Matter of Grossman
Annotate this CaseDecided on January 28, 2011
Sur Ct, Bronx County
Estate of Kate Grossman, Deceased
1522-1967
Nixon Peabody, LLP (Patrick J. Simpson, Esq., of counsel) for JPMorgan Chase Bank, N.A., trustee
Wichler & Gobetz, P.C., (Ranan J. Wichler, Esq., of counsel) for Marvin Kalickstein, executor of the estate of Sidney A. Grossman, objectant
Lee L. Holzman, J.
In this accounting proceeding, the corporate trustee (the movant) seeks summary judgment dismissing separate objections to its final account filed by the executor of the estate of the decedent's son, Sidney Grossman, who died on March 7, 2003, and by the children of the decedent's son, Lawrence Grossman, who died on July 30, 1995.Although Lawrence's children did not oppose the motion, the executor of Sidney's estate did and also cross-moved for summary judgment. Based on this state of the record, the court will consider only the objections filed by the executor of Sidney's estate who is hereinafter referred to as the objectant.
The decedent's will, which was admitted to probate on September 22, 1967, bequeathed the residuary estate in trust for the benefit of Lawrence and Sidney, and their children. The trust provides that income is to be paid to each son for life and upon his death to his children until the youngest grandchild who was alive at the date of the decedent's death reached the age of 26, at which time, the trust principal is to be paid to the living grandchildren. Since March 30, 1976, the movant has administered the trust in separate shares, one for the benefit of each son and his children. The period of the account is from July 28, 1989 to June 30, 2005, by which time, all of the grandchildren were over the age of 26.
The objections to the account primarily concern a family owned business (Bengro) held by the trust, originally in corporate form as Bengro Realty Corporation and then, in 1988, converted into a partnership and dissolved in 1996. The objections raise issues with regard to the valuation of realty sold by Bengro; the movant's receipt of annual commissions based on these values; the movant's receipt of commissions based on liquidation funds that allegedly should have been allocated to and distributed as income but were incorrectly characterized and retained as principal; and, the movant's failure to distribute the net liquidation proceeds received from Bengro to the income beneficiaries. The objectant also avers that the movant should be surcharged for interest free loans that the trust made to Bengro. The objectant further contends that the movant has not supplied sufficient documentation for the court to approve either legal fees already paid or legal fees listed [*2]as unpaid in this proceeding. The objectant argues that the movant is not entitled to charge any legal fee for services that incorrectly characterized the liquidation funds from Bengro as principal.
Bengro was originally a wholly-owned family corporation that owned industrial and manufacturing real property. The decedent held a 44% interest, and Sidney and Lawrence each held a 28% interest. The decedent's interest was transferred to the trust after her death.
The objectant had served as the accountant for Sidney and his spouse prior to 1980, and continues to act as the accountant for Sidney's surviving spouse. At the behest of the objectant, who recommended that Bengro take advantage of tax benefits stemming from changes to the Internal Revenue Code in 1986, the corporation was converted into a partnership. On November 29, 1988 a partnership agreement was executed, and the parties received partnership shares in Bengro proportional to their stock interest in the predecessor corporation. The parties also agreed that the trust would become the managing partner with exclusive management and control of Bengro.
On or about June, 1990, the movant, the income beneficiaries and the presumptive remaindermen informally settled a second intermediate account pursuant to a "Stipulation and Consent" agreement. In pertinent part, that agreement states: "3. All distributions received by the trustees from Bengro Realty Company will be allocated to income and distributed to the income beneficiaries." The movant asserts that Bengro faced severe economic hardship caused by vacating tenants, burglary, vandalism, environmental hazards and loss of rental income necessitating an infusion of capital. On October 22, 1990, when the partnership was unable to obtain conventional financing, it borrowed $300,000 to finance Bengro operations, with $150,000 borrowed from a third party and the balance from the partners. At the movant's request, the partners also made non-interest bearing loans to the partnership as follows: the trust loaned $261,969.88, and Lawrence and Sidney each loaned $130,984.94. On November 27, 1996 the partnership sold the realty and the propriety of the characterization and allocation of the $814,000 liquidation distribution from Bengro to the trust as principal is the primary issue raised by the parties in the motions sub judice.
On December 27, 1996 the objectant, on behalf of Sidney, wrote to the movant asserting that pursuant to the 1990 stipulation, the funds received from Bengro upon its liquidation should be allocated to income and distributed to the income beneficiaries of the trust. At the movant's request, the attorneys who drafted the 1990 stipulation issued an opinion letter dated March 25, 1997. Counsel stated therein that a review of the firm's file did not contain any information that would "shed light" on the meaning of the provision that all distributions from Bengro will be allocated to income and distributed to the income beneficiaries. The author opined that allocating the liquidation proceeds to income was not permissible, because it would effectively terminate approximately 50% of the trust in contravention of the trust terms directing that the principal be paid to the grandchildren upon the trust's termination. In concluding, counsel noted that if the beneficiaries disagreed with the opinion that the liquidation proceeds should be retained as principal, the parties could seek instruction from the surrogate's court in the context of an accounting proceeding "that would, of course, entail expense to the trust."
A copy of the 1997 opinion letter was furnished to Sidney. Neither the objectant nor the movant presented any proof in this application demonstrating that the issue was ever discussed again in the more than eight years that elapsed from the date of the opinion letter to the filing of the instant accounting proceeding. In any event, it is clear that during this period, the movant consistently treated the liquidation proceeds as principal and never distributed any portion of it to the income [*3]beneficiaries.
The movant contends that, in light of EPTL 11-2.1 (b) (1) (D), providing that "[c]orporate distributions, as provided in paragraph (e)" are income, the provision in the 1990 stipulation, that all distributions from Bengro should be treated as income, essentially was a term of art meaning that all distributions from Bengro would be treated as income even though Bengro had changed from a corporation to a partnership, provided that EPTL 11-2.1 (e) treated the distribution as income. Here, movant urges that the liquidation proceeds at issue cannot be allocated to income, because EPTL 11-2.1 (e) (6) expressly provides that "[w]hen a corporation or association is being wholly or partially liquidated, shares of stock and cash or other assets distributed . . . are principal." The movant notes that as this provision is applicable to associations, it clearly covers a partnership. Consequently, the movant contends that the 1997 opinion letter stating that the liquidation distribution from Bengro of $814,000 should be treated as principal was clearly correct. Furthermore, the movant argues that all of the parties accepted the interpretation of the 1990 stipulation set forth in 1997 opinion letter because, in the ensuing years, the movant retained the liquidation proceeds as principal and no party requested a court determination on this issue. The movant also argues that even if its interpretation of the 1990 stipulation is incorrect, the objectant's interpretation would contravene the terms of the testamentary trust by depriving the grandchildren of the remainder interest to which they are entitled and could not be enforced by the court. With regard to the valuation of Bengro prior to its liquidation, a fiduciary officer of the movant states in an affidavit that all inventory values of Bengro were based on periodic valuation reports prepared by a certified appraiser.
The objectant counters that the 1997 opinion letter reached an incorrect conclusion because it focused upon the provisions of the testamentary trust and failed to take into account the provisions of either the 1990 stipulation or the Bengro partnership agreement. Specifically, the objectant asserts that the plain meaning of the words "all distributions received by the trustees from Bengro . . . will be allocated to income and distributed to the income beneficiaries" includes a liquidation distribution. The objectant also notes that the Bengro partnership agreement provides that if any real property is sold the proceeds are to be distributed to the partners, and therefore, the liquidation proceeds arising from the sale that were distributed by Bengro to the trustees should be allocated and distributed by the trust as income. With regard to the inventory valuation of Bengro, the objectant asserts that the real property was ultimately sold for significantly less than the stated inventory values and the objectant never saw the appraisals upon which the movant relies.
Summary judgment cannot be granted unless it clearly appears that no material issues of fact exist (see Phillips v Joseph Kantor & Co., 31 NY2d 307 [1972]). The movant must make a prima facie showing of entitlement to judgment as a matter of law, tendering sufficient evidence in admissible form to demonstrate the absence of any material issue of fact (see Alvarez v Prospect Hosp., 68 NY2d 320 [1986]; Friends of Animals, Inc. v Associated Fur Mfrs. Inc., 46 NY2d 1065 [1979]). When the movant has made out a prima facie case, the burden shifts to the party opposing the motion to produce evidentiary proof in admissible form sufficient to establish the existence of material issues of fact (see Zuckerman v City of New York, 49 NY2d 557 [1980]). Summary judgment is a drastic remedy which requires that the party opposing the motion be accorded every favorable inference and issues of credibility may not be determined on the motion but must await the trial (see Glick & Dolleck, Inc. v Tri-Pac Export Corp., 22 NY2d 439 [1968]). The papers submitted in the summary judgment application are scrutinized in a light most favorable to the party [*4]opposing the motion (see F. Garofalo Elec. Co. v New York Univ., 300 AD2d 186 [2002]).
The filing of an account that appears to be accurate and complete fulfills the initial burden of the accounting party. Thereafter, the objecting party has the burden of going forward by providing evidence raising issues with regard to the account. If the objectant has presented such proof, the accounting party must prove by a preponderance of evidence that the account is accurate and complete (see Matter of Schnare, 191 AD2d 859 [1993], lv denied 82 NY2d 653 [1993]).
Here, the court concurs with the movant that the 1997 opinion letter of counsel, who also drafted the 1990 stipulation, correctly concludes that the liquidation proceeds received from the sale of Bengro realty should be treated as principal. In the 1997 opinion letter, counsel stated that he reviewed the firm's file for the 1990 stipulation and it did not contain any information indicating that the parties specifically negotiated, in the 1990 stipulation, that distributions received from Bengro in its partnership form should be treated any differently than such distributions were treated when Bengro was operated in corporate form. Moreover, it appears that counsel would have made a notation if the parties were negotiating to drastically change the terms of the trust by providing that, under certain circumstances, 50% of the trust principal would be treated as income and distributed to the income beneficiaries instead of the remaindermen. Thus, it is appropriate to conclude that the use of the words "all distributions" from Bengro in the 1990 stipulation was a term of art meaning "all distributions" in accord with EPTL 11-2.1. Specifically, as a general rule, corporate or association distributions are income (see EPTL 11-2.1 [b] [1] [D]; EPTL 11-2.1 [e]; however, when a corporation or association is liquidated the cash distributed is treated as principal (see EPTL 11-2.1 [e] [6]).
Notwithstanding that Sidney originally took the position when the liquidation proceeds were distributed to the trust in 1996 that he should receive one-half of the proceeds as an income beneficiary, thereafter, he apparently accepted the conclusion of the 1997 opinion letter that the distribution should be treated as principal. Specifically, during the approximately six-year period that elapsed between the delivery of the opinion letter to Sidney in 1997 and his death in 2003, he knew that the movant was treating the distribution as principal for all purposes and he neither requested that the movant seek court approval of its interpretation nor commenced such a proceeding himself. Thus, the parties' interpretation of the 1990 stipulation, as reflected by their conduct after the 1996 liquidation distribution was paid to the trust and treated as principal in accord with the 1997 opinion letter, supports a finding that in the 1990 stipulation the parties intended that a liquidation distribution from Bengro arising from the sale of its sole asset, its realty, should be treated as principal (see City of New York v New York City Ry. Co., 193 NY 543 [1908]; T.L.C. W., LLC v Fashion Outlets of Niagara, LLC, 60 AD3d 1422, 1424 [2009], citing Westfield Family Physicians, P. C. v Healthnow NY Inc., 59 AD3d 1014 [2009] lv denied 13 NY3d 703 [2009]; Federal Ins. Co. v Americas Ins. Co., 258 AD2d 39 [1999]). Furthermore, although the commissions payable to the movant would be less if, at this late date, the liquidation proceeds were treated as income for the first time, this would also result in a greater commission payable to the objectant as the executor of Sidney's estate. This is so because any accumulated income in the trust would be distributed to Sidney's estate and subject to commissions payable to the executor of the estate while trust principal, in accord with the provisions of the trust, is paid by the trustees directly to the grandchildren and would not pass through Sidney's estate. Accordingly, the court concludes that the movant correctly treated the Bengro liquidation distribution as principal. In light of this determination, the court need [*5]not consider the movant's alternate argument that even if the parties had intended in their 1990 stipulation to treat this liquidation distribution as income, such an agreement would be unenforceable because the terms of a testamentary trust may not be changed (see Rosner v Caplow, 90 AD2d 44 [1982], affd 60 NY2d 880 [1983]; Matter of Winthrop, 168 Misc 861, 864 [1938], citing Matter of Wenworth, 230 NY 176 [1920]; Matter of Eggers, 167 Misc 66 [1938]).
The court also considered and fails to find any merit in the other objections interposed with regard to the movant's management of Bengro or the movant's request for commissions based upon the stated values of Bengro. The executor of Sidney's estate clearly stands in Sidney's shoes with regard to the objections interposed herein. Thus, it ill-behooves the objectant to complain about the trust making interest free loans to Bengro as Sidney was one of the partners who benefitted from the loans. Furthermore, as Sidney also made interest free loans to Bengro, he clearly was of the opinion that it was necessary for the partners to make interest free loans to Bengro to preserve its principal, the realty.
The objectant had ample time to make discovery demands and failed to do so. Moreover, he failed to timely respond to the movant's discovery demands. Under these circumstances, the objectant is not entitled to relief because he failed in this proceeding to seek copies of either bills for legal services already paid or of the appraisal values of Bengro upon which the movant relied. The fact that the Bengro realty ultimately sold for substantially less than prior appraised values is of no probative value, where, as here, the realty significantly declined in value due to vacating tenants, burglary, vandalism and environmental hazards. Accordingly, the objectant has no basis to object to either the legal fees paid for services rendered prior to the instant accounting or to the appraised value of Bengro upon which commissions were based.
The sole remaining issue is the legal fee to be awarded the movant's counsel for legal services rendered in this proceeding. The court's determination herein that the movant properly allocated the Bengro liquidation proceeds to principal puts to rest the objectant's argument that the trust cannot be charged for legal services in defense of the indefensible. Nonetheless, the court may not fix the reasonable compensation of counsel without an affidavit of services (see 22 NYCRR 207.45). Consequently, counsel for the movant shall serve and file an affidavit of legal services for any additional compensation sought from the trust. Any objections to the request for additional legal fees shall be served and filed within 20 days of the service of counsel's affidavit of legal services.
Accordingly, for the reasons stated herein this decision constitutes the order of the court granting the movant's motion for summary judgment to the extent of dismissing all of the objections to the account other than those that might hereinafter be interposed to counsel fees requested by the movant's attorney for services rendered in this proceeding, and denying the objectant's cross motion for summary judgment.
Proceed accordingly and settle decree judicially settling the account.
SURROGATE
Dated: January 28, 2011
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