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Fiduciary’s Conflict of Interest Renders Transactions Voidable

The First Department noted the effect of a fiduciary’s conflict of interest upon transactions entered into by the fiduciary:

When a fiduciary has a conflict of interest in entering a transaction and does not disclose that conflict to his/her principal, the transaction is “voidable at the option of” the principal … . Moreover, “an agent cannot bind his principal . . . where he is known to be acting for himself, or to have an adverse interest” … .  Genger v Genger, 2014 NY Slip Op 06248, 1st Dept 9-23-14

 

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Husband, Criminally Responsible for the Death of His Mother-in-Law, Could Not Inherit the Mother-in-Law’s Estate Indirectly After the Death of His Wife

The Second Department, in a full-fledged opinion by Justice Hall, determined the husband, Brandon, who was criminally responsible for the death his mother-in-law, could not inherit the mother-in-law’s estate indirectly after the death of his wife, Deanna:

The principle that a wrongdoer may not profit from his or her wrongdoing is deeply rooted in this State’s common law. In 1889, the Court of Appeals decided the seminal case of Riggs v Palmer (115 NY 506) . In Riggs, a grandson, who had intentionally killed his grandfather in order to ensure his inheritance, was prevented from inheriting under the grandfather’s will. In reaching this determination, the Court of Appeals held that, “[n]o one shall be permitted to profit by his own fraud, or to take advantage of his own wrong, or to found any claim upon his own iniquity, or to acquire property by his own crime” (id. at 511). In short, the Riggs rule “prevents wrongdoers from acquiring a property interest, or otherwise profiting from their own wrongdoing” … . * * *

The issue here is whether the Riggs doctrine may be extended to prevent a wrongdoer from indirectly profiting from his or her own wrongdoing. More specifically, we are asked to determine whether Brandon may inherit assets of the decedent’s estate indirectly through Deanna’s estate. While it is clear that Brandon would not be able to inherit from the decedent’s estate directly, the issue of whether he may do so indirectly through Deanna’s estate is less settled. Indeed, this is an issue of first impression, as there is no appellate precedent from New York addressing whether the Riggs doctrine applies where a killer seeks to inherit assets from his or her victim indirectly through the estate of a person not implicated in the unlawful killing. * * *

Here … there is a clear causal link between the wrongdoing and the benefits sought … . But for Brandon’s killing of the decedent, the estate of Deanna would not likely include any assets from the decedent’s estate. Furthermore, since only a relatively short period of time elapsed between the decedent’s death and the death of Deanna, it is clear that Deanna’s estate would include assets traceable to the decedent. Indeed, according to [the] petition for letters of administration, Deanna’s estate consists only of funds Deanna received as beneficiary of the decedent’s retirement plan, and the expected inheritance from the decedent. Significantly, the decedent’s estate has not yet been distributed to Deanna’s estate, and no commingling of any funds between the two estates has occurred.

Under these circumstances, the Surrogate’s Court appropriately exercised its equitable powers (see SCPA 201[2]) in extending the Riggs doctrine to prevent Brandon from inheriting any portion of the decedent’s estate through the estate of Deanna … . Matter of Dianne Edwards, 2014 NY Slip Op 05873, 2nd Dept 8-20-14

 

No Contest Clause Was Not Triggered by Offering Will for Probate or Questioning Actions of Named Executor(s)

The Third Department, in a full-fledged opinion by Justice Peters, over a dissent, determined that a no contest clause in a will was not triggered by offering the will for probate and was not triggered by questioning the actions of the named executors.  The beneficiary of a 2006 will, who had been excluded from the 2011 will, sought to probate the 2006 will.  The petitioners then sought probate of the 2011 will when the executors failed to do so. The beneficiary of the 2006 will argued that the no contest clause in the 2011 will had thereby been triggered:

While enforceable, no contest clauses are disfavored and must be strictly construed … . The no contest provision at issue provides for revocation of a beneficiary’s interest if the beneficiary “contest[s] the probate or validity of [the] Will or any provision thereof, or . . . institute[s] . . . any proceeding to . . . prevent any provision [of the Will] from being carried out in accordance with its terms.” Here, petitioners did not contest the validity of the will or any of its provisions by seeking to admit the will to probate … . Rather, given that [the beneficiary of the 2006 will who had been excluded as a beneficiary from the 2011 will] had already offered the 2006 will for probate nearly two months earlier, they reasonably undertook to probate the 2011 will themselves after the nominated executor and successor executor thereunder failed to do so.

To the extent that petitioners sought letters of administration, we cannot conclude that, by including the no contest clause in his will, decedent intended to preclude a beneficiary from challenging or otherwise questioning the conduct of a fiduciary. Matter of Prevratil, 2014 NY Slip Op 05478, 3rd Dept 7-24-14

 

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Under Mental Hygiene Law, Claim Made for Payment from Nursing Home Resident’s Guardianship Account During Resident’s Life Had Priority over Claim by Department of Social Services After Resident’s Death

The First Department, in a full-fledged opinion by Justice Acosta, over a dissent, determined that a nursing home (Eastchester) which had submitted a claim for the resident’s (Shannon’s) care to the resident’s guardianship account during the resident’s life had priority over the Department of Social Services, which submitted a claim for the resident’s care (Medicaid) to the resident’s estate after death:

Eastchester, a skilled nursing facility, admitted Edna Shannon into its care in 2005. In 2008, due to Shannon’s need for assistance, and concerns about the proper handling of her finances by third parties, Eastchester commenced a proceeding pursuant to Mental Hygiene Law article 81 to have a guardian appointed for her person and property. It also filed an application for medical assistance for Shannon’s nursing home costs. In 2009, DSS determined that Shannon was eligible for Medicaid, effective September 1, 2008. By order and judgment entered April 24, 2009, Supreme Court appointed Family Service Society of Yonkers as her guardian. Among other things, the court conferred on Family Service Society the authority to pay Shannon’s nursing home expenses and to pay bills after her death. Shannon died in December 2011 at age 87. * * *

As Eastchester was to be paid out of the guardianship account before any funds passed to the estate, its claim had priority over DSS’s claim.  MHL § 81.44(d) provides that, within 150 days of the death of an incapacitated person, the guardian must serve on the personal representative of the decedent’s estate, or if none, the public administrator or chief fiscal officer, a statement of assets and notice of claim, and “except for property retained to secure any known claim, lien or administrative costs of the guardianship,” deliver all guardianship property to the personal representative, public administrator, or chief fiscal officer (emphasis added). Matter of Shannon, 2014 NY Slip Op 04452, 1st Dept 6-17-14

 

“Confidential Relationship” With Decedent Not Demonstrated As a Matter of Law

The Third Department determined Supreme Court properly ruled that petitioners had not demonstrated, as a matter of law,  the existence of a confidential relationship between the decedent and respondent. Where a confidential relationship is demonstrated, the stronger party has the burden of showing by clear and convinciing evidence that a particular transaction from which the stronger party benefitted was not the result of undue influence.  The court explained the operative criteria for a confidential relationship:

A confidential relationship is one that is “of such a character as to render it certain that [the parties] do not deal on terms of equality” … . Such inequality may occur from either one party’s “superior knowledge of the matter derived from a fiduciary relation, or from an overmastering influence” or from the other’s “weakness, dependence, or trust justifiably reposed” on the stronger party … .

The limited issue presented on this appeal is whether Supreme Court erred when it declined to find, as a matter of law, that there was a confidential relationship between respondent and decedent. The basis for petitioners’ claim that such a relationship existed was, in part, the familial relationship between respondent and decedent. A familial relationship, however, is not necessarily a confidential relationship … . Importantly, the existence of a confidential relationship is ordinarily a factual determination based upon “evidence of other facts or circumstances showing inequality or controlling influence”… . Matter of Bonczyk v Williams, 2014 NY Slip Op 05231, 3rd Dept 7-10-14

 

Surrogate’s Court Properly Declined to Suspend the Fiduciaries’ Letters Testamentary and Letters of Trusteeship Pending a Hearing to Determine the Contested Facts

The Second Department determined Surrogate’s Court properly declined to suspend the fiduciaries’ letters testamentary and letters of trusteeship pending the outcome of an accounting proceeding.  Although allegations of comingling property would support such a suspension, the allegations were contested and it would be an abuse of discretion to order the suspension without a hearing:

The removal of a fiduciary pursuant to SCPA 711 and 719 is equivalent to “a judicial nullification of the testator’s choice and may only be decreed when the grounds set forth in the relevant statutes have been clearly established” … .

Nevertheless, pursuant to SCPA 719(7), “letters [issued to a fiduciary] may be suspended, modified or revoked, or a lifetime trustee removed or his powers suspended or modified, without process. . . . [w]here he mingles the funds of the estate with his own or deposits them with any person, association or corporation . . . in an account other than as fiduciary” (SCPA 719[7] [emphasis added]). Fiduciary letters also may be suspended without process “[w]here any of the facts provided in 711 are brought to the attention of the court” (SCPA 719[10]).

However, as noted in Matter of Duke (87 NY2d 465),

“[w]hile the Surrogate is clearly granted the exceptional authority to summarily remove executors without the formality of commencing a separate proceeding, the authority to exercise the ultimate sanction summarily is not absolute. The Surrogate may remove without a hearing only where the misconduct is established by undisputed facts or concessions, where the fiduciary’s in-court conduct causes such facts to be within the court’s knowledge, or where facts warranting amendment of letters are presented to the court during a related evidentiary proceeding” (Matter of Duke, 87 NY2d at 472-473 [internal citations omitted; emphasis added]).

Thus, revoking a fiduciary’s letters without a hearing pursuant to SCPA 719 will constitute an abuse of discretion “where the facts are disputed, where conflicting inferences may be drawn therefrom . . . or where there are claimed mitigating facts that, if established, would render summary removal an inappropriate remedy” … .

Contrary to the appellants’ contention, the allegations in this case are sharply disputed and give rise to conflicting inferences regarding the Fiduciaries’ alleged misconduct. Matter of Mercer, 2014 NY Slip Op 05186, 2nd Dept 7-9-14

 

Petitioner Sufficiently Alleged She Is a Nonmarital Child of the Decedent—Probate Decree Properly Vacated

The Second Department determined Surrogate’s Court properly vacated a probate decree based upon petitioner’s assertion she is a nonmarital child of the decedent:

Here, the petitioner … sufficiently alleged that the decedent … “openly and notoriously acknowledged [her] as his own [child]” and, thus, she may be entitled to inherit from him (EPTL 4-1.2[a][2][C][ii]…). Accordingly, the Surrogate’s Court properly denied the executor’s motion pursuant to CPLR 3211(a) to dismiss the petition.

” Because vacatur disrupts the orderly process of administration and creates a continual aura of uncertainty and nonfinality, a probate decree will be vacated only in extraordinary circumstances'” … . “However, it is equally true that the Court should also be slow to say that an injustice may not be corrected'” … . “A petitioner seeking to vacate a probate decree must establish with some degree of probability that his claim is well founded, and that, if afforded an opportunity, he will be able to substantiate it'” … . An application to vacate a probate decree is committed to the discretion of the court … . Here, the petitioner showed with some degree of probability that she is a nonmarital child of the decedent and that, if afforded an opportunity, she will be able to substantiate her claim. Matter of Saginario, 2014 NY Slip Op 05192, 2nd Dept 7-9-14

 

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Constructive Trust Cause of Action Sufficiently Pled/Dismissal “With Prejudice” Not Allowed—Doctrine of Res Judicata Does Not Apply—a Dismissal for Failure to State a Cause of Action Is Not On the Merits

The Second Department determined Supreme Court should not have dismissed the constructive trust cause of action.  The court further determined that the conversion, constructive fraud and breach of contract causes of action were properly dismissed for failure to state a cause of action, but should not have been dismissed “with prejudice.”  With respect to the constructive trust and the dismissal with prejudice, the court wrote:

The equitable remedy of a constructive trust may be imposed ” [w]hen 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 cause of action to impose a constructive trust are (1) the existence of a confidential or fiduciary relationship, (2) a promise, (3) a transfer in reliance thereon, and (4) unjust enrichment” … . “To achieve equity and avoid unjust enrichment, the courts apply these factors flexibly rather than rigidly” … .

Here, the plaintiff sufficiently alleged the existence of a confidential or fiduciary relationship with the defendants. The parties were related through marriage, and the plaintiff and Atanasio, along with their respective spouses, pooled their resources in order to purchase the residential property and the boat … . Further, the plaintiff sufficiently pleaded the elements of a promise and a transfer in reliance on the promise. He alleged that, before he sold the defendants his interest in the property in November 2005, the defendants promised to reimburse him for the expenditures he made for the property and boat as long as he continued making those payments for one year after the sale of his interest. In reliance on this alleged promise and his confidential relationship with the defendants, he transferred his interest in the property to the defendants, and thereafter continued to make expenditures in connection with the property and boat. Finally, his allegations that he made all expenditures for the property and boat during a period of 7½ years, and that the defendants refused to reimburse him, despite being co-owners of the property and boat and notwithstanding their promise, were sufficient to plead the unjust enrichment element necessary to the imposition of a constructive … .

…Supreme Court, upon dismissing the second, third, and fourth causes of action, improperly did so “with prejudice.” A dismissal for failure to state a cause of action based on the insufficiency of the allegations in the pleading is not a dismissal on the merits, and does not bar the adequate repleading of the claim in a subsequent action… . Canzona v Atanasio, 2014 NY Slip Op 04458, 2nd Dept 6-18-14

In a related case, the Second Department noted that, because a dismissal for failure to state a cause of action is not on the merits, the doctrine of res judicata does not apply.  Canzona v Atanasio, 2014 NY Slip Op 04459, 2nd Dept 6-18-14

 

No Assets Left to Distribute—Disposition of a Painting Which Was Part of the Estate and Had Been Donated to a Museum Could Be Protected by the Attorney General (Charged with Protecting the Donor’s Wishes)–No Need to Issue Letters of Administration to Petitioner to Ensure Proper Use of the Painting

The Fourth Department determined letters of administration should not have been granted because all the assets of the estate had been distributed.  The letters were sought by a relative of the decedent who was concerned about the disposition of a valuable painting which was a charitable gift to a museum and could not be otherwise disposed of without a court order.  The court concluded that the disposition of the painting could be protected by the Attorney General:

…[W]e … conclude that [the Surrogate] erred in granting letters of administration c.t.a. to petitioner. It is undisputed that there are no assets of the estate that have not been administered … . As the Court of Appeals has written, “[t]here may be cases where letters of administration are necessary to be granted for other purposes than the recovery and distribution of assets[,]” including a “claim in respect to them which can be enforced” … . Nevertheless, we conclude that any claim with respect to the painting is to be “enforced by the [Attorney General], pursuant to his duty to effectuate the donor’s wishes” …, and we conclude that letters of administration c.t.a. are not “necessary” … .

We further conclude that limited letters of administration also are not “appropriate or necessary in respect of the affairs of the estate” (SCPA 702 [10]…). … [T]he Surrogate has previously prohibited the disposition of the painting without court approval, and there is no basis to conclude that the Attorney General is not properly fulfilling his duty to protect the decedent’s wishes with respect to the bequest to the Emerson Foundation … . Matter of Seward, 2014 NY Slip Op 04317, 4th Dept 6-13-14

 

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“No Action” Clause In a Trust Indenture Interpreted Narrowly Under Established Principles of Contract Interpretation—The Clause Did Not Preclude Suit By Securityholders Based Upon Their Common Law and Statutory Rights In an Action Stemming from the “Credit Default Swap” Crisis

In an action arising out of the credit default swap crisis, the Court of Appeals, in a full-fledged opinion by Judge Rivera, determined that a “no action” clause, which imposed restrictions on actions brought by securityholders, must be construed narrowly according to its terms.  The “no action” clause stated in pertinent part:  “Limitations on Suits by Securityholder. No holder of any Security shall have any right by virtue or by availing of any provision of this Indenture to institute any action or proceeding at law or in equity or in bankruptcy or otherwise upon or under or with respect to this Indenture… .”  The “Indentures” were agreements entered into with trustees who served as third party administrators of the issuance of securities.  The Court of Appeals held that the clause related solely to actions “with respect to this Indenture” and did not affect the common law and statutory actions brought by securityholders to enforce their rights:

A trust indenture is a contract, and under New York law “[i]nterpretation of indenture provisions is a matter of basic contract law” … .

In construing a contract we look to its language, for “a written agreement that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms” … . As the case law further establishes, we read a no-action clause to give effect to the precise words and language used, for the clause must be “strictly construed” … .

Applying these well established principles of contract interpretation, and with the understanding that no-action clauses are to be construed strictly and thus read narrowly, we turn to the language of the no-action clause presented by the certified question. The no-action clause here states that no securityholder “shall have any right by virtue or by availing of any provision of this Indenture to institute any action or proceeding at law or in equity or in bankruptcy or otherwise upon or under or with respect to this Indenture . . .”. The clear and unambiguous text of this no-action clause, with its specific reference to the indenture, on its face limits the clause to the contract rights recognized by the indenture agreement itself. Further supporting this construction of the clause is the sole textual reference to securities, which is contained in the clause's provision for a Trustee-initiated suit for a continuing “default in respect of the series of Securities.”[FN11] This part of the no-action clause permits the trustee to sue in its name, after notice by a securityholder of a continuing default and upon approval of the suit by a majority of securityholders. Thus, the clear import of the no-action clause is to leave a securityholder free to [*10]pursue independent claims involving rights not arising from the indenture agreement. Quadrant Structured Prods Co Ltd v Vertin, 2014 NY Slip Op 04114, CtApp 6-10-14

 

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