Opinion
3358/1999.
Decided August 30, 2011.
Pending in this contested final accounting by the executors of the estate of Richard Otto are the executors' motion for a protective order denying discovery related to decedent's wholly owned corporation, RB Holdings Corp. ("RB Holdings") (CPLR § 3103[a]), and a cross-motion by objectant, Maria Otto, to compel the production of documents relating to such entity (CPLR 3124).
The cross-motion had also sought to compel the production of additional documents unrelated to RB Holdings, Inc., as well as other relief. However, the court has been notified that all issues other than those relating to RB Holdings have been resolved.
The history of this matter must be retraced before the merits of the motions can be evaluated. Richard Otto died on August 18, 1999, at the age of 66, leaving a probate estate valued at approximately $43 million. Under his will, after making specific bequests to Maria Otto, his third wife, decedent left his residuary estate as follows: two-sixths outright to Maria; three-sixths in separate trusts for Maria's daughter, Karina de Brabant, and three of his six children from prior marriages, namely Regan Otto Schroeder, Dylan Otto and Tiffany Otto; and one-sixth in trust for Maria's lifetime benefit with remainder to Karina, Regan, Dylan and Tiffany. Decedent nominated Regan and Jed Isaacs, his accountant, as executors, and Regan and an attorney, Richard Marlin, as trustees. Letters testamentary and of trusteeship issued accordingly on December 16, 1999.
From the outset, the administration of this substantial estate proved complicated and contentious, due in part to litigation related to RB Holdings, decedent's wholly owned corporation. RB Holdings was the successor to Rock Bottom Stores, Inc. ("Rock Bottom"), of which decedent, his son, Jonathan Otto, and sister, Linda Otto Landsburg, were shareholders. Decedent had become the sole owner of RB Holdings after Rock Bottom had sold its assets to Duane Reade, Inc. ("Duane Reade"), a pharmacy and convenience store chain.
According to the executors' Amended Account, the sale netted (after liquidation of outstanding bank debt) $40,677,177.27.
In connection with the sale, which closed on September 11, 1998 (almost a year before decedent's death), the shareholders of Rock Bottom executed distribution and redemption of stock agreements. Pursuant to these agreements, the net proceeds of the asset sale to Duane Reade (except for approximately $6.3 million, which was retained to cover liquidation expenses and
potential future liabilities) were distributed to the Rock Bottom shareholders, and decedent became the sole remaining shareholder of RB Holdings. Also, in connection with the sale, decedent, Jonathan Otto and Linda Otto Landsburg executed a Contribution Agreement, dated October 5, 1998, whereby each agreed to be responsible for meeting any unpaid obligations of RB Holdings in certain proportions to the extent that the funds withheld were insufficient.
Under the Contribution Agreement, decedent was obligated to pay 54.8% of any unpaid liabilities and Jonathan Otto and Linda Otto Landsburg were required to pay 35.9% and 9.3%, respectively.
Shortly after the closing of the sale, Duane Reade sought a downward adjustment of the sale price, claiming that Rock Bottom had overstated its inventory. Thereafter, in late 1998, Duane Reade notified RB Holdings of a potential additional claim for breach of contract. After decedent's death, Duane Reade filed a formal arbitration claim against RB Holdings, seeking at least $43,000,000 in damages ( i.e., a sum in excess of the net sale proceeds).
By early 2000, RB Holdings (now managed by co-executor Jed Isaacs for no additional compensation) needed an infusion of capital to pay for litigation expenses and to fund a potential settlement of Duane Reade's claims. To that end, the company demanded funds from the estate, as successor to decedent, as well as from the other Rock Bottom shareholders, pursuant to the Contribution Agreement. The estate met three capital calls between April 2000 and April 2001, paying RB Holdings a total of $2,331,192. Other than a $269,250 payment by Jonathan Otto in April 2000, however, neither Jonathan nor Linda Otto Landsburg met the capital calls, purportedly because both had taken issue with a $5 million bonus that decedent, as the company's CEO, had awarded himself out of the sale proceeds for his work on the Duane Reade transaction. Accordingly, legal proceedings were commenced to enforce the right of RB Holdings to funds from Jonathan and Linda under the Contribution Agreement.
In the meantime, arbitrations between RB Holdings and Duane Reade proceeded on Duane Reade's claims that Rock Bottom had overstated its inventory and breached the asset sale contract. After awards were issued in Duane Reade's favor, further litigation ensued involving various challenges to the amount of the awards. Eventually, however, RB Holdings, the estate and Duane Reade reached a settlement agreement, dated September 28, 2001 (the "Duane Reade Settlement"), under which RB Holdings agreed to pay Duane Reade $7,187,999.19 to settle all of its claims.
It appears from the record that Jonathan Otto also entered into an agreement with Duane Reade relating to certain real estate matters and the settlement of the arbitration awards. However, the exact nature and terms of the agreement have not been made clear.
This is the settlement amount set forth in the executors' Amended Accounting. However, the executors state in their motion papers that this is a mistake and the actual amount due Duane Reade from RB Holdings under the Duane Reade Settlement was $200,000 less (i.e., $6,987,999.19) and that the accounting would be amended accordingly.
As result of this substantial payment, the legal and accounting fees incurred in connection with the Duane Reade transaction and litigation as well as other operating expenses, the liabilities of RB Holdings far exceeded the approximately $6.3 million reserve for payment of such liabilities. Accordingly, RB Holdings immediately entered into settlement negotiations to resolve the dispute over the obligations of the former shareholders of Rock Bottom under the Contribution Agreement. Mrs. Otto does not dispute that her counsel was "actively involved" in negotiations that resulted in a settlement agreement, dated December 27, 2001, among RB Holdings (by Jed Isaacs as its president and sole director), the estate (by its executors, Jed Isaacs and Regan Otto Schroeder) and Jonathan Otto (the "2001 Settlement Agreement").
For reasons that are not made clear in the record, Linda Otto Landsburg was not made a party to the 2001 Settlement Agreement. The Agreement makes reference to her obligations, but provides for the estate and Jonathan Otto to be charged to the extent that Linda does not meet her obligations, and further provides in that event for the estate and RB Holdings to assign any claims against Linda to Jonathan if they elect not to pursue them, and for the estate and Jonathan to share thereafter any recoveries and/or costs in certain proportions.
By its terms, the 2001 Settlement Agreement resolved the issues relating to the Contribution Agreement so that RB Holdings, before its dissolution, could pay off all of its outstanding liabilities, including those incurred in connection with the Duane Reade Settlement. To that end, the 2001 Settlement Agreement set forth a clear methodology for determining the obligations of each party under the Contribution Agreement, taking into account the capital calls previously met by the Rock Bottom shareholders. The Agreement also provided for specified initial payments to RB Holdings by the estate and Jonathan Otto. However, the Agreement did not specify the total amount that each party ultimately would be required to pay to RB Holdings because the liabilities and assets of RB Holdings, although substantially known, could not then be fixed with precision.
Nevertheless, various financial schedules were annexed to the 2001 Settlement Agreement, which provided a detailed picture of the financial condition of Rock Bottom (and later RB Holdings). Of particular note were a balance sheet and a statement of operations covering the fiscal years ended January 1998 (before decedent's death) through December 2000, which included a best and worst case estimate for each of the accounting items included in those statements as of June 30, 2001. These best and worst case estimates as well as those in other financial schedules annexed to the 2001 Settlement Agreement were defined as the "June 30 Estimate." The June 30 Estimate, in turn, was specifically used as a basis for determining the parties' initial payments under the Agreement.
Thus, as pertinent here, the estate's initial payment based upon the June 30 Estimate was $623,749 and was to be credited against a payment of $960,093.01, which the estate had already made to Duane Reade on behalf of RB Holdings on October 2, 2001. As noted above, this was in addition to the $2,331,192 the estate had paid RB Holdings to meet capital calls under the Contribution Agreement between April 2000 and April 2001. The 2001 Settlement Agreement explicitly contemplated the possibility that the estate would be required to pay more than $623,749 based upon a "Draft June 30 Final Statement" of its financial condition that RB Holdings was to provide. Such statement, which the estate and Jonathan Otto had a specific right to challenge under the Agreement, was also to include certain "provisions and adjustments." Among these were payments owed to certain professionals to which the parties had specifically agreed. In the absence of any such challenge, the Draft June 30 Final Statement was to be deemed the "June 30 Final Statement" of RB Holdings' financial condition.
Thus, for example, specific provision was made for RB Holdings to include in its final statement of financial condition $265,378 owed to RB Holdings's litigation counsel, Kramer Levin Naftalis and Frankel LLP, for services rendered through December 31, 2000, as set forth in the June 30 Estimate, plus an estimated $200,000 for any of the firm's fees subsequent to January 2001, as well as $195,000 to the accounting firm, RSM McGladrey, Inc.
There is nothing in the record to suggest there was any such challenge.
The financial condition of RB Holdings was further amplified in other schedules annexed to the 2001 Settlement Agreement, namely 1) a statement of accrued expenses with best and worst case estimates of such expenses as of June 30, 2001, as well as an estimate of projected liquidation expenses to be incurred thereafter, 2) a statement entitled "Analysis of Professional Fees," which set forth the names of individuals and companies that had provided professional services to Rock Bottom and RB Holdings and their respective fees from February 1998 through December 2000 (more than $6.6 million in total), as well as a best and worst case estimate of their fees, if any, from January 1, 2001 through June 30, 2001, and 3) a statement of capital calls, which included a best and worst case estimate of the capital calls that would become due from the parties to the Contribution Agreement.
The capital calls schedule indicated that, through April 2001, RB Holdings had made capital calls on the estate of $2,331,192, on Jonathan Otto of $1,527,186, and on Linda Otto Landsburg of $395,622. It also indicated that RB Holdings had received as a result of these capital calls $2,331,192 from the estate and $269,250 from Jonathan Otto, and provided a best and worst case estimate of the capital calls that would be due in the future from the estate, $623,749 (best case) and $993,619 (worst case), from Jonathan Otto, $929,487 (best case) and $1,101,692 (worst case), and from Linda Otto Landsburg, $355,339 (best case) and $396,703 (worst case).
The 2001 Settlement Agreement also expressly contemplated that signed consents of all those persons interested in the estate, including Mrs. Otto, would be annexed to the instrument. In short order, all interested persons, other than Mrs. Otto and Karina de Brabant, gave their signed consents. It was not until almost 18 months later that Mrs. Otto and Karina de Brabant followed suit. Such consent was given only in exchange for the executors' acceptance of certain conditions set forth in a side agreement, dated May 8, 2003, negotiated by Mrs. Otto's new counsel (the "Side Agreement"). Specifically, Mrs. Otto and Karina de Brabant reserved their rights with respect to a specific tax issue and claims they might have against Jonathan Otto in connection with certain real estate matters. They did not reserve any rights in connection with their consents to the 2001 Settlement Agreement.
These persons were identified in the Agreement as the "Consent Parties" and included: Regan Otto Schroeder, as co-executor, trustee of the testamentary trusts and beneficiary under the will, Richard Marlin, as trustee of the testamentary trusts, and Maria Otto, Tiffany Otto, Dylan Otto and Karina de Brabant as beneficiaries under the will.
It is noted that Jonathan Otto was not a signatory to the Side Agreement.
The executors commenced the present final accounting proceeding some three years later, covering the period from decedent's death through April 30, 2006. Objections were filed by Mrs. Otto and Richard Marlin, as co-trustee of the residuary trusts. The executors then filed an amended and supplemental account for the period April 18, 1999, through April 30, 2007 (the "Amended Account"). The Amended Account, unlike its predecessor, included an extensive Schedule J explaining a variety of issues relating to RB Holdings, including the Duane Reade Settlement.
Thereafter, Richard Marlin stipulated to the withdrawal of all of his objections except for one relating to accounting fees incurred by the estate (Schedule C) and another addressed to the computation of commissions, which the parties agreed would remain pending in relation to the Amended Account. It is noted that among the objections that the trustee withdrew were several related to RB Holdings. Mrs. Otto, for her part, did not file objections to the Amended Account. However, since Mrs. Otto asserts that the Amended Account did not put to rest the issues raised in her objections, and the executors do not challenge her objections as procedurally infirm (because they are directed to an account that has been superseded by amendment), the court will deem Mrs. Otto's pleading to be objections to the Amended Account.
After issue was joined, the parties engaged in formal discovery, although it appears from the record that the executors had also provided substantial informal discovery concerning the estate's administration (and RB Holdings) to Mrs. Otto's various attorneys throughout the administration of the estate, including before and after the execution of the 2001 Settlement Agreement and the Side Agreement. Indeed, it was an informal discovery demand in April 2009 by Mrs. Otto's eighth attorney that led to the instant motions.
The informal discovery request came in the form of a letter, dated April 9, 2009, to the executors from Mrs. Otto's current counsel, who had only recently been retained. As relevant here, the letter sought, "[a]ll books and records regarding RB Holdings from 1997 to the present," an index of accounting documents relating to "work done for RB Holdings," as well as a "full accounting" for the funds collected by RB Holdings to pay the professional fees and other obligations under the Duane Reade Settlement. The executors then made the instant motion for a protective order for the stated purpose of preventing Mrs. Otto "from obtaining any discovery relating to [RB Holdings], including any information and documents requested" in the April 2009 letter. Mrs. Otto then cross-moved to compel the production of said discovery. Thereafter, a conference was held and additional submissions were invited to amplify and clarify certain issues.
With this background, we turn to the pending motions, which, it is noted, are directed to informal discovery demands set forth in a letter rather than in CPLR Article 31 disclosure devices. Nonetheless, since the pending motions raise an identifiable discovery dispute between the parties over a specific topic ( i.e., RB Holdings), and the interests of judicial economy would be disserved if the motions were denied on such technical grounds, the court will address them on the merits.
Since a party's right to obtain specific discovery cannot be assessed without reference to the pleading the discovery seeks to advance, we turn first to Mrs. Otto's objections. Although the objections are far from a model of clarity, at least some of them can be read to challenge the executors' conduct as it relates to RB Holdings.
The executors' arguments implicitly assume the existence of such objections. However, the executors contend that Mrs. Otto's consent to the terms of the 2001 Settlement Agreement forecloses her from raising any objections relating to RB Holdings and that a protective order is therefore warranted. Alternatively, the executors argue that they previously have produced documents and given information responsive to the discovery requests to Mrs. Otto's various attorneys and that, in any event, the discovery sought is overly broad and unduly burdensome.
We begin our assessment of the parties' positions by considering the effect that Mrs. Otto's consent to the terms of the 2001 Settlement Agreement has on her ability to pursue her objections in relation to RB Holdings. We must be mindful that such consent was solicited by the executors and given by Mrs. Otto within a standard legal framework. Thus, a fiduciary has the power to compromise disputes such as the one resolved in the 2001 Settlement Agreement ( see EPTL 11-1.1[b][13]). However, persons interested in the estate can thereafter object to such a compromise when the fiduciary accounts ( see SCPA Article 22).
It is beyond dispute that a fiduciary therefore has three choices. First, he can settle the dispute and take his chances that a beneficiary will claim in a later accounting that the settlement was imprudent and that a surcharge should be imposed on the fiduciary for any resultant loss to the estate. Second, he can attempt to foreclose a later challenge to the transaction by obtaining the beneficiaries' consent to the proposed settlement ( see e.g. Butterfield v Cowing, 112 NY 486; Matter of Wells, 282 AD 432; Matter of Kilgannon, 146 Misc 600; see also Bogert's Trust Trustees § 941, Consent). Third, if some or all of the beneficiaries refuse to consent, the fiduciary can seek
court approval of the compromise under SCPA 1813.
Although courts generally will approve a compromise that is deemed to be in the best interest of the estate, courts may not entertain a proceeding for the approval of a settlement if the matter is not of great importance and is limited to an exercise of the fiduciary's business judgment ( see 6 Warren's Heaton on Surrogate's Court Practice, ¶ 71.09[2], at 71-115 [7th ed]).
The fiduciaries here sought the consent of all beneficiaries and, in this regard, there are several matters that are not in dispute. First, Mrs. Otto affixed her signature to the 2001 Settlement Agreement at a time when she was represented by counsel. Second, she agreed to give her consent in the Side Agreement and obtained in exchange what she deemed concessions from the executors that did not include reserving any rights in connection with the 2001 Settlement Agreement.
The 2001 Settlement Agreement specifically provided that "The Consent Parties" were consenting to the terms of the Agreement.
Mrs. Otto's consent is not effectively challenged by her present claim that, at a time when she was represented by counsel, 1) she does not "recall" seeing any "attachments" to the agreement when she executed it in May 2003, and 2) she was unaware of the amount of professional fees paid by RB Holdings in relation to the Duane Reade litigation and settlement. The law presumes that she knew and understood the terms of the agreement which she signed ( see e.g. Lansco Corp. v NY Brauser Realty Corp. , 63 AD3d 513 [1st Dept. 2009]). In any event, her claim is belied first by the agreement's specific reference to attachments and second by her claim to having understood that, in consenting to the 2001 Settlement Agreement, "nothing would prevent [her] from requesting further information to confirm the numbers provided and what was actually paid to professionals" (emphasis added). Indeed, in response to the executors' document requests in this proceeding, Mrs. Otto produced an executed copy of the 2001 Settlement Agreement, which included all of the attachments.
In the absence of any claim by Mrs. Otto that she lacked capacity when she executed the 2001 Settlement Agreement, or that her consent was procured by improper conduct or fraud on the part of the executors, and in the absence of anything in the record to suggest that her consent was tainted in any other way, Mrs. Otto's consent must be given legal effect. Such consent acts as a bar to any challenge to the transactions embraced in the Agreement ( see e.g. Butterfield v Cowing, 112 NY 486, supra; Matter of Wells, 282 AD 432, supra; Matter of Kilgannon, 146 Misc 600, supra).
Although the subject is not raised in her objections, Mrs. Otto suggests in her motion papers that Mr. Isaacs, in his role as President of RB Holdings and executor, acted improperly because he retained his accounting firm and trustee Richard Marlin's law firm (RB Holdings' counsel prior to decedent's death) to provide services to RB Holdings and the fees of those firms were considered in determining the amounts due under the 2001 Settlement Agreement. However, these facts do not eviscerate Mrs. Otto's consent to Agreement, particularly when they were fully disclosed to her and decedent, himself, contemplated in his will that his fiduciaries would be providing services to the estate.
In apparent recognition of this well-established principle, Mrs. Otto argues that the 2001 Settlement Agreement was very limited in scope and is unrelated to her claims regarding RB Holdings. According to Mrs. Otto, the Agreement "merely allocated the relative percentage responsibilities between Jonathan and the estate for the Duane Reade settlement," but left "unresolved" the settlement's "actual cost" and thus the amount the estate would ultimately have to pay to RB Holdings. She therefore asserts that she should be able to challenge the executors' conduct in relation to RB Holdings, including the propriety of the "costs of the Duane Reade settlement (including professional fees) incurred by RB Holdings" and, to that end, seeks access to the books and records of the company.
The total cost of the Duane Reade Settlement, including professional fees, is not set forth in the accounting because RB Holdings absorbed them at the corporate level. What is reflected in the Amended Accounting on Schedule D (Creditor's Claims) is the amount the estate paid to RB Holdings to meet decedent's share of RB Holdings' liabilities as provided in the 2001 Settlement Agreement ($3,281,285.01).
The executors, in contrast, impute to the 2001 Settlement Agreement the broadest possible scope. They assert that the agreement was intended to bar beneficiaries who consented to the Agreement from thereafter raising any claims relating to RB Holdings, rather than only to claims concluded by the resolution of issues arising from the Contribution Agreement. In support of their position, the executors point to the fact that the parties to the 2001 Settlement Agreement (and in the case of Jonathan Otto, his attorney) executed broad releases of one another and of estate beneficiaries from any and all claims relating to RB Holdings. However, despite Mrs. Otto's consent to the parties' execution of broad releases, she did not sign any such release herself.
Although we therefore reject the executors' contention that Mrs. Otto's consent to the 2001 Settlement Agreement bars her from any objection relating to RB Holdings, Mrs. Otto's narrow reading of the Agreement fares no better. If the Agreement had merely reallocated the percentage payment obligations under the Contribution Agreement as Mrs. Otto contends, there would have been no need for many of the Agreement's provisions, including those specifying payments to be made to RB Holdings and linking them to the June 30 Estimate and the June 30 Final Statement. In view of such provisions, it is clear that the Agreement resolved a much broader dispute, namely the total amount the parties to the Contribution Agreement ultimately would be required to pay to satisfy all of the outstanding obligations of RB Holdings. The total amount required, in turn, was a function of the financial condition of Rock Bottom (and then of RB Holdings), i.e., the extent of its remaining assets and liabilities which were necessarily a reflection of the liabilities incurred in connection with the Duane Reade transaction and litigation relating thereto.
It is noted that, even under this narrow interpretation of the scope of the 2001 Settlement Agreement, at least one of Mrs. Otto's objections would be barred, i.e., her objection to the executors' agreement to pay 20% of Jonathan Otto's obligations (since the executors' allowance of such a discount was expressly set forth in the Agreement).
As noted above, the attachments to the 2001 Settlement Agreement provided a detailed picture of the financial condition of RB Holdings over the course of years and included virtually all of the costs to RB Holdings of its settlement with Duane Reade. Indeed, the Analysis of Professional Fees alone detailed, by provider, more than $6.6 million in professional fees that RB Holdings had incurred from February 1998 through December 31, 2000. In this regard, it is noted that Mrs. Otto does not contest Mr. Isaac's claim that it was her counsel who insisted that the financial schedules be annexed to the Agreement.
To the extent certain limited items could not then be determined with finality, best and worst case estimates were provided. But more important for present purposes is that, based upon all of the financial information set forth in the attachments to the 2001 Settlement Agreement, the estate's additional contributions to satisfy the liabilities of RB Holdings were quantified in the capital call schedule as falling within a range between $623,749 (best case) and $993,619 (worst case). Under these circumstances, Mrs. Otto's contention that the 2001 Settlement Agreement simply set forth the parties' percentage obligations under the Contribution Agreement is disingenuous at best.
This is the amount of the estate's initial payment under the 2001 Settlement Agreement.
If a payment within the identified range had been unacceptable to Mrs. Otto, whether because it was based upon excessive professional fees or other costs detailed in the various schedules annexed the Agreement, she should not have consented to the terms of an agreement that contemplated such a payment. As it turned out, the estate paid to RB Holdings pursuant to the 2001 Settlement Agreement an amount squarely within this range, i.e., $960,093.01. In this connection, it may be noted that, by the time Mrs. Otto gave her consent to the 2001 Settlement Agreement in May 2003, the record suggests that the estimated expenses reflected in schedules had been finally determined. In other words, if Mrs. Otto had not been content to consent to terms that in part rested on estimates and ranges, she would have been free to ask for disclosure of the precise figures in question.
Additionally, according to the Amended Account, RB Holdings now owes the estate a refund for a contribution overpayment in the sum of $250,832. Thus the amount the estate will have had to pay under the 2001 Settlement Agreement will be much closer to the lower end of the range provided.
Accordingly, to the extent that Mrs. Otto's objections may be understood to challenge the estate's payments to RB Holdings under the Contribution Agreement and in accordance with the 2001 Settlement Agreement, they — and any discovery to advance them — are foreclosed by her consent. As for the other objections that arguably relate to RB Holdings, they either fail to state a connection to the Amended Account, or fail to state a cognizable ground for surcharge. Accordingly, the court cannot direct discovery in furtherance of those objections.
For example, one objection claims that "Schedule A fails to include an unknown principal amount which came into the control of the Executors relating to the decedent's interest in RB Holdings Corp. in which the executor's are chargeable or in which they have failed to render a satisfactory account in that the Executors paid RB Holdings Corp. $5,626,714.01."
In view of the foregoing, there is no need to evaluate the executors' alternate contentions, including that they have already given Mrs. Otto the discovery that she seeks. Nevertheless, a few observations in this regard are warranted. The record indicates that Mrs. Otto has indeed already received substantial discovery regarding RB Holdings during the course of the estate's administration and, in particular, this proceeding. In other words, in the past, the executors had gone above and beyond their technical duty in relation to matters that had been concluded by Mrs. Otto's consent. Such responsiveness on the part of fiduciaries is to be encouraged to the extent that it may allay a beneficiary's concerns and thereby avert a protracted and expensive dispute. However, where, as here, a fiduciary determines that particular requests for information and/or documents are too broad and are not reasonably calculated to support possible objections, they are charged with the obligation to cease using estate funds for this purpose and, if necessary, to seek court intervention.
Based on the foregoing, the executors' motion for a protective order is granted, and Mrs. Otto's cross-motion to compel is denied except to the extent necessary to substantiate that the professional fees accounted for as estate expenses were not incurred by and paid from RB Holdings.
This decision constitutes the order of the court.