Papers Considered:1. Petitioner’s Notice of Motion for Default and Summary Judgment dated March 1, 2018;2. Petitioner’s Memorandum of Law in Support of Motion for Default and for Summary Judgment dated March 1, 2018;3. Affirmation of Aaron F. Carbone in Support of Motion for Default and Summary Judgment dated March 1, 2018;4. Respondent’s Affidavit in Opposition to Motion for Default and Summary Judgment dated March 14, 2018; and5. Petitioner’s Reply Affirmation dated March 19, 2018.DECISION AND ORDER Before this Court is a motion for default judgment and summary judgment requesting the Court to: (1) issue an order and judgment holding respondent in default of the Court’s conditional order dated January 3, 2018; (2) determine that respondent has engaged in unlawful self-dealing and direct respondent to return $725,453 to the estate; (3) surcharge respondent for consequential damages, accrual damages, costs and attorneys’ fees suffered by the estate as a result of alleged self-dealing; and (4) direct the parties to appear for a hearing to determine the amount of any surcharges against respondent. Respondent opposed the motion, in part, and the matter was submitted for decision. William J. Smith (hereinafter decedent) died testate on May 19, 2003, a resident of Albany County. His Last Will and Testament dated March 1, 2001 was offered for probate by respondent on July 11, 2003, through his counsel Matthew J. Kelly, Esq. of the law firm Roemer Wallens Gold & Mineaux, LLP. This Court issued Preliminary Letters Testamentary to respondent on July 11, 2003, and subsequently admitted the will to probate and issued Letters Testamentary on February 7, 2006 (Doyle, S.). Pursuant to Article III of the will, 70 percent of decedent’s stock in Quailman Investors, Inc. was to be held in trust for distribution by the trustee “as he deems fit according to my instructions, and for the college education of various individuals as per my instructions.” Decedent’s will also left 15 percent of Quailman Investors to respondent and 5 percent to Aaron Berhaupt. By decision of this Court construing the will, Surrogate Doyle found “that the decedent’s testamentary intent is clear. His dominant plan of distribution was to place the majority of his assets — seventy percent (70 percent) of the stock in his closely held company, plus the remainder of his estate — in trust for a particular group of children.” The Court found fourteen individuals, many of them minors, to be the intended beneficiaries of the estate. Respondent was named as trustee under Article VI of said will, but did not obtain letters of trusteeship.At the time of his death, decedent owned 90 percent of Quailman Investors and the other 10 percent was owned by respondent. The probate petition and the application for preliminary letters testamentary filed by respondent listed the gross value of the assets in the estate to be greater than $100,000, but less than $250,000, and, in an incomplete accounting filed with this court in 2007, respondent listed the value of Quailman Investors as $20,000. A guardian ad litem was appointed by this Court (Nichols, S.) in a proceeding brought by respondent to terminate the trust as uneconomical, in January 2010. The guardian ad litem’s report revealed the net value of real property sales by Quailman Investors between October 31, 2003 and May 10, 2004 to be $960,184.41. Respondent retained his estate counsel, Matthew J. Kelly, of Roemer Wallens Gold & Mineaux, LLP, to assist with the real property sales by Quailman Investors.A supplemental report of the guardian ad litem revealed a corporate resolution, adopted at a special meeting of the Board of Directors of Quailman Investors and signed by respondent as Secretary of the Corporation on August 15, 2003, paying himself $435,000 in deferred compensation for the years 1973 through 2002, and a salary of $290,453 for the year 2003, without court authorization in an act of alleged self-dealing. Said resolution states:The following is a true copy of a resolution adopted by the Board of Directors, Shareholders of Quailman Investors, Inc. at a special meeting of said board held on August 15, 2003.RESOLVED, that the corporation pay Jerold A. Nadel $15,000.00 per year commencing in 1973 and continuing through 2002 for services thereon for a total of $435,000.00 an after tax amount which amount to be paid pursuant to the sale of property herein, and further resolved that he be paid an appropriate salary for the year 2003.RESOLVED, that the Secretary of the Corporation be authorized on behalf of the corporation to execute any and all documents necessary to make such payments.The resolution was then signed “Jerold A. Nadel, Secretary.”According to the guardian ad litem’s supplemental report, there were no minutes of said meeting offered and the identity of the persons at that meeting could not be determined. At the time of the corporate resolution and subsequent real estate sales, respondent remained a minority shareholder of Quailman Investors (10 percent) and was acting in a fiduciary capacity as preliminary executor of decedent’s estate, representing the estate’s 90 percent interest in the corporation since decedent’s will had not been probated at that time. This made respondent the sole director and officer of Quailman Investors at the time the Board adopted the corporate resolution to pay himself $725,453 out of the proceeds of estate assets sold after decedent’s death.The guardian ad litem’s report also revealed that the Corporate Income Tax Return for Quailman Investors for the fiscal year August 1, 2003 through July 31, 2004 reflected not only the sale of real property and the payment to respondent in the amount of $725,453, but a $72,989 loan to shareholders that had been repaid. Notably, the return does not identify the shareholder repaid, nor does the proposed estate accounting reflect the payment so it was assumed by the guardian ad litem that the payment was to respondent. Finally, two other significant deductions were questioned in the report; specifically, $15,160 in supplies and $14,000 in travel. These amounts were questioned for two reasons. First, the guardian ad litem thought it was unusual that aggregate expenses in any category would appear as such round numbers. The expenses also reportedly seemed excessive given that respondent lived in Albany County at the time the corporation was in the process of liquidating its inventory and all of the real property sold was also in Albany County.By Order of this Court dated August 31, 2015, Letters Testamentary issued to respondent were revoked due to his failure to comply with the numerous orders to file a complete accounting. Petitioner, Public Administrator, was thereafter appointed as the Temporary Administrator CTA of the estate and subsequently attempted to obtain information from respondent necessary to render a proper account, which included a valuation of Quailman Investors. Respondent failed to cooperate with petitioner’s requests. On January 31, 2017, petitioner commenced this discovery proceeding pursuant to SCPA 2103, seeking to obtain personal property from respondent in the amount of $960,184.41. According to petitioner, this figure represents the profits from the sale of assets held by Quailman Investors at decedent’s death, and subsequently paid by respondent to himself as secretary of Quailman Investors while he was the preliminary executor of the estate.On March 10, 2017, respondent, through Attorney Kelly, moved for a protective order and to vacate the Order of the Court removing him as executor. This motion was denied by Order of this Court entered June 8, 2017, and respondent was ordered to file an answer in the discovery proceeding within ten days of service of notice of entry of the Order. Respondent appealed this decision and moved for an order pursuant to CPLR 2201 staying the discovery proceeding pending the appeal.1 Respondent’s motion to stay the discovery proceeding was denied by Decision and Order of this Court dated August 1, 2017 and respondent was ordered to comply with the scheduling order issued by this Court.2 On October 26, 2017, petitioner moved to compel compliance with discovery demands, to preclude respondent from offering any evidence or testimony to substantiate his compensation pending compliance with the discovery demands, within thirty days of the order and conditionally striking respondent’s answer. By Decision and Order of this Court dated January 3, 2018, petitioners motion was granted and respondent subsequently appealed.Respondent’s counsel then moved for recusal of the Surrogate based on his alleged bias and prejudice against respondent and respondent’s counsel. By Decision and Order of this Court dated February 26, 2018, respondent’s motion was denied and respondent subsequently appealed. Now before this Court is a motion for summary judgment and default judgment requesting the Court to find that respondent has engaged in unlawful self-dealing and to hold respondent in default of the Court’s order dated January 3, 2018.DISCUSSIONSelf-DealingOne of the most sacred duties of a fiduciary is the duty of undivided loyalty, also known as the duty against self-dealing (see Birnbaum v. Birnbaum, 73 NY2d 461, 466-467 [1989]; Meinhard v. Salmon, 249 NY 458, 464 [1928]). There is a strict prohibition against self-dealing because of the potential conflict of interest between the fiduciary’s private interest and that of an estate. Once a conflict of interest has been disclosed, the law imposes a “no further inquiry rule” and the fairness or unfairness of the underlying transaction is immaterial, and the transaction must be set aside (see City Bank Farmers Trust Co v. Cannon, 291 NY 125, 132 [1943]; Wendt v. Fischer, 243 NY 439 [1926]; Matter of Parisi, 111 AD3d 941, 943 [2d Dept 2013]; Matter of Coyle, 34 AD2d 612, 613 [3d Dept 1970]; Matter of Shehan, 285 App Div 785, 791 [4th Dept 1955]). This “rule is designed to obliterate all divided loyalties which may creep into a fiduciary relationship and utterly to destroy their effect by making voidable any transactions in which they appear” (City Bank Farmers Trust Co v. Cannon, 291 NY at 132). In cases where a fiduciary has placed himself in a position where his interest is in conflict with his duty of loyalty, the fiduciary may be surcharged (see Matter of Rothko, 43 NY2d 305, 321 [1977]; Matter of Ryan, 291 NY 376, 407 [1943]).It is undisputed in this case that respondent paid himself $435,000 in deferred compensation for the years 1973 through 2002, along with a salary of $290,453 for the year 2003 from estate assets, without court authorization. The payment was made at a time when respondent was in full control of Quailman Investors through his own 10 percent interest in the corporation and as preliminary executor of decedent’s estate, which held a 90 percent interest in the corporation.3 Respondent’s payment to himself in the amount of $725,453.00 from an estate asset while acting in a fiduciary capacity is in direct violation of his fiduciary duty of undivided loyalty to the intended beneficiaries of this estate. The Court finds, therefore, that respondent has engaged in unlawful self-dealing.When a determination is made that a fiduciary has engaged in self-dealing, the underlying merits or fairness of a transaction are irrelevant and the transaction must be set aside (see Matter of Rothko, 43 NY2d 305, 321 [1977]; Matter of Ryan, 291 NY at 407). As preliminary executor of decedent’s estate, respondent was charged with the welfare of the fourteen individuals who were the intended beneficiaries of 70 percent of Quailman Investors as valued on decedent’s date of death. Thus, the Court finds that the payment in the amount of $725,453.00 must be set aside and returned to the estate.Respondent was also expressly prohibited from paying himself an alleged claim against the estate without Court approval (see SCPA 1805). Akin to a finding of self-dealing, when a fiduciary pays himself a claim without leave of the court, he must return the funds and is subject to surcharge, which can include, among other things, costs, attorney fees and interest (see Matter of Pritchard, 138 Misc 2d 945, 949 [Sur Ct, Suffolk County 1988]; Matter of Annunziato, 201 Misc 971, 972 [Sur Ct, Kings County 1951]; Matter of Maas, 38 NYS2d 261, 265 [Sur Ct, NY County 1942]). Petitioner argues that he is entitled to attorneys’ fees and costs, along with consequential and accrual damages, based on respondent’s conduct, including self-dealing and the payment of an unauthorized alleged claim held by respondent. While counsel fees generally “may not be collected by a prevailing litigant where there is no agreement, statute or rule providing for such fees and where the losing party has not acted maliciously or in bad faith” (Matter of Saxton, 274 AD2d 110, 121 [3d Dept 2000]; see Bibeau v. Ward, 228 AD2d 943, 946 [1996], lv denied 89 NY2d 804 [1996]; Parker v. Rogerson, 49 AD2d 689, 689 [4th Dept 1975]), here the record is clear that respondent acted in violation of his fiduciary duty and statutory obligation by paying himself $725,453.00 out of estate assets without court approval. As a result, petitioner was compelled to commence this proceeding to recover the funds, thus incurring significant costs and attorney fees. Based on the facts of this case, the Court grants petitioner’s request and awards counsel fees to be paid by respondent in an amount to be determined at a hearing before this Court on June 22, 2018 at 9:00 am. Any further surcharge will be determined at that time as well (see Matter of Rothko, 43 NY2d at 321; Matter of Billmyer, 142 AD3d 1000, 1002 [2d Dept 2016]).Default Judgment for Failure to Comply with January 3, 2018 OrderBy Decision and Order of this Court dated January 3, 2018, respondent was ordered to provide responses to petitioner’s discovery demands within thirty days. The Court also granted petitioner’s motion to conditionally strike respondent’s answer and preclude him from offering any evidence or testimony to substantiate his claims pertaining to his deferred and officer compensation pending compliance with the discovery demands within thirty days. Respondent has failed to comply with the Court’s order within the time period prescribed, which makes the order absolute absent an adequate explanation for the delay (see Kihl v. Pfeffer, 94 NY2d 118, 123 [1999]; Willis v. Keeler Motor Car Co., 121 AD3d 1373, 1375-1376 [3d Dept 2014]; Matter of Kalin, 79 AD3d 1381, 1383 [3d Dept 2010]). To “obtain relief from the dictates of a conditional order…, the defaulting party must demonstrate (1) a reasonable excuse for the failure to produce the requested items and (2) the existence of a meritorious claim or defense” (Gibbs v. St. Barnabus Hosp, 16 NY3d 74, 80 [2010]).Respondent provides two explanations for failure to produce the requested items. The first is that respondent should not be required to respond until the appeals of the Court’s January 3, 2018 and February 26, 2018 orders are decided. As set forth in the Court’s Decision and Order dated August 1, 2017, a pending appeal does not stay discovery (see CPLR 2201, 5519; Matter of Eshagian, 48 Misc 3d 920, 923 [Sur Ct, Queens County 2015]). Respondent’s second explanation for delay is that he cannot be compelled to produce information he does not have. Respondent alleges that he has provided the entire collection of records on Quailman Investors and that he cannot be compelled to create information that he does not have, including a record of an alleged compensation agreement. Notably, the only document that has been discovered to substantiate the alleged deferred compensation and officer compensation payment is the Certificate of Resolution discovered by the guardian ad litem in a prior proceeding.Despite respondent’s claim that that he is not in possession of documentary evidence to support the date of death valuation of Quailman Investors or substantiation for the deferred compensation and salary payments, respondent claims that there are two witnesses, namely Sidney Richter and Donna Trainor, with material and relevant information with regard to the corporate valuation and payments. Respondent asserts that the Court has “taken the extraordinary steps of precluding depositions from proceeding,” however, at a discovery conference on the record before this Court on October 12, 2017, it was determined that the depositions were premature because respondent had not responded to petitioner’s paper discovery demands. Petitioner repeats his position in this matter that attempting to depose non-party witnesses sympathetic to respondent before the completion of paper discovery is extremely prejudicial to petitioner. The Court understands petitioner’s concern, however, given that depositions of respondent’s witnesses are alleged to be a way to obtain relevant information about the circumstances of the $725,453.00 payment and the date of death valuation of Quailman Investors, the Court will allow the depositions to proceed by May 31, 2018. The Court’s conditional order will become absolute on the completion of the depositions of Mr. Richter and Ms. Trainor.Accordingly, it is herebyORDERED that petitioner’s motion for summary judgment is granted; and it is furtherORDERED that respondent shall deliver a certified check in the amount of $725,453.00 to Michael F. Conners, II, as administrator of the estate, within 30 days of the date of this order; and it is furtherORDERED that petitioner shall be entitled to reasonable attorney fees and expenses related to the recovery of the $725,453.00 payment to respondent, which amount shall be paid by respondent pursuant to a subsequent order of this court; and it is furtherORDERED that the parties, including respondent, appear at Albany Surrogate’s Court, Room 111 on June 22, 2018 at 9:00 am for a hearing to determine the precise amount of any additional surcharges to be imposed on respondent; and it is furtherORDERED that the depositions of respondent’s witnesses, Mr. Richter and Ms. Trainor take place no later than May 31, 2018, and that the Court’s conditional order will become absolute upon completion of the depositions.This constitutes the Decision and Order of this Court.Dated and Entered:
