Opinion
# 2011-049-017 Claim No. 102924 Motion No. M-80452
11-02-2011
LOWERS v. THE STATE OF NEW YORK
Synopsis Case information
UID: 2011-049-017 Claimant(s): CHYNA N. LOWERS, an infant, by her mother and natural guardian, YVONNE LOWERS, and YVONNE LOWERS, Individually Claimant short LOWERS name: Footnote (claimant name) : Defendant(s): THE STATE OF NEW YORK Footnote (defendant name) : Third-party claimant(s): Third-party defendant(s): Claim number(s): 102924 Motion number(s): M-80452 Cross-motion number (s): Judge: DAVID A. WEINSTEIN For Applicant BNY, Mellon, N.A.: Claimant's attorney: Bleakley Platt & Schmidt, LLP By: Nancy J. Rudolph, Esq. Defendant's Eric T. Schneiderman, NYS Attorney General attorney: By: Katherine S. Brooks, Assistant Attorney General Third-party defendant's attorney: Signature date: November 2, 2011 City: Albany Comments: Official citation: Appellate results: See also (multicaptioned case) Decision
This matter comes before the Court on an application by BNY, Mellon, N.A. ("BNY" or "the Bank"), for an Order permitting the withdrawal of funds from an account established following the settlement of this action, such funds being held for the sole benefit of infant Chyna Lowers ("CL"), pursuant to an Infant's Compromise Order which governs the distribution and oversight of those funds. The purpose of the withdrawal was to pay the funds to the United States Internal Revenue Service ("IRS") in compliance with a levy issued by the IRS on August 31, 2011, under Internal Revenue Code ("IRC") § 6331.
The Court has since learned that, prior to the return date on this motion and the Court's ruling thereon, the Bank has made the payment at issue. Nevertheless, the Bank's application raises significant concerns as to whether the infant's settlement funds are being dissipated by the failure of Yvonne Lowers ("YL"), CL's mother, to file tax returns.
Therefore, pursuant to the Court's authority to ensure compliance with the Infant's Compromise Order and its continuing responsibility to protect settlement funds belonging to an infant (see infra pp. 7-9), the Court issues the following order.
Background
The settlement fund at issue was created following a series of lawsuits brought on behalf of infant claimant Chyna Lowers ("CL") by her mother and natural guardian Yvonne Lowers ("YL"), which sought damages for injuries CL was alleged to have suffered as a result of physician malpractice during her delivery at State University Hospital Center. Specifically, the filings in those cases assert that, as a result of doctors' errors, CL suffers from shoulder dysctocia and erb's palsy, and cannot lift one of her arms. YL also brought derivative claims for loss of services.
The first such action was filed against four doctors in New York State Supreme Court, Kings County in 1998, Lowers v Zapantis, Index No. 9490/98. A global settlement of $1.6 million was agreed to between the parties in 2000, of which $1.4 million was to be paid by the State of New York, although not at that time a defendant in any pending action brought by YL or CL.
The settlement was effectuated through a series of agreements and court proceedings. The plaintiffs moved in Supreme Court for an infant compromise order, which the Court issued on September 28, 2000. After deductions for attorneys' fees, satisfaction of Medicaid liens and a $50,000 settlement for YL's personal claim, the Court ordered the payment of $1,054,141 to YL, as mother and natural guardian for CL, and Salomon Smith Barney ("SSB"), to be placed in an SSB financial management account. Among other provisions, the Compromise Order filed in Supreme Court provided that "YVONNE LOWERS shall cause to be filed with the clerk of this Court copies of [CL's] tax returns and the accountant's bill, together with proof of payment within 60 days of making such payment."
The claimant commenced a companion action against the State in the Court of Claims on August 16, 2000, to effectuate the State's payments (YL Aff., Claim No. 102924, at p.3). YL also brought a guardianship application before the Kings County Surrogate, which appointed her guardian of CL's property on November 15, 2002 (Decree Appointing Guardian, In the Matter of the Guardianship of Chyna Lowers, File No. 2444/02 [Sur Ct, King's County Nov. 15, 2002]). The decree directed that YL "receive all money and property" of CL, and that it be deposited or invested in the name of YL subject to certain restrictions set forth in that order.
On January 18, 2001, the State informed claimant that the settlement as structured in Supreme Court was not acceptable to it, and a separate order would be required from the Court of Claims (YL Aff., Claim No. 102924, at p.5). After numerous hearings and written submissions, on April 2, 2003, the Court of Claims issued an Infant's Compromise Order approving the $1.4 million settlement between YL, CL and the State of New York. The Order approved the same deductions for attorneys' fees and Medicaid liens as originally as set forth in the Supreme Court Order, and an award of $100,000 to YL. The remainder of the funds were to be paid to CL in two parts.
First, the State agreed to make a lump sum payment of $502,070.51 to be paid to "YVONNE LOWERS as mother and natural guardian of CHYNA N. LOWERS, an infant, jointly with an officer of THE BANK OF NEW YORK," and deposited in a managed account at BNY. The Infant's Compromise Order barred any payments from going directly to CL while she remained an infant. Only when CL turns 18 is the Bank authorized by the Order to pay to her all moneys held in the managed account (the "Account"), without any need for a further court order (Infant's Compromise Order at 8).
Second, in the Infant's Compromise Order the Court "determined that a structured settlement is in the best interest of the infant claimant, and that future periodic and lump sum payments constitute damages on account of physical injury or physical sickness in a case involving physical injury or physical sickness within the meaning of Section 104(a)(2) and 130(c) of the Internal Revenue Code of 1986, as amended" (Infant's Compromise Order at 7). Under IRC § 104(a)(2), damages (other than punitive damages) received as compensation for personal injury are not deemed gross income for purposes of the federal income tax. In regard to the periodic payments, the State agreed to make guaranteed monthly payments for the benefit of CL of $2,910.84 through May 1, 2015, payable to "YVONNE LOWERS as guardian of the property of CHYNA N. LOWERS, jointly with the Clerk of Kings County Surrogate's Court," and a final lump sum payment of $295,583.12, made payable to CL on May 23, 2015.The total cost of these payments was stated as $502,070.
It appears that this Order superceded the Supreme Court order as regards to the State's payments. The Supreme Court Order also concerned $200,000 received from two doctors, which presumably remains subject to that Court's jurisdiction.
The Order further provided that there be "no right of withdrawal" from the Account, except as provided in the Order, without further Order of the Court. In regard to income tax, however, the Order stated as follows:
"[U]pon presentation to the Bank of New York of a copy of the estimated and yearly income tax returns prepared by a Certified Public Accountant, indicating the amount of income taxes due, the Bank of New York, without further Order of this Court, is authorized to issue a check payable to the appropriate taxing authority, indicating thereon that such payment is on behalf of CHYNA N. LOWERS . . . ."(Infant Compromise Order at 8).
On September 30, 2011, the Bank filed an application with this Court for an "Order Permitting Withdrawal of Funds." The application appended a Notice of Levy received by the bank on August 31, 2011 from the IRS. The levy listed the taxpayer as "Chyna Lowers [ - ] Yvonne Lowers Custodian/Guardian," and set forth unpaid balances of $47,907.26 for the tax period ending December 31, 2004, $44,639.85 for the tax period ending December 31, 2006, $24,577.23 for the tax period ending December 31, 2007 and $18,543.36 for the tax period ending December 31, 2008. The levy also listed "statutory additions" (i.e. penalties and interest) for each of these tax years, which totaled $8,283.09. Altogether, the amount due on the levy was listed as $143,950.79. This amounts to over 14% of the value of the settlement received by CL, and over 26% of the initial lump sum payment deposited in the Account. The notice indicated that it must be paid by September 24, 2011, or additional interest would accrue.
Since BNY made its payment after September 24, it is possible that additional interest has accrued, although that information is not contained in the record presently before the Court.
According to an affidavit filed in support of the motion, the Bank first took action in regard to the levy on September 22, two days before the final date for payment, seeking an extension of the date (Rudolph Aff. ¶ 6). On that day, it left a message for the relevant agent, and after not succeeding in talking with him, it wrote the IRS on September 26. The letter stated the following:
"As set forth in the [Infant's Compromise] Order, the Bank is authorized to pay out funds only when prescribed in the Court Order. The only funds which may be paid out without a further Order of this Court are to pay commissions and to pay income taxes upon presentation to the Bank if a copy of the estimated and yearly income tax returns prepared by a certified public accountant. The Bank never received such presentation"(Rudolph Aff., Ex. C).
The Bank's filings indicate that it spoke to the IRS agent on September 28, and was informed that no extension would be given (Rudolph Aff. ¶ 6). Two days later, it filed the present application, with copies to YL and CL. The Clerk's Office of this Court wrote BNY on October 5, copying as well YL, CL, the Attorney General's office and claimant's counsel, and setting a return date of October 19 for the motion.
The Court scheduled a conference call on October 17 to discuss the Bank's application. During that call, the Bank informed the Court for the first time, without any prior notice, that it had paid the levy.
The conference call, which was held on the record, was attended by counsel that represented CL and YL in the underlying action and an Assistant Attorney General appearing on behalf of the State; both these attorneys indicated that they had not seen the Bank's application. Claimant's counsel also expressed the view that his firm had no role to play in this proceeding. CL and YL were not contacted, as the Court lacks telephone contact information for them, and the call was set up on one workday's notice.
The Bank also stated that it is merely a custodian of CL's fund, and not a fiduciary. As such, it has no information about the child's income, and neither possesses nor has sought any understanding from the IRS regarding the basis for the levy.
Nonetheless, a disabled infant - who received settlement payments intended for her sole benefit and whose principal was meant to be exempt from federal taxation - now owes a substantial tax liability which threatens to consume a significant part of her settlement before she reaches the age of majority. Moreover, the Account may well face further tax liabilities and penalties each year, since the IRS levy addresses only the tax returns through the year 2008. Needless to say, this will have disastrous results for the amount of settlement funds CL will ultimately receive when she turns 18.
Discussion
This Court possesses "all of the powers necessary to carry out properly the jurisdiction granted and the duties imposed" upon it (see Court of Claims Act § 9[1]), and thus "has the power to enforce its orders" (Davis-Eckert v State of New York, 118 AD2d 375 [3d Dept 1986], affd 70 NY2d 632 [1987]). Further, a court presiding over an infant compromise has the obligation to protect and oversee the infant's settlement funds (Peterson v City of New York, 107 Misc 2d 1055, 1056 [Sup Ct, Queens County 1981] [court has the duty to "protect infant's funds deposited subject to the order of the court, and such duty should be scrupulously discharged"]; see also Valdimer v Mount Vernon Hebrew Camps, 9 NY2d 21, 24 [1961] ["courts are bound to protect infants, who are their wards"]; Matter of Louis, 21 Misc 3d 1126A [Sup Ct, Kings County 2008] ["[i]t is the duty of the court to protect the child's fund until he reaches his majority"]; Pena v Bronx-Lebanon Hosp. Ctr., 239 NYLJ 87 [Sup Ct, Bronx County 2008] ["[t]he court has a duty to protect the assets of a trust created by an infant compromise order"]; Franklin v Newberry, 77 Misc 2d 1042, 1043 [Civ Ct, Queens County 1974] ["the court is the protector of the funds of the infants and has an inherently high obligation to the infant to see to it that his funds are not unnecessarily or recklessly depleted"]).
Infant settlement funds belong to the child alone; in the oft-quoted language of De Marco v Seaman, 157 Misc 390, 395 (Sup Ct, Queens County 1934) (emphasis in original): "[t]he infant's money is awarded to compensate for his pain, his suffering and his incapacity" (see also Matter of Stackpole v Scott, 9 Misc2d 922, 925 [Mun Ct, Queens County 1957] ["[w]e must ever remind ourselves that the money on deposit is the infant's property and the court has full control of the money allotted to the infant which is held subject to the order of the court until the infant attains his majority when it should be delivered to him"]). Upon reaching majority, the child "has a right to expect to receive the money awarded him for his injury with interest" (Caban v Lonkey, 53 Misc 2d 171, 172 [Civ Ct, New York County 1967]).
In light of the Court's responsibility to safeguard the assets a child has received from a settlement, funds can be withdrawn from an infant's account only in accordance with an order of the Court (see NY CPLR § 1206[c]; Infant's Compromise Order at 8). Any expenditure from an infant's settlement account can be approved only after exacting scrutiny (see Pena, supra ["the evidentiary and substantiation requirements for an approval for withdrawal of funds are rigorous"]). Therefore, the Court has the obligation "to look into every avenue before allowing these funds to be depleted" (Franklin, 77 Misc 2d at 1043), and may approve an expenditure only if there is "unequivocal proof of [the] necessity" (Matter of Dagani, 226 AD2d 197, 199 [1st Dept 1996]).
Payment of income taxes, and associated penalties for non-payment, is one expense that courts have found an appropriate use of the infant's funds (see Matter of Lockwood, 99 Misc 2d 972 [Ct Cl 1979]; Matter of Billick, 176 Misc 2d 293 [Sur Ct, Sullivan County 1998]; Matter of Curry, 128 Misc 2d 760 [Sur Ct, Dutchess County 1985]), as was recognized in the Infant's Compromise Order in this case. But such payments still fall under the Court's supervision, and require the same sort of scrutiny as any other expenditure out of the infant fund, particularly if they are taken from the infant's principal (see Lockwood, 99 Misc 2d at 973 [the court "must scrutinize closely any application for withdrawal and must be satisfied that the proposed expenditure relates to a legitimate need or liability of the infant alone"]; Billick, 176 Misc 2d at 295 [allowing withdrawal of funds to reimburse tax paid, but "under no circumstances should any principal funds of any child be utilized"]; Curry, supra [allowing withdrawal to pay overdue taxes and penalties; noting in opinion that none of funds withdrawn thereunder represented invasion of principal]).
There are significant limitations on what the Court may do where the imposition of federal tax is involved (see 26 USC 7421; Matter of Simon, 78 Misc 2d 102, 104 [Sur Ct, Erie County 1974] [New York Court forbidden by federal law from "in effect, restraining or prohibiting the Internal Revenue Service" from recovering certain taxes]). Nonetheless, the record before the Court presents issues of grave concern which at very least necessitate further inquiry. If YL has failed to submit required income tax returns, this has imperilled, and will continue to imperil, the future of CL's settlement funds. Moreover, it appears that at present only YL can act to ensure that the moneys paid to the IRS are those properly owed under the IRC, yet YL may not be taking any steps in this regard. Further, under the Court's supervisory authority over the Infant's Compromise Order, it must make certain that the Bank's actions to date have been in compliance therewith, and determine whether there are any appropriate and available steps that can be taken within its jurisdiction to protect the infant's funds.
BNY contends that CL will not suffer any financial harm from the Bank's payment of the funds in the Account, because the taxpayer "still has the opportunity to file the missing income tax returns for the years set forth in the Levy and then may request a refund, should the amount paid by the Levy be an overpayment of the income taxes due" (Hess Aff. ¶ 11). This seems to miss the central conundrum presented by the facts before the Court: the only party with an interest in the Account, and who has a right to its contents, is a 14-year-old girl, CL. A different individual, YL, has the responsibility to file the requisite tax returns, and presently it would appear that only she can take the steps required to seek a return of any tax wrongfully levied. If YL fails to act, her child may have no means to challenge the levy, and may suffer future levies and penalties, even if she is legally powerless to remedy the situation (see Bassett v Commr. of Internal Revenue, 67 F3d 29 [2d Cir 1995] [child may be penalized for parent's failure to file tax return, although child had no legal right to file return herself]).
In sum, as matters stand, a child with a significant disability received funds in the settlement of her malpractice claims, and the Court approved that settlement with the stated understanding that those moneys would be exempt from federal income tax, and fully available to CL when she became an adult. Yet a sum constituting over 14% of the infant's principal has now been taken from the Account, and further depletion of assets seems likely to occur in the years ahead.
With all this in mind, the Court orders the following:
•The Bank shall submit to the Court by December 9, 2011, with copies to the Office of the Attorney General, Yvonne Lowers and Chyna Lowers, the following: (1) all account statements for CL's managed account, along with any correspondence with YL and the IRS regarding the tax payments owed therefrom; and (2) a written submission explaining (with citation to any relevant legal authority) why its actions in this matter did not violate the Infant's Settlement Order, and addressing whether or not the Bank possesses any fiduciary obligations to CL or the Account.Upon review of all responses to this Order, the Court shall determine what additional steps, if any, are warranted.
•Effective the date on which the Bank receives a copy of this Order, and for as long as the Infant's Compromise Order remains in effect, the Bank shall promptly provide the Court with any communication which indicates that the Bank may be required to pay assets out of the Account.
•Yvonne Lowers shall advise this Court by December 9, 2011, of any actions she has taken to file the tax returns for her daughter as required by law. If she has not filed such returns, she shall notify the Court as to what steps she will take to remedy this situation. She may apply to the Court for reimbursement of funds necessary to hire a Certified Public Accountant in accordance with the Infant's Compromise Order.
•A copy of this decision shall be provided to the IRS, the Surrogate's Court of Kings County, and the New York State Supreme Court of Kings County, so that they may take any action they deem appropriate.
•All recipients of this Order are encouraged to provide the Court with any other information that may assist in safeguarding the assets belonging to CL.
It is further ORDERED that M-80452 be held in abeyance, pending further order of the Court.
November 2, 2011
Albany, New York
DAVID A. WEINSTEIN
Judge of the Court of Claims
Papers Considered:
1. Claimant's Verified Claim No. 102924, Lowers v State of New York, New York Court of Claims.
2. Proposed "Order Permitting Withdrawal of Funds," Affidavits in Support and annexed exhibits, filed by BNY, Mellon, N.A., Lowers v State of New York, New York Court of Claims.
3. Decree Appointing Guardian, In the Matter of the Guardianship of Chyna Lowers, File No. 2444/02, Surrogate Court for the County of Kings, November 15, 2002.
4. Compromise Order, Lowers v Zapantis, et al., Index No. 9490/98, Supreme Court of the State of New York, County of Kings, September 28, 2000.
5. Infant's Compromise Order, Lowers v State of New York, New York Court of Claims, filed April 16, 2003.
6. Attorney's Affirmation of Thomas J. Principe, Esq., in support of the proposed infant's compromise order, Lowers v State of New York, New York Court of Claims, January 17, 2003.
7. Affidavit of Yvonne Lowers, in support of the proposed infant's compromise order, Lowers v State of New York, New York Court of Claims, March 12, 2003.