Matter of Parisi

[*1] Matter of Parisi 2011 NY Slip Op 52429(U) Decided on December 22, 2011 Sur Ct, Queens County Kelly, 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 This opinion is uncorrected and will not be published in the printed Official Reports.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 December 22, 2011
Sur Ct, Queens County

In the Matter of the Accounting of JOSEPH S. PARISI, as Executor of the Estate of Marie Parisi, Deceased.



1998-4187/A



The attorneys on this matter were:

Gail Goldfarb, Esq.

Brian P. Flaherty, Esq.

Attorneys for Petitioner/Executor

Madeline S. Egelfeld, Esq.

Gary B. Friedman, Esq.

Attorneys for Objectants

Peter J. Kelly, J.

Marie Parisi died on January 20, 1998. She was survived by her husband, Joseph S. Parisi (hereinafter "Joseph") and three children, Michael Parisi (hereinafter "Michael"), Camille Parisi (hereinafter "Camille") and Joseph M. Parisi (hereinafter "Joe, Jr.").

Under the decedent's Will and Codicil admitted to probate, Joseph was appointed the Executor and the sole Trustee of the Family Trust and the Marital Trust established therein. In November, 2007, Joseph filed the instant Accounting as Executor. Camille and Joe, Jr. filed Objections thereto. On November 8, 2008 Joseph died and the Executor of his estate, Michael, was substituted as the Petitioner in this proceeding.

Objectant Camille now moves for partial summary judgment on 11 of her 36 Amended Objections to the Account seeking an order setting aside the December 31, 1998 sale of the decedent's interest in White Birch Farms, Inc.; an order surcharging Joseph $6,000,000.00 plus interest for failing to marshal the decedent's one-half interest in a promissory note; an order surcharging Joseph $252,058.12 plus interest for failing to marshal the proceeds of a mortgage which was satisfied prior to decedent's death; an order surcharging Joseph $145,900 plus interest for the write-off of the balance due from Michael for the purchase of the decedent's interest in White Birch Farms, Inc.; and a finding that Joseph failed to invest the estate's principal with due regard for the interests of the remaindermen and directing a hearing to determine damages.

Petitioner Cross-Moves for summary judgment for an order declaring that the $12,000,000.00 mortgage and non-recourse note secured by the mortgage passed to [*2]Joseph as surviving tenant by the entirety pursuant to New Jersey law.

Objectant Joe, Jr. submitted an Affidavit wherein he joins in the application of Camille to set aside the sale of 200 shares of White Farms, Inc. to Michael, but objects to her application to surcharge Joseph for failing to collect $6,000,000.00 on the note dated March 15, 1992 and joins in the Cross-Motion of Michael to dismiss Camille's objections thereto.

Summary judgment may be granted only where it is clear that no triable issue of material fact exists (See, Alvarez v Prospect Hosp., 68 NY2d 320; Phillips v Joseph Kantor & Co., 31 NY2d 307).

To defeat a motion for summary judgment, the opponent must assemble and lay bare affirmative proof to demonstrate the existence of a genuine triable issue of fact (Stainless, Inc. v Employers Fire Ins. Co., 69 AD2d 27, aff'd 49 NY2d 924). Allegations must be specific and detailed, substantiated by evidence in the record; mere conclusory assertions will not suffice (Iselin & Co. v Mann Judd Landau, 71 NY2d 420; Matter of Newman, 14 AD3d 567). The papers submitted in support of and in opposition to the motion are scrutinized in a light most favorable to the party opposing the motion. If there is any doubt as to the existence of a triable issue of fact, then the motion must be denied (Robinson v Strong Memorial Hosp., 98 AD2d 976).

Initially, the court will address the issues surrounding White Birch Farms, Inc., specifically, movants' objections 8 and 25. At the time of her death, decedent and her husband Joseph each owned 200 shares of White Birch Farms, Inc. (hereinafter "White Birch"). On December 31, 1998, Joseph, as fiduciary, sold the decedent's 200 shares (representing a 50% interest in the corporation) to Michael for $925,000.00, to be paid as follows: $50,000.00 cash at closing and $87,500.00 per year, for ten years. Joseph also obtained an appraisal of the corporation for estate tax purposes, which indicated that the decedent's one-half interest therein was worth $925,000.00. Subsequently, and before his death, Joseph gifted the bulk of his own 200 shares of White Birch to Michael.

Camille contends that Joseph's sale of decedent's shares of White Birch to his son constituted self-dealing, and that, therefore, the transfer must be set aside.

Where self-dealing is found, the fairness or unfairness of the transaction is immaterial and not considered by the court (See, In re Kilmer, 187 Misc. 121). Thus, where a fiduciary has transferred estate or trust property to himself, the court will not consider the fairness or unfairness of the transaction nor consider whether or not full consideration was paid.

Such "no further inquiry" doctrine has also been applied where fiduciaries purchase "indirectly by procuring a third person to purchase in the first instance," later reaping an individual advantage from the transaction (Reynolds v. Aetna Life Ins. Co., 28 AD 591) and where fiduciaries sell estate or trust property to their spouse (In re Fulton, 253 AD 494) or a Co-Trustee (In re Estate of Kinzler, 195 AD2d 464).

Camille, citing In re Estate of Segal ,170 Misc 673, contends that the "no further inquiry" doctrine should apply to this transfer which was a transaction between the fiduciary and his son. Her reliance on Segal, however, is misplaced since Surrogate Wingate did not apply the "no further inquiry" rule therein. Rather the court in Segal held: [*3]

No sound distinction may be drawn between a conveyance of this variety to a person of the executor's family who stands in a marital relationship to him and a like conveyance to a son or daughter, as in the present case. The transaction must be declared void at the election of the cestui que trust unless conclusively demonstrated to have been made for a full consideration under circumstances which preclude the possibility of any improper advantage to the individual fiduciary himself. [emphasis added] (170 Misc. 673, 675).

While transactions with a child may put fiduciaries in conflict with certain beneficiaries, the question remains whether this constitutes "self-dealing." This court has not found a case extending the "no further inquiry" doctrine to transactions with children and is loathe to broaden the per se rule to the fact pattern encountered at bar. Under the circumstances presented here, the court's role should be to determine whether the fiduciary can conclusively demonstrate that the transaction was made for full consideration under circumstances which preclude the possibility of any improper advantage to the fiduciary. Based upon the facts set forth in the motion papers herein, Petitioner has sustained this burden.Although Camille does not concede that $925,000.00 was full consideration for the 200 shares of White Birch Farms, Inc., she has not submitted proof in her motion papers that $925,000.00 was an undervaluation. In fact, the only evidence pertaining to the value of the stock submitted on the motion, apart from pure conjecture, was an appraisal Camille annexed to her motion papers which indicated that the stock had a value of $925,000.00, which was the actual purchase price. Furthermore, in the fifth branch of her motion, Camille seeks a surcharge in the sum of $145,900.00, which represents the difference between the $925,000.00 valuation and the amount subsequently collected by Joseph from Michael.

Also, as Joseph later gifted the bulk of his shares of White Birch Farms, Inc. to Michael, there doesn't appear to have been any improper advantage gained by the fiduciary in selling the decedent's shares to Michael for full consideration.

The Court also notes that, as set forth in Segal, supra, the beneficiaries have two remedies available at their election if an illegal transfer takes place: they may obtain a declaration that the transfer was void or, in the alternative, obtain from the fiduciary the difference between the consideration actually paid and the fair market value of the property at the time of the sale. In her Amended Objections to Account, Camille again only sought to request the difference between what Michael actually paid and $925,000.00. A request for a declaration that the transfer was void was only raised in the instant motion.

Accordingly, the branch of the motion for an order setting aside the December 31, 1998 sale of the decedent's interest in White Birch Farms, Inc. to Michael is denied and Objections 8 and 25 are dismissed.

Next, the court turns to the branches of the motion for summary judgment on objections 7 and 8 by which the movants seek a surcharge against Joseph in the amount of $125,000.00. As previously set forth, on December 31, 1998, Joseph sold the decedent's 200 shares of White Birch Farms, Inc. to Michael for $925,000.00, to be paid as follows: $50,000.00 cash at closing and $87,500.00 per year, for ten years, with interest at 6% per annum. Michael made three payments of $87,500.00 and, on [*4]December 19, 2005, made an additional payment of $466,600.00 for a total sum paid of $779,100.00, which is $145,900.00 less than the contract price.

In Schedule B of his Accounting, Petitioner indicates that there was a "write-off"" in the sum of $145,900.00 "due to decrease in market value of 200 shares of capital stock of White Birch Farms, Inc." In his motion papers, however, Petitioner claims that the sales price was overvalued because Joseph "...only used a 5% lack of control discount" instead of a 20% lack of control discount. Camille objected thereto and sought an order surcharging Joseph the sum of $145,900.00 plus interest at 9% per annum from December 19, 2005, the date the balance due was forgiven.

As previously stated herein, the only evidence submitted on the motion and cross-motion concerning the valuation of the capital stock of White Birch Farms, Inc. was the appraisal setting forth the value of $925,000.00 and the Memorandum of Sale dated December 31, 1998 with that sales price.

Any subsequent depreciation of value of the stock or realization by the fiduciary that the purchaser may have paid in excess of the market price is of no consequence as the fiduciary has a duty to the beneficiaries of the estate to sell the property at full market value and collect the full proceeds of any sale that is consummated.

Accordingly, Objections 7 and 26 are sustained and the branch of the motion seeking an order surcharging Joseph the sum of $145,900.00 plus interest is granted as follows: Joseph shall be surcharged the sum of $145,900.00 plus interest at the rate of 6% per annum from December 19, 2005.

With respect to the branch of the motion addressing Joseph's failure to collect the proceeds of a promissory note as set forth in Objection 5, on March 15, 1982, Joe, Jr., Michael and the decedent, acting as Trustee for Joe Jr. and Michael, executed a promissory note whereby they agreed to pay to Joseph and the decedent the sum of $12,000,000.00, together with 9% interest thereon per annum, due on March 15, 2007. The promissory note was secured by a mortgage, assignment of leases and rents, and a security agreement dated March 15, 1982 on real property in Allentown, Monmouth County, New Jersey. At the time the note and mortgage was signed, decedent was married to Joseph. The note states that it was held by "Joseph S. Parisi and Marie Parisi or their heirs, successors, or assigns" and the mortgage states that it was granted to "Joseph S. Parisi and Marie Parisi, his wife."

The note provides as follows:

"This Note is to be construed and enforced in accordance with the laws of the State of New Jersey without giving effect to New Jersey's principles of conflicts of law."

The mortgage provides as follows:

"Section 3.4 The enforcement of this Mortgage shall be governed, construed and interpreted in accordance with the laws of the State where the Premises are [*5]located."

The instant Accounting makes no mention of the decedent's interest in this promissory note and Camille seeks summary judgment based on the failure of the fiduciary to include the decedent's one-half interest in the note in his Account.

Camille, citing Miller v Miller, 22 NY2d 12, contends that the note should be interpreted under New York law. In Miller, the New York Court of Appeals, quoting In re Estate of Clark, 21 NY2d 478, held that "...[a]s between two states, the law of that one which has the predominant, if not the sole, interest in the protection and regulation of the rights of the person or persons involved should, of course, be invoked." Camille contends that there is no question that the "... [n]ote's most significant contacts are in New York State" as all of the parties to the note resided in New York when it was executed; the note was prepared by a New York law firm with offices on Wall Street; the document was executed in New York; and that the only connection to New Jersey is the location of the land secured by the mortgage, which she contends is incidental to the note.

Since EPTL §6-2.2[a] provides that "... a disposition of property to two or more persons creates in them a tenancy in common, unless expressly declared to be a joint tenancy", Camille contends that, applying New York law, the decedent and Joseph held the note as tenants in common, and, therefore, decedent's estate owns a one-half interest in the note. Additionally, Camille argues that under EPTL §13-1.1[a][7] and EPTL §3-5.1[a][2], the decedent's interest in the note is personal property and, thus, all issues concerning the character of same, must be determined by a New York court.

Petitioner, on the other hand, contends that the note and mortgage should be regarded as one, and that the note clearly indicates thereon that it is secured

by a mortgage on the property located at White Birch Farms in New Jersey. Further, the terms of the note revel that it is "non-recourse". Since there is no personal liability thereunder, the only method to enforce the note is through foreclosure of the mortgage. Consequently, the Petitioner reasons that the note, in and of itself, has no value and, thus, the note and mortgage must be viewed together, as without the note, the mortgage is a nullity.

Under New Jersey law, a tenancy by the entirety is created when a husband and wife take title to an interest in real or personal property under a written instrument designating both of their names as husband and wife ( NJSA §46:3-17.2). NJSA §46:3-17.3 provides:

No instrument creating a property interest on the part of a husband and wife shall be construed to create a tenancy in common or joint tenancy unless it is expressed therein or manifestly appears from the tenor of the instrument that it was intended to create a tenancy in common or joint tenancy.

Petitioner contends that since both the note and mortgage were held as tenants [*6]in the entirety under New Jersey law, upon the decedent's death, Joseph became the sole owner of the note. In his Cross-Motion, Petitioner seeks summary judgment declaring that the note passed to Joseph as surviving tenant by the entirety pursuant to New Jersey law.

The dispute presented herein is whether a note secured by a mortgage on real property located in New Jersey is itself considered to be real property or personal property. More fundamentally, however, an issue exists as to whether New York or New Jersey law should be applied in determining this dispute.

EPTL §3-5.1[b][1] provides that the formal and intrinsic validity, effect and manner in which real property devolves when not disposed of in a will is "determined by the law of the jurisdiction in which the land is situated". On the other hand, disposition of personal property is "determined by the law of the jurisdiction in which the decedent was domiciled at death." (EPTL §3-5.1[b][2]). However, subdivision [i] of EPTL §3-5.1 additionally states that:

[n]otwithstanding the definition of "real property" in subparagraph (a)(1), whether an estate in, leasehold of, fixture, mortgage or other lien on land is real property governed by subparagraph (b)(1) or personal property governed by subparagraph (b)(2) is determined by the local law of the jurisdiction in which the land is situated.

Interestingly, while both parties have submitted detained analyses and arguments concerning which various provisions of the EPTL govern in this instance, scant attention has been given the terms of the note itself which specifically states it is to be construed and enforced according to the laws of New Jersey.

Courts will enforce a choice of law clause so long as the chosen law bears a reasonable relationship to the parties or transactions subject to certain exceptions that do not apply in this matter (Welsbach Elec. Corp. v MasTec N. Am., Inc., 7 NY3d 624, 629).

No serious argument can be made that the controversy herein does not concern the construction of the instrument as personality or realty and there is no need to parse the agreement to ascertain that the clear intent of the parties was to have New Jersey law apply in controlling this transaction despite the associated trappings concerning the place, time and people involved in the drafting the note.

Secondly, while it is true that EPTL §13-1.1 is clear on its face that a debt secured by a mortgage is personal property, the court can not apply this statute unless it first finds it has subject matter jurisdiction to do so pursuant to EPTL §3-5.1.

Under New Jersey law, where the subject of the security is land, a mortgage debt, although a chose in action, is "an interest in land" and is treated as realty not personalty (See, Burke v Hoffman, 28 NJ 467). In New York, a mortgage is an incident to the note and when the latter is transferred, the mortgage is conveyed with the interest in the note. Conversely, a mortgage is merely security for the note and can not exist independently (See, Bank of NY v Silverberg, 86 AD3d 274, 280). However, in [*7]this case the note is non-recourse and can only be enforced through foreclosure upon the mortgage and the basis for the note was to memorialize the payment terms for real property located in New Jersey.

In an analogous situation as presented here, the Appellate Division, Second Department, was faced with an issue of whether income generated from New Jersey realty should be considered real property or personal property. Applying New Jersey law, the court determined that the income was considered real property and, therefore, a New York court did not have subject matter jurisdiction to determine its distribution (See, Matter of Messaros, 262 AD2d 322).

Given the above factors, even if the terms of the note were to be found not controlling, as the note is considered an interest in realty under New Jersey law and the real property in question is located in New Jersey and finding the rationale of the Messaros decision persuasive, this Court finds it is without jurisdiction to determine whether the note, apparently valueless independently, should be a personal asset of the decedent's estate or a real property interest that passed to Joseph by operation of law.

Accordingly, the branch of Objectant Camille's motion for summary judgment seeking a surcharge of $6 Million from Joseph's Estate, and the Cross-Motion seeking a determination that the note passed by operation of law to Joseph are both denied, and Camille's Objection 5 is dismissed.

The next issue to be addressed is the branch of the motion seeking summary judgment pertaining to the Permanent Realty Mortgage proceeds as contained in Objection 6. On November 1, 1997, checks in the sums of $499,950.00 and $4,166.25 were issued by Permanent Realty Corp. payable to Joseph and the decedent in full satisfaction of a mortgage. Both checks were deposited into Joseph's personal bank account, in his name only, on November 3, 1997.

Objectant Camille contends that there is no indication that the decedent's one-half share of the mortgage proceeds, $252,058.12, was marshaled by Joseph.

Petitioner contends that the deposit into Joseph's account was consistent with the pattern and practice by which Joseph and the decedent had conducted their affairs for their entire married lives; that Joseph and the decedent did not maintain any joint bank accounts; that Joseph deposited money into the account that was then used for his own expenses, the decedent's expenses, and their joint expenses. Petitioner contends that when the decedent died, whatever amount remained in Joseph's account, if any, passed to Joseph since it had been deposited, "...by their common consent," in an account in his name only. Essentially, the Petitioner claims the funds were gifted to Joseph.

Petitioner also submitted an affidavit by Deborah A. Cox, the property and leasing manager for M. Parisi & Son Construction Co. Inc., which indicates that she received the two certified checks and "pursuant to the instructions from Mr. Parisi (Joseph) and as was our customary practice, the funds were deposited in Joseph S. Parisi's bank account." She further stated that Joseph and the decedent did not maintain joint bank accounts and that Joseph would deposit all incoming funds and [*8]earnings, whether joint or not, in his individual bank account.

One who attempts to establish title to property through an inter vivos gift as against the estate of a decedent must meet a heavy burden which he must support by evidence of great probative force, which clearly establishes every element of a valid gift (Matter of Kaminsky, 17 AD2d 690). The three essential elements of a gift donative intent, delivery and acceptance must be established by clear and convincing evidence (Gruen v Gruen, 68 NY2d 48). The evidence of gift taken as a whole must not be subject to any other interpretation, such as a transfer for purposes of custody (See, Frick v Cone, 160 Misc. 450, aff'd 251 AD 781).

Petitioner herein presented no evidence in the motion papers to support a claim of an absolute and unequivocal intention on the part of the decedent to make the alleged gift of one-half of the Permanent Realty mortgage proceeds to him. There is no indication that the decedent even knew of or actually endorsed the check. In fact, all the evidence in the record leads to an equally valid conclusion that the mortgage proceeds were deposited into Joseph's bank account as a matter of convenience for banking and payment purposes. As such, one-half of the mortgage proceeds should be included as assets of the decedent's Estate.

The question remains, however, as to how much of these proceeds were actually in Joseph's bank account at the time of Marie's death. Schedule A of the Accounting claims decedent had cash amounting to $208,915.00 at the time of her death. Objectant Camille contends that this amount is greatly understated as it is $44,000.00 less than the Permanent Realty mortgage proceeds and asserts that such a reduction is "unlikely, as she (the decedent) owned income producing real estate." Petitioner responds that Joseph paid sums out of his account for his wife's benefit, including medical, nursing and funeral expenses.

Upon the papers presented, the branch of the motion seeking summary judgment surcharging Petitioner for decedent's one-half share of the mortgage proceeds ($252,058.12) is, therefore, denied as the evidence submitted herein present a triable issue of fact as to the amount to be surcharged.

Lastly, Camille seeks summary judgment with respect to Objections 23, 27, 28, 29 and 30 wherein she seeks a surcharge due to the manner in which the estate assets were invested.

Joseph, as Executor of decedent's Estate, invested the Estate's assets in checking accounts and certificates of deposit. Objectant Camille contends that such deposits were made without regard for the interests of the trust remaindermen, as there was no capital appreciation. The principal balance is approximately the same today as it was on the date of the decedent's death.

The Accounting reveals that $283,546.12 was generated in income, with the sum of $124,614.89 in interest from the checking accounts and certificates of deposit.

Objectant Camille moves for summary judgment on the issue of Joseph's liability, and requests a hearing to determine damages.

The Prudent Investor Act, EPTL §11-2.3, specifies the duties of fiduciaries when making investment decisions with, as is applicable here, estate and trust proceeds. [*9]Likewise, the Uniform Principal and Income Acts, EPTL §11-2.1, et. seq. and §11-A-1.1, et. seq., further codify the obligations of a trust fiduciary as concerns balancing investments for the benefit of income and remainder beneficiaries.

Generally, the Prudent Investor Act sets four primary requirements for a fiduciary to follow: [1] to pursue an overall investment strategy which balances risk and rate of return which will enable the trustee to make appropriate present and future distributions; [2] to consider numerous factors in developing an investment strategy, including size of the portfolio, general economic conditions, liquidity of the estate and distribution requirements and the needs of the beneficiaries; [3] to diversify the trust assets, unless the trustee "reasonable determines that it is in the interests of the beneficiaries not to diversify" and [4] to determine within a reasonable amount of time whether to retain or dispose of the assets. (See, EPTL §11-2.3[b][3][A - D]).

The Prudent Investor Act "encourages investing for total return on a portfolio . . . [u]nless the governing instrument expressly provides otherwise" (Matter of Heller, 6 NY3d 649, 653). Morever, a fiduciary is required to consider the "testator's primary objectives and undertake a formal analysis of the estate to establish an investment plan consistent therewith" (See, In re Estate of Saxton, 274 AD2d 110, 118).

As an overall matter, investment strategies should not be viewed in hindsight and the issue of "whether a fiduciary has acted prudently is a factual determination to be made by the trial court" (In re Estate of Janes, 90 NY2d 41, 50).

In the present case, the decedent's Last Will and Testament provides for two trusts, a Marital Trust and a Family Trust. Joseph had renounced his interest in the Marital Trust, so the residuary assets from the Estate pass to The Family Trust, which provides that the co-trustees, at their discretion, were to pay or provide for Joseph and the decedent's children income and/or principal for their health, education, maintenance and support. The trustees are also given the discretion to accumulate to the principal. The article 6[a] of the trust stataes the following:

Without infringing upon the absolute discretion of the Co-Trustees herein, it is my intention that the well-being of my husband, JOSEPH S. PARISI, is my first consideration. It is, therefore, my desire that my Co-Trustees pay to my said husband or apply to his use from the "Family Trust", so much of the income, either current or accumulated, up to the whole thereof, and as much of the principal as the Co-Trustees may deem necessary or desirable taking into consideration the other property or resources of my husband, JOSEPH S. PARISI, so as to enable him to maintain the standard of living he shall have maintained prior to my death; provided, however, that if, I the sole discretion of my Co-Trustees, my husband shall not need all the income of the "Family Trust", then the Co-Trustees shall distribute from the income of the "Family Trust" such part thereof as, in the Co-Trustees' sole discretion, my husband may not need to my children, as the Co-Trustees, in their sole discretion shall see fit for their health, education, maintenance and support" [emphasis added].

In view of the fact that the Family Trust expresses an explicit intention to first provide for the well-being of the decedent's husband, Joseph, and gives the Co-Trustees such absolute discretion with regard to distributions of income and principal for the benefit of Joseph, Camille has failed to establish prima facie that Joseph's investment of Estate assets into bank accounts and certificates of deposit were, as a [*10]matter of law, a violation of EPTL §11-2.1, §11-2.3 or EPTL §11-A-1.3.Accordingly, the branch of Objectant Camille's motion for summary judgment finding Joseph liable pursuant to EPTL §11-2.1, §11-2.3 or §11-A-1.3 is denied.

A Pre-Trial Conference in this proceeding shall be held on January 9, 2012 at 9:30 AM.

This is the Decision and Order of the Court.

Dated: December 22, 2011

__________________________

SURROGATE