Ethics & Tactics In Surrogate’s Court Litigation
Frank W. Streng, Esq.
11 Martine Avenue
White Plains, NY 10606-1934
McCarthy, Fingar, Donovan,
Drazen & Smith, L.L.P.
914-946-3817 ext. 256 (voice)
Gary E. Bashian, Esq.
Bashian, Enea & Sirignano
235 Main Street
White Plains, NY 10601
Joseph M. Accetta, Esq.
140 Grand Street
White Plains, NY 10601
Robert G. Kurzman, Esq.
Kurzman, Eisenberg, Corbin, Lever & Goodman, LLP
One North Broadway
White Plains, NY 10601
(914) 285-9800 (voice)
(914) 285-9855 (fax)
The Bank of New York – May 21, 2002
Ethics and Tactics in Surrogate’s Court Litigation
I. CONTESTED PROBATE PROCEEDINGS
- Basic Facts (see separate statement of facts)
- Gary Bashian represents Mary and Mr. Joseph as co-executors.
- Frank Streng represents Steven and Jessica Jeffrey.
- Bob Kurzman is the Guardian ad Litem for his ward, Robert Jeffrey.
- Joe Accetta is the Law Assistant at the Surrogate’s Court assigned to the matter.
- Measures to be taken shortly after the Decedent’s Death
- Petitioner’s Perspective (Gary Bashian) (10 minutes)
- Issues of representation
- Counsel for petitioners in probate proceeding
- Counsel for petitioner, in individual capacity, as the surviving spouse and as a named beneficiary under the Will
- Conflicts of interest issues?
- Retainer Agreement
- Written retainer agreement: Effective March 4, 2002, written retainer agreements, including the right to arbitration with regard to disputes of fees, are mandated in all matters where the projected fees are $3,000 or more (see article entitled “Professional Liability” by Norman B. Arnoffand and Sue C. Jacobs, N.Y.L.J. February 20, 2002.
- Individual v. Fiduciary engagement
- Hourly v. Other/Fixed fees, such as executor percentage fees.
- Petition for probate and for Preliminary letters
- Requirements for Attorney-Fiduciary under SCPA 2307-a
- Issuance of citation
- Need for appointment of Guardian ad Litem for persons under a disability
- Marshalling of assets and other matters incident to estate
- Objectants’ Perspective (Frank Streng) (10 minutes)
- Petition for temporary letters (SCPA 901)
- If preliminary letters granted, consider a petition to revoke
- if Will is facially (arguably) improper
- if proper grounds under SCPA 711 or 719
- If preliminary letters not sought, then possibly seek temporary letters
- If preliminary letters granted, consider a petition to revoke
- Petition to compel production of Will (SCPA 1401)
- Pursuant to SCPA 1412(4)(b), take whatever actions necessary to make sure that “papers and records of the decedent” are properly preserved by the preliminary executor
- Options on Return date of Probate Citation
- Objectants’ Perspective (Frank Streng) (7 minutes)
- Conduct examination of attesting witnesses pursuant to SCPA 1404
- Defer date for objections to probate until conclusion of examination of witnesses
- Permits attorney and client to make studied decision as to whether to object to probate
- If there is an in terrorem clause (EPTL 3-3.5), puts off decision as to possible forfeiture of client’s interest that may be caused by unsuccessful objections to probate
- Pursuant to local rule of Surrogate’s Court, Westchester County, expense of transcripts of examinations of witnesses are paid by estate
- Defers other CPLR discovery devices until after objections are filed and issue is joined
- 1404 examinations are to take place at Surrogate’s Court pursuant to Rule 207.28, unless the Court otherwise provides; and usually cannot be conducted until personal jurisdiction is complete
- Defer date for objections to probate until conclusion of examination of witnesses
- File objections to probate and to the issuance of letters
- Grounds for objections to probate of will
- Due execution
- Consider not filing objection if it cannot reasonably be supported based upon 1404 examinations
- Undue Influence
- Demand for jury trial
- Due execution
- Grounds for objections to probate of will
- Permits immediate use of CPLR discovery devices
- Objectant generally pays for transcripts of depositions, including examinations of attesting witnesses
- Objections to issuance of letters
- Grounds generally under SCPA 707/711/719
- For Attorney-fiduciaries, see SCPA 2307-a
- If there is a person under a disability adversely protected by the Will and represented by a Guardian ad Litem (GAL), work closely with GAL
- Consider options as to status of parties, e.g., is the spouse a distributee or not?
- Petitioner’s Perspective (Gary Bashian) (7 minutes)
- Make sure probate proceeding is aggressively prosecuted
- Interview attesting witnesses and make sure they are available for SCPA 1404 examinations
- If you want to expedite the proceeding, seek a discovery order
- If you have not yet gotten preliminary letters, seek them
- Make sure that your client is doing his/her/its job as fiduciary, i.e., ignore Will contest and administer the estate
- Make sure records of the decedent are preserved
- If a beneficiary under contested Will is also a petitioner, make sure that, at all times, your client is acting properly
- Vigorously assert surviving spouse’s elective share rights under EPTL 5-1.1-A ($50,000 plus one-third (1/3) of net estate), and timely file elective share notice “protectively”
- GAL’s Perspective (Bob Kurzman) (10 minutes)
- Appointment and qualification as Guardian ad Litem (GAL)
- Responsibilities of GAL
- Assure that jurisdiction is obtained over ward
- Meeting with ward and understanding ward’s interest
- Strategies in representation of ward’s interest
- Basic alignment of interest with other objectants
- Taking positions that reinforce objectants’ positions, but recognize more limited interest of ward
- In this case, get funding of Supplemental Needs Trust and, if necessary, walk way from the rest of the goals of the other objectants
- In view of limited interest of GAL, play the role of an intermediary in which, more than any other attorney, acts as an “officer of the court”
- Court’s Perspective (Joe Accetta) (15 minutes)
- Notice of Objections Filed: Before discovery can begin, a citation for notice of objections filed must be obtained from the Court and served upon all beneficiaries under Will whose interest are adversely affected by objections (SCPA 1411; Rule 207.27); conduct discovery after return date of citation
- Document production
- Pursuant to local rule, duces tecum subpoenas for medical records are returnable at Surrogate’s Court
- 3 and 2 rule – Unless there are “special circumstances”, discovery limited to the period of three years before and two years after the execution of Will (Rule 207.27)
- Attesting witnesses out of state: Pursuant to SCPA 508 and Rule 207.22, the Court may direct testimony to be taken outside of the state by a commission
- Bills of Particulars
- Generally, the petitioner is entitled to bill as to those objections in which the objectant has the burden of proof
- See Rule 207.23 for further details
- Summary Judgment Motions
- Place burden on objectant to flesh out objectant’s case, if one exists
- With volume of cases, summary judgment motions are getting greater sympathy from Surrogates
- CPLR 4519 (dead man statute) problems do not help movant on summary judgment motion
- Objections on lack of due execution
- Submit transcripts of 1404s and other examinations
- Objections on lack of testamentary capacity, undue influence and fraud
- Make motion after the end of discovery
- More difficult motion: do not make unless your case is compelling
- Settlement Conference at Surrogate’s Court (30 minutes)
- Petitioner’s Perspective (Gary Bashian)
- Objectants’ Perspective (Frank Streng)
- GAL’s Perspective (Bob Kurzman)
- Court’s Perspective (Joe Accetta)
- Settlement Options
- Non probate and gifted assets
- Estate tax apportionment
- Distributions under the intestacy statute
- Distributions under the elective share statute
- Interest of beneficiaries under prior Wills
- Appointment of executors and trustees
- Interest of persons under a disability and working with GAL
- Outright share or trust share for spouse
- Types of Settlements:
- Admit propounded Will to probate, subject to lump sum payment to objectant
- Deny probate to propounded Will, admit prior Will to probate, subject to lump sum payment to petitioner
- Revise testamentary scheme to accommodate interests of petitioner and objectants
- Consider income tax consequences of IRA withdrawal and possibility of “putting back” money in IRA “improperly” withdrawn;
- Consider potential liability of the decedent’s estate to The Bank of New York on outstanding credit facility of Jeffrey Machine
- Consider valuation issues and other estate tax settlement consequences that are impacted by an “amicable” settlement
- Pursuant to SCPA 1411(6), settlement is binding on all persons under propounded Will who has not appeared upon service of the citation upon the filing of objections
- In jury trial, case is not scheduled for trial until the filing of a note of issue and statement of readiness and an order framing issues
- In court trial, you need to file a note of issue and statement of readiness and statement of issues
- Consider possible withdrawal of jury demand to compel court trial if you are the objectant and have asked for a jury trial (SCPA 503(b))
- Critically evaluate your case
- Withdraw objections that you cannot support, such as due execution on a lawyer supervised execution
- Consider CPLR 4519 and how it impacts on petitioner or objectant
- Consider expert witnesses and whether your expert knew the decedent
- Consider relevancy of financial transactions with decedent on objections and effect of such evidence
- Mini Reference Guide to Proceedings in Surrogate’s Court (5 minutes)
- Various Proceedings
- Discovery/Turnover (SCPA 2103/2104)
- Construction (SCPA 1420)
- Legal fees (SCPA 2110)
- Advice and Direction (SCPA 2107)
- Relief Against as Fiduciary (SCPA 2102)
- Revocation of Letters (SCPA 712/719)
- Determine Validity of Right of Election
- Determine Claim against Estate (SCPA, Article 18)
- Other possible proceedings and broad jurisdictional mandate under SCPA 201/202
- Accounting and Compulsory Accounting Proceedings
II. Ethical Considerations
- A. Introduction – Source Materials
- Our goal: to try to raise some issues for Surrogate’s Court litigants so we are better able to work with the ethics rules and to become effective lawyers for our clients
- What is professionalism? How does a lawyer maintain professionalism and a successful business?
- What are lawyers selling? Knowledge, competence and experience in solving a client’s problem?
- In the wake of the internet, how can you, the lawyer, compete in this market place? How do you compete in market in which, following a community based seminar on estate planning, someone asks you if you could recommend (1) books or periodicals on estate planning or (2) good web sites
- Have you ever talked to anyone who attending a “lawyer bashing” revocable trust seminar?
- Canons of Ethics: Code of Professional Responsibility
- Ethical Considerations (ECs) (aspirational standards)
- Disciplinary Rules (DRs) (black letter rules)
- American Bar Association’s Model Rules of Professional Conduct (adopted by 4/5ths of states) (black letter rules, with commentary)
- Bar Association Opinions
- New York State Bar Association Committee on Professional Ethics
- Association of the Bar of the City of New York
- New York County Lawyers Association
- Court decisions
B. Canons of Ethics; Ethical Considerations and Disciplinary Rules
Introduction: Take us through the Canons of Ethics and to focus on particular ECs and DRs relevant to Surrogate’s Court practice
Canon 1: A Lawyer Should Assist in Maintaining the Integrity and Competence of the Legal Profession.
Canon 2: Lawyer Should Assist the Legal Profession in Fulfilling its Duty to Make Legal Counsel Available.
Canon 3: A Lawyer Should Assist in Preventing the Unauthorized Practice of Law.
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.
* * *
- A lawyer may reveal:
* * *
- 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?
- Proposed amendments to CPLR 4503 (see annexed article in NYLJ by Colleen Carew and Charles Gibbs)
- How about:
Canon 5: A Lawyer Should Exercise Independent Professional Judgment on Behalf of a Client.
Can you take a case if you will be a witness?
DR 5-102: Lawyers as witness
A. A lawyer shall not act, or accept employment that contemplates the lawyer’s acting, as an advocate on issues of fact before any tribunal if the lawyer knows or it is obvious the lawyer ought to be called as a witness on a significant issue on behalf of the client, except that lawyer may act as an advocate and also testify:
(1) If the testimony will relate solely to an uncontested issue.
(2) If the testimony will relate solely to a matter of formality and there is no reason to believe that substantial evidence will be offered in opposition to the testimony.
(3) If the testimony will relate solely to the nature and value of legal services rendered in the case by the lawyer or the lawyer’s firm to the client.
B. Neither a lawyer nor the lawyer’s firm shall accept employment in contemplated or pending litigation if the lawyer knows or it is obvious that the lawyer or another lawyer in the lawyer’s firm may be called as a witness on a significant issue other than on behalf of the client, and it is apparent that the testimony would or might be prejudicial to the client.
* * * *
- Witness Advocacy Rule. When can a lawyer:
- Act as the sole advocate?
- Act as “co-counsel” and use a trial counsel?
- Will contest. Answer: Get trial counsel for probate proceeding; and represent estate if the fiduciary wants you. In many instances, it might be advisable to have a different lawyer acting as counsel of record; and not simply as a trial counsel.
- Estate Litigation seeking surcharges. Likelihood that your fiduciary is the person in control. However, when there is estate litigation, you may have estate counsel giving testimony; and it may be helpful or harmful to fiduciary
- Estate Litigation dealing with nonprobate assets payable to fiduciary. Keep in mind who you represent.
DR 5-105: Conflict of Interest; simultaneous representation
A. A lawyer shall decline proffered employment if the exercise of independent judgment in behalf of a client will be or likely to be adversely affected by the acceptance of the proffered employment, or if it would be likely to involve the lawyer in representing differing interests, except to the extent permitted under DR 5-105(C).
B. A lawyer shall not continue multiple employment if the exercise of independent professional judgment in behalf of a client will be or is likely to be adversely affected by the lawyer’s representation of another client, or if it would be likely to involve the lawyer in representing differing interests, except to the extent permitted under DR 5-105(C).
C. In the situations covered by DR-105(A) and (B), a lawyer may represent multiple clients if a disinterested lawyer would believe that the lawyer can competently represent the interest of each and if each consents to the representation after full disclosure of the implications of the simultaneous representation and the advantages and risks involved.
· Conflict Rules. Existence of Conflict: Under DR 5-105, you first determine whether a conflict exists. A conflict exists if either (1) the attorney’s “exercise of independent professional judgment” on behalf of one client “will be or is likely to be adversely affected” by representing the other client, or (2) the simultaneous representation of both clients “would be likely to involve the lawyer in representing differing interests. DR 5-105(A) and (B).
- Possible Waiver of Conflict by Clients: If there is a conflict, the attorney must determine whether the conflict may be waived by both clients. Specifically, both clients can waive the conflict, provided “it is obvious that the lawyer can adequately represent the interests of each” client. DR 5-105(C).
- Disclosure before Obtaining Waivers: If the attorney concludes that, upon waiver, he or she can still adequately represent client, the attorney can obtain waiver from both clients only “after full disclosure of the possible effect of [the joint] representation on the exercise of the lawyer’s independent professional judgment on behalf of each.” DR 5-105(C).
- Representing multiple clients with potential conflicts of interest is a common theme for many trusts and estates lawyers, particularly since a substantial part of trusts and estates practice is considered to be “nonadversarial.” Examples of some problems follow.
- Lifetime Planning: Can you represent both clients in these scenarios? Does it matter whether husband and/or wife are on second or third marriages and have children of prior marriages?
- Husband and Wife in preparation of Wills and Trust Agreements and Related Estate Planning.
- Husband and Wife in Execution of Spousal Waivers of Elective Share. Bad Idea
- Husband and Wife in Husband’s or Wife’s creation of Irrevocable Life Insurance Trust.
- Husband and Wife in Husband’s or Wife’s execution of spousal waiver of Qualified Plan accounts.
- Husband and Wife who cannot agree on who the “ultimate” beneficiaries of estate will be.
- Both fiancées in prospective marriage in the preparation and execution of prenuptial agreements.
- Multiple Fiduciaries. Inform fiduciaries of the consequences of representing all of them. In the event of a conflict, you may continue to represent one of them, with the consent of the other fiduciary. See discussion below on representing fiduciaries and beneficiaries.
- Fiduciary and Surviving Spouse in Will with Q–Tip trust with issues as to Whether Spouse Files Elective Share. Husband and Wife make reciprocal wills creating Credit Shelter outright bequests and Q-Tip trusts. Husband predeceases and an issue exists as to whether the wife will get “more money” by an elective share. Must there be independent representation for the wife?
- Communications with Beneficiaries. Can a lawyer represent one or more of the beneficiaries of the estate and the fiduciary of the estate? No, not in the proper sense, and the beneficiaries would need to engage separate counsel to represent their interest. But, to the extent that the fiduciary of the estate is considered to be acting in a representative capacity (as the representative of the residuary beneficiaries of the estate), then the lawyer for the fiduciary arguably has a duty to such beneficiaries (see Matter of Clarke, 12 N.Y.2d 183, 187 (1962) (“An attorney for the fiduciary has the same duty of undivided loyalty to the cestui as the fiduciary himself”). That duty is sometimes discharged by the lawyer having necessary communications with such beneficiaries in the proper representation of the fiduciary as the client. See discussion above for issues arising out of attorney-client privilege. Indeed, pursuant to SCPA 2102(1), a fiduciary has a duty to respond to written requests for information concerning an estate, and the attorney for the estate will frequently provide to such beneficiaries copies of important documents in the estate, such as Federal and New York estate tax returns and related papers, even prior to an accounting.
- Representing Fiduciary in Individual and Representative Capacities. Can a lawyer represent a fiduciary both in his or her capacity as a fiduciary and his or her capacity as a beneficiary. Yes, and it happens all the time. But, what if the fiduciary/beneficiary has offered a will for probate and substantial litigation and/or controversies take place in the estate, such as a will contest and other similar problems for which your client is the target? The answer is still yes, but the lawyer needs to evaluate all of the consequences in these difficult scenarios.
- Consider: Retainer agreement. Who do you represent and who pays the bill?
- Representing Multiple Objectants in Will Contest with Different Interests. Can you represent multiple objectants in will contest even though their interest are different? Examples:
- multiple classes of distributees/beneficiaries (distributees, with no interest in prior will; distributees with interest in prior will;
- clients with differing goals in will contest (distributees with interest in challenging will; distributees with interest in sustaining a claim against the estate for debt.
Canon 6: A Lawyer Should Represent a Client Competently.
EC 6-4: Having undertaken representation, a lawyer should use proper care to safeguard the interests of the client. If a lawyer has accepted employment in a matter beyond the lawyer’s competence but in which the lawyer expected to become competent, the lawyer should diligently undertake the work and study necessary to qualify. In addition to being qualified to handle a particular matter, the lawyer’s obligation to the client requires adequate preparation for and appropriate attention to the legal work, as well as promptly responding to inquiries from the client.
DR 6-101: A. A lawyer shall not:
1. Handle a legal matter which the lawyer knows or should know that he or she is not competent to handle, without associating with a lawyer who is competent to handle it.
2. Handle a legal matter without preparation adequate in the circumstances.
3. Neglect a legal matter entrusted to the lawyer.
- If a lawyer does not have prior experience in a particular legal matter, he or she can still be engaged. For example, a lawyer who has no experience even in litigation in the Surrogate’s Court involving sophisticated tax issues can be engaged, provided that lawyer commits himself or herself in becoming competent or associates with a lawyer who is competent on the tax issues.
- For lawyers with insufficient experience in this area, consult and pay out of your own pocket someone who is. Ethically, professionally and economically required. The alternative: your very sophisticated client sees your lack of experience in working on the tax aspect of the litigation; and your client either gets bum work or fires you.
- Before mandatory CLE, maintaining your skills and ability, through CLE, permitted us lawyers to satisfying our ethical obligations.
- The use of legal assistants by trusts and estates lawyers brings on ethical obligations. Assuring proper oversight and training is necessary to assure that competent legal work is carried out in behalf of a client.
- Performing legal work effectively, and expeditiously, is an important component of carrying out competent legal work.
- Communicate, Communicate, Communicate!!!! The single biggest criticism of lawyers is their failure to return phone calls or otherwise communicate with their clients.
Canon 7: A Lawyer Should Represent a Client Zealously Within the Bounds of the Law.
- Dilemma: When does your duty of advocacy end and your relationship to the Surrogate’s Court and its personnel begin?
- Dilemma: When does your duty of advocacy end and your relationship with your adversary, a long-time friend, begin?
Canon 8: A Lawyer Should Assist in Improving the Legal System.
Canon 9: A Lawyer Should Avoid Even the Appearance of Professional Impropriety.
EC 9-5: Separation of the funds of a client from those of his lawyer not only serves to protect the client but also avoids even the appearance of impropriety, and therefore commingling of such funds should be avoided.
DR 9-102: Preserving Identity of Funds and Property of Others; Fiduciary Responsibility; Commingling and Misappropriation of Client Funds or Property; Maintenance of Bank Accounts; Record keeping; Examination of Records
A. Prohibition Against Commingling and Misappropriation of Client Funds or Property. A lawyer in possession of any funds or other property belonging to another person, where such possession is incident to his or her practice of law, is a fiduciary, and must not misappropriate such funds or property or commingle such funds or property with his or her own.
B. Separate Accounts. * * * *
C. Notification of Receipt of Property; Safekeeping; Rendering Accounts; Payment or Delivery of Property. * * * *
D. Required Bookkeeping Records. * * * *
E. Authorized Signatures. * * * *
F. Missing Clients. * * * *
G. Designation of Successor Signatories. * * * *
H. Dissolution of a Firm. * * * *
I. Availability of Bookkeeping Records; Records Subject to Production in Disciplinary Investigations and Proceeding. * * * *
J. Disciplinary Action. * * * *
- Full compliance with DR 9-102 in dealing with client escrow accounts is essential to assure that a lawyer maintains his or her license to practice.
- Proper record keeping is the key.
- Should you use escrow accounts in the management of estates and trusts?
- DR 9-102 goes beyond the management of escrow accounts; it goes to the core of the lawyer’s business records. DR 9-102(D.) requires retention for 7 years many business records, including, but not limited to, all escrow account records, special account records, retainer and compensation agreements, client disbursement records and bills.
- What are the stakes in proper management of escrow accounts: Tarrytown lawyers, Robert J. Ponzini, Robert W. Spencer and Thomas W. Maroney know that the stakes were their licenses (since modified by the Second Department).
- Balances fell below 0, through inadvertence
- Obligation of bank to inform Central Registry at the Lawyers’ Fund for Client Protection within 5 days when negative balance takes place
- Bookkeeping errors
- Failed efforts in curing bookkeeping problem
- Control your bookkeeper
- Instruct your bookkeeper
- Exercise control over your bookkeeper
- Develop strict procedures to assure that, under no circumstances, are escrow accounts over drafted
- What about check fees, for example, certified check fees? Either know, with certainty, what they are if you permit them to be charged against the escrow account. Or, do what my firm does, and have such charges assessed against our firm’s business account.
- Balances fell below 0, through inadvertence
C. Attorney Drafter/Beneficiary
(The paragraphs below are reprinted with permission from McQuaid, Streng and LaPiana, NEW YORK WILLS AND TRUSTS (3rd Ed. Lexis, 1998))
Persons who are in a confidential relationship to a testator, and who receive legacies or other benefits under a will, have a special burden to explain the circumstances leading to such benefit. The principle leading to this rule was enunciated by the Court of Appeals in 1931 in Matter of Putnam,21 in which the Court said: “Attorneys for clients who intend to leave them or their families a bequest would do well to have the will drawn by some other lawyer. Any suspicion which may arise of improper influence used under the cover of the confidential relationship may thus be avoided.”22
Under the Putnam Rule, a legacy in favor of a person who is in a confidential relationship to the testator may be excised from a will if the Surrogate finds that the legacy was the product of undue influence. While the Putnam Rule is an offspring of the objection of undue influence,23 the Surrogate can allow the probate of the will but expunge the legacy.24 In applying the rule, the court either requires the submission of an affidavit or schedules a hearing to explore the circumstances that led to the legacy.
The Putnam Rule has its most obvious application to an attorney- drafter, but it has been applied to individuals who share different confidential relationships with the testator, including, but not limited to, relatives of the attorney-drafter,25 doctors,26 nurses,27 nursing home personnel,28 accountants and financial advisors,29 and clergy.30 If another attorney is selected to prepare a will in which the testator’s primary attorney, or a member of his or her family, is a beneficiary, the attorney who is selected must be independent of the control or interest of the initial attorney.31
In a developing area of the law, the Putnam Rule has been used by Surrogates to review the propriety of the designation of an attorney- drafter as an executor or trustee under the will. In Matter of Weinstock,32 the Court of Appeals reinstated a Surrogate’s decree in which letters testamentary had been denied to attorneys, a father and a son, who were named as executors in a will prepared by the father, but who had had no previous professional relationship with the testator. Noting that the attorneys were aware of the testator’s intention to avoid executor’s commissions, the Court held that the testator’s confidential relationship with the attorneys required that the attorneys disclose the effect of a joint designation to the testator.33
The designation of attorneys as fiduciaries, which is illustrated by Weinstock , has led to close supervision by Surrogate’s Courts over compensation to the attorney-fiduciary for both legal services and statutory commissions. In Matter of Laflin ,34 the Appellate Division, Second Department, held that objections to multiple executors’ commissions may be made by the beneficiaries in the final accounting proceeding. And in view of the “fact that an attorney draftsman of a will is uniquely situated to selfishly gain additional employment”35 as counsel for a testator’s estate, Surrogates generally are giving strict scrutiny to attorney fees for the attorney-fiduciary.36
- The Putnam rule: Almost needs no introduction: It started with an attorney, in which, in 1931, the Court of Appeals held that, in the absence of an acceptable explanation, a jury would be justified in drawing an inference of undue influence as to a bequest drafted by the drafting attorney to the drafting attorney. Court advised: have someone else draw the Will under these circumstances.
- Hearing v. Affidavit
- Even when attorney did not draft, court can hold hearing
- Bare minimum Court will require an affidavit explaining circumstances of the bequest to attorney
- Usually Court renders decision
- Putnam rule has been widely expanded to apply to just about anyone with a confidential relationship able to exercise influence.
- Examples: doctors, dentists, nurses, clergyman, accountants, secretary and relatives of attorney, charity created by attorney
- Ethical derivation of Putnam rule:
- Canon 5: must exercise independent judgment; and by accepting a gift, attorney is susceptible to charge that he or she unduly influenced or overreached the client
- Proposed ABA rule bars lawyer from preparing an instrument providing for gift, unless attorney is related to donee
- 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.
- 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
- SCPA 2307-a: Absence compliance with the statute’s disclosure forms to be executed by client – client agrees that you are entitled to full commissions and full fees – then commission is one-half of statutory commission
- If, however, will is made prior to statute – 12/31/95, Court will examine on a case-by-case basis. However, as time passes, the window is virtually completely shut by the Court.
- Consider attorney-trustee: Advice: broaden disclosure form for trustee, whether attorney serves as primary or ultimate alternate fiduciary
- Attorney fiduciary can act as witness to will, but beware: if there is will contest, perhaps the attorney fiduciary appointment may prove to be fodder for objectant
21 257 NY 140, 177 NE 399 (1931).
22 Id at 143, 177 NE at 400. See also New York State Bar Association Code of Professional Responsibility EC 5-5 (1975). See generally Groppe, Putnam/Weinstock Revisited: Problems Facing the Attorney/Legatee/ Fiduciary, 7 Newsletter of General Practice Section NYSBA (1986).
23 See generally Children’s Aid Socy v Loveridge, 70 NY 387 (1877).
24 Matter of Lawson, 75 AD2d 20, 428 NYS2d 106 (4th Dept 1980); Matter of Eckert, 93 Misc 2d 677, 403 NYS2d 633 (1978).
25 Matter of Hayes, 49 Misc 2d 152, 267 NYS2d 452 (1966).
26 Matter of Satterlee, 281 AD 251, 119 NYS2d 309 (1st Dept 1953).
27 Matter of McCarthy, 269 AD 145 54 NYS2d 591 (1st Dept 1945), affd , 296 NY 987, 73 NE2d 566 (1947).
28 Gordon v Bialystoker Center, 45 NY2d 692, 385 NE2d 285, 412 NYS2d 593 (1978); Matter of Burke, 82 AD2d 260, 441 NYS2d 542 (2d Dept 1981).
29 Matter of Collins, 124 AD2d 48, 510 NYS2d 940 (9th Dept 1987).
30 Marx v McGlynn, 88 NY 357 (1882) (a precursor to Putnam , in which it is cited, Matter of Putman, 257 NY 140, 144, 146, 177 NE 399, 400-01 (1931)).
31 Matter of Guidi, 259 AD 652, 20 NYS2d 240 (1940).
32 40 NY2d 1, 351 NE2d 647, 386 NYS2d 1 (1976).
33 Id at 5, 351 NE2d at 648, 386 NYS2d at 3.
34 111 AD2d 924, 491 NYS2d 35 (2d Dept 1985).
35 Matter of Stalbe, 130 Misc 2d 725, 727, 497 NYS2d 237, 240 (1985).
36 See, e.g., Matter of Harris, 123 Misc 2d 247, 473 NYS2d 125 (1984). Some Surrogate’s Courts require the probate petition to disclose whether an attorney-fiduciary or a member of the firm is a drafter of the will, and if so the drafter is required to prepare and file an affirmation setting forth the facts and circumstances surrounding the testator’s selection of the drafter as a fiduciary of the estate. These affirmations, which are sometimes required to be filed in probate and accounting proceedings, are apparently being used to determine the reasonableness of commissions and attorney fees for an attorney-fiduciary.