Matter of D.P.G.

[*1] Matter of D.P.G. 2009 NY Slip Op 51691(U) [24 Misc 3d 1232(A)] Decided on August 3, 2009 Sur Ct, Kings County Johnson, 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 This opinion is uncorrected and will not be published in the printed Official Reports.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 August 3, 2009
Sur Ct, Kings County

In the Matter of the Guardianship of D.P.G. An Infant



2130/03



For the Guardian: Lorentz W. Hansen, Esq., 624 East 20th Street, New York, NY 10009 (212) 473-6740

For Gerstein, Fisher:Lusthaus & Lusthaus, PLLC, by Stephen Lusthaus, 330 7th Avenue, New York, NY 10001 (212) 268-6100

GAL for the infant: Kim E. Mazzatto, Esq., 233 Broadway, 5th Floor, New York, NY 10279 (347) 392-7043

Diana A. Johnson, J.

C.D.T, the guardian ("Guardian") of the person and property of D.P.G, petitioned in February 2008 to withdraw monies from the infant's guardianship accounts. She is the maternal great-grandmother of D.P.G. The infant's mother died on September 11, 2001 in the World Trade Center tragedy leaving D.P.G as her sole distributee. On June 9, 2004 the U.S. Department of Justice (September 11th Victim Compensation Fund) granted a final award to the infant in the sum of $3,048,255.81.

The alleged value of the infant's property at the time of this petition was $3,652,663. The total withdrawal sought was $35,400 by monthly withdrawals of $2950 from January to December, $1,600 allocated to the ward's living expenses, and $1,350 as a stipend for the Guardian.

As a fiduciary, a guardian is charged with the proper stewardship of monies belonging to the infant until the infant attains majority. This notwithstanding, permission to withdraw monies from a guardianship account remains in the sound discretion of the court (SCPA 1713(2); Matter of Polinsky, 33 Misc 2d 1002 [1962]). It is within the power of the court to allow a fiduciary to recover for past maintenance of an infant where the facts and circumstances justify it (see In re Russell's Estate, 43NYS2d839 [1943] and cases cited therein). The court may grant a withdrawal from infant's funds where parents are unavailable to provide for the infant, and it is necessary for the infant's care, support and education. The court's ultimate responsibility, however, is to preserve the infant's funds and to deliver the funds intact to the infant [*2]upon attaining majority. Absent unusual circumstances withdrawal of funds for support from the corpus of an infant's funds is not favored (Matter of Bilick, 176 Misc 2d 293 [1998]). Therefore a court's discretion in permitting withdrawals must be exercised scrupulously and sparingly (Ahders v Southampton Hosp., 90 AD2d 508 [1982]; Matter of Darlene C., 96 Misc 2d 952 [1978]).

In fulfilling its mandate of preserving the infant's funds, the Court in considering the withdrawal petition reviewed the entire file maintained by the court. The file herein revealed, among other things, that on July 21, 2006 Surrogate Seddio determined a previous withdrawal petition brought by the Guardian. In his Order he granted the Guardian $40,500 as "back pay" for the period September 11, 2001 through September 11, 2006, and compensation of $675 monthly commencing September 11, 2007. He also authorized the Guardian to use the infant's $1,600 monthly from Worker's Compensation toward support and maintenance, with the Guardian to account annually for this money. As there had been no annual accounting, the Court directed the Guardian to appear on October 2, 2008 to account.

On October 2, 2008, a stipulation was entered into by the Guardian and her attorney Lorentz Hansen, Esq., providing that the Guardian would account for all of the infant's funds from the date of Surrogate Seddio's Order to that time. It was further agreed that pending compliance with same, the petition for withdrawal would be held in abeyance.

The Guardian submitted her accounting dated October 31, 2008 listing the following accounts and balances through September 30, 2008:

Sovereign Bank $42,381.96

Sovereign Bank$36,456

Sovereign Bank $13,738

Capital One Bank $15,939

In her affidavit the Guardian indicated that although authorized by Surrogate Seddio to withdraw the $1,600 monthly for her ward's expenses, she had not done so and had been paying his expenses with her own funds and his social security benefits. The Guardian also indicated withdrawals of the ward's funds had been made from accounts not subject to court control to pay for the ward's vacations to Disney World, Florida and Cancun, Mexico.

On November 13, 2008 the Court issued an Order finding that the accounting was incomplete as no mention was made of the infant's funds in the brokerage account at Gerstein, Fisher & Associates, Inc.,("Gerstein") containing the bulk of the infant's assets. The Court directed the Guardian to supply the complete annual statements from Gerstein for calendar years 2006, 2007, along with the complete monthly statement for October 2008. The Court further directed the Guardian identify the accounts containing the ward's funds not subject to court control and the source of the funds used to establish them. The Court in the Order appointed Kim Mazzatto, Esq., as guardian ad litem ("GAL") to protect the interests of the infant.

The court file regarding this guardianship reveals that the brokerage account with [*3]Gerstein was established in January 2006. On July 28, 2004 the Guardian had brought a petition seeking consent to invest guardianship funds and dispense with a bond pursuant to SCPA 1708. The petition indicated the money would be invested in U.S. Treasury Notes and municipal bonds. On March 21, 2005 Acting Surrogate Tomei signed the decree approving this investment. The decree provided that of the $3,007,345 authorized to be invested, 52.89% ($1,590,575) was to be invested in Treasury Securities, with the remaining 47.11% ( $1,416,770) invested in New York Municipal Bonds. A number of U.S. Treasury securities of differing price and quantity, along with specifically named New York municipal bonds were listed in the decree. The investments were to be held jointly with the clerk of the court.

The guardianship funds could not be invested however, as the bank checks had to made payable to an institutional investor and not Gerstein, who was the registered investment advisor. On December 14, 2005 Mr. Hansen moved to amend the decree to the extent of providing that the checks from the banks be made payable to Pershing LLC. Acting Surrogate Tomei signed the amended decree ("Decree") on December 16, 2005. In all other respects the terms of the original decree remained unchanged. On January 19, 2006 three bank checks were issued. The statement from Gerstein for the period 11/21/05 -01/3106 shows an initial deposit on January 23, 2006 of $3,119,637.98.

On January 13, 2009 the Guardian submitted her response to the November 2008 Order. The Guardian identified the accounts containing the ward's funds not subject to court control as Uniform Tranfers to Minor's Act accounts funded with monies from numerous charities as the ward's mother had died in the World Trade Center terrorist attack of September 11, 2001. The Guardian identified the bank and the balances through December 11, 2008 for these funds as:

J.P. Morgan Chase (UTMA) $61,965.50

J.P. Morgan Chase (UTMA) $50,365.72

$112,311.22 Total

Review of the submitted account statements from Gerstein revealed the funds were not invested as provided in the Decree neither as to the percentages nor named securities. Further the statements showed purchases and sales of U.S. Treasury Securities and New York municipal bonds, and payment of investment advisory fees for which no permission was granted. By Order dated January 26, 2009 the Court directed the Guardian to appear on February 19, 2009 and bring with her copies of all monthly statements from the opening of the account to that time, and be prepared to address these issues.

At the February 19, 2009 hearing the Guardian, Mr. Hansen, and the GAL appeared. On that day Mr. Hansen handed up to the bench a copy of motion papers to amend the Decree to: permit investing to continue, approve investments made, and approve the advisory fees. This motion had been neither served, filed or placed on the court calendar. Contained therein is his affirmation in support dated February 18, 2009 which the Court makes part of the record in this proceeding. In response to who authorized the charging of the investment advisory fee and the active trading of the account, and his knowledge concerning same, the following colloquy ensued:

-[Page 9 of transcript]-

Mr. Hansen:It was not, unfortunately, authorized because there was an omission. It [*4]was understood by everybody at the time but there was an omission in Surrogate Tomei's

The Court:Understood by who, counsel?

Mr. Hansen:By the guardian ad litem, Stanley Finklestein, by Surrogate Tomei, by myself and by my client, that

-[Page 11-12 of transcript]-

The Court:The question is, where is the order that authorizes activetrading of this child's accounts and where is the order thatauthorizes this investment company to take fees, deductfees from this child's money, without further order of thisCourt?

Mr. Hansen:The answer to that is that there is no such order, your Honor, and by way of explanation, the reason is that, unfortunately, several paragraphs of boiler plate were omitted from the decree of Surrogate Tomei. Everybody understood that when a bond matures, and this happens maybe four or five, up to eight times a month, the Court did not expect the investment advisor to come and ask for court approval.

****

The Court:Counsel, I am not going to speculate as to what the Court expected. I'm not going to speculate as to what everybody understood. There is a court order. And as far as I can see, Counsel, that court order has not been complied with.

Mr. Hansen:I couldn't agree with you more, your Honor, and that is the purpose of my motion, which requests, number one, to approve the fees that have been paid in the past, the bond transactions that have taken place in the past. And number two, to amend the amended decree of Surrogate Tomei to permit these in the future.

-[Page 13-14 of transcript]-

The Court:I don't think it's that you didn't hear because you answered, Counsel. You just didn't answer the question I asked. Now, again, how long have you known about Surrogate Tomei's order?

Mr Hansen:Known about it or—I'm not sure I understand your question, your Honor. Of course, I was there when we discussed it with

The Court:What's the date of it? Can you answer that question?

Mr. Hansen:Yes, I can. I believe its March 21st, 2005

The Court:And so, since March, 2005 since you were there at the time of the order was issued, you've known Counsel, that the order was boiler plate and that it did not reflect the understanding of the Surrogate and all of the parties that were before the Surrogate?

Mr. Hansen:I understood what, your Honor. It has just come to my attention that these investment advisory fees have been deducted from the income of the portfolio. I was not aware of it.

After the hearing, the matter was adjourned to April 2, 2009 to allow the GAL to review the brokerage account statements which were presented, and to obtain others not [*5]brought to court.

On April 2, 2009 Gerstein appeared by counsel in the proceeding, and the GAL submitted her report to the Court. The report indicates:

- The infant's funds were not invested in the percentages or in thespecific bonds or treasury notes set forth in the Decree.

-On September 15, 2005 the Guardian had executed an investmentadvisory agreement ("Agreement") and fee schedule with Gerstein.

-From the inception of the account to date the total sum of$29,308.41 had been automatically debited from the infant's accountpursuant to the Agreement for which no permission had been granted. -The investment advisor had agreed to voluntarily suspend allautomatic fee withdrawals and suspend all trading activity in the account pending further order of the court.

The GAL requested leniency for both Gerstein, which she believed was acting in good faith pursuant to the Agreement, and the Guardian who entered into the Agreement, "without malice, and under the misguided advice and direction of her counsel, who failed, until now, to seek approval of said Investment Advisory Agreement and Fee Schedule as was required under SCPA 1708 (c)". The GAL recommended that the Guardian seek an amended decree approving the Agreement "nunc pro tunc" and that the current manner of investment be allowed to continue.

The April 9, 2009 supplemental report by the GAL indicated that the Decree only authorized the Guardian to purchase investments outlined therein and collect the interest, as no trading activity is authorized by SCPA 1708 2(b). Gerstein, however, had pursuant to the Agreement invested and reinvested the funds in holdings permissible under SCPA 1708 2(b). She reiterated her recommendation made in the original report.

In his response dated April 25, 2009, Mr. Hansen took issue with the GAL's recommendation that the Court approve the Agreement pursuant to SCPA 1708 2 (c), as the Agreement would have to be substantially rewritten to comply with court precedents regarding such agreements. He indicated however, that the Guardian fully approved of Gerstein's handling of the ward's funds whose management should be allowed to continue as in the past. He alleged that he was unaware of the investment advisory agreement, claiming it was entered into without his knowledge or consent. He avers that the first time he saw it was when a copy of the GAL's report was handed to him in court.

On May 14, 2009 the Court issued an order directing the Guardian, the GAL, Mr. Hansen and counsel for Gerstein to appear on May 28, 2009 to address the issues raised by the GAL and Mr. Hansen. On May 28, 2009 the matter was further adjourned to June 11, 2009 for the GAL to meet with the infant.

At the conference on June 11, 2009, Mr. Hansen in a fit of pique expressed that the Court had delved into issues that were not emergent and not pertinent to consideration of the withdrawal petition. In doing so, he emphasized, for the past year and a half the infant who is a multi-millionaire has been forced to live off of his great grandmother's social security and has been denied the money he needs. He reiterated that behind his back Gerstein had the Guardian sign the Agreement allowing them to take fees quarterly, and that he was never told of this. He stated that he had repeatedly asked Gerstein for the monthly statements, but Gerstein did not comply. He [*6]acknowledged, however, that when needed, he obtained the monthly statements from his client, the Guardian. He did not believe, however, that they indicated fees were being taken. At the conclusion of the conference, the proceeding was marked submitted.[FN1]

Although Mr. Hansen alleged at least three times during the June 11, 2009 conference that the infant is being forced to his detriment to live off the Guardian's social security benefits for the past year and a half, his letter mailed to chambers dated February 11, 2009 indicated that the Guardian has been using the infant's social security benefits of $8,100 a year towards his support. And, as indicated earlier, the Guardian in her affidavit of October 31, 2008 indicated she has been using her ward's social security benefits towards his expenses. In addition the Guardian has always had at her disposal unfettered access to the $112,331.22 in the UTMA accounts at Chase Bank not subject to court control, which she has used in the past to pay his expenses.

Mr. Hansen alleged before the Court on February 19, 2009 that it had just come to his attention that advisory fees were being deducted from the brokerage account. However, his affirmation dated February 18, 2009 makes it obvious that he was intimately familiar with the fees and how they were assessed. In it he averred:

An investment advisory fee has been paid to the investment

advisor Gerstein, Fisher quarterly since the investment fund

was created following Surrogate Tomei's March 21, 2005 Amended decree.... Gerstein, Fisher's fees were charged atslightly less than one-third the standard fee, on humanitarian grounds in view of the fact that the fund being managed by

them was awarded by the Victim Compensation Fund to the

ward, [D.P.G], as compensation for the loss of his mother in the World trade Center terrorist attack.... The

standard annual investment advisory fee for services

involving an investment portfolio similar in size and

composition to the one here involved would generally

be 100 basis point or 1% of principal. The reduced fee

charged by Gerstein, Fisher is 30 basis points or .3%

of principal. The fee is paid in four quarterly installments,

January, April, July and October and totals approximately

$10,000 annually....

No questions were raised by Surrogate Seddio or

Guardian ad litem Murray Weinstein, Esq.,[the GAL appointed for the withdrawal petition before Surrogate Seddio], regarding the propriety of this fee arrangement involving,as it does, a substantial sacrifice by Gerstein, Fisher &

Associates made on charitable grounds. The Court is

respectfully requested to authorize payment of this fee [*7] in the future and to approve prior payments as reasonable

and appropriate.

Nowhere does Mr. Hansen indicate that the fee arrangement was not known to him, rather his allegation is that no questions were raised concerning its propriety by Surrogate Seddio and the former guardian ad litem as it is 1/3 Gerstein's normal fee, which he denominates a "substantial sacrifice" on "charitable grounds".

Even more compelling evidence that he was aware that advisory fees were being assessed is the fact that attached as Exhibit I to the Annual Account for 2007 dated May 5, 2008, which he signed as attorney, is the Gerstein account statement for January 2008 showing a deduction of fees in the amount of $2,533.42. It is obvious that at least as of May 2008, if not sooner, Mr. Hansen knew that fees were being assessed.

In regard to the active trading in the brokerage account, Mr. Hansen conceded at the February 19, 2009 hearing that trading was not authorized by the Decree, as several paragraphs of boiler plate were omitted from it, but claimed in defense that everyone understood trading would occur. Despite his knowledge of active trading in violation of the Decree he did not seek to amend the Decree to permit same, but like with the advisory fees allowed it to continue.

Only now when confronted with these issues by the Court does Mr. Hansen attempt to remedy the limitations contained within the Decree. And to exonerate himself with respect to what has occurred over the past three and half years, he feigns ignorance concerning the advisory fees, and attributes and excuses the active trading on the collective understanding of everyone involved. No more telling, that the current state of affairs would have continued unabated if not discovered, is Mr. Hansen's own words at the February 19, 2009 hearing after conceding the Decree was not being complied with,"[w]ell your Honor, that's why I'm caught really red-handed here because we've been before the Court many times, and these issues that were raised in your decision have never come up" (p.12 transcript of February 19, 2009 referring to this Court's January 26, 2009 decision/order questioning, among other things, the active trading and assessment of advisory fees).

Additional evidence of his disregard for, and nonchalant attitude toward the Decree was uncovered by the Court in preparing this decision. Mr. Hansen, in a February 17, 2006 affirmation, averred that on January 19, 2006 three checks "totaling slightly over $3,000,000" were obtained and delivered by him to Michael R. Sanders, the Managing Director and Senior Investment Advisor of Gerstein. Attached as an exhibit to his affirmation were copies of checks from the following:

HSBC Official Check$1,077,825.83

North Fork Bank Cashier's Check$ 985,676.21

Independence Community Bank Teller Check$1,056,135.94

While Mr. Hansen may denominate it as "slightly over $3,000,000", the three checks added together come to $3,119,637.98, $112,292.98 more than was authorized for investment by the Decree. The brokerage account statement from Gerstein for the period 11/21/05 -01/31/06 substantiates that the initial deposit on January 23, 2006 was $3,119,637.98. However, there was no authority for Mr. Hansen to invest more [*8]guardianship funds than authorized. Clearly he knew the amount set in the Decree was $3,007,345, yet he delivered to Gerstein over one hundred and twelve thousand dollars more without judicial authorization. Even assuming a sound financial basis for doing so, this does not excuse his not seeking judicial authorization and approval of same.

Giving Mr. Hansen, who is serving pro-bono the benefit of the doubt that he perceived he was acting in the best interests of the infant, does not excuse his wanton disregard for the Decree. Nor does the fact, as Mr. Hansen is quick to point out, that the funds as invested have significantly increased the infant's assets, wash away the impunity with which the Decree has been disregarded. Compliance with terms of court orders/decrees is obligatory not optional. If there is a error, omission or deficiency contained therein, the proper remedy is to seek to amend the order/decree, not turn a blind eye to it.

The GAL's recommendation that the Guardian seek an amended decree approving the Agreement "nunc pro tunc" to allow the current manner of investment to continue pursuant to SCPA 1708 2 (c), was one way of dealing with the reality that occurred over the past three and half years without judicial authorization. The Court, however, agrees with Mr. Hansen that the existing Agreement would have to be substantially revised to pass muster with the Court. With these revisions, Gerstein may not be willing to serve as the investment advisor.

On the other hand, the resolution advanced by Mr. Hansen of simply amending the Decree to allow for ongoing investment in securities authorized by SCPA 1708 2(b), and for payment of advisory fees is also not an available option. There is no support for the proposition that no formal investment advisory agreement is required as long as the decree of the court makes clear that the investment advisor is to assemble, manage, and update the ward's portfolio solely with government securities permitted by SCPA 1708 2(b).

SCPA 1708 2(b) authorizes the guardian to purchase and invest in United States savings bonds, treasury bills, treasury notes, treasury bonds, or bonds of the state of New York or bonds or other obligations of any county, city, town, village or school district of the state of New York. It directs the guardian to deposit these instruments, along with any interest and income derived from them, in joint custody with a bank, savings bank, trust company, safe deposit company, or state or federal credit union. It does not provide that the investments can be made by a financial services entity or authorize active trading or payment of investment advisory fees.

SCPA 1708 2 (c) provides that the court may authorize the guardian to invest guardianship funds pursuant to an investment advisory agreement with a financial services entity acceptable to the court. A copy of the proposed investment agreement must accompany the petition, and provide that the funds will be invested in accordance with the provisions ofEPTL 11-2.3 [Prudent Investor Act].

There are reasons for the differing strictures contained within the subsections of SCPA 1708 for investment of guardianship funds. If the Guardian and Mr. Hansen wanted to invest the guardianship funds in government securities only, but felt SCPA 1708 2(b) was too limiting, they could have petitioned for investment under SCPA 1708 2 (c), restricting the investments to government securities. The Court cannot authorize active trading by an investment advisor and payment of advisory fees to it under SCPA [*9]1708 2 (b), as long as investments are limited to those permitted by that subsection. To do so would in effect be creating a new subsection, a hybrid of SCPA 1708 2(b) & 2 (c), which the Court is without authority to do, which the legislature could have done if it sought fit.

This being so, the issue becomes what is the Court to do regarding the brokerage account at Gerstein valued as of May 31, 2009 at $3,582,881.61, which for the past three and a half years has been managed and operated in violation of the Decree. Secondly what action, if any, should the Court take with respect to the Guardian who as the fiduciary bears ultimate responsibility for what occurred.

As the infant will attain the age of majority on December 3, 2009, the Court believes the best course of action is to maintain the status quo and continue the heretofore voluntary suspension of all trading and automatic fee withdrawals from the brokerage account until D.P.G. reaches eighteen this December. Doing so will allow for maximum liquidity of the funds, allowing Gerstein to continue placing any proceeds from instruments that mature or are redeemed by the issuer in a money market account as it has done since trading was suspended. Upon attaining majority, D.P.G may elect to enter into an investment advisory agreement with Gerstein or make whatever other arrangements he and his advisors deem appropriate.

In order to bring the Decree in conformity to the reality which occurred, and based on the GAL's finding concerning the lack of culpability of Gerstein, the Court approves the withdrawal of the investment advisory fees debited from the brokerage account in the sum of $29,308.41. The Court also sua sponte deems the Decree amended to authorize the investment of the $3,119,637.98 instead of the $3,007,345 set forth in the Decree.

The Guardian at the February 19, 2009 hearing alleged that she didn't know what was going on. This was buttressed by Mr. Hansen in his letters to Chambers wherein he indicated that the Guardian relied primarily on his advice and recommendations, having little or no knowledge of the technical financial matters involved (letters dated February 11, 2009 & February 16, 2009 respectively), and the findings by the GAL that the Guardian's actions were based on advice of counsel. Based on this and the fact that the guardianship will end in four months, the Court will not seek to revoke her letters of guardianship pursuant to SCPA 719 (10), based on violating SCPA 711 (3).

As to the withdrawal petition where, as here, a guardian and the ward are related the intention to charge for care must be shown by clear and convincing evidence and it must be shown that the expenditure was necessary for the best interests of the infant (Matter of Owens, 225 AD 702 [3rd Dept 1928]). Here the Guardian fails to document or explain the reason(s) for the requested $1,600 monthly for support and maintenance of the ward, when the annual expenses for the ward alleged in the petition in Schedule D [rent $2,400, clothes etc. $4,250, food $2,600, and travel $3,000] total $12,250, or $1020.83 monthly.

Accordingly the Court will only consider the sum of $1020.83 monthly for the support and maintenance of the infant. From the $1,020.83 will be deducted the $675 in social security benefits the infant receives each month, leaving $345.83 as the amount the Court will allow to be withdrawn for the ward's support and maintenance monthly for the time period of January 2008 through December 2009. [*10]

The Court denies the requested monthly stipend of $1,350 to the Guardian. There is no basis for the Court to award this great grandmother of the ward financial remuneration. There is no allegation that due the infant living with her she was unable to work, as she is retired. The Court will not authorize the Guardian to be paid a "salary" out of the ward's assets.

The clerk shall prepare an order authorizing the Guardian to withdraw from the funds of the infant on deposit at Sovereign Bank the sum of $6,916.60 (Jan 08-August 09 at $345.83/month) and then $345.83/month from September through December 2009.

The guardian ad litem Kim E. Mazzatto, Esq., may submit an order directing payment in the sum of $6,500 from the infant's funds as and for her services rendered on behalf of her ward. This constitutes the decision and order of the Court.

___________________

Dated:Brooklyn, New YorkHon. Diana A. Johnson

August 3, 2009Surrogate Footnotes

Footnote 1: The Court did not consider any submissions mailed by Mr. Hansen to Chambers after the record closed on June 11, 2009.