Opinion
284060.
Decided January 27, 2006.
Jerome Kamerman, Esq. (Attorney for Respondent, John K. Chadrjian) Martin Klein, Esq., Kamerman Soniker, P.C., New York, NY.
John J. Barnofsky, Esq. (Attorney for Petitioner, Lita Chadrjian) Farrell Fritz, P.C., Uniondale, NY.
Alan Scott, Esq. (Attorney for Respondent, Nancy Tumelty) New York, NY.
This decision focuses on the due process requirements that attach to an application to suspend letters of trusteeship under SCPA 712, but after service of process.
By order to show cause, dated September 13, 2005, Lita Chadrjian, as petitioner, commenced a proceeding to revoke letters of trusteeship issued to her two step-children, John K. Chadrjian and Nancy Tumelty. Included in the prayer for relief was a request that the court immediately suspend the letters pending the outcome of the hearing on the revocation. On November 7, 2005, the parties orally argued this latter point. In the ensuing two weeks, the parties filed additional argument and asked the court to decide the issue of suspension on the papers submitted.
For the reasons that follow, the application to suspend letters of trusteeship issued to John K. Chadrjian and Nancy Tumelty is granted, pending the hearing and determination of the proceeding to revoke letters.
The testamentary trust referred to in the preceding paragraphs is a QTIP trust created for the life benefit of Lita Chadrjian by her late husband, Jack Chadrjian. The decedent died a resident of Nassau County of December 28, 1993. His Will was admitted to probate by this court on January 28, 1994. The decedent was survived by his wife, Lita Chadrjian, and two children from an earlier marriage, John K. Chadrjian and Nancy Tumelty. Lita Chadrjian was issued letters testamentary while she and her two step-children were issued letters of trusteeship under the testamentary QTIP trust. Both the estate and the trust have engendered protracted litigation between the parties.
Jack Chadrjian was a real estate developer and investor. Consequently, the unliquidated bulk of his estate consisted of limited partnership interests in real property and the various business vehicles used to control them. The testamentary QTIP trust made Lita Chadrjian the mandatory income and discretionary principal beneficiary of the trust and her step-children the presumptive remainder beneficiaries.
Effective November 30, 2003, the QTIP trust was funded with the assignment of partnership percentage units in Bristol East Co. (26.05%), Caprice Land Co. (15.675%), and Caprice Associates LP (13.60%). Bristol East owns an apartment house at 310 East 65th Street, that was valued at $13,200,000.00 in 2003. Caprice Land Co. and Caprice Associates LP own the land and building, respectively, located at 320 E. 68th Street, that was valued at $16,800,000.00 in 2003. All three partnerships have the same corporate general partner, Caprice Management Corp. While there are issues concerning control of these and other related entities, it is not controverted that the decedent's son, John K. Chadrjian runs the day-to-day operations of the real estate businesses. While the focus of this decision is necessarily on his and Nancy Tumelty's conduct as the controlling trustees of the QTIP trust, the court notes that their roles as the two controlling co-trustees are closely intertwined with the day-to-day management of the real estate and the corporate and partnership entities used to control them.
On February 22, 2005, the Appellate Division affirmed this court's order of September 30, 2003, holding that distributions from the trust could not be reduced by depreciation amounts authorized by IRC § 754 ( Matter of Chadrjian, 15 AD3d 579). The instant application alleges, among other things, that John K. Chadrjian and Nancy Tumelty have continued to violate this court's order even after it was affirmed by the Second Department and that the income payments from the trust have been withheld, delayed, or made with the prohibited deduction. The co-trustees deny these allegations, arguing that any deductions from the income distributions are permissible and do not constitute IRC § 754 depreciation.
Generally, a partnership cannot adjust the basis of its property because of a distribution of property to a partner or because of a transfer of an interest in the partnership, whether by sale or exchange or because of the death of a partner. IRC § 754 ( 26 U.S.C. § 754) is a special basis provision dealing with partnerships. It allows a partnership to elect to adjust the basis of partnership property as a result of a sale or exchange of a partnership interest or as a result of the death of a partner, with the usual, or at least anticipated, enhanced depreciation that results.
The court notes that the petition contains additional allegations of wrongdoing and hostility on the part of John K. Chadrjian and Nancy Tumelty. These include the following:
1) establishing a separate corporation to compete with trust assets (Kennan Ash LLC);
2) John K. Chadrjian's secret purchase of partnership units;
3) the level of compensation and perquisites enjoyed by John K. Chadrjian;
4) secret refinancing of real estate properties owned by the partnership;
5) investment in an undisclosed and self-dealing real estate project; and
6) failure to provide financial information.
As noted above, the salient argument offered by Lita Chadrjian to suspend letters is the alleged violation of this court's order that was affirmed by the Second Department. However, the application is not limited to that one element but instead calls into question all the allegations made by Lita. This fact will be important to keep in mind during the following analysis.
This proceeding requests relief pursuant to SCPA 711 and 712. The petition, commenced by order to show cause, seeks not just the revocation of letters of trusteeship issued to John K. Chadrjian and Nancy Tumelty, but also the summary suspension of those letters pending the hearing and determination of the revocation proceeding. The court notes that the suspension of letters is expressly authorized by SCPA 712, "upon the issuance of process"; the court need not await the return of process to suspend the letters. Moreover, the court notes that SCPA 719 permits the summary suspension or revocation of letters even without the service of process. Of course, such extraordinary powers granted to the Surrogate under SCPA 719 have been constrained by due process considerations in Matter of Duke ( 87 NY2d 465). In Duke, the court ruled that the summary removal of a trustee "will constitute an abuse of discretion where the facts are disputed, where conflicting inferences may be drawn therefrom, or where there are claimed mitigating facts that, if established, would render removal an inappropriate remedy" ( Matter of Duke, 87 NY2d at 473).
Clearly, the intent of the legislature is self-evident; to grant the Surrogate the emergency powers necessary to preserve an estate when there is imminent danger of harm ( see Turano and Radigan, New York Estate Administration [2005 ed.] § 14.04[a][1]). The extraordinary ex parte powers granted by SCPA 712 and 719 are ample authorization for the instant application that has been vigorously litigated and argued.
While SCPA 712 does not elucidate the grounds for suspension of letters, other than by reference to SCPA 711 the court notes that the few cases decided under SCPA 712 do seem to adhere to the formulation quoted above regarding summary revocation ( see e.g., Matter of Filardi, NYLJ, May 25, 1999 at 34; Matter of Chan, NYLJ, March 19, 1999 at 27). Therefore, the court will consider this application as being controlled by Matter of Duke ( 87 NY2d at 465).
Based upon the applicable standard noted above, the court declines to suspend letters for the primary reason cited by Lita Chadrjian, i.e., the alleged continuing violation of this court's order with regard to income payments being reduced by IRC § 754 depreciation. There is a sharp issue of fact on this point that precludes the court from suspending letters without a fact-finding hearing. John K. Chadrjian and Nancy Tumelty's attorneys have countered this allegation with the argument that the interim distributions to Lita are not reduced by § 754 depreciation but rather reflect the trustees' decision to distribute 75% of the cash receipts received from the limited partnerships with 25% retained until a proper determination could be made of the amount of the trust's net income for the year. Whether this explanation is accurate or not would require a finding of fact on the part of the court that would be unwarranted in this context.
There is an independent basis, however, for suspending the letters of trusteeship that satisfies the criteria established by Matter of Duke ( 87 NY2d at 465).
As noted above the decedent, Jack Chadrjian, was a real estate investor. During his lifetime, the decedent owned Kennan Ash Corp. which was used to provide various general contracting services to the real estate partnerships. The corporation was wholly owned by Jack Chadrjian and, upon his death, an asset to be distributed to the QTIP trust. After Jack Chadrjian died, his son John K. Chadrjian became the de facto manager of all the real estate interests owned by his father as well as one of the three co-trustees of the QTIP trust that held equity positions in the real estate partnerships.
Parenthetically, the court notes that there is a dispute over his status vis-a-vis the various corporations and the ownership or control over them. That status was challenged in a prior proceeding in this court that was dismissed for lack of subject matter jurisdiction.
In 2001, John K. Chadrjian established another company, Kennan Ash LLC, that was wholly owned by him. It began to provide the general contracting work that was previously provided to the real estate interests by Kennan Ash Corp. The income tax returns of the estate-owned Kennan Ash Corp. show a sharp reduction in gross receipts since John K. Chadrjian's creation of the competing corporation. In fact, the gross income of Kennan Ash Corp. fell from $417,398.00 in 2000, to $22,985.00 in 2001, to $39,487.00 in 2002, to $47,293.00 in 2003, and to $46,536.00 in 2004. The only tax return made available to Lita Chadrjian for the competing Kennan Ash LLC, showed that the company in 2001, its first year of operation, reported gross receipts of $607,019.00.
While the foregoing figures might lead a person to draw a reasonable inference of the usurpation of corporate opportunities by a fiduciary, it is still possible that such an inference would not satisfy the rigorous standard that would justify the court in suspending letters. John K. Chadrjian's own words, under oath at a deposition, provide the missing element that transforms this inference into a fact. At pages 33-34, 53, and 59 of his deposition on February 10, 2003, John K. Chadrjian testified as follows:
Question: Now, there's a company called Kennan Ash LLC, Right?
Answer: Yes.
Question: Okay. Who owns that corporation?
Answer: I do.
Question: And when was that formed?
Answer: Two years ago, about.
* * *
Question: What does that company do?
Answer: That [sic] does the interior construction.
Question: So the work that previously done by Kennan Ash Corp. has now been taken over by Kennan Ash LLC; Is that correct?
Answer: Not — not entirely, no.
Question: Okay. Fair to say that the bulk of the work previously performed by Kennan Ash Corp. is now being performed by Kennan Ash LLC?
Answer: If you want to say it like that, then yes.
* * *
Question: Was there a board of directors' meeting or action that approved the changing of the business that was done by Kennan Ash Corp. to Kennan Ash LLC; yes or no?
Answer: No.
Question: Okay. The decision was made by you unilaterally; is that correct?
Answer: Yes.
Question: And you — in what capacity?
Answer: As president.
* * *
Question: [W]hen this decision was made to give the business to the LLC rather than to Kennan Ash Corp.
Answer: Uh-huh.
Question: You didn't consult with Lita in any capacity, right?
Answer: No.
John K. Chadrjian's diversion of these corporate opportunities to his personal benefit is not disputed. Conduct of this sort strikes at the very heart of a fiduciary's duty of undivided loyalty to the trust estate and the duty to refrain from self-dealing. All are familiar with Judge Cardozo's "punctilio of an honor the most sensitive" from Meinhard v. Salmon ( 249 NY 458, 464). Other portions of that famous opinion are also instructive, e.g.:
Equity refuses to confine within the bounds of classified transactions its precept of a loyalty that is undivided and unselfish. Certain at least it is that a man obtaining his locus standi, and his opportunity for making such arrangements, by the position he occupies as a partner, is bound by his obligation to his co-partners in such dealings not to separate his interest from theirs, but, if he acquires any benefit, to communicate it to them' [citation omitted]. Certain it is also that there may be no abuse of special opportunities growing out of a special trust as manager or agent [citation omitted] . . . Salmon had put himself in a position in which thought of self was to be renounced, however hard the abnegation. He was much more than a co-adventurer [i.e., fiduciary]. He was a managing co-adventurer [citations omitted]. For him, and for those like him, the rule of undivided loyalty is relentless and supreme.
Meinhard v. Salmon, 249 NY 458, 467, 468.
John K. Chadrjian's position here, vis-a-vis the other two co-trustees, is unique in that he was not just the one active co-trustee, but he was also the manager of the underlying property interests, as well as, along with his sister, one of the remainder beneficiaries of the QTIP trust. His conduct with regard to the two Kennan Ash entities, by his own admission, is self-dealing. There is no doubt that a trustee has a duty of undivided loyalty to his or her beneficiaries, which includes the duty to refrain from self-dealing. Indeed, John K. Chadrjian's position became fraught with conflict once the similarly named company was established. In such a case, once a trustee has placed himself in a position where his interest may be in conflict with his duty then further inquiry ends and an appropriate action must be taken ( Matter of Van Deusen, 37 AD2d 131; Matter of Kellogg, NYLJ, Dec. 30, 1999 at 21; Matter of Rose, NYLJ, December 16, 1998 at 22). Moreover, the record is sufficient to raise serious concerns that his inherent conflict of interest as remainder beneficiary and his self-dealing as co-trustee may color his judgment and that he may administer the trust in a way which favors his own interest ( cf. Matter of Liebert, NYLJ, November 18, 2005 at 30 and Matter of Smith, NYLJ, June 25, 1997 at 29).
John K. Chadrjian's conduct vis-a-vis Kennan Ash Corp. is a sufficient and uncontroverted basis to suspend his letters of trusteeship. Likewise, Nancy Tumelty's position in this matter is also equally problematic. When there are three or more trustees, the joint powers of the trustees may be exercised by agreement of a majority of the trustees pursuant to EPTL 10-10.7. In addition, a co-trustee shall be held jointly and severally liable for the joint actions of the trustees ( Matter of Farley, 186 Misc 2d 355). Liability may also attach to a trustee's failure to act ( Matter of Rothko, 84 Misc 2d 830, mod on other grounds, 56 AD2d 499, mod on other grounds, 43 NY2d 305, on remand 95 Misc 2d 492). While Ms.Tumelty's affidavit claims non-participation in the events alleged, that non-participation does not serve to commend her efforts as a trustee. Her affidavit constitutes an admission of passivity or intentional ignorance of the actions of her brother. Suspending her brother and keeping Ms. Tumelty as a co-trustee along with her step-mother promises only exacerbation of an already acrimonious relationship, along with deadlock in the administration of the trust during the pendency of this proceeding. The court recognizes that its discretion is broad enough to allow Ms. Tumelty to stay on duty as a co-trustee but to appoint a third, independent trustee to replace, if only temporarily, John K. Chadrjian ( see e.g., Matter of Richardson, NYLJ, June 24, 2004 at 27). However, the court believes the trust is better and more efficiently served by suspending Ms. Tumelty's letters of trusteeship.
Based upon the foregoing, the letters of trusteeship issued to John K. Chadrjian and Nancy Tumelty are suspended pending the hearing on revocation.
John K. Chadrjian and, if applicable, Nancy Tumelty, will deliver all the books and records pertaining to the trust to Lita Chadrjian within seven (7) days of service of a copy of this order with notice of entry.
The court need not at this time delve into the other allegations raised in the petition or the papers submitted on the suspension application.
The parties are directed to appear for conference on Wednesday, February 15, 2006, at 10:00 am to discuss outstanding disclosure and to schedule a hearing on the revocation proceeding.
Settle order.