Tips From the Pros: Rocky Estate Planning

Tips From the Pros: Rocky Estate Planning

Among the most ubiquitous challenges confronting estate-planning lawyers are those that arise out of joint representations and the obligations of the lawyer to each of the parties represented. Such challenges frequently involve conflicts of interest, confidentiality and fulfilling the duty of loyalty to all such parties.

Although the most common joint representation scenario in estate planning involves spouses, joint representation problems can also arise when a lawyer represents or counsels multiple members of the same family occupying different generations. What follows is a dramatic, real-life story that demonstrates what can happen when estate planners seek to advise and assist members of a family whose objectives are, or become, irreconcilable.

 

Benihana Founder Saga Begins

Rocky Aoki was the founder of the Benihana Restaurant chain, comprising approximately 110 restaurants worldwide. The restaurant chain was controlled by Benihana of Tokyo, Inc. (BOT), which Rocky controlled in its entirety. In 1998, Rocky was convicted of insider trading and resigned from his positions related to the restaurant chain. 

In 1998, on Rocky’s behalf, his personal lawyer of 30 years, L1, engaged a trusts and estates lawyer, L2, to draft the governing instrument of an asset protection trust, the Benihana Protective Trust (the BPT), for Rocky. Rocky transferred his interest in BOT to the BPT. Rocky and his six children were discretionary beneficiaries. Rocky also held a testamentary limited power of appointment (POA) exercisable in favor of any person other than himself, his estate, his creditors or the creditors of his estate. Two of the children, Kana and Kevin, along with L1, were the trustees.

In July 2002, Rocky married his third wife, Keiko Ono Aoki (Keiko). Rocky’s children became concerned that Keiko might influence Rocky into depriving them of part or all of the inheritance they expected. Their concern was amplified when, in September 2002, Keiko was asked if she would sign a postnuptial agreement, and she refused. Within a few days thereafter, Kana and Kevin met with L1 to voice their concerns. It was proposed that Rocky execute a partial release of his POA so that he could appoint only to his descendants or trusts for his descendants.

 

Partial POA Releases

On Sept. 23, 2002, Rocky met with Kana, Kevin and L1, and they reviewed a “close to final draft” of a document entitled “Partial Release of a Power of Appointment under New York Estates, Powers & Trusts Law § 10-9.2” (the September Release). The next day, Rocky, Kana and Kevin met with L1 and L2,1 and Rocky then signed the September Release. The relevant language provided:

 

I hereby irrevocably partially release the power of appointment [in Article V(a) of the BPT agreement] 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 accumulated net income remaining at my death to or for the benefit of any one or more of my descendants. 

 

In December 2002, Rocky signed a document titled “Further Partial Release of Power of Appointment Under New York Estates, Powers & Trust Law § 10-9.2” (the December Release). The December Release further limited Rocky’s POA by eliminating as potential donees those descendants who were non-resident aliens. L2 later testified that the December Release was executed solely for tax purposes.

 

Rocky Wakes Up

In July 2003, Rocky retained a new lawyer, L3. L3 was Keiko’s regular counsel. On Aug. 4, 2003, Rocky executed a codicil to his will, prepared by L3, by which Rocky exercised the POA by appointing 25 percent of the BPT principal to Keiko outright and the remaining 75 percent to a trust for her lifetime benefit. The codicil also conferred on Keiko a testamentary power to appoint the trust property among Rocky’s descendants and designated her as the executrix. L3 asked L1 to give a legal opinion regarding whether the codicil’s provision by which Rocky would exercise his POA (if the codicil remained in place at Rocky’s death) would be valid. On receiving this request, L1 wrote a memorandum to the file stating, in part:

 

Undoubtedly, the fur will fly when [L3] and his clients, Keiko and Rocky, discover the existence of the executed Partial Release.

 

On Sept. 8, 2003, L2 rendered his opinion that Rocky’s attempted exercise of his POA would be invalid because of the releases.

On Sept. 22, 2003, Rocky executed an affidavit in which he stated he didn’t understand that by signing the releases he couldn’t leave his Benihana stock to anyone he chose through his will. The affidavit stated in part: “If I had known that these documents prevented any changes to the disposition of my stock, I never would have signed the documents.”

In deposition testimony given in connection with fiduciary misconduct litigation initiated by Rocky in 2006, Rocky stated, regarding his execution of the September Release, that L1, his friend and lawyer for a long time, said, “Rocky, sign here,” and he signed as instructed. Rocky further testified that he never would have signed the releases had he understood before he signed them that they were irrevocable. At his deposition in the same litigation, L1 testified that he explained to Rocky that, on signing the release, disposition of the Benihana assets would be limited to his children and their descendants. Both Rocky and L2 testified that L2 explained that the effect of the September Release was that Rocky could appoint only to his descendants.

On Sept. 7, 2007, Rocky executed a new will. Similar to the Aug. 4, 2003 codicil, the will contained language by which Rocky would appoint 25 percent of the BPT principal outright to Keiko and the remaining 75 percent to a trust providing her with a lifetime income interest. The will further provided, however, in an apparent act of retribution against Kana and Kevin, that:

 

In the event that it is finally determined that the [above] exercise of my power of appointment is invalid because, contrary to my wishes, the [releases] are found to be valid, I hereby exercise said power fifty percent in favor of DEVON AOKI, and fifty percent in favor of STEVEN AOKI.

 

Trial Court Rules Releases Invalid

Rocky died in July 2008 survived by Keiko and his six children. In February 2009, the trustees of the BPT commenced litigation in the Surrogate’s Court of New York County to determine the validity of the releases. Devon and Steven filed an answer taking the position that the releases were valid. Keiko answered, asserting in one of her five affirmative defenses that the releases were invalid as “the product of fraud” or having been “obtained through fraudulent devices.” At the conclusion of discovery, Devon and Steven brought a motion for summary judgment.

At the hearing on the motion, Keiko relied on circumstantial evidence that Rocky didn’t intend irrevocably to limit his POA over the assets of the BPT and argued that L1 and L2 had a conflict of interest in representing both Rocky and his children and preparing the releases for Rocky’s signature. According to Keiko, the fraud arose from L1 and L2’s failure to inform Rocky of the irrevocable nature of the releases.

The Surrogate dismissed four of Keiko’s affirmative defenses but allowed the fraud affirmative defense to remain. The court found that Rocky relied on L1 and L2, and they owed fiduciary duties to him. The court further found that L1 and L2 had entered into an attorney-client relationship with Kana and Kevin and that L1 and L2 had an “impermissible conflict of interest” and had failed to inform Rocky of that conflict.

The court found that, due to the fiduciary duties owed by L1 and L2 to Rocky, it was reasonable for Rocky to have relied on L1 and L2 regarding the execution of the releases, even though Rocky failed to read the releases before signing them. According to the court, under New York law, this was a case of constructive fraud, the remedies for which protect a party who, “by virtue of an unequal relationship, places his trust and confidence in another and thereby ‘relax[es] the care and vigilance he would ordinarily exercise in the circumstances’” quoting Brown v. Lockwood.2 The court concluded that there existed triable issues of fact on the issue of constructive fraud and whether the proponents of the releases could meet their burden of demonstrating that Rocky’s signature on the releases was voluntary and not the result of misrepresentation or omissions by L1 and L2. Accordingly, the Surrogate denied the summary judgment motion.

Following a bench trial, the Surrogate’s Court declared the releases invalid.3 The court found that Devon and Steven failed to meet their burden of proving that Rocky signed the releases voluntarily and not as a result of omissions by his counsel. The court stated that there was no evidence that anyone explained the releases to Rocky, that Rocky understood the substance of what he was signing or that the releases were irrevocable.

 

Releases Upheld on Appeal

Devon and Steven appealed, and the Supreme Court, Appellate Division, First Department (the intermediate appellate court in New York), concluded that there was no evidence in the record showing that Rocky wasn’t aware of the irrevocability of the releases. Furthermore, Rocky had the opportunity, as to both the September Release and the December Release, to read them and ask any questions but failed to do so. Accordingly, the Appellate Division reversed, concluding the releases should have been upheld and the summary judgment motion granted.4 Keiko appealed the Appellate Division’s ruling. In Aoki v. Aoki,5 the Court of Appeals of New York (New York’s highest court) affirmed the Appellate Division’s order. In so doing, the Court of Appeals stated:

 

[L1] and [L2] were clearly Rocky’s fiduciaries. But … the critical inquiry is whether they were either parties to the Releases or stood to directly benefit from their execution, such that the burden shifted to Devon and Steven to demonstrate that the Releases were not procured by fraud … Neither [L1] nor [L2] were parties to the Releases or stood to directly benefit from their execution … Therefore, the Appellate Division correctly determined that … the Surrogate had improperly shifted the burden of proof to Devon and Steven to demonstrate that the Releases were not procured by fraud … [I]t is undisputed that [L2] explained the overall effect of the September Release to Rocky, and that Rocky signed it … Rocky testified that he may have signed the Releases without actually reading them, but that was not the result of any alleged misrepresentations or omissions by [L1] and/or [L2], the latter having explained to Rocky what he was signing and receiving confirmation from Rocky that he wanted to sign the Releases.

 

It could be inferred that L1 and L2, in initially agreeing to meet and work with Kana and Kevin, believed they were furthering the interests of their client, Rocky, and that it didn’t occur to them that they were establishing an attorney-client relationship with Kana and Kevin. The Surrogate’s Court clearly believed otherwise, however, and it took eight years of undoubtedly intense and expensive litigation for L1 and L2 to avoid the charge that they’d defrauded their client. The damage to the professional reputations of L1 and L2 may linger indefinitely.

 

Lessons Learned

Estate planners can learn important lessons from this fiasco. Whenever considering representing, or even just communicating with, multiple members of the same family, carefully examine the relationships among, and the stated and probable objectives of, the prospective clients, and consider whether there are any existing or potential conflicts that, under Model Rule 1.7, would or could present a “significant risk that the representation of one or more clients will be materially limited by [your] responsibilities to another client” such that it may be impossible for you to provide “competent and diligent representation” to all your clients. Avoid leading any member of the family who isn’t a client of yours to believe he’s your client or that you’re promoting and protecting his interests. In a comprehensive engagement letter tendered to each client you undertake to represent, establish how you propose to address any existing or subsequently developing conflicts of interest and how you propose to handle confidential information received from such client, and ensure the client assents to your approach. Don’t perform services for a client at the direction of a non-client who’s a member of the client’s family, even if you think the direction is given in good faith and the requested services would be in the client’s best interests, without the client’s informed consent. Finally, in any communication with a non-client member of the family, never, ever breach your duty of confidentiality to your client family member(s).          

 

Endnotes

1. L2, by this time, had joined L1’s law firm.

2. Brown v. Lockwood, 76 A.D.2d 721 (N.Y. App. Div., 2d Dep’t 1980).

3. In re Aoki, 243 N.Y.L.J. 93, at 18 (May 17, 2010).  

4. In re Kevin Aoki, 117 A.D.3d 499 (N.Y. App. Div., 1st Dep’t 2014).

5. Aoki v. Aoki, 2016 N.Y. Slip Op. 02474 (March 31, 2016).

 
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