On Duty to Diversity, Validity of Conveyance, Standing To Challenge

January 30, 2002

The last half of the calendar year, 2001, saw significant activity at the appellate level affecting the area of trusts and estates. Within the past six months, the Third and Fourth Departments have addressed a fiduciary’s duty to diversify, the validity of a conveyance of real property and standing to challenge the administration of a trust. The First Department issued a strongly worded decision supporting the enforcement of settlement agreements, and the Second Department passed upon the effect of a renunciation on recovery in a wrongful death action. Last, but certainly not least, the Court of Appeals took the opportunity to hear and determine a matter regarding inheritance rights and forfeiture.

Review of these decisions provide valuable instruction to trusts and estates practitioners.

Fiduciary Duty to Diversify Sustained
Summary Judgment Granted Regarding Shift in Bank’s Investment Philosophy: In a contested accounting, the Appellate Division, Third Department, inter alia, modified an Order and Decree of the Surrogate’s Court, Fulton County (Lomanto, S.), in order to grant partial summary judgment to the Petitioner with respect to the objections addressed to its investment philosophy and the res judicata effect of accounting decrees entered in prior years.

The decedent created a trust under her will, the principal purpose of which was to provide suitable life income to her daughter, with the remainder to be paid to her daughter’s issue upon her death.

Upon the death of the decedent, the testamentary trust was funded with a block of the trustee-bank’s stock, as well as shares of stock in 18 other corporations. All of the stock, except for the trustee-bank’s, was immediately liquidated and the proceeds invested in the trustee-bank’s common trust funds. The bank’s stock was sold approximately 18 years later and invested as well in these same funds. At the death of the income beneficiary, the trust had increased four-fold. Nevertheless, Respondent filed objections to the trustee-bank’s 1999 final trust accounting addressed, amongst other things, to the investment philosophy of the bank and to the propriety of the Petitioner’s investment in its own common trust funds.

With regard to Respondent’s objections regarding the sale of bank stock and the shift in investment philosophy, the court held that the bank’s decision to sell its stock in order to avoid undue concentration of the trust portfolio in a particular security insured proper portfolio diversification in compliance with the prudent person rule. See, EPTL _11- 2.2(a)(1); Matter of Janes , 90 N.Y.2d 41, 50-51; Matter of Rowe , 274 A.D.2d 87, 91, lv. denied, 96 N.Y.2d 707; Matter of Saxton , 274 A.D.2d 110, 118. Significantly, the court determined that “[n]either the trust language permitting retention of the stock nor the preferences of the trust beneficiaries would have insulated Petitioner from a claim that it breached its fiduciary duty had it failed to achieve appropriate diversification.” Further, the court found that the sale was appropriate in that it permitted Petitioner to invest in higher yielding bonds consistent with the decedent’s express purpose of providing adequate lifetime income to her daughter. As to the alleged inappropriate shift in investment philosophy, the court noted that the only person who could have suffered from the shift, the decedent’s daughter, repeatedly approved of same in writing.

With regard to those objections addressed to the propriety of the bank’s investment in its own common trust funds, the court determined that as to three of the years in issue the Respondents were precluded from litigating their claims based upon principles of res judicata. The court found that decrees settling the bank’s common trust fund accountings had been entered, and that Respondents had received notice of these accountings as required by Banking Law _100-c(6).

Matter of Strong, Appellate Division, Third Department, Decided and Entered Dec. 20, 2001.

Conveyance of Real Property
Respondent Fails to Rebut Presumption of Undue Influence: In a contested proceeding regarding a conveyance of real property, the Appellate Division, Third Department, affirmed the Order of the Surrogate’s Court, Montgomery County (Tomlinson, S.), which set aside a conveyance of certain real property from the decedent to Respondent.

By deed, dated March 27, 1998, the decedent, who was then 80 years old and suffering from terminal cancer, conveyed title to her residence to the Respondent. Respondent had been the decedent’s life-long friend and had taken the decedent into her home about one month prior to the conveyance to care for her. About three and one half weeks after the transaction, the decedent died with no immediate family.

Following her appointment, the co-executor of the decedent’s estate moved to set aside the conveyance. After a trial of the matter, the Surrogate’s Court found that Respondent had a confidential/fiduciary relationship with the decedent, thus making it her burden to establish by clear and convincing evidence that the conveyance was free of undue influence. The surrogate found that Respondent failed to meet this burden and invalidated the conveyance. The Appellate Division affirmed.

The record revealed that Respondent and/or her husband, accompanied the decedent to counsel’s office on three occasions in order to discuss the transaction in issue. Decedent’s conversations, which were in Ukrainian, with minimal English, were all translated by Respondent’s husband. Although decedent initially expressed an interest in transferring the realty to Respondent’s daughter, she ultimately decided to transfer it to Respondent.

It was also established that during the period of time the transaction was being discussed, the decedent was dependent upon Respondent for all essentials of daily living and general companionship. Additionally, the testimony indicated that it had always been the decedent’s intent to convey her real property to her family members in the Ukraine.

Based upon the foregoing, the Appellate Division sustained the Surrogate’s Court’s finding that a confidential relationship existed between the decedent and the Respondent which cast upon the Respondent the burden of demonstrating that no deception was practiced in the transaction, no undue influence was used, and that all was fair, open, voluntary, and well understood. Furthermore, the court sustained the Surrogate’s Court determination that Respondent failed to rebut the presumption that the conveyance was the result of controlling or undue influence.

Matter of Mazak, 732 N.Y.S.2d 707 (3rd. Dept. 2001)

Standing to Challenge Trust Administration. Challenge to Charitable Remainder Trust Limited to Attorney General: In a contested proceeding regarding the administration of a charitable trust, the Appellate Division, Fourth Department, affirmed an Order of the Surrogate’s Court, Erie County (Mattina, S.), which dismissed the cross-petition of Respondent seeking an order directing Petitioners to adhere to the terms of decedent’s will in distributing trust income. The court held that Respondent, who was the decedent’s grandson and a person in whose honor the trust was created, lacked standing to challenge the administration of the trust; standing to challenge or enforce the administration of a charitable trust being restricted to the Attorney General.

Matter of Alaimo, 732 N.Y.S.2d 819 (4th Dept., 2001)

Enforcement
Enforcement of Settlement Agreement Sustained. Public Policy Concerns Make Reversal of Surrogate’s Court Order “Imperative”: In a contested probate proceeding, the parties entered a stipulation of settlement, the terms of which provided for the payment of $3 million to the principal beneficiary under the propounded will, together with a half interest in a trust comprising the residuary estate.

Subsequent to the entry of a decree incorporating the terms of the agreement, counsel for the proponents/preliminary executors applied for the fixation of their fees for services rendered during the proceeding. The application was opposed by the objectants to probate who alleged that counsel had represented parties who “knowingly propounded an invalid will.” On a motion by counsel to dismiss the answer on grounds of judicial estoppel, res judicata, collateral estoppel and the language contained in the probate decree regarding the legitimacy of the issues raised in the proceeding, the Surrogate’s Court (Preminger, J.) rejected counsel’s arguments, reasoning that the question of bad faith on the part of counsel, asserted in the answer, had not been litigated in the probate proceeding, that the probate decree did not constitute a finding of fact and that the issues bearing upon the award of fees were expressly reserved for decision by both the settlement agreement and the probate decree. Counsel appealed. The Appellate Division, First Department, found reversal of the Surrogate’s Order to be “imperative.”

The court rejected the Respondents arguments on appeal, finding them to be inherently inconsistent with their stipulation consenting to the admission of the propounded will to probate. More importantly, however, the court’s reversal was predicated upon “substantial public policy considerations favoring the enforcement of settlement agreements as a matter of contract.” The court held:

At issue in the probate proceeding was the validity of the 1988 will, to which the fixing of fees is a mere incident. By stipulating to disbursements from the estate to the will’s beneficiaries, respondents have necessarily removed the issue of the will’s validity from the controversy. Moreover, to adjudicate an issue resolved by stipulation, merely for the sake of deciding a collateral matter, would obviate any benefit obtained as a result of the expeditious resolution of the dispute by settlement.

Nevertheless, the court held that the language of the settlement agreement preserved Respondents’ right to contest the reasonableness of the fees sought by counsel and to seek reimbursement of such fees to the estate. Accordingly, the answer of the Respondents was ordered stricken, and the matter was remanded to the Surrogate’s Court for further proceedings.

Chadbourne & Parke LLP v. Warshaw, New York Law Journal, Nov. 31, 2001, (App. Div., First Department)

Wrongful Death Action

Wrongful Death Action and Renunciation. Beneficiary of Renounced Interest Entitled to Assert Pecuniary Loss as Sole Distributee: In an action to recover for wrongful death and conscious pain and suffering, the Appellate Division, Second Department, reversed an Order of the Supreme Court, Richmond County (Sangiorgio, J.) insofar as appealed from, which, inter alia, dismissed a cause of action by the decedent’s sister to recover damages for wrongful death.The decedent died as a consequence of injuries sustained in a motorcycle accident survived by his mother, who was his sole distributee. At the time of his death, the decedent was living with and fully supporting his sister. The decedent’s sister was issued limited and restricted letters of administration in order to pursue causes of action for conscious pain and suffering and wrongful death, which she asserted on behalf of herself and her mother. The defendants moved for partial summary judgment dismissing the wrongful death action asserted by the decedent’s sister on the grounds that she was not a distributee of the decedent. Subsequent to the making of the motion, the decedent’s mother renounced her interest in the decedent’s estate, including any recovery for conscious pain and suffering and wrongful death.

The defendants argued that the recovery of the decedent’s sister should nevertheless be limited to the recovery, which the decedent’s mother would have recovered had she not renounced. The difference in the recoveries was significant. The plaintiffs then moved for partial summary judgment declaring that the decedent’s sister was permitted to assert a cause of action to recover damages for wrongful death. The Supreme Court granted defendants’ motion for partial summary judgment and denied the plaintiffs’ motion.

The Appellate Division reversed, holding that a renunciation is retroactive to the creation of the distribution, and has the same effect as if the renouncing distributee had predeceased the decedent. As such, because the decedent’s mother renounced her share of the wrongful death proceeds, she was considered to have predeceased the decedent, and the decedent’s sister thus became entitled to the entirety of the wrongful death proceeds recovered, attributable to her own pecuniary loss, as the decedent’s sole distributee.

DeLuca v. Gallo, New York Law Journal, Dec. 24, 2001 (App. Div., Second Department)

Forfeiture of Inheritance

Distributees of Wrongdoer Entitled to Participate in Decedent’s Estate: In a contested proceeding regarding the distribution of the estates of husband and wife, the Court of Appeals took the opportunity to determine the operative effect of the rules of forfeiture upon the disposition of assets to a wrongdoer’s distributees. The estates arose as a result of a murder-suicide. The property in issue was either individually owned, owned jointly with right of survivorship, or individual assets (insurance and pension plan proceeds) with named beneficiaries.

As to the individually owned property, the Court held that they were subject to disposition pursuant to the terms of the decedent’s will and that the doctrine of forfeiture did not apply to prohibit members of the wrongdoer’s family, as alternate beneficiaries, from inheriting thereunder.

As to property held jointly with right of survivorship, the Court noted that each joint tenant, during the lifetime of the other, was entitled to an immediate one-half interest in the joint property. This being the case, the wrongdoer, or his estate, was entitled to this one-half interest, but nothing more.

Finally, the Court held that the insurance and pension plan proceeds must pass to the alternate beneficiaries of each, albeit members of the wrongdoer’s family. Absent a showing that the terms of these contractual arrangements were deficient or ambiguous, their provisions were to be enforced.

Matter of the Estates of Covert, New York Law Journal, Nov. 21, 2001 (N.Y.Ct. App.)

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