Home » Publications & Outlines » Frank W Streng, White Plains Lawyer, Contested Accountings - 5-5-03

Contested Accountings

Frank W. Streng, Esq.

Partner

McCarthy, Fingar, Donovan,

Drazen & Smith, L.L.P.

11 Martine Avenue

White Plains, NY  10606-1934

914-946-3817 ext. 256 (voice)

914-946-0134 (fax)

e-mail:  fstreng@mfdds.com

web: www.mfdds.com                                                  www.mfdds.com

Gary E. Bashian, Esq.

Partner

Bashian, Enea & Sirignano

235 Main Street

White Plains, NY  10601

914-946-5100 (voice)

914-946-5111 (fax)

e-mail:  garybashian@aol.com

 

 

 

 

 

 

 

 

 

Westchester County Bar Association – Trusts & Estates Section

 

Contested Accountings

 

May 5, 2003

 

  • Introduction:
    • Surrogate’s Court accountings are the least understood amongst litigants and the lay public
      • Full receipts and disbursement accountings prepared pursuant to the rules of the Court
      • Compare with financial statements prepared for businesses/corporations
    • In this seminar:
      • We will offer
        • the perspective of the petitioner [the executor/trustee/accounting party];
        • the perspective of the objectants/beneficiaries of estate/trust

 

  • Duty to Account:
    • Need for finality – statute of limitations generally does not run.  The statute of limitations to compel an accounting is six years (CPLR 213(1)) and will begin to run on the date the executor/trustee openly and unequivocally repudiates a Will/Trust (Matter of Barabash, 31 N.Y.2d 76 (1972)
    • Why do you account:
      • Bottom line: executor/trustee needs to be properly discharged before final distributions are made in estate or trust.
      • Examples of need to have judicial accounting:
        • Creditor’s rights not resolved without accounting
        • Can’t work out “informal” settlement of accounting by receipt and release agreement
        • Minors or others under disability
        • Other issues impacted, such as elective share notice that cannot be settled

 

  • Voluntary accounting proceedings
    • Prerequisites to commencement of proceeding (SCPA 2208)
    • Period for claims expired (SCPA 1802)
    • Fiduciary’s letters revoked
    • Sale of real estate to pay debts, taxes, expenses or distributive shares
    • In the case of intermediate accountings, at least one year passes, if court entertains proceedings

 

  • Consequences for Failing to Account
    • Compulsory accounting proceeding under SCPA 2205
      • Change in SCPA 2205 and 2206, effective 11/1/2002
        • Court may
          • Direct the accounting
          • Suspend a fiduciary who defaults on return date of application or who fails to file accounting
          • Fix a trial date for removal of fiduciary whose letters are suspended
          • Fix a trial date to take and state an accounting
          • Petitioner’s strategy:
            • Comply with new statute and request all the relief permitted under the statute
              • Prepare citation in form that complies with new statute
                • Note: there are no forms available for the amended statute, so develop your own form
          • Before 11/1/2002: limited remedies:
            • If the fiduciary fails to account within the time frame ordered by the Court, the petitioner can either “take and state the account” (SCPA 2206(3) or petition to have the accounting party held in contempt (SCPA 606/607)
            • Practical effect of new statute: gives courage to Surrogates in some counties that were reluctant to grant broad relief against an errant fiduciary
              •  
    • Usually, on the return date of the proceeding, the only issue for the court is the timing for filing the accounting
      • Petitioner’s perspective: wants a court order compelling an accounting within specified time period: as short as a “30 day order” or as long as a 90 or 120 day order
      • Executor/Trustee: want to adjourn proceeding or wants maximum time

 

  • Necessary Parties in Voluntary Accounting Proceeding
  • Unpaid claimants
  • Surety
  • Non joining co-fiduciaries
  • Successor fiduciary
  • Att. Gen. for charities, unknowns, or known beneficiaries who can’t be found
  • Distributees, for beneficiaries where beneficiary died intestate
  • Devisees; trustees; legatees
  • SCPA 2210(7) and (10) – conflict of interests
  • Consider conflicts of even co-trustee who is not a co-executor where there is a conflict of interest, in fact, for some other reason
  • Virtual representation – SCPA 315; SCPA 2210(14)
  • Fiduciary of deceased fiduciary’s estate

 

  • Pleadings and other Necessary Documents
  • Petition
  • Use approved Surrogate’s Court forms
  • Consider purchasing HotDocs for Surrogate’s Court forms, approved by the Surrogate’s Court and the Bar
  • Interested parties – list everyone, even fiduciaries and those who have consented; the list of interested parties is a checklist for court personnel to make sure everyone’s interest is protected in proceeding.  For infants, get appropriate information
  • Statement of relief requested
  • Remember, the petition is a formal pleading; and unless you request relief, you may not get it.  Seek:
    • Approval of accounting
    • Fixation of fees
    • Fixation of compensation of pre-deceased fiduciary
    • Construction
    • Disallowance of claims
    • Other unusually items

 

  • Citation
  • The relief sought in the petition is also recited in the citation
  • The Surrogate’s Court has also always been a filing jurisdiction, with the Court (and not the attorneys) issuing the process

 

  • Affidavits for virtual representation of lateral interest (SCPA 315(5)) (Court rule 207.18)

 

  • Claims of fiduciary against estate
    • SCPA 1805

 

  • Service of citation
    • Personal, for in state people – 10 days
    • By cmrrr, for out of state people – 20 days, within US; 30 days outside US
    • For infants
    • Under 14
    • Over 14

 

  • Alternatives to Service of Citation

Waiver and Consent – see Rule 207.40(f)

  • Be careful
    • See Matter of Hunter, 194 Misc. 2d 364 (Surr. Ct., Westchester 2002) [ineffectiveness of waiver and consent on accounting proceeding when there appears to be overreaching by executor in obtaining consent]
    • Appearance in the proceeding
    • Acknowledgement of service
    • Dispensing with service for interest less than $500

 

  • Issues to be Resolved as Part of Accounting Proceeding

 

  • Approval of executor’s actions
  • Direction as to Payment of Claims and Expenses
  • Disallowance of creditor’s claims
  • Allowance of fiduciary’s claims
  • Legal fees that are unpaid
  • If paid on Schedule C, then no reason to seek payment
  • Filing of affidavit of legal services – in Westchester, it must be filed before the Court issues the citation
  • Issues Concerning the distribution of Assets; Construction
  • Construction
  • Estate tax apportionment

 

  • ·        Measures to take when you are first retained to review an estate accounting: Perspective of beneficiaries’ counsel

 

  • ·        Perform Due diligence
    • ·        Review will/trust
    • ·        Dispositive plan
    • ·        Construction or tax apportionment issue
    • ·        Investment directives
    • ·        Limitations on fiduciaries – e.g., commissions

 

  • ·        Review Court file

 

  • ·        If litigation, review pleadings and other papers in litigation

 

  • ·        Review potential liabilities of estate

 

  • ·        Review
    • ·        Inventory
    • ·        Federal and New York estate tax returns
    • ·        Federal and New York fiduciary tax returns
    • ·        Federal and New York income tax returns
    • ·        Federal and New York gift tax returns
    • ·        Bank/cash/brokerage/mutual fund statements, etc.
    • ·        If corporation involved, Federal and local tax returns

 

  • ·        What generally are you looking for:
    • ·        Collection of all assets
    • ·        Joint assets
      • ·        Bank accounts: Convenience accounts v. survivorship accounts
      • ·        Other joint assets
      • ·        Gifted assets
        • ·        Gifts beyond gift tax exclusions
        • ·        “Medicaid” planning and “extra” legal estate planning
        • ·        Totten trusts
        • ·        Qualified plans or IRAs
        • ·        Insurance policies
        • ·        Tangible personal property

 

  • ·        Uninvested cash

 

  • ·        Tax elections and tax matters
  • ·        Separate v. joint income tax returns
  • ·        Alternate valuation
  • ·        Q-Tip Property (Q-TIP)
  • ·        Generation Skipping Tax (GST)
  • ·        Deduction of expense on fiduciary v. estate tax return
  • ·        Proper funding of pecuniary trusts, such as credit shelter trusts
  • ·        Possible refund claims
  • ·        Penalty and/or interest for failure to timely file return or pay tax

 

  • ·        Transactions of attorney-in-fact
    • ·        Gifting issues and authority to make gifts
    • ·        Other transactions

 

  • ·        Neutrality as to beneficiaries
  • ·        E.g., non-pro rata distributions
  • ·        Timing of payment of pecuniary bequests/cash legacies

 

  • ·        Attorney/Fiduciaries
  • ·        Commissions
  • ·        Legal fees

 

  • ·        Claims of creditors

 

  • ·        Examination of Accounting Schedules

 

  • ·        Schedule A
    • ·        Review 706/ET-90
    • ·        Review individual tax returns and backup – look for 1099s and indication of other assets
    • ·        If collection on law suits, investigate further
    • ·        If businesses, look for buy-sell or other agreements affecting company and possible sale; if businesses, consider possible forensic examination of company; consider need for separate accounting for wholly-owned business
    • ·        Joint and other nonprobate assets
    • ·        Possible ancillary assets in other jurisdiction
      • ·        Note: Surrogate’s Court limited jurisdiction as to assets in other jurisdiction

 

  • ·        Schedules B/A-1
    • ·        If decreases, consider a forensic examination of reasons for losses
    • ·        You do not get surcharged for losses; you get surcharged for imprudent losses
    • ·        You do not get surcharged for “lost opportunity” for a premature sale of stock that boomed
    • ·        You might get surcharged for poor decision making module and loss, or even no loss – e.g., real estate sold without an appraisal and a quick sale
    • ·        Look for accurate schedule
    • ·        If there are investments after date of death in stocks, examine losses very carefully
    • ·        Practical point: executors should not invest in anything but short term investments, such as CDs, money market, T Bills – no T Notes, stocks, bonds, mutual funds or reinvestment of mutual funds
    • ·        Timely disposition of improper investments
    • ·        Personal benefit to a fiduciary from an expense of sale
    • ·        Real estate brokerage – review closing statement
    • ·        Stock brokerage
    • ·        Look at increases just as carefully as decreases
    • ·        Abandonment of assets

 

  • ·        Schedule A-2
    • ·        Look at published dividends records
    • ·        Uninvested cash
    • ·        Proper allocation between income and principal
    • ·        E.g., interest on estate tax refund does not belong to A-2; it belongs to Schedule C
    • ·        If business or partnership, consider a full forensic examination
    • ·        If there is underproductive property [e.g., unsold real estate generating no rental income], see 11-2.1(k); or, effective 1/1/02, see Article 11-A [Uniform Principal and Income Act]

 

  • ·        Schedule C
    • ·        Make judgments individually as to each item
    • ·        Are there are expenses that should not have been incurred had the estate been administered more efficiently and rapidly, e.g., bank service charges for decedent’s accounts, rent, etc.
    • ·        Funeral expenses
    • ·        Storage charges and delivery charges for bequests of tangible personal property
    • ·        Commissions paid without court approval
    • ·        Extra fees for fiduciary – e.g., brokerage fees
    • ·        Executorial services – e.g., bookkeeping
    • ·        Accounting fees
    • ·        Attorney fees
    • ·        Estate and other transfer taxes
    • ·        Tax elections
    • ·        Valuation of assets and proper payment of taxes
    • ·        Penalties
    • ·        If trust involved, consider allocation of expenses between income and principal
      • ·        Estate of Thomas Carvel and issues pending in case

 

 

  • ·        Schedule C-1
    • ·        Relationship between C and C-1
    • ·        Calculation of commissions – see Schedule I
    • ·        Attorneys fee

 

  • ·        Schedule D
    • ·        Was a claim barred or unenforceable for any reason
    • ·        Statute of limitations
    • ·        CPLR 4519 evidentiary problem in proving claim

 

  • ·        Personal claim of fiduciary paid without court approval
  • ·        Applies even to bank mortgages
  • ·        Allowances for contingent claims?

 

  • ·        Schedule E
    • ·        If satisfaction in kind and nonprorata, check values of assets
    • ·        Consider interrelated tax issues, e.g., satisfaction of pecuniary legacy in kind results in a gain; no inherited tax basis
    • ·        Pro rata distributions; if not, look for adjustments on income side (see EPTL 11-2.1(d)(2)
    • ·        Untimely payment of cash bequests; if not, was interest paid; was the amount of interest fair if interest paid
    • ·        If charitable and individual residuary interest, were fiduciary taxes charged to individual (see EPTL 11-2.1(d)(2))

 

  • ·        Schedule F
    • ·        Uninvested cash
    • ·        Investments in appropriate short-term par investments v. improper investment in bonds, stock, etc.
    • ·        If business loans, etc., do forensic work on company

 

  • ·        Schedule G
    • ·        Are assets segregated in estate and separate from those in individual name of fiduciaries
    • ·        Should assets have been sold
    • ·        Caution: surcharge usually cannot apply when the executor has failed to sell retained assets

 

  • ·        Schedule H
    • ·        If there are power of attorneys or assignments on file, determine whether they have any impact on your client’s strategic position in any litigation
    • ·        Are proposed distributions correct – consider non-pro rata distribution and Schedule E comments

 

  • ·        Schedule I
    • ·        Commissions property computed
    • ·        Unsold real estate
    • ·        Specifically bequeathed or devised property
    • ·        If pledged property, perhaps only entitled to commission on net amount
    • ·        If multiple fiduciaries, consider entitlement (SCPA 2313 – limited to 2)
    • ·        If attorney-fiduciary, consider entitlement
    • ·        Consider whether actions of fiduciary result in deprivation – usually not, unless actions are dramatic – e.g., removed fiduciary
    • ·        Corporate fees – review fee schedule and look for problems, e.g., fees on nonprobate assets

 

  • ·        Schedule J – Cash Reconciliation and Other Pertinent Facts

 

  • ·        Usually a rich source of information, e.g., nonprobate assets described here usually in order to prevent liability for a fiduciary accused of hoodwinking court or beneficiaries
    • ·        Cash reconciliation
    • ·        Equitable adjustments

 

  • ·        Schedule K
    • ·        Estate tax apportionment
    • ·        Foreign taxes

 

  • ·        If trust involved

 

  • ·        Schedule E-1 (Distributions of income)
  • ·        Schedule C-2 (Expenses Charged Against Income
  • ·        Schedule F-1 (Income on Hand)

 

  • Proceedings on and after the Return Date of Accounting Citation
  • The return date
  • Pre objection proceedings
  • SCPA 2211 examination of fiduciary
    • An opportunity to answer additional questions that you or client have concerning the estate, before a decision is made to move forward with litigation as to the accounting
      • Compare with SCPA 1404 examination of attesting witnesses in prospective will contest
      • Access to estate records
        • Attorney client privilege issue
          • Old law (no real attorney-client privilege
          • Amended CPLR 4513 (real attorney-client privilege)
  • Appointment of Guardian ad Litem

 

  • Objections to Accounting
  • See issues above as to possible grounds for objections
  • Consider that each objection is a type of a separate cause of action
  • Detailed v. general objection
  • Possible description of “ground” for objection
    • E.g., “Objection to Schedule A for its failure to include as an asset The Bank of New York a/c #12345 on the ground that such asset is an asset of the decedent’s assets and did not mass by right of survivorship to John Doe on the death of the decedent.”

 

  • Post-Objections Discovery
  • CPLR rules apply in all respects
  • Particular problems in discovery
  • Duty of executor to maintain records and prove expenses
    • Consider that, under burden of proof rules, an executor could be surcharged if there is an adequate record for an expense
    • Attorney fee application
      • Access to records
        • Impact on attorney-client privilege
      • Ongoing controversies in estate that impact an asset or liability [read: possible surcharge claim against fiduciary]
        • Example: litigating issue of penalty paid when issue is not finally resolved with Federal or State tax authority

 

  • Ethical Issues

 

  • Attorney Client Privilege
    • Canon 4:         Lawyer Should Preserve the Confidences and Secrets of a Client.

 

EC 4-1:              Both the fiduciary relationship existing between lawyer and client and the proper functioning of the legal system require the preservation by the lawyer of confidences and secrets of one who has employed or sought to employ the lawyer.  A client must feel free to discuss anything with his or her lawyer and a lawyer must be equally free to obtain information beyond that volunteered by the client. *  *  *  *

 

DR 4-101:          Preservation of Confidences and Secrets of a Client

 

*         *          *

 

B.          Except when permitted under DR 4-101(C), a lawyer shall not knowingly:

 

              1.  Reveal a confidence or secret of a client.

 

*         *          *

 

  1. A lawyer may reveal:

 

*       *       *

 

  1. Confidences or secrets necessary to establish or collect the lawyer’s fee or to defend the lawyer or his or her employees or associates against an accusation or wrongful conduct.

 

CPLR 4503(a) “[U]nless the client waives the privilege, an attorney . . . shall not disclose, or be allowed to disclose such communication . . . .”

 

CPLR 4503(b) “in any action involving the probate, validity or construction of a will, an attorney or his employee shall be required to disclose information as to the preparation, execution or revocation of any will or other relevant instrument, but he shall not be allowed to disclose any communication privileged under subdivision (a) which would tend to disgrace the memory of the decedent.”

     

  • Reconciling the traditional attorney-client privilege rules with the attorney-client relationship between a lawyer and a fiduciary of an estate.  What is different about trusts and estates clients?  In theory, estate planning clients are no different than any other client whose confidence we must uphold.  But see CPLR 4503(b) (will exception) (“tend to disgrace” the decedent’s memory; concerned about how the decedent will be seen)

 

  • After the client’s death, who does the lawyer represent:
  • the estate?
  • the executor(s)?
  • specific legatees of tangible personal property
  • cash or pecuniary legatees
  • the independent trustee of residuary trust?
  • permissible lifetime beneficiaries of residuary trust?
  • remainderman of residuary trust?
  • the outright residuary beneficiaries?
  • all of the above?

 

  • In Hoopes v. Carota, 74 N.Y.2d 716 (1989), the Court of Appeals held that, since the trustees of a trust were acting in a fiduciary capacity, the privilege is not absolute and may be set aside on a showing of “good cause” by the beneficiaries.  The Court also noted that “some courts have held that the privilege does not attach at all.”  Id. at 717.  The Court upheld the Appellate Division’s finding of “good cause” and concluded that “the communications are not privileged in any event.”  Id.  But see  AMBAC Indemnity Corp. v. Bankers Trust Co., 151 Misc. 2d 204 (Sup. Ct., N.Y. Co. 1991) (good cause not shown for indentured trustee)

 

  • What does it mean to “act in a fiduciary capacity”  Is it different to “act in a representative capacity”?   No; you are acting “in behalf” of someone else – the beneficiaries.

 

  • In Matter of Baker, 139 Misc. 2d 573 (Surr. Ct., Nassau Co. 1988), Surrogate Radigan, after analyzing the various cases and issues as to whether a privilege can be asserted by a fiduciary of an estate, compelled the fiduciary to turn over a sensitive document in the estate that pertained to distributions from the estate.  Surrogate Radigan held as follows:

 

This court is of the opinion that a fiduciary has an obligation to disclose the advice of counsel with respect to matters affecting the administration of the estate (2A Scott, Trusts § 173 [4th ed]).  This is subject to the limitation that the fiduciary should have the protection of the privilege when litigation has commenced or is anticipated  (2A Scott, Trusts § 173 [4th ed]); see, In re LTV Sec. Litig., 89 FRD 595).  Certainly, the fiduciary is entitled to the benefit of counsel in the preparation of his defense in a contested accounting or other proceeding.

 

                                                Id. at 577 (Emphasis Supplied)

 

  • When does a lawyer advise the fiduciary that “litigation . . . is anticipated”?   For purposes of privilege, should we be identifying areas where litigation might be “anticipated”?
  • The answer: tell executors and trustees that, with few exceptions, they cannot be expected to have a true privilege.  As in the case of Justice Stewart’s famous definition  of pornography – you’ll know that the subject is “privileged” when you see it
    • How about:
      • Conflicts between beneficiaries of estate and fiduciary/beneficiary of nonprobate assets
      • Estate tax penalty issues
      • Noninterest bearing funds and possibility of surcharges
      • A “blown deal” for the sale of estate assets on the part of the executor, with clear fault/imprudence on the executor’s part; communications with executor before and after the blown deal
      • Retention by client to represent executor in contested estate accounting proceeding, and objectant seeks surcharges against the executor
      • Is there risk in asserting privilege for trusts and estates lawyers whose fee applications may need to be determined by the Court; and the lawyer is considered, more than in other areas, to be “officers of the Court”?
      • Do lawyers have conflicts of interest as to potential privilege issues when the lawyer’s fee may be compromised if the lawyer becomes an “advocate” on a privileged issue?
      • Discuss amendment to CPLR 4503  to “recreate” attorney-client privilege fails

 

  • Attorney-Fiduciary Issues
    • Ethical Considerations
      • EC 5-6: Do not influence a client to name you as fiduciary; avoid the appearance of impropriety.
      • See NYSBA Opinion #481 (3/28/78): Opinion holds that a lawyer offering to serve as executor is not improper, per se, but you must exercise great caution.  Initially, the opinion stresses the propriety of the drafter using his or her influence in being named as an executor.  However, the opinion found a substantial exception as follows:

 

There may be circumstances which can justify a lawyer’s conduct in offering his services as executor.  Principally, those circumstances must be such as support a firm conviction that the client would request his lawyer to serve in that capacity if he were aware of the lawyer’s willingness to accept the responsibility.  Not only should the lawyer have enjoyed a long-standing relationship with the client, but it must also appear that the client is experiencing difficulty in selecting other persons qualified and competent to serve as executor.

 

(Emphasis Supplied)

  • What if your don’t have the relationship?  Can you still accept an appointment?  Yes, in my judgment, if the client wants you, an independent lawyer (who was well recommended to him/her) to handle the estate

 

  • Sanctions can be applied if you are not careful and follow the letter and spirit of the ethical considerations

 

  • Weinstock case: attorney fiduciary is denied letters in probate proceeding

 

  • Harris permits Weinstock objection in accounting proceeding

 

  • Courts take action

 

  • Denial of letters
  • Denial of commissions
  • Limitation to one commission where multiple fiduciaries
  • Possible disciplinary ruling
  • Relationship between attorney fees and commissions

 

 

  • Summary Judgment or other summary determinations
  • Attorney fee determinations
  • Submission on papers
    • Waiver of hearing
    • Usually, an agreed schedule for submissions of affidavits of legal services and replies to such affidavits
  • Other issues that do not require a fact-finding trial

 

  • The Trial of the Accounting
  • Presentation of evidence by both sides
  • Accounting: executor’s prima facie case
    • Offered through executor
      • Or, alternatively, offered through individual who prepared accounting
      • Objections:
        • Burdens of proof on individual objections
          • Executor’s burden to prove reasonableness of expense v. objectant’s burden to establish surcharge claim
          • Shifting burdens of going forward with evidence
      • Trial Exhibits
      • Nonjury trial (see, e.g., Matter of Nelson, 105 Misc. 2d (Surr. Ct., Westchester 1980)

 

  • Settlement of Objections to Accounting
  • Fiduciary’s perspective
  • Beneficiaries’ perspective