Coordinating a Testator’s Intention with Public Policy Can Prove Challenging When Construing an In Terrorem Condition
August 11, 2016
In construing an in terrorem provision, or any part of a will, the paramount consideration is identifying and carrying out the testator’s intent. Although paramount, the testator’s intention will not be given effect if doing so would violate public policy. For example, an in terrorem provision that purports to prevent a beneficiary from questioning a fiduciary’s conduct is void as contrary to public policy (see Matter of Egerer, 30 Misc 3d 1229[A], at *1-4 [Sur Ct, Suffolk County 2006]). The recent decision in Matter of Sochurek, NYLJ, July 20, 2016, p. 31 (Sur Ct, Dutchess County June 30, 2016), illustrates the difficulty in reconciling the testator’s intention in respect of an in terrorem condition with the rights of beneficiaries to obtain an accounting or otherwise challenge the actions of their fiduciary.
Sochurek involved a dispute between the decedent’s spouse, who was the executor of his estate, and his two daughters from a prior marriage. Decedent owned a 50% membership interest in an LLC that owned real property and a business. The will bequeathed “an estate for life” in the LLC to decedent’s wife, including the right to receive income therefrom. Upon his wife’s death, “her life interest shall terminate” and the LLC was bequeathed to his two daughters. The will also contained provisions, likely boilerplate, regarding the executor’s powers to sell estate assets.
After the will had been admitted to probate, the executor/spouse sold the LLC’s real property and business. The executor and decedent’s daughters entered into a “standstill agreement” providing that any funds the executor received from the sale would be held in a segregated “Life Estate Account” from which no withdrawals would be made for a period while the daughters had an opportunity to appraise the LLC assets and negotiate a reasonable treatment of the proceeds.
Before the standstill agreement expired, the daughters commenced an action against the executor in Supreme Court. The daughters asserted causes of action for, inter alia, breach of fiduciary duty and an accounting. An order to show cause enjoined the executor from withdrawing any funds in the “Life Estate Account.” The ultimate relief sought in the order to show cause was a temporary restraining order and an accounting. These claims were grounded in the executor’s sale of estate property (assets of the LLC) and actions thereafter as to the proceeds.
The in terrorem provision in the will was directed toward any person who “shall, directly or indirectly, institute or become a party to any proceedings to set aside, interfere with, or make null any provision of this Will, or to offer any objections to the probate thereof . . .” (emphasis added).
The executor commenced a construction proceeding in the Surrogate’s Court contending the daughters’ Supreme Court action interfered with her authority as executor and prevented her from accessing/managing estate assets, thereby triggering the in terrorem clause. In response, the daughters contended they never contested their father’s will and, to the contrary, conceded its validity. The daughters asserted that their lawsuit is focused on the executor’s “egregious abuse of her fiduciary duties” and breach of the standstill agreement.
In ascertaining the testator’s intent, the Court reviewed the fiduciary powers article in the Will which gave the executor broad powers to sell, exchange or otherwise dispose of all estate property on such terms as the executor deemed advisable. Thus, the Court concluded, the executor undoubtedly had the power to dispose of the LLC. The Surrogate held:
The clear intent of the testator upon a complete reading of the will was to give the executrix of his estate the necessary and broad powers to manage the property as she saw fit. The Court finds the [daughters] have violated [the in terrorem provision] by commencing an action in the Supreme Court, Westchester County challenging the executrix’s action with regard to the disposition of estate assets, thereby “interfer[ing] with any provision of this Will” [quoting the in terrorem provision]. By interfering with the executrix’s management and ultimate sale of [the LLC], the [daughters] have violated the in terrorem clause of the will and have forfeited their legacies (Matter of Sochurek, NYLJ, July 20, 2016, p. 31 at *8).
The daughters had a beneficial interest in the assets of the LLC which the executor held in a fiduciary capacity. The relief sought by the daughters in Supreme Court included an accounting and damages for mismanagement of estate assets, including alleged self-dealing. In Egerer, supra, the Surrogate’s Court held, “any attempt by a testator to preclude a beneficiary from questioning the conduct of the fiduciaries, from demanding an accounting from said fiduciaries or from filing objections thereto will result in a finding that the pertinent language is void as contrary to public policy and the applicable statutes of the State of New York” (Matter of Egerer, 30 Misc 3d 1229[A], *3 [Sur Ct, Suffolk County 2006]).
Thus, following Egerer, had the daughters petitioned the Surrogate’s Court successfully for a compulsory accounting and objected to the executor’s accounting alleging the sale of the LLC assets was self-interested, that the executor misappropriated estate assets and breached an agreement as to the management of estate assets, it does not appear the in terrorem condition would have been triggered.
What about obtaining a provisional remedy, such as a TRO, in the context of the accounting? It would seem inconsistent to allow beneficiaries the right to pursue objections to an accounting without forfeiting an interest in the estate by triggering an in terrorem condition, but deprive them of the ability to seek a provisional remedy securing their interests in the subject of the proceeding. While the daughters in Sochurek obtained a TRO that interfered with the executor’s management of estate assets, it was in the context of a plenary action seeking an accounting and otherwise challenging the executor’s conduct (cf. Egerer, supra).
As the Sochurek decision illustrates, the case law on the scope and validity of in terrorem conditions continues to develop, and the outcome of each proceeding depends on the particular provisions of the will and the unique, fact-specific circumstances related to the conduct of the party alleged to have violated the condition.