03.13.2018

NJ Appellate Division Upholds Award of Counsel Fees Under the Niles Exception

In The Matter of The Estate of Irene Halpecka, No. A-5400-15T1 (N.J. Super. Ct. App. Div. Jan. 10, 2018).

This is an unpublished Appellate Division opinion arising out of Burlington County. Plaintiffs and Rosemary Walsh (“Rosemary”) were the residuary devisees under the will of Irene Halpecka.  Rosemary was also the executor and Halpecka’s agent under a power of attorney.  Plaintiffs filed a complaint against Rosemary, individually, in her capacity as agent for Halpecka and as executor.  Plaintiffs alleged fraud, conversion, breach of fiduciary duty, undue influence and unjust enrichment.  Plaintiffs also named Rosemary’s husband John as a defendant, alleging complicity in Rosemary’s actions.

Following a bench trial, the trial court found that immediately after Halpecka executed the power of attorney Rosemary undertook a convoluted series of financial transactions whereby she transferred Halpecka’s assets to herself, reducing Halpecka’s probate estate by hundreds of thousands of dollars and leaving minimal assets for distributions to the remainder devisees. The court also found that Rosemary transferred several thousand dollars to herself while Halpecka was on her death bed.

The court found that Rosemary executed undue influence over Halpecka and violated her fiduciary duties both as attorney-in-fact and executor. The court also found that John was aware of his wife’s activities and the substantial amount of money that she transferred into their joint accounts, which was used for their mutual benefit.  The court concluded that John was complicit in and unjustly enriched by Rosemary’s undue influence over Halpecka.  The court imposed a constructive trust on all assets Rosemary transferred to herself and John, totaling $580,442.59, which the court found rightfully belonged to the estate.

Plaintiffs sought counsel fees totaling $142,294.50. Defendants did not dispute that amount.  Rather, they argued that the exception to the American Rule recognized in In re Niles, 176 N.J. 282 (2003), which allows counsel fees to be assessed against an executor or trustee who commits undue influence, did not apply because (i) plaintiffs were not representatives of the estate but merely third party beneficiaries who could not seek redress for actions Rosemary took as agent and (ii) the allegation was not that Rosemary exercised undue influence or fraud in becoming a fiduciary but instead that she misused her fiduciary status.  The trial court disagreed, ruling, “The fact that Rosemary took the money through the front door of a power of attorney exercising undue influence is no different than if she had removed the money through the back door by exercising undue influence on the execution of a will by Halpecka.  The result is the same and the Niles principals equally apply.”  The court ordered the Rosemary and John to pay plaintiffs’ counsel fees in the amount of $101,806.00.

The Appellate Division affirmed, noting that the Supreme Court in Niles had ruled that “when …an executor or trustee reaps a substantial economic or financial benefit from undue influence, the fiduciary may be assessed counsel fees incurred by plaintiffs … in litigation to restore the estate’s assets to what they would have been had the undue influence not occurred.”

Rosemary and John filed a petition for certification.  Rosemary and John asked the court to address, “Whether the common law exception to the American Rule in Niles permits reimbursement of fees incurred by third party will beneficiaries challenging decedent’s inter vivos transfers to fiduciaries, where the documents creating the fiduciary relationship themselves are not challenged.”

As a reason for granting certification, Rosemary and John argued, “The Niles exception is said to apply when an executor or trustee commits the pernicious tort of undue influence.  Yet, recognizing the danger of opening the flood gates, this court cautioned in Niles that the exception is limited to matters where an executor’s undue influence results in the development or modification of estate documents that create or expand the fiduciary’s beneficial interest in the estate.  However, here, the third party beneficiaries to a will, not acting on behalf of the estate, challenged inter vivos transfers to Rosemary and John but never challenged the documents creating a fiduciary relationship, namely a power of attorney and later several wills.”

The Supreme Court denied certification. On March 27, 2014, the Supreme Court denied Rosemary and John’s request for reconsideration.

The trial court judgment had been entered on February 18, 2010. Almost six years later, on June 7, 2016, Rosemary and John filed a motion pursuant to R. 4:50-1 to vacate that part of the judgment requiring them to pay counsel fees.  Rosemary and John argued that they were entitled to relief because the recently decided In re Folcher, 224 N.J. 496 (2016), supported the interpretation and application of the Niles exception they had argued in their prior appeal and petition for certification.  According to Rosemary and John, Folcher clarified that the Niles exception must be strictly limited to situations where an estate’s assets were depleted by one with a fiduciary obligation to estate beneficiaries, not simply the decedent.  Rosemary and John argued that because Rosemary’s fiduciary obligations under the power of attorney were only to Halpecka, plaintiffs could not recover fees for work performed to recover inter vivos transfers.

Judge Dow issued a written opinion denying the motion, finding that a change in the law or in the judicial view of an established rule of law did not constitute extraordinary circumstances that would justify relief from a final judgment under R. 4:50.  The Appellate Division affirmed, providing two reasons.  First, the Appellate Division agreed with Judge Dow that a change in the law is not a sufficient basis to warrant relief from a final judgment under R. 4:50.  Second, the Appellate Division noted that the facts in Folcher were distinguishable from the facts in Halpecka.  Specifically, in Folcher the defendant was not an attorney-in-fact to the decedent or the executor.  She owed no fiduciary duty to the decedent, the decedent’s estate or the estate’s beneficiaries.  However, Rosemary was Halpecka’s attorney-in-fact and executrix.  The court concluded “Knowing that Halpecka designated plaintiffs as one-third beneficiaries of her estate, Rosemary used her power of attorney to make inter vivos transfers to herself and John that depleted the estate, nullifying Halpecka’s testamentary intent and depriving plaintiffs of their rightful bequests.  Under the egregious circumstances of this case, plaintiffs were entitled to an award of counsel fees against defendants under the Niles exception.”