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Trustee Was Not Negligent In Its Management of Three Trusts; Surrogate’s Court’s Findings Reversed

Reversing Surrogate’s Court, the Fourth Department determined the trustee of three trusts initially funded by Kodak stock was not negligent in its management of the trusts. The Fourth Department analyzed each trust using the relevant investment standards:

We conclude that the Surrogate erred in sustaining the objections to the three accounts because objectants failed to sustain their burden of proving that petitioner failed to diversify the trusts prudently within a reasonable time, and also failed to establish a reasonable date from which a surcharge could be calculated. As we explained in Knox (98 AD3d at 308-309), petitioner was subject to three separate standards of care as trustee: “[f]rom [1966] until 1970, the standard was the common-law rule, which provided that the trustee is bound to employ such diligence and such prudence in the care and management, as in general, prudent [persons] of discretion and intelligence in such matters, employ in their own like affairs’ . . . From 1970 to 1995, the standard of care was the prudent person rule established in EPTL 11-2.2 (a) (1), which provided that [a] fiduciary holding funds for investment may invest the same in such securities as would be acquired by prudent [persons] of discretion and intelligence in such matters who are seeking a reasonable income and preservation of their capital’ . . . Effective, January 1, 1995, the Prudent Investor Act (EPTL 11-2.3 [L 1994, ch 609, § 1]) created a new standard of care by providing that [a] trustee shall exercise reasonable care, skill and caution to make and implement investment and management decisions as a prudent investor would for the entire portfolio, taking into account the purposes and terms and provisions of the governing instrument’ (EPTL 11-2.3 [b] [2]). The statute lists various elements of the prudent investor standard, including: pursuing an overall investment strategy; considering numerous factors pertaining to the overall portfolio including, e.g., general economic conditions; and diversifying assets (see EPTL 11-2.3 [b] [3] [A]-[C]).” Notably, the “Prudent Investor Act requires a trustee to diversify assets unless the trustee reasonably determines that it is in the interests of the beneficiaries not to diversify’ ” (Janes, 90 NY2d at 49 n, quoting EPTL 11-2.3 [b] [3] [C]; see Knox, 98 AD3d at 310). Matter of Jp Morgan Chase Bank, N.A., 2015 NY Slip Op 08533, 4th Dept 11-20-15

 

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Constructive Trust Properly Imposed on Real Property, Criteria Explained

The Second Department determined the defendant (Chen) was entitled to impose a constructive trust on real property for which she contributed money. The court explained the criteria:

“Generally, a constructive trust may be imposed when property has been acquired in such circumstances that the holder of the legal title may not in good conscience retain the beneficial interest'” … . “The elements of a constructive trust are (1) a fiduciary or confidential relationship; (2) an express or implied promise; (3) a transfer in reliance on the promise; and (4) unjust enrichment” … . While these factors are useful in many cases, the constructive trust doctrine is not rigidly limited … . Thus, although the elements of a constructive trust must be proved by clear and convincing evidence …, “[t]he constructive trust doctrine is given broad scope to respond to all human implications of a transaction in order to give expression to the conscience of equity and to satisfy the demands of justice” … .

Here, the Supreme Court properly awarded judgment in favor of the defendant Al Ming Chen on her counterclaim to impose a constructive trust on the subject real property. Contrary to the plaintiff’s contention, Chen offered evidence satisfying the elements generally needed for the imposition of a constructive trust. The plaintiff’s contention that Chen never had any interest in the subject property, and therefore is not entitled to the imposition of a constructive trust, is without merit. Chen showed that she contributed money for the purchase of the subject property and for paying down the mortgage in reliance on an implied promise by the plaintiff that she shared an interest in the property … . Moreover, Chen demonstrated that a constructive trust is necessary in this case to satisfy the demands of justice … . Liu v Chen, 2015 NY Slip Op 08152, 2nd Dept 11-12-15

 

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Statute of Limitations for Breach of Fiduciary Duty Tolled Until Fiduciary’s Roles Terminated

In an action against a fiduciary stemming from the distribution of an estate, Supreme Court determined the six-year statute of limitations applied to the breach of fiduciary duty cause of action and precluded any evidence from prior to 2007.  The Third Department agreed that the six-year statute was the correct one, but held that the statute never started running because the fiduciary’s roles were never terminated. Therefore pre-2007 evidence was not precluded:

Although “New York law does not provide a single statute of limitations for breach of fiduciary duty claims [and] the choice of the applicable limitations period depends on the substantive remedy that the plaintiff seeks” …, the parties do not dispute that a six-year period applies to these two remaining causes of action. However, the statute of limitations for a claim alleging a breach of fiduciary duty is tolled until there has been an open repudiation by the fiduciary or the relationship has otherwise been clearly terminated … .

There is nothing in this record indicating that respondents’ relevant fiduciary roles have terminated. Although many of the actions about which petitioners complain were done openly, petitioners also allege that they were repeatedly assured that such actions were ultimately in their best interests. The amended petition alleges that respondents have not to date repudiated their positions as fiduciaries. That allegation is not denied in this pre-answer motion, which was supported only by an attorney’s affirmation and memorandum of law. Matter of Therm, Inc., 2015 NY Slip Op 07732, 3rd Dept 10-22-15

 

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Securities Did Not Pass Outside the Estate, Requirements of Transfer on Death Security Registration Act (TODSRA) Not Me

The First Department, in a full-fledged opinion by Justice Gische, over a concurring opinion arguing the matter had already been determined by Surrogate’s Court, determined a letter sent by decedent to Merrill Lynch did not meet the requirements of the Transfer on Death Security Registration Act (TODSRA) such that the securities account passed to the beneficiary outside the estate:

In order to take advantage of New York’s [TODSRA] law, certain categories of owners may request that a security be registered in beneficiary form (EPTL 13-4.2). The institution holding the securities account, however, is not required to either offer or accept a request to register a security in beneficiary form (EPTL 13-4.8). It is only if the owner requests that a security be held in beneficiary form and the entity holding the security accepts the designation, that an enforceable contractual relationship is created between the owner and that registering entity, requiring the registering entity to act in accordance with the designation (EPTL 13-4.9). Under TODSRA, the registering entity has the sole right to establish the terms and conditions under which it will receive and implement requests to register securities in beneficiary form (EPTL 13-4.10), and TODSRA statutorily mandates that the registering entity have certain protections in the process (EPTL 13-4.8).

A registering entity is not the owner of the security, but rather the person or entity that originates or transfers title to a security by registration, which includes a broker such as defendant (EPTL 13-4.1[i]). Thus, under the statute, it is perfectly clear that a unilateral action by an owner of a securities account to designate a beneficiary in the event of death is not by itself sufficient. Arroyo-Graulau v Merrill Lynch Pierce, Fenner & Smith, Inc., 2015 NY Slip Op 07774, 1st Dept 10-22-15

 

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Instructions In Will Re: Payment of Estate Taxes Properly Followed

The Second Department determined the instruction in the will that estate taxes be paid out of the residuary estate was properly followed:

All estate tax payments must be equitably apportioned among recipients of estate assets “unless otherwise provided in the will or non-testamentary instrument” (EPTL 2-1.8[c]), and such a contrary direction must be clear and unambiguous … . Although there is a strong policy favoring apportionment …, that policy gives way where the clear and unambiguous wishes of the testator direct otherwise … . Analysis begins with the general rules of will construction which provide that a court is to determine and effectuate the intent of the testator and that in doing so, it must construe his or her words according to their ordinary and natural meaning … .

Here, the second paragraph of the decedent’s will directs that all estate taxes, “in respect to any property required to be included in my gross estate for estate tax or like purposes by any such government, whether the property passes under this Will or otherwise, without contribution by any recipient of any such property,” were to be paid out of the residuary estate. The words clearly and unambiguously reflect the decedent’s intent that his preresiduary and nontestamentary beneficiaries … are to take their property without liability for the payment of any estate taxes, regardless of whether the taxes are imposed on property and assets passing under the will or outside of the will … . Matter of Priedits, 2015 NY Slip Op 07508, 2nd Dept 10-14-15

 

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Appropriate Statutes of Limitations and Accrual Dates Explained for “Breach of Fiduciary Duty,” Civil RICO,” and “Declaratory Judgment” Causes of Action

The Second Department described the analytical criteria for determining the statutes of limitations and accrual dates for (1) breach of fiduciary duty claims where allegations of fraud are essential; (2) civil RICO claims; (3) and declaratory judgment actions seeking a constructive trust:

“New York law does not provide a single statute of limitations for breach of fiduciary duty claims. Rather, the choice of the applicable limitations period depends on the substantive remedy that the plaintiff seeks. Where the remedy sought is purely monetary in nature, courts construe the suit as alleging injury to property’ within the meaning of CPLR 214(4), which has a three-year limitations period. Where, however, the relief sought is equitable in nature, the six-year limitations period of CPLR 213(1) applies” … .

“[W]here an allegation of fraud is essential to a breach of fiduciary duty claim, courts have applied a six-year statute of limitations under CPLR 213(8)” … . “An exception to this rule . . . is that courts will not apply the fraud Statute of Limitations if the fraud allegation is only incidental to the claim asserted; otherwise, fraud would be used as a means to litigate stale claims'” … . “Thus, where an allegation of fraud is not essential to the cause of action pleaded except as an answer to an anticipated defense of Statute of Limitations, courts look for the reality, and the essence of the action and not its mere name” … . …

CPLR 213(8) provides, in part, “the time within which the action must be commenced shall be the greater of six years from the date the cause of action accrued or two years from the time the plaintiff or the person under whom the plaintiff claims discovered the fraud, or could with reasonable diligence have discovered it.” “The discovery accrual rule also applies to fraud-based breach of fiduciary duty claims. An inquiry as to the time that a plaintiff could, with reasonable diligence, have discovered the fraud turns upon whether a person of ordinary intelligence possessed knowledge of facts from which the fraud could be reasonably inferred” … . …

“The statute of limitations for civil RICO claims is four years” … . “A RICO claim is deemed to have accrued when the plaintiff knew or should have known of his or her injury, regardless of when he or she discovered the underlying fraud'” … . …

“Actions for declaratory judgments are not ascribed a certain limitations period. The nature of the relief sought in a declaratory judgment action dictates the applicable limitations period. Thus, if the action for a declaratory judgment could have been brought in a different form asserting a particular cause of action, the limitations period applicable to the particular cause of action will apply” … .

The … action for a declaratory judgment could have been brought … as a cause of action to impose a constructive trust … . A constructive trust is equitable in nature and governed by a six-year statute of limitations … . DiRaimondo v Calhoun, 2015 NY Slip Op 07002, 2nd Dept 9-30-15

 

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Flaws in Causes of Action Stemming from the Alleged Breach of a Joint Venture Agreement Explained

In an action stemming from the alleged breach of a joint venture agreement, the Second Department, in the context of a motion to dismiss for failure to state a cause of action, went through each cause of action and, where dismissal was appropriate, noted the pleading failure. The joint venture cause of action did not allege a mutual promise to share the losses. The constructive trust cause of action did not allege a confidential or fiduciary relationship. The fraud allegations were not collateral to the terms of the alleged joint venture and no out-of-pocket losses were alleged. The tortious interference with contract cause of action did not allege the intentional procurement of a breach of the joint venture agreement. The accounting cause of action did not allege that a demand for an accounting was made. The Second Department noted that the motion to amend the complaint to cure some of the defects should have been granted. With respect to the criteria for determining a motion to dismiss for failure to state a cause of action where documentary evidence supporting the motion is submitted, the court explained:

“A motion pursuant to CPLR 3211(a)(1) to dismiss the complaint on the ground that the action is barred by documentary evidence may be granted only where the documentary evidence utterly refutes the plaintiff’s factual allegations, thereby conclusively establishing a defense as a matter of law” … .

In considering a motion to dismiss a complaint pursuant to CPLR 3211(a)(7), “the court must accept the facts as alleged in the complaint as true, accord plaintiffs the benefit of every possible favorable inference, and determine only whether the facts as alleged fit within any cognizable legal theory” … . A court may consider evidentiary material submitted by a defendant in support of a motion to dismiss pursuant to CPLR 3211(a)(7) … . When evidentiary material is considered on a motion to dismiss a complaint pursuant to CPLR 3211(a)(7), and the motion has not been converted to one for summary judgment, “the criterion is whether the [plaintiff] has a cause of action, not whether he [or she] has stated one, and, unless it has been shown that a material fact as claimed by the [plaintiff] to be one is not a fact at all and unless it can be said that no significant dispute exists regarding it . . . dismissal should not eventuate”… . Mawere v Landau, 2015 NY Slip Op 06317, 2nd Dept 7-29-15

 

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Failure to Timely Submit a Proposed Judgment of Divorce Did Not Constitute Abandonment of the Divorce Action/Decedent’s Death Before the Judgment of Divorce Was Entered Did Not Abate the Divorce Action/The Stipulation of Settlement (Re: the Divorce), In Which the Parties Agreed They Were No Longer the Beneficiaries of Each Other’s Wills, Was Enforceable

Decedent and her husband had entered a stipulation of settlement and all matters related to their divorce had been settled at the time of decedent’s death. Only the submission of the proposed judgment of divorce remained. The stipulation of settlement included the parties’ agreement that they were no longer the beneficiaries of each other’s wills. Decedent’s husband sought letters testamentary and a share in the estate, arguing that, because the proposed judgment of divorce was not submitted by decedent, decedent had abandoned the divorce action. Surrogate’s court agreed the divorce action had been abandoned and found there was a question of fact whether the stipulation of settlement was enforceable.  The Second Department reversed, finding that the divorce action was not abandoned and the stipulation of settlement was enforceable. Decedent’s husband, therefore, had no right to share in decedent’s estate:

Contrary to the Surrogate Court’s determination, the decedent did not abandon the divorce action pursuant to 22 NYCRR 202.48 by failing to timely submit a proposed judgment within 60 days of the Supreme Court’s verbal direction. Since the 60-day time period to submit a proposed judgment under 22 NYCRR 202.48(a) does not run until “after the signing and filing of the decision directing that the [judgment] be settled or submitted,” and the court’s direction was not reduced to a written decision, there was no violation of that rule here … . Furthermore, since all issues in the divorce action had been resolved at the time of the decedent’s death, the Supreme Court had adjudged that the decedent was entitled to a divorce, and nothing remained to be done except the ministerial entry of a judgment of divorce, the decedent’s death did not abate the divorce action … . Under these circumstances “the parties’ substantive rights should be determined as if the judgment of divorce had been entered immediately as of the time nothing remained to be done except enter a judgment” …, and the stipulation of settlement is thus enforceable as a matter of law. Moreover, since the stipulation of settlement contained language which “clearly and unequivocally manifests an intent on the part of the spouses that they are no longer beneficiaries under each other’s wills” …, the stipulation of settlement revoked any testamentary disposition in Carmine’s favor under EPTL 3-4.3, regardless of whether it was ultimately followed by a formal dissolution of the marriage … . Matter of Rivera, 2015 NY Slip Op 06247, 2nd Dept 7-22-15

 

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Constructive Trust Cause of Action Did Not Accrue When Defendant Acquired the Subject Property (In 1995 or 1996), But Rather When Defendant , Who Had Properly Acquired the Property, Breached Her Promise to Transfer an Interest in the Property to Plaintiff (In 2012)

In finding the constructive trust cause of action should not have been dismissed as time-barred, the Second Department explained that a cause of action for a constructive trust accrues (1) when the constructive trustee acquires the property wrongfully, or (2) when the constructive trustee wrongfully withholds property which was lawfully acquired but was to be transferred:

A cause of action “for the imposition of a constructive trust is governed by the six-year Statute of Limitations of CPLR 213(1), which starts to run upon the occurrence of the wrongful act giving rise to a duty of restitution” … . “A determination of when the wrongful act triggering the running of the Statute of Limitations occurs depends upon whether the constructive trustee acquired the property wrongfully, in which case the property would be held adversely from the date of acquisition, or whether the constructive trustee wrongfully withholds property acquired lawfully from the beneficiary, in which case the property would be held adversely from the date the trustee breaches or repudiates the agreement to transfer the property” … .

Here, the gravamen of the plaintiff’s cause of action for the imposition of a constructive trust is not … that the defendants wrongfully acquired the subject properties in or around 1995, or 1996, but rather that subsequent thereto, sometime in 2012, the defendant… breached her promise to the plaintiff that they would be equal partners with respect to those properties … . Barone v Barone, 2015 NY Slip Op 06102, 2nd Dept 7-15-15

 

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Estate of Mortgage-Holder Is a Necessary Party In a Foreclosure Proceeding

The Third Department determined that the estate of one of the mortgage-holders was a necessary party in a foreclosure proceeding. The court explained the relevant law:

“In an action to foreclose a mortgage, all parties having an interest, including persons holding title to the subject premises, must be made a ‘party . . . to the action'” … . Although defendant did not specifically raise the argument that decedent’s estate was a necessary party to the instant action, “the absence of a necessary party may be raised at any stage of the proceedings, by any party or by the court on its own motion” … . …. [W]here two individuals are the co-holders of a mortgage and one dies, the plaintiffs in a related foreclosure action would be the living mortgagee — or, in this case, his assignee … — and the personal representative of the deceased mortgagee … .

Here, given the lack of evidence that the corpus and distribution of decedent’s estate have previously been determined, such determination for the first time could inequitably affect decedent’s estate … . We find that decedent’s estate is therefore a necessary party to this action, as “[t]he rights, interests and equities of all of the parties claiming an interest in the mortgaged premises . . . should be settled and determined before any judgment of foreclosure and sale is entered” … . Bayview Loan Servicing, LLC v Sulyman, 2015 NY Slip Op 05989, 3rd Dept 7-9-15

 

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