Opinion
File No. 91-0815
01-06-2022
In the MATTER OF Intermediate Accounting of NBT BANK, N.A. AS TRUSTEE UNDER the Last WILL and Testament OF Ellen C. STARK, Deceased.
Letitia James, Attorney General, Binghamton (Mary A. Walsh of counsel), for petitioner. Lewis, Glasser, Casey & Rollins PLLC, Buffalo (Roy H. Cunningham of counsel), for trustee.
Letitia James, Attorney General, Binghamton (Mary A. Walsh of counsel), for petitioner.
Lewis, Glasser, Casey & Rollins PLLC, Buffalo (Roy H. Cunningham of counsel), for trustee.
David H. Guy, J. NBT Bank, N.A. is the successor trustee ("Trustee") of the residuary trust created under the Will of Ellen C. Stark (the "Trust"). The Trust is an ongoing charitable trust with income payable annually to New York Natural Food Associates, Inc. ("Natural Food") and Cornell Cooperative Extension ("CCE"), equally. On September 22, 2020, the New York State Attorney General ("AG"), a statutory interested party due to the charitable nature of the trust beneficiaries, filed a petition to compel the Trustee to file an intermediate accounting. That petition appears to emanate from the AG's frustration with what is now known to be a six-year period of discussion among the beneficiaries, the Trustee and the AG, the genesis of which was the Trustee's discovery that Natural Food had lost its USC § 501(c)(3) charitable status. The Trust's language explicitly conditions each charity's receipt of income upon retention of its 501(c)(3) charitable status. Three years of facially improper distributions had been made to Natural Food after the loss of its 501(c)(3) status by the time the discovery was made. The Trustee hatched a plan to address its distribution error through a proposed reformation of the Trust, which was discussed with and apparently acceptable to both beneficiaries, but not to the AG. When the AG declined to execute a stipulation of the terms agreed by the Trustee and the beneficiaries, and after protracted discussions, the Trustee indicated it would simply not move the matter forward. The AG's petition to compel an accounting ultimately followed, triggering the Court's awareness and involvement.
The AG's right to compel an accounting is without question. The Court issued an order on November 2, 2020, directing the filing of the petition and an interim accounting by the Trustee. That order resolved the petition to compel the accounting, although the allegations of the petitioner remain relevant to the other proceedings subsequently filed in this matter. On December 1, 2020, the Trustee filed a petition to account and an intermediate accounting, for the period ending on September 8, 2016 , four years shy of the Order compelling its production. Clearly, the accounting was generated in the context of the earlier discussions among the parties and the AG.
On February 29, 2021, the Trustee filed a petition requesting reformation of the Trust, supported by a memorandum of law and the stipulation signed by all interested parties, except for the AG. These documents are also all dated in 2016.
Multiple citations, supplemental citations, return dates, and adjourned return dates were set, generating multiple conferences among counsel for the Trustee, the AG and the Court. The undisputed background facts of this situation, in very summary form, are that Natural Food fell into a state of organizational disarray, due to the "aging out" and passing of what had formerly been active members. By approximately 2006, the operation of Natural Food was left in the hands of one person, Maurice Uzick, who, in the words of the Trustee's counsel, "was appointed as the president and treasurer of Natural Food, and alone was left to deal with all of its day-to-day operations." Mandatory tax filings were not continued and the 501(c)(3) status of Natural Food was ultimately revoked by the Internal Revenue Service.
That status is an explicit component of each charity's qualification for distributions from the Trust. The Trust makes specific provision for how distribution changes in the event one, or both, charities lose their 501(c)(3) status. The Trustee became aware that Natural Foods had lost its 501(c)(3) designation three years after that loss occurred. Ultimately, and - if the fee affirmation of Trustee's counsel is any indication - without substantial effort, the three years of incorrect distributions (2012, 2013 and 2014) were recovered in from Natural Food, so the Trust was made whole. Annual distributions continue solely to CCE, pursuant to the terms of the Trust.
The Trustee and its counsel were in somewhat regular communication with Mr. Uzick from at least 2014 forward, but none the less service of citations upon Natural Food in connection with these petitions proved incredibly problematic. Ultimately, Mr. Uzick died, and his family indicated to the Trustee that they did not have any interest in trying to continue the operation of Natural Food. This effectively mooted the issue of distributions to Natural Food and the petition for reformation of the Trust was withdrawn and dismissed, with the consent of the AG. The only petition which remains pending is the intermediate accounting. The only interested party who has not either defaulted or consented to the account, as stated, is the AG. The Court issued a scheduling order setting a deadline for the AG to file objections to the accounting, and for the Trustee to respond. Objections were received and responded to. That petition is now before the Court for a decision on submission.
The AG's objection to the interim accounting is that the legal fees the Trustee paid, which relate to these pending and resolved proceedings, should be mostly, if not exclusively, allocated to the Trustee, not paid from the Trust corpus to the detriment of its charitable beneficiaries. The AG also objects to payment of any legal fees from the Trust corpus subsequent to September 8, 2016, the end date of the intermediate accounting period. Trustee's counsel clearly spent substantial time on these Trust matters after 2016. While any fees paid from the Trust subsequent to the intermediate accounting end date would ultimately be subject to further Court review, the AG urges that the issue of the propriety and allocation of those fees be dealt with now, while the matter is before the Court.
The Court agrees that it is better to address all the legal fees related to these matters, whenever paid, at the present time, rather than relying on future counsel and Surrogate to address them. The Trustee's answer to the AG's objections appears to make the issue moot. At multiple points in that answer, counsel for the Trustee asserts that he will not be charging any further fees to the Trust for this intermediate accounting. The Court takes this to mean that the Trustee will bear all its counsel's expenses relating to the Trust for the period from September 8, 2016 through the issuance of this Decision. The Court further assumes that this includes representation not only on the petition to account, but the Trustee's response to the petition to compel the account and the Trustee's petition to reform the Trust; in other words, no legal fees for any reason charged to the Trust for services rendered from September 8, 2016 to date. If that is not the case, the Trustee's counsel is directed to inform the Court within seven days of the receipt of this Decision. If there were or are any such legal fees, the Court intends to address those now.
Regarding the period covered by the accounting, the AG's objection is that the legal fees were for the benefit of the Trustee, which had made an error, or for the benefit of Natural Food, the beneficiary whose loss of 501(c)(3) status caused the problem, thus not for the benefit of the Trust as a whole. The language of the Trust is explicit and clear: loss of 501(c)(3) status terminates a beneficiary's right to payment. That in fact occurred, but the Trustee did not become aware of the loss of status immediately. When it did, it properly stopped payments to that beneficiary. Ultimately, the Trustee recovered those improperly paid payments. Those efforts are referenced on only two of the bills included with counsel's affirmation. Those bills total less than $1,000, out of nearly $20,000 in legal fees shown as paid in this intermediate accounting. Even if the legal work associated with recovering these payments consumed all the time of the bills where they are noted, which clearly is not the case, the correction of the Trustee's error took only nominal legal assistance.
Very simply and directly stated, the Trustee made an error. There is no indication that the Trustee's failure to realize that Natural Food had lost its 501(c)(3) designation was negligent, willful, or in bad faith on the part of the Trustee. That is not suggested in the AG's objections and the Court makes no such finding. The issue is what portion, if any, of the expense incurred by the Trustee to rectify its error is properly allocable to the Trust, rather than directly to the Trustee.
As noted by counsel for the Trustee in his fee affirmation, the bellwethers for fiduciary legal fees are the factors under the Potts and Freeman cases. In re Estate of Potts' , 213 A.D. 59, 209 N.Y.S. 655 (4th Dept. 1925), aff'd 241 N.Y. 531, 150 N.E. 542 (1925) ; In re Freeman's Estate, 40 A.D.2d 397, 341 N.Y.S.2d 511 (4th Dept. 1973), aff'd 34 N.Y.2d 1, 355 N.Y.S.2d 336, 311 N.E.2d 480 (1974). In this case, the critical factor is the benefit resulting to the Trust from the services rendered. Counsel will be paid based on his retainer agreement with his client, the Trustee. The issue for the Court is what portion of the fee is properly allocable to the Trust. There is no question that counsel for the Trustee delved into complex tax and other issues, presumably at the behest of the Trustee, and because of the Trustee's error. The questions are (1) whether the legal services were required to respond to the Trustee's error, and (2) independent of whether the services were required, were they beneficial to the Trust, rather than merely beneficial to the Trustee or one of the two beneficiaries?
As it has been stated in this decision, the language of the Trust is clear and explicit. Could an argument be made that the Trust should be reformed to preserve the benefit to Natural Food, despite loss of its 501(c)(3) designation? Perhaps, but what responsibility does the Trustee have to explore, pursue, and argue for such a result? The disarray that was obviously apparent at Natural Food when the Trustee's error was discovered would certainly give a fiduciary pause with respect to the appropriateness of continuing to make distributions to that entity. It may well be that the concern as to whether her charitable beneficiaries were operating effectively, as evidenced at least by continuance of their legal charitable status, motivated the testator's language conditioning distribution upon that status. That is at least as likely as it being her intent that the Trust itself continue to qualify as a charitable tax entity, which is not what the explicit language of the Trust states. Ms. Stark was deceased more than 20 years when these issues arose. Her intention is difficult, if not impossible, to glean, but it has not been demonstrated that the Court needs to resort to extrinsic evidence of her intent, as the language of her will is clear. Matter of Scale , 38 A.D.3d 983, 985, 830 N.Y.S.2d 618 (3d Dept. 2007).
As pointed out by the AG, the responsibility to maintain its status as a qualified beneficiary lies primarily with Natural Food, not with the Trustee. Certainly, the Trustee needs to monitor the qualification status of the beneficiaries, but it goes too far in advocating for a position contrary to the express language of the Trust, to the detriment of the charitable beneficiary that did not have qualification problems. It appears the Trustee became so interested in the concept of reformation of the Trust that simple rectification of its error became obscured. The Court feels compelled to note that approximately $11,800 of income was distributed in error to Natural Food, while nearly $20,000 in fees was expended from the Trust (by 2016) in response to the error, and only a tiny fraction of the work reflected by those fees was incurred to successfully recover the funds.
The Trustee in its reply to the objections attempts to retreat from its prior position of the primary importance of the Freeman and Potts factors. Reference is made to law confirming the Trustee's right to have its "reasonable attorney's fees" paid from the Trust. EPTL 11-1.1 (b)(22) ; Matter of Ordway , 196 N.Y. 95, 89 N.E. 474 (1909). The Court does not dispute the Trustee's right to have its reasonable attorney's fees paid; the question is what amount is reasonable, and of benefit to the Trust. Ordway , supra at 98, 89 N.E. 474 ("[The fiduciary] was entitled to employ counsel and pay them out of the funds of the estate up to the time when in the exercise of due dilligence [sic] it was ascertained, or should have been ascertained, that the interests of the estate called for no further protection. All liability ... incurred to counsel after that time must be regarded as having accrued against her individually and not as [fiduciary]."); Estate of Rockefeller , 44 A.D.3d 1170, 1173, 843 N.Y.S.2d 732 (3d Dept. 2007) (legal fees not of benefit to estate not allowable); Matter of Rockefeller , 2 Misc 3d 1004(A), *5, 2004 WL 503508 (Sur. Ct., New York County 2004) (trustee responsible for the majority of its legal fees where its own actions led to the dispute).
In the Ellis case cited by the Trustee, the court confirmed a surcharge against the fiduciary to correct an improper payment by it in good faith, while allowing the fiduciary its legal fees to successfully defend against a charge of bad faith. Ellis v. Kelsey , 241 N.Y. 374, 381-82, 150 N.E. 148 (1925). No claim of bad faith has been made against the Trustee here, so none of its legal fees relate to such a defense. In the Kettle case cited by the Trustee, the appellate court upheld the sanctions and some legal fees imposed against the trustee by the Surrogate, remitting the case for an appropriate allowance of the trustee's attorneys’ fees on proper application. In re Kettle , 73 A.D.2d 786, 787, 423 N.Y.S.2d 701 (4th Dept. 1979). In each of these cases, the courts upheld an economic cost to the trustee due to its error. Here, the Court has not found the Trustee acted in bad faith, nor surcharged it, but does find that the fees which have been paid are not fully allocable to the Trust under these circumstances. Potts , supra at 62, 209 N.Y.S. 655 ; Freeman's, supra at 398, 341 N.Y.S.2d 511.
The Trustee argues that it was merely attempting to preserve the testator's intent that half of the Trust income be paid to Natural Food. A full statement of the testator's intent is that Natural Food was to receive half the income, subject to its retention of its 501(c)(3) status. The explicit language of the will stands; the reformation proceeding has been withdrawn and dismissed.
Certainly, the retention of counsel to assist the Trustee in addressing its error, once discovered, is appropriate. As already noted, counsel's role in effectuating the refunding of the improperly made payments was beneficial to the Trust and a reasonable use by the Trustee of legal services. The Trustee was also compelled to file an accounting proceeding. Certainly, such a proceeding requires legal assistance, although the accounting itself was clearly prepared in-house by the Trustee. Upon detailed review of the submitted affirmation and billing statements, the Court finds that the sum of $5,000 is reasonably allowable from the trust corpus for legal services rendered in connection with this intermediate accounting and the related petitions. The Trustee is directed to refund the sum of $14,657, the excess of the fees paid from the Trust above those allowed by the Court, to the Trust within 30 days to the date of this Order.
The Court appreciates the effort by the AG to bring this matter before the Court through its petition to compel an accounting. The Trustee's decision to not bring the matter forward, when it could not get the AG's consent to its reformation plan, is concerning. The Trustee's position that the AG should consent to the proposed reformation merely because the other interested parties consented is also of concern. It misapprehends the AG's role in these proceedings. The AG's Office represents not the interests of the charitable entities named in the trust or estate, which are often sophisticated and represented parties themselves, but the ultimate beneficiaries of the munificence of the charitable entities themselves, who do not otherwise have an effective voice in these proceedings. EPTL 8-1.1(f).
Given that the objections of the AG to the fees charged on the intermediate accounting have been largely sustained, if the Trustee wishes to charge any legal fees to the Trust "for the defense of these objections," which the Court interprets as the work associated with counsel's affirmation dated September 13, 2021 and his answer to the objections dated October 21, 2021, the Trustee is directed to petition for that relief, on notice to all interested parties. With all due respect to counsel, it is the Court's discretion, not counsel's, which determines the appropriate legal fees chargeable to a trust. SCPA 2110.
This Decision constitutes the Order of the Court.