Opinion
No. 2008-4410/G/H
08-03-2023
Petition of The McKelvey Entrepreneurial Foundation, as Residuary Beneficiary of the Estate of ANDREW MCKELVEY, Deceased, For a Decree Revoking and Suspending the Letters Testamentary Issued to Bradford Peters
Unpublished Opinion
DECISION AND ORDER
The following papers were considered in determining these discovery-related cross-motions:
| Papers Considered | Numbered |
| Notice of Motion to Compel Discovery, with Affirmation of Michael L. Kenny, Jr., Esq., with Exhibits 1 through | 6 1, 2 |
| Memorandum of Law in Support of Motion to Compel | 3 |
| Cross-Motion for a Protective Order, with Affirmation of Bruce C. Johnson, Esq., with Exhibits A through N | 4, 5 |
| Memorandum of Law in Opposition to Motion and in Support of Cross-Motion | 6 |
| Reply Memorandum of Law by Movant | 7 |
| Reply Memorandum of Law by Cross-Movant | 8 |
At the call of the calendar on October 4, 2022, the court, to the extent set forth herein, granted the motion by Petitioner, The McKelvey Entrepreneurial Foundation (MEF or Petitioner), to compel certain document discovery from Respondent Bradford Peters (Peters or Respondent) as successor executor of the estate of decedent Andrew McKelvey. The court also granted the Respondent's cross-motion for a protective order in part, finding Petitioner's discovery demands overbroad. In the underlying petition, MEF, the residuary beneficiary of the estate, seeks the removal of Peters as executor.
Peters's removal is sought based on allegations that he breached his fiduciary duty as executor because of his divided loyalty as evidenced by his use of his position as majority owner and designated manager of a Delaware limited liability company, Health Diagnostics, LLC (HD), to modify HD's operating agreement to the disadvantage of the estate's minority interest (stated to be 23.529% of HD) and also that he directed distributions from HD to another LLC, generating management fees for Peters. Additionally, Petitioner claims that Peters has failed to provide the estate's beneficiaries with information about HD. Peters denies the allegations and argues, among other things, that the complained-of management fee arrangement existed when the decedent was alive and that his acts benefited HD and therefore, the estate's interest in it.
Petitioner also sought originally Peters's immediate suspension as well as injunctive relief but the court, by decision dated June 25, 2021, denied those requests. Thereafter, the parties stipulated to a discovery schedule, but disputes as to the scope of discovery led to the instant cross-motions.
In the instant motion, Petitioner sought to compel Peters's response to its broad discovery demands regarding HD's management and finances, while Peters's cross-motion for a protective order claimed, on jurisdictional grounds, that little or nothing regarding HD is discoverable in this proceeding. According to Peters, this court cannot compel the requested discovery regarding HD in this removal proceeding because the court does not have subject matter jurisdiction to order what would in essence be an accounting for HD, an entity in which the estate has only a minority interest. Peters, however, has failed to establish that issues arising from a fiduciary's administration of an estate's minority interest in a business entity are outside this court's subject matter jurisdiction over all matters relating to "estates and the affairs of decedents" (SCPA 201 [3]; see NY Const art VI, § 12[d]; Matter of Piccione, 57 N.Y.2d 278, 288 [1982] ["[F]or the Surrogate's Court to decline jurisdiction, it should be abundantly clear that the matter in controversy in no way affects the affairs of a decedent or the administration of [the] estate" (internal citations and quotations omitted)]).
The court briefly touched on this threshold issue in its June 25, 2021 decision, noting that an estate fiduciary who also controls a business entity in which the estate is interested can be accountable to estate beneficiaries in Surrogate's Court (Matter of McKelvey, Sur Ct, NY County, June 25, 2021, File No. 2008-4410/G/H, at 3, n2). The issue was not fully briefed previously however, and for that reason, the court does not consider its 2021 decision as law of the case, which Petitioner sought to argue on these motions.
"The surrogate's court shall have jurisdiction over all actions and proceedings relating to the affairs of decedents, probate of wills, administration of estates and actions and proceedings arising thereunder or pertaining thereto, guardianship of the property of minors, and such other actions and proceedings, not within the exclusive jurisdiction of the supreme court, as may be provided by law" (NY Const art VI, § 12[d]).
Here, MEF alleges as a basis for Peters's removal that he breached his fiduciary duty to the estate's beneficiaries while acting in his dual roles as executor and owner of the majority interest in HD. Such a claim (and the discovery to advance it) falls squarely within the purview of this court's jurisdiction as a matter relating to decedent's estate and its administration.
The older authority on which Respondent relies for its position - Matter of Sylvester (5 A.D.2d 970 [1st Dept 1958]) - does not compel a different result. In that case, the Appellate Division, First Department indicated that the Surrogate's Court could not compel the executor to account for the operations of a corporation in which the decedent held a majority interest where the executor had distributed the shares pursuant to decedent's will to their beneficiaries and did not own any of the corporate stock. In contrast, Petitioner alleges here that the executor held the estate's minority interest in HD when at the same time he was a majority owner of HD in his individual capacity, as well as HD's Designated Manager and conducted HD's business to benefit himself and not the estate.
To the extent that Matter of Sylvester reflects a more limited view of this court's jurisdiction, a later decision - Matter of Brandt (81 A.D.2d 268 [ 1 st Dept 1981])- makes clear that Sylvester is no impediment to the exercise of jurisdiction here. There, the remainder beneficiaries of two trusts commenced a proceeding to remove the trustees and to recover damages from the general partners (who were also the trustees of the trust at issue) of a limited partnership in which the trusts had a 50% limited partnership interest.
The Appellate Division, First Department in Brandt cited its prior decision in Matter of Sylvester but held that allegations that the trust was harmed by the waste and diversion of partnership assets and the futility that the trustees would sue themselves as general partners was a sufficient basis for the Surrogate's Court to exercise jurisdiction over the trust beneficiaries' claims as they related to the management of the partnership. It was no impediment for the Surrogate's Court to order an accounting by the general partners as sought on behalf of the trusts (as limited partner) that they "h[e]ld their positions as general partners in their individual capacities, and not as executors or trustees of the testator's estate" (Brandt, 81 A.D.2d at 276).
Brandt thus stands for the proposition that an estate need not have a controlling interest in a business entity for this court to exercise jurisdiction to compel an account, particularly where there are allegations of bad faith, waste, diversion, or improper exploitation by an estate fiduciary functioning in dual capacities. This court recognized as much in Matter of Hotung (NYLJ 1202618182717, at * 1, 2013 WL 4510402 [Sur Ct, NY County]), where it noted, citing Matter of Brandt, that it could order the trustee to account for business interests in which the trusts at issue held minority ownership positions, but declined to do so on the facts there presented. As these cases make clear, estate beneficiaries are not relegated to seeking judicial remedies against an estate fiduciary alleged to have violated their duty of loyalty in a court of general jurisdiction simply because the business entity at issue is not majority owned or controlled by the estate (Brandt, 81 A.D.2d at 277-78). This court has jurisdiction in the context of this removal proceeding to adjudicate MEF's claim that Peters violated his fiduciary duty as a result of his divided loyalty.
Peters argues that the estate's interest in HD was not needed by Peters to conduct some "supermajority" activities as required under the LLC's operating agreement, including the amendments Peters made to such agreement. MEF counters that Peters in fact executed such amendments as decedent's executor - that is, using the estate's interest in HD - in addition to implementing them using Peters's individual interest in HD. To the extent that the parties ask the court to resolve in these discovery motions the issue of whether use of the estate's interest in HD was necessary to implement the HD operating agreement amendments, it declines to do so.
Also without merit is Peters's further argument that MEF, as residuary beneficiary, lacks standing to seek information regarding HD because it is not a current member of the LLC. Where, as here, the fiduciary normally charged with taking action to protect estate or trust assets cannot be expected to do so because of a conflict, beneficiaries may seek redress on the estate's or trust's behalf (Brandt, 81 A.D.2d at 279-80 [trust beneficiaries have right to sue on behalf of trusts where trustees will not act in accordance with their fiduciary obligations]). The application is one in the nature of a derivative action, brought on behalf of the business itself, where, like here, the manager or director will not take action because they are the person alleged to have engaged in waste, bad faith, or self-dealing (see id.).
Based on the foregoing, the court decided that in the context of this proceeding to remove Peters as executor it has jurisdiction to entertain the claim that the executor, while acting in his capacity as majority owner and designated manager of HD, in which the estate has an interest, violated his fiduciary duty to the estate's beneficiaries because of his divided loyalty (Brandt, 81 A.D.2d at 279-80). Accordingly, the court allowed discovery to advance such claim, including an investigation into the executor's handling of the estate's interest in HD.
The parameters of what discovery Petitioner is entitled to were set forth generally in the court's 2021 decision: "Petitioner is entitled to disclosure concerning its allegation that the Executor, due to a divided loyalty between his own interests in HD and the interests of the estate in that entity, has breached his fiduciary duty to the estate's beneficiaries" (Matter of McKelvey, Sur Ct, NY County, June 25, 2021, File No. 2008-4410/G/H, at 3, n2). Additionally, in the context of this removal proceeding, "Petitioner should be allowed inquiry into Peters' proceedings as Designated Manager of HD after his appointment as the estate's fiduciary" (id.). This latter inquiry necessarily includes, to an extent, the management of HD and the estate's interest in it and whether the executor engaged in improper self-dealing or inappropriately used his controlling interest in the LLC to the detriment of the estate (see Matter of Tananbautn, NYLJ, April 13, 1988, at 14, col 1 [Sur Ct, NY County] [trust beneficiaries entitled in an accounting to discovery regarding real estate corporation, controlled by co-trustee, in which trust assets were invested]).
The cross-motion for a protective order was also granted in part, however, because the discovery demands Petitioner served on the executor were overbroad. They sought for instance, "All HD financial statements" and also, "All documents and communications" concerning, among other things, HD's capital funding. The court thus directed Petitioner to reformulate its demands to request information or documents that relate to the specific allegations in the petition.
The reformulated demands were directed to be served by Petitioner no later than October 25, 2022, with the response directed no later than November 22, 2022.
This decision, together with the transcript of the October 4, 2022 proceedings, constitutes the order of the court.