Opinion
314939.
Decided June 29, 2005.
This is a decision after a four day bench trial of the accounting of Joseph J. Sciacca, Esq., (hereinafter "Sciacca") as executor of the estate of Casimiro Romano. A total of twenty-six objections to the executor's account were filed by the decedent's son, Louis Romano, as guardian of his infant son, Casey Romano. All of the objections were dismissed by the court's prior decision on summary judgment (Decision No. 116), except: (1) the objection relating to the purported gift of the decedent's property known as 45-01 161st Street, Flushing, New York; (2) the objection to the sale of 43-72 162nd Street, Flushing, New York, to the decedent's spouse, Geraldine Romano; and (3) the objections relating to legal fees. A determination as to the objections relating to legal fees was reserved until the accounting is made current. At the conclusion of the taking of evidence, the parties were permitted to submit memoranda of law after the filing of the transcript. Based upon the credible evidence, the court makes the following findings of fact and conclusions of law.
ISSUES TO BE DETERMINED AND
BURDENS OF PROOF
In a contested accounting proceeding, the accounting fiduciary has the initial burden of proving that he has fully accounted for all of the assets of the estate ( Matter of Schnare, 191 AD2d 859, lv denied 82 NY2d 653). Generally, the filing of the account makes a prima facie showing of completeness and accuracy ( Matter of Schnare, 191 AD2d 859, lv denied 82 NY2d 653); Matter of Pollock, NYLJ, Sept. 17, 1998 at 24). The objectant then bears the burden of coming forward with some evidence to show that the account is inaccurate or incomplete ( Matter of Curtis, 16 AD3d 725; Matter of Schnare, 191 AD2d 859, lv denied 82 NY2d 653). Once that showing is made, the burden of going forward shifts back to the accounting fiduciary to prove, by a fair preponderance of the evidence, that the account is accurate and complete ( Matter of Curtis, 16 AD3d 725).
The two issues raised in the statement of issues adopted at trial were: (1) Did Sciacca fail to determine whether the decedent signed the deed or validly gifted the property known as 45-01 161st Street, Flushing, New York; and (2) Did Sciacca sell the property known as 43-72 162nd Street, Flushing, New York, to Geraldine Romano on such terms that would be most advantageous to the beneficiaries of the estate.
Here, with respect to the 161st Street property, respondent, Geraldine Romano, claims that the decedent made a gift of the property to her during his lifetime. Where the account omits property which is claimed to be the subject of a gift by the decedent, the alleged donee has the burden of proving a valid gift by clear and convincing evidence ( Gruen v. Gruen, 68 NY2d 48). Thus, Mrs. Romano has the affirmative burden of proof on whether the transfer of the 161st Street property from the decedent's name into the names of the decedent and Geraldine Romano, as tenants by the entirety, constituted a valid gift.
In addition, the objectant has the affirmative burden of proof on the issue of whether the sale of the 162nd Street property was on terms most advantageous to the beneficiaries, since he claims that the 162nd Street property was sold for less than its fair market value ( Matter of Barnett, 84 NYS2d 105 [1948]).
Further, pursuant to CPLR 3025(c), the objectant has moved, in his post-trial memorandum, to amend his pleadings to conform to the evidence presented at trial. The additional issues which the objectant seeks a determination on are as follows:
1. That the leases entered into between the decedent as lessor and his wife Geraldine Romano as lessee dated May 23, 1999 were voidable in consequence of Mrs. Romano's default in failing to timely pay the rent, thereby imposing upon her the burden to show whether the sale of the 162nd Street property was most advantageous to the beneficiaries;
2. Whether Sciacca should be removed as executor and trustee of the trust and his letters revoked; and
3. Whether Sciacca should be denied executor's and trustee's commissions.
Sciacca argues that objectant should be bound by his statement of issues filed with the court. Sciacca claims that the objectant never raised the possibility that the leases were voidable prior to trial, and therefore, to allow the amendment would be prejudicial to him as it would deprive him of his ability to rebut the claim with competent evidence. Mrs. Romano's counsel argues that granting the motion would place a more onerous burden on Mrs. Romano.
A notice of motion or formal application for amendment to conform the pleadings to the proof is not necessary ( Benach v. Sabel Hat Co., 219 App Div 720; Weinstein-Korn-Miller, NY Civ Prac ¶ 3025.29). An application to amend may be made at any time to support an alternative and/or additional cause of action. An authoritative treatise states:
"[t]he court is empowered to grant any relief appropriate to the case. See CPLR 3017(a) . . . Under CPLR 3025 (c), an amendment may change the legal theory or the cause of action or bring before the court matter outside the transactions and occurrences set forth in the original pleadings. It is proper to deny the amendment only in limited circumstances, such as when a new or alternate theory is plainly lacking in merit. It is also proper to deny the amendment if the variance is so substantial or the request for an amendment is so poorly timed that terms cannot be imposed to alleviate surprise and prejudice that may be inflicted upon other parties to correct any impairment of the orderly progress of the lawsuit." (Weinstein-Korn-Miller, NY Civ Prac ¶ 3025.28).
Thus, leave to amend is a matter of discretion which is freely granted in the absence of prejudice or surprise ( Stroock Stroock Lavan v. Beltramini, 157 AD2d 590, 591; Kirstein v. Kirstein, NYLJ, April 9, 2002 at 17). Furthermore, a court may sua sponte conform the pleadings to the proof ( Harbor Associates, Inc. v. Asheroff, 35 AD2d 667, appeal denied 27 NY2d 490; Kirstein v. Kirstein, NYLJ, April 9, 2002 at 17).
The objectant seeks to amend his pleadings to put squarely before the court the issue of the voidability of the leases due to Mrs. Romano's alleged failure as the tenant to pay rent. The court does not find that granting the motion would cause prejudice or surprise to either Sciacca or Geraldine Romano. Although the voidability of the leases was not specifically put before the court in the statement of issues, it is a factor to be considered in determining whether the sale was on terms most advantageous to the beneficiaries. Sciacca testified at trial that the leases were the sole reason why he viewed Mrs. Romano as the only realistic purchaser of the 162nd Street property. In addition, the production of the decedent and Mrs. Romano's joint income tax returns was the subject of a prior motion before the court. Thus, Sciacca and Geraldine Romano knew or should have known that the payment of rent was an issue by virtue of that prior motion.
Although the court finds that the issue of the voidability of the leases is relevant to the determination of whether the sale was on terms most advantageous to the beneficiaries, objectant's post-trial position that the ultimate burden has somehow shifted from the objectant to Mrs. Romano, is misplaced. Objectant suggests that the court's prior decision dated November 30, 2004 (Decision No. 990) implies that the burden shifts to Mrs. Romano. The court held that if the objection as to the sale of 162nd Street property resulted in an unsatisfied surcharge against the fiduciary, the estate would not be made whole. For that reason, the court concluded that if the evidence at trial showed that Mrs. Romano colluded with Sciacca to purchase the property for less than fair market value, the objectant would be permitted to obtain relief against Mrs. Romano in the form of monetary damages. The burden of proof, nevertheless, remains on the objectant ( Matter of Barnett, 84 NYS2d 105 [1948]).
The court also finds that no prejudice would result by granting the motion with respect to the issues of the removal of Sciacca as executor and/or trustee and denial of Sciacca's commissions. Where any facts provided in SCPA 711 are "brought to the attention of the court" (SCPA 719), the court, in its discretion, may decide to revoke such letters. Similarly, the Surrogate may deny commissions upon a showing of misconduct ( Matter of Lucia, NYLJ, Dec. 4, 2002 at 24, col 3; Matter of Richmond, 187 Misc2d 872). Allowing the objectant to amend his pleadings to put these issues squarely before the court causes no prejudice or surprise as the court may take such actions sua sponte if the evidence warrants.
With the foregoing in mind, the court will now address these issues.
FACTUAL BACKGROUND
The decedent, Casimiro Romano, died on June 4, 2000, leaving a Will dated January 24, 2000 which was admitted to probate by the court on January 12, 2001. Letters testamentary and letters of trusteeship issued to the decedent's former attorney and the draftsman of the Will, Sciacca. The decedent was survived by his wife, Geraldine Romano, and two sons from a prior marriage, Louis and Frank.
Article "SECOND" of the decedent's Will provides as follows:
"I leave nothing to my beloved wife, GERALDINE ROMANO, except my interest in various properties that she will obtain, by operation of law, that we presently own, as tenants by the entirety, including our Great Neck home located at 21 Sussex Road, Great Neck, NY; a supermarket located at 45-04 162nd Street, Flushing, New York and the farm we own in upstate New York."
Article THIRD provides:
"All the rest, residue and remainder of my property and estate, both real and personal, including my interest in premises 45-01 161st Street, Flushing, New York; 40-28 149th Street, Flushing, New York, 43-80 162nd Street, Flushing, New York, the two family house located at the corner of 161st Street, Flushing, New York, as well as the mortgage, I am holding on the pizza parlor which is located at 45-01 162nd Street and the mortgage I am holding on 22 Main Street, Wappinger Falls, New York, I give unto my Trustee, hereinafter named, IN TRUST NEVERTHELESS, into two separate trusts as follows: 90% to my Grandson, Casey Romano, and 10% to my Granddaughter, Gagrielle [sic] Romano for the maintenance, support and education of my grandchildren . . ."
The Will makes no provision for either of the decedent's two children. No objections to the probate of the Will were filed.
Edward McCoyd, Esq. was appointed as guardian ad litem in this proceeding for the decedent's two minor grandchildren, Casey Romano and Gabrielle Romano. The guardian ad litem has joined in the objections of Louis Romano presented at trial.
THE 161st STREET PROPERTY
The decedent had been the sole owner of a two-family house located at 45-01 161st Street, Flushing, New York (hereinafter the "161st Street Property") prior to his purported execution of a deed conveying title to himself and Geraldine as tenants by the entirety. Louis Romano objected to the executor's omission of the 161st Street property from the accounting and to the executor's failure to bring a discovery proceeding against Geraldine Romano to recover the 161st Street property as an asset of the estate. Prior to trial, the objectant made an application for limited letters in order to bring a discovery proceeding against Geraldine Romano regarding her alleged ownership of the 161st Street property. That application for limited letters was denied. The court held, however, that the discovery proceeding would be joined for trial with the accounting.
This property is the same as the two-family house located at the corner of 161st Street, Flushing, New York, and is, therefore, mistakenly referred to twice in the Will.
The following evidence was adduced at trial with respect to the 161st Street property. On April 18, 2000, approximately four months after executing his Will, the decedent executed a deed conveying the 161st Street property from his individual name into the names of himself and Geraldine Romano, as tenants by the entirety. The deed was prepared by Mark Piazza (hereinafter "Piazza"), an attorney whose office is located in Staten Island. Piazza testified that he never met or spoke to the decedent. Piazza met only with Mrs. Romano and prepared the deed at her request. He never performed any legal work for Mrs. Romano other than legal services relating to the transfer of the 161st Street property. Based upon the instructions given to him, Piazza prepared the deed and related transfer documents and forwarded them for execution. The executed deed and transfer documents were returned to Piazza and were then recorded with the Queens County Clerk's Office. There was no testimony as to whom Piazza returned the recorded deed.
In support of her claim that the conveyance was a gift, Mrs. Romano offered the testimony of Benedict Lonetto (hereinafter "Lonetto"), the decedent's accountant for over thirty-six years, who purportedly acted as a witness on the deed. Prior to trial, the objectant claimed that the signatures of both the decedent and Lonetto on the deed were forgeries. At the commencement of the trial, however, the objectant, based upon a change of opinion of his handwriting expert, conceded that the decedent's signature was genuine. The objectant maintained that Lonetto's signature was a forgery and offered at trial the testimony of Jeffrey Luber, a handwriting expert, in support of his position.
Lonetto testified regarding the circumstances surrounding the execution of the deed. According to Lonetto, on April 18, 2000, the decedent and Geraldine Romano arrived at his office unexpectedly with the deed and transfer documents. The decedent asked Lonetto to notarize his signature on the deed. Lonetto advised the decedent that he was not a notary, but that he would attempt to find one for the decedent in the building. Lonetto was unable to locate a notary in the building and suggested that the decedent go to a bank to have the deed notarized. The decedent asked Lonetto to accompany him and Mrs. Romano to the bank. Although Lonetto protested, the decedent insisted and Lonetto acquiesced, albeit reluctantly.
The decedent and Mrs. Romano went to Chase Manhattan Bank located in Great Neck, New York where Lonetto met them. It is uncontroverted that an employee of the bank notarized the decedent's signature. The decedent then told Lonetto that he wanted him to sign the deed as a witness. Lonetto protested and advised the decedent that the deed did not have to be witnessed since the decedent's signature had been notarized. Once again, the decedent insisted and Lonetto signed his name without looking down at the deed. He also testified that he was tired from tax season, was having health problems, would have left the office earlier if he had known in advance that the decedent was coming and that he was angry at being forced to accompany Mr. and Mrs. Romano to the bank.
After leaving the bank, Lonetto went to a diner with the decedent and Mrs. Romano at the decedent's request. At this point in Lonetto's testimony, counsel for Geraldine Romano questioned Lonetto regarding what, if anything, the decedent said about the transfer. Louis Romano's counsel objected to this line of questioning as hearsay and the court allowed the testimony but reserved decision. In response, Lonetto testified to the effect that the decedent stated that he transferred the 161st Street property as a gift to his wife for her 60th birthday and explained that he had planned a trip to celebrate Mrs. Romano's birthday, but legal problems with his former wife required him to cancel the trip. Instead, he purportedly made a gift to her of the 161st Street property.
Sciacca testified that he learned of the transfer for the first time after the decedent's death when he saw the deed and other recording instruments. He concluded that the signature of the decedent on these documents was genuine. Sciacca also spoke with both Geraldine Romano and Lonetto regarding the transfer. Both of them told Sciacca that the transfer was made as a birthday present for Mrs. Romano in lieu of the planned trip. Sciacca was aware of the litigation with the decedent's former wife since he was representing the decedent in that litigation. Presented with the recorded deed, Sciacca accepted the accounts of Mrs. Romano and Lonetto and determined that the 161st Street property belonged to Geraldine Romano and not to the estate. He never contacted Piazza or considered commencing a discovery proceeding. Sciacca testified that he believed the decedent understood the legal consequences of tenancy by the entirety because the decedent and his wife held other property in this manner. Sciacca also discussed the legal consequences of this form of ownership with the decedent when the Will was drafted. The term "tenants by the entirety" appears in Article "SECOND" of the Will.
Mrs. Romano subsequently sold the 161st Street property, and received net proceeds of sale in the approximate amount of $291,000.00. Sciacca represented Mrs. Romano in connection with the subsequent sale.
THE 162nd STREET PROPERTY
The decedent was the fee owner of commercial property located at 43-72 162nd Street, Flushing, New York (hereinafter "the 162nd Street property"). Pursuant to the decedent's Will, the 162nd Street property was devised to a testamentary trust for the benefit of the decedent's grandchildren.
On May 1, 2001, Sciacca sold the 162nd Street property to Geraldine Romano for $800,000. Sciacca testified that the estate needed to raise cash to pay estate taxes of $134,000.00, which had been due as of March 4, 2001, and to pay debts, the most significant of which was an outstanding promissory note in the amount of approximately $100,000. Sciacca knew that the income generated by the decedent's commercial properties at 149th Street and 162nd Street was less than the monthly expenses on these properties.
The first floor of the 162nd Street property was subject to a 15-year lease dated May 23, 1999 between the decedent, as lessor, and Geraldine Romano, as lessee, which was prepared by Lonetto. The lease provided for monthly rent in the amount of $5,000. The landlord was responsible for real estate tax increases, electricity, heat, and other expenses typically borne by a tenant. Mrs. Romano operated a laundromat on the first floor.
The street level space was subject to a 15-year lease dated May 23, 1999 between the decedent, as lessor and C G Marketplace, Ltd., as lessee, also prepared by Lonetto. The lease provided that the tenant would pay rent of $3,000.00 per month and the landlord would be responsible for the same expenses as with the first floor space. Geraldine Romano is the sole shareholder of C G Marketplace, Ltd. and operates a delicatessen in the street level space.
Sciacca testified that, in view of the estate's need to raise cash, he approached Mrs. Romano and asked her if she would be interested in purchasing either the 162nd Street property or the 149th Street property. Sciacca believed that Mrs. Romano was the only person who would be interested in purchasing the 162nd Street property because of the long-term below-market leases. Mrs. Romano expressed no interest in purchasing the 149th Street property because she was not the only tenant in the building, but did have some interest in the 162nd Street property since she was the sole tenant in that building.
Sciacca instructed Mrs. Romano to obtain an appraisal of the 162nd Street property. She did so, and her appraisal concluded that the fair market value of the 162nd Street property was $775,000.00. At the same time, Sciacca obtained an appraisal which concluded that the value was $640,000. Sciacca's appraisal took into consideration the long-term below market leases. Mrs. Romano's appraisal, however, did not consider the leases and Mrs. Romano initially was unwilling to pay the $775,000.00 for that reason. Sciacca, however, was able to negotiate a sales price of $800,000.00, and Mrs. Romano ultimately agreed to purchase the 162nd Street property at that price. In his summary judgment motion Sciacca stated that the contract of sale was executed on April 1, 2001. This was not disputed by the objectant. Mrs. Romano paid the purchase price of $800,000.00, in cash. Mrs. Romano testified that she was not represented by an attorney at the closing because she could not afford one since she used all of her available cash to purchase the 162nd Street property.
Neither of the appraisals were introduced into evidence at trial for the purpose of establishing the fair market value of the 162nd Street property.
Sciacca represented Mrs. Romano and Mr. Romano jointly prior to Mr. Romano's death. He also testified that he did not list the 162nd Street property with a broker, advertise the property or, for that matter, take any other steps to sell the property other than approaching Mrs. Romano. Sciacca did not consider selling the stocks on hand since the market was low. However, Sciacca did consider refinancing the properties and spoke with a mortgage broker, but ultimately concluded that this was not a viable option. Sciacca also testified that he believed the estate attorney, Stephen Ressa, and Lonetto did not consider an election under Section 6166 of the Internal Revenue Code ( 26 USC § 6166) since interest would still be due even if the election were made.
When questioned about whether he took any steps to invalidate the May 23, 1999 leases, Sciacca testified that he did not because he believed the leases were valid. They were signed by the decedent and Mrs. Romano. He never reviewed the decedent's income tax returns to determine if rent was being paid, although he thought Stephen Ressa might have reviewed them. Similarly, he did not review the decedent's final income tax return which showed rental income of $21,000 for the 162nd Street property for the period through the decedent's date of death, although he thought Steve Ressa might have. Lonetto testified that he didn't remember either Sciacca or Mr. Ressa requesting copies of the returns until objectant's counsel requested that they be produced.
Sciacca testified that he confirmed that Geraldine Romano was paying the rent for the period after the decedent died and prior to his appointment as executor. He had Mrs. Romano come into his office with proof that the mortgages were current. According to Sciacca, Mrs. Romano was making the monthly mortgage payments which exceeded the monthly rents due. He also testified that he knew that prior to the decedent's death, it was the common practice of the decedent and Mrs. Romano to go to the bank where Mrs. Romano would then pay the mortgages in cash. Sciacca did not state how he knew this. Since the mortgages were current and the payments thereon were more than the rental payments, he concluded that the rent was not in arrears.
EVIDENTIARY ISSUES
Lonetto, the decedent's accountant for over 36 years, testified at trial concerning the decedent's statements regarding the transfer of the 161st Street property. Louis Romano's counsel objected to the testimony on the basis of hearsay and argued that since the statements were not made simultaneously with the execution of the deed, the statements do not constitute a declaration against interest, which is an exception to the hearsay rule. The court allowed the testimony and reserved decision on the objection. Lonetto went on to testify that the decedent made the following statements at the diner: "the property, half of the property was given to his wife as a birthday present" and "I gave to Geraldine — I put Geraldine's name on the property."
It is well-settled that "[a]ny witnesses who do not have an interest at stake in the proceeding may testify to acts and declarations of the decedent that may establish the gift, regardless of when they were made. Testimony of this nature can be admissible as an exception to the hearsay rule because it is a statement made by the decedent against her/his interest" (Groppe, et al., 2 Harris New York Estates: Probate, Administration and Litigation § 22:94 [5th ed. rev]).
The Court of Appeals has held that admissions against interest are "at least some evidence upon which to base a finding that a valid gift inter vivos had been made" ( Mutual Life Ins. Co. of New York v. Holley, 280 NY 330, 337; see also Matter of Kinch, 33 AD2d 221, affd 27 NY2d 979; Matter of Rinchiuso, 20 AD2d 254, affd 15 NY2d 865; Matter of Wolf, 29 Misc2d 188). In Matter of Rinchiuso ( 20 AD2d 254, affd 15 NY2d 865), the decedent made statements about ten days before and two days after the transfer at issue. The court held that the declarations were competent evidence of the decedent's intention to make a gift of her bank accounts. Similarly, in Matter of Kinch ( 33 AD2d 221, affd 27 NY2d 979), statements made by the decedent to a third party were admissible to determine whether a valid gift was made. In that case, the court noted that the third party's testimony was not contradicted by any direct evidence. In Matter of Wolf ( 29 Misc2d 188), the court likewise held that such statements are probative of the decedent's intent whether or not accompanying the gift.
The declarations made by the decedent to Lonetto at the diner concerning the gift were made shortly after the deed was executed. The objectants have not offered any direct evidence to contradict that the statements were, in fact, made or that Lonetto has a stake in the proceeding. Thus, the court finds that the statements are admissible as declarations against interest.
CONCLUSIONS OF LAW TRANSFER OF 161ST STREET PROPERTY
The burden of proving an inter vivos gift from a decedent is on the party asserting ownership by gift ( Gruen v. Gruen, 68 NY2d 48; 4 Warren's Heaton on Surrogates' Courts, § 62.08 [2][f] [6th ed. rev]; Groppe et al., 2 Harris New York Estates: Probate, Administration and Litigation § 22.90 [5th ed rev]). The alleged donee must prove three essential elements: donative intent, delivery sufficient to divest the donor of dominion and control over the property, and acceptance ( Gruen v. Gruen, 68 NY2d 48; Matter of Szabo, 10 NY2d 94). The donee must establish the gift by clear and convincing evidence, a heavy burden to prove ( Matter of Henry, NYLJ, Jan. 13, 2000, at 34). The proof must be of great probative force and must clearly establish every element ( Matter of Abramowitz, 38 AD2d 387, affd 32 NY2d 654; Matter of Kennedy, 36 AD2d 549; Matter of Kaminsky, 17 AD2d 690, appeal dismissed 12 NY2d 840). "[A] party who must establish his or her case by clear and convincing evidence must satisfy you that the evidence makes it highly probable that what he or she claims is what actually happened" (New York Pattern Jury Instructions § 7.65 [Gifts Discovery Proceedings] 2nd ed).
To prove that an inter vivos gift has been made, the donee must show that the donor intended to make an irrevocable present transfer of ownership. The test of intent is "whether the maker intended the [gift] to have no effect until after the maker's death, or whether he intended it to transfer some present interest" ( McCarthy v. Pieret, 281 NY 407, 408). If the decedent's intention is to make a testamentary disposition effective only after death, the gift is invalid unless made by Will ( see McCarthy v. Pieret, 281 NY 407, 409; see also Gannon v. McGuire, 160 NY 476, 481; Martin v. Funk, 75 NY 134, 137-138). In addition, the donor must be mentally capable of formulating the requisite intent to make the gift ( Matter of Creekmore, 1 NY2d 284).
To constitute a valid delivery of the property, the donor must relinquish dominion and control over the property ( Matter of Kennedy, 56 Misc2d 1092, modified on other grounds 36 AD2d 549). There must be a "delivery of the property to the donee with an intent upon the donor to immediately divest himself of all title and right thereto, and the evidence must be inconsistent with any other design on his part ( Matter of Kennedy, 56 Misc2d 1092, modified on other grounds 36 AD2d 549). It is not necessary that there be an actual physical delivery if other events or declarations, whether or not accompanying the act, signify that a gift has been made ( Matter of Wolf, 29 Misc2d 188).
The final element is the donee's acceptance of the gift. Acceptance may be presumed where delivery and intent are present from the fact that a gift is beneficial to the donee ( First National Bank v. Fitzpatrick, 29 AD2d 450, affd 26 NY2d 792). Acceptance of a deed by a grantee is presumed where the conveyance is beneficial to the grantee ( Williams v. Ellerbe, 62 Misc2d 827).
The objectant alleges that the relationship between the decedent and Geraldine Romano constitutes a confidential relationship. If a confidential relationship exists, the donee must present additional evidence that the transaction was voluntary and that no undue influence or restraint was imposed on the donor ( Hennessey v. Ecker, 170 AD2d 650). The relationship between a decedent and a close family member, however, is not considered "confidential" as a matter of law ( Matter of Walther, 6 NY2d 49; Connelly v. Conneely, 2004 Slip Op 50961U; 4 Misc 3d 1019A [2004]). Conversely, the existence of a close family relationship between a donor and donee may be of some probative value on the question of intent by suggesting a sentimental basis for the gift ( Matter of Szabo, 10 NY2d 94; Connelly v. Conneely, 2004 Slip Op 50961U; 4 Misc 3d 1019A [2004] ; Matter of Hauck, NYLJ, Dec. 23, 1992 at 25, col. 3). "Where a familial relationship exists, it may only be viewed as a confidential or fiduciary relationship sufficient to shift the burden of establishing that the transaction was not the product of undue influence if coupled with other factors, such as where the donor is in a physical or mental condition such that he or she is completely dependent upon the defendant-donee for the management of his or her affairs and/or is unaware of the legal consequences of the transaction" ( Connelly v. Conneely, 2004 NY Slip Op 509614, 4 Misc 3d 1019A [2004]). Whether a confidential relationship exists is a "question of fact dependent upon the circumstances in each case" ( Matter of Brand, 185 App Div 134, 140-141). No evidence was put forward to suggest that the decedent was prone to fraud or undue influence by Mrs. Romano. In fact, the testimony was to the contrary. It appears that the decedent was a strong-willed person and that people did what he said without question. Accordingly, the court does not find that Mrs. Romano and the decedent had a confidential relationship which imposes these additional burdens on her.
Concerning the element of donative intent, the objectant raised the issue of whether the decedent had the requisite competency to understand the legal consequences of the transfer to Geraldine Romano. Objectant questioned Sciacca as to the decedent's ability to understand the English language as well as the decedent's level of education. Sciacca testified that to his knowledge, the decedent did not have any difficulty understanding the English language and the decedent was self-taught. He further testified that the decedent was an experienced businessman who negotiated leases, and that he had discussions with the decedent about the substantive provisions of his Will.
The law presumes that a person is competent unless there is some proof to the contrary ( Matter of Jacobs, 2 AD2d 774, affd 3 NY2d 723; Matter of Rinchiuso, 20 AD2d 254, affd 15 NY2d 865). The objectant has not introduced any evidence other than innuendo to suggest that the decedent was incapable of comprehending the legal consequences of the transaction.
The strongest evidence of the decedent's donative intent is the documentary evidence consisting of the deed and the related transfer documents which it is conceded were signed by the decedent. The term "tenants by the entirety" appears on the deed. The transfer is characterized as a "gift transfer" on the New York City Real Property Transfer Tax Return. Similarly, the New York State Combined Real Estate Transfer Tax Return reflects that the transfer was a "transfer from husband to husband and wife," "without consideration," and as "bona fide gifts." The execution of the deed and related transfer documents "in and of themselves" is enough to find donative intent ( Matter of Breitman, NYLJ, April 7, 1999 at 35). Thus, the court finds that the element of donative intent has been established by clear and convincing evidence.
Moreover, the recording of the deed gives rise to a presumption of delivery and acceptance ( Ten Eyck v. Whitbeck, 156 NY 341; Dwyer v. Adler, 251 AD2d 535; Viggiani v. Favata, 257 App Div 346; Matter of Colbert, 101 NYS2d 666, 670 [1950]). The recording of a deed is for the benefit of the transferee and therefore, constitutes a relinquishment of dominion and control ( Whalen v. Harvey, 235 AD2d 792; Winick v. Winick, 26 AD2d 663). In those cases where a deed has not been recorded, courts have found that the decedent maintained dominion and control and the elements of delivery and acceptance have not been met ( Matter of MacGregor, 119 AD2d 909; Matter of Kennedy, 56 Misc2d 1092, modified on other grounds 36 AD2d 549). The presumption of delivery by virtue of a recorded deed, however, is not conclusive and may be rebutted ( Winick v. Winick, 26 AD2d 663; Matter of Colbert, 101 NYS2d 666 [1950]). Continued possession and control of the property by the donor, declarations of the donee that are inconsistent with a change of title and inconsistent conduct of the parties are factors that should be considered to determine whether the presumption has been rebutted ( Ten Eyck v. Whitbeck, 156 NY 341; Matter of Colbert, 101 NYS2d 666 [1950]).
In addition, a certificate of acknowledgment attached to a deed raises a presumption of due execution which can only be overcome with clear and convincing evidence ( Albany County Savings Bank v. McCarthy, 149 NY 71, 80; Republic Pension Services, Inc. v. Cononico, 278 AD2d 470). Here, the allegation of forgery is made as to the witness's signature on the deed which, in this case, was superfluous since the deed was acknowledged. In any event, in the case of alleged forgery, "[a] high degree of proof is required to set aside a deed on the ground of forgery" (5 Warren's Weed New York Real Property § 50.81 [5th ed. rev.]). Although the handwriting expert testified he is ninety-eight to ninety-nine percent certain it is not Lonetto's signature on the deed, Lonetto vehemently testified that it is his signature. Mrs. Romano's counsel argues that the expert's opinion is questionable because he ultimately conceded prior to trial that he was incorrect in his position that the decedent's signature on the deed was a forgery. Furthermore, most of the exemplars used by the expert were photographic reproductions, not originals. The expert also testified that he did not review some of the exemplars until immediately before he testified. Here, the testimony as to Lonetto's signature is conflicting and as such is insufficient to overcome the presumption of due execution of the deed raised by the acknowledgment.
Objectant claims that Lonetto is not a credible witness and his testimony should be disregarded. At the same time, however, objectant relies on Lonetto's testimony regarding the decedent's statements made at the diner to show that the decedent did not understand the legal consequences of the transfer. Based upon Lonetto's testimony, objectant claims that either the decedent did not make a gift of a present interest, but merely intended to confer upon Geraldine Romano a survivorship interest in the property, or that decedent only intended to make Mrs. Romano a tenant in common as to one-half of the 162nd Street property.
Objectant's argument, however, is misplaced. If objectant's position were valid, the creation of a tenancy by an entirety, by its very nature, would never constitute a gift. In fact, however, the law presumes a present gift not just an expectation of a survivorship interest on the part of the spouse who transfers property from his individual name into the names of himself and his spouse as tenants by the entirety ( Dufour v. Lobdell, 74 Misc2d 460; Matter of Rosenkranz, NYLJ, Feb. 19, 1998 at 31). That presumption, of course, may also be rebutted ( Matter of Rosenkranz, NYLJ, Feb. 19, 1998 at 31). Lonetto's statement that the decedent said he made a gift of half of the property is insufficient to rebut the presumption. The decedent was not a lawyer. Accordingly, his mischaracterization of the transfer, or perhaps Lonetto's imprecise recollection of the exact words used by the decedent are not a sufficient basis on which to find that the decedent did not intend to make a gift of the entire 161st Street property to Geraldine Romano. In fact, in Passarella v. Passarella (NYLJ, April 13, 1990 at 21), the court itself referred to the transfer by the husband of property held by him in his individual name into his and his spouse's names as tenants by the entirety as a gift of "one-half" of the property.
Assuming, arguendo, objectant's contention that Lonetto's credibility as a witness is suspect, the court, nevertheless, finds that the other evidence establishes clearly and convincingly that the decedent made a gift of the 161st Street property to Geraldine Romano. The marriage between the donee and the donor was a long-term marriage. The decedent's Will disinherited both sons in favor of the decedent's grandchildren. The decedent was a strong-willed individual with experience in real estate. He and Mrs. Romano owned other property as tenants by the entirety. The term tenants by the entirety is used in Article "SECOND" of the decedent's Will. Although it appears was that it was Mrs. Romano who retained Piazza to prepare the deed, it is uncontroverted that the deed came into the decedent's possession for execution. The most compelling evidence is the documentary evidence. It is uncontroverted that (i) the deed purports to convey the property from the decedent's individual name into the names of the decedent and Mrs. Romano as tenants by the entirety, (ii) the decedent signed the deed and transfer documents, (iii) his signature was acknowledged by an independent notary, (iv) the deed was recorded, and (v) the transfer documents reflect that the transfer was a gift or a transfer without consideration.
Thus, the court finds that Mrs. Romano has met her burden of proof, and that the decedent made a gift of the 161st Street property to his wife.
Concerning Sciacca's duty to bring a discovery proceeding, the court notes that after an individual's death, a fiduciary may find that "significant transfers before death were contrary to the estate plan or distribution in intestacy. In such a case, the fiduciary should examine the transferee in a discovery proceeding" (Groppe et al., 2 Harris New York Estates: Probate, Administration and Litigation, § 22.88 [5th ed. rev]). Sciacca's failure to bring a discovery proceeding, however, against Mrs. Romano is of no consequence since the court has found that a valid gift was made.
SALE OF THE 162ND STREET PROPERTY
The second issue presented at trial was whether the sale of the 162nd Street property to Mrs. Romano was on terms most advantageous to the beneficiaries. EPTL 11-1.1(b)(5)(B) provides that a fiduciary is authorized to sell property "[a]t public or private sale, and on such terms as in the opinion of the fiduciary will be most advantageous to those interested therein."
Objectant's position at trial was as follows. Sciacca sold the 162nd Street property to Geraldine Romano for less than fair market value based upon a conflict of interest which caused him to favor Mrs. Romano and breach his duty of undivided loyalty to the beneficiaries of the estate. The alleged conflict of interest results from Sciacca's prior representation of Mrs. Romano. Sciacca should not have viewed Mrs. Romano as the only potential buyer because the long-term below market leases were invalid and were voidable for the non-payment of rent. The leases were invalid because the terms were one-sided in Mrs. Romano's favor and were not negotiated in an arms-length transaction. Moreover, the joint 2000 income tax return for Mrs. Romano and the decedent reported less rental income than was due under the lease agreements from the 162nd Street property. Based upon the tax return, the objectant concludes that the rent was in arrears and, therefore, the leases were voidable. Objectant disputes that a sale was necessary since the other assets of the estate were sufficient to meet the estate's administration expenses, including estate taxes. Similarly, Sciacca could have made a Section 6166 election under the Internal Revenue Code to defer the payment of the estate taxes which would have given him more time to locate a buyer on more advantageous terms.
STANDARDS OF CONDUCT
It is well-settled that a fiduciary owes a duty of undivided loyalty to the beneficiaries and cannot act in his own self-interest ( Matter of Rothko, 43 NY2d 305); Matter of Burack, NYLJ, Mar. 26, 1993 at 26; Matter of DePlanche, 65 Misc2d 501; 4 Warren's Heaton on Surrogates' Courts § 6102 [6th ed rev]). A fiduciary must act in good faith (4 Warren's Heaton on Surrogates' Courts § 61.02 [6th ed rev]) and must employ "such prudence and such diligence in the care and management of the estate or property as, in general, prudent men of discretion and intelligence employ in their own like affairs" (Matter of Corbit, 115 App Div 310, 315 affd 187 NY 541). In determining whether the acts of a fiduciary were prudent, the court must "look at the facts as they exist at the time of their occurrence, not aided or enlightened by those which subsequently take place ( Purdy v. Lynch, 145 NY 462, 475-476) for a wisdom developed after an event and having it and its consequences as a source is a standard no man should be judged by ( Costello v. Costello, 209 NY 252, 262)" ( Matter of Cohen, 13 Misc2d 694, 697, modified by 9 AD2d 916). A fiduciary who acts prudently will not be held liable for mere errors of judgment ( Matter of Cohen, 13 Misc2d 694, modified by 9 AD2d 916; Matter of Bunker, 184 Misc 316).
In addition, a fiduciary's power of sale is usually a matter of business judgment to be exercised by the fiduciary ( Matter of Petrycki, NYLJ, Mar. 20, 2002 at 25; Matter of Osterndorf, 75 Misc2d 730). Only in "extraordinary circumstances" should a fiduciary's exercise of a power of sale be subject to the advice and direction of the court ( Matter of Petrycki, NYLJ, Mar. 20, 2002 at 25; Matter of Stanton, NYLJ, Nov. 29, 1993 at 34, col. 1; Matter of Osterndorf, 75 Misc2d 730). "The proper and efficient administration of estates demands that the propriety of the exercise of a general discretionary power of sale conferred in a will upon an executor, in the first instance, be determinable by the executor. And it is for this reason that in such cases the courts uniformly refuse to entertain applications by a fiduciary for advice and directions as to the sale of property where no unusual or exceptional circumstances are involved" ( Matter of Zehe, 57 NYS2d 574, 577 [1945]).
An executor, however, must exercise his power of sale in a proper manner ( Matter of Shurtleff, 206 Misc 255, appeal dismissed 285 App Div 988). Nevertheless, "[w]here the sale has been properly conducted and the property is sold for a fair price and on reasonable terms, no objection ordinarily can be made" ( Matter of Shurtleff, 206 Misc 255, 258, appeal dismissed 285 App Div 988). It is not enough, however, to "show that the representatives of the estate did not get the highest price obtainable; it must be shown that they acted negligently and with an absence of diligence and prudence which an ordinary man would exercise in his own affairs. An honest mistake will not furnish basis for charging the executors" ( Matter of Brower, 71 Misc 398, 400). "Discretion may excuse honest errors of judgment, but it never excuses bad faith . . ." ( Matter of Bruches, 67 AD2d 456, 461). With these standards in mind, the court must determine whether Sciacca's conclusion that the sale of 162nd Street property to Mrs. Romano was on terms most advantageous to the beneficiaries was reasonable.
CONFLICT OF INTEREST
Objectant claims that the executor had a conflict of interest in the matter because of his prior representation of Mrs. Romano which caused him to favor Mrs. Romano over the beneficiaries of the estate to whom he owed a duty of undivided loyalty. A conflict of interest does not exist simply because Sciacca knew Mrs. Romano in either a professional or personal capacity ( see, Matter of Kane, 98 AD2d 851, lv denied 61 NY2d 607). In Matter of Kane ( 98 AD2d 851, lv denied 61 NY2d 607), the fiduciary sold real property to the wife of a local attorney who was a close friend of the executor's attorney. The objectant questioned whether the sale was an arms-length transaction. The court did not "perceive any genuine conflict of interest resulting from the uncontroverted fact that several of the parties involved in this proceeding, including the coadministrators, the estate's attorney, the appraiser, the purchaser and the Surrogate, knew each other in either a personal and/or professional capacity" ( Matter of Kane, 98 AD2d 851, 852, lv denied 61 NY2d 607). Similarly, in Matter of Shelton (NYLJ, May 19, 1999 at 27), the petitioners claimed that the co-executor, who was the decedent's former attorney, should not be permitted to act as a fiduciary because of a conflict of interest. The petitioners claimed that the conflict would preclude the co-executor from making a fair and reasonable inquiry into various transfers of property which the decedent had made to his spouse during his lifetime. The court held that the basis of the conflict was the "unsupported assertion" that the co-executor was the decedent's lifetime friend and attorney. The co-executor claimed that he had no relationship with the decedent's spouse independent of his relationship with the decedent and that he met the decedent's spouse only after he met the decedent. The court found that there was no evidence of any self-interest or conflict which would have precluded the executor from fulfilling his fiduciary duties and declined to remove the fiduciary. Similarly, the court did not find a conflict of interest where the fiduciary sold decedent's real property to a corporation owned by her father-in-law ( Matter of Obloj, NYLJ, Sept. 20, 2000 at 33).
The objectant here has not introduced any evidence to show a conflict of interest other than that Sciacca represented Mrs. Romano jointly with the decedent during his lifetime and that he represented Mrs. Romano with respect to the subsequent sale of the 161st Street property. Sciacca knew Mrs. Romano only after she became the decedent's spouse. Like the co-executor in Matter of Shelton (NYLJ, May 19, 1999 at 27), Sciacca did not know Mrs. Romano in any independent manner, but knew her only by reason of the fact that she was the decedent's spouse. It appears that most of his representation prior to the decedent's death was of both Mr. and Mrs. Romano together. He did, however, represent Mrs. Romano individually after the decedent's death. Sciacca testified that he was not the only attorney Mr. and Mrs. Romano used to handle their legal affairs. The evidence presented did not establish that Sciacca would personally benefit from a sale to Mrs. Romano or that his judgment was clouded by his prior joint representation of Mr. and Mrs. Romano. Accordingly, the court does not find that a conflict of interest existed.
NECESSITY OF A SALE
Objectant contends that the sale of the 162nd Street property was a "distress sale" by the executor and that there were other options available to Sciacca which would have made a sale of the 162nd Street property unnecessary at that point in time. Sciacca testified at length as to his conclusion that a sale was necessary to pay the estate taxes which were already delinquent, a promissory note in the amount of $100,000, and the funeral and administration expenses of the estate. The executor noted that his decision to sell was based on the illiquidity of the estate and the costs associated with retaining the 162nd Street property and the 149th Street property including, but not limited to, servicing the existing mortgages.
Objectant attempted to show that the executor could have maintained the 162nd Street property until sufficient rent was collected to pay the estate tax and other obligations. The executor testified, however, that this would have led to a default in paying the mortgages which would have ultimately led to foreclosures and the loss of these properties for the estate. The guardian ad litem concedes that the executor was probably correct in making this determination and, nevertheless, it was the executor's decision to make, absent self-dealing or arbitrary behavior ( see Matter of Bulova, 60 Misc2d 151).
The objectant also suggested that Sciacca could have sold securities in order to raise cash to meet these expenses. The executor testified that he did not want to sell the stocks at a time when the market was low. Certainly, Sciacca had a right to convert the 162nd Street property into cash to pay expenses and debts without court approval since the disposition of the 162nd Street property was not a specific disposition (EPTL 1-2.18). Moreover, the executor's power of sale existed "even though other personal assets may have been available to the executor for the payment of debts . . ." ( Matter of Larson, 87 Misc2d 397, 401). Although, an executor is primarily charged with the duty of liquidating estate assets as soon as practicable ( Matter of Larson, 87 Misc2d 397, 402; see also Matter of Bancroft, 196 Misc 787), his power of sale over real property not specifically bequeathed exists even if there are other estate assets available to pay estate expenses.
The guardian ad litem and objectant also suggest that Sciacca was so intent on selling the 162nd Street property to Mrs. Romano that he failed to pursue a Section 6166 election under the Internal Revenue Code. IRC Section 6166 allows a deferral of a portion of the estate tax liability attributable to closely held business assets. The estate must qualify for the election. The assets must constitute at least 35% of the adjusted gross estate ( 26 USC § 6166). The deferred portion of the estate tax may be paid in ten annual installments, which do not commence until 15 years after the tax is due. The executor testified that he believed that neither Stephen Ressa, the attorney representing him in connection with the administration of the estate, nor the estate accountant, Lonetto, considered making the election because interest would continue to accrue. The guardian ad litem argues, however, that the executor, if he elected to pay the estate tax in installments under IRC Section 6166, would have had sufficient cash flow to pay the interest charges for the first four years as well as other expenses such as the mortgage receivables, thereby giving him time to explore other possibilities for selling the property. The guardian ad litem's analysis, however, fails to take into account the costs of attorneys' fees, the obligation on the promissory note and other administration expenses. In addition, this approach would have required the executor to walk a financial tight rope since there would be very little room for error. The slightest miscalculation could have resulted in the inability to cover the expenses associated with the properties as Sciacca testified that the costs of maintaining the properties exceeded the income generated.
Moreover, it is uncertain whether the estate would have qualified for an IRS § 6166 election. Section 6166 of the Internal Revenue Code in certain cases permits the deferral of the payment of the Federal estate tax where, in order to pay the tax, it would be necessary to sell assets used in an ongoing business and thus, disrupt or destroy the business enterprise. Section 6166 was "not intended to protect continued management of income producing properties or to permit deferral of the tax merely because the payment of the tax might make necessary the sale of income-producing assets, except where they formed a part of an active enterprise producing business income rather than income solely from the ownership of property" (Rev Rul 75-367, 1975-2 C.B. 472). In Revenue Ruling 75-367, the Service determined that although some of the assets in that estate qualified as a closely held business for purposes of Section 6166, "the decedent's relationship to the rental properties was merely that of an owner managing investment assets to obtain the rents ordinarily expected from them and does not represent an interest in a closely held business within the meaning of section 6166 (c)" (Rev Rul 75-367). Thus, it is mere speculation as to whether the decedent's interests in these real properties would have been viewed as income producing assets or as a qualified closely-held business. The Section 6166 election is not a mechanism for reducing estate taxes, it is simply a means to defer payment of estate taxes.
THE LEASES
Sciacca testified that the sales price was determined after he obtained an appraisal of the 162nd Street property of $640,000, which took into account the below market leases, and Mrs. Romano obtained her own appraisal which valued the 162nd Street property at $775,000, without taking into account the leases. Sciacca, because of the cash requirements of the estate, then negotiated a higher sales price of $800,000.
The objectant's position at trial was that the 1999 leases should have been disregarded because the leases were sham leases between related parties. In support of his position, objectant points to the lack of a tax escalation clause and clauses obligating the tenant to pay certain standard expenses such as water and utilities. Similarly, the leases were of a long-term duration and provided for below-market rents. Objectant also claims that even if the leases were valid, they were voidable for non-payment of rent and could have been voided by Sciacca.
It is uncontroverted that the 1999 leases for the street level space and first floor space of the 162nd Street property were signed by the decedent and Mrs. Romano. Accordingly, there was no reason for Sciacca to believe that the leases were not binding. The guardian ad litem, in fact, concedes that it would be difficult to find that the leases were invalid just because the terms were favorable to Mrs. Romano. Whether the leases were "sweetheart leases" from the decedent to his wife which provided favorable terms or were simply the result of poor negotiation does not make them invalid. If the rent was inadequate, absent fraud or unconscionability, the decedent simply made a bad bargain ( Schneidman v. Steckler, 12 Misc2d 946, affd 5 AD2d 990). "Every man is presumed capable of managing his own affairs, and whether his bargains are wise or unwise, is not ordinarily a legitimate subject of inquiry in a court of either legal or equitable jurisdiction ( Parmelee v. Cameron, 41 NY 392, 395; Matter of Ruszkiewicz, 41 NYS2d 437, affd 266 App Div 709)" ( Schneidman v. Steckler, 12 Misc2d 946, 948-949, affd 5 AD2d 990). Here, no showing of unconscionability was made nor was there any evidence presented to show that Mrs. Romano fraudulently induced the decedent into signing the leases.
Objectant and the guardian ad litem take the position that even if the leases were binding, Sciacca, pursuant to paragraph 17 of each lease agreement, could have voided the agreements for non-payment of rent. Free of the encumbrances of the leases, Sciacca would have been able to obtain a higher price for the 162nd Street property. Objectant suggests that Mrs. Romano was in "serious arrears" as to the rental payments based upon the decedent and Mrs. Romano's 2000 joint income tax return. Schedule E of the joint 2000 income tax return shows only $21,000 of rental income from the 162nd Street property for the six-month period ending in June, 2000. Pursuant to the lease agreement, $48,000 in rent should have been collected for that period. The only evidence presented to suggest that Mrs. Romano was in default on the rent was the income tax return.
Sciacca testified that he did not recall reviewing the 2000 income tax return, although Steve Ressa, the estate attorney might have. He did, however, undertake efforts to confirm that the rent was paid from the time of the decedent's death until his appointment as executor. He verified that Mrs. Romano paid the mortgages for this period of time, which was the estate's obligation, not Mrs. Romano's. He also testified that the mortgage payments actually exceeded the amount of rent due. In addition, he was aware that, prior to the decedent's death, the decedent and Mrs. Romano would go personally to their bank to pay the mortgages in cash with the rental payments.
With respect to the question of whether the rent was in arrears prior to the date of the decedent's death, the court bears in mind that the lessor and lessee here were husband and wife. Courts have recognized that business dealings between spouses usually do not follow the formalities employed in similar business dealings between non-married parties ( Scull v. Scull, 94 AD2d 29, affd 67 NY2d 926; Janke v. Janke, 47 AD2d 445, affd 39 NY2d 786). In Janke v. Janke ( 47 AD2d 445, affd 39 NY2d 786), the court noted that, by virtue of the marital relationship, business transactions between spouses lack the usual formalities. In that case, the court awarded the value of a one-half interest in a restaurant-tavern business to the wife based upon the doctrine of a constructive trust. The court noted "[t]he absence of any express promises formalizing the venture grows out of the very confidence and trust implicit in the marriage relationship. It would be unnatural for a husband and wife to reduce their understanding to writing." ( Janke v. Janke, 47 AD2d 445, affd 39 NY2d 786). Similarly, in Scull v. Scull ( 94 AD2d 29, 34, affd 67 NY2d 926), the court noted that "an agreement for joint venture between spouses is rarely spelled out in writing. Such promises are usually implicit in the nature of the marital relationship." Thus, all transactions between Mr. and Mrs. Romano while Mr. Romano was alive must be viewed with this relationship in mind.
The May 1999 lease agreements imposed upon Mrs. Romano an obligation to pay total rent for the two spaces in the amount of $8,000.00 per month. Schedule E of the 2000 joint income tax return filed by Mrs. Romano and the estate reports less than the rental income which was due pursuant to the lease agreements. The objectant correctly points out that Mrs. Romano signed the income tax return. Lonetto testified that it was his practice to prepare the income tax returns by using figures for rental income which the decedent provided to him on sheets of paper. With respect to the 2000 return prepared after Mr. Romano's death, Lonetto claims to have simply made an error in allocating income between the estate and the decedent's final return. A fiduciary is "chargeable only with what it knew and what, in the exercise of ordinary care and prudence, it ought to have known" ( Matter of Cowles, 22 AD2d 365, 376, affd 17 NY2d 567; see also Matter of Dalsimer, 251 App Div 385, 388-389, affd 277 NY 717). It is uncontroverted that the contract of sale with Mrs. Romano was executed on April 1, 2001 and, that the negotiations with respect to the sale took place before that time. Both appraisals upon which Sciacca relied were prepared prior to the due date of the joint income tax return for the year 2000 even assuming that the return was timely filed. It appears, therefore, that the 2000 income tax return, which showed only $21,000.00 in rental income from the 162nd Street property, was not even available to Sciacca during the negotiations or prior to the time the contract was signed. Thus, Sciacca cannot be charged with actual knowledge of the information in the 2000 income tax return at the time the contract of sale was executed.
If the rent was in arrears for the time prior to the decedent's death, the decedent himself never sought to void the leases or commence an action to recover the past due rent. One can only speculate as to the agreement of the spouses during Mr. Romano's lifetime. Sciacca did state, however, that he verified that the rent was not in arrears because the mortgages were current, and he knew that it was the practice of the decedent and Mrs. Romano to go to the bank and use the rent to pay the mortgages in cash.
Where the lessee is the decedent's spouse, it is difficult to impose upon the executor an obligation to void the leases for non-payment of rent solely upon the basis of income tax returns.
Courts have recognized in many contexts that the information reported in income tax returns is not conclusive. In wrongful death actions income tax returns are not conclusive on the decedent's income for purposes of determining pecuniary loss ( Matter of Pellegrino, 128 Misc2d 757 , affd 121 AD2d 612; Spadaccini v. Dolan, 63 AD2d 110, 124). In Matter of Pellegrino ( 128 Misc2d 757, affd 121 AD2d 612), the court found that the decedent did not report his total income to the taxing authorities and held that it would consider the decedent's "total contribution to his family and not just the amount reflected in his tax returns" in calculating pecuniary loss ( Matter of Pellegrino, 128 Misc2d 757, affd 121 AD2d 612). Similarly, in the matrimonial context, the courts have recognized that income tax returns are not determinative on the issue of a spouse's gross income ( Peppers v. Peppers, 266 AD2d 193; Liebman v. Liebman, 229 AD2d 778; Legname v. Legname, 43 AD2d 543; Silvan v. Silvan, 93 AD2d 790). In Peppers v. Peppers, ( 266 AD2d 193, 194), the Second Department held that the defendant-husband's "personal tax returns were not necessarily conclusive on the issue of his gross annual income."
Moreover, in Matter of White (NYLJ, April 10, 2003 at 22, col. 2), a contested accounting proceeding, the objectants argued that the executor failed to account for all rents received. The executor and the decedent each owned a one-half (½) interest in an apartment building. The executor's accountant testified that he prepared the rental figures for the accounting from the executor's income tax returns which he also prepared. The income tax returns were prepared based upon schedules provided to the accountant by the executor. The court concluded, based upon the testimony of the tenants, that the rent roll was actually much greater than shown in the executor's income tax returns and the accounting.
The issue of the probative value of income tax returns was also before the court in Matter of McArdle ( 140 Misc 257) which involved an application to impose a constructive trust. The executors of the decedent's estate in that case argued that the decedent owned a one-half interest in a piece of real property with his sister. The sister sold the property and retained all of the proceeds of sale. The executors introduced the income tax returns of both the decedent and his sister in which each of them included rentals from a one-half interest in the property. The accountant, who prepared both the decedent's and his sister's income tax returns, testified that he prepared the returns based upon information provided by the decedent and that at no time did he receive any information from the decedent's sister. The court held that the income tax returns were prepared for the sister's signature and were not conclusive on the issue of ownership. The court, therefore, declined to impose a constructive trust.
In the instant case, Lonetto testified that he prepared the joint income tax returns on information provided by the decedent, not Mrs. Romano. The testimony also showed that the decedent was a man of strong will and that Lonetto accepted the decedent's figures without question because he did as Mr. Romano said. It appears that the tax returns, like those in Matter of McArdle ( 140 Misc 257), were prepared for Mrs. Romano's signature without any active participation by her in their preparation.
For the foregoing reasons, the court finds that the income tax returns do not sufficiently establish that the rent was in arrears. Accordingly, the 1999 lease agreements between the decedent and Mrs. Romano were valid agreements which were in effect at the time of the sale, and it has not been proven that they were subject to being voided for nonpayment of rent.
THE APPRAISALS
"A fiduciary is not negligent for selling real property at a private sale where the purchase price is above a valid appraised value and the objectant has failed to establish that a higher purchase price was obtainable" ( Matter of Dean, NYLJ, Aug. 4, 1997, at 30; see also Matter of Kane, 98 AD2d 851, lv denied 61 NY2d 607). In Matter of Dean (NYLJ, Aug. 4, 1997, at 30), this court was faced with an issue similar to the one currently before the court. There, the court held that in determining whether the executor should be surcharged "the court is not required to compare appraisals and make an independent determination as to the value of the property. The question is only whether the executors reasonably relied upon . . . appraisals." ( Matter of Dean, NYLJ, Aug. 4, 1997 at 30). Even if it turns out that the appraisal is flawed, an executor is not "imprudent in relying on the opinion of a certified appraiser when . . . [the executor] had no basis to question its validity" ( Matter of Vale, 291 AD2d 353). The courts have recognized that "[a]ppraisal is not an exact science and . . . the determination of an appraiser is to be upheld as long as the appraiser proceeds in good faith and without bias or fraud ( Olympia York 2 Broadway Co. v. Produce Exch. Realty Trust, 93 AD2d 465, 468; Winter Mgt. Corp. v. Perlbinder, 179 AD2d 518). Appraisers have broad discretion as to their methods and as to their sources of information ( Rice v. Ritz Assocs., 88 AD2d 513, 514, affd 58 NY2d 923)" ( Perlbinder v. Jakubovitz, 239 AD2d 294).
Sciacca obtained an appraisal of the 162nd Street property which took into account the long-term leases. That appraisal valued the 162nd Street property at $640,000.00. Mrs. Romano obtained an appraisal that valued the property at $745,000.00 without taking into account the leases. Neither of these appraisals was admitted into evidence at trial for the purposes of establishing the value. Instead, petitioner introduced an appraisal by Integrated Real Estate Services, Inc. prepared in September of 2004 and objectant introduced an appraisal by Capital Appraisal Services, Inc. prepared in October of 2003. As this court articulated in Matter of Dean (NYLJ, Aug. 4, 1997 at 30), the court is not required to analyze the appraisals and come up with an independent value. Instead, the court must determine whether it was reasonable for Sciacca to rely upon the two appraisals before him at the time of sale. For this purpose, the court will consider the appraisals of Integrated Real Estate Services, Inc. and Capital Services, Inc., as well as the expert testimony in support of each appraisal. At trial, the executor's appraiser testified that the value of the 162nd Street property was $500,000.00 taking into account the leases. Objectant's expert testified that the value of the property was $1,300,000.00 without taking the leases into account.
Petitioner's expert, a highly qualified certified appraiser who has written a number of articles and treatises on valuation, testified that he took the leases into account because he viewed them as binding agreements even though the parties were spouses. The petitioner's expert valued the property using three approaches: capitalization of income, sales of comparable properties and cost approach, and then blended the results. "Property held primarily for income-producing purposes is most often valued on the basis of the income that the property is able to produce. This is particularly true in the case of property that is leased on a long-term basis" (10 Warren's Heaton on Surrogates' Courts § 152.02 [6th ed rev]). "[A]n encumbrance on property in the form of a leasehold interest owned by a third person will have a direct effect upon the value of the property in the sense that it fixes the income to be derived from the property for the remaining period of the lease. Accordingly, a lease on the property will have the effect of depressing or enhancing the value of the property, depending upon the terms of the lease and the amount of rental as compared with the current rental market" (10 Warrens Heaton's on Surrogates' Courts § 152.02 [6th ed rev]). Accordingly, the court finds that the petitioner's appraisal properly took into account the May 1999 lease agreements.
The court finds that the objectant's appraisal is flawed for a number of reasons. Foremost, the appraiser testified that he did not take the leases into account, but instead valued the property as an unencumbered fee interest. The court has concluded that the leases were valid and were not voidable. Thus, it was an error on the appraiser's part not to factor in the leases. The appraiser also used comparables that were considerably smaller than the 162nd Street property and were located on major arteries which made them superior locations to the subject. The appraiser failed to discount for the size difference between the subject property and the comparables he used. Furthermore, the appraiser failed to do an interior inspection of the property, although he did enter the premises, and failed to inquire as to whether any improvements were made by Mrs. Romano after the date of purchase. The appraiser also used a higher rent in the income approach than the actual rent. The appraiser only valued the property using the income and comparable approaches and not the cost approach.
The fact that the sale to Mrs. Romano was an all cash deal and that no brokerage commission was due in connection with the sale was also beneficial to the estate ( see Matter of Obloj, NYLJ, Sept. 30, 2000 at 33). Moreover, there was no evidence to show that any other purchaser was ready, willing and able to purchase the property for the purchase price paid by Mrs. Romano, or a higher price ( see Matter of Garcia, NYLJ, Feb. 22, 1988 at 15). Louis Romano's argument that petitioner failed to make him an offer to purchase the 162nd Street property is without merit. Mr. Romano never advised petitioner that he had any interest in purchasing the property and his intimation that he would have purchased the 162nd Street property for a higher price is clearly self-serving.
For the foregoing reasons, the court finds that Sciacca should not be surcharged with respect to the sale of the 162nd Street property because, pursuant to EPTL 11-1.1[b][5][B], the terms of the sale were most advantageous to the beneficiaries of the estate.
REMOVAL
"The removal of an executor is a determination within the discretion of the Surrogate (SCPA 713; Matter of Simon, 44 AD2d 570) and the power to revoke should be exercised sparingly ( Matter of Israel, 64 Misc2d 1035)" ( Cooper v. Jones, 78 AD2d 423). The court has determined that the sale of the 162nd Street property was in the opinion of the executor on terms most advantageous to the beneficiaries and that the gift of the 161st Street property was a valid gift. The court does not find any grounds which warrant Sciacca's removal as executor or trustee (SCPA 711).
COMMISSIONS
The commission of an executor is fixed by statute (SCPA 2307). The Surrogate may deny commissions to an executor only where misconduct has been proved ( Matter of Lucia, NYLJ, Dec. 4, 2002, at 24, col. 3; Matter of Richmond, 187 Misc2d 872). The court has found that misconduct on Sciacca's part has not been proved. Accordingly, Sciacca is entitled to commissions.
Sciacca is directed to bring his account down to date.
Settle decree.