Opinion
84-P-1978/A.
Decided October 29, 2010.
Greenfield, Stein Senior, LLP, (Gary B. Freidman, Esq., of Counsel) for Sandra Adelson, trustee.
Scheichet Davis, P.C., (David I. Scheichet, Esq., of Counsel) for William Adelson, petitioner.
The successor trustee (the trustee) of a testamentary trust moves for summary judgment dismissing the petition of the sole income beneficiary of the trust (the petitioner). The petitioner, the decedent's son, seeks the following relief: (1) removal of the trustee; (2) in the alternative, an order directing the trustee to make additional monthly income distributions of $3,000 from trust principal or surcharging her therefor; and, (3) an order directing the trust to pay all costs, expenses and reasonable attorney's fees he incurred in bringing this proceeding. The trustee is the only child of the petitioner's first marriage, and the principal of the trust is to be paid to her upon the petitioner's death.
The petitioner alleges that he is entitled to an invasion of principal under the following language of the testamentary trust:
"In addition, from time to time to pay over to [the petitioner], so much, if any, of the principal of this trust as in the sole, absolute and uncontrolled discretion of my Trustee may be necessary to supplement the income received by [the petitioner] from this trust to care for the health, welfare and comfort of [the petitioner], all on the standard of living maintained by [him] during my life and I direct my Trustee to liberally construe this provision on [his] behalf."
Sometime after the petitioner consented to the issuance of successor letters of trusteeship to his daughter in 1995, he became dissatisfied with the income that the trust was earning. As of December 31, 2000, the trust corpus was valued at $2.3 million dollars, with annual trust income of only $45,000. The trustee and the petitioner, each represented by a separate attorney, entered into a written agreement dated April 9, 2001, as amended by a side agreement dated April 17, 2001 (collectively, the 2001 agreement). This agreement provides that: (1) starting in 2001 and in each year thereafter, the petitioner was to receive "annual distributions from the Trust" equal to the greater of $60,000 or 2 ½% of the value of the trust corpus as of the immediately preceding December 31, with quarterly distributions of $15,000 on January 1, March 1, June 1 and September 1 of each year; and, (2) commencing January 1, 2002 and annually thereafter, the amount of quarterly and annual distributions were to be subject to a cost of living adjustment based on a formula agreed to by the parties which, in part, is determined by multiplying the distributions due to the petitioner by a fraction based, in part, on the Consumer Price Index.
Paragraph 12 of the 2001 agreement provides:
"[The petitioner] acknowledges that the benefits contained in this Stipulation, including the release of any claims heretofore that may have existed against [the trustee], are fair and reasonable and in lieu of any claims he may have had in the past. That by this Stipulation . . . he releases [the trustee] as Trustee of the Estate of George Adelson, of and from any and all claims he may have against her by reason of any acts or matters heretofore done or heretofore omitted to be done in her capacity as Trustee, and any acts done or matters which may hereafter be done or omitted to be done pursuant to the terms of this Stipulation. It is the intention of the parties to put to rest any past disputes in relation to the Trust as well as any future claims except such claims based upon the malfeasance [of the trustee] or her non-compliance with the provisions of this Stipulation. [The petitioner] accepts the amount of the distributions in accordance with the terms of this Stipulation in lieu of any future claims relating to the amount of the distributions from the Trust."
Although the agreement originally provided for court approval of the terms of the agreement, the side agreement executed eight days thereafter deleted this requirement. In any event, until the instant application the trust was administered in accord with the terms of the 2001 agreement and without the benefit of court approval.
The petitioner's second wife died in 2003. At present, the petitioner, who is in his late 80's, resides in Florida with his stepson and the stepson's wife. The stepson is the child of the petitioner's second wife. In 2009 the petitioner fractured his left shoulder. The petitioner alleges that his monthly expenses are now $8,603 and his income from the trust distributions and social security payments totals $6,516. Consequently, the petitioner asserts that his expenses exceed his income by approximately $25,000 a year and that he needs an additional invasion of principal of $3,000 monthly to remedy this situation.
The trustee, relying, inter alia, upon Hadden v Consolidated Edison Co. ( 45 NY2d 466), and Matter of Morrisey ( 16 Misc 2d 421), contends that the petitioner is barred from the relief he now seeks under the doctrines of either waiver or estoppel as, pursuant to paragraph 12 of the 2001 agreement, the petitioner agreed to accept the distribution provided for therein "in lieu of any future claims relating to the amount of distribution from the Trust," and, in fact, he has received all of the distributions provided for under the agreement. The trustee also contends that the petitioner failed to present sufficient proof to support his contention that she acted improperly by failing to exercise her discretion to make additional invasions of principal for his benefit. Specifically, she asserts that the petitioner commenced this proceeding because he is now under the influence of his stepson to whom he has already transferred assets of significant value. In support of this allegation, the trustee notes that the petitioner transferred the remainder interest in a home in Remsenberg, New York, having a value in excess of $1 million, to his stepson, and thereafter he transferred his interest as a tenant-in-common in realty located in Florida, valued in excess of $200,000, to his stepson, the other tenant-in-common. The trustee concludes that the decedent did not intend to benefit the petitioner's stepson over herself, the decedent's only grandchild. Assuming, arguendo, that petitioner did not waive his right to commence this proceeding, the trustee argues that when she requested documents from the petitioner to support his alleged monthly expenses of $8,603, he was only able to document monthly expenses of $4,388 and, therefore, he does not need an additional invasion of principal as the petitioner's monthly income exceeds his documented monthly expenses by more than $2,000.
The petitioner notes that the standard of behavior for a trustee is "[n]ot honestly alone, but the punctilio of an honor the most sensitive" and the trustee is obliged not to place herself in a position whereby her personal interest comes in conflict with the interest of her cestui que trust (Meinhard v Salmon, 249 NY 458, 464 [1928]). The petitioner contends that in light of the trustee-beneficiary relationship, he should be allowed to request an invasion of principal for his benefit on any one of the following grounds: (1) it is against public policy to allow a beneficiary of a testamentary trust to enter into an agreement with the trustee whereby the beneficiary forfeits his right under the trust to request an invasion of principal for his benefit; (2) the 2001 agreement is ambiguous on the issue of whether it precludes him from requesting additional invasions of principal for his benefit, and this ambiguity should be construed in favor of the beneficiary and against the trustee; and, (3) in any event, the trustee is guilty of "malfeasance" by denying his request for additional distributions and, therefore, the instant application is expressly permitted under the terms of the 2001 agreement. The petitioner also argues that although he was not able to furnish documentation for all of his monthly expenses in a limited time period, he will, nonetheless, be able to establish at a hearing that his alleged monthly expenditures are accurate.
Aside from certain statutory exceptions, for example, EPTL 7-1.6, permitting application of principal to an income beneficiary, and EPTL 7-1.19, permitting termination of uneconomical trust, upon the death of a settlor of a trust, which applies by definition to every testamentary trust, the trust becomes indestructible and neither total destruction by termination of the trust nor partial destruction by changing trust terms is permissible (see Rosner v Caplow, 90 AD2d 44, affd 60 NY2d 880; Matter of Winthrop, 168 Misc 861, 864, citing Matter of Wenworth, 230 NY 176; Matter of Eggers, 167 Misc 66). Perhaps this line of cases prohibiting a court from sanctioning a modification of the terms of a testamentary trust explains why the petitioner and the trustee decided in the April 17, 2001 side agreement to delete the April 9, 2001 provision requiring court approval of their agreement.
In appropriate circumstances, based upon waiver, equitable estoppel or ratification, the court may, in effect, enforce a modification of the terms of a trust notwithstanding that the court could not have approved such a modification at the time that the trustee and the beneficiary agreed to change the terms of the trust. Here, however, the court holds that the 2001 agreement cannot be the basis for relieving the trustee of her fiduciary responsibility to exercise her discretion in determining whether trust principal should be invaded for the petitioner's benefit if needed "to care for the health, welfare and comfort" of the petitioner. The trustee may not permit her remainder interest in the trust to influence her decision as to whether the petitioner needs additional funds from the trust (see Meinhard v Salmon, 249 NY at 464). The court has no reason to believe, for example, that the trustee would not invade principal of the trust were it necessary to pay for an operation to save her father's life, and finds it untenable to allow the 2001 agreement to serve as a basis for denying a request for an invasion of principal for such an emergency. Accordingly, the court holds that the provision in the 2001 agreement that the petitioner "accepts the amount of the distributions in accordance with the terms of this Stipulation in lieu of any future claims relating to the amount of the distributions from the Trust" must, as a matter of law, be interpreted to refer to any claim for a larger distribution based upon allegations that the principal should generate more income, and not to relieve the trustee of her duty to exercise her discretion as to whether principal should be invaded for the petitioner's benefit.
The court also holds that the trustee cannot be relieved of her fiduciary responsibility to invade principal for the petitioner's benefit in accord with the standard provided in the trust based upon waiver, equitable estoppel or ratification. A waiver arises where a party by agreement or conduct intentionally relinquishes a known right (Hadden v Consolidated Edison Co., 45 NY2d at 469). Thus, in Matter of Morrissey ( 16 Misc 2d at 421), the court held that the beneficiary's letter to the trustee, stating that she did not want trust principal invaded to pay income taxes that arose as a result of distributions from the trust, constituted a waiver of her right to such distributions under the trust only until such time as she changed her mind. Similarly, here, although the 2001 agreement might constitute a waiver of additional distributions for the period that the petitioner accepted those distributions, it does not constitute a knowing relinquishment of the petitioner's future right to request that the trustee exercise her discretion to determine whether principal should be invaded for his benefit.
In order for the trustee to prevail on the theory of equitable estoppel she must establish that the petitioner, by his "commissions or omissions," induced the trustee to act in a certain way so that he "now cannot be heard to complain of the results of that action" (Matter of Mendleson, 46 Misc 2d 960, 976). Here, the quid quo pro that the trustee received in exchange for paying the petitioner a greater sum than the interest actually earned by the trust principal was to ensure that the petitioner would not commence a proceeding requesting that the trust principal be converted to assets that were more likely to produce greater income, but less likely to appreciate. Accordingly, it is not inequitable to request that the trustee now fulfill her duties as trustee to exercise her discretion as to whether or not the principal should be invaded for the petitioner's benefit, using the standard set forth in the trust.
Under the facts herein, ratification is also not available to the trustee as a basis for not exercising her fiduciary responsibility with respect to a request for an invasion of principal for the petitioner's benefit. A trustee who relies upon ratification in an equitable proceeding must prove that the beneficiary made the ratification "with a full knowledge of all the material particulars and circumstances," including "knowledge of a defect in the act to be confirmed, and of the right to reject or ratify it" (Rosner v Caplow, 90 AD2d at 49, quoting Matter of Ryan, 291 NY 376, 417 [1943]), and "that the beneficiary unequivocally declares that he does not regard the act in question as a breach of trust but rather elects to treat it as a lawful transaction under the trust" (Matter of Levy, 69 AD3d 630, 632, lv denied 14 NY3d 711, quoting Bogert, Law of Trusts and Trustees § 942 [2d ed]). Here, there was no past act of the trustee with regard to her discretionary power to invade principal that the petitioner could have ratified.
The sole remaining issue is whether a trial is needed to determine if the trustee's denial of the petitioner's request for an invasion of principal constitutes an abuse of her "sole, absolute and uncontrolled" discretion. The trustee's denial of this request would constitute a good faith exercise of her discretion if the facts support her contention that the purpose of the request is not for the petitioner's own needs and, instead, is to enable the petitioner to gift more assets to his stepson who is not related to the settlor of the trust. It is noted, however, that all of a person's expenses cannot always be supported by documentary evidence. Moreover, although a trustee's "absolute" discretion is indeed broad, a trustee must reach a determination "in good faith" and "in accordance with the standard which the trust imposes;" therefore, if the trustee's decision was arbitrary or made in bad faith, the court will not honor the trustee's purported exercise of discretion (see Matter of Harmon, 73 AD3d 1059, 1061). Accordingly, on the papers presented herein, the court cannot ignore the possibility that the petitioner has a need for additional funds for his own care, health and welfare and that the trustee's denial of the application was based on either the 2001 agreement or her dislike for the petitioner's stepson. There is no need for the court to now determine or discuss whether the petitioner is entitled to removal of the trustee or to be reimbursed for his costs and attorney's fees in this proceeding, as it appears that the petitioner would have no grounds for such relief if it is determined after trial that the trustee appropriately exercised her "absolute" discretion in denying the requested invasion of principal.
Accordingly, the motion for summary judgment is denied because the petitioner is entitled to his day in court on the issue of whether, notwithstanding the substantial gifts that the petitioner has already made to his stepson and the petitioner's retention of a life estate in a valuable parcel of realty, his expenses for his "health, welfare and comfort" based upon the standard of living maintained by him during the decedent's life exceeds his present income by such an amount that it would be an abuse of the trustee's "absolute" discretion to deny his application for an invasion of principal. The order to be settled hereon shall also contain a provision scheduling a status conference for an agreed upon regular calendar date of the court.
Proceed accordingly.