Saturday, May 21, 2011

“Busting” the Trust!

A Trust was created by a woman in her Last Will and Testament (testamentary trust), leaving her children and their issue (children) as the sole beneficiaries of the trust. The Children’s Trust was formed as a “mixed” discretionary trust; meaning that the trustees maintain the discretion to pay moneys to the beneficiaries of the trust but the trust itself is a spendthrift trust, whereby the beneficiaries cannot invade the trust or, in other words, take out money themselves. A “discretionary” trust is typically set up to give the trustees the authority to pay money (either principal or interest) as they see fit, considering the lifestyle and resources of the beneficiary. A “spendthrift” trust prohibits the beneficiary, creditors of the beneficiary, or any other person from taking money out of the trust.

The “deadbeat” parent

A couple was married and had two children. The husband was one of the children of the woman who set up the trust. They got divorced and the two children lived with the wife. As part of the Judgment of Divorce, the husband was ordered to pay child support and yeshiva tuition for the couple’s daughter. The husband failed to pay the court-ordered amounts. The judge granted money judgments against the husband to pay child support arrears, tuition and legal fees. Enforcement of the money judgments proved fruitless. The wife brought proceedings to punish the husband for contempt of court. The judge found that the husband was guilty of contempt of court and even granted an Order of Contempt, allowing for the husband’s arrest for not paying child support. The husband and his assets could not be located – the typical case of a “deadbeat parent.”

Unfortunately, the wife was, perhaps, more down and out than most people. She was ill and unable to work; not eligible for social security disability income; and living off of her adult son’s meager income and public assistance through food stamps. Her daughter was going to be expelled from school for nonpayment of three years’ worth of tuition. That’s when the wife’s divorce lawyer referred her to Richard A. Klass, Your Court Street Lawyer, for help.

Looking at invading the Children’s Trust

Generally, a trust can be made invincible – no one can gain access to the moneys or property contained in it, not even the beneficiary. The “settlor” (the one who sets up the trust and funds it) appoints a trustee who will carry out her wishes and follows the directions contained in the trust document.

In this particular trust, the beneficiaries were listed as “the Child and the Child’s issue.” Clearly, the Children’s Trust envisioned the trustees giving money not only to the “deadbeat parent” but also to his children, including the daughter who was about to be kicked out of school.

An Order to Show Cause was brought in New York State Supreme Court to (a) have the trustees pay the child support arrears and yeshiva tuition owed by the husband; (b) restrain the trustees from paying any money out of the trust to the “deadbeat” parent; and (c) sequester, or set aside, enough money from the trust to pay future child support until the daughter’s age of majority.

The guiding light of Judge Nathan Sobel

The issue of “busting” a trust set up by a grandparent for the benefit of a grandchild was brought up in a case over 40 years ago, in a case of first impression, before the beneficent Surrogate of Kings County, Judge Nathan Sobel. In Matter of Chusid, Judge Sobel first stated the general proposition that a testator may dispose of his own property as he pleases. Among other things, a testator may create a trust for the benefit of an infant or improvident person, so that the beneficiary does not squander the money. However, Surrogate Sobel stated the oft-cited principle which applied to this situation (and, unfortunately, to so many others): “No man should be permitted to live at the same time in luxury and in debt.”

While recognizing that the general purpose of a discretionary trust is to protect the trustee from unreasonable demands of a beneficiary or from creditors’ claims, it does not insulate or protect the trustee from responsibility to and reasonable directions from a court. Further, as stated in the Chusid opinion, this “is particularly true where the income beneficiaries are dependent children who will either starve or become public charges if the trustees refuse to exercise discretion in their favor.” Judge Sobel then held that the trustee’s discretion yields to and is subordinate to the equity powers of the court to direct payment for the support of minor dependent children.

After argument of the Order to Show Cause, with the opposition of the trustees of the Children’s Trust, the judge made the determination that the wife was entitled to “bust” the trust open to have the trustees pay the child support arrears and yeshiva tuition owed by the husband from the principal and interest of the trust. The judge ordered the trustees of the Children’s Trust to pay the following amounts: (a) 82,350 for yeshiva tuition; (b) 43,329 for child support arrears; and (c) $3,960 for school transportation expenses; he also ordered the trustees to sequester $53,891 for future child support payments.

— Richard A. Klass, Esq.

Art credits: Leute am blauen See, by August Macke (1887-1914).

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copyr. 2011 Richard A. Klass, Esq.
The firm's website: www.CourtStreetLaw.com
Richard A. Klass, Esq., maintains a law firm engaged in civil litigation at 16 Court Street, 28th Floor, Brooklyn Heights, New York.
He may be reached at (718) COURT-ST or e-ml to RichKlass@courtstreetlaw.com with any questions.
Prior results do not guarantee a similar outcome.

Sunday, May 1, 2011

Notice to Admit: The Power of a Piece of Paper


In the Civil Practice Law and Rules (CPLR) – the “Game Book” of civil practice in New York State courts, there is a little-used device called the “Notice to Admit.” While not as often utilized by attorneys as it ought to be, it can pack a powerful punch to the other side in litigation.


As most of us know, the old days of Perry Mason pulling out a trick at trial have greatly diminished due to the introduction into the legal process of a phase in the litigation known as “discovery.” During the discovery phase, each adversary is permitted to inspect and “discover” relevant documents and information pertaining to the lawsuit, through the use of various discovery techniques. Those discovery techniques may include, among other things, inspecting the books and records of a business, asking questions known as “interrogatories,” performing a physical examination, viewing photographs or videos made of the scene of an incident, and inspecting the geographic location of an area which is the subject of the litigation. Among those discovery techniques, there is the Notice to Admit.


CPLR Section 3123 provides that: “a party may serve upon any other party a written request for admission by the latter of the genuineness of any papers or documents, or the correctness or fairness of representation of any photographs, described in and served with the request, or of the truth of any matters of fact set forth in the request, as to which the party requesting the admission reasonably believes there can be no substantial dispute at the trial and which are within the knowledge of such other party or can be ascertained by him upon reasonable inquiry.” It is further provided that, if the latter party fails to respond, the effect is that the matter shall be deemed “admitted.”


In Rodriguez v. Moreno, it was alleged that, in 1994, the owner of a 2-family house in Brooklyn had to leave this country in a hurry and needed cash. He made an agreement with his tenant that, in exchange for $30,000 cash and the continued payment of the mortgage on the house, the tenant could effectively purchase the house from him. To memorialize their understanding, the owner and his tenant went to the owner’s attorney to sign documents.


The owner’s attorney drafted the documents necessary to transfer title to the house, including a Deed. The owner signed the documents, and the attorney held onto the originals. The agreement was, once the tenant paid off the last of the mortgage payments on the house, the Deed would be released to him from the attorney’s escrow. This arrangement continued for 13 years.


In 2007, the tenant discovered that the owner, who still held title to the house, was trying to sell it to someone else. The only proof of the agreement he had was a photocopy of the front side of the Deed that the owner signed 13 years earlier. Unfortunately, the owner’s attorney had been disbarred years earlier and was nowhere to be found; also gone were the original documents.


Quick Action Was Needed

Armed with only a skimpy photocopy of the first page of the Deed, which had the signature of the owner, the tenant hired Richard A. Klass, Esq., to bring an action under New York’s Real Property Actions and Proceedings Law (RPAPL) to enforce his rights to the house. Since the owner was actively trying to sell the house, and had signed a contract to sell the house to someone else, quick action to stop the sale was needed. With the filing of the Summons and Complaint, a Notice of Pendency (also known as a “lis pendens”) was filed against the house, which operates as notice to outsiders that someone is laying claim to ownership of the house.

The owner denied the agreement, since there was no proof of the agreement between himself and the tenant. He also claimed that the mortgage payments made by the tenant were intended as rent.


Proving the Copy To Be a Duplicate of the Original

The next, important step was to nail down through the discovery phase the proof of the agreement. In general, contracts relating to the sale of real estate require written proof under a legal doctrine known as the Statute of Frauds. Since here, there was no writing other than the photocopy of the Deed, the lawsuit appeared to be futile.


The admissions requested were as follows:
  1. That the attached Deed was signed by the defendant on September 1, 1994.
  2. That the attached Deed was prepared by the defendant’s attorney, or on his behalf by a member of his staff or office.
  3. That the defendant’s attorney prepared the attached Deed at the request of, or on behalf of the defendant.
  4. That the original of the attached Deed was taken into escrow by the defendant’s attorney at or about the time of execution thereof.
Despite being served with this Notice to Admit, the defendant failed to respond to it within the 20-day time frame in which to respond. By virtue of his not timely responding, the above allegations were deemed “admitted.”


Since it was now admitted that the owner signed the Deed in favor of the tenant, and the Deed was to be held in escrow by his attorney, the terms of the agreement were arguably established in a manner allowed by the Statute of Frauds. Coupled with the fact that the tenant made all of the mortgage payments for 13 years, the owner elected to settle the case instead of proceeding to trial.


— Richard A. Klass, Esq.

©2008 Richard A. Klass. Art credits: page one, Der Schindanger in Livorno by Giovanni Fattori, 1865-1867.

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copyr. 2011 Richard A. Klass, Esq.
The firm's website: www.CourtStreetLaw.com
Richard A. Klass, Esq., maintains a law firm engaged in civil litigation at 16 Court Street, 28th Floor, Brooklyn Heights, New York.
He may be reached at (718) COURT-ST or e-ml to RichKlass@courtstreetlaw.com with any questions.
Prior results do not guarantee a similar outcome.