Matter of Teitelbaum

[*1] Matter of Teitelbaum 2006 NY Slip Op 50422(U) [11 Misc 3d 1067(A)] Decided on March 15, 2006 Sur Ct, Rockland County Berliner, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on March 15, 2006
Sur Ct, Rockland County

In the Matter of Hanoch Teitelbaum and MINDEL TEITELBAUM, Creators of the SIMCHA TEITELBAUM Irrevocable Trust, for Partial Suspension of Trustee's Authority to Act, Approval of Resignation of Trustee and Appointment of Successor Trustees.



2001/49A

Robert M. Berliner, J.

This is a proceeding by the grantors of a trust to remove the trustee and to appoint successor trustees of the grantors' choosing. The trustee cross-petitions to dismiss the petition and to "suspend" certain provisions of the trust relating to the removal of a trustee and the appointment of a successor trustee. In order to resolve the complicated issues raised in these two proceedings, the court must fully set forth the factual background of both of them.

Simcha Teitelbaum received settlement proceeds from a medical malpractice action brought on his behalf for injuries he suffered at birth. Hanoch and Mindel Teitelbaum, his parents, were appointed guardians of his person and property under SCPA Article 17-A by order of this court on June 20, 2001. Under that order they were permitted to enter into an agreement with the Bank of New York, as investment advisor, and to invest the settlement funds.

In May, 2002, the guardians petitioned the court for the establishment of an irrevocable trust for Simcha's benefit into which the guardianship funds would be placed. By order dated May 22, 2002, this court authorized the establishment of the trust, authorized the transfer of the guardianship assets to the name of the trust, and authorized the withdrawal of monies to pay legal fees and to settle a debt owed to the Rockland County Department of Social Services. At the time of the establishment of the trust the guardianship account held assets with a market value of over $4,000,000.00.

The trust agreement names GUARDIAN TRUST COMPANY, FSB (hereinafter Guardian) as trustee of the trust and provides that the appointment of a successor trustee "shall be upon application to the court." [Trust Agreement, Article V(1)]. The agreement provides in Article V(4) that the creators of the trust may remove any trustee, appoint a successor or co-trustee or trustees, and appoint a trustee or trustees to replace a trustee who has been removed or [*2]who ceases to act. The agreement also gives the trustee broad powers for the management of the trust, including the express and implied powers of EPTL Article 11, but necessarily provides that court approval must be sought in order to exercise powers beyond those granted by the agreement or by statute.

Guardian began acting as trustee and, pursuant to requests made by the guardians, made disbursements of income and principal to them. Such disbursements were, pursuant to the trust agreement, solely within the trustee's discretion. [Trust Agreement, Article II(1)(a)]. The trust agreement also provides that, "The trustee shall file in the month of February of each year with the Surrogate's Court of the County of Rockland, an annual report in the form and manner required by §1721 of the Surrogate's Court Procedure Act." [Trust Agreement, Article V(6)]. The agreement further provides that, "The Court shall have continuing jurisdiction over the performance of the duties of the Trustee, the interpretation, administration, and operation of this Trust, the appointment of a successor Trustee and all other related matters." [Trust Agreement, Article V(7)].

The guardians filed guardianship accountings, as required by the decree appointing them, for the year 2001, and also for the entire year 2002 (including the time period following the establishment of the trust). They also filed a guardianship accounting for 2003, and submitted a guardianship accounting for 2004 which was not accepted for filing by the court, since all funds from the guardianship are now in the trust, and the trustee was required by the terms of the trust agreement to account. The trustee continued to make disbursements to the guardians through and including the year 2005, and has not filed any accountings since the establishment of the trust.

In May 2004, the trustee filed a verified petition seeking advice and direction concerning property located in Jerusalem, Israel which was "purchased by the Trustee as an investment pursuant to its authority under Article FOURTH of the Trust . . ." [Verified Petition of Guardian Trust Company, filed May 3, 2004, para. 8]. The trustee sought approval from the court for the prior purchase of the property. A copy of the unsigned contract of sale, approved by the trustee, which was submitted as an exhibit to the petition lists Hanoch and Mindel Chana Teitelbaum as the purchasers of the property. A certified, translated copy of the deed[FN1], also submitted with the petition, names Daniel and Scheindl Sara Geldzahler as the owners of the property. The trustee also sought approval of the court for proposed annual gifts of principal and income to Congregation Tamar of Monsey, New York, where Simcha's father serves as Rabbi, based on Simcha's religious obligation to make gifts to charity and the fact that such gifts would benefit the trust by reducing the taxable income of the trust.

On July 9, 2004, the trustee notified the guardians in writing that it was electing to resign as trustee "effective June 30, 2004," and that it would petition the court to be formally relieved. The correspondence included a "Notice of Resignation of Trustee." On July 13, 2004, the trustee by its attorneys, Slade & Newman, LLP, withdrew the petition for advice and direction. To date, the trustee has not filed a petition to be relieved.

After the guardianship accounting for the year 2004 was submitted to the court in March of 2005, and after the petition for advice and direction was filed by the trustee, the court, on its [*3]own motion, appointed Gary E. Bashian, Esq., as guardian ad litem for Simcha in the proceeding. [Decision and order, August 29, 2005, Del Pizzo, Surrogate.][FN2] According to correspondence in the court's files, dated December 6, 2005, the guardian ad litem had reviewed the court's entire guardianship and accounting files and reported that he questioned many transactions made by the trustee as well as the possible improper use of monies paid for the benefit of Simcha. Mr. Bashian also reported that he advised the attorneys for the trustee that he was preparing to petition the court for an accounting from the trustee and the turnover of assets to the trust or the guardianship. On December 9, 2005, the trustee filed a summons and verified complaint in Supreme Court, New York County, against Rabbi Hanoch Teitelbaum, Mindel Teitelbaum, Daniel Geldzahler, Shaindy Sara Geldzahler, and Congregation Tamar, Inc. a/k/a Congregation Tamar of Monsey, Inc., as defendants. The complaint alleges causes of action for fraud, constructive trust, conversion, accounting and unjust enrichment. In that action the trustee continues to be represented by Slade & Newman LLP.

On January 6, 2006, by order to show cause, the present petition was filed by the guardians. The petition alleges that there has been an "irretrievable breakdown in the relationship" between the petitioners and the trustee, citing the filing of the action in Supreme Court, New York County. The petition also alleges that the trustee, following its notice of resignation, never sought court approval for the resignation and has never filed an accounting. It further alleges that the trustee had made monthly disbursements to petitioners on Simcha's behalf in varying amounts up to and including $4,700.00 in December, 2005, but had "elected to discontinue the monthly disbursement." The petition also alleges that the trustee has continued to withdraw funds for attorneys' fees in an amount greater than $37,000.00 in the one-year period beginning three months after its notice of resignation. The petition sought confirmation of the trustee's resignation or, in the alternative, removal of the trustee, and the appointment of trustees nominated by the guardians, the grantors of the trust. The nominated successor trustees were Aaron Berger, a family friend; Daniel Geldzahler, Simcha's uncle; and Mindel Teitelbaum, Simcha's mother and co-guardian.

The order to show cause requested temporary relief in the form of an order directing the trustee to continue monthly disbursements in the amount of $4,700.00 to the guardians on Simcha's behalf to maintain the status quo, as well as a partial suspension of the trustee's authority to act pending the outcome of the proceeding. The court granted both requests for temporary relief. The court's order restrained the trustee from making any withdrawals or distributions from the trust except for the $4,700.00 monthly payment for Simcha's benefit.[FN3] The trustee submitted a verified answer to the petition, denying the allegations and raising affirmative defenses. Petitioners submitted a reply affirmation in which they argue that the nominated [*4]successor trustees should be appointed by the court according to the terms of the trust agreement and also arguing that the present trustee failed to comply with the court's temporary order directing monthly payments to continue on Simcha's behalf and restraining the trustee from making any other withdrawals or distributions from the trust pending the hearing and determination of the petition. Petitioners supplied a copy of the transaction detail of the trust account showing a disbursement of $6, 868.78 on January 20, 2006, for legal fees to Slade & Newman LLP. With the court's permission, the trustee submitted a sur-reply arguing, inter alia, and in support of its first affirmative defense, that petitioners had failed to allege or prove any cause under SCPA §711 for suspending, modifying or revoking the trustee's authority. They also argue that the delay in issuing the January disbursement on Simcha's behalf was not willful, but rather a matter of delay to be expected in the operation of corporate entities. The trustee also denies that the payment of legal fees constituted a willful violation of the court's order, because the court had expressly permitted it to continue acting in the New York County action, and it believed it was entitled to pay legal fees under the court's ruling. The trustee asserted that the appropriate manner to challenge the fees would be in an objection to an accounting, not in the present proceeding.

On January 23, 2006, the trustee filed the present cross-petition. In the cross-petition, the trustee asks the court to deny the petition seeking its removal, to "suspend the operative provision of Article V, paragraph (4) of the Trust Agreement pending resolution of the New York Action," and to deny petitioners' request to appoint the trustees nominated by them. In support of the relief requested the trustee purports to withdraw its notice of resignation, noting that no petition for resignation has ever been submitted to the court. The trustee further argues that the petitioners' request to partially suspend the trustee's authority to act is sought solely to prevent the trustee from litigating the New York County Supreme Court action, and that appointment of the nominated trustees should be denied because of their conflicts of interest with the trust and because they are accused of serious wrongdoing in the pending litigation. Finally, the trustee argues that, by the terms of the trust agreement, the court is without the power to direct continuing distributions on behalf of Simcha, and that the court should suspend the provision of the trust agreement permitting the creators of the trust to appoint successor trustees. The guardians filed a verified answer and affirmation in opposition to the cross-petition, and the court granted leave to cross-petitioner, the trustee, to file a reply, which was filed on March 7, 2005.

The court has reviewed and considered all of the submissions by all parties to these proceedings as well as the court documents in the related guardianship proceeding and now makes the following findings of fact and conclusions of law.

This court is given broad authority in law and equity to determine all questions between the parties in any proceeding before it. SCPA §201(3). The court, like all courts with equitable jurisdiction, has a duty to protect the interests of its wards. Yaddow v. Estate of Smith, 130 AD2d 838 (3d Dept 1987); In re Bomba, 2001 WL 1536807, 2001 NY Slip Op. 40311 (Sup Ct NY County); Favier v. Winick, 151 Misc 2d 910 (Sup Ct Suffolk County, 1992). The court also has specific continuing jurisdiction over the guardians of the person and property of individuals. SCPA §1758. In the context of the present rancorous dispute between the parties, the court must act to do what is in the best interests of Simcha Teitelbaum. Having an extensive record as well as ample pleadings from all parties before it the court does not find that due process requires a [*5]hearing at this time. Matter of Rose BB, 300 AD2d 868 (3d Dept 2002).

The plain language of the trust agreement allows the grantors, Simcha's guardians, to remove a trustee and appoint a new trustee or trustees, but only with this court's approval. It is clear that the trust instrument in question would not have been approved by the court without the language in Article V(7) giving the court continuing supervisory power over the trust. Estate of Mede, 177 Misc 2d 974 (Surrogate's Court, Kings County 1998)(trust for minor children not approved where it would improperly eliminate Surrogate Court's right to supervise fiduciary); Matter of Larson, 190 Misc 2d 482 (Surrogate's Court, Nassau County 2002)(device similar to supplemental needs trust approved only with condition that annual account and inventory be filed with court).

In this proceeding it is indisputable that Guardian, as trustee, has failed to file annual accountings with the court as required by the trust agreement. There is also uncontroverted proof that the trustee made a disbursement of trust funds for its own legal fees, whether willfully or not, after being directed by the court not to do so. This alone might provide the court with sufficient reason to remove a fiduciary. See Matter of Makowski, 13 AD3d 1210 (4th Dept 2004). However, the court need not make such a finding since, in the exercise of its discretion and its equitable powers, it finds that it would be in the best interests of its ward and of the trust to approve the grantors' request to remove the trustees at this time.

The court need not, as argued by the trustee, await the outcome of the present New York County action in order to take whatever steps are necessary to protect Simcha's interests. Cf. Matter of Brady, 111 Misc 492 (Surrogate's Court Bronx County, 1920). The court does not anticipate that a change of trustee will impede Guardian in its continuation of the New York Supreme Court action. However the court does find that, at the present time, the legal fees for Guardian should not continue to be borne in the first instance by the trust. The award of any legal fees incurred by the fiduciary is ultimately a matter for this court to decide upon a proper application, notwithstanding any agreements which the trustee has entered into with counsel. Matter of Trotta, 161 Misc 2d 853 (Sup Ct Suffolk County 1994). Nor does the court find that a large trust company like Guardian should be permitted to continue to pay legal fees from the trust without prior court approval, particularly since Guardian alleges in its cross-petition that the trust does not presently earn enough income to cover the $4,700.00 monthly distribution for Simcha's benefit. (Cross-petition, para. 36). Guardian's parent company must, at the very least, have in-house counsel, and if not, the ability to pay for outside counsel to continue this action. As Guardian concedes in its sur-reply to the court, the appropriate time and method of determining its legal fees will be in a trust accounting proceeding (Sur-reply affirmation of Kara K. Miller, para. 32), which will, in any event, be directed by the court.

The court also finds that there are serious allegations lodged against Simcha's guardians concerning the possible misuse of trust funds. Similar allegations are also lodged against another of the individuals proposed by the guardians as successor trustee, Daniel Geldzahler. While these are presently only allegations, the court finds that, under these circumstances, the appointment of Mindel Teitelbaum and Daniel Geldzahler as two out of three successor trustees would be improvident and would not be in the best interests of Simcha or the trust. Although there are presently no allegations of wrongdoing against the third proposed trustee, Aaron Berger, the court finds that the interests of the trust and of Simcha's future economic well-being are best [*6]served by the appointment of a completely neutral, independent trustee who has no ties to any party in this dispute and who has expertise in handling a trust of this nature and magnitude. The court therefore appoints Abraham N. Kleinman, Esq., P.O. Box 211, West Nyack, NY 10994, as successor trustee who shall qualify upon the filing of a bond in the sum of $3,000,000.00 (three million dollars).

In reviewing all of the documents in this proceeding, the court finds that at the time the guardian ad litem was appointed there was no proceeding pending. The guardian ad litem is therefore relieved and is granted leave to file with the court an affidavit of services for time expended.

Based on the foregoing the petition is granted to the extent that Guardian Trust Company, FSB is immediately removed as trustee of the trust and is otherwise denied. The cross-petition to dismiss is denied in its entirety. The court orders that, with the exception of the monthly stipend on Simcha's behalf, no disbursements be made or approved from the trust funds without further order of the court. The successor trustee may continue to pay $4,700.00 per month for Simcha's benefit for the months of April, May and June, 2006.

Under SCPA §1758, before payments may be made from trust funds for the succeeding months, the guardians are directed to present to the successor trustee for approval by the court a detailed budget setting forth the amounts needed for Simcha's care, and also setting forth the income and other assets of Simcha's parents which may be used to contribute to his care. SCPA §§1761, 1713; Matter of Cruz, 2001 WL 940206, 2001 NY Slip Op. 40083 (Sup Ct New York County 2001). As consented to in their reply affirmation to the petition, the guardians are directed to transfer title to the property in Jerusalem, Israel to the trust to be held in the name of the successor trustee no later than thirty days after the successor trustee's qualification in this court.

Guardian Trust Company, FSB is directed to immediately turn over and transfer title to all trust assets to the successor trustee as soon as the trustee qualifies, and to file an accounting within sixty days of the date of this order.

This decision shall constitute the order of the court.

Dated: New City, New York

March 15, 2006

Surrogate

TO: Alden H. Wolfe, P.C., Atty for petitioners

Slade & Newman LLP, Attys for cross-petitioners

Gary E. Bashian, Esq., Guardian ad litem

Abraham N. Kleinman, Esq., Successor Trustee [*7] Footnotes

Footnote 1:Apparently, land in Israel is conveyed in the form of a renewable leasehold. However, for purposes of this decision the court finds the distinction immaterial.

Footnote 2:The court notes that the proceeding seeking advice and direction had been withdrawn by the trustee in July, 2004, and the accounting had not been accepted for filing.

Footnote 3:The order was clarified, at the request of counsel for the trustee, by letter from the court dated January 10, 2006, which advised all parties that the "trustee's authority to act" in the pending New York County litigation was "not prohibited or circumscribed in any way." (emphasis added).