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IN RE: the Accounting of George Terranova, MD, Co-Trustee of the Trust created pursuant to Article Fifth of the Last Will and Testament of Vincent Terranova, Deceased.
Objectant, Carl Terranova (Carl) moves for partial summary judgment and to "sustain" his amended objections to petitioner's accounting numbered 14, 16-24, 26-31, 33-35, 37, 39-40, 45-50, 53-54, and 56-74. The petitioner, George Terranova (George) has cross-moved for partial summary judgment dismissing objections 17-22, 28-30, 32-34, 35, and 37.
The decedent died on July 16, 1992 at the age of 79 having amassed a substantial fortune in real estate during his lifetime. According to the petitioner's amended account, which covers the period from December 31, 2010 to December 31, 2016, the gross assets of the estate were valued at over $54 million. The decedent was survived by his second wife, Vera, and his children from a prior marriage, George and Carl. Vera did not file objections to this account.
The decedent's Will created a testamentary trust for Vera's benefit. The trust provides for the payment of income to Vera to be made at least semi-annually and discretionary payments of principal. Upon Vera's death,1 the balance of the trust is to be distributed equally between George and Carl, or, in the event of their passing, to their natural born children.
The Will nominated decedent's attorney, Robert Becht (Becht), his "friend and advisor," Edward Templeton Borg (Borg), and his children, Carl and George to act as Co-Trustees. Letters of co-trusteeship were issued by the Court on August 24, 1992. Unfortunately, the testator's decision to appoint multiple co-trustees would ultimately prove counter-productive to his express wishes under the Will "to minimize the expenses of the administration of my estate as much as possible."
Approximately 13 years elapsed before litigation erupted, commencing with Vera's proceeding to compel the co-trustees to provide an accounting (1992-3511/A). Initially, all of the co-trustees appeared to be united, utilizing the same attorneys and accountants to undertake the task, and filing a single accounting and petition for judicial settlement thereof reflecting their activities as co-trustees.
That accounting was met with objections by Vera. The ensuing litigation, mired with discovery disputes, motion practice, and appeals, coupled with family friction, served to slowly and steadily erode the relationship of unity between the co-trustees, with Carl and George eventually retaining separate legal counsel. Ultimately, an 11 million dollar surcharge was imposed against the co-trustees in Vera's favor, and Carl's letters were suspended. A settlement agreement entered into between the parties on June 17, 2011, ostensibly to finally resolve the issues of payments to Vera and the management and/or sale of real property has incongruously served as the predicate for a bevy of new feuds.
Carl, still stripped of his status as co-trustee, now seeks partial summary judgment in his favor with respect to objections he has filed to George's accounting in his capacity as a 50% residuary beneficiary of the Trust.
The 1031 Exchange Objections (1622, 28-30)
The most prominent controversy circles back to provisions concerning a potential 1031 Exchange set forth in the settlement agreement entered into between the parties. The facts surrounding this issue, as set forth below, implicate objections 16-22,2 and 28-30.3
It is readily observable that Article 22 of the Agreement includes various safeguards that appear to be in place solely for the benefit of decedent's spouse, Vera, the income beneficiary of the Trust and the party to whom over 11 million dollars of surcharges were owed. The Agreement obligates the trustees to obtain written consent from Vera prior to consummating a "Liquidity Event" defined as the "sale, exchange, conveyance or other transfer or disposition" of Trust assets.
At the time of the agreement, the Trust, and a corporation owned by the Trust known as VGC Realty Corp. (VGC), owned certain real property located in Manhattan (the Chrystie properties). Given the obligation to inform Vera of any Liquidity Events, section 22.02 of the Agreement specifically sets forth Vera's understanding that the trustees "intended" to effectuate a "1031 exchange" of the Chrystie properties, and had entered into a contract for their sale.
Section 1031 of the United States Internal Revenue Code provides that "no gain or loss shall be recognized on the exchange of real property held for productive use in a trade or business or for investment if such real property is exchanged solely for real property of like kind which is to be held either for productive use in a trade or business or for investment" (see 26 USC 1031 [a]).
The statute addresses the liquidity concerns of taxpayers who are unable to pay a gains tax because they were not actually cashing in or closing out their investment in a trade or business but transferring same to a like property (see Starker v United States, 602 F.2d 1341 [9th Circuit 1979]).
Here, the Agreement provided for Vera's express acknowledgment that "the Trustees [Becht, Borg, and George] intend to effectuate the Section 1031 exchange." The subsequent language of the paragraph contained various provisions all designed to keep Vera informed of the trustee's progress in this regard, including notifying Vera of potential like-kind properties, and promptly advising Vera when the 1031 exchange was consummated. Notably, none of the obligations set forth in this paragraph expressly applied to the objectant.
The Chrystie properties were sold for $8,350,000.00 with net proceeds of $7,273,569.81. Vera, who was already due cash payments from the Trust, agreed to accept $2,270,000.00 of the proceeds in satisfaction of payment in full of a 1.5 million promissory note; repayment of a mortgage recording taxes of over $300,000.00; along with interest and prepayment fees.
However, the 1031 exchange transaction was never consummated. With Vera's consent, the trustees abandoned same. The sale of the Chrystie Street Properties was thus treated as a Liquidity Event under the Agreement and the proceeds were applied to satisfy the various payments that were due Vera; legal and accounting fees; taxes; and to make capital improvements on real property located at Canal Street.
Carl did not agree to the abandonment of the 1031 exchange and contends that the trustees breached the agreement, and as a result thereof, the Trust and its beneficiaries suffered losses of $8,000,000.00 in a replacement property, $2,000,000 in lost tax benefits, and the loss of appreciation and income of the replacement property. Objectant seeks an award of summary judgment in his favor on this issue.
Petitioner opposes Carl's motion and cross-moves for summary dismissal of objections 17-22 and 28-30, claiming they are premised upon a misreading of the Agreement and are predicated upon theories of damages that are not recoverable under New York Law. Further, petitioner claims that the objections grounded on the basis of a breach of fiduciary duty must be dismissed as duplicative of the breach of contract claims. Regardless, petitioner maintains that the trustees' conduct was reasonable and prudent under the circumstances.
Summary judgment may be granted only where it is clear that no triable issue of material fact exists (see Alvarez v Prospect Hosp., 68 NY2d 320; Phillips v Joseph Kantor & Co., 31 NY2d 307). To defeat a motion for summary judgment, the opponent must assemble and lay bare affirmative proof to demonstrate the existence of a genuine triable issue of fact (see Stainless, Inc. v Employers Fire Ins. Co., 69 AD2d 27, aff'd 49 NY2d 924).
Allegations must be specific and detailed, substantiated by evidence in the record; mere conclusory assertions will not suffice (see Iselin & Co. v Mann Judd Landau, 71 NY2d 420; Matter of Newman, 14 AD3d 567). If there is any doubt as to the existence of a triable issue of fact, then the motion must be denied (see Robinson v Strong Memorial Hosp., 98 AD2d 976).
"In a proceeding to settle a fiduciary's account, 'the party submitting the account has the burden of proving that he or she has fully accounted for all the assets of the estate, and this evidentiary burden does not change in the event the account is contested. While the party submitting objections bears the burden of coming forward with evidence to establish that the account is inaccurate or incomplete, upon satisfaction of that showing the accounting party must prove, by a fair preponderance of the evidence, that his or her account is accurate and complete' " (Matter of Doman, 110 AD3d 1073, 1074, quoting Matter of Schnare, 191 AD2d 859).
Breach of the Settlement Agreement
With respect to the objections grounded on Carl's claim that the trustees breached the terms of the Settlement Agreement, the operative language of the Agreement is as follows:
Section 22.01 Notice and Consent: Application of Net Cash Proceeds from Liquidity Event. Prior to the consummation of any Liquidity Event the Trust shall provide Vera Terranova at least ten (10) days' written notice thereof (which notice shall identify such Liquidity Event, the proposed use of proceeds therefrom, and the proposed date of consummation) together with documentation relating thereto, including, without limitation, term sheet, commitment letter, and acquisition documentation. The Trust shall not consummate a Liquidity Event for consideration other than cash payable upon the consummation thereof without the prior written consent of Vera Terranova . . .
Section 22.02 Section 1031 Exchange. Notwithstanding the foregoing provisions of this Article XXII, Vera Terranova acknowledges that the Trustees intend to effectuate the Section 1031 Exchange with respect to the Chrystie Street Properties. The Trust and V.G.C. have entered into the Chrystie Street Sale Contract, a true and complete copy of which has been delivered to counsel for Vera Terranova. The Trustees shall use all commercially reasonable efforts to identify potential like-kind property in replacement of the Chrystie Street Properties ("the QRP" Property) not later than 45 days after the consummation of the transactions contemplated by the Chrystie Street Sale Contract and to provide Vera Terranova with a copy of the notice of the identification of such potential like-kind property required to be provided under Section 1031 of the Internal Revenue Code and the regulations promulgated thereunder, and to complete the purchase of like-kind property not later than 180 days after the consummation of the transactions contemplated by the Chrystie Street Sale Contract. The Trustees will advise Vera Terranova promptly following the consummation of the purchase of such like-kind property (emphasis added).
The above provisions plainly have been crafted exclusively to satisfy Vera as the income beneficiary of the Trust and the party to whom a large debt was owed, largely as a result of Carl's actions. Vera did not file objections to the within accounting. The lone objectant is Carl.
Objectant argues that the provisions of the agreement were breached inasmuch as the trustees failed to use "commercially reasonable" efforts to effectuate the 1031 exchange. Further, he claims the trustees had no intention to go through with the exchange, and used it solely to bait him into signing the Agreement.
Summary judgement as to liability on a breach of contract claim requires the movant to demonstrate the existence of a valid contract, the movant's own performance under the contract, and a breach by the other party of its obligations under the contract (see Samson Lift Tech., LLC v Jerr-Dan Corp, 2014 NY Misc Lexis 5864 [Sup Court New York County 2014]).
A threshold issue in assessing Carl's breach of contract claims is whether any obligations were owed to Carl when the Settlement Agreement was entered into to ensure that the income beneficiary, Vera, received money to reduce the $11 million dollar debt she was owed in a manner that would not totally deplete the trust of its assets.
While Carl's complaints concern the precise method that should have been used to perform the 1031 exchange, the trustees were faced with a tactical decision concerning management of the real estate coupled with an impossibility to pay obligations owed to the income beneficiary and a loss of principal through foreclosure or enforcement actions by Vera.
The proof shows that the trustees, with the consent of the income beneficiary, acted in accordance with the Settlement Agreement by choosing an alternative to the exchange which was expressly permitted.
First of all, the Agreement contemplated the possibility that, though intended, the 1031 exchange may very well not take place. For instance, the so-called Standstill Period described in the agreement (discussed infra) was measured, in part, by such a contingency:
(a) (I) the closing of the sale of the Chrystie Street Properties; and (ii)(A) the closing on the purchase of the QRP Property in the Section 1031 Exchange pursuant to Section 22.02; or (B) in the event that the Section 1031 Exchange pursuant to Section 22.02 is not effectuated, the application of the net cash proceeds of the sale of the Chrystie Street Properties pursuant to Section 22.01.
Secondly, Carl's argument that the trustees failed to undertake "commercially reasonable efforts" is ridiculous. The settlement instrument, a virtual manifesto, does not define this term, although it provides purported clarity for nearly 100 other terms.
In considering the meaning to be attributed to the term "commercially reasonable" the Court finds the Uniform Commercial Code's ("UCC") explanation to be instructive. By way of example, the UCC provides that while a secured creditor is required to dispose of its collateral in a commercially reasonable method, the fact that a better price could have been obtained by a sale at a different time or in a different method from that selected by the secured party is not of itself sufficient to establish that the sale was not made in a commercially reasonable manner (NY CLS UCC § 9-627[a]). It also provides that an action is commercially reasonable if it is performed in conformity with reasonable commercial practices among dealers in the subject type of property (NY CLS UCC § 9-627[b])
With this in mind, and giving due consideration to the plain meaning of the words employed, "commercially reasonable efforts" did not require the trustees to act in a manner at odds with the financial interests of the Trust and to complete the exchange to the exclusion of all other alternatives. Nor did it require herculean efforts to secure an alternative property.
In sum, the trustees' decision to avail themselves of the alternative set forth above so as to treat the sale as a liquidity event and pay trust debts was not only commercially reasonable under these circumstances, but was specifically provided for in the agreement.
Nor can it be gleaned from the language of the agreement that a claim for damages could be made by the remainder beneficiary as a consequence of choosing this option (see Goodstein Const. Corp v NY, 80 NY2d 366 ). Carl's alternate view of reality in this regard is akin to the Mad Hatter in Alice in Wonderland. Having contributed to the amassing of an 11 million dollar liability, Carl contends that somehow, he is the real victim. The Court declines the opportunity to follow him down this rabbit hole of irrational thought.
Accordingly, the branch of the motion seeking summary judgment in favor of objectant is denied, and the corresponding branch of the cross-motion seeking dismissal of the objections grounded in breach of the agreement (Objections 28-30) is granted.
Turning to Carl's separate claims that the trustees breached their fiduciary duties, the objectant must demonstrate the existence of a fiduciary relationship, misconduct, and damages attributable to the misconduct (see Kurtzman v Bergstol, 40 AD3d 588, 590 [2d Dept 2007]).
Unquestionably, a fiduciary duty exists between the trustees and the trust beneficiaries (see, e.g., EBC I, Inc. v Goldman Sachs & Co., 5 NY3d 11, 19 ; Matter of Heller, 23 AD3d 61 [2d Dept 2005]).
Duties imposed by virtue of the fiduciary relationship are independent, and can subject the trustees to liability irrespective of any contractual obligations (see EBC I, Inc. v Goldman Sachs & Co., 5 NY3d 11, 20 ; Bullmore v Ernst & Young Cayman Is., 45 AD3d 461 [1st Dept 2007]). Here, the duty owed to Carl as a remainder beneficiary was to reasonably preserve the principal of the trust.
The alleged misconduct complained of again arises out of the trustees' abandonment of the 1031 Exchange—an act authorized by the Settlement Agreement. However, the trustees' decision to pay the looming debts owed to the income beneficiary, thereby avoiding a total loss of principal through foreclosure and enforcement actions, is aligned with Carl's interests as a remainder beneficiary and does not constitute a breach of the fiduciary duty owed to him (EPTL 11-2.3[b]).
Objectant's bald assertions of bad faith on the part of the trustees and claims that he was baited into signing the agreement are self-serving and, again, at odds with reality given the fact that the agreement was painstakingly negotiated and entered into by sophisticated parties who were all represented by counsel. Moreover, the whole purpose of the agreement was to provide a mechanism by which the surcharges occasioned by objectant's misconduct could be paid, a fact Carl conveniently overlooks.
Accordingly, the branch of the motion seeking summary judgment in favor of objectant is denied, and the corresponding branch of the cross-motion seeking dismissal of the objections grounded in breach of fiduciary duty (Objections 17-22) is granted.
The "Amendment" to the Settlement Agreement
The objectant separately moves for summary judgment on his claims that the trustees impermissibly "amended" the agreement without obtaining his consent in violation of the following provision:
Section 30.06 Amendment. No amendment, modification, revision, supplement or termination of this Agreement shall be effective unless such amendment, modification, revision, supplement or termination is in writing and has been executed by each of the Parties to this Agreement.
Objectant points to an instrument executed by the trustees and Vera dated December 15, 2011, characterizing it is an "amendment" or "alleged amendment" that purports to impermissibly re-write the terms of the agreement and as such, amounts to a breach of the agreement and is further undisputed proof of bad faith and misconduct on the part of the trustees.
Upon review, the document is plainly not an amendment to the agreement, but rather, is a "Waiver and Consent" that seeks only Vera's agreement with respect to several actions to be undertaken by the trustees. The Waiver contains the following salient language:
C. In light of the consummation of the Canal Street Financing, the Trustees . . . have requested that Vera Terranova waive any breach, violation or default arising out of any failure to comply with certain provisions of the Settlement Agreement, including, but not limited to, provisions regarding the application of the Canal Street Financing Proceeds and the Chrystie Street Proceeds, and to consent to the taking of certain actions as provided herein.
Section 1.1. Waiver with Respect to Disbursement of Chrystie Street Proceeds: Any breach, violation or default arising out of the failure by the Trust or the Trustees to comply with either or both Section 22.01 and Section 22.02 of the Settlement Agreement is hereby irrevocably waived to permit the Trust to apply the Chrystie Street Proceeds, following the release thereof by the QI [Qualified Intermediary], solely for the purposes set forth on Schedule 1.1. attached hereto.
. . .
Section 2.4 Consent Regarding Section 1031 Exchange. Vera Terranova acknowledges that the Trustees do not intend to consummate a Section 1031 Exchange with respect to the Chrystie Street Properties . . .
Notwithstanding objectant's claims to the contrary, obtaining such a waiver from Vera, the party entitled to the benefit of the provisions, is not unlawful, and in fact, was expressly provided for in Section 30.05 of the instrument:
Waiver: Any term or provision of this Agreement may be waived at any time by the party entitled to the benefit of such term or provision only by a written instrument duly executed by such Party. The failure by any Party to seek redress for any violation of, or to insist upon strict performance of, any term or provision of this Agreement shall not be deemed to be a waiver by such Party of its right to enforce such term or provision.
Based on the plain and clear language of the agreement, the execution by Vera of a Waiver and Consent does not constitute an impermissible re-write, amendment, or breach of the agreement. The agreement from the outset obligated the trustees to obtain Vera's consent with respect to certain actions. Objectant's consent was not required.
Accordingly, the branch of the motion which seeks a determination that the trustees breached the terms of the Agreement by obtaining the Waiver and Consent from Vera is denied, as are objectant's claims that obtaining the Waiver from Vera was an act of bad faith rising to a breach of the fiduciary duty.
The cross-motion seeking dismissal of objection 30 is granted.
The Court turns now to the branch of the motion which seeks a determination that objectant is due $181,967.21 reflecting three years of standstill payments 4 owed pursuant to the agreement. The relevant language of the Agreement is as follows:
Section 9.08 Standstill Period Payments to Carl Terranova: In lieu of commission payments to the Suspended Trustee [Carl] during the period commencing the Closing Date to the Standstill Period Termination Date the Trust shall pay to Carl Terranova an annual payment of Seventy Five Thousand Dollars ($75,000.00) (the "Carl Terranova Standstill Period Payments"). The Carl Terranova Standstill payments shall be pro rated for any partial year based the number of days elapsed in such year, and shall be paid in quarterly equal installments in arrears solely from Annual Cash Flow as provided in Article VII without interest. One-Third (1/3) of the Carl Terranova Standstill Period Payments shall be charged against Trust Income. The remaining two-thirds (2/3) ofeach Carl Terranova Standstill Period Payments shall be charged against Trust Principal.
The parties actually agree that the Closing Date referenced above is the date the agreement was entered into, to wit: June 17, 2011, but differ, of course, on the Standstill Period Termination Date.
Objectant argues that the Standstill Termination Date is three years from the Closing Date, or June 17, 2014, whereas petitioner claims that the termination date is January 20, 2012. Section 9.07 of the Agreement provides in pertinent part as follows:
During the period commencing on the date hereof, and ending on the earlier to occur of (x) the third anniversary of the Closing Date and (y) the occurrence of all of the following events (the "Standstill Period").
(a)(I) the closing of the sale of the Chrystie Street Properties; and
(ii) (A) the closing on the purchase of the QRP Property in the Section 1031 Exchange pursuant to Section 22.02; or,
(B) in the event that the Section 1031 Exchange pursuant to Section 22.02 is not effectuated, the application of the net cash proceeds of the sale of the Chrystie Street Properties pursuant to Section 22.01; and (b) the payment by the Trust in full of (1) all principal of an accrued interest on the Notes, (ii) the mortgage recording tax payable pursuant to Section 24.04, and (iii) The Settlement Legal Fees.
The language makes it clear that where, as here, the 1031 exchange was not effectuated, the termination date is determined pursuant to completion by the trustees of the payments described subsection (B).
Objectant states that the events set forth in sub-paragraph (B) did not occur, whereas the cross-movant states that all obligations and payments set forth in subsection (B) of the Agreement were made by January 20, 2012. However, the cross-movant submitted only an attorney affirmation, and failed to provide independent documentary evidence providing proof of payments, such as cancelled checks, transfer confirmations, or receipts.
As the Court has only been presented with contradictory statements from the parties, and sufficient evidence has not been tendered to eliminate the material issues of fact, the motion and cross-motion seeking a summary determination with respect to this issue are denied (see Winegrad v New York Univ. Med. Center, 64 NY2d 851, 853 ).
In addition to the aforesaid Standstill Payments, pursuant to the terms of the Agreement, objectant claims entitlement to $28,249.88 reflecting pro-rated commissions for the 67 day period beginning January 1, 2011 up to the time of his suspension. In opposition, petitioner claims that objectant is misinterpreting the Agreement, and no such payments were contemplated. Therefore, a construction of Section 9.06 of the Agreement is required:
Section 9.06 Commissions Payable To Trustees states:
In lieu of trustee's commissions pursuant to Section 2309 of the SCPA commencing January 1, 2011, and for so long as they remain Trustees and provided that no Event of Default shall have occurred and is continuing, the Trust shall pay to (I) George Terranova an annual trustee's commission of One Hundred Fifty Three Thousand Nine Hundred Dollars ($153,900), and (ii) each of Becht and Borg in their capacities as Trustee, an annual trustee's commission of Twenty Five Thousand Dollars ($25,000.00)...
As previously observed by this Court in its prior decision, where, as here, the contract is clear, "the best evidence of what parties to a written agreement intend is what they say in their writing." (see Teitelbaum Holdings, Ltd v Gold, 48 NY2d 51 ).
A plain reading of the aforesaid paragraph indicates that the objectant was not included in the payment provisions which represented a negotiated deviation from the provisions of SCPA 2309 (e.g. "In lieu of"). If the parties intended for objectant to receive a pro-rated commission then this painstakingly negotiated, detail-laden document should have provided for the same in a separate sub-paragraph delineated for Carl, just as it was for George, Becht, and Borg. The only portion of this section that contemplates payments to objectant is in the event that his suspension is vacated. That has not occurred, and given Carl's continuous litigious posture, is not imminent.
Accordingly, the branch of the motion seeking payment of $28,249.88 in commissions is denied and the cross-motion seeking dismissal of objection 37 is granted.
Any additional relief sought by the movant and cross-movant that has not been specifically addressed, including determinations with respect to reporting objections, legal fees, and accounting fees, are reserved for trial.
The parties are directed to appear on September 28, 2023 at 9:30 a.m. with their clients for a final pre-trial conference.
This constitutes the decision and order of the Court.
Dated: September 11, 2023
HON. PETER J. KELLY
1. Vera passed away on October 29, 2022. A fiduciary has recently been appointed for her estate.
2. Collectively, these objections refer to claims that the co-trustees breached their fiduciary duties as trustees.
3. These objections refer to specific breaches of the terms of the parties Agreement as well as breaches of the fiduciary duty owed to Objectant by the trustees.
4. According to the objectant, he has received $43,032.79 of the $225,000.00 in payments he claims he is due.
Peter J. Kelly, S.
Response sent, thank you
Docket No: File No. 1992-3511/G
Decided: September 11, 2023
Court: Surrogate's Court, New York,
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