Authored by: Michael C. Levy, Esq.

When a fiduciary relationship exists, whether between a trustee and beneficiaries or a lawyer and their clients, it is incumbent upon the fiduciary to keep the people they represent informed and to ensure that the represented parties understand the actions being taken on their behalf.  Failure to do so could have very negative consequences and, as shown in a recent decision by the New York Surrogate’s Court, may allow aggrieved parties to raise claims of constructive fraud.

In 2002, Rocky Aoki, the founder of the Benihana restaurant chain, married for the third time.  Prior to this marriage, Rocky had transferred his entire interest in Benihana, Inc. to a trust for the benefit of himself and his children.  A fact that would later prove important in this matter was that the trust agreement was drafted by a trust and estates lawyer who Rocky had never met, but who was retained by his longtime personal attorney for over 30 years.

Within the trust agreement that he signed, Rocky was given a testamentary power to appoint the corpus of the trust at his death without limitation chosen beneficiaries.  Concerned that their father would attempt to leave a portion of the company to his new wife, Rocky’s children contacted their father’s trusts and estates attorneys about preparing releases (of the testamentary power of appointment) for their father to sign.  The release was in fact executed by Rocky but, as was determined by the Court, never shown to Rocky prior to his signing.  (An interesting lesson looms here for all T&E practitioners to make sure all draft instruments are accompanied by letters/memorandum of explanation.)  By signing these releases, Rocky could only appoint his interests in the trust to his children.  The releases also stated that they were irrevocable and therefore incapable of being undone.  The releases stated:

“I hereby partially release that power of appointment so that, from now on I shall have only the following power: I shall have a testamentary power to appoint any of the principal and accumulate net income remaining at my death to or for the benefit of any one or more of my descendants…”

Rocky later attempted to appoint a portion of the trust corpus to his wife by a new last will and testament drafted by his new trusts and estates attorneys.  His original attorneys informed him that the previously signed releases prevented him from appointing the Trust corpus to his wife.  Rocky died in 2008 and his wife offered his will for probate.  His children sought a declaration that the releases signed by Rocky were valid and that they foreclosed his wife from taking any portion of the trust.

The New York Surrogate’s Court dismissed the children’s motion for summary judgment on the grounds that Rocky’s wife presented a triable issue of whether Rocky’s original attorneys had failed to inform him of the contents of the releases.  Based on Rocky’s testimony in an unrelated matter, evidence existed that Rocky didn’t understand the content of the releases his attorneys had him sign.  In such situations, where a fiduciary relationship exists, a failure by the fiduciary to properly explain to the person they represent what they are signing may provide the basis for a claim that constructive fraud existed.

Critical to the Surrogate’s Court reasoning was the fact that neither of Rocky’s attorneys advised him of the million-dollar tax consequences of the September, 2002 Release, which deprived him of the marital deduction.  The Court noted that the only way to satisfy the anticipated estate tax obligations due the estate would have been to sell Benihana, Inc. stock, something that Rocky loathed to do.

The Court went on to point out that it seemed clear that Rocky’s attorneys had an impermissible conflict of interest when the September, 2002 Release was signed.

While the Court has yet to rule conclusively on whether constructive fraud was present, the possible failure of Rocky’s original attorneys may require his children to prove that Rocky’s signature was not acquired by misrepresentation or omission by his counsel.