Friday, Aug 1, 2008
Representing Single and Multiple Fiduciaries: When to Seek Advice & Direction from Court
By Lucy Kats
Trusts and Estates practitioners are familiar with the SCPA 2107 advice and direction proceeding available to fiduciaries who face a difficult situation. What happens if multiple fiduciaries disagree with respect to the exercise of their discretionary powers? For example, one fiduciary may believe it is prudent to sell the stock held by the trust, while others may vehemently disagree.
Historically, resolutions of such disagreements have been difficult to achieve because the
In 1993, the Legislature amended SCPA 2102(6) to expand the surrogate’s courts’ powers to resolve the fiduciaries’ deadlocks. As a result, SCPA 2102(6) proceeding for advice and direction is now available to fiduciaries who disagree on “any issue affecting the estate.” Although SCPA 2107 was also amended at that time, that amendment was not nearly as sweeping in its effect as the one that was adopted in the SCPA 2102(6), but merely incorporated a test previously set forth in caselaw. As a result, in the absence of a disagreement, the more stringent SCPA 2107 standard of “extraordinary circumstances” must be met by fiduciaries seeking advice and direction.
II. The Law Prior to 1993
Prior to the 1993 expansion of SCPA 2102(6) and 2107, the surrogate could provide direction to the fiduciaries only on a very narrow issue of the custody of money or other property. The general rule was that the surrogate had no power to “substitute his own discretion for the discretion of those upon whom the duty has been cast of settling the affairs of the estate.” This standard applied regardless of whether the proceeding was brought by a sole fiduciary or multiple fiduciaries. The courts’ reluctance to become involved, while disappointing for the fiduciaries seeking guidance and protection, brought to a screeching halt the administration of the trusts and estates whose fiduciaries were in a deadlock with respect to an important issue.
The judges consistently declined to interfere in situations where fiduciaries disagreed:
This is a dispute among multiple fiduciaries concerning issues that are not appropriate for advice and direction. The authority of this court is to give advice and direction is exercised sparingly. Such applications will be denied unless unusual or extraordinary circumstances or compelling reasons are shown to justify interference with the exercise of the fiduciary’s discretionary powers or the substitution of the court’s judgment for that of the fiduciaries.
Most cases holding that a court cannot direct a trustee, executor, or administrator with respect to a decision involving discretionary judgment cited, as precedent, two 1930s Court of Appeals decisions of In re Leopold’s Estate and City Bank Farmers’ Trust v. Smith. In Matter of Leopold, two administrators disagreed on whether to compromise on a claim that was pending against the testator at the time of his death. One of them petitioned the Surrogate to authorize and approve the compromise agreement and to direct his co-administrator to join in the payment. The Surrogate’s Court granted the application, but the Appellate Division reversed, holding that the Surrogate had no power to approve a compromise that was disapproved by one of the fiduciaries. The Court of Appeals, while purporting to reverse the Appellate Division, struck a balance between that court’s and the Surrogate’s views by holding that:
(1) the co-administrator’s failure to join in the compromise was not fatal, since the power to collect and discharge debts is a several, not joint power, exercisable by one of multiple fiduciaries;
(2) the surrogate can review the discretionary administration decisions of the fiduciaries, but cannot substitute his own discretion for theirs;
(3) the surrogate could approve a compromise agreement, thus affording protection to the administrator compromising the claim;
(4) the court did not have the authority to compel a co-administrator to join in the compromise which such fiduciary found ill-advised; and
(5) the objecting co-administrator was directed to join in the payment of claim since the surrogate had power to compel payment of a claim which has not been rejected.
The confusing holding effectively amounted to the following: although it could not compel a co-fiduciary to “sign off” on an action she disagrees with, where the court approved of this action, it could nevertheless compel her to do whatever was necessary to effectuate it. Despite the complexity of that opinion and the fact that the power in dispute was several, Leopold’s Estate was swiftly adopted as precedent for the proposition that where joint, and not several, discretionary decision was involved, the court had no authority to compel one of the fiduciaries to act against such fiduciary’s judgment.
Unlike Leopold’s Estate, the City Bank Farmers’ Trust case did not involve a disagreement among fiduciaries. Instead, a sole trustee was seeking the court’s advice. The Court of Appeals held that a judge should not advise the trustee what course to pursue in administration of the trust, but it may provide instruction or advice “where, upon established equitable principles, instructions or directions are required for his protection and the discharge of his trust.” The purpose of such instruction or advice is to protect the trustee “because of the doubtful meaning of the trust instrument, or because of uncertainty as to the proper application of the law to the facts of the case.” This holding was consistent with Leopold’s Estate inasmuch as Court of Appeals explained that it approved the fiduciary’s settlement of compromise to afford such fiduciary protection. The City Bank Farmers’ Trust, however, served to caution the surrogates that advice and direction in fiduciaries’ discretionary matters should be used sparingly.
In 1949, the Surrogate’s Court in In re Rehill’s Will, cited City Bank Farmers’ Trust as precedent to hold that “the mere existence of an honest difference of opinion between trustees involving a question of business judgment does not justify the interference of the Court unless such action is required for the protection of the trustees or the discharge of the trust.” In that case, two co-trustees could not agree on whether certain real property should be sold or retained. The court refused to break the deadlock, stating that whether or not the trustees exercise their right to sell the premises was a matter of business judgment “which the courts will not usurp.” It further explained, that it would resolve the conflict, if either trustee could show “that the continued retention of the property in question would be imprudent, negligent or otherwise improper”. By refusing to become involved, however, the court effectively ruled in favor of the trustee who wished to preserve status quo, or to retain the property.
Similarly, in In re Ebbets’ Will, two individuals serving as co-executors and as co-trustees of a testamentary trust brought an application for the advice and direction on how they should vote certain shares of stock held by the estate. The judge held that such a decision involved a business judgment and was not a question “properly determinable by this court.” In dicta, however, the court stated that in view of the experts’ and interested parties’ support of a vote in favor of a certain action, voting against such action “would unquestionably place upon [the fiduciaries] a heavy duty of explanation.” Thus, the court managed to effectively resolve the dispute without overstepping its boundaries.
In a 1960 case of Estate of Bourne, the estate assets were comprised of stock in a corporation wholly owned by the testator. Two of the three executors disagreed on whether the corporation should be dissolved prior to distribution of the assets. The third executor declined to commit to a definite position. Surrogate Cox refused to provide direction on this issue. Citing no less than fifteen cases as precedent, he held that the surrogate’s courts could review the executors’ discretionary decisions but lacked authority to exercise their business judgment for them.
In 1985, Surrogate Roth finally identified the dilemma facing the
The power to dispose of this fund is a joint power as distinguished from a several power. In general, the decisions define a joint power as one which requires the exercise of discretion… Where there are only two fiduciaries, and the will does not contain any direction for breaking a tie vote, the consent of both fiduciaries is required to exercise a joint power. However, neither [EPTL 10-10.7] nor any decision provides any guidance to the problem before the court - how to resolve a dispute between two fiduciaries who hold a joint power. In fact, the deadlock situation between two trustees presents an issue of first impression in this jurisdiction.
The court held that, except in extraordinary circumstances, it has no power to direct the trustees with respect to their discretionary decisions. Even if it gave such a direction, Surrogate Roth believed that it could not be enforced.
Apparently not wishing to create new precedent, while at the same time attempting to resolve the situation, the court creatively held that, while lacking authority to give direction, it could give advice. The Surrogate then told the parties which charities it would choose, “[i]f the court were a trustee,” while reminding them in the next sentence that they [were] not required to follow this advice. To discourage further lack of cooperation, the court explained that it will appoint a third trustee, to cast a deciding vote, if the court’s advice was not followed.
III. 1993 Amendments
In 1993, the New York Legislature loosened the constrains placed upon the surrogate’s courts by Estate of Leopold and City Bank Farmers’ Trust by amending Section 2102(6) of the SCPA to provide that “[a] proceeding may be commenced to require a fiduciary… to comply with such directions as the court may make whenever two or more fiduciaries disagree with respect to any issue affecting the estate.” This proceeding may be commenced by a fiduciary, an interested person, or a creditor.
Following this enactment, surrogate’s courts at last became willing to resolve disputes between fiduciaries. In Estate of Heim, for example, one fiduciary asked the court to direct her co-fiduciary to cooperate in the sale of certain real property. Citing its powers under SCPA 2102(6), the court broke the deadlock in favor of the sale, and directed the resisting co-fiduciary to cooperate.
However, even after the expansion of the court’s power of interference in the SCPA 2102(6), the surrogates remain somewhat reluctant to become involved where the fiduciaries’ business judgment is concerned. In Estate of Duell, for example, the co-executors could not agree on any major or even simple management issues. Without a reference to the SCPA 2102(6), Surrogate Roth resolved the situation by appointing an independent third person as a third fiduciary to break deadlocks and to avoid the expense and delay of repeated applications to the court for relief. A year later, when the third independent fiduciary testified that, even upon his resolution of the deadlocks, one of two original co-trustees was still refusing to cooperate and to sign papers, the court responded by removing the non-cooperative trustee.
The standards set forth in Estate of Leopold and City Bank Farmers’ Trust, still apply where a sole fiduciary is uncertain regarding a discretionary course of action. A proceeding for advice and direction in that situation must be brought pursuant to the SCPA 2107, and not under section 2102(6). While this section was also amended in 1993, the effect was not nearly as sweeping as that of the SCPA 2102 amendment. Prior to 1993, SCPA 2107 allowed an advice and direction proceeding only as to “the propriety, price, manner and time of sale” of estate property whose value was uncertain. In amending this section, the legislature echoed the Court of Appeals’ language in Estate of Leopold and City Bank Farmers’ Trust, providing the surrogates with additional authority to entertain an application “in other extraordinary circumstances such as complex valuation issues, or tax elections, or where there is conflict among interested parties,” while reminding them that they “need not entertain jurisdiction if to do so would be merely to substitute the court’s judgment for that of the fiduciary.”
While this amendment appeared to have expanded the scope of advice and direction proceedings, in fact SCPA 2107(2) merely codified what was already permitted by the courts in cases such as Estate of Leopold and City Bank Farmers’ Trust.
IV. Bottom Line For Practitioners
A fiduciary who faces difficult business decisions or disagrees with one or several co-fiduciaries with respect to such decisions requires sound legal advice. Practitioners representing such clients must know when to recommend a proceeding for advice and direction in the surrogate’s court.
In advising clients with respect to advice and direction proceedings, attorneys must clearly understand the difference between the SCPA 2102(6), which allows for such a proceeding “on any issue” that is subject of a disagreement among multiple fiduciaries, and the SCPA 2107, which limits a sole fiduciary’s ability to seek the court’s advice and direction to certain “extraordinary circumstances.” Accordingly, attorneys representing a sole fiduciary or multiple fiduciaries who do not disagree must weigh the costs of the proceeding against the probability that the facts of the case are unusual enough to satisfy the SCPA 2107 standard. Where fiduciaries disagree, however, practitioners should be less hesitant to bring a proceeding pursuant to the SCPA 2102(6). Unlike the SCPA 2107, this section does not require that any special circumstances be present for the court to direct the parties’ actions.
Advice and direction proceeding is, of course, not necessary every time a disagreement arises among the fiduciaries. If the power in dispute is “several,” or a purely ministerial power exercisable by the fiduciaries individually, one fiduciary can proceed without the permission of others. Even the exercise of a joint power does not necessarily require a court’s involvement, as long as such power was conferred upon three or more fiduciaries. Pursuant to EPTL 10-10.7, such power “may be exercised by a majority of such fiduciaries.”
Where disagreement among the fiduciaries with respect to a joint discretionary power results in a deadlock and the governing instrument does not provide for a mechanism to resolve it, the court’s involvement is inevitable. Under some circumstances, an SCPA 2102(6) proceeding may also be desirable where the disagreement among the fiduciaries does not result in a deadlock. Since passive fiduciaries can be held responsible for the wrongful actions of their co-fiduciaries, the dissenting fiduciary who believes the majority’s discretionary business decision is unsound, negligent or in breach of their fiduciary duty may wish to bring an SCPA 2102(6) proceeding to put his dissent on the record and to force the participation of all the interested parties.
 Legislative Bill and Veto Jackets, Laws of 1993,
 See e.g.,
 S.C.P.A. 2102(6) (emphasis supplied). The 1993 amendment expanded the scope of advice and direction proceeding by substituting the language “as to custody of money or other property of the estate committed to them” with “with respect to any issue affecting the estate.” Laws of N.Y., 1993 Regular Session,
SCPA 103(19) defines “estate” to include the property of “a decedent, trust, absentee, internee or person for whom a guardian has been appointed”.
 S.C.P.A. 2102, Practice Commentary, Margaret Valentine Turano; 17A West’s
 N.Y.L.J. July 7, 2001, p. 32, col. 5 (
 N.Y.L.J. July 23, 1996, p. 23, col. 1 (Surr. Ct. N.Y. Co.).
 Estate of Duell, N.Y.L.J. Sep. 22, 1997, p. 28, col. 5 (Surr. Ct. N.Y. Co.).
 Estate of Weinstock, N.Y.L.J. Oct. 2, 2000, p. 31, col. 3 (Surr. Ct. Kings Co.) (internal citations omitted). Examples of purely ministerial powers are collection of assets or depositing of funds into a bank.
 At the very least, a fiduciary who disagrees with the majority’s position should express his or her dissent in writing. John R. Morken & Gary B. Friedman, Early Detection of Possible Pitfalls in Fiduciary Obligations Can Prevent Later Problems, 74-Jan. N.Y. St. B.J. 22 (2002).