Recent Cases:
Beneficiary Designation – Second Wife
In the Matter of Nathaniel Pallone, 2010 N.J. Super. Unpub. ____ (Docket No.: A-0968-09T3) (App. Div. 2010). On appeal from a Final Decision of the Department of the Treasury, Division of Pensions and Benefits. Before Judges Cuff and Simonelli.
This appeal concerns the life insurance benefit payable on the death of a member of the faculty at Rutgers University. Upon Decedent’s death, the death benefit was paid to Decedent’s first wife, who was the designated beneficiary. Decedent’s second wife argued that the death benefit should have been paid to her pursuant to a Change of Beneficiary Form which was signed by the Decedent prior to his death and filed with the Division of Pensions several days after his death.
The form submitted by Decedent’s second wife named her as primary beneficiary, and had “white-out” over the contingent beneficiary portion of the form. Due to the white-out, the form was rejected by Division personnel. There were also inconsistencies in the underlying facts presented by counsel for Decedent’s second wife. Based on the foregoing, the appellate court found that the Division properly rejected the change, authorizing payment to Decedent’s first wife.
Life Insurance – Beneficiary Designation (Divorce)
In re Estate of Paul Brown, deceased, 2010 N.J. Super. Unpub. LEXIS 681 (Docket No. A-5069-08T3) (App. Div. 2010). On appeal from the Superior Court of New Jersey, Chancery Division, Probate Part, Gloucester County. Before Judges Lisa and Baxter.
This matter involved the court’s apportionment of the proceeds of a life insurance policy among the Decedent’s children and his third wife based on the terms of a Property Settlement Agreement (“PSA”) which was upheld on appeal.
This appeal involved a dispute over the right to certain life insurance proceeds on Decedent’s life between Decedent’s third and final wife and Decedent’s children from his first marriage. Decedent entered into a PSA requiring him to maintain life insurance for his 2 minor children. Over the years, Decedent increased the policy amounts payable by his employer, each time, deleting the names of his sons as beneficiaries, in violation of the PSA, and naming his third wife as beneficiary. The increases were done on 3 separate occasions, only the last of which was done while Decedent was married to his third wife. Recognizing that Decedent had violated the PSA, the court was required to equitably apportion the proceeds.
The court concluded that the most equitable distribution was one that recognized both Decedent’s obligations under the PSA and Decedent’s desire to provide financial security for his third wife. Upon balancing the equities, the court determined that Decedent’s children should receive an amount up to the second increase, before Decedent met his third wife, with the remainder being distributed to his third wife.
The appellate court upheld the lower court’s decision, and also held that the matter was properly adjudicated on summary judgment as a matter of law, without the necessity of a plenary hearing.
Life Insurance – Beneficiary Designation (Divorce)
Provident Life & Casualty Insurance Company v. The Estate of Consuela Howard, et al., 2010 U.S. Dist. LEXIS 95153 (Docket No. 06-4482) (U.S.D.C. 2010).
The Estate filed a motion seeking summary judgment declaring the proceeds of life insurance on the Decedent’s life, which named the Decedent’s husband, as estate property in light of husband’s conviction of the murder of Decedent. The Court granted the motion based on N.J.S.A. 3B:7-1.1(a), wherein an individual forfeits all benefits of the estate if found to be responsible for the intentional killing of the Decedent. The court also remanded the matter to the Chancery Division on the issue of whether a constructive trust should be established for the minor children of the Decedent until they reach 21 years of age.
Life Insurance – Beneficiary Designation (Divorce)
American General Life Insurance Company v. Mi Ja Jae, et al., 2010 U.S. Dist. LEXIS 75857 (U.S.D.C. 2010).
This matter involved a dispute over the proceeds of a life insurance policy on Decedent’s life. Decedent purchased the policy and named his then fiancée as primary beneficiary, with his brother and sister as contingent beneficiary. Decedent broke off his relationship with his fiancée, and married someone else. Decedent made hand written changes to the beneficiary designation prior to his death naming his wife as beneficiary, but failed to send a copy of a new beneficiary designation form to the insurance company. The Court granted summary judgment directing the life insurance payable to the beneficiaries contained on the original form in the insurance company’s possession, thereby disregarding the handwritten change by the Decedent.
Annuities – Assets Passing by Operation of Law
Lincoln Benefit Life Company v. Linda Occhipinti, et al., 2009 N.J. Super. Unpub. LEXIS 535 (Docket No. A-2973-07T2) (App. Div. 2009). Before Judges Reisner and Sapp-Peterson.
Issue: Does a provision in Decedent’s Will expressly disinheriting a child control the disposition of an annuity contract which by its terms is distributable to the “Decedent’s surviving children”?
Holding: No. The terms of the annuity contract control, and the proceeds are distributable to each of the Decedent’s surviving children, including the one child specifically disinherited under Decedent’s Will. The annuity contract specifically provided that in the absence of a designated beneficiary, the annuitant’s remainder passed to the Decedent’s surviving children. The document falls outside of the Will and is a separate contract which controls the disposition of the annuity. The lower Court found that the contract was clear and unambiguous, and is therefore enforceable.
Business Succession Planning – Buy-out of Decedent’s Interest
Reutter v. Michael E. Dalsey, D.O., Reutter-Dalsey Associates, P.A., et al., 2009 N.J. Super. Unpub. LEXIS 1577 (Docket No. A-2610-07T3) (App. Div. 2009). Before Judges Winkelstein, Fuentes and Gilroy.
Issue: Was the trial Court’s grant of summary judgment proper in light of it’s refusal to allow extrinsic evidence to construe the terms of the Shareholder’s Agreement entered into by the Decedent governing the buy-out of his interest in a medical practice?
Holding: No. The trial Court erred by not allowing the parties to introduce extrinsic evidence as to their intentions when entering into the Shareholder’s Agreement pertaining to the utilization of life insurance to fund the buy-out of Decedent’s interest in the medical practice.
The trial Court refused to allow the plaintiff to introduce testimony of the attorney who drafted the Shareholders’ Agreement and Deferred Compensation Agreement and the contemporaneous letter written by the attorney which emphasized the purpose behind the agreements. On appeal, the Court found that Defendant should be given sufficient opportunity to present relevant extrinsic evidence to assist the trier of fact in determining what the parties intended when they signed the agreements in question governing the buy-out of Decedent’s shares in the medical practice.
Business Succession Planning – Life Insurance – Buy-Out
Banco Popular North America v. Pepe Sneakers, et al., 2009 N.J. Super. Unpub. LEXIS 2028 (Docket No. A-1717-07T1) (App. Div. 2009). Before Judges Fuentes, Gilroy and Chambers.
Issue: Is the Court’s grant of summary judgment and denial of a constructive trust over a life insurance policy intended to fund the buy-out of the shares of Decedent’s partner proper in light of the extrinsic evidence presented to the Court?
Holding: No. Two brothers, who were shareholders of a sneaker company, purchased individual life insurance policies on their own lives pursuant to the terms of a Shareholder Agreement entered into between them. The life insurance was required to be used as a buy-out of a deceased brother’s share in the company. Instead of complying with the shareholders’ agreement, each brother named their spouse as beneficiary and did not deposit the life insurance with the trustee, as provided for by the agreement. One brother died, and his life insurance was paid to his wife as designated beneficiary. The surviving brother stopped making payments under a loan with Banco Popular. Suit was filed by Banco Popular seeking to recover the amount due on the promissory notes signed by the brothers. A cross-claim was filed by the surviving brother against the deceased brother’s estate seeking to recover the proceeds of the life insurance policy. Motion for summary judgment requesting a constructive trust over the proceeds of the life insurance was denied as the lower Court found that the terms of the Shareholder’s Agreement governing the life insurance was abandoned. The Appellate Court reversed and remanded the matter for further proceedings as the trial Court failed to properly consider the intentions of the parties as to the abandonment of the agreement between them.
Business Succession Planning – Transfer of Decedent’s Interest in LLC -Operating Agreements
Brick Professional, LLC, et al. v. Anthony Napoleon, Jr., 2009 N.J. Super. Unpub. LEXIS 3194 (Docket No.: A-1283-08T3) (App. Div. 2009). Before Judges Axelrad and Winkelstein.
Issue: Are the notice, election and valuation procedures set forth in an LLC’s Operating Agreement unenforceable as contrary to the LLC statute?
Holding: No; the terms of the Operating Agreement control the admission into the LLC upon the death of a member.
The terms of the Operating Agreement provided that upon the death of a member, his interest must first be offered to a named designee for a period of 30 days. If the designee does not act, the remaining members are compelled to buy out the deceased member’s interest in the company.
The trial Court found that the election procedure set forth in the Operating Agreement violated the statute, and instead, what was intended under the agreement was to affect assignee status on the member’s designee. The trial Court held that upon the death of the member, the member’s designee became an “assignee” under the statute entitled to allocations and distributions in the company. The trial Court therefore rejected plaintiff’s contention that the member’s interest should be bought out at date of death.
On appeal, the Court held that members of an LLC can adopt election procedures that differ from the statutory scheme. The LLC statute governs only in the absence of an operating agreement. As a general matter, the terms of an operating agreement for which the members expressly bargained will be upheld. The matter was therefore remanded for a determination as to whether an election was made and if not, as to the appropriate valuation procedure to be engaged pursuant to the terms of the Operating Agreement.
Business Succession Planning – Valuation
W.R. Huff Asset Management Co., LLC, et al. v. The William Soroka 1989 Trust, et al., 2009 U.S. Dist. LEXIS 17940 (2009). Before Judge Hayden.
Issue: Is the interest of a member in a limited liability company terminated when, as part of his estate planning, he makes an invalid attempt to transfer his interest in the company to a trust containing a non-member beneficiary without first offering his interest to the rest of the membership, in violation of the Operating Agreement?
Holding: No. The attempted transfer was not effectuated and was therefore not in violation of the Operating Agreement.
Declaratory judgment was sought seeking to declare the attempted transfer by a member to his revocable trust as a violation of the Operating Agreement. A counterclaim sought payments through the end of the company’s existence, which expired after 10 years.
The Operating Agreement, governed by Delaware law, gave the company a right of first refusal on the sale or transfer of shares before they could be offered to a third party. A trust was created by one of the members and a letter sent to the manager to transfer the member’s interest to the trust. Pursuant to the terms of the Operating Agreement, this attempted transfer was void as it did not meet the requirements of the Operating Agreement. The Operating Agreement also did not give the company automatic redemption rights upon an attempted, but invalid transfer, it merely gave the company the right to override an attempted transfer to a non-member by purchasing for itself the interest to be transferred.
The Court therefore found that based on the terms of the Operating Agreement, and past practices, that the Decedent’s estate is entitled to continue in the member’s shoes and receive ongoing distributions until the end of the company’s existence.
Estate Planning – Beneficiary Designation – Divorce
Hadfield v. Prudential Ins. Co., 408 N.J. Super. 48 (App. Div. 2009), certif. denied, — N.J. – (N.J. Oct. 1, 2009). Before Judges Wefing, Parker and Lewinn.
Issue: Is a life insurance beneficiary designation naming Decedent’s ex-wife as beneficiary voided pursuant to N.J.S.A. 3B:3-14?
Holding: Yes.
The parents of a Decedent filed suit seeking to void the beneficiary designation of Decedent’s life insurance policy naming his ex-wife as beneficiary.
The provisions of N.J.S.A. 3B:3-14, although changed after Decedent’s initial designation of his ex-wife as beneficiary, controlled the disposition of his life insurance policy. Under the statute, a divorce or annulment revokes any revocable dispositions made by a divorced individual to his former spouse in a “governing instrument”, which includes a life insurance policy.
Affirming the trial Court, the Appellate Division held that the proceeds of the life insurance should pass as if the ex-wife predeceased the Decedent.
Estate Planning – Beneficiary Designation – ERISA
The Prudential Insurance Company of America v. Giacobbe, 2009 U.S. Dist. LEXIS 101202; 48 Employee Benefits Cas. (BNA) 2016 (U.S. Dist. Ct. 2009). Before Judge Thompson.
Issue: Is Decedent’s wife the proper beneficiary of Decedent’s group term life insurance policy as named beneficiary even though the Decedent submitted a change of beneficiary forms naming his parents and brother as beneficiaries to his employer, Prudential Insurance Company of America, who failed to process the change prior to Decedent’s death due to missing information on the form?
Holding: Yes, Decedent’s wife is the proper beneficiary. The change form submitted by Decedent was properly rejected, and the Court did not find that Decedent substantially complied with the requirements set out by Prudential to effectuate the change in beneficiary.
On March 6, 2007, Decedent submitted forms to change the beneficiary of his life insurance policy from his wife to his parents and brother. On March 21, 2007, the beneficiary change form was sent back by Prudential unprocessed as the form lacked the requisite social security numbers. Decedent died on March 22, 2007 without having responded to Prudential’s letter.
Decedent’s wife claimed that the change in beneficiary was governed by ERISA and required her consent to make a change. This was rejected as the plan was a welfare benefit plan which did not require consent, as opposed to a pension benefit plan, which does. A pension benefit plan provides retirement income whereas a welfare benefit plan provides benefits after the occurrence of a specific contingency.
The change form failed to meet Prudential’s requirements for making such a change. Failure to administer the plan in accordance with the beneficiary rules established by Prudential would be a violation of ERISA. Defendants claimed that Decedent substantially complied with Prudential’s requirements and the change should be enforced. If the insured substantially complied with the process required for a change of beneficiary (made every reasonable effort to effect the change in beneficiary), it may be enforced under New Jersey law. This is narrowly construed.
The Court held that Decedent failed to make every reasonable effort to comply with the change in beneficiary designation and his actions are therefore not sufficient to establish substantial compliance. He completed the forms himself and was in contact with the Defendants. He could have asked them for their social security numbers and placed them on the form, but failed to do so. Prudential properly rejected the change form and the Decedent’s wife is therefore entitled to the life insurance proceeds.
Estate Planning – Malpractice
Joseph DeVino, Jr. v. Gerald R. Della Torre, Esq., 2009 N.J. Super. Unpub. LEXIS 256 (Docket No.: A-2569-07T2) (App. Div. 2009). Before Judges Fuentes and Chambers.
Issue: Was Decedent’s child entitled to sue the scrivener of Decedent’s estate plan after a full trial in probate Court and after reaching a settlement with his siblings on the distribution of Decedent’s estate?
Holding: No. The matter was dismissed on summary judgment.
The scrivener prepared an estate plan for the Decedent whereby he left his residuary estate in equal shares to his 3 children. A Codicil was then executed disinheriting Plaintiff, Decedent’s son. At Decedent’s death, Plaintiff filed suit seeking to challenge his disinheritance. The matter was settled with plaintiff receiving $265,000. Plaintiff then filed suit against the scrivener of Decedent’s estate plan for malpractice claiming that he received less than 1/3 of the Decedent’s estate in settlement, and that the scrivener was liable for the remainder. The matter was dismissed on summary judgment by the trial Court which rendered a 23 page written opinion, and was affirmed on appeal. The Court held that Plaintiff failed to articulate a viable legal malpractice claim against the defendant – scrivener.
Irrevocable Trusts – Transfer of Assets to Trustee
Koste v. Turski, et al., 2009 N.J. Super. Unpub. LEXIS 2218 (Docket No.: A-1068-08T2) (App. Div. 2009). Before Judges Fisher and Gilroy.
Issue: Is it proper for the trustee of an irrevocable grantor trust which was established by the trustee pursuant to a general Power of Attorney given to her by the grantor, to transfer to herself by Deed real property out of the trust pursuant to the terms of the trust?
Holding: Yes. The trust was properly established pursuant to the power of attorney and that trust provided adequate authority for the transfer to be made.
Decedent’s daughter, pursuant to a Power of Attorney, created an irrevocable grantor trust in the Decedent’s name, with daughter as Trustee. Daughter had full discretion to distribute the principal and income of the trust to the daughter, and upon Decedent’s death, to daughter outright, and in default, in equal shares to daughter’s children. The Decedent conveyed real estate to the trust by Deed, reserving a life estate. A subsequent Deed was made by Decedent and daughter, as Trustee, conveying the property to daughter, individually. Suit was brought by a child of the daughter, after her death, seeking to void the transfer out of the trust to daughter, individually. Plaintiff argued that the daughter was the settlor of the trust and the trustee, and in violation of her duty to the residuary beneficiaries, liquidated the trust. The Court found that the daughter was not the grantor, she merely acted with authority under the Power of Attorney, and the terms of the trust gave her the authority to make the Deed transfer. Dismissal of the complaint was therefore affirmed.
Spendthrift Trusts – Child Support
Lerman v. Lerman, et al., 2009 N.J. Super. Unpub. LEXIS 2093 (Docket No.: A-1953-07T3) (App. Div. 2009). Before Judges Winkelstein and Gilroy.
Issue: Did the trial Court have the authority to order the payment of child support arrearages owed by a beneficiary of a spendthrift trust established in Florida?
Holding: No; the spendthrift provisions set forth in the trust agreement giving the trustees absolute discretion as to how much income and principal is to be distributed to the beneficiary prevents the Court from issuing an order requiring payment of child support owed by that beneficiary. The trust also provided for restriction on alienation and standard spendthrift provisions, and consisted of an account held in the State of Florida.
Factually, a judgment of divorce was entered and the beneficiary of the trust was ordered to pay alimony and child support. The beneficiary was eventually incarcerated, and a New Jersey Court issued a writ of execution to freeze all funds in the name of the beneficiary to secure the payment of child support arrearages. This included the account held by the spendthrift trust for his benefit. A restraining order was entered in Florida and the within appeal was filed.
A writ of execution may not be issued against the trust assets, it may only be issued against assets held in the beneficiary’s individual name. The Court upheld the spendthrift provisions, holding that the right of a third party to levy on assets of a beneficiary of a spendthrift trust are limited to disbursements from the trust, and if disbursements are wholly within the trustees’ discretion, the Court may not order the trustee to make such disbursements.