Authored by: Paul J. Sowell, Esq.
In a major battle involving the estate of the late Dr. Atkins, his surviving spouse has successfully sought the removal of three of her joint trustees. Dr. Atkins, the famous physician who created the Atkins diet, died in 2003. His estate was valued at several hundred million dollars. His Last Will and Testament directed that 90 percent of his residuary estate be given to a Marital Trust for the benefit of his wife, Veronica, with the balance of his estate set aside for the benefit of his private charitable foundation.
Many states have procedure whereby one can petition a court to remove a trustee. Under New York law, the statute for a party filing a removal proceeding is Section 711 of the Surrogate’s Court Procedure Act which sets forth several broad grounds for trustee removal including:
- Wasting or improperly applying the assets of the estate;
- Improvidently managing or injuring the Trust property;
- Misconduct in the execution of his office, or dishonesty, drunkenness; improvidence or want of understanding.
While the statue addresses many appropriate circumstances for removal, it does not provide guidance as to whether hostility between a beneficiary and a trustee warrants removal. New York courts have commented that mere friction between a beneficiary and a trustee does not warrant removal, but have concluded on occasion that removal of a trustee may be warranted when unfriendly personal relations and differences of opinion would threaten the administration of the trust.
All of this makes the current holding in the Atkins decision important for practitioners and clients to understand because of the degree of hostility and apparent conflicts of fiduciary duties that arose in this case.
A BIT OF ATKINS HISTORY
According to the recent Surrogate’s Court decision, MATTER OF A PETITION TO REMOVE CERTAIN INDIVIDUALS AS CO-TRUSTEES OF THE MARITAL TRUST UNDER THE WILL OF ROBERT C. ATKINS, DECEASED, 4/9/2010 N.Y.L.J. 34, (col. 6) Dr. Atkins’ will was admitted to probate on April 28, 2003. Letters testamentary and trusteeship were granted to his wife, Veronica, and two other persons who were business associates of Dr. Atkins. Within nine months of taking office, these two business associates resigned and were succeeded by respondents (co-trustees) Messrs. Metz, Mezzanotte and Corrigan.
A few facts about these respondent co-trustees are worthy of note. First, in May, 2003 Mrs. Atkins entered into an oral retainer agreement for legal and accounting services for $50,000 per month. A written retainer agreement followed in July, 2003 but was made retroactive to May, 2003. The court noted that pursuant to the fee agreement two of the trustees were paid more than $1 million in fees within the first six months of their work.
NOT A BAD DAY’S PAY!
Two days after the appointment of Messrs. Metz, Mezzanotte and Corrigan as co-trustees, Mrs. Atkins signed a “Trustee Fee Allocation Agreement” in which she waived her own share of fiduciary commissions, thus leaving the bulk of the commissions to the other trustees. Mrs. Atkins also signed, without the benefit of independent counsel, a Royalty Services Agreement with MMC Royalty Services, a Florida LLC. The LLC established by the three co-trustees, was set up to oversee the publishing and royalty interests held by Dr. Atkins’ estate. According to the agreement, Mrs. Atkins was personally obligated to pay her co-trustees a monthly minimum sum of $100,000.
The Court also found it interesting to note that the co-trustee were (after their fiduciary appointments became effective) named as beneficiaries under separate estate planning instruments for Veronica Atkins.
In 2006, Veronica became disenchanted with her co-trustees. In fact, according to the Surrogate’s Court, Mrs. Atkins stopped making payments under the Royalty Services Agreement claiming that her co-trustees had abused their positions as fiduciaries to further their own financial interests. Thereafter, the three co-trustees sued Mrs. Atkins in Florida for breach of contract seeking to enforce the terms of the Royalty Services Agreement.
Finally, in April, 2007 Mrs. Atkins commenced the removal proceeding under Surrogate’s Court Procedure Act section 711. In summary, she alleged that her co-trustees had overreached at her expense and at the potential expense of the charitable foundation and that this behavior rendered them unfit as fiduciaries. Second, she alleged that the acrimonious litigation commenced in Florida by her co-trustees had engendered such hostility between her and them as to disable them from serving the trust well.
The Surrogate noted that
“The overriding substantive principle in a proceeding such as this is that a fiduciary must act in the best interests of the estate and is therefore required to be among other things sensitive to the needs of the beneficiaries…”
The Court went on to note in its opinion that Courts exercise this discretion of removal only rarely, especially where they are called upon to remove a fiduciary chosen by the testator and will only do so upon a clear showing of serious misconduct that endangers the welfare of the estate. The court found that the case was replete with incontrovertible evidence of a level of vitriol between Mrs. Atkins and her three co-trustees which would inevitably burden the three co-trustee’s decision making abilities and would just ultimately make them subject to continuous second guessing “at every turn”.
In light of all of the issues considered by the court, the court concluded that the evidence submitted by Mrs. Atkins regarding the contractual transactions between Mrs. Atkins and the co-trustees and the “highly poisoned relationship” between Mrs. Atkins and the co-trustees warranted the courts decision to remove the co-trustees.
The relationship of trustee and beneficiary is similar to an arranged marriage where both are likely to be somewhat wary of the other. The tensions that exist frequently lead to open hostility and contentious litigation as in the Atkins case. To avoid future conflicts, every trust arrangement and the choice of trustee must be carefully considered.