Matter of Mayo

[*1] Matter of Mayo 2006 NY Slip Op 50525(U) [11 Misc 3d 1072(A)] Decided on March 31, 2006 Sur Ct, Nassau County Riordan, 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 This opinion is uncorrected and will not be published in the printed Official Reports.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 31, 2006
Sur Ct, Nassau County

In the Matter of the Estate of Irving A. Mayo, Deceased, Motion to Dismiss Complaint.



324527



Shaw, Licitra, Gulotta, Esernio & Schwartz, P.C.

(Of Counsel to Deutsch, Coffey & Metz, LLP)

1475 Franklin Avenue

Garden City, NY 11530

Farrell Fritz (Attorney for Defendant, Stephen I. Mayo)

1320 EA B Plaza

13 West Tower

Uniondale, NY 11556-0120

Deutsch, Coffey & Metz, LLP (Attorney for Plaintiff, Jane Cavallaro)

18 East 41st Street

6th Floor

New York, NY 10017

John B. Riordan, J.

This is a miscellaneous proceeding involving the estate of Irving Mayo. This proceeding was transferred to this court by order of the Supreme Court of New York County dated April 27, 2005. The decedent's daughter, Jane Cavallaro, commenced this action against her brother, Stephen I. Mayo, alleging various acts of wrongdoing on Stephen's part in connection with the estates of their father, Irving, and their predeceased mother, Eugenie. Before this court is Stephen's motion to dismiss "counts" I through IX of the complaint on the following grounds: 1) lack of standing; 2) statute of limitations; and 3) failure to state a cause of action.

FACTUAL BACKGROUND

Jane Cavallaro ("Jane") and Stephen I. Mayo ("Stephen") are the children of Eugenie and Irving Mayo. Eugenie died intestate in 1991. Irving died on May 11, 2002 leaving a Will dated April 30, 1997 and a First Codicil thereto dated December 13, 2001 (collectively "the Will"), which were admitted to probate by decree of this court dated August 15, 2002. Letters testamentary issued to Jane and Stephen as co-executors. Irving's Will bequeaths all of Irving's personal property to Jane. In addition, Irving's "Business Interests", as defined in his Will, are bequeathed to Stephen, and Jane is the beneficiary of Irving's entire residuary estate.

At issue in this proceeding is the ownership of two entities, Artistic Desk Pad & Novelty Co., Inc. ("Artistic") and EMA Co. ("EMA"). Artistic is a New York subchapter S corporation with one class of common stock and is in the business of manufacturing office products. Irving, Eugenie, Jane, Stephen and Stephen's children were to varying extents the shareholders of Artistic. Among Artistic's assets are two parcels of real estate located at 721 East 133rd Street, Bronx, New York (referred to in the complaint as "the First Parcel") and 728-30 East 134th Street, Bronx, New York (referred to in the complaint as "the Second Parcel"). Stephen has been an officer and director of Artistic for over twenty years.

In l968, Eugenie gifted 16 shares of Artistic to each of Jane and Stephen. At the time of her death, Eugenie owned 66 shares of Artistic stock. Jane alleges that Stephen misrepresented to her that Eugenie left all of her property to Irving, and then caused the record title to Eugenie's 66 shares of Artistic to be transferred to Irving. Jane claims that since Eugenie died intestate, her 66 shares of Artistic should have passed pursuant to EPTL 4-1.1. According to Jane, pursuant to EPTL 4-1.1, Irving would have received only 33 of Eugenie's shares and she and Stephen would have each received 16.5 shares. Instead, Jane alleges that Stephen claims to be the owner of Eugenie's 66 shares which passed to Irving upon Eugenie's death and then to Stephen under [*2]Irving's Will. Thus, Jane contends that she is entitled to an additional 16.5 shares of Artistic by virtue of her interest as a distributee of Eugenie's estate.

Jane also alleges that between 1999 and 2003, Stephen misappropriated Artistic's assets. Specifically, Jane alleges that Stephen increased Artistic's debt by $600,000 and diverted this money to himself under the guise of expenses and advances. In July of 2003, Stephen purportedly signed a contract to sell Artistic's assets without Jane's knowledge. At the closing, Stephen allegedly entered into a consulting and non-competition agreement with the buyer whereby Stephen would receive $1,500,000 over four years, an expense allowance of $4,000 a month and a $900 per month rent allowance if the lease was terminated. Jane further alleges that Stephen used assets of Artistic to purchase real estate at 735 East 133rd Street, Bronx, New York (referred to in the complaint as "the Fourth Parcel") and took title in his own name and that Stephen diverted assets of Artistic to other entities which he controlled.

EMA is a New York general partnership which was owned equally by Irving and Eugenie. EMA' s sole asset was a real estate parcel located at 706-812 East 133rd Street, Bronx, New York (referred to in the complaint as the "the Third Parcel").

In 1987, EMA and the New York City Industrial Development Agency ("IDA") entered into a sale-leaseback financing arrangement under which EMA could repurchase the Third Parcel for $1 upon repayment of the IDA loan to EMA. Jane alleges that Stephen told her that the Third Parcel was owned entirely by Irving at his death and, therefore, that it became part of Irving's estate, which ultimately passed to Stephen as a "Business Interest". Jane further asserts that sometime after mid-2004, Stephen misrepresented to both Jane and IDA that all of EMA's assets, including the right to purchase the Third Parcel, had vested in Irving's estate. Around July 2004, Stephen allegedly caused Irving's estate to lease the Third Parcel to a third party and then illegally diverted the rental payments to either himself or Norwich International Products, Inc., a New York corporation owned by Stephen and of which he also serves as its president. Jane also claims that, in late 2004, based upon Stephen's misrepresentations, she consented to the exercise of an option to purchase the Third Parcel by 708 LLC, a New York limited liability company of which Stephen and Irving were members.

In 1991, Eugenie created The Mayo Family Trust, an irrevocable inter vivos trust, which according to the schedule annexed to the trust agreement, was to be funded with all of Eugenie's interest in EMA. The trust provided that its income and principal were to be applied for Irving's benefit during his lifetime. The agreement further provided that upon Irving's death, the trust would terminate, and the principal was to be distributed equally to Jane and Stephen. The trustees of the trusts were Irving, Jane and Stephen. The trust was executed by Irving on behalf of Eugenie through a power of attorney. Jane claims that she did not receive a complete copy of the trust document until December 2004. Jane, therefore, asserts that she has an interest in the Third Parcel by virtue of her one-half remainder interest in the trust, or alternatively, if as Stephen argues, the trust was not properly funded, as a distributee of Eugenie's estate.

Jane also claims that, in 1999, Stephen had Irving enter into an agreement to form the Mayo Family Limited Partnership and, thereafter, had Irving transfer EMA to the Mayo Family Limited Partnership in exchange for an interest in the limited partnership.

The Complaint also alleges that Stephen exercised control over Irving's estate and induced Jane to rely on and trust him. [*3]

CAUSES OF ACTION

The Complaint sets forth ten causes of action labeled as separate "counts". The counts are as follows:

1. Count 1 is a claim by Jane, individually, seeking a declaratory judgment that she is the beneficial and record owner of an undivided quarter interest in the Third Parcel and directing that title be reformed to reflect her ownership, nunc pro tunc, to the date of the formation of the trust.

2. Count 2 is a claim by Jane, individually, for an accounting by Stephen, 703 LLC and Irving's estate for all property taken or transferred from the trust and EMA to 703 LLC and Stephen.

3. Count 3 is a claim by Jane, individually, for compensatory damages of not less than $1 million plus punitive damages of three times that amount, for conversion by Stephen, through 703 LLC and Irving's estate, of rentals and other monies received from the Third Parcel.

4. Count 4 is a claim by Jane, individually, for a declaratory judgment that she is the rightful owner of an additional 16.5 shares of Artistic.

5. Count 5 is a claim by Jane, individually, for an accounting of the monies and property representing her 16.5 shares of Artistic.

6. Count 6 is a claim by Jane, individually, for compensatory damages of not less than $1 million and punitive damages of three times such amount for the conversion by Stephen of the 16.5 shares of Artistic which Jane claims belong to her.

7. Count 7 is a claim by Jane, individually, for compensatory damages of not less than $1 million and punitive damages of three times such amount for breach of fiduciary duty which Stephen allegedly owned to Jane as (i) the controlling shareholder of Artistic and (ii) a controlling trustee of the trust.

8. Count 8 is a derivative claim on behalf of Artistic against Stephen for self-dealing and breach of fiduciary duties as an officer and director of Artistic and for diverting and/or converting property, assets and business opportunities of Artistic for his own benefit.

9. Count 9 is a derivative claim on behalf of Artistic for a constructive trust upon the Fourth Parcel which Jane alleges was a corporate opportunity of Artistic.

10. Count 10 is a claim brought by Jane individually against Stephen for breach of his fiduciary duty as an executor of Irving's estate.

Stephen argues that Counts I through IX of the Complaint should be dismissed. According to Stephen, Counts I, II and III should be dismissed because they are barred by the statute of limitations, the claims fail to state a cause of action and Jane lacks standing to assert each of the claims since she is not a fiduciary of Eugenie's estate. In addition, Stephen argues Counts IV, V and VI should be dismissed as time-barred and for lack of standing. Similarly, he asserts that Counts VII and IX should be dismissed because they are time-barred and fail to state a cause of action. Lastly, Stephen contends that portions of Count VIII should be dismissed because they are barred by the statute of limitations.

STATUTE OF LIMITATIONS

Stephen argues that the claims asserted in Counts I, II and III relating to Jane's alleged one-quarter interest in the Third Parcel accrued, depending on which theory of entitlement Jane [*4]relies on, either upon Eugenie's death in 1991, or upon the alleged transfer of EMA by Irving to the Mayo Family L.P. in 1999 and are therefore time-barred under either the three year or six year statute of limitations. He also argues that Jane's claims relating to ownership of an additional 16.5 shares of Artistic accrued upon Eugenie's death in 1991 and, therefore, all of her claims relating to Artistic are also time-barred under either the three year or six year statute.

"The test of a cause of action to determine the applicable statute of limitations is its gravamen, and not the form in which it is pleaded" (Matter of Carvel, NYLJ, Nov. 24, 1995, at 33; see also Wilson v Bristol-Myers Company, 61 AD2d 965 [1978]. The statute of limitations for a discovery proceeding or a proceeding for replevin or conversion is three years (CPLR 214(3)). The statute of limitations for a proceeding in which fraud is alleged, however, is six years from the commission of the wrong or two years from the discovery of the fraud or the date on which it could reasonably have been discovered, whichever is later (CPLR 203 [g]; 213[8]). Although fraud must be pleaded with particularity (CPLR 3016[b]), "if fraud is the cause of the injury, the form in which it is pleaded will be immaterial and the six year statute of limitations under CPLR 213(8) will apply" (Matter of Carvel, NYLJ, Nov. 24, 1995, at 33). In addition, the statute of limitations for a derivative action based upon breach of fiduciary duties arising from the misappropriation of corporate assets is six years (Toscano v Toscano, 285 AD2d 590 [2001]). The law is also clear that the statute of limitations for an accounting proceeding is six years (Matter of Behr, 191 AD2d 431 [1993]). The limitations period does not begin to run until the fiduciary openly repudiates his fiduciary obligations (Matter of Barabash, 31 NY2d 76 [1972]; Matter of Behr, 191 AD2d 431 [1993]). The repudiation consists of an action by the fiduciary whereby the fiduciary makes known to the beneficiaries that he is treating the property as his own (Matter of Barabash, 31 NY2d 76 [1972]). A repudiation cannot occur with respect to an asset that has never been collected by the fiduciary (Matter of Zilkha, 174 AD2d 331 [1991]). Furthermore, the fact that 30 years have passed does not relieve a fiduciary of the obligation to account where no repudiation has occurred (Matter of Anolik, 274 AD2d 515 [2000]). Similarly, "[w]here factual issues exist as to the date of open repudiation, a motion to dismiss will not lie" (Matter of Alpert, NYLJ, Apr. 16, 1996, at 26).

The crux of the complaint is alleged fraudulent behavior by Stephen in connection with Eugenie's estate, the Mayo Family Trust, and Irving's estate. There are allegations of concealment and self-dealing alleged in the claims. According to Jane, Stephen exercised control over Artistic and Irving's estate to conceal his wrongdoing and misappropriation of assets in Eugenie's estate. The complaint provides sufficient details of the transactions and occurrences constituting the fraud, and thus gives sufficient notice to Stephen that the gravamen of Jane's complaint is Stephen's conspiracy to defraud her of assets to which she was entitled either as a distributee of Eugenie's estate or a remainderman of the Mayo Family Trust. "Fraud is defined broadly to include any cunning, deception, or artifice employed by one person to deceive or gain an unfair advantage to the detriment of another. . . It is well settled that the elements of a common law fraud are: (i) a representation or omission of a material fact, (ii) falsity, (iii) scienter, (iv) deception, and (v) injury" (Matter of Colonna, NYLJ, Oct. 13, 1998, at 33, affd 271 AD2d 444 [2000]). Moreover, where the question is when the fraud could or should have been discovered, and there is a factual dispute as to when the party alleging fraud knew or should have discovered the alleged fraud, the complaint should not be dismissed even though it may well turn [*5]out at trial that the claim is time-barred (Trepuk v Frank, 44 NY2d 723 [1978]; Matter of Colonna, NYLJ, Oct. 13, 1998, at 33, affd 271 AD2d 444 [2000]; Matter of Liebowitz, NYLJ, Mar. 28, 1991, at 30).

Stephen argues that Jane should have known about the ownership of Artistic because she was receiving K-1's for Artistic since the time of Eugenie's death which showed Irving's ownership of the 66 shares previously owned by Eugenie. In fact, however, the K-1's support Jane's claim that Stephen represented that the ownership of those shares had been transferred to Irving. In any event, there is a factual dispute as to when Jane should have discovered Stephen's alleged fraudulent actions, which precludes dismissal at this stage on grounds of statute of limitations.

Apart from the allegations regarding fraud, there are other issues raised in the complaint which require a more detailed examination of the statute of limitations defense. There is a factual issue of whether Stephen can be considered a de facto fiduciary of Eugenie's estate. The concept of a de facto fiduciary has been recognized under New York law (Matter of Bialor, NYLJ, July 15, 1998, at 25; Matter of Lasser, NYLJ, June 4, 1986, at 13, col 3; Matter of Hoppenfeld, NYLJ, Sept. 30, 1994, at 27). The result of finding that a person has assumed the role of a fiduciary is that the de facto fiduciary may be held liable for his actions and may be surcharged for self-dealing (Matter of Sakow, 219 AD2d 479 [1995]). "The courts in New York have shown a willingness to hold a person to fiduciary responsibilities even though he or she never judicially qualified, or was authorized to act as a fiduciary, if that person undertook fiduciary duties" (Matter of Carvel, NYLJ, Nov. 24, 1995, at 33). Thus, the statute of limitations defense fails at this stage of the proceeding since there are also issues of fact regarding whether Stephen was a de facto fiduciary of Eugenie's estate.

Thus, the branch of the motion seeking to dismiss Counts I, II, III, IV, V, VI and VII and portions of Count VIII as barred by the statute of limitations is denied.

FAILURE TO STATE A CAUSE OF ACTION

Stephen asserts that Counts I, II, III and VII are based on alleged interests arsing under the trust which must fail because the trust was never funded. According to Stephen, the trust was never funded because the Third Parcel was not transferred into the trust.

"On a motion to dismiss a complaint for failure to state a cause of action the complaint is to be construed in a light most favorable to the plaintiff (Cohn v Lionel Corp., 21 NY2d 559), and deemed to allege whatever can be implied from its statements by fair intendment (Howard Stores Corp v Pope, 1 NY2d 110)" (Matter of Carvel, NYLJ, Nov. 24, 1995, at 33). In addition, on a motion to dismiss for failure to state a cause of action, all of the allegations contained in the pleading must be assumed true, and the court must determine whether the alleged facts fit within any cognizable legal theory (Morone v Morone, 50 NY2d 481 [1980]).

In order to establish a valid express trust, there must be (1) an identification of a designated beneficiary; (2) a designated trustee, who is not the beneficiary; (3) a fund or property sufficiently identifiable to enable title to be transferred to the trustee(s), and (4) a legal assignment or actual delivery of the fund or property to the trustee with the intention of passing legal title (Matter of Hurd, NYLJ, Oct. 2, 2003, at 29). Simply attaching a schedule which states that certain assets belong to the trust is insufficient (Matter of Rothwell, 189 Misc 2d 191 [2001]). In the case of real estate, transfer means completion of recording of the deed (Matter of [*6]Hurd, NYLJ, Oct. 2, 2003, at 29).

Schedule A of the Mayo Family Trust sets forth as the property transferred to the trust "all rights, title or interest of Grantor in EMA Co., a New York State general real estate partnership." The only asset EMA held was title to the Third Parcel. Stephen argues that the trust was never funded because the Third Parcel was never transferred to the trust, the trust never applied for or had a tax identification number, and never filed tax returns.

Here, there is a dispute as to whether Eugenie's interest in EMA was ever transferred to the trust. Jane alleges that because Irving was the only other partner of EMA and actually signed the trust agreement as a trustee, nothing further was required to transfer Eugenie's partnership interest. In addition, under Jane's theory, whether or not EMA was transferred to the trust, Jane still has an interest in EMA as a distributee of Eugenie's estate. Accordingly, construing the complaint in a light most favorable to Jane, the branch of the motion seeking the dismissal of Counts I, II, III and VII for failure to state a cause of action is denied.

STANDING

Stephen argues that Counts I through VI should be dismissed because Jane lacks standing to recover assets for Eugenie's estate since she was never appointed fiduciary.

A beneficiary does not have an independent cause of action to seek to recover assets withheld from an estate (McQuaide v Perot, 223 NY 75 [1918]). An individual must obtain letters of administration before suing on behalf of the decedent's estate (Brandon v Columbian Mutual Life Insurance Co., 264 AD2d 436 [1999]). Under certain circumstances, however, it has been held that the interested party had standing to assert a claim for return of property, especially where the executor himself was involved in the alleged wrongful transfer (Inman v Inman, 97 AD2d 864 [1983]; see also Matter of Van Patten, 190 AD2d 322 [1993]). Nevertheless, since it appears that the more appropriate remedy would be for Jane to commence the causes of action relating to assets which she claims were part of Eugenie's estate as a fiduciary of Eugenie's estate, and for the protection of any creditors of Eugenie's estate, the court, based upon its broad equitable powers to convert or fashion a remedy upon the facts alleged, deems that portion of the instant proceeding which seeks recovery of assets alleged to be part of Eugenie's estate, as an application for the issuance of limited letters of administration to Jane pursuant to SCPA 702(9) (Matter of Nickolas, NYLJ, Apr. 27, 2005, at 27). Accordingly, limited letters of administration with respect to Eugenie's estate shall issue to Jane upon duly qualifying according to law.

COUNT IX

Count IX is a derivative claim commenced by Jane, on behalf of Artistic, for a constructive trust relating to Stephen's alleged misappropriation of a corporate opportunity to purchase the Fourth Parcel. Stephen argues that Count IX should be dismissed as time-barred and because it fails to state a cause of action.

The law is well settled that an action to impress a constructive trust is governed by a six year statute of limitations, which begins to run on the date of the transfer (Eickler v Pecora, 12 AD3d 635 [2004]). Stephen purchased the Fourth Parcel on May 23, 1985. The statute of limitations for imposition of a constructive trust has expired.

In addition, Count IX fails to state a cause of action for misappropriation of a corporate opportunity. The doctrine of "corporate opportunity" provides that a corporate fiduciary cannot divert for his or her own benefit an opportunity that should be deemed an asset of the corporation [*7](Alexander & Alexander, Inc. v Fritzen,, 147 AD2d 241 [1989]). Various criteria have been employed to determine whether a venture is a corporate opportunity. One such test is whether the corporation has an "interest" or "tangible expectancy" in the opportunity (Alexander & Alexander, Inc. v Fritzen, 147 AD2d 241 [1989]). A second test employed is whether the opportunity is essential to the corporation's line of business (Alexander & Alexander, Inc. v Fritzen, 147 AD2d 241 [1989]). Neither test has been met here.

Accordingly, the branch of the motion seeking dismissal of Count IX is granted.

Settle order.

Dated: March 31, 2006

JOHN B. RIORDAN

Judge of the

Surrogate's Court

The appearance of counsel is as follows: