IN RE: Samuel P. Pejo (2022)

The Last Will and Testament of Samuel P. Pejo, Sr. dated September 22, 2017 (Will) was admitted to probate by this Court on November 18, 2019. Letters testamentary were issued on that date to Mayumi Pejo Spence, the named Executor and one of Dr. Pejo's children. Ms. Spence was also granted letters testamentary trusteeship as trustee of trusts for the benefit of Dr. Pejo's minor grandchildren, M.S. and R.R., the children of Dr. Pejo's predeceased son.

The Executor has now petitioned for judicial settlement of her account. The Court appointed Richard Matties Esq., as Guardian ad Litem for M.S. and R.R, whose trusts are collectively one-third residuary beneficiaries of the estate. Dr Pejo's surviving children, the Executor and Dr. Pejo's son Samuel S. Pejo, are also each one-third residuary beneficiaries. A Waiver and Consent to the accounting from Samuel was filed with the petition to account.

Dr. Pejo's distributees were his two adult children and the two minor children of his predeceased son. His Will makes a specific gift of a watch to his grandson, Jameson Spence, the Executor's son. This asset is not reflected in the accounting. The Will specifically devises a membership interest in an LLC to the Executor, which is reflected in the accounting. Dr. Pejo's grandchildren, Jameson Spence and Madison Spence, the Executor's children, were specifically devised Dr. Pejo's interest in real property located at 106 Moore Avenue in the City of Binghamton, New York, with the caveat that the distribution of the property be deferred until both Jameson and Madison are 18 years old, which both now are. The Moore Avenue property was an asset of the Estate and its conveyance to Jameson and Madison is reflected in the accounting.

Article sixth of the Will specifically bequeaths decedent's M & T Bank 401K fund to the Samuel P. Pejo MD Foundation. This fund and its distribution to the Foundation are not included in the accounting, so either the fund did not exist at the decedent's death, or it passed outside of the will.

The Will provides that the balance of the estate, including decedent's personal property, his Meryl Lynch 401K and UHS pension, as well as the residuary of his estate, pass as they would under intestacy: one-third to each of his surviving adult children and one-third to his minor grandchildren whose father predeceased Dr. Pejo.

At the return date on the citation issued on the petition to account, the Guardian ad Litem questioned the Executor's payment in full of the outstanding mortgage on the Moore Avenue property from the assets of the estate, rather than transferring the property to the specific devisees subject to the mortgage. The Guardian ad Litem filed a written report supporting this position dated June 29, 2022. Executor's counsel submitted Jameson Spence's and her own affidavits and a memorandum of law in support of the decision to pay the mortgage from estate assets on June 30, 2022. The Guardian ad Litem filed a reply affirmation July 11, 2022. Petitioner's counsel filed a further affirmation and memorandum of law July 15, 2022. The matter is before the Court on submission.

The Guardian ad Litem's position is that the general rule set forth in Estates, Powers and Trusts Law § 3-3.6 (a) applies to preclude payment by the Executor of the mortgage balance on the Moore Avenue property from the estate assets, requiring that the property be transferred to the devisees subject to the mortgage. EPTL 3-3.6 (a) states as follows:

Where any property, subject, at the time of decedent's death, to any lien, security interest or other charge, including a lien for unpaid purchase money, is specifically disposed of by will or passes to a distributee, the personal representative is not responsible for the satisfaction of such encumbrance out of the property of the decedent's estate, except as provided in SCPA 1811, unless, in the case of a will, the testator has expressly or by necessary implication indicated otherwise. A general provision in the will for the payment of debts is not such an indication. (Emphasis added).

Neither party has argued that the exceptions of Surrogate's Court Procedure Act § 1811 are relevant to the inquiry in this case.

The statutory presumption that specifically devised real estate is subject to an existing mortgage is established and well settled law. Current EPTL 3-3.6 (a) derives from statutes enacted more than 100 years ago. It was initially contained in Real Property Law (RPL) § 250, which provided that variance from the rule required "express direction" in the will. Real Property Law § 250; In re Loughman's Will, 45 NYS2d 678 (Sur Ct, Westchester County 1943). Former Decedent's Estate Law (DEL) Section 20, adopted in 1941, applied the same rule with respect to a bequest of personal property subject to a lien, but added the alternative language "or necessary implication" to a will provision reversing the presumption. Decedent's Estate Law § 20. The necessary implication language was retained when DEL § 20 and RPL § 250 evolved to EPTL 3-3.6 in 1967. The express contrary direction standard of Loughman with respect to a devise of mortgaged real estate has not been abrogated by subsequent case law.

The application of EPTL 3-3.6 (a) to this specific gift of real estate is clear. The devise is subject to the mortgage in place at the time of the decedent's death, unless in his will, Dr. Pejo "expressly or by necessary implication indicated otherwise." The Will does not expressly provide for payment of the mortgage. The issue is whether the language of the Will creates a necessary implication that the mortgage be paid. A "necessary implication" is one "so strong in its probability that anything to the contrary would be unreasonable." Black's Law Dictionary (7th ed 1999). On the record before it, the Court finds that there is no such necessary implication.

It is well established that a testator's intent "must be gleaned not from a single word or phrase but from a sympathetic reading of the will as an entirety and in view of all the facts and circumstances under which the provisions of the will were framed." In re Goldstein's Will, 46 AD2d 449, 450 (4th Dept 1975) (quoting Matter of Fabbri, 2 NY2d 236 [1957]). The testator's intent "is best found in the clear and unambiguous language of the instrument itself." Goldstein, supra at 450 (citing In re Keyserling, 306 NY 442, 445 [1954]). In both Goldstein and Fabbri, the Court found lack of clarity in the language of the will, then applied rules of construction. In Bisconti, there was no ambiguity found, so the Court did not need to resort to construction rules or extrinsic evidence. Thus, a finding of ambiguity is a threshold issue in a construction case.

None of the cases cited by the Executor deal directly with a testamentary devise of real estate subject to a mortgage. Some cases address whether particular property was devised. Goldstein, supra; In re Malasky, 275 AD2d 500 (3d Dept 2000). Phillips addresses the breadth of description of devised real estate. In re Estate of Phillips, 101 AD3d 1706 (3d Dept 2012). McCabe centers on how certain accounts would pass. In re Estate of McCabe, 269 AD2d 727 (3d Dept 2000). Bordewick's Estate is about the identification of the residuary beneficiaries. (Matter of Bordewick's Estate, 64 AD3d 183 (3rd Dept 1978). In each of these cases, the Court found ambiguity, then sought to determine intent.

In this case, governed by EPTL 3-3.6, the statute requires an express or unambiguously implied direction in a will to avoid the general rule that devised property is conveyed subject to an existing mortgage. Loughman's Will, supra (no express contrary provision in will, devised property passed subject to mortgage); compare In re Beach's Estate, 36 NYS2d 982, 984 (Sur Ct, New York County 1942) (direction in will that executor pay taxes and other charges so that the beneficiaries receive "the gross amount of the bequests herein" found to be sufficient to allow payment of mortgages on devised property, under prior statute).

The language of this Will makes a specific devise of decedent's real estate to two of his grandchildren and contemplates that either or both may be minors at the time the devise is effective. The testator directs that the property be held in the estate and further directs that the Estate pay "any expenses associated with the real property, including utilities, maintenance, taxes and insurance until the real property is distributed." The expenses listed for payment are the typical carrying costs, other than a mortgage, associated with ownership of real estate. There is no mention of the mortgage. The Court finds this language is clear, unambiguous, and insufficient to express an exception to be the general rule of EPTL 3-3.6.

The Executor submits substantial extrinsic evidence, implicitly assuming a lack of clarity in the Will. Though the Court has found no lack of clarity and thus no need to resort to extrinsic evidence, even if such evidence were considered, it does not necessarily imply a direction for payment of the mortgage from the Estate. Notably, the affirmations from counsel who drafted the probated will confirm discussion with the testator about the devised real estate but do not state any express direction by the testator that his Will provide for the mortgage be paid by his estate. A "plain reading" of the Will, in the opinion of counsel, is not an express direction by the testator.

The language of the Will is to the contrary, specifying only expenses other than the mortgage to be paid. That a general provision in a will for payment of debts and expenses does not serve to override the rule of EPTL 3-3.6 cannot be argued. Carpenter v Carpenter, 131 NY 101 (1892); Ring v Wooly, 155 AD 817 (3d Dept 1913).

Clearly, Dr. Pejo wanted to provide a benefit to the Spence grandchildren. Such a benefit was bestowed by the specific devise of his home. That does not necessarily lead to the conclusion argued by the Executor that Dr Pejo wanted his grandchildren absolved of the mortgage balance existing at the time of his death. Dr. Pejo may have chosen, while living, to support Jameson and Madison Spence's college living. That does not impact the clarity of his will. Upon his death, a portion of his substantial probate and non-probate estate flowed to his daughter, the mother of the Spence grandchildren, who could make the decision to use those, or other, resources to similarly support her children's education endeavors.

The payment or non-payment of the mortgage from the Estate does not remove the benefit to the Spence grandchildren; it merely impacts the magnitude of that benefit. That is a subjective issue, where the Court must be even more cautious not to interfere with the clear language of the decedent's will. See, In re Estate of Hennel, 29 NY3d 487, 496 (2017) (decedent's failure to fulfill oral promise to pay mortgage balance on conveyed property, allegedly depriving grandsons of the full equity in the property, not unconscionable; grandsons could still realize the remaining equity in the property.)

The Executor argues, without supporting, that applying the general rule of EPTL 3-3.6 would basically compel the sale of this property, depriving the Spence grandchildren of any benefit. The property could have been transferred subject to the mortgage. Federal law generally precludes a mortgage being called when a property is transferred to a relative as the result of the borrower's death. 12 USC 1701j-3(d), from Garn-St. Germain Depository Institutions Act of 1982, 97 P.L. 320, 96 Stat. 1469, 97 P.L. 320, 96 Stat. 1469.

One of the pieces of extrinsic evidence offered by the Executor is a prior will of Dr. Pejo. In that will, this property was left to Dr. Pejo's "then girlfriend," with a specific provision that she inherits it subject to the then existing mortgage. In the probated Will, that article was changed to this specific devise to the Spence grandchildren, with the reference to the mortgage removed, and replaced with the language regarding payment of other specified caring costs pending the distribution upon the Spence grandchildren both reaching age 18. As already noted, the language in the probated Will is clear, so there is no need to resort to extrinsic evidence. Even if the two wills are compared, if the earlier will makes clear that Dr. Pejo understood the ability to expressly address the mortgage in a specific devise of real estate, he chose not to do so in his later Will, leaving the statutory rule in place.

Another issue relevant to this analysis is the fiduciary obligation of the Executor to all the beneficiaries of the Estate, and the potential conflict of interest arising for the Executor due to the identity of the devisees of the real property, who are her children. The Executor's decision to pay the mortgage secured by the specifically devised real estate from the estate is an economic disadvantage to the residuary beneficiaries, including her minor niece and nephew. Favoring one beneficiary over others creates a potential conflict. Renz v Beeman, 589 F2d 735, 746 (2d Cir 1978), citing Schwartz v Marien, 37 NY2d 487, 491 (1975). This decision by the Executor is at variance with the general statutory rule relating to devised real estate. The Executor can agree to the reduction of her own residuary share, as can her adult brother, assuming he is fully apprised of the facts and the law. The Executor's minor niece and nephew cannot consent, hence the appointment of their Guardian ad Litem.

The Executor's decision to interpret the Will in a way she acknowledges is contrary to the statutory rule, requiring the support of extrinsic evidence, is a violation of her duty of undivided loyalty. As famously stated by Chief Judge Cardozo, "Uncompromising rigidity has been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty by the 'disintegrating erosion' of particular exceptions." Meinhard v Salmon, 249 NY 458, 464 (1928) (internal citation omitted). Breach of this duty does not require either bad faith or personal gain to the fiduciary, neither of which were raised by the Guardian ad Litem or is found by the Court in this case. Matter of VanDeusen, 37 AD2d 131 (3d Dept 1971).

The identification of a breach of the duty of undivided loyalty due to the Executor's potential conflict could end the inquiry, precluding further court review of the transaction. Renz, supra; In re Parisi, 34 Misc 3d 1204(A) (Sur Ct, Queens County 2011), citing In re Fulton, 253 AD 494 (3d Dept 1938) ("no further inquiry" doctrine applicable to a transaction between fiduciary and spouse). Since the Guardian ad Litem did not raise this issue in his report, the Court has addressed the basis identified in his report first and uses the fiduciary duty issue as supplemental support for the determination made.

The payment of the mortgage against the devised real estate from these funds of the estate is disallowed and the Guardian ad Litem's related objection is sustained. It is apparent from the accounting that several mortgage payments were made between the time the decedent died and the mortgage was paid in full. It is not evident whether those payments included an escrow amount for taxes and insurance. The taxes and insurances were properly payable from the estate, until the distribution of the property to the Spence grandchildren.

The Executor is directed to provide an affidavit to the Court with supplemental information so that the amount paid on taxes and insurance can be separated from the amount paid on the mortgage. The Court will use this information to recalculate the final distributions. As noted above, the Executor and her brother are free to waive the increase this recalculation will generate in their respective residuary shares. That information should be communicated to the Court, in form suitable for filing, so that the filed distributions can be computed.

This Decision constitutes the Order of the Court.

November 4, 2022

Hon. David H. Guy

Surrogate

David H. Guy, S.