Westchester County Bar Association - Trusts & Estates Section
September 21, 2011
"Everything you Wanted to Know about Property Turnover Proceedings in the Surrogate's Court”
Frank W. Streng, Esq.
McCarthy Fingar LLP
11 Martine Avenue
12th Floor
White Plains, NY 10606
Phone: 914-385-1022
Email: fstreng@mccarthyfingar.com
How to Conduct 2103 Inquiry Stage Examination
Facts
Eileen Diamond Smith died on 6/1/2011 in Scarsdale of brain cancer at the age of 70. She was diagnosed with brain cancer in 10/2009. At her death, Eileen was divorced for 10 years from her first husband, John Smith, in which they had 3 children, our clients, James Smith, Kyle Smith and Lynn Smith. Eileen also had a boyfriend and fiancée, Garrett Studds, who was named as executor under her Will and was 30% beneficiary of tangible personal property and residuary estate under Eileen's Will. Our clients are 70% beneficiaries of such TPP and residuary estate. Eileen's financial advisor, Josephine Studds Jones (Garrett's cousin), was named as alternate executor.
In addition to family inheritance, Eileen was a well known and respected art dealer and collector. Prior to her death, Eileen's art dealership, located in Manhattan and held in corporate form (Eileen's Diamond Art, Inc.), was netting annual profits of about $500,000. In addition, her private art collection had an approximate value of $5 million. Eileen's fiancée, Garrett Studs, who was a former male model, was being groomed in the art dealership by Eileen and has, by all accounts, grown the business and was poised to take over the business after Eileen's expected death. Eileen met Garrett 3 years ago through a mutual friend, at a time when Garrett’s career as a male model had ended and his sole source of income was as a male escort. Garrett started worked in the art dealership about 2 years ago, and was making a sizable salary. After their engagement (9/2009), our clients provided us with many anecdotes in which Garrett appeared to be isolating Eileen from our clients; and our clients are concerned that their mother was being improperly influenced to do things to help Garrett.
Eileen's affairs at the time of her death were complicated by several things: first, when Eileen and John Smith were divorced, Eileen and John agreed to the following provision in their separation agreement (dated 6/1/2001) was incorporated in their divorce decree:
9. John and Eileen agree that they shall make wills or other documents in which each of them give at least 70% of the assets owned by each of them at their death to their children, James, Kyle and Lynn, and not to make nontestamentary transfers inconsistent with this provision.
Eileen did two things during her lifetime that could be argued to be inconsistent with paragraph 9 of the separation agreement. On 1/1/2010, she made a gift, in cash and public securities to Garrett Studds in the amount of $500,000, and a gift of 3 works of art that Eileen had purchased years earlier and had a book value on her company's records of $500,000. On the same date, she also "sold" to Garrett a 50% shareholder interest in Eileen's Diamond Art, Inc. for $500,000. Our clients tell us that in December, they had found out that Garrett had threatened to end the relationship with their mother, if she did not make the gifts and sale. Our clients had obtained emails from their mother’s computer, without Garrett’s knowledge, and have provided us with such emails. It appears that the gifts and sale was handled by Garrett’s friend and attorney, Jeff Bush, but we don’t have any documents on the gift and sale or Jeff’s involvement.
Second, when Eileen was in a final illness, 3 months before she died, she appointed Garrett Studds as an agent under a power of attorney form dated 3/1/2011, in which under a major gifts rider, she authorized Garrett to make gifts to himself and to Eileen's 3 children. The form was prepared by Eileen’s long-standing attorney, Steven Bonano. On 5/1/2011, a month before she died and when Eileen was in a coma, Garrett made two gifts: a gift, valued at $500,000, of the remaining shares in Eileen's Diamond Art, Inc. (making Garrett the 100% shareholder); and a $500,000 gift, in cash, in equal shares to Eileen's 3 children. Steven Bonano was not involved in these transactions, and, apparently, Jeff Bush was advising Garrett as to such matters.
After Eileen's death, her will, dated 5/5/2011 (prepared by Steven Bonano), was admitted to probate, with waiver and consents signed by Eileen's 3 children. However, Mr. Bonano was not retained to handle the probate proceeding and the administration of the estate by Garrett. Instead, Garrett’s friend and attorney, Jeff Bush, has handled all matters, including failed effort to oppose our clients’ application for limited letters. After a vigorous battle, in which virtually no new facts and documents surfaced, our clients were granted limited letters and moved forward with a 2103 inquiry stage proceeding against Garrett Studds. Prior to the examination, Garrett, as executor, had filed Federal and New York estate tax returns, and Federal gift tax returns.
Documents for 2103 Examination
10. Various letters written to Garrett or Garrett’s lawyers (re demand for information/documents, etc.)
11. Email from Garrett to Eileen in 12/2009 re threat to end relationship
12. Federal Estate Tax Return
13. New York Estate Tax Return
14. Federal Gift Tax Return
9. John and Eileen agree that they shall make wills or other documents in which each of them give at least 70% of the assets owned by each of them at their death to their children, James, Kyle and Lynn, and not to make nontestamentary transfers inconsistent with this provision.
Gail M. Boggio, Esq. McCarthy Fingar LLP 11 Martine Avenue White Plains, New York 10606 914-946-3700 Nuts and Bolts of 2103 Proceedings I. Proceeding by fiduciary to discover property withheld or obtain information Purpose of a 2103 proceeding is to permit a fiduciary to marshal estate assets Consists of: Inquiry Stage Turnover Stage II. Statute of Limitations
• Discovery proceeding is in the nature of replevin or conversion and absent fraud is subject to the three year statute of limitations • Breach of fiduciary duty is subject to six year statute of limitation III. Who may bring a proceeding
2101(a) May be commenced by a fiduciary, creditor or person interested Executor Administrator Preliminary executor Temporary Administrator What if the fiduciary has a conflict or is unwilling to bring a 2103 proceeding ((conflict of interest) person who has the property or information regarding the property is the fiduciary or fiduciary does not investigate or refuses to investigate although requested)? Apply for limited or restricted letters of administration pursuant to SCPA §702 or SCPA §902 for temporary administration Distributee Beneficiary Financial institution acting as a stake holder Right to bring a proceeding under 2103 not absolute
2101(b) May be entertained by the court or may be reserved for determination in an accounting or other proceeding or the court may decline to entertain the proceeding. All proceedings shall be deemed entertained unless rejected by the court in writing within 15 days of submission. Reasons for court to reject proceeding: No subject matter jurisdiction No personal jurisdiction over necessary parties Lack of standing Another proceeding or action pending in Surrogate’s Court or other court Court’s discretion Jurisdiction over Respondent Lives in NY NY Domiciliary Committed an act or omission in NY Procedure for bringing a 2103 proceeding IV. Option 1 Inquiry Stage Then Turnover A. When fiduciary is not certain respondent has possession of estate property or when fiduciary believes respondent has information concerning estate property Not all cases require inquiry stage By petition alleging that a third party respondent has money, personal property or information relating to the decedent’s assets – based upon knowledge or "information and belief" and such property should be paid or delivered to the fiduciary 1. Identify Decedent 2. Identify the property at issue 3. Recite when the fiduciary was appointed 4. Set forth facts to support the position that respondent is in possession or control of estate property or had knowledge about such property 5. No requirement to allege facts that the estate owns the property that is the subject of the inquiry 6. Allegations sufficient to justify the inquiry to recover estate assets or administer the estate 7. Relief • Must request an inquiry or examination • Injunctive relief – maintain the status quo C. Supporting affidavit may accompany petition D. Order directing the respondent to appear and be examined ORDER TO ATTEND Court’s subpoena power Certified copy of the order is served on respondent together with requisite subpoena fee under CPLR 8001 Personal service in NY No long arm jurisdiction outside of NY Failure to serve order properly and tender proper subpoena fee is a jurisdictional defect subject to dismissal of proceeding or supplemental order and proper service E. On return date of Order to Attend Court may require inquiry to commence on the return date of the order Not in Westchester F. Respondent may make motion to dismiss proceeding – rarely given during inquiry stage G. No discovery during inquiry stage Scope of inquiry is very broad Licensed fishing expedition Dead Man Statute is not a barrier to the examination, however may be used at a trial in the turnover stage of the proceeding After Inquiry Stage the information serves as a basis for seeking recovery of the property or determination that asset does not belong to the estate. H. No requirement that respondent file and answer during inquiry stage 1 may appear and not file an answer 2 answer the petition 3 answer petition and claim title to the property 4 answer and admit possession without claiming title 5 answer and turnover property to the estate I. At the end of inquiry the petitioner MUST demand that the property be turned over and that respondent file an answer If respondent claims possession and ownership he MUST file a verified answer to the 2103 petition V. Option 2: Turnover Stage A. Convert to Turnover Stage at conclusion of Inquiry Stage -once issue joined by filing of a verified answer B. Fiduciary certain Respondent has property C. If Petitioner skips the Inquiry Stage, then Petitioner must make factual allegations supporting the Petitioner’s position that the respondent has assets belonging to the estate and demand respondent turn over such assets to the fiduciary D. If no Inquiry Stage then court issues a citation to show cause why person alleged to be in possession of the property should not deliver the property or its proceeds or value No subpoena fee required E. Injunctive relief would be sought by a separate order Either party may demand jury trial Ultimate Relief: Direct delivery of property to the fiduciary Injunctive relief Constructive trust F. No discovery until issue has been joined. Normal discovery rules under CPLR would apply, including party and non-party depositions, document production, demands for bill of particulars and other disclosure devices
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