Alleged Fraud, Undue Influence and Financial Exploitation Withstand Motion to Dismiss an Action Brought by the Charity of a Radio PioneerPrint Article
- Posted on: Aug 14 2019
On July 15, 2019, New York Surrogate Nora Anderson denied, in part, a motion to dismiss the petition filed by Radio Drama Network, Inc. (“Radio Drama” or “Petitioner”), in which Radio Drama sought to invalidate testamentary instruments that deprived it of a $100 million bequest from Himan Brown (“Brown”), the creator of “Dick Tracy” and “Inner Sanctum Mysteries,” and founder of the Himan Brown Revocable Trust (the “Revocable Trust”). Radio Drama Network, Inc. v. Kay, File No. 2010-2056 A (Sur. Ct., N.Y. County July 15, 2019) (here). In the petition, Radio Drama claimed that Brown’s long-time lawyer, Richard L. Kay (“Respondent”), defrauded Radio Drama out of $100 million when he allegedly deceived Brown into substituting a charitable trust that he controlled as the beneficiary of his estate. Petitioner claimed that Brown, who at the time was 94 years old, intended to bequest the money to Radio Drama, but instead left the money to another trust that Respondent controlled. Brown died six years later in June 2010, at the age of 99. Petitioner claimed that Respondent exploited his position as a trusted adviser for his own benefit.
[Ed. Note: Respondent denied the allegations and claimed that Brown knew what he was doing when he made the testamentary changes complained of.]
On June 4, 2010, Brown died, leaving an estate valued at approximately $850,000. During the decade before his death, Brown had transferred property worth millions of dollars to the Revocable Trust, of which he was the sole trustee and primary beneficiary, under an instrument dated November 20, 2002. Under the terms of the Revocable Trust instrument as originally stated, at Brown’s death, the majority of the trust remainder (after relatively modest provisions for family and friends) was to be distributed to Radio Drama, which Brown established to “create, produce, market and distribute radio dramas.”
On July 8, 2003, Brown amended the trust instrument (the “First Restatement”) to provide that his successor trustee would be entitled to commissions “in an amount equal to the commission [as] payable to an executor of [an] estate, the total principal of which equals the trust principal.” According to Radio Drama, this provision (the “Commissions Provision”) resulted in an additional $1.7 million in trustee commissions that Respondent received. The First Restatement did not alter Radio Drama’s share of the trust remainder.
However, on October 20, 2004, Brown eliminated Radio Drama’s designation as the remainder beneficiary, created a new trust (the “Charitable Trust”), and named the latter as remainder beneficiary in Radio Drama’s place (the “Second Restatement”). The primary purpose of the Charitable Trust, as identified in the Second Restatement, was to advance “language and the spoken word.” On the same day, Brown executed a new will in which he left his by-then relatively modest estate to Radio Drama.
As noted by the Court, Respondent or another lawyer at Respondent’s law firm drafted the trust and testamentary instruments discussed above. Respondent is the executor of Brown’s estate and is the sole trustee of both the Revocable Trust and the Charitable Trust. He is also one of four directors of Radio Drama; Brown’s two granddaughters, Melina and Barri, are two of the three other directors.
Radio Drama alleged that, through the foregoing revisions, Respondent carried out a fraudulent scheme to divert virtually all of Brown’s assets from Radio Drama to the Charitable Trust, over which Respondent, as trustee, had complete control, and to Respondent individually, through steeply increased commissions. According to Radio Drama, Respondent misled and confused Brown, who was elderly (e.g., 94 years old) and hearing-impaired, into changing the provisions of the Revocable Trust relating to the computation of commissions and to the disposition of the Revocable Trust remainder.
Radio Drama filed a petition in Surrogate’s Court on December 14, 2015, requesting the following relief: (1) invalidation of specific provisions of the instruments amending the Revocable Trust and the consequent reinstatement of Radio Drama as the remainder beneficiary of the Revocable Trust; (2) imposition of a constructive trust for Petitioner’s benefit on the assets of the Charitable Trust; (3) removal of Respondent from his position as a director of Radio Drama; (4) declarations that Respondent defrauded both Brown and Petitioner, unduly influenced Brown, breached his fiduciary duty to Petitioner, and violated Judiciary Law § 487; and (5) an award of compensatory, punitive, exemplary and treble damages consistent with such declarations. In connection with the foregoing, Radio Drama asserted the following six causes of action: (1) fraud; (2) fraudulent concealment; (3) undue influence; (4) breach of fiduciary duty; (5) violation of Judiciary Law § 487; and (6) unjust enrichment (asserted against Respondent both individually and as trustee of the Charitable Trust).
Respondent moved to dismiss the Petition for failure to state a claim. Additionally, Respondent sought dismissal of the first, second, third, fourth and sixth causes of action as time-barred. Finally, Respondent moved to dismiss Petitioner’s request to remove Respondent from its board of directors, on the ground that the Court lacked subject matter jurisdiction over such a claim for relief.
This Blog will discuss the Court’s ruling with regard to the fraud/fraudulent concealment, undue influence, and unjust enrichment causes of action and the application of the statute of limitations.
The Court’s Decision
Fraud and Fraudulent Concealment
To withstand a motion to dismiss a fraud claim, a plaintiff must allege a misrepresentation or omission of a material fact, made with knowledge of its falsity, and an intent to induce reliance thereon; justifiable reliance thereon; and injury resulting from such reliance. See, e.g., Lama Holding Co. v. Smith Barney, Inc., 88 N.Y.2d 413, 421 (1996). To state a claim for fraudulent concealment, in addition to pleading the foregoing elements, a plaintiff must allege that a defendant had a duty to disclose the information to him and failed to do so. Mandarin v. Wildenstein, 16 N.Y.3d 173, 179 (2011) (citation omitted). Both claims must be pleaded with particularity. They cannot be grounded in speculation and supposition.
Radio Drama based its fraud claim, in part, on Respondent’s actions in connection with the 2003 and 2004 restatements of the Revocable Trust. Radio Drama alleged that Respondent inserted “misleading revisions” into the restatements in order to deceive Brown into significantly increasing the commissions to which he would be entitled and changing the remainder beneficiary from Radio Drama to the Charitable Trust over which he was the sole trustee, thereby giving him more control over Brown’s assets.
Radio Drama contended that Respondent’s alleged failure to disclose the impact of such revisions constituted a material omission by which Respondent induced Brown to execute the restatements and that Radio Drama was thereby damaged when assets allegedly intended for its benefit were diverted to the Charitable Trust.
The Court held that these allegations sufficed to state a claim for fraud and fraudulent concealment.
However, the Court granted the motion with regard to Petitioner’s other fraud-based claims because the damages sought were too speculative. Connaughton v. Chipotle Mexican Grill, Inc., 29 N.Y.3d 137, 142 (2017) (noting that a plaintiff cannot be compensated under a fraud cause of action “for what [he] might have gained”).
Radio Drama argued that Respondent’s alleged failure to disclose the testamentary changes to Radio Drama’s other directors prior to Brown’s death constituted fraud and/or fraudulent concealment since the other directors would have tried to convince Brown to undo the revisions had they been made aware of them. The Court found the possibility that the directors would have reversed the changes to be “too speculative to constitute a stated injury.”
“For the same reason,” said the Court, “Radio Drama’s allegation that respondent did not provide notice of the probate proceeding to Radio Drama’s three other directors, thereby depriving Radio Drama of an ‘opportunity to participate actively in the … objections, or … to explore its rights and potential claims,’ [did] not state a claim for fraudulent concealment.” At its core, the Court held that this allegation was too speculative because “Radio Drama [could not] demonstrate any injury resulting from its nonparticipation in the probate proceeding.”
The Court held that “Radio Drama … stated a viable claim for rescission on the ground of undue influence.” To state such a claim, a plaintiff must allege that the defendant had both the motive and the opportunity to exercise undue influence over the grantor and that the defendant actually exercised such influence. Matter of Walther, 6 N.Y.2d 49, 55 (1959).
The Court held that Petitioner “clearly state[d] a claim for undue influence, finding that it alleged “that: (i) respondent was motivated by the prospect of increased commissions and control over trust assets; (ii) as grantor’s lawyer, respondent had ample opportunity to influence grantor; and (iii) he actually exercised such influence.”
Unjust Enrichment and Imposition of a Constructive Trust
To state a claim for unjust enrichment, a petitioner must show that the respondent was enriched at the petitioner’s expense and that “it is against equity and good conscience to permit [the respondent] to retain what is sought to be recovered.” Mandarin, 16 N.Y.3d at 182.
Radio Drama alleged that Respondent and the Charitable Trust were enriched at Radio Drama’s expense when Brown executed the 2003 and 2004 restatements to the Revocable Trust. Specifically, Petitioner claimed that Respondent benefited from the First Restatement by the insertion of a new provision in the trust instrument increasing Respondent’s trustee commissions, and both the Charitable Trust and Respondent (as its sole trustee) benefited from the Second Restatement by the substitution of the Charitable Trust in place of Radio Drama as the remainder beneficiary of the Revocable Trust. The Court held that the foregoing “stated a claim for unjust enrichment for which the imposition of a constructive trust may be an appropriate remedy.” Beatty v. Guggenheim Exploration Co., 225 N.Y. 380, 386 (1919).
Statute of Limitations
Under CPLR § 213(8), claims based on fraud and/or fraudulent concealment must be brought within either six years from the date on which the claims accrued or two years from the time the fraud was, or should have been, discovered, whichever is later.
Radio Drama filed the petition in December 2015, about five and a half years after Brown’s death, and more than ten years after Respondent [was] alleged to have committed the fraud and/or exercised undue influence over Brown.
The parties disagreed over the date on which the fraud-based claims accrued. Respondent argued that the limitations period began to run on the respective dates on which the restatements were executed, while Radio Drama contended that the claims did not accrue until Brown’s death in 2010, because prior to that point it had no vested interest in the Revocable Trust and thus would have lacked standing to challenge the restatements.
The Court agreed with Petitioner, holding that the date of accrual was at the time of death. Thus, since Radio Drama filed its petition within six years of Brown’s death, its fraud, fraudulent concealment, undue influence, and unjust enrichment claims were timely.
In so holding, the Court found the analysis in Matter of Tisdale, 171 Misc. 2d 716 (Sur. Ct., N.Y. County 1997), and Matter of Heumann, 2006 WL 6897055 (Sur. Ct., Westchester County 2006), to be persuasive.
In Heumann, which relied on Tisdale, the settlor had executed a revocable trust instrument in 1996 which provided that, at her death, the trust remainder was to be distributed among her six children. The settlor amended the trust instrument in 1997 to remove one of her children (the petitioner) as a beneficiary. The settlor died in 2004, and the petitioner commenced a proceeding in 2005 challenging the validity of the 1997 amendment on the ground of undue influence. The successor trustees moved to dismiss the proceeding as time-barred, noting that more than six years had passed between the execution of the amendment execution and the filing of the petition and that the petitioner knew, or should have known, of the amendment in 2002, more than two years prior to filing his petition. The court denied the motion, holding that, because the petitioner could not have commenced the proceeding until after the settlor had died, the six-year limitations period did not begin to run until the date of the settlor’s death.
The Court found further support in Matter of Dalton, N.Y.L.J., Feb. 2, 2009, at 47, col 4 (Sur. Ct., Suffolk County 2009), which cited to both Tisdale and Heumann with approval, and which held that proceedings challenging revocable trusts can be instituted only after the settlor’s death, and therefore “the running of the statute of limitations regarding the underlying trust instrument [does] not commence until the death of the grantor.” Id.
Based upon the foregoing authorities, the Court held that “Radio Drama could not demonstrate any injury to a cognizable interest in the Revocable Trust until [Brown’s] death had given it standing to claim such an injury.” “Accordingly, since Radio Drama filed its petition within six years of [Brown’s] death, its fraud, fraudulent concealment, undue influence and unjust enrichment claims are timely, and the motion to dismiss these claims is denied.”
Radio Drama is notable for a few reasons.
First, with regard to the fraud-based claims, Radio Drama not only illustrates the degree of specificity needed to withstand a motion to dismiss but also highlights the importance of seeking relief that is quantifiable and not speculative.
Second, Radio Drama makes an important distinction over the date on which a fraud claim accrues when dealing with a revocable trust. In a typical fraud case, the cause of action accrues when “every element of the claim, including injury, can truthfully be alleged” (Carbon Capital Mgmt., LLC v. Am. Express Co., 88 A.D.3d 933, 939 (2d Dept. 2011) (citation and alterations omitted)), “even though the injured party may be ignorant of the existence of the wrong or injury.” Schmidt v. Merchants Despatch Transp. Co., 270 N.Y. 287, 300 (1936). But cases involving a revocable trust instrument are not typical in so far as the underlying instrument is ambulatory subject to change or revocation at any time prior to the settlor’s death. Proceedings challenging revocable trusts can be instituted only after the settlor’s death because the plaintiff has no vested interest in the trust prior thereto. Therefore, as the Radio Drama Court found, the statute of limitations involving the underlying trust instrument could not commence until the death of the grantor.
Third, in New York, there is a question over whether the courts should recognize undue influence as an independent cause of action. Some courts have held that undue influence is not a cause of action or a claim in its own right, but rather a ground for the rescission of an instrument or transaction. E.g., Spinella v. Costantino, 33 Misc. 3d 1232(A) (Sup. Ct., Kings County 2011); Weinberg v. Kaminsky, 2017 N.Y. Slip Op. 31628(U) (Sup. Ct., N.Y. County 2017). Other courts treat undue influence as an independent claim, subject to dismissal if not adequately pleaded or supported by the evidence. See, e.g., Matter of Nealon, 57 A.D.3d 1325 (3d Dept. 2008); Kelly v. Overbaugh, 2008 N.Y. Slip Op. 32124 (Sup. Ct., Greene County 2008). Rather than wade through the differing views, the Court took a pragmatic approach to the issue, holding that “[r]egardless of how the claim is characterized, Radio Drama has stated a viable claim for rescission on the ground of undue influence.”
Finally, though not discussed herein, Radio Drama explores the boundaries of the Surrogate Court’s subject matter jurisdiction – a discussion that many readers might find interesting.