Fiduciary Imprudence: When the Sale of an Asset Results in a Surcharge
February 10, 2017
Although one of the many duties and responsibilities of an executor is to marshal and appraise estate assets, and, depending upon the dispositive terms of the governing instrument, liquidate them for purposes of distribution, the fulfillment of these duties may, at times, result in fiduciary liability. In Matter of Billmyer, 142 AD3d 1000 (2d Dept 2016), the Appellate Division, Second Department, considered this issue, in an appeal from an Order of the Surrogate’s Court, Kings County (Lopez Torres, S.), which surcharged the executor for selling certain real property of the estate below fair market value.
The decedent died with a brownstone residence, located in Brooklyn, New York, valued at approximately $1.5 million. In her Will, she named four Lutheran charities and Adelphi University as residuary beneficiaries of her estate.
Two years after the decedent’s death, the executor entered a contract for the sale of the Brownstone residence to an acquaintance of his for the sum of $670,000. Prior to the closing, the purchaser assigned his rights under the contract to an LLC, and the sale was consummated shortly thereafter between the estate and the LLC. Three days after this sale, the LLC sold the subject property to an unrelated third party for the sum of $1,300,000, pursuant to the terms of a contract dated one month prior to the date of the contract that it had entered with the estate.
The executor then accounted, and objections were filed by the charitable beneficiaries and the Attorney General of the State of New York, as the statutory representative of the charities. Following depositions, Adelphi University and the Attorney General moved for summary judgment determining that the sale of the real property was for less than its fair market value, and surcharging the executor accordingly. The executor opposed, alleging that the property required extensive repairs prior to its initial sale, albeit without an explanation as to how the property resold three days later for almost twice the price. The Surrogate’s Court granted the motion, and surcharged the executor in the sum of $630,000, plus 6% interest from the date of the estate’s sale to the date of remittance.
The Appellate Division affirmed, opining that in performing his fiduciary duty, the executor was required to employ good business judgment. Further, the Court explained that to the extent the executor failed to satisfy this standard in the sale of estate property, he could be surcharged. However, the Court cautioned that a surcharge did not result simply upon a showing that the estate fiduciary did not obtain the highest price obtainable for an asset. Rather, it had be demonstrated that the executor “acted negligently, and with an absence of diligence and prudence which an ordinary [person] would exercise in his [or her] own affairs” (Billmyer, citing Matter of Lovell, 25 AD3d 386, 387 [2d Dep’t 2005]).
Within this context, the Court noted that the executor chose a real estate agent for the sale of the brownstone, who was based in Staten Island, had no knowledge about the Brooklyn real estate market, and did not actively market the property for sale. Moreover, the record indicated that the executor did not obtain an appraisal of the property at the time of sale or learn the fair market value of comparable properties, failed to visit the property for an extended period of time prior to sale, and was unaware of how the property was being marketed. In addition, he sold the property to an acquaintance of his, when there was an unrelated third party ready and willing to buy the property for nearly double the price paid by the LLC.
In view thereof, the Court found that the objectants had established, prima facie, that the executor had breached his fiduciary duty and acted negligently with respect to the sale of the property. Further, it concluded that the executor had failed to submit evidence in opposition sufficient to raise a triable issue of fact. Finally, the Court held that the Surrogate’s Court had properly exercised its discretion in awarding interest upon the surcharge, based upon proof that three days after the executor had sold the property, it was resold for nearly twice the original purchase price.