brother had been incredibly litigious, obstinate and consistently reluctant to pay James H.’s medical bills and expenses. In finding that the services benefitted James H., the court further concluded as follows:

“Upon [James H.’s brother’s] removal, petitioner was better able to ensure that James H.’s weekly needs were met, resulting in the timely and efficient payment of bills and coordination and receipt of services benefiting him, thus reducing James H.’s anxiety. More importantly, [James H.’s brother] was also the executor of their mother’s estate and, despite the fact that two years had elapsed since their mother’s death, [James H.’s brother] had not transferred James H.’s inheritance into his SNTs, leaving two of the SNTs unfunded. [The] removal further led to the subsequent significant funding of the SNTs, resulting in greater availability of funds for the payment of James H.’s necessities, such as health care, transportation and groceries, as well as personal items to enhance his lifestyle.”

As with any SNT, the appellate court recognized a chief concern was whether payment to a third party from the SNTs would render James H. ineligible for receipt of government benefits or assistance. The appellate court looked to Social Security Administration, Program Operations Manual System (POMS) as guidance and found that the payment from the SNTs would not render James H. ineligible for government benefits.

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

court room

What should you ask the drafting attorney during the SCPA 1404 Examination?

If you are considering objecting to a will, the Surrogate’s Court Procedure Act provides you with the right to question the drafting attorney.  But what should you ask?  

The questions for each specific case will vary.  However, in most cases you should ask questions about the attorney’s background and qualifications, the attorney’s prior interactions with the decedent and beneficiaries, the attorney’s prior legal representation of the decedent and beneficiaries, the existence of prior wills, the names of the decedent’s prior attorneys, who referred the decedent to the drafting attorney, who initiated the first contact for the services, where they met, who was present, what was discussed, the extent to which decedent discussed his family members and assets, what occurred during the will ceremony, the contents of the attorney’s notes and billing entries, whether the decedent was driven to the appointments, whether the decedent explained why he/she wanted to change his/her will, and any subsequent interactions between the decedent and the drafting attorney. 

Sample List of Questions

When were you admitted to practiced law in New York?

How long have you done estate planning?

When did you first meet the decedent?

When did you first perform any legal services for the decedent?

When did you first meet the beneficiary/named executor?

Have you ever performed any legal services for the beneficiary before?

Did the decedent have a prior will/estate plan?

How was it different than the will you drafted for him?

Do you know the name of the prior drafting attorney?

Did someone refer the decedent to you?  Who?

Who arranged for the first meeting between you and the decedent?

How did the decedent get to your office?

Who was present?

What did the decedent tell you?

What did you discuss with the decedent?

What did you discuss with the beneficiaries?

Did the decedent say anything about his family/assets?

Did the decedent ever tell you why he/she wanted to make the change to the will?

What is the basis for your conclusion that the decedent was of sound mind?

Did you prepare an engagement letter for the services? 

How much did you charge for your legal services? 

Who paid?   

Who signed check?

Who wrote out the check?

Do you have any (other) invoices or billing records to reflect the services performed?

Did you take any notes? 

Do you have any other notes other than these?

Did you send the decedent any letters/correspondence?

Did the decedent give you any writings/letters?

Did you have any other/subsequent interactions with the decedent?

Do you know the names of the decedent’s banks?  Medical providers?  Pharmacy?  Cell phone number and provider?

Do you know if the decedent made any beneficiary changes to any of his/her non-probate assets during such and such time period?

Do you know if the decedent had any Powers of Attorney?  Who was named as the agent?  Do you know if the decedent had any joint accounts with the beneficiaries?

Can a beneficiary recover the cost of attorney’s fees from estate litigation?

Generally, the fiduciary is entitled to recover the cost of attorney’s fees as a reasonable and necessary administration expense.  However, SCPA 2110 also authorizes the court to award attorney’s fees for legal services rendered to a beneficiary.  The court may direct payment directly from the estate generally or from certain funds in the hands of the fiduciary (SCPA 2110 [2]).

            In Matter of Rose BB., 35 AD3d 1044, 1045 (3d Dept 2006), for example, the court reiterated the well-recognized rule that “Surrogate’s Court may award counsel fees in situations where the misconduct of a fiduciary brings about the expense.”   There, the court affirmed the fee award, pointing to the other party’s “numerous instances of obstructing and prolonging an otherwise uncomplicated proceeding and his violation of his fiduciary duties.”  The record evidence also supported Surrogate’s Court’s finding that “with the exception of the ordinary administration of decedent’s estate, the proceedings … were necessitated by and attributable to … improper conduct.”

            Similarly, in Matter of Graves, 197 Misc 638, 639-640 (Sur Ct, Monroe County 1950), the court awarded fees out of the estate where, “without the performance of the services, the estate would have been charged additional commissions in the sum of $11,245.31.”  The court held that “where legal services have been rendered for the benefit of the estate which result in enlargement of the distributive shares of the estate beneficiaries, reasonable compensation should be granted out of the estate for such services” (id.).  “In such case the personal interests of the executors cause them and their counsel, in effect, to step aside and permit those whose interests are not inimical to the estate in general to protect the rights of the estate” (id.; see also Matter of Berg, 91 Misc 2d 939 [Sur Ct, New York County 1977] [awarding fees even though the court sustained only 3 of the objections and denied approximately $89,000 of the $100,000 surcharge requested]; Matter of Geller, 167 Misc 578, 578 [Sur Ct, Kings County 1938] [holding that the court may allow fees of an attorney for an interested party to be charged against the estate if the services were necessitated by the neglect of the fiduciary of his duties]).

            “The theory which justifies payment by the estate to the attorney of a beneficiary is that the attorney has represented the fiduciary who has defaulted in protecting or collecting the assets of the estate and, therefore, what would have been a proper charge for legal fees if the executor had acted, is a proper charge when the executor fails to act because of an adverse interest, disinclination or neglect” (Matter of Bellinger, 55 AD2d 448, 449-454 [4th Dept 1977]; see e.g. Matter of Berg, 91 Misc 2d at 939 [awarding fees even though the court sustained only 3 objections and denied approximately $89,000 of the $100,000 surcharge requested]; see also e.g. Matter of Del Monte, 37 AD2d 827, 827 [1st Dept 1971] [benefit to the estate for saving the estate disallowed commissions])

Does the Surrogate’s Court Have Jurisdiction Over Lifetime Trusts after the Grantor’s Death?

A decedent may create a trust during his or her lifetime.  What happens after the decedent dies?  Does the Surrogate’s Court have jurisdiction to compel a trustee to account to a beneficiary or determine other matters relating to the trust?   

      SCPA § 207 provides two separate grounds upon which the Surrogate’s Court may exercise jurisdiction over lifetime trusts after the grantor’s death.  Under SCPA § 207, the Surrogate’s Court “has jurisdiction over the estate of any lifetime trust which has assets in the state … or of which a trustee then acting resides in the state or, if other than a natural person, has its principal office in the state.” 

      It is therefore important to determine whether trust assets exist in New York and whether the trustee resides in New York.  If either one of these two grounds exist, SCPA § 207 provides the Surrogate’s Court with jurisdiction to entertain the proceeding.  See SCPA § 207(1); see e.g. Matter of Srozenski v Porcelli, 78 AD3d 1596 (4th Dept 2010); Matter of Jensen, 39 AD3d 1136 (3d Dept 2007).