Opinion
1400-017
11-10-2011
In the Matter of the Accounting of G. Robert Garrasi and Gail L. Aggen, Trustees of the Samuel A. Garrasi and Mary H. Garrasi Family Trust dated September 7, 1991, Samuel A. Garrasi, Deceased.
G. Robert Garrasi, Self Represented Gail L. Aggen, Self Represented Attorneys for Sallie Hume Garrasi, William Hume and Lori Hume McNamee, Lochner, Titus & Williams, P.C., Richard Cirincione, Esq., of counsel
G. Robert Garrasi, Self Represented
Gail L. Aggen, Self Represented
Attorneys for Sallie Hume Garrasi, William Hume and Lori Hume
McNamee, Lochner, Titus & Williams, P.C., Richard Cirincione, Esq., of counsel
Vincent W. Versaci, J.
On May 15, 2007, Co-Trustees, G. Robert Garrasi and Gail L. Aggen (hereinafter the "Petitioners"), filed with this Court an Accounting of the Samuel A. Garrasi and Mary H. Garrasi Family Trust dated September 7, 1991, covering the period of time from the creation of the Trust to December 15, 2006. On June 5, 2009, the decedent Samuel A. Garrasi's surviving spouse, Sallie Hume Garrasi, by and through the Guardians of her Person and Property, William S. Hume and Lori Hume (hereinafter the "Objectant"), filed Verified Objections to the Co-Trustees' Accounting. After the Court heard and decided a number of motions, a non-jury trial commenced on May 10, 2011.
The Petitioners called one witness to testify, William Hume, and then rested their case. Thereafter, the Objectant moved for a directed verdict to dismiss the Accounting Petition and summarily grant the Objections to the Accounting. By Decision and Order dated May 24, 2011, this Court denied the Objectant's motion for a directed verdict, finding that "the Petitioners' filing of their Accounting with the Surrogate's Court satisfied their prima facie burden of showing that they have fully accounted for all of the assets of the trust." The trial was scheduled to resume on July 7, 2011, with the Objectant's case-in-chief.
The Objectant called the following witnesses to testify: Co-Trustee Gail L. Aggen and Co-Trustee G. Robert Garrasi. Several exhibits were received into evidence by oral stipulation or without objection. Upon the close of proof, closing arguments were presented orally, which the parties supplemented with their respective written submissions of proposed Findings of Facts and Memorandums of Law.
Given the Court's earlier ruling that the Petitioners satisfied their initial prima facie burden of showing that they fully accounted for all of the trust assets, the burden of proof then shifted to the Objectant to establish that the Accounting is inaccurate or incomplete.
Matter of Shnare, 191 AD2d 859, 860. See also, Matter of Curtis, 16 AD3d 725, 726 [internal citations omitted]; Matter of Rubin, 30 AD3d 668, 669; Matter of Campione, 58 AD3d 1032, 1034; Matter of Lever, 2010 NY Slip Op 31741U; 9 Warren's Heaton on Surrogate's Court Practice §117.04[2] (7th ed. LexisNexis Matthew Bender). Thus, the question now before the Court is whether, based upon a fair preponderance of the credible evidence, any of the Verified Objections to the Accounting (see Court's Exhibit "5"), should be sustained. Objections No. 1 and No. 2
Although paragraphs "1" and "2" of the Verified Objections contain general statements regarding the Objectant's legal standing in this Accounting proceeding rather than objections to the Accounting per se, which issue the Court previously resolved by its Decision and Order dated May 3, 2011, these statements warrant further comment here. Consistent with the Court's prior ruling, the Court finds that these statements are true and accurate and supported by the credible evidence. With respect to paragraph "1", the Petitioners have admitted that the Objectant is the surviving spouse of Samuel Garrasi and that she filed her right of election against his Estate pursuant to EPTL §5-1.1-A (see paragraph "1" of the Petitioners' Verified Answer to the Objections, received into evidence as Court's Exhibit "6").
With respect to paragraph "2", the Court finds that the Trust that is the subject of this proceeding is a testamentary substitute subject to the surviving spouse's elective right pursuant to EPTL §5-1.1-A(b). EPTL §5-1.1-A(b) provides in pertinent part as follows:
(b)Inter vivos dispositions treated as testamentary substitutes for the purpose of election by surviving spouse.
1)Where a person dies after August thirty-first, nineteen hundred ninety-two and is survived by a spouse who exercises a right of election under paragraph (a), the transactions affected by and property interests of the decedent described in clauses (A) through (H), whether benefiting the surviving spouse or any other person, shall be treated as testamentary substitutes and the capital value thereof, as of the decedent's death, shall be included in the net estate subject to the surviving spouse's elective right . . . Notwithstanding the foregoing, a transaction . . . that is irrevocable or is revocable only with the consent of a person having a substantial adverse interest . . . will constitute a testamentary substitute only if it is effected after the date of the marriage.
* * * *
(F)Any disposition of property or contractual arrangement made by the decedent, in trust or otherwise, to the extent that the decedent (I) after August thirty-first, nineteen hundred ninety-two, retained for his or her life . . . the possession or enjoyment of, or the right to income from, the property . . .; or (ii) at the date of his or her death retained either alone or in conjunction with any other person who does not have a substantial adverse interest, by the express provisions of the disposing instrument, a power to revoke such disposition or a power to consume, invade or dispose of the principal thereof. . .
The Trust Agreement creating the Trust that is the subject of this proceeding was received into evidence without objection as Court's Exhibit "7". This instrument is replete with express, unequivocal language that qualifies the Trust as a testamentary substitute under the above quoted statutory provisions. Specifically, Samuel A. Garrasi and Mary H. Garrasi, as Trustors, or the survivor of them, retained during their respective lives, the right to receive all net income of the Trust upon demand. (See Article III of the Trust Agreement at page 5, and Article VII.A of the Trust Agreement at page 7). Further, either of the Trustors retained during their lifetime the power to revoke the Trust in whole or in part, without needing the consent of a person having a substantial adverse interest. (See Article IV of the Trust Agreement at page 5, and Article VII.D of the Trust Agreement at page 8).
Thus, despite the fact that the Trust Agreement was effected prior to the date of Samuel Garrasi's marriage to Sallie Hume Garrasi, this Revocable Trust clearly constitutes a testamentary substitute within the meaning of EPTL §5-1.1-A(b) and is subject to the Objectant's right of election. See, Turano, Practice Commentaries, McKinney's Cons Laws of NY, Book 17B, EPTL §5-1.1-A, at 198. See also, Matter of Wenzel v. Atlantic Trust Co., N.A., 85 AD3d 563, 564; In re Mattei, 169 Misc 2d 989, 995. Notably, Petitioner Robert Garrasi himself even admitted in his Affidavit in Support of his prior Motion to dismiss the Objections for lack of standing, that at the time of Samuel Garrasi's death, "Sallie H. Garrasi became an interested person in the trust, as she was deemed to have a valid spousal election pursuant to EPTL §5-1.1-A, upon proper filing of her election with the surrogate court. From that point on, the trustees had a fiduciary obligation to the objectant to the extent of her spousal election in my father's estate, of which the Trust was part." (See, paragraphs "10" and "11" of Petitioner Garrasi's Affidavit in Support, sworn to on April 4, 2011.) Accordingly, Objection No. 1 and Objection No. 2 are both hereby sustained.
Objection No. 3
This objection consists of a general objection to the Accounting as not being complete and accurate. For the same reasons as are hereinafter set forth with respect to any of the remaining Objections that are sustained, the Court finds that the Petitioners have failed to prove, by a fair preponderance of the credible evidence, that the Accounting is accurate and complete. Matter of Schnare, supra, at 860. See also, Matter of Curtis, supra, at 726-727; Matter of Campione, supra, at 1034; Matter of Lever, supra; 9 Warren's Heaton on Surrogate's Court Practice §117.04[2] (7th ed. LexisNexis Matthew Bender). Accordingly, Objection No. 3 is hereby sustained. Objection No. 4
This objection pertains to the initial deposit into the Trust made on December 4, 2001, in the amount of $394,381.31, as reflected in Schedule A of the Accounting (see Court's Exhibit "3"). The Objectant alleges that these monies were withdrawn from her bank accounts at Trustco Bank and Ballston Spa National Bank by Robert Garrasi through use of a Power of Attorney given to him by Samuel Garrasi. The Objectant contends in other court documents that these monies were owned solely by her since the bank accounts, although they were titled jointly to her and Samuel Garrasi, were entirely funded by her own separate funds. The Objectant claims that Samuel Garrasi never made any deposits into these bank accounts, and that his name was only put on the accounts as a matter of convenience so that Samuel Garrasi could pay their bills. The Objectant seeks the return of these monies, with interest from December 4, 2001.
These monies are also the subject of a "reverse turnover" proceeding commenced by Mrs. Garrasi against Robert Garrasi and Gail Aggen pursuant to SCPA §2105, that is still pending before this Court.
It is well established that the creation of a bank account jointly titled in the names of two persons gives rise to a presumption under the law of a true joint tenancy, and that the person depositing the money intends to vest the other party with a joint interest in the account. See, Banking Law §675; Mittman v. Mittman, 30 AD2d 867. This legal presumption is created regardless of the source of the deposit, and each tenant is entitled to an undivided one-half property interest in the account, giving either of them the right and power, during the lifetime of the other, to withdraw up to the full amount of their moiety. Kleinberg v. Heller, 38 NY2d 836, 841, citing, Matter of Filfiley, 63 Misc 2d 824, 825; Matter of Bricker v. Krimer, 13 NY2d 22, 27. See also, Walsh v. Walsh, 29 AD2d 991.
The statutory presumption contained in Banking Law §675 is however, a rebuttable one, and can be refuted by clear and convincing proof that the joint account was used as a matter of convenience only. In re Estate of Stalter, 270 AD2d 594; Fischedick v. Heitmann, 267 AD2d 592; Hernandez v. D'Elia, 99 AD2d 777; Brezinski v. Brezinski, 94 AD2d 969. The burden of proof in rebutting the presumption rests upon the party challenging it. Banking Law §675(b). See also, McGill v. Booth, 94 AD2d 928; Matter of Sabatino's Estate, 66 AD2d 937.
The Court finds, after reviewing all of the evidence elicited at trial, that the Objectant failed to satisfy her burden of refuting the prima facie presumption that the subject bank accounts were true joint tenancy accounts. Mrs. Garrasi's allegations regarding the creation of the bank accounts and the transaction history are unsupported by any proof in admissible form. Mrs. Garrasi, who notably, was determined to be a person with functional limitations in need of a guardian back in 2007 in an MHL Article 81 proceeding, did not testify at trial. Her Guardian, William Hume, testified that he has no personal knowledge with regard to the bank accounts. Ms. Aggen testified that she has no personal knowledge as to who made deposits into the subject bank accounts. Although she testified that she took no part in making the initial deposit on December 4, 2001 into the Trust, Ms. Aggen stated that it was her understanding that the money came from two joint accounts belonging to Samuel Garrasi "and/or" Sallie Garrasi.
No testimony was elicited from Robert Garrasi regarding any knowledge he may have with respect to the source of the funds used to open the bank accounts, or the transaction history preceding the December 4, 2001 withdrawal. The signature cards were not produced in evidence, nor were any deposit slips, cancelled checks, monthly statements, or any other evidence tending to show the intentions of Samuel and Sallie Garrasi vis-a-vis these bank accounts. This lack of proof cannot overcome the presumption that these bank accounts were true joint tenancies. See, In re Byrnes, 85 AD2d 601; In re Estate of Coddington, 56 AD2d 697; In re Estate of Gilgore, 55 AD2d 734.
It is undisputed that the withdrawal on December 4, 2001, amounted to one-half of the total monies then on deposit in the bank accounts, representing Samuel Garrasi's moiety. Since the Objectant has failed to rebut the presumption that Samuel Garrasi was entitled to withdraw the full amount of his moiety during his and Sallie Garrasi's lifetime, Objection No. 4 is hereby dismissed.
The Objectant alternatively argues that the initial deposit into the Trust was an invalid and unauthorized gift to the Trust under Matter of Ferrara, 7 NY3d 244. The Court of Appeals in Matter of Ferrara held that the gift-giving authority given to an agent under a power attorney must be exercised "in the best interest of the principal, consistent with financial, estate or tax planning techniques and objectives". Id. at 253. An attorney-in-fact is prohibited from making gifts to her or himself that are not in the principal's best interest and are contrary to the principal's estate plan.
The Objectant contends that Robert Garrasi made an unauthorized gift when he used the Power of Attorney given to him by Samuel Garrasi to transfer Samuel Garrasi's moiety from the bank accounts to the Trust, since the gift was not in Samuel Garrasi's best interest and was not for the purpose of minimizing income, estate, inheritance, generation-skipping transfer or gift taxes. The Objectant requests that the gift be deemed invalid, and that the Petitioners be ordered to return the amount of the initial deposit into the Trust to its original source, the joint accounts of which the Objectant is the surviving tenant.
First, the Court does not agree that Robert Garrasi made an outright gift to himself under the gift-giving authority conferred upon him by the Power of Attorney (Respondent's Exhibit "A"). The reason being that it is undisputed that at the time of the transfer into the Trust, Samuel Garrasi was still alive and that under Article VII of the Trust Agreement (Court's Exhibit "7" at pages 7-8), he was the lifetime income beneficiary of the Trust, and retained a power of appointment of the principal and any undistributed income. Further, Samuel Garrasi retained the power to revoke the Trust, which did not terminate until his death on March 12, 2005. Thus, the initial deposit was not a transfer Robert Garrasi made to himself, but was made to the Trust, making this case distinguishable from the Matter of Ferrara case upon which the Objectant primarily relies, where the attorney-in-fact in that case was found to have transferred about $820,000 of the decedent's assets directly to himself. Id. at 249-250.
Similarly, the Court rejects the proposition that the initial deposit into the Trust was against Samuel Garrasi's best interest. As will be discussed below, at least some of the monies deposited into the Trust were used for Samuel Garrasi's care and benefit as reflected in Schedule E of the Accounting (Court's Exhibit "3"). In addition, although Robert Garrasi testified that the initial deposit into the Trust was not made for estate, gift or income tax reasons, this fact does not render the transfer invalid. The Objectant argues that under the authority of Matter of Ferrara and the General Obligations Law provision discussed at length therein, that in order for gifts made under a Power of Attorney to be valid, they must be made for the sole purpose of minimizing taxes. However, the minimization of taxes is just one reason for such a gift to be made, which would be deemed to be in the best interest of the principal. Id. at 252. A gift made under a Power of Attorney need only be in the best interest of the principal, consistent with the principal's financial, estate or tax plans. Id. at 253-254. The Court finds that the initial deposit into the Trust was consistent with Samuel Garrasi's estate plan since the Trust, an estate and financial planning tool in and of itself, was created by Samuel Garrasi and was never modified, changed or revoked by him at any time prior to his death. For all of these reasons, the Court declines to invalidate the initial deposit into the Trust because no evidence has been elicited from the Objectant which would lead this Court to the conclusion that this deposit was contrary to Samuel Garrasi's best interests.
The Court also rejects the Objectant's argument that the initial deposit into the Trust should be voided because the Supreme Court revoked Robert Garrasi's Power of Attorney in 2003 when an MHL Article 81 Guardian was appointed for Samuel Garrasi. The Objectant argues that a court can only revoke a power of attorney upon a judicial determination that it was executed while the principal lacked capacity and, once revoked, all prior transactions made with the use of that power of attorney are voidable, citing Matter of Kern, 165 Misc 2d 108,117 and Estate of Berry, 69 Misc 2d 397,400.
The MHL Article 81 Guardianship Order dated September 15, 2003, received in evidence as Respondent's Exhibit "C", was based on an oral stipulation of the parties to that proceeding, the transcript of which is attached to the Order. The decretal paragraph in the Order that revoked all powers of attorney and health care proxies for Samuel Garrasi was based on the agreement of the parties as reflected on pages 3-4 of the transcript of the oral stipulation. Nowhere in these court documents does it appear that the Supreme Court adjudicated the issue of Samuel Garrasi's capacity, or lack thereof, on the day that he executed the power of attorney to Robert Garrasi. Robert Garrasi's Power of Attorney was not revoked as a result of any such judicial determination, but rather, was revoked because the parties agreed that it should be revoked in light of the appointment of an MHL Article 81 Guardian. These facts are distinguishable from the facts of the cases relied upon by the Objectant, wherein the principal's incapacity at the time of the transactions at issue was adjudicated. These cases are therefore, inapplicable here.
Further, nowhere in the stipulation did the parties agree, nor did the Supreme Court order, that any of the prior transactions made through the use of Robert Garrasi's Power of Attorney be voided, thereby suggesting that the parties intended that the revocation of the Power of Attorney be prospective only. To find otherwise would have a chilling effect on the potentiality of settling an MHL Article 81 proceeding whereby a power of attorney is routinely revoked by stipulation of the parties upon the appointment of a guardian to avoid competing and/or conflicting agencies. Such parties would be unwilling to agree to a revocation of the power of attorney if by doing so, the agreement could be misinterpreted and the revocation misapplied retroactively, rendering all prior acts done under its authority voidable when such effect was not the intent of the parties and there has been no finding of prior incapacity.
Thus, the Court finds that without a judicial determination that Samuel Garrasi was incapacitated when he executed the power of attorney to Robert Garrasi, the subsequent revocation of the power of attorney based upon the agreement of the interested parties does not in and of itself void, or render voidable, the transactions made under its authority prior to its revocation. Moreover, there is insufficient proof in the trial record before this Court to make an independent determination that Samuel Garrasi lacked the capacity to execute the Power of Attorney on December 4, 2001 (Respondent's Exhibit "A). Despite some lay testimony from Robert Garrasi and Gail Aggen that their father was very ill and physically debilitated in or around December, 2001, no medical records were offered into evidence, nor was any expert testimony or opinion offered to establish that Samuel Garrasi did not have the capacity to execute the Power of Attorney on December 4, 2001. Accordingly, the Court declines to make such a finding, and therefore will not void the initial deposit into the Trust on this ground or any alternative grounds alleged by the Objectant as set forth above. Objections No. 5, No. 11 and No. 12
These objections are all based on the Co-Trustees' alleged failure to adhere to the requirements of the Prudent Investor Act contained in EPTL §11-2.3, thereby causing loss to the Objectant. The Prudent Investor Act requires a trustee who holds property in a fiduciary capacity to "exercise reasonable care, skill and caution to make and implement investment and management decisions as a prudent investor would for the entire portfolio, taking into account the purposes and terms and provisions of the governing instrument." EPTL §11-2.3(b)(2). "Substantial compliance" with the Prudent Investor Act is required, and "is determined in light of facts and circumstances prevailing at the time of the decision or action of a trustee." EPTL §11-2.3(b)(1). The Objectant argues that the Co-Trustees' complete failure to invest any of the Trust assets other than for their own benefit, which constitutes acts of self-dealing, in addition to paying expenses to themselves and others that were not for a valid trust purpose, violates the Prudent Investor Act for which the Co-Trustees should be surcharged.
As previously determined by this Court in its Decision and Order dated May 3, 2011, the Co-Trustees have a fiduciary duty to account to the Objectant for all of their actions as Co-Trustees of this testamentary substitute that the Objectant has chosen to elect against. It is of no consequence that the Objectant is not a named beneficiary under the Trust Agreement. She is a "beneficiary" as that term is defined in SCPA §103(8) , entitled to receive her elective share of Samuel Garrasi's Estate, of which this Trust is a part. Thus, it logically follows that if the Co-Trustees did not prudently invest the trust assets, thereby causing the date of death value of the Trust (upon which the Objectant's elective share will be calculated) to have diminished, and/or causing the present day value of the Trust (from which the elective share will be paid) to have diminished, such violation of the Prudent Investor Act would cause the Objectant to sustain financial harm, justifying the imposition of a surcharge against the Co-Trustees. See, Matter of Donner, 82 NY2d 574.
SCPA §103(8) defines a "beneficiary" as "[a]ny person entitled to any part or all of an estate."
"Prudence is measured by the trustee's overall investment strategy, and connotes long-term planning, income production, and growth." See, Turano, Practice Commentaries, McKinney's Cons Laws of NY, Book 17B, EPTL §11-2.3, at 371 and 373. At the very least, it is the trustee's absolute duty to preserve the assets of the trust "to insure that they [are] protected for the persons or entities eventually entitled to receive them", and to prevent losses. Matter of Donner, supra, at 584-585.
The proof at trial revealed that the initial deposit on December 4, 2001 of $394,381.31 into the Trust was placed in a non-interest bearing bank account. Thereafter, Robert Garrasi, on seven (7) separate occasions, loaned to himself or to Castle Creek, LLC, a limited liability company in which he and his wife were the only members, a total of $168,046.21 from the Trust (see Schedules B and F of Court's Exhibit "3"). These "loans" were booked as promissory notes, however no writings evidencing these alleged notes were offered into evidence.
On four (4) additional occasions, Robert Garrasi loaned to 59 Boyack Road, LLC, a limited liability company in which he testified he is a minority owner, a total of $25,000.00 from the Trust, evidenced by promissory notes (see Petitioners' Exhibit "5").
Mr. Hume testified that it is his belief that these monies were invested by Robert Garrasi in aggressive technology stocks that lost quite a bit of money and generated no income. Robert Garrasi testified that although he is familiar with the Prudent Investor Act, he does not believe that he had a duty to invest the Trust assets. He testified that the Trust funds loaned to himself, Castle Creek, LLC and 59 Boyack Road, LLC were invested in real estate transactions, some of which were secured by mortgages. However, no mortgage documents were offered into evidence to support his testimony.
Although not properly reflected in the Accounting, Robert Garrasi claims that these loans, with the exception of the loans to 59 Boyack Road, LLC which have not yet matured, have been partially paid back to the Trust in the form of income distributions to himself (see Schedule E-1 of Court's Exhibit "3"). However, Schedule A-2 of the Accounting shows that the only income collected was generated from the loans to Robert Garrasi and Castle Creek, LLC, and was only in the total amount of $5,462.35.
Petitioners' Exhibit "7", which is an "Accounting" of the Trust for the period from December 15, 2006 to October 30, 2009, reflects additional interest income collected or "receivable" in the total amount of $4,566.87 (see Schedules A-2 and G of Petitioners' Exhibit "7").
Ms. Aggen testified that her brother Robert Garrasi handled everything and solely made all of the management and investment decisions with regard to the Trust. She indicated that she "left investment decisions up to him", and "just went along with whatever he did". She admitted that she was aware of the loans her brother made from the Trust to himself and Castle Creek, LLC, but never questioned why he needed the money and just assumed that his real estate investments were making money without ever asking to see any documentation to show such a profit. Ms. Aggen further testified that shortly after the death of Samuel Garrasi on March 12, 2005, she resigned as co-trustee "because matters were over her head". She admitted that she was not aware of the Prudent Investor Act during the time that she was acting as co-trustee, only learning of it about a month before the trial date. She did not think that she or her brother were accountable to anyone else because she viewed the Trust as "family money".
Based on the foregoing evidence, the Court finds that the Petitioners failed to exercise diligence and prudence in the care and management of the Trust under the standards required by the Prudent Investor Act. "The prudent investor rule requires a standard of conduct, not outcome or performance." EPTL §11-2.3(b)(1). In loaning Trust assets to himself, without obtaining prior court approval, Robert Garrasi engaged in self-dealing violative of the Prudent Investor Act. See, Matter of Rothko, 43 NY2d 305, 319 ("While a trustee is administering the trust he must refrain from placing himself in a position where his personal interest or that of a third person does or may conflict with the interest of the beneficiaries"); Matter of Tydings, 32 Misc 3d 1204(A) (trustee found "guilty not only of negligence but of a breach of trust"). See also, Matter of Witherill, 37 AD3d 879, 880. The loaned money was not put in investments for the benefit of the Trust, but rather was used for Robert Garrasi's own personal investments. Robert Garrasi failed to pursue any kind of investment strategy, except the one he pursued for his own self-interest and personal financial gain. Rather than properly and prudently investing the Trust assets, he loaned them to himself at below-market interest rates, that generated minimal interest income for the Trust. The loans failed to produce any true income or growth to the Trust, and did in fact diminish the date of death value of the Trust (upon which the Objectant's elective share will be calculated) and the present day value of the Trust (from which the elective share will be paid).
Putting the loans aside, there was also a complete failure on the part of the Petitioners to invest any of the principal remaining on hand as reported in Schedule G of the Accounting to be valued at $127,934.97. Not only did this amount of principal not produce any income whatsoever for the Trust, it was not even bearing interest from the bank account in which it sat. Such failure to "exercise reasonable care, skill and caution . . . as a prudent investor would for the entire portfolio", without question violates the Prudent Investor Act for which the Petitioners must be held accountable. EPTL §11-2.3(b)(2).
Notably, despite the undisputed fact that Robert Garrasi solely handled the administration of the Trust and Gail Aggen merely played a passive, subservient role beside him, it is well settled that a trustee who knows that the co-trustee "is committing breaches of trust and not only fails to exert efforts directed towards prevention but accedes to them is legally accountable". Matter of Donner, supra, at 584, citing, Matter of Rothko, supra, at 320. Ms. Aggen testified that she did nothing to prevent or even question her brother's actions. Moreover, while Ms. Aggen claims to have resigned as co-trustee shortly after her father's death, she is still equally accountable for all matters relating to the Trust until formally discharged by this Court. Accordingly, Objections No. 5, No. 11 and No. 12 are hereby sustained against both Petitioners. Objections No. 6, No. 7 and No. 8
These objections all pertain to Schedule C of the Accounting, and allege that the payments made to the Co-Trustees for alleged administration expenses are not properly reimbursable to the Co-Trustees (Objection No. 6); that all of their commissions should be denied (Objection No. 7); and that all of the legal fees paid from the Trust should be denied as being unreasonable, unrelated to the Trust administration, and which only benefited the Co-Trustees individually (Objection No. 8).
When questioned about the itemized expenses listed in Schedule C of the Accounting, neither of the Petitioners could enlighten the Court as to the nature of any of the entries listed as "administration expense" or "reimbursement". Neither of them could remember or did not know what these expenses were for. Nor did they retain any records or documentation to explain these expenses, despite their duty to account for these expenses. Without any proof to enable the Court to verify the legitimacy of these expenses, the Court finds that the Objectant has established by a fair preponderance of the credible evidence that the Accounting with respect to these expenses is incomplete, and that the Petitioners have failed to satisfy their burden of establishing the propriety of these expenses. Accordingly, Objection No. 6 is hereby sustained, and all of the "reimbursement" or "administration" expenses listed in Schedule C that are payable to either Robert Garrasi, Gail Aggen, Castle Creek, LLC or Cash totaling $15,443.28 are hereby denied. The expenses similarly listed in Schedules C-2, D and E of Petitioners' Exhibit "7" totaling $821.24 are also denied.
Likewise, all of the expenses listed in Schedules C and C-2 as "trustee's commissions" payable to Robert Garrasi or Gail Aggen are also hereby denied. The Accounting does not provide a proper calculation showing how the amounts periodically taken as trustee commissions were arrived at. Nor were either of the Petitioners able to testify as to how these amounts were calculated. In this regard, the Accounting is similarly incomplete. Furthermore, based on the Petitioners' violation of the Prudent Investor Act and the breach of their fiduciary duties by engaging in acts of self-dealing, or being complicit therewith as in Ms. Aggen's case, the Court finds that the Petitioners have forfeited their trustee commissions for such willful mishandling of the Trust. See, Matter of Witherill, supra, at 880, citing, Matter of Donner, supra, at 587. Accordingly, Objection No. 7 is hereby sustained.
The denial of trustee commissions to Gail Aggen are also denied on the further ground that she admitted to having performed no work with regard to the administration of the Trust because her brother was handling everything to her satisfaction.
With respect to Objection No. 8, the Court currently has pending before it a Motion filed by Robert Garrasi to Fix the Fair Value of Barris, Sott, Denn & Dryker, PLLC's Legal Fees Pursuant to SCPA §2110. The Court reserved decision on this Motion pending the conclusion of this Accounting proceeding. Since this Motion involves an additional party, namely, the law firm, and contains additional documentation that is not part of the trial record, a separate decision determining the fair and reasonable value of the legal services rendered, and the source from which any fees awarded will be paid, will be issued after the judicial settlement of the Estate Accounting proceeding hereinafter directed.
Accordingly, the Court reserves decision with respect to Objection No. 8, with the exception of the attorneys' fees already awarded in the context of the Supreme Court MHL Article 81 Guardianship proceeding and ordered to be paid out of the Trust, by a Letter Decision dated November 5, 2003 (Respondent's Exhibit "D"). The Objectant is collaterally estopped from challenging these attorneys' fees in this Accounting proceeding. In light of the Supreme Court Order, this Court, being bound by that Order, approves these attorneys' fees as proper administration expenses of the Trust. In addition, the attorneys' fees paid to Pierro & Associates, LLC that are listed in Schedule C of the Accounting and that were not already awarded in the context of the Supreme Court MHL Article 81 Guardianship proceeding are likewise approved as proper administration expenses of the Trust. These attorneys' fees were paid prior to Samuel Garrasi's death, and appear to have been for estate planning services for the benefit of Samuel Garrasi. The Objectant offered no proof to the contrary, and failed to offer any proof that these attorneys' fees were unreasonable or excessive. Thus, Objection No. 8, insofar as it challenges the particular attorneys' fees approved herein, is hereby dismissed. Objections No. 9 and No. 10
These attorneys' fees, as listed in Schedule C of the Accounting, are as follows:
These objections allege that the Co-Trustees breached their fiduciary duties by their acts of imprudent, self-dealing related to the Trust and which caused harm to the Objectant. These objections are based on the same facts that have been discussed above at length with regard to Objections No. 5, No. 11 and No. 12. For the sake of brevity, these facts will not be restated here, but rather shall be incorporated herein by reference as if set forth in their entirety herein.
It is well established that a trustee has a duty of undivided loyalty to serve in the best interests of the trust and all of its beneficiaries, and must exercise reasonable care, diligence and prudence at all times. "The standard of loyalty in trust relations does not permit a trustee to create or to occupy a position in which he has interests to serve other than the interest of the trust estate." Matter of Rothko, 84 Misc 2d 830, 847, citing, City Bank Farmers Trust Co. v. Cannon, 291 NY 125,131-132. As stated earlier, a trustee, while administering the trust, "must refrain from placing himself in a position where his personal interest or that of a third person does or may conflict with the interest of the beneficiaries." Matter of Rothko, 43 NY2d 305, 319; Matter of Witherill, supra, at 880.
For all of the same reasons as set forth above with regard to Objections No. 5, No. 11 and No. 12, the Court finds that the Petitioners breached their fiduciary duties as a result of the self-dealing acts of Robert Garrasi in loaning Trust assets to himself without prior court approval, and the complete failure of the Petitioners to pursue any kind of investment strategy except for the one pursued by Robert Garrasi for his own selfish financial gain, all being in violation of the Prudent Investor Act. Accordingly, Objections No. 9 and No. 10 are hereby sustained. Objection No. 13
This objection requests a separate accounting from Robert Garrasi for his activities as attorney-in-fact for Samuel Garrasi. Robert Garrasi testified that he believed that his attorney, Douglas Stein, Esq., who prepared the Trust Accounting, included the Power of Attorney accounting within this Accounting. The Court heard no testimony that Robert Garrasi used the Power of Attorney given to him by Samuel Garrasi to make any transactions other than the initial deposit into the Trust. There being no proof that there were other transactions performed by Robert Garrasi using his Power of Attorney for Samuel Garrasi that have not been included in the Trust Accounting, the Court finds that the Objectant has failed to sustain her burden of proving that the Trust Accounting is incomplete in this regard. The Court denies the request to order Robert Garrasi to file a separate Power of Attorney accounting. Accordingly, Objection No. 13 is hereby dismissed. Conclusion
Based on the above finding that the Petitioners' actions constituted a breach of trust that violated their duties as the fiduciaries of the Trust at issue, the Court finds that it is appropriate to impose damages against the Petitioners in order to make the trust whole. Matter of Rothko, supra, at 322 (allowance of appreciation damages where the fiduciary's misconduct consisted of deliberate self-dealing and faithless transfers of trust property); Scalp & Blade, Inc. v. Advest, Inc., 309 AD2d 219 (compensatory damages are recoverable where breach of fiduciary duty extends beyond mere negligent retention of the portfolio's holdings and involves deliberate and flagrant self-dealing and dishonesty on the part of the fiduciaries); Matter of Hunter, 27 Misc 3d 1205(A) ("lost profit" measure of damages appropriate where fiduciary's misconduct consisted of deliberate self-dealing with trust property); Matter of Tydings, supra (where the breach of trust consists of a serious conflict of interest, the trust can recover the lost profit from the trustee).
Restatement, Third, of Trusts §205(b) (1992) provides that a "trustee who commits a breach of trust is chargeable with the amount required to restore the values of the trust estate and trust distributions to what they would have been if the trust had been properly administered." Uniform Trust Code §1002 provides:
§1002. Damages for Breach of Trust.
(a)A trustee who commits a breach of trust is liable to the beneficiaries affected for the greater of:
(1)the amount required to restore the value of the trust property and trust distributions to what they would have been had the breach not occurred; or
(2)the profit the trustee made by reason of the breach.
The court can also deny the trustee commissions as part of the surcharge. Matter of Donner, supra, at 587; Matter of Witherill, supra, at 880.
Since the Objectant's interest in the Trust is limited to her elective share against the date of death value of the Trust, her damages are limited to the diminishment of the date of death value of the Trust caused by the misconduct of the Petitioners. Clearly, if Robert Garrasi had not loaned the Trust assets to himself and instead had prudently managed and invested these funds, the date of death value of the Trust would have been greater.
Typically, in a contested accounting proceeding where a fiduciary has been found guilty of misconduct, this Court would review the entire period of the accounting and use the balance at the end of the accounting period to determine the damages sustained by the beneficiaries. However, in this proceeding, the fiduciary, Robert Garrasi, is the sole remaining beneficiary of the Trust. Robert Garrasi's status as sole remaining beneficiary is as a result of this Court's prior Decision and Order dated January 14, 2011, that found that Ms. Aggen validly assigned to Robert Garrasi all of her right, title and interest in the Family Trust. Thus, it does not make practical sense here to look beyond the date of death value of the Trust (which is the relevant date for assessing the Objectant's damages), since doing so would merely result in a surcharge against Robert Garrasi payable to himself.
Thus, the Court calculates the damages intended to make the Trust whole as of Samuel Garrasi's date of death as follows. The total principal and income received as of the date of Samuel Garrasi's death, as reflected in Schedules A and A-2 of the Accounting, is $465,088.36. The pre-date of death distributions made from the Trust for Samuel Garrasi's care as reflected in Schedule E of the Accounting, amount to $234,615.77. The difference in these two amounts is $230,472.59. From this amount the Court will subtract the pre-date of death administration expenses as reflected in Schedule C of the Accounting that have not been denied as part of the Court's decision with respect to Objections No. 6 and No. 7 above, and the pre-date of death attorneys' fees that were approved as part of the Court's decision with respect to Objection No. 8 above. These administration expenses, which the Court finds to be proper, amount to $25,535.85, leaving a date of death value of $204,936.74 ($230,472.59 - $25,535.85).
There are a few amounts listed in Schedule A that appear to have been received post-date of death. However, since Samuel Garrasi was entitled to these funds upon his death, the Court finds that they are properly included in the date of death value of the Trust.
The Objectant offered no proof that any of these distributions were improper, excessive, or for any other purpose than for Samuel Garrasi's care. Given this lack of proof, the Court hereby approves these expenses as proper distributions from the Trust.
The Court finds that interest should be added to this amount. "Whether interest is awarded, and at what rate, is a matter within the discretion of the trial court." Matter of Janes, 223 AD2d 20. It is nearly impossible to determine exactly how much interest or income the principal of the Trust would have generated if it had been prudently invested by the Petitioners as it should have been. However, there is no doubt that income, in whatever amount, certainly would have been produced. Without having any better guidepost, the Court will use an interest rate of 6%, which is the rate reflected in Schedule F of the Accounting at which Robert Garrasi loaned the Trust assets to himself. Accordingly, the Court hereby assesses interest against the amount of principal and income that should have been in the Trust upon Samuel Garrasi's date of death ($204,936.74), at an annual rate of 6%, compounded annually, from December 4, 2001 to March 12, 2005, the date of Samuel Garrasi's death. The Court calculates the total amount of interest to be $58,012.32, bringing the date of death value to $262,949.06. This amount is only offset by the pre-date of death income collected as reflected in Schedule A-2 of the Accounting in the amount of $5,431.11, leaving a balance of $257,517.95. See, Matter of Janes, supra; Matter of Saxton, 274 AD2d 110.
Based on the foregoing, the Court hereby surcharges both Petitioners, jointly and severally, in the amount of $90,494.87 , which is the difference between what should have been the date of death value of the Trust, as calculated above ($257,517.95), and what was actually in the Trust as of Samuel Garrasi's date of death ($167,023.08). The Petitioners are hereby ordered to pay the amount of this surcharge into the Trust within thirty (30) days of the date of this Decision and Order. Further, in order to properly calculate the Objectant's elective share of the Estate pursuant to EPTL §5-1.1-A(a)(2), of which the date of death value of this Trust is a part, the Court, on its own initiative pursuant to SCPA §2205, hereby orders Robert Garrasi, as Executor of Samuel Garrasi's Estate, to file with this Court a Petition to Judicially Settle the Executor's Account, within thirty (30) days of the date of this Decision and Order.
EPTL §5-1.1-A(a)(2) provides that "[t]he elective share . . . is the pecuniary amount equal to the greater of (i) fifty thousand dollars or, if the capital value of the net estate is less than fifty thousand dollars, such capital value, or (ii) one third of the net estate."
Lastly, there had been a Motion previously filed by Robert Garrasi on September 28, 2009, to Strike the Objections and For More Specific Objections. That Motion, to the extent that it was based on a lack of standing argument, was adjudicated as part of this Court's May 3, 2011 Decision and Order. The balance of the Motion requesting a more definite and specific set of Objections is now hereby denied. The Court finds that the Objections were sufficiently definite and specific and did not prevent the Petitioners from properly and adequately defending against the Objections. The Petitioners suffered no surprise or prejudice at the trial, and any claim to the contrary is without merit.
With respect to the "reverse turnover" proceeding commenced by Ms. Garrasi against the Co-Trustees pursuant to SCPA §2105, Ms. Garrasi's Petition is hereby dismissed with prejudice, for the reasons set forth above in the Court's decision dismissing Objection No. 4. Given the dismissal of this Petition, the Motion for Summary Judgment filed by Robert Garrasi in that proceeding is deemed academic, and the Temporary Restraining Order and Preliminary Injunction issued by Acting Surrogate Judge Reilly is hereby vacated. However, pursuant to the equitable powers vested in this Court, and based on the Objectant's success on the merits of some of her Objections, resulting in a surcharge against the Petitioners, the irreparable harm to the Objectant if the remaining Trust assets are depleted before her elective share of the Estate is paid, and a balancing of the equities, the Petitioners shall continue to be enjoined and restrained from making or causing to occur, the transfer of any funds or assets from the Trust, without prior court approval, except as to and until such time as the spousal elective share of the Estate is calculated and paid in full to the Objectant and approved by this Court in the judicial settlement of the Estate Accounting.
The parties' remaining arguments, to the extent not specifically addressed herein, have been considered and found to be unavailing.
The foregoing shall constitute the Decision and Order of this Court.
Signed at Schenectady, New York, this 10th day of November, 2011.
____________________
HON. VINCENT W. VERSACI
Surrogate
ENTER:
+-------------------------------------------------------------+ ¦DATE ¦DESCRIPTION ¦AMOUNT ¦ +------------------------+--------------------------+---------¦ ¦06/18/2003 ¦Pierro & Associates, LLC ¦$3,500.00¦ +------------------------+--------------------------+---------¦ ¦11/16/2003 ¦Gerard F. Parisi, Esq. ¦$5,000.00¦ +------------------------+--------------------------+---------¦ ¦11/16/2003 ¦Frederick W. Killeen, Esq.¦$2,500.00¦ +------------------------+--------------------------+---------¦ ¦11/16/2003 ¦William M. Harris, Esq. ¦$2,500.00¦ +------------------------+--------------------------+---------¦ ¦11/16/2003 ¦ ¦ ¦ +------------------------+--------------------------+---------¦ ¦Pierro & Associates, LLC¦$4,786.34 ¦ ¦ +-------------------------------------------------------------+
These attorneys' fees are as follows:
+-----------------------------------------------------------+ ¦DATE ¦DESCRIPTION ¦AMOUNT ¦ +------------------------+------------------------+---------¦ ¦12/05/2001 ¦Pierro & Associates, LLP¦$1,000.00¦ +------------------------+------------------------+---------¦ ¦02/02/2002 ¦Pierro & Associates, LLC¦$ 341.91 ¦ +------------------------+------------------------+---------¦ ¦03/15/2002 ¦Pierro & Associates, LLC¦$ 503.59 ¦ +------------------------+------------------------+---------¦ ¦04/14/2003 ¦ ¦ ¦ +------------------------+------------------------+---------¦ ¦Pierro & Associates, LLC¦$ 775.61 ¦ ¦ +-----------------------------------------------------------+