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Streng & Boggio, White Plains lawyers, Everything you Wanted to Know about Property Turnover Proceedings in the Surrogate's Court

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 

  • Strategies for Conducting 2103 examination

 

  • Preparation, preparation, preparation

 

  • Preparation of topics/questions for examination
  • Collecting exhibits for examination
  • Interview clients to obtain facts, anecdotes and documents

 

  • Limitations of 2103 examination

 

  • Unlike normal EBT, where you serve DNI production demand prior to EBT, you can’t get documents prior to inquiry stage of 2103 examination

 

  • What is a “topical” examination?

 

  • Developing topics and subtopics for examination

 

  • Identify a comprehensive list of subjects for the examination
  • Hone in on your facts and available documents
  • With few exceptions, do not write out questions; the danger of developing questions for EBT is that the questioner limits the examination; topical examination requires questioner to develop questions from both topics/subject matter and answers to questions

 

  • Possible disadvantages of topical examination

 

  • Requires questioner to be comfortable on his/her feet
  • EBTs are “direct” examinations; yet there are times when precise questions need to be asked.  A good EBT will have at least a couple “gotcha” moments

 

  • Outline of  topical examination for Garrett Studds

  

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

  1. Will dated 5/5/11
  2. Petition for preliminary letters, including schedule of assets
  3. Power of attorney form dated 3/1/2011
  4. Corporate Tax Return for Eileen's Diamond Art, Inc. - 2009
  5. Financial statements for Eileen's Diamond Art, Inc. - 2009
  6. Photographs of Garrett Studded
  7. Separation Agreement dated 6/1/2001
  8. Photographs of Eileen Diamond Smith
  9. Various medical records

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

 

  • Background

 

  • Education (high school onward)
  • Social security number
  • Family relationships
  • Employment
    • Male model (scope problem)
    • Male escort (scope problem)
    • Eileen's Diamond Art, Inc.
      • Salary history on employment

 

  • 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) 

 

  • First meeting 
    • Source of relationship: male escort (scope problem)
    • Relationship with Eileen 
      • It is fair to say that sex was a motivating factor in the relationship for Eileen? (scope problem)
      • Engagement
      • Relationship with Eileen’s children, James Smith, Kyle Smith and Lynn Smith
      • Eileen’s illness
        • Description
        • Eileen’s ability to make decisions
        • When, in fact, did Eileen’s illness reached the point when she could no longer make decisions
          • Coma
          • Capacity before coma
          • Did you, at some point, decide that you wanted to end the relationship?

 

  • Eileen's Diamond Art, Inc.

 

  • Description of business
    • netting annual profits of about $500,000
    • When you first worked in business
      • groomed in the art dealership by Eileen and has, by all accounts, grown the business
        • things you have done to grow the business
        • Show 2009 tax returns
        • Seek 2010 and 2011 tax returns (DNI request problem)

 

  • Eileen’s Will and Estate Planning

 

  • Will
    • Show; when you are first aware of will and Eileen’s estate plan (scope)
    • Garrett’s involvement in will (scope)
    • Involvement of Eileen's financial advisor, Josephine Studds Jones (Garrett's cousin), on will (scope)
    • You are executor
      • Show Federal & NY estate tax return
      • Show Federal Gift Tax return
      • Relationship with Eileen’s lawyer, Steven Bonano
        • Was Mr. Bonano ever your lawyer?
        • Separation Agreement dated 6/1/2001
          • Show; when you are first aware
          • Discussions with Eileen on obligations to give her children 70% of her assets
          • Discuss provisions of agreement:

            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.

  • Discussion of agreement with your lawyer, Jeff Bush (attorney client issue)
  • Discussion of agreement with Steven Bonano (attorney client issue)
    • Didn’t Mr. Bonano tell you that the agreement would be violated by any gifting?

 

  • Gifts and “gift” sale on 1/1/2010 (cash and public securities; 3 works; “sale” of 50% shareholder interest in Eileen's Diamond Art, Inc. for $500,000)

 

  • Describe gifts
    • Cash and securities
      • Documents executed
      • Seek documents (scope)
      • 3 items of art work
        • Full description
        • Seek evidence as to gift
          • Donative intent
          • Delivery
          • Acceptance
          • Location of art work at time of gift
            • Isn’t it true that these 3 works of art were located at the art gallery at the time of gift and that their location never changed
            • Seek documents (scope)

 

  • Circumstances of gift
    • Whose idea was the gift?
      • Seek full description of discussions between Eileen and Garrett
      • Emails of December, 2009
        • 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.
        • Inquire about Garrett’s threats
        • Eileen’s physical and mental condition at time of gifts
        • Show medical records
          • Do you see the reference in the records that Eileen was disoriented
          • What evidence do you have that she was not disoriented at the time of gift.

 

  • Discussion of gifts with attorneys and other advisors
    • Steven Bonano?
    • Jeff Bush?
    • Others?

 

  • Show Gift Tax return

 

  • Sale of ½ stock for $500,000

 

  • Whose idea was this?
  • Seek full description of conversation between Eileen and Garrett
  • Seek contract of sale (DNI Request Issue)
    • Seek full description of contract and terms
    • Attorney for transaction
      • Jeff Bush.
      • Show gift tax return and inquire why stock sale not described as gift
        • Valuation problem
        • Discuss current operation of art gallery business (scope)

 

  • Gifts pursuant to Power of Attorney dtd. 3/1/11

 

  • power of attorney form dated 3/1/2011
    • major gifts rider
      • authorized Garrett to make gifts to himself and to Eileen's 3 children.
      • form was prepared by Eileen’s long-standing attorney, Steven Bonano
      • Discussions with Mr. Bonano on circumstances in which gifts could be made to you?
        • Discussion on separation agreement (attorney client privilege)
        • Gifts made 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)
    • a $500,000 gift, in cash, in equal shares to Eileen's 3 children.
    • Circumstances surrounding the gift
      • Discretion exercised in making gift to yourself
      • Legal and tax advice on gifts
        • Steven Bonano was not involved in these transactions
        • Jeff Bush was advising Garrett as to such matters

 

  • Discussions with others on today’s examination

 

  • Review of documents to prepare for today’s examination

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.  

       

    1. Elements of Petition:
    2.  

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

  •  

       

    • TRO
    •  

       

    • Likelihood of success
    •  

       

    • Probable injury
    •  

       

    • Balance of the equities
    •  

       

    • Unique property
    •  

       

    • Irreparable harm
    •  

 

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