The Court of Appeals, in a full-fledged opinion by Judge Pigott, over a two-judge dissenting opinion, determined an affirmative defense alleging constructive fraud on the part of attorneys who drafted irrevocable releases of powers of appointment of trust assets was properly dismissed by the Appellate Division. The Benihana Protective Trust (BPT) was formed by Rocky, the founder of the Benihana restaurant chain. The irrevocable releases of powers of appointment allowed disposition of the trust assets only to Rocky's descendants. However, irrespective of the releases, Rocky's will attempted to pass trust assets to his wife. Rocky indicated in a deposition that he would not have signed the releases had he known they would prohibit the disposition of trust assets to his wife. Upon Rocky's death, Rocky's wife sought to have the releases declared invalid under a fiduciary constructive-fraud theory. Rocky's wife argued that the fiduciary exception to the usual constructive fraud proof requirements shifted the burden to the trust beneficiaries to prove the releases were not procured by fraud. Rejecting the applicability of the fiduciary exception, the court affirmed the Appellate Division's grant of summary judgment in favor of the trust beneficiaries:
It is a well-settled rule that “'fraud vitiates all contracts, but as a general thing it is not presumed but must be proved by the party seeking to [be] relieve[d] . . . from an obligation on that ground'” … . However, an exception to that general rule provides that where a fiduciary relationship exists between the parties, the law of constructive fraud will operate to shift the burden to the party seeking to uphold the transaction to demonstrate the absence of fraud … . * * *
[The attorneys who drafted the Releases] were clearly Rocky's fiduciaries. But that is only one part of the equation. The critical inquiry is whether they were either parties to the Releases or stood to directly benefit from their execution, such that the burden shifted to [trust beneficiaries] to demonstrate that the Releases were not procured by fraud.
Here, the only individuals who stood to benefit from Rocky's execution of the Releases were his descendants. [The attorneys] were [not] parties to the Releases [and did not] to directly benefit from their execution … . If anything, the execution of the Releases all but ensured that [the attorneys] would have no interest in, nor would receive any benefit from, the trust assets. Therefore, the Appellate Division correctly determined that, because the fiduciary exception does not apply in this case, the Surrogate had improperly shifted the burden of proof to [the trust beneficiaries] to demonstrate that the Releases were not procured by fraud. Matter of Aoki v Aoki, 2016 NY Slip Op 02474, CtApp 3-31-16
FRAUD (FIDUCIARY EXCEPTION TO THE USUAL BURDEN OF PROOF IN A CONSTRUCTIVE FRAUD ACTION DID NOT APPLY, FIDUCIARIES WERE NOT PARTIES TO THE RELEVANT DOCUMENTS AND DID NOT STAND TO BENEFIT FROM THE PROVISIONS OF THE DOCUMENTS)/ATTORNEYS (FIDUCIARY EXCEPTION TO THE USUAL BURDEN OF PROOF IN A CONSTRUCTIVE FRAUD ACTION DID NOT APPLY, ATTORNEYS WHO DRAFTED THE RELEVANT DOCUMENTS WERE NOT PARTIES AND DID NOT STAND TO BENEFIT FROM THE PROVISIONS OF THE DOCUMENTS)/TRUSTS AND ESTATES (FIDUCIARY EXCEPTION TO THE USUAL BURDEN OF PROOF IN A CONSTRUCTIVE FRAUD ACTION DID NOT APPLY, ATTORNEYS WHO DRAFTED RELEASES OF POWERS OF APPOINTMENT WERE NOT PARTIES TO THE RELEASES AND DID NOT STAND TO BENEFIT FROM THE RELEASES)/POWERS OF APPOINTMENT (FIDUCIARY EXCEPTION TO THE USUAL BURDEN OF PROOF IN A CONSTRUCTIVE FRAUD ACTION DID NOT APPLY, ATTORNEYS WHO DRAFTED RELEASES OF POWERS OF APPOINTMENT WERE NOT PARTIES TO THE RELEASES AND DID NOT STAND TO BENEFIT FROM THE RELEASES)